Dan on February 6th, 2016

I have always been diligent about looking at past performance of mutual funds prior to investing, and consider it to be one factor when comparing mutual funds.  However a recent improvement I made to  the VFS Daily Investment contest caused me to look at historical performance in a different light.

Starting in 2016, I am providing a prize for the portfolio with the best 3 year cumulative return.   The purpose was to reward ‘long-term’ excellence, and assumed the top portfolios would be pretty consistent.  However, I was surprised when I saw the results for 01/31/16 – the rankings for the top 10 portfolios changed dramatically:

One Month Change

 

So this caused me to immediately assume my calculations were messed up – so I did a little analysis of the top two portfolios:

 

Karen’s Portfolio Greg’s Portfolio
Month Monthly Return $100 invested
1/1/13 to 12/31/15
$100 invested
/1/13 to 1/31/16
Monthly Return $100 invested
1/1/13 to 12/31/15
$100 invested
2/1/13 to 1/31/16
1/31/2016 -3.89%  $  190.29 -7.54%  $  181.96
12/31/2015 2.34%  $  197.24  $  197.99 -4.98%  $  206.56  $  196.79
11/30/2015 2.61%  $  192.73  $  193.46 5.99%  $  217.37  $  207.09
10/31/2015 19.97%  $  187.82  $  188.54 9.37%  $  205.08  $  195.38
9/30/2015 -2.58%  $  156.55  $  157.15 -4.11%  $  187.51  $  178.64
8/31/2015 -2.06%  $  160.70  $  161.31 5.02%  $  195.56  $  186.31
7/31/2015 8.10%  $  164.07  $  164.70 0.67%  $  186.21  $  177.40
6/30/2015 -4.63%  $  151.78  $  152.36 -1.96%  $  184.98  $  176.23
5/31/2015 1.59%  $  159.16  $  159.76 4.19%  $  188.68  $  179.76
4/30/2015 1.75%  $  156.67  $  157.26 5.40%  $  181.09  $  172.53
3/31/2015 -2.02%  $  153.98  $  154.56 -0.89%  $  171.82  $  163.70
2/28/2015 7.40%  $  157.15  $  157.75 5.35%  $  173.36  $  165.16
1/31/2015 -1.26%  $  146.32  $  146.88 7.62%  $  164.55  $  156.77
12/31/2014 -3.65%  $  148.19  $  148.75 -2.65%  $  152.90  $  145.68
11/30/2014 2.77%  $  153.80  $  154.39 2.32%  $  157.06  $  149.64
10/31/2014 5.12%  $  149.65  $  150.22 0.23%  $  153.50  $  146.24
9/30/2014 -2.45%  $  142.36  $  142.90 -1.79%  $  153.15  $  145.91
8/31/2014 1.93%  $  145.94  $  146.49 4.60%  $  155.94  $  148.57
7/31/2014 1.37%  $  143.17  $  143.71 -1.79%  $  149.08  $  142.03
6/30/2014 0.65%  $  141.24  $  141.77 3.03%  $  151.80  $  144.62
5/31/2014 5.11%  $  140.32  $  140.85 6.09%  $  147.34  $  140.37
4/30/2014 -0.33%  $  133.50  $  134.01 -0.15%  $  138.87  $  132.31
3/31/2014 -0.98%  $  133.95  $  134.46 -3.44%  $  139.09  $  132.51
2/28/2014 6.70%  $  135.27  $  135.78 4.00%  $  144.04  $  137.23
1/31/2014 -2.99%  $  126.78  $  127.26 -1.80%  $  138.50  $  131.95
12/31/2013 2.63%  $  130.69  $  131.18 4.74%  $  141.04  $  134.37
11/30/2013 2.86%  $  127.34  $  127.82 3.31%  $  134.65  $  128.29
10/31/2013 9.14%  $  123.80  $  124.27 7.58%  $  130.34  $  124.18
9/30/2013 0.90%  $  113.43  $  113.86 5.08%  $  121.16  $  115.44
8/31/2013 -1.22%  $  112.42  $  112.84 -1.51%  $  115.31  $  109.86
7/31/2013 4.78%  $  113.81  $  114.24 9.06%  $  117.07  $  111.54
6/30/2013 -1.71%  $  108.61  $  109.02 0.24%  $  107.35  $  102.27
5/31/2013 1.48%  $  110.50  $  110.92 1.08%  $  107.09  $  102.02
4/30/2013 3.26%  $  108.89  $  109.30 1.44%  $  105.94  $  100.93
3/31/2013 2.90%  $  105.45  $  105.85 2.15%  $  104.44  $    99.50
2/28/2013 2.87%  $  102.48  $  102.87 -2.60%  $  102.23  $    97.40
1/31/2013 -0.38%  $    99.62 4.96%  $  104.96

 

And I found my explanation.  Using the approach of measuring return in terms of ‘$100 invested 3 years ago now is worth x’ does really magnify recent performance.  Note that even though Gregs portfolio was down 7.5% in January, it knocked $15 off his hypothetical investment.  So losses for the leaders are magnified as they hypothetically have more assets to lose.

