Category Archives: Investiv Daily


Sunday Edition: Setting Reasonable Investing Expectations

The story of the tortoise and the hare teaches us that the prize doesn’t always go to the swift, who are sometimes easily distracted, but often ends up in the hands of the one who perseveres regardless of speed.

This apologue is even more true when applied to investing. Many investors are too easily lured by “get rich quick” investing schemes and strategies, rather than safe and consistent compounding month after month, using what some might consider a boring strategy.

I shudder at the thought of comparing Thomas’ nearly 30% annual returns over the last two years to the tortoise. Especially when his returns exceed those of investing greats Buffett, Ichan, and Tepper. But when compared to the pipe dream some investors have of earning 100% + annual returns buying options and futures contracts, then it most certainly appears “boring.”

Sure, some investor might have a banner year buying leveraged options and futures contracts, but lets see him string together two, three, or four years of similar performance. Any trader who more than doubles his account in a year, or even 18 months for that matter, will have been helped by lady luck much more than he cares to admit.  

The fact is, for every gunslinger who doubles, triples, or even quadruples his trading account in less than 18 months, there are 50 other traders who attempted the same thing, and completely blew up their trading account. You don’t want to be one of them.

In today’s reprint of Thomas’ Rebel Income newsletter (annual subscription $1,164), he talks about his own experience trading leveraged futures contracts and why he is sticking to the more “boring” strategy of selling put options.

Week 2: Setting Reasonable Investing Expectations

“How much money can I expect to make if I use your system?”

This is a question I often see from new potential subscribers. It’s essentially the same question I used to deal with on a daily basis when I worked for a major mutual fund in the 1990s. It’s a natural question that many of us ask when we’re thinking about putting our hard-earned money into an investment.

The natural answer, of course, is to point to previous results. I make my trading log available through the Investiv website so you can see my trading results almost as quickly as I make trades, and I’ve used it quite a lot in customer communications to illustrate what I think is a reasonable example of what is possible using the Rebel Income system. At the same time, though, I remember that I got tired very quickly of telling potential customers to look at the historical returns of the funds I was trying to get them to put money into. I came to realize why every performance graph I could show people included the disclaimer “past performance is not a guarantee of future results.”

With mutual funds, performance often varies wildly from one year to the next for any number of reasons. For example, we had a very high profile manager managing our flagship fund who decided to retire. His replacement was highly intelligent, educated and groomed in the same basic approach his predecessor had used to beat the market year after year, and was this manager’s first choice as his successor. And yet in the first few years after the switch, the fund lagged its previous performance in glaringly obvious ways. The fact is, the new guy wasn’t the old guy, and so thinking their approach was going to be the same—and that the fund would just keep chugging along the same way it had—wasn’t actually very realistic. Through it all, the instructions I kept getting from management was to rely on the fund’s average historical numbers, which tended to obscure the more recent data (with the new manager) because the older performance (from the old manager) had been so strong. This was one of the first ways I learned to distrust funds that trumpeted their historical returns for everybody to hear.

Where does that leave individual investors? As you’re trying to make investment decisions that will provide for current or future needs, what are you supposed to hang your hat on? Marketing material out there tends to work with the most impressive numbers they can come up with, because nobody is going to pay attention to an ad promising conservative results. We are all cursed by the the consumption-based society we live in; we want maximum benefit/pleasure/entertainment value with minimum work/effort/money spent. It makes it easy to pay attention to the shiniest, newest, and best-looking thing out there, and hard to care about anything that is dressed up in any other way.

Several years ago, I had a good friend who was achieving some really spectacular investing results as a day trader. He had begun trading futures, which were highly leveraged contracts on commodities like gold, oil, and even on the broad stock market indices. He was doing so well in just a few months of time that he had paid off the mortgage on his house, his college student loans, and every other debt he had, and was living almost entirely off of his trading income. Naturally, I was impressed and asked him to show me what he was doing. His approach seemed simple enough, and so I decided to give it a try. I thought I had everything to gain and little to lose, especially since I started my trading with just a few thousand dollars that wouldn’t have gotten me into trouble to lose.

For about the first six weeks, I did okay; I almost doubled my account value by applying a similar method that my friend showed me with some rules that I customized for my own purposes. I was having a lot of fun, telling people I was a day trader and bragging about how astute I was. After that sixth week, though, the market shifted, and I didn’t shift with it. The thing about futures trading is that the leverage that pays you so well when you’re right takes it away from you even more quickly when you’re wrong. I saw my profits evaporate within days, and didn’t have the sense to stop what I was doing to figure what I needed to change. I was so upset about how things had turned against me that I was convinced I just needed to keep trying. I watched my account drop all the way to $0, and then put in a few thousand dollars more and tried again. Within weeks, all of the money I could put towards futures trading was gone. All I had to show for it were a lot of lumps, a big slice of humble pie and a very hard lesson learned.

As time passed and I was able to think more rationally about my experience and my failure, I realized that one of the problems was that I went into futures trading with guns blazing; I relied on the experience and knowledge I had built by investing in stocks and trading options to make my futures trading decisions. I didn’t take the time to really study and learn about the futures market first. It’s true that futures form trends just as stocks do, but it’s also true that futures behave in ways that are very different from anything I was used to at that time. My ignorance about that reality kept me from recognizing trouble when it was in front of me.

I also learned an important lesson about expectations. I assumed that because my friend had achieved such fantastic results, I could too. I’m not saying that setting ambitious goals is a bad thing – but when you base your expectations of your own success or failure on what somebody else has done, you’ll usually end up disappointing yourself. I was so determined to prove to myself that I was just as good as my friend that it blinded me to the need to apply what I was seeing in the market properly for my own trading system. I stopped thinking about the fact that we were different people, with different perspectives, experiences, and investing styles. My expectations became completely unrealistic because I was trying to be like my friend instead of just being myself.

In the years since that experience, I’ve stayed away from the futures market. I’ve decided that part of what makes me successful as an investor is to work with investments that make it easy for me to stay grounded – not only to what I know works, but also to what I know I can manage effectively and rationally for my own purposes. I’ve realized that I don’t have to trade the coolest, sexiest markets to get what I need out of my investments. My expectations are simpler, and because of that, the system I use is more effective and easier to manage.

The purpose of Rebel Income is to highlight income-generating trades each week that you can use to provide for your own needs; so what does everything I’ve just said about my expectations mean to you? My system is based on my own study and experience of what a fundamentally strong stock with a great value proposition is. I’ve worked hard to ground that system in principles and concepts that have been proven by time and by the wisdom of other investors. Even so, I don’t believe you should take the things I write about in this Rebel Income on blind faith. That’s why we’ve provided a lot of educational resources for you, in the form of the Homestudy Kit (my e-book and training video library) and the videos available in the Getting Started area of the site to Rebel Income subscribers. It’s also why when I write about subjects like position sizing and diversification, or trading based on overnight information, I tell you about what I do. I don’t necessarily want you to do the same thing, but if you know how I approach those concepts, you can decide for yourself if my logic makes sense or whether you need to apply a different method that works better in your case.

