Today's market action continues the pretense that stocks provide any security of receiving one's nominal money back, valued in US dollars or gold. CAT is an example. Disastrous quarterly results and similarly disastrous projections can't drop the stock again. It already is exactly where is was in October 2010. It no longer matters that it was over $100. CAT sells well above book value and has made poor acquisitions of Bucyrus (as it now appears) and the Chinese company that it now claims had fraudulent accounting. Meanwhile the nonsense of KO and PEP "beating expectations" but with yoy sales growth trailing price increases, leading to sharp markups of the share price is indicative of distribution of stock to anxious retail clients searching for the magic bullet. This "bullet" is supposed to triangulate triumphantly between the Scylla of low bond yields and the Charybdis of inflation. This will work until it doesn't. I "like" a couple of special situations such as YHOO and BLK, but my stock allocation is near record lows, i.e. close to zero. I'm not at zero as I think that gradually stocks are becoming more attractive than bonds, even on a risk-adjusted basis-- but the history of the US post-Depression and of Japan post-ZIRP suggests that relative valuations of stock dividends vs. bond yields has more to go before stocks really bottom.
Meanwhile, on another front, about last June I penned a post on TDC about the Fed(s) blowing Housing Bubble 2.0; yet I was skeptical about the housing stocks. And indeed, the housing stocks promptly correct 5+% and then surged. Yet they are sinking due to vast over-valuation. The cream of the crop, NVR, is down big on a "miss" today. TOL is wildly overvalued based on analyst's EPS projections for 2013 and 2014.
I continue to believe that most retail money is best off in tax-exempts of quality, duration, character to suit. The closed-end funds such as Nuveen (where I shop for CEFs) are where my more aggressive and "for sale" tax-exempts are allocated, but individually-owned bonds, while much less liquid, are much safer. After all, they expire, possibly when stocks will be cheap again (could that actually occur?), and possibly when interest rates will appear more attractive.
Finally, it's unclear how unattractive bonds actually are now. The stock GCC tracks an overall commodities index. It is sinking. It parallels realized inflation. Between China and the euro mess, another period of "deflation" might just be occurring, vs. disinflation. The bond market may be the current equivalent of the NAZ in the late '90s: over-valued but with prices amazingly just moving on up.
Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
Monday, April 22, 2013
Wednesday, April 17, 2013
Jeremy Grantham Updates His Projections, Is Ultra-Bearish On US Stocks
Mr Grantham, of GMO.com, yesterday provided his 7-year estimates for different asset classes based on data from the end of March. He now gives US large cap and small cap stocks about a zero annual total return, including dividends, over this seven year span. This brings him to where John Hussman has been for a while, using lower stock market averages. But similar, indeed.
This appears reasonable to me, from a q and CAPE perspective and from looking at balance sheets.
Investors appear to have forgotten that financial asset value matters. It's not all about earnings.
Where Grantham is mildly optimistic still is that he has an undefined category that he calls "High quality US stocks". It's unclear which stocks these are. Are they stocks of high quality companies, many of which are at very high valuations? I'd be a bit skeptical that in a well-studied market, the average stock is poised to underperform a specified smallish group of equities by what comes out to 5% yearly (he assumes 2% price inflation).
His fundamental analysis thus is now in accord with my long-standing view that the average investor in taxable accounts should mostly just own tax-exempt bonds, which at least on a 7-year basis can return about the anticipated rate of CPI inflation.
In any case, with both interest rates and commodities in well-defined downtrends, and with gold's smash downward suggesting liquidity issues somewhere (eurozone/Cyprus?), the case for US stocks is weak perhaps for the next 6 months.
Stocks for the long run? Maybe the very long run...
This appears reasonable to me, from a q and CAPE perspective and from looking at balance sheets.
Investors appear to have forgotten that financial asset value matters. It's not all about earnings.
Where Grantham is mildly optimistic still is that he has an undefined category that he calls "High quality US stocks". It's unclear which stocks these are. Are they stocks of high quality companies, many of which are at very high valuations? I'd be a bit skeptical that in a well-studied market, the average stock is poised to underperform a specified smallish group of equities by what comes out to 5% yearly (he assumes 2% price inflation).
His fundamental analysis thus is now in accord with my long-standing view that the average investor in taxable accounts should mostly just own tax-exempt bonds, which at least on a 7-year basis can return about the anticipated rate of CPI inflation.
In any case, with both interest rates and commodities in well-defined downtrends, and with gold's smash downward suggesting liquidity issues somewhere (eurozone/Cyprus?), the case for US stocks is weak perhaps for the next 6 months.
Stocks for the long run? Maybe the very long run...
Friday, June 1, 2012
Gold Up but Oil Down: A Mixed Message
Oil and gold are doing what they did in later periods of 2008 as well as last year. Oil is breaking down while gold is moving up. The gold:oil ratio is either about 20:1 (WTI) or about 17:1 (Brent). Either way, gold is not historically cheap to oil. There is clearly more room for oil prices to drop, both fundamentally and based on my reading of net short positioning of the commercials in the crude oil futures market. Thus as in 2008, a deeper low in the gold market is very possible (no guarantee), as people start really fearing deflation (perhaps). More fundamentally, in recessions, people must pay their bills with currency, not gold, plus jewelry purchases decrease. Finally, let's remember that the gold is now about 4X as expensive relative to U.S. residential real estate as it was when the ratio was at its minimum about seven years ago. You can't eat either gold or a home, but you can live in the latter (or rent it out for a profit, or so you hope). Value buyers are looking to homes this cycle for inflation protection, not only gold. I think the financial markets will reflect this relatively high price of gold compared not only to houses but to metals such as platinum.
Thus I am looking at the action in the precious metals today as technical, under cover of the "they will print" POV. But no U.S. recession is baked in the cake, and the current money flows into the Treasury market out of Europe and out of the global stock markets are probably sufficient to take the place of a new QE.
All recessions are deflationary (or disinflationary). As regular readers know, I give ECRI's views more weight than the Street does. Their WLI was down again today, and the multi-year trend is uninspiring.
If their U.S. recession call is correct while Europe works through its various problems, I think we can look forward to demand for commodities sharply diminishing. For example, there is said to be a 2-year supply of platinum in ETFs, for which the public is paying storage costs. LOL! Platinum can go into deficit, plus what do you think happens to the demand for platinum jewelry in a global recession? Platinum "could" fall a lot further from here. Just look at the 2008 lows if you are skeptical. Maybe it can't go so low, but sub-$1200 is quite possible. I just don't see gold as a good value at its current price in that global recession scenario. Message: sometimes markets should be watched and not traded.
As I've been saying since January 2009, the U.S financial structure. has been developing as Japan did during its ZIRP period. The zero bound has been a gravitational force, as it were, pulling the longer maturities toward it, with inflationary spurts during the expansion phase of the economic cycle.
I still consider stocks as a whole to be overpriced. OTOH, buy-and-hold investors are finally getting the chance to purchase a growing number of equities that are likely to outperform Treasuries on a multi-year basis, ignoring the fluctuations in between. Hint: think secure and growing income stream, a la BDX; or high and safe income stream even if it fails to grow ("we" think safe), as in ED.
Thus I am looking at the action in the precious metals today as technical, under cover of the "they will print" POV. But no U.S. recession is baked in the cake, and the current money flows into the Treasury market out of Europe and out of the global stock markets are probably sufficient to take the place of a new QE.
All recessions are deflationary (or disinflationary). As regular readers know, I give ECRI's views more weight than the Street does. Their WLI was down again today, and the multi-year trend is uninspiring.
If their U.S. recession call is correct while Europe works through its various problems, I think we can look forward to demand for commodities sharply diminishing. For example, there is said to be a 2-year supply of platinum in ETFs, for which the public is paying storage costs. LOL! Platinum can go into deficit, plus what do you think happens to the demand for platinum jewelry in a global recession? Platinum "could" fall a lot further from here. Just look at the 2008 lows if you are skeptical. Maybe it can't go so low, but sub-$1200 is quite possible. I just don't see gold as a good value at its current price in that global recession scenario. Message: sometimes markets should be watched and not traded.
As I've been saying since January 2009, the U.S financial structure. has been developing as Japan did during its ZIRP period. The zero bound has been a gravitational force, as it were, pulling the longer maturities toward it, with inflationary spurts during the expansion phase of the economic cycle.
I still consider stocks as a whole to be overpriced. OTOH, buy-and-hold investors are finally getting the chance to purchase a growing number of equities that are likely to outperform Treasuries on a multi-year basis, ignoring the fluctuations in between. Hint: think secure and growing income stream, a la BDX; or high and safe income stream even if it fails to grow ("we" think safe), as in ED.
Tuesday, May 24, 2011
Another Non-Barking Dog
A dog that did not bark today was the stock market. After Monday's drubbing, bulls wanted to stage a "Turnaround Tuesday". Instead, with less than an hour to go in the regular stock trading session, stocks are flat with the VIX down (a lower VIX indicating less fear in the marketplace as judged by certain options activity). However, Treasuries reversed from down in price to up in price, joining gold in the plus column.
Meanwhile, my favored proxy group for the fundamentals of the economy, namely large financials, are depressing. JPM, generally considered the best of the TBTFs, is weak again today. BofA stock looks horrible, as do C and AIG. A high-quality not-quite TBTF, the President's banker (Northern Trust) also has a failing chart. DE and CAT don't have hot charts, either.
I recently read an erudite piece out of Cumberland Associates that "sell in May and go away" historically has not applied when some circumstance or another that in my approaching dotage I cannot remember is present, as it was when the writer wrote that. But at least for industrially sensitive stocks and commodities, today's action is more consistent than not with the thesis that for the next few months, investors' trading accounts are better off on defense than offense.
