PHYS is the symbol for a Canadian gold exchange-traded fund (ETF) with about $700 MM in gold assets (U. S. dollars). It came public this year as a new fund and has typically traded at about a 12% premium to net asset value (NAV). This premium reflects confidence that all the gold is physical, with no use of derivatives; high liquidity for trading purposes; claimed ability to be taxed at a capital gains rate rather than as a commodity sale; and the ability to withdraw the equivalent of a large bar (worth hundreds of thousands of dollars) as a form of redemption of one's shares in the ETF. (Please note that the last feature is a negative for small investors due to adverse tax consequences to existing shareholders should a large shareholder actually redeem. Currently I do not think there is enough appreciation in gold's price to make this feature important.)
In any case, the more typical 12% premium to NAV has recently and fairly suddenly dropped to 6.4%. Click HERE to view the webpage that shows data on how infrequently this ETF has traded under a 7% premium to NAV.
Having sold out of PHYS recently at a double-digit premium to NAV, I am long it again as of today. It's easy to see that at some point within the next 12 months gold being 7% higher simultaneous with this ETF regaining a 10% premium to NAV; the potential 7% price gain of gold (the metal) plus a 3-4% proposed gain in the premium to NAV would imply a 10-11% total return (minus the small expenses of running the fund and minus brokerage commissions; currently the bid-asked spread is one to two pennies, so that's irrelevant).
I continue to see a financial pendulum that may be swinging to restore gold's importance or even primacy in international and possibly national finance, with a higher real value relative to Federal Reserve notes than it now has.
Copyright (C) Long Lake LLC 2010
Monday, September 13, 2010
Sunday, September 12, 2010
Protecting Capital from Fed's Activities, Part 2: Focus on Silver
In the initial part of this series, I focused on gold as a way to protect capital from loss of purchasing power due to Federal Reserve policies, but also discussed silver (which has risen about 4% in price since then) and certain foreign currencies as ways for Americans to potentially protect their wealth by ownership of these assets.
In this post, the main topic will be silver. Here's some further background discussion before getting to silver specifically.
I am presenting herein my opinions and what I believe to be facts, but the facts have not been fact-checked and there may be some inadvertent errors, including typos; apologies if such proves to be the case.
The Federal Reserve has taken and continues to take extensive actions to keep short-term interest rates below the rate of general price rises in
the broad economy. It has done this in concert with the policies of the current and immediately prior administrations.
I believe that Fed-induced monetary inflation is likely to show itself via further general price increases, which will tend to accelerate under steady-state economic conditions.
The bogeyman of "deflation" has been scaring people into buying bonds after a 29 year bond bull market, and unlike Japan, where zero interest rates have taken hold with clear stability or even mild decline in consumer prices and therefore have not been adverse to savers, the same policy in the U. S. continues in force despite positive consumer price rises which are greater than the near-zero Fed interest rate policy.
The Fed has been deliberately costing savers money in real terms. It has been doing this while protecting stockholders and bondholders of financial companies.
I object to this policy (these policies) and believe that as in World War II, the full force of the government and the mainstream media has been marshalled to sell people debt instruments that the government (through a compliant central bank) intends in good measure to inflate away rather than repay in full and in good faith.
U. S. policy has been actually been quite inflationary from 1933 onward, with the exceptions of brief periods of Fed tightening; a good part of the 1950s, when there was both peace and a president who actually believed in balanced budgets; and with the partial exception of the early Volcker years as Fed head. Further, many people also don't realize how major the Iraq-Afghan/AfPak Wars are from a direct budgetary standpoint (even ignoring the indirect costs), and as with the Viet Nam War, Congress has made no attempt to fund the war by raising additional revenues. The Viet Nam War provided the final nail in the coffin of a gold-backed dollar (see Nixon, 1971 - closing the "gold window" for a unique take and HERE for a more thorough, standard take) and it helped lead to massive inflation. The Fed had begun accommodating first President Kennedy and then President Johnson monetarily ("stimulus") before prices were noticed to rise throughout the broad economy.
I think something similar is happening now.
President Johnson pursued a guns and butter approach, but it was small beer compared to current and recent policy. When LBJ escalated in Viet Nam, there was no Medicare and no Medicaid, and Social Security took in much more in taxes than it expended. Thus the money-printing has crossed the previously unthinkable threshold of direct Fed purchase of Federal government debt, something that was only supposed to happen "elsewhere". Not in America. But it has now happened twice. 2009; 2010. Sic transit gloria.
In that context, silver may be both a sensible addition to gold and foreign currencies for the part of a financial portfolio that attempts to preserve capital in real terms. This article does not represent investment advice. It also does not look at silver as "money", in contrast to the official monetary metal, gold.
The nearby chart (click on it to enlarge) shows silver prices in both real terms and in relation to gold over the centuries, beginning with 1344. Not shown are reasons why silver became less useful. These include the mass production of stainless steel "silverware" and, more recently, the advent of digital photography.
This chart demonstrates that silver's price has lost ground in real terms over the centuries. Silver is and has been a speculative investment in a way that gold is not. However, "real" returns are a difficult metric to match when the Fed is inflating the value of "money" away at a rapid rate.
(Click HERE to link to the site that gets one to this chart and to many others, including a similar chart for gold.)
It is possible that over the intermediate term, an asset such as silver may simultaneously fail to keep up with the rate of general price increases yet rise in nominal terms more than the interest rate available to an individual with capital to loan or invest. Such a happenstance would nonetheless make it a good investment relative to most alternatives.
Whether one takes the September 8 price at which I mentioned silver as a hedge against dollar weakness or whether one takes the most recent price (Friday, Sept. 17), silver is, I believe, well-positioned to rise in fiat dollar terms faster than the general rate of price increases people will face in America over the next year or two. Here are some of the reasons I feel this way.
1. Silver has non-mainstream committed sponsorship that has gotten the price trend right. Please consider an on-line article on silver written by Adam Hamilton in 2006 (who currently writes at http://www.zealllc.com/). Please consider reading it in its entirety. Not only do these comments from 4 years ago look wise today, his bullish commentary over the more recent past has been impressive as well (full disclosure: we are totally unaffiliated).
Silver has some highly committed partisans. Some of them argue passionately that there is a cartel that has been manipulating the price of silver down, and that there are massive "short" positions that would cause a tremendous rise in silver's price should these positions have to be covered.
I have no opinion on this controversy. It is, however, helpful to less committed silver bulls to have owners of silver who are not looking simply for another 5-20% appreciation (for example) before they sell. There may be many holders of silver who are looking for much, much higher prices. Thus the more modest aspirations I have for silver prices may allow me to sell with less competition from other sellers.
2. Silver has interesting fundamentals from a supply and demand perspective (click HERE for the Silver Institute's analysis, and scout the entire website if you are interested in all sorts of facts about silver). Above-ground silver stocks are historically low, and silver is primarily produced by miners as a by-product from copper and other mining. Therefore, the pace of silver production does not vary much with the ups and downs of silver's market price. Silver production is relatively price-inelastic.
3. A specific aspect of the supply-demand aspect of silver investing is, in a circular fashion, the investment aspect itself. Not to be mysterious; this refers to the growth of exchange-traded funds (ETFs) that own silver bullion. It was only in 2006 that the first silver ETF, symbol SLV, was created. Then came SIVR. Now there is also Silver Bullion Trust (mostly traded on the Toronto Stock Exchange). Eric Sprott's folks, who came out this year with the hugely successful "PHYS" gold ETF, are in registration with another silver ETF that may come public in a few months.
The more silver ETFs there are, the more silver they will buy. Of the "flavors" of ETFs, Silver Bullion Trust and the upcoming Sprott silver ETF are different from SLV and SIVR, and unlike them, they permanently take silver out of the supply chain and hold it indefinitely, regardless of the price of silver. So the growth of those sorts of funds is more bullish for the supply side of the supply-demand ratio than is the case for SLV and SIVR, which sell silver into the marketplace when demand wanes and thus can exacerbate a bear market in silver (having helped cause the bull market by first having purchased the silver).
A further important factor is that unlike gold, which is very valuable per ounce and is also denser than silver, it is not easy to store significant investment quantities of silver in one's personal possession. It is certainly do-able, depending on one's storage capacity, but those practical difficulties have seriously inhibited silver bulls from taking personal possession of investment silver. This is in sharp contrast to gold. Silver ETFs mitigate that problem and their growth may be even more bullish for silver's price than gold ETF's have been for the price of gold.
4. Silver has been money on and off throughout history and could be money again. In India and many other places, silver is viewed as a permanent store of wealth. It has taken the United States a long time to begin to lose its faith in paper money; in India, the public never trusted paper currency. Thus silver trades as a potential monetary metal in the minds of most of its purchasers in a way that the vastly more valuable platinum or palladium do not. Should the mass media start pushing inflation and not deflation as the problem, silver will come onto the "buy" list of John/Jane Q. Public as a gold substitute, I believe.
5. Silver has important physical-chemical activities that make it medically and industrially useful, and its use in such fields as medicine will continue whether it sells for $10/ounce or $50/ounce.
6. If you are my age, you may remember when the Hunt brothers tried to corner the silver market and briefly pushed the price to $50/ounce or so in early 1980. You also may remember that the metal bounced back to almost $25 in September 1980, related to the onset of the Iran-Iraq war. So in other words, silver at $24/ounce would merely put it below where it was 30 years ago in nominal terms, without inflation adjustment (of course, $25 was very high; silver crashed to near $4/ounce in 2001). Any sophisticated bullish investor who looks, as he or she should, at a very long-term price chart on silver, will be comforted to see that a purchase around now is unthreatening from a long-term perspective. Merely to hit the September 1980 price high, which was free of the manipulation the Hunt Brothers engaged in, would in inflation-adjusted dollars put the price at least at $75/ounce. That's about a quadruple in price. It would take a tax-free 4% zero coupon bond well over 30 years to quadruple in total return. So the truly long-term investor in silver can wait a long, long time for it to outperform bonds while providing portfolio diversification.
