Posted by Don Martin on Tue, Jul 31, 2012 @ 06:28 PM
Facebook stock plunge is a hint of the end of tech bubble 2.0
|
If a stock dropped from $45 to $21.71 in two and a half months what would you assume? If you knew it was a large and profitable company, what would you think?
Facebook’s drop of more than 50% from the top remind me of the great tech stock bubble of 2000 when healthy good quality companies like Cisco were valued by the market at $80 but went down to 20 and stayed in the $20 area for a long time. So if the same fate of a long term 75% drop from the top awaits Facebook shares then that implies Facebook shares would be settling at $11. Could this create a stampede out of Apple and Google thus making equities in general go way down? Could this start a Flash Crash which would create problems for margin traders and writers of naked Put options?
I bought Social Media stocks and all I got was this little coin
On August 16 more Facebook employees will be able to sell their locked up shares, further depressing the price with more supply of shares. At year end the Federal “fiscal cliff” of higher taxes will begin, thus motivating people to sell shares before then.
The hoped for value of Facebook is its access to information about its subscribers. If this information is of limited use then Facebook is worth the typical multiple of an advertising or media company which are at a PE ratio of 15. There is even the risk that Facebook could increase costs faster than revenue, which it is now doing. This would hurt profitability making the intrinsic value even lower than my $7 forecast.
Once Facebook shares go down as much as Cisco did (by 75%) then there will be a risk that people will lose faith in non-tech stocks, leading to a new bear market.
I wrote an article “Three items you must know: Facebook to go to $7”.
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Jul 30, 2012 @ 03:27 PM
Inflation versus Deflation Debate:
|
Arguments in favor of the economy being reflated and returning to normal soon:
*Unemployed people will go to night school and learn a new trade in the economically hot fields of health care or information technology and this will solve unemployment
*Affluent people with career skills that are in high demand will earn and consume more to make up for lack of consumption by unemployed people
*High debt balances don’t matter if people have a very low monthly payment because of low rates
*Corporate profits using current year or next year’s earnings justify today’s stock prices
*Demand for goods and services will come from growth in tech and medical fields
*The government will find a way to borrow more to stimulate the economy
Will the Fed create excess money growth and inflation?
Arguments in favor of economy being mired in long term Japan-style Soft Depression:
*The unemployed are mostly at the lower educational levels in society and it is unlikely they will suddenly improve their study habits and IQ and get a technical education.
*Affluent people will not over-consume enough to offset lack of consumption by the poor and unemployed
*High debt balances do matter even if the monthly payment is “interest-only” with a very low rate. If the economy returns to normal then interest rates will go up and people will feel the pain of excessive debt. Also as time goes by a lot of debt financed things become obsolete and need to be replaced by a new one. So if you are still making interest -only payments on a machine that needs to be replaced and financed with debt and then interest rates return to normal then you will have unaffordable monthly payments. The high level of debt to GDP has never existed before and has increased dramatically in recent decades.
*Corporate profits are mean reverting and could easily drop by a third, which could make stocks drop by more than one-third. The best measure of stock values are the ten year inflation adjusted average of profits because it may smooth out temporary bubbles. This measure implies stocks need to drop about a third to about roughly 900 for the SP. Also, the economy could slip into recession and thus further erode profits.
*Demand for goods and services was manipulated by excessive increases in debt over several decades and due to the need to pay this down and save for retirement there will be less new debt and less extra cash flow available to consumers to consume. This has created an era of austerity since the crash started in 2008. It may take until 2023 to work of the excess debt and excess unemployment.
*The government can't borrow more to stimulate the economy because there is already too much debt
I wrote an article “Soft depression for another decade” and “Two items you must know about preparing for deflation”.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Jul 27, 2012 @ 05:13 PM
Facebook earnings quarterly figures show Social Media industry doomed
|
Facebook released their quarterly earnings figures Thursday. Facebook’s results were as the news media expected. The risk is great that Facebook can’t persuade Fortune 500 corporations to run huge ads; if that risk becomes true then Facebook could be another has-been tech company like Yahoo or AOL.
I wrote an article "Decline in Facebook price damages 401k" saying if there is no growth factor then Facebook is worth $7 a share based on a PE ratio of 15. The PE ratio for advertising companies is 15 and it is 16 for media companies. If Facebook fails and becomes a penny stock that gets bought out by a tech giant and is used as an advertising platform then this will send shockwaves throughout the tech industry and doom the Social Media industry. Of course there is a huge growth in revenue at Facebook, so one needs to dig deeper.
Three reasons to be afraid of Facebook stock:
First: Facebook’s share price to sales revenue ratio is 15 versus Google which is at 5, which implies the stock needs to drop from the mid-twenties to a third of that or about down to my $7 estimate. Today the stock has been trading at $22.28 to 24.50.
Second: The company’s 12 cent a share quarterly profit was up only a penny from a year earlier. So where is the growth in profits? It’s all about profits and their growth.
Third: The company grew marketing expenses by 433% from same quarter a year ago and it grew general and administrative expenses by 558%. For a company with thousands of employees it growth rate in expenses should not be as steep as a tiny new start-up. How can the company survive if its growth rate in expenses is far greater than the growth rate of revenue, especially if the rate of revenue growth has been decelerating.
The company’s revenue grew by 32% in the last quarter versus 45% in the previous quarter. The slowdown in the rate of growth implies in only one year they will be in a “normal” single digit growth rate and thus the stock will have to be valued using a PE of 15 times annual earnings of $0.48 or roughly $7.20. (This ignores the cost of employee restricted stock units (RSU) expense, which is actually a legitimate expense that should not be ignored, in which case the company is worth even less).
Facebook’s big hope is that it allegedly has high quality targeted marketing data on consumers and that marketers can actually use the data to make sales happen. However, no amount of information about a consumer can be used to convince a consumer to buy a product that he does not want. If you visit a car dealership and give the sales rep a huge personal dossier on yourself, no amount of intelligence on his part can brainwash you or force you to buy an over-priced car that you can’t afford. If the detailed information on consumers that Facebook has is not that helpful to advertisers then Facebook gets demoted by the market to simply another ad agency/media company deserving a generic PE ratio of 15 with a share price of $7.
In less developed countries it is customary to only buy from people you are connected to such as a relative's close friend, etc. However, in highly developed countries people are willing to take a chance buying from a stranger. In doing so people are sending the message that they want the best "deal" for themselves rather than seeking to buy from a person who they trust. Thus simply marketing on Facebook won't work if the "deal" is not attractive enough for the consumer, and if the sale can't be closed then the merchant will stop advertising on a particular media.
A popular marketing myth is that there is a magic way to find a hidden niche of potential customers, however, the Fortune 500 companies have already done so much marketing that I doubt there are hidden consumers who will be uncovered because of their behavior on Facebook. What is likely is that new amounts of tiny sales of cute impulse purchase items to micro-niche customers will be sold through Facebook ads but these sales will be too small to make a difference to Facebook. These type of micro-niche ad buyers are not the Fortune 500 companies with deep pockets and huge ad budgets.
Open the secrets of investing in Social Media
In the past five years a new type of marketing paradigm has evolved in that marketers believe that outbound marketing (ads, telemarketing, etc.) doesn’t work because it gets tuned out by consumers. The idea is that marketers should attract consumers to browse their website by using inbound marketing. If this theory is true then placing on ads on Facebook, especially if a viewer is using mobile’s tiny screens, would be an ineffective way of marketing. Once corporate managers at large corporations discover this they will cancel their Facebook ads and Facebook’s revenue will decline.
