| Dear Ladies and Gentlemen
I somewhat do have the impression, we live in a time of aggressive nervousness, and I can not think much of it. I am fully aware that bad news sell and yet, we all deserve a break. This is why I decided to write only about positive things in today’s weekly. First of all, the sentiment of U.S. house building companies is skyrocketing. In October, the mood among home builders reached a new all-time high, rising from 83 to 85 points compared to September. The NAHB home construction index has never been higher at any time since the start of the survey in 1986. Housebuilding sentiment is good when interest rates are falling or when interest rates are staying on low levels for a long time. It can be seen as an indicator and usually runs ahead of a stock market trend. At least this was the case at the end of 1998 and in summer of 2005. The S&P 500 marked its high points one and a half and two and a half years later (September 2000 and October 2007). Following the corona-related economic slump in the second quarter, the U.S. economy grew strongly again in the third quarter. The gross domestic product grew by 33.1 per cent between July and September on an annualised basis, thus exceeding market expectations. Then we have seen last week’s Weekly Economic Index (WEI) rise to -3.8 per cent from -4% in the previous week. The recovery of the U.S. economy continues. As the WEI is scaled to the growth rate of the past four quarters, it is increasingly approaching the expected growth rate for the calendar year. Considering all Covid-19 implications, this is rather good. Looking at the largest economy in Europe, we see the German truck toll performance index remaining at a high-level. The decrease compared to February is now only marginal at 1.7%. The toll performance index is published with a delay of about one week and acts as an indicator for the development of industrial production. Germany’s industrial production developed positively in October. The reason for this is substantial demand from Asia. Last but not least, we have seen Bitcoin performing positively over the last few weeks, and this usually is a clear sign of risk-on mood among investors and speculators. Therefore, if Bitcoin continues to rise, it could well be a positive signal for stock markets. Ladies and Gentlemen, by the end of next week one uncertainty is most probably going to be gone. I hope we will receive the results from the U.S. presidential election next week and this again would be good news, no matter who would be elected, as there would be one short-term uncertainty out of the way. By the way and just for fun, I like looking at the quotes on: Now, next week I have a real treat for all of you. My old friend Claudio was able to interview a former head of state on and during the Covid-19 pandemic ’s first wave and he allowed me to publish the interview in my next weekly. Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li And now, Ladies and Gentlemen I wish you a great day and weekend. Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
Kategorie: Stefan’s Weekly
Does Patience bring Roses?
| Dear Ladies and Gentlemen
On October 3, one month before the elections in the USA, the editorial of the „Magazin“ (No 40) read the following: „What does it make to be an adult?“ (I did mention this quote some three weeks ago in my weekly mail). „Faced with difficulties, they look for solutions. They do not despair at the first hurdle. They know that many problems that seem big and important at the moment are not in the long run and will eventually resolve themselves. However, above all, being an adult also means always being friendly and showing compassion for others“. Alain de Botton Now, back to the question in the headline of this mail. Is the old wisdom that patience should bring roses justified and above all, does it also apply to my profession, the investment of assets for private clients. Let me say straight away; I think this is the case. When I look back over the last decades, long-term investors have always been able to earn money with stable equity investments, even if they had to accept negative performances in the short term. As you know, our private clients‘ mandates are geared to cash flows. That is why our portfolios always include shares from insurance- and telecom-, pharmaceutical- and energy-, real estate- and food industry sectors. Now, this year, it is precisely such stocks that are suffering. All of these companies usually produce positive cash flows for years and sometimes decades. From time to time, for a quarter or two, those cash flows may stop. However, and due to their strong balance sheets, these companies are still able to pay dividends. Even though Royal Dutch, for example, has cut its dividend payments for the first time in 45 years, they still pay out 3%, Swiss Re has always paid out 5% or more in recent years, and Zurich Insurance has shown a constant dividend yield of over 6% in recent years. For us, these shares belong in every portfolio that is geared towards cash flow. If I now take the share of Zurich Insurance as an example, the dividend of 20 Swiss francs over 15 years can amortise the investment of 300 Swiss francs. In our opinion, this is very attractive. All the more so as we find ourselves in an environment of negative interest rates. We are well aware that our approach requires patience, especially in this exceptional year, but we are convinced that after many good years, some of them even very good, we will just get through this year as well. You know, Ladies and Gentlemen, Molière is credited with saying that „trees that grow slowly bear the best fruit“. So if patience brings roses and the slow-growing trees produce the best fruit, and if, as Alain de Botton suggested, many of the problems that currently seem to be significant and vital are not in a longer-term perspective and will eventually resolve themselves, then I am rather confident that our cash flow strategy will continue to generate gratifying returns over the coming decades despite Covid-19. Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li Many thanks, indeed! And now, Ladies and Gentlemen I wish you a great day and weekend. Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
