Economic Analysis from John Mauldin
- Wed, 23 Apr 2014 14:43:00 +0000: Hoisington Investment Management – Quarterly Review and Outlook, First Quarter 2014 - Mauldin Newsletters
In today’s Outside the Box, Lacy Hunt and Van Hoisington of Hoisington Investment have the temerity to point out that since the Great Recession officially ended in 2009, the Federal Open Market Committee (FOMC) has been consistently overoptimistic in its projections of US growth. They simply expected QE to be more stimulative than it has been, to the tune of about 6% over the past four years – a total of about $1 trillion that never materialized. Given that dismal track record, our authors...
- Wed, 16 Apr 2014 12:52:00 +0000: Dare to Be Great II - Mauldin Newsletters
I can’t tell you how many thousands of hours I have spent, over the years, thinking about, reading about, and talking about how to be a consistently successful investor; but I can tell you this: I’m still working at it. And once in a while – less frequently as the years pass, it seems – I come across investment advice that strikes me as fundamentally strong, innovative, and worth assimilating. I feel that way about today’s Outside the Box. It’s a client memo sent last week by Howard Marks,...
- Sat, 12 Apr 2014 14:59:00 +0000: Every Central Bank for Itself - Mauldin Newsletters
“Everybody has a plan until they get punched in the face.” – Mike Tyson For the last 25 days I’ve been traveling in Argentina and South Africa, two countries whose economies can only be described as fragile, though for very different reasons. Emerging-market countries face a significantly different set of challenges than the developed world does. These challenges are compounded by the rather indifferent policies of developed-world central banks, which are (even if somewhat understandably)...
- Wed, 09 Apr 2014 14:12:00 +0000: Risk On, Regardless - Mauldin Newsletters
When Gary Shilling was with us here last fall, he and I were feeling considerably more sanguine about the near-term propects for the US and global economies. In fact, I said about Gary that “that old confirmed bear is waxing positively bullish about the future prospects of the US. In doing so he mirrors my own views.” In today’s excerpt from Gary’s quarterly INSIGHT letter, he tackles head-on the shift in sentiment and economic performance that has ensued since then. He steps us through the...
- Sat, 05 Apr 2014 21:00:00 +0000: The Lions in the Grass, Revisited - Mauldin Newsletters
“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them. “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the...
Economic Analysis from Casey Research
- Wed, 23 Apr 2014 06:29:00 +0000: Forgotten Sadomonetarists - Casey Research - Research & Analysis
If you favor sound money, you’re a sadomonetarist, according to New York Times columnist Paul Krugman. The Nobel Prize winner says he doesn’t use the term “just to be colorful.” No, he uses the term “advisedly,” and defines it as “an attitude, common among monetary officials and commentators, that involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low.”
Krugman writes as if one favors low interest rates versus high ones in the same way a person supports high taxes versus low, or more government versus less. Interest rates are now government policy to be argued about and decided by government bureaucrats serving at the pleasure of politicians, instead of a reflection of the demand for funds versus the supply.
At what interest rate does a person’s support render him or her the Marquis de Sade?
The columnist says he’s happy that sadomonetarists have little influence at the Federal Reserve, “but they do constantly harass the Fed, demanding that it stop its efforts to boost employment.”
Krugman still buys into the dubious notion that low interest rates lead to more jobs, not to let the facts get in the way of his Keynesian theory.
In the Depression of 1920-‘21, prices of everything plunged. The Fed, only operating since 1914, was, as James Grant says, “not quite out of short pants.” In those days the central bank was run by bankers. When the crisis hit, Chairman William P.G. Harding, a banker from Alabama, and the other sadomonetarists on the board of governors, raised interest rates.
Relating this anecdote to an audience at the Mises Institute in Auburn, Alabama, Grant looked into the camera and wondered, tongue in cheek, “How did we ever recover, Dr. Krugman? I know you’re watching.”
The US economy did recover—powerfully, in fact, and in short order. Benjamin Anderson wrote in Economics and the Public Welfare: “In 1920-‘21, we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921, we started up again. By the spring of 1923, we had reached new highs in industrial production and we had labor shortages in many lines.”
Since then recessions have been lengthened into depressions by the meddling of the PhDs now running the Fed. Interest rates are not supposed to be government policy, but signals to the market. For now the signals are scrambled. Artificially low rates have engendered booms in asset prices and government dependence (food stamps), but not job creation.
The dichotomy between the real economy and financial markets in Europe is even more pronounced. In today’s guest article, Dirk Steinhoff tells us what’s going on across the pond and how US trade policies, exchange rates, and what Janet Yellen does impacts Europe, its economy, and its investment prospects.
Doug French, Contributing Editor
Europe: Cliff Ahead?
By Dirk Steinhoff
(This article originally appeared in World Money Analyst)
When Kevin Brekke, managing editor [of World Money Analyst], contacted me last week, I knew it was time again to survey the investment landscape. This month, I will focus on Europe and its decoupled financial and real-economy markets.
Globally, the last two years were marked by booming stock exchanges of developed markets, disappointing bond markets, and devastation across the precious metals markets.
Since June 2012, the EURO STOXX 50 Index, Europe’s leading blue-chip index for the Eurozone, has advanced by approximately 50% and outperformed even the S&P 500 and the MSCI World indices.
Over the last six months, European stock exchanges have seen a surprising change of leadership: The major stock market indices of the “weaker” countries, like Portugal, Spain, and Italy, have outperformed those considered stronger, like Germany. One of the top performers was a country that was and still remains in “bankruptcy” mode: Greece.
The question at this point is: Can these outstanding European stock market performances continue?
In our search for an answer, let’s start with a closer look at the economic conditions within the European Union (EU), where approximately 2/3 of total “exports” (internal and external) of the EU-28 are traded. And then let’s have a look at the economic setting of some major trading partners, such as the US and BRIC countries, which account for roughly 17% and 21%, respectively, of the external exports of the EU-28.
Although the EURO STOXX 50 Index has soared since June 2012, certain key measures of the underlying real economies paint a different picture.
To start, the GDP of the EU-28 is not really growing. In 2012, it contracted by 0.4% and grew by the smallest fraction of 0.1% in 2013. The GDP growth numbers for the countries in the euro area are even worse: -0.7% in 2012 and -0.4% in 2013. Whereas Germany’s GDP was up in 2013 by 0.5%, economic growth was down in Spain, Italy, and Greece by -1.2%, -1.8%, and -3.6%, respectively.
Real GDP Growth Rates 2002-2012
The EU unemployment rate stood at 10.2% at the beginning of 2012 and stands at 12.1% today. That the European Union is anything but a homogenous body that moves in unison can be seen in the following chart:
Where Germany has a current unemployment rate of 5.2% and a youth (under 25) unemployment rate of 7.5%, the numbers for other countries are worrisome: Current unemployment in Spain is 26.7%, and 12.7% in Italy, with youth unemployment in Spain at an incredible 57.7%, and 41.6% in Italy. And don’t forget Greece, which is mired in a historically unparalleled economic depression where unemployment is 28% and youth unemployment is a shocking 61.4%. Keep in mind that all of these numbers are those officially released by bureaucratic agencies. The real numbers, as we know, would likely be even worse.