It is important to realize that marketer’s enthusiasm for Social Media is primarily in terms of using the free part to persuade consumers to “like” something and tell other consumers thus boosting search engine optimization. This won’t help Facebook to sell ads.
I wrote an article “Social Media tech stock hype discredited” and “Tech stock bubble warning”.
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Jul 26, 2012 @ 04:50 PM
Facebook’s and Amazon’s earnings quarterly figures released today
|
Facebook and Amazon both released their quarterly earnings figures today. Facebook’s results were as the news media expected. Amazon’s results were below expectations. The risk is great that Facebook can’t persuade Fortune 500 corporations to run huge ads; if that risk becomes true then Facebook could be another has-been tech company like Yahoo or AOL.
Facebook’s big promise is that it has high quality targeted marketing data on consumers. However, no amount of information about a consumer can be used to convince a consumer who is tapped out to buy a product that he can’t afford. A popular marketing myth is that there is a magic way to find a hidden niche of potential customers, however, the Fortune 500 companies have already done so much marketing that I doubt there are hidden consumers who will be uncovered because of their behavior on Facebook. What is likely is that new amounts of tiny sales of cute impulse purchase items to micro-niche customers will be sold through Facebook ads but these sales will be too small to make a difference to Facebook. If you visit a car dealership and give the sales rep a huge personal dossier on yourself, no amount of intelligence on his part can brainwash you or force you to buy an over-priced car that you can’t afford.
It would be funny if someone could document that a consumer in the U.S. was discovered on Facebook to have never tried Coca-Cola or used laundry detergent and now he was sold because of ad on Facebook.
Of course it is possible that advertising customers will cancel all of their ad spending in newspapers, radio, and TV and transfer it to Facebook. But how do you explain Twitter running ads on TV?
My concern is that the stock market is propped up by investors who chase after a few glamorous tech stocks. If these tech stocks should fail to provide ever-increasing sales and profits then they could be deserted by the market and their stock prices would go way down. This would make the rest of the market go down.
In recent years large private investors have bought pre-IPO shares of tech companies and allowed an IPO to occur after the company’s value had been fully realized, thus making it impossible for retail investors to buy publicly traded shares at a good, low price. Instead retail investors are forced to buy shares of very risky tech companies with a disproportionate risk-reward ratio. The risk is great that many Social Media companies will go the way of the bubble tech companies that went public in 2000 and failed. This risk is shouldered by the retail buyers of tech stock IPO’s. Buffett doesn’t buy tech stocks or airline stocks because of the risk that investors will overpay for technology companies and the risk the tech edge of a company will rapidly become obsolete.
This is similar to the giant oil companies spinning off pipeline assets to MLP royalty trusts. This allows the oil company to offload risk of a commoditized, low growth asset to retail investors. (It also allows retail investors to capture tax benefits that would be lost if the asset was in a “C” corporation.) The retail investor ends up owning an asset that has less chance of appreciation and more concentrated business risk than the oil company which is constantly looking for new opportunities.
Today tech companies have become obsolete faster than in previous eras. Look how deeply and how quickly the stocks of Nokia, RIMM, Sprint have declined in recent years. The point is that that there is excessive risk in owning publicly traded shares of tech companies and there is not enough potential reward by the time the stock has gone IPO.
The bond market is dominated by professionals who feel that low rates are justified because of the global macro risks. The stock market, especially tech stocks, is often subject to unfair irrational whims of retail investors who overpay for bubbly unproven tech stocks. I feel the judgment of bond market professionals is more reliable than the stock market. Eventually retail stock investors will realize a PE ratio of 181 for Amazon makes no sense even with a 30% revenue growth rate. Eventually the rate of revenue growth will slow and match that of the U.S. economy which is close to 1% in real terms.
The NASDAQ never recuperated from its 2000 high of 5,132 points and is now at 2,893. By contrast the Barclay’s Intermediate Bond index annualized total return has been 5.29% for ten years and 5.93% for fifteen years with far less risk.
I wrote an article “Tech stock risks threaten stock market” and "Social Media hype discredited".
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Jul 25, 2012 @ 02:39 PM
What is the message from record low Treasury rates?
|
An article in Wall Street Journal “Falling Global Rates Boost Appeal of Japan” (referring to their bonds) today mentioned how global investors are turning to investing in low yielding Japanese government bonds which yield 0.75% for a ten year Treasury. The U.S. Treasury ten year yield dropped yesterday to a record shattering 1.4% partly due to fears that Apple stock would go down when an earnings estimate was missed.
The problem with the stock market is that it is propped up by a few glamorous tech companies. If these statistical outlier companies should go down then broad market indexes will go down and investors will flee into the safety of bonds.
The problem with the Fed’s Quantitative easing is that it has been producing diminishing returns, so the use of QE3 which will begin soon will have no effect. When the markets see that the Fed can’t rescue it from a crash with more QE then stocks will go down. The era of 1996 to present has been the Greenspan-Bernanke “Put” option era where the Fed issued a free Put option to equity investors by constantly bailing them out with ever-decreasing interest rates and Quantitative Easing. This policy encouraged stock investors to be too bullish which created a stock bubble. But now that tool’s effectiveness has been exhausted and no longer works. Once investors realize it they will flee the stock market and invest in bonds. Investors will stop writing Put options once they see how risky stocks are. When a severe shortage of Put options occurs then hedge funds will have to sell off a lot of their over-leveraged assets to reduce risk, making stocks go down.
The invisible hand of the market is very worried that the Euro and Eurozone debt of all types is not a safe haven. The marketplace is worried that U.S. based Muni bonds are much riskier than they have been in the past as more Muni bond issuers decide bankruptcy is a feasible option.
As rates continue to go lower and stay ultra-low far longer than people expect then financial companies like insurance companies, stock brokers, and banks that depend on earning income from the spread between wholesale versus retail rates or between short term versus long term rates will earn less money, making their earnings go negative. When this happens that alone will create another Lehman style financial institution panic.
Another thing the bond market is telling us is to note that this is the first time in 26 years that the three month CPI has declined.
I wrote an article “T-Bond yield says crash coming”.
Investors should seek independent financial advice.
Posted by Don Martin on Tue, Jul 24, 2012 @ 08:25 AM
How Will Huge Federal Budget Cuts Affect Your Investments?
|
The Federal budget deficit is a problem that has been hidden until the elections. In October the debt ceiling may be reached and perhaps the Treasury can manipulate payments to hold off default until after the election, giving Congress time to pass emergency legislation. Then at year end the mandatory sequestration law takes effect and huge, gigantic budget cuts will occur.
One possible outcome would be for republicans to accept huge defense budget cuts and authorize withdrawal of U.S. forces from overseas and less military equipment, etc. The effect of the US. becoming isolationist is that it would make Third World countries admire us more and they would be more willing to authorize American companies to work in their country. Also a U.S. withdrawal could cause political instability that would create more talented, affluent refugees. This would make the U.S. more attractive as a safe haven for one’s residence and capital compared to some shaky dangerous small country that had suffered from instability. This could lower the cost of capital for the U.S. in addition to the effect of the deflationary aspects of huge budget cutbacks.
