Market Volatility

The big sell-off in the stock markets on Monday, February 5 was unusual but not unprecedented nor unexpected in percentage terms.  The S&P 500 Index lost 4.1% on that day.  A Page 1 article in the Wall Street Journal on the next day titled “What Should We Make of the Stock Price Drop” contained information about the frequency of large selloff’s.  Here is a link to the article:

In a chart, the article shows that we get a movement (up or down) of 4% or greater about 0.6% of the time, which is about 1 trading day per year.  In statistical terms, Monday’s 4.1% drop was a between 2 and 3 standard deviation event:  3 standard deviations mean some result is expected 99.7% of the time, so the 4.1% sell of wasn’t quite a 3 standard deviation event, but almost.  This is based on actual data since 1964.  So, you would expect not to have another 4.1% or greater move this year, if past performance is an accurate indicator.  Or is it?


Author Nassim Nicholas Taleb would question whether you can rely on the statistics of the past to see what the future might be like.  Taleb is famous for pointing out the concept of Fat Tails, which implies that unusual events like February 5 are really not that unusual.  Weird stuff happens more frequently than you think, according to Taleb.  Expect and prepare for weird stuff.


In a different WSJ article, also on February 6, a reporter asked former US Secretary of State Henry Kissinger for advice about writing a column about foreign affairs.  Kissinger’s advice was one word: “Context”.  That applies to the stock market, as well.  Noting that the market has moved 4% or greater in a day about 1 trading day per year is useful as a context for the February 5 move.  However, it doesn’t mean that we won’t have more frequent 4% moves in the future – just that they have happened only every so often in the past.

How to Prepare

Most investors made it through Monday’s selloff and lived.  Only those that were heavily into shorting market volatility got really burned, but that’s an esoteric side of the trading universe.  There will likely be more bumps along the way to hopeful recovery.  I don’t think it is necessary to bubble-wrap your portfolio to prepare for every eventuality.  That said, portfolios that were well-diversified among different asset classes (stocks, bonds, foreign, commodities, real estate) fared better as a whole during the selloff than did stocks-only portfolios.  I believe it is best to prepare for 3 Sigma or fat tail events by being well diversified.  Why is that?  Because investors who sell an asset in a crisis move the money that they got from selling into another asset in another asset class that they perceive as being safer.  Collectively, as many investors do the same thing, the price of that new asset will go up due to supply and demand.


The amount of the decline – 1,175 points on the Dow – got the headlines, but 4.1% is really not that unusual.  When you get to the nosebleed section, a 4.1% fall seems like a really big fall, and you fall a long way.  Don’t let the decline scare you away.  The road can be bumpy.  The flight can be turbulent.  Use any metaphor you want.  It is best to stay in the car or on the plane.  Keep going.  Stay invested.  Stay diversified, and you will hopefully achieve your financial goals.


One way to think about the economy is through the equation MV = PQ.  Money times Velocity equals Price times Quantity.  Also called the Equation of Exchange, MV = PQ is the basis for the Monetarist School espoused by Milton Friedman.  MV = PQ implies that the money supply affects prices, other factors being equal.  An increase in the money supply must lead to an increase in prices.  After all, the Velocity of money is relatively constant, right?  This is a concept at the 50,000 foot-level of macroeconomics.  Big picture.

Money Supply

M2 Money Supply has been increasing rapidly in the US since the Financial Crisis of 10 years ago.  The US Treasury prints the money but the Federal Reserve Bank controls the amount of money in circulation.  Increasing the money supply is stimulative and it was thought that increasing the money supply would stimulate the economy and help bring it out of the Recession of 10 years ago.  According to the St. Louis Federal Reserve website, the M2 money supply has increased from about $7.5 Trillion in November 2007 (the beginning of the Recession) to about $13.8 Trillion currently, a near doubling in about 10 years, and about 7% average per year.  Here is a link to the website with that information:

This money printing program has continued even in the past year, despite the better economic growth and unemployment indicators.  M2 is up 4.7% just in the past year.


One would think that higher inflation would result from the increase in the money supply, but it has not.  Inflation has averaged about 1.6% over the past 10 years, according to the Bureau of Labor and Statistics.  Here is the link to a chart of monthly inflation:

Why has the huge increase in the money supply not caused inflation?  There are many explanations out there for the causes of dormant inflation, including the following:

  • Global labor surplus:  There is no shortage of cheap labor in other countries, and as companies offshore their manufacturing, the cost of goods remains inexpensive.
  • Slow Wage Growth:  US wages have remained stagnant, and real wage growth (adjusted for inflation) has been near zero for the past 10 years.  That 2% raise that you receive every year?  It only keeps up with inflation rates
  • Too much debt:  At the household level and at the government level, we have been overburdened with debt.  When your first priority is to pay your lender every month, you don’t have as much money to buy new stuff.  This dampens inflation.


