As was strongly suggested on yesterday's post, today the European and U.S. stock markets staged what looks to be a major intra-day reversal, both in Europe and here. Spanish and Italian govvies were clobbered. The SPY closed below its 150 day sma once again, and has a 10 week pattern now of lower highs since the April 2 high. Lower lows coming soon to a stock market near you would be highly unsurprising.
I am long a variety of utilities because of my favorite reason to buy/own stocks: income in a world starved for seemingly secure income; and technicals. These include ED, AVA, SWX, WGL, XLU. Note these have replaced my zero-coupon Treasuries, on which I took profits the week before last, and now I am increasingly ramping into the utilities as a preferred income and price appreciation play. Today's drop in interest rates is perfect for this thesis. My expectation is that utilities will suffer profit-taking on days like today but then go up a nice amount when we have days as we did last week when stocks rebound and rates go up. I'm banking on some resumption of the historical relationship between the 10 year T-note and utility yields. Some utes could go up 50%++ if that occurred near today's record-low T-yields. (Not counting on that!)
I also own a few of the small community S&Ls/bank stocks I have mentioned for quite some time on The Daily Capitalist. I prefer not to name them b/c they are so illiquid. Finally, I own a very modest amount of stocks with varying charts that are "normal" operating companies, are ultra-high quality, have the leading position in essential growth industries, and have TTM P/Es of 7-14. In general, they all are GARP stocks that are well off their highs but with record earnings, and all pay dividends and have substantial tangible book value.
I am also long a significant amount of some of the leveraged closed end tax-exempt bond funds, the largest holdings being NIO and NVG.
I see investors turning away from the SPY until it yields double the 10-year Treasury. This process takes time. That's how it ended up in Japan, with a 1% 10-year JGB and a 2% Nikkei yield. In the US in the 1940s, the market had periods where the highest-quality stocks yielded 7-9% with T-bond yields marginally higher than today's.
Once people really start worrying about stocks, a 2% SPY yield is trivial. They can go out for lunch and come back to find the SPY down that much, just like that. Thus we saw the psychology to get high dividends- and note back in the '40s, stocks often traded close to tangible book value, which as the decade drew to an end got to be understated due to inflation. I expect the lust for high dividend income is likely to return. For now, utilities with seemingly secure dividends are the best way I see to make investment lemonade out of today's ZIRP-era lemons.
I also took very small trading profits on GTU, having bought it late last week at a zero premium to NAV, selling it today with bullion a little below where it was when I purchased GTU but the premium to NAV had rised to 3+%. Every little bit helps. GTU does not fit the income theme! With oil turning to the downside today, I don't want more than a core gold holding, the trend being your friend and all that.
Showing posts with label The Daily Capitalist. Show all posts
Showing posts with label The Daily Capitalist. Show all posts
Monday, June 11, 2012
Sunday, June 12, 2011
New Post on the Stock Market at The Daily Capitalist
A new post has gone up on The Daily Capitalist on the stock market, click on the link or cut and past the link below. Due to formatting problems, work of this nature is not transferrable to the Blogger format.
http://dailycapitalist.com/2011/06/12/why-bill-russell-would-be-a-bear-on-the-stock-market-now/
http://dailycapitalist.com/2011/06/12/why-bill-russell-would-be-a-bear-on-the-stock-market-now/
Monday, June 6, 2011
Wednesday, May 25, 2011
A Case of Scurvy and Financial Vitamin C
One of the benefits of being a certain age is having had several different experiences while still being young enough to remember them. With that intro, I'd like to recount a diagnostic coup I observed and relate it to the financial matters mentioned in the title.
When I was an intern rotating through the Bronx Veterans Administration Hospital, I performed a history and physical exam on a newly admitted patient. He was clearly unwell, but the nature of his diagnosis was obscure in the extreme. I discussed the case with my senior resident, still a doctor in training but a year or two above me. I was puzzled; he was quite interested.
The next morning, the resident had quite the self-satisfied look. He announced that the patient had scurvy (a disease due to severe deficiency of vitamin C). Had the resident ever seen anyone with scurvy before? No. How did he know? He had correlated the symptoms with the patient's dietary habits. The patient basically lived on sardines. There was no vitamin C in sardines.