Recent EU industrial production numbers have shown some slight improvement. Nevertheless, industrial production has only managed to recover to its 2004 level, and remains way below its 2007 heights (see next graph).
So let’s see: a shrinking GDP, high and rising unemployment, and stagnant production significantly below 2007 levels. Those are not the rosy ingredients of a booming economy (as indicated by the stock exchanges) but of one that is struggling.
Europe is not in growth mode.
This verdict is further supported by the export numbers for trade between EU countries, known as internal trade. In 2001, internal trade accounted for 67.9% of EU exports. Today, this share is down to 62.7%. In an attempt to compensate for sluggish European growth, EU companies had to develop other export markets, such as the US or the emerging markets.
Will these markets help rescue European companies?
Time to Taper Expectations
With regards to the US, two important developments are worth mentioning. The first key development, which will have severe consequences for the global economy, was brought to my attention by my friend Felix Zulauf, an internationally well-known investor and regular member of the Barron’s Roundtable for more than 20 years. Running ever-increasing deficits in its trade and current accounts for almost 30 years, the US thus provided an enormous amount of stimulus for foreign exporters. Since 2006, however, the US trade deficit has shrunk, with deteriorating trade data for many nations as a consequence.
The second key development is that the newly appointed head of the US Federal Reserve system, Janet Yellen, seems determined to continue the taper of its bond buying program. This fundamental shift in monetary policy could be questioned if the economic numbers for the US begin to show significant weakness. But in the meantime, the reduction of economic stimulus in the US should lead to a reduced appetite for European export goods.
The emerging markets had been seen, not too long ago, as the investment opportunity and alternative to the fiscal and debt crisis-stricken countries of the developed world. Today, on a nearly daily basis, you hear bad news about the situation and developments in the emerging countries: swaying stock markets, plunging currencies, company bankruptcies, corruption scandals, and even riots.
The emerging markets are dealing with the unintended consequences of the Quantitative Easing (including liquidity easing and credit easing) programs in the West. The increased liquidity spilled over into the emerging markets in the hunt for yield. This flow of capital into the emerging markets lowered capital costs, inflated asset prices like stocks and real estate, and boosted commodity prices. All that, and more, sparked the emerging markets boom.
Now, this process has reversed. The natural conclusion to exaggerated credit-driven growth, the tapering of QE programs, the shrinking US trade deficit, and lower commodity prices has been an outflow of capital from emerging markets, triggering lower asset prices and exchange rates. The attempt of some countries to defend their currencies by raising interest rates will only exert further pressure on their economies.
With weaker emerging market economies and currencies, there will be no big added demand for European exports. Revenues and profits for EU companies (measured in euros) will fall.
When Trends Collide
So, over the last two years we had opposing trends—booming European stock markets and weak underlying real economies. This conflicting mix was mainly fostered by easy money that drove down interest rates to historic low levels. Plowing money into stocks, despite the poor fundamentals, was the only solution for most investors.
At their current elevated levels European stock markets appear vulnerable, and it seems reasonable to doubt that we will see a continuation of booming stock markets. Of course, such a decoupling can continue for some time, but the longer it continues, the closer we will get to a correction of this anomaly. Either the real economy catches up to meet runaway stock prices, or stock prices come down to meet the poor economic reality. Or some combination of the two.
Because of the economic facts that I discussed above, in my view, we may be seeing just the beginning of a stronger correction in stock prices.
Dirk Steinhoff is chief investment officer of portfolio management (international clients) at the BFI Capital Group. Prior to joining BFI in 2007, Mr Steinhoff acted as an independent asset manager for over 15 years. He successfully founded and built two companies in the realm of infrastructure and real estate management. Mr Steinhoff holds a bachelor’s and master’s degree in civil engineering and business administration, magna cum laude, from the University of Technology in Berlin, Germany. Contact: firstname.lastname@example.org.
- Tue, 22 Apr 2014 06:20:00 +0000: America’s Pipe Dreams: Hollywood vs. Buffett - Casey Research - Research & Analysis
Hydrocarbon pipelines have existed for centuries. The first historical report of a pipeline comes from ancient Sichuan, China, where people for thousands of years dug or drilled holes to tap a briny aquifer for its salt content. One day, the story goes, a lightning bolt struck one of the wells, sending a pillar of fire into the air—the discovery of natural gas.
The villagers began to utilize the water’s “firepower” to produce the brine and eventually expanded their salt-making facilities by building underground “pipelines” of bamboo. There is evidence that natural gas may also have been transported into the nation’s capital, Peking (now Beijing), for lighting at night.
I believe that right now, the controversy about pipelines—specifically, the Keystone XL—is shaping up to become a great investment opportunity. Bear with me as I present to you…
A Short History of Pipelines in America
In 1859, when Edwin Drake drilled his landmark oil well near Titusville, Pennsylvania, the discovery set off an oil rush that drew prospectors to Oil Creek from near and far looking to strike black gold.
Drillers soon realized, however, that the bottleneck of profit was not so much in finding oil as in getting the oil they found to market. The nearest rail line was several miles away from the Oil Creek fields, and some difficult terrain lay between.
But where there’s a will, there’s a way, as the saying goes. The drillers hired thousands of horse-drawn wagons and their drivers, called teamsters, to haul their crude from drilling site to river, railroad, or refinery. The teamsters, themselves no dummies, sensed opportunity and charged exorbitant prices. In fact, a driller often paid more to move his oil the first several miles by teamster than he did to move it the remaining 350 miles to New York City by rail.
The teamsters’ monopoly ended in 1865, when Samuel van Syckel built the first major US pipeline—a two-inch iron pipe that covered five crucial miles between a new field and the nearest railroad station.
This first pipeline carried 2,000 barrels of oil every day: not much compared with the million-plus barrels per day the existing Keystone pipeline handles, but a considerable amount in terms of horse-drawn wagons.
Building the pipeline wasn’t easy. The roadless, hilly terrain posed a challenge, and the teamsters did everything they could to sabotage the project, including cutting pipes and burning the oil.
Van Syckel defended his pipeline in true American fashion: he posted armed guards along its entire length. With firepower now backing the enterprise, harassment stopped, the pipeline began to run at full capacity, and now it was van Syckel’s turn to reap profits.
Seeing his success, others raced to build their own. Pipelines indeed proved cost-effective as a means to transport oil, even while they were still short and restricted to localized areas of production.
Shale Revolution Reveals America’s Achilles Heel
Fast forward to 2010, when the unconventional shale revolution started to increase domestic oil production significantly (by 2014, domestic production of oil and gas would almost double from its lows two decades earlier). All of a sudden, existing pipelines didn’t have enough capacity to transport the vast amounts of “new” shale oil south.
But the American entrepreneurial spirit found a solution—even though it was a weak one: eventually, the shale oil was transported via rail.
On February 12, 2010, Warren Buffett capitalized on the trend and purchased the second-largest railway in America, Burlington Northern Santa Fe (BNSF), for $44 billion.
And that wasn’t his only purchase in the up-and-coming shale oil sector…
Buffett Bets Big on Canadian Oil Sands
On August 15, 2013, the investing public found out through fund filings that Warren Buffett had bought more than $500 million worth of Suncor Energy Inc. (NYSE.SU), Canada’s largest integrated oil company and the world’s largest oil sands company. Suncor has done quite well since the end of June when Buffett bought it, climbing another 20% and adding C$110 million to Berkshire Hathaway’s net worth.