From a trading perspective, the proprietary technical indicators I pay attention to are, in general, positive. Silver appears to be in a high-level consolidation below the 2008 high. I am looking to buy more on a dip; my assessment is that the chart suggests enough "potential energy" for silver to ascend well above its current price within the next year.
What follows is a history of silver's recent price action, followed by a detailed discussion of ways to invest in silver.
Silver hit a post-1980 peak in March 2008 at slightly above the current price; but that followed a massive move from a low of $11.67/ounce on 8/21/07 to a high of $20.92 on 3/17/08. That seven-month move saw silver's price almost double. It occurred during the last gasp of the financial bubble but at a time when the lagging effects of several years of Fed tightening (or, diminishing looseness, if you prefer) were slowing the economy. That surge was "too far, too fast". (Data from Kitco.com)
The current move in silver has also lasted 7 months. It began with a Feb. 8 low of $15.14. The tightness of this move and the length of time silver has spent in the high teens without triggering profit-taking impresses me.
One year ago, gold also quietly moved up on its 2008 price high, consolidated at a high level below that high, and then burst through it, so far never to revisit that 2008 high. Silver may strangely be mimicking gold one year out of phase.
Income-oriented investors should be aware that both the SLV and SIVR silver ETFs allow shareholders to sell covered calls against their shares. SLV options have far more liquidity than do those of SIVR. Many people may find a "buy-write" strategy attractive. A further discussion of options is beyond the scope of this post.
Readers interested in exploring investing in SLV, by far the most popular way to invest in silver in the United States, may want to read the prospectus. Questions have been raised about SLV's use of derivatives, sub-custodians and other aspects of its structure and operations. I look at SLV as a trading vehicle and a vehicle that allows me to perform options strategies. My silver ETF of choice for longer-term investing is Silver Bullion Trust, which is a Canadian operation and which stores its silver in Canada. It trades on the Toronto stock exchange as SBT.U (SBT_U on some web trading systems) and has a relatively illiquid U. S. "pink sheets" listing with the symbol SVRZF. SBT is run by the same Spicer family that started the Central Fund of Canada (CEF) years ago. CEF is, by the way, the one investment I know that allows one to simultaneously own both gold and silver. CEF is highly liquid and fulfills an interesting market niche by being a combined gold and silver fund.
I have only bought shares in these sorts of ETFs when their premium to net asset value (NAV) has dropped to average or preferably below average. Each ETF tends to have its own premium (or discount) to NAV.
The above discussion is, again, not any sort of recommendation for anyone to purchase any security or sell any option, but perhaps it may stimulate thinking and research.
I have not mentioned stocks of silver producers. I do own stocks of gold miners but not of companies that primarily produce silver. The price of silver is volatile enough for me.
Right now I believe that the intermediate trend for silver as being up, so I'm looking for that volatility to work in favor of the owners of silver.
Regular readers of my blog know that I believe that the American investment world has become "over-financialized", as described by PIMCO's Bill Gross in his November 2009 note. This means that it is my opinion that all financial investments involve trying to choose from the best of an overvalued lot, so that I am not enthusiastic about any choices.
In owning silver, I am choosing something at the other end of the financial spectrum from most investment alternatives that mainstream financial advisers recommend to most people all (or, almost all) of the time. As does gold, investment silver just sits there. There is no promise to repay principal as with a debt instrument. There is no operational risk. In fact, it costs money to store it in the ETF. Most financial advisers will, to my knowledge, point out how speculative precious metals investing is. And of course they have a point. However . . .
I think that it now is the case that lending at today's interest rates is a speculative activity, especially to the U. S. Treasury given the rampant monetary inflation that has already occurred but has simply not shown up in consumer prices (yet).
Not to confuse anyone about bonds: I have written a few weeks ago that I believe that Treasuries have very recently crossed the line into bubble territory. Actually I sold stocks and bought some Treasuries just a couple of trading days ago on the recent yield bounceback associated with the stock rally, because I wanted to speculate that the Treasury bubble will continue. In fact, it is my current assessment that the Treasury bubble is not bursting that leads me to expect yet more inappropriate money-printing by the Fed, and that when that ceases, the financial community will find ways to keep yields low. All of which will tend to be bullish for precious metals as I see it today. (What happens with yields on Treasuries is too political to do other than speculate on.)
As a loyal American, I hope I am all wrong. I hope the Fed is making brilliant, responsible choices. I hope there is a clear plan somewhere in Washington to deal with all the Federal budgetary issues so that no further pressure is placed on the Fed to buy government debt with newly-created "money". I want living standards to rise in a non-inflationary manner. Hope is not an investment strategy, though.
I believe, though, that's its closer to the truth to say that the American monetary fish is rotting from the head down. Simon Johnson's The Quiet Coup provides an expert's view on this topic. I fear that the risks to the dollar are to the downside. I believe that's what Barack Obama, all the Congressional leaders of the Remocrat/Depublican party, and Ben Bernanke all want. And as a loyal American, I want to invest along with their desires.
Since all currencies are now fiat, precious metals help me do so.
In the final part of this series, I will discuss foreign currencies that Americans can invest in both for higher current income than U. S. Treasuries provide and that offer possible appreciation against the dollar.
In this post, the main topic will be silver. Here's some further background discussion before getting to silver specifically.
I am presenting herein my opinions and what I believe to be facts, but the facts have not been fact-checked and there may be some inadvertent errors, including typos; apologies if such proves to be the case.
The Federal Reserve has taken and continues to take extensive actions to keep short-term interest rates below the rate of general price rises in
the broad economy. It has done this in concert with the policies of the current and immediately prior administrations.I believe that Fed-induced monetary inflation is likely to show itself via further general price increases, which will tend to accelerate under steady-state economic conditions.
The bogeyman of "deflation" has been scaring people into buying bonds after a 29 year bond bull market, and unlike Japan, where zero interest rates have taken hold with clear stability or even mild decline in consumer prices and therefore have not been adverse to savers, the same policy in the U. S. continues in force despite positive consumer price rises which are greater than the near-zero Fed interest rate policy.
The Fed has been deliberately costing savers money in real terms. It has been doing this while protecting stockholders and bondholders of financial companies.
I object to this policy (these policies) and believe that as in World War II, the full force of the government and the mainstream media has been marshalled to sell people debt instruments that the government (through a compliant central bank) intends in good measure to inflate away rather than repay in full and in good faith.
U. S. policy has been actually been quite inflationary from 1933 onward, with the exceptions of brief periods of Fed tightening; a good part of the 1950s, when there was both peace and a president who actually believed in balanced budgets; and with the partial exception of the early Volcker years as Fed head. Further, many people also don't realize how major the Iraq-Afghan/AfPak Wars are from a direct budgetary standpoint (even ignoring the indirect costs), and as with the Viet Nam War, Congress has made no attempt to fund the war by raising additional revenues. The Viet Nam War provided the final nail in the coffin of a gold-backed dollar (see Nixon, 1971 - closing the "gold window" for a unique take and HERE for a more thorough, standard take) and it helped lead to massive inflation. The Fed had begun accommodating first President Kennedy and then President Johnson monetarily ("stimulus") before prices were noticed to rise throughout the broad economy.
I think something similar is happening now.
President Johnson pursued a guns and butter approach, but it was small beer compared to current and recent policy. When LBJ escalated in Viet Nam, there was no Medicare and no Medicaid, and Social Security took in much more in taxes than it expended. Thus the money-printing has crossed the previously unthinkable threshold of direct Fed purchase of Federal government debt, something that was only supposed to happen "elsewhere". Not in America. But it has now happened twice. 2009; 2010. Sic transit gloria.
In that context, silver may be both a sensible addition to gold and foreign currencies for the part of a financial portfolio that attempts to preserve capital in real terms. This article does not represent investment advice. It also does not look at silver as "money", in contrast to the official monetary metal, gold.
The nearby chart (click on it to enlarge) shows silver prices in both real terms and in relation to gold over the centuries, beginning with 1344. Not shown are reasons why silver became less useful. These include the mass production of stainless steel "silverware" and, more recently, the advent of digital photography.
This chart demonstrates that silver's price has lost ground in real terms over the centuries. Silver is and has been a speculative investment in a way that gold is not. However, "real" returns are a difficult metric to match when the Fed is inflating the value of "money" away at a rapid rate.
(Click HERE to link to the site that gets one to this chart and to many others, including a similar chart for gold.)
It is possible that over the intermediate term, an asset such as silver may simultaneously fail to keep up with the rate of general price increases yet rise in nominal terms more than the interest rate available to an individual with capital to loan or invest. Such a happenstance would nonetheless make it a good investment relative to most alternatives.
Whether one takes the September 8 price at which I mentioned silver as a hedge against dollar weakness or whether one takes the most recent price (Friday, Sept. 17), silver is, I believe, well-positioned to rise in fiat dollar terms faster than the general rate of price increases people will face in America over the next year or two. Here are some of the reasons I feel this way.
1. Silver has non-mainstream committed sponsorship that has gotten the price trend right. Please consider an on-line article on silver written by Adam Hamilton in 2006 (who currently writes at http://www.zealllc.com/). Please consider reading it in its entirety. Not only do these comments from 4 years ago look wise today, his bullish commentary over the more recent past has been impressive as well (full disclosure: we are totally unaffiliated).
Silver has some highly committed partisans. Some of them argue passionately that there is a cartel that has been manipulating the price of silver down, and that there are massive "short" positions that would cause a tremendous rise in silver's price should these positions have to be covered.
I have no opinion on this controversy. It is, however, helpful to less committed silver bulls to have owners of silver who are not looking simply for another 5-20% appreciation (for example) before they sell. There may be many holders of silver who are looking for much, much higher prices. Thus the more modest aspirations I have for silver prices may allow me to sell with less competition from other sellers.
