Per Zero Hedge, economists Robert Shiller and Mark Zandi believe that perhaps up to $100 B yearly is spent by consumers who have stopped paying their mortgages, or who pay much less than they owe due to modification programs. That may be 1% of consumer spending ultimately paid for by the taxpayer due to such programs as the Fannie/Freddie/Fed MBS two-step. Basically it's monetization.
Meanwhile the stock market remembers Marty Zweig's admonition and is not fighting the Fed or the tape.
Not only is this an extend and pretend rally and then some, but based on antiquated measures such as the Greenspan Fed model, the stock market can be said to be grievously undervalued. But . . . but . . . the rationalist splutters-- it's a contrivance. Treasury rates are low because the economy is so weak, not strong, and thus price-earnings ratios must account for normalized Treasury or corporate bond rates.
And the rationalist is right--someday.
Living in the immaterial world, as the (former?) Kabbala-ist known as Madonna has done, stocks are just numbers on a computer screen.
Probably the worst thing heard today was that a talking head on CNBC asserted that GOOG stock is undervalued because Baidu trades at 100 times earnings. 1999, anyone?
But as in 1999, babies were thrown out while bathwater was being promoted as perfume (or something like that!). On its own merits, the reinsurer Everest Re ("RE") trades at a big discount to tangible book value. In the early 2000s, it did so and then went wild, quickly trading at a big premium to (rising) tangible book. This sort of stuff happened like mad in 1999 and 2000. So there are both trading and buy-and-hold opportunities in the stock market, with a lot of fluff.
Re cash, a poll of economists in early 1982 showed an overwhelming preference for cash. Looking out over the next year or two, by far the worst investment class was cash, as rates plummeted. Stocks and bonds, disliked by those experts, did far better. By analogy, cash is hated and disdained, but one of these days if the economy in fact is/becomes strong, rates on cash will rise. Stocks and bonds may both fall in price and cash will then be the appreciating asset. Watch for it. Not today or tomorrow, but investors should watch for that situation.
Copyright (C) Long Lake LLC 2010
Showing posts with label Everest Re. Show all posts
Showing posts with label Everest Re. Show all posts
Wednesday, April 14, 2010
Saturday, March 27, 2010
The New Bubble: Feds May Need a Stock Crash to Keep Deficit Spending Affordable
We are moving into government bailout bubble territory in the U. S. The state of California had to (could) increase the size of its bond offering. What's up with that? The Feds are helping.
A potentially vast new FHA rejiggering of mortgages to help bail out borrowers and lenders alike with taxpayer funds has just been announced. The money is said to be coming from some prior bailout funds.
The surprising thing is that with the flood of issuance, the 10-year is not back above its peak of last year in yield. Certainly sentiment on the Treasury bond is as bad as can be imagined. Meanwhile "liquidity" is running wild. The "smart money" "knows" that the party will continue until the Fed tightens, thus stocks and junk bonds are buys.
When I look at my Value Line charts, I can find almost no stocks below their "value lines". Some such as Oracle and Mickey D are at their lines, but one is left with TJX and DLTR, Chubb and Everest Re (insurers highlighted by Barron's today), and scattered others. Mostly the chart patterns look long-term weak, short term overbought. You never know with bubbles and can't try to pick the top.
Holding this bubble together is a rickety edifice.
If Treasury yields surge, look out. Since Obamanomics requires low borrowing rates, watch out for the opposite happening. Obamanomics requires Treasuries to have low rates more than companies to have high stock prices. The more people and businesses suffer, the more the Feds can step in and save them. The question is whether the government can keep long rates low or even for them to move much lower. The Japan scenario, in other words. 1-2% inflation would be fine to allow 3% 10-yar treasury yields. Remember that long rates were much lower than today's all through the 1940s and well into the 1950s even as some years of war and post-war high inflation came and went. In other words, sometimes rates can be well below inflation. It just depends on psychology and on relative opportunities. And right now cash is trash and stocks are fundamentally overpriced.
There is no good general investing solution right now other than trading profits, which most people living normal sane lives cannot hope to achieve. I still think that one of these months, we are likely to see a recrudescence of a Treasury buying surge/panic. No idea when, though. But unlike with stocks as a whole, the 10-year pays you to wait.
