Seeking Alpha Follow-Up; Jim Rogers Shorts Treasuries

A second article, on gold/GLD, has been published on SA:

I picked GLD for a general readership.  My preference is either for physical or for a true physical fund, basically PHYS, the Sprott fund that allows Americans to get capital gains treatment; no other fund has this capability.  Thus gains in GLD etc. get treated as commodity gains.  In any case, the longer-term bull case on gold looks better to me than it has since mid-2011, though as restated below, times are unusually uncertain.  Gold has no short-term momentum behind it, so this is not a "wild bull" piece, more of a statement of a bullish bias toward the asset versus the USD and other USD-based investment choices.

I am in the process of getting links or notifications in place between SA and this site.  My daughter who lives down the street from us just had a C-section and a healthy baby, and I've been busy with other mission-critical things, so -- everything in its time.  It's gratifying to start that relationship.  I think that SA has potential and that it might be attracting a better class of writers; likely that's their goal.

I published a thematic article in which the message was "gold on hold, buy munis" piece at The Daily Capitalist in September, 2011 around the current gold price but at much higher muni bond yields.  This was a good call.  Gold has gone nowhere even though stocks have caught up and QE is now underway in a huge way.

I now reverse that muni call and think munis are at best a hold, or a sell-- the fear factor is finally gone from munis.  Though some California zero-coupon low-investment grade tax-exempt munis-- a very special niche, to be sure, yield much more than Treasuries and may still see some nice price appreciation faster than the yield implies.  And given how I feel about stocks "for the long run", I also took some spare cash and purchased a small odd lot of Illinois GO's maturing in 2016 at a pretty decent yield for the times we're in.  The reasoning was the the President is not, not, not going to let his home state default.  I think that Illinois GO's are money-good for a while.  It's sad that investors are reduced to scrounging for 100 basis points of yield, but as Charlie Munger said, we have to suck it up.

And actually, per today's topic, Treasuries are beginning to finally be looking like the tail end of a bear move, though perhaps they have some more upside potential in yield even if lower yields await (though the structural bull market may or may not be over).

One reason I say this is the following headline in BBG (LINK):

Jim Rogers Joins Bill Gross Warning on Treasuries

Much as I have enjoyed reading Jim Rogers' travel books and have followed him into investing in Russian ETFs (a modest exposure, to be sure), he has been the single best contrarian indicator on the movement of Treasuries I have seen over the past three years.  It seems to me that the time to short Tbonds is when stocks have been pummeled and the VIX is high.  Even Jim Rogers has to pay the broker its call money to short a security, and he is out the coupon.  So on an annualized basis, perhaps he's out 6% or more just to short the long bond.  Who needs it?  Why not just go long silver if he's so confident that price inflation is going to accelerate?

The other reason I'm sniffing at least a rally is that, finally, the speculators are shorting them on the futures board.  Now we will just have to see how the politicians handle things in DC, and how the real economy appears to perform, and whether Europe actually finally suffers an extreme event or actually starts healing for real.  These are unusually uncertain times, and thus I'm not trading much or initiating new positions.  Is the long-term secular bear market in stocks actually ending, or resting?  Could be, you never know.  Or are we due for a third crash?  Could be, you never know.

Bill Gross, OTOH, has not been much of an indicator either way.  Sometimes he's right on interest rates, sometimes he's wrong-- at least in his public pronouncements.  But sometimes he's talking his book, and sometimes perhaps he's trying to move markets a bit so he can trade against the market.

For want of a better valuation metric in today's very strange markets, I'm happy to use Value Line's time-tested and self-adjusting algorithm.  Based on that, and based on a mediocre Q4 earnings season and higher interest rates than at year-end (a negative for stock prices in their equation), stocks are ahead of themselves at best. (Their average projection for the Dow for 2013 was 13,440; that would be lower now given higher yields.  Thus a correction to 13,000 would make sense to their computer even in a non-recessionary situation.)

I am also researching RyanAir (RYAAY in the US), the Irish airline, which is the European version of LUV (Southwest Airlines).  Here is a LINK to the max timeframe chart.  To a nerd like me, this chart is a thing of beauty, not necessarily for a short-term trade, but on a longer-term basis.  The agreement with SA is that the articles are unique, so I won't say more now.  If any readers have personal experience with the airline or if you have thoughts on it as an investment, please comment.  I have not solidified my thinking on it.  It just announced a bang-up quarter and analysts raised out-year earnings estimates a lot, so it appears to be achieving strong operational results.