The other important point is the starting point makes a big difference.  Greg’s portfolio for the period 2/1/13 – 01/31/16 got hurt, because he had a decent month in January (highlighted in green), which no longer counted. Removing the 4% gain from the first month knocked $10 off the 3 year return, further causing the large drop in Greg’s portfolio’s value.

So the moral to the story?  Be careful when looking at mutual fund past performance – as the time period you are looking at may make a big difference in how the performance is measured.  Or better yet – maybe mutual fund expense ratio is a much better indicator of future fund performance, since past performance is a pretty fluid measurement.

Dan on January 28th, 2016

Smart move by GM to invest in Lyft – perhaps they see the disruption coming to the car ownership model that self driving cars will bring, and are hedging their bets.  Interesting that Google gets all the press on self driving cars while Detroit is seemingly under emphasizing the future of self driving cars.  A great article here on  GM’s venture into the self driving cars.

The model for the future of cars is not only self driving – but renting on a per-trip basis.  Essentially automating Uber.  Statistics show cars go unused 94% of the time – sitting in the garage.   So my prediction?  Google (or some other ‘new-tech’ company’) will win the battle.  The self driving car ‘disruption’  reminds me of a number of times in the past 20 years I have voted for the incumbent, dominant company.  I recall a discussion with a co-worker – ‘why would you invest in Netflix when you can buy Blockbuster at a much bigger discount’.  After all, Blockbuster had the customer base, inventory and retail presence.  When Amazon went public in the 1990s at a huge premium, I thought ‘how can Amazon compete with entrenched booksellers – how hard can it be for booksellers to sell books over the internet?’

The problem is the entrenchment and lack of original thinking by the incumbents.  The market leaders have to worry about protecting their existing business model for as long as possible – hampering the adoption of the technologies and business models.

Detroit seems to be in that category – I am sure margins are much higher selling cars to individuals  and executives will fight to keep the existing model (and short term profits).   Maybe GM’s tiny investment in Lyft shows there is some chance that they can re-invent themselves – but I am skeptical.

Dan on January 16th, 2016

Interesting chart here from a presentation by Jeffrey Gundlach of Doubleline Capital  (see the complete presentation here):

 

Fed easing correlates to oil?

Fed easing correlates to oil production?

His thesis is the overproduction of oil in the US may have been driven by all the excess money the Fed pumped into the economy. All this low interest capital was put to work drilling and selling oil. An interesting hypothesis – at first glance it seems to be to unrelated graph lines that happen to correlate, but after thinking about it a bit I have to wonder.

This chart, showing the ratio of North American companies losing money vs the default rate, also sort of supports the theory:

nadefault

If you assume the oil production companies are backed by investment funds, rather than earnings, this chart would indicate they are still holding themselves up by draining investment funds.  But assuming oil prices stay low, the game will be over in a few quarters.

So if you are convinced there is some merit to this theory, then one way to invest on this thesis would be on overweighing international developed markets (EAFE):

eafesp500

Reading this chart (as found in this Goldman Sachs presentation) tells me international developed markets appear to be underpriced,   If true, and assuming they have invested less vigorously in the oil production space, they will be helped more by cheap energy prices  than the S&P 500.  Many of these markets are also in countries where their government is doing some form of QE, pumping money into the economy, which is bullish for stocks.  If history is any indicator, these countries will be investing all this low cost money on the next economic bubble.

Dan on January 12th, 2016

A quick rant – though I know this article is over a month old.

The latest foreign policy dilemma America is facing:

Air Force burning through bomb stockpiles striking ISIL

One would think this article is from the satirical site The Onion – but this is a serious new piece.   This quote from the article shows the emergency America is facing:

The Air Force has fired more than 20,000 missiles and bombs in the air war against the Islamic State, depleting its stocks of munitions and prompting the service to scour depots around the world for more weapons and to find money to buy them, according to records obtained by USA TODAY.

