Too harsh - Johnson & Johnson stock price

Fund manager Eddy Elfenbein, over at Crossing Wall Street, has recently been on about the dividend yield/stock price of Johnson & Johnson (JNJ), which is currently yielding about 3.8% on a forward basis. Johnson & Johnson is routinely cited for winning various awards involving titles like "Most Admired Company ...", or "Best Managed ...".

While the JNJ stock price recently stumbled on a revised outlook for the year, investors should remember that this is a very robust and diversified business that has had a long history of growth. To be able to acquire such a nice dividend stream (and at only a ~40% earnings payout ratio), together with acquiring a nice robust business is an attractive prospect indeed.

Morningstar provides a description of the business as follows:

Johnson & Johnson holds a leadership role in diverse health-care segments,including medical devices, over-the-counter medicines, and several pharmaceutical markets. Contributing about 40% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including rheumatoid arthritis drug Remicade. The medical device and diagnostics group brings in more than 35% of sales, with the company holding controlling positions in many areas, including DePuy's orthopedics and Ethicon Endo-Surgery's surgical devices. The consumer division largely rounds out the remaining business lines. The 2007 acquisition of Pfizer's PFE consumer business solidified Johnson & Johnson's position in this market.

They currently award it a five star rating (their highest, suggesting out-sized returns going forward), provide a fair value estimate of $80, low uncertainty rating, and indicate it is a wide moat business.

IndexArb currently calculates the average dividend yield of the S&P500 at 1.8% for all index companies, and 2.5% for just the dividend paying ones. Investors should ask themselves if JNJ is really worse than the average S&P500 company? (Not!)

Eddie is right: notwithstanding a minor bruise or two, what's not to like about this company, and especially the stock, at this price ($59; 3.8% dividend yield)?

Jay to Stock Market: "Man you are harshing me out!"

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JW The Confused Capitalist

Automatically generated links follow

Cranky Barry Ritholtz

Sure, Barry Ritholtz is cranky about the palaver of the unthinking about the Goldman Sachs case.

Oh, by the way, he's right.

The case did turn out to be a slam-dunk, otherwise the settlement would never have occurred so quickly, and for such a large amount.

The fact that the fine is a fraction of GS earnings is completely irrelevant as Barry points out.

The outflow of the case is now such that the initial beat-down on the stock from ~$180 to ~$130/share was perhaps due in part to the compelling case that Barry made. While I don't recall Barry mentioning any potential fine or settlement figures, now that those figures are known, and assuming that civil liability is held to under 10x that amount, suggests that the beat-down on the price was just about right.

Industrial strength caution: That assumes, of course, that the same unthinking commentators are right about that 10x being the maximum figure.

No matter what, if you thought about it for even 5 minutes, you'd realize that a case of "malfeasance-corporate-lite" isn't all that shocking today, nor was it really likely to damage Goldies franchise by much. After all, making money with an occasional touch of dodgy behaviour isn't like withdrawing from the "Bank of Fidelity" in marriage; money flows where money grows. And Goldie remains a powerful money tree.

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

Automatically generated links (might or might not be relevant):

The New Normal - Low Returns

Many commentators have commented on the "New Normal", a paradigm in which returns from the two main assets classes, bonds and stocks, are poised for, perhaps years of low returns. Perhaps as low as 3-5% for a decade, in which the rich economies are nursed back to health, and before emerging economies begin to add lots of consumer demand. Add to that the sickly real estate market, and it's tough to see where decent future returns can be generated from.

This is true, particularly if your portfolio looks "normal" or average. Stuffed with a few mega cap stocks, or broad S&P 500 equity exposure, and a bit of bonds here and there, it's likely your returns will fit the New Normal profile.

To the extent that you move away from that normal profile, adding growing small cap companies at reasonable value, adding emerging economies companies of all sorts, leaning away from the popular sectors, and loading up on dividend growers, is the extent to which your portfolio won't be bedridden by the new normal.

You are only confined to the New Normal paradigm, if that's how you orient your portfolio. The easiest of all of these two components to begin swinging away from average are emerging market ETFs, and dividend-growing companies. The other suggestions take more effort and also entail more risk, but can help diversify your portfolio.

