No one gets the Fed. Everyone is confused. Everyone is upset. And NO ONE gets it.
Not too long ago the Federal Reserve, which is NOT the government by the way, announced that they are embarking on a cruise, the QE2. Ok, ok, it's not really a cruise line, it's an abbreviation for Quantitative Easing, Round 2. It means that the Federal Reserve, a private corporation, is going to buy US Treasuries...and we at MOFinancial say THANK THE HEAVENS.
Lets give you a little background on the situation. For more, you can check out our older post entitled "Bail on your Bonds". Inflation is coming...seriously, it's coming. Look at food and energy prices and you'll see that inflation is upon us. You know what loves inflation? Stocks. Do you know what hates inflation? Bonds.
It's a simple: When interest rates go up (they're at zero now...sooooo, you tell me a situation in which the next rate hike isn't up), then bond prices go down. Bonds always trade with market interest rates (outside of the inefficiencies that exist in the markets temporarily). When a bond doesn't have a market interest rate, the price will decline until it reaches a market interest rate. So, as the Feds eventually raise rates to head inflation off at the gap...bonds are going to get WHACKED!
Now, here is the genius of the Fed. What's the one way NOT to lose money on bonds? That's right, hold them until maturity. Given the average age of a bond buyer (somewhere in the 50s or 60s) because of the asset class being viewed as "safe" and "conservative" , it is unlikely that these investors will even LIVE to maturity...let alone hold the asset until maturity (if they're holding 30 year bonds). When they pass away, the funds will be liquidated by eager beneficiaries who will realize what should be massive losses at that point thanks to a higher federal funds rate & inflation (which will destroy the principle value of those bonds).
Another problem? Do you really think investors will hold treasuries of the 10 & 30 year variety when they start going down as rates go up? Heck no! No bond fund manager is going to stand around and watch their fund price get hit week after week...they'll lose their jobs. Thanks to an inflow of $16 Billion Dollars last year, those guys have a lot of firepower these days to do massive damage by hitting the sell button. It'll be like yelling fire in a crowded movie theatre & watching everyone hit the door at the same time. When individual investors see what the institutional seller is doing to the price...they'll jump in and hit the panic button along with them.
What is the solution? Just take a quick look at QE2. Ben has $600 Billion in firepower to go out and buy treasuries that are floating around out there. That is enough to buy up every penny of the $16 Billion that flowed into the individual investor held Mutual Funds last year PLUS some. This gives individual investors a "buyer of last resort" to offload their treasury holdings so that they can swap into smarter investments like clean corporate debt, high yield bond ETFs, Emerging Market Sovereign Debt, REITs, and high yielding equities. All of which are better choices right now than the long end of the treasury curve...heck, better than the short end because of low yields. Because the Federal Reserve is an institution and not an individual, they can afford to hold the bonds to maturity without giving a darn about the principle since they'll collect that bond interest the entire time & will be made whole at maturity. Heck, they may even take the interest & go buy some real assets like corporate debt (which would be a terrific idea when bonds get hit as they raise the fed funds rate).
So to all you holders of Treasuries out there...individuals, PIMCO, China, everyone...go sell your US Government to the Fed because Ben is buying. You can thank him later for saving your rear end, and your retirement savings. We'll probably get some inflation out of all this...which means Ben will make your 401(k), IRA, and even your house go up in value...not a bad days work for a guy who no one but Jim Cramer seems to understand. We're with you Jim, Ben may just be the man of the Century after being Time's Man of the Year. So to Ben & the Fed leaving on the QE2...BON VOYAGE from Magnum Opus Financial!
Monday, November 15, 2010
Tuesday, October 26, 2010
Timeframe is Everything
It was 11:31 on October 20th and I was blown away. Yesterday we were down over 200 points in the DOW and the Bears jump out of every corner they've been hiding in and tell us that the world is going to burn to the ground.
The same news stories get trotted out over & over in an attempt to level the banks to the ground. TV analysts, uninformed news casters, and nay-sayers blast negative press via every avenue they can think of to get the market to fall off a cliff.
At the end of Oct. 19th, the DOW finished down 166 or so. The day looked rough, but the market closed up 60 points above its lows with earnings from the likes of Wells Fargo, Westerm Digital, CREE, and others due out after the bell or the next morning.
All that really matters in the price of a stock (eventually) is the earnings. It's a simple math problem. Figure out what the "market" will pay for a particular stock, multiply by the full year EPS and anyone with a calculator can figure out a price target for a stock.
While there are an endless number of macro news stories, rumors, economic readings that can and will move a stock...they are ultimately irrelevant. In fact, almost (and I stress almost as the financial sector, especially the banks, have been obliterated thanks to endless negative press) everything BUT earnings is irrelevant. As a trader, or rather, a value investor who is willing to participate in the markets intraday and refuses to accept a terrible price for what I want to own; the wild swings (especially at the open) give me a chance to buy good merchandise (stocks & options) at great prices...if you're watching.
So, while I think that the wild oscillations of the market are quite overblown over the short term...I would never wish them away for anything.
Take NetFlix for instance. The stock ran up to $127, only to pull back to $98 because earnings were "bad". Well, I was on that conference call when they reported in July and we doubled down on our short put spread trade...should have added calls to it, and the stock rallied from $98 to the current level of $171. The endless negative stories on the stock were vastly overblown & the stock is up near 100% from that recent low. If you didn't do your homework on the stock, you probably were one of the sellers when the stock broke $100 to the downside & you are still kicking yourself.
How about Salesforce.com. The company reported and the stock went from $123.77 to $97.92. Again, the cloud had burst, all these stocks were going to zero, and you were supposed to hit the sell button (according to the "talking heads"). The stock is now back up above $110 and you could be up over 10% from those recent lows...or at least sold 85/75 put spreads when the stock broke $100 to take advantage of the elevated volatility in the stock.
I can go on. The Wells Fargo Conference Call was terrific because it told us that the formula is really 8 to 1; meaning that for every $8 Billion in mortgages someone tries to make a bank take back, only $1 Billion in actual real losses results. This told you that Bank of America, Citigroup, and all sorts of other banks had a MUCH lower liability than the news media has stated.
Bottom line, there is no substitute for doing the homework. Knowing your stocks, listening to the conference calls, and watching the markets often means that you are much less likely to fall prey to the endless negative news that executive producers believes is why people tune in to watch one trainwreck after another.
If you want to watch endless trainwrecks, watch the first few weeks of American Idol or go pick up an issue of US Weekly. There should be plenty of "news" that no one needs to know that "everyone" will be talking about the next day at work. But as for stocks, ultimately, the only thing that matters is what they earn & what multiple the market will let them trade with.
Anyone remember Goldman Sachs at $133 when the Government was going to erase them? Probably not because you never went long down there and missed it. Well, consider Bank of America your 2nd shot at glory...but keep in mind, time-frame is everything ('cause this story wont turn around overnight). The book value of the stock is closer to $13 and they have about $70/share of cash on hand and do business with about 50% of America's Households. I'm not saying that I'll be right tomorrow, or next week. But eventually, earnings are all that matter and BAC will have them.
The same news stories get trotted out over & over in an attempt to level the banks to the ground. TV analysts, uninformed news casters, and nay-sayers blast negative press via every avenue they can think of to get the market to fall off a cliff.
At the end of Oct. 19th, the DOW finished down 166 or so. The day looked rough, but the market closed up 60 points above its lows with earnings from the likes of Wells Fargo, Westerm Digital, CREE, and others due out after the bell or the next morning.
All that really matters in the price of a stock (eventually) is the earnings. It's a simple math problem. Figure out what the "market" will pay for a particular stock, multiply by the full year EPS and anyone with a calculator can figure out a price target for a stock.
While there are an endless number of macro news stories, rumors, economic readings that can and will move a stock...they are ultimately irrelevant. In fact, almost (and I stress almost as the financial sector, especially the banks, have been obliterated thanks to endless negative press) everything BUT earnings is irrelevant. As a trader, or rather, a value investor who is willing to participate in the markets intraday and refuses to accept a terrible price for what I want to own; the wild swings (especially at the open) give me a chance to buy good merchandise (stocks & options) at great prices...if you're watching.
So, while I think that the wild oscillations of the market are quite overblown over the short term...I would never wish them away for anything.
Take NetFlix for instance. The stock ran up to $127, only to pull back to $98 because earnings were "bad". Well, I was on that conference call when they reported in July and we doubled down on our short put spread trade...should have added calls to it, and the stock rallied from $98 to the current level of $171. The endless negative stories on the stock were vastly overblown & the stock is up near 100% from that recent low. If you didn't do your homework on the stock, you probably were one of the sellers when the stock broke $100 to the downside & you are still kicking yourself.
How about Salesforce.com. The company reported and the stock went from $123.77 to $97.92. Again, the cloud had burst, all these stocks were going to zero, and you were supposed to hit the sell button (according to the "talking heads"). The stock is now back up above $110 and you could be up over 10% from those recent lows...or at least sold 85/75 put spreads when the stock broke $100 to take advantage of the elevated volatility in the stock.
I can go on. The Wells Fargo Conference Call was terrific because it told us that the formula is really 8 to 1; meaning that for every $8 Billion in mortgages someone tries to make a bank take back, only $1 Billion in actual real losses results. This told you that Bank of America, Citigroup, and all sorts of other banks had a MUCH lower liability than the news media has stated.
Bottom line, there is no substitute for doing the homework. Knowing your stocks, listening to the conference calls, and watching the markets often means that you are much less likely to fall prey to the endless negative news that executive producers believes is why people tune in to watch one trainwreck after another.
If you want to watch endless trainwrecks, watch the first few weeks of American Idol or go pick up an issue of US Weekly. There should be plenty of "news" that no one needs to know that "everyone" will be talking about the next day at work. But as for stocks, ultimately, the only thing that matters is what they earn & what multiple the market will let them trade with.
Anyone remember Goldman Sachs at $133 when the Government was going to erase them? Probably not because you never went long down there and missed it. Well, consider Bank of America your 2nd shot at glory...but keep in mind, time-frame is everything ('cause this story wont turn around overnight). The book value of the stock is closer to $13 and they have about $70/share of cash on hand and do business with about 50% of America's Households. I'm not saying that I'll be right tomorrow, or next week. But eventually, earnings are all that matter and BAC will have them.
Wednesday, October 6, 2010
How the Apple iPhone brought Verizon & AT&T to their knees
Who is happy about Verizon FINALLY getting an iPhone? The answer may just surprise you...
Years ago, Apple approached Verizon about this crazy idea that they use the success of the iPod to launch their own phone. Apple wanted Verizon to carry it exclusively on their network and they said: "Sounds good...so lets see it, first." Apple told Verizon that unless they had an exclusive deal with a carrier...they weren't going to make the phone in the first place...so no upfront view of the phone...just had to trust that it would be appleriffic.
Verizon said no, they moved on to AT&T...and clearly the answer was a yes. Here we are, 4 generations into the iPhone and it has been RUMORED that Verizon would get an iPhone for YEARS now. In fact, ever since the iPhone came to AT&T it has been rumored that Verizon would get one. Today, we finally found out that Verizon is finally getting their own iPhone.
So, who is excited about this new release? It's not Verizon, it's not AT&T, and it's sure as heck not Research in Motion (the maker of the Blackberry). It's Apple. They really don't care who carries the phone...now that it's the most amazing phone in the universe. I don't think they will ever give back their choke hold on the mobile phone industry. I wouldn't be surprised if they made an iPhone nano to compete in the dumb phone market...just to steal the lunch money of the "other guys".
Ever since Apple has came into it's own in 2001 when it destroyed the diskman (remember those from Sony...wait...if you're under 20 years old you've never heard of Sony)...Apple has been destroying the market cap of companies the world over with new product introductions. You don't believe me? The market cap of Microsoft (MSFT) in June of 2001 was $392 Billion...now it's $213 Billion (down 45% since the iPod release). Let look at Dell. It was $70 Billion in 2001...enter the new iMAC...and now it's worth $25.9 Billion (down 63% from 2001).