But Casey Energy subscribers were aware of Suncor long before Buffett started buying. We laid out all of the reasons to own the stock in January 2012; we talked about it not only in our newsletter, but also at the Casey Summits—more than a year before Buffett’s big purchase.
After Buffett had bought into Suncor, we stated in this missive:
“Don’t bother buying Suncor now, though. The stock isn’t cheap anymore and is getting more expensive by the day, as the herd is following Buffett’s example.
While we do have the utmost respect for him—if you’re the third-richest person in the world, you must be doing something right—right now we have one up on Warren Buffett again, just like we did in early January 2012.
The company we recently highlighted in our Casey Energy Dividend newsletter pays a better dividend, has a better near-term growth profile, a higher revenue per barrel, less debt on the books, and a lower debt-to-cash ratio than Buffett’s bet in the oil sands.
In fact, even though this company is also a big oil producer, it pays a dividend three times higher than what Buffett is getting on Suncor right now.”
Not only did our oil sands recommendation outperform Warren Buffett’s pick, its dividend was much higher. But we’re not here to gloat—we’re here to lay out what Buffett’s next play is. But you should take serious note of what we are saying next…
Warren Buffett’s Next Energy Investment
So, this is how Buffett has played the American energy matrix: first, he bought into the railways to exploit the US’s Achilles heel. Then, when rail capacity peaked and serious accidents started giving this method of transporting oil a bad name, he invested $500 million in Canada’s largest oil sands producer.
Here’s where it gets juicy—and how you can invest like America’s most famous multibillionaire.
Warren Buffett is now pushing for the Keystone XL Pipeline. Coincidence? Hell, no. He did make his move on the Canadian oil sands, but that heavy oil is trapped. It needs the Keystone XL pipeline to transport it to the US refineries—which, by the way, are now being upgraded to be able to refine the heavy oil from Canada.
Hollywood’s Anti-Pipeline League vs. Buffett’s Clout—Who Do You Think Will Win?
The Hollywood crowd has signed up Jared Leto, Mark Ruffalo, Robert Redford, Daryl Hannah, Julia Louis-Dreyfus, and Jimmy Carter.
Buffett’s pro-Keystone XL consortium includes heavyweights such as former presidents Clinton and Bush, oil man T. Boone Pickens, and even someone to kick butt if necessary—Chuck Norris.
When I debated one of the founders of Greenpeace, I predicted that moving oil via rail would result in many deaths (if you’re interested, it’s at the 9-minute mark). Just six months after that, 47 people died in a horrible accident.
Greenpeace has done some good things in the past, but I have no problem calling them out when they’re wrong. And in the pipeline debate, they are wrong. Warren Buffett has positioned himself to make another fortune from the American energy matrix—have you?
We recently took profits on our favorite oil sands producer and positioned ourselves to take advantage of the next stage of the American Energy Revolution. In our current Casey Energy Dividends newsletter, we cover the companies we think will win the race.
Get on Board… We’ve Done the Work for You
If you get in on the American Energy Revolution with our best guidance, you have two options. Dip your toes in the water for a very low fee and try our Casey Energy Dividends for just $79 a year. This is the right choice for more conservative income investors. As with all of our monthly newsletters, you have 90 days to try it. Love it or cancel for a full refund. Click here to get started.
Or, if you’re an investor with a higher risk tolerance who can stomach the uncertainty of speculative investments in return for a chance at triple-digit and higher returns, I recommend you try the Casey Energy Report.
This month’s issue, which will be published Thursday, April 24, is about the best energy plays in Europe—companies that Doug and I discovered or confirmed on the weeklong trip to Europe we just took together. You can read about our site visits and see photos, as well as get the Energy team’s deep technical analysis about these opportunities. It’s a must-read for any investor serious about making money in the energy sector.
There’s no risk to you: If you don’t like the Casey Energy Report or don’t make any money within your first three months, just cancel within that time for a full, prompt refund. Even if you miss the 3-month cutoff, cancel anytime for a prorated refund on the unused part of your subscription. Click here to get started.
Additional Links and Reads
Four Years Ago—Do You Remember?
I remember hearing the news about the BP oil-spill disaster just as I was about to board a flight from the Nairobi Airport in Kenya to London. After I landed, the news just got worse—I remember watching the broadcast live at the Heathrow Airport lounge, glued to the TV. Four years later to the day, I found myself at the Amsterdam Airport reflecting on the event and learned that BP has finished its final cleanup. Here is a great report from Jon Rees from the UK Mail Online.
- Mon, 21 Apr 2014 14:17:00 +0000: A Crisis vs. THE Crisis: Keep Your Eye on the Ball - Casey Research - Research & Analysis
Precious metals have retreated again in the last few days, apparently in response to the conflict in Ukraine heading for a diplomatic solution rather than a full-fledged civil war. But is that what’s really going on? And how does that fit into the bigger picture?
Casey Metals Team analyst Laurynas Vegys has a look at just these questions in his timely article below, which I hope you’ll find as thought provoking as I did.
Senior Metals Investment Strategist
P.S. Newsflash: I've been invited to speak at the upcoming Stansberry & Associates Natural Resource Conference, Saturday May 31, 2014, at the AT&T Performing Arts Center in Dallas, Texas. Oddly enough, they didn't ask me to speak about gold, nor any metals at all, but about my move to Puerto Rico in search of lower taxes. If you're curious about my legal move to reduce my taxes while remaining in the US, or want to hear the latest regarding resource investments, this event is the soonest you'll be able to do so. For more information, click here.
Rock & Stock StatsLastOne Month AgoOne Year Ago Gold 1,286.80 1,359.00 1,392.50 Silver 19.29 20.86 23.25 Copper 3.02 2.95 3.20 Oil 104.30 98.88 88.00 Gold Producers (GDX) 23.57 26.43 28.22 Gold Junior Stocks (GDXJ) 34.66 41.60 47.04 Silver Stocks (SIL) 12.33 14.00 13.73 TSX (Toronto Stock Exchange) 14,500.40 14,368.98 11,996.34 TSX Venture 998.77 1,038.95 932.94
A Crisis vs. THE Crisis: Keep Your Eye on the BallLaurynas Vegys, Research Analyst
Today I want to talk about crises. Two of the most notable ones that have been in the public eye over the course of the past 6-8 months are obviously the conflicts in Ukraine and Syria. The two are very different, yet both seemed to cause rallies in the gold market.
I say “seemed” because, while there were days when the headlines from either country sure looked to kick gold up a notch, there were also relevant and alarming reports from Argentina and other emerging markets, as well as from China during many of the same time periods. Nevertheless, looking at the impressive gains during these periods, one has to wonder if it actually takes a calamity for gold to soar.
If so, can the yellow metal still return to and beat its prior highs, absent a major political crisis or a full-blown military conflict? My answer: Who needs a new crisis when we live in an ongoing one every day?
More on this in a moment. Let’s first have a quick look at what happened in Ukraine and Syria as relates to the price of gold. Here’s a quick look at the timeline of some of the major events from the Ukrainian crisis, followed by the same for Syria.
