Asset protection
“When interest rates tick up, as they did just recently, this is an indication that the market is showing a nascent preference for cash, rather than bonds.
This incipient increase in interest rates is warning that we may see, at some point, a widespread desire to dump bonds for cash; that would mean a jump in interest rates which would lower the prices of bonds, and the fall would cause losses to holders of bonds and other credit instruments which form the debt cloud. Hasty sales of bonds would aggravate the fall in values and reinforce the rise in interest rates. As in all cases of panic, those who panic first have the greater chance of avoiding losses.
There is a further problem:”
Markets don’t seem to be overly obsessed with developments in Greece. I, however, continue to watch with absolute astonishment as the idea of a currency that was established only 23 years ago sees the potential of fracturing so quickly. With 10 days left in the month of June, key deadlines are quickly approaching for whether Greece can finalize a deal with their creditors and secure funding. Ongoing is the threat of the stability of their financial institutions with overnight lending from the ECB routinely being increased to support the outflow of customer deposits. Still this story, which resembles somewhat of a boy who cried wolf scenario, drags on for 5 years now and counting, but finally it could potentially be nearing a new chapter.
There are legitimate concerns for financial and monetary authorities, such as the ECB and the IMF, to question their support for Greece. The continued pressure put on the European Central Bank to provide a lifeline to Greece’s battered banks is an extra stress in an already beleaguered Eurozone. However, as many involved within the debt negotiations have expressed, Greece’s presence in the Eurozone has been a political decision from the beginning, and for that reason whether they remain should be a political decision as well. That being said, finer details of any such agreed upon deal by the Greeks and their creditors must satisfy the conditions set by the economic institutions like the ECB and IMF in order to provide financial support.
At the risk of not oversimplifying the situation, two potential scenarios seem to be floated by the markets. First is the risk of default, which is paired with an exit from the monetary union (or leaving the euro), and the second is that a deal is reached and everything goes back to business as usual. The latter is what’s more likely priced into the markets with near term Greek debt still priced at less than a fifty per cent chance of default. A legitimate fear for the markets, however, is the amateur Greek government, compared to its predecessors, lacks the credibility or follow through that suggests that even though a deal may be forged, a very likely scenario to one we are in now will be revisited upon the next set of deadlines.
The probability of default, however, still seems underpriced. For starters, at no point during negotiations have the Greeks or the creditors showing any leeway to the other party. The creditors want pension reform and for the Greeks that remains their sacred cow. The question becomes whether the stubbornness of the Greeks, or their inability to concede will stall the IMF from offering any concessions whatsoever. The other point that is worth noting though goes back to the money. The country has entered into a damned if they do, damned if they don’t scenario. Deposits at Greek banks are estimated to be down by 30 per cent this year as a staggering 3 billion euros has left Greece this week alone. Long-term solvency of the Greek banks becomes yet another uncertainty, particular for the German controlled ECB who are the major source of funding for the banks.
Although the story with Greece will continue to steal headlines for months into the future, these next few weeks could see a further concentrated amount of action and volatility. Greece is and always has been a distraction for the ongoing and real problems elsewhere in Europe, but how events unfold will also set precedent for debt negotiations with nations like Spain, Portugal, and others. One would hope for a deal and for Greece to remain in the Eurozone, as any fracture to the euro currency only increases its overall level of fragility.
1. Stratfor Has 11 Chilling Predictions For What the World Will Look Like a Decade From Now
2. War Cycles Will Affect Everything!
by Larry Edelson
“Not since the mid- and late-1800s have so many different war cycles converged together at the same time.”
3. The Skeptical Investor – June 2015
…and KeyStone’s Latest Reports Section below –
Back in the early 1960s, then University of Chicago PHD candidate, Eugene Fama published a thesis which was later developed into a theory called the Efficient Market Hypothesis (EMH). This theory gained widespread acceptance in the finance industry (at least among academics) for several decades afterwards and is still commonly referenced to this day. Essentially what Professor Fama was postulating is that stock markets, or most markets for that matter, were efficiently priced at any point in time and that it was inherently impossible to outperform the market on a risk adjusted basis outside of the aid of pure luck, thus making individual stock selection a futile pursuit.
