Portfolio Musing

With slim pickins' out there, I opened up a couple of positions in some penny stocks. One is VION, which has some drugs in clinical development for cancer. The stock is currently under accumulation and a lot closer to its year low than high. Ergo, the risk to reward seems decent. Another is IBIS, which has a small niche in the semiconductor biz. This likewise is a strong technical play, although the volume is a lot lighter.

Meanwhile, I doubled down on my losing position in ZILA. It seems to have reformed a base and is under accumulation. Looking to do the same for my losing position in ARDI as soon as it firms up a bit more. Both companies have products that logic says should make some nice bucks down the road.

Holding both GERN and ASTM as long term stem cell plays.

Hedging Your Bets With Matt Davio: Pox Americana

I want to address two themes this week. One is the American as a consumer and homeowner. The other is the American as an investor.

The American Investor

Let's start with the investing skill – or lack thereof – of the typical individual investors. According to Dalbar, Inc., "individuals have historically underperformed the markets, earning just 2.6% vs. the S&P 500 gain of 12.2% between 1984 and the end of 2002*. Research in the U.S. has shown that this dramatic underperformance comes as a direct result of client behavior, or more specifically, the attempt to avoid bad performance while seeking out better returns."

What's the more exact cause of this underperformance? In a word, it is EMOTION – as illustrated in this char of the classic cycle of investor sentiment:

Figure One: Cycling Investor Sentiment

My question to you is whether your behavior would seem to comport with this chart. Or, alternatively, have you been a contrarian able to countercyclically exploit opportunities that have presented themselves?

In this regard, the major emotional risks equity investors face include: • Herd mentality, • Likely investment at the top (Buy High), • Likely withdrawals at the bottom (Sell Low), and last by not least, a deviation from one's long-term strategy and discipline when times get tough.

The American Consumer and Homeowner

Housing, in my mind, has seen its best days of growth. That's not to say prices can't go higher. However, if 70% of Americans already own mortgages and houses, is there really that many 2nd, 3rd, and 4th home buyers still out there for people to be chasing "values" at these prices? I don't have the answer but circumstantially there are many signs pointing to a nearing of a relative top anyways. 
Prior to July 2003, mortgage refinancing activity seemed to track movements in interest rates fairly closely. Since then, however, homeowners have been less than responsive.

Figure Two: Limits in the Re-Fi Market?

Have we hit the limits to growth in the refi market? If so, it may be another hint that the home-as-ATM phenomenon has come to an end. The real question is whether homeowners are scaling back of their own accord -- or whether circumstances have forced them to.

Of course, over the last few years, betting against the US consumer has been a losing wager. And yet when we look at the parabolic rise of non-mortgage household debt in the chart below, one cannot help but imagine that it eventually will be problematic. 

Table Two: Household Credit Market Debt Outstanding (non-Mortgage)

1953-01-01 to 2005-01-01 (billions of dollars)

Source: St. Louis Fed

Note first the exponential acceleration of the curve. This is a true geometric gain that is clearly outstripping population growth. In fact, you can draw at least 3 separate trend lines on that chart -- 1960-80; 1985-96 1999-2005 -- each running at a higher rate than the prior trend.
This can't go on forever, and whoever does figure out exactly when the U.S. consumer gives up the ghost -- within a quarter or so -- stands to make a lot of money betting on the downside -- shorting retailers, banks and consumer cyclicals to name but a few.