There seems to be a fairly clear pattern in both of these charts. Gold seems to rise in the anticipation of a conflict; once the conflict gets going, or turns out not as bad as feared, however, it sells off. We see, for example, that as the news broke that chemical weapons were being used in Syria and Obama was threatening to intervene, gold moved up. But when the US did not wade into the bloodshed and Putin proposed his diplomatic solution, gold slid into a protracted sell-off, ending up lower than where it began.
It’s impossible to say with any degree of certainty how much of gold’s recent rise was due to anticipation of the Ukraine/Crimea crisis, but there were certainly days when gold seemed to move sharply in response to news of escalation in the conflict. And again, after it became clear that the US and EU would do little more than condemn Russia’s actions with words, gold retreated. As of this writing, it’s down about $85 from its high a little over a month ago. (We think many investors underestimate the potential impact of tit-for-tat sanctions, but they are not wrong to breathe a sigh of relief that a war of bullets didn’t start between East and West.)
In sum, to the degree that global crisis headlines do impact the price of gold, the effects are short-lived. Unless they lead directly to consequences of long-term significance, these fluctuations may capture the attention of day traders, but are little more than distractions for serious gold investors betting on the fundamentals.
You have to keep your eye on the ball.
The REAL Crisis Brewing
Major financial, economic, or political trends—the kind we like to base our speculations upon—don’t normally appear as full-fledged disasters overnight. In fact, quite the opposite; they tend to lurk, linger, and brew in stealth mode until a boiling point is finally reached, and then they erupt into full-blown crises (to the surprise and detriment of the unprepared).
Fortunately, the signs are always there… for those with the courage and independence of mind to take heed.
So what are the signs telling us today—what’s the real ball we need to keep our eyes upon, if not the distracting swarm or potential black swans?
Readers who’ve been with us for a while know that the big-league trend destined for some sort of major cataclysmic endgame that will impact everyone stems from government fiscal policy: profligate spending, leading to debt crisis, leading to currency crisis, leading to a currency regime change. And not in Timbuktu—we’re talking about the coming fall of the US dollar.
The first parts of this progression are already in place. Consider this long-term chart of US debt.
Notice that government debt was practically nonexistent halfway through the 20th century, but has seen a dramatic increase with the expansion of federal government spending.
Consider this astounding fact: The government has accumulated more debt during the Obama administration than it did from the time George Washington took office to Bill Clinton’s election in 1992. Total US government debt at the end of 2013 exceeded $16 trillion.
Let’s put that in perspective, since today’s dollars don’t buy what a nickel did a hundred years ago.
Except for the period of World War II and its immediate aftermath, never before has the US government been this deep in debt. Having recently surpassed the threshold of 100% debt to GDP, America has crossed into uncharted territory, bringing itself in-line with the likes of…
- Japan, “leading” the world with a 242% debt to GDP ratio
- Greece: 174%
- Italy: 133%
- Portugal: 125%
- Ireland: 117%
The projection in the chart above is based on the 9.4% average annual rate of debt-to-GDP growth since the US embarked on its current course in response to the crash of 2008. If the rate persists, the US will be deeper in debt relative to its GDP than Ireland next year, deeper than Portugal in 2016, Italy in 2017, Greece in 2019, and even Japan in 2023 (and the US does not have the advantage of decades of trade surpluses Japan had).
Granted, the politicians and bureaucrats say they will slow this runaway train, but we’re not talking about Fed tapering here. Congress will have to embrace the pain of living within its means. We’ll believe that when we see it.
But let’s take a more conservative, 10-year average growth rate (an arbitrary standard many analysts use): 5.3%. At this rate, the US will still be deeper in debt than Ireland and Portugal in 2017, Italy in 2019, Greece in 2024, and Japan in 2030.
Either way, this is still THE crisis of our times; all of the countries mentioned above are undergoing excruciating economic and social pain. It’s no stretch to imagine the kind of social and political turmoil that has resulted from the European debt crisis coming to Main Street USA, as American debt goes off the charts.
It’s also important to understand that the debt charted above excludes state and local debt, as well as the unfunded liabilities of social entitlement programs like Social Security and Medicare.
This ever-growing mountain—volcano—of government debt is long-term, systemic, and extremely difficult to alter trend. Unlike the crises in Ukraine and Syria (at least, so far), it’s here to stay for the foreseeable future. While some investors have grown accustomed to this government-created phenomenon and no longer regard it as dangerous as outright military conflict, make no mistake—in the mid- to long-term, it’s just as dangerous to your wealth and standard of living.
Protecting yourself from this crisis is simple: convert as much government currency units as you can into real money: gold.
Precious metals are the only financial assets that are not simultaneously someone else’s liability. No government in the world can simply print up all the gold it would like to spend, and, unlike bitcoins and other such abstractions, gold can’t be stolen over the Internet. This is not news to our readers, but is so essential to their future financial health, it’s worth emphasizing again and again.
And profiting from this trend is what we dedicate ourselves to here: speculating on the best mining stocks that offer leverage to the price of gold.
Here’s what I suggest: take a risk-free, 3-month trial subscription to our monthly advisory focused on junior mining stocks, the Casey International Speculator. If you sign up today, you can get instant access to two special reports detailing which stocks are most likely to gain big this year: Louis James’ 10-Bagger List for 2014 and 7 Must-Own Mining Stocks for 2014. You can get all of them. Click here to get started now.
I know of no better way to not just survive what’s coming but thrive despite it all.
Gold and Silver HEADLINES
India’s Pain Is UAE’s Gain (Mineweb)
The gold restrictions in India have had some positive unintended consequences for another nation. Bullion traders in UAE are registering brisk sales, much of the rise attributed to expatriate Indians and visitors from India to the UAE.
“The UAE’s gold trade has become the de facto beneficiary of the Indian government’s tough stance on domestic consumption. There is almost a 16% difference on a per gram basis, in buying gold ornaments in the UAE as compared to buying gold in India,” said an official at a store in Dubai’s gold souk.
The country was the top destination for gems and jewelry out of India, with volumes totaling $14.37 billion last year, followed by Hong Kong at $9.86 billion, and the US at $4.79 billion.
This shows how strong the culture for gold is in India. Citizens know the long-term value of the metal and will seek it out regardless of how their politicians try to restrict it.
Strike-Hit Platinum Producers Increase Pay Offer (Bloomberg)
The world’s largest platinum producers increased their offer for miner wages, as the strike that has crippled operations entered a 13th week. Per company officials, annual pay will double by July 2017.
However, the companies cannot satisfy all union demands, because “labor costs account for approximately 55% to 60% of annual production costs and unsustainable increases in these costs will be catastrophic.” The negotiations will continue on April 22.
The strike has shut some of the biggest mines in South Africa, which accounts for more than two thirds of the world’s mined platinum, used for jewelry and as automotive catalysts in vehicles. The shortfall in production is so big that Morgan Stanley predicts it will take at least four years to fix.
Recent News in International Speculator and BIG GOLD—Key Updates for Subscribers
- One of our Canadian gold explorers delivered great metallurgical test results that the market liked, but the shares are still relatively on sale.
- With all major permits now in hand, this company is now green-lighted to quadruple output. We like the story a lot, and our expectation is that mining costs will be exceptionally low and margins commensurately high.