Setting expectations isn’t really about how much money you can make with a given investment or system, even though that’s naturally the way we all tend to think about it. Setting expectations  is really about thinking about a given investment or system in the most practical terms you can, against what your own investing style, risk tolerance, and needs look like. In my case, I decided that the futures market didn’t offer the right fit for my investing style or my needs. That doesn’t mean it’s a bad investment, or even that I might not use it at some point in the future, only that I decided it would be easier for me to not spend more time, energy or money on trying to make it fit when I already had a system in place that did. If you work with the Rebel Income system, make sure that you’re evaluating it based on how easily it fits, or can be adjusted to fit into your own preferences and needs. That’s really the only way you’ll be able to get what you want from any system or investment in the long run.

Through his own market experience, Thomas has gained a unique perspective on investing expectations, and has most certainly carved out a niche selling put options to generate income.

Quite frankly his track record is unheard of in the financial publishing business. He’s closed exactly 101 trades, of which 98 have been winners with only 3 small losers.

To become a tortoise and finish the race, we’ve arranged for you to follow Thomas’ put selling income picks for the next 30 days for only $9, with no obligation to continue, and get two incredible bonus items free, click here.


Shane Rawlings
Co-founder, Investiv 


Where The Risks Are: It’s Not Where You Might Think…

  • Car sales are in a downtrend and PMI is falling, which ties the FED’s hands.
  • Japan has just entered into direct economic stimulus with $273 billion.
  • The Bank of England behaves like the economy is in a depression, cutting rates and printing money.


Yesterday we discussed how China isn’t as big of a risk as many would like to make it out to be. Today, we are going to go through the latest data from the U.S., Japan and Europe in order to assess their riskiness.

The U.S. 

We already discussed on Tuesday how the GDP has grown at a slower rate than expected and the actual growth is fueled by increased consumer debt, which isn’t a sustainable long term situation. Going into more detail will enable us to better forecast what will happen in the short to midterm.

One area of consumer spending that is currently essential for U.S. GDP is car sales. In the first 7 months of 2016 car sales have hit a plateau, which means there is more downside than upside. Car sales peaked in October 2015 and it looks like a downtrend is forming. The peak reached in sales is especially worrisome as car loan rates have hit historical lows and are currently around an average of 4%.

figure 1 car sales and rate
Figure 1: U.S. Total vehicle sales and car loan interest rates. Source: FRED.

This explains why the FED’s hands are tied when it comes to interest rate increases. Increased rates would increase the costs for consumer debt and therefore immediately lower consumption, sending the U.S. into a recession.

If you are overweight car stocks, be careful and watch what is going on because the low valuations are there for a reason and any kind of economic turmoil might be very negative on stock prices.

Continuing on the state of the U.S. economy, the Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI), which measures factory activity, came in positive but below expectations on Wednesday. The PMI declined from 53.2 in June to 52.6. Any reading above 50 signals activity is expanding which is a good sign, but a downward trend isn’t ideal to see as most indicators were slower than in the previous month.

figure 2 manufacturing
Figure 2: U.S. manufacturing. Source: ISM.

Apart from the decline in activity, it is also important to note how the PMI reacted to the FED increasing interest rates in December 2015. The expectation of an interest rate increase alone decreased the PMI, and only with the later change in the FED’s rhetoric did the PMI return back into positive territory.

figure 3 the fed and PMI
Figure 3: PMI index in the last 12 months. Source: ISM.

This is yet another indication of how difficult it will be for the FED to increase rates as businesses and people have gotten used to low rates and any increase would immediately lower economic activity, pushing the FED to step backwards.

Japan’s Easing

On Tuesday Japan’s prime minister, Shinzo Abe, approved a $274 billion stimulus package aimed to help the Japanese economy and to help ensure his political survival. The package includes $173 billion of fiscal measures, $73 billion of government spending and $59 billion in low cost loans.

As this is a step beyond monetary easing, we will see what the impact will be on the Japanese economy. Analysts expect added economic growth of 0.4%.

The conclusion is that, if everybody is easing, it doesn’t make much of a difference and forces other central banks to do the same. This is the third reason in this article that makes it difficult for the FED to increase rates.


The situation isn’t better in the UK.

While the major economic impact of BREXIT won’t be seen for two to four years, the first signs of a slowdown can be seen from the weaker sentiment. The UK Manufacturing PMI came in at its lowest level since 2013, which was a recession year in Europe. What is also important is the sharp decline, the PMI index fell to 48.2 in July from 52.4 in June which confirms BREXIT related uncertainty.

figure 4 uk pmi index
Figure 4: UK manufacturing PMI index. Source: Markit Economics.

On top of the negative PMI, the Bank of England has slashed its growth forecast to 0.8% from 2.3% for 2017, lowered interest rates to a record low, and announced increased lending of 100 billion pounds to banks. It will also increase bond purchases by 60 billion pounds. The Bank’s actions portend an outright depression in the UK rather than a possible future economic slowdown, but this is what central banks do these days.


A positive note comes from Europe which saw its PMI grow in July to 53.2.

figure 5 gdp pmi europe
Figure 5: Europe PMI. Source: Business Insider.

But the negative news is that GDP growth in Europe is expected to only be 0.3% in Q3 2016, further emphasizing the already bad decline to the 1.2% annualized growth rate in Q2 2016. All eyes are on the ECB which has stated many times that it will do whatever it takes to keep things stable and growing, thus, more stimulus.


The main question is: how long will central banks be able to keep things stable and markets high, and when will monetary and fiscal stimulus become inefficient and spur inflation? All factors indicate that the markets are overvalued, the economies are stretched and monetary stimulus is reaching its limits. As soon as signs of a normal economic cyclical downturn emerge, central banks step on the gas and print more money.

On one hand, investing logic would indicate that investors stay in cash as a bear market is imminent, but the fact that central banks keep printing money and saving markets, or not even allowing markets to decline, indicates that stocks and bonds will be artificially propelled even higher and investors might want to stay long these markets for the time being rather than fight the trend.  However, having well thought out stop loss orders in place is a must, and raising some cash would be prudent too because at some point things will turn.

It is important to keep an eye on inflation because low or no inflation is what is enabling central banks to continue with easing. As soon as inflation increases, central banks will have to start tightening.  Consumer price inflation is still at only 1%.

figure 6 inflation rate
Figure 6: U.S. inflation annual inflation rate per month. Source: Trading Economics.

As we discussed yesterday, China is growing at 6.7% per year, has low debt when compared to developed countries yet and is considered a risk. While developed countries use desperate measures to keep things as they are, fight deflation and spur some economic growth. Logic suggests that the risks lie in the developed world and China is a much safer bet.



Forget The News: If You’re Not Exposed to China, You Should Be. Find Out Why.

  • Don’t be scared by the news, China is growing strong and has incredible future prospects.
  • Temporary bumps are and will continue to be normal.
  • Portfolio diversification with China is essential for increased returns in the future.


Exactly a year ago fears around slower economic growth in China, the Yuan devaluation, and oil prices below $40 were the main catalyst for a market correction. The S&P 500 fell from 2102 points on August 17, 2015 to 1867 points on August 25, 2015.