Disclosure: I am short BAC and NTRS, though I am long a much greater quantity of offsetting longs in a similar investment niche. I am also long gold in various forms and have certain other longs and shorts. My major recent asset allocation change has been to sell out of almost all foreign currency positions and energy stocks as soon after the reported "hit" on Mr. bin Laden occurred and silver and oil began crashing, and replace much of those positions with long Treasury bonds and most of the rest with cash.
Copyright (C) Long Lake LLC 2011
Meanwhile, my favored proxy group for the fundamentals of the economy, namely large financials, are depressing. JPM, generally considered the best of the TBTFs, is weak again today. BofA stock looks horrible, as do C and AIG. A high-quality not-quite TBTF, the President's banker (Northern Trust) also has a failing chart. DE and CAT don't have hot charts, either.
I recently read an erudite piece out of Cumberland Associates that "sell in May and go away" historically has not applied when some circumstance or another that in my approaching dotage I cannot remember is present, as it was when the writer wrote that. But at least for industrially sensitive stocks and commodities, today's action is more consistent than not with the thesis that for the next few months, investors' trading accounts are better off on defense than offense.
Disclosure: I am short BAC and NTRS, though I am long a much greater quantity of offsetting longs in a similar investment niche. I am also long gold in various forms and have certain other longs and shorts. My major recent asset allocation change has been to sell out of almost all foreign currency positions and energy stocks as soon after the reported "hit" on Mr. bin Laden occurred and silver and oil began crashing, and replace much of those positions with long Treasury bonds and most of the rest with cash.
Copyright (C) Long Lake LLC 2011
Sunday, August 22, 2010
Weekend Update: More Stocks Finally Looking Less Bad than the Alternatives
The public continues to be in a sour mood, and continues not to engage in many elective purchases, as shown by Gallup's ongoing polling, which shows that one measure of discretionary spending by consumers remains stuck in the $65 per day range, roughly where it has been since the mild recession of 2008 turned into the nightmare of the Great/Global Financial Crisis. This level was in the $100-125 range well into 2008 per Gallup data no longer shown on the chart, if memory serves. This is a simply amazing drop. To think that this is not a form of a very great recession requires, in my opinion, one to think again.
Governmental retail sales data suggest to me that from peak in 2008 to trough in 2009, per capita inflation-adjusted spending dropped at least 15%, given that nominal sales dropped about 12.3% (Jan. 2008 through Mar. 2009).
Since then, conventional macroeconomists have simply gotten it wrong. The best advice that President Obama obtained early in 2009 indicated that at most unemployment rates would peak at 8%. Wall Street economists concurred. The stock market began anticipating a strong and sustained economic recovery, but personal income absent governmental transfer payments have yet to reach their peak. If it were not for all the millions of unanticipated dropouts from the labor force, the measured unemployment rate would be well over 10%.
Recently (finally), mainstream economists have been substantially lowering their estimates for 2010 and often for 2011 economic performance.
Are the markets are finally discounting, or over-discounting, the economic weakness that many of the Austrian persuasion (and others, such as Nouriel Roubini) have been foreseeing? Now that there is a growing understanding that the paradox of shifting a credit boom/bubble from private to governmental ownership does not induce more profitable economic activities, is there so much gloom that it's time to tack toward a form of optimism as exemplified by buying certain common stocks?
My sense is that there is still more economic pain to go but that the answer to the above question is a "Yes, but" type of answer. For guidance I refer readers to the paper by Reinhard and Rogoff (go to http://www.google.com/search?q=rogoff+reinhart&sourceid=ie7&rls=com.microsoft:en-us:IE-SearchBox&ie=&oe=&rlz=1I7ADRA_en and then click on the first link, to "This Time Is Different"), or read the book of the same name. I also refer readers to a variety of the books on the reading list of Econophile that present an array of viewpoints and historical narratives often from the standpoint of Austrian economics.
Since securities such as stocks and bonds of at least intermediate duration, or assets such as precious metals, are long-term, investors are forced to read tea leaves and look beyond the financial storms that are so common during hurricane season in Florida.
Now that the interest rate structure has come down drastically in a short time, while at the same time the S&P 500 has dropped about 9% since interest rates peaked April 5, common stocks are far more competitive against fixed income than they were this past spring.
While many valuation measures show stocks to be overvalued, that measure assumes a desired positive rate of return, such as 7-9% annually. If, however, one is willing to invest in stocks at a 5 +/- 2% (i.e. 3-7%) annual rate, I suspect that the formulas that indicate overvaluation would no longer do so.
Further, Jeremy Grantham of GMO LLC is out with his famous 7 year predictions as of July 31, suggesting that the best asset class 7 years from now will prove to be high quality U. S. stocks (he does not define high quality, and does not equate that with large cap). He has been pretty darn accurate to date with these predictions to date, so far as I know. He does not like non-high quality small cap U. S. stocks. He gives a 6.1% return from the class of high-quality stocks in real terms, which would be about 9% per year if prices rise 3% annually.
Supporting the idea that a stock market which currently is trading with a high degree of correlation between all stocks can have an identifiable subset with superior risk-adjusted prospective returns is the lfact that when the general stock market was at its most overvalued ever, in 2000, it surprises most people to look at numerous types of stocks and find that they peaked in 1997-8 and bottomed in March 2000 just when the NASDAQ peaked. Think of everybody rushing to the left side of a boat, then some rushing to the right side.
Many of the stocks that bottomed in 2000 made things, as opposed to techs that made vaporware or proposed to be the fifth online pet supplies company, or the recent enthusiasm for financials that made bad loans or bad investments but produced little or nothing or real value. This list of relatively undervalued stocks as of 2000 includes homebuilders and numerous industrial companies. In fact, the Russell 2000 Index, which includes stocks with market cap between 1001-3000 and is thus a proxy for small cap stocks, hit a record early in 2004 when the general averages were far behind their 2000 peak. Thus there is precedent for a large class of stocks to outperform their index.
For stocks, my working hypothesis has been that the process of creative destruction/boom-bust cycles within industries remains in play as follows.
After the energy boom and overvaluation of energy and gold stocks (and gold and oil themselves) in 1980, cheap energy fueled growth for over two decades until oil started a huge price rise about a decade ago. After tech stocks went wild in the late 1990s, the stocks were just as bad buys as oil drillers were in 1980, but the technology revolution fueled growth and efficiency and continues to do so. Tech is the major force in the economy fueling lower prices in a virtuous cycle, as opposed to lower prices simply resulting from oversupply due to malinvestment during the recent boom.
The latest fad was obviously for financials. It is said that about 40% of corporate profits at the bubble peak in 2007 were from financial activities. Of course, these were in many (most?) cases "profits" rather than real, economic profits. Thus the bust.
The analogy I am drawing is that the bust in the financials has the potential to fuel growth, but that the financials and their relatives such as housing- and finance-related businesses are likely to prove as disappointing investments on a multi-year basis as techs and energy stocks were following their busts and rebounds. Trading: OK. Buy and hold; I don't think so.
The special problem now, though, is how inextricably linked with all other financial assets the financial companies are and with the State itself. Thus, teleologically, the historical record per Rogoff and Reinhart of an average of perhaps 6 years post-credit collapse for matters to right themselves. They observed that stock markets bounced back well ahead of the economy as central banks flooded the markets with cash. Thus a bust in the price of energy was viewed as good for most of the country, but a bust in financial intermediaries plays havoc with a macroeconomic world-view in which borrowing and lending, rather than accumulation of true equity, provides a crucial key to growth.
So I believe that industries with real futures, meeting real needs of real people and other real businesses globally, and that are in fields that are as far from leveraged finance as possible, should (broad brush picture here) be optimally positioned to survive and, probably grow, and could be as good investments for years to come as depressed consumer stocks were in 1981 (pre-great recession of 1981-2). At a time of constrained credit, being self-financing is a marvelous situation. As an example, Intel recently announced a deal to buy McAfee (MFE) at about 15X earnings. Zeroing out MFE's cash, that's about a 7% earnings yield; Intel is paying with cash yielding nothing. The Street booed the acquisition. Whether it's a good one or not, just think what price Intel was paying for acquisitions or what Intel's investment portfolio was receiving for IPOs a decade ago.
This buy or potential buy "list" (I have no formal list) could include energy producers and high tech companies, but it really could include almost any company. Said companies would in general be of very high quality, a la Grantham's analysis, and thus would be financially stronger than the banking system itself. If a company were a strong enough multinational, it might be stronger than almost all sovereigns financially as well as somewhat independent of any one sovereign, as well.
So my personal investing strategy is as follows. I am heavily allocated to muni bonds and short-duration Ginnie Maes (yielding as much as long-term Treasuries when bought correctly), as well as to cash. I have sold all my intermediate to long Treasuries which I bought so recently, following the amazing plunge in rates this month. I went to about a zero stock allocation at Dow 13000 in summer 2007 and except for a few months in late 2009 ending in early May this year, have hardly been in stocks at all.
While noting that the chart on all sorts of stocks stinks, the same would have been said for Treasuries at all optimal buy opportunities during this almost 30 year bull market in bonds. Seasonality and the down-pointing charts, and the rise of statism in the economy, make the future of the economy and the public's prospective mood for stocks unusually uncertain and even scary. Nonetheless, in a time of very poor investment choices, as an investor seeking both current income and long-term capital appreciation that at least stays even with inflation, I have started in with a program of purchasing stocks that yield around or over 3% and that often have P/E's in the 10 range. My thinking is that some time within the next 7 years, these companies will at the least probably not cut their dividends and will probably raise them (examples such as BP notwithstanding), and at some point their stock prices will exceed their current prices; thus their total return potential adjusted for risk probably exceeds that of the 7 year Treasury note, currently at 2.05%. Such names include Chubb (CB), McDonald's (MCD)--both of which have strong charts; and Intel (INTC) and ExxonMobil (both of which have weak charts) and/or other oils.
I am avoiding yet higher-yielding pharmaceuticals because so much of their income comes directly and indirectly from governments, which are tapped out and will have to cut somewhere, and because their profit margins are ultra-high as a direct result. But I'm watching them carefully for signs of technical strength and improvement in their R&D productivity.
