Retirement Rescinded – Part One

What is the likelihood you’ll receive in your retirement the amount you anticipated?  And just how safe are your retirement funds?

It should come as no surprise that all retirement plans depend on earning returns on the principal while funds are being added during working years as well as when funds are being withdrawn during retirement.  If those earnings are below what was anticipated, then the plan has been under-funded and something has to give.

I’ve previous discussed in this blog the massive under-funding of government retirement plans and, indeed, health care plans such as Medicare. Anyone who is not aware that these programs are in serious financial trouble is just not paying attention — or just doesn’t want to think about it.

Even Alan Greenspan, not one of my favorite persons, is sounding an alarm, “Alan Greenspan, former chairman of the Federal Reserve, said the global economy’s inability to produce goods and services efficiently is going to cripple the ability to pay for pensions and health programs for the elderly.”  Alan, where were you when the alarm needed to be sounded at least a couple of decades ago?

And a sluggish economy contributing to reduced investment returns is only one of the problems besetting these government programs.  Over-promising benefits would be another.

Okay, so chalk off Social Security and Medicare.  Not entirely, but at least at their promised benefit levels.  That’s strike number one against our current and future retirees.

Plans sponsored by businesses and unions aren’t in much better shape as the 400,000 members of the Centrals States Pension Fund have learned.  As I’ve pointed out before, this education regarding under-performing pension funds is going to be spread far and wide in the coming years.  Central States is just one preview of coming attractions. Grandmas and grandpas today are not going to have as carefree of retirements as my grandparents enjoyed simply because defined benefit pension plans have not generated the returns needed to provide the benefits at the levels promised.  Strike two.

But what about IRA and 401k plans? What’s the deal with these?

Well, to start off with, there’s a mindset out there bordering on hysteria that suggests that these retirement funds might be frozen, seized, have their terms changed by government regulation, or otherwise rendered less valuable than anticipated due to a national financial crisis. Lurid possibilities are presented typically accompanied by the recommendation that folks should close these accounts, take the tax and/or penalty hits, and stuff the money in gold bullion held personally. Nonsense.

Well, almost nonsense. Sort of.

I’ll assume my readers know what 401k and IRA plans are.  If you’re unclear, just click on the terms in the previous sentence and the folks at Investopedia will get you up to speed. These plans offers a highly desirable means for building funds for retirement unmolested by taxation until it’s time to draw out funds in the golden years.

So what can go wrong?  Plenty.

First, a 401k or IRA can suffer from the same problem as the other retirement plans I just mentioned – investment returns below expectations resulting in either an accelerated draw-down rate during retirement, or a shortened time horizon over which the retiree can expect to receive benefits.

Second, if you are paying someone to manage this for you, they are taking fees which reduce your returns. Of course those performing this service deserve their pay, especially when successful. Advisers will have several model portfolios and will recommend the one that their research indicates looks best for your particular situation.

That said, I believe there is a bias present which defines success as beating a particular index. Which means that if the index to which your fund is compared drops by 4% and your fund drops by 3%, your investment is deemed a success for the relevant time horizon.

There’s also a long-term investing bias. For those beginning their investment careers, this can be a great thing, and these folks get to buy low during market corrections.  (We are no longer allowed to have “crashes.”)  And one can take the perspective that the deeper and longer the correction the better – when you’re young.

But if you’re 60 t0 65 and your fund takes a 35% haircut, it will be years before you get back to even.  This will result in sleepless nights.  And the possibility of corrections in the amount of 35% or more have not been repealed.

I’ve said it before, people do not realize how risky common stocks can be. And if your IRA or 401k are full of the things, your retirement, to the degree you are depending on withdrawals from those funds, is in danger of disappointing very badly.

I will quickly be remonstrated for not pointing out that folks near their retirement years should have a very different portfolio than someone who’s 25. Okay, I just pointed it out, and I agree.

But I will also point out that this is not my grandparents’ market where satisfactory returns can be earned on 10-year treasuries, bank certificates of deposit, and utility stocks. Try stuffing your fund with those now and you had best have a much larger principal on which to draw interest and dividends than most have.