Research in Motion, the maker of the Blackberry was at $26 Billion in market cap when the iPhone came out in January of 2007. It grew to $78 Billion in May 2008 only to see Apple release the iPhone 3G, 3GS, and iPhone 4. Their market share is now back down to $26 Million and slipping (a loss of 67%). Finally, Sony...remember, the maker of the diskman and the walkman that we all used before the iPod. They were $68 Million in market cap...now down to $31.65 million (a decline of 53%).
Apple destroys market cap wherever it goes. You cannot compete. Their products are better, faster, crash less, are cooler...and are flat out easier to use thanks to the MAC OS.
So, what happens to Verizon when they get the iPhone...Millions of people will dump their "I need a college degree Blackberry to use 25% of what this phone can do" Blackberry Storm, Torch, or whatever the heck they have and get an iPhone. People who left VZ to begin with so they could have an iPhone will flood back. In about 6 months the Verizon network will be as bogged down as AT&T. But I thought Verizon's network was the best? You put that many data hogs on the same network...you're going to weigh down the network. iPhone users are going to find out that it doesn't matter who's network you're on. Millions of people all streaming data to their iPhones constantly will drag any network down.
When Verizon can't draw new iPhone users to their "network"...guess what's the only tool left for Verizon and AT&T to fight each other with? You guessed it...price. I don't want to be around when they start a price war...well...not as a shareholder that is. It will be a race to the bottom like you have never seen before and shareholders of both companies will be in the crossfire. As Jim Cramer always says: "Competition is the enemy of profits".
But, really...all of this is old news if you saw our Lunch @ the Market from 09/02/2010. AT&T sold off on the news today 2.5%...can't say it'll end there so be careful. In case you missed Lunch @ the Market (L@tM) from September, here you go:
So, today Apple, the toast is to you! Good luck to Verizon and AT&T in their upcoming price war...may the lowest price...I mean network...win. :-)
Years ago, Apple approached Verizon about this crazy idea that they use the success of the iPod to launch their own phone. Apple wanted Verizon to carry it exclusively on their network and they said: "Sounds good...so lets see it, first." Apple told Verizon that unless they had an exclusive deal with a carrier...they weren't going to make the phone in the first place...so no upfront view of the phone...just had to trust that it would be appleriffic.
Verizon said no, they moved on to AT&T...and clearly the answer was a yes. Here we are, 4 generations into the iPhone and it has been RUMORED that Verizon would get an iPhone for YEARS now. In fact, ever since the iPhone came to AT&T it has been rumored that Verizon would get one. Today, we finally found out that Verizon is finally getting their own iPhone.
So, who is excited about this new release? It's not Verizon, it's not AT&T, and it's sure as heck not Research in Motion (the maker of the Blackberry). It's Apple. They really don't care who carries the phone...now that it's the most amazing phone in the universe. I don't think they will ever give back their choke hold on the mobile phone industry. I wouldn't be surprised if they made an iPhone nano to compete in the dumb phone market...just to steal the lunch money of the "other guys".
Ever since Apple has came into it's own in 2001 when it destroyed the diskman (remember those from Sony...wait...if you're under 20 years old you've never heard of Sony)...Apple has been destroying the market cap of companies the world over with new product introductions. You don't believe me? The market cap of Microsoft (MSFT) in June of 2001 was $392 Billion...now it's $213 Billion (down 45% since the iPod release). Let look at Dell. It was $70 Billion in 2001...enter the new iMAC...and now it's worth $25.9 Billion (down 63% from 2001).
Research in Motion, the maker of the Blackberry was at $26 Billion in market cap when the iPhone came out in January of 2007. It grew to $78 Billion in May 2008 only to see Apple release the iPhone 3G, 3GS, and iPhone 4. Their market share is now back down to $26 Million and slipping (a loss of 67%). Finally, Sony...remember, the maker of the diskman and the walkman that we all used before the iPod. They were $68 Million in market cap...now down to $31.65 million (a decline of 53%).
Apple destroys market cap wherever it goes. You cannot compete. Their products are better, faster, crash less, are cooler...and are flat out easier to use thanks to the MAC OS.
So, what happens to Verizon when they get the iPhone...Millions of people will dump their "I need a college degree Blackberry to use 25% of what this phone can do" Blackberry Storm, Torch, or whatever the heck they have and get an iPhone. People who left VZ to begin with so they could have an iPhone will flood back. In about 6 months the Verizon network will be as bogged down as AT&T. But I thought Verizon's network was the best? You put that many data hogs on the same network...you're going to weigh down the network. iPhone users are going to find out that it doesn't matter who's network you're on. Millions of people all streaming data to their iPhones constantly will drag any network down.
When Verizon can't draw new iPhone users to their "network"...guess what's the only tool left for Verizon and AT&T to fight each other with? You guessed it...price. I don't want to be around when they start a price war...well...not as a shareholder that is. It will be a race to the bottom like you have never seen before and shareholders of both companies will be in the crossfire. As Jim Cramer always says: "Competition is the enemy of profits".
But, really...all of this is old news if you saw our Lunch @ the Market from 09/02/2010. AT&T sold off on the news today 2.5%...can't say it'll end there so be careful. In case you missed Lunch @ the Market (L@tM) from September, here you go:
So, today Apple, the toast is to you! Good luck to Verizon and AT&T in their upcoming price war...may the lowest price...I mean network...win. :-)
Buybacks DO matter...eventually.
It is a fact, companies often do an amazingly terrible time buying back their own stock. I mean really, shouldn't THEY KNOW when their stock is cheap and when it's expensive?
Did you know Cisco (CSCO)bought back $3.5 BILLION in stock in the January 2008 quarter? Seriously...the stock was at $24...which seems low since it was at $33.13 on 09/28/2007. But when the stock fell to $14.57 on 02/27/2009...how much stock did they buy back in that quarter? $384 Million. Is it just us or is that bad math? It seems like after buying $3.8 Billion $10 higher; they'd want to average down on their cost basis.
Well, it seems as if Cisco (and the rest of the market) are up to their old tricks of buying back large amounts of stock. In the July, 2010 quarter, Cisco managed to buy back $1.93 Billion of stock (at least they finally managed to grab it for under $24). The stock fell off a cliff when they reported earnings, under $20. Hopefully the person or firm in charge of their buybacks had his/her finger on the trigger to Buy! Buy! Buy! When it fell below $20.
JPMorgan Chase went nuts, purchasing back $18.93 BILLION in stock in the June 2009 quarter after barely registering any purchases in December of 2004 and September of 2006. If there is one firm that has done a terrific job buying back stock...it's certainly Jamie Dimon (their CEO) and his band of merry executives. The stock fell below $40...and without being able to pay a dividend, the used the capital they took in to buy back stock to return capital to shareholders.
IBM came in with $3.16 Billion a couple quarters in a row this year. Even Microsoft got into the act with $2.93 Billion in stock repurchases.
Why do you care about all these companies spending billions of dollars on their own stock? Well...the stock market works on supply and demand just like everything else in the free market. When people want the merchandise...if there is less of it...it will demand a higher price. See where I'm going with this? That's right: If companies continue to buy back their stocks & the Feds engineer inflation (which means asset prices will become inflated...they'll go up), then that means that there will be more demand for stocks. This becomes especially true if companies continue to report great earnings and if we finally see the average working American begin to fund their 401(k) again because the markets have gone up so much and they want to be a part of it.
Companies have taken so much supply out of the market that eventually, when demand returns...all these stock buybacks really will matter. That time is coming. It may even be close. But so far...it hasn't happened yet.
Below is a link to YCharts.com for you to take a look at the Stock Buyback Metrics of different companies. This site works just like finance.yahoo.com or CNBC.com except it gives you charts of the fundamental stock statistics over time like P/E, Revenue, EPS, Cash on Hand, and yes, even Stock Buybacks.
Cisco Systems (CSCO) Stock Quote and Charts
Did you know Cisco (CSCO)bought back $3.5 BILLION in stock in the January 2008 quarter? Seriously...the stock was at $24...which seems low since it was at $33.13 on 09/28/2007. But when the stock fell to $14.57 on 02/27/2009...how much stock did they buy back in that quarter? $384 Million. Is it just us or is that bad math? It seems like after buying $3.8 Billion $10 higher; they'd want to average down on their cost basis.
Well, it seems as if Cisco (and the rest of the market) are up to their old tricks of buying back large amounts of stock. In the July, 2010 quarter, Cisco managed to buy back $1.93 Billion of stock (at least they finally managed to grab it for under $24). The stock fell off a cliff when they reported earnings, under $20. Hopefully the person or firm in charge of their buybacks had his/her finger on the trigger to Buy! Buy! Buy! When it fell below $20.
JPMorgan Chase went nuts, purchasing back $18.93 BILLION in stock in the June 2009 quarter after barely registering any purchases in December of 2004 and September of 2006. If there is one firm that has done a terrific job buying back stock...it's certainly Jamie Dimon (their CEO) and his band of merry executives. The stock fell below $40...and without being able to pay a dividend, the used the capital they took in to buy back stock to return capital to shareholders.
IBM came in with $3.16 Billion a couple quarters in a row this year. Even Microsoft got into the act with $2.93 Billion in stock repurchases.
Why do you care about all these companies spending billions of dollars on their own stock? Well...the stock market works on supply and demand just like everything else in the free market. When people want the merchandise...if there is less of it...it will demand a higher price. See where I'm going with this? That's right: If companies continue to buy back their stocks & the Feds engineer inflation (which means asset prices will become inflated...they'll go up), then that means that there will be more demand for stocks. This becomes especially true if companies continue to report great earnings and if we finally see the average working American begin to fund their 401(k) again because the markets have gone up so much and they want to be a part of it.
Companies have taken so much supply out of the market that eventually, when demand returns...all these stock buybacks really will matter. That time is coming. It may even be close. But so far...it hasn't happened yet.
Below is a link to YCharts.com for you to take a look at the Stock Buyback Metrics of different companies. This site works just like finance.yahoo.com or CNBC.com except it gives you charts of the fundamental stock statistics over time like P/E, Revenue, EPS, Cash on Hand, and yes, even Stock Buybacks.
Cisco Systems (CSCO) Stock Quote and Charts
Thursday, August 12, 2010
Gold's shine growing dim...
There is so much talk about gold. A few months ago, the started putting in Gold ATM's in the Middle East. If that isn't the sign of a top...I don't know what is. Millions of Americans...and probably people from all over the world are long gold now, and it has to be one of the most crowded trades in the universe.
A crowded trade is when so many people are in it, that the last one out of it should expect to see losses well over 20%, maybe even over 50% before the selling is done. Let me just mention a couple things that worry me about gold.
1) Everyone owns it, and the way investments work...at least when you make money on them, is to sell it to someone else for more than you bought it. If everyone owns gold...who is going to buy yours?
2) Gold is rarely used anymore outside of jewelry. Gold used to be in dental applications...but it's just too soft (and too expensive) to be used regularly for many industrial uses. Metals like aluminum, copper, steel, and even silver, platinum, and palladium all have industrial uses (which provide a level of natural or healthy demand).
3) The demand for gold, as we see it, is largely investor driven. Every investment falls out of favor eventually...why would this be the ONE that didn't?
4) Most people own gold through the GLD or other ETF that tracks gold. Those ETFs actually have to hold the physical gold in order to track the index as a percentage of assets under management. Who in the HECK is going to buy all that gold from them when people hit the sell button? What will that do to the price?
5) Gold is HEAVILY correlated to the S&P...don't believe me, check out the video we did a few months back and see the chart yourself:
6) I spoke with Guy Adami on America's Favorite Traders about Gold and his comments were disturbing. This is a man who was the head gold trader at TWO FIRMS, who has met the biggest gold traders out there, and who "wouldn't own gold if someone put a gun to his head." For more details you can listen to the full interview here:
http://www.magnumopusfinancial.com/demystify/2010/adami.php
I think Jim Cramer is right, the world will run out of gold to pull out of the ground, and the places to get it will become more and more the most dangerous places left on the earth to go mining for them between the government risk and military risk. So, if that's the case...why not own a gold miner in that instance, especially a foreign one that may be able to avoid some of the "anti-American" sentiment that is found in places that are a little scarier in the world.
Compania de Minas Buenaventura (BVN) is a Peruvian Gold Miner with a forward P/E of 11.82, a PEG of 1.65, Cash of $444 Million with only $27 Million in debt, and pays a dividend of 1.6%. I get why people WANT to own gold...we just think you should strongly consider not doing it any way.