Barring major financial/economic events such as led up to the collapse in stock prices from 2007-August 2008 (i.e., pre-stock market collapse), in my humble opinion the highest-quality common stocks are finally beginning to merit a significant place in a diversified portfolio with a multi-year horizon and are finally competitive with munis for taxable accounts. I write this, though, with a distinct lack of enthusiasm given the fact that in Japan, there has hardly ever been a good time to go long stocks other than for a trade since the 1980s, and the U. S. is continuing to look Japanese. Nonetheless, analogies are imperfect, America is not Japan, etc. Most importantly, I have signed on to the stagflation rather than price deflation scenario.
Meanwhile, I do not think that stocks are safe and I believe that the rent money should not be entrusted to the stock market. I also continue to believe that gold is the single best investment for funds that will not be needed any time soon, given the apparent commitment of the ancien regime (aka the authorities) to more money printing and other financial maneuvers to "save" us rather than directly face up to the many historical and ongoing malinvestments that plague the U. S. economy. But an all-gold (or all precious metals) portfolio would be quite something else again!
Last but not least, and with the caveat that I know nothing about tech, AAPL appears to be a classic GARP (growth at a reasonable price) special situation stock with a company that is a financial and market share juggernaut. AAPL is very risky, though, and may or may not ever return cash to shareholders.
I am not an investment adviser and am proffering no investment advice in this and my other web posts. No obligation exists to disclose any changes in specific or general views discussed herein or by me elsewhere.
Copyright (C) Long Lake LLC 2010
Governmental retail sales data suggest to me that from peak in 2008 to trough in 2009, per capita inflation-adjusted spending dropped at least 15%, given that nominal sales dropped about 12.3% (Jan. 2008 through Mar. 2009).
Since then, conventional macroeconomists have simply gotten it wrong. The best advice that President Obama obtained early in 2009 indicated that at most unemployment rates would peak at 8%. Wall Street economists concurred. The stock market began anticipating a strong and sustained economic recovery, but personal income absent governmental transfer payments have yet to reach their peak. If it were not for all the millions of unanticipated dropouts from the labor force, the measured unemployment rate would be well over 10%.
Recently (finally), mainstream economists have been substantially lowering their estimates for 2010 and often for 2011 economic performance.
Are the markets are finally discounting, or over-discounting, the economic weakness that many of the Austrian persuasion (and others, such as Nouriel Roubini) have been foreseeing? Now that there is a growing understanding that the paradox of shifting a credit boom/bubble from private to governmental ownership does not induce more profitable economic activities, is there so much gloom that it's time to tack toward a form of optimism as exemplified by buying certain common stocks?
My sense is that there is still more economic pain to go but that the answer to the above question is a "Yes, but" type of answer. For guidance I refer readers to the paper by Reinhard and Rogoff (go to http://www.google.com/search?q=rogoff+reinhart&sourceid=ie7&rls=com.microsoft:en-us:IE-SearchBox&ie=&oe=&rlz=1I7ADRA_en and then click on the first link, to "This Time Is Different"), or read the book of the same name. I also refer readers to a variety of the books on the reading list of Econophile that present an array of viewpoints and historical narratives often from the standpoint of Austrian economics.
Since securities such as stocks and bonds of at least intermediate duration, or assets such as precious metals, are long-term, investors are forced to read tea leaves and look beyond the financial storms that are so common during hurricane season in Florida.
Now that the interest rate structure has come down drastically in a short time, while at the same time the S&P 500 has dropped about 9% since interest rates peaked April 5, common stocks are far more competitive against fixed income than they were this past spring.
While many valuation measures show stocks to be overvalued, that measure assumes a desired positive rate of return, such as 7-9% annually. If, however, one is willing to invest in stocks at a 5 +/- 2% (i.e. 3-7%) annual rate, I suspect that the formulas that indicate overvaluation would no longer do so.
Further, Jeremy Grantham of GMO LLC is out with his famous 7 year predictions as of July 31, suggesting that the best asset class 7 years from now will prove to be high quality U. S. stocks (he does not define high quality, and does not equate that with large cap). He has been pretty darn accurate to date with these predictions to date, so far as I know. He does not like non-high quality small cap U. S. stocks. He gives a 6.1% return from the class of high-quality stocks in real terms, which would be about 9% per year if prices rise 3% annually.
Supporting the idea that a stock market which currently is trading with a high degree of correlation between all stocks can have an identifiable subset with superior risk-adjusted prospective returns is the lfact that when the general stock market was at its most overvalued ever, in 2000, it surprises most people to look at numerous types of stocks and find that they peaked in 1997-8 and bottomed in March 2000 just when the NASDAQ peaked. Think of everybody rushing to the left side of a boat, then some rushing to the right side.
Many of the stocks that bottomed in 2000 made things, as opposed to techs that made vaporware or proposed to be the fifth online pet supplies company, or the recent enthusiasm for financials that made bad loans or bad investments but produced little or nothing or real value. This list of relatively undervalued stocks as of 2000 includes homebuilders and numerous industrial companies. In fact, the Russell 2000 Index, which includes stocks with market cap between 1001-3000 and is thus a proxy for small cap stocks, hit a record early in 2004 when the general averages were far behind their 2000 peak. Thus there is precedent for a large class of stocks to outperform their index.
For stocks, my working hypothesis has been that the process of creative destruction/boom-bust cycles within industries remains in play as follows.
After the energy boom and overvaluation of energy and gold stocks (and gold and oil themselves) in 1980, cheap energy fueled growth for over two decades until oil started a huge price rise about a decade ago. After tech stocks went wild in the late 1990s, the stocks were just as bad buys as oil drillers were in 1980, but the technology revolution fueled growth and efficiency and continues to do so. Tech is the major force in the economy fueling lower prices in a virtuous cycle, as opposed to lower prices simply resulting from oversupply due to malinvestment during the recent boom.
The latest fad was obviously for financials. It is said that about 40% of corporate profits at the bubble peak in 2007 were from financial activities. Of course, these were in many (most?) cases "profits" rather than real, economic profits. Thus the bust.
The analogy I am drawing is that the bust in the financials has the potential to fuel growth, but that the financials and their relatives such as housing- and finance-related businesses are likely to prove as disappointing investments on a multi-year basis as techs and energy stocks were following their busts and rebounds. Trading: OK. Buy and hold; I don't think so.
The special problem now, though, is how inextricably linked with all other financial assets the financial companies are and with the State itself. Thus, teleologically, the historical record per Rogoff and Reinhart of an average of perhaps 6 years post-credit collapse for matters to right themselves. They observed that stock markets bounced back well ahead of the economy as central banks flooded the markets with cash. Thus a bust in the price of energy was viewed as good for most of the country, but a bust in financial intermediaries plays havoc with a macroeconomic world-view in which borrowing and lending, rather than accumulation of true equity, provides a crucial key to growth.
So I believe that industries with real futures, meeting real needs of real people and other real businesses globally, and that are in fields that are as far from leveraged finance as possible, should (broad brush picture here) be optimally positioned to survive and, probably grow, and could be as good investments for years to come as depressed consumer stocks were in 1981 (pre-great recession of 1981-2). At a time of constrained credit, being self-financing is a marvelous situation. As an example, Intel recently announced a deal to buy McAfee (MFE) at about 15X earnings. Zeroing out MFE's cash, that's about a 7% earnings yield; Intel is paying with cash yielding nothing. The Street booed the acquisition. Whether it's a good one or not, just think what price Intel was paying for acquisitions or what Intel's investment portfolio was receiving for IPOs a decade ago.
This buy or potential buy "list" (I have no formal list) could include energy producers and high tech companies, but it really could include almost any company. Said companies would in general be of very high quality, a la Grantham's analysis, and thus would be financially stronger than the banking system itself. If a company were a strong enough multinational, it might be stronger than almost all sovereigns financially as well as somewhat independent of any one sovereign, as well.
So my personal investing strategy is as follows. I am heavily allocated to muni bonds and short-duration Ginnie Maes (yielding as much as long-term Treasuries when bought correctly), as well as to cash. I have sold all my intermediate to long Treasuries which I bought so recently, following the amazing plunge in rates this month. I went to about a zero stock allocation at Dow 13000 in summer 2007 and except for a few months in late 2009 ending in early May this year, have hardly been in stocks at all.
While noting that the chart on all sorts of stocks stinks, the same would have been said for Treasuries at all optimal buy opportunities during this almost 30 year bull market in bonds. Seasonality and the down-pointing charts, and the rise of statism in the economy, make the future of the economy and the public's prospective mood for stocks unusually uncertain and even scary. Nonetheless, in a time of very poor investment choices, as an investor seeking both current income and long-term capital appreciation that at least stays even with inflation, I have started in with a program of purchasing stocks that yield around or over 3% and that often have P/E's in the 10 range. My thinking is that some time within the next 7 years, these companies will at the least probably not cut their dividends and will probably raise them (examples such as BP notwithstanding), and at some point their stock prices will exceed their current prices; thus their total return potential adjusted for risk probably exceeds that of the 7 year Treasury note, currently at 2.05%. Such names include Chubb (CB), McDonald's (MCD)--both of which have strong charts; and Intel (INTC) and ExxonMobil (both of which have weak charts) and/or other oils.
I am avoiding yet higher-yielding pharmaceuticals because so much of their income comes directly and indirectly from governments, which are tapped out and will have to cut somewhere, and because their profit margins are ultra-high as a direct result. But I'm watching them carefully for signs of technical strength and improvement in their R&D productivity.