2. Silver has interesting fundamentals from a supply and demand perspective (click HERE for the Silver Institute's analysis, and scout the entire website if you are interested in all sorts of facts about silver). Above-ground silver stocks are historically low, and silver is primarily produced by miners as a by-product from copper and other mining. Therefore, the pace of silver production does not vary much with the ups and downs of silver's market price. Silver production is relatively price-inelastic.
3. A specific aspect of the supply-demand aspect of silver investing is, in a circular fashion, the investment aspect itself. Not to be mysterious; this refers to the growth of exchange-traded funds (ETFs) that own silver bullion. It was only in 2006 that the first silver ETF, symbol SLV, was created. Then came SIVR. Now there is also Silver Bullion Trust (mostly traded on the Toronto Stock Exchange). Eric Sprott's folks, who came out this year with the hugely successful "PHYS" gold ETF, are in registration with another silver ETF that may come public in a few months.
The more silver ETFs there are, the more silver they will buy. Of the "flavors" of ETFs, Silver Bullion Trust and the upcoming Sprott silver ETF are different from SLV and SIVR, and unlike them, they permanently take silver out of the supply chain and hold it indefinitely, regardless of the price of silver. So the growth of those sorts of funds is more bullish for the supply side of the supply-demand ratio than is the case for SLV and SIVR, which sell silver into the marketplace when demand wanes and thus can exacerbate a bear market in silver (having helped cause the bull market by first having purchased the silver).
A further important factor is that unlike gold, which is very valuable per ounce and is also denser than silver, it is not easy to store significant investment quantities of silver in one's personal possession. It is certainly do-able, depending on one's storage capacity, but those practical difficulties have seriously inhibited silver bulls from taking personal possession of investment silver. This is in sharp contrast to gold. Silver ETFs mitigate that problem and their growth may be even more bullish for silver's price than gold ETF's have been for the price of gold.
4. Silver has been money on and off throughout history and could be money again. In India and many other places, silver is viewed as a permanent store of wealth. It has taken the United States a long time to begin to lose its faith in paper money; in India, the public never trusted paper currency. Thus silver trades as a potential monetary metal in the minds of most of its purchasers in a way that the vastly more valuable platinum or palladium do not. Should the mass media start pushing inflation and not deflation as the problem, silver will come onto the "buy" list of John/Jane Q. Public as a gold substitute, I believe.
5. Silver has important physical-chemical activities that make it medically and industrially useful, and its use in such fields as medicine will continue whether it sells for $10/ounce or $50/ounce.
6. If you are my age, you may remember when the Hunt brothers tried to corner the silver market and briefly pushed the price to $50/ounce or so in early 1980. You also may remember that the metal bounced back to almost $25 in September 1980, related to the onset of the Iran-Iraq war. So in other words, silver at $24/ounce would merely put it below where it was 30 years ago in nominal terms, without inflation adjustment (of course, $25 was very high; silver crashed to near $4/ounce in 2001). Any sophisticated bullish investor who looks, as he or she should, at a very long-term price chart on silver, will be comforted to see that a purchase around now is unthreatening from a long-term perspective. Merely to hit the September 1980 price high, which was free of the manipulation the Hunt Brothers engaged in, would in inflation-adjusted dollars put the price at least at $75/ounce. That's about a quadruple in price. It would take a tax-free 4% zero coupon bond well over 30 years to quadruple in total return. So the truly long-term investor in silver can wait a long, long time for it to outperform bonds while providing portfolio diversification.
From a trading perspective, the proprietary technical indicators I pay attention to are, in general, positive. Silver appears to be in a high-level consolidation below the 2008 high. I am looking to buy more on a dip; my assessment is that the chart suggests enough "potential energy" for silver to ascend well above its current price within the next year.
What follows is a history of silver's recent price action, followed by a detailed discussion of ways to invest in silver.
Silver hit a post-1980 peak in March 2008 at slightly above the current price; but that followed a massive move from a low of $11.67/ounce on 8/21/07 to a high of $20.92 on 3/17/08. That seven-month move saw silver's price almost double. It occurred during the last gasp of the financial bubble but at a time when the lagging effects of several years of Fed tightening (or, diminishing looseness, if you prefer) were slowing the economy. That surge was "too far, too fast". (Data from Kitco.com)
The current move in silver has also lasted 7 months. It began with a Feb. 8 low of $15.14. The tightness of this move and the length of time silver has spent in the high teens without triggering profit-taking impresses me.
One year ago, gold also quietly moved up on its 2008 price high, consolidated at a high level below that high, and then burst through it, so far never to revisit that 2008 high. Silver may strangely be mimicking gold one year out of phase.
Income-oriented investors should be aware that both the SLV and SIVR silver ETFs allow shareholders to sell covered calls against their shares. SLV options have far more liquidity than do those of SIVR. Many people may find a "buy-write" strategy attractive. A further discussion of options is beyond the scope of this post.
Readers interested in exploring investing in SLV, by far the most popular way to invest in silver in the United States, may want to read the prospectus. Questions have been raised about SLV's use of derivatives, sub-custodians and other aspects of its structure and operations. I look at SLV as a trading vehicle and a vehicle that allows me to perform options strategies. My silver ETF of choice for longer-term investing is Silver Bullion Trust, which is a Canadian operation and which stores its silver in Canada. It trades on the Toronto stock exchange as SBT.U (SBT_U on some web trading systems) and has a relatively illiquid U. S. "pink sheets" listing with the symbol SVRZF. SBT is run by the same Spicer family that started the Central Fund of Canada (CEF) years ago. CEF is, by the way, the one investment I know that allows one to simultaneously own both gold and silver. CEF is highly liquid and fulfills an interesting market niche by being a combined gold and silver fund.
I have only bought shares in these sorts of ETFs when their premium to net asset value (NAV) has dropped to average or preferably below average. Each ETF tends to have its own premium (or discount) to NAV.
The above discussion is, again, not any sort of recommendation for anyone to purchase any security or sell any option, but perhaps it may stimulate thinking and research.
I have not mentioned stocks of silver producers. I do own stocks of gold miners but not of companies that primarily produce silver. The price of silver is volatile enough for me.
Right now I believe that the intermediate trend for silver as being up, so I'm looking for that volatility to work in favor of the owners of silver.
Regular readers of my blog know that I believe that the American investment world has become "over-financialized", as described by PIMCO's Bill Gross in his November 2009 note. This means that it is my opinion that all financial investments involve trying to choose from the best of an overvalued lot, so that I am not enthusiastic about any choices.
In owning silver, I am choosing something at the other end of the financial spectrum from most investment alternatives that mainstream financial advisers recommend to most people all (or, almost all) of the time. As does gold, investment silver just sits there. There is no promise to repay principal as with a debt instrument. There is no operational risk. In fact, it costs money to store it in the ETF. Most financial advisers will, to my knowledge, point out how speculative precious metals investing is. And of course they have a point. However . . .
I think that it now is the case that lending at today's interest rates is a speculative activity, especially to the U. S. Treasury given the rampant monetary inflation that has already occurred but has simply not shown up in consumer prices (yet).
Not to confuse anyone about bonds: I have written a few weeks ago that I believe that Treasuries have very recently crossed the line into bubble territory. Actually I sold stocks and bought some Treasuries just a couple of trading days ago on the recent yield bounceback associated with the stock rally, because I wanted to speculate that the Treasury bubble will continue. In fact, it is my current assessment that the Treasury bubble is not bursting that leads me to expect yet more inappropriate money-printing by the Fed, and that when that ceases, the financial community will find ways to keep yields low. All of which will tend to be bullish for precious metals as I see it today. (What happens with yields on Treasuries is too political to do other than speculate on.)
As a loyal American, I hope I am all wrong. I hope the Fed is making brilliant, responsible choices. I hope there is a clear plan somewhere in Washington to deal with all the Federal budgetary issues so that no further pressure is placed on the Fed to buy government debt with newly-created "money". I want living standards to rise in a non-inflationary manner. Hope is not an investment strategy, though.
I believe, though, that's its closer to the truth to say that the American monetary fish is rotting from the head down. Simon Johnson's The Quiet Coup provides an expert's view on this topic. I fear that the risks to the dollar are to the downside. I believe that's what Barack Obama, all the Congressional leaders of the Remocrat/Depublican party, and Ben Bernanke all want. And as a loyal American, I want to invest along with their desires.
Since all currencies are now fiat, precious metals help me do so.
In the final part of this series, I will discuss foreign currencies that Americans can invest in both for higher current income than U. S. Treasuries provide and that offer possible appreciation against the dollar.
Copyright (C) Long Lake LLC 2010
Apple Continues to Excite Its Fans; AAPL not in a Stock Bubble Yet
The article from Canada, Hundreds camp out as Apple store opens, shows that the magic remains, at least in an area near Ontario:
Apple diehards waited in line through the night to get their hands on the latest high-tech gizmos as the company opened its first York Region store at Upper Canada Mall in Newmarket today.
By 8 a.m., hundreds had staked out a spot in a pair of lines that stretched in either direction from the Apple store’s glass-plated entrance. At the head of the throngs, hoping to score the coveted, yet highly elusive iPhone 4, was Richmond Hill’s Michael She. He and a contingent of friends and family had arrived at 9 p.m. last night to ensure they got one of the sought-after devices.
“I really want the iPhone 4,” Mr. She said. “You can’t find it anywhere else right now.”
One's reaction to this news, the entire article, and the general enthusiasm of Apple fans, may well be that this is cultish/bubble-type behavior. Or the reaction could be my considered one that given the inroads that the iPad, Mac line and even iPhone are making within businesses, what Apple has been doing is a legitimate series of innovations in a tech sector and economy that is short of new New things.
