The Real Deal

The Brazilian Real has lost more than 60% of its value against the US Dollar since peaking in July of 2011. A combination of a weak Real and very strong Dollar has pummeled Brazil’s currency. Unfortunately for those who continue to hold the currency, it looks as if the pain may not be over. And maybe, by a long shot.

Looking at the ratio of the Dollar to the Real in the chart below, you can see it sits at an important level that has provided resistance many times in the past. Each and every attempt to move higher has been rejected. Those pattern geeks will appreciate the smaller (blue) cup and handle pattern is the handle of the much, much bigger red, cup and handle. A pattern within a pattern. Something that occurs quite often and provides a higher probability outcome.

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If the dollar continues to rise, like I believe it will, and eventually breaks above the important horizontal resistance, the Real is in real trouble. The first target would be another 13% decline, the second target would be double that and the third? Let’s not go there because I don’t want to talk about low probability events especially considering the potential disastrous affects it could trigger. The bottom line is those that anyone in the US holding Brazilian Real should expect a loss in their purchasing power. Those in Brazil, should expect to see the cost of imported items (particularly those denominated in US dollars) rise dramatically. Those that are looking to travel to Brazil from the US should find some huge bargains ahead.

The Worst

As you can see in the chart below that looks back over the past 69 years at the US stock market major sectors (SP500, small caps, technology and industrials), September has been the only month, “on average”, that every one of those sectors closed lower than where it opened. In other words, lost money.

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While this data might trigger a negative emotional response like Sell! Sell! Or even Sell!  Before succumbing to the fear, check what the data’s message is after September. The total “average” gains made in Oct-Dec for all major sectors well exceed the “average” losses in September. Your response to these questions tells a lot about you as an investor.

What this tells me is that the higher probability is to expect more choppy action this month and there is no reason, yet, to add risk to portfolio’s in anticipation of Q4’s “average” rise.

All-Time Low

Friday’s close, August’s final trading day, marked the lowest close for US 30-year Treasury bond yields. Ever.

Long-term US Treasury yields printing all-time lows cannot be ignored. It is sending a message. It has, at times in the past, been a great harbinger that an economic slowdown will be likely sometime in our future. But at other times it’s signaled fear from an external event and the subsequent rush to safety. US Treasuries are considered the safe haven and where investors stash their cash waiting for markets to settle down. Just thinking out loud in an attempt to provide another reason, if I were a foreign investor and needed to park some money where it is guaranteed (let’s avoid the guarantee discussion for the sake of keeping the blog civil), US treasuries are about the best answer.  At least for now. While a yield less than 2% is just about as unappealing as listening to Rosanne sing the national anthem, it sure beats most every other sovereign bond offering around the globe. As we know, most of Europe is now charging you interest to lend them money rather than giving it. Large inflows into US Treasuries drive prices higher and yields lower. If you are looking for certainty here as to what the exact message is, you’re going to be sorely disappointed. Unfortunately, the exact message will only be known in the future because it will be so obvious in hindsight. What the message should be used for is the same message you would get if you walked down a dark alley alone, at night. Raise your awareness and have a plan.

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The other thing that cannot go without mention at this time of all-time low yields is to continue to highlight the devastating impact low yields have on pensions. When yields fall and stay low, the biggest losers, besides savers are pension funds. Why? because they are required, by law, to hold some of their retirement investments in the “safety” of US Treasuries. All pensions use returns of 7-8% (some foolishly have used higher and are in deeper trouble or already defunct because of it) to project and pay the future benefits to their participants. In order to earn a long-term pension return of 8% with 2% treasury yields, the stock portion of their investment holdings will need to return 12-14%. Every year. Forever … well at least as long as the pension survives … or they cut benefits. What do you think the likelihood of that happening is? Exactly. And why the pension crisis is not a matter of if, but when. I have no doubt, there is still ample time but smart pensioners should be finding a way to eventually live on less.

Burritos or Curing Cancer?

Wall street’s “sell” is most often about a story … and who wouldn’t invest in a company that is attempting to cure cancer rather than one that sells burritos if you could only own one? That’s anti-American isn’t it? The difference (so far) this year between the best and worst performing stocks that are within the sp500 index is a trivial 130%+. The top performing stock is Chipotle Mexican Grill, up more than 87% while the worst performing is Nektar Therapeutics, a biotech company creating products that are targeted at curing cancer is down more than 44%.

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This, by no means is meant to disparage Nektar any more than it is to promote Chipotle. Rather, an example of why, if you want the best returns, you need to find other (or supplemental) reasons than just a story.