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Posted in Dividend Achiever Watch List
Posted in inflation
If we're on the brink of a breakout to gold at $9,000 an ounce as UBS claims (source: Financial Times, requires registration) then let the party begin. By my own calculations, after halving my worst case scenario, gold could go as high as $9,414.16. Yeah, I know, make an outrageous claim and cement your fame. However, I have a logical explanation for my belief that a run up in gold is possible.
Confidence in my math on how gold could plausibly get to $9,000 is actually less important than the wait that we're in for to get to such a level. After all, the rise from $35 an ounce in 1969 to $800 an ounce in 1980 took a lot of twists and turns. I personally believe that we'd see a collapse in the price of gold and other related commodities before we move to the insane levels that I mentioned earlier.
If you compare the yields on gold stocks today to the 1970's you'd think we were on different planets. As an example, Barrick Gold (ABX), a "domestic" producer, has a dividend yield of 1% while AngloGold Ashanti (AU) has a paltry yield of 0.40%. DRDGOLD (DROOY), the old Durban Deep, has the massive yield of 1.4%. In the list of gold stock provided by Richard Russell, only 3 stocks sported no dividend. None of the publicly traded South African gold producers have dividend yields that provide a margin of safety.
In an earlier posting, I scoffed at the notion of gold stocks paying a dividend just to get investors into the market. Despite that concern, it doesn't stop me from believing that if we are really in a long term bull market in commodities (inflationary period) then it would certainly be nice to get compensate for the wait.
Keep your mind open to the prospect that even if some gold stocks are paying a dividend just to get speculators in, there might be a chance that the current run up in gold is a repeat of the early stages of a genuine gold bull market. If you happen to find gold stocks with such outrageous yields then let me know, I'm always interested (only those with earnings please.) Touc.
*See my note on commodities in the comment section of my September 12, 2009 posting.
Posted in gold, Richard Russell
I turned to one of the greatest investor of our time, Warren Buffett, for advice on how to invest during inflationary period. What I found confused me rather than enlightened me. Back in 1977, Buffett wrote an article titled "How Inflation Swindles the Equity Investor" (Fortune, May, 1977) which implicitly suggest that investors stay away from stock (equity) during inflationary time. The quote below was taken from the context of that article.
It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment. We have been in such an environment for most of the past decade, and it has indeed been a time of troubles for stocks. But the reasons for the stock market's problems in this period are still imperfectly understood.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later.
I had an investment in Heinz not long ago and wrote that "We were told to have gold in our portfolio for inflation hedge. The good news is that can of beans will do just that." Things were probably different in 1977 or maybe I misinterpret his article, but any investors who took his advice without educating himself may have missed the greatest bull run from 1982 to 2000. Please see the chart below. Related article.
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Posted in inflation, Warren Buffett
"The structure of a scheme like this [ETFs] only works when the market continues higher or new money floods in."
Are we on the cusp of seeing this situation with EFTs unravel? Currently, the U.S. Natural Gas Fund (UNG) is being forced into the position of issuing new shares to offset the expiration of old creation units. Without the issuance of new units, UNG has become priced well above net asset value as new money has flooded in with a diminishing number of units.
Some have said that the real problem is the fact that UNG has been too successful at raising money. I believe that the flood of money into the fund shouldn't be considered a success, instead it should be considered bordering on a ponzi or pyramid scheme. Again, no value exists unless more money comes into the fund. If the spigot of new money was turned off, in a matter of months the fund would end up worthless, unless the price of natural gas goes up.
One guy, Jim Cramer, said back in June that he believed that the flood of money into the ETF would actually allow UNG to push up or prop the price of natural gas. However, when you view the history of natural gas prices over the last year (courtesy James L. Williams WTRG Economics at WTRG.com) you can easily see that, in this case, UNG and the futures price of natural gas are in complete agreement.
Most market professionals would claim that a changing of the rules is the real reason why there is turmoil in the commodity ETF market which is reminescent of the FIRREA rule change on Savings and Loan institutions before the S&L crisis. The reality is that the rule changes are an outgrowth of lawsuits from overzealous attorneys on behalf of misinformed investors. In their zeal to create hedging and leveraging opportunities to the retail investors, leveraged ETF distributors didn't emphasis enough the fact that the risk of loss was far beyond known market risk. Unfortunately, like the FIRREA rule change we could see painful unintended consequences.
Oh, by the way, did I mention that there is no real intrinct value to ETF funds. Whether they are Index ETFs or leveraged ETFs it is really all about the luck of the draw. If a lot of money is coming in at the time that you own the fund then the net asset value (NAV) will move in-line with the market. However, when net redemptions exceed new money coming in, the value of the ETF declines. The only hope is that market for that fund is in a rising trend.
The news on UNG's plight isn't all that encouraging even though the issuance of more shares is meant to mitigate the disparity in the NAV. My hope is that things don't get to out of hand as we enter the most volatile months in the year. -Touc
The following are the latest articles on what may become the great ETF unwind.