AAPL sells at a price-earnings ratio far less than its current and prospective 3-5 year growth rate. Given its clean financials, this makes it a classic "GARP" (growth-at-a-reasonable-price) stock. It is also hot in many overseas venues, as well. So AAPL fits my theme of investing in stocks with large international components. That Apple, the company, has a buzz among the public is better than if there were none, in this blogger's opinion. Perhaps an investing public burned by too much hype is correctly cautious with growth stocks.
In any case, the iPad may be the single hottest item for high-end gifts this fall; and iPods will be in favor for less costly gifts. Not to mention the iPhone and potential upside surprises with that line. AAPL continues to be a core holding in the DoctoRx portfolio.
Copyright (C) Long Lake LLC 2010
Apple diehards waited in line through the night to get their hands on the latest high-tech gizmos as the company opened its first York Region store at Upper Canada Mall in Newmarket today.
By 8 a.m., hundreds had staked out a spot in a pair of lines that stretched in either direction from the Apple store’s glass-plated entrance. At the head of the throngs, hoping to score the coveted, yet highly elusive iPhone 4, was Richmond Hill’s Michael She. He and a contingent of friends and family had arrived at 9 p.m. last night to ensure they got one of the sought-after devices.
“I really want the iPhone 4,” Mr. She said. “You can’t find it anywhere else right now.”
One's reaction to this news, the entire article, and the general enthusiasm of Apple fans, may well be that this is cultish/bubble-type behavior. Or the reaction could be my considered one that given the inroads that the iPad, Mac line and even iPhone are making within businesses, what Apple has been doing is a legitimate series of innovations in a tech sector and economy that is short of new New things.
AAPL sells at a price-earnings ratio far less than its current and prospective 3-5 year growth rate. Given its clean financials, this makes it a classic "GARP" (growth-at-a-reasonable-price) stock. It is also hot in many overseas venues, as well. So AAPL fits my theme of investing in stocks with large international components. That Apple, the company, has a buzz among the public is better than if there were none, in this blogger's opinion. Perhaps an investing public burned by too much hype is correctly cautious with growth stocks.
In any case, the iPad may be the single hottest item for high-end gifts this fall; and iPods will be in favor for less costly gifts. Not to mention the iPhone and potential upside surprises with that line. AAPL continues to be a core holding in the DoctoRx portfolio.
Copyright (C) Long Lake LLC 2010
Thursday, September 9, 2010
Gallup Confirms New Normal Stinks for Almost Everyone Who Didn't Get Bailout Money
Just in case you were feeling too cheery today, Gallup reports Consumer Spending Across All Income Groups Down in August:
Americans' self-reported average daily spending in stores, restaurants, gas stations, and online averaged $63 per day during August -- down $5 from July, and down $2 compared with August 2009. Consumer discretionary year-over-year spending is thus running just slightly below the depressed "new normal" rate of a year ago.
Despite the victory in the presidential election who would appear to be ideologically very comfortable in a Democratic Socialist party were he a European, please note what a disaster things have been for what should be his core constituency:
Middle- and lower-income Americans spent an average of $54 per day during August -- down from $64 in July and $62 in June, and lower than the $57 seen in August 2009. Americans in these income groups had been spending at the higher end of last year's "new normal" range of $52 to $61 but are now back to the lower end of that range.
Matters were no better in early September:
This year's somewhat disappointing back-to-school spending has been followed by few added expenditures for Labor Day. Consumer spending for the week before Labor Day averaged $61 per day -- the same as during the prior week, and down from a $70 average during the same week in 2009.
What Gallup does not say is that in the first part of 2008, discretionary spending was well over $100/day.
This is consistent with a modern-day depression.
Copyright (C) Long Lake LLC 2010
Americans' self-reported average daily spending in stores, restaurants, gas stations, and online averaged $63 per day during August -- down $5 from July, and down $2 compared with August 2009. Consumer discretionary year-over-year spending is thus running just slightly below the depressed "new normal" rate of a year ago.
Despite the victory in the presidential election who would appear to be ideologically very comfortable in a Democratic Socialist party were he a European, please note what a disaster things have been for what should be his core constituency:
Middle- and lower-income Americans spent an average of $54 per day during August -- down from $64 in July and $62 in June, and lower than the $57 seen in August 2009. Americans in these income groups had been spending at the higher end of last year's "new normal" range of $52 to $61 but are now back to the lower end of that range.
Matters were no better in early September:
This year's somewhat disappointing back-to-school spending has been followed by few added expenditures for Labor Day. Consumer spending for the week before Labor Day averaged $61 per day -- the same as during the prior week, and down from a $70 average during the same week in 2009.
What Gallup does not say is that in the first part of 2008, discretionary spending was well over $100/day.
This is consistent with a modern-day depression.
Copyright (C) Long Lake LLC 2010
Socialism in Retreat? But in Cuba, not the U. S.
Reuters reports that Fidel Castro says Cuban model no longer works.
Jeffrey Goldberg, a writer for the Atlantic Monthly magazine, wrote in a blog that he asked Castro, 84, if Cuba's model -- Soviet-style communism -- was still worth exporting to other countries and he replied, "The Cuban model doesn't even work for us anymore." . . .
Goldberg said Julia Sweig, a Cuba expert at the Council on Foreign Relations think tank in Washington who accompanied him to Havana, believed Castro's words reflected an acknowledgment that "the state has too big a role in the economic life of the country."
Given that the United States has a written Constitution and a history of a Declaration of Independence the former constraining Leviathan (viz., 10th Amendment), the latter celebrating the individual's right to liberty and to pursue happiness (all of which are antithetical to state-mandated purchase of health insurance), might the Colossus of the North wish to listen to el Comandante and do an about-face on its march toward statism?
We can only hope . . .
Copyright (C) Long Lake LLC 2010
Jeffrey Goldberg, a writer for the Atlantic Monthly magazine, wrote in a blog that he asked Castro, 84, if Cuba's model -- Soviet-style communism -- was still worth exporting to other countries and he replied, "The Cuban model doesn't even work for us anymore." . . .
Goldberg said Julia Sweig, a Cuba expert at the Council on Foreign Relations think tank in Washington who accompanied him to Havana, believed Castro's words reflected an acknowledgment that "the state has too big a role in the economic life of the country."
Given that the United States has a written Constitution and a history of a Declaration of Independence the former constraining Leviathan (viz., 10th Amendment), the latter celebrating the individual's right to liberty and to pursue happiness (all of which are antithetical to state-mandated purchase of health insurance), might the Colossus of the North wish to listen to el Comandante and do an about-face on its march toward statism?
We can only hope . . .
Copyright (C) Long Lake LLC 2010
Update on Yesterday's McDonald's Update
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
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
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
Hedging Against U. S. Dollar Weakness Caused by Federal Reserve Policy
The major theme I am focusing on these days is prospective U. S. dollar weakness and how to invest accordingly as a U. S.-based individual.You may click on the enclosed charts to enlarge them.
This is Part I, with one or more additional parts to follow.
I think that most investors based in the U. S. continue to have the vast proportion of their assets tied to the dollar, or naturally so if the holding is real estate based in the U. S. Our dollar has been the reserve currency of the world for everyone's investment lifetime . . . but it's been having its ups and downs. Here are some reasons why I have been allocating an increasingly large proportion of my financial assets in non-dollar and anti-dollar vehicles, and commentaries of which vehicles I have chosen.
The case that the U. S. dollar is fundamentally overvalued is well made by John Hussman in a post from a few weeks ago titled Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar.
Please read the discussion as he presents it. My thumbnail summary is that by suppressing the rates on Treasuries below market via its various debt purchases (creating "inflation" in the Austrian sense of the term), the Fed is inducing markets to rapidly and substantially decide to devalue the exchange rate of the U. S. dollar (the "dollar" herein, as opposed to dollars of other countries such as New Zealand). I agree and want to hedge against a de facto dollar devaluation. This multi-part series begins with a mention of gold and then introduces other assets I have been accumulating for at least six months.
The purest way to hedge against the dollar's decline is by owning currencies against which said decline will occur, as opposed to indirectly doing so by owning stocks of companies doing business in foreign countries.
It appears to me that this trend predicted by Dr. Hussman is playing out quietly under cover of a euro that is at this time even weaker than the dollar. I am not involved in investments that have a short-term focus, however. This is more of an intermediate (months to years) strategy in my mind.
Once again, the commentary provided is mine alone, the opinions are mine, and nothing represents investment advice.
At this juncture in the markets, the ultimate "currency" continues to be gold. Gold has just set what has to be the quietest all-time closing high for a major asset class in memory. I was lucky enough to successfully trade an important intermediate top in gold and described said tactical trades in a post on December 3, 2009. The major reasons for severely lightening up then were that exchange traded gold funds such as Gold-Trust (GTU) had gone to significant premia over net asset value, the pricing appeared extended, and there was lots of excitement about gold on such websites as Zero Hedge.
Now, GTU and the more newly-launched "PHYS" gold ETF are at relatively low premia to NAV and for some time now, there has been little excited talk about gold on Zero Hedge. Compared to December 3, 2009, the metal is much closer to its 200 day moving average and is up year-on-year much less. So I am not inclined to sell any gold. If the comparator investment is a 5-year Treasury yielding almost certainly less than consumer prices will increase, how likely is it that at some point within the next 5 years, gold's price will allow gold-related investments to be sold at a profit that exceeds the return from that 5-year note? I think the probability is very high.
This series of articles is not going to discuss different ways to invest in gold. That will be addressed in the future.
In addition to gold vehicles, I have identified one other commodity in which I have invested, and three other currencies. The commodity is silver, and the currencies are those of Norway, New Zealand and Brazil. The other chart shown above is an exchange-traded fund that provides the return equal to money market rates
available in Brazil (very roughly 10%) minus fund expenses, with full currency risk vs. the dollar. Not shown is a similar ETF for the New Zealand dollar, "BNZ".In contrast, the only way I know to invest from America in the Norwegian kroner is by purchasing Norwegian sovereign bonds through a full-service broker.