- Recent exploration results from this producer extend a recently discovered high-grade silver-gold-mineralized zone—here’s our specific recommendation.
- The bidding war for Osisko is getting fun to watch and now involves a third company. Here’s how we think this will shake out, and what investors should do.
- Fri, 18 Apr 2014 16:15:00 +0000: How to Invest in China’s Middle-Class Boom… on the Nasdaq - Casey Research - Research & Analysis
It was an abject failure.
In 2006, after conquering the US home improvement market, Home Depot (NYSE:HD) ventured into China to claim its share of the Chinese middle class’s exploding growth.
It bought 12 stores from local Chinese firm The Home Way, turned them into Home Depots, and waited for voracious middle-class consumers to swarm its aisles, just like they had in the US.
But they never came. By 2012, Home Depot had closed its last big box store in China and retreated with its tail between its legs.
The business merits of expanding to China seemed ironclad. Hundreds of millions of Chinese people were climbing into the middle class. Homeownership rose from virtually nil 15 years ago to 70% today. Who doesn’t like to personalize their brand-new digs?
What Home Depot’s management didn’t understand is that Chinese people aren’t do-it-yourself types. Almost no one in China owned their own home until recently, so furnishing a home was a new concept. They’d never done it before. They needed guidance.
Which is exactly why Ikea has been so successful there. The Swedish furniture giant arranges its stores into model rooms that showcase furniture combinations and color schemes. Chinese people love it because it helps them visualize how components fit together to make a complete room.
To a home improvement novice, that’s much more useful than the stacks of lumber and 47 varieties of faucets that Home Depot offers. Plus Ikea’s merchandise is easy to buy and put together. No caulk, molding, or power tools necessary. All you need are the instructions, an Allen wrench, and a few hours.
Having spent the last two months studying China’s booming smartphone market in search of an investment opportunity for The Casey Report, I appreciate that subtle cultural differences can make or break a company’s bid to transfer its business model to a foreign country. Every smartphone maker wants a piece of China’s huge pie, but the mighty international brands like Apple, Nokia, and LG are struggling to capture it. Tiny upstart Chinese manufacturers, with just a fraction of the resources but a huge advantage in local knowledge, are kicking their butts.
I’ll let Adam Crawford, Casey Research technology analyst, elaborate.
How to Invest in the Great UpgradeAdam J. Crawford, Analyst
Most people think the smartphone was an overnight success made possible by a sudden technological leap from Apple.
Not so. Eddie Cantor had it right 50 years ago when he said, “It takes 20 years to be an overnight success.”
Rise to Fame
Visionaries first conceptualized the smartphone way back in the 1970s. In the 1990s, that concept became reality when IBM released the Simon Personal Communicator: a cellphone that, in addition to its telephonic capability, could send and receive faxes and emails and featured a touchscreen display. Many consider the Simon the first commercial device that could legitimately be called a smartphone.
After Simon came a decade of rapid evolution. Smartphone functionality expanded to include video cameras, GPS features, and web browsing. Processing power, storage capacity, and battery life grew geometrically to accommodate the added functionality.
Meanwhile, the telecoms were doing their part to coax the smartphone caterpillar out of its cocoon. In 2001, they launched 3G networks that achieved data-transfer speeds four times that of 2G networks. Suddenly, media streaming and/or downloading from the web became practical mobile functions.
Finally in 2007, Steve Jobs and Apple—acting more like Great Synthesizers than Great Innovators—integrated all these converging elements into the iPhone. Then Apple added two important things to the mix…
- A unique talent for designing intuitive, user-friendly devices, and
- A robust ecosystem with thousands of apps.
Boom. The smartphone butterfly emerged and took flight. The sales trajectory has been astounding…
After seven years of sustained and explosive growth, is the smartphone market reaching saturation?
Not even close. Smartphones are ubiquitous in the US and Western Europe, but that’s not the case everywhere. Old-fashioned feature phones still dominate in many emerging countries. But as incomes rise and smartphone prices fall, legions of consumers will upgrade from feature phones to smartphones.
Indeed, the great upgrade is already under way. In China alone, almost 300 million people will purchase smartphones in 2014.
The smartphone megaboom is far from over—it’s just moved to the East... and has a much different look than in the West.
Price is paramount in emerging markets, including the biggest emerging market of them all… China. Lower- to middle-class Chinese can only afford to pay about $150 for a handset. 35% of smartphones sold in China are priced below $150, and almost 60% are priced below $330…
Companies are desperate to capture this huge and growing piece of the low-end pie, and so they’re rolling out new, cheap smartphones every month.
That’s great news for consumers. But here’s the rub: in order to hit low price points, handset manufacturers are stripping out features that differentiate their products. Low-end smartphones are essentially becoming commodities.
That opens the field up to a slew of competitors. There are literally hundreds of small handset manufacturers in China trying to undercut each other for a piece of this lucrative market.
How to Invest
Handset manufacturers and proprietary chip makers are not the way to play the Great Upgrade. For handset manufacturers, competition is simply too fierce—margins, if they exist at all, will be razor thin. And brand loyalty will be almost impossible to achieve.
The same goes for proprietary chip makers—there’s simply no demand for their products in low-end devices. Such are the problems in a commodity-based market.
Fortunately, the clever minds at The Casey Report have discovered a way to play this trend. It’s a “picks and shovels” company that supplies Chinese smartphone manufacturers with a trendy, ever-expanding software product that they wouldn’t be able to do without—and it’s beating the competition by having formed strategic alliances with China’s top three wireless service providers.
What we love most about this pick is that this is one of the few companies (if not the only one) in this massive market that is nearly certain to profit from the smartphone megatrend. Let the handset manufacturers cannibalize each other—this company will cash in by selling them its services, regardless of who ultimately wins the smartphone wars.
We expect to double our money on this one within the next two years. But best of all, this stock trades on the Nasdaq—that means no dealing with foreign stock exchanges, no complicated transactions. You can profit from China’s middle-class boom and the “Great Upgrade” with just a few mouse clicks.
You can find the full investment story, including a comprehensive analysis of the Chinese smartphone market, in the newest edition of The Casey Report.
Dan again. Note that today is the last day to take advantage of our special offer—get The Casey Report for just $298, (a 15% savings) plus receive our special report Going Global 2014 for free.
Usually we sell this book-length report for $99, and I think it’s worth every penny. If you’ve ever thought of internationalizing your assets (and maybe yourself), Going Global 2014 is an absolute must-read. Put together by our top experts, it shows you strategies to get your money to safety—from very simple steps to more complex plans.
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Next up is Doug French, with an unglamorous but lucrative investment idea that you’ve probably never considered.
Betting on a Poorer AmericaDoug French, Contributing Editor
Here at Casey Research, we believe what Doug Casey calls the “Greater Depression” is coming, and that it will be here sooner rather than later.
Americans will get poorer. Not that they’re doing so hot right now:
- Baby boomers, 10,000 of whom turn 60 every day, have saved nothing.
- Pension plans are broke, and the average 401(k) balance is just $84,300.
- 46.5 million Americans are on food stamps.
That all adds up to a bull market in low-cost housing, especially for retirees on fixed incomes and the working poor. Such housing exists, but is in short supply.