Year-End Competition Update II
| Dear Ladies and Gentlemen
Time for another update on our year-end competition. The estimates are still wide-spread; this is great and as I had mentioned before, makes it more fun than if everybody is around the same numbers. We had some new readers joining in, but there were no new „highest“ or „lowest“ estimates. However, the prices for Gold, Silver, and the S&P moved up considerably since the last update. So, let us have a look where we are standing. Gold: Silver: S&P 500: Currently (at the time when I was finishing this message) gold stands at USD 1’908.59, Silver at USD 24.24, and the S&P at 3’483.34. If there are still readers out there who would like to participate, please feel free to send me a quick email, and I will be happy to take you on the list of participants. Do not forget; you may win a one-ounce Silver coin. Its price just went up by roughly 35% since my last (June-) update. Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li Many thanks, indeed! Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health! Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
Efficient Market Hypothesis
| Dear Ladies and Gentlemen
Much as expected, I received many messages concerning my last weekly mail called „a quantum of decency“. Also, much as expected, my personal perspective was not necessarily congruent with the perspectives of all of my readers. Nevertheless, thankfully, and again much as expected, most of the messages not agreeing with my point of view came along politely and thoughtfully, and I had many interesting conversations with readers explaining (agreeing or not) their perspectives, and this is what my weekly emails are all about, at least for me. Thank you very much to Barbara, Bob, AJ, Tom, Thomas, Mark, Steve, John, Mike, David and all the others for sharing your points of view! Now, before writing about the market efficiency hypothesis and because it fits last week’s topic so well, I would like to share a quote by the Swiss/British writer and philosopher Alain de Botton. When asked what adulthood meant to him, he said: „When faced with difficulties, they (adults) look for solutions. They do not despair at the first hurdle. They know that many problems that seem big and important at the moment are not at all in a long-term perspective and will eventually resolve themselves. Above all, being an adult also means always being friendly and showing compassion for others.“ Today’s topic is about EMH, the efficient market hypothesis (EMH), which is a mathematical-statistical theory of finance. The EMH states that asset prices reflect all available information. Therefore, assuming this is true, no amount of analysis can give an investor an edge over other investors in a given market. EMH does not require that investors be rational; it says that individual investors will act randomly, but as a whole, the market is always right. In simple terms, „efficient“ implies „normal“. For example, an unusual reaction to unusual information would therefore be expected. If for example, a crowd suddenly starts running in one direction, it would be normal for anyone to run in that direction as well, even if there is not a rational reason for doing so. A direct consequence to believers of that theory is that no market participant can beat the market in the long run. Many market participants and even financial markets scientists object to it. Warren Buffet, Daniel Kahneman, Amos Twersky and Richard Thaler have been criticizing EMH on various occasions. Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li And now, Ladies and Gentlemen I wish you a great day and weekend. Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
A Quantum of Decency
| Dear Ladies and Gentlemen
Last week I wrote about mean reversion and proposed this week’s mail to be on the market efficiency theory. I am sorry, but the topic will have to wait, I feel we „have bigger fish to fry“. I do not want my weekly mail to become a political instrument of any sort, and I consider myself to be a reasonably free spirit, but I almost felt urged to share my thoughts with you. So, there I was, getting up at 02:30 CET in the morning (yes, 2:30 am) on Wednesday to be ready for the first of three debates between the U.S. President, Donald Trump, and the former U.S. Vice President, Joe Biden. Ladies and Gentlemen, I was shocked by the performance. Are these two candidates really the best the U.S. has to offer? After all, this is supposed to be one of the most important jobs in the world (comes right after CEO at Incrementum) and out of a population of 328.5 million people, one could expect to find at least a handful of intelligent and classy people, no? But, let me start with first things first. To win a presidential election, a U.S. president needs a majority in the „electoral college“, i.e. the electoral men and women. This body consists of 538 people, so the majority is 270 votes. Each state sends a certain number of electoral men and women depending on the size of its population. The winner of a state receives all the votes, thus strengthening the Electoral College for his or her party. The absolute majority of the people’s votes (popular vote) is not decisive. Now that we have established this part, let us briefly concentrate on what happened from my perspective on Wednesday morning. It should have been a debate to show the two candidates‘ position on the following six topics chosen by Chris Wallace, the debate’s T.V. host, from Fox News. “The records of President Trump and former Vice President Joe Biden.” Chris Wallace is a 72-year-old and very experienced journalist, and yet, he had severe troubles to keep the debate and discussion on a decent level. To me, the president of the United States of America behaved in a very indecent way, and watching him perform on Wednesday morning CET confirmed one fundamental view that had developed over the past four years inside myself. The view I have today is that no matter how potentially excellent his political performance was during his term in office, without a quantum of decency no one should serve as president of the United States of America (or any other country), the largest economic and military power in the world. You know, Ladies and Gentlemen, in sociology, decency is defined as a standard for ethical and moral standards and expectations of good or correct behavior that is taken for granted. Decency determines manners and lifestyle. To me, this is a must-have for any politician, but even more so, for the president of the superpower called the USA. I am not sure if Mister Joe Biden will be a good president and if his political program will help to get the job done, but because to me he seems to be the more decent person, than the current U.S. president, the political program becomes almost less critical. I want the without a doubt globally most influential politician to be a reasonably decent person, and currently, I do not have the impression President Donald Trump meets this expectation. Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li And now, Ladies and Gentlemen I wish you a great day and weekend. Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
Mean Reversion
| Dear Ladies and Gentlemen
It seems my last weekly mail „Double Standards“ hit the nail on the head. I received many very positive feedbacks and exciting comments. One of them I would like to share with you: „people’s outrage is definitely selective, and the selectivity conveniently coincides with people’s preexisting political objectives. Stories attributed to anonymous (and, one often suspects, nonexistent) sources are also commonly used to justify political positions. The pressure to join one of two extreme sides and abandon individual thought is also very real“. Very well formulated, I am happy to say! Today I would like to concentrate on what is called the theory of „mean reversion“. In capital market theory, the term mean reversion is an extension of regression to the mean by negative autocorrelation to market price and volatility changes. This may sound a bit complicated, but it is not. In other words, the theory suggests that asset prices and historical returns eventually will revert to the long-run mean or average level of the entire dataset of an explicit asset and is thus focused on the reversion of only relatively extreme changes, as average growth or other fluctuations are an expected part of the paradigm. The mean reversion theory is used as part of a statistical analysis of market conditions and can be part of an overall investment strategy. It applies well to the ideas of buying low and selling high, by hoping to identify abnormal activity that will, theoretically, revert to a regular pattern. The theory implies that markets tend to exaggerate and that they correct themselves over time not only randomly, but have a „memory“ and reverse previous trends. (As some of you may notice, this theory is in contrast to the „market efficiency“ hypothesis, a theory I will cover in my next weekly mail). Therefore, an excessive increase in the price of an asset means that it must come down to more „normal“ levels in the future and vice versa. The extreme case is speculative bubbles. The same applies to volatilities and sales volumes and mean reversion for series running into the future means that in the long run, yield rates and interest rates do not just fluctuate around a mean value, but virtually actively return to it. Ladies and Gentlemen, to be frank, this is a theory and not a 100% bulletproof investment truth. However, I think it is always interesting to look at the long price-trend-lines of an asset and ask yourself why the current price is above or below such a long price-trend-line and if there may be in one way or another an exaggeration in the market, offering an investment opportunity for long-term investors. You know, this theory has led to many investment strategies that involve the purchase or sale of stocks or other securities whose recent performances have significantly differed from their historical averages. However, a change in such returns could also be a sign that a company no longer has the same prospects it once did, in which case it is less likely that mean reversion would occur, and therefore the theory could not be applied in every case. Percentage returns and prices are not the only measures considered in mean reverting; interest rates or even the price earnings ratio (P/E) of a company can be subject to this phenomenon. Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li And now, Ladies and Gentlemen I wish you a great day and weekend. Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
Double Standards
| Dear Ladies and Gentlemen