In today’s article we are going to analyze the current situation to see if things are better, or if the market has shifted its focus to other things.

Yuan, Economic Growth and Oil

When the Chinese government devalued the Yuan it spread fears around the globe that the Chinese economy might be doing worse than previously assumed. Everyone knew China was slowing down, but expected growth was still at 7%.

The Chinese government devalued its currency by 3.2% on August 15, 2015. Since then the Yuan has further depreciated by 3.5% against the dollar, but no one seems to care about that anymore.

figure 1 usd yuan
Figure 1: Yuan per 1 $US. Source: XE, author’s own annotations.

The fear then was that Chinese economic growth was going to slow down more than expected. And while growth has been slightly less than 7% over the last year, it is still growing at 6.7%.

figure 2 chinese growth
Figure 2: Chinese annual economic growth. Source: Trading Economics.

In order to avoid a hard landing, the Chinese government has taken action. It has forced state-owned companies to increase investments, and it further lowered interest rates to a record low of 4.35% which further increased debt, forcing the debt to GDP ratio to record highs. In its annual review of the Chinese economy, the IMF (International Monetary Fund) stated that policy actions improved the Chinese near term growth outlook but “the medium-term outlook, however, is more uncertain due to rapidly rising credit, structural excess capacity, and the increasingly large, opaque, and interconnected financial sector.”

Increasing debt to GDP means that China is using debt to keep its growth stable which isn’t unusual, but does tell us that without increased debt levels the economy would have slowed down sharply. Current Chinese debt to GDP is 43.9% which is still very little when compared to the U.S. with 104.17%, especially when we know that China is growing at a 6.7% rate and the U.S. at a rate of 1.1%.

figure 3 debt to gdp
Figure 3: Chinese debt to GDP. Source: Trading Economics.

Even the IMF, in its closing remarks, states that Chinese debt is not worrying, especially as China is transitioning from a manufacturing economy to a service based economy which is never a smooth transition.

The final scare last August was that oil prices fell below $40. At the moment oil prices are again around $40, but the S&P 500 is still stable at above 2150 points as this is considered the “new normal.”

figure 4 oil price
Figure 4: Oil prices. Source: Bloomberg.

Local Perspective

In order to better understand what is going on in China, it is a good idea to take a local view which will provide us with a better understanding of the headlines we have read or may read in the future.

Regional data for the first six months of 2016 show that economic growth increased in 15 of the 31 Chinese provinces which indicates that things are, if not turning around, pretty stable in China. On the other hand, difficulties in the coal industry have created a recession in the provinces based on coal and steel production.

figure 5 province growth
Figure 5: Chinese economic growth by province in 1H 2016. Source: Bloomberg.

The chart above is essential for understanding that China is transitioning and therefore economic problems have to be expected, but at the same time, China is still booming. Don’t let negative news about a specific sector or province in China scare you about its future prospects. A longer term perspective will give us a better view of where China is now and where it is headed.

Longer Term Perspective

The GDP per capita indicator is the best way to see where a country is and where it is going. The current GDP per capita in China is $6,416 which is just 12% of the U.S. level ($51,486).

figure 6 gdp per capita
Figure 6: Chinese GDP per capita. Source: Trading Economics.

The low starting level is reassuring for the future as there is still plenty of room to grow. Fears about China should be cast aside when looking at the longer term perspective, and not be reacted to like they were last August as the IMF still predicts that China will grow around 6% for the foreseeable future.

figure 7 gdp forecast
Figure 7: IMF Chinese growth prediction. Source: Knoema.


All in all, we can say that China is doing well and that last year’s August scare was just that, a scare, and a market misperception. China is a large country that still has plenty of room to grow. It is completely normal for it to be a bumpy ride, and seeing what China has done in the past 25 years gives confidence that the country will continue on its growth path, and scary moments can be used to buy investments on the cheap.

Given the positive long term prospects, it might be a good idea, if you haven’t already, to have your portfolio exposed to China. This can be done by buying Chinese ETFs or being overweight in companies that have a large exposure to China. The iShares China Large Cap ETF’s (NYSE: FXI) historical performance shows how investment performance is related to economic growth.

figure 8 etf - new
Figure 8: $10,000 invested in the China large cap ETF in October 2004. Source: iShares.

Therefore, with much weaker prospects in the U.S., don’t let frightening headlines scare you. Diversify into China, there is still plenty of room to grow.


Investing In REITs Is Great, But Not Right Now

  • On one hand, REITs offer higher dividend yields, inflation protection, real estate diversification.
  • On the other, REITs are highly leveraged and consequently have more downside when economic circumstances turn.
  • Don’t get tempted by the higher dividend yields of the general REIT market now, security selection is the only option for profitable longer term REIT investments.


As we promised in our farmland article, today we are going to talk about Real Estate Investment Trusts (REITs). We are going to discuss what REITs are, what benefits they offer, what risks there are with them and what the current market perception for them is, whether overvalued or undervalued.

What are REITs?

REITs are trusts that allow individual investors to invest in large scale real estate projects. They were created in 1960 by Congress in order to enable any investor to invest in long term real estate investments. By buying shares in an REIT you can diversify your portfolio with real estate without having to worry about managing properties or about minimum investments. The trust usually owns and manages properties itself.

REITs operate in various real estate sectors, from office buildings, to shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans to farmland, which we discussed on Monday.

There are also various types of REITs. Some are publicly traded while others are registered but not traded, and thus have more liquidity constrains for investors.

Benefits and Risks of Investing in REITs

  • Lack of Liquidity – As there are many REITs, some of them have really thin trading volumes and are very volatile, but those REITs usually carry a premium so if you can part with your money for a longer period of time and are willing to do proper due diligence, you might want to dig into small cap REITs for higher dividends.
  • Diversification and Liquidity – Large REITs offer high liquidity real estate diversification that can’t be matched anywhere else. You can buy a part of large real estate projects just by sitting at your home desk, and sell it again whenever you want.
  • Real Estate Diversification – In addition to asset diversification, with REITs you can also get real estate diversification. As real estate prices do not move in sync across the country, having one piece of real estate might expose you to the wrong market. By owning an REIT, or several of them, you can be exposed to the whole U.S. real estate market.
  • High Dividend Yields – The current average dividend yield from the 220 REITs that pay a dividend yield is 5.31%. REITs are able to pay such large dividends because it is not unusual for them to have payout ratios that are much higher than their earnings as REITs usually payout their entire free cash flow. This is the benefit of depreciation for real estate investments.
  • Increasing and Stable Income – As rents increase over time, you can expect higher dividends that remain stable as real estate investing is more stable than other assets classes.
  • Tax Advantages – If REITs payout more than 90% of their taxable income, its profits are not taxed at a corporate level which is the second reason for higher REIT dividends. If a corporation makes $1 pretax it has to pay 35% corporate tax which leaves $0.65 available for dividends. An REIT can payout the whole dollar without paying corporate taxes. Further, when holding REITs in your IRA account you can avoid paying your own dividend taxes.
  • Inflation Protection – Real estate is a great protection against inflation. As money becomes less valuable, all assets of a fixed amount increase in value. Plus, with higher inflation, rents also increase and protect your income.