Granted, this is not a glamorous sector. But it has the ingredients for investment success—growing demand and restricted supply. Some of the best-known and richest investors in the US already have huge investments in trailer parks.
You might be scared to enter one of these developments. Don’t be. Go ahead and drive through a mobile home park near you. Get comfortable. It might be the investing opportunity you’ve been looking for.
Falling Supply, Plenty of Demand
Mobile homes are universally hated—except by people who actually live in and own them.
There are 8.6 million mobile homes in the US, and 12 million people live in them. “That number is not likely to grow,” writes Gary Rivlin for the New York Times Magazine. “We learned in Southern California, given restrictive zoning laws and the prohibitive cost of building a new park in the boonies, meaning supply is static even as demand for cheap places to live is high.”
“Since peaking at 374,000 units in 1998, manufactured home placements have fallen by nearly 90 percent,” Fannie Mae Housing Insights reported in June of last year. “During the last four years, manufactured housing placements have averaged 51,000 units per year, one quarter of average annual production during the last three decades.”
New parks are scarce no matter where you look. Planning boards and city councils are shy to approve land use for them. They’re ugly and have a bad reputation for squalor and attracting police activity. No one wants to stick their neck out for more of that.
A bank I worked for in Las Vegas financed the construction of a new park, but that was back in the late 1980s. The town has quadrupled in population since, and I never heard of another new park in the area. But I did see a number of parks bulldozed to make way for more houses, when residential land prices increased tenfold.
In talking to a couple of my appraiser contacts recently, one said he hadn’t appraised a park in eight years, and the other said he couldn’t remember the last time he appraised a park, but it was at least five years ago.
Like Being Chained to a Booth at Waffle House
Unlike apartment projects, where only a security deposit and maybe first and last month’s rent prevent tenants from skipping out, rolling a trailer into or out of a space costs around $5,000. Also, many people own their coaches and don’t want to walk away from that equity. Once a coach is set, park owners have a paying tenant who isn’t likely to go anywhere, even if they bump rents up $10 or $20 a month each year.
The Nevada Legislature considers a mobile home park rent-control bill every two years, evidence that landlords aren’t shy about jacking up rents. Frank Rolfe, longtime park investor and teacher for Mobile Home University, says tenants get used to annual increases, just like they do with their cable bills. Rolfe has raised the rent in one particular park 30% in just three years. He quips, “We’re like a Waffle House where everyone is chained to the booths.”
With thousands of veterans going to college after WWII on the G.I. Bill, trailer parks appeared around college campuses all over the US to accommodate ex-soldiers looking for cheap housing. I reside in the college town of Auburn, Alabama, and trailer parks here are both numerous and in great demand.
A friend has lived in a park on the west side of town since 2006 when he enrolled at Auburn. His rent has risen from $175 to $255 since he moved in, and management just emailed him to say it’s upping his rent again. His rent will double each month if he doesn’t sign the new lease with higher rent. With Auburn University’s vet school just down the road, management can play hardball.
The good news is that my friend can sell his coach for what he paid for it anytime he wants.
Trailer Park Moguls
Sam Zell is known as the savviest real estate investor in the US. Nicknamed “the grave dancer,” Zell has bought all types of real estate low and sells most of it high.
But trailer parks? He hangs on to them.
Zell is chairman of Equity LifeStyle Properties, formerly known as Manufactured Home Communities, a company he took public in the early 1990s. The company is the mobile home industry’s largest landlord, with 370 communities containing close to 140,000 lots.
Zell said at a conference of Equity LifeStyle Properties Inc. in 2012, “We like the oligopoly nature of our business.”
Zell isn’t the only big shot in the mobile home industry. In 2003, the Oracle of Omaha himself, Warren Buffett, bought Clayton Homes, one of the country’s largest mobile home manufacturers, for $1.7 billion.
Buffett says the manufactured housing industry, from the production side, has “endured a veritable depression,” with no recovery apparent. According to Berkshire Hathaway, US manufactured housing sales were 49,789 in 2009, 50,046 in 2010, and 51,606 in 2011. That’s compared to 146,744 homes sold during the housing boom of 2005. But Clayton is still making money.
Private equity companies are also becoming interested in mobile home parks. Carlyle Group purchased two parks last October for a combined price of $31 million. Both are higher-end senior parks where tenants have to be 55 or older.
Not Sexy, But Profitable
Dan Weissman and David Shlachter wanted to own a business that wasn’t sexy but was fragmented. “The litmus test was if we told someone at a cocktail party what we do and their response was a grimace, we were on the right track,” Shlachter told Bloomberg. “It’s hairy, and it’s colorful, and it’s sometimes scary.”
For instance, two hours after they closed on the purchase of their second park, a SWAT team descended on the property in Indianapolis, looking for one of the park’s tenants who would eventually be charged with arson and murder.
The partners, both in their thirties, found small parks for sale around the country with deferred maintenance and vacancies. “When you stop maintaining anything, it goes bad,” Shlachter says. “When you stop maintaining a mobile home park, it goes real bad, real fast.” These are the kinds of situations where new owners can create value.
In one case, Weissman and Shlachter paid $485,000 for a park and invested another $250,000 toward improvements. This year they think they’ll earn $150,000 from the park, with the project only 40% full.
Mobile home park pros say buyers should look for parks with a master water meter, which means the current owner is paying for their tenants’ water. The first thing savvy new owners do is install meters for each trailer so renters can pay their own water bills.
Mr. Rolfe says investors should steer away from tenant-friendly states like California and New York, where it takes too much time and money to evict deadbeats. He won’t touch Las Vegas or Phoenix, believing distressed home prices are low enough to compete with parks. However, both housing markets have rebounded sharply and, I believe, will offer opportunities.
The guiding sales metric for real estate purchases is cap rate. A project generating $50,000 in annual net income changing hands for $500,000 equates to a 10% cap rate. Low interest rates have brought cap rates down, but Rolfe and Reynolds still look for 9% to 10% caps when they buy.
Lot rent should top out at half of what a decent two-bedroom apartment in a particular area goes for. However, the sweet spot for lot rent is $495 a month. Go over that and it “could mean death.” Nationwide, rents average about $390 per pad per month, according to real estate researcher JLT & Associates.
While Sam Zell’s parks offer swimming pools and clubhouses, Rolfe says, “We don’t like amenities of any kind.” Rolfe and his partner Dave Reynolds understand mobile home living is the last chance for many people, and he keeps expenses and rent as low as possible. If he buys a park with a swimming pool, he shuts it down to save on expenses and liability insurance. Laundry rooms and vending machines? Forget it. Rolfe and Reynolds fill vacant spaces with used trailers they can rent out cheaply.
Rolfe says he and his partner are making a “contrarian bet on a poorer America.” The bet is paying off handsomely so far, with annual returns of 25%. “By catering to those living on the economic margins,” writes the New York Times’ Rivlin about Rolfe and Reynolds, “their parks generated more than $30 million in revenue last year. More than half of that was profit.”
This is not coupon clipping. But if you’re interested in potentially great returns, a great place to start is MobileHomeParkStore, which has “for sale” park listings located all over the country: all shapes, sizes, cap rates, and price ranges.
Just remember: as the economy gets worse, this bet may go from contrary to expensive. Good luck and happy hunting in the trailerhood.
