How the Street works.
Or doesn't.
Having mentioned relative bullishness on McDonald's (MCD) a week or so earlier, after the close of trading yesterday I posted a brief note on MCD titled McDonald's Update: Selling on the Bullish Commentary. I didn't like bullish comments about its routine report on August monthly sales.
Here's what happened. Per the corporate press release: McDonald's Posts Strong Global Comparable Sales - August Up 4.9%
But the Street spun it rather strangely, per Bloomberg.com: McDonald’s August Sales Rise 4.9%, Missing Estimates
How much was the "miss"?
Sept. 9 (Bloomberg) -- McDonald’s Corp., the world’s largest restaurant chain, said comparable-store sales climbed 4.9 percent last month from a year earlier, missing analyst estimates, as growth in demand came up short in Europe.
Analysts projected global sales would advance 5 percent, the median of three estimates compiled by Bloomberg.
The stock is down 3% (over $2) on this "miss" based on estimates of three analysts. Why three analysts, and which three? It appears as though a full 20 analysts have guesstimates for the September quarter earnings. Do the other 17 just not bother predicting monthly sales?
Well, Big Finance got its commissions out of me. I sold all my MCD Tuesday and Wednesday on the price strength, sold covered calls on the rest, and then bought some back today.
These sorts of shenanigans remind anyone paying attention that everything that emanates from the financial community is for its perceived benefit. What benefits it may or may not benefit you.
Copyright (C) Long Lake LLC 2010
Showing posts with label McDonald's. Show all posts
Showing posts with label McDonald's. Show all posts
Thursday, September 9, 2010
Wednesday, September 8, 2010
McDonald's Update: Selling on the Bullish Commentary
A brief note on MCD. Two weekends ago I did a post titled Chubb and McDonald's Suggest Leadership for Next Bull Move in Stocks two companies as among a group of strong multinationals that could lead the way in a new bull market, or a bull move in what I believe to be at best a chronic stagnant stock market. Both stocks have moved up both through the August downturn and again in the up-move after the late August bottom, and are now moderately extended versus each stock's own moving averages. Thus they are at least in a mini-way momentum stocks. In that context, I did not like the headline today about MCD found on Yahoo!'s Finance section:
Analysts: high hopes for McDonald's sales figure
Analysts: McDonald's sales figure to rise faster than industry
THE OPINION: UBS analyst David Palmer expects August revenue at McDonald's restaurants open at least a year to rise higher than the 4.5 percent analysts expect on average. Industrywide, the figure rose 1.5 percent to 2 percent last month, he told clients in a note Wednesday.
Having earlier in the day sold covered calls on some of my MCD shares, I sold the rest outright on that headline given the recent superior outperformance of the stock, general distaste for the stock market overall, and the premium valuation of MCD vs. other high quality stocks. (I also sold some MCD yesterday to buy Chubb on CB's price weakness.) Bullish headlines "reporting" bullish opinions before the fact smack of takedowns unless the news is outstanding. True long-term investors can ignore this sort of stuff. Let's see what happens tomorrow.
Of course, none of this commentary is other than commentary and is not investment advice of any sort.
Copyright (C) Long Lake LLC 2010
Analysts: high hopes for McDonald's sales figure
Analysts: McDonald's sales figure to rise faster than industry
THE OPINION: UBS analyst David Palmer expects August revenue at McDonald's restaurants open at least a year to rise higher than the 4.5 percent analysts expect on average. Industrywide, the figure rose 1.5 percent to 2 percent last month, he told clients in a note Wednesday.
Having earlier in the day sold covered calls on some of my MCD shares, I sold the rest outright on that headline given the recent superior outperformance of the stock, general distaste for the stock market overall, and the premium valuation of MCD vs. other high quality stocks. (I also sold some MCD yesterday to buy Chubb on CB's price weakness.) Bullish headlines "reporting" bullish opinions before the fact smack of takedowns unless the news is outstanding. True long-term investors can ignore this sort of stuff. Let's see what happens tomorrow.
Of course, none of this commentary is other than commentary and is not investment advice of any sort.
Copyright (C) Long Lake LLC 2010
Saturday, August 28, 2010
Chubb and McDonald's Suggest Leadership for Next Bull Move in Stocks
On a week in which both gold and silver had strong price move, one might think that stock leadership might come from miners. Not so. While intermediate to long term Treasuries continued their price surge (lower yields) the first four trading days of the week, one of the only two Dow 30 stocks to rise in price during 2008 set yet another all-time price high today. That is McDonald's. It is the only Dow 30 stock to have hit an all-time high since the bear market officially began early in 2008. If one believes as I do that central banks and governments will pull out all the anti-deflation stops and err in policy to be soft on inflation, just as the Bank of England is currently doing (0.5% policy rate with 3+% inflation rates) and Ben Bernanke did in 2006-8 (and I believe is doing again), then one wants exposure to nominal growth as well as organic growth.
Well, Mickey D can benefit from price decreases and it is gaining market share globally. Business is good for MCD.
While I have not done a formal statistical analysis, I have been watching MCD for well over a year in relation to the 10-year Treasury yield. The two have tended to track each other. Thus when stocks were rally sharply in 2009 and Treasury yields were surging upwards, MCD dropped or at best stagnated in price when the whole market was rallying. So here are my thoughts on this stock at its current price around the all-time high set yesterday of $74.
Dividends are expected to be $2.45/share in 2011. (The board may announce a dividend increase soon.) At today's price, that would give shareholders about a 3.3% yield. The 10-year is around 2.60. Let us say that the 10-year yield backs up to 3.0% on average for all of 2011. If MCD trades at a yield equal to the 10 year as has been the case a number of times in 2009 and 2010, that would allow about a 9% price appreciation in addition to the dividend. If at any time in 2011 MCD trades at a 2.6% yield, one is looking at about a 30% total return.
What is the downside?
Of course, it is unlimited. But on a 15-year basis, I think it is reasonable to expect that MCD raises its dividend at least 5% annually. This would mean a doubling of dividends from 3% to a terminal dividend of 6% if the stock price is unchanged. Let us say that the average dividend yield would then be 4.5% at year 7/8 of this 15-year horizon. One can go out 7 years on the Treasury yield curve and get 2% back on one's money yearly.
Between the two choices, I'll take McDonald's for long-term capital I can afford to lose. And given operational trends and price increases that are galloping along in fast-growing countries such as Brazil, where MCD is doing very well; India; and China. McDonald's is financially flexible in a way Uncle Sam isn't, having just received some accolades for a yuan-denominated bond issue.
Now, I am not a professional stock analyst. I haven't eaten at a McDonald's in decades. I tried their espresso drinks last year and hated them (as did two other people who taste-tested them with me). I'm a vegetarian cardiologist who thinks America would have been better off from a public health standpoint without than with McDonald's. But I also think America would be better off without trillion-plus dollar federal deficits or Americans and "allies" chasing Afghans around their own country. But I have to live in the real world, and at least MCD has added some sops to health, and the head of McDonald's India is also a vegetarian.
But I have digressed. I am going with technical chart strength, strong operational results, steady dividend growth, global presence, and the like. If the 10-year returns to 4%, I expect MCD stock price to drop, but that would likely be in association with price increases/economic growth, so faster dividend growth and stronger earnings may await.
If you doubt that it is a market of stocks vs. a stock market, look at the charts of MCD vs. JPM (strong bank) and BAC or C (weak banks). Rising earnings/rising dividends and all-time high stock prices for MCD. Sliced dividends and variable earnings of uncertain quality for the financials = failing stock charts.
However, not all financials are created equal. The boring insurer Chubb (CB) also set a 12-month high yesterday. Its stock chart over the past 2 years is gently upsloping. It retires substantial amounts of stock, sells only slightly above tangible book value (which may be understated due to the bull market in its assets, which are almost entirely bonds), raises the dividend regularly, and has rising earnings estimates, and has stellar financial strength ratings from S&P. The stock is near its May 2007 high (I ignore the bizarre up-move into the $60s during the meltdown in fall 2008 as it might have been due to takeover speculation) and the various moving averages show that it is picking up strength on an accelerated basis.
Thus, even someone such as myself who believes that the general stock market remains overpriced, I am able to find specific boring companies such as the two listed above that meet my criteria for sleep-well-at-night on price declines plus reasonable valuation, strong chart action, no hype by the Street, and rising dividends.
If things break properly, these two stocks could provide 10% total returns year after year even if the general stock averages fail to keep up with consumer price increases (0r less likely decreases).
Lest one think I am bubbling over with enthusiasm for these assets, there is a more mature and safer asset that has no operational issues, cannot disappoint the Street with insufficient earnings gains or a smaller-than-expected dividend increase, and that remains out-of-favor with the mainstream media yet has a picture-perfect bull market chart that looks like a bull market that just might turn into a bubble that could expand for a while before it bursts. That asset is gold. Its compound annual return over long periods of time proves that compared to other financial assets, it is in no bubble. It remains my favorite asset on risk-reward considerations, but it is good to see that as discussed above, stock buyers are quietly rewarding well-run diverse companies.
If only the authorities in Washington were paying heed.
Copyright (C) Long Lake LLC 2010
Well, Mickey D can benefit from price decreases and it is gaining market share globally. Business is good for MCD.
While I have not done a formal statistical analysis, I have been watching MCD for well over a year in relation to the 10-year Treasury yield. The two have tended to track each other. Thus when stocks were rally sharply in 2009 and Treasury yields were surging upwards, MCD dropped or at best stagnated in price when the whole market was rallying. So here are my thoughts on this stock at its current price around the all-time high set yesterday of $74.
Dividends are expected to be $2.45/share in 2011. (The board may announce a dividend increase soon.) At today's price, that would give shareholders about a 3.3% yield. The 10-year is around 2.60. Let us say that the 10-year yield backs up to 3.0% on average for all of 2011. If MCD trades at a yield equal to the 10 year as has been the case a number of times in 2009 and 2010, that would allow about a 9% price appreciation in addition to the dividend. If at any time in 2011 MCD trades at a 2.6% yield, one is looking at about a 30% total return.
What is the downside?
Of course, it is unlimited. But on a 15-year basis, I think it is reasonable to expect that MCD raises its dividend at least 5% annually. This would mean a doubling of dividends from 3% to a terminal dividend of 6% if the stock price is unchanged. Let us say that the average dividend yield would then be 4.5% at year 7/8 of this 15-year horizon. One can go out 7 years on the Treasury yield curve and get 2% back on one's money yearly.
Between the two choices, I'll take McDonald's for long-term capital I can afford to lose. And given operational trends and price increases that are galloping along in fast-growing countries such as Brazil, where MCD is doing very well; India; and China. McDonald's is financially flexible in a way Uncle Sam isn't, having just received some accolades for a yuan-denominated bond issue.
Now, I am not a professional stock analyst. I haven't eaten at a McDonald's in decades. I tried their espresso drinks last year and hated them (as did two other people who taste-tested them with me). I'm a vegetarian cardiologist who thinks America would have been better off from a public health standpoint without than with McDonald's. But I also think America would be better off without trillion-plus dollar federal deficits or Americans and "allies" chasing Afghans around their own country. But I have to live in the real world, and at least MCD has added some sops to health, and the head of McDonald's India is also a vegetarian.
But I have digressed. I am going with technical chart strength, strong operational results, steady dividend growth, global presence, and the like. If the 10-year returns to 4%, I expect MCD stock price to drop, but that would likely be in association with price increases/economic growth, so faster dividend growth and stronger earnings may await.
If you doubt that it is a market of stocks vs. a stock market, look at the charts of MCD vs. JPM (strong bank) and BAC or C (weak banks). Rising earnings/rising dividends and all-time high stock prices for MCD. Sliced dividends and variable earnings of uncertain quality for the financials = failing stock charts.