The patient was discharged on vitamin C and we all learned that there is no substitute for careful, case-by-case evaluations along with encyclopedic knowledge and an open mind.
That said, I wanted to correlated the above example with a post from Mish today titled Hyperinflation Nonsense in Multiple Places. This lengthy post is of special interest because not only is Mish one of my very favorite bloggers, but he approvingly quotes Jeff Harding of The Daily Capitalist from last fall on the prospects for hyperinflation in the U. S. As regular readers may know, I have agreed with Jeff about stagflation being the likely outcome for the foreseeable future.
I also agree with Mish that hyperinflation is not imminent, but I am mindful of the case of scurvy. Does the U. S. have the financial habits that can lead to hyperinflation, just as my patient had the dietary habits that led to the rare case of scurvy in New York City?
In a word, yes. Central bank monetization of large amounts of Federal spending is the key.
The politics of the day are in favor of this policy. The Democrats refused to raise taxes when, for two years, they controlled both Congress and the White House. Then they were all too happy to keep taxes as they were after the midterms, at least till the next election. Now they are happy to complain about the Republicans' position on Medicare while not saying how they will fund it. Presumably money will arrive from the tooth fairy AKA the Federal Reserve or a coalition of the unwilling and coerced. Net-net, my take is that the irresponsible fiscal and monetary policies that were followed when Bush the second was president have simply gotten worse in the Age of Obama.
So if the prediction of a significant global industrial downturn starting no later than summer is correct, there will be a cyclical factor working to restrain prices. But the trend in consumer prices is up, and with returns on bank deposits yielding much less than the rate of consumer price inflation, the hoarding mentality that can quickly lead to high and accelerating rates of inflation may take hold rapidly. Most Americans have never experienced anything approaching hyperinflation and are not as savvy as the brilliant doctor who sniffed out scurvy. In practice, all this continues to argue for possession of a significant and permanent holding of gold. Had the patient simply eaten some fruit or taken a vitamin pill, he would have had better health status. Similarly, gold and only gold is the classic way to hold long-term purchasing power when a government goes out of fiscal control, as the government of the United States may do sooner rather than later. There is no financial VA Hospital you can go to should the rate of loss of purchasing power vs. money rates paid by banks get worse. There may only be the Internet, depending on the point of view of any financial advisor(s) you may have.
I don't know anything about future choices that the authorities will make. Whether the U. S. goes in and out of deflation, as Mish predicts, is above my pay grade. All I can do is ask whether the U. S. is as deficient in financial prudence as my scurrilous patient was before he got sick enough to come to medical attention. Thus, my equivalent of financial vitamin C is gold.
BTW, in follow-up of my recent posts, I reversed trading course this AM and covered most of my shorts and also added more longs. The reason was that too many headlines were gloomy, and bearishness does not love company.
Copyright (C) Long Lake LLC 2011
When I was an intern rotating through the Bronx Veterans Administration Hospital, I performed a history and physical exam on a newly admitted patient. He was clearly unwell, but the nature of his diagnosis was obscure in the extreme. I discussed the case with my senior resident, still a doctor in training but a year or two above me. I was puzzled; he was quite interested.
The next morning, the resident had quite the self-satisfied look. He announced that the patient had scurvy (a disease due to severe deficiency of vitamin C). Had the resident ever seen anyone with scurvy before? No. How did he know? He had correlated the symptoms with the patient's dietary habits. The patient basically lived on sardines. There was no vitamin C in sardines.
The patient was discharged on vitamin C and we all learned that there is no substitute for careful, case-by-case evaluations along with encyclopedic knowledge and an open mind.
That said, I wanted to correlated the above example with a post from Mish today titled Hyperinflation Nonsense in Multiple Places. This lengthy post is of special interest because not only is Mish one of my very favorite bloggers, but he approvingly quotes Jeff Harding of The Daily Capitalist from last fall on the prospects for hyperinflation in the U. S. As regular readers may know, I have agreed with Jeff about stagflation being the likely outcome for the foreseeable future.
I also agree with Mish that hyperinflation is not imminent, but I am mindful of the case of scurvy. Does the U. S. have the financial habits that can lead to hyperinflation, just as my patient had the dietary habits that led to the rare case of scurvy in New York City?