If the world's economy collapses, you're kidding yourself if you think I'll trade you my food for your gold. You're better off stocking up on food storage and a taser to fend people off. But, until then, consider owning a gold miner instead of the GLD or the physical metal...at least until someone pulls the fire alarm and everyone presses the sell button at the same time.
A crowded trade is when so many people are in it, that the last one out of it should expect to see losses well over 20%, maybe even over 50% before the selling is done. Let me just mention a couple things that worry me about gold.
1) Everyone owns it, and the way investments work...at least when you make money on them, is to sell it to someone else for more than you bought it. If everyone owns gold...who is going to buy yours?
2) Gold is rarely used anymore outside of jewelry. Gold used to be in dental applications...but it's just too soft (and too expensive) to be used regularly for many industrial uses. Metals like aluminum, copper, steel, and even silver, platinum, and palladium all have industrial uses (which provide a level of natural or healthy demand).
3) The demand for gold, as we see it, is largely investor driven. Every investment falls out of favor eventually...why would this be the ONE that didn't?
4) Most people own gold through the GLD or other ETF that tracks gold. Those ETFs actually have to hold the physical gold in order to track the index as a percentage of assets under management. Who in the HECK is going to buy all that gold from them when people hit the sell button? What will that do to the price?
5) Gold is HEAVILY correlated to the S&P...don't believe me, check out the video we did a few months back and see the chart yourself:
6) I spoke with Guy Adami on America's Favorite Traders about Gold and his comments were disturbing. This is a man who was the head gold trader at TWO FIRMS, who has met the biggest gold traders out there, and who "wouldn't own gold if someone put a gun to his head." For more details you can listen to the full interview here:
http://www.magnumopusfinancial.com/demystify/2010/adami.php
I think Jim Cramer is right, the world will run out of gold to pull out of the ground, and the places to get it will become more and more the most dangerous places left on the earth to go mining for them between the government risk and military risk. So, if that's the case...why not own a gold miner in that instance, especially a foreign one that may be able to avoid some of the "anti-American" sentiment that is found in places that are a little scarier in the world.
Compania de Minas Buenaventura (BVN) is a Peruvian Gold Miner with a forward P/E of 11.82, a PEG of 1.65, Cash of $444 Million with only $27 Million in debt, and pays a dividend of 1.6%. I get why people WANT to own gold...we just think you should strongly consider not doing it any way.
If the world's economy collapses, you're kidding yourself if you think I'll trade you my food for your gold. You're better off stocking up on food storage and a taser to fend people off. But, until then, consider owning a gold miner instead of the GLD or the physical metal...at least until someone pulls the fire alarm and everyone presses the sell button at the same time.
Monday, July 12, 2010
I'm Cheap
By now, if you've seen any of our comments on Twitter, you probably know that we're cheap. Paying up for anything, a car, a home, a movie, and especially stocks/bonds is against our personal religion and something we try to avoid at all costs. As investors, everyone should avoid buying expensive stocks/bonds.
Specifically regarding bonds, we really only like to pay below par for a bond, being that the bond will be redeemed for par...we just find it too difficult to figure out when you get out of a bond if you already bought it for more than par. Obviously, if you hold a bond that you bought for more than par to maturity...you're going to lose money when the bond principle is paid out since all bonds end up at par by maturity. So, a quick lesson on bonds for you individual investors out there is to try and only by bonds when you can get them below par...or you may fall into a yield trap (which you can do when you buy them too far below par as well). We'll save the bond less for another day.
Today, since we were asked about valuation, and how we use it, we're going to talk about stocks. P/E and recently PEG, are the two things we use before we even look at a stock further. Often, if a stock has a P/E over 18...we just don't even take a look at it. BUT, there are a couple metrics that we use that will let us buy a stock with a P/E north of 18 and stick to our discipline.
One of the things we'll use to buy a stock with a P/E north of 18 is forward P/E. So, trailing P/E is valuation based on earnings already in the book...so nothing really to figure out there because everything you're looking at (P, E, and M (the multiple)) is real time and you can trust it. Forward P/E, that's the P/E based on either guidance from the company OR from analysts when the company doesn't give forward guidance. When we see a stock with a current P/E that's HUGE, but a forward P/E that's in our range...we get very interested. It's a simple math problem from there. For more on P/E, check out the video from our YouTube Channel on how to do the math (it's easier to watch then to write it out).
EMC is a perfect example of a stock that has a P/E of 32.04, but a forward P/E of 14.2. That's EXACTLY what we want to see. If those forward earnings come to fruition, then we could see the stock trade BACK UP to something close to 32 (since it trades there now and people still own it). So we'll say, forward earnings are $1.36 ($19.45 current price divided by 14.2 forward P/E (19.45/14.2) = 1.36 in earnings). Then, we apply a discounted multiple back on the earnings. If it trades at 32 now...what if it trades with a P/E of 20, you get a stock price of $27.39. That's about $8 higher than the stock trades at right now...we double check the PEG (that's P/E dividend by long term growth rate) and we see that EMC trades with a 0.99 PEG...so the future earnings SHOULD be higher than current earnings and the stock is actually "cheap" and can be bought here safely.
PEG is like taking the temperature for us. A stock may look healthy based on the P/E, but may actually be overheated if the PEG is too high. A PEG over 2 usually signals to us that the growth really isn't there (or there are not enough analysts out there that think it's there and so no one's model includes high growth in it) and we have to believe everyone else that values the company is wrong and we're right. We usually don't like to make that bet, so we avoid stocks with a PEG over 2.
Walking away from stocks with high P/E multiples and a PEG over 2 means that we'll often miss some of the market's hottest stocks. That's OK, those that follow us have to know that we're value managers, not growth managers over here. Every now and then we get up the guts to buy something like VMWare (which we caught for 22 points) or Amazon (which we flagged as a buy at $70/share)...but then we get off before most people do when we catch a move like that because we're value investors over here...not growth. Something like a SalesForce.com is a PERFECT example of something that we'd normally stay away from because P/E is 140, forward P/E is 60 and the PEG is 2.83. BUT, if we believe that analysts have estimates that are too low, and that the "G" in PEG could be higher, or that E will come in better than expected...that will bring down P/E (momentarily) to something more reasonable. If you believe in a strong, secular trend, like cloud computing, then owning SalesForce.com (CRM) might not be as reckless as valuation indicates (but you MUST be right about the growth and earnings). If you're wrong, and you own a stock like Google, when they pulled out of China, the decline will be breathtaking ($150 was erased off Google's stock price in a matter of weeks). Those kinds of losses can be devastating.
What is one instance when we will ignore a high PEG? When we don't need/want growth. Take for instance, an MLP (Master Limited Partnership) that we really don't care if they grow that much...we just want the dividend paid consistently. We're not that concerned about the PEG as these companies rarely grow at the rate of an Apple, Google, Amazon, VMWare, SalesForce.com, etc. Take one of our favorite, Calumet Specialty Products Partners (CLMT), it trades with a forward P/E of 11.42 (that's great for us), but the PEG is 9.41. That's a terrible PEG, but we don't expect big growth out of a company like CLMT. Look at KMP, a P/E of 34.41 and a PEG of 11.75. That is TERRIBLE if you compare it to other companies...but we own KMP for the dividend (although, KMP is now getting expensive compared to other MLPs and you may want to consider swapping out of KMP and into another MLP before everyone else figures that out as well and does it before you do, leaving you with a lower stock price). The same is true of Kilroy Realty...and many other big dividend paying stocks that don't have big growth...you can ignore PEG (except you probably want to use it to compare it to other stocks in the same category).
There are reasons to use P/E and PEG, and some reasons not to (in certain circumstances)...but, as a general rule for us...cheaper is always better.
Specifically regarding bonds, we really only like to pay below par for a bond, being that the bond will be redeemed for par...we just find it too difficult to figure out when you get out of a bond if you already bought it for more than par. Obviously, if you hold a bond that you bought for more than par to maturity...you're going to lose money when the bond principle is paid out since all bonds end up at par by maturity. So, a quick lesson on bonds for you individual investors out there is to try and only by bonds when you can get them below par...or you may fall into a yield trap (which you can do when you buy them too far below par as well). We'll save the bond less for another day.
Today, since we were asked about valuation, and how we use it, we're going to talk about stocks. P/E and recently PEG, are the two things we use before we even look at a stock further. Often, if a stock has a P/E over 18...we just don't even take a look at it. BUT, there are a couple metrics that we use that will let us buy a stock with a P/E north of 18 and stick to our discipline.
One of the things we'll use to buy a stock with a P/E north of 18 is forward P/E. So, trailing P/E is valuation based on earnings already in the book...so nothing really to figure out there because everything you're looking at (P, E, and M (the multiple)) is real time and you can trust it. Forward P/E, that's the P/E based on either guidance from the company OR from analysts when the company doesn't give forward guidance. When we see a stock with a current P/E that's HUGE, but a forward P/E that's in our range...we get very interested. It's a simple math problem from there. For more on P/E, check out the video from our YouTube Channel on how to do the math (it's easier to watch then to write it out).
EMC is a perfect example of a stock that has a P/E of 32.04, but a forward P/E of 14.2. That's EXACTLY what we want to see. If those forward earnings come to fruition, then we could see the stock trade BACK UP to something close to 32 (since it trades there now and people still own it). So we'll say, forward earnings are $1.36 ($19.45 current price divided by 14.2 forward P/E (19.45/14.2) = 1.36 in earnings). Then, we apply a discounted multiple back on the earnings. If it trades at 32 now...what if it trades with a P/E of 20, you get a stock price of $27.39. That's about $8 higher than the stock trades at right now...we double check the PEG (that's P/E dividend by long term growth rate) and we see that EMC trades with a 0.99 PEG...so the future earnings SHOULD be higher than current earnings and the stock is actually "cheap" and can be bought here safely.
PEG is like taking the temperature for us. A stock may look healthy based on the P/E, but may actually be overheated if the PEG is too high. A PEG over 2 usually signals to us that the growth really isn't there (or there are not enough analysts out there that think it's there and so no one's model includes high growth in it) and we have to believe everyone else that values the company is wrong and we're right. We usually don't like to make that bet, so we avoid stocks with a PEG over 2.
Walking away from stocks with high P/E multiples and a PEG over 2 means that we'll often miss some of the market's hottest stocks. That's OK, those that follow us have to know that we're value managers, not growth managers over here. Every now and then we get up the guts to buy something like VMWare (which we caught for 22 points) or Amazon (which we flagged as a buy at $70/share)...but then we get off before most people do when we catch a move like that because we're value investors over here...not growth. Something like a SalesForce.com is a PERFECT example of something that we'd normally stay away from because P/E is 140, forward P/E is 60 and the PEG is 2.83. BUT, if we believe that analysts have estimates that are too low, and that the "G" in PEG could be higher, or that E will come in better than expected...that will bring down P/E (momentarily) to something more reasonable. If you believe in a strong, secular trend, like cloud computing, then owning SalesForce.com (CRM) might not be as reckless as valuation indicates (but you MUST be right about the growth and earnings). If you're wrong, and you own a stock like Google, when they pulled out of China, the decline will be breathtaking ($150 was erased off Google's stock price in a matter of weeks). Those kinds of losses can be devastating.
What is one instance when we will ignore a high PEG? When we don't need/want growth. Take for instance, an MLP (Master Limited Partnership) that we really don't care if they grow that much...we just want the dividend paid consistently. We're not that concerned about the PEG as these companies rarely grow at the rate of an Apple, Google, Amazon, VMWare, SalesForce.com, etc. Take one of our favorite, Calumet Specialty Products Partners (CLMT), it trades with a forward P/E of 11.42 (that's great for us), but the PEG is 9.41. That's a terrible PEG, but we don't expect big growth out of a company like CLMT. Look at KMP, a P/E of 34.41 and a PEG of 11.75. That is TERRIBLE if you compare it to other companies...but we own KMP for the dividend (although, KMP is now getting expensive compared to other MLPs and you may want to consider swapping out of KMP and into another MLP before everyone else figures that out as well and does it before you do, leaving you with a lower stock price). The same is true of Kilroy Realty...and many other big dividend paying stocks that don't have big growth...you can ignore PEG (except you probably want to use it to compare it to other stocks in the same category).