However, not all financials are created equal. The boring insurer Chubb (CB) also set a 12-month high yesterday. Its stock chart over the past 2 years is gently upsloping. It retires substantial amounts of stock, sells only slightly above tangible book value (which may be understated due to the bull market in its assets, which are almost entirely bonds), raises the dividend regularly, and has rising earnings estimates, and has stellar financial strength ratings from S&P. The stock is near its May 2007 high (I ignore the bizarre up-move into the $60s during the meltdown in fall 2008 as it might have been due to takeover speculation) and the various moving averages show that it is picking up strength on an accelerated basis.
Thus, even someone such as myself who believes that the general stock market remains overpriced, I am able to find specific boring companies such as the two listed above that meet my criteria for sleep-well-at-night on price declines plus reasonable valuation, strong chart action, no hype by the Street, and rising dividends.
If things break properly, these two stocks could provide 10% total returns year after year even if the general stock averages fail to keep up with consumer price increases (0r less likely decreases).
Lest one think I am bubbling over with enthusiasm for these assets, there is a more mature and safer asset that has no operational issues, cannot disappoint the Street with insufficient earnings gains or a smaller-than-expected dividend increase, and that remains out-of-favor with the mainstream media yet has a picture-perfect bull market chart that looks like a bull market that just might turn into a bubble that could expand for a while before it bursts. That asset is gold. Its compound annual return over long periods of time proves that compared to other financial assets, it is in no bubble. It remains my favorite asset on risk-reward considerations, but it is good to see that as discussed above, stock buyers are quietly rewarding well-run diverse companies.
If only the authorities in Washington were paying heed.
Copyright (C) Long Lake LLC 2010
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
Wednesday, August 18, 2010
Trading Uncle Sam's Debt for Burgers and Fries
The long Treasury bond has defied the obvious tendency that when a lot more of something is produced, the price tends to drop. Instead, there has been a buying surge in Treasuries. Thus, based on such reasons as weakening forward-looking economic statistics, general disdain for the way in which the economy has been run (including disapproval that it is being "run" at all rather than functioning freely), and the technical picture just a few weeks ago, I turned tactically bullish on bond prices just a few weeks ago, as discussed in various blog posts.
The Treasury markets have moved massively in a very short time, with relatively little fundamental support for such a large repricing. The 10-year (not shown here) has collapsed from high to low in 4 1/2 months over 35% in yield (4.0% to below 2.6% briefly). The 30-year (click on image to enlarge) shown here has moved less, and I favor it over the 10-year as the yield spread between the 10 and the 30 hit over 120 basis points and compressed today to a very wide level of 110 bps.
Nonetheless, the absolute yield level of the 30 year bond at about 3.7% is at or below the lowest level its 200 day smooth moving average hit during the entire 2008-9 stock bear market and amazing Treasury bull market. Thus I'm thinking there's some combination of fundamental and technical overvaluation here in both the 10 and 30 year bonds, with greater risk in the former (and less reward).
Who knows, but it's looking more and more to me that a base case is for the 10-year to correct upward in yield even if the longer-term picture is for a 2% yield and a 30-year yielding in the 2.5-3.5% range. Thus the long bond, which day-to-day tends to trade directionally with the 10-year, is in my view a difficult hold from a trading perspective, and I have taken some nice profits for a 1-2 week trade. A completely unscientific rule of thumb I have developed is that if I can "make" one year's worth of interest income from a quick bond trade, I strongly consider taking it. If I get two year's worth of interest income, I grab it.
Thus I've reversed most of my bond purchases put on in the last few weeks.
Meanwhile, one of the many correlations I have found useful in the post-Great/Global Financial Crisis world is that MCD (McDonald's; Mickey D) has for over a year traded in line with the 10-year. MCD recently joined gold in making a new all-time high in 2010; I believe MCD is the only Dow 30 Industrial to do so. And this is MCD's 2nd surge this year to a new high, if memory serves me well. Meanwhile, with the amazing fall in the 10-year yield to well under 2.70, MCD yields 3.00% now and thus can easily appreciate 10% in price and still be fairly valued under this relationship.
In addition, should the rest of this year not have a re-run of 2008 or worse, MCD's board will increase its dividend late this year for 2011. My guess is about a 9% increase. Thus I reason that if the 10-year yield is at 3.0% sometime next year, MCD stock could easily trade at that same 3.% dividend yield it now enjoys and thus stockholders could see a price increase of about 9% to keep the new (projected) yield at 3.0%, plus the current yield of 3.0%, and thus get a total return of 12%.
If over the next 10 years MCD's dividend rises at a compound annual rate of 7%, it will have a terminal dividend yield of 6%. Thus for every $100 invested in the stock at today's price, about $45 would come back to shareholders; this is vs. about $26 back to buyers of the 10-year bond at this week's price/yield. All other things being equal, MCD's stock price could thus drop 19% (45-26) ten years from now and be about an equally good investment as the 10 year bond.
This August 18, with so much of the public convinced that the "Great Recession" never ended and thus pinching pennies, and with MCD's sales and profits growing in the U. S. and abroad at a pretty good clip, a good part of my personal trading money has abruptly shifted to MCD on the early breakout to new highs and sold the extended Treasury move. If MCD stock price falls without a change in the fundamentals and without a massive breakdown in Treasury prices, I plan to buy more.
Less than 10 years ago, the stock market recognized McDonald's as a poorly run behemoth. It cleaned up its act. Will the U. S. government, another poorly run behemoth than unlike McDonald's is a monopolist extraordinaire, do the same?
Copyright (C) Long Lake LLC 2010
Thursday, April 22, 2010
Beware! Greeks Are not Alone
From Eurointelligence today, THE CRISIS IS SPREADING TO PORTUGAL:
Investors are beginning to doubt whether the Greek rescue will be sufficient, according to the Financial Times, amid doubts that another package stands any political chance, given the uproar in Germany over the current package. The paper quotes Thomas Mayer of Deutsche Bank as saying: “I hope that I am wrong, but I fear that by the end of the year, they will find out that Greece needs a lot more money for 2011 and 2012, and that we will have serious problems getting another package through.”
These and similar fears were reflected on the financial markets yesterday, where Greek 10 year bond yields exceeded 8%, which makes a trigger of the EU/IMF package imminent.
In the meantime, the crisis is starting to spread to Portugal, the next weakest part of the eurozone’s house of cards. The finance minister, George Papaconstantinou, said yesterday that the formal request for aid might occur even before the end of negotiations with the EU/IMF delegation, which began yesterday, and is expect to take two weeks.
Portguese bond yields have been coming under additional pressure, with 10 year yields up to 4.77%, about 1.7pp high than Germany’s. El Pais picks on the IMF’s latest forecasts, in the Global Economic Outlook (more below) for Portugal, which show a strong downward revision for 2010 (to 0.3%). The report also mentioned that Portugal will miss the targets set out in its stability report. At the end of this year, the IMF calculated, Portugal will have a deficit-to-GDP ratio of 8.7%, while the deficit reduction will then proceed only at snail’s pace. In other words, the IMF believes that the stability programme of PM Jose Sokrates is a joke. (The Commission believes the same, and has recently asked Sokrates to make bigger efforts).
Media Conspiracies
Incidently, the Portguese business press, is full of stories this morning telling us that this contagion is not justified, citing anybody who defends up Portugal (Commerzbank for example, which says that contagion has no fundamental justification), while severely criticising those who say a negative word about their country. We observed the same phenomenon in the early stages of the Greek crisis, which was regarded initially as some foreign, or rather anglo-saxon plot against the country.
This is sounding like 1997-98, with rolling currency/debt crises. Then, the NATO countries were impregnable and imported deflation, helping to keep the boom alive. The same is happening now in the U. S., but then we were running governmental cash surpluses and had just won the Cold War and the Iraq War.
Yesterday in the markets, it appeared as if it were that era as well. The average stock per the Value Line Index peaked in 1997-8; a narrowing group of favored stocks led the averages higher into the 2000 ultimate peak. The same thing may be happening now; retailers were strong, drugs and financials weak. Gold rose along with the dollar and the long Treasury. This is getting interesting.
Meanwhile, the first stock I chose to re-enter the stock market with in spring 2009, McDonald's, traded horribly for months, basically tracking the long bond. Now, however, it looks like a star. It is by my count the only Dow Industrial at an all-time high. It beat earnings and sales expectations in reporting Q1 yesterday. It is neither cheap nor expensive, has enough skepticism to convert lots of non-holders to be stockholders, and appears to be gaining share in its market segment, which itself has been pressured the past 2 years and thus may see its own rebound.
The pattern is that MCD, DLTR, TJX and ROST are market leaders with strong but not overextended charts and rising earnings estimates. They are subject to bouts of profit-taking at any time, but every stockholder is happy and will tend either to dump high-flyers or underperformers during feared or ongoing market corrections rather than what for now are good actors reading from an upbeat script.
Bigger picture: What is different between the policies of the Greek government from that of the U. S.? And thus why does not the U. S. end up like Greece?
Thus we have the Scylla of the Japan scenario and the Charybdis of the Greek scenario. It's all about mise-en-scene.
This reality show bears watching.
Copyright (C) Long Lake LLC 2010
Investors are beginning to doubt whether the Greek rescue will be sufficient, according to the Financial Times, amid doubts that another package stands any political chance, given the uproar in Germany over the current package. The paper quotes Thomas Mayer of Deutsche Bank as saying: “I hope that I am wrong, but I fear that by the end of the year, they will find out that Greece needs a lot more money for 2011 and 2012, and that we will have serious problems getting another package through.”
These and similar fears were reflected on the financial markets yesterday, where Greek 10 year bond yields exceeded 8%, which makes a trigger of the EU/IMF package imminent.
In the meantime, the crisis is starting to spread to Portugal, the next weakest part of the eurozone’s house of cards. The finance minister, George Papaconstantinou, said yesterday that the formal request for aid might occur even before the end of negotiations with the EU/IMF delegation, which began yesterday, and is expect to take two weeks.
Portguese bond yields have been coming under additional pressure, with 10 year yields up to 4.77%, about 1.7pp high than Germany’s. El Pais picks on the IMF’s latest forecasts, in the Global Economic Outlook (more below) for Portugal, which show a strong downward revision for 2010 (to 0.3%). The report also mentioned that Portugal will miss the targets set out in its stability report. At the end of this year, the IMF calculated, Portugal will have a deficit-to-GDP ratio of 8.7%, while the deficit reduction will then proceed only at snail’s pace. In other words, the IMF believes that the stability programme of PM Jose Sokrates is a joke. (The Commission believes the same, and has recently asked Sokrates to make bigger efforts).
Media Conspiracies
Incidently, the Portguese business press, is full of stories this morning telling us that this contagion is not justified, citing anybody who defends up Portugal (Commerzbank for example, which says that contagion has no fundamental justification), while severely criticising those who say a negative word about their country. We observed the same phenomenon in the early stages of the Greek crisis, which was regarded initially as some foreign, or rather anglo-saxon plot against the country.
This is sounding like 1997-98, with rolling currency/debt crises. Then, the NATO countries were impregnable and imported deflation, helping to keep the boom alive. The same is happening now in the U. S., but then we were running governmental cash surpluses and had just won the Cold War and the Iraq War.
Yesterday in the markets, it appeared as if it were that era as well. The average stock per the Value Line Index peaked in 1997-8; a narrowing group of favored stocks led the averages higher into the 2000 ultimate peak. The same thing may be happening now; retailers were strong, drugs and financials weak. Gold rose along with the dollar and the long Treasury. This is getting interesting.
Meanwhile, the first stock I chose to re-enter the stock market with in spring 2009, McDonald's, traded horribly for months, basically tracking the long bond. Now, however, it looks like a star. It is by my count the only Dow Industrial at an all-time high. It beat earnings and sales expectations in reporting Q1 yesterday. It is neither cheap nor expensive, has enough skepticism to convert lots of non-holders to be stockholders, and appears to be gaining share in its market segment, which itself has been pressured the past 2 years and thus may see its own rebound.
