How to Invest Safely in Today’s Volatility



TrimTabs’ Charles Biderman and Jim Bianco of Bianco Research discuss investment strategy during today’s volatile economic times. The following a transcript of the video:


Charles Biderman: “With me today is Jim Bianco of Bianco Research, one of the leading experts in bonds and capital markets in part three of a three part interview.”


Jim Bianco: “Hey Charles, it’s 9 degrees and snowing here in Chicago, how about in Sausalito?”


Charles: “(Laughs) Lots nicer. What do you invest in these days given that the market’s up a gazillion percent – US stocks bottomed at a $9.6 trillion market cap in March 2009 –  and the market cap of all US listed stocks is back up to $24 trillion. So as of right now that the Fed has started tapering, meaning there’s less new money available, companies are not announcing very many new buy backs and cash takeovers are nowhere. Add questionable Q2 quarterly guidance. How do you invest in this volatility? Do you buy bonds, short stocks, gold, bit coins?”


Jim: “Let me start by bringing up one quick stat about what you are talking about. We run a regular statistic that is the correlation of every stock in the S&P 500 to the index. And it is running at around 50 to 60 percent right now according to our measures. Historically it runs to about 25 percent. Now what does that mean?”


Charles: “At it’s peak what was the correlation?”


Jim: “At it’s all-time peak in 2011 it was at 83 percent. What that means is historically over the last 80 years correlations would run at 25-26 percent. Basically that means that if you buy a stock, 25 percent of the reason it goes up or down is the stock market is in a bull or bear market. And the other 75 percent is because of the company’s fundamentals or their product or their management. Today that’s 50-50, and it was as high as 80 percent in 2011 as I just mentioned. So when you own stocks, you are more tied to the overall trend of the stock market than almost at any other point, except for maybe a year or two ago. But definitely more than any other point between 1926 when the S&P 500 was invented up to the 2011 high. So this is one of the reasons why active equity managers have done such a terrible job, especially hedge fund managers. Guys that are trying to create alpha do horrible in this environment. The reason I bring that up is .1. If you own stocks, you are tied to the beta of the market like you’ve never been tied before whether the market is going up or down. So this “I own a whatever-proof stock portfolio” or “I own a stock portfolio that can handle a downturn” – that has been the hardest thing to find over the last 85 years according to statistics in the market. So if the market is going to go down, it’s going to hurt all stocks. So there’s a risk in owning equities because of that high correlation. Why is that there? It’s because Federal Reserve policy, central bank policies world wide, physical policy is driving the stock market like never before. So I’m concerned about stocks because the Fed is tapering. There’s nowhere to hide. Stocks are correlated to each other in a degree we haven’t seen before. And when the Fed pulls back, you’re going to have problems and that’s what we’re beginning to see.”


Charles: “For the record, there is one group of stocks that do outperform in down markets, and those are companies that using free cash flow to shrink the trading float of shares. Historically that type of stock has outperformed. And obviously I’m talking my own book here. Be that as it may, you’re absolutely right. The other question I had, wasn’t the current 50 percent correlation higher last year? If the Fed is indeed tapering and creating less money to buy financial assets, shouldn’t the correlation be going down as well. Is that happening or has the 50 percent been constant?”


Jim: “You’re right. Typically when the market is rallying like it is now the correlation should go down. And when the market sells off the correlation should go up. The market was up 30 percent last year and the correlation’s down to 50 percent. It was 60-65 a year ago. I would have thought it would be in the 30s by now. But our measures don’t show that at all. So, it’s still elevated and if the market sells off it could go back to 60 or 70 percent.”