Over and out for now.

 

Halloween Horror Show for Dems: ABC

The ABC News Consumer Comfort Index was described by its sponsor as per the title. Here are some excerpts from today's weekly update:

With five days ’til Halloween and seven before the election, consumer confidence is looking like a horror show for the party in power.

The ABC News Consumer Comfort Index stands at -47 on its scale from +100 to -100, 7 points from its low in nearly 25 years of weekly polls. It’s been this bad just twice in the week before an election: in 2008 and 1992, both years the Republicans were turfed out of the White House.

Now it looks like the incumbent Democrats’ turn to suffer. As in the past, economic discontent is fueling broad dissatisfaction with the status quo, and it’s aimed particularly at the party calling the shots in Washington.

Meanwhile, the one bit of consumer polling I have seen that is an upside change is Gallup's daily polling of hiring-not hiring, which has broken out to what I believe is a multi-month high of +15. Let us see if that can be sustained or is a blip. (Other parameters such as discretionary spending were depressed as usual in the same poll, however.)

In other news, Bill Gross has turned bearish on U. S. bonds. Probably time to buy again.

Copyright (C) Long Lake LLC 2010

Nouriel Roubini Should Stick to Economics, not Market Forecasting

In Roubini Says Global Stocks May Correct as Growth Disappoints, Bloomberg.com continues to publicize the market views of a top-tier economist who has built a large consulting business. The article begins:

A global rally in stocks may end in the second half of the year amid a muted recovery in the world’s largest economies and as deflationary pressures limit gains in corporate earnings, Nouriel Roubini said.

Failure to restrain asset-price bubbles in emerging markets, fueled by loose monetary policies in the U.S. and around the world, may also cause an “unraveling and a significant correction of asset prices which will be damaging to global and regional economic growth,” Roubini, the Harvard- schooled New York University professor who in 2006 foresaw the financial crisis, said in Hong Kong today.

At this point, the Roubini outlook as expressed in the article are quite mainstream.

Because they are mainstream, it is unclear whether even if events occur as he predicts whether markets are discounting this and will look forward even as a growth slowdown occurs.

What is most important in looking at markets is spying relative over- and under-valuation. A classic example involves March 2000. The NASDAQ peaked around 5100, having doubled in 1999 and gone up a bit farther in the new year. Fundamental measures of market overvaluation were at record levels, surpassing those of 1929.

Yet there were a great many industry groups that bottomed exactly when the averages popped. These groups were diverse and included homebuilders, HMOs, basic industry, and other out of favor groups. By mid-2002, if memory serves me well, the Russell 2000 was hitting record levels even as the averages were floundering. By the time the market his its double bottom in early 2003, many stocks had moved a great deal.

Toll Brothers, for example, bottomed in March 2000 around 4 and hit 15 little over 2 years later, ending 2003 at 20 (about where it trades today).

What had really happened was that the average stock, rather than the large cap stocks and the tech sector, topped out during the Asian contagion that began in 1997 and rolled on through 1998; it is those stocks that kept bleeding support and got grossly undervalued relative to the popular stuff.

It appears to me that a milder version of that has now occurred. One can look through Value Line and find company after company that is way off its lows, has a poor long-term chart, relatively weak financial strength, no dividend payment and none on the way, and a fundamentally rich valuation. One can also find strong companies with fundamental reasonable valuation, rising and record dividends, rising and record sales and earnings, and no reason not to have a reasonable expectation at least mid-to-high single digit returns to shareholders over a 5-10 year history. Relative to the market, they have underperformed the past year, but on a 2-year or 5-year basis, these companies have outperformed the stuff that I believe has moved too much.

These companies have been highlighted many times here. The list does not change much. Some, such as National Presto, have moved a great deal and are no longer cheap. Others, such as Teva, have not moved much. Everest Re, trading around book value, was up yesterday despite the general sell-off.

There are a series of poor investment choices available due to the general inflation of financial assets that Bill Gross wrote about in his December Pimco letter. This will cycle, but living in the present, we know that cash is being trashed but all bonds are increasingly risky given the explosion of debt combined with stagnant incomes.