The pattern is that MCD, DLTR, TJX and ROST are market leaders with strong but not overextended charts and rising earnings estimates. They are subject to bouts of profit-taking at any time, but every stockholder is happy and will tend either to dump high-flyers or underperformers during feared or ongoing market corrections rather than what for now are good actors reading from an upbeat script.
Bigger picture: What is different between the policies of the Greek government from that of the U. S.? And thus why does not the U. S. end up like Greece?
Thus we have the Scylla of the Japan scenario and the Charybdis of the Greek scenario. It's all about mise-en-scene.
This reality show bears watching.
Copyright (C) Long Lake LLC 2010
Wednesday, March 17, 2010
The Fed and the Stock Market: Weak Economy Continues to Propel Stock Price Inflation
Every pro and many amateurs are aware of the correlation with the Fed funds rate and low volatility, and between that of low volatility and rising stock prices. Thus it is no surprise that the Fed's unsurprising reiteration of its prior policy track was followed by yet another late afternoon increase in stock prices. Gold was up all day, up a bit more later in the day, and is up a bit more overnight. The joys of cheap money!
Meanwhile, probably the best portent for job growth is yesterday's downbeat job projections out of the White House. They won't be caught on the overoptimistic side of predicting the economy if they can help it ever again.
Unfortunately, the health care "reform" fiasco is looking the end of Terminator. You can't kill it, but it keeps getting uglier. This plus the recent Nancy Pelosi pledge that Federalization of health care is just the start is definitely not helping the mood amongst small businessmen. One wonders if by some chance the majority party can't beg/borrow/steal just a few more votes from its own party members in the House to pass this bill the stock market will give a big cheer, just as it did when Bill Clinton lost control of the house in the 1994 elections. And one wonders if passing the bill would give a sense of finality (finally) and allow business to focus on business rather than the irritant of health insurance, which would also be good for the public mood. On the other hand, this bill imposes tax increases before the spending kicks in. So that might make it bad for the public mood and anti-Keynesian. So I'm ignoring this bill in discussing investment options.
Let us step back and with apologies to Barry Ritholtz and his blog, look at the big picture.
Money printing and various forms of credit extension into such things as the black hole of Fannie/Freddie and the new black hole of Ginnie Mae (FHA), plus population growth plus cyclical factors have "strengthened" the real economy-- whatever that really means. There will be growth in the spring. But much is rotten in the state of this country. The Federal government is not close to a true AAA credit any more. Multiple states are fiscally mismanaged. Many financial institutions that remain too big to fail would be insolvent today on a mark to market basis. Thus your money in the bank is not there. Gold is roughly trading at an historical average price relative to the (long-suffering) S&P 500 index.
Doubling back to the Fed-- if the economy remains so weak that cash must be trash and even the alleged security of 10-year Federal debt only pays $3.65 per $100, how are stock buyers so sure that the future is so bright as to pay such a large premium over tangible book value as they are today and to accept such a historically low rate of return on BBB-rated corporate debt?
Yet even more than the bond market to my eyes, the stock market has pockets of relative attraction. Discount retailers have surging stock prices but TJX and DLTR remain at quite ordinary P/E's. Everest Re is a totally boring reinsurer that trades far under tangible book value yet has a top-notch quality rating by S&P's stock advisory service. Chubb, a cream of the crop sort of insurer, trades marginally above tangible book, has a 3% dividend yield, has a very high free cash flow yield (as do the other names mentioned above), and could be a mega-company's takeover meal to boot. McDonald's is operationally outperforming its peers and has a stock chart that has already broken to new alltime highs in its 50 and 200 day moving averages. It yields almost that of the 10 year Treasury but in 10 years, if dividends rise 7% per year, it will be paying investors twice what the T-bond will pay out in year 10. What will the "stub" of the MCD equity be worth then? I dunno, but as a conservative income and inflation hedge, plus the strong chart pattern, I find it a worthwhile part of a diversified portfolio.
Every name mentioned above is "defensive". With ECRI sounding the tocsins about more frequent recessions ahead, but with many stocks pricing in a strong and/or prolonged economic expansion, yours truly finds this a stock market that only a pro should short but that most people should be leery of. As it should be of most of modern, debt-infested finance.
Copyright (C) Long Lake LLC 2010
Meanwhile, probably the best portent for job growth is yesterday's downbeat job projections out of the White House. They won't be caught on the overoptimistic side of predicting the economy if they can help it ever again.
Unfortunately, the health care "reform" fiasco is looking the end of Terminator. You can't kill it, but it keeps getting uglier. This plus the recent Nancy Pelosi pledge that Federalization of health care is just the start is definitely not helping the mood amongst small businessmen. One wonders if by some chance the majority party can't beg/borrow/steal just a few more votes from its own party members in the House to pass this bill the stock market will give a big cheer, just as it did when Bill Clinton lost control of the house in the 1994 elections. And one wonders if passing the bill would give a sense of finality (finally) and allow business to focus on business rather than the irritant of health insurance, which would also be good for the public mood. On the other hand, this bill imposes tax increases before the spending kicks in. So that might make it bad for the public mood and anti-Keynesian. So I'm ignoring this bill in discussing investment options.
Let us step back and with apologies to Barry Ritholtz and his blog, look at the big picture.
Money printing and various forms of credit extension into such things as the black hole of Fannie/Freddie and the new black hole of Ginnie Mae (FHA), plus population growth plus cyclical factors have "strengthened" the real economy-- whatever that really means. There will be growth in the spring. But much is rotten in the state of this country. The Federal government is not close to a true AAA credit any more. Multiple states are fiscally mismanaged. Many financial institutions that remain too big to fail would be insolvent today on a mark to market basis. Thus your money in the bank is not there. Gold is roughly trading at an historical average price relative to the (long-suffering) S&P 500 index.
Doubling back to the Fed-- if the economy remains so weak that cash must be trash and even the alleged security of 10-year Federal debt only pays $3.65 per $100, how are stock buyers so sure that the future is so bright as to pay such a large premium over tangible book value as they are today and to accept such a historically low rate of return on BBB-rated corporate debt?
Yet even more than the bond market to my eyes, the stock market has pockets of relative attraction. Discount retailers have surging stock prices but TJX and DLTR remain at quite ordinary P/E's. Everest Re is a totally boring reinsurer that trades far under tangible book value yet has a top-notch quality rating by S&P's stock advisory service. Chubb, a cream of the crop sort of insurer, trades marginally above tangible book, has a 3% dividend yield, has a very high free cash flow yield (as do the other names mentioned above), and could be a mega-company's takeover meal to boot. McDonald's is operationally outperforming its peers and has a stock chart that has already broken to new alltime highs in its 50 and 200 day moving averages. It yields almost that of the 10 year Treasury but in 10 years, if dividends rise 7% per year, it will be paying investors twice what the T-bond will pay out in year 10. What will the "stub" of the MCD equity be worth then? I dunno, but as a conservative income and inflation hedge, plus the strong chart pattern, I find it a worthwhile part of a diversified portfolio.
Every name mentioned above is "defensive". With ECRI sounding the tocsins about more frequent recessions ahead, but with many stocks pricing in a strong and/or prolonged economic expansion, yours truly finds this a stock market that only a pro should short but that most people should be leery of. As it should be of most of modern, debt-infested finance.
Copyright (C) Long Lake LLC 2010
Thursday, August 27, 2009
Wednesday Night Investment Update
As suggested here this past weekend, the long Treasury bond has surprised many with significant strength. The 30-year Treasury has dropped greatly- 20 basis points, down to 4.21%, corresponding to over a 3% upward move in price in the close ETF proxy, TLT. Some technicians are pointing to current interest levels as important; traders may want to lock in gains or place close stops. Given that Trimtabs Demand Index has just registered a sell signal on the stock market (was neutral) and given the fact that this move in Treasuries has occurred with no publicity and no obvious cause, I remain positive on direct ownership of zero-coupon intermediate to long Treasuries, though I'm no longer pounding the table for underinvested people to jump in here. Fundamentally, we all or almost all of us "know" that 4.2% a year for 30 years is a poor investment. Of course, if a Japanese purchased a 30-year Japan Government bond 20 years ago as the bubble was topping, he or she made a great investment.
I also remain positive on gold. Now that the Fed this weekend in Jackson Hole doubled down on its promise/threat to keep interest rates "too low, too long" in order to create inflation, I have changed my investment posture on gold from trading range-oriented with a bullish tilt, to buy and hold a significant core position, trading around it as desired. Physical gold and the two gold ETFs, GLD and GTU, all make sense.
Another reason for liking gold is the recent appointment of a labor leader with no legal, banking or economic credentials to head the New York Fed. Click here for the link, courtesy of Naked Capitalism. Click here for a link to his bio.
I also like cash. Yields vary greatly. If you trust the FDIC, it may be worthwhile to move money from bank to bank to grub extra yield.
Finally, at what should be roughly the nadir of the economic banana, there are probably solid long-term values in McDonald's. After the recent mini-sell-off, I also like FPL.
What is the theme to the above: high quality. Junk should have had its 5 months in the sun. Quality will out over the long run. Exactly when, those who lived through the late 1990s know that one never knows.
The Baltic Dry Index has come down sharply; link here for it on an ongoing basis. Chinese stocks look to be cracking, though it's not a market I know anything about. A growing number of pundits who both called the stock bear market and then the March low are very cautious to bearish, whereas other bears who stayed bearish have caved under the "don't fight the tape" theory. Yet all this is occurring during light end-of-summer trading, where the low-priced stuff such as Fannie Mae is dominating trading.
This game never ends, but when a mainstream outlet such as Bloomberg piles onto Dr. Roubini, a truly eminent academic, for no reason other than his first wrong (for now) call after what he says are five correct ones, I fear that that is a corroborating sign of too much complacency amongst the bulls.
Copyright (C) Long Lake LLC 2009
I also remain positive on gold. Now that the Fed this weekend in Jackson Hole doubled down on its promise/threat to keep interest rates "too low, too long" in order to create inflation, I have changed my investment posture on gold from trading range-oriented with a bullish tilt, to buy and hold a significant core position, trading around it as desired. Physical gold and the two gold ETFs, GLD and GTU, all make sense.
Another reason for liking gold is the recent appointment of a labor leader with no legal, banking or economic credentials to head the New York Fed. Click here for the link, courtesy of Naked Capitalism. Click here for a link to his bio.
I also like cash. Yields vary greatly. If you trust the FDIC, it may be worthwhile to move money from bank to bank to grub extra yield.
Finally, at what should be roughly the nadir of the economic banana, there are probably solid long-term values in McDonald's. After the recent mini-sell-off, I also like FPL.
What is the theme to the above: high quality. Junk should have had its 5 months in the sun. Quality will out over the long run. Exactly when, those who lived through the late 1990s know that one never knows.
The Baltic Dry Index has come down sharply; link here for it on an ongoing basis. Chinese stocks look to be cracking, though it's not a market I know anything about. A growing number of pundits who both called the stock bear market and then the March low are very cautious to bearish, whereas other bears who stayed bearish have caved under the "don't fight the tape" theory. Yet all this is occurring during light end-of-summer trading, where the low-priced stuff such as Fannie Mae is dominating trading.
This game never ends, but when a mainstream outlet such as Bloomberg piles onto Dr. Roubini, a truly eminent academic, for no reason other than his first wrong (for now) call after what he says are five correct ones, I fear that that is a corroborating sign of too much complacency amongst the bulls.
Copyright (C) Long Lake LLC 2009
Thursday, July 23, 2009
UPS and Irrational Exuberance
The fundamental good news today is that new unemployment claims, both with and without seasonal adjustment, are trending down--though they are at high levels, and the very low workweek suggests another 'jobless recovery' could well await us.