Barring major financial/economic events such as led up to the collapse in stock prices from 2007-August 2008 (i.e., pre-stock market collapse), in my humble opinion the highest-quality common stocks are finally beginning to merit a significant place in a diversified portfolio with a multi-year horizon and are finally competitive with munis for taxable accounts. I write this, though, with a distinct lack of enthusiasm given the fact that in Japan, there has hardly ever been a good time to go long stocks other than for a trade since the 1980s, and the U. S. is continuing to look Japanese. Nonetheless, analogies are imperfect, America is not Japan, etc. Most importantly, I have signed on to the stagflation rather than price deflation scenario.
Meanwhile, I do not think that stocks are safe and I believe that the rent money should not be entrusted to the stock market. I also continue to believe that gold is the single best investment for funds that will not be needed any time soon, given the apparent commitment of the ancien regime (aka the authorities) to more money printing and other financial maneuvers to "save" us rather than directly face up to the many historical and ongoing malinvestments that plague the U. S. economy. But an all-gold (or all precious metals) portfolio would be quite something else again!
Last but not least, and with the caveat that I know nothing about tech, AAPL appears to be a classic GARP (growth at a reasonable price) special situation stock with a company that is a financial and market share juggernaut. AAPL is very risky, though, and may or may not ever return cash to shareholders.
I am not an investment adviser and am proffering no investment advice in this and my other web posts. No obligation exists to disclose any changes in specific or general views discussed herein or by me elsewhere.
Copyright (C) Long Lake LLC 2010
Friday, February 5, 2010
Today's Commodity Markets: Stocks vs. Commodities Ownership Per Se
Based on current prices, palladium-- the "junkier" platinum group metal (vs. platinum itself) is off 11% since Wednesday's close (less than 2 full trading days; it being Friday AM now). Gold is off 5%, platinum off 6%, and silver off 7 1/2%.
On a 2-year basis, the GDX index of gold miners' stocks is off about 17%, whereas GLD (passive ownership of the metal) is up about 19%. On a short-term basis, gold mining stocks are off their peaks much more than gold itself.
On a 5-year basis, GDX is up about 5% (1% a year, underperforming money in the bank), whereas GLD is up about 140%.
In other words, the focus at EBR on owning the metal rather than the stocks of the producers has worked. So long as mining stocks are priced insanely, with no requirement by investors that they actually return large dividends to shareholders as Homestake Mines did in the 1930s, then the basic economic argument for gold ownership continues. This argument is simple. It is that gold is becoming scarcer and thus more expensive in real terms to produce. Environmental concerns enhance that expense. Thus, one of the reasons for projecting increasing gold prices is the difficulty of creating refined gold. However, that point is an argument against owning a mining company.
GLD, GTU, physical ownership of gold, etc. They are all variations on a theme. Most investors have been trained to own gold in the ground (stock market gold) rather than the thing itself.
This concept is also true for silver, platinum, and the like. Should stock prices fall relative to the price of the commodity, the investment case could shift to favor ownership of the stock rather than the commodity itself. For now, ownership of a durable commodity such as a metal of course does not protect one from booms that turn into busts or simple changes in "sentiment", but it is the anti-AIG, anti-Fannie Mae mode of investing. So long as the fund or other caretaker holds the metal it says it holds, or your bank vault is not cleaned out or the like, you own a thing that simply is what it is when you own the commodity rather than a minority share of a corporation that may never make a dime even if it churns out the metal as promised.
Commodities bears are growling loudly and scarily. Are these bears nothing but paper tigers?
I have no idea, but . . .
During sharp market moves, investors who own commodities outright, without margin debt, can sleep well so long as they can live their lives if the commodities drop sharply in price. A severe drop in price, which tends to reverse if the commodity is an essential one, may however bankrupt individual companies, but the commodity itself cannot suffer that fate. It survives to "fight" another day. Ownership of a common stock of a metals miner is mostly for suckers.
Copyright (C) Long Lake LLC 2010
On a 2-year basis, the GDX index of gold miners' stocks is off about 17%, whereas GLD (passive ownership of the metal) is up about 19%. On a short-term basis, gold mining stocks are off their peaks much more than gold itself.
On a 5-year basis, GDX is up about 5% (1% a year, underperforming money in the bank), whereas GLD is up about 140%.
In other words, the focus at EBR on owning the metal rather than the stocks of the producers has worked. So long as mining stocks are priced insanely, with no requirement by investors that they actually return large dividends to shareholders as Homestake Mines did in the 1930s, then the basic economic argument for gold ownership continues. This argument is simple. It is that gold is becoming scarcer and thus more expensive in real terms to produce. Environmental concerns enhance that expense. Thus, one of the reasons for projecting increasing gold prices is the difficulty of creating refined gold. However, that point is an argument against owning a mining company.
GLD, GTU, physical ownership of gold, etc. They are all variations on a theme. Most investors have been trained to own gold in the ground (stock market gold) rather than the thing itself.
This concept is also true for silver, platinum, and the like. Should stock prices fall relative to the price of the commodity, the investment case could shift to favor ownership of the stock rather than the commodity itself. For now, ownership of a durable commodity such as a metal of course does not protect one from booms that turn into busts or simple changes in "sentiment", but it is the anti-AIG, anti-Fannie Mae mode of investing. So long as the fund or other caretaker holds the metal it says it holds, or your bank vault is not cleaned out or the like, you own a thing that simply is what it is when you own the commodity rather than a minority share of a corporation that may never make a dime even if it churns out the metal as promised.
Commodities bears are growling loudly and scarily. Are these bears nothing but paper tigers?
I have no idea, but . . .
During sharp market moves, investors who own commodities outright, without margin debt, can sleep well so long as they can live their lives if the commodities drop sharply in price. A severe drop in price, which tends to reverse if the commodity is an essential one, may however bankrupt individual companies, but the commodity itself cannot suffer that fate. It survives to "fight" another day. Ownership of a common stock of a metals miner is mostly for suckers.
Copyright (C) Long Lake LLC 2010
Sunday, January 10, 2010
As Gold Rises Without Platinum for a Change, Quality May Finally Be Winning for a While
Following the weak jobs report Friday, gold is surging again, having had a strong afternoon after market participants had a chance to decide what they are again apparently deciding, which is that the Fed is on hold for, perhaps, forever, and thus money-printing will dominate in America.
What may be telling for at least a nanosecond or two is that platinum is down while the more monetary metal silver is up as much as gold. Given increased commentary that China may be bubbly and stockpiling raw materials that it is not about to use, gold looks to be the safest metal and definitely is the only precious metal that is already in record territory.
High-quality dividend-paying stocks as well as true growth issues can continue on their merry way upward as long as there is no change in Fed policy.
If the economy moves up slowly but steadily while employment is weak, Treasuries can catch a bid and if and when the next major correction comes, they might just be viewed as the only game in town as was the case 15 months ago. Sentiment is horrible and therefore strongly bullish on Treasuries, as every pro knows that the public has been buying bonds the past year when it foolishly should have been buying Peruvian bonds, copper and money-losing tech stocks that have never paid dividends and likely never will.
Copyright (C) Long Lake LLC 2010
What may be telling for at least a nanosecond or two is that platinum is down while the more monetary metal silver is up as much as gold. Given increased commentary that China may be bubbly and stockpiling raw materials that it is not about to use, gold looks to be the safest metal and definitely is the only precious metal that is already in record territory.
High-quality dividend-paying stocks as well as true growth issues can continue on their merry way upward as long as there is no change in Fed policy.
If the economy moves up slowly but steadily while employment is weak, Treasuries can catch a bid and if and when the next major correction comes, they might just be viewed as the only game in town as was the case 15 months ago. Sentiment is horrible and therefore strongly bullish on Treasuries, as every pro knows that the public has been buying bonds the past year when it foolishly should have been buying Peruvian bonds, copper and money-losing tech stocks that have never paid dividends and likely never will.
Copyright (C) Long Lake LLC 2010
Saturday, October 31, 2009
Gold Continues to Outperform Stocks and Bonds
As suggested here earlier this month, the volatility index VIX was indeed at a turning point as suggested by a chart with a positive "second derivative" (slowing rate of descent), soaring on limited news during the week to levels of much earlier this year, when the stock averages were much lower. I have reviewed prior post-recession periods (assuming the "banana" has ended) where the VIX has turned up suddenly. The best info I can find is that it has been unwise to buy the dips on the theory that the bottoming process in the VIX will be orderly. Certainly, nimble traders will look at short-term "oversold" numbers and step in to buy the steep drops such as we saw Friday. If over coming weeks truly awful news appears, I'd be careful. If the news is merely disappointing, such as occurred in 2003 with some weakish establishment employment numbers, while stocks succumb to profit-taking, that would be a different matter.
Meanwhile, the DoctoRx approach is to be out of almost all common stocks except those that are income plays or ETFs in precious metals. This decision occurred last week when the VIX started confirming the pattern described 2 weeks ago.
The gold chart is orderly and structurally is much stronger than the stock averages. Gold has begun to go mainstream, but for now the articles I have seen are as much about sellers as about buyers. If there is a sell-off of more major proportions in the stock market, the prior pattern during th bear market is for gold to fall only when there is panic selling/liquidation. The all-gold ETF GTU has a strong chart that is just now breaking out. It trades at a lower premium to net asset value than the much better-known CEF (Central Fund of Canada). CEF is basically Silver Bullion Trust, which trades near NAV, plus GTU in a certain ratio. In other words, there is no speculation in a physically-backed gold ETF located in Canada. If and when gold embarks on a wild bull market, rest assured that GTU will trade well over NAV, and CEF will trade more than its current 9% or so over NAV.
Meanwhile, Gallup.com's hiring/not hiring numbers have shown a minimal bump up lately, but today fell back to zero -- workers seeing the same number of firms that are hiring vs. those that are laying off. Of course, it is possible that layoffs per "not hiring" firms is smaller and hires per "hiring" firms is greater than before. However, the current 1:1 ratio is horrible.
Historically, major surges off an oversold bear market-recession bottom such as has occurred this year pause and trend down for some months. In 1975, the downturn was sharp and severe, but the rally into 1976 was to new nominal highs in the stock averages, but inflation was so high that the inflation-adjusted Dow did not come close to its 1965 high; and, 1977-8 were very poor ones even for nominal stock prices.