So people chase yield.  Or attempt to trade the equity markets in their retirement funds in the hope of ramping up the return to something that allows withdrawals to provide the living standard they had hoped for when they started the plans.

I’m going to let those thoughts sink in for a while before I continue with some specific reasons I dislike IRA and 401k plans – which I’ll do in Part Two.





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Betting on the Horse or the Jockey?

Anyone who knows much about my views on the markets is aware of my belief that the precious metals sector offers some excellent opportunities for price appreciation, especially after having been beaten with the ugly stick for the past few years. That said, there’s no doubt that mining is a nasty business. All sorts of things can, and often do, go wrong.

Precious metals miners can be devastated by a catastrophic mine collapse. Their assets can be confiscated by hostile governments. Environmental regulations can stop a project dead, or hang it up in negotiations with authorities for years. Their activities create toxic byproducts. Financing is a problem. Labor relations are a risk.  Volatile energy costs are a big factor. Speaking of volatility, the prices of gold and silver are subject to dramatic moves. And if the company survives all of this there may be nothing at the bottom of the hole.

On the other hand, if what’s found at the bottom of the hole is what they’re looking for, it is valuable.  In fact, it’s very valuable. And it has been in demand for thousands of years.

Given all these factors it’s no surprise that the mining stocks are some of the most volatile stocks in the market.  Even buying an ETF such as GDX is to engage with volatility.

If you’re willing to accept the volatility and risk, individual precious metals miners can be — well, they can turn out to be gold mines. One such firm that’s worthy of consideration is McEwen Mining (NYSE:MUX).

McEwen Mining Inc. is a growing gold and silver producer in the Americas. Rob McEwen, Chairman & Chief Owner, owns 25% of the outstanding shares. The Company’s goal is to qualify for inclusion in the S&P 500. – taken from MUX’s website

After getting a warning some months ago from the NYSE that MUX would be delisted if didn’t get its stock price back above $1.00 per share, CEO Rob McEwen lead the company to accomplish exactly that.

McEwen is something of a legend in the precious metals mining industry having built Goldcorp (NYSE:GG) into the company it is today. Will he do the same for McEwen Mining? He has good reason to. His salary is zero, and he owns 25% of the company.

Not surprisingly, the firm isn’t profitable although its annual losses have declined the past three years. Even with negative earnings, note how little long-term debt the company carries.  One other positive is that it operates in relatively safe jurisdictions thereby reducing much of the country risk.

Would I buy a company in any other industry with the financials MUX has? Without some strong, countervailing positive factors, probably not.  But McEwen is lead by McEwen, who has a phenomenal record of leading such firms and has a ton of his own skin in the game.

This is a case of where I’d bet on the jockey more than on the horse.

(Disclosure:  Craig is not a licensed or registered investment investor, but is simply a private speculator with an opinion who manages only his own money.  At the time of the writing of this article Craig had no position in any of the mentioned securities.)




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Yellen Calling

April 1, 2016

Gold is still stuck in this trading-range between 1210 and 1242. The drop today coincided exactly with the release of the non-farm payrolls report, bouncing right at support at 1210.30 before recovering about half of its daily loss, taking us back to where we were a couple of days ago. Once we get a good, solid close above 1250 that holds for a couple of days we should start to see some fireworks to the upside.

In the, “And you thought we had freely-trading markets” department, the Fed has released Yellen’s daily schedule. So happens that a few days ago she made two telephone calls, one to the president of the Bank of England and another call to the president of the European Central Bank. Each call was for 40 minutes. Just coincidentally, of course, the S&P 500 was in decline just before those two calls.  And again, just coincidentally, it rallied  substantially immediately after those calls were concluded.

Once manipulation destroys the price-discovery function that is what markets are supposed to be all about, you have a broken financial system with traditional analysis methods rendered much less useful. I don’t know how this all will end or when, but it’s not going to be good. On the other hand, maybe things will just continue with this phenomenon, just shifting from one market to another – seems hard to believe, though.

I have a hunch that the market will tire of being pushed around, and will rebel.  It’s going to be really interesting to see what that looks like – something I look forward to with great eagerness.

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What I Am Doing Now

February 11, 2016

If I’m going to write on the markets, it would probably be helpful to confess what sort of strategy I’m following.  I offer this not as an example for you either to emulate or to avoid like the plague.  You’ll find out what that strategy is as you peruse this post.