There are reasons to use P/E and PEG, and some reasons not to (in certain circumstances)...but, as a general rule for us...cheaper is always better.
Saturday, July 10, 2010
The Blue Box
Best Buy is toast. The other week at the office, we had a conversation about Best Buy...and it's hard not to think that they're in trouble. Their most recent quarter, although not the horror show that some analysts say it was...was something to be concerned about.
Circuit City is gone, and for several quarters, it was clear Best Buy grabbed all their customers. The stock rocketed. But then, after the most recent quarter, we starting thinking about what might go wrong with Best Buy. Losing money is always the bigger risk when managing money than not making enough. People are generally happy, as long as they don't see red. Black is the new green these days.
So, after seeing the stock decline, selling the stock, then cashing out of the puts...we're left wondering what the future holds for Best Buy. Their biggest risk: pre-packaged media. That's the HUGE section of the store right in the center for movies, music, and games. That's right...going the the store and buying the ACTUAL CD or DVD will soon disappear. And with it, go great margins, revenue, and ultimately profit dollars. Granted, Best Buy announced on the call that they will be beating up GameStop and stealing their lunch money (they're going to start buying, selling, and trading of used games). This new strategy will help offset some of the revenue lost from other media sales...but it will only delay the inevitable: people shop online more an more these days. We visited the local Best Buy to see what computers they had in stock when it was time to get a new laptop at the office. It was clear that we could get far more from a NewEgg.com or a TigerDirect.com than we could by going into the store...and we're willing to bet we're not alone in what we have found.
iTunes has revolutionized content distribution along with NetFlix. If other companies don't catch up, they will be eliminated...Circuit City style. These two companies are taking a huge bite out of Best Buy's pre-packaged media sales with their direct download to consumer programs. So, what is the solution you say, for Best Buy?
Best Buy needs to buy BlockBuster Video. BLOKA.PK (because it now trades on Pink Sheets after it was delisted) is in a world of hurt. Holleywood Video has already been eliminated (Movie Gallery) and BlockBuster is next. Why? Thanks to CoinStar...the creator of the Red Box, brick and mortar movie rental places are getting burned to the ground by these little red boxes with little overhead, no healthcare costs, and loads of profits. BlockBuster has already countered with the Blue Box...but it's too little too late. The ENTIRE MARKET CAP of BlockBuster's stock is now only $36 Million. Heck, for that price Best Buy could take a stab at it and be wrong and still come out OK...but I think that they'd come out better than OK.
First of all, the color schemes are almost identical, so very little in terms of branding would need to be done. They could change the name or leave it, and I don't think people would notice.
Second, all that space they now have in their stores can be converted from pre-packaged media into a BlockBuster. They keep only the hottest selling music in stock (same thing with DVDs, which BlockBuster already sells) and then throw in the buy/sell/trade for music, movies, and games (since they're getting into the act with video games...no reason to stop there). This should be a much better use of the space in stores and they need more revenue/sq foot in the stores because media sales are down so much.
Third, BlockBuster already competes with NetFlix via it's in-the-mail-style rental package. Jumping with both feet into the content distribution for Best Buy should help margins and bring a serious competitor to NetFlix. You can easily see sales reps cross selling the down loadable content to those ready to walk out of Best Buy with a new television. Best Buy can work with the makers of the products it sells to add capability to the televisions, pick a video game partner...the sky would be endless. Deals like buy a television and get access to our downloadable content free for 3 months (after which the billing starts) would help subscriptions skyrocket for the BlockBuster division of the company who already has the service...they just need Best Buy's distribution.
Finally, having a Blue Box outside EVERY Best Buy all over the world means that they have instant revenue Red Box style. I think Blue Box even has a deal with Sheetz, the gas station extravaganza that draws all sorts of people with it's selection and variety of things inside. Adding a Blue Box to the outside of every Best Buy should ADD to the foot traffic inside the stores as some will ultimately venture into the store to shop after they grab a movie. Or, you can see them buying a new BlueRay or Home Theatre and grabbing a movie on the way out.
BlockBuster may have $1 Billion in debt...but it looks like their free cash flow is $650 Million...plenty of cash coming in to refinance the debt with the financial backing of Best Buy behind it. The issue for BLOCKA.PK is that on their own...they face extinction and they just don't have the balance sheet to make it. At 16.5 cents/share for BlockBuster we think Best Buy is missing out on a great opportunity grab a perfect, complimentary asset...at a block buster price (and it's a move that might just save both companies).
Circuit City is gone, and for several quarters, it was clear Best Buy grabbed all their customers. The stock rocketed. But then, after the most recent quarter, we starting thinking about what might go wrong with Best Buy. Losing money is always the bigger risk when managing money than not making enough. People are generally happy, as long as they don't see red. Black is the new green these days.
So, after seeing the stock decline, selling the stock, then cashing out of the puts...we're left wondering what the future holds for Best Buy. Their biggest risk: pre-packaged media. That's the HUGE section of the store right in the center for movies, music, and games. That's right...going the the store and buying the ACTUAL CD or DVD will soon disappear. And with it, go great margins, revenue, and ultimately profit dollars. Granted, Best Buy announced on the call that they will be beating up GameStop and stealing their lunch money (they're going to start buying, selling, and trading of used games). This new strategy will help offset some of the revenue lost from other media sales...but it will only delay the inevitable: people shop online more an more these days. We visited the local Best Buy to see what computers they had in stock when it was time to get a new laptop at the office. It was clear that we could get far more from a NewEgg.com or a TigerDirect.com than we could by going into the store...and we're willing to bet we're not alone in what we have found.
iTunes has revolutionized content distribution along with NetFlix. If other companies don't catch up, they will be eliminated...Circuit City style. These two companies are taking a huge bite out of Best Buy's pre-packaged media sales with their direct download to consumer programs. So, what is the solution you say, for Best Buy?
Best Buy needs to buy BlockBuster Video. BLOKA.PK (because it now trades on Pink Sheets after it was delisted) is in a world of hurt. Holleywood Video has already been eliminated (Movie Gallery) and BlockBuster is next. Why? Thanks to CoinStar...the creator of the Red Box, brick and mortar movie rental places are getting burned to the ground by these little red boxes with little overhead, no healthcare costs, and loads of profits. BlockBuster has already countered with the Blue Box...but it's too little too late. The ENTIRE MARKET CAP of BlockBuster's stock is now only $36 Million. Heck, for that price Best Buy could take a stab at it and be wrong and still come out OK...but I think that they'd come out better than OK.
First of all, the color schemes are almost identical, so very little in terms of branding would need to be done. They could change the name or leave it, and I don't think people would notice.
Second, all that space they now have in their stores can be converted from pre-packaged media into a BlockBuster. They keep only the hottest selling music in stock (same thing with DVDs, which BlockBuster already sells) and then throw in the buy/sell/trade for music, movies, and games (since they're getting into the act with video games...no reason to stop there). This should be a much better use of the space in stores and they need more revenue/sq foot in the stores because media sales are down so much.
Third, BlockBuster already competes with NetFlix via it's in-the-mail-style rental package. Jumping with both feet into the content distribution for Best Buy should help margins and bring a serious competitor to NetFlix. You can easily see sales reps cross selling the down loadable content to those ready to walk out of Best Buy with a new television. Best Buy can work with the makers of the products it sells to add capability to the televisions, pick a video game partner...the sky would be endless. Deals like buy a television and get access to our downloadable content free for 3 months (after which the billing starts) would help subscriptions skyrocket for the BlockBuster division of the company who already has the service...they just need Best Buy's distribution.
Finally, having a Blue Box outside EVERY Best Buy all over the world means that they have instant revenue Red Box style. I think Blue Box even has a deal with Sheetz, the gas station extravaganza that draws all sorts of people with it's selection and variety of things inside. Adding a Blue Box to the outside of every Best Buy should ADD to the foot traffic inside the stores as some will ultimately venture into the store to shop after they grab a movie. Or, you can see them buying a new BlueRay or Home Theatre and grabbing a movie on the way out.
BlockBuster may have $1 Billion in debt...but it looks like their free cash flow is $650 Million...plenty of cash coming in to refinance the debt with the financial backing of Best Buy behind it. The issue for BLOCKA.PK is that on their own...they face extinction and they just don't have the balance sheet to make it. At 16.5 cents/share for BlockBuster we think Best Buy is missing out on a great opportunity grab a perfect, complimentary asset...at a block buster price (and it's a move that might just save both companies).
Saturday, July 3, 2010
Financial Television is Like a Comic Book Series
People don't watch enough television. Seriously, I hear people all the time who say that so and so recommended a stock on television and all of a sudden it's down and they've lost money and they want to know what to do.
They're getting it all wrong. Television isn't one long buy/sell list for investors to watch, execute the trade, and then get rich. That's now how television works. If you read our article earlier "They Are Idiots", then you know that when you buy a stock from someone, you have to make the bet that they are an idiot...otherwise you are the idiot; as they convinced you to buy something they didn't want anymore. Guess how many other people are watching EXACTLY THE SAME THING you are watching right then; and you now have to trade with AND against these people to make money.
Say Steve Grasso comes on television and says he's buying BP, which he did. And then you go on vacation, forget about the real world for a week, come back and check on your BP position. You see that it's down from $34 to $27 and think: "What the heck happened to BP? That Grasso guy is an idiot, I'll never listen to him again." This is where people go wrong. A few days later, after getting long BP, Steve Grasso, Patty Edwards, and many others on the Fast Money Desk stated very clearly that BP had gotten too difficult to measure and that there was too much risk in the trade and that they had sold their position and were not going back in.
Watching television, at least financial television, is like reading a comic book. If you don't read every single issue that comes out, you are GOING TO MISS SOMETHING. That detail that you miss, could cost you hundreds or thousands of dollars. Like reading a comic book, it's important to read a few issues before you form an opinion. The biggest mistake (one of them) retail investors make is in thinking that a stock is going to run away from them, so they jump in when they hear a convincing story on say Jim Cramer's Executive Decision Segment, where he has a CEO from a company come on and tell you what's new and exciting about their company. Then, Cramer says he likes the company, the person is so excited, they go and buy it the next morning at the open (often the time that people pay too much and get crushed by the end of the day).
What they have forgotten, or not witnessed, is that on ANOTHER episode of Mad Money, Jim Cramer vehemently warned viewers to always wait 5 days before buying a stock, never buy your whole position at once (in case the stock goes down and you can get it for cheaper), and always use limit orders so you get the price you want. But, the person who buys this stock after the Executive Decision segment missed the other shows about disciplined investing and ignored all of Cramer's rules for buying a stock. They exclaim that Steve Grasso and Jim Cramer are idiots and they never buy another stock again (or they repeat their mistake after listening to someone else on TV).
The bottom line, you MUST watch EVERYTHING before you buy ANYTHING. Shows like Fast Money, Mad Money, Strategy Session, and Stop Trading are terrific; but they are often just one piece of a much bigger puzzle that needs to be pieced together before you buy or sell a position. There will never be any substitution for doing your own homework. When you watch someone on television they will ASSUME that YOU, the viewer, has heard everything else they have said or written. They have to do that, otherwise, they would say the same thing every single time that you watched them. This wouldn't help anyone...and it certainly wouldn't be entertaining. So, next time, before you make a decision that costs you thousands of dollars, "read up" and watch a week's worth of whatever program it is you're watching until you understand how each person trades so that when they change their mind on BP, Research in Motion (RIMM), or Goldman Sachs (GS) you'll be there to see it and then you can change yours too...after you do your homework of course.
They're getting it all wrong. Television isn't one long buy/sell list for investors to watch, execute the trade, and then get rich. That's now how television works. If you read our article earlier "They Are Idiots", then you know that when you buy a stock from someone, you have to make the bet that they are an idiot...otherwise you are the idiot; as they convinced you to buy something they didn't want anymore. Guess how many other people are watching EXACTLY THE SAME THING you are watching right then; and you now have to trade with AND against these people to make money.