Wow – I guess we should throw a few more billion at the military budget.

usmilitaryspending

But wait – lets see how effective this campaign is:

USA TODAY reported earlier this week that Army Gen. Lloyd Austin, who oversees U.S. military activities in the Middle East, estimated that the air war has killed 23,000 ISIL fighters, raising the death toll by 3,000 in just over a month. However, the movement continues to recruit replacements, and the Pentagon does not release its estimates of the war dead.

Lets see… 20,000 bombs, and we have killed 23,000 ISIL fighters – yet the movement continues to recruit replacements.  So effectively once could calculate easily that each bomb produces under 1 enemy casualty (lets assume that for each casualty we recruit .5 replacements) – no statistic on how many innocent people are killed.

This is really our best strategy?  But hey – what else should we do with American tax dollars – its not like we need to save money or anything.

 

 

 

Dan on January 3rd, 2016

I had chance to pull the stats from the solar panels I installed in mid-January 2015  (more details here) – and there is some good news and bad news.

  1.  The good news:  My total power production for the year (from mid-January on)   was 4005.5 kilowatts.  We had a pretty optimal year for solar – lots of sunny days in the summer long days, and a rainy winter when solar production is pretty much a non-issue.   My solar contractor who installed the system gave me a solar power production prediction before the install, and they estimated first year power production of 3886 kilowatts – which I beat by 3.1%.  So they were pretty darn accurate.
  2. The bad news:  Solar power incentives will be dropping in 2016.  Much of my payback analysis was based on the Washington State incentive structure providing 54 cents per kilowatt – the projected 2016 incentives as shown here  show a much lower incentive rate.  This will stretch out my payback – and it will be interesting to see what impact this will have for the expansion of solar in the Northwest.  At the predicted incentive rates, new installations would have a much increased payback period.  Having said that, I don’t regret the decision.  Much of the cost of the system install was for the production meter installation – setting me up for future expansion of panels or replacement of existing panels with more efficient ones.  I still envision the day when panels will be low cost, but the cost of retrofitting houses to produce power will not be going down.

If you are planning a trip to the Pacific Northwest – further proof that summer is the time to visit.  Surprisingly, we had a nice June in 2015 – combine that with the summer solstice and June was my best month for Production:

 

Day Kilowatts
06/16/2015 25.4
06/20/2015 24.88
05/30/2015 24.86
06/13/2015 24.60
06/23/2015 24.44
06/17/2015 24.31
06/11/2015 24.14
06/14/2015 24.11
06/10/2015 24.06
06/22/2015 24.00

I would of expected some July days to be in there in normal years – but we had an exceptionally nice June.  As far as my worst days – December 2015 was the 2nd rainiest month in Seattle history, and my numbers reflect that:

Day Kilowatts
12/07/2015 0.29
12/08/2015 0.35
12/05/2015 0.44
12/12/2015 0.48
12/21/2015 0.49
01/17/2015 0.70
12/27/2015 0.72
01/23/2015 0.73
12/03/2015 0.75
12/17/2015 0.90

To be fair I do have some tree issues which greatly reduce my production in winter – but if you are planning on visiting in December you can likely leave the sunscreen at home (My top power day in December was 3.55 kilowatts on 12/31).

My total power consumption for the year was 8055 kilowatts, so I produced approximately 50% of the electricity I used for the year.  I will be watching this trend over the years- in theory as lighting gets more efficient and panels get more efficient – I should be able to raise that percentage.

So my first year is in the books and I consider it a moderate success.  If you are planning on a solar install in the Pacific Northwest – and have any questions or comments – please feel free to add a comment below.

Dan on December 17th, 2015

An interesting overview here of how all of our recycling gets processed.

http://arstechnica.com/science/2015/12/recycling-matching-high-tech-materials-science-with-economics-that-work/

It’s interesting to think how recycling has evolved over the last few decades, and it appears like the technology to sort and process our recyclables has evolved also.  I think this is another story of machines doing a better job of mundane tasks (such as sorting garbage) than humans can do – freeing us up to do (hopefully) more productive things.

 

Dan on December 5th, 2015

Interesting data point here from w3techs.com on which Content Management Systems are behind internet websites:

 

WordPress is a free open source CMS – no wonder its eating market share from custom developed websites.  It has a huge ecosystem of prebuilt plugins, and if you can’t find the plugin you want, you could easily find  someone to build you one.

WordPress has thousands of free and low-cost themes, so you no long need to have a designer custom design a site – you can get a nice looking, pre-packaged design for free.