Norway is in good part an oil-backed country, so I view its kroner as a form of a commodity currency; New Zealand has a large commodity role given how many sheep and cattle it contains per (human) capita; and Brazil is a special case with a strong chart pattern for BZF.
In Part II, I will discuss silver on its own merits and in relation to gold. Discussion of the above-mentioned countries and their currencies will follow.
Copyright (C) Long Lake LLC 2010
Monday, September 6, 2010
Obama Reminds Us Again that the Era of Big Government Never Ended
The President is announcing what appears to be a simply bad proposal to Congress. Here is Bloomberg.com in Obama to Announce Transportation Infrastructure Plan:
President Barack Obama today will propose a six-year plan to rehabilitate the nation’s transportation infrastructure with an initial $50 billion to help spur an economy that’s lost jobs for three straight months. . .
Two months before congressional midterm elections, Obama will call for the formation of an “infrastructure bank” and request money to rebuild 150,000 miles (241,400 kilometers) of roads, construct and maintain 4,000 miles of rail, and overhaul 150 miles of runways, the statement said.
The first reaction I have is that this proposal is "off", perhaps "out-of-touch", as was used to describe Bush 41. Didn't ARRA (the winter 2009"stimulus" bill) address this topic?Of course it did; per the article:
The economic stimulus package approved last year allocated $38.6 billion for the Transportation Department and so far $18.5 billion has been paid out, according to a government website that tracks the spending.
So there's substantial unspent ARRA money left with which to "stimulate" the economy. Why wasn't enough allocated in ARRA to do an adequate job? Also, President Bush (43) had quite a row with Congress in his second term a few years back over Congress's desire to stimulate its re-election with a very large transportation bill, and he successfully fought for a smaller bill. (This was before Mr. Bush decided that the way to save capitalism was to abandon its principles.)
The Obama proposal has the look of uncreative but destructive behavior from an administration that was touting a Recovery Summer too recently to allow even the most cynical pols assume that people will have forgotten it by the first Tuesday in November.
Let's examine the first two points in the proposal in more detail.
1. Roads. 150,000 miles of them. That's a lot of roads. It is in fact more miles of roads, by far, than exist in the Interstate Highway System. Wikipedia points out that:
As of 2006, the system has a total length of 46,876 miles (75,440 km),[1] making it both the largest highway system in the world and the largest public works project in history. The Interstate Highway System is a subsystem of the National Highway System.
While Interstate Highways usually receive substantial federal funding (90% federal and 10% state) and comply with federal standards, they are owned, built, and operated by the states or toll authorities. (emphasis added)
So the money goes to the states and eventually all politics is local, so this is pork.
Why does the announcement cover so many more miles than the total of Federally-financed (90%) roads? Perhaps because the IHS is part of the much larger National Highway System, which is described thusly by Wikipedia:
The National Highway System (NHS) of the United States comprises approximately 160,000 miles (256,000 kilometers) of roadway, including the Interstate Highway System and other roads, which are important to the nation's economy, defense, and mobility. The NHS was developed by the United States Department of Transportation in cooperation with the states, local officials, and metropolitan planning organizations. Its main purpose is to coordinate federal funding; most of the roads (including the Interstates) are maintained by the states.
So it would appear that Mr. Obama wants the world, and Americans, to pay up rebuild the National Highway System. I don't get around much anymore, but I wonder if our roads are in such poor repair that this suddenly is such a priority that a normal Congressional review of budgetary priorities is inappropriate. Is there a Pearl Harbor- or 9/11-type event that has just occurred with the roads?
No.
Let's move on to the second point:
2. Railroads. Is the Federal government going to own 4000 new miles of track? If so, is it because Amtrak is such a great financial success? Here are some facts from the Ass'n of American Railroads:
Between 2006 and 2007, the "miles of track operated less trackage rights" dropped about 1% to about 160,000 miles.
So the free market, during a boom, was removing track from its network. Why does Barack Obama want to add so much track when freight traffic is still not near its 2007 peak?
Might the answer have something to do with the following statistic from the same source?
Average 2006 wages: $68,1141.
Average 2006 total compensation: $94,607.
My answer to my question is probably YES, given that this proposal is being unveiled on Labor Day.
Re the third point, airport runways, I have no comment.
The country is, it appears to me, treading water till the appearance of a new New Thing such as the information technology and communications revolution that appeared so exciting a decade ago.
What the country needs is for Washington, including the Fed, to realize that we are now in a situation where the right answer for D. C. is: don't just do something, stand there!
Or, when you're in a hole, stop digging.
Instead, the Democrats are proving that they are fundamentally no different from the Republicans. Together they comprise an ancien regime in a nation founded on libertarian, small government principles.
Per the administration wish list proposed today, the Feds want to increase their control over the real economy and will, as did Scarlett O'Hara, think tomorrow about how to pay for gaining that control.
Unfortunately, we know how that thought ends. During the period when Ross Perot's movement actually had influence, the people were stating clearly that they wanted a government that was in some sort of harmony with society. That's the basic point of belief in a balanced budget. One can be for small or large government and share a belief that honest accounting is the right way to go. I believe that the public continues to understand that the piper gets paid eventually. From a financial standpoint, the easiest solution for Washington is to promote the idea and fear of "deflation" while inflating away.
Despite the alleged need for yet more "stimulus", oil prices are holding almost 4 times greater than the industry assumed price of $20/barrel that prevailed as recently as 5 years ago; copper is holding around $3.50/pound; silver is for now holding near its post-1980 record around $20/ounce; and gold is holding around $1250/ounce.
Some deflation.
As James Montier makes clear in a very nice, brief and interesting blog post, to be fundamentally satisfied with today's 10-year Treasury yield suggests that one is assuming a 70% probability that the U. S. "goes Japanese". To be bullish on the 10-year would therefore suggest a greater than 70% chance of such an event. He suggests that a more "normal" 10-year yield is about 4.4%.
Whether the President's proposal for Transportation Dep't. spending goes anywhere in Congress, and whether he will fight hard for it should it have legislative difficulties, is yet unknown.
What I believe is clear is that the public increasingly has realized that the era of big government never ended, though it did initially hide in the last decade behind a public-private partnership with Big Finance, and that the basic accounting problem of ever-growing Federal deficits (in the setting of near-bankruptcy of more than one state) cannot be wished away and should not be resolved by more and more Federal Reserve monetization of the debt.
In this context, the ups and downs of the voting machine known as the stock market are almost irrelevant. I continue to believe that gold and Treasuries are in, or entering into, a sort of contest analogous to the finals of a single-elimination tournament. I suspect that gold will "win", given the nonsense coming from both wings of the Establishment in Washington. Thus I am in a "hold" mode with gold versus a tactical "buy on dips" mode with long Treasuries (meaning buy on price weakness, which is the same is surges up in yield, given that I currently think that the Treasury bubble has farther to run).
That view does not mean that over the course of a season of tournaments, or several seasons, that other competitors will not do well. These competitors include silver and several strong companies, and even perhaps such boring entities as high quality muni bonds.
Copyright (C) Long Lake LLC 2010
President Barack Obama today will propose a six-year plan to rehabilitate the nation’s transportation infrastructure with an initial $50 billion to help spur an economy that’s lost jobs for three straight months. . .
Two months before congressional midterm elections, Obama will call for the formation of an “infrastructure bank” and request money to rebuild 150,000 miles (241,400 kilometers) of roads, construct and maintain 4,000 miles of rail, and overhaul 150 miles of runways, the statement said.
The first reaction I have is that this proposal is "off", perhaps "out-of-touch", as was used to describe Bush 41. Didn't ARRA (the winter 2009"stimulus" bill) address this topic?Of course it did; per the article:
The economic stimulus package approved last year allocated $38.6 billion for the Transportation Department and so far $18.5 billion has been paid out, according to a government website that tracks the spending.
So there's substantial unspent ARRA money left with which to "stimulate" the economy. Why wasn't enough allocated in ARRA to do an adequate job? Also, President Bush (43) had quite a row with Congress in his second term a few years back over Congress's desire to stimulate its re-election with a very large transportation bill, and he successfully fought for a smaller bill. (This was before Mr. Bush decided that the way to save capitalism was to abandon its principles.)
The Obama proposal has the look of uncreative but destructive behavior from an administration that was touting a Recovery Summer too recently to allow even the most cynical pols assume that people will have forgotten it by the first Tuesday in November.
Let's examine the first two points in the proposal in more detail.
1. Roads. 150,000 miles of them. That's a lot of roads. It is in fact more miles of roads, by far, than exist in the Interstate Highway System. Wikipedia points out that:
As of 2006, the system has a total length of 46,876 miles (75,440 km),[1] making it both the largest highway system in the world and the largest public works project in history. The Interstate Highway System is a subsystem of the National Highway System.
While Interstate Highways usually receive substantial federal funding (90% federal and 10% state) and comply with federal standards, they are owned, built, and operated by the states or toll authorities. (emphasis added)
So the money goes to the states and eventually all politics is local, so this is pork.
Why does the announcement cover so many more miles than the total of Federally-financed (90%) roads? Perhaps because the IHS is part of the much larger National Highway System, which is described thusly by Wikipedia:
The National Highway System (NHS) of the United States comprises approximately 160,000 miles (256,000 kilometers) of roadway, including the Interstate Highway System and other roads, which are important to the nation's economy, defense, and mobility. The NHS was developed by the United States Department of Transportation in cooperation with the states, local officials, and metropolitan planning organizations. Its main purpose is to coordinate federal funding; most of the roads (including the Interstates) are maintained by the states.
So it would appear that Mr. Obama wants the world, and Americans, to pay up rebuild the National Highway System. I don't get around much anymore, but I wonder if our roads are in such poor repair that this suddenly is such a priority that a normal Congressional review of budgetary priorities is inappropriate. Is there a Pearl Harbor- or 9/11-type event that has just occurred with the roads?