As investors scramble to sell “safe” stocks that serve the defense industry and buy treasuries this will tip things over in the stock market towards another stock bear market and bond bull market. During the emergency last minute Congressional debates about this the markets may suffer wild convulsions but eventually things will be better. If the sequestration actually occurs it could be like when Margaret Thatcher stood up against striking miners or Ronald Reagan said to striking air traffic controllers “You’re fired!” It would be scary but things will improve.
I wrote an article “Deleveraging to continue” and "Congress budget deadline nears-crisis looming".
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Jul 23, 2012 @ 09:02 AM
Overcoming some economic prejudices to get better investment results
|
There are some incorrect myths that can greatly mislead investors. One myth is that it is normal for interest rates to be between 5 to 9% for long term Treasuries. A second myth is that recessions only last a year and then everything goes back to normal. A third myth is that during a period of excessive government debt that interest rates rise to compensate for the increased risk of lending to an over-indebted government.
Myth 1. Inflation is normal and is a risk with a higher probability than depression.
The fact is: The history of the U.S. before the 1930’s was one of constant crashes and long term depressions lasting 15 to 25 years. Only after the start of WWII did the U.S. switch to a long era of inflationary Keynesian debt financed demand managed economy, culminating in a near hyperinflation in the 1970’s. Most people can only recall the past 71 years since the start of WWII. They need to see that Keynesian inflationary debt bubble methods are discredited and they need to consider the deflationary and depression experiences from 1790 to 1941. We had long term depressions in the 1830’s, 1870’s, 1890’s, 1907-1922, and 1929-1941. If the Central bank and Congress can’t stimulate the economy then the best guide to what will happen is the pre-1941 era.
Myth 2. Recessions only last a year and then everything goes back to normal.
Fact: Unfortunately the current recession is a Japan-style Soft Depression that will last a long time. Bond bull markets where interest rates go lower and bond prices go higher can last up to 25 years. Since the ultra-high rate era of Volcker was an aberration then the beginning of the current bond bull market should be marked from the time in 1997 when Asian countries encountered a crisis and Greenspan and the world’s credit markets lowered interest rates in response. The bond bull market could last until 20 years after 1997 which is 2017. Many bearish commentators have felt that is when the economy would get better, so that may be when the bond bull market ends.
Myth 3. During a period of excessive government debt that interest rates rise to compensate for the increased risk of lending to an over-indebted government.
Fact: As things get worse people panic and engage in a bidding war to buy seats on a financial lifeboat, which are Treasuries. The worse things get for the private sector the more the tax collector (who also has a printing press and debts denominated in the local currency) looks like the only reliable credit risk to lend money to.
Once investors learn to be unprejudiced about credit market myths then they can invest correctly.
I wrote an article “Deleveraging to continue”.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Jul 20, 2012 @ 02:56 PM
How Will the Euro Collapse Affect 401k Values?
|
The trade weighted dollar index published by the St. Louis Fed shows a high in 2002 of 130 and a recent low of 95 in 2011 with a current value of 101.819. If the Euro breaks up then it will probably retouch its old lows below $1.00 so the dollar index will retouch its old highs. This will hurt investments in foreign currencies. It will hurt U.S. corporations that export things, it will hurt U.S. corporations that use offshore subsidiaries as tax shelters. When a tax sheltered offshore subsidiary loses money the parent company can’t take advantage of the loss and get a tax deduction, so those shelters are two-edge sword. Ironically a rising dollar will reduce demand by foreigners for U.S. stocks and real estate because they would be more expensive in relative terms.
In another year or two the European Central Bank (ECB) will be forced to simply print money and buy government bonds at par even if the value has dropped. Excessive money printing could create inflation which would result in a much needed devaluation of the Euro. It will lead to a flight out of the Euro. Then the ECB’s credibility will be lost and only German taxpayers can save the Euro. Eventually German voters will tell their politicians the solution is to break up the Euro. This means letting the German banks that hold bad debt from southern Europe’s PIIGS countries go bankrupt. And it means spending the taxpayer’s money on rebuilding Germany’s damaged economy instead of subsidizing PIIGS countries that engaged in the reckless, selfish creation of real estate bubbles while Germans refused to have a real estate bubble.
The damage to Germany from a Euro breakup are allegedly higher than if they subsidized the PIIGS members of Euro. But the German subsidies of PIIGS countries would spiral out of control and create antagonism between Germans and southern Europe, so it would be better for Germans to pay extra for the more reliable solution of closing down the Euro and ending the uncertainty of the Euro’s problems.
Will investors say all I got from a Euro breakup was this worthless coin?
What will benefit from a rising dollar are Treasuries because foreign institutional investors can’t use bank deposits because the tiny $250,000 FDIC limit is too small, so institutions will buy Treasuries.
It is way too early to buy depressed European stocks because the continent has not yet reached the peak of their crisis.
People ask what will happen to their 401k if the dollar is devalued. They should instead be concerned about the possibility that their stocks could go down regardless of whether their stocks are in a 401k or held directly. Look at how (CMG) Chipotle stock crashed today down 21% in a day. When the dollar goes up then foreign tourists can’t afford to eat our burritos.
I wrote an article “Two things about devaluation you must know” where I discussed the possibility that an old paradigm was broken. It has not been broken as the dollar remains the least dirtiest shirt in a dirty clothes hamper of the world’s major currencies.
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Jul 19, 2012 @ 05:40 PM
When Will the Economy Return to Normal?
|
The U.S. economy will return to normal when there is about 43% less debt. The U.S. total debt as a percent of GDP in modern times (if you smooth out the worst peaks) has been roughly 200% of GDP before the great debt bubble of the past 15 years. It peaked at 380% in 2009 and is now at 350%. To get to 200% requires a 43% reduction in debt, or else if debt balances remain the same then the economy needs at grow at 4% a year in real terms for nine years with no recessions, which has very rarely happened. Currently the economy is at roughly 1.25% growth and is headed into a recession with negative growth rates when the 2013 “fiscal cliff” is implemented. Assuming the economy gradually improves to a 4% growth rate in 2014, has a recession every four years, then it would be roughly 10 years after 2014 for the economy to grow enough for people to pay down debt to a reasonable level. So that means waiting until 2024 to return to normal. (Hedge fund Bridgewater mentioned it might take until 2023 for the economy to recover.) However, this ignores income taxes. If people use after-tax dollars to pay down principal then it might take another 20 to 40% longer to pay down debt. Some of the debt has been issued by government agencies, so that would be different than a consumer seeking to pay down debt. Some debt could be “paid down” sooner by a consumer default or loan forgiveness program. Some low tax bracket people could pay down debt faster than those in high tax brackets.
People will speed up debt payment by cutting expenditures elsewhere but that will reduce growth as people consume less this will result in less employment and less sales.
I don’t buy the argument that all that matters (instead of loan balances) are today’s low payments that are caused by low interest rates because when interest rates drop the proportion of principal in a payment goes up so the total payment is not reduced as much as one would think, especially if one counts the reduced tax deductible interest expense for mortgages or business debt. I wrote about this in “Housing has not bottomed. Three things you must know” where I showed how a 38% drop in rates is only a 10% real drop in total payments.
Open the doors to new insights
There is some hope that the U.S. will outwit its competitors and induce a high growth rate. We have the best economic system, lowest taxes (including payroll taxes that are not called a tax) and lowest wages of any major developed country. We have the best source of coal and natural gas of any developed country except Canada. Well educated Europeans suffering from a Depression will migrate here and contribute to the workforce. European employers like Airbus are moving here because it is less costly. We have more Silicon Valley style innovation than other countries. So these good things will gradually, over a decade, create growth that will slowly heal the economy.
