Tuesday, August 28, 2007

The Upside of Declining Consumer Confidence

The Conference Board reported that consumer confidence dropped in August, giving up nearly all of its July gains.

As the Conference Board reported it ...

"A softening in business conditions and labor market conditions has curbed consumers' confidence this month. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."

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It was reported that this was a prime cause of weakness in the stock market today. Despite notions to the contrary, declining consumer confidence is a good, healthy response to the indebtedness of both the consumer, and the federal government.

Acting otherwise would be a denial of reality. For those soundly in the bullish camp, let's review some facts:
  1. Household debt at unprecedented levels;
  2. A negative household savings rate, something never seen in the midst of an economic expansion;
  3. Federal government debt at the highest levels in recent memory, and still growing;
  4. The continuing trade deficit;
  5. The prospect of a continuing decline in the currency, meaning the Fed has to continue to walk the tightrope between importing inflation on the one hand, and managing the orderly decline of the currency on the other. All the while trying to massage the debacle in the credit markets. An undertaking fraught with short and/or long term risk. Take your pick.

Yes, there's times to be confident, like when things are humming along really well. This isn't one of those times. Then there's the confidence that comes from having been in a place of despair, but when the trends are moving in the right direction. This isn't one of those times either.

Now is a time to make sure you get your own financial house in order.

Start with the basics - your household budget. Review it for unnecessary expenditures. Trim your debt levels, with the most expensive interest rates first. Save some money! Use a high yield account, or find some solid blue-chip stock prospects, or broad-based ETFs. Save (anyone remember the word?) ... save ... save ...

In short, the upside of declining consumer confidence is the ability to not to be a monkey brain - to recognize the potential for trouble (like now), and put some preventative personal actions in place. While the trouble may or may not materialize, planning and acting like this will serve you well in any case. Now isn't the time to be an overconfident consumer - its' the time to be a confident saver!

Don't be blind to reality - open your eyes, look around, think, plan, and act. Are you a monkey?


The Confused Capitalist

Monday, August 27, 2007

Distressed credit buyers opportunity?

They say it's an ill wind that blows nobody good - meaning that even in times of turmoil, there's often someone who's situation is improving.

With that thought in mind, I recalled the recent turmoil in the credit markets, and wondered what companies might benefit from this situation. Leafing through my investment scrapbook, I came across an entry I made some two years ago, suggesting that if the US debt situation imploded, that a beneficiary might be those whose business profile sound like this ...

... provides outsourced receivables management and related services in the United States. It engages in the purchase, collection, and management of portfolios of defaulted consumer receivables. The defaulted consumer receivables are the unpaid obligations of individuals to credit originators, including banks, credit unions, consumer and auto finance companies, and retail merchants. It also provides collateral-location services for credit originators, collections and revenue administration, and audit and debt discovery/recovery services for government entities.
... in other words, those who benefit from a higher default level on any type of consumer debt, since a higher level of delinquency is inevitable, given the negative savings rate of the average American family. Given that, opportunities to load up the balance sheet for these companies with cheaper than ever defaulted debt, at favourable prices, appears better than in recent memory. This could fund very profitable growth for these companies for some years to come.

Some names in this space include:

Portfolio Recovery Associates - PRAA
Encore Capital Group - ECPG
Asta Funding - ASFI
Asset Acceptance Capital - AACC
First City Financial - FCFC

This is an idea worth exploring more for your own portfolio, if you think, as I do, that the ill wind is blowing towards these companies right now.

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The Confused Capitalist

Thursday, August 23, 2007

Dividend Yield and Payout Yield

Confused Capitalist readers know that I'm a fan of dividends, and consider them to be one of the stronger indicators of a firm who's total return is likely to outperform the broader market into the future.

While the above remains true, one also has to consider the net payout yield, which is the total returned to shareholders by dividends and by the net of share issuance's and re-purchases.

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There's more and more evidence available to suggest that this is even a better predictor of excess future returns than dividend yield alone. Here are two resources in that regard:

World Beta Posting and PayoutYield.com


The Confused Capitalist

Monday, August 20, 2007

What Greenspan has wrought ... the current market environment

Barry Ritholtz at the Big Picture has exactly nailed the problems that the Fed faces in attempting to manage this market so that things remain orderly. Rather than re-iterate them, I direct you to Barry's posting.

... Pay particular attention to the "while avoiding" part of the posting, and try to think how you can construct your portfolio to take advantage of those very distinct possibilities.


Monday, August 13, 2007

WallSt.Net Podcast

Welcome to everybody from WallSt.net who came over here because of the podcast interview with Dennis Olson (Haven't heard it? Go here; it'll be on their site on Wed. Aug. 15th). Thanks to Dennis and WallSt.net.

This posting is essentially related to some stuff I talked about on the podcast.

Firstly, anyone interested in buying my book can go here.

Secondly, in terms of some of the stuff I talked about in the podcast about why this blog is a bit different than many out there, I mentioned specifically, dividend investing, and long-tail investing. Here's a couple of articles I've posted that kind of give you a bit of the flavor of these topics, here, here and here. And for those who know me and my bent towards value investing, I re-submit this evidence ...

