Recently posed Question:
Why do you favor U.S. equities, when bonds and emerging markets are doing well?
Answer:
When I see 10% free cash flow in a time when yields on Treasuries are at 3%-3½%—and if I have any faith in management that they won’t take that free cash flow and pour it down a rat hole—10% looks a whole lot better to me than 3½%, especially if such companies are doing business in areas that are growing.
Tuesday, December 14, 2010
Tuesday, November 9, 2010
End of Q3 2010 Commentary
Market Snapshot
We experienced a roller coaster, with a small correction in August, followed by what turned out to be one of the best September’s on record. Earnings have been good, though we have much mixed data, and are stuck in a “jobless recovery”. The government tells us that the recession ended last July, but Warren Buffett disagrees. Hmmm? The government also likes to tells us that prices are under control, but when we look at the CPI we are supposed to look at it “ex-food, ex-fuel”… On the optimistic side, much of the September rally has been attributed to a likely changing of the guard in Washington DC. A recent poll shows that 85% of the population is “angry” with the economy—never good for the incumbents. This is from Phil Gramm:
Let’s just hope that prescriptions by any political “new guard” don’t precipitate any major policy missteps. Investors have continued to pile into equities, with cash coming off the sidelines from money market funds, as well as a robust outflow of funds from the Bond markets into Equities. We continue to selectively make purchases in areas that appear undervalued and underappreciated for their earnings stability, necessity, and stable of products.
As an example of our risk-adjusted approach to equities, we have favored purchases in oil and oil drillers; for example, such companies trade at just over 9 times earnings, which is about half of the broader stock market multiple of 15-20 times earnings. We feel that such an example plays well on a bottom-up company analysis, on a top-down global macro analysis, on a global demand basis, on a currency basis (if the dollar weakens), and on a “black swan event” basis (Middle East instability). Further, if the economy weakens, oil prices are likely to stay in a $65-85 range; if the economy continues to expand, the range could reach $100 again. Here in early October in fact, oil has reached $80/barrel, and the Obama Administration just removed the moratorium on oil drillers in the Gulf—all positives for this sector.
Buy Stocks that Look Like Bonds and Bonds that Look Like Stocks
What do we mean by this? Simply, for new money purchases we are actively screening for equity valuations trading for 7-12x earnings, with dividend yields between 3-6% as an added bonus if we can get it. By buying the earnings stream of a high quality company at these valuations, we are much more certain in our investment thesis in terms of risk. In other words, we are looking to buy an earnings stream for ½ to ¾ of the valuation placed on the broader market, which only yields 1.5-2%. So any stock that pays 3-4% at a minimum is yielding twice as much as the S&P 500 with ½ to ¾ of the price risk. With the high grade corporate bond index paying between 4-5% yields, it becomes clear that if we can find great companies with even higher payout attributes, we are buying stocks that resemble bonds.
To flip the equation, in the bond market we are looking for high grade corporate bonds (4-5%) and “vanilla flavored” high yield bonds (7-8%). Why? Because we don’t trust the government, to put it bluntly. This mindless money-printing should lead all investors to ask the question: who do I trust more to pay me back? Warren Buffett or the USA? Increasingly the answer is corporate America, since we can easily examine a corporate balance sheet and determine the percentage of the company that is financed by debt. In a word, debt at the corporate level is a finite number; whereas government debt is dangerously in the other direction. Considering that the 10-year Treasury pays only 2.5%, and in the context of our view that inflation will eventually come home to roost, any holders of Treasury securities will lose badly to inflation or erosion of capital.
Often it takes time for the market to capture the intrinsic value of securities. While there are those who “believe” in the EMH (Efficient Market Hypothesis), we note that it is extremely important to realize that an “efficient” market doesn’t mean the market is always “rational”; in fact the inverse is true. “Efficiency” means that the market will efficiently produce a price, matching a buyer with a seller. “Efficient” pricing led to extremely high short-term valuations in 1999/2000, and extremely low short-term valuations in March 2009—but was it rational long term?
Inflation Is Still A Monetary Phenomenon!
Milton Friedman said it best: “Inflation is always and everywhere a monetary phenomenon”. MV=PQ is the equation, and it essentially breaks down into a simple explanation such as “the more money is printed or created by the government, the higher the price level (prices) will be”. In other words, inflation. There has been discussion that increasing inflation will reduce unemployment; however Milton Friedman’s work in 1968 explained why any gain in employment would be temporary—it would last only so long as people underestimated the rate of inflation!
Looking at the Fed’s rather aggressively attempts at reflation, there is some concern now that the Fed may not be sparking the “good” inflation that is caused by strong demand and reduced slack in the economy, but rather the “bad” inflation that behaves more like a tax hike. The Fed is hoping that the wealth effect produced by a rising stock market will offset the concerns. The Fed’s policies produce asset classes that are re-flated due to a commensurate newfound liquidity creation of dollars and Treasuries via debt monetization (i.e. using one credit card to pay off another). The Fed has signaled that it again may resort to Quantitative Easing (being called QE2). This should keep a lid on mortgage rates (for now), but at what future cost to the economy is anyone’s guess…
Re-flation of Assets
The economic debate has centered on deflation versus inflation. Based upon a fiat currency (our currency has been this way since we went off the gold standard), inflation is always preferable to deflation. Deflationary risks are to be avoided if at all possible, and by this measure the Fed seems to be succeeding.
In a reflationary period it is quite possible for all types of assets to go up in value, and then based upon this 2011/2012 time frame, commodities and stocks could decouple in favor of commodities and commodity-related enterprises. In such an environment, it is important to remember “why we invest”, which is to outpace inflation. If the stock market goes up 30% but oil and other commodities go up 60%, you will have wanted more exposure to those sectors within the market.
In a long-term inflationary environment, we expect that foreign currencies may also be useful vehicles, but not as clearly as precious metals and commodities. The reason is that the U.S. is certainly not the only country demonstrating open-checkbook monetary and fiscal policy here. That means that currency positions largely represent the choice of which currency is "less bad." It's quite likely that hard assets such as precious metals and other commodities will advance relative to a wide range of currencies, beginning in the second half of this decade (which is another way of saying that we would expect inflation to be largely a global phenomenon). Conversely, while some currencies will most probably depreciate less than others against a fixed basket of commodities (i.e. exchange rates between different currencies will fluctuate even in a global inflation), those choices may turn out to be more subtle.
In short, nearly all developed economies are behaving badly in terms of fiscal and monetary discipline. We do expect that there will be relative valuation differences in currencies and policies that will provide a basis for currency positions as we gradually transition from a low-inflation world eager for safe-havens to a post-credit crisis inflationary outcome several years from now. But the most likely beneficiaries (and the securities that we would be inclined to accumulate on significant deflation fears), are likely to be commodities, precious metals and TIPS. As usual, we'll respond to the data as it emerges, but the foregoing is a reflection of where we would expect the opportunities to emerge. The recent TIPS auction produced a negative yield for the first time ever… bolstering the case for inflation over deflation.