One other thing I am a firm believer in is adding some exposure to food commodities, either directly through ETFs/ETN's, or indirectly through companies operating in the farming sectors. The longer term picture is a compelling investment theme, one which has been disguised by the general economic weakness and crisis over the past two and a half years. That won't last forever and, likely, not even for that much longer on a go forward basis.

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!JWThe Confused Capitalist

Do we ever learn. As seen through the "Big Fish" Movie

I was watching the movie "Big Fish" last night (released in 2003), directed by Tim Burton, with Jessica Lange (as Sandra Bloom) and Albert Finney (Ed Bloom) as the lead characters. At one point, the dialogue absolutely grabbed me in reference to the 2007-2009 credit crisis origins.

Scene: 1970s - Albert Finney has just robbed a bank as an unplanned accomplice of the poet Norther Winslow (played by Steve Buscemi). The vault however, which Finney inspected, was empty:

Dialogue:

Buscemi: Yeah! There's gotta be close to $400 here! And that's just from the drawers. Let's see what you got from the vault.

(looks in the vault bag)

This is it? The whole vault?

Finney: I'm afraid so.

Buscemi: It's got your deposit slip on it.

Finney: Well, I just didn't want you leaving empty-handed.
There's something you should know. The reason they don't have money...
I told Norther about the vagaries of Texas oil money...

...and its effect on real-estate prices...

...and how lax enforcement of fiduciary process...

...had made savings and loans particularly vulnerable.

Hearing this news, Norther was left with one conclusion:

He should go to Wall Street. That's where all the money is.

I knew then that while my days as a criminal were over...

Thanks for the hand!

...Norther's were just beginning.

When Norther made his first million dollars...

...he sent me a check for $10,000.


I protested, but he said it was my fee as his career advisor.


************

Substitute "oil money", for "ridiculously low mortgage rates for an extended period of time" and you have a perfect apt description of the culmination of the sub-prime lending crisis.




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!JWThe Confused Capitalist

What diversification is and isn't

(Note: During a crash - all movements become highly correlated)

A few recent readings about the crash of '08-'09 has led me to this post. Investors wishing to diversify away from all market volatility are foolish indeed (an impossible task); it can't be done at times of violent market movement. Investors panic en-masse in those times, so traditional measures of relative correlation totally dismember.

What diversification does, is during relatively normal times, involving single stock fluctuations of 30-40% per annum (eg normal variations), is produce more stable returns during those periods. Even during some periods of somewhat greater than average relative market strength or weakness, it the chance for those non-correlations to hold together, producing those more stabilized returns, that most investors prefer.

During times of market stress or extreme giddiness, only YOU can provide the non-correlation to market averages: keeping your head about you and increasing (decreasing) your market exposure during periods of violent downdrafts (irrational exuberance).

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!JWThe Confused Capitalist

Market Decisions - Process

1. Process
   
   This is #2 in the Market Tremors series.
   
   In the last posting, I stated that few retail investors ask and answer the right questions before portfolio construction, with the result that they panic during both bear and bull markets. This panic, whether due to significant market decline or portfolio lag, is the cause of most market underperformance. That is primarily because the investor panics and begins chasing the wrong asset class, at the wrong time.
   
   I suggest that all investors need to deal with these five questions, in order to have a good chance to outperform the market:
   
   1. Process;
   2. Rationale;
   3. Emotions;
   4. Holdings;
   5. Market Exposure
   
   Today, we are looking at Process, through the lens of my own recent portfolio reconstitution. Here’s how I define Process:
   
   What process and tools did I use to construct this portfolio?
   Have I given myself an edge in some way?
   
   Firstly, it’s rare that any long term market outperformance is possible without a decent process. If you’ve been outperforming the market without a specific process, then you better chalk it up to luck – and just like in the casino, it’s not likely to last. If you’ve luckily lurched from stock tip and suggestion and back to the same, better quit now and put your winnings in your pocket. Stop now, build and define your process.
   
   While I don’t suggest my process will fit everyone, it fits me. Here’s mine.
   
   First, I admit with my time constraints, I just don’t have the time to delve deep into the annual report of every corporation in the areas I have chosen. I used to do that when I bought just small and micro cap stocks, but have neither the time nor the desire to orient my portfolio that way anymore.
   
   Instead, I use quality “buy side” analysts who have my interests at heart (unlike the conflicted investment banks and their ADHD analysts). Therefore, I extensively use the Morningstar database to find stocks that might interest me.
   