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Posted in ETF
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Posted in Dividend Achiever Watch List
Research recommendations are intended to be a starting point for investigating a quality company at a reasonable price. It is hoped that after doing the background research you can buy the stock at a lower price. Ideally the stock should be held in a tax deferred account and should not consist of less than 20% of your holdings. Personally, I prefer holding only 2-3 stocks at a time.
Sell recommendations are intended to deal with the short term reality of the market. The tracking of the Sell recommendations are the worst case scenario if you happen to have bought a stock at the time the research recommendation was made (please avoid making this mistake.) I aim for mediocrity in my returns, therefore I am happy with 9-12% annual gains. However, since codifying my approach to investing in 2005, I have had annual returns of 14% and above every year since.
It is always recommended that when selling a stock, one should not place stop orders, limit orders or orders after hours. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, I would rather leave some money on the table rather than have it taken away from me by the trades that are placed by institutions and market makers.
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Posted in Air Products, APD, Sell Recommendations
Historically, since 1871 (Cowles Commission Expectation of Individual Stocks), the altimeter has indicated that whenever the Dow Industrials went above the 30 range the market was overvalued and whenever the market was below 15 the market was undervalued. As illustrated in the chart below, since 1920 the Dow Industrials followed this pattern quite well until the breakout above 38.47 on June 13, 1995 (point X).
After the January 13, 1950 (point J) buy signal, the altimeter gave numerous sell signals from 1961 (point K) to 1972 (point R). At any point that the sell signals were given, except for 1961 (point K), you would have avoided the major market declines of the late 60's and throughout the 1970's. When the next buy signal was registered on December 13, 1974 (point S) the stock market was off to the races and never looked back.
From December 13, 1974 (point S) until the present we've been confronted with an unprecedented pattern change in the altimeter. Even though the pattern that was established no longer seems to fit previous indications, it is important to note that the indicator is giving us a massive head and shoulders technical pattern to watch for.
After the peak in the altimeter on August 25, 1987 at 38.24 (point V) and the subsequent crash that followed, the market bounced from the 1989 bottom (point W) at 21.14 to the 38.07 level in December 28, 1993. The declined that followed the 1993 peak signified that the 38 level was very important to watch for. Of course, after falling to the 1995 level of 32.88 (point X) the altimeter went to the unprecedented level of 68.13 in 1999.
Everything that has happened since 1999 has only cemented the significance of the 38 and 21 levels on a technical basis. The reversal of the decline from 1999 to 2003 at 36.06 (point X1; near 38) and the congestion, and subsequent crash, in 2007 led to the altimeter falling back down to 21 on March 9, 2009.
If we get lucky, we could see the Dow go back to the 38 level. This means that we could possibly reach the 10,901.44 on the index. After reaching the 38 level we should expect the stock market to decline at least to the 21 level again. However, the current trend is still indicating a downward trend since hitting the most recent peak of 33.53 on August 27, 2009.
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Posted in Altimeter
Below are the Nasdaq 100 companies that are within 21% of the 52-week low for the respective week.
2009
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Posted in Nasdaq 100 Watch List
Historically, since 1871 (Cowles Commission Expectation of Individual Stocks), the altimeter has indicated that whenever the Dow Industrials went above the 30 range the market was overvalued and whenever the market was below 15 the market was undervalued. As illustrated in the chart below, since 1920 the Dow Industrials followed this pattern quite well until the breakout above 38.47 on June 13, 1995 (point X).
After the January 13, 1950 (point J) buy signal, the altimeter gave numerous sell signals from 1961 (point K) to 1972 (point R). At any point that the sell signals were given, except for 1961 (point K), you would have avoided the major market declines of the late 60's and throughout the 1970's. When the next buy signal was registered on December 13, 1974 (point S) the stock market was off to the races and never looked back.
From December 13, 1974 (point S) until the present we've been confronted with an unprecedented pattern change in the altimeter. Even though the pattern that was established no longer seems to fit previous indications, it is important to note that the indicator is giving us a massive head and shoulders technical pattern to watch for.
After the peak in the altimeter on August 25, 1987 at 38.24 (point V) and the subsequent crash that followed, the market bounced from the 1989 bottom (point W) at 21.14 to the 38.07 level in December 28, 1993. The declined that followed the 1993 peak signified that the 38 level was very important to watch for. Of course, after falling to the 1995 level of 32.88 (point X) the altimeter went to the unprecedented level of 68.13 in 1999.
Everything that has happened since 1999 has only cemented the significance of the 38 and 21 levels on a technical basis. The reversal of the decline from 1999 to 2003 at 36.06 (point X1; near 38) and the congestion, and subsequent crash, in 2007 led to the altimeter falling back down to 21 on March 9, 2009.