History As Prequel
On a historical basis, every major stock market peak of the 20th Century was followed by a crash in the U.S. dollar five years later. People who kept their savings in dollars saw the purchasing power of their savings shrink substantially. For example, four years after the peak of 1929, FDR closed the banks and made it illegal for private citizens to own gold. In January 1934—five years after the bubble—he devalued the dollar, crushing people’s savings. Commodity prices had triple-digit rises in the mid-1930s and speculators once again made a fortune. The same thing happened five years after the market peaked in the late 1960s. Five years later, Nixon took the dollar off the gold standard (this time for good). Commodity prices soared for the next ten years, with the price of gold reaching $850/oz by the time it was over. Fast forward—the stock market popped in March 2000, and five years later in the Spring of 2005, the bull market in commodities was on. Oil went from $40 to $140; gold went from $400 to $1000/oz. We just had another peak in the stock market in October 2007. Based upon this precedent, we could foresee a raging bull market in commodities (due to a falling US dollar value, big inflation, or both) somewhere between mid-2011 and the fall of 2012. This is the risk, and the opportunity.
Positioning Globally for Any Environment
The sectors we like most are commodity-related equities, including oil, coal, mining, agriculture, metals; we also like select healthcare, medical device, and biotech companies as well as a few select technology names that exhibit reasonable valuations (Growth At a Reasonable Price, GARP). The reasoning for our commodities-related/oil/metals bent is many-fold: 1) they are needed , (2) they appear undervalued and are economically sensitive; if they drop due to a weaker environment it shouldn’t be disastrous due to their inherent value, and if the market goes up, they go up too, (3) commodities are priced in US$, so if the dollar goes down, it takes more US$ to buy them, meaning the producers of these commodities will have higher earnings, (4) during inflationary periods they tend to hold up the best, (5) if we experience a currency devaluation for whatever reason (and inflation is but another means of achieving this), see #1-4. So we are adding positions that can withstand gale force winds based on macroeconomics and/or deliver strong earnings. Additionally, the recent news that China’s Yuan is floating higher adds to the demand for commodities.
Currencies
Increasingly we are hearing about a troubled dollar, but the truth is that there is a global “race to the bottom” in currencies. Governments are printing money to inflate their way out of the global meltdown. And while some politicians are trying to put new tooth into the old Smoot-Hawley Tariff Act of the 1930’s (you probably think we’re joking, but we are not), the truth is that we are in an Economic War of Protectionism which is going at full throttle—countries with cheaper currencies are hoping to benefit growth of exports in order to grow their top line GDP numbers. But at what cost? It’s all an illusion to make it appear that things are better; the reality is that many countries are beginning to discuss a global currency alternative, or IMU (International Monetary Unit)—by the way this was a long time prediction by Nobel-prize winning economist Robert Mundell, who also predicted the rise of the Euro, says of the very unstable relationship between the euro-dollar rate “[this is a] terrible things for the world economy. We’ve never been in this unstable position in the entire currency history of 3,000 years”… what could transpire in the future that leads us to the IMU? An important question to contemplate, and one to which the price of gold may be sending us an answer.
Gold
Irving Fisher, economist of the 1920’s whose ideas were overshadowed by John Meynard Keynes, is the original proponent of a strong dollar backed by commodities.
If the Fed would have listened to gold (or the nominal GDP model) over the past 15 years, the US would probably not be in the mess it is in today. Gold prices fell from $400 per ounce to $255 an ounce between 1996 and 1999. This signaled deflation, but the Fed chose to ignore the signal and raised interest rates anyway in 1998 and 1999. Deflation, recession and a stock market crash were the result.
In the wake of the stock market crash, the Fed started cutting rates because it feared deflation. Gold started to rise and by late 2003 it was back above $400/oz. But the Fed held rates at 1% anyway, which created a housing bubble. When that bubble burst, the Fed started cutting rates again and gold prices have now moved to more than $1300/oz. At this point, one would think the Fed would pause before pumping even more money into the system and targeting higher inflation.
But it isn’t. The Fed continues to hold interest rates at zero, proposes another round of “quantitative easing” and plans to target 2% inflation. All because it won’t listen to gold and it’s unable to see that banks are afraid to use the money the Fed is pumping in because, down the road, the Fed will be forced to take it out or face serious inflation.
That’s what gold is saying. By signaling that it won’t quit anytime soon, the Fed is trying to force banks to change their behavior. If it works, look out for inflation to reach multiples of 2% in the years ahead. The Fed hasn’t been successful yet, when it ignores gold and commodity prices.
Mortgages
If you have not done so, take advantage of still-historically low 30 year fixed mortgage rates. Recently the 30 year fixed mortgage dipped to about a 60-year low. It’s still cheap money, and it should be considered a very temporary “gift” from the Fed. The Fed is re-upping its bet of Quantitative Easing (buying mortgage backed securities on the yield curve to artificially keep mortgage rates low). Take advantage of this now, especially if you currently hold an adjustable rate mortgage. This gift, if you decide not to take advantage of it, will self-destruct within 24 months…
Fixed Income Commentary
Corporate bonds, both investment grade and high yield, look relatively attractive. In fact high grade corporate bonds are now trading on a near-equal basis with Treasury securities, meaning that sovereign debt is trading on credit-worthiness and balance sheet strength (instead of on ability to tax). As far as we know, this has never occurred before in history. Well, after all, who would you trust more to pay back a loan right now? Warren Buffett or the U.S. government? We’d choose Buffett.
Treasury securities with longer maturities should be avoided at all costs in this environment. TIPS offer some inflation protection, though recent auctions have produced negative real yields since investors are becomingly increasingly convinced that inflation is coming.
CA Municipal Bonds
The CA political atmosphere is heating up, with lots of talk; hopefully the “winners” can actually deliver on their rhetoric in terms of fixing the state’s woeful financial condition. The problems are big, but as a great politician once said: “the answers aren’t easy, but they are simple.” Please make your vote heard on November 2, unless you have already changed your legal residency to Nevada.
We experienced a roller coaster, with a small correction in August, followed by what turned out to be one of the best September’s on record. Earnings have been good, though we have much mixed data, and are stuck in a “jobless recovery”. The government tells us that the recession ended last July, but Warren Buffett disagrees. Hmmm? The government also likes to tells us that prices are under control, but when we look at the CPI we are supposed to look at it “ex-food, ex-fuel”… On the optimistic side, much of the September rally has been attributed to a likely changing of the guard in Washington DC. A recent poll shows that 85% of the population is “angry” with the economy—never good for the incumbents. This is from Phil Gramm:
Let’s just hope that prescriptions by any political “new guard” don’t precipitate any major policy missteps. Investors have continued to pile into equities, with cash coming off the sidelines from money market funds, as well as a robust outflow of funds from the Bond markets into Equities. We continue to selectively make purchases in areas that appear undervalued and underappreciated for their earnings stability, necessity, and stable of products.
As an example of our risk-adjusted approach to equities, we have favored purchases in oil and oil drillers; for example, such companies trade at just over 9 times earnings, which is about half of the broader stock market multiple of 15-20 times earnings. We feel that such an example plays well on a bottom-up company analysis, on a top-down global macro analysis, on a global demand basis, on a currency basis (if the dollar weakens), and on a “black swan event” basis (Middle East instability). Further, if the economy weakens, oil prices are likely to stay in a $65-85 range; if the economy continues to expand, the range could reach $100 again. Here in early October in fact, oil has reached $80/barrel, and the Obama Administration just removed the moratorium on oil drillers in the Gulf—all positives for this sector.
