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Someone--if the euro zone did break up--would have to print the new pesetas, drachmas, lira and Deutsche-guilder-francs as well as to dispense and count the new currency and protect it from counterfeit. Who might that money-printer be? On the haunting similarities between Jackson Pollock's painting and Ben Bernanke's banking.
"In the entire history of the S&P," so Bianco Research advises its clients, "there have been 11 days when 490-plus stocks all moved in the same direction on a given day. Of those 11 instances, six have occurred since July 2011." New cause to fear for the future of securities analysis.
Herewith a portrait of a metal making company in macroeconomic context, along with an answer to a timely question: Now that stocks, bonds, commodities and currencies seem to trade in lockstep--as if there were just two tickers, "risk on" and "risk off"--why even bother opening an annual report?
Deutsche Bank is leveraged 34:1. That is, Deutsche Bank is leveraged 34:1 if we compare tangible assets to tangible equity and shrink the DB derivatives portfolio in accordance with U.S. accounting convention. American and European finance is separated by more than an ocean.
Four farmers in Sioux County, Iowa, last week dueled at auction over a 74-acre tract near Hull, with an opening bid of $15,000 an acre. The winner paid $20,000 an acre, a new record in nominal Bernanke money, topping the $16,750-per-acre set in October. Few regions are bubblier than northwestern Iowa, but the bull market in black earth is lifting the Midwest bodily.
Failure of a German government debt auction on the Wednesday before Thanksgiving launched a thousand tweets. Ah, said the bold ones who presume to speak for Mr. Market: The vigilantes will work their will on the Germans as they have already done on the Italians, Spaniards and Greeks. But what the avenging creditors really want isn’t what you think.
Real estate—illiquid, despised, discounted—is the subject at hand. It was subscriber Todd Tateo who observed last year that, for the precious right to convert an asset into cash at the twitch of a nerve, the world was prepared to pay exorbitantly. The price of liquidity has only gone up in the meantime.
At $3.63 per million BTUs, the price of natural gas has plunged by 78% since the 2005 peak. Once upon a time, the market feared a chronic shortage; today, it fears perpetual glut. “Now,” says a man who buys cast-off interests in conventional wells for a song, “that theoretically should not happen.”
The un-stolid Germans have built towers of leverage, the un-gnome like Swiss are printing boxcars full of francs and the €1 trillion European Financial Stability Facility was reduced to buying its own bonds last week to mask the failure of a €3 billion 10-year note auction. A new look at an aging crisis.
If ideas could file for bankruptcy protection, the modern model of money and banking would have beaten MF Global Holdings to the courthouse. The concept of leveraged finance in a world of paper money and socialized risk deserves rehabilitation under an intellectual Chapter 11.
"I don't believe there is any upside anymore, "said Carl E. Walter, who worked in the People's Republic for 20 years and together with Fraser Howie, wrote "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise." Walter lived in China and invested in China--"invested my career in China"--but now, he said, he is through.
In response to a question from the audience, John Bogle held forth on exchange-traded funds: "When I studied the [mutual fund] industry at Princeton, I thought: 'What a miracle! You mean you can get your money back by redeeming your fund's shares any day you want to do that? How can that be possible?' Now, that's not good enough."
The median income of the American household has risen fourfold since 1971, according to Sean Fieler. Yet, over same span of years, the dollar has lost 82% of its purchasing power, which reduces the improvement in median household income to just 16%. Blame the shrinking dollar, said our speaker, but don't try to rehabilitate it.
If Monday's attempt by the Bank of Japan to cheapen the yen, its third in a year, is no more successful than the first two tries, the Japanese unit is on its way to new highs. Simultaneously, the Japanese stock market is approaching new lows, official purchases of exchange-traded funds notwithstanding.
Not every Grant’s reader will choose to act on a bearish investment idea concerning a company situated 7,649 miles west of the New York Stock Exchange. Each, however, will value the chance to learn more about what makes the world’s No. 2 economy tick—or, as we see the situation, not tick.
"Only the elderly, who have not understood the changes in the nation's financial markets, or who are unable to adjust to them, are sticking with stocks." Thus did Business Week magazine blight an entire asset class in an infamous 1979 cover story. An update on the age-old duel between "risky" assets and the other kind.
With its unimaginably large numbers, perfervid rhetoric and complex twists in political plot, the European monetary crisis would seem to defy comprehension, never mind a solution. How much simpler it would be if this Continental mess could be expressed in the simple analytical terms of a single, representative common stock. It just so happens that it can.
The raging, telegenic crises in money and credit deflect attention from the quiet desperation of the American saver. Collapsing Treasury yields, zero-percent money rates and the flattening yield curve--all in the context of a 3.8%-rising CPI--bring ever closer the realization of the "euthanasia of the rentier."