I guess the moral of the story is don’t let your children grow up to be website builders  or designers – I am not sure that’s where the future is.  The future appears to be in becoming an expert at knowing how to integrate existing software and themes, or building components and themes for use by all.

The w3tech site has all sorts of interesting data about the most popular technology behind websites – worth a browse at http://w3techs.com/.

Dan on November 18th, 2015

In September the financial world was on pins and needles as to whether or not the Fed would raise rates by a quarter of a percent.  In the end, the Fed did not take the much anticipated step of increasing the benchmark rate due to global risks.  At the time, the Chinese economy and stock market was plummeting, so the Fed backed off due to this uncertainty.

Now the market is starting to buzz about a rate hike in December.  Minutes from the October Fed meeting have traders thinking the Fed will do a December rate hike.  The latest job report tells us that the job market is at full employment.    We are nearing perhaps the best of all possible economic worlds, yet I think the Fed will still leave rates at historic lows so as to not risk slowing growth.

Why?  A couple reasons.  The latest Retail Sales numbers show the consumer is not spending all this supposed wealth:

retailsales

 

Second, despite the massive fiscal stimulus modeled after the US strategy, Japan – the worlds third largest economy – fell into recession:

japanrecession

 

(source:  http://www.tradingeconomics.com/japan/gdp-growth)

So even though China appears to have stabilized, I think these new economic data points will be enough for the Fed to not do anything.  However, there is growing financial market clamor to get the Fed off the 0% overnight Bank Lending Rate, so it is possible that they will make this move in sort of a symbolic fashion.  But I am not looking for any meaningful short term rate hikes in the first half of 2016, even though the numbers tell us that the economy is firing on all cylinders.

I have been critical of the Fed’s policies in past posts – and how it has led to a malformed recovery.  How can we be at full employment and at historically low interest rates?  The Fed appears to be no longer data driven, and looking at worldwide soft indicators for guidance.   In the words of one Wall Street reporter, the Fed is winging it.  And that may be OK, since we are in economic times with no precedent.

Dan on November 7th, 2015

In honor of CISA passing the senate, which is another nail in the coffin of the rule of law in exchange for homeland security,  I thought it would be a good time to post a lot of random stuff on how all the emphasis on intelligence by the CIA and others has grown over the last 60 years or so.

First off, a great read here on the architect of the modern day CIA – Allen Dulles:

http://whowhatwhy.org/2015/10/12/new-book-on-cia-master-plotter-dulles-sneak-peek-part-1/

Granted, this is a pretty evil account of Allen Dulles – who knows how much of it is true.  But given the fact that we already know Operation Northwoods and Operation Mockingbird was engineered by the CIA during Dulles tenure, it doesn’t seem like this account is too much of a stretch.

Speaking of Operation Mockingbird, I ran across this article from the 1970’s from none other than Carl Bernstein on how effective the CIA has been in partnering with the media.

http://carlbernstein.com/magazine_cia_and_media.php

Worth a read – a couple good outtakes:

The Columbia Broadcasting System. CBS was unquestionably the CIAs most valuable broadcasting asset. CBS President William Paley and Allen Dulles enjoyed an easy working and social relationship.

Time and Newsweek magazines. According to CIA and Senate sources, Agency files contain written agreements with former foreign correspondents and stringers for both the weekly news magazines.

Finally, here is a copy of the op-ed that Harry Truman wrote in 1963 regarding  his concerns about the CIA:

http://www.maebrussell.com/Prouty/Harry%20Truman’s%20CIA%20article.html

The last quote is particularly prescient:

 I never had any thought that when I set up the CIA that it would be injected into peacetime cloak and dagger operations. Some of the complications and embarrassment I think we have experienced are in part attributable to the fact that this quiet intelligence arm of the President has been so removed from its intended role that it is being interpreted as a symbol of sinister and mysterious foreign intrigue—and a subject for cold war enemy propaganda.

 

Dan on October 26th, 2015

Interesting to see Carl Icahn is creating a $150 million Super-PAC expressly to lower taxes on foreign earnings.

http://www.bloomberg.com/politics/articles/2015-10-23/icahn-says-he-ll-use-new-super-pac-to-help-america-and-himself

Given his investments that will benefit from a lowering of foreign taxes, this seems like a no-brainer as far as return on investment.  The good news is he is being public and straightforward about his motives.  The bad news is it only takes his pocket change to dangle in front of Congress to do it.  This will be a good test to see the market value of what it costs to buy legislation changes – if this legislation gets passed, hidden in some other bill no doubt, we will at least know the market price for democracy.