The huge overhang of debt has created a Japan-style Soft Depression in the U.S and world economy. People will gradually learn to get tougher and cut their expenses more than they already have done, thus making growth rates lower than expected. This will hurt stocks and investors will flee into the safety of investment grade bonds. Even though interest rates are very, very low there is much reason to think they can go even lower and stay low for a long time.
I wrote an article “Deleveraging to continue”.
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Jul 18, 2012 @ 02:53 PM
Will Zero Duration Assets Beat Inflation, Diversify Against Risk and Go Up When Stocks Go Down?
|
The duration of an asset is the time it takes to get paid back after you bought it. So a zero coupon bond that pays nothing until maturity has a duration equal to its maturity date. A one month CD, that pays interest at the end of the 30 day holding, would have a duration of one month.
A typical bond might have an eight year maturity and a five year duration. The reason the duration is about a third less than the maturity is because of the interest payments.
A “demand deposit” (a checking account) has a zero duration because you can get the money back immediately.
Collectables are zero duration assets because you immediately get the benefit, assuming you want to consume it. If you own a bottle of rare wine as long as you own a corkscrew then you can get an immediate benefit. If you own art work like an original oil painting you get the benefit by looking at the painting. Holding precious metals is a zero duration asset because you get the satisfaction of looking at it and in theory can sell it immediately.
Except for cash or near cash equivalents, zero duration assets are “collectables”. If society suffers from a Depression including loss of employment and loss of economic growth then collectables will become worth far less than their value during prosperous times. Also collectables will become illiquid, hard to sell, hard to borrow against, or to estimate a value. An asset should be judged by its risk as well as its rewards. The hidden risk of zero duration collectables is that they can go down in value during a depression more than things that are easier to value such as shares of large cap stocks. If the hidden contingent risk is greater than the reward then it is a bad investment.
The Greenspan-Bernanke era debt bubbles enriched the elites who were most capable to utilize cheap and plentiful credit. So they used their excessive ability to access money and credit by overpaying for luxury collectables. The resulting surge in price made collectables look like a respectable asset class. But society may be going through a prolonged multi-decade period of deleveraging where consumers need to sell off luxuries to pay down debt. Eventually some of the elite may find that their assets were propped up by a debt bubble; when the assets decline (like stocks and real estate) the elites will also need to deleverage, resulting in fire sales of collectables.
If inflation returns this will make people poorer and people will balance their budget by selling off unneeded luxuries, so I doubt the ability of collectables to beat inflation. If inflation returns lenders will be ready with adjustable rate loans and they will charge high rates to protect themselves from inflation. Thus borrowers won’t be able to afford to borrow and there will be no repeat of the inflationary 1970’s credit binge. In that era lenders were dumb enough to lend a greater proportion of money in the form of fixed rate loans; today bank loans except for mortgages are variable rate. So the next inflation cycle may not enrich holders of zero duration collectables.
Collectables have a 28% Long Terms Capital Gains tax instead of the 15% rate for other assets.
Collectables must be kept in a safe
The greatest danger of collectables is that investors may buy them and fantasize that they are investing when they are really consuming an asset that has maintenance costs and no yield. A similar problem occurs with owner occupied homes where people over-consume a house that is too big and they are wasting money by buying a home larger than what they need.
I wrote an article “Inflation hurts real estate” where I mentioned that assets propped up by debt are hurt by rising interest rates caused by inflation. I wrote how Japan’s monetary bubble of the 1980’s made the price of collectables go up on a worldwide basis in “Japan’s monetary policy”. When a monetary bubble bursts then collectables get jettisoned by some over-leveraged owners.
Investors should seek independent financial advice.
Posted by Don Martin on Tue, Jul 17, 2012 @ 12:56 PM
What are low priced sales of Digg and MySpace telling us?
|
In 2008, Digg, a hot new Social Media company, was valued at $160 million according to Dow Jones VentureSource. It was sold this month for $500,000. Remember 13 months ago MySpace was sold for $35 million and a few years ago it was worth $580million? AQuantive was recently written down to near zero by Microsoft five years after its multibillion dollar purchase. This shows only one company gets to be a winner in a new tech field. Look at Intel, Microsoft, Amazon, Google, and Apple dominating the market for their industry niche. Can anyone compete against them in a fiscally sound way with a reasonable risk-reward tradeoff? Thus buying tech stock is too risky because it is too hard to know which company will be the winner, and one must diversify and then only one winner out of many losers equals bad odds. A key to investing is to avoid excessive risk, so this problem with tech stock implies they are too risky to invest. Look at Amazon’s stock chart, the PE is 210. (Traditionally it should be 15 or for a growth tech company double that in exceptional circumstances). Its PE exploded during post-2008 crash Federal Reserve’s Quantitative Easing era as speculators sought a way to get rich and this pushed up Amazon’s price and the average tech stock price and broad market indexes, disguising the poor performance of many tech stocks and of many other stocks. Were it not for a few superstars in the tech field the tech indexes would be lower.
If Facebook becomes discredited and goes the way of MySpace and Digg then this would pop the bubble of tech stocks and make the overall stock market go down. Facebook gets marketing experts excited because they hope it will be a platform that allows their clients to get massive publicity through viral marketing on Social Media. But consumers are burned out of being teased by viral marketing. Consumers know anything really worthwhile won’t be free or below cost and so consumers assume free things are a sales trick and tune it out. So if viral marketing for free on Social Media is a worthless hype then that should cool off some of the enthusiasm about investing in Facebook and its peers. But the real test of survival for Facebook is that it must sell ads to Fortune 500 companies in large quantities. To do that requires approval by top management of those companies and if they see that experimental no cost viral marketing doesn’t work then they will doubt the value of paid-for ads on Facebook.
Open the secrets of Social Media
The great danger of investing in marketing related ventures like Social Media tech companies is that this marketing is a very experimental and unreliable way of doing business and the new tech of Social Media is an unproven, new way to market. So if Facebook and its peers are just another new form of a marketing company that exists to serve the needs of its paying customers (the Fortune 500) then there is a huge amount of risk that the new hip, fashionable, experimental, creative way is marketing is just a unworkable fad with no foundation. In that case Facebook may join Webvan, Pets.com, MySpace, Eloan, Digg in the history books. It may continue as a no-profit branch of a giant media or old line tech company assuming that it loses customers who pay for ads. When the thrill is gone about tech stocks that will cool off the other areas of the stock market.
I wrote an article “Tech stock risks threaten stock market” and “Will tech bubble 2.0 create a stock crash?”
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Jul 16, 2012 @ 03:15 PM
What are record low Treasury yields telling us?
|
Treasury rates retouched a record low today. The ten year Treasury yield gapped down, from the previous day’s close, at opening today to 1.45%, then hit 1.44% which is a tie with the record low of June 1, 2012. It clsoed for the day at 1.46%. The closing yield was 2/3rd's of the way between the previous day's close and today's low, which implies it was not a temporary panic spike but rather a sound data point of the market's pricing of interest rates. There were no scary headlines today to justify such a drop in yields. Bond investors tend to be dominated by sober minded institutional investors who do a good job of forecasting the economy. What is the invisible hand of the market trying to tell us?