   Using their database, I screen for stocks based on both “moat” (barriers to competition) and largest discount to fair market value.
   
   Second, I require all of the stocks I select to have a moat, and preferably a wide moat. I want that implicit margin of safety. I also require that all of the stocks I buy to have some margin of safety in terms of the pricing – the lower the stock price relative to their fair value estimate, the better. Also, I generally want to buy a four or five star rated equity, which, according to Morningstar’s data, have on average significantly outperformed the market over a relatively long period.
   
   I also check this rating with the S&P report (another buy side rating agency), to see if it’s roughly similar. Again, they report that their four and five star rated equities have significantly outperformed the market on average.
   
   Third, I also require that the equity be paying a dividend. I am looking for both an above average dividend yield, and recent history of dividend growth (or the possibility that is about to occur). Given the long-term outperformance of dividend-paying stocks, as further boosted by those providing dividend growth, I consider this one of the edges I use in the market.
   
   Fourth, when looking at the truncated financials, I look for above market average returns on equity and capital (assets), as both are long term drivers of stock price growth. I look for decent earnings per share growth. I also look at overall financial health of the company, accepting a “C” Morningstar rating at the lowest, but looking for better if possible. I also look at the PE ratio to see if that is a relative bargain.
   
   In terms of my ETF selection, I use a much more “gestalt” process – I usually pick specialty ETFs in areas I think there’ll be considerable growth into the future. Here, I use my general reading, and just plain thinking about the future, to orient towards those ETF buys. I also try to envision those ETF buys ten years out, because that’s my projected holding period in that instance. I look at the valuation ratios but, given I perceive these as the growth portion of my portfolio, are somewhat less concerning than in the stock selection (which I perceive as the value oriented portion of my portfolio). However, I also check relative value measures, like the PE ratio, to ensure I’m not buying the NASDAQ index circa 1999, with a PE of 100.
   
   Now, the final piece of the process is to print up all these materials I’ve compiled, together with any handwritten notes on the reports. I then do a very brief summary on the equities selection, such as dividend yield, Morningstar ratings and percentage of fair market value the equity is selling at, and a brief narrative overview, including PE ratios, value drivers, exposure to the US market, and/or other odds and sods. I do the same for my ETFs.
   
   Next we’ll look at “Rationale”, which will be published next.
   

JW

The Confused Capitalist

(Reprise series from 2008)

PIGS - Market Tremors

In my family of origin, reading something you thought interesting to a sibling, parent or child was a sign of love and affection, as well as a way to stay connected and to expand your world. Receiving one of those readings was taken similarly.

So, on a recent trip, I asked my wife to read to me, as I ground it out for the fifth hour on the freeway on our way there.

“Read what?”, she asked.

“The business pages, please.”, I replied.

But then I glanced down at the paper and saw the front page headline – “Markets Pounded – PIGS to blame”. Knowing my wife’s market nervousness, I told her to skip the reading. Instead of it being an enjoyable pastime for us both, I know she’d be pounding me with questions about our holdings, feeling sick if we lost anywhere near the average and dismal if it was more.

Which brings me to the point of this exercise: she reacted just like many people do. At a sign of market decline, they seriously question the market in general, and their holdings in particular.

Unfortunately, it is usually only at times of market extremes like these that people begin ask these questions, and it is usually in this order:

1. Market Exposure – Am I comfortable with the levels of equities I hold?

2. Holdings – What are my specific holdings – what is their orientation, what is their risk profile? How much am I counting on “the future” (potential growth of earnings etc.), rather than “the past” (historical earnings, etc.)?

3. Emotions – What is my emotional readiness to handle declines or lags in my portfolio, without changing strategies?

4. Rationale – What was my thought process for assembling this particular portfolio, and how well will this rationale hold up if market conditions are reversed?

5. Process – What process and tools did I use to construct this portfolio? Have I given myself an edge in some way?

In a bear market, the predictable answers to #1 and #2 are “I have too much equities – I need to lighten up”, and “I have too risky holdings, I need to sell”. In a bull market the answers are of course reversed. Typically, whether in a bull or bear market, few bother to get around to questions #3, #4, and #5.


If you want to outperform the market, aside from being willing to assemble a portfolio that looks unlike the market – and all the perceived and real risk that can entail - you need to spend considerable time on questions #3, #4 and #5.