Charles: “I just think it’s going to be hard for the market to keep going up given that the Fed is putting less money in, unless corporate American gets very bullish and keeps reducing the number of shares outstanding dramatically like it did last year. So far this year, and yes it’s still early, we’re just not seeing very many new buy back announcements as part of the earnings releases that we had in prior quarters. I’m concerned. I have actually cut my long-equity exposure by a third and I have increased my short positions in Emerging Markets and Europe via bearish ETFs. To me from a long-term perspective, this stock market reminds of me of 2000. At the end of 1999, I said the bull market had to end in 2000. Why? My estimate was there would be $70 billion of unlocking shares from IPOs and option conversion wanting to be sold each month at a time when no more than $30 billion a month was going into the market from mutual fund flows. And so, I was several months early on calling the decline. The market held up until early-April and then collapsed. What happens in early-April? People forget there’s something called Tax Day. Looking at the market over the years, whenever there’s been a bull market over the prior few years, investors tend to hold back selling stock to pay taxes until the last minute because they don’t want to miss the gains. They’ve been trained by the market to keep the money in stocks until they have to sell. So if a lot of people are doing that – and I estimate at least $100 billion in stocks is going to have to be sold this April — regardless of what happens between now and April I think there’s going to be a down draft early in April particularly in stocks that have done the best.”


Jim: “It makes perfect sense that the flows have always been kind of critical to the way the markets going to go. January’s a good flow period. We’re supposed to have a huge inflows, I know your work says that that’s not happening, and the market is not going wild right now. And it’s only going to get exacerbated when we go into May.”


Charles: “Well I think the big inflows happened in the fourth quarter.  Investors invested in the fourth quarter anticipating big inflows this January. Well, we’re not seeing it.”


Jim: “That was the rally from Dec. 15 to the end of the year.”


Charles: “What about bonds?”


Jim: “First thing to keep in mind is that there’s 313 million Americans and I think there’s maybe 20 or 30 people that actually like bond market while the other 313 million hate it. And that’s not a exaggeration. So from a contrarian standpoint, bearishness is in. The selling is in. When you see asset gatherers on CNBC telling people ‘you’ve got to get out of bonds,’ those advisors are out. If you’re not out of bonds right now, you’re not getting out of bonds. Reminds of the commercials telling people they need to refinance their house. Well, they’ve already refinanced, You don’t have to tell them that any more. So contrarian, all the selling in bonds are done. I’m not surprised the bond market is rallying. And, if the bond market were to continue to head higher in yield, that would hurt housing, and also it hurts the economy. That becomes a self-fullfilling bullish story for bonds.  So bonds look like a reasonable place right, especially after the rise of yields in 2013.”


Charles: “I was actually thinking about buying long bonds, not inflation-protected, for the first in I can’t remember how long. I probably will buy some if the economy remains as weak as I think it is.”


Jim: “Yeah, you’re right. The only thing that I think would hurt you in that scenario is if the economy’s getting ready to take off. Earnings might come back, inflation might kick up, people would take out of bonds towards stocks. The economists have been telling us breathlessly for five years any moment now it’s going to happen. They’re still telling us that and I don’t see that happening in the statistics now any more than more than I have in the last five years. That is a concern, but I don’t see that as a big concern right now.”


Charles: “How about gold? I just bought a small amount of the Goldminer ETF, GDX after the huge sell off. And given all the uncertainty and who-knows-what, I think gold is probably going to rally from here. What do you think?”


Jim: “Well gold peaked in September of 2011. We’re approaching 2.5 years and 30 percent off the 2011 high. But prior to that, gold was up every single year for 12 years. It was the best investment since 2000. The typical bear market in gold runs around 2.5 to 3 years. We’re about there right now. A third off the of the price, we’re about there right now. So technically speaking, gold was due for a bear market. It had it. It’s not about to have it. It’s had it. So yeah, I do think that gold has a floor on it right now. I don’t see it going much lower from here. And should we run into problems as we move forward, it could catch a bid one more time.”


Charles: “Last question, would you accept Bitcoin as someone paying for your services?”