Reuters had an article today saying the GDP forecasts are being downgraded which implies the economy is headed into a recession. GDP data will be released July 27.
The Economist magazine wrote on July 14 that Quantitative easing (QE1) cut corporate rates by 1% and QE2 cut rates by 0.13%. My opinion is that the implication is that QE3 will have almost no effect at all on rates because QE has diminishing returns. Assuming that the marketplace is waking up the potential of diminishing returns for additional QE and reduced Fed credibility then the market could worry that the Greenspan-Bernanke “Put” option of the past 25 years is beginning to become worthless. This implies stocks will go down and stay down.
What if you deposited $1,000,000 in a bank and all you got back in interest was a little coin?
A further reduction in interest rates and an increase in inflation could cause a lot of savers to get angry and do something drastic. The Fed wants this, because it hopes savers will decide if money is depreciating that they should start buying consumption items or use their savings to start a business. However, this would be a mistake to create inflation. Savers could decide that they should abandon the bond market and bank accounts causing interest rates to go up when the economy is weak, which would make the economy worse than it is. The Fed must avoid hurting savers, so the Fed should not do QE3.
QE3 might make bond yields temporarily go lower but there is a risk it could awaken bond vigilantes and drive rates higher. Investors who are savers could decide to invest in Emerging Market bonds completely bypassing the Fed’s goals and creating more Emerging Markets inflation (some of it could be imported into the U.S.) and job growth. Then Americans would migrate to EM countries to find work and the U.S. would have less tax revenue because of emigration by high wage earners.
The biggest risk of QE3 is that the stock market would realize that the Greenspan-Bernanke “Put” option of the past 25 years is beginning to become worthless which would result in mass panic out of stocks and into bonds. If the stock crash occurs that would scare away the writers of Put options who are vital to hedge funds. Then if highly leveraged hedge funds stopped buying and instead sold stocks this would hurt stocks. Once stock investors who hoped to get 2% to 3.5% in dividends instead get a massive loss of asset values they will regret owning stocks and wish they owned Treasuries at a 1.45% yield rather than losing money in stocks.
The bottom line is that the marketplace is anticipating that the “Fiscal Cliff” of 2013 plus lingering problems in the Eurozone and Japan mean that stocks will go down and so they are moving more assets into Treasuries.
I wrote an article on June 1 when yields reached record lows “Treasury rates plunge: When will the economy get better?” and "Treasury yields imply crash is coming".
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Jul 13, 2012 @ 05:01 PM
Romney incurs 233% higher future tax trying to reduce tax
|
Mitt Romney made a tax planning error by putting too many appreciating capital assets into his IRA. Those assets will come out of the IRA, when he retires, as ordinary income at the maximum tax bracket; he should have put it into directly owned shares in a taxable account so as to get Long Term Capital Gains tax treatment. Also, if someone can hold onto an appreciated asset all of their life then when they die they get an income tax basis step-up so he might have paid zero income tax if the shares were held in a taxable account. Since his kids are wealthy then when they inherit his IRA they will have the same problem.
He should have held the appreciating assets in a taxable account, borrowed against them with a margin loan then bought more assets in a taxable account and then use the 15% capital gains tax rate should he chose to sell. Instead when he makes IRA withdrawals he will need to pay a 35% tax, which is 233% higher tax than a 15% rate. If we compare the 35% rate to the tax-free sale (for basis step-up when one has died) then the 35% tax rate would be infinitely higher.
This shows Romney, who is an Ivy League MBA and is thus too smart to make a financial mistake, was deliberately trying to pay the highest possible amount of taxes. No one that smart could have accidentally made this mistake, so clearly he went out of his way to incur the maximum possible tax liability to show he is making a sacrifice to help those who are less fortunate.
To be fair he should be praised as a model for financial planning because he managed to get millions into his IRA to prepare for retirement, despite the $5,000 annual contribution limit, which was $2,000 before 2001.
The story is here.
I wrote an article “401k contributions not always a good thing”.
Posted by Don Martin on Fri, Jul 13, 2012 @ 01:33 PM
I can’t believe it happened again!
|
First in December, 2008 Madoff’s gigantic Ponzi scheme collapsed. It used a one person CPA auditing firm. Had the audit been done correctly the Ponzi scheme would have been detected. I have no evidence as to whether the auditor was honest and dumb or was dishonest. Now Peregrine Financial Group, a futures broker went bankrupt this week due to fraud. It too was audited by an obscure one person CPA firm. The chief executive of collapsed brokerage firm was arrested Friday. The Broker's weak quality risk controls helped to allow this problem to occur. It's shockingly similar to the MF Global brokerage failure of October 31, 2011.
The lesson investors must learn is to lookout for themselves and be suspicious of investment firms. They need to get their own set of risk controls at investment firms.
First, demand a separation of duties which is a basic accounting technique to make it harder to commit fraud. This means that you have one firm act as Custodian for your investments and hire another firm to be the advisor that picks the recommended investments. The advisor should be a Registered Investment Advisor (RIA) licensed by the state or federal government. The advisor who uses a Custodian to hold assets does not get to have custody over your investments, he or she merely gets to execute trades for your assets that are held at a custodian.
Second, the advisor should be fee-only so that he is not under pressure to recommend products to meet a sales quota. A fee-only RIA is not allowed to get a kickback (referral fee) from anyone, which increases the odds that he will act exclusively in your interest. The advisor should have a simple financial life with no side jobs or other business ventures. Perhaps investors should ask their advisor “Do you have excessive debts or a bad credit history or any unpaid liens, etc. What's your credit score?”
Third, it is best to confine investments to publicly traded securities and insured bank deposits as these can be easily audited by the auditor. By contrast, owning a closely held business or real estate with others in a partnership is harder to audit and easier for a dishonest person to manipulate or to simply run up exorbitant compensation expenses. Unfortunately the futures trading industry seems to have inadequate investor protection in place.
Fourth, the Custodian should either be a large, well known firm or clear through a large, well known firm. A possible alternative would be for the advisor to simply give advice and then the client executes the trade in his own retail account, although that will have problems with access to the lowest cost Institutional class mutual funds.
Fifth, review your rights under SIPC insurance $500,000 limit per investor and see if you can structure things to be insured by SIPC. For example a husband’s and wife’s IRA’s are counted as separate from their taxable accounts, so they could have $500,000 each in an IRA and a taxable account and get SIPC coverage.
Find out what the SPIC insurance limits are for your various accounts.
Six, avoid buying obscure microcap stocks. If you insist on owning them then use a mutual fund to buy them. Occasionally fraudsters have manipulated microcap companies and the larger a company is the less likey that this can happen.
I wrote an article “Is your financial planner a fiduciary?” and “Broker failure highlights need for vigilance”.
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Jul 12, 2012 @ 03:19 PM
What you must know about the five hidden weaknesses of a financial adviser
|
*The advisor lacks professional training and certification. A financial advisor should have a CFP® or CFA credential and a four year degree in a supportive field such as finance, financial planning, or economics, etc.
* The advisor has conflicts of interest. For example, will the advisor get a bigger commission by recommending a more expensive investment? Is he pushing sales of insurance products on you that will provide him with a huge commission?