Buy Stocks that Look Like Bonds and Bonds that Look Like Stocks
What do we mean by this? Simply, for new money purchases we are actively screening for equity valuations trading for 7-12x earnings, with dividend yields between 3-6% as an added bonus if we can get it. By buying the earnings stream of a high quality company at these valuations, we are much more certain in our investment thesis in terms of risk. In other words, we are looking to buy an earnings stream for ½ to ¾ of the valuation placed on the broader market, which only yields 1.5-2%. So any stock that pays 3-4% at a minimum is yielding twice as much as the S&P 500 with ½ to ¾ of the price risk. With the high grade corporate bond index paying between 4-5% yields, it becomes clear that if we can find great companies with even higher payout attributes, we are buying stocks that resemble bonds.
To flip the equation, in the bond market we are looking for high grade corporate bonds (4-5%) and “vanilla flavored” high yield bonds (7-8%). Why? Because we don’t trust the government, to put it bluntly. This mindless money-printing should lead all investors to ask the question: who do I trust more to pay me back? Warren Buffett or the USA? Increasingly the answer is corporate America, since we can easily examine a corporate balance sheet and determine the percentage of the company that is financed by debt. In a word, debt at the corporate level is a finite number; whereas government debt is dangerously in the other direction. Considering that the 10-year Treasury pays only 2.5%, and in the context of our view that inflation will eventually come home to roost, any holders of Treasury securities will lose badly to inflation or erosion of capital.
Often it takes time for the market to capture the intrinsic value of securities. While there are those who “believe” in the EMH (Efficient Market Hypothesis), we note that it is extremely important to realize that an “efficient” market doesn’t mean the market is always “rational”; in fact the inverse is true. “Efficiency” means that the market will efficiently produce a price, matching a buyer with a seller. “Efficient” pricing led to extremely high short-term valuations in 1999/2000, and extremely low short-term valuations in March 2009—but was it rational long term?
Inflation Is Still A Monetary Phenomenon!
Milton Friedman said it best: “Inflation is always and everywhere a monetary phenomenon”. MV=PQ is the equation, and it essentially breaks down into a simple explanation such as “the more money is printed or created by the government, the higher the price level (prices) will be”. In other words, inflation. There has been discussion that increasing inflation will reduce unemployment; however Milton Friedman’s work in 1968 explained why any gain in employment would be temporary—it would last only so long as people underestimated the rate of inflation!
Looking at the Fed’s rather aggressively attempts at reflation, there is some concern now that the Fed may not be sparking the “good” inflation that is caused by strong demand and reduced slack in the economy, but rather the “bad” inflation that behaves more like a tax hike. The Fed is hoping that the wealth effect produced by a rising stock market will offset the concerns. The Fed’s policies produce asset classes that are re-flated due to a commensurate newfound liquidity creation of dollars and Treasuries via debt monetization (i.e. using one credit card to pay off another). The Fed has signaled that it again may resort to Quantitative Easing (being called QE2). This should keep a lid on mortgage rates (for now), but at what future cost to the economy is anyone’s guess…
Re-flation of Assets
The economic debate has centered on deflation versus inflation. Based upon a fiat currency (our currency has been this way since we went off the gold standard), inflation is always preferable to deflation. Deflationary risks are to be avoided if at all possible, and by this measure the Fed seems to be succeeding.
In a reflationary period it is quite possible for all types of assets to go up in value, and then based upon this 2011/2012 time frame, commodities and stocks could decouple in favor of commodities and commodity-related enterprises. In such an environment, it is important to remember “why we invest”, which is to outpace inflation. If the stock market goes up 30% but oil and other commodities go up 60%, you will have wanted more exposure to those sectors within the market.
In a long-term inflationary environment, we expect that foreign currencies may also be useful vehicles, but not as clearly as precious metals and commodities. The reason is that the U.S. is certainly not the only country demonstrating open-checkbook monetary and fiscal policy here. That means that currency positions largely represent the choice of which currency is "less bad." It's quite likely that hard assets such as precious metals and other commodities will advance relative to a wide range of currencies, beginning in the second half of this decade (which is another way of saying that we would expect inflation to be largely a global phenomenon). Conversely, while some currencies will most probably depreciate less than others against a fixed basket of commodities (i.e. exchange rates between different currencies will fluctuate even in a global inflation), those choices may turn out to be more subtle.
In short, nearly all developed economies are behaving badly in terms of fiscal and monetary discipline. We do expect that there will be relative valuation differences in currencies and policies that will provide a basis for currency positions as we gradually transition from a low-inflation world eager for safe-havens to a post-credit crisis inflationary outcome several years from now. But the most likely beneficiaries (and the securities that we would be inclined to accumulate on significant deflation fears), are likely to be commodities, precious metals and TIPS. As usual, we'll respond to the data as it emerges, but the foregoing is a reflection of where we would expect the opportunities to emerge. The recent TIPS auction produced a negative yield for the first time ever… bolstering the case for inflation over deflation.
History As Prequel
On a historical basis, every major stock market peak of the 20th Century was followed by a crash in the U.S. dollar five years later. People who kept their savings in dollars saw the purchasing power of their savings shrink substantially. For example, four years after the peak of 1929, FDR closed the banks and made it illegal for private citizens to own gold. In January 1934—five years after the bubble—he devalued the dollar, crushing people’s savings. Commodity prices had triple-digit rises in the mid-1930s and speculators once again made a fortune. The same thing happened five years after the market peaked in the late 1960s. Five years later, Nixon took the dollar off the gold standard (this time for good). Commodity prices soared for the next ten years, with the price of gold reaching $850/oz by the time it was over. Fast forward—the stock market popped in March 2000, and five years later in the Spring of 2005, the bull market in commodities was on. Oil went from $40 to $140; gold went from $400 to $1000/oz. We just had another peak in the stock market in October 2007. Based upon this precedent, we could foresee a raging bull market in commodities (due to a falling US dollar value, big inflation, or both) somewhere between mid-2011 and the fall of 2012. This is the risk, and the opportunity.
Positioning Globally for Any Environment
The sectors we like most are commodity-related equities, including oil, coal, mining, agriculture, metals; we also like select healthcare, medical device, and biotech companies as well as a few select technology names that exhibit reasonable valuations (Growth At a Reasonable Price, GARP). The reasoning for our commodities-related/oil/metals bent is many-fold: 1) they are needed , (2) they appear undervalued and are economically sensitive; if they drop due to a weaker environment it shouldn’t be disastrous due to their inherent value, and if the market goes up, they go up too, (3) commodities are priced in US$, so if the dollar goes down, it takes more US$ to buy them, meaning the producers of these commodities will have higher earnings, (4) during inflationary periods they tend to hold up the best, (5) if we experience a currency devaluation for whatever reason (and inflation is but another means of achieving this), see #1-4. So we are adding positions that can withstand gale force winds based on macroeconomics and/or deliver strong earnings. Additionally, the recent news that China’s Yuan is floating higher adds to the demand for commodities.