Say Steve Grasso comes on television and says he's buying BP, which he did. And then you go on vacation, forget about the real world for a week, come back and check on your BP position. You see that it's down from $34 to $27 and think: "What the heck happened to BP? That Grasso guy is an idiot, I'll never listen to him again." This is where people go wrong. A few days later, after getting long BP, Steve Grasso, Patty Edwards, and many others on the Fast Money Desk stated very clearly that BP had gotten too difficult to measure and that there was too much risk in the trade and that they had sold their position and were not going back in.
Watching television, at least financial television, is like reading a comic book. If you don't read every single issue that comes out, you are GOING TO MISS SOMETHING. That detail that you miss, could cost you hundreds or thousands of dollars. Like reading a comic book, it's important to read a few issues before you form an opinion. The biggest mistake (one of them) retail investors make is in thinking that a stock is going to run away from them, so they jump in when they hear a convincing story on say Jim Cramer's Executive Decision Segment, where he has a CEO from a company come on and tell you what's new and exciting about their company. Then, Cramer says he likes the company, the person is so excited, they go and buy it the next morning at the open (often the time that people pay too much and get crushed by the end of the day).
What they have forgotten, or not witnessed, is that on ANOTHER episode of Mad Money, Jim Cramer vehemently warned viewers to always wait 5 days before buying a stock, never buy your whole position at once (in case the stock goes down and you can get it for cheaper), and always use limit orders so you get the price you want. But, the person who buys this stock after the Executive Decision segment missed the other shows about disciplined investing and ignored all of Cramer's rules for buying a stock. They exclaim that Steve Grasso and Jim Cramer are idiots and they never buy another stock again (or they repeat their mistake after listening to someone else on TV).
The bottom line, you MUST watch EVERYTHING before you buy ANYTHING. Shows like Fast Money, Mad Money, Strategy Session, and Stop Trading are terrific; but they are often just one piece of a much bigger puzzle that needs to be pieced together before you buy or sell a position. There will never be any substitution for doing your own homework. When you watch someone on television they will ASSUME that YOU, the viewer, has heard everything else they have said or written. They have to do that, otherwise, they would say the same thing every single time that you watched them. This wouldn't help anyone...and it certainly wouldn't be entertaining. So, next time, before you make a decision that costs you thousands of dollars, "read up" and watch a week's worth of whatever program it is you're watching until you understand how each person trades so that when they change their mind on BP, Research in Motion (RIMM), or Goldman Sachs (GS) you'll be there to see it and then you can change yours too...after you do your homework of course.
Monday, May 10, 2010
No Hope for the Weary
I sat next to someone on the plane from California over the weekend and I was struck, nearly dumb by his comments. He spun a tale of conspiracy, paid-off government, oligarchs, financial misgivings, bail-outs, smoke and mirrors, uprising, chaos, and civil war. By the time he was done telling his tale I only had one question: "Why do you live in the United States?"
Seriously, if our country is so horrible and terrible, which he attempted to convince me in under 10 minutes, then why live here? He then answered that, at least for now, Americans believed in the "Rule of Law" more than any other country and as long as the government can keep us in the matrix, then the "Rule of Law" will govern us, even as we're free to rebel and overthrow our government (which he thinks oppresses us and keeps us impoverished because the government is owned by the banks and the oligarchs, of which I get the impression he thinks Warren Buffet is one). I couldn't bring myself to learn more about his twisted view of our world and I really couldn't stand the thought of another 10 minutes of terror if I asked him to tell me just who the oligarchs are. He made mention of Warren Buffet's deal for Preferred Stock with Goldman Sachs (which I get the impression that he thinks was done with fire and blood in a dark room with everyone wearing robes and fancy handshakes) and that was enough for my taste.
I felt like saying something that you'll hear Guy Adami say frequently on CNBC's Fast Money: "So what's the trade?" Seriously, all this conspiracy stuff is great for movies (if you like that sort of thing) but how do you make money? If the world is going to fall apart, or we're going to have a genuine populous revolt, shouldn't their be a way to profit from it? I know that sounds terrible, but one thing I've noticed since I started managing money (professionally) 6 years ago was that I was able to reduce everything to dollars and cents. It has made me much less emotional and that's how I'm able to think in black and white regarding decisions the people I advise/manage/work with is by eliminating my emotional attachment to the subject and look at it objectively.
Jim Cramer is great at reducing any caller's question to one thing: "Is the stock going to go up or down?" "It doesn't matter what your cost basis is," is something we've seen him tell dozens of callers and write in his books. It only matters whether or not you think the investment (of any kind) will go up or down. If you know/feel/think/believe that it's going to decline or there is significant risk to such, then you just sell it and look to allocate your capital elsewhere.
"Hope is not an investment thesis," is something I've heard several times, from both Guy Adami, Jim Cramer, and many others. I had a call, just today, and I was told "I know that solar power doesn't really make economic sense right now, but I'm really hoping that in the future we'll have cleaner energy and I want to benefit from it financially." But, his thesis was ultimately that he would like to see clean energy be successful and so if his hope is realized, then the stocks of solar companies would indeed rise in value.
Unfortunately, no matter what people want the future to look like, when it comes to your money, that should never be part of the thought process. The only two things you want to know are Guy Adami's "what's the trade" and Jim Cramer's "is it going to go up or down from here". If you can answer these two questions, then I think you can be successful as an investor. Do not find yourself investing in what you'd like to happen; but rather, what you think will make you money. It's fine if you will not put money into companies that you think are morally reprehensible, but you certainly shouldn't make the connection between buying something like Massey or BP and wanting to the world to burn on the use of dirty, unsafe carbon fuels. It means that the stocks went down and they're tremendously oversold and represent very attractive investments because all the bad news of the two events and MUCH MORE are now "priced in" to the stock's price. That's it, with investing, it's about doing just that...investing...making money.
Bottom line on this story, when it comes to where you place your capital to invest in your future, try to ignore what you'd like the future to look like and try to think about what you think the future probably will look like, and go with the latter. Now, when it comes to your social causes, where you donate your time and money...that's when you get your big heart out and give back to the world you live in. When you are being charitable, it helps to get out a big bag of hope and spread it like salt on mashed potatoes.
So lets recap: 1) When it comes to making money, ignore what's said on the news, ignore your friends, please don't listen to anyone at the office, do your homework, and make sure you feel like it's going to go up based on what you learn from doing your analysis before you invest. 2) When it comes to hope, make sure you have a lot of it as this world is a tough one and you'll face many challenges ahead, but make sure you check your hope at the door before you sit down in front of your computer to trade because "hope is not a valid investment thesis."
PS. Stop watching the news, and try putting CNBC on mute for most of Power Lunch unless Steve Grasso or Fast Money is on and when the market closes, you can come back at 5pm to take it off for 2 hours.
Seriously, if our country is so horrible and terrible, which he attempted to convince me in under 10 minutes, then why live here? He then answered that, at least for now, Americans believed in the "Rule of Law" more than any other country and as long as the government can keep us in the matrix, then the "Rule of Law" will govern us, even as we're free to rebel and overthrow our government (which he thinks oppresses us and keeps us impoverished because the government is owned by the banks and the oligarchs, of which I get the impression he thinks Warren Buffet is one). I couldn't bring myself to learn more about his twisted view of our world and I really couldn't stand the thought of another 10 minutes of terror if I asked him to tell me just who the oligarchs are. He made mention of Warren Buffet's deal for Preferred Stock with Goldman Sachs (which I get the impression that he thinks was done with fire and blood in a dark room with everyone wearing robes and fancy handshakes) and that was enough for my taste.
I felt like saying something that you'll hear Guy Adami say frequently on CNBC's Fast Money: "So what's the trade?" Seriously, all this conspiracy stuff is great for movies (if you like that sort of thing) but how do you make money? If the world is going to fall apart, or we're going to have a genuine populous revolt, shouldn't their be a way to profit from it? I know that sounds terrible, but one thing I've noticed since I started managing money (professionally) 6 years ago was that I was able to reduce everything to dollars and cents. It has made me much less emotional and that's how I'm able to think in black and white regarding decisions the people I advise/manage/work with is by eliminating my emotional attachment to the subject and look at it objectively.
Jim Cramer is great at reducing any caller's question to one thing: "Is the stock going to go up or down?" "It doesn't matter what your cost basis is," is something we've seen him tell dozens of callers and write in his books. It only matters whether or not you think the investment (of any kind) will go up or down. If you know/feel/think/believe that it's going to decline or there is significant risk to such, then you just sell it and look to allocate your capital elsewhere.
"Hope is not an investment thesis," is something I've heard several times, from both Guy Adami, Jim Cramer, and many others. I had a call, just today, and I was told "I know that solar power doesn't really make economic sense right now, but I'm really hoping that in the future we'll have cleaner energy and I want to benefit from it financially." But, his thesis was ultimately that he would like to see clean energy be successful and so if his hope is realized, then the stocks of solar companies would indeed rise in value.
Unfortunately, no matter what people want the future to look like, when it comes to your money, that should never be part of the thought process. The only two things you want to know are Guy Adami's "what's the trade" and Jim Cramer's "is it going to go up or down from here". If you can answer these two questions, then I think you can be successful as an investor. Do not find yourself investing in what you'd like to happen; but rather, what you think will make you money. It's fine if you will not put money into companies that you think are morally reprehensible, but you certainly shouldn't make the connection between buying something like Massey or BP and wanting to the world to burn on the use of dirty, unsafe carbon fuels. It means that the stocks went down and they're tremendously oversold and represent very attractive investments because all the bad news of the two events and MUCH MORE are now "priced in" to the stock's price. That's it, with investing, it's about doing just that...investing...making money.
Bottom line on this story, when it comes to where you place your capital to invest in your future, try to ignore what you'd like the future to look like and try to think about what you think the future probably will look like, and go with the latter. Now, when it comes to your social causes, where you donate your time and money...that's when you get your big heart out and give back to the world you live in. When you are being charitable, it helps to get out a big bag of hope and spread it like salt on mashed potatoes.
So lets recap: 1) When it comes to making money, ignore what's said on the news, ignore your friends, please don't listen to anyone at the office, do your homework, and make sure you feel like it's going to go up based on what you learn from doing your analysis before you invest. 2) When it comes to hope, make sure you have a lot of it as this world is a tough one and you'll face many challenges ahead, but make sure you check your hope at the door before you sit down in front of your computer to trade because "hope is not a valid investment thesis."
PS. Stop watching the news, and try putting CNBC on mute for most of Power Lunch unless Steve Grasso or Fast Money is on and when the market closes, you can come back at 5pm to take it off for 2 hours.
Monday, May 3, 2010
They are Idiots.
Every now and then I talk to people who think that when you buy the stock of a publicly traded company, that you buy it from the company. Heck, it happened yesterday. So, the first thing I tell them is that a company only sells stock a few times in its existence...say 1/2 a dozen times or so...maybe more if it buys a lot of other companies. If it does this, by the way, you should be concerned. Read Jim Cramer's book: "You got screwed" about how Enron went down and you too can be worried about companies that endlessly acquire other companies (think Oracle...don't know if it's different in their case, but they are serial acquirers).
So, the bottom line of the above comments is that when you buy a stock, you buy it FROM another person or institution. That's right, you could be buying stock from someone on your very street that you live on...who just sold it to you. Now, why would someone sell you their stock if they thought it was going to keep going up? That's right, when you buy stock, you MUST assume that the person who sold it to you is an idiot. If you don't want to be that mean, you have to at least politely think that they are wrong, very wrong. Otherwise, the loser in the transaction...is you. If you are wrong, and they are right, then the stock will go down and you'll lose money, and they'll laugh all the way to the bank.
This is where the title comes from. You have to believe that the people who sold you your stock are idiots or you're about to lose money. You're about to lose serious money if you don't have the guts to cut your losses and watch it go to zero. I know these are strong words, but I'm trying to help you avoid seeing your investments go to zero. It means that you have to do your homework. You have to listen to the conference calls. You have to watch CNBC, read books, and read company balance sheets and cash flow statements. You have to do all of that, or someone is going to make an idiot out of you.