Sahra Wagenknecht, former parliamentary party leader of the Left Party in the Bundestag in Germany, warns against double standards in the debate about consequences for Russia after the poisoning of Kremlin critic Alexei Nawalny. Wagenknecht explained to the „Neue Osnabrücker Zeitung“ that anyone who demands an end to the Nord Stream 2 natural gas pipeline concerning Nawalny must evaluate all other raw material suppliers to Germany according to the same criteria and demand consequences there too. „Everything else is hypocrisy. To poison an opposition politician with the nerve poison Novichok is a heinous crime, she said. „But even if the Kremlin should be responsible for it (for which there is no evidence so far), it is no more heinous than beheading or flogging opposition members to death, as is common practice in Saudi Arabia, from which we (i.e. Germany) obtain oil,“ she said. „Nor is it any more heinous than tearing up innocent civilians with drones, as the United States, which supplies us (i.e. Germany) with its fracking gas, has done in well over a thousand cases. Ladies and Gentlemen, I am by no means a left-wing political supporter, as I by no means a right-wing political supporter but instead I am usually trying to seek common sense, and what Ms. Wagenknecht states is common sense to me and shows political double standards with the example of Russia. One serious problem we face today comes about different views and different opinions, i.e. individual thinking and the sometimes non-acceptance of it. It almost seems, that we live in a time where individualism is less and less accepted, and that collective outrage hits everything and everyone oscillating away from the mainstream opinion. Please let me know your thoughts. Now, I receive many messages or questions to equities investments. You know, Ladies and Gentlemen, I am not allowed for regulatory reasons to give any advice in this formate, and as unbelievable as it may seem (and as inconvenient as it really is – especially to me and my clients), I simply am unable to foresee the future. However, I, of course, have my very own humble opinion and I think if as a long-term investor you hold a well-diversified portfolio based on equities and other investments that yield some cash flow stemming from dividends, interest payments, and the like, you may well have to accept volatility as the price for the cash flow you receive with your portfolio and in a 0% yield environment, the price for a positive cashflow yielding portfolio may even be slightly higher volatility. However, a volatile portfolio is not, by definition, a bad portfolio. It depends on your very personal strategic target and your return expectations if you have to accept volatility as the price to pay for reaching your return targets long-term. Nevertheless, I do think only a small part of investors have the courage and knowledge to invest that way, and the general public would get too afraid to keep money in a portfolio going up and down and – unfortunately – most investors seek immediate gratification, and sadly enough this is not the way „investing“ works. Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li Many thanks, indeed! And now, Ladies and Gentlemen I wish you a great day and weekend. Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
The Outperformance of Gold – A Possible Explanation
| Dear Ladies and Gentlemen
I was asked to write an article on gold for the “Global Executive” magazine. The introductory part of the article reads like this: “By August 21, the year to date price of gold had gone up a hefty 27%. While many other asset classes experienced difficult times, the gold price not only showed significant resistance against global concerns on political issues, trade disputes, an oil price crash, Brexit, Covid-19 pandemic, social unrest in the U.S. and other countries, and more but was able to show a substantial positive outperformance over many other asset classes. Gold usually moves upwards if investors fear any form of disruption. To mention only fear regarding the recent performance increase, however, would not do the price development justice, as various reasons lead to this price increase. In August 2018 one ounce of gold would cost slightly over USD 1’200. Today one ounce of gold costs almost USD 2’000. Over the same period, interest rates for U.S. government bonds have come down to almost 0%, which means the opportunity cost of holding gold versus U.S. government bonds practically disappeared. Furthermore, the interest differential between the USD currency region and the EUR currency region virtually disappeared as well and resulted in a weakening of the U.S. Dollar in relation to the Euro. A weaker U.S. Dollar, lower interest rates, speculation, a pandemic, political unrest in the U.S. and other countries, trade wars, massive global financial stimulus, fear of inflation, if not hyperinflation, and more, all of these are the main drivers for the current outperformance of gold.” If you feel like reading more, please do not hesitate to click on the link below and enjoy the read: https://www.incrementum.li/en/journal/the-outperformance-of-gold-a-possible-explanation-summer-2020/ And please, Ladies and Gentlemen, never forget what I have been mentioning on numerous occasions: “We keep gold, we see some very particular and robust long-term positive features of holding gold, but just because we hold gold, we are not hoping for war, hyperinflation and the like.” Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li Many thanks, indeed! And now, Ladies and Gentlemen I wish you a great day and weekend. Yours truly, Stefan M. Kremeth Tel.: +423 237 26 60 |
Investment Managers
Dear Ladies and Gentlemen
Investment managers are strange animals, at least sometimes.
The amount of investment strategies out there is almost unlimited, and yet it seems only some of them are working. One of the most important decisions when choosing an investment manager is to understand the proposed investment strategy. Only when the investment strategy is well understood, one should choose to invest. An investment strategy that is difficult to understand may indeed deliver excellent results, but it may, unfortunately, deliver catastrophic results as well. The critical thing is to understand the strategy in order to avoid disappointment.