Currencies
Increasingly we are hearing about a troubled dollar, but the truth is that there is a global “race to the bottom” in currencies. Governments are printing money to inflate their way out of the global meltdown. And while some politicians are trying to put new tooth into the old Smoot-Hawley Tariff Act of the 1930’s (you probably think we’re joking, but we are not), the truth is that we are in an Economic War of Protectionism which is going at full throttle—countries with cheaper currencies are hoping to benefit growth of exports in order to grow their top line GDP numbers. But at what cost? It’s all an illusion to make it appear that things are better; the reality is that many countries are beginning to discuss a global currency alternative, or IMU (International Monetary Unit)—by the way this was a long time prediction by Nobel-prize winning economist Robert Mundell, who also predicted the rise of the Euro, says of the very unstable relationship between the euro-dollar rate “[this is a] terrible things for the world economy. We’ve never been in this unstable position in the entire currency history of 3,000 years”… what could transpire in the future that leads us to the IMU? An important question to contemplate, and one to which the price of gold may be sending us an answer.
Gold
Irving Fisher, economist of the 1920’s whose ideas were overshadowed by John Meynard Keynes, is the original proponent of a strong dollar backed by commodities.
If the Fed would have listened to gold (or the nominal GDP model) over the past 15 years, the US would probably not be in the mess it is in today. Gold prices fell from $400 per ounce to $255 an ounce between 1996 and 1999. This signaled deflation, but the Fed chose to ignore the signal and raised interest rates anyway in 1998 and 1999. Deflation, recession and a stock market crash were the result.
In the wake of the stock market crash, the Fed started cutting rates because it feared deflation. Gold started to rise and by late 2003 it was back above $400/oz. But the Fed held rates at 1% anyway, which created a housing bubble. When that bubble burst, the Fed started cutting rates again and gold prices have now moved to more than $1300/oz. At this point, one would think the Fed would pause before pumping even more money into the system and targeting higher inflation.
But it isn’t. The Fed continues to hold interest rates at zero, proposes another round of “quantitative easing” and plans to target 2% inflation. All because it won’t listen to gold and it’s unable to see that banks are afraid to use the money the Fed is pumping in because, down the road, the Fed will be forced to take it out or face serious inflation.
That’s what gold is saying. By signaling that it won’t quit anytime soon, the Fed is trying to force banks to change their behavior. If it works, look out for inflation to reach multiples of 2% in the years ahead. The Fed hasn’t been successful yet, when it ignores gold and commodity prices.
Mortgages
If you have not done so, take advantage of still-historically low 30 year fixed mortgage rates. Recently the 30 year fixed mortgage dipped to about a 60-year low. It’s still cheap money, and it should be considered a very temporary “gift” from the Fed. The Fed is re-upping its bet of Quantitative Easing (buying mortgage backed securities on the yield curve to artificially keep mortgage rates low). Take advantage of this now, especially if you currently hold an adjustable rate mortgage. This gift, if you decide not to take advantage of it, will self-destruct within 24 months…
Fixed Income Commentary
Corporate bonds, both investment grade and high yield, look relatively attractive. In fact high grade corporate bonds are now trading on a near-equal basis with Treasury securities, meaning that sovereign debt is trading on credit-worthiness and balance sheet strength (instead of on ability to tax). As far as we know, this has never occurred before in history. Well, after all, who would you trust more to pay back a loan right now? Warren Buffett or the U.S. government? We’d choose Buffett.
Treasury securities with longer maturities should be avoided at all costs in this environment. TIPS offer some inflation protection, though recent auctions have produced negative real yields since investors are becomingly increasingly convinced that inflation is coming.
CA Municipal Bonds
The CA political atmosphere is heating up, with lots of talk; hopefully the “winners” can actually deliver on their rhetoric in terms of fixing the state’s woeful financial condition. The problems are big, but as a great politician once said: “the answers aren’t easy, but they are simple.” Please make your vote heard on November 2, unless you have already changed your legal residency to Nevada.
Wednesday, August 4, 2010
Valuations Favor Stocks
Stocks: The second quarter of 2010 was not good, with Mr. Market struggling between optimism, and finally caving in to pessimism. A slide of over 11% for the quarter ensued. Thus far in July we have recouped about 6%. We continue to selectively make purchases in areas that appear undervalued and underappreciated for their earnings stability, necessity, and stable of products. As an example of our risk-adjusted approach to equities, we have favored new purchases in oil and oil drillers, health care companies, mining/materials, and telecomm. While the broader stock market trades at 15x earnings, we are finding exceptional companies trading between 5-10x earnings, which provides a greater “margin of safety” in investing. We focus on bottom-up company analysis within a greater context of top-down global macro analysis, global demand, and currency issues. In fact, valuations of the strongest, best-managed, highly capitalized multinational businesses are priced at a deep discount (about 35%) to where they have traded on a normalized 10 year basis.
As a consequence of low interest rates, investors are very interested in purchasing higher yielding securities. This has led some to some investors buying longer 10-30 year bond maturities as they reach for yield, which frankly we view as a mistake. Though we have not yet seen investors flock to higher dividend paying securities in the stock market, it would not surprise us to see this movement gain momentum going forward. Corporate balance sheets have improved dramatically, and it is now possible find stable stocks with healthy dividends whose yield exceeds the 10/20/30 year bond.
Bonds: Investors continue to throw money at the bond markets with little consideration to the risk inherent in choosing an asset class that is grossly overpriced. The yield on the 10 year Treasury bond implies investors are paying a price-to-earnings ratio of 34x for these interest payments. Over the past three years, $572 billion has flowed into bond mutual funds. Over the same period, nothing has flowed into stock mutual funds. Corporate cash levels are at the highest percentage of total assets ever, and total cash sitting in money market funds stands at $9.4 trillion, also the highest level in history. The message is that we are on the right track in terms of how we value cash flows, particularly the entities that produce those cash flows. We would rather own a high quality corporation, trading at 5-10x earnings, paying a 4-5% dividend (that can grow relative to inflation) than an asset class (10 year Treasury) trading 2x stock market valuations that on a risk-adjusted and inflation-adjusted basis are likely to lose money over the next decade. Are we facing a future “lost decade” in the bond market?
Value Investing
This is worth repeating from Bill Miller, legendary investor:
“If your expectation is that we will outperform the market every year, you can expect to be disappointed. We would love nothing better than to beat the market every day, every month, every quarter and every year…Unfortunately, when we purchase companies we believe are mispriced, it is often difficult to determine when the market will agree with us and close the discount to intrinsic value…
Our goal is to construct portfolios that have the potential to outperform the market over an investment time horizon of three to five years without assuming any undue risk. If we achieve that goal, we believe we will be doing our job, whether we beat the market each and every year or not.”
At ACCIMI we agree strongly with Bill Miller’s view. Often it takes time for the market to capture the intrinsic value of securities. While there are those who “believe” in the EMH (Efficient Market Hypothesis), we note that it is extremely important to realize that an “efficient” market doesn’t mean the market is “always rational”; in fact the inverse is quite true. “Efficiency” means that the market will efficiently produce a price, matching a buyer with a seller. “Efficient” pricing led to extremely high valuations in 1999/2000, and extremely low prices in March 2009—but was it rational?
