Monday, August 30, 2010

A cautionary tale for bubblicious portfolios

What chart is this?

I am sure that a lot of you are thinking that it must be some internet stock.

Well, it could be: the chart resembles many which peaked in the 1999-2001 period. I recently looked at the stock prices for Microsoft (MSFT) - it peaked around $59 back then, and is currently in the $25-$30 range - about half its peak value. Intel (INTC) peaked in the $75 range, and is now in the $25-$30 range. Cisco (CSCO)? $77 then and $21-$28 recently.

But no, this is not from the tech sector. This is a cautionary tale of how inflated prices can get in one, or many, sectors during a bubble.

No, this is the behemoth drug maker Merck & Co (MRK). which peaked around the same era at $94 and is now in the $35-$40 range. You can pull up the charts for the other pharmaceutical giants, then and now, like Pfizer (PFE), Abbott Labs (ABT), Novatis (NVS), etc. and find the same cratering effect: most of these still haven't reached the halfway point of their bubble prices.

Have some things changed for both sectors? Sure - but not nearly to the extent implied by both a lost decade of price appreciation and, worse, price declines that could have eviscerated some over weighted portfolios.

One thing remains constant - investors, whether buying single companies or weighing into sectors via ETF's etc., have to be very cautious on the flavour of the year. Avoiding the most popular sectors, especially after several years of popularity, can be one of the best things you can do for your portfolio's health - and can help you get a good night's sleep too.

Disclosure: No positions.
On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Thursday, August 26, 2010

Investment Earworm Contest Winner - Rick

A fairly recent posting of mine challenged readers to identify the speaker of the following comment, together with the asset class he was speaking of.

The comment is, essentially, this:

Commodities wins both the optimistic and the pessimistic scenario."



Rick has correctly identified the speaker and the asset class as being Jim Rogers (the commodity guru) and speaking of the commodity asset class.

What Rogers is saying here, is that if the emerging economies continue their assent - and with it demand for commodities - then commodities prices will continue rising, even if inflation is benign. This is the optimistic scenario.

On the other hand, if inflation starts to run away, due to the extremely high levels of monetary and fiscal stimulus with continuing budgetary deficits (the pessimistic scenario), then the only thing that'll hold their value, are "real" assets, namely commodities and possibly real estate.

Congratulations Rick. You will receive your book choice, The Ultimate Dividend Playbook, shortly.


On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Tuesday, August 24, 2010

Compass Minerals International Inc (CMP) likely a future victim in climate change?

As this blog begins to grow its focus on climate change investment strategy, I thought I'd highlight a company that was mentioned in the fine Josh Peters book, The Ultimate Dividend Investor Playbook, which I recently reviewed.  In the book, Mr. Peters, of Morningstar, mentions Compass Minerals International Inc. (CMP) as then (sometime in 2006 or 2007) perhaps being a candidate worthy of consideration for addition to a dividend stock portfolio.

Compass' main business then, as now, "is highway deicing salt, so its profitability is determined by cold, snowy, or icy winter weather." So says Morningstar. 

Morningstar currently provides a three star (average) rating to Compass, meaning they perceive its total stock return outlook to be approximately comparable to the universe of stocks they cover. Owing to a wide economic moat (in this case, a low cost to bring the salt to market), balanced against other factors, is what produces the overall three star average rating.

Me - I think that Compass is an implosion waiting to happen, whether it's this coming winter season, the next year, or in three of the next six years. This is not owing to any prescient thoughts on my part about debt, customer loss, or competitors acting irrationally by pricing below the cost of production. No, I worry about the climate. Notwithstanding occasional contrary hickups, winters are growing shorter and less severe. The scientists say so, and it matches the global warming theory (first postulated by Nobel Prize winner Svante Arrhenius, in 1896).

Trying to continue to maintain salt volumes in the face of this reality, is the investment equivalent of expecting buggy whip makers to continuing to pump out similar volumes, something Morningstar apparently expects, as their quote in their outlook on growth states ...

Growth: We expect long-run demand growth for Compass' salt to be quite minimal. Earnings growth will depend on increasing sales prices and cost efficiencies. (emphasis not in original)


Note that they do NOT say they expect growth for salt to actually decline for Compass, something that can realistically be expected, unless competitors throw in the towel, and they gain a larger share of a shrinking pie. Even if that were to occur, most investors recognize the futility of fighting a secular "headwind". No pun intended.

Climate change investment strategy, as I will begin to explore over the coming while, involves a very few great opportunities, some good opportunities, and a whole lot of businesses to stay away from, unless you have the stomach for shorting stocks.

Compass is one example of a stock I'd be extremely cautious of getting involved with, especially since it is priced at roughly the same PE ratio as the S&P500.