In fact, I believe you need to reverse the order of asking these questions. That’s because they form the long-term framework for sticking with your ideas. And retail investors are notorious for dumping both their strategies and equities, just as market conditions begin to favor those very equities and strategies.

So, over the course of the next few postings, we’ll look more deeply at all these questions, in what I regard as the proper order (1. Process; 2. Rationale; 3. Emotions; 4. Holdings; 5. Market Exposure).

(Reprise series from 2008)

The 5 W's (plus 'How') in Investing

A recent story in Canada's Globe and Mail, by Tom Bradley, President of Steadyhand Investment Funds prompted this blogging.

Mr. Bradley's story contends that most mutual fund investors are far too complacent when there has been a change of managerial talent at the head of a fund (or a merger into another fund), as this may produce a radical change in investment style - a style which perhaps does not fit into your risk profile or asset allocation plans.


"Sometimes the investment approach has a history and is more enduring than any one individual. At Burgundy and Beutel Goodman for instance, the investment teams are fine-tuned from time to time, but the approach never changes. The “who” is important, but not as much as the “how.”

So every change is different and they don't all necessitate the client taking action. But like my old institutional clients did when there was a significant shift in investment philosophy, people or business practices, you should at least put the fund on a watch list. In a well-constructed portfolio that holds between five to eight funds, every slot has a purpose. If someone else is making changes to it, you need to pay attention. "


Mr. Bradley's comment covers a couple of the W5 (& "How") questions you should ask when allocating to your portfolio. What is left unsaid, is the larger question of "Why?"

I would ask "why" invest in mutual funds today? If you don't know the difference between MER and REM and don't know the pain of one of them, and the beauty of the other, then you shouldn't be investing in mutual funds (other than index funds). What you should be doing is setting up a risk profile, a broad asset allocation strategy, then seeking the lowest cost method to accomplish that task (hint - see MER).

I have written many times on couch potato portfolios, and the rationale for, and outperformance of, them remains as strong as ever. For most equity investors, an EFT or index portfolio with equal measures of:

1. Their home country index;


2. Emerging market exposure;


3. US index;


4. International index; and


5. One speciality index (here's where you get to "freestyle") ....

should be sufficient to match or better the market in the long haul. Control of risk, and costs, as always, remain key. A low cost, low turnover, portfolio constructed per above should ably help with both criteria.

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

US Dollar Strength - DO NOT be complacent

As I have written several times in the past few years, it seems obvious that the US dollar is poised to continue its long-term descent that started a half-dozen years ago.

A presentation I watched today, put on by the IAAO, reminded me of this once again - it seems inevitable the currency will continue it's decline, given the amount of debt the US government is currently taking on.

Time immemorial has shown that the temptation for a government to inflate it's way out of external-owed debt - denominated in national currency - is too tempting for most governments.

Expect the US to follow the same path - be wise and move some of your assets out of USD denominated investments, or at least into hard assets that historically have shown some resistance to "inflation-depreciation". Think real estate, oil, gold, minerals - generally, "hard assets". The first path is usually better (movement out of the currency entirely), but the second path allows you to hedge your bets, should the currency not decline as (much as) expected.

Many commentators have commented on the fact that Treasury bills are currently well oversubscribed, meaning there is currently much more demand than available bonds. They perceive this as an indication of health of the US finances, and foreign appetite for such debt. This is a short term trap, based upon investors seeking the most liquid assets during times of turmoil. Neither will last - diversify now.

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

Proposed securitization rules

I see that the administration has come to some roughly similar conclusions as me, in regards to reducing incentives to willy-nilly securitize crappy loans. Have they achieved the appropriate balance between efficiency of capital, and systemic risk reduction and system redundancy?

According to reports, the administration intends to reduce the vile habit of bankers throwing crappy loans through to unsuspecting investors (imagine, investors EXPECTING banks to have performed some sort of reasonable underwriting in the first place).

It appears that the administration intends to force the underwriting firm to hold at least 5% of the securitized loans through to completion, and further disallow firms to immediately book securitization profits. Instead, they would book the profits as the loans matured and would have that securitization income reduced if the loans performed badly due to weak underwriting standards.