Our media, and the certain parts of the financial services industry, continue to focus on the shorter term-- economic announcements hit the wire and investors are led to believe that all of this information is important and that it will have a direct impact on a company’s performance. Nothing could be further from the truth. In fact, sometimes we can capitalize on investors’ shortsightedness by taking advantage of lower prices over a short period of time. Over a five year period, the price of a stock will largely track the fundamentals of the company, and its actual earnings rather than its quarterly economic reports.
Re-flation of Assets
The economic debate has centered on deflation versus inflation. Based upon a fiat currency (our currency has been this way since we went off the gold standard), inflation is always preferable to deflation. Deflationary risks are to be avoided if at all possible, and by this measure the Fed seems to be succeeding, though there *are* some deflationary signals that exist. In a reflationary period it is quite possible for all types of assets to go up in value, commodities and stocks could decouple in favor of commodities and commodity-related enterprises between 2011 and 2012. In such an environment, it is important to remember “why we invest”, which is to outpace inflation. If the stock market goes up 30% but oil and other commodities go up 60%, you will have wanted more exposure to those sectors within the market.
In a long-term inflationary environment, we expect that foreign currencies may also be useful vehicles, but not as clearly as precious metals and commodities. The reason is that the U.S. is certainly not the only country demonstrating open-checkbook monetary and fiscal policy here. That means that currency positions largely represent the choice of which currency is "less bad." It's quite likely that hard assets such as precious metals and other commodities will advance relative to a wide range of currencies, which is another way of saying that we would expect inflation to be largely a global phenomenon. Conversely, while some currencies will most probably depreciate less than others against a fixed basket of commodities (i.e. exchange rates between different currencies will fluctuate even in a global inflation), those choices may turn out to be more subtle. And what is the distinction between inflation and debasement of a currency in real purchasing power?
Well, the real difference is that the government gets yelled at for the former, and gets an invisible hall-pass for the latter. So bet on the latter. A doubling of the money supply in the last 18 months, again using the Milton Friedman formula, and monetization of debt, yields a currency that is worth half its value in purchasing power. Here’s where it gets even trickier though: let’s say that much of the rest of the world agrees in principle to also print more and more money, as a coordinated effort. Now what? Is a new global currency standard emerging? Nearly all developed economies are behaving badly in terms of fiscal and monetary discipline. We do expect that there will be relative valuation differences in currencies and policies that will provide a basis for currency positions as we gradually transition from a low-inflation world eager for safe-havens to a post-credit crisis inflationary outcome several years from now. But the most likely beneficiaries (and the securities that we would be inclined to accumulate on significant deflation fears), are likely to be commodities, agriculture, oil, and precious metals. As usual, we'll respond to the data as it emerges, but the foregoing is a reflection of where we would expect the opportunities to emerge.
This Time Is Different, Or Not: History As Prequel
On a historical basis, every major stock market peak of the 20th Century was followed by a crash in the U.S. dollar five years later. People who kept their savings in dollars saw the purchasing power of their savings shrink substantially. Commodity prices had triple-digit rises in the mid-1930s and speculators once again made a fortune. Based upon this precedent, we could foresee a raging bull market in commodities (due to a falling US dollar value, big inflation, or both) somewhere between mid-2011 and the fall of 2012.
History has shown that stock markets move in very broad cycles. Up cycles usually give us sustained earnings growth, P/E multiple expansion, and upward sloping economic indicators. Common characteristics of down cycles usually show low/no earnings growth, P/E contraction, and downward sloping economic data. For down cycles, the cause of the final multi-year leg down is nearly always different. However, a bottom is usually finally in place once the major economic indicators are completely gutted, along with P/E multiples, and trailing long term stock returns. Interestingly in March 2009, the items just listed matched the 1982 lows, and arguably March 2009 was a more extreme bottom. Interestingly, in 1983 once the initial spike of new orders occurred post-recession, there was much talk of a “double dip”, leading stocks to trade in a broad range for six to nine months. Sound familiar?
Positioning Globally for Any Environment
The sectors we like most are commodity-related equities, including oil, coal, mining, agriculture, metals; we also like select healthcare, medical device, and biotech companies as well as a few select technology names that exhibit reasonable valuations (Growth At a Reasonable Price, GARP). The reasoning for our commodities-related/oil/metals bent is many-fold: 1) they are needed , (2) they appear undervalued and are economically sensitive; if they drop due to a weaker environment it shouldn’t be disastrous due to their inherent value, and if the market goes up, they go up too, (3) commodities are priced in US$, so if the dollar goes down, it takes more US$ to buy them, meaning the producers of these commodities will have higher earnings, (4) during inflationary periods they tend to hold up the best, (5) if we experience a currency devaluation for whatever reason (and inflation is but another means of achieving this), see #1-4. So we are adding positions that can withstand gale force winds based on macroeconomics and/or deliver strong earnings.
Mortgages
Recently the 30 year fixed mortgage dipped to about a 60-year low. Take advantage of this now, especially if you currently hold an adjustable rate mortgage.
Fixed Income Commentary
In the context of our general comments on Treasury securities, high grade corporate bonds look relatively attractive. In fact high grade corporate bonds are now trading on a near-equal basis with Treasury securities, meaning that sovereign debt is trading on credit-worthiness and balance sheet strength (instead of on ability to tax). As far as we know, this has never occurred before in history. Well, after all, who would you trust more to pay back a loan right now? Warren Buffett or the U.S. government? We’d choose Buffett.
Treasury securities with longer maturities should be avoided at all costs in this environment. TIPS offer some inflation protection, but are based upon CPI numbers which are controlled by a government currently desperate to avoid automatic increases in budgetary items based upon CPI.
CA Municipal Bonds
The CA political atmosphere is heating up. Our prediction: Whoever wins will usher in a new era of “hope” for CA, and then around April or May of 2011, it will become quite apparent that CA is drowning in debt, and the CA legislature will fail Californians yet again. We are already beginning to lower our exposures to CA municipals, even short term durations. Both AMBAC and MBIA, the primary issuers of muni debt, are in big financial trouble, and by law they cannot issue municipal debt at a higher rating than their own firm. At some point the Federal government will need to act as a backstop for municipal debt in all 50 states, 48 of which are drowning in red ink.
Big Question Posed: So are we headed for a double-dip recession? Or not?
We read volumes of research, and frankly the signals are mixed, with some research pointing to an “oversold” condition, and some research pointing to an “overbought” condition. The truth is that nobody knows, and because nobody knows we are erring on the side of finding high quality businesses trading for 5-10x earnings (versus 15-17x for the S&P 500). If we run into a double-dip recession, we have already established a huge “margin of safety” by purchasing companies that are trading a low multiples relative to their asset base, balance sheets, dividends, and prospects. If we go into expansion mode, the market may begin to appreciate these companies via expanding market multiples. So in total we feel that our allocation to stocks looks attractive on a risk-adjusted basis.
