How to Be Sane in an Insane Investment Climate

Jan
10

By Charles Biderman

 

Those of you out there who are sane type investors should be worried about the fundamental investment problem you face. And that is how do sane people invest in an insane financial world? Stocks and bonds are up now for four years solely because of central bank rigging. At the same time our leaders refuse to address the fundamental problem that the economies of the US, Europe and Japan will not grow fast enough anytime soon to generate enough taxes to pay current bills, let alone past due.

 

How individual investors have answered that conundrum appears to be put the money in the bank. Last year over $700 billion went into bank savings and checking accounts and another $350 billion went into bond mutual and exchange traded funds. There is no doubt that many investors are so scared that they are literally doing nothing with their money other then leaving it in the bank.

 

Other than cash in the bank; which by the way means taking on the risk of inflation a dollar plunging against gold and other currencies, what should a sane investor do in an insane investment world?

 

My answer to that question is in Biderman’s Market Picks, currently a $260 a year weekly report that is centered around a model portfolio. Biderman’s Market Picks model portfolio has two purposes. One is preserve capital. And two, keeping one in mind, invest safely to take advantage of current trends.

 

So in a world where all the major central banks are printing huge amounts of money, gold stands out as a key core holding. Gold has sold off a bit recently but is still up 6% since BMP began at the end of May last year. I recommend holding gold equal to a quarter of your investments. And what is more, I would recommend not buying an ETF but rather buying one ounce gold bars from a reputable dealer at the lowest mark up possible over the spot price. However, the model portfolio uses the GLD ETF for pricing purposes.

 

If gold is key holding in a world of massive money printing, so should be inflation protected assets. That is why 18% of the model portfolio is in the Vanguard Inflation Protected Bonds fund, VIPSX. Yes, inflation is modest now. But to imagine that rampant inflation is not bear by is foolish given that the FED, the ECB, and the Bank of Japan are all printing money hand over fist.

 

Stock prices are at five year highs and the economy is barely growing. To be sure Q4 results that are starting to be reported will look good. That is only because around $100 billion of 2013 income was recognized in 2012 to avoid taxes. What’s more some of that extra money also apparently went into stocks to start the year.

 

To me that makes current stock prices insane and sets up and major decline later this quarter. But that does not mean all companies will not grow and prosper even if the bulk of the market drops. That is why 7% of the model portfolio is in TrimTabs Float Shrink ETF, TTFS, which invests 1% each in the hundred companies shrinking the trading float the most while only using free cash flow to do so. TTFS is up 12% since the model portfolio began. For the record, I am the portfolio manager of TTFS and CEO of TTFS sub advisor.

 

In addition I also have liked those stocks not only growing fast, but also gaining market share and generating lots of cash. Therefore the model portfolio includes longs Apple AAPL, Salesforce.com CRM, Amazon.com AMZN and Whole Foods WFM.

 

To protect against the eventual market plunge, the model portfolio is about 40% to 45% short. The short positions consists of four ETFs that go up when the underlying goes down; the leveraged EURO short ETF, EUO, the big banks short SEF, Emerging Markets EUM and Europe, EFZ.

 

Of course if the stock market keeps zooming from here forever and ever, then the model portfolio will certainly underperform but hopefully not lose too much capital. However if higher gold and inflation as well as a market downturn are in the future, then the model portfolio should do well.

 

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7 Responses to How to Be Sane in an Insane Investment Climate

  1. Lincoln Hawks on January 10, 2013 at 4:29 pm

    PREDICTION: The “Insanity” will reach extreme levels in 2014 after the effects of appointing an unqualified Treasury Secretary and Federal Reserve Chairman are felt.

    I believe Bernanke will leave after his term expires early next year. He’s grown tired of paddling the monetary canoe upstream through the rapids of fiscal negligence.

  2. Rex on January 10, 2013 at 10:40 pm

    Why own physical gold as opposed to the ETF GLD?

    • Ed_B on January 12, 2013 at 4:06 am

      ETFs are convenient and cheap but that does not mean that all gold ETFs are created equally. I own some shares in the gold ETF SGOL. I prefer this ETF because it holds gold bullion in Swiss vaults, is independently audited, and maintains a strict and specific ratio of shares to physical gold. I am less sanguine about the involvement in GLD by large US hedge funds and uber-bank JP Morgan Chase.

      That said, holding real physical gold has zero counter-party risk, so you never have to worry about having one of those MF Global moments, where your registered and serial numbered gold bars disappear somehow and, if located during any bankruptcy proceeding, become lumped in with all of the other unallocated assets and distributed equally to the other brokerage clients. Some would call this theft but far be it from me to gainsay the financial powers that be who are OK with such dubious activities involving other people’s assets. Additional problems of this type have surfaced at PFG-Best and Sentinel, both of which are interesting case studies in both finance and law.

  3. Cornel Campeanu on January 11, 2013 at 12:33 am

    Hi Charles,

    I used to feature in blogs by the late Dan Dorfman and I read your suggestion on gold today.

    We should team up on this Charles.

    Gold is NOT a safe haven right now and you will see what I mean next week.

    There has been talk of a “bungee” event coming soon and I must admit that I really like that profile in relation to the near term direction for Gold.

    Like all “bungee” dives, you end up with your head near the deck as the swings dissipate.

    Is that likely soon? I think so.

    • Ed_B on January 12, 2013 at 4:16 am

      If the Fed is planning to print less money any time soon, I have not yet heard about it. That is what it will take to do serious price damage to gold at this point. If anything, the printing of more currency goes on unabated in the US, UK, EU, and Japan. Japan is putting their printing presses on steroids and other central banks may soon follow. The EU probably has a different structure to their money printing / bond buying schemes than does the US but the result should be quite similar. For now, the powers that be in the EU are talking an excellent recovery from recession but have the appearance of sliding into a much more severe recession, if not a depression, at some point in the next year or two.

      Personally, a falling gold price caused by a strengthening US economy, an end to Fed stimulus, modestly higher interest rates, and higher employment would be terrific news. Unfortunately, none of this is happening at the moment and does not seem likely to happen in the next year or two in the US.

  4. Paul on January 12, 2013 at 6:33 am

    Hi Charles,

    Aren’t you worried about the negative compounding effects the inverse and leveraged etfs suffer over time? There have been some very convincing articles about these etfs recently which suggest you are better off shorting the index fund directly, rather than buy the inverse funds.

    Or, better yet, find a 2 or 3 x leverage long version of what you want to bet against and short that fund. This at least puts the decay effect on your side, gives you a bit of a tailwind.

  5. CaCaBuBu on January 14, 2013 at 11:41 am

    Inflation Propaganda Exposed by Peter Schiff
    http://goo.gl/5pUU3

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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