The bad news from a stock standpoint is that UPS had an in-line (and poor) quarterly earnings report and guided down for Q3- yet the stock is surging with the market. First, from Calculated Risk re the conference call:
UPS executives went on to say (paraphrasing) that 1) trends in July have shown no improvement to date, 2) don’t have any confidence that trends or volumes will improve materially in Q3, 3) economy sitting here at this bottom. (Emph. added)
Second, from Reuters:
The company anticipates third-quarter earnings per share of 45 cents to 55 cents, versus the analyst view of 59 cents.
"Declines in both our domestic and international businesses appear to be stabilizing, but volumes will remain significantly below last year's levels," Chief Financial Officer Kurt Kuehn said in a statement.
Why is this stock up? What "long" institutional investor truly is happy about such a "down" guidance?
On the other hand, one of EBR's favorites, McDonald's, reported an in-line quarter, showed growth everywhere worldwide, lowered no estimates, and is down 4% today. MCD now sells for under 15 times 2009 estimated earnings, yields a bit over 3.5%, and sells for about 14 times next year's estimated earnings. UPS now sells for about 23 X this year's prior earnings estimate--which P/E will rise given the guidance down for the current quarter. Who could even guess about 2010 earnings for UPS. UPS yields a bit under MCD's yield.
Click HERE for the McDonald's earnings release.
My conclusion: McDonald's is a better buy than it was yesterday. The stock market as a whole, however, is a worse buy. Cyclicals like Eaton and UPS keep going up even as they guide earnings lower and see no imminent business upturn, whereas "good guys" far away from credit bubbles such as MCD, Wal-Mart and Northern Trust can't get out of their own way.
This is a very speculative stock market. It would be a better sign of economic vigor if the speculation were occurring years into an economic up-cycle.
Copyright (C) Long Lake LLC 2009
Copyright (C) Long Lake LLC
The bad news from a stock standpoint is that UPS had an in-line (and poor) quarterly earnings report and guided down for Q3- yet the stock is surging with the market. First, from Calculated Risk re the conference call:
UPS executives went on to say (paraphrasing) that 1) trends in July have shown no improvement to date, 2) don’t have any confidence that trends or volumes will improve materially in Q3, 3) economy sitting here at this bottom. (Emph. added)
Second, from Reuters:
The company anticipates third-quarter earnings per share of 45 cents to 55 cents, versus the analyst view of 59 cents.
"Declines in both our domestic and international businesses appear to be stabilizing, but volumes will remain significantly below last year's levels," Chief Financial Officer Kurt Kuehn said in a statement.
Why is this stock up? What "long" institutional investor truly is happy about such a "down" guidance?
On the other hand, one of EBR's favorites, McDonald's, reported an in-line quarter, showed growth everywhere worldwide, lowered no estimates, and is down 4% today. MCD now sells for under 15 times 2009 estimated earnings, yields a bit over 3.5%, and sells for about 14 times next year's estimated earnings. UPS now sells for about 23 X this year's prior earnings estimate--which P/E will rise given the guidance down for the current quarter. Who could even guess about 2010 earnings for UPS. UPS yields a bit under MCD's yield.
Click HERE for the McDonald's earnings release.
My conclusion: McDonald's is a better buy than it was yesterday. The stock market as a whole, however, is a worse buy. Cyclicals like Eaton and UPS keep going up even as they guide earnings lower and see no imminent business upturn, whereas "good guys" far away from credit bubbles such as MCD, Wal-Mart and Northern Trust can't get out of their own way.
This is a very speculative stock market. It would be a better sign of economic vigor if the speculation were occurring years into an economic up-cycle.
Copyright (C) Long Lake LLC 2009
Copyright (C) Long Lake LLC
Thursday, July 16, 2009
Misleading Headlines Make Today's Move Up in the Stock Market More Suspect than Usual
Bloomberg.com has what sounds like a good Roubini reversal to help stocks in U.S. Stocks Rise as Roubini Predicts Recession to End This Year . Today at an investors' conference in New York, Dr. Roubini said that the economy's freefall is over and was quoted in a different Bloomberg article as follows: “We should continue with fiscal stimulus and we might need a second one,” Roubini said. While the worst of the crisis is over, there’s still a “meaningful amount of weakness” in labor markets, industrial production and housing, he said. . He has said this sort of thing many times. Here is what he wrote what some on the Street think may be an eternity ago, though it was actually only two days ago: Mounting Job Losses Will Hurt Consumption, Housing, Banks’ Balance Sheets, Public Finances and Lead to Protectionist Pressures. The Roubini article begins as follows:
Recent data suggest that job market conditions are not improving in the United States and other advanced economies. In the U.S., the unemployment rate, currently at 9.5%, is poised to rise above 10% by the fall. It should peak at 11% some time in 2010 and remain well above 10% for a long time. The unemployment rate will peak above 10% in most other advanced economies (especially Europe and Japan), too, where social safety nets are broader and thus leading to less short term job losses and pain, but where the effects of the crisis on growth have been even more severe than the U.S.
Here is the conclusion of Roubini's post:
Little wonder, then, that we are now witnessing a significant correction in equity, credit, and commodities markets. The irrational exuberance that drove a three-month bear-market rally in the spring is now giving way to a more sober realization among investors that the global recession will not be over until year end, that the recovery will be weak and well below trend, and that the risks of a double-dip W-shaped recession are rising. The alleged green shoots turned to be yellow weeds and – unless policy makers figure out a sensible medium term exit strategy for monetary and fiscal policy – they may turn into brown manure.
The Bloomberg headline completely misrepresents Roubini's current views.
The second topic today relates to the unemployment numbers. Supposedly these were good, with seasonally adjusted claims dropping a lot. The problem is that the raw data show a substantial worsening of these claims, consistent with both anecdotal and data-driven evidence that the economy is at best stalling and at worst is dipping downward again. Here is the data (compliments of Credit Writedowns for the circles:
Anyone can easily see that the NSA initial claims have risen from 559,857 on Jun 27 to 667, 534 on July 11.
Insured unemployment rose apace. The entire release can be found by clicking HERE.
The seasonal adjustments are off primarily due to the extraordinarily early cutbacks at the auto manufacturers, and potentially at some early hiring there as well.
Here are some other headlines from Bloomberg.com today:
Commercial Paper Falls Most Ever as ConEd Sells Bonds (Update1) The U.S. commercial paper market, the cheapest source of corporate cash, is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co.
Schumer Fees on Insurers May Deplete Profit, Push Up Premiums A Senate demand for at least $75 billion in fees on U.S. health insurers over a decade may raise premiums for people who have insurance while erasing much of the $13 billion in annual profit earned by the industry.
Credit-Card Defaults May Rise as Tax Refunds Wane, Analyst Says Bank of America Corp., American Express Co. and JPMorgan Chase & Co. may face further credit- card defaults as benefits from income-tax refunds wane and unemployment rises, analysts said.
Accounting changes at the consolidating Big Finance subsidiaries of the Federal Government mean as much as the intergovernment bonds transfers that supposedly are going to finance Social Security payments for future retirees. Facts are stubborn things and don't look so hot.
If the stock market has definitively ended in the first week of March, it means that the worst economic and financial crisis since the Great Depression ended with a stock market downturn roughly half as long as the duration between the March 2000 peak and the winter 2003 true stock market bottom, which was associated with the mildest possible recession.
Econblog Review's viewpoint is that the ongoing worst post-Great Depression fall in profits and dividends, and the first fall in total nominal wages since then as well, along with an increasingly less pessimistic Fed still predicting that the economy needs ultra-low interest rates for an extraordinarily long time, argues for caution amongst investors.
The stock market really does not know a lot about the future. Consider: 10 months ago, AIG sold for 40 times what it sells for now. CIT and Fannie Mae sold for 30 times their current prices. In fact, CIT sold for 10 times its current stock price within the past 3 months, losses and current conditions notwithstanding.
Recent data suggest that job market conditions are not improving in the United States and other advanced economies. In the U.S., the unemployment rate, currently at 9.5%, is poised to rise above 10% by the fall. It should peak at 11% some time in 2010 and remain well above 10% for a long time. The unemployment rate will peak above 10% in most other advanced economies (especially Europe and Japan), too, where social safety nets are broader and thus leading to less short term job losses and pain, but where the effects of the crisis on growth have been even more severe than the U.S.
Here is the conclusion of Roubini's post:
Little wonder, then, that we are now witnessing a significant correction in equity, credit, and commodities markets. The irrational exuberance that drove a three-month bear-market rally in the spring is now giving way to a more sober realization among investors that the global recession will not be over until year end, that the recovery will be weak and well below trend, and that the risks of a double-dip W-shaped recession are rising. The alleged green shoots turned to be yellow weeds and – unless policy makers figure out a sensible medium term exit strategy for monetary and fiscal policy – they may turn into brown manure.
The Bloomberg headline completely misrepresents Roubini's current views.
The second topic today relates to the unemployment numbers. Supposedly these were good, with seasonally adjusted claims dropping a lot. The problem is that the raw data show a substantial worsening of these claims, consistent with both anecdotal and data-driven evidence that the economy is at best stalling and at worst is dipping downward again. Here is the data (compliments of Credit Writedowns for the circles:
Anyone can easily see that the NSA initial claims have risen from 559,857 on Jun 27 to 667, 534 on July 11.
Insured unemployment rose apace. The entire release can be found by clicking HERE.
The seasonal adjustments are off primarily due to the extraordinarily early cutbacks at the auto manufacturers, and potentially at some early hiring there as well.
Here are some other headlines from Bloomberg.com today:
Commercial Paper Falls Most Ever as ConEd Sells Bonds (Update1) The U.S. commercial paper market, the cheapest source of corporate cash, is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co.
Schumer Fees on Insurers May Deplete Profit, Push Up Premiums A Senate demand for at least $75 billion in fees on U.S. health insurers over a decade may raise premiums for people who have insurance while erasing much of the $13 billion in annual profit earned by the industry.
Credit-Card Defaults May Rise as Tax Refunds Wane, Analyst Says Bank of America Corp., American Express Co. and JPMorgan Chase & Co. may face further credit- card defaults as benefits from income-tax refunds wane and unemployment rises, analysts said.
Accounting changes at the consolidating Big Finance subsidiaries of the Federal Government mean as much as the intergovernment bonds transfers that supposedly are going to finance Social Security payments for future retirees. Facts are stubborn things and don't look so hot.
If the stock market has definitively ended in the first week of March, it means that the worst economic and financial crisis since the Great Depression ended with a stock market downturn roughly half as long as the duration between the March 2000 peak and the winter 2003 true stock market bottom, which was associated with the mildest possible recession.
Econblog Review's viewpoint is that the ongoing worst post-Great Depression fall in profits and dividends, and the first fall in total nominal wages since then as well, along with an increasingly less pessimistic Fed still predicting that the economy needs ultra-low interest rates for an extraordinarily long time, argues for caution amongst investors.
The stock market really does not know a lot about the future. Consider: 10 months ago, AIG sold for 40 times what it sells for now. CIT and Fannie Mae sold for 30 times their current prices. In fact, CIT sold for 10 times its current stock price within the past 3 months, losses and current conditions notwithstanding.
In the meantime, breaking news is that IBM has just issued its quarterly report. Sales missed lowered estimates by $300 M and were 13% or so below 2008 sales. Earnings were up due to cost-cutting. This is the same old story. In a bear market with truly excessive pessimism, the same IBM report would be taken negatively and the brave ones would be the buyers. Now, the stock is up post-market on the news and the braver ones are the sellers (if they are long the stock) or the short sellers.
Meanwhile, Wal-Mart and McDonald's cannot get out of their own way. These stocks reflect the average U. S. consumer's buying power (WMT) and the U. S. and global consumer's buying/eating power. Should Wal-Mart break to a new low if stocks mosey downward this summer, that could be a very bad sign.