No.
Let's move on to the second point:
2. Railroads. Is the Federal government going to own 4000 new miles of track? If so, is it because Amtrak is such a great financial success? Here are some facts from the Ass'n of American Railroads:
Between 2006 and 2007, the "miles of track operated less trackage rights" dropped about 1% to about 160,000 miles.
So the free market, during a boom, was removing track from its network. Why does Barack Obama want to add so much track when freight traffic is still not near its 2007 peak?
Might the answer have something to do with the following statistic from the same source?
Average 2006 wages: $68,1141.
Average 2006 total compensation: $94,607.
My answer to my question is probably YES, given that this proposal is being unveiled on Labor Day.
Re the third point, airport runways, I have no comment.
The country is, it appears to me, treading water till the appearance of a new New Thing such as the information technology and communications revolution that appeared so exciting a decade ago.
What the country needs is for Washington, including the Fed, to realize that we are now in a situation where the right answer for D. C. is: don't just do something, stand there!
Or, when you're in a hole, stop digging.
Instead, the Democrats are proving that they are fundamentally no different from the Republicans. Together they comprise an ancien regime in a nation founded on libertarian, small government principles.
Per the administration wish list proposed today, the Feds want to increase their control over the real economy and will, as did Scarlett O'Hara, think tomorrow about how to pay for gaining that control.
Unfortunately, we know how that thought ends. During the period when Ross Perot's movement actually had influence, the people were stating clearly that they wanted a government that was in some sort of harmony with society. That's the basic point of belief in a balanced budget. One can be for small or large government and share a belief that honest accounting is the right way to go. I believe that the public continues to understand that the piper gets paid eventually. From a financial standpoint, the easiest solution for Washington is to promote the idea and fear of "deflation" while inflating away.
Despite the alleged need for yet more "stimulus", oil prices are holding almost 4 times greater than the industry assumed price of $20/barrel that prevailed as recently as 5 years ago; copper is holding around $3.50/pound; silver is for now holding near its post-1980 record around $20/ounce; and gold is holding around $1250/ounce.
Some deflation.
As James Montier makes clear in a very nice, brief and interesting blog post, to be fundamentally satisfied with today's 10-year Treasury yield suggests that one is assuming a 70% probability that the U. S. "goes Japanese". To be bullish on the 10-year would therefore suggest a greater than 70% chance of such an event. He suggests that a more "normal" 10-year yield is about 4.4%.
Whether the President's proposal for Transportation Dep't. spending goes anywhere in Congress, and whether he will fight hard for it should it have legislative difficulties, is yet unknown.
What I believe is clear is that the public increasingly has realized that the era of big government never ended, though it did initially hide in the last decade behind a public-private partnership with Big Finance, and that the basic accounting problem of ever-growing Federal deficits (in the setting of near-bankruptcy of more than one state) cannot be wished away and should not be resolved by more and more Federal Reserve monetization of the debt.
In this context, the ups and downs of the voting machine known as the stock market are almost irrelevant. I continue to believe that gold and Treasuries are in, or entering into, a sort of contest analogous to the finals of a single-elimination tournament. I suspect that gold will "win", given the nonsense coming from both wings of the Establishment in Washington. Thus I am in a "hold" mode with gold versus a tactical "buy on dips" mode with long Treasuries (meaning buy on price weakness, which is the same is surges up in yield, given that I currently think that the Treasury bubble has farther to run).
That view does not mean that over the course of a season of tournaments, or several seasons, that other competitors will not do well. These competitors include silver and several strong companies, and even perhaps such boring entities as high quality muni bonds.
Copyright (C) Long Lake LLC 2010
Sunday, September 5, 2010
The Times Goes Austrian (Sort Of); Are the Dems Shifting Their Approach?
Is the New York Times warming to Austrian economics?
David Streitfeld is out tonight with Grim Housing Choice: Help Today’s Owners or Future Ones. It begins by presenting a view of the problem:
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
I am not going to debate whether the post-tax credit drop-off in home sales was unexpected or not. Mr. Streitfeld has set the table. In the third paragraph, he surprises by saying:
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
Even more surprisingly, he reports that this solution emanates from one of the citadels of Austrian economics thought in America:
When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”
Usually when the Times talks about unnamed "experts", it is referring to deficit spenders when the topic is economics, and "warmists" when the topic relates to climate change. Now all of a sudden, the unnamed experts are preaching the common sense virtues of letting markets seek their own level.
Deeper in the article are references to more mainstream experts, who support the Sanders/George Mason approach:
“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.
Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”
Not present in the article is a Krugmanlike derision of Austrian/free market thinkers as "Austerians".
Moving on to a deeper level of intrigue, an article that comes out on or about Labor Day on this topic has to be considered to possibly be political. Is someone in the administration or at least Congress using Mr. Streitfeld as a stalking horse?
To support that musing, please consider the finale to the article:
Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.
“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.
That might give the Obama administration permission to take the risk of doing nothing.
The risk of doing nothing . . . what a felicitous phrase. And from none other than the lead online story in the New York Times. Methinks the debate is, in fact, changing.
And if by some happy reason the Obama administration actually stops intervening in natural processes, perhaps it will realize how futile a poorly thought-out strategy ARRA was; how wrong it was to lean on FASB to change accounting for bank holding companies; and that the "surge" in Afghanistan was simply plumping for one group of narcotics traffickers against another. Might the president also whisper to Chairman Bernanke that a policy of non- (or at least less)intervention in the free market in money might also ultimately be in the national interest?
I know you are thinking, "Dream on DoctoRx". But what's wrong with good dreams? It's time for our long national nightmare to end.
Three months ago, who would have expected to see the Times running this particular article during the kickoff to election season?
Copyright (C) Long Lake LLC 2010
David Streitfeld is out tonight with Grim Housing Choice: Help Today’s Owners or Future Ones. It begins by presenting a view of the problem:
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
I am not going to debate whether the post-tax credit drop-off in home sales was unexpected or not. Mr. Streitfeld has set the table. In the third paragraph, he surprises by saying:
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
Even more surprisingly, he reports that this solution emanates from one of the citadels of Austrian economics thought in America:
When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”
Usually when the Times talks about unnamed "experts", it is referring to deficit spenders when the topic is economics, and "warmists" when the topic relates to climate change. Now all of a sudden, the unnamed experts are preaching the common sense virtues of letting markets seek their own level.
Deeper in the article are references to more mainstream experts, who support the Sanders/George Mason approach:
“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.
Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”
Not present in the article is a Krugmanlike derision of Austrian/free market thinkers as "Austerians".
Moving on to a deeper level of intrigue, an article that comes out on or about Labor Day on this topic has to be considered to possibly be political. Is someone in the administration or at least Congress using Mr. Streitfeld as a stalking horse?
To support that musing, please consider the finale to the article:
Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.
“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.
That might give the Obama administration permission to take the risk of doing nothing.
The risk of doing nothing . . . what a felicitous phrase. And from none other than the lead online story in the New York Times. Methinks the debate is, in fact, changing.
And if by some happy reason the Obama administration actually stops intervening in natural processes, perhaps it will realize how futile a poorly thought-out strategy ARRA was; how wrong it was to lean on FASB to change accounting for bank holding companies; and that the "surge" in Afghanistan was simply plumping for one group of narcotics traffickers against another. Might the president also whisper to Chairman Bernanke that a policy of non- (or at least less)intervention in the free market in money might also ultimately be in the national interest?
I know you are thinking, "Dream on DoctoRx". But what's wrong with good dreams? It's time for our long national nightmare to end.
Three months ago, who would have expected to see the Times running this particular article during the kickoff to election season?
Copyright (C) Long Lake LLC 2010
Friday, September 3, 2010
Maybe the Weak Jobs Picture is at Least Partly Due to "Stimulus"
One of the themes amongst critics of ARRA was expressed by Mish today. He said:
The dotted lines (in a jobs chart) tell the real story about how pathetic a jobs recovery this has been. Bear in mind it has taken $trillions in stimulus to produce this.
Paul Krugman has a different starting viewpoint from Mish and believes that the "stimulus" was simply not large enough.
What about a different point of view from both the above? What if the poor jobs recovery was and continues to be due in good measure to the "stimulus" and all the misguided government intervention? Remember the sharp rebounds from the 1973-5 and 1981-2 recessions? Other than the Fed easing up on anti-inflationary efforts, I don't recall it taking extraordinary measures. Neither do I recall the Federal government making massive interventions.
While it is not possible to run a controlled experiment with reality, I continue to believe that the practical and morally best solution for the economy is a large dose of freedom. If governmental statistics are to be trusted, the American economy produces at least $43,000 per person per year in economic output. Thus a family of four proportionately (allegedly) on average has over $170,000. This number is so much more than people need to live that there is no justification for government and the Fed taking extraordinary lengths to goose it up a bit even if they had the capacity to do so.
Since they manifestly lack that ability, it's past time for government to do little more intervention than helping the truly needy. The free market really does work. However, when the authorities interfere with necessary price signals and reward failure, they worsen matters.
There is a correlation between the amazing weakness of the current economic "recovery" and the Bushbama Continuity of bailouts of the companies that took the lead in causing this mess. It may be that Christina Romer's unemployment predictions would have been correct if President Obama had shown up President Bush as a futile, pro-big business interventionist, and the economy had recovered just as JFK's economy recovered from the 1960 recession with a tax-cutting program (and low deficits). But instead we got what we got.
It's time for real change. But as the old Mets used to say, you gotta believe. In this case, the faith should be in the proven ability of free markets to meet the needs of the people better than central planners can do.
Copyright (C) Long Lake LLC 2010
The dotted lines (in a jobs chart) tell the real story about how pathetic a jobs recovery this has been. Bear in mind it has taken $trillions in stimulus to produce this.