* The advisor is not independent of his employer thus he may succumb to corporate pressure to meet a sales quota by pushing inappropriate products rather than doing what is right for his clients
* The advisor lacks a long period of experience in a finance career and thus is unaware of what it is like to live through bizarre counter-intuitive panics and crashes
* The advisor is selling “canned” products instead of personalized, custom designed services. Each client’s portfolio should be custom built to his or her unique needs.
I wrote an article “Is your financial planner a Fiduciary?” and “MF Global bankruptcy two points you must know”
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Jul 11, 2012 @ 02:24 PM
The Wall Street Journal is wrong about calling a housing bottom
|
David Wessel of Wall Street Journal wrote that housing had bottomed. He is wrong. The housing bulls base their claims on past high water mark metrics which are irrelevant because fundamental structural changes occurred to corrupt the value of those metrics.
During 1984-2009 borrowers used “Easy Qualifier” loans to qualify if they could not otherwise qualify for a loan. Those loans have been outlawed so much of the past data of consumer behavior is not relevant. This means that historical ratios like rent to price or rent to income have fundamentally changed and can’t be used to compare with the past. In the past 30 years the labor market has changed workers’ pay from a straight salary to a hodgepodge of unreliable bonus, overtime, profit sharing, stock options, independent contractor work, etc. This unreliable income is often not acceptable by banks for a mortgage, especially during an era of extreme economic volatility. So even if someone’s income in real inflation adjusted terms is as good as it was in previous decades the problem is he may not qualify for a bank loan. And the loss of potential buyers who can’t qualify because they were using now unavailable “Liar’s Loans” to borrow more than they could afford is another permanent problem for housing. These potential borrowers who can’t get a loan will simply have to rent and push up the ratio of rent to home prices beyond normal metrics.
Housing is very difficult to get good data on because when a home sells it could be a better than average home in top condition and that would push up average prices. It is very hard to get data that adjusts the price for amenities such as recently upgraded homes, homes in good school districts, homes adjusted for age or for quiet streets, etc. So simply saying the average home sales price in a certain zip code went up is meaningless. My own house was appraised by an online appraisal with a 20% error because the online appraisal didn’t take these factors into account.
The recovery in the job market is skewed towards the higher income professionals, so these people can afford to play the housing game disproportionately to the moderate income people. Thus upper-middle class homes will sell more than homes in moderate income areas. This skews prices.
Housing economists are pilots doing an instrument landing in the fog with defective instruments
Suppose you are a pilot coming in for an instrument landing in fog. If some of your instruments have suddenly become unreliable and you absolutely have to land at your destination then you must rely on the ones that are reliable and ignore the now unreliable ones. What is still reliable in the housing market is to look at personal earned income. It is stagnant for those in the bottom 90% of the population. Until they start getting significant increases of earned income they simply can’t play the housing game (except by buying a lower quality house than they would normally want) and prices can’t go up. Also the huge overhang of underwater houses whose owners can’t play the move up game and foreclosed homes not yet put up for sale is a gigantic headwind against any potential appreciation. So which is stronger, the headwind of future foreclosures, or the power of moderate income job holders to get an inflation-adjusted raise? I think moderate income people are very weak in terms of economic power and no amount of tax credits, ultra-low rates or improvement in confidence can offset that weakness. The broken instruments are simple comparisons of past ratios of the bubble debt era to today’s no nonsense loan market. It is wrong to say that because housing starts are at record lows that they must go up. They can only go up if a buyer has a better job than his old job that prevented him from buying. The question to ask is has the job market for moderate income middle class people firmed up and improved?
Is this a huge pay raise?
When is a 38% reduction only a 10% reduction?
Another misunderstanding about the benefit of low mortgages rates is that when rates drop the amortization of principal goes up so that the total payment doesn’t drop as much as if it were an interest-only loan. Also the tax refund is less when interest expense is less. The property tax and insurance remains the same even if interest cost decreases. A $100,000 house with an 80% loan at 6% for 30 years would have $479.64 payment, plus about $167 monthly tax and insurance (in California) and roughly $80 monthly in maintenance costs, for a total of $726. If the rate was cut to 3.75% (a 38% cut) the mortgage would be $370.49, and the total payments would be $617, a 15% reduction. To this we should add $37 monthly increase in income tax (because of lower interest cost), so the adjusted cost is $655 versus $726 before refinancing, which is a 10% reduction in after-tax cost. (Note: the amortization of principal is not a cost from an accounting standpoint, but since you have to write a check for it until you sell the house and get back your principle then it “feels” like a cost. Also the amortization example assumes the new loan would be at the same $80,000 balance as the old loan, in reality the old loan balance was probably a few thousand lower due to amortization, but then one must add in closing costs, unless one got a higher interest rate no-cost loan). The point is that a 38% reduction in a mortgage rate may only provide a 10% economic betterment (ignoring the fact that some extra principal is being paid).
This essay doesn’t apply to special places like Silicon Valley, or Manhattan and is for general economic purposes.
I wrote an article “Home price to income metrics are wrong” and “Real estate bottoming”.
Investors should seek independent financial advice.
Posted by Don Martin on Tue, Jul 10, 2012 @ 06:34 PM
Another brokerage firm shut down for alleged fraud and misappropriation of customer funds
|
Collapsed futures Peregrine Financial Group Inc. shows futures brokerage industry is still very risky and needs better regulation. Futures brokers are called “futures merchants” and are different from securities Broker-Dealers. Fortunately securities investors are much more secure because they are protected by strict audits of securities Brokers and are protected by SPIC insurance up to $500,000. By contrast, there is no insurance protection for futures brokerage accounts. Apparently the audit process for futures brokers is very poor or else the collapse of Peregrine Financial Group Inc. and MF Global would not have happened.
I prefer to recommend mutual funds that invest in securities and to avoid investing in futures contracts, including avoiding ETN’s that invest in futures contracts. Mutual funds have their assets held by a Transfer Agent which is a bank. The bank is regulated and audited by the government and is audited by an outside CPA. The mutual fund shares are held at a Broker-Dealer where SIPC insurance protects the account up to $500,000 in the event of a brokerage collapse.
The collapse of the two futures brokers should alert investors to be vigilant against fraud and poor internal controls. Investors should recognize the value of using multiple layers of watchdogs that are different parties, to look over their assets.
Ironically losses from investors buying overpriced bubble stocks is worse than loss from fraud. Therefore investors need to be self-aware of the need to avoid bubbles, over-priced investments, and excessive investment fees including early redemption fees, surrender charges, etc. Whenever bad news like Peregrine Financial Group Inc. failure occurs investors can benfit because they will be inspired to learn to be on the alert.
Steps to protect yourself:
*Avoid risky bubble investments; instead invest conservatively
*Avoid overpriced investment services like mutual funds with excessive fees
*Avoid investments where one party has all the control. This means using layers of different entities to keep an eye on your investments. For example you could hire an RIA company to advise you on investments and then hold the investments at a Custodian who is a Broker-Dealer. Further the investments could be mutual funds so that the fund’s employees are examining the investments, the fund company gets its books audited, the fund company has the assets held at a bank Transfer Agent where additional auditors examine the bank’s records.
*Avoid risky commodity futures, ETN’s, ETP’s. Simply own (shares of mutual funds that hold) unleveraged assets like stocks and bonds.
I wrote an article “Prepare for more broker failures” and “MF Global crash affects your 401k”.