Around the 1990s, Fama’s theory started to lose its appeal among the mainstream finance community. Empirical evidence and research did not support the EMH’s conclusion that capital markets were perfectly efficient and select investment strategies, such as buying stocks with low price-to-earnings and cash flow multiples, did demonstrate an ability to outperform the market on a risk-adjusted basis over time. Providing an explanation of the short-comings of the Efficient Market Hypothesis was a relatively new field known as Behavioral Finance. This new field sought to study the emotional traits of investors and the impact they had on investment decisions and market activity. EMH was largely based on the assumption that humans were perfectly rationale beings and that decisions were made instantaneously with full knowledge of all potential outcomes in an unbiased and emotionless process. However, studies in both psychology and finance have demonstrated that this perfectly rationale investor was largely a myth. Human beings in fact rely on emotion to a large extent when making important decisions and are subject to a wide variety of potential biases. An objective of Behavioural Finance is to integrate these real world human biases into modern day financial theory to create a more realistic explanation of how the markets work.
Behavioral finance and psychology have defined numerous biases that can lead to poor investment decisions. We have provided a few examples below.
Bias: Bandwagon Effect
Definition: This occurs when a certain idea, investment type, or investment style starts to become more popular. As popularity increases, more and more people adopt the groupthink mentality and adopt the mentality themselves which further accelerates popularity, and in the case of investing, asset overvaluation.
Example: Alex has been looking at the market for potential investment opportunities. He has noticed that many small-cap tech companies have been doing well. A few of his friends have started to invest heavily in the sector, with good results, but Alex is worried about the high risk nature of the securities. As time passes, more of Alex’s friends have gravitated towards the sector and he is starting to see more portfolio managers and experts talk about it on the financial news. More time passes and the popularity increases. Finally, Alex has grown tired of missing out on the returns and decides to make some significant purchase of these stocks. Unfortunately, the growing popularity of the asset class has pushed valuation far beyond reasonable levels and the sector is now in serious risk of a crash.
Bias: Recallability Trap
Definition: This occurs when an individual’s opinions and decisions are overly influenced by large scale (and often dramatic) events that have taken place in the past.
Example: John receives a call from his financial advisor informing him that he has compiled a report of several successful technology companies that offer strong investment value. All of the companies in the report are profitable, growing, maintain healthy financial positions, and are trading at attractive value. John tells his advisor that he has no interest in receiving the report as he was heavily invested in tech stocks shortly before the market crashed 2001. His opinion is that the sector is far too volatile and he has decided to stay out of it completely. Although John’s decision is understandable, he is now limiting the flexibility of his portfolio based on an irrational bias. The tech market crashed in 2001 because it was substantially overvalued – but that does not mean that current opportunities do not exist in that space.
Bias: Confirmation Bias
Definition: When people have an existing belief, such as an opinion on an individual stock or the movement of the economy, we tend to overweight evidence that supports our original view and underweight, or even disregard, evidence that that conflicts with this view.
Example: Jane recently made a purchase of Company B which is advancing a new technology. She spent a great deal of time reading the company reports and speaking to management. About a week after the initial purchase, she hears an analyst on the news reiterate what the company said about the technology. Pleased to see more people taking notice of the company, Jane increases her position that day. About a week later, she hears another analyst with a respected background in science discuss the technology and conclude that it is not as commercially viable and the company suggests. Although somewhat concerned with the statements, Jane takes no action.
Bias: Anchoring and Adjustment
Definition: Very similar to confirmation bias, anchoring and adjustment is a tendency to not fully reflect and adjust for new information when reviewing an existing opinion or forecast. This is a very common bias in the professional analyst community but can also been seen regularly with retail investors.
Example: Jim owns shares in Company C and believes that the stock price will appreciate from $5.00 to $9.00 in 12 months as a result of increased sales from a new product offered by the company. Company C releases a statement later on indicating that sales of the new product are falling significantly short of initial expectations. Disappointed, Jim decides that the stock is probably only worth $7.00 over the next 12 months and cuts his price expectation by $2.00. Considering the lack of visibility going forward, a large reduction is the price expectation is justified but Jim is still being influenced (he is anchored) to this original target.