So far, nothing has occurred to change the central case that expectations are low, which is somewhat bullish, but asset bulls have gotten too jiggy too soon. Again, historical precedent suggests a strong possibility of all sorts of whipsawing and trend reversals. The failure of stocks with improving fundamentals, reasonable valuations, good dividend yields and the like to make any progress suggests that stocks continue in a secular bear market. Long-term holdings should provide dividends and be financially very strong. Under those circumstances, returns better than Treasuries appear likely, but that may not be apparent for many years.
There are no easy places to hide. GTU and SIVR may be amongst the safest.
Copyright (C) Long Lake LLC 2009
Meanwhile, the DoctoRx approach is to be out of almost all common stocks except those that are income plays or ETFs in precious metals. This decision occurred last week when the VIX started confirming the pattern described 2 weeks ago.
The gold chart is orderly and structurally is much stronger than the stock averages. Gold has begun to go mainstream, but for now the articles I have seen are as much about sellers as about buyers. If there is a sell-off of more major proportions in the stock market, the prior pattern during th bear market is for gold to fall only when there is panic selling/liquidation. The all-gold ETF GTU has a strong chart that is just now breaking out. It trades at a lower premium to net asset value than the much better-known CEF (Central Fund of Canada). CEF is basically Silver Bullion Trust, which trades near NAV, plus GTU in a certain ratio. In other words, there is no speculation in a physically-backed gold ETF located in Canada. If and when gold embarks on a wild bull market, rest assured that GTU will trade well over NAV, and CEF will trade more than its current 9% or so over NAV.
Meanwhile, Gallup.com's hiring/not hiring numbers have shown a minimal bump up lately, but today fell back to zero -- workers seeing the same number of firms that are hiring vs. those that are laying off. Of course, it is possible that layoffs per "not hiring" firms is smaller and hires per "hiring" firms is greater than before. However, the current 1:1 ratio is horrible.
Historically, major surges off an oversold bear market-recession bottom such as has occurred this year pause and trend down for some months. In 1975, the downturn was sharp and severe, but the rally into 1976 was to new nominal highs in the stock averages, but inflation was so high that the inflation-adjusted Dow did not come close to its 1965 high; and, 1977-8 were very poor ones even for nominal stock prices.
So far, nothing has occurred to change the central case that expectations are low, which is somewhat bullish, but asset bulls have gotten too jiggy too soon. Again, historical precedent suggests a strong possibility of all sorts of whipsawing and trend reversals. The failure of stocks with improving fundamentals, reasonable valuations, good dividend yields and the like to make any progress suggests that stocks continue in a secular bear market. Long-term holdings should provide dividends and be financially very strong. Under those circumstances, returns better than Treasuries appear likely, but that may not be apparent for many years.
There are no easy places to hide. GTU and SIVR may be amongst the safest.
Copyright (C) Long Lake LLC 2009
Wednesday, September 23, 2009
Evolving Relationships Between Major Asset Classes
EBR's take is that the long Treasury bond story is getting more interesting. The 3-month chart of the long 
Treasury ETF 'TLT' shows that the 50-day moving average has now risen above the declining 100 day ma. When this happens but the pierced, declining ma is the 200 day ma, this event is called a "golden cross". Is this lesser event a "silver cross"? (Upper chart; click on charts for more clarity.)
Treasury ETF 'TLT' shows that the 50-day moving average has now risen above the declining 100 day ma. When this happens but the pierced, declining ma is the 200 day ma, this event is called a "golden cross". Is this lesser event a "silver cross"? (Upper chart; click on charts for more clarity.)The intraday chart shows a lot of volatility, with volume peaks coming in at 1 PM before the FOMC announcement, and after the Fed announcement. In other words, support for TLT, which is identical to buying interest in the long bond at the mildly higher yield.
So far as stocks went today, they reversed hard. Gold had a weak day, but . . .
Gold both intraday, over the past year, and over the past 3 years has been both a stronger performer than stocks while being less volatile.
Per Tradersnarrative.com, at least as of yesterday's close, 93% of stocks were above their 50 day ma and 95% of stocks were above their 200 day ma. No wonder a reader said recently that he was sucking his thumb in amazement at the relentless advance of stocks.
Let's put the stock market in an intermediate-term perspective, however. The "real", playable low for the DJIA in the 2002-3 bottoming process was about 7500. If we arbitrarily add 25% to that number to reflect 7 years of inflation, we get about 9300. That is roughly equal to the 50 day moving average of the Dow today.
A buyer and holder of the Dow ETF = 'DIA' from that point would have, after the ETF's expenses but including dividends, likely have done just as well buying and holding a 7-year Treasury, and would have underperformed buying and holding a 30-year Treasury.
As they say, "nobody knows anything". Strictly on a chart basis, gold and Treasuries look better to yours truly than do stocks. Personally I only like stocks of companies that are far away from the Fed shenanigans, that have had rising earnings throughout the past few years, that have rising and "interesting"dividends, and where the chart suggests an acceptable level of underlying support and appreciation potential.
Throughout the first several months of this blog, which began in December 2008, the consistent opinion re stocks was that they were for gamblers. And amazingly, it has been the gambling stocks such as Ford and BofA that paid off, though of course Citi is off about 1/3 since yearend 2008 despite more than quadrupling off its low, and GM fared worse. This blog has been kinder to gold than stocks, and gold has slightly outperformed the Dow with less volatility.
Past may be prologue. In the anxious times, all the headlines about 3 government actions or investigations re BofA would have sent the stock plummeting; lately it's ignored them. Yet the 200 day ma for BofA is not much above $11. BofA is almost 7X its low of the past 7 months and about 50% above its average price for the past 200 trading days. Gold is less than 7X its low for the past 30+ years. To present that data is to strongly suggest an answer to the question of which asset has more short-intermediate term downside risk.
Past may be prologue. In the anxious times, all the headlines about 3 government actions or investigations re BofA would have sent the stock plummeting; lately it's ignored them. Yet the 200 day ma for BofA is not much above $11. BofA is almost 7X its low of the past 7 months and about 50% above its average price for the past 200 trading days. Gold is less than 7X its low for the past 30+ years. To present that data is to strongly suggest an answer to the question of which asset has more short-intermediate term downside risk.
My heart is with low commodity prices and prosperity. At least for the next weeks to months, my head tells me that stocks are not just for gamblers, but that the market as a whole is at least ready for a change of leadership. Did the markets begin to ring a bell today with the Fed announcement that it is planning to exit its direct interference with the mortgage market? And will the established, structural bull markets in gold and Treasury bonds resume, while the stock averages go back to meandering unpredictably?
Copyright (C) Long Lake LLC 2009
Tuesday, August 18, 2009
What Does the 20th Century Outperformance of Stocks over Government Bonds Presage?
Found on Naked Capitalism today:
The average return for U.S. stocks has trailed government bonds by about 8.6 percentage points annually since 1999, after outperforming by 8.2 points last century, based on data compiled by the London Business School and Zurich-based Credit Suisse Group AG.
Sellers of stock will point to that statistic-- which ignores the transaction costs involved in trading stocks (remember that commissions were huge for most of the prior century) and say that it's time for stocks to resume their historic outperformance over Govvies.
I would say that one never knows, but perhaps a century from now, people will look back at the 1% 30-year government yields and chronic beneficial deflation due to massive productivity gains and look at stocks trading under tangible book value and say that Govvies are historically the way to go!
Today, brokers have a financial incentive to sell their customers almost anything except a long Government bond. Thus, only pros such as banks buy these bonds- and they rarely sell them. Thus, the current state of affairs in the pricing of Govvies has occurred without a sales effort to the public. The longer a near-zero interest-rate world continues on the short end, the more people will embrace yield. Just think if the investing public's investing tastes went from 1% allocation to Govvies, 13% CD's and demand deposits and 25% stocks to 5% Govvies and 2% less of each of the other categories named above. Couple that with cyclical improvement in the Federal deficit, and you could have the declining trend in the 10-year bond continue farther than almost anyone expects.
Just a thought . . .
Copyright (C) Long Lake LLC 2009
The average return for U.S. stocks has trailed government bonds by about 8.6 percentage points annually since 1999, after outperforming by 8.2 points last century, based on data compiled by the London Business School and Zurich-based Credit Suisse Group AG.
Sellers of stock will point to that statistic-- which ignores the transaction costs involved in trading stocks (remember that commissions were huge for most of the prior century) and say that it's time for stocks to resume their historic outperformance over Govvies.
I would say that one never knows, but perhaps a century from now, people will look back at the 1% 30-year government yields and chronic beneficial deflation due to massive productivity gains and look at stocks trading under tangible book value and say that Govvies are historically the way to go!
Today, brokers have a financial incentive to sell their customers almost anything except a long Government bond. Thus, only pros such as banks buy these bonds- and they rarely sell them. Thus, the current state of affairs in the pricing of Govvies has occurred without a sales effort to the public. The longer a near-zero interest-rate world continues on the short end, the more people will embrace yield. Just think if the investing public's investing tastes went from 1% allocation to Govvies, 13% CD's and demand deposits and 25% stocks to 5% Govvies and 2% less of each of the other categories named above. Couple that with cyclical improvement in the Federal deficit, and you could have the declining trend in the 10-year bond continue farther than almost anyone expects.
Just a thought . . .
Copyright (C) Long Lake LLC 2009
Wednesday, July 22, 2009
Some New Data Not Colored Green as in Green Shoots
Data points we are noting:
1. From TrimTabs July 21:
The disconnection between perception and reality about the U.S. economy is stunning. As Wall Street gains confidence that the economy is recovering, declines in wages keep accelerating. Adjusting for the “Making Work Pay” tax credit, income tax withholdings plunged 9.6% y-o-y in the past week and two days (Friday, July 10 through Monday, July 20) and 6.8% y-o-y in the past three weeks and two days (Friday, June 26 through Monday, July 20). These declines are much steeper than the drop of 5.3% y-o-y in the past three months. Both we and our favorite official Washington economist are unaware of any calendar quirks skewing the data.