The warnings of seers such as Nouriel Roubini are part of the chatter, no matter how right they are. Where they are most valuable is when they identify an evolving bubble or a seriously undervalued situation. Right now, the major imbalances - governmental deficits and money-printing are well known (don't sell gold). Unsexy stocks such as Chubb, Everest Re selling at single-digit P/E's and yielding over 2%; discount retailers with low double-digit P/E's and huge free cash flows; Teva and other special situations; and others provide inflation protection yet can do well in a no-growth economy. Over time these financially strong companies that have proven themselves winners over many years tend to continue to be winners.

Nothing in Nouriel Roubini's outlook have any special relevance to my willingness to hold all the above as part of a diversified portfolio. Until he develops more market experience, he would be well advised to stick to getting the economics correct and letting his clients adjust their market expectations accordingly.

Copyright (C) Long Lake LLC 2010

More on Bonds, with Insights from Bill Gross

In Midnight Candles, PIMCO's Bill Gross says what EBR has been saying all year, which is that virtually all conventional financial instruments are overpriced in aggregate: stocks, bonds, and cash. PIMCO presents an interesting analysis that comes to the conclusion that all paper "wealth" in the U. S. is in aggregate overvalued by 100% vs. 50 years ago. Without getting quantitative, I agree. That's the underlying why gold has made sense to me all year. The authorities are making heroic efforts to keep the paper ship afloat. His brief missive is worth a read, philosophizing about getting old notwithstanding, especially when one looks at his photo on the Web page and realize that it took some serious plastic surgery for a 65-year old to look like that.

Specifically because all classes of paper "wealth" appear overvalued, it continues to make sense to yours truly to run with the hypothesis that a Japanese solution could be in our future: very low inflation for long enough to allow Treasury rates to drop further or at least to stay where they are, thus allowing banks to make money on their "carry trade" and allow the Fed to dispose of all its Treasuries and mortgage-backed at no worse than breakeven. The Fed is notoriously stingy and does not like to lose.

In the prior post, we discussed some rationale for Treasuries: if the underlying principal is no good, then we have bigger troubles, and one could at least own gold (and canned goods?).

For retirement accounts, owning a no-current income Treasury can make a lot of sense. This "zero coupon" or "stripped" par bond is purchased at a discount to the ultimate payback price of 100. The rate is computed by a simple compound interest program. A price of 50 for the zero coupon bond will give a higher rate of return the sooner it is paid off at 100. There are three benefits of the zero coupon bond. Here are the advantages:

1. No reinvestment decision with small amounts of interest (at today's rates). If you spend $10,000 to purchase a 4.5% 30-year standard bond at par, every six months you will receive $225 dollars. Try reinvesting that!

2. If rates drop, the mathematics of the bond mean that the price moves up faster than a standard bond that provides current income. So, a "zero" can be bought with the possibility of speculation in mind.

3. Stated yields are about 10% or more higher for zero coupon Treasuries than for par bonds; i.e., a 3.5% standard Treasury bond rate (which is what the media report) is often correlated with a 3.85-4.0% rate for a zero. Why is that? One reason is that it just is that way; the other is the following disadvantage of zeros:
The built-in appreciation is taxable even though one receives no current income. So more people only buy them in tax-deferred accounts.

This can be avoided by finding zero coupon municipal bonds. Another way to avoid this is to find a mutual fund that owns zeros on behalf of fund owners; but yield to maturity is notably lower with these vehicles than with bonds you directly own. American Century is the fund I use; one security of theirs to look at has the symbol BTTRX.

Strangely, the standard bonds that pay interest every 6 months are much safer should interest rates soar than are zeros. Let us say that you buy a 10-year Treasury and rates soar from 3.5% to 20% in one year. Yes, the market price of both bonds will plummet. If you invested $10,000 in a standard bond, you will receive $350 per year. If interest rates go to 20%, you at least can earn $70 per year off of that $350 (excluding taxes). It's not a lot, but that extra $70 can compound at very high interest rates for the life of the bond. With a zero, the value can go near zero.

Zeros are also less liquid than standard par bonds.

Overall, the less well-known zero coupon bonds are the simpler, higher-yielding bonds that also offer better profit potential should rates drop a lot. The path less taken in this case is the better one for people who do not need current income and are confident that they can afford to hold the bond till maturity.

Zeros are one way that yours truly is dealing with the highly abnormal financial environment.

Copyright (C) Long Lake LLC 2009