Gold continues to act as suggested here. It is frustrating traders, short sellers and long-term investors. The more the financial markets inflate in price and gold does not, the more it is likely that gold prices are set to surge.
Copyright (C) Long Lake LLC 2010
A potentially vast new FHA rejiggering of mortgages to help bail out borrowers and lenders alike with taxpayer funds has just been announced. The money is said to be coming from some prior bailout funds.
The surprising thing is that with the flood of issuance, the 10-year is not back above its peak of last year in yield. Certainly sentiment on the Treasury bond is as bad as can be imagined. Meanwhile "liquidity" is running wild. The "smart money" "knows" that the party will continue until the Fed tightens, thus stocks and junk bonds are buys.
When I look at my Value Line charts, I can find almost no stocks below their "value lines". Some such as Oracle and Mickey D are at their lines, but one is left with TJX and DLTR, Chubb and Everest Re (insurers highlighted by Barron's today), and scattered others. Mostly the chart patterns look long-term weak, short term overbought. You never know with bubbles and can't try to pick the top.
Holding this bubble together is a rickety edifice.
If Treasury yields surge, look out. Since Obamanomics requires low borrowing rates, watch out for the opposite happening. Obamanomics requires Treasuries to have low rates more than companies to have high stock prices. The more people and businesses suffer, the more the Feds can step in and save them. The question is whether the government can keep long rates low or even for them to move much lower. The Japan scenario, in other words. 1-2% inflation would be fine to allow 3% 10-yar treasury yields. Remember that long rates were much lower than today's all through the 1940s and well into the 1950s even as some years of war and post-war high inflation came and went. In other words, sometimes rates can be well below inflation. It just depends on psychology and on relative opportunities. And right now cash is trash and stocks are fundamentally overpriced.
There is no good general investing solution right now other than trading profits, which most people living normal sane lives cannot hope to achieve. I still think that one of these months, we are likely to see a recrudescence of a Treasury buying surge/panic. No idea when, though. But unlike with stocks as a whole, the 10-year pays you to wait.
Gold continues to act as suggested here. It is frustrating traders, short sellers and long-term investors. The more the financial markets inflate in price and gold does not, the more it is likely that gold prices are set to surge.
Copyright (C) Long Lake LLC 2010
Wednesday, March 17, 2010
The Fed and the Stock Market: Weak Economy Continues to Propel Stock Price Inflation
Every pro and many amateurs are aware of the correlation with the Fed funds rate and low volatility, and between that of low volatility and rising stock prices. Thus it is no surprise that the Fed's unsurprising reiteration of its prior policy track was followed by yet another late afternoon increase in stock prices. Gold was up all day, up a bit more later in the day, and is up a bit more overnight. The joys of cheap money!
Meanwhile, probably the best portent for job growth is yesterday's downbeat job projections out of the White House. They won't be caught on the overoptimistic side of predicting the economy if they can help it ever again.
Unfortunately, the health care "reform" fiasco is looking the end of Terminator. You can't kill it, but it keeps getting uglier. This plus the recent Nancy Pelosi pledge that Federalization of health care is just the start is definitely not helping the mood amongst small businessmen. One wonders if by some chance the majority party can't beg/borrow/steal just a few more votes from its own party members in the House to pass this bill the stock market will give a big cheer, just as it did when Bill Clinton lost control of the house in the 1994 elections. And one wonders if passing the bill would give a sense of finality (finally) and allow business to focus on business rather than the irritant of health insurance, which would also be good for the public mood. On the other hand, this bill imposes tax increases before the spending kicks in. So that might make it bad for the public mood and anti-Keynesian. So I'm ignoring this bill in discussing investment options.
Let us step back and with apologies to Barry Ritholtz and his blog, look at the big picture.
Money printing and various forms of credit extension into such things as the black hole of Fannie/Freddie and the new black hole of Ginnie Mae (FHA), plus population growth plus cyclical factors have "strengthened" the real economy-- whatever that really means. There will be growth in the spring. But much is rotten in the state of this country. The Federal government is not close to a true AAA credit any more. Multiple states are fiscally mismanaged. Many financial institutions that remain too big to fail would be insolvent today on a mark to market basis. Thus your money in the bank is not there. Gold is roughly trading at an historical average price relative to the (long-suffering) S&P 500 index.