The disconnection between perception and reality about the U.S. economy is stunning. As Wall Street gains confidence that the economy is recovering, declines in wages keep accelerating. Adjusting for the “Making Work Pay” tax credit, income tax withholdings plunged 9.6% y-o-y in the past week and two days (Friday, July 10 through Monday, July 20) and 6.8% y-o-y in the past three weeks and two days (Friday, June 26 through Monday, July 20). These declines are much steeper than the drop of 5.3% y-o-y in the past three months. Both we and our favorite official Washington economist are unaware of any calendar quirks skewing the data.
July 22 (Bloomberg) -- Standard & Poor’s again boosted its projections for losses from U.S. subprime mortgages backing securities, reflecting increasing delinquencies and defaults amid slumping home prices and growing unemployment.
Losses on loans backing 2006 securities will reach an average of about 32 percent of the original balances, while losses for similar 2007 bonds will total about 40 percent, the New York-based ratings firm said in a statement today. In February, S&P said the losses would total an average of 25 percent for 2006 bonds and 31 percent for 2007 securities.
3. Gallup has a nice graph reflecting polling on how people see their companies: Hiring, laying off, or neither.
I am unable to cut and paste it; click HERE to view it. Per the Gallup.com home page, 4% fewer respondents reported that their employer was hiring on the last survey. A look at the graph (first link) shows stability between percent of employers expanding/hiring vs. shrinking their workforces/firing, from December 2008 till now. Of course, during this time unemployment has been soaring. I'm not loving this trend, especially given the reality of a work force that is growing steadily and thus requires net hiring to keep the unemployment rate from rising, and the "New Normal" that older people are deferring retirement. I know of one local MD in his 70s who had to go back into practice due to investment losses. I'm sure he's not the only professional in that situation.
4. Larry Summers gave some downbeat comments within the past few days, suggesting that he was uncertain as to the pace of the expected economic upturn.
5. From a technical basis, here's a 3-month chart of GE, with the red line representing the 50 day simple moving average and the green line the 200 day sma. Bad news:
GE has moved below its 50 day ma, which has begun to
descend. It never reached its 200 day sma. Concurrently, Yahoo reports that analyst estimates for GE's 2010 earnings have also begun to descend, from 95 cents 3 months ago, to 94 cents 7 days ago, to 92 cents currently. BofA ("BAC") has a stronger pattern but is not all that different, and perhaps ominously, 2010 earnings estimates for BAC keep dropping; click HERE to view them and scroll down to view EPS trends, "Next year/Dec.-10".
GE has moved below its 50 day ma, which has begun to
descend. It never reached its 200 day sma. Concurrently, Yahoo reports that analyst estimates for GE's 2010 earnings have also begun to descend, from 95 cents 3 months ago, to 94 cents 7 days ago, to 92 cents currently. BofA ("BAC") has a stronger pattern but is not all that different, and perhaps ominously, 2010 earnings estimates for BAC keep dropping; click HERE to view them and scroll down to view EPS trends, "Next year/Dec.-10".Meanwhile, CNBC may now be reporting that something like 200% of all reporting companies have beaten "estimates" from the group of deep thinkers laughingly called "analysts". No matter that IBM had to somehow lower its SG&A an astounding 19% to wow these seers on the bottom line while missing shrunken revenue estimates. (Note: DoctoRx is no longer long IBM, having sold it on strength this week.) Someone should tell someone else that a company can't starve itself and yet win either an endurance running race or a strength contest.
Nonetheless, what we also somewhat laughingly refer to as "money" has to go somewhere if one has investable funds. People who can afford the risk probably should have some money apportioned into dividend-paying stocks with strong short-term and long-term charts and a history of being shareholder friendly.
EBR will discuss its favorites over coming days: in its estimation, these are among the best of a mangy lot of pre-owned "in"-securities.
Copyright (C) Long Lake LLC 2009
Saturday, May 16, 2009
Looking for Trends in all the Wrong Places?
Since the salespeople on CNBC want the average Joe to focus on the stock market as a whole, which has a decent hopeful chart in the setting of an economic banana that is so long in the tooth that it likely is winding down, it makes sense to look at trends in key markets and stocks to try to divine what forces of supply and demand have been extant. (Click on any chart to enlarge.)
By far the best-looking chart on the upside is gold. Above is the lifetime chart of its major exchange-traded fund, "GLD". The commodity formed a 20-year base between 1979 and 1999 or so, and is currently holding in nominal dollars just above its 1980 spike high of about $875/ounce. The short-term chart is also strong:
No matter how many formerly depressed common stocks are now above their 50 day moving averages, GLD shows short, intermediate and long-term strength. Gold has been a store of wealthy for millenia. Which will impress Asian creditors in 10 years more: gold, or Federal Reserve notes backed by junk bonds?
Next, let's consider gold's counterparty, the long Treasury bond, as exemplified by the ETF "TLT". Here's a multi-year view; not bad considering that unlike GLD, this has been paying dividends steadily. TLT has come back to former resistance which could now be support. The short-term moving average trends raise a real possibility that at some point this year, a rally at least back to the 200 day ma co
uld occur.
uld occur.
Probably the single best investment characteristic that the intermediate or long Treasury has is that it is hated as an investment by pros and the public alike. A zero-coupon 10 or longer duration Treasury can be held to maturity for the stated yield, preferably in a tax-deferred account; or if rates fall enough, the price upside is leveraged due to the zero coupon feature and thus a nice capital gain can be reaped.
Turning to stocks, former leadership which should still be leadership has vanished. Consider the only two Dow 30 gainers of 2008, MCD and WMT. Here are their one-year charts with moving averages.
Neither chart is strong, and on a 3 month relative strength basis, each is a disaster relative to the market as a whole. Earnings estimates for each company are falling, and each is close to its 12-month low in price.
For what little the opinion here may be worth, EBR is skeptical of the move in the financials, especially with the stock disaster that NTRS is sketching out, is skeptical of the charts of Wal-Mart and McDonald's (but at least their dividend yields beat cash and likely will rise for years to come), believes that the Fed and Treasury do not have your best interests at heart, and believes that the general stock market is nowhere near a level of fundamental undervaluation that justifies a buy and hold strategy. Cash is deliberately being trashed by the Fed, though the current deflation means holding cash is acceptable, and Treasuries over the longer haul look to be in oversupply. Gold is not overvalued on an historical basis. EBR thus favors it largely because competing investments look poor. EBR also likes Brazil for the nonce; a good way to play it is with its high-yielding currency, the ETF "BZF".
Accept that the economy is probably bottoming, at least for now, but from a very low level. The economy bottomed in 1975 and 2001, with much better stock-buying investment opportunities ahead when the fundamentals were better and inflation-adjusted stock prices were lower.
Copyright (C) Long Lake LLC 2009
Friday, February 27, 2009
Domestic Product Gross
The Commerce Department has just released its "preliminary" GDP data for Q4 2008. The numbers are bad and much worse than the milder downturn suggested by the "advance" GDP numbers a month ago.
Far be it from anyone to suggest that there is a trend here, which is to soften up people's views of the economy by letting out a bad number and then revising it downward.
If you are interested in receiving Government economic reports directly, without the filter of the MSM, it is easy. You can simply go to www.economicindicators.gov and sign up for free Email dissemination of the data. You may see the numbers before the President!
One day the news will be good, and it may even be truthfully good. For now, the bad news on the economy and the fundamental lack of real asset support for stocks continue to make the basic trend of the stock market lower till proven otherwise.
Copyright (C) Long Lake LLC 2009
Far be it from anyone to suggest that there is a trend here, which is to soften up people's views of the economy by letting out a bad number and then revising it downward.
If you are interested in receiving Government economic reports directly, without the filter of the MSM, it is easy. You can simply go to www.economicindicators.gov and sign up for free Email dissemination of the data. You may see the numbers before the President!
One day the news will be good, and it may even be truthfully good. For now, the bad news on the economy and the fundamental lack of real asset support for stocks continue to make the basic trend of the stock market lower till proven otherwise.
Copyright (C) Long Lake LLC 2009
Monday, February 2, 2009
Winter of Discontent
Perhaps it's time for Monopoly sets to reappear both on kitchen tables and on expensive dining room tables for twenty in Greenwich mansions.
The classic Depression-era game may start making a comeback. The headlines are grim, as is the commentary from many of the top bloggers:
Mish has two posts today: "Railroad Traffic Plunges"; and, "Exports Plunge in China, Japan, South Korea".
Yves at Naked Capitalism posts, among others: "Veneroso: Japan on the Edge of the Abyss", and "Willem Buiter: Mismanagement by the Officialdom Can Produce a Depression".
Then there's the redoubtable CR at Calculated Risk. A representative post that sums up the recent economic news is January Economic Summary in Graphs. A lot of "cliff diving".
If you have time, you may want to read all the above. However, you get the picture. At a time of increasingly slack labor markets, now-abundant raw materials, and Asian exporters desperate to export at increasingly low prices, their customers have had to pay down debt.
In addition, Bloomberg.com has given up the happy talk at least for today. Perhaps the former Masters of the Universe meeting at Davos convinced them it was out of touch. The Econblog Review proprietary Bloomberg.com Vido Indicator shows bearishness, with talk about a new depression and musing about a further drop in the S&P 500 should it drop below 800.
Also, the Obama Administration is acting like a . . . new Administration. Gone is the hype about a stimulus package ready to be signed on or about Inauguration Day. Delay is the order of the day. Methinks that too many traders and investors were thinking that there would be so much enthusiasm for the new Administration that they could sell their stocks under cover of such enthusiasm. Since one of the functions of markets is to fool the greatest number of people, there are lots of bears who are angry that they either missed their chance to short-sell at Dow 8800 or whatever, or holders of economically sensitive stocks who missed their chance to lighten up. What do they do now at lower prices and worsening headlines?