Another explanation for low inflation is lower Velocity.  Velocity is the number of times that a dollar is spent.  When you earn money, you either spend it or save it.  When you spend it, the company whose product you bought your product puts your spent dollar to use, either by paying its employees or buying new raw materials.  Hence velocity.  When you save it, you either put it into the bank so that the bank can, in turn, lend it out, or you invest it in a company’s equity, which, in turn, will also put it to good use.  Hence velocity through savings or investment.

Where the equation has changed in the past 10 years is that companies have not been spending their cash as quickly.  They have not hiked salaries commensurate with their profits, and they have not reinvested or redeployed their capital as much.  Take Apple, for instance.  Its iPhone has been a high profit-margin cash cow.  Its employees are already highly and fairly compensated.  They have not found another product that can replicate the profit margins that the iPhone can, either internally or externally.  So, their corporate cash grows and grows – as of Q2 2017 they had over $260 Billion of cash.  Presumably, it is mostly invested in US Treasury securities or derivatives thereof.  The same phenomenon has occurred with banks.  Instead of lending out money so that companies and businesses may grow, they have been increasingly just investing their excess cash back into riskless US Treasuries.  Loan-to-deposit ratios nationwide trended downward through the recovery after the 2008 Recession, although that trend has turned around somewhat recently.  Here is an article by Trefis Research that speaks to trends in loan-to-deposit ratios:

Why have companies and banks been hoarding cash instead of redeploying it back into the economy?  Several reasons:

  • Aversion to risk:  Banks would rather take no risk and lend to the US Government than take a business risk by lending to companies.  Banks got burned in the mortgage crisis so that dampened mortgage lending for a while, but mortgage lending is strong again.  The penalties for making the wrong bet on risk are stout, so banks have not been taking a risk.
  • Lack of accretive investments:  As the stock market has risen, potential acquisition targets have been bid upward, so there are fewer businesses out there to buy that would add to corporate earnings.
  • If you put your hand on the stove, you learn it hurts, so you don’t do it again:  Businesses have been burned in the past by not having sufficient cash on hand, so they want to have enough for future rainy days.  This is unlike any federal, state or local government out there, which have no rainy day funds.  Maybe I am mixing too many metaphors.
  • Regulations and Accounting Changes:  This also falls into the contingency bucket.  Businesses want to make sure they have enough cash to ride out any problems.


Again, this post is about big picture macroeconomic issues.  I believe that there is a lot of “pent-up velocity” out there, for lack of a better term.  Companies have been hoarding their cash for the past 10 years  There are signs that this practice has been reversing.  If it does, I believe there is a lot of potential growth out there that hasn’t been accounted for yet.  2% inflation is nothing to be worried about, yet.  The Fed, as well as investors, have their collective eyes on inflation.  As long as inflation remains in the 2% range, I think this economy and this stock market still has room to run.

Long-Term Care Insurance

The Long-Term Care Insurance market is collapsing.  A recent Wall Street Journal article pointed this out.  It is a nice article, written to high journalistic standards, but written more from the standpoint of the insurers rather than from the insureds.  I write to the insureds, and my interpretation of the article is the following:  If you don’t already have LTC insurance, you won’t get it.  Especially if you have any pre-existing conditions, you are Skeee-rewed!  I have some experience with this market through clients and insurance agents that I will share below.  Here is a link to the article:

The article states that there were fewer than 100,000 LTC policies sold in the US in 2016 and the pace was at fewer than 70,000 through the first half of 2017.  Sales peaked at about 750,000 policies at about 750,000 policies in 2002.  That’s a decline of about 90%.  That’s a collapse of a market.

Long-Term Care

Long-Term Care insurance is supposed to insure against the costs that you will likely incur when you get older and/or become ill.  In addition to nursing home care, LTC insurance also covers in-home care and home health aids, as long as the insured cannot accomplish various Activities of Daily Living, or ADL’s, such as bathing, feeding, getting out of bed, etc, on their own.  We probably all know some or many people, perhaps family members, who have needed a home health aide or a nursing home.

Aging Boomers

Demographics do not bode well for the LTC insurance market.  Conversely, they bode very well for the homes and service providers.  The largest generation in US history is reaching the age that they will need assistance, if not full-time care.  The insurers are getting caught in this trap and they are retreating.  The following are some of the reasons given in the WSJ article for why insurers are losing money on LTC insurance:

  • Insurers overestimated how many people would opt for care given by family members and underestimated how many older people instead would opt for extended care or nursing homes.  Maybe it was the frazzled family members who opted the older relatives into the homes.
  • Insurers underestimated how much home residents have enjoyed their new living arrangement and how relatively well they have thrived and how long they have lived once inside the homes.  This meant insurers’ payouts were much greater than originally anticipated.
  • I infer from the WSJ article that policies written at the beginning of the LTC insurance industry, say 40-50 years ago, had no cap on payouts, but were able to increase premiums with permission from the relevant State insurance commissioner.  If so, these insurers are really screwed.  Genworth is mentioned.  More recent policies do have a cap on payouts.  Even so, insurers underestimated how much they would pay out and for how long.
  • Reinvestment rates are half of what was anticipated, if that.  Insurers collect your premium money and invest it, mostly in various bonds, and hold it for anticipated payouts.  Actuaries get involved.  This is how insurance companies make money.  As interest rates have decreased to near zero or negative in some places, insurers have suffered.
  • Policies are not lapsing as anticipated.  Only 1% per year are lapsing, vs. 5% anticipated by the actuaries.  LTC policyholders are diligent in their planning and in their payment of premiums.
  • Cost of care has skyrocketed.  That is the subject of a whole column to be written.


We financial planners tell clients that they really need to get LTC insurance in order to offload the risk that they might someday need to be taken care of.  Unless you are young, healthy, and not on any medications or at least not adding or changing any medications, you most likely won’t be able to buy your LTC insurance.  Insurers are finding any way not to write new policies, citing risks related to unstable health history, among other excuses.  At the same time, married couples have been having fewer children, meaning that families are smaller than they used to be, meaning that there are fewer children available and willing and able to take care of elderly parents, meaning these elderly are going into and staying in homes.  Being simply sick or disabled is one thing.  Having Alzheimer’s or other disease-related dementia requires a whole other level of care that is above and beyond the pay grade of family members who may have younger family members of their own that need care.  All of this means that you need to save for your own care, probably way more than you thought you would need to save.

Our society stresses eating vegetables, eating well, and living a healthy lifestyle so that you can enjoy the life you have and so that you won’t die young.  Then, after having lived said healthy lifestyle, you still get sick and need care when you get old.  So, is the trope that you need to eat healthy just a conspiracy put forward by the nursing home industry to ensure that they have full beds going forward?  I don’t think there is a conspiracy, but it is one of the ironies of life and it does stink.

The Elevator

An old saying on Wall Street is that stocks take the stairs up and the elevator down.  As I write this, after the close on Monday, February 5, it is clear that the elevator is packed.  The Dow Jones Industrial Average is down 1,800 points over the past 2 days.  Today’s 1,175 point drop was the biggest point drop ever.  While the sizes of these point drops are high, percentage-wise, they are reasonable:  The Dow is down about 7% from its all-time high, which we hit a little over a week ago.


There are a lot of reasons being given by the financial media as well as market analysts as to why we are seeing this sell-off.  My take regarding these reasons is that they are valid but that they should not result in panic selling:

  • Friday’s Jobs Report was too strong:  The US economy added 200,000 jobs instead of the expected 160,000.  In the convoluted reasoning of Wall Street, this is bad news because it means the economy is growing stronger than expected.  Don’t surprise Wall Street analysts, or it will come back to bite you.
  • Interest Rates are Rising:  Yes they are, but the rise seems to be in line with expectations, and it is probably a healthy thing.  The Fed has said they intend to raise short-term rates by 75 basis points this year.  The speculation now is that the Fed will raise more than that.  The market can handle 100 basis points.  The 10 Year Treasury Bond yield has now risen to 2.88%, from the 2.4%-range as of 1/1/18.  However, at 1/1/18, the yield curve was too flat, meaning the difference between short-term and long-term rates was too small.  The yield curve is now steepening, which is a sign that investors see the future as good.  There was no good reason why the yield curve was flattening.  A flattening or an inverted yield curve portends a recession, and there are no signs of recession looming out there.
  • Technical Indicator Busted:  The major averages today traded below the 50-day moving average, which is a technical indicator.  Some algorithms are programmed to sell when a security breaches the 50-day moving average.  A breach of a technical indicator is not a sign that there is something fundamentally wrong with the economy, although it is not without meaning.
  • Program Trading:  At one point, late during today’s trading session, the DJIA dropped about 1,000 points over the course of about 30 minutes.  That is almost always indicative of a large institutional trader trying to exit a large position at market.  Again, this does not mean there is something wrong with the economy, just that there was a big seller for whatever reason.
  • The VIX:  The VIX Index moved up 115% today alone.  Because the VIX Index is made up of Put options, Put options being options to sell at a given price, the explosion in the VIX today is almost certainly because of large institutional investors piling into Puts.

Not a Reason Given

What is not given as a reason for this market sell-off is anything major that was unexpected or anything deeply fundamentally wrong with the economy.  For instance, the 2007-2008 sell-off was due to the revelation that there was insufficient or even fraudulent collateral behind the mortgage-backed securities market.  The sell-off in August 2015 was due to an unexpected devaluation of the Chinese currency.  Likewise, the correction in January-February 2016 was caused by China issues.  Other sell-offs were triggered by information that the economic or financial world was about to upend.  There is nothing out there to indicate we are about to go into a recession, either here in the US or in most other major economies.  China is not changing course right now.


