I Don’t Know

By Charlie Bilello




Three words rarely heard in the investment business are perhaps the most important to long-term success.


Because the future is unknown, and having the humility to admit that we can’t predict it is very hard for us to do. We’re wired instead with overconfidence – we overestimate our abilities when it comes to sports, driving, investing and many other areas of life.

While a little bit of confidence can be a good thing in many areas of life, overconfidence, particularly in the investment world, can be disastrous. With overconfidence comes the tendency to overtrade and make highly speculative, concentrated bets on the future.

Many studies have shown that these attributes tend to lead to lower overall returns. The more confident you are, the more you trade, and the worse your returns are on average…

Image result for trading is hazardous to your wealth

Source: Barber and Odean (1999)

Continue reading I Don’t Know

Rent-Seekers Rejoice! Fannie-Freddie Privatization Urged in White House Report

By Anthony B. Sanders

Few Details, Numerous Roadblocks

Like the Star Wars film franchise (each worse than the other), now we have yet another “What do we do with Fannie Mae and Freddie Mac’ proposal, this one from The White House. Don’t look for specifics in the 132-page reorganization plan (it is for the entire Federal government (Fannie and Freddie are only on pages 75-77).  Government-Reform-and-Reorg-Plan

(Bloomberg) — White House proposes that Fannie Mae and Freddie Mac’s federal charter be removed and that the mortgage-finance giants be “fully” privatized, according to a copy of Trump administration’s reorganization plan released Thursday.

Privatizing companies would enable competitors, report says

Administration’s report also urges explicit mortgage-backed security guarantees for GSEs and any competitors

White House plan for Fannie and Freddie would require legislation by Congress
Fannie jumped as much as 6.8% on news to $1.58.

Fannie Mae’s preferred stock price is back down to $1.44 on the realization that Democrats will likely not cooperate. You see, Trump is suggesting abandoning Fannie and Freddie’s charters and that has to be done by Congress (but nothing surprises me anymore).


Continue reading Rent-Seekers Rejoice! Fannie-Freddie Privatization Urged in White House Report

A Real Concern About Over(h)eating

By Michael Ashton

I misread a headline the other day, and it actually caused a market analogy to occur to me. The headling was “Powell Downplays Concern About Overheating,” but I read it as “Powell Downplays Concern About Overeating.” Which I was most delighted to hear; although I don’t normally rely on Fed Chairman for dietary advice[1] I was happy to entertain any advice that would admit me a second slice of pie.

Unfortunately, he was referring to the notion that the economy “has changed in many ways over the past 50 years,” and in fact might no longer be vulnerable to rapidly rising price pressures because, as Bloomberg summarized it, “The workforce is better educated and inflation expectations more firmly anchored.” (I don’t really see how an educated workforce, or consumers who have forgotten about inflation, immunizes the economy from the problem of too much money chasing too few goods, but then I don’t hang out with PhDs…if I can avoid it.) Come to think of it, perhaps the Chairman ought to stick to dietary advice after all.

But it was too late for me to stop thinking about the analogy, which diverges from what Powell was actually talking about. Here we go:

When a person eats, and especially if he eats too much, then he needs to wait and digest before tackling the next course. This is why we take a break at Thanksgiving between the main meal and dessert. If, instead, you are already full and you continue to eat then the result is predictable: you will puke. I wonder if it’s the same with risk: some risk is okay, and you can take on more risk up to a point. But if you keep taking on risk, eventually you puke. In investing/trading terms, you rapidly exit when a small setback hits you, because you’ve got more risk on than you can handle. Believe me: been there, done that. At the dinner table and in markets.

Continue reading A Real Concern About Over(h)eating

Don’t Cry for Me, Rachel Maddow

By James Howard Kunstler

The latest artificial hysteria cranked up by the Offendedness Cartel — re: detention of juvenile illegal immigrants — is the most nakedly sentimental appeal yet by the party out-of-power, a.k.a. “the Resistance.” I have a solution: instead of holding these children in some sort of jail-like facility until their identity can be sorted out, just give each one of them an honorary masters degree in Diversity Studies from Harvard and let them, for God’s sake, go free in the world’s greatest job market. Before you know it, we’ll have the next generation of Diversity and Inclusion deans, and America will be safe from racism, sexism, and Hispanophobia.