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Jul 09, 2012 @ 05:29 PM
What are Treasury Bonds Telling us About the Economy?
|
The “real” yield on ten year TIP’s Treasuries in normal times ranged from 1.5% to 2.75% with an average of roughly 2%. Since the Great Recession of 2008 it has gone down in a clear consistent downtrend and is now negative 0.60% for a Treasury TIP’s maturing in 9.5 years. The 10 year Treasury yield is often lowest on the day the employment report is released, which was Friday, July 6, so one would expect today’s yield to be flat or higher, instead it continued to go down to 1.51% from Friday's 1.54% even though there were no big negative news stories to provoke a downward move.
A rate this low implies that the bond markets are afraid of deflation and afraid that other assets are too risky, so the bond market is willing to pay very high prices (which means low yields) for the safety of a Treasury bond.
The job market's inability to recover from the high level of unemployment implies the economy will be stuck in a recession for several more years.
The more that an asset is considered boring the greater the probability that the investors who follow that asset will behave in a logical, professional manner and avoid participating in a bubble. At the opposite end of the risk spectrum in highly risky (exciting) things like small cap stocks, or naked options writing is where investors have tended to engage in speculative behavior that can create an artificially high bubble valuation.
Open the secrets of investing
So I believe the wisdom of the investment grade bond market is usually correct and the opinion of the speculative risk asset market for stocks is less likely to be correct. Stocks are priced for perfection. Stocks like the fact that U.S. corporations are very efficient with artificially low taxes using offshore subsidiaries and low manufacturing costs using offshore workers and subsidies from governments desperate to create jobs. But there’s a catch: the corporations forgot that they have to sell their products to consumers. If consumers are heavily indebted or suffer from excessive chronic unemployment then consumers will buy less goods and corporations will suffer a profit decline. When corporate profit goes down then stock prices will go down.
Currently corporate earnings, at 9% of sales, are 50% higher than the long run average of 6%. Partly this is due to moving facilities offshore, but with growing costs of offshoring and shipping those profit margins will be eroded even if consumers can somehow keep consuming. Most importantly the post WWII paradigm of constant expansion of consumer credit and spending is slowing down, since consumers have far too much debt. Consumers as wage earners have seen no real inflation adjusted wage growth in 14 years. They satisfied their need to spend by using their home as an ATM. But in 2008 real estate crashed and in 2009 “Easy Qualifier” mortgages were outlawed. Now consumers have no choice but to reduce their spending. Corporations will need to survive with less sales and slimmer profit margins, which is bad news that is not yet priced into the stock market. The bond market has priced it in.
I wrote an article “Very low bond yields a tipoff of impending crisis”.
Investors should seek independent financial advice.
Posted by Don Martin on Fri, Jul 06, 2012 @ 04:31 PM
Today’s non-farm employment report
|
Today’s Labor department non-farm payroll employment report came in at 80,000 jobs versus the consensus forecast of 100,000, thus confirming we are in a recession. When adjusted for the need to create 125,000 new monthly jobs for population growth that means in real terms that the unemployment increased by 50,000. At an annualized rate that would be a 0.5% increase in the unemployment rate. Of course, one month’s results are not a very reliable indicator, however the trend has been weak for several months. I had forecast 100,000 jobs and I’m bearish; as a bearish advisor I was surprised it was worse than I expected.
The age 55 and up cohort actually increased the amount of jobs that they hold, while other age groups lost jobs. This implies that the most experienced people are taking jobs away from less experienced with the youngest workers suffering a severe increase in unemployment. Since young people are the first-time homebuyers who are a critical part (the foundation of the pyramid) of the home buying “food chain” then less of them can buy starter homes and thus other people will be unable to sell and move up to bigger homes.
A symbol of the amount of real wages increase
There was a slight increase in real wages but that could be explained by employers laying off mediocre low productivity younger workers and replacing them with more experienced and expensive older workers who might do more work in a lesser amount of hours. Thus the notion of real hourly earnings rising needs to be carefully checked, because in this case the alleged increase in real wages didn’t occur. Further, this could be warped by the top 5% of the most skilled workers getting raises while the rest got nothing.
The unemployment rate is the foundation on which rests the cause of inflation which in turn is the foundation of bond market values. (Although part of what moves Treasury bond prices is a flight to safety factor). When unemployment rate is worsening then that is deflationary. Today gold and foreign currency went down, as did stocks, and commodities .
I wrote an article “Jobless rate to show no real improvement” and “Unemployment will take years to fix”.
Investors should seek independent financial advice.
Posted by Don Martin on Thu, Jul 05, 2012 @ 01:27 PM
Tomorrow’s non-farm employment report to be 100,000 jobs
|
The Bureau of Labor statistics employment report will be released tomorrow. The U of M survey asked households about their jobless rate with more bad than good news from the respondents; this is a worse than usual U of M report implying the BLS employment report will be bad. The consensus is 100,000 jobs, but population increase requires 100,000 to 125,000 jobs each month so that means no real gain.
One of the few outliers has been Goldman Sachs estimate of 125,000 new jobs. GS feels 125,000 is correct partly because of ADP’s payroll report but ADP has been wrong before. ADP's clients are likely to be skewed towards bigger, more prosperous companies thus they are less likely to include less prosperous companies that can’t afford ADP.
It is not that hard to do payroll using Quickbooks software, so I suspect lots of small businesses don’t use ADP and they may hire less during a recession; the big companies during stagnation get a disproportionate share of the economy, the small companies that are not clients of ADP are usually less in demand during recession thus need to have less hiring, so I don't feel comfortable using ADP as a source of guessing the employment report.
Will workers be shown the door and laid off in the employment report?
So if employment growth is 100k and the economy needs at least that to breakeven adjusting for population growth then we have a stalled out economy instead of much needed growth, and a looming fiscal cliff, so that means a stall out will tip over into a recession in a few months. The unprecedented fiscal cliff in less than 6 months with a probable stock sell off several months ahead of the fiscal cliff means stocks (which are overpriced by 50%) will go down this summer, in part triggered by tomorrow’s weak employment report. My guess is the consensus view of 100k is correct, but the news media needs to mention in bold print that this is a zero gain due to population growth. Also people need to be aware that population growth disproportionately is coming from lower class levels where people are less educated and less able to perform new tech skills. These people who are a large part of the growth will end up working in minimum wage retail jobs that can’t be sent overseas and the job growth from that doesn’t give enough income to qualify for a mortgage or to do a reasonable amount of consumption, and consumers’ purchases are needed to fuel job growth.
The key to powerful job growth and consumer recovery is when unemployed and underemployed people spend years upgrading their skills and work discipline. This can’t happen in less than a few years; many people need a whole decade to change their nature and skills.
I wrote an article “Jobless rate to show no real improvement” and “Unemployment will take years to fix”.
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Jul 04, 2012 @ 08:30 AM
Wealth is created by individualism and destroyed by mindless groupthink
|
Independence Day should not merely be a chance to loaf and eat junk food. The founders of the U.S. endured eight years of warfare to create this country. It should be a time to contemplate the meaning of the formation of the U.S. and the nature of American freedom and how it affects investments.
Most of the countries in the rest of the world seem to run their banking systems in a way where loans are granted to unworthy borrowers (or in excessive amounts) so as to prop up the economy. The exceptions to that are the prosperous Northern and Central regions of Europe, Canada, Australia, New Zealand, Singapore, etc.