Since I don’t see anything that is fundamentally changing with the economy, and while there are always geopolitical issues looming out there, there is nothing imminent.  The Market has traded steadily upward, taking the steps, especially since President Trump’s election in November 2016, without ever having had a correction.  Markets never go straight up forever.  There is always digestion required.  What we have seen in the last few days is the return of the volatility that we haven’t seen for many months, but that is historically normal.  The elevator down was empty, and a lot of people piled in.  I am not saying this is a dip to buy, but I do believe this sell-off is not indicative of a major change for the worse in the economy.  Remain calm.  At least for now.


When To Sell?

2018 is off to a roaring start in the stock markets, both in the US and abroad.  (By the way:  I say “twenty eighteen”, and try to avoid “two thousand eighteen”.  How about you?)  US markets are up for a variety of reasons, not the least of which is optimism based on corporate tax cuts.  International markets, particularly in emerging markets, are up in part because the US Dollar has fallen.  When I say emerging markets are up, I mean in US dollar-denominated terms.  Some media types think the market is too frothy – the CAPE ratio (cyclically-adjusted price-earnings) is near an all-time high; the bull market has gone on too long and it has to end sometime;  interest rates are bound to go up; etc.   These are the reasons given why the bull market won’t last much longer.  The nay-sayers may be right.  Who knows?


If you are currently long in the market, even maybe through your 401k or equivalent retirement account, you may justifiably be suffering from a case of vertigo.  You like the view up here, but you are looking down and getting dizzy.  That’s ok.  It’s natural to be concerned.  You have gains and you want to protect those gains.  Should you sell part or all of your stocks, take profits, and move to something safer?  Should I do it now, or is there room for the market to run some more?  If I sell now, will I suffer from FOMO (Fear of missing out)?


There is no wrong answer, but there are answers that can cost you some money.  You can go on gut instinct, which may work especially if you follow the market.  You can watch CNBC or Bloomberg and consider what the talking heads there are saying.  However, the best way to think about when to sell is to use some simple rules.  Rules-based selling is the way many professional money managers make their Sell decisions.

What rule should I use to sell?  There are several in use out there.  Each may be appropriate given different market circumstances.  Here is a list of rules that you can consider:

  • Sell when your stock hits your price target that you had set up when you bought it.  If you were looking for a 10% profit when you bought the stock and you get it, just sell.  Don’t second-guess yourself.  Make it a hard and fast rule.  Maybe you even put in a limit order to sell.  The problem is, what if you sell and the stock then continues to run?  You may suffer a severe case of FOMO.  I have found that a target price rule works better with a short-term or day trade and that there are too many variables to consider if you are a long-term holder, especially in a retirement account.
  • Sell when your stock falls below some percentage of what you bought it for, say 7% to 9%.  Take the price that you bought it for, and if it falls 7% from that price, sell it, no matter the extenuating circumstances.  Cutting your losses in this way is a very important part of money management.  Live to fight another battle.  One big loser can tank your portfolio’s overall performance.  This rule is espoused by Investor’s Business Daily, among many others.  However, if your stock has run up, you don’t want it to run back down and then lose 7% after having been in the black.  That’s not good for the psyche.
  • Sell when the stock falls below a technical indicator, such as the 50-day or 200-day moving average.   Famous investor Paul Tudor Jones uses the 200-day moving average rule.  You can find the 200-day SMA (Simple Moving Average) in most free stock charting websites such as FINVIZ and StockCharts.  Falling below the 200-day SMA is sometimes a sign of inherent weakness in a stock.  You can still book a profit – the SMA may be higher than your purchase price.
  • Sell part of your stock, enough to refund yourself for what you paid for it, and hold the rest.  This is called Playing with House Money.  Or maybe just sell to refund a part of your investment but keep the rest.  This is a good way to look at selling in the current market if you have some profitable holdings.
  • Sell if the overall market goes into a correction.  Most individual stocks move mostly in concert with the broader market.  It is highly unlikely that your stock will buck the trend if the trend is downward.  How can you tell if the market is in a correction?  Look at maybe 10% below the peak as a correction, and look at 20% below the peak as a Bear Market.  Likely the 200-day SMA rule would also be triggered in this case.


I am an advocate of rules-based buying and selling.  If your instinct tells you that you should sell, or if the talking heads on CNBC are striking fear into your heart, at least you should look at some of the rules I outline here might apply.  Don’t go only on your instinct or what others are saying.  Then, the last rule:  Once you sell, don’t look back.  Every day is a new day with different factors that play into buy and sell decisions.  Don’t come down with FOMO.

Ray Dalio

Ray Dalio is the head of Bridgewater Associates, LP, the world’s largest hedge fund with about $150 Billion under management, according to its website.   I think it is very interesting to read and to learn about Mr. Dalio’s ideas and think about how they might apply to your life.