Market commentary:

Our friends at Investors Business Daily are all bent out of shape that gold and gold shares are doing well as they view gold as a defensive item and thus a contra-indicator of the health of the equity markets. I’m not sure it’s that simple, and I may be mischaracterizing their position anyway. IBD is essentially a system for buying stocks with outstanding fundamentals breaking out of “sound” chart bases, but only when IBD has the market in “confirmed uptrend.” Right now IBD shows the market in “correction.” The only other status I’ve ever seen is “uptrend under pressure,” which is where I think it was yesterday. Their news pages have had a slew of negative reports (which you can get anywhere) and their editorial page has been less than encouraging.

If we’re looking for a positive indicator, I suppose we could note that small speculators are very short S&P 500 futures right now. And since the little guys usually get it wrong … well, you get the picture. Being somewhat cynical about the methods of the various major market participants, I’m sitting here wondering if a surge higher in equity markets will be staged to get these guys offside by getting them to flip to long followed by a rapid decline to clean them out. Wouldn’t be the first time. We shall see.

Unfortunately, we have Yellen appearing before congressional committees Wednesday and Thursday, so for the short term, markets will turn on what she has to say. Will she state that the .25% rate hike was an error? Will further rates hikes be ruled out for this year? Will she address possible negative interest rates? Will she claim the economy is improving and rate hikes are still on the table?  Will she confess that the FED has no idea what it’s doing?

To me, at least, it’s maddening to have to configure one’s investments based on what the head of the central bank has to say. Of course there are those who will say to ignore her and to invest for the long-haul. The snag with that is she and her confederates are very capable of shoving a teetering market right off the cliff requiring years to recoup losses. I don’t expect that, but at the same time, I don’t have much confidence in any of the central banks getting things right. And that assumes we should have unaccountable, unaudited, opaque central banks in the first place.

The S&P 500 closing around 1850 is a very bad sign. If you look at a chart and review the period from around July to present, you have the longer-term trend starting to break in July followed by that nasty drop in August. October through January carved out that nice rounded top followed by the recent thud below the August lows. If you flipped the chart over you’d have an incredibly bullish pattern and be ready to buy. So I believe it’s now a matter of how much the market will drop and how long that will take.

In the event the bears are right and S&P drops to its 200-month moving average, we’re in for substantial losses possibly reaching 40%. Only those who got out of the way, or who have already put a tail-hedging strategy in place can be somewhat complacent. As it is now, traditional tail-hedges such as put options have gotten too expensive to be viable techniques. I’ve heard of longs turning to options on Eurodollars to tail-hedge, so perhaps that’s worth a look.

For all that bearishness, I still would not be surprised to see a bear-market rally from here.  These can be quite stunning, and can also get investors on the wrong foot for when the decline resumes in earnest.

All of these massive deficits our government is accumulating do nothing to stabilize the economy or markets.  Pretty sure a country, or world for that matter, cannot continue to engage in profligate and fraudulent economic policies forever without negative consequences coming home to roost. If the Austrian economists are right, the greater the distortions introduced by liquidity-pumping central banking policies, the greater and nastier the inevitable correction. If accounts were not squared and bad debts not written down after the 2008 crisis, then they are still there, ready to reek havoc once again.

S&P closed near the bottom of its range today which doesn’t inspire confidence. Right now S&P 500 futures are trading off 12.00 at 1834.75 which doesn’t really mean a whole lot as it’s not unusual during the current market for those contracts to swing back and forth from gain to loss overnight.

What does surprise me is that we’ve not seen a violent reversal in the equity decline for some time. Nor have we seen gold get hammered for quite a while. I was expecting to see gold pull back after it broke the round number at 1200. Well, it did, but by much less than I expected. China is out of the market this week for its new year celebration which has thinned out trading a bit making it easier for major players to push price around. I took some of my long exposure off at that time in anticipation of a decline that has yet to arrive. Still long gold futures but looking for a spot to increase my long position. April gold futures now trading at 1208 after hitting 1215 a bit ago. If we stay above 1208 without the commercials taking the short side and pounding gold, then we could see a nice price rise from here.