Now that you understand how buying stocks works, you can understand how insane it is that everyone insists that Goldman Sachs should have disclosed to the buyer of the Abacus paper that John Paulson was on the other side of the trade. ARE YOU KIDDING ME? Name one time you bought a stock and didn't know who sold it to you. How about EVERY TIME! It happens every day in the market. The only one who knows who is who are the market makers who put the trade together and that's how it should be. Can you imagine if you knew every time who was selling and who was buying? You want to see some real manipulation, try requiring firms to disclose who is on what side of the trade. I have never heard of anything so stupid in my life! Look, everyone has the right to be angry when things are done wrong. Everyone should feel hurt when you're taken advantage of. But this Goldman Sachs case has gone too far. Do you even know what kind of money you MUST have before they'll even deal with you? This was not someone buying the Abacus paper on E*Trade from someone for $7.95 or whatever they charge. The group putting the security together got to toss ANY mortgage out of the SIV (Structured Investment Vehicle) they wanted to! Can you believe that part of it? So, who's really to blame that it went south? I don't see the millions of people who were stupid enough to buy GM stock before it was declared worthless coming out and filing a lawsuit against GM. Jim Cramer told people for months that the GM paper was worthless...but that didn't stop people from trading it.
Just because someone loses money in the stock market, or any other capital market like commodities, options, SIVs, CDOs, RMBS, CMBS, MBS doesn't mean something was wrong or criminal. No one is exempt from doing their homework, especially not people with money who can hire other people to do their homework for them. When this buyer asked Goldman Sachs for the product, they didn't ask their advice on it, they asked them to have someone make the product. John Paulson was willing to do that and go short the product. Who says the IBM you bought today wasn't someone who borrowed the shares and sold them short to you? Heck, you may be the person to sell it back to them when they cover since you have the exact amount of shares they'll need.
Sometimes investments are complicated. Sometimes people lose money. But you always have to do your homework, no matter who you are or what you're buying...and you'll never know who's on the other side of the trade...at least not in a world that's fair. You just have to hope that the person or institution that sold you the investment, is an idiot.
So, the bottom line of the above comments is that when you buy a stock, you buy it FROM another person or institution. That's right, you could be buying stock from someone on your very street that you live on...who just sold it to you. Now, why would someone sell you their stock if they thought it was going to keep going up? That's right, when you buy stock, you MUST assume that the person who sold it to you is an idiot. If you don't want to be that mean, you have to at least politely think that they are wrong, very wrong. Otherwise, the loser in the transaction...is you. If you are wrong, and they are right, then the stock will go down and you'll lose money, and they'll laugh all the way to the bank.
This is where the title comes from. You have to believe that the people who sold you your stock are idiots or you're about to lose money. You're about to lose serious money if you don't have the guts to cut your losses and watch it go to zero. I know these are strong words, but I'm trying to help you avoid seeing your investments go to zero. It means that you have to do your homework. You have to listen to the conference calls. You have to watch CNBC, read books, and read company balance sheets and cash flow statements. You have to do all of that, or someone is going to make an idiot out of you.
Now that you understand how buying stocks works, you can understand how insane it is that everyone insists that Goldman Sachs should have disclosed to the buyer of the Abacus paper that John Paulson was on the other side of the trade. ARE YOU KIDDING ME? Name one time you bought a stock and didn't know who sold it to you. How about EVERY TIME! It happens every day in the market. The only one who knows who is who are the market makers who put the trade together and that's how it should be. Can you imagine if you knew every time who was selling and who was buying? You want to see some real manipulation, try requiring firms to disclose who is on what side of the trade. I have never heard of anything so stupid in my life! Look, everyone has the right to be angry when things are done wrong. Everyone should feel hurt when you're taken advantage of. But this Goldman Sachs case has gone too far. Do you even know what kind of money you MUST have before they'll even deal with you? This was not someone buying the Abacus paper on E*Trade from someone for $7.95 or whatever they charge. The group putting the security together got to toss ANY mortgage out of the SIV (Structured Investment Vehicle) they wanted to! Can you believe that part of it? So, who's really to blame that it went south? I don't see the millions of people who were stupid enough to buy GM stock before it was declared worthless coming out and filing a lawsuit against GM. Jim Cramer told people for months that the GM paper was worthless...but that didn't stop people from trading it.
Just because someone loses money in the stock market, or any other capital market like commodities, options, SIVs, CDOs, RMBS, CMBS, MBS doesn't mean something was wrong or criminal. No one is exempt from doing their homework, especially not people with money who can hire other people to do their homework for them. When this buyer asked Goldman Sachs for the product, they didn't ask their advice on it, they asked them to have someone make the product. John Paulson was willing to do that and go short the product. Who says the IBM you bought today wasn't someone who borrowed the shares and sold them short to you? Heck, you may be the person to sell it back to them when they cover since you have the exact amount of shares they'll need.
Sometimes investments are complicated. Sometimes people lose money. But you always have to do your homework, no matter who you are or what you're buying...and you'll never know who's on the other side of the trade...at least not in a world that's fair. You just have to hope that the person or institution that sold you the investment, is an idiot.
Saturday, February 13, 2010
We Need More Laws...Well, At Least Better Ones
Usually, asking for lawmakers to make laws never happens...at least by normal people. Don't get us wrong, there are plenty of legislators being hounded by lobbyists every day for this piece of legislation or that. But what about good laws? Are there things we could be doing to help this country move forward?
You bet there is!
Recently, we saw Aubrey McClendon (CEO of Chesapeake Energy) and James Rogers (CEO of Duke Energy) go at each other on stage at the Wake Forest University. If you want to see some of that footage, you can check it out right here (courtesy of our YouTube Channel) (Just be sure to turn up the sound on your computer as we're sitting about 10 rows back).
In this video, you'll hear Jim tell Aubrey that he is agnostic about where he gets the fuel to fire his power plants. What? How can that be? Doesn't he want to be clean and green with his power? Doesn't he want to save the planet, lower carbon emissions, and plant trees? Nope...well, at least unless he can plant trees tall enough to hide his nuclear power plants from view. His number one goal is to find the cheapest energy sources that will supply consistent, reliable power to his customers.
Why does he take that stance if natural gas has 50% of the carbon footprint of coal? Because we live in a Pro-Black Lung Coalition world in which the Coal Lobby in Washington is one of the oldest, strongest, and most powerful Lobbying groups out there. They have convinced Washington to create "coal friendly" legislation so that they can keep providing their "heroine" (that's what Aubrey called coal after Jim called natural gas crack cocaine) to utility companies. Until legislation is changed, it is clear that neither Jim Rogers at Duke Energy, or any other energy company CEO is going to change over to natural gas (despite it being cleaner) unless they know that it will be supported by legislation.
Years ago, about 2 decades ago, congress momentarily made it illegal to use natural gas to fire power plants because it was in short supply and they wanted to make sure homes had it available to heat and cook. This event created the opening for the coal lobby that no one has been able to close to this day. Coal is cheap, abundant, and it offers the "unicorn myth" that one day we can do CCS (Carbon Capture and Sequestration) and make "clean coal".
Well, while that has never happened yet, we are getting natural gas out of shale properties all over this country from Texas to Pennsylvania and in plenty of places in between. There is said to be around 100 years of natural gas in the shale formations in the US...enough for us to run everything off of natural gas until we can make the switch to wind, solar, and water. You can read more about this from The PickensPlan, just click on the link.
Also, you can watch the videos below, which break down what we saw take place between Chesapeake Energy (CHK) and Duke Energy (DUK) at the Energy Conference.
While it's certainly up to us to learn more about the different fuels and their use in providing us with power; one thing is for sure, until legislation allows "fracking" or horizontal drilling explicitly, no matter how clean natural gas may be, power companies will not use it to fire power plants until the legislative uncertainty is removed.
The other thing that is very clear now, is that our Country needs a new economy. We think it has to come from Energy or Technology. Health Care is already 1/6th of our economy. The Service Sector is huge right now. The Defense Sector can grow in terms of preventing Cyber Warfare, Anti-Virus, FireWalls, X-Ray Machines, Full-body Scanners, etc. But, in order to get us back to anywhere close to a 5% unemployment rate...we're going to need to create a new economy. We can't simply put more people to work doing what we already do as a country because businesses will not give up the productivity they currently enjoy. Profits are getting better and better. The last thing corporate America wants to do now, is to go back to declining profits. That means we need a new Energy Economy and we need the help of legislation to set a long term energy policy for our country.
It doesn't have to be perfect, but we need to lay out the case for how different fuels will be used over time. A longer term energy policy will give CEOs enough certainty to make decisions that will take 5-7 years to implement. Jim Rogers stated that he will replace every single plant he has right now in the next 40 to 50 years, every plant. Can you imagine the jobs that would create today if CEOs had a blueprint for the future of legislation. We have heard for weeks on CNBC and other channels that legislative uncertainty means that companies will hire less and spend less. Well today, Aubrey McClendon and James Rogers just proved it.
Please contact your congressperson and senator today to let them know that we need to remove legislative uncertainty and get started putting people back to work.
You bet there is!
Recently, we saw Aubrey McClendon (CEO of Chesapeake Energy) and James Rogers (CEO of Duke Energy) go at each other on stage at the Wake Forest University. If you want to see some of that footage, you can check it out right here (courtesy of our YouTube Channel) (Just be sure to turn up the sound on your computer as we're sitting about 10 rows back).
In this video, you'll hear Jim tell Aubrey that he is agnostic about where he gets the fuel to fire his power plants. What? How can that be? Doesn't he want to be clean and green with his power? Doesn't he want to save the planet, lower carbon emissions, and plant trees? Nope...well, at least unless he can plant trees tall enough to hide his nuclear power plants from view. His number one goal is to find the cheapest energy sources that will supply consistent, reliable power to his customers.
Why does he take that stance if natural gas has 50% of the carbon footprint of coal? Because we live in a Pro-Black Lung Coalition world in which the Coal Lobby in Washington is one of the oldest, strongest, and most powerful Lobbying groups out there. They have convinced Washington to create "coal friendly" legislation so that they can keep providing their "heroine" (that's what Aubrey called coal after Jim called natural gas crack cocaine) to utility companies. Until legislation is changed, it is clear that neither Jim Rogers at Duke Energy, or any other energy company CEO is going to change over to natural gas (despite it being cleaner) unless they know that it will be supported by legislation.
Years ago, about 2 decades ago, congress momentarily made it illegal to use natural gas to fire power plants because it was in short supply and they wanted to make sure homes had it available to heat and cook. This event created the opening for the coal lobby that no one has been able to close to this day. Coal is cheap, abundant, and it offers the "unicorn myth" that one day we can do CCS (Carbon Capture and Sequestration) and make "clean coal".
Well, while that has never happened yet, we are getting natural gas out of shale properties all over this country from Texas to Pennsylvania and in plenty of places in between. There is said to be around 100 years of natural gas in the shale formations in the US...enough for us to run everything off of natural gas until we can make the switch to wind, solar, and water. You can read more about this from The PickensPlan, just click on the link.
Also, you can watch the videos below, which break down what we saw take place between Chesapeake Energy (CHK) and Duke Energy (DUK) at the Energy Conference.
While it's certainly up to us to learn more about the different fuels and their use in providing us with power; one thing is for sure, until legislation allows "fracking" or horizontal drilling explicitly, no matter how clean natural gas may be, power companies will not use it to fire power plants until the legislative uncertainty is removed.
The other thing that is very clear now, is that our Country needs a new economy. We think it has to come from Energy or Technology. Health Care is already 1/6th of our economy. The Service Sector is huge right now. The Defense Sector can grow in terms of preventing Cyber Warfare, Anti-Virus, FireWalls, X-Ray Machines, Full-body Scanners, etc. But, in order to get us back to anywhere close to a 5% unemployment rate...we're going to need to create a new economy. We can't simply put more people to work doing what we already do as a country because businesses will not give up the productivity they currently enjoy. Profits are getting better and better. The last thing corporate America wants to do now, is to go back to declining profits. That means we need a new Energy Economy and we need the help of legislation to set a long term energy policy for our country.
It doesn't have to be perfect, but we need to lay out the case for how different fuels will be used over time. A longer term energy policy will give CEOs enough certainty to make decisions that will take 5-7 years to implement. Jim Rogers stated that he will replace every single plant he has right now in the next 40 to 50 years, every plant. Can you imagine the jobs that would create today if CEOs had a blueprint for the future of legislation. We have heard for weeks on CNBC and other channels that legislative uncertainty means that companies will hire less and spend less. Well today, Aubrey McClendon and James Rogers just proved it.