Mr. Dalio has written a new book, titled “Principles”.  As he is the head of the largest hedge fund, one would think that “Principles” is about how to find the best investments.  It is not.  “Principals” is about how to build and properly operate the best organization according to his main goal, the quest for Truth in all things, and his means of achieving the Truth, which he calls Radical Transparency.  Think about it:  What if, all day, every day, your whole purpose to everything you do is to seek the truth?  How would you change what you do?  How would you work with others?  Could you look at yourself in the mirror every night after having worked in your current job and believe that you have successfully sought the Truth?  It’s a very different way of thinking about your job, even if you aren’t the boss of a big company.  You would have to be fully trusting of everyone you work with.  That’s what Radical Transparency is all about:  No coffee break gossip; no holding back information from other employees in an effort to gain an edge over them; and really no place for office politics.  Tell everything to everyone’s face.  Be blunt to everyone.  Would you like to work in a place like that?  Or not?

I have not read “Principles”, but there is a PDF of Mr. Dalio’s ideas, circa 2011, that summarize the most important 210 points (that’s right, 210) of his ideas.  Perhaps they have been refined since then, and likely Mr. Dalio has embellished the 210 points with some good stories, but if you don’t want to buy the book, you can get a flavor of it through this link:

Economic Machine

Four years ago, Mr. Dalio posted a 30-minute animated video titled “How the Economic Machine Works”.  You can find it on YouTube and I highly recommend it.  As the title suggests, the video is big-picture focused.  Most specifically, it is focused on how governments have printed money and gone into massive debt over the years, and the macroeconomic ramifications thereof.  Mr. Dalio believes that history repeats itself and that massive money printing and government indebtedness does not end well.  The video moves quickly and the animation is very clever.  Go to YouTube and search for Ray Dalio.

All Seasons Strategy

Bridgewater’s asset allocation strategy is their own Secret Sauce.  Luckily, Tony Robbins, in his book “Money: Master the Game”, interviewed Mr. Dalio and got a basic idea of how Bridgewater allocates its assets.  A summary of Robbins’ interview and the asset allocation strategy, which Dalio calls the All Seasons Strategy, is through this link:

The end of the bull market

The All Seasons Strategy is predicated on containing risk.  Stocks are much riskier than bonds, meaning their returns fluctuate and are not consistent over time.  Therefore, according to Dalio, an investor should not put all of their money into stocks.  Dalio also sees other asset classes, including gold and other commodities, as natural hedges against stock risk.  The following is a summary of the All Seasons Strategy:

  • 30% Stocks
  • 40% Long-Term US Bonds
  • 15% Intermediate US Bonds
  • 7.5% Gold
  • 7.5% Other Commodities

As its name implies, the All Seasons Strategy is a long-term hold strategy that should do well during all economic cycles.  If you think about it, the 5 asset classes represent more or less the largest economic classes of the US economy.  If one sector is underperforming, it probably means that another is outperforming.  As the whole US economy moves forward, so should this All Seasons Strategy which mimics the broadest sectors of the US economy.  This is the type of portfolio that, once established, you might look at once or twice per year to see if it needs reallocation.  Kind of an autopilot strategy.  Does it work?  I have backtested a version of it, using ETF’s as proxies for the various sectors.  While my backtested returns didn’t match those of Bridgewater, they were positive, even during down markets.  There are other articles linked in Google that find similar results.


My main takeaway is a glimpse into the way Ray Dalio thinks about risk, how to limit it, and invest while being cognizant about risk.  He does view portfolio risk differently than do most investors.  As to his Principles and his non-stop quest for truth:  While it is admirable, I don’t view my mission the same way.  I view my mission as helping my clients achieve their dreams through their financial success.  I also think it is important for most people to have some sense of privacy, and the Radical Transparency concept of Dalio doesn’t allow for much personal privacy.  One can be truthful and still maintain privacy.  Nevertheless, Ray Dalio and his writings and his video are thought-provoking, especially coming, as they do, from the manager of the world’s largest hedge fund.

Weak Dollar

I am writing this on Thursday, January 25, 2018.  Trading action over the past week has shown how much the stock market has traded off of changes in the value of the dollar.  Specifically, earlier this week, Treasury Secretary Mnuchin publicly stated his and the administration’s desire for a weaker dollar.  Most administrations have sought a stronger dollar.  Not the current administration.  The result of Mnuchin’s comments:  The Dollar Index dropped almost 1% that day, and the US stock markets soared to new highs.  Then, today, while at the annual Davos economic conference, and in an interview on CNBC, President Trump mentioned that he would like to see a strong dollar at some point.  The result:  A wild ride for the Dollar Index, including a reversal upward of about 1% when Trump made his comments, and a commensurate correction in the stock market.