In a word, yes. Central bank monetization of large amounts of Federal spending is the key.
The politics of the day are in favor of this policy. The Democrats refused to raise taxes when, for two years, they controlled both Congress and the White House. Then they were all too happy to keep taxes as they were after the midterms, at least till the next election. Now they are happy to complain about the Republicans' position on Medicare while not saying how they will fund it. Presumably money will arrive from the tooth fairy AKA the Federal Reserve or a coalition of the unwilling and coerced. Net-net, my take is that the irresponsible fiscal and monetary policies that were followed when Bush the second was president have simply gotten worse in the Age of Obama.
So if the prediction of a significant global industrial downturn starting no later than summer is correct, there will be a cyclical factor working to restrain prices. But the trend in consumer prices is up, and with returns on bank deposits yielding much less than the rate of consumer price inflation, the hoarding mentality that can quickly lead to high and accelerating rates of inflation may take hold rapidly. Most Americans have never experienced anything approaching hyperinflation and are not as savvy as the brilliant doctor who sniffed out scurvy. In practice, all this continues to argue for possession of a significant and permanent holding of gold. Had the patient simply eaten some fruit or taken a vitamin pill, he would have had better health status. Similarly, gold and only gold is the classic way to hold long-term purchasing power when a government goes out of fiscal control, as the government of the United States may do sooner rather than later. There is no financial VA Hospital you can go to should the rate of loss of purchasing power vs. money rates paid by banks get worse. There may only be the Internet, depending on the point of view of any financial advisor(s) you may have.
I don't know anything about future choices that the authorities will make. Whether the U. S. goes in and out of deflation, as Mish predicts, is above my pay grade. All I can do is ask whether the U. S. is as deficient in financial prudence as my scurrilous patient was before he got sick enough to come to medical attention. Thus, my equivalent of financial vitamin C is gold.
BTW, in follow-up of my recent posts, I reversed trading course this AM and covered most of my shorts and also added more longs. The reason was that too many headlines were gloomy, and bearishness does not love company.
Copyright (C) Long Lake LLC 2011
Wednesday, March 23, 2011
Miner Leagues
In the unending search for relative investment value in this overpriced neighborhood we call today's markets, yours truly has, following some indecision, to sink some real money into certain gold mining stocks. Criteria I have used include standard criteria that would apply to any company, such as rising profits and free cash flow, and preferably dividends. Just having gold in the ground is not good enough for me to invest in a company.
I also like to see good, or better than good, relative strength of the stock compared to its peers. In other words, I like to see that Mr. Market has been on my side. I also need to be absolutely convinced that a reasonable base case provides for adequate total return in a defined time frame.
Why is it worth the trouble to risk capital and spend time in these matters, given how picked over the stock market is by people smarter and better informed than I, and who work with the aid of immense computing power, inside information and other advantages? (I am talking large cap investing here.)
The answer comes from having an economic philosophy that the market has not priced in.
The many insights of the Austrian school of economics, which I recognize as at base simple common sense, have not been accepted by the investment mainstream. Thus when I invest in gold (unhappily, given that gold is the anti-dollar and I am a loyal American), I feel that no matter what surges its price has, I can see that the miners are themselves buffeted by rapidly rising costs of mine development, so I know that there is reality behind the nominal price of gold. This would change if the authorities in Washington either lost power or pursued policies of decades ago (not to mention those of the post-Civil War era).
Much more speculative than large cap dividend paying stocks are the junior miners and yet more speculative are the explorers. My sense is that at some point, "the Bernank" will have a "von Havenstein moment (lite, I hope)" and this (prolonged) moment will be associated with huge moves in said speculative stocks, mirroring the NASDAQ of the late 1990s. I fervently hope that this does not come to pass, but since hope is not an investment strategy, I will disclose that I own some of these highly speculative securities as well. Not enough to get hurt if they revert to what may be a lower fair value, but enough to provide some juice should things explode upward.
Large caps meeting my criteria include ABX, GG, and FNNVF. The GDXJ and GLDX funds are good enough for me right now, as they respectively cover junior (producing) gold mining companies and exploration (non-producing) companies, with some silver exposure included.
Copyright (C) Long Lake LLC 2011
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