The personal freedom and responsibility that American have is reflected in the government’s requirement that bank lending be only to those who can afford to borrow. Yes, I know, the mortgage market during the “1984-2009 “Easy Qualifier” era did not follow that, but the other areas of borrowing did. In 1984-2009 a few of the giant U.S. banks fooled the regulators with a complex scheme of issuing bad mortgages and repackaging them into securities that were falsely rated as AAA quality. But except for mortgages on one to four unit properties the rest of the borrowing was reasonably honest.
Other countries have a reputation for trying to create massive rapid economic growth by having the bank regulator force the banks to lend money to uncreditworthy corporations. The worst case was the Japanese boom of 1973-1989 which resulted in a 22 year Soft Depression. This created a false boom which ultimately came to a tragic end. In the Eurozone banks operate with a very small net worth percentage and they have lent money carelessly to the PIIGS’s countries that now can’t be repaid causing a 50% youth unemployment rate. The banks were too cozy with the regulators so they dropped their guard and funded more loans to the PIIG’s than they should have, thus creating a false boom that later collapsed.
I think the American spirit of freedom, independence, individualism, etc. has helped keep the government from turning the banking system into a form of welfare for rich crony capitalist speculators. (Yes, I know, some TARP bank borrowers got too good of a deal, but that’s smaller issue). Our economy is on a better foundation than those nations that use massive government sponsored debt bubbles to overstimulate the economy. Our individualism makes us more open to the idea that a bubble may be forming and that we should take steps to protect ourselves. Other countries let their bubbles get bigger partly because of more “groupthink” peer pressure has caused the doubters to keep quiet.
There was a study done to learn why a particular Emerging Market airline had a high crash rate. Finally the study concluded that the co-pilots were too afraid to criticize the pilot so they let the plane crash and let themselves die in order to be loyal to the person in charge. It’s amazing that someone with pilot skills would let himself be killed in order to comply with a social custom of anti-independent thinking even though his employment duties should require flight safety above all else.
The spirit of property rights, freedom, independence, in the aggregate, outweigh the economic errors of the U.S. and create, in the aggregate, a better place to invest than other major countries. Of course there will always be a few small statistical outlier countries that may generate a few statistics that are better than the U.S. but in terms of a deep, consistent, well established marketplace and legal system the U.S. has the best economy and it is because of the American tradition of independence.
American individualism will open the doors to contrarian thinking - this creates wealth
This tradition is not simply about property rights; it also about independent thinking which may manifest itself by someone dropping out of college to start a tech company, or it may mean a gadfly who warns years early that the banking system is creating a bubble; it certainly means less irresponsible use of debt than was done in Japan or southern Europe. To the degree that a nation’s culture enforces mindless groupthink one finds a greater bubble-causing abuse of the banking system. To be successful in investing or in entrepreneurship requires taking an independent, contrarian view, which is best supported by our culture.
I wrote an article “Memorial Day remembrances”.
Investors should seek independent financial advice.
Posted by Don Martin on Tue, Jul 03, 2012 @ 02:52 PM
Microsoft write down shows risks of Social Media tech stocks
|
Microsoft’s write off of $6 billion from the purchase of aQuantive eliminated all of the company’s quarterly profit. This implies the purchase is now worthless. AQuantive was purchased by Microsoft five years ago. The company’s online services division lost $5 billion in the past three years, according to Reuters. AQuantive is an online ad agency.
An online ad agency is not the same as Social Media but has similarities which can be used to evaluate Social Media investments. Both rely on creating an environment that attracts a lot of “sticky eyeballs” (viewers) who will log on for free entertainment and then view ads. But in additional to viewing ads the viewers actually need to buy the advertised products or else the businesses that pay for ads will stop paying for ads and then these media companies will go out of business. Except for Google’s acquisition of an online ad company the tech industry has had a lot of misfortunes trying to profit from ads. These failures remind me of the 2000 dotcom hype that ended with tech companies going down in price by 95% or 99%.
Imagine an investor saying "I bought a tech stock and all I got was this lousy coin"
The stock market is propped up by a few outperforming tech stocks. If something should happen to hurt these few outperformers then that could trigger a general stock market crash. Stocks are overpriced by about 50% and need to come down to a level where the PE10 is at 15. If investors lose faith in the best tech stocks this could trigger a market rout.
Buffett does not own any tech stocks. He probably feels the risk is greater than the reward.
I wrote an article “Tech stock crashes threaten stock market” and “Facebook valuation problems effect on your 401k”.
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Jul 02, 2012 @ 05:49 PM
What can we learn from low Treasury bond yields?
|
When will interest rates go up to normal levels? My response is to look at today’s 10 year Treasury yields which dropped 4.7% (as a percent of a percent) today from Friday from 1.66% to 1.58%. The last time the rate was lower than this was for a few days around June 1 to 5. The drop in yields offset bullishness of Friday’s good news when the Eurozone announced a new plan to solve their problems. The bond market is trying to signal that the surprisingly bearish conditions of the June 1st payroll report that made 10 year Treasury yields drop to 1.44% that day are still with us and that no real solution has been found for the Eurozone’s problems. The bond market tends to be a more professional, honest, sober, mature measure of the economy than the stock market since retail investors make emotional mistakes with stocks but rarely get involved with bonds. So when the bond yields plunged today that indicated that one should continue to be bearish about equities.
Unlock the secrets of hidden risk
Of course one should be careful not to be fooled by the trading anomalies that occur on the day before a trading holiday. Tomorrow is a half day for the bond market so today is a day for professional investors to close out risky short positions that they don’t want to hold over a holiday. Also the first business day of the month triggers mindless buying by some investors who signed up for automatic monthly reinvesting which may make prices higher (so yields would be lower) today only. My intuition is that the bond market senses that stocks will crash in the summer, the U.S. payroll report of July 6 will be bad for jobs (and good for bonds) and the Eurozone’s latest “solution” will once again be discredited.
No real solution has been found to solve the problems of the Eurozone or Japan or the U.S. deficit which threatens a year end fiscal cliff. China has a huge task of trying to change its economy from a capital intensive export oriented economy to a consumer demand economy and there appears to be no progress on that. A slowdown in China means that commodity exporting countries that are the economic outperformers like Australia may find they experience a crash due to a drop in demand for commodities. Commodities are entering a bear market because the extreme demand from China in the past decade is slowing down. The phony commodities boom has triggered lots of erroneous reports of an economic rebound and an inflation rebound, causing investors to make a mini-bubble in alleged inflation fighting things like TIP’s real yields, commodities, etc. The U.S. economy is in “stall speed” of a 2% growth rate where there is risk of it stalling out and going down.
The world is in an unprecedented situation where never before have the governments and private sector had so much debt. Yet the traditional Keynesian solution to recessions is to simply have the Treasury borrow more and spend dollars to stimulate the economy. It seems that may no longer be possible because there is too much debt and thus there is no way to stimulate the economy back to normal. Thus bond yields deserve to be low because of the safe haven nature of investment grade bonds makes it the only low risk place to be during a period of extreme risk. The risk is that problems in the Eurozone, commodities, U.S. employment, U.S. fiscal cliff, and China real estate and capital goods bubbles could get worse thus justifying the bond market’s low yields.
Bond market vigilantes have reinterpreted their task to be one of protecting assets from a deflationary equities crash rather than fighting inflation.
I wrote an article “Will interest rates ever be normal?” and “Treasury rates plunge – when will the economy get better?”
Investors should seek independent financial advice.