Tale of Two Charts

Here are charts for the S&P 500 Index and the US Dollar Index for the past several months.  Do you see perhaps any correlation between the two?

These charts are since July 2017.  If I was able to show you charts since 1/1/17, the negative correlation between the two would be more marked.  However, I am not technologically adept enough to figure out how to do that.  The takeaway:  The stock market has gone up as the Dollar Index has gone down.  Dollar Index going down means things like stocks are more expensive in dollar terms.


Dollar Index going down also usually means inflation, especially for Americans purchasing imported goods.  However, inflation in the US for 2017 was only 2.1%, which is historically low.  Of course, that is based on the Fed’s “basket of goods” method, which some consider outdated.

Interest Rates

Dolar Index going down also usually means that interest rates rise in reaction to the currency going down.  Yet, US Treasury rates remain in the 2.6% range, at least for the 10 Year Bond.  That is also historically low.  The Federal Reserve Bank raised rates in December 2017 and indicated there will be more increases in 2018.  The Fed affects short-term rates, and long-term rates typically follow, which they have, to some extent.  They are still relatively low.  There is a lot of debate among large institutional investors regarding rates, as you might expect.  My take is that longer-term rates will adjust as the Fed adjusts and that we will not fall into an inverted yield curve situation (where long-term rates are lower than short-term rates) because we are not moving toward an economic recession, which an inverted yield curve portends.

Rest of the World

There is another body of thought that the decline of the Dollar Index is a result of the rest of the world catching up to the US.  Europe, in particular, has undergone a great deal of turmoil over the past several years due to issues in Greece, Portugal, Spain, and Italy.  If they are not fully corrected, issues in those countries are at least out of the headlines for the time being.  There are still negative interest rates in Europe, so there are still major issues there.  However, the US Dollar may be just reacting to the rest of the world now being under more stable footing.  In addition, as I wrote about in an earlier posting, India is finally getting its economic act together after decades of mismanagement.


There is a lot of talk about a “perfect storm” of good economic news throughout the world, and that stock markets are going up as a result.  I think there are still a lot of geopolitical risks out there and that the US Dollar has traditionally been a safe haven in times of turmoil.  That said, I do believe you should hold on to any assets you currently own – stocks, real estate, or other valuable assets.  If you don’t already own, it’s not too late.  Trends in the values of currencies tend to take a long time – months and years – to play out.  The new Fed Chairman (Powell) does not seem like the type to upset the apple cart, meaning he will likely not raise interest rates any more than has been projected.  This is more good news for stocks.

Average True Range

Average True Range (ATR) is a technical analysis indicator of a security’s volatility.  Although it was originally developed for commodities, ATR can also be used for stocks.  It is a measure of the average trading range of a stock each day.  If you look at a stock candlestick daily chart, you will see the high and low for the day, in addition to the last or closing price for the day.  The height of the chart is the trading range.  Average those daily trading ranges over some time using Calculus, and you calculate the ATR.

Volatility Measure

Beta is the most used measure of a stock’s Volatility, but Beta is a measure of Volatility in relation to the S&P 500 Index.  ATR, on the other hand, is a measure of absolute Volatility, meaning it is in relation to itself, not to an index.  It answers the question, “How wide a range does this stock trade in each day?”, instead of “How does this stock trade in relation to the S&P 500 Index?”, which is answered by a stock’s Beta coefficient.

Day Traders

Day Traders like stocks that have a high ATR because daily trading range volatility means profit opportunities for Day Traders.  Day Trading also probably contributes to a stock’s ATR – a stock that is highly day-traded probably has a higher ATR because of the day-trading activity.  Smaller tech companies tend to have relatively high ATRs, whereas established “old economy” companies such as utilities have lower ATRs.

Stock Chart Sites

Free stock chart sites and will tell you a stock’s ATR.  I don’t see it on Yahoo! Finance but perhaps I am missing it.  In Stockcharts, you select ATR in the Indicators section below the chart.  In Finviz, ATR is also listed below the chart with no additional selection by you required.

Whole Number vs. Percentage

Average True Range is calculated as a whole number.  Thus, higher-priced stocks such as Amazon, at $1,259 per share, have a larger ATR than do lower-priced stocks.  To get a true measure of the ATR, divide the ATR number by the stock price.  This will give you a percentage trading range, which will help you determine which stocks are truly volatile and which are less so.


One stock that I follow but don’t own is Ambarella, Inc. (AMBA), a chipmaker whose products are used in GoPro cameras, among other customers.  Here is a chart of AMBA as I write this post:

AMBA has an ATR of 2.42, which, when divided by its current price (as I write this) of $54.32, means that its ATR is 4.45% of its stock price.  That’s very high!  It means that, on an average day, AMBA trades within a range of 2.42 points or 4.45% of its value.  Compare that with the SPY, the S&P 500 Index ETF, which has an ATR of 1.56 or 0.6% of its stock price of $275.62.  AMBA is much more volatile.  If you are looking for a stock with large price swings on a daily basis, AMBA is one possibility.  There are many others.