Please contact your congressperson and senator today to let them know that we need to remove legislative uncertainty and get started putting people back to work.
What does a Year Supply of Food, a 72 Hour Emergency Kit, and Stocks Have in Common?
The value of the dollar may be one of the most talked about issues on Wall Street, and in Political Circles on Main Street. What does a "weak dollar" mean for the US and for it's citizens.
For American companies, it's fabulous. It means that the rest of the world can buy our goods for less. That usually means that, as a country, we will sell more goods because they are more competitive internationally. There are many more consumers outside the US than inside of it. If we are to prosper as a country, we will have to export and in large amounts. As international companies convert foreign currency back into US dollars, they get more for their money on account of the exchange rate; especially if the US dollar has weakened from the time they sold the goods and collected payment.
How does this all relate to inflation? Inflation occurs when your dollar buys less in the future than it does today. Many people feel like the act of printing money by the Federal Reserve Bank is what leads to inflation. That is just simply not the case. Just because money is created, does not mean that it will find it's way into the hands of those who will spend it. We hear all the time about how we face hyper inflation if we keep interest rates at zero for an extended period of time. But, we also hear how banks are not lending...well...at least not to sketchy lenders. Without lending that not so "easy money" to borrowers, there is little risk that inflation gets out of control.
So, how does inflation really happen? Say you buy a house for $150,000. Just two years later you hear about someone desperate to buy a house in your area, and he/she is willing to pay top, top dollar for that house. You personally find out who it is and have them over for dinner. You offer to sell them your home and all of your furniture for $175,000 because you agree to move out in 10 days. Now, all of a sudden, when real estate agents run comparables of your market and find out that a house just sold for $10,000 to $15,000 over market...now every home in that market is "worth" more money. When the next buyer pays $170,000 for a similar home, inflation is born. See, inflation happens when someone is willing to pay "too much" for something and then all similar sales follow suit.
If I wanted to buy a Toyota Prius in 2004 when the 2nd Generation Prius (2005) Prius came out, there were literally waiting lists in California to buy that car. People were actually buying the car and then reselling it if they were able to get the HOV Lane sticker (that allowed you to drive your Prius in the HOV lane by yourself in California). People were paying OVER the sticker price for a Toyota Prius in 2004 and 2005. All of a sudden, this car was experiencing inflation and it had nothing to do with the Feds printing money. When someone "pays up" for something, inflation is born.
So, the next time someone insists that the Fed is printing money, you ask them where you can get yours, because until that money gets in the hands of those who will spend it, you will not see inflation. In this environment, the Federal Reserve is much more worried about deflation. That's where no one has money to spend and there are all sorts of things to buy. You may hear the term "slack in the economy". That means we have much more production capacity than demand and it causes producers to sell their goods for less just to generate cash to stay in business. A deflationary spiral is MUCH worse than inflation. They say inflation is too many dollars chasing too few goods. You know what that's called in economics? It's called demand. Regardless of how it happens, when people want something and they are willing to pay more than the next person...inflation is born.
So, what do you do when inflation strikes? I can tell you what you do not want to do, and that's own bonds that have lower interest rates or are going to mature shortly. Without having a much longer duration or an above average interest rate, you could see your bond price get whacked, hard, in order to bring the yield in line with the market's interest rate.
Lets take a look at Zimbabwe's situation in which they experienced hyperinflation:
Highest Monthly Inflation Rates in History Country Month with highest inflation rate Highest monthly inflation rate Equivalent daily inflation rate Time required for prices to double
Hungary July 1946 1.30 x 1016% 195% 15.6 hours
Zimbabwe Mid-November 2008 (latest measurable) 79,600,000,000% 98.0% 24.7 hours
Yugoslavia January 1994 313,000,000% 64.6% 1.4 days
Germany October 1923 29,500% 20.9% 3.7 days
Greece November 1944 11,300% 17.1% 4.5 days
China May 1949 4,210% 13.4% 5.6 days
Source: Prof. Steve H. Hanke, February 5, 2009.
This compares Hungary, Zimbabwe, Yugoslavia, Germany, Greece, and China. Besides Zimbabwe, only Yugoslavia's inflation is in recent memory. Hungary, Greece, and China were all in the 1940s and Germany's inflation was in the 1920s. The data above shows you the country of inflation, the date experienced, the highest monthly inflation rate, the inflation seen on a daily basis, and the time it took prices to double. In just over 24 hours, prices doubled in Zimbabwe for a month.
So, what do you hold when inflation hits? If the answer isn't bonds, it certainly isn't the currency itself. What is left to hold?
That's right, you're looking at the Zimbabwe Industrial Index over the period of 12 months. Stocks themselves, are the way to fight inflation...or at least keep pace with it. See, when you buy a banana for $1 today and inflation is 5% over the next year, that banana will cost you $1.05 the next year. Imagine you hold IBM at $120 and inflation sets in at 5% and at the end of the year, your IBM stock is worth $126. What if hyper inflation sets in and inflation goes up 100% over the course of the year? Your IBM stock goes from $120 to $240. When inflation sets in, it's really everything that goes up...but it's only because someone is willing to pay it.
If the President came on TV and said: "Do NOT pay more for a gallon of milk than $3.50," and people listened...we would not see inflation in the price of goods. Just because something happens geopolitically or economically, does NOT mean that people have to pay that price. The supermarket tries to take advantage of the fear, and they mark the goods up. As soon as someone pays that price, it causes a panic and people rush to spend their hard earned dollars on goods that cost too much. Inflation is more about a lack of discipline that it is about some macroeconomic force pushing the cost of goods to unreasonable levels. It just takes one undisciplined person to make that purchase, and now everyone else seems to be willing to say "that's the new price." That is how inflation is born. If you wanted to sell a loaf of bread for $10 today, very few people would pay it. If you said that we will all be snowed in for 2 weeks under 8 feet of snow...I bet the grocery store could get $10/loaf of bread to the highest bidder. Someone with money, who waited too long to go grocery shopping will end up paying that price for bread and then everyone else will be worried they might have to go without, and then they pay that insane price...inflation is born.
If everyone went to the store together and said, we refuse to pay more than $4...and the store wouldn't sell it at that price, everyone should walk away. When the store realizes that no one will pay that price, what happens? They have to lower the price until demand appears. See, inflation is really about supply and demand, not prices and the availability of money. We call it inflation and deflation, but it's really simple. If someone will pay a certain price for it, that's what it cost. It's purely driven by demand. If the demand isn't there, the price will fall. If the demand is there, prices will rise. Instead of acting independently of each other, consumers should really act together to get a favorable price for their goods. Hmmmm, sounds familiar, how about Walmart*? They are the single largest consumer in the world and they determine the prices for many of the worlds goods. Why? Because they control demand.
What do you do to make sure you're in a position never to "have" to pay up for something? How about save money out of each paycheck so that you can buy goods an an opportunistic time like a sale or with a coupon? Invest in stocks with dependable dividends that will grow over time with good business models and great cash flow. Keep a 72-hour kit so that when disaster strikes, you don't have to run to the store to buy basic goods because you have them. Keep a years supply of food and rotate it so that you're not "forced" to buy food during a time of panic at unreasonable prices. If Zimbabwe taught us anything about how to handle inflation, it's that stocks should do just fine.
You don't have to take our word for it. If you want to read more about the state of the economy and how the US is recovering, our friend James Altucher has a great article in The Huffington Post. You can read his article here: "Why Ron Paul is Wrong"
Don't forget to leave your comments, we'd love to see a brisk conversation about this topic! :-)
For American companies, it's fabulous. It means that the rest of the world can buy our goods for less. That usually means that, as a country, we will sell more goods because they are more competitive internationally. There are many more consumers outside the US than inside of it. If we are to prosper as a country, we will have to export and in large amounts. As international companies convert foreign currency back into US dollars, they get more for their money on account of the exchange rate; especially if the US dollar has weakened from the time they sold the goods and collected payment.
How does this all relate to inflation? Inflation occurs when your dollar buys less in the future than it does today. Many people feel like the act of printing money by the Federal Reserve Bank is what leads to inflation. That is just simply not the case. Just because money is created, does not mean that it will find it's way into the hands of those who will spend it. We hear all the time about how we face hyper inflation if we keep interest rates at zero for an extended period of time. But, we also hear how banks are not lending...well...at least not to sketchy lenders. Without lending that not so "easy money" to borrowers, there is little risk that inflation gets out of control.
So, how does inflation really happen? Say you buy a house for $150,000. Just two years later you hear about someone desperate to buy a house in your area, and he/she is willing to pay top, top dollar for that house. You personally find out who it is and have them over for dinner. You offer to sell them your home and all of your furniture for $175,000 because you agree to move out in 10 days. Now, all of a sudden, when real estate agents run comparables of your market and find out that a house just sold for $10,000 to $15,000 over market...now every home in that market is "worth" more money. When the next buyer pays $170,000 for a similar home, inflation is born. See, inflation happens when someone is willing to pay "too much" for something and then all similar sales follow suit.
If I wanted to buy a Toyota Prius in 2004 when the 2nd Generation Prius (2005) Prius came out, there were literally waiting lists in California to buy that car. People were actually buying the car and then reselling it if they were able to get the HOV Lane sticker (that allowed you to drive your Prius in the HOV lane by yourself in California). People were paying OVER the sticker price for a Toyota Prius in 2004 and 2005. All of a sudden, this car was experiencing inflation and it had nothing to do with the Feds printing money. When someone "pays up" for something, inflation is born.
So, the next time someone insists that the Fed is printing money, you ask them where you can get yours, because until that money gets in the hands of those who will spend it, you will not see inflation. In this environment, the Federal Reserve is much more worried about deflation. That's where no one has money to spend and there are all sorts of things to buy. You may hear the term "slack in the economy". That means we have much more production capacity than demand and it causes producers to sell their goods for less just to generate cash to stay in business. A deflationary spiral is MUCH worse than inflation. They say inflation is too many dollars chasing too few goods. You know what that's called in economics? It's called demand. Regardless of how it happens, when people want something and they are willing to pay more than the next person...inflation is born.
So, what do you do when inflation strikes? I can tell you what you do not want to do, and that's own bonds that have lower interest rates or are going to mature shortly. Without having a much longer duration or an above average interest rate, you could see your bond price get whacked, hard, in order to bring the yield in line with the market's interest rate.
Lets take a look at Zimbabwe's situation in which they experienced hyperinflation:
Highest Monthly Inflation Rates in History Country Month with highest inflation rate Highest monthly inflation rate Equivalent daily inflation rate Time required for prices to double
Hungary July 1946 1.30 x 1016% 195% 15.6 hours
Zimbabwe Mid-November 2008 (latest measurable) 79,600,000,000% 98.0% 24.7 hours
Yugoslavia January 1994 313,000,000% 64.6% 1.4 days
Germany October 1923 29,500% 20.9% 3.7 days
Greece November 1944 11,300% 17.1% 4.5 days
China May 1949 4,210% 13.4% 5.6 days
Source: Prof. Steve H. Hanke, February 5, 2009.
This compares Hungary, Zimbabwe, Yugoslavia, Germany, Greece, and China. Besides Zimbabwe, only Yugoslavia's inflation is in recent memory. Hungary, Greece, and China were all in the 1940s and Germany's inflation was in the 1920s. The data above shows you the country of inflation, the date experienced, the highest monthly inflation rate, the inflation seen on a daily basis, and the time it took prices to double. In just over 24 hours, prices doubled in Zimbabwe for a month.
So, what do you hold when inflation hits? If the answer isn't bonds, it certainly isn't the currency itself. What is left to hold?
That's right, you're looking at the Zimbabwe Industrial Index over the period of 12 months. Stocks themselves, are the way to fight inflation...or at least keep pace with it. See, when you buy a banana for $1 today and inflation is 5% over the next year, that banana will cost you $1.05 the next year. Imagine you hold IBM at $120 and inflation sets in at 5% and at the end of the year, your IBM stock is worth $126. What if hyper inflation sets in and inflation goes up 100% over the course of the year? Your IBM stock goes from $120 to $240. When inflation sets in, it's really everything that goes up...but it's only because someone is willing to pay it.