Because zero percent interest rates, “quantitative easing,” stupendous borrowing and upwards of $1 trillion of spending have failed to reignite the U.S. economy, the administration and the Federal Reserve are weighing mighty new interventions. The case for constructive inaction.
Hypothesis: Though the sovereign debt crisis rages, the corporate credit crisis has ended. In the United States, it ended in 2009. Barring a new recession, corporate credit is likely to prove a better investment than the sovereign debt that supposedly never defaults but actually does, recurrently.
In a mid-August Gallup poll, 34% of Americans identified gold as the "best long-term investment," double the percentage choosing equities. "Gold is Americans' top pick as the best long-term investment regardless of gender, age, income or party ID." Today, at $1,800-plus to the ounce, gold is just as much a valuation cipher as it was in 1999, at $260 an ounce. Which leads us back to the question of the hour: is gold, in fact, a long-term investment of any kind, let alone the best one? Is it a bubble?
What with the United States sagging and Europe imploding, stock markets are understandably struggling. Which is not to say, however, that all is lost. In stocks--for the philosophical and patient value seeker with money to commit--lower prices have much to commend them. Therefore, let the value restoration project proceed--within reason, of course.
"The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of deflationary development," exploded Tuesday's bombshell from the Switzerland's FOMC. "With today's decision," said SNB President Philipp Hildebrand in a statement on Tuesday, "the SNB sets foot on a challenging journey. We have to accept that the costs associated with it might be very high." Don't say they didn't warn us.
According to Warren Buffett, Standard & Poors should have upgraded the United States, not demoted it. Certainly, with respect to the long-run success of the American enterprise, a quadruple-A rating, if such existed, would seem conservative. But shocked—and stunned and confused and a good deal lower—the markets are. Value investors, however, are invigorated, as cheapskates love a sale.
Forty years ago this Monday, the world lost its semi-golden dollar. Last week, the United States lost its unqualified triple-A rating. In 1971, the gross public debt totaled 37.8% of GDP. As of July 31, gross public debt stood at 94.8% of GDP. Monetary cause and fiscal effect are the subjects at hand.
"Our banks are liquid," Prime Minister Silvio Berlusconi assured the Italian parliament two Wednesdays ago, "they passed the stress tests, and Italian families are less indebted than others among the major economies." Which got us wondering: if the debt crisis is manageable, why aren’t the Italian banks rallying? And if the debt crisis is unmanageable, why isn’t the Euro sinking?
On Sunday, the European Central Bank tipped its intention to buy Italian and Spanish sovereign debt. Equities plunged on Monday, but Italian and Spanish 10 year bonds rallied by 80 and 89 basis points, respectively. Dramatic the ECB’s intervention may have been. Novel it was not.
Concerning the crisis of the federal debt ceiling, living American politicians have had their say. So have living ratings analysts, TV commentators, mutual fund bond managers, federal debt functionaries, central bankers and Chinese sovereign wealth fund administrators. Yet, for all their words—what did they say?—the situation is unresolved.
In what seems another age, people you knew would hold a stock to the end of the 12th month to qualify for U.S. long-term capital gains treatment. Nowadays, the high-frequency traders you may or may not know conduct their affairs as if there is no capital gains tax—and for that matter, no annual reports, analyst reports, 10-Qs, proxy statements, channel checks or conference calls, either. Maybe their computers do the reading.
Not for nothing do China’s lights flicker. While the government suppresses domestic electricity rates, coal trades freely on world markets. Coal-fired utilities therefore face the choice of producing at a loss or not producing at all. The consequences are the ones you might expect: rolling blackouts and rising coal inventories.
A soybean is a soybean—unless, perhaps, it’s a soybean in China doing double duty as bankers’ collateral. Nonperishable commodities have long served in that financial capacity—Chinese lenders have a special affinity for copper. But soybeans and cotton? The People’s Republic writes another chapter in the book of frenzied finance.
Last summer, this publication asked its can-do Bloomberg terminal to list the names of profitable public companies to which the sell side was paying no attention. Maybe, we speculated, investment value was present where the analysts weren’t. Herewith an update of those analytical orphans plus a look at a new set of marginalized businesses.
Growth is well and good—no value investor is against it. The question is how to define it. Viewed on the basis of gross dollars of sales and earnings, a certain mature blue chip company may look as if it were sound asleep. But divide those dollars by a constantly shrinking share count and the same company begins to resemble the stupendous Apple. On this great proposition, a growth stock guru might agree with a great value guru.
Let us say that inflationary forces will triumph (a working assumption, not a high-confidence forecast). Brick-and-mortar REITs are one coping asset, gold-mining equities another. In the past year or so, REITs have been favored, gold-mining stocks disfavored. That, however, is history.