Copyright (C) Long Lake LLC 2009
Sunday, May 31, 2009
Up McDonald's, Down Starbucks
One day in high school, all English classes subjected their students to an unannounced 100-word spelling test. The teacher read the words out; the students tried to write them down with the correct spelling. After the test was over, we exchanged papers with the student in an adjacent desk for grading. That completed, my friend (who had graded me) looked at me with amazement. What was up? 100% correct. He was floored. And he had known me for years. For me, it was no big deal. I had gone through the entirety of second grade with weekly spelling tests with no misspellings the entire year.
That and 25 cents (in those days) would get you on the subway. No big deal. (This sort of photographic memory would, however, come in handy tackling 2000-page texts in medical school.)
The above said, how on earth could I be interested in the stock of a company with a descriptive Web page titled Havin' Fun, when the heading of the page misspells Havin' as Havin? (Apostrophes count!)
Well, chalk it up to the decline of standards in this country.
More important than spelling is the buzz on the street.
Yesterday I was walking on a country street and talking with my friend, who is a restaurateur, about the investment merits of McDonald's (the "Havin' Fun" company). MCD's 1- and 2-year stock charts show no sign of the bear market, the stock yields 3 1/2%, the price-earnings ratio is reasonable, most sales are generated in foreign lands, and eating never goes out of style. Is that good enough to justify putting a lot of money in the stock? Not necessarily. As with Apple when it surged, a catalyst helps a lot. And it looks as though McDonald's has a catalyst to grow sales and earnings and to provide the very important theme to attract new investors.
As stated, I was pointing out that thinking in an old-fashioned way about actually marrying a stock rather than what has become the fool's game of trading (since the computers are smarter than you and less predictable), MCD, as a well-run growing company the fractional ownership of which yields more than cash and as much as a 10-year Treasury bond is interesting.
A voice interrupted from behind. A couple had been walking behind us and ventured to inform us that they had given up Starbucks' coffee for that of McDonald's. They said that McDonald's new line of espresso-based coffee drinks (McCafe) is superb. Not just good, but great. The local McDonald's, they said, is jammed full at 8 AM with espresso drinkers.
You should know that the specific part of America where we were strolling is isolated and upper crust enough that McDonald's is not a typical source of nutrition for the occasional fellow walker one may encounter from time to time.
That's good enough for me. In this modern industrial depression, luxury coffee remains affordable to many. "Mickey D" gives you a buzz, and is catching one. It is about as far from the Merchants of Debt as can be (until relatively recently, it did not even accept credit cards).
Buy and hold.
For the nonce.
Copyright (C) Long Lake LLC 2009
That and 25 cents (in those days) would get you on the subway. No big deal. (This sort of photographic memory would, however, come in handy tackling 2000-page texts in medical school.)
The above said, how on earth could I be interested in the stock of a company with a descriptive Web page titled Havin' Fun, when the heading of the page misspells Havin' as Havin? (Apostrophes count!)
Well, chalk it up to the decline of standards in this country.
More important than spelling is the buzz on the street.
Yesterday I was walking on a country street and talking with my friend, who is a restaurateur, about the investment merits of McDonald's (the "Havin' Fun" company). MCD's 1- and 2-year stock charts show no sign of the bear market, the stock yields 3 1/2%, the price-earnings ratio is reasonable, most sales are generated in foreign lands, and eating never goes out of style. Is that good enough to justify putting a lot of money in the stock? Not necessarily. As with Apple when it surged, a catalyst helps a lot. And it looks as though McDonald's has a catalyst to grow sales and earnings and to provide the very important theme to attract new investors.
As stated, I was pointing out that thinking in an old-fashioned way about actually marrying a stock rather than what has become the fool's game of trading (since the computers are smarter than you and less predictable), MCD, as a well-run growing company the fractional ownership of which yields more than cash and as much as a 10-year Treasury bond is interesting.
A voice interrupted from behind. A couple had been walking behind us and ventured to inform us that they had given up Starbucks' coffee for that of McDonald's. They said that McDonald's new line of espresso-based coffee drinks (McCafe) is superb. Not just good, but great. The local McDonald's, they said, is jammed full at 8 AM with espresso drinkers.
You should know that the specific part of America where we were strolling is isolated and upper crust enough that McDonald's is not a typical source of nutrition for the occasional fellow walker one may encounter from time to time.
That's good enough for me. In this modern industrial depression, luxury coffee remains affordable to many. "Mickey D" gives you a buzz, and is catching one. It is about as far from the Merchants of Debt as can be (until relatively recently, it did not even accept credit cards).
Buy and hold.
For the nonce.
Copyright (C) Long Lake LLC 2009
Wednesday, May 20, 2009
14 TRILLION . . . CALORIES
When financially-oriented souls think of the number 14 trillion, they usually think of U. S. GDP. They may also with good reason think of it as the stated Federal deficit plus the amount pledged to support what's left of the financial system.
However, another estimate of the importance of 14 trillion is the number of calories Americans would need to shed in order to get to some semblance of normal weight.
This number can be estimated as follows. 300 M Americans X 15 lbs overweight (or more) X 3500 calories/pound gets one there, plus a little for good measure.
What does this number have to do with an economics post?
Think of the outperformance of McDonald's vs. Wal-Mart. McDonald's stock is the best performer of the Dow 30 over the past 24 months, having returned about 10% in that time frame. Wal-Mart sells what are arguably more necessary items than MCD, yet its stock price keeps eroding. Today, MCD got a lift because an analyst touted the rollout of its premium espresso/cappuccino line.
It would seem that despite a poor economy, Americans are more hooked on junk food and sugary coffee drinks than on the low-margined necessities that Wal-Mart sells.
Copyright (C) Long Lake LLC 2009
However, another estimate of the importance of 14 trillion is the number of calories Americans would need to shed in order to get to some semblance of normal weight.
This number can be estimated as follows. 300 M Americans X 15 lbs overweight (or more) X 3500 calories/pound gets one there, plus a little for good measure.
What does this number have to do with an economics post?
Think of the outperformance of McDonald's vs. Wal-Mart. McDonald's stock is the best performer of the Dow 30 over the past 24 months, having returned about 10% in that time frame. Wal-Mart sells what are arguably more necessary items than MCD, yet its stock price keeps eroding. Today, MCD got a lift because an analyst touted the rollout of its premium espresso/cappuccino line.
It would seem that despite a poor economy, Americans are more hooked on junk food and sugary coffee drinks than on the low-margined necessities that Wal-Mart sells.
Copyright (C) Long Lake LLC 2009
Wednesday, March 11, 2009
Wednesday Morning Market Commentary
Almost everyone wants the economy's and securities markets' pain to have ended with yesterday's explosive stock market rally, a "turnaround Tuesday" as suggested in yesterday morning's post.
For now, despite how extreme many sentiment, up-down ratios, distances from moving averages, etc. readings are, there is one lodestone that has kept yours truly in the bearish camp since July 2007, and that is the credit markets. The credit markets have predicted the economy and with variable lags, the stock market. Unfortunately, the trends in credit market reports today are reported as bad.
At Calculated Risk the title of last night's post, "More Credit Tightening", says enough. It references Bloomberg and the WSJ, the former re Libor creeping upward and the latter re worries about the quality of the corporate debt of financial holding companies.
Similarly, Bloomberg today reports:
Credit Market Cracks
While stocks around the world staged their biggest one-day rally of the year yesterday after Citigroup Inc. said it was having its best quarter since 2007, credit markets weakened.
The extra yield investors demand to own U.S. corporate bonds instead of Treasuries rose to 8.09 percentage points, the most since December and up from the low this year of 7.03 percentage points on Feb. 11, according to Merrill Lynch & Co. index data.
Also, the McDonald's indicator shows that the stock not only has quasi-collapsed, but MCD failed to participate in yesterday's rally. What one wants to see, as in the bottoming process in 1982 and 2002, are stocks with good relative strength that also show leadership on the rallies.
Similarly though lagging, gold (and its poor relation silver) continues to act "heavy". While I believe that everyone who can afford it should physically own some gold, I suspect that there is substantial downside short-term risk in gold. Intermediate- to long-term, the thinking here is different.
Re Treasuries, they continue to trade within the new, lower trading range established in the second half of last year, despite all the new supply. Five-to-ten year T-notes could be interesting speculations for those willing to sell into price strength or hold till maturity.
Getting back to stocks: although my emotions push me to "put cash to work", be "bullish on America", and other such platitudinous stuff, my head says: keep to the plan. Stay with what is working. From a market perspective, the Yamada big picture take of a structural bear market has been working (as discussed here recently). From a fundamental standpoint, listening to the credit markets has been working. Stocks may go anywhere, including sharply upwards, but without strength in the credit markets any rally will likely not be a moon shot.
Copyright (C) Long Lake LLC 2009
Monday, March 2, 2009
Debt Watch
"Things they do look awful c-c-cold (Talkin' 'bout my generation)
Yeah, I hope I die before I get old (Talkin' 'bout my generation)"
-The Who, "My Generation"
The babies born in the 1910s and 1920s lived in such dread of another Great Depression that they acted in such a way that, despite periodic fears of one, it never occurred.
And due to Social Security and Medicare, those of that era still alive are relatively well protected from the current economic mess.
The post-WW II "Boomer" generation took prosperity, including guns and butter, for granted. Too many people in government, the media, the economics profession, and in business drank the permanent prosperity Kool-Aid that all sense of history was dispelled.
A rickety financial structure of every-increasing indebtedness was created, with repeated bank crises, along with the greatest spreading out of military personnel the globe has ever seen from one country.
The "Merchants of Death" (arms dealers) were joined by "Merchants of Debt". The Boomer generation and the subsequent one were induced in a million ways to want own a stairway to heaven- but with borrowed funds. The generation without direct experience of the errors of the Great D is in danger of causing one for the same basic reason: debt piled upon debt.
We are seeing the historical theme of alternation of generations play out in a smaller scale in the stock market. For all the fraudulent aspects of valuation of "growth" stocks in the 1990s and to a lesser degree in this decade, at least the tech stocks had a culture of ownership as opposed to debt. Their VC's and managers knew how risky and cyclical the high-tech business is, and built companies with no or limited debt, such as Microsoft, Intel, and Cisco, along with a host of others. These companies may well continue to have overpriced stocks, but none of them have imploded as have the leveraged ones such as Fannie/Freddie, AIG, Citigroup, and many smaller ones. The tech stocks had their quasi-destruction in the 2000-2002/3 bear market; the theory of alternation of cycles suggests that they will lead the market up if and when we ever see an up-cycle again. The same theory of alternation of cycles suggests that real estate will sit out the next bull market in financial assets to an extent, which is to say that it will be pulled upward in the next strong bull market but just as with the NASDAQ, it will ultimately move back toward its bear market lows.
Now that everyone sentient fears another Depression, the long-term odds are finally more balanced toward equities than they have been for many years, no matter the historical fact that another 80% down from here would match the 1929-32 experience and therefore would not even represent a record bear market. One wants to follow stocks and markets that have structurally strong or relatively strong chart characteristics. This includes precious metals and well-run purveyors of timeless necessities, such as Wal-Mart and McDonald's.
Unfortunately, right now stock markets as a whole across the board look poised for collapse and are thus very risky. Vast amounts of debt need to be rationalized. Tragically, governments across the world and their central bank enablers persist in trying the hair-of-the-dog that bit you strategy by increasing debt loads rather than reducing them. If the owners of capital see governments finally reject the Merchants of Debt, they will put money to work and the world will see its next cycle of prosperity.
Unless that happens, investors in corporate stock and most bonds will do well to recall the immortal words of Chauncey Gardiner: "I like to watch".
Copyright (C) Long Lake LLC 2009
Wednesday, February 25, 2009
Nowhere to Run, Nowhere to Hide
The markets continue to be uninspiring at best. Any hope that the President's speech to Congress last night would provide an uplift to any market was dashed. Not only did stocks sell off, they did so in the worst way, losing support both in the AM and into the close. A familiar pattern continues, with rotation occurring while the overall market trends lower. For example, HMO stocks were weak all day and weakened into the close. Gold and silver moved lower today after being higher at mid-day. Unlike the explosive move that Treasuries had last fall, gold is getting close to the anniversary of its all-time high. GLD has had about a zero total return over the past 12 months and thus has only been a relative-strength story. SLV is a worse performer; as silver is not really a monetary metal, its strength the past few months leads me to be skeptical not only of its move but that of gold, as well.