No, if I were you, and thinking of holding Compass for a year or more, I would take Morningstar's rating, in this case, "with a grain of salt".

Disclosure: CMP - no investment position.


On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Sunday, August 22, 2010

Book Review - The Ultimate Dividend Playbook

Any investor worth his or her salt, who doesn't want to rely on the vagaries of capital appreciation to grow their net worth, and who would readily lean on the best shortcut in the world to wealth creation, dividends, simply must seek to understand them. Numerous studies have shown that dividend paying stocks outperform all other stock classes, and usually by a wide margin of 2% or more annually.

This book, by Josh Peters of Morningstar, helps the investor understand the case for dividends, and how to select individual stocks for a modestly diversified portfolio. While many investors may think dividends are suitable for income investors only, the fact is that dividend paying stocks should be a or the major stock holding style in most investors' portfolios.

Why? Well, as Josh points out, it's very simply because they outperform most other stocks, and generally with reduced volatility. So, it's a more stable, higher-returning investment. What could be better than that?

As Josh points out, dividends are a sign of many things investors like to see:
  • An alignment of managements and the investors interest (return of, and return on, cash);
  • Corporate self-discipline (have to keep grinding out the cash to pay and grow the dividend);
  • Financial strength;
  • And a Valuation basis (dividends can show when a stock is overpriced, and underpriced).
Josh covers economic moats, which he likes all his dividend-paying stocks to have, as well as return on equity (see his book, or mine, on why this is important). He suggests looking at the trend of the dividend (the trend is your friend, in terms of projecting the future), so see how the dividend might grow into the future.

He covers handy items like payout ratios, high yielding stocks (generally, be careful) and high payout ratios (look out if ratio has been continuing to rise).

In the book, Josh covers especially two items that make the book an entirely worthwhile addition to any investors bookshelf: the dividend drill, and the dividend drill return model.

The dividend drill focuses on three items;
  1. Is the dividend safe;
  2. Will the dividend grow;
  3. What does the dividend stream tell me the stock is likely to return to me as a shareholder?
Attempting to answer these questions will help you decide whether or not a prospective stock investment is one that you can or should add to your portfolio.

In relation to #3 above (the total return from the stock), he also introduces one very handy shortcut (and investing is full of them, from PE ratios, to inventory turns, to PEG ratios). Think about the potential of the total return of the stock as the sum of the actual dividend yield, plus the likely growth rate of dividend over the next while, say ten years.

A couple of simple examples showing how the total return might be different for two stocks, is that one might be yielding a 5% return, and has recently been increasing the dividend by about 4% annually. If you think that increase would continue over the next decade or so, then the likely total return on that stock would be about 9% annually (5%+4%). In the case of a stock which has a lower initial yield, but is increasing the dividend more rapidly, the projected return might look like this; a 3% dividend yield, plus expected future dividend increase at 8% annually, suggests an 11% (3%+8%) total return.  The book is full of handy advice like this, written in a straightforward and uncomplicated style.

The book also details the more complicated (but not complex) Dividend Drill Return Model, which encourages you to think more deeply about the company and its prospects. Yes, it's more work, but relies only on elementary/grammar school arithmetic, so it's within the reach of virtually any investor.

I highly recommend this book, and thank Josh Peters for writing it. The information is handy, practical, simple, and timeless.

The Confused Capitalist

Monday, August 16, 2010

Retail Investors Indicate Bonds are lousy deal right now ....

The retail investor has long been a contra-indicator of what's truly both a timely and good investment ...

Firstly, they often have trouble knowing the difference between a savings vehicle (holding time frame of under five years, generally; and very low expected return) and an investment vehicle (holding time frame of over five years; and relatively high expected return).

Add to that the mistiming of buying and the comedy of errors reaches Shakespearean proportions. 

Municipal bond mutual funds that report their figures weekly reported $953.9 million in new money from investors during the week ended Aug. 11, according to Lipper FMI. That was the biggest weekly inflow since March, and heavier than all but 33 inflows since Lipper started tracking the data in 1992 — 970 weeks ago.

AND

Solender said because expectations are that the Federal Reserve’s target for interest rates will remain near zero well into next year, people are growing increasingly comfortable with the yields offered on municipal bonds — even though they have never been lower. (highlighting not in original)

The yield on a 10-year triple-A rated municipal bond sank below 2.5% for the first time last week, according to Municipal Market Data.

Article here

_____

As opposed to that, IndexArb reports that the current average dividend yield of all the S&P500 dividend-paying stocks is 2.51% (with a reasonable expectation of future dividend growth), yet the retail investor saver piles into the bond market, potentially locked into a 2.5% yield for 10 years.

Yikes!