Poverty in America is almost sure to rise in the next few years, as the United States slides nearer to the brink of economic collapse. Don’t believe it could happen here? Watch our new documentary, Meltdown America. Using the harrowing stories of three survivors from Zimbabwe, Serbia, and Argentina, it shows how stealthily a major crisis can creep up on you—and why the US may well be the next domino to fall. If you haven’t yet, watch it here.
Subscriber Robert Lynn submitted the following short piece to our recently completed Casey Research storytelling contest. I thought his satirical and hilarious take on the erosion of personal responsibility fit best in the Friday Funnies. Take it away, Robert…
By Robert Lynn
I am going to be rich.
You see, people and companies are committing unconscionable acts, and they are going to pay dearly for them.
For instance, last week I was performing basic ballet moves on the top step of a ladder, and I fell. How could a company manufacture a hazardous product like this and not properly inform the consumer of the risks involved in dancing on it? Oh, sure, the ladder is covered with warning labels, and any idiot should know how to safely use a ladder, but they didn’t tell me not to do a pirouette on it. They must take responsibility for that. I’m suing for three million dollars.
As a kid, I never sued anybody. I can see, now, the error of my ways. In my neighborhood, when some kid did something stupid, other kids would taunt him. “Suffer the consequences,” they would say. And suffer they did. That was even more stupid, because, as an adult, I have learned that nothing is my fault. Recognizing this fact is going to make me millions.
Two weeks ago, I saw a movie in which a stupid person lay down on a busy roadway and tried to avoid getting hit by traffic. Now, I have always thought that the best way to avoid getting flattened by traffic was to stay out of it completely. But what do I know? The messages the media are sending me are so overwhelming, I just have to try stuff like this. Unfortunately, I was hit by a car. I’m all right now, but that movie company is going to pay. Add two million to my total.
I like to play my stereo at volume levels just below the threshold of pain. My next-door neighbor has never complained once. Now I have partial hearing loss. Are people so callous these days that they only think of themselves? Not if I can help it. I’m suing my neighbor for not telling me to turn my stereo down, to the tune of one million dollars.
It seems that wherever you go these days, people and companies are so self-absorbed that they don’t give an ounce of consideration to how their actions, or inaction, is going to affect innocent people like me. If you listened to some of them, you’d think that I’m somehow supposed to figure out on my own that I shouldn’t lick the lids of cans I just opened, or that plugged-in toaster ovens are not bath toys, or that drain cleaner shouldn’t be used as eye wash.
I saw a cartoon in which a character used a hairspray can as a blowtorch. I tried it and burned my house down. Eight million.
I put my face on an escalator stair as it reached the top, and it sheared off my lower lip. Sixteen million.
I played a heavy-metal album backwards. It sounded better that way, but I clearly heard irresistible messages about assisting my parakeet’s suicide. One million.
There was no warning on my cheese grater saying, “Not to be used as a loofah body sponge.” Six million.
I saw a riot and was forced to start beating people and looting because of the overwhelming mob mentality that swept through the streets. I didn’t have a choice. What was I supposed to do, stay home? Somebody ought to be responsible for that. Twenty-two million.
I went to one of those Cartoon Characters on Ice shows and sneaked backstage, where I saw my favorite cartoon pig removing his head. I had a nervous breakdown, and I still have nightmares about a headless swine asking to borrow my deodorant (don’t ask me to explain it). Thirty million.
I broke into my neighbor’s house to steal his Dukes of Hazzard action figure collection set, and he shot me. I think that’s a little severe. I mean, it was a terrible show. He’ll be hearing from my lawyer. Thirteen million.
My older brother jumped off a cliff, so I did too. Twenty-seven million.
I have a few other suits in the works. It seems like just about every day I do something that some company or person should have warned me not to do. When will they learn? When will people start taking responsibility for my actions before it’s too late?
After all my lawsuits are settled, when I have more money than I know what to do with, I’ll focus my full attention on one last case. I’ll sue the United States judicial system for refusing to recognize my free will and denying my right to do stupid things and suffer the consequences.
Terrible Wheel of Fortune Player
My heart goes out to this Wheel of Fortune player who couldn’t solve a puzzle even with all of the letters filled in…
Income Inequality Institute to Pay Paul Krugman $25,000 per Month
That’s It for This Week
One last reminder that our special Casey Report/Going Global 2014 package deal for 15% off expires tonight at midnight EDT—so take advantage while it lasts. Have a wonderful weekend!
Managing Editor of The Casey Report
- Thu, 17 Apr 2014 16:44:00 +0000: Value Investing Is Dead; Long Live Compelling Values - Casey Research - Research & Analysis
Once you could make money in the markets by looking for value hidden away in financial statements. Thanks to the digital era and its ease of access to information, that day is now past. But there’s still a proven way to consistently earn a positive return in the market—you just have to understand why value investing once worked and why it never will again.
There’s no doubt that Benjamin Graham and David Dodd shaped the modern profession of investor more than anyone in our history. When they posited—starting in 1928 at New York City’s Columbia Business School—that investors could find companies whose stocks were mispriced by just digging through publicly available numbers, they set off a revolution.
First hundreds, then thousands, and eventually millions of investors learned the art of scrutinizing those numbers to find compelling companies trading below their “intrinsic value.” Graham and Dodd’s books—Security Analysis and The Intelligent Investor—remain staples on virtually every financial bookshelf in the library.
Prominent investors all the way up to the inimitable Warren Buffett have long espoused the wisdom of the approach. It has evolved over the years as well, moving from a focus on book value to a focus on earnings value to a combination of similar factors. In fact, there are as many variations on the theme as can be imagined—thousands of permutations on how to discover value by crunching the numbers in the right way.
However, value investing has a dirty little secret.
It’s always been based on knowing something that few other people could know. In tech speak, it’s about an asynchronous information advantage.
In other words, value investing is not that different from, say, insider trading. In the case of insider information, the opportunity lies in being able to position yourself in front of some fact that has the potential to revalue a company on the market. Maybe you know Intel is going to miss on earnings next month because your friend is on the board. Trading on that information is, of course, illegal. But it’s a crime that’s committed again and again because it works and because it can be difficult to prove.
Value investing, on the other hand, is perfectly legal because in theory it is based only on public information. The catch is that it relies on the information being hard to find or hard to make sense of.
In the 1930s, of course, gathering information on the performance of a company was difficult. Xerox photocopiers hadn’t even been invented yet. (Those didn’t come around until 1959.) Even then, gathering information on a public company was tedious, time consuming, expensive, and really a task best left to the pros.
In other words, in order to learn of a compelling value, one had to make a significant time and energy commitment. That kept competition to a minimum, and allowed those with better information and a knack for processing it faster to position themselves earlier and then benefit as the word spread (and often, they spread it themselves—no harm in talking your own book).
You profit by being ahead of the knowledge of others. Nothing more than information arbitrage.
Value investing is not alone in its dubious distinction from insider trading, however. The same thing applies to all forms of investing, including technical analysis. In fact, it is the sole basis on which it is possible to make a living investing: your ability to be right about the future value of a company’s paper before others, whether they be your fellow speculators or a corporate suitor in search of an acquisition.
However, in an age of mass computerization and real-time streams of stock-market data over the public Internet, the idea that one can find a “value” stock by simply crunching the numbers has vanished into the Cloud.