I won’t waste more than this sentence in arguing that official policy for the treatment of juvenile illegal immigrants is exactly what it was under Mr. Obama, and Mr. Bush before him. I didn’t hear Paul Krugman of The New York Times hollering about the various federal agencies acting “like Nazis” back in 2014, or 2006. You’d think that ICE officers were taking these kids out behind the dumpster and shooting them in the head. No, actually, the kids are watching Marvel Comics movies, playing video games, or soccer, and getting three square meals a day while the immigration officials try to figure out who their parents are, or how to repatriate them to their countries-of-origin if they came here without any parents — say, with the assistance of the Sinaloa Drug Cartel. By the way, these make up the majority of kids detained in the latest wave of mass border crossings.

Continue reading Don’t Cry for Me, Rachel Maddow

3 Amigos (SPX/Gold, Long-term Yields & Yield Curve) Updated w/ edit


It has been a while since we’ve had a 3 Amigos update because a) Italy and global tariffs noise aside, nothing much has changed with the macro and b) I felt my ‘image-based metaphorical content to straight content’ ratio was getting a little excessive. So I gave it a rest.

Now it is time again for an update of these important macro riders in order to touch base with their signals. As always, I’ll remind you that there is much more to the macro market backdrop that NFTRH manages on an ongoing basis, but these three are important.

The quick answer is that only Amigo #2 (long-term yields on a rise to our preset limits) has reached destination. I marked up the graphic as he was approaching our targets.

[edit] The monthly charts driving the view that current trends remain intact can be considered big, dumb (i.e. not overly sensitive) indicators. Shorter-term views of these and other indicators can be used to gauge signs of oncoming changes. As one example, if daily SPX/Gold were to take a hard plunge on any given day or week (as was the case in February and March) we’d pay close attention as we did then before the larger trends ultimately took over again.

Amigo #1: Gold vs. the S&P 500 (or stock markets in general)

The theme for this Amigo is that the stock market (cyclical, risk ‘on’) has been trending up vs. gold (counter-cyclical, risk ‘off’) since 2011 in order to close out the negative cycle that completed that year.

The daily chart shows that despite the stock market’s recent weakness the ratio is making a new recovery high.

spx/gold ratio Continue reading 3 Amigos (SPX/Gold, Long-term Yields & Yield Curve) Updated w/ edit

Bumpiness Signals Weakness

By Tom McClellan

DJIA McClellan Price Oscillator

After bottoming on April 3, the DJIA’s Price Oscillator has been making a bumpy up move. That is important because bumpiness or smoothness of a move carries important information.

Our Price Oscillator is calculated using the same math as the McClellan A-D Oscillator, by finding a difference between two exponential moving averages (EMAs).  The difference for the Price Oscillator is that it uses closing prices rather than daily A-D differences.  See this link for details on the calculations.

Continue reading Bumpiness Signals Weakness

Most Shorted Stocks vs. the S&P 500

By Callum Thomas

This chart draws inspiration from some of the charts and themes I shared in last week’s S&P500 #ChartStorm, it shows the Thomson Reuters “Most Shorted Stocks” index vs the S&P500 (as well as the performance ratio between the two).  When you see the “most shorted stocks index” materially outperforming vs the broader index you can draw one key conclusion: shorts are getting squeezed.  Basically what happens in a short squeeze is you get a rush to cover short positions as bears get caught wrong-footed.  So you can basically say that much of the recent rally was driven by short-covering.  However, as I’ve noted elsewhere there are a few macro undercurrents that are preventing the S&P500 itself from heading unrestrainedly higher, and this is creating a series of winners (e.g. US small caps) and losers (e.g. emerging markets).