The Confused Capitalist

Friday, August 13, 2010

Management Tinkering

The management of this blog is tinkering with the layout ... feel free to comment and let me know what you think ...


The Confused Capitalist

Thursday, August 12, 2010

Commodities Report

As predicted, wheat prices did indeed jump following the latest USDA report. Given the issues with flooding (1, 2, ) in other parts of the planet, eg South-East Asia, we can probably expect more upward price pressure on foodstuffs in the short-term.


Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!JW The Confused Capitalist

Investment Earworm Contest

Ever get a music earworm? Sometimes it happens with other things too.

As readers of this blog may suspect, my most prolific posting often comes when I am also doing the most investment reading. Obviously, one of those times is now.

The many earworms of Warren Buffett have worked on my investment thinking over the years. However, I recently caught another investment earworm which I just can't shake, because it seems to make far too much sense.

The investment earworm is, essentially, this:


.... (this asset class/type/sector/leaning) wins both the optimistic and the pessimistic scenario."

This was a recent utterance of a well known investor. The first one to name both the asset class/type/sector etc. and the investor, wins their choice of either of the two following good investment books:























Please post in the comments section, and I will monitor for the winner. The contest is open for the next two weeks - limit of one entry per day per person.


Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!












Wednesday, August 11, 2010

Outperformance comes many ways

There are many ways to outperform the general market, some adding incremental value here and there, such as finding undervalued individual companies, or staying away from seemingly overvalued sectors (bearing in mind of course, that over [under] valuations can stay that way for very long periods of time).

However, the one of the seemingly most riskiest ways is to find an unacknowledged secular tailwind, and ride it to outperformance. These are always present, but difficult to figure out how much return they'll produce, and how long the ride will go on for, or even when it will begin.

In some cases, like the tech sector beginning in the late 1980's, should have been very visible to figure out, and ride it for a very long period of time. Some, like the hard commodities boom, beginning in the very late 1990s, were a bit tougher to figure out, given the nearly two decades of very weak performance in that sector. Even if you figured it was on the cusp of a long term revival, it would have taken considerable courage to move against the thinking that had solidified over two decades: namely, that this was a poor investment area.

Today, soft commodities (eg foodstuffs, generally) and emerging markets (both personal holdings; GRU, RJA, DEM), seem like excellent bets to overweight a portfolio in, something I have been writing about for three years or more now. Will these bets produce the outperformance I think is available there?

When thinking about these types of potentially big portfolio moves, it might hearten you to think about what one of the deep management thinkers of the last century, Dr. W. Edwards Deming had to say about the unknowability of things .... which can reverberate in investment thinking ....

"The most important things cannot be measured."

"The most important things are unknown or unknowable."


Given that Dr. Deming was a statistician who preached quality improvement through process management and statistical output measurement to the ready post-war Japanese, the first comment might seem surprising, but he is simply acknowledging a fundamental truth. The quality of management, their philosophy, for example, simply can't be directly measured. These are, however, long-term drivers of corporate success.

The second comment simply builds on the first, and speaks to the relative unpredictability of the future, trends that may be building below the surface, or simply events that are virtually not predictable.

If you can keep these thoughts in mind, long enough to take advantage of the trend you have researched, thought about, and are willing to take a flyer on, then you too might enjoy outperformance in this way.


Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW The Confused Capitalist

Tuesday, August 10, 2010

John Hussman - Valuator extraordinaire?

A short while ago, I chided Dr. John Hussman for not properly considering the increased demand for stocks in a posting of his, and for suggesting that a 6.7% annual return was inadequete for stocks.

However, I also have to note that some of his prior predictions are, so far, spot on track. In February 2005, John suggested that a valuation trend for the next decade, suggested a potential return, based on historical average and median trends, portended a 2 to 3% annual return over the next decade. To date - five and a half years in - after adjusting for dividends, the SPY SPDR (S&P500 index) has produced an annual return of under 1%, while the DIA SPDR (Dow Jones index) has produced just 2.5% annually. While John may seem like a perma-bear, you would be unwise not to consider his thoughts on various valuation issues.



Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW The Confused Capitalist

Thursday, August 05, 2010

Big price jump following next crop report

The next major USDA international crop report is due August 12, 2010. Watch for a big jump in prices thereafter ... surprise to the upside folks (unless you are a humanitarian, in which case you'll consider it as a crash to the downside) ...


The classic definition of inflation, as I remember it from my college days, is "Too much money, chasing too few goods." Most concerned with inflation these days have all the argument on the "too much money" side of the equation - does it arise from monetary issues, or fiscal imprudence? They totally forget the other side of the equation, because it rarely is the problem - the "too few goods." Watch for this to be the difference in the coming years, as agricultural production declines ("too few goods") begin to become part of the "new normal".