While this is not quite as good as the 15-25% loan book hold-back I felt would be prudent, this is certainly a large step forward.

The 5% hold-back still amounts to 20 to 1 leverage in effect, atop the normal leverage that banks enjoy. Given banks particularly important place in our economy, I am not sure that is prudent enough.

While this is not quite as good as the minimum 15-25% hold-back, it is a large step forward from existing standards - yet I am still left wondering whether this is not a half measure.

I'm therefore hopeful that FASB rules will further help to dampen the capital leveraging effect through some proposed rules, yet to be issued.

Now, of course, reforming executive pay remains a important topic which needs serious attention in order to also reduce further systemic risk.

This is something I have written about previously, and that my internet "colleague", Rick Konrad, at Value Discipline, is writing about in greater detail.

I encourage you to visit his blog, read some of his posts (1, 2, 3) on the matter, and to add your voice by sending your elected official a quick email (find your congressperson here, find your senator here) encouraging such reform.

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

Thinking ahead - planning your investment game

The last time I wrote, it seemed like the global economy generally, and the American economy in particular, was in for a serious bout of greacession.

However, the coordinated global attack on the economic slowdown and banking sector crisis appears to have had some effect with, most importantly of all, confidence being restored. That's not to say there won't be some washouts in the road ahead, but most commentators seem to agree that "The Great Depression, Redux" just won't happen at this time. Opinions on the severity and remaining length of the recession in front of us, and the inflation to follow (or not!) now seems to be the subject of debate, rather than the collapse of the economic system itself.

With all that in mind (or not) and remembering that the most important aspect of investment is the right temperament, here is an investment clock that can suggest various investment timing to be had in the cycle in front of us. Whereas it can often be quite difficult to tell exactly where in the cycle we are, at this time it is unusually clear, at least to the extent of knowing that we aren't in the boom phase, nor have we really reached recovery yet. We appear to be, undeniably, in the recession phase at this time.

Therefore, if you like sector rotation and feel you can use it to your advantage, then this Merrill Lynch clock should be very handy at this time.

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

Officially, we are looking at GREACESSION

Well, it now seems clearer and clearer that this economic period going forward is going to be very tough sledding for some time.

It might be a year or two more, it might be four or even six.

What it isn't, it is becoming clearer and clearer, is a garden variety recession, which usually lasts two to six quarters of consecutive GDP decline.

Yet, to reasonable people, all signs and current actions do not point to a "Great" Depression. The hungry 30's were characterized by unemployment in the very high teens, possibly into the mid-20s, accompanied by significant deflation. And it lasted nearly ten years. Alternative "great" depressions in other eras have featured also high unemployment, and hyper-inflation. And they also lasted for a long period. Like what Zimbabwe has been suffering through since 2000.

No, what we appear to be in for here, is a "Great Recession", a "Greacession", if you will. A period of moderate GDP decline for several years, likely accompanied by moderate deflation. Unemployment will likely settle in the range of 10-14%, and stay there for several years.

Yes, the Confused Capitalist has officially recognized that the Greacession appears the most likely outcome of current circumstances.

"Greacession".

Remember, you heard it here first ... "Greacession"




JW

The Confused Capitalist

Long term value? Or frightened professionals?

I'm a fairly avid reader of various financial blogs and financial newspapers. Many of these blogs and the news reports relate to people who make their living in the stock market world.

I've noted a big theme among them - over the years, these professionals on the whole claim to be stock pickers who concentrate on "long-term value creation. Very few of them at or near the market highs said "Whoa, stock prices are pretty high - so I've got my fund positioned in 50% cash". There were a few notable exceptions of course, but mostly the long-term investment mantra remained chattered amongst the investment class professional masses.

Now that the market dropped, some of these same investment managers talk about "nibbling" on some "good" stocks, or "scaling" back into the market.

I'm confused! If the market was good enough for you when it was 60% higher than today, then doesn't your long-term value creation model hold intact? Or is that only palaver you dole out when the market is high, and you run scared just like the general public when the market is low?

Just asking.




JW

The Confused Capitalist

Obama's Approval Ratings Will Fall, unless ...

... unless he opens his presidency with (and continues) communicating directly with voters on the number and severity of problems facing the US. Too many people simply aren't aware of how serious the problems the US faces are, and their expectations will be (are?) far too high on what can be realistically achieved in a relatively short time frame.