As we can see, REITs have a lot of benefits, but, unfortunately, all of these benefits currently come at a high price.

REIT Performance

As home prices have increased since the Great Recession, so have REIT prices.

figure 1 home prices
Figure 1: S&P/ Case Shiller 20-city U.S. home price index. Source: FRED.
figure 2 vanguard ETF
Figure 2: Vanguard’s REIT ETF performance. Source: Yahoo Finance.

As the figure above shows, REITs are much more volatile than home prices. This is due to their leverage as REITs usually borrow to the maximum in order to leverage their real estate operations. It also means that in case of a recession, REITs might be severely hit. In the Great Recession, the Vanguard REIT ETF fell from a high of $83.76 in January 2007 to a low of $23.89 in February 2009.

Investors have to carefully assess if the higher dividend yield and real estate diversification is enough of a benefit to counter for a larger decline if circumstances take a turn for the worst.

REIT ETFs have the largest weights in the largest REITs. As the current Vanguard REIT ETF (NYSE: VNQ) dividend yield is 3.35%, it only confirms the thesis that smaller REITs offer higher returns but also less liquidity and more risks as the average dividend yield for all REITs is 5.31%.


As REITs have been surging in the last 7 years and their yields have been declining, one might argue that REITs are nearing bubble territory. In such a situation the best thing to do is to look for quality in the sea of REITs rather than buy everything through an ETF.  Because once the tide retreats, we’ll know who is swimming naked, as over leveraged and poor quality REITs are exposed.

As for the risk and reward, yes REITs offer higher dividend yields but, due to their leverage, their downside is also greater.

Keep an eye on REITs, maybe have some exposure to them and then increase your exposure as prices decline.


Euphoria & Denial Point to the Last Days of the Bull Market

  • Risks are cumulating and getting bigger.
  • U.S. GDP growth is slower than expected, earnings and oil prices continue to decline.
  • Japan is unable to grow while BREXIT risks are still unfolding.


It is difficult to find good news lately. The last really good news was the June jobs report when 287,000 jobs were added. Since then, most of the news seems dismal, however, it has yet to have a negative impact on financial markets. It’s as though investors are just hoping for something good to happen in the future. As hopes are an immaterial human feeling, they should not be the base for investment decisions.

In this article we are going to analyze what’s pushing the S&P 500 to new highs. Are we in a state of euphoria about stocks or are the valuations and price increases rational?

GDP News

The U.S. economy was expected to grow 2.5% in Q2 2016, but it only grew 1.2% (seasonally adjusted). U.S. economic growth for 2016 is currently at 1% which is the weakest start of a year since 2011. Saving the economy from a recession is consumer spending which increased by 4.2%.

Low interest rates create cheap money which fuels two trends, growth in both consumer spending and the S&P 500. Consumer loans have increased at a faster pace than consumer spending which makes it clear that spending growth is fueled by debt.

figure 1 consumer loans
Figure 1: Consumer loans at all commercial banks (blue) and consumer spending (green). Source: FRED.

Anyone who has studied economics will tell you that the economy works in credit cycles, when money is cheap and prospects good, people take on credit and spend it. But one can only take on so much credit, and all banks want their money back sooner or later. When sentiment shifts, a credit contraction arises and consumer spending falls. As this is inevitable, the only justification for the current hope of increased GDP growth can be explained with the most dangerous words for investors: “this time is different.”

figure 2 credit cycle
Figure 2: Credit cycle. Source: Loomis Sayles.

As we are in the expansion part of the credit cycle, a recession is going to hit us as soon as we reach the downturn part of the credit cycle because consumer loans are the only thing still boosting growth.

figure 3 gdp contributors
Figure 3: Contributions to Q2 economic growth. Source: Wall Street Journal.

If it wasn’t for consumer spending fueled by cheap loans, the U.S. economy would most likely already be in a recession.

The S&P 500

With economic growth largely missing expectations you would assume the S&P 500 would tank, but that’s not what happened Friday when the economic data was released. On the contrary, the S&P 500 reached a new intraday high at 2177 points. The main reason for the new S&P 500 high is hope of future economic growth, the same economic growth that didn’t realize itself in this quarter.

Another reason stocks have continued to rise has been the Q3 2016 expected corporate earnings growth, but that also vanished like the above described economic growth. As most companies have issued negative guidance we cannot expect higher earnings in Q3 2016.

figure 4 positive guidance
Figure 4: Q3 2016 earnings guidance for the S&P 500. Source: FACTSET.


It would appear the FED is also somewhat in denial about the true state of the U.S. economy and S&P 500 earnings, and is holding on to the hope of increasing interest rates as soon as the economy shows signs of strength, be we’ve been hearing the same story for a while now.

Last week the FED left the door open for interest rate increases as the economy seemed to be improving, but this was before Friday’s GDP debacle. With growth being lower than expected, the FED will probably continue with its status quo policy. As we now know that the only thing pushing the economy higher is consumer spending fueled by consumer debt, any interest rate increases would be detrimental for the economy and push it into the downturn part of the cycle because higher interest rates would increase the cost of debt.

Data on jobs, consumer spending and inflation will be available before the FED’s next meeting in September so we will closely watch that in order to see if the FED will eventually move, highly unlikely after the latest GDP debacle.

Global Situation

The BREXIT had only a short-term effect on markets as investors soon focused on other things and hoped that it would not have any long term effects. But any BREXIT effects won’t be seen in economic data for a few years as it will take the UK at least two years to exit the EU, if not four.

figure 5 brexit
Figure 5: Soon forgotten BREXIT. Source: Google.

News from Japan was also not that good. As economic targets have not been reached, the Bank of Japan decided to double the annual amount it uses to buy exchange traded funds, from ¥3 trillion to ¥6 trillion ($57 billion). This is only a modest increase to Japan’s easing policy, measured in hundreds of trillions, and brings us to the conclusion that Japan is out of monetary policy ammo. Even with constant increases in monetary easing, Japan has experienced a 0.5% deflation in June and slower consumer spending. This should be a warning sign for the U.S. as it is clear that easing has its limits.


All the above indicates that we are currently in the denial phase of a stock market cycle. We have had a bull market for 7 years now and no one wants to look at the above data as it indicates a turn in the credit cycle, lower business spending and earnings, a strong dollar and global uncertainties with the UK, Japan and China. We will analyze the situation in China soon as it requires a special article.

figure 6 stock market cycle
Figure 6: Stock market cycle. Source: The Gold and Oil Guy.

Not to mention oil prices coming close to $40 dollars per barrel, which will push energy earnings down, again.

All of the cumulating risks we’ve discussed send a strong message. Investors have to start thinking about risks and rewards. In the late stage of a bull market, many are overweight stocks, which means they can expect a beating if any of the above mentioned risks trigger a bear market. The options are to increase one’s cash in order to have liquidity when a market decline comes, or to own more uncorrelated asset classes. I’ve written more on this in our recent article on Ray Dalio’s strategy.

For stocks, simply ask yourself, how much are you willing to risk for a 4% long term expected yield?



Should You Invest in Boring Farmland?