Jim: “I will accept it if someone will pay for my services. But if the question is a larger question: is Bitcoin a legitiment currency? I have my doubts about Bitcoin. But digital currencies themselves I think are very real. I’ve used the analogy with the Bitcoin that it’s like Alta Vista. Alta Vista was the first search engine, it went bankrupt, it didn’t survive. But we learned from that and went ‘hey, these global search engines are a good idea.’  Then we got Lycos and that wasn’t too successful. We got Yahoo, that was very successful and then we got Google and that redefined the world. So Bitcoin 3.0 or Bitcoin 4.0, or whatever it is, that might replace the dollar. But Bitcoin 1.0, I don’t think it will.”



Charles: “Thank you Jim until next time.”



8 Responses to How to Invest Safely in Today’s Volatility

  1. Chris on January 28, 2014 at 8:04 am

    Mr. Bianco and Mr. Biderman…two unusually honest and frank voices in an industry over run with shysters and salesman always selling.

    However, speaking of how to invest safely…the condition of being protected from or unlikely to cause danger, risk, or injury. In this QE world, that is a tough one. What is safety? Maintenance of dollars? Maintenance of purchasing power? Avoidance of bail-ins or the like?

    How long is safety granted? Safety for who? Is safety the avoidance of a “market” or the return to a “market”? Is a command economy driven by central banks “safety”?

    Is CB monetization of sovereign debt worldwide “safety” or is it the ultimate moral hazard and far less safe than the risks borne in a market?

    I guess some things are safer than others ’til they aren’t but seems unlikely anyone will blow a whistle signaling the change…just funny todays centrally driven safety will be some tomorrows bankrupted risk and vice versa.

    I think safety might be the wrong word in this environment since there truly is no safety available when everything is centrally manipulated.

  2. gn on January 28, 2014 at 4:14 pm

    Chris- well said. Safety is not losing principal and finding your own way to sleep at night, and it’s not “shrink-float” stocks, with all respect to Charles, imho.The Fed has all markets by the neck. Look at pre-Fed short-covering in oil today, as one example. They are a bunch of THUGS !

  3. Dan M. on January 29, 2014 at 3:18 pm

    Charles, Do you still offer Biderman’s Market Picks? If so, I’d be interested. Thanks,

    Dan M.

    • cbiderman on January 29, 2014 at 5:59 pm

      Sorry, we stopped due to lack of significant demand.
      However, we have special rates for TrimTabs Weekly Liquidity Review for individual investors.
      If you are interested I will put you in contact with the appropriate person.


      • Dan M. on February 6, 2014 at 6:07 pm

        Charles, I’ll probably just continue to buy TTFS, but this insane obamacare has me concerned about the profitability of US corporations and future buy backs in the near term.

  4. Chris on January 31, 2014 at 7:43 pm

    Charles, this is an unbelievable story…not sure you want to mess with it…but what is going on here is bigger than sub-prime in ’07, bigger than Nazdaq in ’99…and the foundation of “safety” is @ play. Please read…even if you have no comment.

    Oct 12, 12 – German Audit court sez audits of gold advisable (but court only in advisory role to Bundesbank…cannot enforce this)…Bundesbank sez no need…and CNBC runs following article.

    “The Bundesbank is, of course, quite right in its opinion of the value of the examinations. In reality, it does not matter one bit whether the Federal Reserve Bank of New York actually has the German central bank’s gold or whether the gold is pure. As long as the Fed says it is there, it is as good as there for all practical purposes to which it might be put. It can be sold, leased out, used as collateral, employed to extinguish liabilities and counted as bank capital just the same whether it exists or not.

    The actual presence of the gold wouldn’t make a lick of difference unless, say, Germany’s central bank decided it wanted to start using the gold for some practical, non-monetary purpose like making watches.”

    Oct 24, 12 – Buba requests 50 tons sent annually to Germany for 3 yrs for inspection plus “in negotiations” for full auditing rights

    Apparently, negotionations go nowhere…Fed explained that “in the interests of security and of the control process” no “viewings” are possible.

    Nov 3, 12 – Buba says fears over gold stored in Fed are “irrational”, “no doubts concerning credibility of the Fed”.