Doubling back to the Fed-- if the economy remains so weak that cash must be trash and even the alleged security of 10-year Federal debt only pays $3.65 per $100, how are stock buyers so sure that the future is so bright as to pay such a large premium over tangible book value as they are today and to accept such a historically low rate of return on BBB-rated corporate debt?
Yet even more than the bond market to my eyes, the stock market has pockets of relative attraction. Discount retailers have surging stock prices but TJX and DLTR remain at quite ordinary P/E's. Everest Re is a totally boring reinsurer that trades far under tangible book value yet has a top-notch quality rating by S&P's stock advisory service. Chubb, a cream of the crop sort of insurer, trades marginally above tangible book, has a 3% dividend yield, has a very high free cash flow yield (as do the other names mentioned above), and could be a mega-company's takeover meal to boot. McDonald's is operationally outperforming its peers and has a stock chart that has already broken to new alltime highs in its 50 and 200 day moving averages. It yields almost that of the 10 year Treasury but in 10 years, if dividends rise 7% per year, it will be paying investors twice what the T-bond will pay out in year 10. What will the "stub" of the MCD equity be worth then? I dunno, but as a conservative income and inflation hedge, plus the strong chart pattern, I find it a worthwhile part of a diversified portfolio.
Every name mentioned above is "defensive". With ECRI sounding the tocsins about more frequent recessions ahead, but with many stocks pricing in a strong and/or prolonged economic expansion, yours truly finds this a stock market that only a pro should short but that most people should be leery of. As it should be of most of modern, debt-infested finance.
Copyright (C) Long Lake LLC 2010
Meanwhile, probably the best portent for job growth is yesterday's downbeat job projections out of the White House. They won't be caught on the overoptimistic side of predicting the economy if they can help it ever again.
Unfortunately, the health care "reform" fiasco is looking the end of Terminator. You can't kill it, but it keeps getting uglier. This plus the recent Nancy Pelosi pledge that Federalization of health care is just the start is definitely not helping the mood amongst small businessmen. One wonders if by some chance the majority party can't beg/borrow/steal just a few more votes from its own party members in the House to pass this bill the stock market will give a big cheer, just as it did when Bill Clinton lost control of the house in the 1994 elections. And one wonders if passing the bill would give a sense of finality (finally) and allow business to focus on business rather than the irritant of health insurance, which would also be good for the public mood. On the other hand, this bill imposes tax increases before the spending kicks in. So that might make it bad for the public mood and anti-Keynesian. So I'm ignoring this bill in discussing investment options.
Let us step back and with apologies to Barry Ritholtz and his blog, look at the big picture.
Money printing and various forms of credit extension into such things as the black hole of Fannie/Freddie and the new black hole of Ginnie Mae (FHA), plus population growth plus cyclical factors have "strengthened" the real economy-- whatever that really means. There will be growth in the spring. But much is rotten in the state of this country. The Federal government is not close to a true AAA credit any more. Multiple states are fiscally mismanaged. Many financial institutions that remain too big to fail would be insolvent today on a mark to market basis. Thus your money in the bank is not there. Gold is roughly trading at an historical average price relative to the (long-suffering) S&P 500 index.
Doubling back to the Fed-- if the economy remains so weak that cash must be trash and even the alleged security of 10-year Federal debt only pays $3.65 per $100, how are stock buyers so sure that the future is so bright as to pay such a large premium over tangible book value as they are today and to accept such a historically low rate of return on BBB-rated corporate debt?
Yet even more than the bond market to my eyes, the stock market has pockets of relative attraction. Discount retailers have surging stock prices but TJX and DLTR remain at quite ordinary P/E's. Everest Re is a totally boring reinsurer that trades far under tangible book value yet has a top-notch quality rating by S&P's stock advisory service. Chubb, a cream of the crop sort of insurer, trades marginally above tangible book, has a 3% dividend yield, has a very high free cash flow yield (as do the other names mentioned above), and could be a mega-company's takeover meal to boot. McDonald's is operationally outperforming its peers and has a stock chart that has already broken to new alltime highs in its 50 and 200 day moving averages. It yields almost that of the 10 year Treasury but in 10 years, if dividends rise 7% per year, it will be paying investors twice what the T-bond will pay out in year 10. What will the "stub" of the MCD equity be worth then? I dunno, but as a conservative income and inflation hedge, plus the strong chart pattern, I find it a worthwhile part of a diversified portfolio.