As I consider it, there are many very serious issues that need attention over the next decade, and it's doubtful that even the most remarkable president would be able to fully turn "the good ship USA" around in that time on all of them. However, turning it does need, and if process can begin even on a handful of these items over two terms, then the future - which currently looks grim indeed will begin to brighten. By my count these items include:

1. Global climate change initiatives - only the most idiotic "flat-world" person would argue that this doesn't exist, or need serious attention to ensure simple survival;
2. National debt - now standing at around $80,000 per family and continuing to grow - this will continue to eat further and further into expenditures - a nasty "positive" feedback loop;
3. Repair of the seriously decaying national infrastructure (don't do more of the "same old, same old", but consider in conjunction with point #1 above, to ensure that the right kinds of infrastructure gets built - i.e. mass transit, bullet trains, implementation of geo-thermal as standard heating for national building codes, etc.)
4. Future style and cost of US intervensionism - perhaps using the military as a last resort is not that cost effective, and there are other ways to achieve the same goals, if a longer range view is taken (i.e. expect that policy decisions won't be immediately visible, but that total cost will be lower and long term results more satisfying);
5. Social security and medicare reform (reform both so they are based on proper actuarial accounting, so that future users of the service are paying the correct cost today) - the current "pay as you go" isn't sustainable into the future and burdens tomorrows young people with an effective "tax" from yesterday's workers;
6. Educational reform - approximately one-half of the nation’s entering postsecondary students do not meet placement standards and are not ready for college-level work and US students international performance is weak;
7. Current economic crisis;
8. Health care reform (any wealthy modern industrial country wherein 20% of its citizens lack medical coverage has to be viewed as a societal failure [please, think about the children before you add commentary about "choice"]);
9. Growing income inequality (a major prerequisite for a long-term stable society is some level of income equality).

The current addiction to short-term fixes won't help in this instance - rehab is needed to face these challenges square on. Whether the US, collectively, is ready to look in the mirror and face them, is yet to be seen.

Well, that's my litany - for a 30 minute video from Juan Enriquez detailing some of these problems, visit this link.

JW

The Confused Capitalist

Bigotry Alive Still

The tearful responses of many prominent black people after the election tells me that a great many of them have personally endured some amount of bigotry during their lifetimes. I suspect that had a women been elected president, the response would have been far more muted, as many of the most important gains made by women happened mostly decades ago.

Just as an Asian friend of mine was able to point out nuanced bigotry during a speech by a poorly chosen MC, acknowledging lifetime achievement by a great college teacher of mine, Dr. Fred Young, so too are many minorities sensitive (sensitive in the positive sense in that they are actually able to see something that exists) to bigotry.

I sincerely hope that racial reconciliation continues to occur and that people of all races, ages and faiths continue to open their hearts. May the promised land grow ever closer and closer.


JW

The Confused Capitalist

Two years out: Deflation or Inflation?

Everybody is talking about deflation these days as the flavour of the month. Commodities guru Jim Rogers makes the point that - virtually always - inflation follows monetary stimulus ... buy hard assets he recommends, to deal with the inflation which will inevitably follow the very significant stimulus being added world-wide to deal with the banking issues/financial crisis.

He says they are printing "gigantic" amounts of money, and "massive" ("terrible") inflation is coming, 6, 12, 24 months down the road, and the only way to get out of the way of this is to get out of paper assets.



Video Date: October 24 2008.

Further points he makes are that he expects agriculture also to continue to outperform given the very low stores of food globally. This is something to think about and study for your own portfolio.


JW

The Confused Capitalist

This blog endores Obama for President

Thankfully, this election has offered up one of the better pairs of candidates in some time. The debate, has mostly centred on issues; but still, we all could have done with a little less "Joe the Plumber" palaver, and a little more discussion of some of the very serious issues facing the US - perhaps the most serious litany of issues since the Great Depression and subsequent World War (or maybe more serious).

What is somewhat alarming is that neither candidate has had the fortitude to really begin to talk directly with voters about some of the seemingly unfavorable choices Americans must make in the next few years. All of them involve a move away from personal consumption and, in many cases, extravagance, to choices affecting affecting long-term future and prosperity. Never an easy talk at any time, but one that has to be started sometime - and sometime soon.