Paul Krugman has a different starting viewpoint from Mish and believes that the "stimulus" was simply not large enough.
What about a different point of view from both the above? What if the poor jobs recovery was and continues to be due in good measure to the "stimulus" and all the misguided government intervention? Remember the sharp rebounds from the 1973-5 and 1981-2 recessions? Other than the Fed easing up on anti-inflationary efforts, I don't recall it taking extraordinary measures. Neither do I recall the Federal government making massive interventions.
While it is not possible to run a controlled experiment with reality, I continue to believe that the practical and morally best solution for the economy is a large dose of freedom. If governmental statistics are to be trusted, the American economy produces at least $43,000 per person per year in economic output. Thus a family of four proportionately (allegedly) on average has over $170,000. This number is so much more than people need to live that there is no justification for government and the Fed taking extraordinary lengths to goose it up a bit even if they had the capacity to do so.
Since they manifestly lack that ability, it's past time for government to do little more intervention than helping the truly needy. The free market really does work. However, when the authorities interfere with necessary price signals and reward failure, they worsen matters.
There is a correlation between the amazing weakness of the current economic "recovery" and the Bushbama Continuity of bailouts of the companies that took the lead in causing this mess. It may be that Christina Romer's unemployment predictions would have been correct if President Obama had shown up President Bush as a futile, pro-big business interventionist, and the economy had recovered just as JFK's economy recovered from the 1960 recession with a tax-cutting program (and low deficits). But instead we got what we got.
It's time for real change. But as the old Mets used to say, you gotta believe. In this case, the faith should be in the proven ability of free markets to meet the needs of the people better than central planners can do.
Copyright (C) Long Lake LLC 2010
ISM Reports Upward Price Pressures
From today's August 2010 Non-Manufacturing ISM Report On Business®:
Commodities Up in Price
Bacon; Beef (5); Butter; Chicken; Coated Groundwood (2); Dairy; Diesel Fuel; #2 Diesel Fuel (2); Freight Charges (2); Fuel (8); Gasoline (2); Linen; Pharmacy Products (2); Pork; and Transportation Costs.
Commodities Down in Price
No commodities are reported down in price.
Note: The number of consecutive months the commodity is listed is indicated after each item.
Given a subpar economic "recovery" (if this a recovery be), and with immense slack in the most important cost input (labor), there should be some price declines in the above list. This smells like stag(in)flation to me.
Just a guess, but both the apparent economic facts as we have been presented them and the general cyclicality of booms and busts suggest to me that housing prices will lag the average consumer price rises that I believe are on the horizon.
Copyright (C) Long Lake LLC 2010
Commodities Up in Price
Bacon; Beef (5); Butter; Chicken; Coated Groundwood (2); Dairy; Diesel Fuel; #2 Diesel Fuel (2); Freight Charges (2); Fuel (8); Gasoline (2); Linen; Pharmacy Products (2); Pork; and Transportation Costs.
Commodities Down in Price
No commodities are reported down in price.
Note: The number of consecutive months the commodity is listed is indicated after each item.
Given a subpar economic "recovery" (if this a recovery be), and with immense slack in the most important cost input (labor), there should be some price declines in the above list. This smells like stag(in)flation to me.
Just a guess, but both the apparent economic facts as we have been presented them and the general cyclicality of booms and busts suggest to me that housing prices will lag the average consumer price rises that I believe are on the horizon.
Copyright (C) Long Lake LLC 2010
Thursday, September 2, 2010
Small Business Sentiment Worsens Dramatically: Discover
Sometimes the news just wants to make you jump in a hole and hide. Instead of a Summer of Recovery, or at least a "zero summer", Rasmussen polling on behalf of Discover(R) Small Business Watch shows Small Business Confidence Plummets. Here are some quotes:
Small business owners’ confidence in the economy soured significantly from July to August in the largest one-month decline since November 2009 . . .
In August, 62 percent of small business owners said the economy is getting worse and a record 55 percent of small business owners expect economic conditions for their businesses to be unfavorable in the next six months, up 10 percentage points from July. Those indicators led the drop in confidence from 83 on the index in July to 73 in August.
Confidence was at a record low among small business owners who sell directly to consumers. Those small businesses slid 17.4 points since last month to a record-low 65.5 points on the index, compared to business-to-business operators who marked 79 on the index in August, down only 2.2 points from July.. .
August marks the third straight monthly decline in the index, which is the lowest it has been in 18 months on the 4-year-old index. In July, the Watch reported that 75 percent of small business owners expected a second recession to occur before the country sees a full recovery.
The especially weak consumer spending environment would be even weaker were it not for large governmental transfer payments. The lack of real improvement in consumer spending is supported by Gallup's ongoing polling of consumer spending, which is mired in the roughly $65/day range it has been in since the post-Lehman collapse.
Many economic signs continue to point to the Japanese-Grecian ("Japanecian") scenario playing out in the U. S. It appears fair to say that with Federal interest payments pushing $200 B annually against revenues not much more than 10X that, matters are getting curiouser and curiouser. Will the Feds double their borrowing and have the Fed and the banking system buy enough government debt to halve the interest rates again?
There certainly is precedent for pricing in the earlier stages of a bubble to go much, much higher before the bubble bursts.
Copyright (C) Long Lake LLC 2010
Small business owners’ confidence in the economy soured significantly from July to August in the largest one-month decline since November 2009 . . .
In August, 62 percent of small business owners said the economy is getting worse and a record 55 percent of small business owners expect economic conditions for their businesses to be unfavorable in the next six months, up 10 percentage points from July. Those indicators led the drop in confidence from 83 on the index in July to 73 in August.
Confidence was at a record low among small business owners who sell directly to consumers. Those small businesses slid 17.4 points since last month to a record-low 65.5 points on the index, compared to business-to-business operators who marked 79 on the index in August, down only 2.2 points from July.. .
August marks the third straight monthly decline in the index, which is the lowest it has been in 18 months on the 4-year-old index. In July, the Watch reported that 75 percent of small business owners expected a second recession to occur before the country sees a full recovery.
The especially weak consumer spending environment would be even weaker were it not for large governmental transfer payments. The lack of real improvement in consumer spending is supported by Gallup's ongoing polling of consumer spending, which is mired in the roughly $65/day range it has been in since the post-Lehman collapse.
Many economic signs continue to point to the Japanese-Grecian ("Japanecian") scenario playing out in the U. S. It appears fair to say that with Federal interest payments pushing $200 B annually against revenues not much more than 10X that, matters are getting curiouser and curiouser. Will the Feds double their borrowing and have the Fed and the banking system buy enough government debt to halve the interest rates again?
There certainly is precedent for pricing in the earlier stages of a bubble to go much, much higher before the bubble bursts.
Copyright (C) Long Lake LLC 2010
Wednesday, September 1, 2010
Gold 'n Apple
The golden apple is an element that appears in various national and ethnic folk legends or fairy tales. Recurring themes depict a hero (e.g., Hercules or Făt-Frumos) retrieving the golden apples hidden or stolen by a monstrous antagonist. Alternatively, they are depicted as divine food and the source of immortality in Norse mythology.
Three golden Apples were featured in Greek mythology, in which a hunter named Atalanta raced against a suitor named Hippomenes who used the golden apples to distract her so that he could win the race . . .
(From Wikipedia)
Gold and Apple. Interesting how they have been linked over the millenia; they form ends of a barbell investing strategy for me at this time.
As an ongoing accumulator of AAPL stock, I am satisfied that it went up with a strong NASDAQ today. I am too old and out-of-it to use any of the stuff that Apple announced today, but it is good to see a blogger have very positive things to say. While not uniform, most reviews I saw on the 'Net were positive as well.
There are other product-related straws in the wind. Re the iPad, it's great to see the offbeat report that a private school in Scotland has shifted instruction entirely to the iPad. I never would have guessed; in fact, I traded out of AAPL stock after a 10% gain ($200 to $220) shortly before the iPad's introduction as I was worried it would be a disappointment. Given the success of this product and of the iPhone 4, along with the decline in interest rates which have made fixed income even less attractive, I am quite satisfied having bought back into the stock at somewhat higher prices.
Perhaps the most underappreciated news of the day is about the iPhone 4 and not today's presentation about the iPod line refreshment, iTV and the like. Worried about how the antenna controversy and/or Android are affecting sales? Here's a great headline for anyone who owns AAPL stock:
Apple unable to keep up with iPhone 4 demand, say execs
The brief article begins:
Apple is still unable to cope with interest in the iPhone 4, two of the company's key executives indicate. A Deutsche Bank analyst, Chris Whitmore, recently met with CFO Peter Oppenheimer and senior VP of retail Ron Johnson to discuss the state of sales. "iPhone 4 demand remains very robust and despite efforts to close the supply-demand imbalance and the continued supply ramp, Apple still cannot meet iPhone demand," Whitmore says of the discussion.
Yours truly is not a financial analyst. Looking at little more than seasonal consecutive quarter-on-quarter trends aligned with year-on-year comparisons, and also doing more than looking at the last 6 year's average price of AAPL stock to cash flow and earnings, I come up with a reasonable trading price of $450-500 for AAPL stock for some point in 2011. This derives from the Value Line chart which shows AAPL trading at about an average of 22X cash flow for the past 6 years. Of course, few traders forget that the third year of a President's term is usually a strong one for investors. (Of course, let's also not forget that the 3rd year of Herbert Hoover's term was not so hot.)
I am using $20/share for Apple's2011 calendar year earnings. (Apple is on a September fiscal year.)
Apple is growing at an amazing pace for a large company. In July, it preannounced $18 B for current quarter sales. Analysts are currently targeting $18 1/2 B. In its April 9 edition (merely 4 months ago), Value Line was predicting $14.8 B for current quarter sales. How often does a very large company have such a "beat"? I can't remember such an occurrence since the tech bubble.