  • Global demand for food is going to increase by 50% in 2050, while farmland supply is pretty much fixed.
  • Historically farmland returns are an inflation hedge and have low volatility.
  • REITs give retail investment options.


With low general yields and high stock valuations, you might want to look at other types of assets to improve your diversification and returns. An interesting asset to own is farmland.

In this article we are going to elaborate on the reasons why to and why not to invest in farmland, analyze the current farmland market situation and give some ideas you can dig deeper into.

Investing Rationale

The investing thesis is pretty simple, farmland quantity is fixed and therefore with more demand for food or more money being printed, prices can only go up.

With growing global population and higher protein intake per person, it is expected that demand for food will consistently increase in the future. In order to feed the larger population, food supply has to increase by 50% by 2050. But farmland won’t increase as there is a finite amount of land available.

figure 1 global arable land
Figure 1: Global arable land. Source: Food and Agriculture Organization of the United Nations (FAO).

Farmland is also relatively uncorrelated to economic cycles. You might postpone buying a new boat or going on that great trip, but you won’t stop eating during a recession. On the other hand, there is the food price cycle which is mostly influenced by weather, good weather means lots of food and lower prices. Food prices were hit severely in 2014 and 2015, but are now rebounding which is normal for food prices.

figure 2 food prices
Figure 2: Food price index. Source: FAO.

The rebound in food prices mitigates rent risk as low food prices put downward pressure on rents. Higher food prices will give stability to rents and lower the risks for farmland investing.

There are two returns you are receiving when buying farmland, one is the yield and the other is capital appreciation as farmland is protecting you against inflation. In the last two decades, farmland has rewarded investors with excellent returns (12.5% per annum) and low volatility (7.1%).

figure 3 farmland returns
Figure 3: Average annual returns and standard deviation: Farmland vs. selected asset classes. Source: Farmland Partners.

A risk may be that farm prices are inflated at the moment seeing the exceptional past returns, but if we look at the above food demand prospects the positive trend could continue.

figure 4 farm value
Figure 4: U.S. farm real estate value. Source: U.S. Department of Agriculture (USDA).

Another risk might arise from the current low yields on farmland. The yield range is from 1% to maximum 5%.

figure 5 farm rent
Figure 5: U.S. farmland rent per acre. Source: USDA.

If interest rates increase and expected yields also increase, farmland prices might go down along with all yielding assets.

Investing Options

The first option is that you buy farmland yourself, but that limits your diversification and most people don’t have the skills to properly manage farmland assets.

The second option is to look for private partnerships, but you have to carefully analyze the partnership and fee structure. As many private partnerships are externally managed, fees might be high and activities might not always be in your best interest, plus the minimum investment could be very high.

The third option, and one that is available to everyone, is to look at farmland real estate investment trusts (REIT). The first advantage of REITs is that they are liquid and you can sell them instantly on the stock market. As REITs typically have lots of capital, they are very diversified and can avoid local farmland risks. High capital amounts give REITs the opportunity to raise capital in the form of debt and further leverage on the positive farmland returns.

Unfortunately, or fortunately because the sector is not overcrowded, there are only three farmland REITs. Those are Gladstone Land (NASDAQ: LAND), American Farmland Company (NYSE: AFCO) and Farmland Partners (NYSE: FPI). International farmland options are Adecoagro S.A. (NYSE: AGRO) and Cresud (NASDAQ: CRESY).

Going into detail on these stocks is beyond the purpose of this article, so every investor will need to find the best investment for themselves. Keep in mind that all of these stocks are small caps, and CRESY and AGRO are Latin American stocks, which are much more volatile than other kind of investments. In order to facilitate your investment decisions, keep reading Investiv Daily as we are going to write a detailed article on how to invest in REITs soon.


Owning farmland is a long-term, boring investment, yields will vary in relation to the food price cycle and farmland prices will move accordingly but the long term structural trends will give it stability. The slump in food prices has created some fear, so farmland investments can be found below book value as seasoned farmland investors are reminded of the 1980s farmland bubble when farmland prices declined for 5 years. However, a similar slump in farmland prices this time around is unlikely since the 1980s were influenced by a strong increase in farmland supply from South America.

Also, big new investors are attracted by the sector, like the financial services TIAA-CREF which raised $3 billion in 2015 for its second global farmland-investment partnership. Big institutional players entering the field lowers the risks of owning farmland and bubble fears might burst quickly.

The main risk is related to yield. With increasing yields, asset values should decline, but if inflation comes along, fixed supply assets like farmland should be a good hedge. The second risk is that farm prices continue to tank, but this risk is being mitigated by increasing food prices.


Sunday Edition: Put Selling as a Conservative Investing Strategy

We recently decided to add a Sunday Edition of Investiv Daily to mix it up a bit. We hope you are enjoying the daily content provided by Sven Carlin, one of the sharpest analysts and investors we know.

In the Sunday Edition we plan to publish content which is more educational in nature and can help you become a much better investor.

These first few issues will focus on what we believe is one of the safest and most profitable investing strategies that exists.

Over the last two years this strategy has averaged nearly 30% per year, compared to only 3.3% for the S&P 500.  

The content we will be sharing over the next few weeks is written by Thomas Moore, Chief Editor of Rebel Income, and has been pulled directly from his weekly posts to his paid subscribers.

Thomas’ investment advice doesn’t come cheap (a 1 year subscription is $1,164). At the end of his article we’ve arranged a special offer for you to follow his exact income trades for the next 30 days.

Whatever you do, make sure you read these new Sunday posts. These next few will give you insight and understanding about the most important income strategy for retirees and soon-to-be retirees and can’t be found anywhere else.

Here’s Thomas:

Put Selling as a Conservative Investing Strategy

If you’re new to income-based options trading, you’re probably still trying to get used to placing trades on a “Sell to Open” basis. The thing about covered calls is that they are very simple – buy the stock, then sell an out-of-the-money call on the same stock. Put selling, admittedly, is a different animal. If you haven’t spent a lot of time with put selling, you might struggle a little bit to understand the reasons and risks associated with put selling.

Because put selling requires a higher level of authorization and (outside of an IRA account) setting up a margin account with your broker if you want to sell naked puts, it is almost automatically assumed that put selling is a risky strategy. You may have even heard your broker tell you that put selling was a “very aggressive” investing strategy. That is a true statement – but only if you are selling puts naked and not following my approach.

The Truth According to Your Broker

Here’s why brokers and investment advisors want everybody to believe put selling is risky. Suppose you sell a put on a $50 stock with a $50 strike price. By the time expiration day comes, the stock has dropped all the way to $35. You will be assigned the stock at this point, and you will buy the stock at $50 per share, because the strike price is the price you are contractually obligated to complete the trade at. Right out of the gate, you’re down $15 per share or 30%, not counting the premium you brought in when you opened the trade. This is where brokers and investment advisors stop for a dramatic pause to let you react emotionally to the idea of such a big drop; and then they follow up with something like, “nobody wants to have to take that kind of loss.”