If we get lucky, we could see the Dow go back to the 38 level. This means that we could possibly reach the 10,901.44 on the index. After reaching the 38 level we should expect the stock market to decline at least to the 21 level again. However, the current trend is still indicating a downward trend since hitting the most recent peak of 33.53 on August 27, 2009.
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Posted in Altimeter
While I respect and agree with much of your logic, let's not forget that it is the people who borrowed the money to pay for property they can no longer afford that are sticking it to the taxpayer by reneging on their promises.
My response is as follows and is relevant to the topic:
Your point is well taken. However, a financial institution should always be held to a higher standard. Therefore, while a consumer signed on the dotted line, the lender was willing to let the loan go through even though it was clear that the client couldn't survive financially in the short and long term.
All consumers, if given the opportunity, will borrow to the max. It is the responsibility of the lender to make the decision not to give the loan. While working for Fannie and Freddie from 2001 to 2006, I would contact the loss mitigation unit of the banks and the response was always the same from the loss mit team inside the bank, "why in the world did the bank give out the loan to this individual?"
The point being, it was abundantly clear from the initial loan docs that were approved, that the individual couldn't maintain the mortgage from the very beginning. You can't expect the public, who is more versed in the art of voting for American Idol contestants, to understand or care about the terms of a document. Most Americans routinely sign legal contracts without faking that they've read the terms beforehand. This puts the responsibility back on the banks.
By no means does my position support the belief that the consumer isn't to blame somehow. Instead, the banks should have been concerned about doing due diligence and determine the long term financial viability while remaining profitable. Such a stance may mean sacrificing short term competitiveness in order to avoid the pending train wreck. Or, you could at least sell out at the top like Golden West Financial did (my favorite financial institution, former Dividend Achiever and a real success story for a bank) when they got bought by Wachovia (WB).
Unfortunately, Fannie and Freddie fanned the flames which encouraged banks to take on more risk than was prudently acceptable. Touc.
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Posted in Fannie Mae, Freddie Mac, GSE
"Look for a boosting of the share price to ridiculous levels (anything above $1) or go literally to zero in the next delisting notification process."
Soon after falling t0 $0.35, Fannie Mae and Freddie Mac briefly, on a closing and intraday basis, went above $1 on March 19th and then promptly fell from there. According to the New York Stock Exchange, spend six months under $1 and you get delisted. As strange as it may seem, September is exactly six months away from the month of March.
One reader of this blog, Ron, poignantly remarked, "...it seems to me the exchanges are constantly bending their own rules about delisting, extending grace periods, etc. Especially in this case the govt will probably be leaning on the exchanges not to delist." My response was, "...there is little need to do this (bend the rules.) If you're the government, and you don't know anything about fiscal responsibility, you'll more than likely feel compelled to waste the money and artificially inflate the stock price." Furthermore, I specifically stated that this was going to be "one of the biggest speculations in history."
Well, as promised, the U.S. government proved to be as gullibull as has been the case since the beginning of time. In an article titled "Fannie, Freddie Avoid Delisting as Price Triple" published by Bloomberg.com, you get the sense that there is a collective exhaling about the notification that the companies would not be delisted. Strangely, FBR Capital Market's Paul Miller seemed indignant at the thought that the Fannie and Freddie stock price went up. Miller, a banking analyst, said that the rise was "unjustified" and that there was "no fundamental value remaining" in the two GSEs.
I say to Mr. Miller (with tongue firmly in cheek), the threat of being delisted was a completely justifiable reason for Fannie and Freddie stock to go up in value. The government had already gamed the markets by reverse splitting AIG, so it would be challenging to commit the same fraud twice on the investing public in such a short time.
Also Mr. Miller, if Fannie and Freddie are delisted, the market for all bad mortgages cannot be absorbed by the taxpaying public through the GSE conduit. That means these two companies are incredibly valuable. Mr. Miller, maybe Fannie and Freddie are not valuable to you but they are definitely valuable to the banks that are receiving bailouts in the front door and dumping their trash on the taxpayer through the back door. Silly Mr. Miller, still talking about notions like fundamental values and such.
We have witnessed the all too familiar quality known as predictably irrational behavior of the government and the financial markets. In many respects, Ron was right, the rules were bent to favor those in powerful positions. When the NYSE says "The World Put Its Stock in Us," they should have also added that it is the best exchange that money can buy. After all, the NYSE should be held criminally for allowing such blatant fraud to reign on their exchange. Instead, they looked the other way in the face of clear manipulation and malfeasance.
It is just our luck that history repeats so well and so often in financial markets. This is the reason why the addressing of this matter of the delisting of the GSEs was so predictable. The maneuvers that I've described have happened so many times in the remote and distant past with far more inferior technology that it's laughable. The more things change the more they remain the same...and that ain't no cliche in the financial markets. Touc.
related articles:
Posted in Bloomberg, delisting, Fannie Mae, FRE, Freddie Mac, NYSE, speculation, speculative
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Posted in Dividend Achiever Watch List