Now, in terms of stuff I specifically recommended (either avoiding, or moving towards) ...


Real estate stocks, especially home-builders (see the reasons why, in an article I wrote in my other life) and avoid sub-prime lenders; the first for three to five years; the second for two plus years. Pessimism after that will be prevalent and then would be the time to buy. There's still too much optimism in the market.


Conversely, the really big banks are getting tarred with the "sub-prime" brush, which isn't warranted, in my view. Many of these institutions are tremendously strong, with great balance sheets and will easily weather this storm, and perhaps come out of it with better than ever opportunities. They're also paying great dividends right now, and most have raised their dividend recently. This is another sign that they are probably being mis-priced in the market. Some to look at would include:

Of course, those risk-takers might wait for the next mini-plunge which, if it occurs, might raise these yields by another 50 to 100 basis points (i.e. prices might fall by another 10-20%). However, I think they're good enough deals as they sit. Don't delay too long on these folks - "on sale" today!

Emerging markets remain a very-long-term theme that investors will be able to successfully play for a decade at least (provided the stocks don't get overpriced). On a purchasing power parity (PPP) basis, these economies currently account for about 20-25% of world trade, yet most conventional financial advisers suggest a 5% weighting or so. This is a serious backward-looking mistake. No investor with a 20 year horizon can afford to take such a light weighting in these strong growth markets.

While the conventional BRIC countries have been bandied about as "the" emerging country investment destinations, other countries also have strong profiles too. A personal favourite of mine remains South Korea, with nearly an "emerged" economy, yet very cheaply priced.

Here's some ways to play the emerging markets theme, via ETFs, in my personal order of preference:

  • Wisdom Tree's ETF - "DEM" - a dividend-weighted emerging market ETF. This ETF should prove more resilient than many emerging market investments during market corrections, while retaining most of the upside during exuberant bull markets.

  • The Claymore Investments ETF - "EEB", which is designed to provide exposure to the BRIC countries, through ADRs. Because ADR issuers tend to be large, liquid companies, this also reduces some risk.

  • The iShares S.Korea ETF, "EWY" - a narrow singly country focussed ETF.

  • The iShares Emerging Market ETF, "EEM" - a very broadly-based emerging market ETF.


I think this sector is going to have a huge tailwind going forward, something I've written about here. In later postings, I'll elaborate on how to play this trend.

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    This is tied in with several other trends, including the re-building of the industrialized world's infrastructure to make it greener (using mass transit for instance, to replace the crappy aging stock of roads and bridges).

    Also, the infrastructure build out in the emerging markets is something that's going to continue to occur during the next several decades. For instance, the Chinese GDP per head is about 1/4 of what it is in the US (on a PPP basis), while in India it's about 1/10 (PPP basis). These economies will also obviously be building out their infrastructure. Accordingly, I like some of the very large manufacturers, like General Electric ("GE") & Siemens AG ("SI"), but I especially like the engineering firms that'll obviously be beneficiaries of the design and over-sight work needed here. Some names in this sector include:

    Well, that's about all for right now - if you're new to the site, feel free to poke around. If you're a regular, thanks for coming by.


    The Confused Capitalist

    Thursday, August 09, 2007

    Car makers: Why can't they understand it's all about long-term quality?

    I see that the former embattled head of Home Depot, Robert Nardelli, has been named head of newly-private Chrysler Corp.

    According to one report, Mr. Nardelli wants to move faster on a turnaround plan announced back in February.

    I know this suggestion may come as a stunning revelation to those in the so-called "Big Three" automakers, but given that Mr. Nardelli is new to the industry, I thought I'd let him know what the problem is.

    Some 40 years after the "invasion" of the Asian car makers, the reason for the decline in the Big Three market share:

    1. isn't because they lack some fine-looking vehicles;

    2. isn't because the vehicles cost too much money (because they usually cost less than the "Japanese" vehicles);

    3. isn't because they don't win some JD Power "initial quality awards";

    4. isn't because the American or Canadian worker is lazy or no good (lots of "Japanese" vehicles are made in the USA and Canada).

    No, the reason for the decline isn't any of those reasons - it's because of the crappy long-term quality and reliability issues. People are tired of buying junk. I mean when you hear (as I have) of five, yes, five, automatic transmissions in a Chrysler mini-van (yes, driven by the sedate mini-van crowd) frying before the warranty expires, you've got to ask yourself, why? Why would I ever buy this junk again?

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    So with the aforementioned in mind, I've prepared a list of the top three tasks for Mr. N over the next five years:

    1. Improve the long-term quality and reliability of Chrysler products as much as possible in the next 1-2 years;

    2. Seriously improve the long-term quality and reliability of Chrysler products as much as possible in the next 3-4 years;

    3. Improve the long-term quality and reliability of Chrysler products to begin truly competing with the best "Asian" vehicles over the next 5-10 years;
    There - that's it - the "magic" formula for success - but why do I feel that this is just futile even mentioning it?


    The Confused Capitalist