Quote of the day:

Global warming will be the most important investment issue for the foreseeable future. But how to make money around this issue in the next few years is not yet clear to me. In a fast-moving field rife with treacherous politics, there will be many failures. Marketing a “climate” fund would be much easier than outperforming with it.
- GMO's Jeremy Grantham

As a side-bar note, I get tired of dealing with dum-dums who, for reasons of mental and emotional convenience, want to continue denying global warming. The comment forum is open as always, but if you disagree with what real, professional climate scientists say, please take it up directly with them. If you have a stunning piece of scientific evidence that disproves one side or the other, don't waste time on my channel, write a paper, get it peer-reviewed, and then published in a reputable journal.


Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW The Confused Capitalist

Tuesday, August 03, 2010

Wheat Prices Jumpin' - Global Warmin' to blame

Has anyone been checkin' the news lately 'bout wheat prices - they's a jumpin'.

Hello people - is anyone really gunna start to take gobal warming seriously - like the massive crop failures; forests a burnin' everywhere... Or are we gunna continue to pretend everything is alright?

We are a seriously fussked up species ... not a happy camper today ... no ... just start clicking on the various weather network reports, and crop reports ... you wouldn't be too happy either ... if any of us had half a brain, or half a heart ... we might be inclined to takle this problem ... strawberry fields forever people ...

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW The Confused Capitalist

Monday, August 02, 2010

Can't see the forest for the trees

I couldn't decide what to entitle this post, but ultimately settled on the above caption. Leading contenders were ... Looking backwards doesn't help you going forward ... Driving by the rear view mirror a recipe for disaster ... I'm a tree hater ...

Anyway, the theme here is trees and thinking about the future ... I've recently read many articles suggesting forest land has historically been a good investment, and is a good hedge against inflation. The fact that big institutions like Harvard and various hedgies like it, obviously isn't too bad for leading the "me too" crowd to think it might be a good investment. I have to say though, that trees scare the crap out of me.

With global warming accelerating, as anyone who lives in a moderately dry forest belt can tell you, the idea that you can get a reliable return from forest land/trees is an open question in my mind. As I have watched our summer "weather" grow to include a period of smoke haze for one or two weeks, from fires near and far, I have to tell you I don't think the prospects are promising. If invested in a single specific company, you could well see your total investment wiped out or severely impaired by a major forest fire; the number and severity of fires seems to be rising rapidly. The open question relating to risk/reward in my mind is this:

  • Will the increased prices for the remaining trees be sufficient to offset the obvious forest wipe-outs that are going to occur?
I am doubtful that sufficient price escalation will occur (or if it does, it'll be so high that it will foster the production of substitute products) and is contrasted against the possibility of severe value impairment on any particular specific forest asset as it burns down. In my mind, on a go-forward globally-warmed planet, I can't think this is an investment I want any part of, at this time.

However, if you are only thinking about the past, driving by the rear view mirror as it were, then you would be likely to miss the impact that global warming might have on such an investment.

NEWS FLASH: Russia is dealing with its' hottest recorded summer temperatures, and one-quarter of a million people have now been deployed to fight forest and peat fires.

As a side-bar note, I get tired of dealing with dum-dums who, for reasons of mental and emotional convenience, want to continue denying global warming. The comment forum is open as always, but if you disagree with what real, professional climate scientists say, please take it up directly with them. If you have a stunning piece of scientific evidence that disproves one side or the other, don't waste time on my channel, write a paper, and get it peer-reviewed and published in a reputable journal.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW The Confused Capitalist

Sunday, August 01, 2010

Employee compensation still seriously messed up

No, this isn't an issue with your average unionized or non-unionized shmo worker. It's a complaint about the "man at the top", the CEO, CFO, CIO, CCO, CRO ... (OK, I made the last one up) ...


It's about board's doing their duty to the owners of the company, even if they are transitory traders, and making sure that the pay of the high level executives are reasonable. What is reasonable? Weeeell, if you need an executive compensation firm to provide you some base thinking around that, then you are too dumb to be a director. So please quit now.


When the compensation levels begin to look like some stratospheric sports hero - overpaid but at the peak of his game - you are paying far, far, too much. Pay them in shares that must be held for long periods of time, in addition to a reasonable base salary. And everything measured on performance, relative ONLY to the industry they are in. Did I really need to tell you this? Grow some balls, as my kids say, and do what is right. Stop looking for an executive compensation firm to give you the dirty, so you can continue do what is wrong about Wall Street.


Want to feel good about yourself? Stand up for a principle for a change. Me, and other shareowners, are begging for it. Stop gold-bricking - both the board, and for the overpaid executives.


Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!







JW The Confused Capitalist