Moves in the dollar will be very relevant. I’m sure Iran, Russia, China, and several other countries are salivating at the thought of knocking the dollar off its pedestal. Now that Iran is back in the oil market (and defense market), they wish to sell oil exclusively for euros. We’ll see what impact a reinvigorated Iran will have.

It’s important to specialize rather than bouncing from one asset class to the next, because it’s very helpful to get a good feel for how a particular market trades over time.  It enables one to hold on during moves that would otherwise shake one out.

I looked back over the years and found my best results have consistent been achieved from trading commodity futures and options on commodity futures. And trying to follow a bunch of stocks and trade futures is more of a project than I want to handle. So, for the foreseeable future I will be in commodities and out of stocks.

All that said, even if some of the most bearish predictions from some of the great lights of the investment industry turn out to be right and the Dow drops to 10,000 or lower, there will still be some intermediate-term rallies during that time, perhaps significant, for those who follow a system like IBD where you’re either long or out of the market. I just doubt very seriously that I’ll be part of that scene.

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A Safer Way to Lose All Your Money

January 31, 2016

I’m  wondering if there are consequences for the incredible increases in debt at all levels, but especially at the federal level, that have be incurred during the current administration and its predecessors. And if so, what those consequences will be. Seven years of next to zero-interest rates, and what’s the result? Could anyone have even proposed such a policy ten or twenty years ago without being written off as a nutcase? And I don’t think the Fed knows what to do.

To some degree, this is a referendum on the various schools of economics, although I doubt it will ever be widely seen as such. Let’s see if this rally in the S&P 500 that got such a boost on Friday has legs or whether it’s a head-fake. If it continues to build on strength over the next couple of weeks, then perhaps the bear case is repudiated or at least postponed. If it flops and we start seeing it close below around 1850 for a few days in a row, then I would be more concerned. Well, I would be if I had substantial long equity or bond exposure, which I don’t. So, personally, I’m just interested in the equity markets to the degree they affect the price of gold.

By the way, what are the equity guys doing over there? Major indices can’t get any traction. Any rebound seems to run into selling pressure. Selling the rallies instead of buying the dips is not what an equity bull wants to see. You aren’t getting ready to stage a major bear market, are you?

Equity markets sure didn’t like what Janet had to say today, although gold got a temporary boost. If the S&P 500 finishes out this week around 1,850 or lower there’s going to be a growing belief that the action over the past three months really has been the market putting in a top. Once that belief takes hold, rallies will be sold until the market proves otherwise. I’m not a perma-bear, but bear markets do happen – just normal events. The market will tell us if we’re entering one or not.

I’ve done better trading futures than I did with stocks. It’s kind of funny, though. Conventional wisdom is that trading futures is very risky. Well, futures are very volatile, and leverage does magnify any moves.

I guess the prevailing thought is that being in the wrong stocks at the wrong time is just a much safer way to lose all of one’s money than through trading futures. I’m thinking that because of the massive government intervention in the markets over the past couple of decades or so that people have forgotten how risky stocks can be. We’ll see if officials can permanently levitate equity prices, or whether Mr. Bear is still alive and capable of doing his work.

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Late Night Market Watch

date, 3:30 am

Dow futures are off 350 points. Nice. Our Dear Leader said something about those expressing concern over the economy engaging in fantasy. Right. Must be a lot of them in the markets tonight…

Crude oil is off about 4% at this time, putting it at $27.50. You can bet that there are plenty of over-the-counter or off-market derivative bets – probably with a notional value into the billions or more – that are at risk of creating serious defaults by financial institutions if the price hits levels that trigger them. Of course, I have no idea of the amounts nor of the various levels that these things will be triggered. I do not breathe the refined air that such knowers breathe.

There are also multi-billion dollar plays on gold (and the dollar, and the equity indexes, and who knows what all). If gold gets out of hand to the upside and its price cannot be contained below say $1,108, then things could go wild. It’s a testimony to the greed and brilliance of the financial engineers in the money center banks to have created financial instruments that are so heavily leveraged that the notional value of those instruments exceeds the underlying value of the actual physical gold and silver to which they are connected by many times over.