Cheery.
From a markets perspective, here are some comments.
GENERAL:
Marc Faber looks increasing right in his core assertion from last fall that the U.S. would have less economic stress than Asia, in that our manufacturing is already low as a % of GDP. But people still need services, and mostly can pay for them, for now. However, he looks optimistic, as he was calling for a stock rally into spring. Apparently the horrible headlines out of Asia are coming in worse than he, an Asia-based economics expert, expected.
The headlines will drive weakened holders out of positions they thought were strong ones.
FIXED INCOME: The deflationary implications of the headlines du jour, which assuredly will not end with today's, are too strong to ignore. One might want to take profits in TIPS and consider instituting positions in Treasuries for a trade, or depending on point of view, to add to them as a core holding. Lower quality debt is not worth holding unless you are John Paulson, with an extensive research organization to evaluate individual securities. But in that case, you are not interested in any thoughts expressed on this blog!
STOCKS: It is too soon for a contrarian purchase. The chance of a meltdown to new lows and far below is real, and unfortunately a bear raid makes sense while the new Administration and Congress decide what to do. In this sense, stocks could do the opposite of the 1999 blow-off top in stocks, when everyone experienced knew that 25X P/E on large-cap glamour stocks was a dangerous level and that the NASDAQ at 4000 was lunatic; yet P/E's on the large-caps went to 30 and the NASDAQ went over 5000. On the other hand, valuations on the stock market are not cheap on a variety of criteria, and earnings could be imploding. If Dow stalwarts such as Procter & Gamble, AT&T, IBM, Coca-Cola, and others get priced based on tangible book value, there is not much "there" there. (A Dow half the current level is easily justifiable on a number of metrics.)
When both the economic and market macro trends are both down, the wise trader and the prudent investor stand clear.
GOLD: Fundamentally increasingly overvalued, as the macro economic trends demonstrate that there is no bottom for cash commodities prices. However, the price of gold is driven by psychology. Traders who are long must remember that the major use of gold remains jewelry, not investment. (Offsetting this is that much jewelry use in India and perhaps China is quasi-bullion at minimal mark-up over bullion.) Technically, the trend lines are up over most time frames, though gold has churned to no net effect over the last 12 months. However, the sudden crash of the price of oil may provide grist for the mill of purchasers of (deep?) out of the money puts on GLD.
Returning to the Shakespearean theme of the title, the time is out of joint. Is Mr. Obama thinking the next part of the quote: "O cursed spite that ever I was born to set it right"?
Copyright (C) Long Lake LLC 2009
The classic Depression-era game may start making a comeback. The headlines are grim, as is the commentary from many of the top bloggers:
Mish has two posts today: "Railroad Traffic Plunges"; and, "Exports Plunge in China, Japan, South Korea".
Yves at Naked Capitalism posts, among others: "Veneroso: Japan on the Edge of the Abyss", and "Willem Buiter: Mismanagement by the Officialdom Can Produce a Depression".
Then there's the redoubtable CR at Calculated Risk. A representative post that sums up the recent economic news is January Economic Summary in Graphs. A lot of "cliff diving".
If you have time, you may want to read all the above. However, you get the picture. At a time of increasingly slack labor markets, now-abundant raw materials, and Asian exporters desperate to export at increasingly low prices, their customers have had to pay down debt.
In addition, Bloomberg.com has given up the happy talk at least for today. Perhaps the former Masters of the Universe meeting at Davos convinced them it was out of touch. The Econblog Review proprietary Bloomberg.com Vido Indicator shows bearishness, with talk about a new depression and musing about a further drop in the S&P 500 should it drop below 800.
Also, the Obama Administration is acting like a . . . new Administration. Gone is the hype about a stimulus package ready to be signed on or about Inauguration Day. Delay is the order of the day. Methinks that too many traders and investors were thinking that there would be so much enthusiasm for the new Administration that they could sell their stocks under cover of such enthusiasm. Since one of the functions of markets is to fool the greatest number of people, there are lots of bears who are angry that they either missed their chance to short-sell at Dow 8800 or whatever, or holders of economically sensitive stocks who missed their chance to lighten up. What do they do now at lower prices and worsening headlines?
Cheery.
From a markets perspective, here are some comments.
GENERAL:
Marc Faber looks increasing right in his core assertion from last fall that the U.S. would have less economic stress than Asia, in that our manufacturing is already low as a % of GDP. But people still need services, and mostly can pay for them, for now. However, he looks optimistic, as he was calling for a stock rally into spring. Apparently the horrible headlines out of Asia are coming in worse than he, an Asia-based economics expert, expected.
The headlines will drive weakened holders out of positions they thought were strong ones.
FIXED INCOME: The deflationary implications of the headlines du jour, which assuredly will not end with today's, are too strong to ignore. One might want to take profits in TIPS and consider instituting positions in Treasuries for a trade, or depending on point of view, to add to them as a core holding. Lower quality debt is not worth holding unless you are John Paulson, with an extensive research organization to evaluate individual securities. But in that case, you are not interested in any thoughts expressed on this blog!
STOCKS: It is too soon for a contrarian purchase. The chance of a meltdown to new lows and far below is real, and unfortunately a bear raid makes sense while the new Administration and Congress decide what to do. In this sense, stocks could do the opposite of the 1999 blow-off top in stocks, when everyone experienced knew that 25X P/E on large-cap glamour stocks was a dangerous level and that the NASDAQ at 4000 was lunatic; yet P/E's on the large-caps went to 30 and the NASDAQ went over 5000. On the other hand, valuations on the stock market are not cheap on a variety of criteria, and earnings could be imploding. If Dow stalwarts such as Procter & Gamble, AT&T, IBM, Coca-Cola, and others get priced based on tangible book value, there is not much "there" there. (A Dow half the current level is easily justifiable on a number of metrics.)
When both the economic and market macro trends are both down, the wise trader and the prudent investor stand clear.
GOLD: Fundamentally increasingly overvalued, as the macro economic trends demonstrate that there is no bottom for cash commodities prices. However, the price of gold is driven by psychology. Traders who are long must remember that the major use of gold remains jewelry, not investment. (Offsetting this is that much jewelry use in India and perhaps China is quasi-bullion at minimal mark-up over bullion.) Technically, the trend lines are up over most time frames, though gold has churned to no net effect over the last 12 months. However, the sudden crash of the price of oil may provide grist for the mill of purchasers of (deep?) out of the money puts on GLD.
Returning to the Shakespearean theme of the title, the time is out of joint. Is Mr. Obama thinking the next part of the quote: "O cursed spite that ever I was born to set it right"?
Copyright (C) Long Lake LLC 2009
Wednesday, January 21, 2009
Stocks as Consumer Items Needing Increased Regulation
I have come to believe that just as are other consumer items, stocks need to be more closely regulated to protect the public.
Even in the greatest bull market of our times, the average investor in mutual funds was reported to have barely made money. Why? Because he/she tended to chase performance, thus guaranteeing purchase as the smart, early money was exiting after the upside had been achieved.
In the go-go late '90s, a national mania was created by the financial community and its enablers in business, the media and government that sucked vast numbers of America into believing that they too could be Bernard Baruch or Warren Buffett.
The whole mantra of "stocks for the long run", even as propounded by such honorable men as John Bogle, who built up the Vanguard Funds, clearly depends on the valuation of stocks when the long run begins. Beyond that, the future is unknowable. All we can say is that common stocks in the U.S. have, over many years, provided X return, but that achieving those returns was not necessarily easy for an individual person, and that individuals must be aware that they should not rely upon past history to predict the future. For example, they should be told that the very data that indicate that stocks have outperformed cash and bonds for the past hundred years (say) may logically suggest that they will underperform the same alternative asset classes for the next hundred years.
All consumer items are subject to some sort of prudential regulation. Even when a physician prescribes a medication, the patient is provided a list of potential side effects. And the prescriber has no financial interest in whether the patient takes any medicine, or which one is given. (Quite different from the selling of financial products!) Even so, patients are by law given information about the downside of the medicine.
Yet when the average investor purchases a mutual fund, all he or she tends to see is a bland warning that it may lose value and that the cost of running the fund is a certain amount. For the millions of investors who buy/trade their own individual stocks, there is no necessary disclosure of the facts of what they are buying. I propose that the boom-bust cycle of the stock market is of such importance both to individuals and to society at large (given the importance of public companies to the economy) that greater disclosure is required. Here are some modest proposals:
1. When a stock that has significant institutional ownership is purchased by an individual, the individual should be informed that large investment organizations that can be expected to have greater knowledge of the value of the company, greater sophistication and greater financial ability to withstand moves down in the price of the stock may either be selling the stock to the individual or are currently unwilling to pay a higher price; in other words, presumably "better" investors have declined to value the stock at the current time at any higher price than the individual is proposing to pay. Further disclosure (where appropriate to the stock) should be made that in addition, sophisticated people are actually paying significant interest and other costs to bet that the stock price will actually decline, and that these individuals can be assumed to have engaged in sophisticated analysis of the Company's financial position and business prospects, and have not only decided not to own the stock but to take on the potentially unlimited risk of borrowing it and selling it without even owning it, in the hope of profiting by buying it back at a cheaper price.
2. The individual must be shown financial data for the company before being allowed to buy the stock. This data should include dividend history and asset value with AND without intangibles and goodwill. Earnings data are insufficient for a variety of reasons. Data on an individual stock could for example have warnings such as the following:
A. If you purchase this stock, you may never receive any income from it. The stock may become worthless for any of a number of reasons.
B. In addition, you have the ability today to purchase a U.S. Government bond that will pay you (prevailing interest rate) for (1, 5, 10 years, for example) and that will return you the face value of the bond in (# of years). You are thus forgoing that guaranteed income and return of principal when you purchase this stock.