Other Applications

I believe the concept of Average True Range can be applied to other aspects of life.  For instance, do you know people where you don’t know what to expect next?  And do you know people who seem to be very steady and even-tempered?  Perhaps you work or go to school with both types of people.  The former can be said to have a high ATR, while the latter can be said to have a low ATR.  I used to use High Beta and Low Beta to describe these personality traits, but I think I will start using ATR instead because they are volatile in and of themselves and not in relation to greater society.  High ATR people tend to have a lot of drama surrounding them.  Sometimes you can handle the drama, or even crave it, and sometimes you want less drama, perhaps because you have more drama going on in your own life at that time.  The same holds true for stocks.  It doesn’t imply that higher ATR people have a higher upside, just that the highs and lows they and you experience throughout an average day are wide, and wider than those of other people.


I am pointing out ATR as another item to look at when looking at individual stocks.  It doesn’t work as well for funds or indexes because of the many holdings within a fund or an index.  Please let me know any thoughts you have and perhaps if this helps you think differently about your interactions with other people.



India may finally be getting its economic act together.  Its Nifty 50 index was up about 35% in 2017.  A new book titled “Our Time Has Come” by Alyssa Ayres (Oxford Press) details the economic and political history of India since it became independent in 1947, which is only 70 years ago.  Ms. Ayres had studied in India while an undergraduate at Harvard.  The book shows how Jawaharlal Nehru, the first prime minister of independent India, and the father of future prime minister Indira Gandhi, instituted socialist principals that almost bankrupted India.  India was forced to sell its gold reserves in 1991 to stay solvent.  Thereupon it started to reform its socialist ways and now seems to be heading in the right direction for its citizens and all involved.

Despite its recent growth and good news, there is still a lot of potential.  India remains an agrarian economy.  Think of the USA right after the Civil War, as our Industrial Revolution was commencing.  According to Ayres’ book, half of the employment is in agriculture, which contributes 17% of GDP.  Only 18% of GDP is in manufacturing, compared with 30% in China.  India has a long way to go to catch up with China’s economy, and therefore a lot of potential.

As Ayres’ book notes, there is little downside for the USA regarding India’s emergence.  India doesn’t seek to displace the USA as either an economic or political powerhouse, and it doesn’t seek Asian hegemony, as does China.  Remember that Tibet’s issue is with China, not neighboring India.  True, India and Pakistan still don’t get along, but their dispute has been confined.  Ms. Ayres doesn’t mention that one downside is for American manufacturing workers faced with its employers outsourcing to less expensive Indian labor. Nevertheless, the point is we are highly unlikely to go to war with India.


Unless you want to become an India expert, travel and/or live in India for a while, and read the Wall Street Journal India edition, rather than to invest in Indian companies through ADR’s here in the US, the best way to invest in India is through ETF’s.  Through ETF’s, you get broad, diversified exposure to India indexes and to the broad India economy without taking individual company risk.  I am not suggesting loading up on India but it is a great idea to have some exposure to the broad India markets.

The following are some broadly traded ETF’s sponsored by top managers that invest only in Indian stocks:

  • PowerShares India ETF (PIN):  This is a broad Index fund that tracks the Indus Advisors, LLC India Index, which has 50 constituents.  This fund was up nearly 40% in 2017.
  • IShares India ETF (INDY):  Tracks the Nifty 50 Index.  Up 35% in 2017.  IShares is a division of BlackRock, the largest funds manager in the world.
  • IShares India MSCI Index ETF (INDA):  Also run by BlackRock, but tracks a similar but slightly different index called the MSCI India Index.  MSCI is derived from Morgan Stanley Capital International.  This is the largest of the three index funds listed here.
  • The Emerging Markets ETF (EEM) is not a pure India play but, with over 8% of its allocation, India is the 4th largest country of allocation, behind China, Korea (South, not North, of course), and Taiwan.  Also, run by IShares, EEM is much larger than any of these other funds, with over $35 Billion of capitalization.

Although I don’t recommend it as an investment manager, if you want to go ahead and buy individual companies, some of the largest in Inda include:

  • Reliance Industries
  • HDFC Housing Finance
  • HDFC Bank
  • Tata Motors
  • Tata Consulting
  • Infosys
  • ITC (Cigarettes)
  • Axis Bank
  • Hindustan Unilever


Allocating some of your portfolio to India, or at least to the EEM, is a good idea.  It is likely that India’s economic growth in the next few years will outpace that of the US, and you are well-advised to get in on some of that action.  Buy ETF’s instead of individual stocks.  I think there is a lot of room for India to grow, although there are still a lot of issues such as its social class system that they need to address.  It will take time but the patient will be rewarded.