So far as I can see, there is no undue speculation in AAPL stock. This does not guarantee positive returns, though. The stock will take a tumble if Steve Jobs retires. But I suspect that it is selling at about 15X CY 2010 and 12.5X CY 2011 earnings. Analysts have the company growing 18% per year over the next five years. In the past they have been conservative. These analysts thus have the stock at under 6X earnings 5 years from now. If Apple were selling 5-year debt, it would hardly pay any premium over Treasuries. So the prospective return from theoretical AAPL 5-year debt is perhaps 1.5% per year. Even if the stock is projected to sell for 9X earnings 5 years from now, it would then be projected to appreciate about 9% per year. This is quite an equity premium for a financial and operational powerhouse.
Compared to the S&P 500, AAPL is in far superior technical shape. The long-term 200 day (40 week) simple moving average of SPY (the ETF for the S&P 500)has begun to turn down. The 150 day sma is about to drop below the 200 day sma, and the 50 day sma is below both of them. SPY is now in a (mildly) bearish technical configuration. AAPL, in contrast, has bounced off its rising 150 day sma, which is properly aligned in a bull market configuration above a rising 200 day sma. AAPL is of course well above its 2007 high stock price of around $200/share, which at that time represented about 40 times its cash flow for CY 2007. I have been using the ability of a commodity or security to move to new highs compared with the pre-Lehman implosion as a sign of fundamental strength. I want to be invested where the charts are fundamentally "strong", given that I believe there are probably a few years of challenging economic and financial markets ahead of us in the U. S. (Thus I said positive things about MCD and CB recently based on operational and chart considerations.)
While from a sure thing (which does not exist in investing without illegal inside information), AAPL is similar to gold from an investment standpoint. Both marched on to new highs after the onset and current aftermath of the Great Recession/credit collapse/depression. Gold is within 2% of its all-time high and is up more than 30% from one year ago. AAPL is both further off its high but in an offsetting manner is up more than 50% above its year-ago price. Neither pays a dividend, and more and more people don't care about that, given that money of zero maturity (cash in the bank) pays little or nothing either.
AAPL and Au are also polar opposites. The former represents many of the best attributes of free market capitalism. It represents the future and appeals to techies and the young, among other groups. The latter appeals in many cases to older people who wish to preserve accumulated wealth against the ongoing Fed and governmental policies in many countries.
There are many cases where a "barbell" approach appeals to investors. This approach could involve holding cash and long bonds but no intermediate term bonds. For metals investors, it could involve holding gold and a very base metal, but not silver, platinum or semi-precious metal. For investment funds, I continue to find gold and AAPL stock as an interesting barbell approach to core investments in what continues to appear to be the bizarre world of central bank-mediated zero interest rates and federal deficits which despite the Summer of Recovery the administration promised two months ago show little sign of shrinking substantially.
Given the good news that iPhone demand apparently is "very robust" and added to a strong revamped iPod product line and rapid growth in iPad and core Mac sales, with growing exposure to sales outside of North America, I like the risk-reward in AAPL stock.
As a topic for another post, one reason I continue to "like" gold (meaning I give a Bronx cheer to Treasury's and the Fed's management of the dollar) is the price action of silver. Silver's 150 day sma has joined its 200 day sma as being in record territory (post 1980). Money-printing is pushing prices upward to record highs in MCD and to or near 12-month highs in CB, gold and silver.
The adage of "don't fight the Fed" continues to apply. I continue to look for the best risk-reward assets despite Fed policies I oppose. This takes some cognitive dissonance, but I'm liking the taste of golden apples so far.
Copyright (C) Long Lake LLC 2010
Three golden Apples were featured in Greek mythology, in which a hunter named Atalanta raced against a suitor named Hippomenes who used the golden apples to distract her so that he could win the race . . .
(From Wikipedia)
Gold and Apple. Interesting how they have been linked over the millenia; they form ends of a barbell investing strategy for me at this time.
As an ongoing accumulator of AAPL stock, I am satisfied that it went up with a strong NASDAQ today. I am too old and out-of-it to use any of the stuff that Apple announced today, but it is good to see a blogger have very positive things to say. While not uniform, most reviews I saw on the 'Net were positive as well.
There are other product-related straws in the wind. Re the iPad, it's great to see the offbeat report that a private school in Scotland has shifted instruction entirely to the iPad. I never would have guessed; in fact, I traded out of AAPL stock after a 10% gain ($200 to $220) shortly before the iPad's introduction as I was worried it would be a disappointment. Given the success of this product and of the iPhone 4, along with the decline in interest rates which have made fixed income even less attractive, I am quite satisfied having bought back into the stock at somewhat higher prices.
Perhaps the most underappreciated news of the day is about the iPhone 4 and not today's presentation about the iPod line refreshment, iTV and the like. Worried about how the antenna controversy and/or Android are affecting sales? Here's a great headline for anyone who owns AAPL stock:
Apple unable to keep up with iPhone 4 demand, say execs
The brief article begins:
Apple is still unable to cope with interest in the iPhone 4, two of the company's key executives indicate. A Deutsche Bank analyst, Chris Whitmore, recently met with CFO Peter Oppenheimer and senior VP of retail Ron Johnson to discuss the state of sales. "iPhone 4 demand remains very robust and despite efforts to close the supply-demand imbalance and the continued supply ramp, Apple still cannot meet iPhone demand," Whitmore says of the discussion.
Yours truly is not a financial analyst. Looking at little more than seasonal consecutive quarter-on-quarter trends aligned with year-on-year comparisons, and also doing more than looking at the last 6 year's average price of AAPL stock to cash flow and earnings, I come up with a reasonable trading price of $450-500 for AAPL stock for some point in 2011. This derives from the Value Line chart which shows AAPL trading at about an average of 22X cash flow for the past 6 years. Of course, few traders forget that the third year of a President's term is usually a strong one for investors. (Of course, let's also not forget that the 3rd year of Herbert Hoover's term was not so hot.)
I am using $20/share for Apple's2011 calendar year earnings. (Apple is on a September fiscal year.)
Apple is growing at an amazing pace for a large company. In July, it preannounced $18 B for current quarter sales. Analysts are currently targeting $18 1/2 B. In its April 9 edition (merely 4 months ago), Value Line was predicting $14.8 B for current quarter sales. How often does a very large company have such a "beat"? I can't remember such an occurrence since the tech bubble.
So far as I can see, there is no undue speculation in AAPL stock. This does not guarantee positive returns, though. The stock will take a tumble if Steve Jobs retires. But I suspect that it is selling at about 15X CY 2010 and 12.5X CY 2011 earnings. Analysts have the company growing 18% per year over the next five years. In the past they have been conservative. These analysts thus have the stock at under 6X earnings 5 years from now. If Apple were selling 5-year debt, it would hardly pay any premium over Treasuries. So the prospective return from theoretical AAPL 5-year debt is perhaps 1.5% per year. Even if the stock is projected to sell for 9X earnings 5 years from now, it would then be projected to appreciate about 9% per year. This is quite an equity premium for a financial and operational powerhouse.
Compared to the S&P 500, AAPL is in far superior technical shape. The long-term 200 day (40 week) simple moving average of SPY (the ETF for the S&P 500)has begun to turn down. The 150 day sma is about to drop below the 200 day sma, and the 50 day sma is below both of them. SPY is now in a (mildly) bearish technical configuration. AAPL, in contrast, has bounced off its rising 150 day sma, which is properly aligned in a bull market configuration above a rising 200 day sma. AAPL is of course well above its 2007 high stock price of around $200/share, which at that time represented about 40 times its cash flow for CY 2007. I have been using the ability of a commodity or security to move to new highs compared with the pre-Lehman implosion as a sign of fundamental strength. I want to be invested where the charts are fundamentally "strong", given that I believe there are probably a few years of challenging economic and financial markets ahead of us in the U. S. (Thus I said positive things about MCD and CB recently based on operational and chart considerations.)
While from a sure thing (which does not exist in investing without illegal inside information), AAPL is similar to gold from an investment standpoint. Both marched on to new highs after the onset and current aftermath of the Great Recession/credit collapse/depression. Gold is within 2% of its all-time high and is up more than 30% from one year ago. AAPL is both further off its high but in an offsetting manner is up more than 50% above its year-ago price. Neither pays a dividend, and more and more people don't care about that, given that money of zero maturity (cash in the bank) pays little or nothing either.
AAPL and Au are also polar opposites. The former represents many of the best attributes of free market capitalism. It represents the future and appeals to techies and the young, among other groups. The latter appeals in many cases to older people who wish to preserve accumulated wealth against the ongoing Fed and governmental policies in many countries.
There are many cases where a "barbell" approach appeals to investors. This approach could involve holding cash and long bonds but no intermediate term bonds. For metals investors, it could involve holding gold and a very base metal, but not silver, platinum or semi-precious metal. For investment funds, I continue to find gold and AAPL stock as an interesting barbell approach to core investments in what continues to appear to be the bizarre world of central bank-mediated zero interest rates and federal deficits which despite the Summer of Recovery the administration promised two months ago show little sign of shrinking substantially.
Given the good news that iPhone demand apparently is "very robust" and added to a strong revamped iPod product line and rapid growth in iPad and core Mac sales, with growing exposure to sales outside of North America, I like the risk-reward in AAPL stock.
As a topic for another post, one reason I continue to "like" gold (meaning I give a Bronx cheer to Treasury's and the Fed's management of the dollar) is the price action of silver. Silver's 150 day sma has joined its 200 day sma as being in record territory (post 1980). Money-printing is pushing prices upward to record highs in MCD and to or near 12-month highs in CB, gold and silver.
The adage of "don't fight the Fed" continues to apply. I continue to look for the best risk-reward assets despite Fed policies I oppose. This takes some cognitive dissonance, but I'm liking the taste of golden apples so far.
Copyright (C) Long Lake LLC 2010
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