C. Management and the board of directors of the company own X% of the stock. In general, the less stock those controlling the company earn, the less their interests are aligned with those of stockholders.
D. Management's interests in the stock may be different from those of stockholders, no matter what % of the company's stock it owns. For example, executive compensation may be high enough to materially affect the profitability of the Company. Substantial amounts of stock options or restricted stock may be granted that would diminish your current ownership of the Company, even if the Company succeeds.
E. Management owns options in the company at X% above/below the current market value. To the extent that the options are exercisable above the current stock price, management may take extra risks in an attempt to increase the stock above that price. These risks may be disproportionate to the chance of success and thus may be adverse to the interests of stockholders. To the extent that management owns options below the current market price, it may fail to take prudent risks to increase the stock price.
F. Even if the stock market as a whole rises, the price of the stock you are purchasing may decline or fail to rise.
G. (If applicable): The company in which you have expressed an interest in purchasing stock also has bonds available for purchase. The current price at which you may be able to purchase a bond of the company is approximately X, which would provide a yield to maturity of Y. A company's bonds may be sound investments even if the stock price of the company goes down.
H. The aggregate market value of the company you may purchase stock in is X. The Company reports that its financial value is Y based on Generally Accepted Accounting Procedures, of which Y' is in net cash and the rest is in more difficult-to-value assets. Thus, by purchasing this security, you are expecting that over time, the company will earn at least Z money (X-Y). In addition, financial professionals adjust upward the value of Z by a variable amount that takes into account such factors as the amount of money that their money could earn in safer places such as a Government bond, bank deposits, corporate bonds, and the like.
I. If a broker has recommended the purchase of this stock to you, he/she will earn income from it and will earn income again if you sell it. The broker therefore has a greater financial interest in you purchasing a stock that you are likely to sell at some point than one that you will never sell. The broker therefore has an inherent, unavoidable interest in you purchasing a stock that is more suited for trading than for long-term investing.
One can go on, but you get the point. In addition, mutual funds and closed end stock funds could be required to disclose the average ratios of price to net cash, price to book value, price to earnings of their stock holdings.
I suspect that if such disclosures were mandated, people would be less willing to part with their money in the "market" in general or individual stocks in particular. This could impart a salutary influence on the valuation of stocks and thus help prevent bubbles. By doing so, these actions would in fact tend to lead to stocks once again being good investments for the long run.
Ferdinand Pecora led the investigation of the U.S. Senate Committee on Banking and Currency in 1933-34 (the "Pecora Commission"). In 1939, he published the book, "Wall Street Under Oath". This is the first paragraph of his "Author's Preface" followed by snippets:
"Under the surface of the governmental regulation of the securities market, the same forces that produced the riotous speculative excesses of the "wild bull market" of 1929 still give evidences of their existence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back to pernicious activity."
" . . . Wall Street . . . looks forward to the day when it shall, as it hopes, resume the reins of its former power."
"The public, however, is sometimes forgetful. As its memory of the unhappy market collapse of 1929 becomes blurred, it may lend at least one ear to the voices of The Street subtly pleading for a return "to the good old times." Forgotten, perhaps, by some are the shattering revelations of the Senate Committee's investigations, forgotten the practices and ethics that The Street followed and defended when its own sway was undisputed in the good old days."
As I stated in my prior post, "Where is Jurassic Park When You Need It?", we need another Pecora Commission to deal with the abuses of the financial system of the past decade.
Copyright (C) Long Lake LLC 2009
Even in the greatest bull market of our times, the average investor in mutual funds was reported to have barely made money. Why? Because he/she tended to chase performance, thus guaranteeing purchase as the smart, early money was exiting after the upside had been achieved.
In the go-go late '90s, a national mania was created by the financial community and its enablers in business, the media and government that sucked vast numbers of America into believing that they too could be Bernard Baruch or Warren Buffett.
The whole mantra of "stocks for the long run", even as propounded by such honorable men as John Bogle, who built up the Vanguard Funds, clearly depends on the valuation of stocks when the long run begins. Beyond that, the future is unknowable. All we can say is that common stocks in the U.S. have, over many years, provided X return, but that achieving those returns was not necessarily easy for an individual person, and that individuals must be aware that they should not rely upon past history to predict the future. For example, they should be told that the very data that indicate that stocks have outperformed cash and bonds for the past hundred years (say) may logically suggest that they will underperform the same alternative asset classes for the next hundred years.
All consumer items are subject to some sort of prudential regulation. Even when a physician prescribes a medication, the patient is provided a list of potential side effects. And the prescriber has no financial interest in whether the patient takes any medicine, or which one is given. (Quite different from the selling of financial products!) Even so, patients are by law given information about the downside of the medicine.
Yet when the average investor purchases a mutual fund, all he or she tends to see is a bland warning that it may lose value and that the cost of running the fund is a certain amount. For the millions of investors who buy/trade their own individual stocks, there is no necessary disclosure of the facts of what they are buying. I propose that the boom-bust cycle of the stock market is of such importance both to individuals and to society at large (given the importance of public companies to the economy) that greater disclosure is required. Here are some modest proposals:
1. When a stock that has significant institutional ownership is purchased by an individual, the individual should be informed that large investment organizations that can be expected to have greater knowledge of the value of the company, greater sophistication and greater financial ability to withstand moves down in the price of the stock may either be selling the stock to the individual or are currently unwilling to pay a higher price; in other words, presumably "better" investors have declined to value the stock at the current time at any higher price than the individual is proposing to pay. Further disclosure (where appropriate to the stock) should be made that in addition, sophisticated people are actually paying significant interest and other costs to bet that the stock price will actually decline, and that these individuals can be assumed to have engaged in sophisticated analysis of the Company's financial position and business prospects, and have not only decided not to own the stock but to take on the potentially unlimited risk of borrowing it and selling it without even owning it, in the hope of profiting by buying it back at a cheaper price.
2. The individual must be shown financial data for the company before being allowed to buy the stock. This data should include dividend history and asset value with AND without intangibles and goodwill. Earnings data are insufficient for a variety of reasons. Data on an individual stock could for example have warnings such as the following:
A. If you purchase this stock, you may never receive any income from it. The stock may become worthless for any of a number of reasons.
B. In addition, you have the ability today to purchase a U.S. Government bond that will pay you (prevailing interest rate) for (1, 5, 10 years, for example) and that will return you the face value of the bond in (# of years). You are thus forgoing that guaranteed income and return of principal when you purchase this stock.
C. Management and the board of directors of the company own X% of the stock. In general, the less stock those controlling the company earn, the less their interests are aligned with those of stockholders.
D. Management's interests in the stock may be different from those of stockholders, no matter what % of the company's stock it owns. For example, executive compensation may be high enough to materially affect the profitability of the Company. Substantial amounts of stock options or restricted stock may be granted that would diminish your current ownership of the Company, even if the Company succeeds.
E. Management owns options in the company at X% above/below the current market value. To the extent that the options are exercisable above the current stock price, management may take extra risks in an attempt to increase the stock above that price. These risks may be disproportionate to the chance of success and thus may be adverse to the interests of stockholders. To the extent that management owns options below the current market price, it may fail to take prudent risks to increase the stock price.
F. Even if the stock market as a whole rises, the price of the stock you are purchasing may decline or fail to rise.
G. (If applicable): The company in which you have expressed an interest in purchasing stock also has bonds available for purchase. The current price at which you may be able to purchase a bond of the company is approximately X, which would provide a yield to maturity of Y. A company's bonds may be sound investments even if the stock price of the company goes down.
H. The aggregate market value of the company you may purchase stock in is X. The Company reports that its financial value is Y based on Generally Accepted Accounting Procedures, of which Y' is in net cash and the rest is in more difficult-to-value assets. Thus, by purchasing this security, you are expecting that over time, the company will earn at least Z money (X-Y). In addition, financial professionals adjust upward the value of Z by a variable amount that takes into account such factors as the amount of money that their money could earn in safer places such as a Government bond, bank deposits, corporate bonds, and the like.
I. If a broker has recommended the purchase of this stock to you, he/she will earn income from it and will earn income again if you sell it. The broker therefore has a greater financial interest in you purchasing a stock that you are likely to sell at some point than one that you will never sell. The broker therefore has an inherent, unavoidable interest in you purchasing a stock that is more suited for trading than for long-term investing.
One can go on, but you get the point. In addition, mutual funds and closed end stock funds could be required to disclose the average ratios of price to net cash, price to book value, price to earnings of their stock holdings.
I suspect that if such disclosures were mandated, people would be less willing to part with their money in the "market" in general or individual stocks in particular. This could impart a salutary influence on the valuation of stocks and thus help prevent bubbles. By doing so, these actions would in fact tend to lead to stocks once again being good investments for the long run.
Ferdinand Pecora led the investigation of the U.S. Senate Committee on Banking and Currency in 1933-34 (the "Pecora Commission"). In 1939, he published the book, "Wall Street Under Oath". This is the first paragraph of his "Author's Preface" followed by snippets:
"Under the surface of the governmental regulation of the securities market, the same forces that produced the riotous speculative excesses of the "wild bull market" of 1929 still give evidences of their existence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back to pernicious activity."
" . . . Wall Street . . . looks forward to the day when it shall, as it hopes, resume the reins of its former power."
"The public, however, is sometimes forgetful. As its memory of the unhappy market collapse of 1929 becomes blurred, it may lend at least one ear to the voices of The Street subtly pleading for a return "to the good old times." Forgotten, perhaps, by some are the shattering revelations of the Senate Committee's investigations, forgotten the practices and ethics that The Street followed and defended when its own sway was undisputed in the good old days."
As I stated in my prior post, "Where is Jurassic Park When You Need It?", we need another Pecora Commission to deal with the abuses of the financial system of the past decade.
Copyright (C) Long Lake LLC 2009
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