I won’t pretend that the very dramatic picture I’ve just painted doesn’t happen, because it absolutely does. I am sitting on stock positions today that fit this description almost to a T. The truth, fortunately for anybody who really pays attention and understands the opportunity a put sale actually gives you, goes much further than otherwise well-meaning but ignorant advisors and brokers tell you about. The picture is much bigger than the limited view I’ve given to this point, and the fact is a lot of investors are either too ignorant or are unwilling to exercise the patience and diligence a successful implementation of put selling requires.

Let’s expand the view of this trade a little more. Suppose now that before you placed the trade, you noticed that the company had built a solid reservoir of cash reflected by its Free Cash Flow, that earnings had been increasing on a consistent basis along with revenues, and that what debt the business carried was clearly contained by a low Debt to Equity ratio. Additionally, the stock paid an annual dividend of 2%. When you analyzed the stock’s price chart, let’s further suppose you noticed that although the stock was trading at or near historical lows, it had established a solid pattern of support along pivot low points. Because the stock is at historical lows, you also notice that it’s Price to Earnings ratio is quite a bit lower than the average for its industry. Given the fundamental strength of the stock’s business, the likelihood that the stock’s poor price performance is being primarily driven by simple buying and selling dynamics in the market in general rather than on any real problems with the stock itself is pretty high.

Since every stock experiences cycles between highs and lows, the truth is that a fundamentally strong company with a stock price at historical lows should be viewed as a solid opportunity in the long-term. This additional information I’ve just given you is the kind of picture some of the most successful investors in the history of the market, like Warren Buffet, Benjamin Graham and a host of others, have looked for as they built their own fortunes. It’s an approach that you might recognize by its popular name – value investing.

Understanding the Real Truth of Put Selling

I refer to put selling as a conservative way to generate income because when I combine the techniques of put selling with the discipline and patience of value investing, I get a way to generate income while at the same time managing risk in a practical, long-term way. Since the stock is already at historical lows, the odds of seeing the stock go up are higher than for a stock that is already running at historical highs from a long-term upward trend. That means that when I sell a put, there is a good chance the stock will stay above the strike price of my put option at expiration, so the option expires worthless and I can move on to the next trade. It might be another put sell on the same stock, or I might find a new one to work with. An expired put sale is a great result in my book. I try to maximize that possibility even more by selling put options that are at least two, three or sometimes even four strike prices out-of-the-money.

Another truth is that just because a stock is at historical lows and may be consolidating a pivot support, it isn’t a given the stock will go up. There is, frankly, an equal chance the stock will drop below the strike price I’ve sold. That is why I will sometimes state in these articles that the strike price I choose for a put sale is a price I’m willing to buy the stock at. I sell the put with the clear understanding I might be forced to buy the stock at that strike price, and if I’m not okay with that idea, I won’t sell the put at all.

Since I’m screening the stocks I use for these trades based on their fundamental strength and looking for a clear value-based advantage, the put sale gives me a gateway to the second part of my income generation system, which is selling covered calls. If I like the stock and don’t mind owning it at the strike price I sold, why not use my ownership to generate some more income from the stock while I can? Selling out-of-the-money call options let’s me keep generating income while simultaneously letting me lower my cost basis and set up a net profitable scenario if the stock closes above my call’s strike price at expiration.

Seeing the stock drop even several dollars below my assignment price doesn’t scare me away from the trade, primarily because of the fundamental strength my analysis is designed to screen for. In the case of these extreme trades, it usually just means that I need to exercise a little more patience and be very cautious about selling calls against the stock. If the stock appears to be consolidating or building some bullish momentum, I’ll usually just hold onto the stock until it starts to get back into the general price area I was assigned at. If I see a clear downward trend, I’ll look for opportunities to sell out-of-the-money call options that are usually further out-of-the-money than normal to sell to keep lowering my cost basis on and which are within just a couple of weeks or less to expiration. A few stocks in the past year I’ve done this with include Pandora Media (P), Abercrombie & Fitch (ANF), U.S. Silica Holdings (SLCA) and Schlumberger Ltd. (SLB).

To be clear, this last part of my system—dealing with stocks that have dropped significantly below my put option’s strike price—is what requires the most discipline and patience. It requires diligence in paying attention to the company’s fundamental news and earnings information and being willing to act if I see a serious degradation in the strength I identified at the beginning of the trade. Fortunately, it just isn’t that common to see a well-run and effectively managed company suddenly stop being well-run and managed, which is why in the last year I’ve only had to unwind one position out of the several dozen I’ve held. The discipline and patience I’m talking about, however, isn’t something that everybody can exercise. I’ve heard from traders who have subscribed to my Rebel Income blog but who didn’t want to deal with put selling on these kinds of terms. While I find that unfortunate, I recognize and readily admit that if you’re just looking for a quick buck or a way to get in and out in a hurry, my system isn’t for you.

If you’re new to put selling, I hope this explanation gives you some encouragement to stick with it; it’s what I’ve seen the best success at in more than two decades of experience in the stock market.

As you can see, put selling is actually safer than just buying stocks outright. Especially when combined with a deep value approach to stock selection, technically oversold stocks, and strong support levels. 

Over the last two years Thomas has closed exactly 101 trades, of which 98 have been winners with only 3 small losers. Quite frankly his track record is unheard of in the financial publishing business.  

To follow Thomas’ put selling income picks for the next 30 days for only $9, with no obligation to continue, and get two incredible bonus items free, click here


Shane Rawlings
Co-founder, Investiv 


Corporate Earnings of the S&P 500’s Top 10: Why It Is Important for You

  • Corporate earnings and fundamentals are variable, pick the stocks that best suit you.
  • There are low PE ratio stocks, high growth stocks, and high dividend yielders – anything you might want.
  • But be aware: some companies engage in buybacks that are detrimental to shareholders’ value.


When you add up the top ten companies by weight, they account for 17.7% of the total weight of the S&P 500. For investors who are heavily invested in the S&P 500, following the earnings of its top ten companies is essential in order to understand the risks and rewards of being invested in the index. In this article we are going to assess the current market situation by looking at what has been going on with the 10 biggest companies in the S&P 500 index.


Apple (Nasdaq: AAPL) reported earnings after hours on Tuesday. Q2 2016 revenue declined 14.4% year-over-year and earnings per share declined 27% to $1.42 from $1.85. Those results were better than expected, and AAPL jumped 7% in after-hours trading.

AAPL isn’t a standard company, its revenue is highly dependent on iPhone sales which fell due to customers awaiting a new generation iPhone to be announced in September. If the same trend holds true as it has in the past with new iPhone generation sales, AAPL’s sales will increase when it releases the new phone. In the meantime, perhaps the most important thing from this earnings report is the fact that AAPL returned $13 billion to investors through dividends and repurchases.

The dividend yield is 2.38% annually but when we add in the repurchases, it comes to a staggering 2.3% quarterly yield, making AAPL’s dividend yield quite a bit higher than the S&P 500 average of 2.05%.

In total, the S&P 500 buybacks were $161 billion in Q1 2016,—interestingly, Apple alone makes up about 8% of this total— second only to Q3 2007 when the buybacks reached $172 billion. The most important thing with buybacks is the question: is buying your own stock the best use of cash at that point in time? Yes, companies protect and increase their share prices, but at what cost? We all know what happened in the two years after Q3 2007 when repurchases reached record highs…

Another company that is strong in repurchases in Microsoft (Nasdaq: MSFT).