However, we view our economy as being at an inflection point based on “which policies” are adopted going forward. Pro-growth, pro-incentive, lower-tax policies would be welcomed by the markets, and we think would propel them to new highs. Concerns over our debt burden would be assuaged by a higher growth economy that could service its debt service (due to the higher growth). This becomes a virtuous cycle, particularly to our creditors, who might then not have concerns about buying our Treasury bonds. An anti-growth, let-the-tax-cuts-expire policy (otherwise known as a tax increase), coupled with some of our impending new laws (higher regulation equals higher costs, healthcare is a new entitlement program) could be the thing that propels us downward. The historians out there like to overlay the Great Depression stock charts over the last several years—and it looks strikingly similar, so “policy” does matter. With all of the recent efforts to not repeat the Great Depression, it would be a shame to replicate it because of what looks like such an easy call on policy matters. There could end up being a bipartisan compromise based on the Administration’s latest efforts to extend unemployment benefits (i.e. Republicans could counter “OK, but we want tax cut extension”), though tax cuts are a primary issue of this November’s elections. If the polls are correct, something like tax cuts or stimulus could transpire by April of 2011-- lots of uncertainty in the interim.
As a consequence of low interest rates, investors are very interested in purchasing higher yielding securities. This has led some to some investors buying longer 10-30 year bond maturities as they reach for yield, which frankly we view as a mistake. Though we have not yet seen investors flock to higher dividend paying securities in the stock market, it would not surprise us to see this movement gain momentum going forward. Corporate balance sheets have improved dramatically, and it is now possible find stable stocks with healthy dividends whose yield exceeds the 10/20/30 year bond.
Bonds: Investors continue to throw money at the bond markets with little consideration to the risk inherent in choosing an asset class that is grossly overpriced. The yield on the 10 year Treasury bond implies investors are paying a price-to-earnings ratio of 34x for these interest payments. Over the past three years, $572 billion has flowed into bond mutual funds. Over the same period, nothing has flowed into stock mutual funds. Corporate cash levels are at the highest percentage of total assets ever, and total cash sitting in money market funds stands at $9.4 trillion, also the highest level in history. The message is that we are on the right track in terms of how we value cash flows, particularly the entities that produce those cash flows. We would rather own a high quality corporation, trading at 5-10x earnings, paying a 4-5% dividend (that can grow relative to inflation) than an asset class (10 year Treasury) trading 2x stock market valuations that on a risk-adjusted and inflation-adjusted basis are likely to lose money over the next decade. Are we facing a future “lost decade” in the bond market?
Value Investing
This is worth repeating from Bill Miller, legendary investor:
“If your expectation is that we will outperform the market every year, you can expect to be disappointed. We would love nothing better than to beat the market every day, every month, every quarter and every year…Unfortunately, when we purchase companies we believe are mispriced, it is often difficult to determine when the market will agree with us and close the discount to intrinsic value…
Our goal is to construct portfolios that have the potential to outperform the market over an investment time horizon of three to five years without assuming any undue risk. If we achieve that goal, we believe we will be doing our job, whether we beat the market each and every year or not.”
At ACCIMI we agree strongly with Bill Miller’s view. Often it takes time for the market to capture the intrinsic value of securities. While there are those who “believe” in the EMH (Efficient Market Hypothesis), we note that it is extremely important to realize that an “efficient” market doesn’t mean the market is “always rational”; in fact the inverse is quite true. “Efficiency” means that the market will efficiently produce a price, matching a buyer with a seller. “Efficient” pricing led to extremely high valuations in 1999/2000, and extremely low prices in March 2009—but was it rational?
Our media, and the certain parts of the financial services industry, continue to focus on the shorter term-- economic announcements hit the wire and investors are led to believe that all of this information is important and that it will have a direct impact on a company’s performance. Nothing could be further from the truth. In fact, sometimes we can capitalize on investors’ shortsightedness by taking advantage of lower prices over a short period of time. Over a five year period, the price of a stock will largely track the fundamentals of the company, and its actual earnings rather than its quarterly economic reports.
Re-flation of Assets
The economic debate has centered on deflation versus inflation. Based upon a fiat currency (our currency has been this way since we went off the gold standard), inflation is always preferable to deflation. Deflationary risks are to be avoided if at all possible, and by this measure the Fed seems to be succeeding, though there *are* some deflationary signals that exist. In a reflationary period it is quite possible for all types of assets to go up in value, commodities and stocks could decouple in favor of commodities and commodity-related enterprises between 2011 and 2012. In such an environment, it is important to remember “why we invest”, which is to outpace inflation. If the stock market goes up 30% but oil and other commodities go up 60%, you will have wanted more exposure to those sectors within the market.
In a long-term inflationary environment, we expect that foreign currencies may also be useful vehicles, but not as clearly as precious metals and commodities. The reason is that the U.S. is certainly not the only country demonstrating open-checkbook monetary and fiscal policy here. That means that currency positions largely represent the choice of which currency is "less bad." It's quite likely that hard assets such as precious metals and other commodities will advance relative to a wide range of currencies, which is another way of saying that we would expect inflation to be largely a global phenomenon. Conversely, while some currencies will most probably depreciate less than others against a fixed basket of commodities (i.e. exchange rates between different currencies will fluctuate even in a global inflation), those choices may turn out to be more subtle. And what is the distinction between inflation and debasement of a currency in real purchasing power?
Well, the real difference is that the government gets yelled at for the former, and gets an invisible hall-pass for the latter. So bet on the latter. A doubling of the money supply in the last 18 months, again using the Milton Friedman formula, and monetization of debt, yields a currency that is worth half its value in purchasing power. Here’s where it gets even trickier though: let’s say that much of the rest of the world agrees in principle to also print more and more money, as a coordinated effort. Now what? Is a new global currency standard emerging? Nearly all developed economies are behaving badly in terms of fiscal and monetary discipline. We do expect that there will be relative valuation differences in currencies and policies that will provide a basis for currency positions as we gradually transition from a low-inflation world eager for safe-havens to a post-credit crisis inflationary outcome several years from now. But the most likely beneficiaries (and the securities that we would be inclined to accumulate on significant deflation fears), are likely to be commodities, agriculture, oil, and precious metals. As usual, we'll respond to the data as it emerges, but the foregoing is a reflection of where we would expect the opportunities to emerge.
This Time Is Different, Or Not: History As Prequel
On a historical basis, every major stock market peak of the 20th Century was followed by a crash in the U.S. dollar five years later. People who kept their savings in dollars saw the purchasing power of their savings shrink substantially. Commodity prices had triple-digit rises in the mid-1930s and speculators once again made a fortune. Based upon this precedent, we could foresee a raging bull market in commodities (due to a falling US dollar value, big inflation, or both) somewhere between mid-2011 and the fall of 2012.
History has shown that stock markets move in very broad cycles. Up cycles usually give us sustained earnings growth, P/E multiple expansion, and upward sloping economic indicators. Common characteristics of down cycles usually show low/no earnings growth, P/E contraction, and downward sloping economic data. For down cycles, the cause of the final multi-year leg down is nearly always different. However, a bottom is usually finally in place once the major economic indicators are completely gutted, along with P/E multiples, and trailing long term stock returns. Interestingly in March 2009, the items just listed matched the 1982 lows, and arguably March 2009 was a more extreme bottom. Interestingly, in 1983 once the initial spike of new orders occurred post-recession, there was much talk of a “double dip”, leading stocks to trade in a broad range for six to nine months. Sound familiar?