One final note:  India would be well-advised to spend some money to develop decent athletes.  Their Olympic and World Cup performance has been terrible.  They are good at Cricket but only they and a few other countries care about Cricket.  India is also good at motion pictures and that is starting to have an impact outside of India.  Having decent athletes would have more impact.


Boeing (BA) earlier this week (as I write this) announced their 2017 airplane deliveries and results, and they are outstanding.  Boeing in 2017 delivered and industry-record 762 airplanes and took orders for 912.  Their backlog is 5,864, which is over 7 1/2 years worth of backlog, based on 2017 deliveries.  Today (Friday, January 12) their stock closed at $336/share, which makes their market capitalization over $200 Billion.  My source for all of this is their outstanding website,  

I own BA – it is one of my only individual stock holdings.  As you can tell, I am very bullish on BA and its future prospects.  The following are several reasons for my bullishness:

  • Backlog:  Any company with a 7 1/2 year backlog has great future prospects.  Orders, of course, can be canceled, but probably not that many.
  • Barriers to Entry:  When I was in Business School 30 years ago, we used the famous Boeing vs. Airbus Case Study.  Guess which two companies are still the dominant players in the commercial jet market?  There have been no new (consequential) entrants into the commercial jet business since then, and I dare say there won’t be over the next 30 years.  True, there are Embraer, Bombardier, and other smaller commercial jet companies.  China’s Comac is getting started, and they may be the most likely to compete with Boeing and Airbus, but their story shows how high the barriers to entry are in this market:  Comac was started in 2008, and they are still in the test flight stage 10 years later.  Their prospects are good, but if it takes 10 years and all of the financial and technical might of the Chinese Government to get this far, it is unlikely there will be another company to build commercial jets.
  • No Threat of Substitutes:  Many industries are disrupted from below, meaning that cheaper substitute technology or products render existing industries obsolete.  Think of Eastman Kodak and photographic film, and how it was made obsolete by digital cameras.  Can you imagine a scenario whereby people will cease to fly in commercial jets?  What would that be?  Individual planes?  Teleporting?  Hyperloop?  Something else Elon Musk concocts?  FaceTime and Skype are nice but are no substitute for face-to-face interaction – ask any grandparent.  My point is that I don’t envision any technology disrupting the worldwide market for commercial air travel.
  • Boeing’s People:  Boeing has the world’s best aeronautical engineers already working for them.  Where else are they going to go and do what they already do?  Maybe some few will leave for smaller ventures here and there, but the likelihood of Boeing’s employee retention is very high.
  • Product Innovation:  Boeing is innovating with things like carbon planes (777 Dreamliner) and other cockpit technologies, always improving their products.  Boeing has not at all become complacent and looking to milk their product stable for cash.
  • Air Freight:  One of the macroeconomic trends going on right now is the emergence of online retailing and the demise of traditional stores.  Now you buy something online and it is shipped to your front door.  By what means is it shipped?  By truck, true, but also by airplane.  Who makes the airplanes, especially big cargo planes?  Boeing, of course.  The growth of air freight has also led to growth in the used airplane market.  If a commercial airline wants to sell an old plane, they increasingly sell it to an air freight company, which will convert it to carry freight instead of people.  Guess who sells the parts to convert these planes and keep them flying?  Boeing, among others.

The above I believe are long-term factors that support Boeing’s continued prosperity.  The following are some other short-term factors that Boeing currently has going for it that could change with political or economic conditions here in the US and worldwide:

  • Weaker Dollar:  Boeing is truly a worldwide company.  Its website shows each airline and each airline and each company worldwide that buys from Boeing.  The US Dollar has weakened somewhat during the past year, which makes Boeing products less expensive for overseas customers.
  • US Trade Balance:  Boeing is hugely important to the US Trade, as its products account for a very high percentage of US Exports.
  • Defense Buildup:  With the current political administration, there is likely to be a buildup of US military capabilities.  Boeing doesn’t just make commercial airplanes; they also are a huge player in defense contracts.  Boeing also sells its defense/military products to other countries.


I am bullish on BA because I really don’t see any downside to their business.  Think about this:  Apple is the largest US company with a market capitalization that is approaching $1 Trillion.  Apple’s largest product is the iPhone.  Can you imagine in the future that there will be a product that will replace the iPhone?  I can, for sure.  The iPhone is a great product but it has only been around for a little over 10 years.  Some company somewhere may very well come up with a product or technology that will replace the iPhone.  I don’t see any scenario whereby there will be a product that will disrupt and replace Boeing’s airplanes.  If Apple is worth nearly $1 Trillion, then I believe Boeing is significantly undervalued, even at a $200 Billion market cap.  This is not a knock on Apple – it is just a way of illustrating how I think about Boeing.  Lastly, I really do recommend you look at Boeing’s website – you will be amazed!