Bias: Overconfidence
Definition: This is when investors tend to place too much confidence in their ability to pick stocks or make investment decisions. It is typically the result of a past success, or successes, which may or may not have been the result of luck. Overconfidence can be dangerous because it can cause investors to underestimate risk, under-diversify their portfolio, and even disregard relevant information.
Example: Garth has been a buyer and seller of speculative junior mining stocks for the last several years with mixed success. But recently he bought shares in Company E which made a notable discovery and appreciated in price substantially. Garth also noticed that many of his other junior mining stocks had been doing well over the past year but that his diversified portfolio had underperformed. Garth concluded that his experience in identifying opportunities in the sector had started to pay off. He was also ignoring the fact that many of his stocks were doing well as a result of a generally strong market over that period. The problem was that Garth didn’t buy enough of Company E to really boost his portfolio value. Confident in his abilities, Garth decides that he is going to search hard for another stock like Company E, only this time he plans to concentrate a large portion of this portfolio in the stock so that he can make a huge return.
Bias: Mental Accounting
Definition: This refers to the way that the people have a tendency to mentally compartmentalize their finances and separate capital to psychological accounts.
Example: Taylor is reviewing his finances and deciding how much money he can contribute to his investment account, which is currently worth $20,000 and has been generating a 6% annual return. Taylor also noticed that his credit card balance was a hefty $10,000 on which he is paying 18% interest. Taylor understands the importance of paying down debt as well as saving for retirement so he splits his $5,000 annual contribution 50/50% to debt repayment and investment. While this may seem appropriate, it is actually highly irrational. For this to be a rational decision, Taylor would need to generate a minimum return of 18% in his investment account which is highly unrealistic. Taylor’s investment portfolio would be better long term if he were to use both his annual contribution and his investment portfolio to completely pay down the high interest debt.
Now that we are aware of a few of the common investor biases we can start to evaluate whether or not our own decisions are impacted by irrational tendencies and counterproductive habits. The first step is simply awareness. While it may be asking too much of ourselves to be perfectly rational at all times, simply being aware of the common biases and reviewing our behaviour in that context can be highly beneficial with respect to making better investment decisions in the future.
KeyStone’s Latest Reports Section
5/29/2015
UNDERVALUED SPECIALTY PHARMA MAKES SOLID PRODUCT ACQUISITIONS, MORE-TO-FOLLOW? – MAINTAIN BUY
The potential impact:
– cutting the car price in half
– Consuming more battery grade graphite commodity than currently produced
– click chart for larger view and much, much more
With $5 billion in capital expenditures and 6,500 high tech jobs, several states continue to court Tesla Motors to build their next megaproject within their borders. The Tesla Gigfactory, slated to open doors in 2017, will set a new precedent for economies of scale in battery production.
Tesla’s new factory will produce more lithium-ion batteries under one roof than all of 2013’s global production combined. As a result, the electric car company estimates this will cut costs per kWh by 30%.
Tesla’s product strategy relies on it. The Gen III is supposed to retail for only $35,000, which is only half the cost of the more upscale Model S.
UBS notes that raw materials make up 70% of the cost of each lithium-ion battery, so sourcing and procuring these minerals will be a very important component of their overall strategy. In the infographic, we break down the potential impact this will have on these commodities. Special thanks to Simon Moores and The Gold Report, who had a great interview recently on the subject.
Graphite:
In 2013, flake graphite production was 375,000 tonnes. The Gigafactory alone would add another 126,000 tonnes (34% increase) over 2013 production. Even more significant, the increase on battery-grade graphite demand would be 154%.
Cobalt:
55% of cobalt comes from the Democratic Republic of the Congo. Tesla says they do not source from the Congo, so this makes getting cobalt a little more difficult. 42% of cobalt demand is from batteries, making it the blue metal’s #1 use. Current Tesla batteries use about 9% cobalt by weight (NCA formulation).
Lithium:
There has been a steady supply of lithium in Chile since 1996, so this will likely be the easiest commodity to source.
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