MSFT also saw its revenue decline, by 6%, and earnings per share declined 23% (GAAP results), but nevertheless returned $2.8 billion in dividends and $3.6 billion in repurchases, giving a dividend yield of 2.54% and a 3.1% indirect yearly repurchase yield.

The decline in revenues and earnings further exacerbates the above mentioned buyback issue, but even more alarming is the fact that MSFT is buying its stock despite their PE ratio of 27.7, while AAPL’s is at 11. This is where alpha kicks in because good stock picking can make you avoid such bad cash investments.

Exxon Mobil

The consensus earnings per share for Exxon Mobil (NYSE: XOM) is $0.64 for Q2 2016 which is 34% below the earnings per share in the same quarter last year.

XOM’s share repurchase program is another crazy example of ill-timed purchases. In February, XOM stopped its buyback program after spending $210 billion over the last decade. The craziness lies in the fact that the company has stopped buying back stocks despite the price being at multiyear lows.

figure 1 xom buybacks
Figure 1: XOM’s stock price movement in the last 2 years. Source: Yahoo Finance.

This falls perfectly in line with what usually happens as managers time buybacks poorly. When stocks are cheap, management doesn’t buy them. When they are expensive, buybacks explode, eroding shareholders’ value.

figure 2 total buybacks
Figure 2: Quarterly share repurchases and number of companies repurchasing shares. Source: FACTSET.

Johnson & Johnson

Johnson & Johnson (NYSE: JNJ) is continuing on its wonderful ascent despite revenues and earnings per share not growing since 2014. JNJ has a $10 billion share repurchase program that is being financed by debt. The current enthusiasm is of course backed by global monetary easing which pushes future expectations higher.

General Electric

General Electric (NYSE: GE) has survived terrible times in the last 7 years. GE’s revenue is currently just 64% of its 2008 revenue, but the company finally managed to increase earnings and revenue in the last quarter. The PE ratio is still high at 24, and J.P. Morgan warns that GE will face bad times again due to the volatility in the economy and other internal issues.

Amazon and Facebook

Amazon (NASDAQ: AMZN) and Facebook (NASDAQ: FB) have the growth that the companies discussed above are missing, but it comes at crazy valuations.

AMZN’s PE ratio is 303, while FB’s PE ratio is 74.5. We cannot know if AMZN will manage to grow its earnings by more than tenfold in order to reach a more normal valuation or if it will forever stay the mega growth company.

Holding the S&P 500 gives you diversification, the unfortunately you gain exposure to companies after their initial growth cycle has passed. AMZN’s weight in the S&P 500 was only 0.46% in 2009 when its price was about a tenth of its current price.

Berkshire Hathaway

Berkshire Hathaway (NYSE: BRK.A, BRK.B) hasn’t yet release its earnings but what is significant and different from the above companies is that buybacks are limited. BRK will buy back its own stocks only if the price falls below 1.2 times book value. Warren Buffett believes that buying back the company’s own shares above book value is a disservice to shareholders. This might be one of the reasons why BRK has by far outperformed the S&P 500 in the last 30 years.

figure 3 brk vs sandp
Figure 3: BRK vs the S&P 500. Source: Yahoo Finance.


AT&T (NYSE: T) doesn’t have comparable earnings as it recently acquired DirectTV, however it is a company that keeps on growing, has a high dividend yield of 4.53%, and has had minimal share repurchases when compared to other companies in the last 4 quarters.

JPMorgan Chase & Co

The last company on our list is JPMorgan Chase & Co (NYSE: JPM). JPM reported revenues up by 4% and net income up by 5%, and has a PE ratio of 10.87 with a price to book ratio of 1.0, making it the company with the best fundamentals on our list and a great introduction to our conclusion.


Most great investors would advise the average investor to hold the S&P 500 for the long term, but the analysis of the 10 companies we’ve discussed and the variety of their revenue growths, earnings, and management buyback policies suggest something different.

Being long the S&P 500 just because that’s what everyone else does means also having managers destroy shareholder value by excessive and poorly timed buybacks, or it means paying high valuations for companies with no growth or exorbitant valuations for growth companies. On top of that, the risks of just owning the S&P 500 are increasing as its valuation is higher and is at levels only seen twice historically, in the dotcom bubble and just before the 2009 crisis.

figure 4 s&P 500 pe ratio
Figure 4: S&P 500 PE ratio. Source: Quandl.

Investors should assess their own needs and financial requirements. There are plenty of relatively safe high dividend yielders on the market, value companies, growth companies and declining companies from which to build your portfolio.



Can Your Portfolio Withstand Any Economic Environment? See What Ray Dalio Has To Say

  • With 86 months of economic growth and growing money supply, the current economic environment might soon change.
  • On top of the beta returns, specific alpha asset allocation can further increase your returns.
  • In this article you will find a strategy that works at all times.


Ray Dalio is the most successful hedge fund manager by net gains. His Bridgewater Pure Alpha fund reached $45 billion in net gains in 2016 beating George Soros with $42.8 billion in gains since inception. What’s even more impressive is that Dalio has reached such a performance with only 4 negative years in the 40 year period.

Dalio is also famous for a simple, yet insightful video explanation that every investor should watch on how the economy works entitled “How The Economic Machine Works by Ray Dalio.”

In this article we are going to analyze his strategy and way of thinking, and see how it can be applied to an individual portfolio.

All-Weather Strategy

Dalio managed to achieve 36 out of 40 positive yearly returns by using the all-weather strategy. The strategy was born in 1971 when president Richard Nixon suspended the convertibility of the dollar into gold, an action that made Dalio look at markets from a broader perspective. Rather than look at the markets from a perspective of one’s lifetime, his strategy expects surprises that are beyond one’s experience.

The main question an investor has to ask themselves is “what kind of investment portfolio would you hold that would perform well across all environments, be it a devaluation or something completely different?” There are a few economic environments that repeat themselves in an economic cycle and are related to economic growth and inflation, either of which can be rising or falling. The goal is to balance asset classes in a portfolio in order to minimize the effect of economic surprises.

figure 1 environments
Figure 1: Investment scenarios. Source: Bridgewater.

Rising Inflation

For such an environment Ray Dalio suggest owning inflation linked (IL) bonds like Treasury inflation protected securities (TIPS) and commodities. As the typical investor has a small percentage of his assets exposed to commodities or IL bonds, they risk to lose a significant part of their investments if inflation rises. As the money supply is constantly increasing, we are already in an inflationary environment, though the consumer price index doesn’t reflect it yet. Therefore, investors should think about allocating higher percentages of their portfolios to inflation protective assets.

figure 2 us money supply
Figure 2: U.S. M2 money supply. Source: FRED.

Falling Inflation

As the money in circulation continues to increase, inflation will eventually hit us but we cannot know when, therefore a 100% inflation protective strategy would be detrimental if low inflation continues. Assets that perform well in deflationary periods, as we have witnessed in the last 7 years, are equities and nominal bonds.