In 2005, a certain storied American bank undertook an investment, noblesse oblige, in a certain under-managed Chinese bank. Come the Great Recession, the great American institution lost its halo, while the Chinese bank went—seemingly—from strength to strength. Deliciously, the tables have turned, but who’s solvent now?
Has the government taken the measure of the cumulative effects of the onslaught of new banking regulations over the past year? The CEO of J.P. Morgan Chase reasonably inquired of the chairman of the Federal Reserve the other day. Which prompts a question of our own: Has anyone taken the measure of the cumulative effects of the sea change in monetary affairs and regulatory philosophy over the past hundred years?
A bear on China must confront the implications of his bearishness. The cessation of Chinese growth would turn down the economic and financial lights in places as geographically far removed from the People's Republic as the United States, Brazil, New Zealand and Australia. It would deflate the reflation trade, the dimensions of which would become fully apparent only after it ended.
Curious is the European Central Bank's aversion to the facts of the intra-European debt crisis. A restructuring of Greece's sovereign debt, a high ECB official was recently quoted as saying, would be no solution but "a horror story." In fact, such a default would be especially horrific for the ECB itself.
Credit continues to heal, as tiny borrowers are admitted to the hospitality of the public high-yield market and yield-starved investors compete for the meager supply of new leveraged loans. Google and Texas Instruments borrow at interest rates not far from zero. Where to find a variable-rate 4% yield.
China's municipal debt crisis--as big a mess, as in proportion to China's economy as America's subprime mortgage bust was to the U.S. economy--is at last revealed. So, too, is the good news from America's auto-finance industry (subprime's back), as well as the deep monetary thinking of Zimbabwe's star central banker.
The less you know about the workings of the great transpacific money press, the better you probably sleep at night. Behind the veneer of reasonable equity valuations, China's banks are busily planting the next bumper crop of non-performing loans. Helicopter money flies home to British Columbia.
$100 invested continuously at 2% upon the death of Cleopatra in 30 B.C. would, by now, expand the Forbes rich list to include every man, woman and child on the face of the planet. Why this worthy endeavor didn't take root 2,041 years ago, and why it's even less likely to catch on today.
"Our customers are running out of money," the CEO of Wal-Mart, Mike Duke, declares. Inflation is always and everywhere a monetary phenomenon, as Milton Friedman adjured. But what if the people have no money to spend? High prices without the customers to pay them quickly become low prices.
"It's not the voting that's democracy," to quote the playwright Tom Stoppard. "It's the counting." So, too, with inflation. It's the calculation. Governments say one thing, the incredulous citizenry sees another. Nowhere is the gulf between assertion and perception wider than in the People's Republic of China. A kind word for some Asian currencies.
A new record set in Mitchell County, Iowa, as investors begin to outbid farmers. "It's been a phenomenal run-up," a broker attests of the great rally in Midwestern black earth, "the strongest I've seen in 26 years." Which would you rather own, land at 28 times earnings, or shares in the agribusiness ETF---ticker: MOO--at 17 times earnings?
To its congressionally directed dual mandate—stable prices and full employment—the Bernanke Fed has unilaterally added a third. It has undertaken to make the markets rise. When the S&P next breaks lower, the Fed will confront the need to bail out the innocents it had previously bailed in.
MIT’s Billion Prices Project, a daily, real-time, Web-based alternative to the CPI, shows soaring merchadise prices. Will Treasury yields, too, take flight? In 2008-09, new disclosures confirm, the Fed lent freely at tiny interest rates against poor collateral to insolvent institutions. Weep, Walter Bagehot. .
You can find insured state and local bonds yielding 8% and higher, Mark Doyle, president of Sterling Grace Municipal Securities, informed the conference-goers. When he finished, a man wanted to know if tax-equivalent yields were perhaps what he had in mind. "I'm not talking about tax-equivalent," Doyle replied. "I'm talking about tax-exempt yield to maturity. Some of the stuff is that cheap."
You'd be surprised, Michael Harkins mused before the Grant's assemblage, how many companies don't make money. GAAP-compliant earnings, they do produce, but not profits, i.e., funds "that we can take out of a business and spend on completely different things. . .and when we come back on Monday morning, we still have an asset to come back to."
In one regulatory generation, "creeping inflation" has eviolved from anathema to settled policy. Where this dubious doctrine came from and where it might be leading. "A connived-at or complaisant depreciation," declared a bold Reserve Bank president of yesteryear, "cannot be covered with the cloak of respectability."
'Core' inflation The recovery in commercial real estate is uniquely concentrated. Shiny, high-rent office towers in major coastal markets command 4% cap rates while solid, cash-flowing properties in flyover cities go bidless. "Miniature money-market interest rates distort every valuation."