Warren Buffet, a man I respect for his abilities but not for his political views, referred to these over-the-counter derivatives on everything from interest rates, to mortgage bonds, to commodities, to financial indices, as “weapons of financial mass destruction.” It could be that we’ll find out if he’s right or not. Point is, they are opaque, not traded on any exchange, not backed by any clearing agency, illiquid, unregulated, valued only by the most complex of computer algorithms (since no market exists for them), and probably fraudulent. Due to the opaque nature of these financial instruments, the total value is impossible to determine – or so I would think. I have seen estimates that their total value exceeds $400 trillion. What could possibly go wrong with this scenario?

We’ll see if the equity markets can shake off this nasty correction tomorrow or if we’re in for more fun. One positive would be if the major stock indices were to get back above their respective 10 day moving averages and stay above them for a few days.

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Prophecies and Yogi Berra

Once again I am impressed with my shortcomings. And not only with mine, but with the shortcomings of people who would have you believe they are unencumbered by any such limitations. If fact, I’m pretty sure it is the folks who don’t believe they have any shortcomings who are the most dangerous. And the further they sink into the hubris surrounding their sense of infallibility, the more dangerous they become. Eventually they might pursue a career in public office making them hazards to the public welfare.

Dear reader, that’s one thing you need not fear from me. I know I make lots of mistakes. And regarding political office, I live by the creed expressed by General Sherman: “If nominated, I will not run; if elected, I will not serve.”

My attention today is directed to prognosticators. We’re drowning in them. Predictions about the economy. Predictions about the crises in the Middle East and Ukraine and China and North Korea and heaven knows where else. And what do these seers, these soothsayers have in common? They are typically wrong.

I could go off in a multitude of directions at this point. That said, I’ve chosen to take a quick look at the world of investing tonight. Partly because I have some education and quite a bit of experience in that discipline. Partly because it might help you. And partly because I am wearied of politicians tonight.

So let’s look at Wall Street. This is an absolute hornets’ nest of tea-leaf readers. By design or result, these self-appoint oracles’ main accomplishment is to separate investors from their money. They publish newsletters with impressive names. They claim to have some confidential, inside information known only to a privileged few with which they can make you rich — for a handsome subscription fee. They produce charts with so many proprietary indicators as to render the things utterly incomprehensible – by design.

Dear friend, you realize, of course, that anyone can get “the hot hand” for a while. In fact, the tedious machinations of statistics guarantee it. Put more bluntly, any blockhead can get lucky for a season — and many do. The key for this fortunate individual is to parlay that streak of success into advisory fees and subscriptions payments and a sterling reputation. Funny how nature often rights things, though, as the oracle of yesterday becomes the buffoon of tomorrow.

And it’s amazing how long people will follow a numbskull. I suppose having invested one’s money into the subscription fee as well as the recommended securities, one feels compelled to hang on until the winning streak returns. Too much invested to pull out it is thought, perhaps? Unfortunately, one typically can stand only so much bad news, eventually gives up, sells all previously recommended investments at a significant loss, and cancels the subscription shortly before another lucky streak begins. It’s a common disaster. Help me feel good about writing to you — don’t make that mistake.

Obviously Wall Street is a magnet for swindlers, con men, charlatans, and miscreants. That there are people who make money investing is without a doubt — with the right study and work, you probably can, too. That there are honest people in the investment industry is also true.  I am simply here to sound the obvious warning. You already know it. It starts out, “If it sounds too good to be true…” Funny how some of the simplest proverbs are the best. The same can be said for various investment principles.

Realize that I am not a licensed or professional investment adviser. In fact, I think the only licenses I have are a driver license and ham radio license. So if you need help in this area, do yourself a favor and spend time seeking out quality professional help. Same as if you need a good psychiatrist. Which you might if you spend too much time in the investment world.

I could turn my attention now to national and world affairs, but there’s a limit to what I can endure of my own writing — and to the amount of hubris I can withstand. So I will let that go for tonight in solid confidence that my opportunity for comment on political affairs will not go away anytime soon.

I’ll just meditate on the words of one of my favorite philosophers, Yogi Berra. “You can observe a lot by just watching.”

Like I said, sometimes the simplest adages are the best. And I’ll keep watching.

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