    Nov 18, 12 – Gold trading @ $1752, COMEX has 3.4 million oz deliverable

    Dec, 12 – Abe takes office in Japan, begins Yen depreciation

    Jan 1, 13 – GLD inventory @ record 1350 tons

    Jan 16, 13 – Buba states gold re-deploy, 300 tons from NY, 374 tons from Paris…both by 2020

    April 1, 13 – Gold trading @ $1581 and COMEX has 3 million oz deliverable

    May, 13 – Indian Gold imports hit record 162 tons for month of May…China imports 225 tons for May…’13 Western investor demand via Mints/bullion remain near/@ record deliveries, allocations required…Demand far in excess of Global mining supply 240 tons/mo

    June, 13 – India adds 8% duty to imports and restrictions…plans to undercut 2012 import total of 845 tons

    August, 13 – India applies bans and restrictions on gold imports…imports cut to under 30 tons…India’s good buddy Pakistan bans gold imports to curb smuggling to India

    Dec, 13 – Japanese Yen/dollar depreciated from 80 to 107…near a 40% depreciation…Yen carry trade is 1:1 inverse of gold price

    Dec, 13 – US scrap (all non-mining output) exports collapse from 880 tons in ’08 to below 200 tons in ’13…Global scrap supply declines from 1775 tons to 1300

    Jan 1, 14 – China takes delivery through SGE of roughly 80% of all annual mining supply (up from less than half in ’12 and significantly lower in previous yrs).

    Jan, 14 – Equties trading all-time highs (up nearly 200% from ’09 lows), Bonds @ depressionary lows

    Jan, 14 – Fed begins $10 B taper…further $10 B taper announced

    Jan, 14 – Fed announces it returned 5 tons of gold to Germany in first of 7yrs…China took delivery through SGE of roughly 1,800 tons

    Jan 31, 14 – Gold trading @ $1240 (-$500 decline or roughly 30%) and COMEX has 375 k oz deliverable (roughly a 90% decline in deliverable)

    Jan 31, 14 – GLD inventory @ 792 tons (roughly 40% drawdown)

    Feb, 14 – COMEX likely greater delivery’s requested for Feb than current Deliverable gold quantity

    Feb, 14 – India considering repealing ban on gold imports as of March, political considerations around rampant inflation absent a hedge is not good politics

    2015 – Gold mining output to begin declining due to lowered capex, non-exploration, continuing cost of production below all-in-costs of mining

    AND GOLD IS UNIVERSALLY EXPECTED TO CONTINUE DECLINING IN PRICE ON WEAK DEMAND…Somehow something this crazy can’t get any traction???

  5. Rex Maffey on March 8, 2014 at 5:13 pm

    Mr. Biderman, Where are you? I miss the videos that you put on once or twice a week. I really enjoy your commentary. I wish you the best and thank you for the knowledge that you have shared with us in the past.
    Come back, Please.
    A faithful follower.

    • cbiderman on March 9, 2014 at 9:00 pm

      Thank you for the kind words. I guess my decision to resume doing a weekly video starting comes this week means I will have at least one viewer.
      I had stopped because it seems that I have nothing new to say.
      However, instead of saying something new and insightful, instead I plan to say what is so for me right now in the markets, the world and maybe even other areas of life.
      I would appreciate any feedback.

      Charles Biderman

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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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Mr. Charles Biderman is an associated person of Trim Tabs Asset Management, LLC, an SEC-registered investment adviser. All opinions expressed by Mr. Biderman on this website are solely those of Mr. Biderman and do not reflect the opinions of Trim Tabs Asset Management, LLC, Trim Tabs Investment Research, Inc., their affiliates (collectively, “Trim Tabs”), or any other associated persons of Trim Tabs. No part of Mr. Biderman’s compensation from Trim Tabs is related to opinions which he expresses on this website, elsewhere on the internet, or in any other medium.

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