These choices involve beginning to slay the national debt time-bomb, the health-care crisis, the future style and cost of US interventionism, educational reform, climate change initiatives that must occur, and Social Security reform. Oh, and did I forget to mention managing the current economic crisis?

In short, there's no shortage of issues upon which the next president could prove himself to be one of the most remarkable presidents in the history of the union (or prove himself a poser at a critical time in history).

And while I have a soft spot for any tough-fighting (and effective) maverick like John McCain, I just can't get past his choice of Sarah Palin as running mate. In the end, her simple lack of knowledge about important worldly things - things a president has to have a handle on from Day One on the job - shows that this was more a choice designed to help McCain win, than thinking about what was best for the country. And now, more than ever maybe, we need a president who`s thinking about what`s best for the whole country.

On the other side of the presidential coin, we have Obama. He`s a man of obvious charm, but more importantly, intellect. That he`s been able to draw a wider and wider constellation of talented individuals towards him, like former Fed Chairman Paul Volker, and former Secretary of State Colin Powell, shows that they believe he`s got what it takes to do the job.

In my view, he`s been able to draw people together, rather than divide them, and this will be a much needed talent in the years to come.

Whether he does or will of course, depends upon many things, including getting elected.

Whether you agree with my choice or not, democracy, an exceptionally unusual privilege demands some hard choices on your part: participation.

Wikipedia: John McCain
Wikipedia: Barack Obama

Platform: John McCain
Platform: Barack Obama


Please feel free to add your comments - however, please keep it civil, and use your frontal lobes, rather than the lizard portion of your brains.

Investing Requires Flexibility to Take Advantage of Conditions

I wasn't sure whether to title this as "Investing requires flexibility", "Rush to liquidity won't necessarily improve investing results", or "US dollar strength won't last".

And that's because, currently, all three are tied together. Nearly every currency in the world has been pounded against the US dollar recently, as there's been a rush towards that currency. Now I can't say that I fully understand all of the reasons for that, but even currencies that should theoretically be strong have been caught in the backwash over the past few months. If you take a look at this currency chart, you can see that virtually every currency therein is down - and in many cases down very significantly - against the USD over the past three months.

So as bad as your short term investments might have done during this turmoil, if they were effectively denominated in other than USD, those ones probably did worse.

Furthermore, during this rush to liquidity (i.e. large cap US stocks, cash and equivalents) has left a lot of other quality investments (but which are less liquid) looking as roadside kill. However, for longer term investors who have too much of their portfolio dominated by USD products, this now presents some wonderful opportunities - perhaps opportunities you missed a couple of years ago.

For some, this might mean moving away from quality US stocks, to other developed country quality stocks. For others, this might mean finally buying the appropriate level of emerging economy stocks (or ETFs). Still others might use this opportunity to position themselves in quality small company stocks.

Whatever or however you decide to approach this opportunity, be aware of two factors: the pounded down overseas relative stock values won`t last - and neither will the current USD strength. Take this bear market opportunity to position your portfolio to look great five to ten years out. Be flexible.




JW

The Confused Capitalist

Wow - Value Village is here

Not too long ago, my daughter dragged me out with a friend of hers (me being the driver, of course) on an avant-garde shopping trip, which meant, that we had to troll all the cheapie thrift stores - Value Village, Sally-Ann, and so on.

Rather than sit in the car alone, I thought I'd take a look through the store while the two shopping mavens trolled the aisles, I was justly rewarded at the Sally-Ann when I found what appeared to be a brand-new pair of smooth leather Hush Puppies - normally a moderate to expensive shoe. They happened to fit me nicely too.

The price? $4.99. Checking the shoe on-line now at the Hush Puppy store, I think this is a $140 shoe. Brand new. Of course I bought them!

The stock market is like that now - given that I don't intend to draw down my stock account for at least 20 years, things look just great right now. I'm trying to get my hands on every stinking cent I can right now to push into the market.

Is everything rosy right now? No. Are we on the cusp of the Next Great Depression? I don't think that either. Given that, I think about my stock purchase of today - trying to look ten years out. And all I can think is BARGAIN, BARGAIN, BARGAIN

Don't think so? How about Chevron (CVX) at a 6.2 PE ratio and a 4.2% yield. How's that purchase going to look in ten years? How about Microsoft at 11.6 PE and 2.4% yield - wow, a meaningful yield from the most dominant software company in the world. Ten years out shouldn't this purchase look good too?

