New take on an old joke: How do you make less than a dollar in the stock market? Answer: Start with 220,000 dollars. Ha ha.

Not-so-funny “small fortune” gags aside, this is a story about a 48-year-old man named Ingmar Bueb of High Bridge, N.J. An opera singer by trade, the good Mr. Bueb may be one of the worst investors in history. For reasons known only to folks who know that opera means “work” in Italian, Ingmar sunk his nest egg – $220,000 – in a single stock. More specifically, the stock of an avaricious company called DryShips, a Greek carrier that has been charting one of the foulest routes in U.S. stock-market history.

What could possibly go wrong?

DryShips’ shares, which trade on the NASDAQ under the ticker symbol DRYS, occupy a nefarious world of tiny stocks where information is limited and what can only be loosely called investors bet on short-term moves. The company, which operates “dry bulk” ships that carry goods like coal and ore, became a hot topic on stock discussion boards when its shares suddenly leapt 1,500% in four trading days.

Nothing says fundamentally sound investing like “stock discussion boards.”

Seems that while Ingmar was practicing his recitative and arias parts, Athens-based George Economou, DryShips’ founder, chairman, CEO, and executive ne’er-do-well, struck a plan that would make any Wolf of Wall Street envious: Issue a batch of new securities through a friendly British Virgin Islands firm and promptly execute 1-for-15 reverse stock splits.

Look out New Jersey.

Reminding us once again why gentle souls like our opera singer friend go broke and double-dealers like Economou get rich, Ingmar didn’t even look at what used to be his nest egg until he was doing his taxes. Only then he discovered that, because of George’s stream of reverse stock splits, he owned only two shares. The investment was worth less than $1.

The Hemingway Law of Motion.

“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” When The Sun Also Rises as written 90 years ago it was a reminder that the world isn’t smooth and linear. By all appearance, no one at the SEC has ever read Ernest’s book.

What the equity markets have been doing…

Confirming the disconnect between Washington and Wall Street, stocks moved steadily higher over the two-week stretch, with both the Dow and S&P 500 touching new intraday highs along the way. The technology-heavy NASDAQ set no records but was actually the best perform benchmark.

A degree of traders’ bullishness no doubt came from Fed Chairman Yellen’s semiannual testimony before Congress. Best interpretation was that the Fed was in no rush to tighten monetary policy. Investors may also appreciate the head banker’s lack of “somewhat rich” comments she had made previously with regard to asset prices. Waiting in the wings is second quarter earnings season, which will kick off in earnest next week. That stocks rallied into the close of the week indicates the Street is looking for a repeat of the previous quarter’s upward earnings surprises.

INDEX Friday’s Close One-Week Point Change Year-to-Date Change
DJIA 21637.74 +288.11 + 9.49%
S&P 500 2459.27 +26.12 +9.85%
NASDAQ 6312.47 +172.05 +17.26%

 

What the fixed income markets have been doing…

To quote the Fed Chairman: “The Committee will be monitoring inflation developments closely in the months ahead.” Given the mushy testimony Treasuries went nowhere across the period. Investment-grade corporates, on the other hand, were quite active thanks in large part to banks and energy companies. Recent weakness the high yield space subsided a bit, with stability in oil prices heling the overall tone of the market. On the tax-free side, a heavy new issuance calendar nudged yields slightly higher.

FIXED INCOME Period YTD 12 Months Yield
U.S. Treasuries
+0.2%
1.8% -(2.3%)% 2.3%
U.S. Investment Grade +0.1% 4.0% 1.4% 3.2%
U.S. High Yield -(0.1)% 5.2% 10.0% 5.6%
U.S. Municipals +0.1% 3.7% -(0.3)% 2.3%
Non-U.S. Developed +0.2% 6.3% -(3.2)% 0.9%

 

What Fund Architects has been doing…

Investors continued to mostly ignore the goings-on in Washington and focused on the positives this period. Stock prices rose for the two-week stretch, with a couple of major indexes hitting new highs. The Global ETF Portfolio’s positions in Global Healthcare (IXJ) and Global Infrastructure (IGF) both participated nicely in this mostly upbeat environment.

On the fixed income side, we like our overweights toward Convertibles (CWB) and U.S. Preferreds (PFF). We will execute a small trade in the qualitative portion of the Conservative ETF Portfolio, swapping our 10% stake in the S&P 500 for iShares EM Local Currency Bond (LEMB). The Investment Committee likes the fundamentals of emerging markets and expect local currencies to hold up well against the dollar, perhaps even appreciate. In the meantime, the Portfolio will benefit from LEMB’s relatively high yield.

In this fairly calm environment, we think the key is stay fully invested in attractive sectors. Moving to safety too soon would be a mistake…a mistake our process should help us avoid.

What the pundits have been saying…

“Most investors have given up on high-grade bonds and mainstream stocks as a way to get a good return in a low-return world. Instead they go up the risk curve to try to get the return they used to get more safely.”

Howard Marks, founder of Oaktree Capital.

What the numbers are saying…

80%

This year’s surge in U.S. pork-belly prices, driven to record highs by a national craving for bacon. Americans bought around 14% more bacon at stores in 2016 than in 2013, and frozen reserves are at a six-decade low

What people have been saying…

“His trump card is his willingness to walk away. He does not have a history of bidding-type competitions, and he typically has played a pretty strong hand.”

  • David Rolfe, chief investment officer of Wedgewood Partners on Warren Buffett’s negotiating style as he faces pressure to raise his bid for Energy Future Holdings.

The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional.  The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.

 

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