Want to know what companies have the lowest P/E ratio among mid-caps, but still have >15% ROI and 70% gross margins? It takes only about half a second for one of the dozens of freely available websites to answer that question for me.
The group meeting those criteria, by the way, contains beleaguered REIT Annaly Capital, Indonesia and Argentina’s telephone companies, and controversial vitamin pusher Herbalife. If the predominant analysis on these companies is right, then they fall into the category of “value traps,” i.e., stocks that look good based on yesterday’s numbers but whose tomorrows will not be nearly as bright.
Base your investments on screens like that one, and you’re likely to fall into trap after trap.
Problem is, virtually anyone can find these numbers. Not only that, they can process them in bulk. On top of that, they can do it in near real time. And they can even use a service like Interactive Brokers to automatically trade on any numbers they like, without even involving a human.
Every day, millions of investors hit sites like Yahoo and Google to dig up value stocks. Thousands more do so on a massive scale across global markets. Every square inch of statistical performance information that can be covered has been, 1,000 times over, before you or I even started looking.
Value investing itself is, thanks to the Internet, dead… or at least drawing its last few breaths.
But the underlying principle is not.
To make money investing, you must find an information advantage you can exploit. It can come in any of a number of forms.
Those who are 60 Minutes fans know that groups of HFT traders have turned to speed as their information advantage. They analyze the same markets we do, using their computers to dig through data in search of a temporary mispricing they can exploit just a few seconds—or even milliseconds—before the next guy. Of course, once they had that capability, they increasingly turned to pure and simple arbitrage, stepping in between buyers and sellers who don’t even know they exist… a lazy man’s way to riches.
Of course, most of us mere mortals lack the means to acquire a dedicated fiber-optic feed to the center of the financial ecosystem, to develop artificially intelligent algorithms that exploit tiny gaps in information, and to profit by making fractions of a cent every few milliseconds. But thankfully, there are slower-moving and less costly options available to the likes of us.
One is to simply understand the world better than the next guy. Instead of finding out what the other guy doesn’t yet know, instead let him be first and then concentrate on figuring out where and when he’ss wrong.
This happens day in and day out in the markets, where one investor battles the next on assumptions about toothpaste sales at Procter & Gamble next quarter, betting millions on the difference of a few pennies in corporate profits. That’s the world of earnings analysis, and it’s cutthroat.
Just because a company is big doesn’t mean that Wall St. is either paying attention or correct. Sometimes you can stumble upon a company that’s followed by plenty of analysts, only to discover none has bothered to update his or her guidance in a year or even two. Our most recent BIG TECH pick is a good example. Nearly half a dozen analysts “covering” the stock, but there’s been not a peep from any of them since mid-2012.
Another possibility is to find herd thinking at work, like we did with HP in BIG TECH. There, every analyst in the world was piling on the doom and gloom, trying to one-up each other in the fear department. But when one swam into the reports they were publishing, one thing was obvious: they were ignoring their own facts. Analysts were calling for 10% sales reductions, but chopping their price targets by 75% or more. Sure, earnings were going to suffer, but this was a company with billions in sales, solid margins, and good if not great management. The realistic view should have been much more tempered, but once those estimates made it into the hands of the mindless computers, the stock quickly plummeted far below sane prices. As they say in the computer world: GIGO (Garbage In, Garbage Out).
It was the right moment to buy in. In no time at all, cooler heads prevailed, estimates were re-revised, and the stock recovered much of its lost ground. No amount of number-crunching on the spreadsheets could have told a computer that, however. It took human ingenuity and an understanding of what was going on behind the scenes to get there… which is why we exited the position with a tidy profit.
This illustrates how herd mentality can lead tens of thousands of professional financiers into failure to understand a business they spend every day watching. But if searching for such opportunities sounds a little daunting to you, fear not. There is still one other super-simple way to be right before the other guys.
Find growth that has yet be discovered. Despite the overwhelming number of computer-armed stock jockeys now saturating the markets, there’s still an amazingly huge universe of stocks which get little to no attention.
Yes, their numbers are crunched by the computers along with every other stock, because it costs nothing more to add a few thousand additional companies to an algorithm. But when it comes to estimating revenues and earnings going forward, there is no shortage of “blue ocean.” Thousands of smaller-cap companies are completely or mostly ignored by Wall St. simply because it has minimum investment sizes to worry about. Why spend an analyst’s time on a stock that can only take $20 million in investment when you have $5 billion to deploy? Instead, Wall St. focuses most of its attention on the big fish. That’s why, according to Yahoo Finance, there are 30 analysts covering Citibank, and only 1 watching National Bank of Greece.
This is a huge potential advantage. The lack of coverage for a universe of stocks like this means that any meaningful information you can find gives you a leg up on the field. And thankfully, these smaller companies are often easier to analyze. Want to know if a 25-outlet regional retailer is growing? Much, much easier to discover than for a big, multinational corporate brand, that’s for sure. Stake out a few stores, ask a few suppliers, and voilà, you’ve got an advantage over any NYC desk pilot… no matter how fast his Internet connection might be.
We do this every day in Casey Extraordinary Technology, where we specialize in companies still flying under the Wall St. radar—ones too small to be noticed today. But as they post bigger and bigger numbers, they get harder and harder to ignore. Wall St., after all, is happy to bend the rules on those minimum investment sizes if it really believes it can make 50% next year just by taking a smaller stake than usual.
Now, I prefer to find growth because I like to be long the market. I love to position myself in a company before it announces good news and wait for the stock to rise, as those computers and the hordes of investors behind them inevitably race to snatch up a profit in the 15 minutes (who am I kidding? 15 seconds is more like it) that “value” lasts nowadays. Nothing is more predictable to me.
The same applies on the downside, too. If you browse through the universe of uncovered stocks (or through the overly enthusiastic estimates of herd-thinking analysts), you’re bound to find plenty of stories that are too good to be true. That’s where many an investor has made a killing on the short side.
Either way, success is about finding your information advantage. What can you know before everyone else knows it? It definitely won’t be an imbalanced price/book ratio in the agricultural sector. It probably won’t be Comcast’s next subscriber count. But it could definitely be sales numbers from the company no one is watching.
And when you’re right, you’ll be glad to see all those value-investing computerized robots trade your shares right on up, providing you liquidity on the way.
This is precisely what we do here at Casey Research. We concentrate on the markets best suited to individual investors, we find our distinct advantage, and we exploit it again and again. For the technology team, that consists mostly of finding undiscovered growth. We comb relentlessly through the data, the opinions, and the companies in the tech markets in search of a mismatch between what products are selling and what companies Wall St. thinks are performing. Time and again, we find compelling bargains—never on past performance alone; almost always by uncovering the next big thing that consumers are walking out of the mall with, that businesses are migrating to, or that otherwise has yet to show up in the numbers available on any computer screen from Yahoo Finance to Bloomberg.
Maybe that’s why we’ve beaten our market index every year since we started publishing. If you’ve yet to see for yourself the advantage this approach provides, then take Extraordinary Technology for a spin and let us prove it to you.
While the computer may have killed old-fashioned, number-crunching value investing, it’s done nothing to change the rules of the game. It’s just shifted asynchronous information advantages around, making the ones where being human helps better than others.