Every name mentioned above is "defensive". With ECRI sounding the tocsins about more frequent recessions ahead, but with many stocks pricing in a strong and/or prolonged economic expansion, yours truly finds this a stock market that only a pro should short but that most people should be leery of. As it should be of most of modern, debt-infested finance.
Copyright (C) Long Lake LLC 2010
Thursday, January 21, 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
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
Saturday, January 2, 2010
State Finances: More Reasons for their Troubles
In The States and the Stimulus, the WSJ editorializes on adverse fiscal effects on the states of last year's ARRA "stimulus" bill. Even after I strip away unnecessary partisan comments, the facts laid out--assuming they are presented accurately--are impressive and taught me something: Sometimes you have to look a gift horse in the mouth. It appears that the states got a "teaser" one-year gift and now they are stuck paying for it.
Thank goodness 49 states have balanced budget requirements. At least they will deal with revenue shortfalls as best as they can. If on the other hand the Federal government makes up much of the states' deficits with grants and borrows/prints the money to so do, then our mess is bigger than contemplated.
The stock market is valuing companies based on earnings, not on tangible assets, and now that ECRI has repeated its prediction for more frequent recessions than we have been used to since Volcker let up on the reins, I continue to believe that investors should minimize their exposure to the general market even though the alternatives look a bit uninspiring to be sure, and follow Jeremy Grantham's advice (at GMO) to focus only on high quality companies whatever their size. And please don't chase performance unless you know how to do it. GOOG/AAPL/ISRG etc. were great buys. But they are in the hands of momentum buyers who are really renters. Who knows, but Chubb (CB) or the less well-known insurer Everest Re (RE) are highly safe stocks (top-ranked for safety by Value Line) that offer historically low price to tangible book ratios, low price/earnings ratios, dividend yields better than 3-year Treasuries, and low correlation to the general market or even general economy. In tech, IBM and Oracle have both broken out to multi-year price highs associated with record earnings, and both are free cash flow generating machines with rising dividends. Neither is cheap, but then nothing from precious metals, cash itself, bonds, etc. is cheap, so it's a pick-your-poison financial marketplace. Perhaps the most dangerous market is the tax-free muni market, as was hinted at at the start of this post. You can lose on credit as well as interest rates. Caveat emptor there.
Copyright (C) Long Lake LLC 2010
Thank goodness 49 states have balanced budget requirements. At least they will deal with revenue shortfalls as best as they can. If on the other hand the Federal government makes up much of the states' deficits with grants and borrows/prints the money to so do, then our mess is bigger than contemplated.
The stock market is valuing companies based on earnings, not on tangible assets, and now that ECRI has repeated its prediction for more frequent recessions than we have been used to since Volcker let up on the reins, I continue to believe that investors should minimize their exposure to the general market even though the alternatives look a bit uninspiring to be sure, and follow Jeremy Grantham's advice (at GMO) to focus only on high quality companies whatever their size. And please don't chase performance unless you know how to do it. GOOG/AAPL/ISRG etc. were great buys. But they are in the hands of momentum buyers who are really renters. Who knows, but Chubb (CB) or the less well-known insurer Everest Re (RE) are highly safe stocks (top-ranked for safety by Value Line) that offer historically low price to tangible book ratios, low price/earnings ratios, dividend yields better than 3-year Treasuries, and low correlation to the general market or even general economy. In tech, IBM and Oracle have both broken out to multi-year price highs associated with record earnings, and both are free cash flow generating machines with rising dividends. Neither is cheap, but then nothing from precious metals, cash itself, bonds, etc. is cheap, so it's a pick-your-poison financial marketplace. Perhaps the most dangerous market is the tax-free muni market, as was hinted at at the start of this post. You can lose on credit as well as interest rates. Caveat emptor there.
Copyright (C) Long Lake LLC 2010
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