If the President came on TV and said: "Do NOT pay more for a gallon of milk than $3.50," and people listened...we would not see inflation in the price of goods. Just because something happens geopolitically or economically, does NOT mean that people have to pay that price. The supermarket tries to take advantage of the fear, and they mark the goods up. As soon as someone pays that price, it causes a panic and people rush to spend their hard earned dollars on goods that cost too much. Inflation is more about a lack of discipline that it is about some macroeconomic force pushing the cost of goods to unreasonable levels. It just takes one undisciplined person to make that purchase, and now everyone else seems to be willing to say "that's the new price." That is how inflation is born. If you wanted to sell a loaf of bread for $10 today, very few people would pay it. If you said that we will all be snowed in for 2 weeks under 8 feet of snow...I bet the grocery store could get $10/loaf of bread to the highest bidder. Someone with money, who waited too long to go grocery shopping will end up paying that price for bread and then everyone else will be worried they might have to go without, and then they pay that insane price...inflation is born.
If everyone went to the store together and said, we refuse to pay more than $4...and the store wouldn't sell it at that price, everyone should walk away. When the store realizes that no one will pay that price, what happens? They have to lower the price until demand appears. See, inflation is really about supply and demand, not prices and the availability of money. We call it inflation and deflation, but it's really simple. If someone will pay a certain price for it, that's what it cost. It's purely driven by demand. If the demand isn't there, the price will fall. If the demand is there, prices will rise. Instead of acting independently of each other, consumers should really act together to get a favorable price for their goods. Hmmmm, sounds familiar, how about Walmart*? They are the single largest consumer in the world and they determine the prices for many of the worlds goods. Why? Because they control demand.
What do you do to make sure you're in a position never to "have" to pay up for something? How about save money out of each paycheck so that you can buy goods an an opportunistic time like a sale or with a coupon? Invest in stocks with dependable dividends that will grow over time with good business models and great cash flow. Keep a 72-hour kit so that when disaster strikes, you don't have to run to the store to buy basic goods because you have them. Keep a years supply of food and rotate it so that you're not "forced" to buy food during a time of panic at unreasonable prices. If Zimbabwe taught us anything about how to handle inflation, it's that stocks should do just fine.
You don't have to take our word for it. If you want to read more about the state of the economy and how the US is recovering, our friend James Altucher has a great article in The Huffington Post. You can read his article here: "Why Ron Paul is Wrong"
Don't forget to leave your comments, we'd love to see a brisk conversation about this topic! :-)
Friday, February 12, 2010
Bail on Your Bonds
In this time of market turmoil, it is imperative that investors understand the risks that now exist in bonds. Bond price and bond yield move inversely to each other. That means, when bond prices go up, the yield goes down.
The yield is just a fancy word for the interest payment or the dividend payment as you might think of it in stocks. Unlike stock dividends, which can fluctuate according to the profitability of the company; bond yields are determined when the bond is written. Say you have a bond that pays $60 annually and sells for $1,000. That bond has a 6% yield, not bad.
Well, when that bond goes on sale, the price will fluctuate according to the interest rates available in the market at the time. If real interest rates, or market rates are 4.5%, then you'll most likely see this bond issue trade "above par". That means that the bond will trade north of $1,000 because it offers a higher than market rate interest rate or yield. If the bond trades all the way to the "market rate", the bond will be worth $1,244.33. That's a 24.4% increase in the price of the bond! This is how people make money in a deflationary period by owning bonds. This is what we have seen this year as $500 Billion has gone into bond mutual funds.
Owning bonds when rates are low is terrific, as they offer terrific safety and even a chance for a capital gain, on top of the interest you will earn. But what happens when interest rates are on the rise?
That's right, when interest rates rise, if you are holding a bond that offers a smaller interest rate than the market rate...the bond price has to decline in order to bring up the yield on the bond. So, take a bond with a 3% interest rate, when market rates are 4.5%. The same $1,000 bond will have to trade down to $754.38 just to have the 3% yield rise to the market rate of 4.5%. What happens if interest rates rise more than 1.5%? Let us just say that you do not want to have a large bond portfolio when interest rates or inflation sets in.
This is why Jim Cramer says holding a massive portfolio of bond mutual funds is just reckless. If you hold an individual bond, you always have the option of holding it 'till maturity, ensuring that you are given the principal back. You can also wait out a turbulent interest rate environment if your time until maturity is far enough out. But, if you have something with a shorter duration and a lower interest rate, you face significant risk to your principal. We are not saying that you shouldn't own bonds. In fact, based on your age, risk tolerance, and diversification needs you probably want to own some bonds. But, when things change, and you hold a mutual fund of bonds...what do you think that fund manager is going to do when rates change or inflation appears? The answer probably isn't hold the bond until maturity. All of that selling across that $500 Billion of bond funds will be like yelling fire in a crowded building...probably not the best thing for your principal.
So, before you buy bonds this year, think about what might happen in the future and choose carefully.
The yield is just a fancy word for the interest payment or the dividend payment as you might think of it in stocks. Unlike stock dividends, which can fluctuate according to the profitability of the company; bond yields are determined when the bond is written. Say you have a bond that pays $60 annually and sells for $1,000. That bond has a 6% yield, not bad.
Well, when that bond goes on sale, the price will fluctuate according to the interest rates available in the market at the time. If real interest rates, or market rates are 4.5%, then you'll most likely see this bond issue trade "above par". That means that the bond will trade north of $1,000 because it offers a higher than market rate interest rate or yield. If the bond trades all the way to the "market rate", the bond will be worth $1,244.33. That's a 24.4% increase in the price of the bond! This is how people make money in a deflationary period by owning bonds. This is what we have seen this year as $500 Billion has gone into bond mutual funds.
Owning bonds when rates are low is terrific, as they offer terrific safety and even a chance for a capital gain, on top of the interest you will earn. But what happens when interest rates are on the rise?
That's right, when interest rates rise, if you are holding a bond that offers a smaller interest rate than the market rate...the bond price has to decline in order to bring up the yield on the bond. So, take a bond with a 3% interest rate, when market rates are 4.5%. The same $1,000 bond will have to trade down to $754.38 just to have the 3% yield rise to the market rate of 4.5%. What happens if interest rates rise more than 1.5%? Let us just say that you do not want to have a large bond portfolio when interest rates or inflation sets in.
This is why Jim Cramer says holding a massive portfolio of bond mutual funds is just reckless. If you hold an individual bond, you always have the option of holding it 'till maturity, ensuring that you are given the principal back. You can also wait out a turbulent interest rate environment if your time until maturity is far enough out. But, if you have something with a shorter duration and a lower interest rate, you face significant risk to your principal. We are not saying that you shouldn't own bonds. In fact, based on your age, risk tolerance, and diversification needs you probably want to own some bonds. But, when things change, and you hold a mutual fund of bonds...what do you think that fund manager is going to do when rates change or inflation appears? The answer probably isn't hold the bond until maturity. All of that selling across that $500 Billion of bond funds will be like yelling fire in a crowded building...probably not the best thing for your principal.
So, before you buy bonds this year, think about what might happen in the future and choose carefully.
Thursday, January 7, 2010
Minerals, Miners, and More OH MY!
Gold has been hot, real hot, and no one even uses it. Gold, unlike other metals, doesn't really have a use. People make jewelry out of it, but that's really it. We know that the base metals like iron, steel, copper, and zinc have heavy industrial uses in all sorts of things from infrastructure, transportation, and appliances. But even the other precious metals like platinum and palladium have uses.
Platinum is used in laboratory equipment, electrical contacts, electrodes, resistance thermometers, dentistry equipment, and even catalytic converters.
Palladium is used in computers, mobile phones, multi-layer ceramic capacitors, component plating, low voltage electrical contacts, SED/OLED/LCD televisions; and in destry, medicine, hydrogen purification, chemical applications, and groundwater treatment. That's a heck of a lot more than you can say for gold. Because pure gold is chemically unreactive, it's uses are limited. It does resist oxidative corrosion, but that's about it.
Now that you know about the metals, how do you play them?
As the platinum and palladium ETFs become available, we like North American Palladium, symbol PAL, and Stillwater Mining, symbol SWC. Think about the GLD, the gold ETF that tracks the price of gold. It has become the 6th largest holder of gold in the world! That’s more than Japan, more than China, More than the ECB, more than Russia, more than the UK, more than Venezuela. Ok, you get it, it’s holding a TON of gold. With the creation of the platinum and palladium it’s hard to imagine that those ETFs will not become large holders of those metals just as the GLD has done for gold.
Because platinum and palladium actually have uses in the real world, beyond jewelry, investor demand for these metals could push their prices up significantly. In order to play that, we are long SWC and PAL. Take a look. You can obviously wait for the ETFs to be issued, and trade on the US exchange, but we are going to play them directly through the miners as the miners are levered to the price of the metal and you’ll see them go down more on a decline and up more on a price gain.
For industrial metals we own Alcoa (AA), US Steel (X), and Nucor (NUE). You can play copper aluminum and zinc without stock by using the Powershares Base Metals ETF (DBB). We'll have a link to Powershares up soon on the MOF Home Page under Investor Tools on the Investor Education Section. You can get gold and silver from PowerShares in the DBP. They also have a miners ETF with PSAU.
Finally, for an individual Gold Miner, we do like BVN. The closer you get it to $30-$32 we think the better. It does have a small dividend, but their cash flow is great, nearly half a billion dollars and about 3 times as much cash on hand as they do debt on the balance sheet. That's always a great sign for us. Forward P/E is only a 13.94 so valuations are not stretched, although the current P/E is a 25. So, look for a pullback, or buy just a little here and build your position on pullbacks. You can own the equipment company Bucyrus International (BUCY) And don't forget about BHP Billiton Limited (BHP), probably the best Miner in the world.
Don't forget to leave comments on this and other posts and check out what's on the YouTube channel by clicking a video on the right!
Platinum is used in laboratory equipment, electrical contacts, electrodes, resistance thermometers, dentistry equipment, and even catalytic converters.
Palladium is used in computers, mobile phones, multi-layer ceramic capacitors, component plating, low voltage electrical contacts, SED/OLED/LCD televisions; and in destry, medicine, hydrogen purification, chemical applications, and groundwater treatment. That's a heck of a lot more than you can say for gold. Because pure gold is chemically unreactive, it's uses are limited. It does resist oxidative corrosion, but that's about it.
Now that you know about the metals, how do you play them?
As the platinum and palladium ETFs become available, we like North American Palladium, symbol PAL, and Stillwater Mining, symbol SWC. Think about the GLD, the gold ETF that tracks the price of gold. It has become the 6th largest holder of gold in the world! That’s more than Japan, more than China, More than the ECB, more than Russia, more than the UK, more than Venezuela. Ok, you get it, it’s holding a TON of gold. With the creation of the platinum and palladium it’s hard to imagine that those ETFs will not become large holders of those metals just as the GLD has done for gold.
Because platinum and palladium actually have uses in the real world, beyond jewelry, investor demand for these metals could push their prices up significantly. In order to play that, we are long SWC and PAL. Take a look. You can obviously wait for the ETFs to be issued, and trade on the US exchange, but we are going to play them directly through the miners as the miners are levered to the price of the metal and you’ll see them go down more on a decline and up more on a price gain.
For industrial metals we own Alcoa (AA), US Steel (X), and Nucor (NUE). You can play copper aluminum and zinc without stock by using the Powershares Base Metals ETF (DBB). We'll have a link to Powershares up soon on the MOF Home Page under Investor Tools on the Investor Education Section. You can get gold and silver from PowerShares in the DBP. They also have a miners ETF with PSAU.
Finally, for an individual Gold Miner, we do like BVN. The closer you get it to $30-$32 we think the better. It does have a small dividend, but their cash flow is great, nearly half a billion dollars and about 3 times as much cash on hand as they do debt on the balance sheet. That's always a great sign for us. Forward P/E is only a 13.94 so valuations are not stretched, although the current P/E is a 25. So, look for a pullback, or buy just a little here and build your position on pullbacks. You can own the equipment company Bucyrus International (BUCY) And don't forget about BHP Billiton Limited (BHP), probably the best Miner in the world.
Don't forget to leave comments on this and other posts and check out what's on the YouTube channel by clicking a video on the right!
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