How about one of the drug makers - Glaxo Smith Kline (GSK), at a 12.5 PE and 6% yield? Is the pharmaceutical world falling apart? I don't think so, and that's why I own some.

How about Kinder Morgan Energy Partners (KM) - they supply oil and gas through their pipeline systems. Are people going to stop heating their houses? Yet it sports a 11.8P E and an 8.1% yield. How would that purchase look ten years out?

And how about some of the emerging market vehicles - I own one of the Wisdom Tree ETFs, the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS). It sports a PE of just 5.8 on the index, and the fund itself traded yesterday at an 18% discount its NAV, meaning the effective PE is below 5. It also has a dividend yield of 8.6%, and the long term growth rate of the net income growth is estimated at 13% per annum. Let's see, an effective PE of under 5, and a growth rate of 13%?

BARGAIN, BARGAIN, BARGAIN!

Now where in the heck can I get my hands on more cash?

Disclosure: Long GSK, DGS.


JW

The immediate crisis is passing ... what the future must look like ...

Yes, the immediate crisis is now in the process of passing, with all the extraordinary measures taken to assure the financial system remains liquid. There will still be, perhaps, moments of further high-wire acts over the next 12-24 months, but these now appear less likely to take down the entire financial system, given the exceptional world-wide commitment to blitzkrieg measures as necessary.

I think that, given the unbelievable bungling by companies, CEOs , and boards in the banking and insurance sectors, a round of applause is due to central banks, and governments, world-wide in managing the crisis. This isn't the same as saying that they took measures to prevent the crisis from arising but, once it was upon us, took appropriate measures to make sure this didn't become "The Great Depression, II".

Given the enormous failure of systemic corporate foresight and governance on an individualized corporate basis, governments must now take steps to regulate systemic strength and redundancy into both the banking and insurance sectors. The government must also reform obscene and excessive-risk-encouraging executive pay schemes, since boards have clearly failed to perform their duties to protect shareholders in particular and, as a group, their actions have endangered society in particular.

Here's some quick thoughts on what some of this regulation can and should look like (by the way, corporate boards, take some notes in case this doesn't get legislated, as it's still solid corporate practice: good and prudent governance, if you will):

Banking:
Never again allow the total disconnect between the lender and borrower to occur, by mandating that any pools of capital moved "off balance sheet" (i.e. sold to hapless investors), have some significant portion retained by the originating institution. Whether that amount is 15%, 25% or 50% should be thought about carefully, with the two competing objectives of robustness of system, and efficiency of capital, duly and thoughtfully considered.

The FDIC and similar institutions need to consider "100 year events" in pricing their deposit insurance, as secular increases or declines playing out over a couple of decades can hide fundamental flaws in this type of insurance pricing (i.e. the current scenario). The pricing needs to properly reflect the risk of the loan book of a particular institution - in other words, those playing in areas of the pool with no lifeguard, need to have appropriately steep insurance costs to discourage the most egregious type of risk-taking - or alternatively, to protect the general public when the inevitable failures occur. More highly levered institutions also need to pay higher premiums.

Insurance/Banking:
Anything that looks or smells like some sort of insurance scheme is appropriately reserved. This means that pretty much anything that is insurance against some other event, and involves a trade (swap) of potential event happenings, or pricings etc. It doesn't take a financial genius to recognize that things that are "insurance" aren't always called "insurance". Here's some keywords for regulators, boards and investors to think as insurance: "hedge", "swap", "obligation" (in certain contexts), "derivatives", and so on. No longer should these be allowed to be unreserved. They are all some type of insurance, and need appropriate regulation and reserving to recognize those risks.

Pay schemes:
Federally regulated industries need to have banned, outright, stock option grants. Options encourage excessive risk taking, without the offsetting consideration to downside risk. A winner take all mentality, if you will. This must be discouraged, as it produces unacceptable systemic risk.

In fact, had boards collectively produced proper and appropriate compensation schemes, I argue that much of these systemic excesses may never have happened. For further thoughts on executive pay reform, go here. (In fact, I'd now go one step further and say that the CEO should have to own stock equivalent to at least two years base pay during his entire tenure + eighteen months, as CEO).



JW

The Confused Capitalist