Within stocks, the McDonald's "indicator" is flashing red. The stock, the second-best performer among the Dow 30 last year, has a miserable short- and intermediate-term chart. An up-move to 57-58 will be met with supply from chartists. WMT has a down-chart in a more advanced state of breakdown. And these two companies are the best in breed amongst the Dow given the poor economies worldwide. Safe-haven stocks such as pharma companies look terrible, including stalwarts such as J&J. Strength today in P&G and AT&T follows a poor recent performance from them. More of the same bear market action, boringly and depressingly. Where is there an end of it, the silent wailing?
Treasuries have a poor technical configuration, but at least this is a seasonally weak time of year for them.
Meanwhile, the ranks of bears is shrinking as the markets deteriorate. Robert Prechter has removed his bear shirt and called for a sharp up-move in stocks. After the Obama victory, a number of other prominent bears such as Bill Fleckenstein turned somewhat bullish. The more the bears drop out while markets deteriorate, the more I want to think that something is wrong that these experienced pros are missing, and I don't want to be exposed to the downside action until I find out what they don't know. We all know that a stock market that has dropped so far, so fast can shoot upward at any time. We just don't know why it doesn't do so.
Technically and fundamentally, matters are a mess. The Administration and the Fed present somewhat coordinated strategies that present no coherent front and appear to leave Citi and its brethren zombiefied. Gold and silver appear to have been sold to the public a bit aggressively. Treasuries are beginning to have credit risk priced in and certainly have no shortage of supply. As for stocks: if the Dow 30 or the S&P 500 were a single stock, and you evaluated it on the basis of earnings, earnings growth, stock chart, and underlying hard assets (ignoring intangibles and goodwill), you would conclude that at best it was a trading vehicle, not a buy-and-hold type of stock.
The only one of the above that can be ascribed to the new President is the supply of Treasuries. It just may be that it is, from the standpoint of markets, 1931 or early 1974, and what is going to happenwhat happened will/would have happened more or less no matter who occupies/occupied the Presidency.
When money leaves all three major asset classes: common stocks, precious metals, and Treasuries on the same day, as it did today, that suggests it went to cash.
Consider doing the same.
Copyright (C) Long Lake LLC 2009
Within stocks, the McDonald's "indicator" is flashing red. The stock, the second-best performer among the Dow 30 last year, has a miserable short- and intermediate-term chart. An up-move to 57-58 will be met with supply from chartists. WMT has a down-chart in a more advanced state of breakdown. And these two companies are the best in breed amongst the Dow given the poor economies worldwide. Safe-haven stocks such as pharma companies look terrible, including stalwarts such as J&J. Strength today in P&G and AT&T follows a poor recent performance from them. More of the same bear market action, boringly and depressingly. Where is there an end of it, the silent wailing?
Treasuries have a poor technical configuration, but at least this is a seasonally weak time of year for them.
Meanwhile, the ranks of bears is shrinking as the markets deteriorate. Robert Prechter has removed his bear shirt and called for a sharp up-move in stocks. After the Obama victory, a number of other prominent bears such as Bill Fleckenstein turned somewhat bullish. The more the bears drop out while markets deteriorate, the more I want to think that something is wrong that these experienced pros are missing, and I don't want to be exposed to the downside action until I find out what they don't know. We all know that a stock market that has dropped so far, so fast can shoot upward at any time. We just don't know why it doesn't do so.
Technically and fundamentally, matters are a mess. The Administration and the Fed present somewhat coordinated strategies that present no coherent front and appear to leave Citi and its brethren zombiefied. Gold and silver appear to have been sold to the public a bit aggressively. Treasuries are beginning to have credit risk priced in and certainly have no shortage of supply. As for stocks: if the Dow 30 or the S&P 500 were a single stock, and you evaluated it on the basis of earnings, earnings growth, stock chart, and underlying hard assets (ignoring intangibles and goodwill), you would conclude that at best it was a trading vehicle, not a buy-and-hold type of stock.
The only one of the above that can be ascribed to the new President is the supply of Treasuries. It just may be that it is, from the standpoint of markets, 1931 or early 1974, and what is going to happenwhat happened will/would have happened more or less no matter who occupies/occupied the Presidency.
When money leaves all three major asset classes: common stocks, precious metals, and Treasuries on the same day, as it did today, that suggests it went to cash.
Consider doing the same.
Copyright (C) Long Lake LLC 2009
Wednesday, February 18, 2009
Wesnesday Morning Commentary
Some day, good news may be released from solitary confinement.
Here is today's Bloomberg.com "Breaking News" (ignore hyperlinks to each article):
•GM Seeks Up to $16.6 Billion in New U.S. Aid, Plans 47,000 More Job Cuts
•Stanford Attorney's Withdrawal `Screams Fraud,' Spurred SEC to Take Action
•MBIA Forms New Municipal-Bond Insurance Company as Part of Restructuring
•U.S. Stock-Index Futures Rise; Citigroup, JPMorgan, General Motors Advance
•Hedge Fund Managers Pressed to Consolidate After Record Losses Erode Fees
•Immelt Waives Bonus as GE Leaves Chief's Salary Unchanged at $3.3 Million
•Berkshire Cuts J&J, Procter & Gamble Stakes as Buffett Favors Fixed Income
•Obama Says Afghan War Is `Still Winnable,' Will Send 17,000 More Soldiers
•California Senate Deadlocked on $14 Billion Tax Increase to Repair Budget.
A Bloomberg video caption quotes a man from a financial company saying that investing in banks is like "gambling". Econblog Review has been saying for some time that investing in stocks in general is for gamblers. At least the Street is catching up to reality. When it gets there, it will probably overshoot to be overly pessimistic in its public pronouncements. Then it will be safe to get back in the stock water.
Here are articles that Naked Capitalism links to (go to NC for links):
Stimulus Big Winner: Battery Manufacturing MIT Technology Review. Egad, I did a study on advanced batteries back in 1993 and got to drive a US manufactured electric car. And guess what? Looks like we ceded leadership to Asia.
Late Change in Course Hobbled Rollout of Geithner's Bank Plan Washington Post
After Manhattan’s Office Boom, a Hard Fall New York Times
Californian dream turns into nightmare Financial Times
Switzerland threatened with bankruptcy Ed Harrison
Adventures in Flackery, Private Jet Edition Felix Salmon
On the December TIC data Rachel Ziemba
Germany may rescue debt-laden EU members Telegraph. This is a big deal.
The news is legitimately bad. Switzerland of all countries threatened with national bankruptcy?
This is not a contrarian signal to buy stocks, however. Given negative price action, long-term topping action in the charts of the stock averages, and poor earnings momentum for the economy, only gamblers should be in the stock market. Presumably at some point the stock market will have a big upward move and people will point to how negative other people were at the bottom and will say to buy on the bad news. But that's easier said than done, the retrospectroscope being the only accurate diagnostic instrument.
Unfortunately, our own Big Mac indicator, the stock of McDonald's Corp. (MCD), has broken support in the 57 range. MCD has been both fundamentally and technically the best Dow 30 stock. Both on a fundamental and technical basis, stocks could fall much, much farther even if President Obama's feared "catastophe" is avoided. Valuations are nowhere close to trough valuations at other major bear market lows, even ignoring the horrors of 1932.
For some reason, the 30-year Treasury bond has been in great demand the last few days. Since we put in our call that the 10-year T-bond looked good at over 3%, the yield has fallen sharply to 2.63%. Geopolitically and "geo-economically", there has been little decoupling of the world from the U.S. and the U.S. financial institutions may be in less poor shape than their counterparts in Europe. Gold continues to compete with Treasuries for the safe haven funds and to have a strong technical chart.
The best hope for the future is that the productive capacity of the world is intact and still growing, and the globe is relatively peaceful. Thus anyone who would like to ride out this economic downturn in Tierra del Fuego, Bikini Atoll or almost anywhere else in the world can get there safely.
Personally, I prefer living in areas suffering from real estate busts.
Here is today's Bloomberg.com "Breaking News" (ignore hyperlinks to each article):
•GM Seeks Up to $16.6 Billion in New U.S. Aid, Plans 47,000 More Job Cuts
•Stanford Attorney's Withdrawal `Screams Fraud,' Spurred SEC to Take Action
•MBIA Forms New Municipal-Bond Insurance Company as Part of Restructuring
•U.S. Stock-Index Futures Rise; Citigroup, JPMorgan, General Motors Advance
•Hedge Fund Managers Pressed to Consolidate After Record Losses Erode Fees
•Immelt Waives Bonus as GE Leaves Chief's Salary Unchanged at $3.3 Million
•Berkshire Cuts J&J, Procter & Gamble Stakes as Buffett Favors Fixed Income
•Obama Says Afghan War Is `Still Winnable,' Will Send 17,000 More Soldiers
•California Senate Deadlocked on $14 Billion Tax Increase to Repair Budget.
A Bloomberg video caption quotes a man from a financial company saying that investing in banks is like "gambling". Econblog Review has been saying for some time that investing in stocks in general is for gamblers. At least the Street is catching up to reality. When it gets there, it will probably overshoot to be overly pessimistic in its public pronouncements. Then it will be safe to get back in the stock water.
Here are articles that Naked Capitalism links to (go to NC for links):
Stimulus Big Winner: Battery Manufacturing MIT Technology Review. Egad, I did a study on advanced batteries back in 1993 and got to drive a US manufactured electric car. And guess what? Looks like we ceded leadership to Asia.
Late Change in Course Hobbled Rollout of Geithner's Bank Plan Washington Post
After Manhattan’s Office Boom, a Hard Fall New York Times
Californian dream turns into nightmare Financial Times
Switzerland threatened with bankruptcy Ed Harrison
Adventures in Flackery, Private Jet Edition Felix Salmon
On the December TIC data Rachel Ziemba
Germany may rescue debt-laden EU members Telegraph. This is a big deal.
The news is legitimately bad. Switzerland of all countries threatened with national bankruptcy?
This is not a contrarian signal to buy stocks, however. Given negative price action, long-term topping action in the charts of the stock averages, and poor earnings momentum for the economy, only gamblers should be in the stock market. Presumably at some point the stock market will have a big upward move and people will point to how negative other people were at the bottom and will say to buy on the bad news. But that's easier said than done, the retrospectroscope being the only accurate diagnostic instrument.
Unfortunately, our own Big Mac indicator, the stock of McDonald's Corp. (MCD), has broken support in the 57 range. MCD has been both fundamentally and technically the best Dow 30 stock. Both on a fundamental and technical basis, stocks could fall much, much farther even if President Obama's feared "catastophe" is avoided. Valuations are nowhere close to trough valuations at other major bear market lows, even ignoring the horrors of 1932.
For some reason, the 30-year Treasury bond has been in great demand the last few days. Since we put in our call that the 10-year T-bond looked good at over 3%, the yield has fallen sharply to 2.63%. Geopolitically and "geo-economically", there has been little decoupling of the world from the U.S. and the U.S. financial institutions may be in less poor shape than their counterparts in Europe. Gold continues to compete with Treasuries for the safe haven funds and to have a strong technical chart.
The best hope for the future is that the productive capacity of the world is intact and still growing, and the globe is relatively peaceful. Thus anyone who would like to ride out this economic downturn in Tierra del Fuego, Bikini Atoll or almost anywhere else in the world can get there safely.
Personally, I prefer living in areas suffering from real estate busts.
Friday, February 13, 2009
Gold, McDonald's, and Stocks for the Long Run
The above images are from Yahoo-Finance.
