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Haven't Found Bottom Yet! Investments And Military Win By Committing Reserves Successfully – Weekly Blog # 732

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Investment Success Defined

Avoiding losses and participating in “bull markets” is the objective of my blog. To accomplish this goal, one needs to expect some losses. However, the key is to not lose too much capital, so gains are multiplied. The strategy I use builds up reserves when the prices of what my clients and I own are high compared to perceived general market risks. I allow capital reserves to build up to the point of meeting conservative cash expenditure expectations, plus a trading reserve for future investment. Years ago, insurance companies set up “valuation reserves” to capture gains above 20% to use for the next upswing. Inherent in this strategy is the assumption that there will be periodic down markets. The trick to making this a successful strategy is the proper timing and approach to committing reserves.

Committing Reserves

This is the single most difficult task, both for an investor and military leader. In each case, the reserve can be wasted by committing too early, and that is why it is often committed piecemeal. For an investor, it is important to identify a time and price soon before a price rise, whereas for the military, it is near the point of exhaustion of the enemy’s supply chain. It is for this reason that a market’s reaction to current events becomes much more important.

Why No Bottom Last Week

In theory, I should be calling a bottom for last week. We had a relief rally on Wednesday after the Fed publicly acknowledged inflation was more than transitory and committed to successfully addressing it. The next day, led by “growth stocks”, the market wiped out considerably more than the prior day’s gains, with further losses on the final day of the week.

Historically, the price level for the stock market occurs either before or after the high-volume day, when sellers feel compelled to liquidate at any price. We did not see this happen last week. I noticed at least three inputs that question the longer-term outlook for stocks.

“3 Strikes and You’re Out”

This is what the baseball umpire yells when a batter misses the pitched ball three times. Perhaps that was the proper call for the week, with the three strikes against the Fed being their attempt to hit the inflation ball out of the park. However, they failed to see the very fast pitch delivered by the seasonally adjusted money supply. M2 grew 12.11% year-over-year, even after considering the current rate increase and three additional anticipated 50-basis point increases to 2.5%. This may be all the politically diseased Fed can do as it ignores the major cause of inflation, the stimulus (bribes) fed to the economy by the White House over the last two administrations. (I don’t know how much of the Russia-Ukraine war expenditures are in the current M2 numbers.)

Immediately following the rate rise, the major banks raised their prime rate to 4%. Remember, in theory, the prime rate is reserved for the bank’s best credits and does not include much of a loss reserve. Currently, most banks are overflowing with deposits and a lack of good loans. Most commercial bank stock prices are also languishing based on their near-term outlook. If major banks require 4% on almost riskless loans, what should the investing and depositing public require from other financial institutions in the way of yield? This is the second strike against the market and the Fed.

The third and final strike is a curve ball ordered by the FTC and SEC. The regulatory mandates extended way beyond prior policy practices. If this expansion is permitted, public companies will expand less and many private companies will never be traded on US stock markets.

To demonstrate how much the reach of these agencies has expanded. The newly appointed chair of the FTC recently announced she was examining the proposed takeover of Twitter by Elon Musk and a group of associates and lenders. The SEC simultaneously intends to examine the disclosures of ESG and compensation. (This could lead to transforming the current cyclical decline, from a bear market in progress to a secular recession/depression, following their FDR model.)

A Bully Hits Someone Who is Down

Each week, I view stock markets through the lens of mutual fund performance. Most of the time, it is wise to pick an investment period that includes an up and down price market for analysis. This week, I examined the latest fifty-two weeks, which includes both rising and falling markets. I found that there were only twenty categories that had positive returns out of 110 peer groups. The highest return was for the average commodity energy fund, which gained 97.33%. The smallest gain was 0.12% for dedicated short funds. The vast majority of the winners were asset-heavy with a perceived marketable value. There were no intellectual property winners. Inflation is driving stock prices and the government is contributing to it, rather than addressing inflation, the biggest single tax on the financially disadvantaged.

Question: Is your portfolio’s current value keeping up with inflation-adjusted spending?

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.