Q: I am not sure I understand the newsletter. Is the goal to evaluate macroeconomic data to make specific stock recommendations? Are you betting on the short vs long? I read a book titled Black Swan that spoke to how changes can happen that often have exponential effects but are masked until it is too late. I am trying to figure out how a small investor like me < $1 mil should consider changing my investment strategy because right now I am broadly diversified. Thanks for your thoughts on this topic.
Jesse: No. I’m not a macro investor. In terms of individual trades, these are based on my own bottom-up research. They are an effort to enhance performance and most of my personal money is focused here. The ETF allocations are a bit different, though, and entail a different strategy. The target allocations are ideal for someone who just wants to buy and hold and not put much more thought or work into it. The tactical allocations, on the other hand, are an effort mainly to reduce drawdowns by identifying value and trends: we want to own things that are fairly-priced and/or in an uptrend and avoid expensive asset classes and/or ones in a downtrend. Putting it all together hopefully adds to performance by enhancing returns via the trade ideas AND limiting drawdowns via the tactical ETF allocations.
Q: In light of today’s entry regarding the necessity for a major Bear market to enhance patient investors’ returns, I was wondering about your longer-term views and whether you thought we were in a Secular Bull Market or not. In terms of the SPX, basic TA implies a retest of the breakout at 1575. A pullback to that level from current prices, would be a 25% pullback. Would you nibble there, or based upon your experience, would you expect much lower prices to ensue? Just curious. No worries if you don’t have time to respond. Appreciate your market views, from one student of the markets to another!
Jesse: From a pure investing standpoint I wouldn’t get interested in owning the broad stock market until it became fairly valued. I figure this number is about 50% below current levels. Now that doesn’t mean I’m not looking for individual ideas. From a trading standpoint I may get constructive on the broader markets after some sort of shakeout here. We’ll just have to see what that looks like when it happens.
Q: If you have cash in the corner…as you and I do…your chart suggests we will soon find ourselves making money on the flip side. Usually at this point in the market…everyone is talking about the market and how much money they’re making…I note that there doesn’t seem to be a lot of that kind of conversation.
Jesse: That might be true, Jeff, but for me I pay a lot more attention to the data than the anecdotal stuff – even if the anecdotal stuff is more interesting at times. The data shows as much bullishness towards this market as we have ever seen.
Q: Not sure if you saw this but was just looking at the European interbank lending rate and both overnight and two nights have NEGATIVE rates!! Actually the negative rates go beyond 2-weeks but these longer duration are “influenced” by the negative sovereigns. However, why do ON and TN lending rate negative ? I don’t know enough about European interbank lending to be able to decipher what this means. Is there a “short squeeze on collaterals” over in euroland ? Thanks for any thoughts.
Jesse: This is not my area of expertise by any means. Having said that there are some wild things going on the debt markets right now.
Q: My question is about ERY. I bought the ERY for 29 dollars, I know it is a risky investment. My questions are: What is your suggestion and future outlook for ERY. As you mentioned, if there is a bear market – will it reach the level of 29 dollars? It is dependent on XLE and the oil price options.
Jesse: This is a tough call. First of all, I can’t give you personal advice about any trade. Having said that, energy stocks have already gotten pounded in many cases and they’re currently seeing an oversold rally. Personally, I think the oil price will probably stay low for a while so many of the fracking and service companies will be in trouble. Even if that’s true I don’t know if ERY is the best way to play it. So this could end up being a classic, “dead cat bounce” but I just don’t have any real feel either way there right now.
Q: For most people they dont want or cannot afford the risks that these people like Druck who bet 200% on one move take. Where is it written that you cannot take a moderate course and have some focused mutual funds, like yachtman, sequoia etc that make better returns and lower risk than indexing– and over time you do ok.. you dont become a buffett or a druck but you don’t lose the farm either .. after all many who leverage and bet the farm lose the farm — only a few make it big. I think you can over diversify and under diversify – it you are not a pig, why not be moderate and still do fine? You may be giving risky advice to readers by not pointing out that people lose big too!
Jesse: That’s exactly why I wrote, “It’s up to each individual to determine where they are in the process and how their personal risk tolerance should dictate how they implement these ideas in their own investments.” My point is not everyone can be Druck but it probably pays to figure out how you can try to be a bit more like the greatest investors of all time.
Q: Look forward to digging into the new idea (NXRT). Where is this one on your conviction scale? Anywhere near HLF conviction level? Speaking of which, I also took the opportunity to buy back into HLF today. Good deal.
Jesse: It’s not nearly as high conviction as HLF was in January but I still like it here even though I’m not very constructive on REITs right now as an asset class. This is why it’s still a pretty small allocation in the model portfolio.