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Signs of a Top, OR that I am a Grumpy Old Man

By Michael Ashton

I was at an alternative investments conference last week. I always go to this conference to hear what strategies are in vogue – mostly for amusement, since the strategies that are in vogue this year are ones they will spit on next year. Two years ago, everyone loved CTAs; last year the general feeling was “why in the world would anyone invest in CTAs?” Last year, the buzzword was AI strategies. One comment by a fund-of-funds manager really stuck in my head, and that was that this fund-of-funds was looking for managers with quantitative PhDs but specifically ones with no market experience so that “they don’t have preconceived notions.” So, you can tell how that worked out, and this year there was no discussion of “AI” or “machine learning” strategies.

This year, credit strategies were in vogue and the key panel discussion involved three managers of levered credit portfolios. Not surprisingly, all three thought that credit is a great investment right now. One audience question triggered answers that were striking. The question was (paraphrasing) ‘this expansion is getting into the late innings. How much longer do you think we have until the next recession or crisis?” The most bearish of the managers thought we could enter into recession two years from now; the other two were in the 3-4 year camp.

That’s borderline crazy.

It’s possible that the developing trade war, the wobbling of Deutsche Bank, the increase in interest rates from the Fed, higher energy prices, Italy’s problems, Brexit, the European migrant crisis, the state pension crisis in the US, Elon Musk’s increasingly erratic behavior, the fact that the FANG+ index is trading with a 59 P/E, and other imbalances might not unravel in the next 3 years. Or 5 years. Or 100 years. It’s just increasingly unlikely. Trees don’t grow to the sky, and so betting on that is usually a bad idea. But, while the tree still grows, it looks like a good bet. Until it doesn’t.

Continue reading Signs of a Top, OR that I am a Grumpy Old Man

Diversification and the Fear of Missing Out

By Charlie Bilello

Diversification is often said to be the only “free lunch” in investing, delivering superior risk-adjusted returns over the long run. So why doesn’t everyone do it? Let’s take a look…

Responsible financial advisors across the country are apologizing to their clients for the seventh year in a row.


Because the diversified portfolios they have built are lagging U.S. stocks … for the seventh year in a row.

Data Sources for all charts/tables herein: Bloomberg, Stockcharts.com

Any way you look at it (from a conservative to aggressive allocation), diversified portfolios have failed to keep pace with the juggernaut known as the S&P.

“Why aren’t we holding more of this S&P thing?” clients ask. “Don’t you know it’s working the best? Even a monkey could see that.”

Continue reading Diversification and the Fear of Missing Out

The Simple Economics of What Really Matters

By Jeffrey Snider

The very idea of a labor shortage is supposed to be strictly an economic concept. No longer. It is now wielded almost exclusively in political terms. Anecdotes about how companies are unable to find workers pepper most commentary on the labor market if only because there is no (none) direct statistical evidence that a nationwide labor problem exists.

In the absence of such data, a plethora of reports on how individual businesses are creatively dealing with the presumed problem is constantly offered as a sort of backup. If there was an actual shortage, no creativity would be required. There is nothing particularly clever about offering more money to workers, both to keep those you have on staff already as well as to bring in new ones if you need them so badly.

It actually argues against the idea.

Continue reading The Simple Economics of What Really Matters

The #1 Rule in Investing

By Charlie Bilello

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – Warren Buffett

With all due respect to Warren Buffett, the #1 rule in investing is not anything close to “never lose money.”

In fact, the entire notion is absurd. Anyone who has ever invested in the history of the world has lost money at one time or another. Buffett himself lost close to 50% on two separate occasions. Being in a drawdown is the norm, not the exception. That is the price you pay in exchange for a higher return than a risk-free savings account.

So what is the number 1 rule in investing? That’s an impossible question, but if I had to pick just one it would be the Peter Lynch line about “knowing what you own and why you own it.” For if you don’t get that one right, you won’t hold any investment long enough to reap the benefits of compounding. You can have the best assets/strategy in the world but if you don’t understand what it is you will abandon it at the first sign of trouble. And believe me when I tell you that there will be many times of trouble.

Most advisors nowadays focus on asset allocation for their clients, typically a diversified mix of stocks and bonds. This is a good start, for asset allocation is the most important determinant of portfolio returns.

Continue reading The #1 Rule in Investing