Usually, regulated investment managers can not derive from their proposed investment strategies without creating regulatory issues, i.e. an investment manager proposing to invest in Indian equities may not suddenly invest in Polish government bonds, even if Polish government bonds would go up in price like there was no tomorrow, Indian equities investment manager would still not be allowed to invest in them. The regulator wants to protect the average investor by forcing investment managers to deliver a product following its label
Now, if an investor seeks growth investments and after some years is disappointed to find out that the investments do not yield any cash returns, the investment strategy is probably not well chosen. Alternatively, if on the other hand, an investor invests in a cash return strategy and after some years is disappointed to find out that the strategy did not deliver any „growth“, again, the investment strategy is probably not very well-chosen.
Investment managers, therefore, may seem very stubborn at times and yet they cannot derive from the proposed strategy for regulatory reasons.
Investors sometimes compare apples with pears or growth with cash-flow strategies or Japanese equity funds with American equity funds, and this, of course, may lead to all sorts of disappointment. It is a little like buying a pickup truck and after some time being disappointed because on a race track sports cars produce better performance-results.
In addition, I believe there are not many people in the world who are good enough at making money from stock trading, because trading is a short term strategy that involves much guessing and as probably not many people can foresee the future, trading does not seem a viable strategy to most investment managers. Nevertheless, I sincerely believe there are a fair amount of money managers who can implement a proposed strategy and make money from investing if financial markets support the proposed strategy. What does this mean? If a money manager proposes an investment strategy in equities of oil-producing companies, the strategy can most probably not make any money in a period of decreasing oil prices, however, if oil prices shoot through the roof, the strategy of investing in equities of oil-producing companies has a fair chance to yield exceptional returns.
Last but not least, please do not get too excited about experts‘ views on TV (CNN, CNBC, etc). So-called experts who present their strategies in the media usually only get airtime because their strategies are working at the moment or in other words, financial markets support their proposed strategies for some time. As soon as the wind shifts, however, they disappear from the public eye until their investment approach once again matches the current market situation some years down the road.
Now, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
The relativity of Inflation
Dear Ladies and Gentlemen
Many thanks for all the inspiring and challenging messages I received to my last weekly mail. The topic „fear of inflation“ indeed triggered a lot of comments, and I apologize for the somewhat delayed answering to some of them, as I was overwhelmed by the sheer number of emails I had received. Many thanks for your active participation!
A fair number of the mails I had received covered the question and interpretation of a definition of inflation. If I look at the concept of inflation, I am not so much concerned if inflation should be called inflation because a country’s monetary base is getting inflated (the „Austrian“ view) or if prices of a basket containing all sorts of goods move up (the „Keynesian“ view). These definitions (to some, they become almost religious in character) are superfluous for broad sections of the population and are usually depending on individual perspectives and defending one, or the other therefore is mostly an unnecessary loss of time. To me, the ultimate variable in the equation of inflation is the answer to how much money the average citizen (consumer) has in his pocket and what the purchasing power of that money is. Because this is what is relevant to the average person in the street.
Moreover, because I think that way, Ladies and Gentlemen, to me, the perception of inflation is a highly relative measure, depending on cultural backgrounds, socio-cultural backgrounds, age, country of citizenship, health status, and more. Let me elaborate.
The statistical inflation number per country is generally calculated with the help of a basket of goods – naturally that basket of goods changes (sometimes more sometimes less) from country to country, according to what the country’s economists think should belong in the basket and therefore be part of the inflation measure. The content of those baskets tends to change over time to adapt the shopping basket to changes in the shopping behaviour of a population. Some people would argue that because the content of the shopping basket changes, a long-term measure is complicated, and there are even people who claim, the changes in the shopping basket are executed only to replace products that go up in price a lot with products that show no to little price increase and thus serve to manipulate official inflation numbers.
Because I do not want to get into that discussion, and just for fun, I prefer to calculate my very own and individual inflation number by putting together my shopping basket with the ten products that are most relevant for our household and together cause the highest costs in our household budget. Thanks to Excel, this is quite an easy task. In my case, for example, housing has become cheaper over the last twenty years, because interest rates went down and as a consequence mortgage cost went down continuously as well, while for people who rent their house or apartment in most cases (a least in Switzerland) cost for housing has gone up. Again, the perception of inflation may change from country to country, but also from household to household.
One last thing I want to touch concerning inflation is the increase in some asset prices. Asset price inflation is real, and I firmly believe it will not stop as long as governments and central banks continue to pour liquidity into the economy. As a consequence, this will most probably lead to an even larger gap between asset owners and people who do not own such assets, and if now we want to somewhat philosophically speculate about further consequences, I think this has the potential to lead to some political unrest eventually.
I am looking forward to your comments!
Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!
Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!
And now, Ladies and Gentlemen I wish you a great day and weekend.
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li