They compare the price action of McDonald's stock and the exchange-traded fund for gold, GLD over 5, 2 and 1 year periods.
Some time ago, Forbes Magazine introduced the Big Mac Index, which correlated prices of a Big Mac in different cities in different countries. This basically utilized a Big Mac as a form of currency, just as gold bulls assert that gold is money.
Some time ago, Forbes Magazine introduced the Big Mac Index, which correlated prices of a Big Mac in different cities in different countries. This basically utilized a Big Mac as a form of currency, just as gold bulls assert that gold is money.
Interesting to see how gold and McDonald's have traded so closely for so many different time periods. Of course, GLD pays no dividend, while MCD has a significant dividend. These differences add up and provide most of the intellectual support for the "stocks for the long run" hypothesis.
So far as stocks for the long run go, Credit Suisse (click for link) has an advertisement for stocks with the veneer of academia. It goes to great lengths to come to the tortured conclusion that stocks are about as cheap as ever. The argument is that stocks over many years have returned 6.2% over inflation, and that the current mild deviation from that trendline shows that we're near a bottom. Yet if the ultimate return for stocks is a mere 5% over trendline, then stocks are way overpriced. On price to dividend, price to tangible book value, price to earnings metrics, etc., stocks are nowhere near as cheap as they have been at major market bottoms.
Also, the CS writeup assumes reinvestment of dividends for stocks but almost certainly does not account for reinvestment of income from the competing asset classes it looks at, bonds and cash in the bank. And the fairer comparator to stocks should not be government bonds but rather corporate bonds. Finally, in prior years, stocks were expensive to buy and sell, whereas bonds and cash were not.
Also, the CS writeup assumes reinvestment of dividends for stocks but almost certainly does not account for reinvestment of income from the competing asset classes it looks at, bonds and cash in the bank. And the fairer comparator to stocks should not be government bonds but rather corporate bonds. Finally, in prior years, stocks were expensive to buy and sell, whereas bonds and cash were not.
It's sad to see the same hucksters trying to persuade the same people at this time that the stock market is cheap. Compared to what corporate debt yields, stocks are not cheap now. Government bonds are not cheap, gold at $930 is not cheap, cash yielding nothing is not cheap; not much is cheap amongst financial assets. Perhaps oil in the $30s per barrel will be proven cheap.
We'll see: that's what makes the markets interesting.
Copyright (C) Long Lake LLC 2009
Wednesday, February 11, 2009
Not Lovin' It Cause They're Still Doin' It
STOCKS
The only Dow 30 stock to be up year on year is McDonald's. This blog has highlighted MCD several times this year as one to watch. Unfortunately, it has begun to break down on the charts. It declined a bit today as the Dow rallied a bit and has broken to a more than one-month price low despite a recent positive earnings surprise and rising earnings estimates for both 2009 and 2010. When the leader starts rolling over despite good news, beware. Perhaps the downmarket move from Starbucks discussed here yesterday, and related competition, is behind the growing weakness in the stock.
Meanwhile, the head of the International Monetary Fund has said that the U.S. and most of the rich countries are in a depression, not recession. What is the natural trend of stock prices in a depression? Down indeed. Trying to pick a bottom remains a job for gamblers.
For example, Procter & Gamble stock has fallen almost by 1/3 in 1/2 year, to about a 5-year low. Poof! Five years worth of stock gains vanished. And that's with earnings having exceeded expectations most of that time. Let's see what happens with continued earnings estimate reductions. If this stock continues falling, then at some point analysts will point out what this blog has already detailed, which is that P&G has a large negative tangible book value. So, what is the company worth on a fundamental basis? The answer is that no one has any idea. Your guess is probably better than that of an analyst, who talks to management and therefore is continuously spoon-fed garbage.
BONDS
In other markets, this blogger put his money where his mouth was and indeed purchased 10-year Treasury bonds two days ago at what for now is the peak of the large correction/bear market in yields. The theory is that Treasuries are seriously hated and we may be at a peak in that hatred. Also, barring true Weimar Republic/Zimbabwean hyperinflation or out-and-out default, there is no such thing as a bubble in Treasuries the way there was a bubble in Internet stocks in 1999. Hold to maturity if you must and you will get the stated yield. In the meantime, I purchased a zero-coupon security, which both has a higher yield than a par bond and has greater price appreciation for every up-move in bond prices. We'll see. Not that that anyone has forgotten around these parts that going back to FDR, a Democratic President combined with a Democratic Congress have generally been bad news for bond prices. Yet the feeling remains that this is more like 1931, with more Great Recession/Minor Depression action yet to unfold, and that at some unpredictable point this year, investors and speculators will get scared again big-time and rush back to Treasuries, temporarily ignoring the tsunami of debt issuance. In that scenario, they will dump corporates and munis, just as they did last year. It should be interesting.
GOLD
Gold has gone to a six-month high. For the first time in some time, the 12-month return on gold as judged by the GLD stock is positive. Despite the positive price action and all the reasons to fear inflation, the fact is that deflation is the order of the day. Furthermore, there is so much current slack in the U.S. and global economy that even if we are at the bottom of the economic cycle, historically inflation diminishes as recovery begins. Extra production can come on at very low marginal cost, so the per-unit cost of production drops as demand increases.
(That includes labor costs.) So re gold, there is little conviction here about its next major move, but the suspicion remains that deflationary fundamentals could push it a lot lower. That would surprise the greatest number of people, it would appear, and markets love to do that, don't they?
OTHER
The Japanese stock market would look like a screaming buy if its chart were turned upside down and if the economic data had positive instead of negative signs. Japan's stocks are a disaster and represent a cautionary example for the U.S. The Japanese stock market is roughly 20 years from its peak. It is down about 80% nominally. Japanese Government bonds yield less than the dividend yield on stocks, but that was also the case months ago, when stocks were much higher. The Nikkei 225 has broken below its declining 50 day moving average and is down 2% in the morning session in Tokyo. There is no obvious bottom for the Japanese stock market.
The recent established order, the nouveau ancien regime, is crumbling. This order is/was based at its core on financialization of anything and everything that could be financialized. Enron did it. So did and do IBM, P&G, AT&T, and especially GE. Even hawkers of precious metals, God forbid, did it. Caveat emptor and caveat "holder".
For me, it's enough to recall Cole Porter: "Birds do it; bees do it; even educated fleas do it; let's do it, let's fall in love".
But don't fall in love with any financial product. For now, purchases should be with a renter's mindset.
Copyright (C) Long Lake LLC 2009
The only Dow 30 stock to be up year on year is McDonald's. This blog has highlighted MCD several times this year as one to watch. Unfortunately, it has begun to break down on the charts. It declined a bit today as the Dow rallied a bit and has broken to a more than one-month price low despite a recent positive earnings surprise and rising earnings estimates for both 2009 and 2010. When the leader starts rolling over despite good news, beware. Perhaps the downmarket move from Starbucks discussed here yesterday, and related competition, is behind the growing weakness in the stock.
Meanwhile, the head of the International Monetary Fund has said that the U.S. and most of the rich countries are in a depression, not recession. What is the natural trend of stock prices in a depression? Down indeed. Trying to pick a bottom remains a job for gamblers.
For example, Procter & Gamble stock has fallen almost by 1/3 in 1/2 year, to about a 5-year low. Poof! Five years worth of stock gains vanished. And that's with earnings having exceeded expectations most of that time. Let's see what happens with continued earnings estimate reductions. If this stock continues falling, then at some point analysts will point out what this blog has already detailed, which is that P&G has a large negative tangible book value. So, what is the company worth on a fundamental basis? The answer is that no one has any idea. Your guess is probably better than that of an analyst, who talks to management and therefore is continuously spoon-fed garbage.
BONDS
In other markets, this blogger put his money where his mouth was and indeed purchased 10-year Treasury bonds two days ago at what for now is the peak of the large correction/bear market in yields. The theory is that Treasuries are seriously hated and we may be at a peak in that hatred. Also, barring true Weimar Republic/Zimbabwean hyperinflation or out-and-out default, there is no such thing as a bubble in Treasuries the way there was a bubble in Internet stocks in 1999. Hold to maturity if you must and you will get the stated yield. In the meantime, I purchased a zero-coupon security, which both has a higher yield than a par bond and has greater price appreciation for every up-move in bond prices. We'll see. Not that that anyone has forgotten around these parts that going back to FDR, a Democratic President combined with a Democratic Congress have generally been bad news for bond prices. Yet the feeling remains that this is more like 1931, with more Great Recession/Minor Depression action yet to unfold, and that at some unpredictable point this year, investors and speculators will get scared again big-time and rush back to Treasuries, temporarily ignoring the tsunami of debt issuance. In that scenario, they will dump corporates and munis, just as they did last year. It should be interesting.
GOLD
Gold has gone to a six-month high. For the first time in some time, the 12-month return on gold as judged by the GLD stock is positive. Despite the positive price action and all the reasons to fear inflation, the fact is that deflation is the order of the day. Furthermore, there is so much current slack in the U.S. and global economy that even if we are at the bottom of the economic cycle, historically inflation diminishes as recovery begins. Extra production can come on at very low marginal cost, so the per-unit cost of production drops as demand increases.
(That includes labor costs.) So re gold, there is little conviction here about its next major move, but the suspicion remains that deflationary fundamentals could push it a lot lower. That would surprise the greatest number of people, it would appear, and markets love to do that, don't they?
OTHER
The Japanese stock market would look like a screaming buy if its chart were turned upside down and if the economic data had positive instead of negative signs. Japan's stocks are a disaster and represent a cautionary example for the U.S. The Japanese stock market is roughly 20 years from its peak. It is down about 80% nominally. Japanese Government bonds yield less than the dividend yield on stocks, but that was also the case months ago, when stocks were much higher. The Nikkei 225 has broken below its declining 50 day moving average and is down 2% in the morning session in Tokyo. There is no obvious bottom for the Japanese stock market.
The recent established order, the nouveau ancien regime, is crumbling. This order is/was based at its core on financialization of anything and everything that could be financialized. Enron did it. So did and do IBM, P&G, AT&T, and especially GE. Even hawkers of precious metals, God forbid, did it. Caveat emptor and caveat "holder".
For me, it's enough to recall Cole Porter: "Birds do it; bees do it; even educated fleas do it; let's do it, let's fall in love".
But don't fall in love with any financial product. For now, purchases should be with a renter's mindset.
Copyright (C) Long Lake LLC 2009
Thursday, January 29, 2009
Market Update
First, the good news. At Calculated Risk, CR summarizes the Credit Crisis Indicators this evening. The short-term financials are getting better.
The bad news is that all this was the run-up to and of course one of the causations of a vicious global economic downturn. While every recession is scary, the current one is setting various records. Simply scour CR's posts this week, and you will find records ranging from the known housing issues to obscure ones such as trucking tonnage and air cargo volumes. And of course the world is experiencing the lowest short-term rates in multiple countries at least in the past 300+ years. Lots of major bear markets have not had much credit crisis. But we'll take any improvement where we can get it.
The bad news is that all this was the run-up to and of course one of the causations of a vicious global economic downturn. While every recession is scary, the current one is setting various records. Simply scour CR's posts this week, and you will find records ranging from the known housing issues to obscure ones such as trucking tonnage and air cargo volumes. And of course the world is experiencing the lowest short-term rates in multiple countries at least in the past 300+ years. Lots of major bear markets have not had much credit crisis. But we'll take any improvement where we can get it.
That said, the markets are at a most interesting juncture. Here's a summary of the 3 major markets covered here.
1. Treasuries. Currently they are in a correction. The 10-year yield bottomed near 2%. This was a historic breakout in price of the continuous bond. In the last cycle, the 10-year bottomed intra-day around 3.1%. It is now around 2.8%. If it hits 3.1%, that would represent a 50% increase in rates from the bottom. That's about as much as a short-term jump as one ever sees and could represent an attractive purchase, especially considering that this is a seasonally weak time of years for Treasuries and the talk is of an oversupply of Treasuries.