Positioning Globally for Any Environment
The sectors we like most are commodity-related equities, including oil, coal, mining, agriculture, metals; we also like select healthcare, medical device, and biotech companies as well as a few select technology names that exhibit reasonable valuations (Growth At a Reasonable Price, GARP). The reasoning for our commodities-related/oil/metals bent is many-fold: 1) they are needed , (2) they appear undervalued and are economically sensitive; if they drop due to a weaker environment it shouldn’t be disastrous due to their inherent value, and if the market goes up, they go up too, (3) commodities are priced in US$, so if the dollar goes down, it takes more US$ to buy them, meaning the producers of these commodities will have higher earnings, (4) during inflationary periods they tend to hold up the best, (5) if we experience a currency devaluation for whatever reason (and inflation is but another means of achieving this), see #1-4. So we are adding positions that can withstand gale force winds based on macroeconomics and/or deliver strong earnings.
Mortgages
Recently the 30 year fixed mortgage dipped to about a 60-year low. Take advantage of this now, especially if you currently hold an adjustable rate mortgage.
Fixed Income Commentary
In the context of our general comments on Treasury securities, high grade corporate bonds look relatively attractive. In fact high grade corporate bonds are now trading on a near-equal basis with Treasury securities, meaning that sovereign debt is trading on credit-worthiness and balance sheet strength (instead of on ability to tax). As far as we know, this has never occurred before in history. Well, after all, who would you trust more to pay back a loan right now? Warren Buffett or the U.S. government? We’d choose Buffett.
Treasury securities with longer maturities should be avoided at all costs in this environment. TIPS offer some inflation protection, but are based upon CPI numbers which are controlled by a government currently desperate to avoid automatic increases in budgetary items based upon CPI.
CA Municipal Bonds
The CA political atmosphere is heating up. Our prediction: Whoever wins will usher in a new era of “hope” for CA, and then around April or May of 2011, it will become quite apparent that CA is drowning in debt, and the CA legislature will fail Californians yet again. We are already beginning to lower our exposures to CA municipals, even short term durations. Both AMBAC and MBIA, the primary issuers of muni debt, are in big financial trouble, and by law they cannot issue municipal debt at a higher rating than their own firm. At some point the Federal government will need to act as a backstop for municipal debt in all 50 states, 48 of which are drowning in red ink.
Big Question Posed: So are we headed for a double-dip recession? Or not?
We read volumes of research, and frankly the signals are mixed, with some research pointing to an “oversold” condition, and some research pointing to an “overbought” condition. The truth is that nobody knows, and because nobody knows we are erring on the side of finding high quality businesses trading for 5-10x earnings (versus 15-17x for the S&P 500). If we run into a double-dip recession, we have already established a huge “margin of safety” by purchasing companies that are trading a low multiples relative to their asset base, balance sheets, dividends, and prospects. If we go into expansion mode, the market may begin to appreciate these companies via expanding market multiples. So in total we feel that our allocation to stocks looks attractive on a risk-adjusted basis.
However, we view our economy as being at an inflection point based on “which policies” are adopted going forward. Pro-growth, pro-incentive, lower-tax policies would be welcomed by the markets, and we think would propel them to new highs. Concerns over our debt burden would be assuaged by a higher growth economy that could service its debt service (due to the higher growth). This becomes a virtuous cycle, particularly to our creditors, who might then not have concerns about buying our Treasury bonds. An anti-growth, let-the-tax-cuts-expire policy (otherwise known as a tax increase), coupled with some of our impending new laws (higher regulation equals higher costs, healthcare is a new entitlement program) could be the thing that propels us downward. The historians out there like to overlay the Great Depression stock charts over the last several years—and it looks strikingly similar, so “policy” does matter. With all of the recent efforts to not repeat the Great Depression, it would be a shame to replicate it because of what looks like such an easy call on policy matters. There could end up being a bipartisan compromise based on the Administration’s latest efforts to extend unemployment benefits (i.e. Republicans could counter “OK, but we want tax cut extension”), though tax cuts are a primary issue of this November’s elections. If the polls are correct, something like tax cuts or stimulus could transpire by April of 2011-- lots of uncertainty in the interim.
Sunday, March 21, 2010
Corporate Bonds more Attractive than U.S. Treasury
To follow up with our recent post on bond yields, here is another story emphasizing the point.
http://www.bloomberg.com/apps/news?pid=20601010&sid=aYUeBnitz7nU
This Bloomberg story shows several instances where high quality corporations have recently issued debt with yields just a few basis points shy of a similar-duration US Treasury. What does this mean?
It means that investors would much rather put their faith in a high quality company's ability to pay its debts than in the U.S. government (with its endless money-creation and ability to tax).
Rumor has it that the USA is about to lose its AAA credit rating, and get bumped to AA. It's about time, and the "market" for US bonds (i.e. China, India, Japan) is sending a wakeup call to our leaders in the USA to right the ship and become sensible in our financial dealings. If we don't, it is very likely that US bond yields will continue to rise in anticipation of a bond market that requires a higher rate of return for the risk.
http://www.bloomberg.com/apps/news?pid=20601010&sid=aYUeBnitz7nU
This Bloomberg story shows several instances where high quality corporations have recently issued debt with yields just a few basis points shy of a similar-duration US Treasury. What does this mean?
It means that investors would much rather put their faith in a high quality company's ability to pay its debts than in the U.S. government (with its endless money-creation and ability to tax).
Rumor has it that the USA is about to lose its AAA credit rating, and get bumped to AA. It's about time, and the "market" for US bonds (i.e. China, India, Japan) is sending a wakeup call to our leaders in the USA to right the ship and become sensible in our financial dealings. If we don't, it is very likely that US bond yields will continue to rise in anticipation of a bond market that requires a higher rate of return for the risk.
Monday, March 15, 2010
Solution to Pension Promises
Here's a link to a great piece from Barron's over the weekend, which addresses the debt albatross hanging around society's neck.
http://online.barrons.com/article/SB126843815871861303.html?mod=BOL_hpp_popview#articleTabs_panel_article%3D1
What to do? What to do?
Why don't we apply the same solution set that can be found at www.cato.org referencing their many-year-old "6.2% Solution" for Social Security. Namely, we need to create a "bridge" from one generation to the next in order to keep the promises we made from two generations ago. Why? Because that "social contract" is completely unsustainable and is literally creating insolvency issues at a local, State, and Federal level.
What would happen? Freeze all pensions today, ideally "earmarking" the frozen portion to each individual. This means that society will honor its social contract in terms of the net-present-value (NPV) of its pension obligations to you (defined benefit plan), but starting tomorrow, like "everyone else", you need to use a 401k-style approach (defined contribution plan). This solution will take 25 years, but it will work. Make it apply to anyone under 50 automatically. If you are 51-55, you can opt "in" or "out". If you opt in, it means you get the NPV of your currently accrued benefits + whatever your 401k-style plan grows to. Anyone over 55 would automatically stay in the current pension system.
How would the bridge work? First off, it is widely known that public sector jobs now either match or exceed private sector jobs in terms of compensation, benefits, etc. This "bridge", besides keeping past social contract promises, also encourages people to buck-up and become entrepreneurs in the American system while simultaneously discouraging people from "getting taken care of by the state". If the perceived benefits from going "public" decline, the benefits of going "private" increase.