Economic Contraction

We have had 7 years of economic growth, but sooner or later a recession will come along. According to the National Bureau of Economic Research we have had 11 economic cycles since 1945 with the average expansion period at 59 months and the average contraction period at 11 months, so the probabilities of a recession are increasing from an economic cycle point of view. In the last two recessions stocks fell 49% (2001) and 56% (2009), so portfolios overweight in stocks are exposed to the risk of recession. In order to protect a portfolio from such a risk, Ray suggests owning nominal bonds and inflation linked bonds which always give you a return and protect you from heavy volatility.

Economic Growth

The fourth scenario is one in which most things do well so a portfolio should also always be exposed to equities, commodities, corporate credit and emerging market credit.

In the end, a portfolio should be constructed in such a way that it does not bet on future economic situations and trends but has consistently positive returns no matter the environment.

figure 3 porfolio allocation
Figure 3: All-weather portfolio allocation. Source: Bridgewater.

As one of the primary investing rules is not to lose money, the all-whether strategy is a good one to follow. Your returns will be lower in bull markets but the loses will be much smaller in bear markets.

figure 4 portfolio risk and rewards
Figure 4: Cumulative total returns and drawdowns of global equities vs all-weather portfolio. Source: Bridgewater.


The main thesis behind the all-weather portfolio is that investors are prepared for everything. A decade ago no one expected close to zero interest rates and those who expected them certainly didn’t expect they’d last for 7 years. Similarly, in 2007 the 2009 crisis seemed like something very unlikely, and the same stands for the amazing bull market we have witnessed since 2009.

The all-weather portfolio enables an investor to grasp rewards and minimize risks from all possible economic environments. As all the assets in the portfolio have betas, which means they will give positive returns in the long term, the total return of the all-weather portfolio is positive, but as assets have uncorrelated returns and behave differently in different economic environments, the downside is minimized.

In order to further increase returns, an investor can choose specific assets in the above asset risk weights. As there is a higher risk of stocks experiencing a sharp decline due to their current high valuations, more defensive stocks could be an option. Stay tuned to Investiv Daily to learn more about such investing opportunities.



Will A Bet On Commodities Pay Now?

  • Iron ore prices are falling as supply continues to grow, while copper and zinc prices show signs of supply gaps forming.
  • Low exploration and discoveries indicate that metals will be winners again in the future.
  • The possibility of future inflation increases the appeal of commodities.


Diversification is the ultimate protection against various economic factors, in recessions you might want to hold gold or treasuries, in inflationary times you want to be long stocks and commodities. Therefore it is very important to always know what is happening in each potential diversification sector.

Three weeks ago we discussed how aluminum is a bet on global transportation and while a supply gap is not the issue, productions costs are. In this article we are going to analyze what is currently going on with iron, copper and zinc. Before we analyze each individual metal, there is one very important trend in the mining sector which will affect all three metals, low prices which minimize exploration investments and new discoveries.

figure 1 discoveries
Figure 1: Expenditures and mineral discoveries. Source: Rio Tinto.


The low number of new discoveries means that sometime in the future there will be a new supply gap like the one we experienced in 2011. It is too early to call for such a situation now, but those are the future benefits of a well-diversified portfolio with commodities.


Let us start with the most mined metal in the world, iron. Iron prices have been declining since 2011 after hitting a 30-year high of nearly $200 per ton. Prices then bottomed out in December 2015 at $40 per ton, only to jump to $60 per ton in April 2016 and then slowly decline to the current price of $50 per ton. From an historical perspective, prices are still high, but it is important to analyze the current supply and demand situation in order to see if iron is a good diversification metal, especially as central banks target inflation.

figure 1 iron ore prices
Figure 2: Historical iron ore prices. Source: index mundi.


All the biggest iron ore producers recently came out with their Q2 2016 production reports, giving a clear indication of the trend in commodities. The results are mixed, Rio Tinto (NYSE: RIO) increased iron ore production by 10% year over year while BHP Billiton (NYSE: BHP) decreased production by 2% and Brazilian Vale (NYSE: VALE) decreased production by 1%. As all major producers are developing new mining projects—like Vale’s 90 million tons per year S11D—and are able to increase production if necessary, we cannot expect the formation of a supply gap in iron and a surge in prices similar to what we witnessed in 2011. Further, as major producers keep increasing production it will keep a lid on future prices.

In order to be diversified with iron, the best thing is to look at the lowest cost producers who are profitable at much lower prices.

figure 2 iron ore cost curve
Figure 3: Iron ore cost curve. Source: Metalytics.


The lowest cost producers manage to have positive cash flows even with iron ore prices below $40, which is still a possibility if we see more global turmoil or slowing in China. On the other hand, iron should be a relatively good hedge against inflation.


Copper has reached its seven year low in January 2016 with prices below $2 per pound, but the recovery has been much smaller than with iron. Current prices are at $2.20 and copper has been trading in the $2.05 to $2.25 range since March.

figure 4 copper prices
Figure 4: 10 year copper prices. Source: Nasdaq.


But copper is expected to enter a supply gap in the next few years as global copper grades are getting lower, big mines are being closed and demand is constantly growing.

figure 5 copper deficit
Figure 5: Expected copper supply gap. Source: Visual Capitalist.


A sign of how important copper is comes from the fact that both Rio Tinto and BHP Billiton base their strategic exploration on copper. In 2015, Rio Tinto spent 66% of its exploration budged on copper with 25 of 37 exploration targets being copper focused.

figure 6 rio tinto exploration
Figure 6: Rio Tinto’s exploration. Source: Rio Tinto.


A commodity that is already in a supply gap and is a great example of what can happen to copper, is zinc.


Similarly to the above described commodities, zinc has reached its multi-year low in January 2016 with prices below $0.7 per pound. But, unlike copper, prices have quickly rebounded to the current $1.03 and the trend looks very positive.

figure 7 zinc prices
Figure 7: One year zinc prices. Source: Infomine.


The reasons for such strong performance are an increase in Chinese infrastructure spending, mine closures and a global increase in demand. With current zinc usage a few percentage points higher than production, we should expect even higher prices.

figure 8 zinc supply
Figure 8: Zinc supply and usage. Source: International Lead and Zinc Study Group.


Investing Opportunities

The lowest risk commodity investments are big miners with low debt levels and low costs.

Another option is to invest through ETFs that hold metal futures. Such an ETF equally spread in aluminum, copper and zinc is the DB Base Metals Powershares. Higher returns can be achieved by investing directly into specialized miners with low debt and low costs, giving a greater assurance of a profitable investment, however the risks also increase. 


Knowing how metal markets work, that near term supply gaps exist for several metals, and that prices are still close to multi-year lows minimizes risk and makes metals an attractive investment opportunity. But the main point of this article is that commodity metals are a protection against inflation since the metal supply is not flexible in the short term and fewer and fewer profitable mining operations are being discovered. With global central banks keeping interest rates very low, and increasing money supply, sooner or later inflation will kick in. Until that happens and metal prices rise, you can enjoy the high dividends miners are currently paying and have a well-diversified portfolio.