In the meantime, TIPS continue to price in deflation, there is excess capacity everywhere except in gold mining and the only real hiring anywhere is for people to handle unemployment claims.
Long Treasury yields did not bottom until about 19 years after the Crash of 1929.
Treasuries are in a primary bull market. There is near-universal belief that rates are way, way too low. Thus there is every possibility that the correct approach for at least a while longer is to buy a 5-10 year Treasury, make a real return against deflation or minimal inflation, and sell the bond in a year or two at a profit; or at the worst hold till maturity. Unlike the NASDAQ that paid no interest and considering the opportunity cost, is down much more than the raw numbers (from 5100 to 1500), Treasuries really do pay one to own them (remember, it's a bond!). So, all the talk of a bond bubble strikes me as incongruous. Overpriced, perhaps; a bubble: not quite.
2. Gold. The most intriguing market of them all. The gold bull Jesse of Jesse's Cafe Americain links to a Times online article titled "Gold price could treble if China divests dollars, warns mining boss". The article quotes Barrick Gold's chairman as scaring us that "there was even a possibility that central banks, including China’s, might start to switch from dollar holdings to gold, which could cause the price of the metal to treble." It seems that every time that chestnut is trotted out, a peak in the gold price is nigh.
The article goes on to point out that:
"Gold has been one of the best-performing assets of recent months, rising in value by nearly 17 per cent since late October even as the price of other commodities, such as oil and copper, has dropped sharply."
"Investors have bought heavily into physical bullion in the form of coins and bars, and physically backed assets, such as exchange-traded funds, as a safe store of value at a time of increased volatility in other asset prices."
Technically, gold is fairly strong, but its 200 day moving average is pointing down and has not crossed yet but an up-sloping 50 day ma. Gold has had an interesting correlation with the stock market during this bear: it has peaked out of phase with the stock market but made important bottoms with it (gold stayed up in October 2008 but crashed as the stock market made its November bottom). This pattern will continue until one day it will not.
So with the short-to-intermediate technicals inconclusive, the take here is that there is too much optimism in the gold price to suit us. Its outperformance vs. essentially all other physical commodities is breathtaking. India is in or near a recession, as is China, and these locales are huge buyers of gold, and are very price-sensitive. Most gold use remains for jewelry, and no one anywhere on the face of the earth is buying gold jewelry anymore (well, that's a slight exaggeration, but you get the point). So the most likely fundamental direction for the price of gold is to go straight down. Numerous nervous people have already placed their orders; the worst timer of the gold price, Barrick, is a raging bull; and its chairman, who should be in the background quietly accumulating gold or his company's stock, is out in public touting his wares.
Caveat emptor on Au. Adventurous sorts could look at purchasing puts, as this market could fall fast. However, gold is in a long-term bull market, so it's most interesting and most people should be on the sidelines unless they want to own physical gold as a true hedge.
3. Stocks. The single worst-looking of the three major markets remains general stocks. Stocks remain in a major bear market, with aggressive supply meeting every jump in prices. Wednesday's move up looks like one of many panicky short-covering rallies, with no follow-through, and with financial stocks continuing to erode. Most depressing is the action of McDonald's, the Dow leader and the only Dow stock to be at a higher price than 1 year ago. It recently "beat" the Street, which however was unimpressed. The technicals are deteriorating. There have been a series of lower highs since the early August high, though as well there have been higher lows. McDonald's almost has to lead a break-out of the general stock market higher. 14 months into a recession, even meeting expectations should ordinarily let a strong company with a high dividend yield squeeze the shorts and pop higher, but instead the stock acts a bit too "heavy" despite the "beat". If MCD goes the way of Wal-Mart and collapses, this would be very, very bad for the market as a whole. Traders and investors should watch MCD carefully.
There is no leadership anywhere. ConocoPhillips wiped out 2 years of earnings with a "one-time" charge of about 32 billion dollars (real money even for a bank), and happily its otherwise OK quarter was not rewarded, and the stock collapsed today.
GlaxoSmithKline, one of the original roll-ups in the pharmaceutical arena, is back to 1997 stock prices. In the last boom, its stock price never got near its 1999 high. Worse, it is trading as if it were a growth company at 12X tangible book value. Pfizer is being taken apart for its multiple sins of halving the dividend and perhaps going to the well one time too many with its emulation of GSK by becoming another roll-up (see Econblog Review's take on the merger, Pfizer Buys Wyeth: Layoffs Financed by You and Me).
GlaxoSmithKline, one of the original roll-ups in the pharmaceutical arena, is back to 1997 stock prices. In the last boom, its stock price never got near its 1999 high. Worse, it is trading as if it were a growth company at 12X tangible book value. Pfizer is being taken apart for its multiple sins of halving the dividend and perhaps going to the well one time too many with its emulation of GSK by becoming another roll-up (see Econblog Review's take on the merger, Pfizer Buys Wyeth: Layoffs Financed by You and Me).
Other medical stocks are providing little leadership, even on good news.
The education stocks that the unemployed go to in a recession are, too predictably to suit us here, strong; the quality of the rally off the November low has been poor.
"Defensive" consumer stocks such as Procter & Gamble have cyclically high operating and net profit margins, which have nowhere to go but down, as well as multi-year low tax rates, which can hardly go lower and therefore should have nowhere to go but up in a world where governments have higher priorities than some marginal extra profits accruing to sellers of staples.
The real geniuses such as Drs. Roubini and Taleb remain bearish, along with most others who "got it right".
And while stocks and headlines can move in quite opposite ways, the stock market is made up of companies which are, for the most part, quietly or not-so-quietly withering on the vine.
Under the earnings/price momentum Value Line-type system that has served this blogger so well over 3 decades of investing, if the stock market were a stock, it would be a 5 (lowest on a 1-5 scale) for "Timeliness". If the bottom has been seen, that would be great news. There's no need to risk your money on that hope.
Where does that leave an individual with new money to put to work?
Consult your financial advisor . . .
Copyright (C) Long Lake LLC 2009
Wednesday, January 21, 2009
The Economy as Predicted by Stocks and Inflation as Predicted by Gold
The following graph was taken from Jesse's Cafe Americain.
What is of special note is not only that CEO Business Confidence, per the Conference Board's Jan. 16 writeup, is at its lowest level ever (it began in 1976), but that a cursory review of the worst bear markets shown, the ones ending in 1982 and 2002/3, show CEO confidence rebounding significantly before the ultimate stock market bottom. In this case, I fully expect to see the equivalent of the perp walks seen at the end of the most recent bear market or the Pecora Commission of FDR's time.
To save you clicking on the report from the Conference Board, it's grim: basically no CEO saw improvement in his industry or general economic conditions. What is most disconcerting to me is that they still predicted price increases, though only 1% for the year ahead. This may be over-optimistic, however.
Next, please review the most stalwart of all Dow Industrials. McDonald's (MCD) has broken down. I take this to be big and bad news. "Mickey D" made a lower high recently below the September high. Its 50 day moving average is below its 200 day ma for the first time in a long time, and both look to be in danger of turning down. In terms of its own long-term valuation metrics, it is neither cheap nor expensive, and it appears to have a secure yield far above competing short-term money rates. Its products are almost necessities in a world where people are trying to work two jobs if they can find them. It is highly international. Despite today's up-move in the markets, all it could do was to rally to what is now chart resistance. What this may portend for the economy scares me. If the market has seen its bottom, it should have been holding up better and then should be poised to break out to new all-time highs. Perhaps it will, but it's acting opposite to that currently.
The best
Dow performer of 2008 was Wal-Mart. It is farther along the stock breakdown stage than MCD. Here is its chart. It moved down today. Perhaps Target is sharpening its pricing; I wouldn't know, but something appears amiss here. You would have been better off buying a Treasury security of any duration from 1 to 30 years than Wal-Mart one year ago, despite its nicely positive 2008 return. This, with MCD, is classic big bear market action. Bears wear out the bulls. In fact, one additional point relates to some uber-bears, such as Bill Fleckenstein.Last year, I read his book on Greenspan's bubbles. Mr. Fleckenstein publicly converted to the more-bull-than-bear camp late last year. I believe that the conversion that he announced and that of some other bears helped fuel the rally off the November lows. He announced that being bearish had simply become wearing on him. This is again, to me, classic big bear action. We generally get interested in markets because we are bullish on this or that. It is tough to be bearish; it's against a healthy emotional state.
But that's why quants use computers. Here at Econblog Review, we find it emotionally easier to basically ignore investing in the stock market when we don't like its looks, while following its twists and turns. Trying to make money on the downside is tough to do and tough on the spirit. We wish Mr. Fleckenstein very, very well, having admired his work and iconoclastic spirit for some time, but worry that his mini-conversion from the short-only camp was premature.
We all know that T-bonds have sold off lately, but the canary in the coal mine of inflation is gold. Gold, in the form of the GLD exchange-traded fund, looks to be in a critical technical position.The first thing to notice, though the image is a bit obscured, is that GLD has provided a negative total return over the past 12 months. You can't eat relative strength. The second is that there are four (4) price peaks, and each one is below the prior peak. So far, each price peak has been followed by a lower low. The price peaks are out of phase with the stock market price peaks, but interestingly the price lows are in phase.
Most recently, GLD bounced off its upsloping 50 day ma and rebounded near its downsloping 200 day ma. With T-bonds selling off today, if there were true inflation fears, GLD should have been up in follow-through to its recent significant short-term rally. That it was down slightly may mean something.
Every stock and every market of importance over the past year of which I am aware that has had this sort of pattern of lower highs and lower lows has failed to break out to the upside. If Dr. Roubini is correct along with the TIPS market, and the Roubini "stag-deflation" is in the cards, then the fundamentals for gold are poor and those for 2-5 year Treasuries are OK. Most gold is purchased for jewelry use, though much of that is in Asia where people where jewelry that is not highly engineered and therefore sells close to the bullion price and therefore serves as money as well as adornment. Nonetheless, I know NO ONE who is spending on fripperies lately, and I know people both with good jobs such as doctors and people with serious money.
Every stock and bond professional I know who "called" this stock bear and Treasury bull at least one year ago doesn't trust today's stock market bounce. They are divided on the prospects for inflation vs. deflation over the short and medium term, though there is no interest in betting on low inflation over the long term. They all believe that the stock market is headed for new lows.
Also, some long-term wealthy investors I know who have bought and held stocks individually or through non-Madoff truly high-quality managers have been selling stocks over the past year and have now decided to get further out of the market. These people were truly in the market for decades. They are dismayed by what they see happening. They may well have voted for Barack Obama, but nonetheless they are moving definitively away from stocks. It is certain that a short-term bounce in the stock market will not tempt these serious investors back to the stock market any time soon. Unless the collapse of the large financial institutions worldwide is miraculously revealed to have been a big joke, they are getting out and staying out for some time.
The stock market remains too risky for most people. It is OK to miss the bottom of the market should we have seen it last November. If the stock market were a stock, and it were ranked by a standard earnings and price momentum screen such as the one Value Line pioneered and that has been widely imitated, the stock market would scream "sell". Gold would be more of a "Neutral", but we remain both viscerally attracted to it as a concept but skeptical of its price prospects over the short term due both to fundamental and technical factors. Treasury bonds would be more like NASDAQ stocks of the late 1990s, which is to say glamor, but the fundamentals and basic chart patterns are both OK to bullish. Just as the stock bubble, including the large-cap S&P stocks of the late 1990s, sent sensible hugely successful investors into retirement because the were too sensible too early and too long, so might this Treasury bull destroy short-seller after short-seller before rolling over, finally having sucked in the public at large, which may finally come to believe in bonds for the long run just when the dawn of a long-term Treasury bear market is born.
Anyway, it's time to support the local economy and support our favorite local eatery. You can't eat either relative performance or computer pixels.
Copyright (C) Long Lake LLC 2009
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