Over 25-30 years, the "old" pension system quite literally gets phased out, along with its tremendous debt burden. This additionally creates an additional huge voting bloc that will want investor-friendly rules and regulations, stable money policies, tax incentives and the like. Thus, US politicians will need to answer to this investor class, which simply reinforces the traditions of the American entrepreneurial system, while also backing the USA away from its debt-induced tipping point (toward a welfare state system). A welfare state is simply unsustainable, and not unstoppable (yet).
This whole idea isn't "perfect", but it's a good starting point for a conversation-- a conversation that is long overdue...
http://online.barrons.com/article/SB126843815871861303.html?mod=BOL_hpp_popview#articleTabs_panel_article%3D1
What to do? What to do?
Why don't we apply the same solution set that can be found at www.cato.org referencing their many-year-old "6.2% Solution" for Social Security. Namely, we need to create a "bridge" from one generation to the next in order to keep the promises we made from two generations ago. Why? Because that "social contract" is completely unsustainable and is literally creating insolvency issues at a local, State, and Federal level.
What would happen? Freeze all pensions today, ideally "earmarking" the frozen portion to each individual. This means that society will honor its social contract in terms of the net-present-value (NPV) of its pension obligations to you (defined benefit plan), but starting tomorrow, like "everyone else", you need to use a 401k-style approach (defined contribution plan). This solution will take 25 years, but it will work. Make it apply to anyone under 50 automatically. If you are 51-55, you can opt "in" or "out". If you opt in, it means you get the NPV of your currently accrued benefits + whatever your 401k-style plan grows to. Anyone over 55 would automatically stay in the current pension system.
How would the bridge work? First off, it is widely known that public sector jobs now either match or exceed private sector jobs in terms of compensation, benefits, etc. This "bridge", besides keeping past social contract promises, also encourages people to buck-up and become entrepreneurs in the American system while simultaneously discouraging people from "getting taken care of by the state". If the perceived benefits from going "public" decline, the benefits of going "private" increase.
Over 25-30 years, the "old" pension system quite literally gets phased out, along with its tremendous debt burden. This additionally creates an additional huge voting bloc that will want investor-friendly rules and regulations, stable money policies, tax incentives and the like. Thus, US politicians will need to answer to this investor class, which simply reinforces the traditions of the American entrepreneurial system, while also backing the USA away from its debt-induced tipping point (toward a welfare state system). A welfare state is simply unsustainable, and not unstoppable (yet).
This whole idea isn't "perfect", but it's a good starting point for a conversation-- a conversation that is long overdue...
Monday, March 8, 2010
Ribbit Mobile is Like TiVo For Business
I usually just discuss some market news item, investment, give policy analysis, or distill some complex issue as it relates to investments. Today, instead, I wanted to advise you with a way to simplify and distill your work life: Ribbit Mobile.
Huh? What? What is Ribbit Mobile?
The best way to describe it is to first tell you why I love it. I get cold-called from different suppliers ALL day (hedge funds, mutual funds, separate account managers, etc.). If I don't recognize a phone number coming in, I let it roll to the Ribbit Mobile phone system, which transcribes the voice message into a readable email and text within a couple of minutes. If I erroneously missed the call, I call right back; but otherwise, the cold call message gets transcribed. Then...I don't have to talk to them, lose my train of thought, waste time with them, try to understand what they're selling...none of it. It goes to voicemail/text message version.
Frankly, sometimes it even helps if I legitimately miss a call, because I can read the gist and call back with a really well-thought-out response, possibly with some research, or answer for somebody. It actually improves my business and my service.
So now that you know WHY I like it, I'll tell you how I think of it: it's like "TiVo for Business". Yes, just as Tivo improves TV-watching productivity, Ribbit Mobile improves my phone-answering productivity. By a ton! You need to check this out:
http://www.ribbit.com/mobile/
If you want to thank me, just call ACC Investment Management, Inc. at 650-344-1600, but don't be surprised if I don't answer.
Huh? What? What is Ribbit Mobile?
The best way to describe it is to first tell you why I love it. I get cold-called from different suppliers ALL day (hedge funds, mutual funds, separate account managers, etc.). If I don't recognize a phone number coming in, I let it roll to the Ribbit Mobile phone system, which transcribes the voice message into a readable email and text within a couple of minutes. If I erroneously missed the call, I call right back; but otherwise, the cold call message gets transcribed. Then...I don't have to talk to them, lose my train of thought, waste time with them, try to understand what they're selling...none of it. It goes to voicemail/text message version.
Frankly, sometimes it even helps if I legitimately miss a call, because I can read the gist and call back with a really well-thought-out response, possibly with some research, or answer for somebody. It actually improves my business and my service.
So now that you know WHY I like it, I'll tell you how I think of it: it's like "TiVo for Business". Yes, just as Tivo improves TV-watching productivity, Ribbit Mobile improves my phone-answering productivity. By a ton! You need to check this out:
http://www.ribbit.com/mobile/
If you want to thank me, just call ACC Investment Management, Inc. at 650-344-1600, but don't be surprised if I don't answer.
Tuesday, March 2, 2010
PIMCO agrees with ACC Investment Management!
The following is from Bill Gross of PIMCO from yesterday. I concur. Gross and I come to the same conclusion through two different analyses. His conclusion is based on the quantitative, showing that sovereign credit spreads are narrowing toward a "unicredit" rating, since governments are printing money, debasing currencies, and their ability to pay will eventually be questioned. My conclusion (June of 2009) is based on qualitiative arguments-- I would rather purchase high grade corporate debt paper relative to sovereign debt, since corporate debt ratios are *finite* and thus more credit-worthy!
Read his piece here, it's quite good.
Investment Outlook
Bill Gross March 2010
Don't Care
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Investment+Outlook+March+2010+Bill+Gross+Dont+Care.htm
Read his piece here, it's quite good.
Investment Outlook
Bill Gross March 2010
Don't Care
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Investment+Outlook+March+2010+Bill+Gross+Dont+Care.htm
Wednesday, February 24, 2010
Financial Outlook 2010
January 7, 2010
Program: Financial Outlook 2010
This is from an Investment Panel I participated in at San Mateo Rotary. Enjoy.
But there is a problem. What happens when the game ends? When the liquidity party is over, will the exits be too crowded? Our "near zero" interest rate policy has helped reflate assets but it brings with it negative externalities and uncertainties: the specter of inflation, debasement of our currency, uncertainty of creating a new bubble, liquidity concerns. So, what can you do?
Take a sober look at this, consider maintaining bond money in high grade corporate bonds or short term CA municipal bonds. Mid/long term Treasury securities could suffer their own "lost decade"; short term Treasury securities "should" be OK, though can still lose value if sold before maturity (or they could lose value to inflation). Cash will not hold up to inflation, which seems a matter of "when" not "if". To maintain a sufficient hedge against inflation, consider equities in the ag, oil, oil drilling, natural gas, gold, gold and minerals sectors, as well as a healthy dose of large cap stocks that pay nice dividends and are defensive.
Buy the future, but also buy what is needed!
Subscribe to:
Posts (Atom)
Posts
