The market has been on an absolute tear the last 4 months, up almost 20%. Consequently I have reduced exposure, and think that selling losers this week is a pretty good idea. Get the tax benefit, clear out any crummy names you own and be a little more cash rich to put some dough to work on solid, cheap names next year when it looks a lot uglier than now.
It is only human that we want to buy stocks when they are going up, and that inclination only gets stronger the more they've rallied. The downside of that is that most investors are most exposed at market peaks, and least exposed at the bottom. As for right now, I think the risk reward in equities in general is mediocre. We have perhaps 5% upside from here, and 10-15% downside. Can the market go higher? Absolutely, but you want to manage risk, that is how you preserve capital and get in and out of stocks at better times.
The sentiment index is also one I closely follow, and last week we hit a near annual high of 63% bullish. (that is, 63% of investors surveyed are bullish on the market). This is a contrarian indicator, and when it hit 65% last April, the market fell 13% over the nex 6 weeks. When everyone wants to be long, there is no more room to go up. For some perspective, at the market lows this year at the end of August, a mere 20% of those surveyed were bullish. That was the time to buy.
So, yea, here I am buying Cisco today. Yes, this may pull back, so I am shorting some SPY's against it dollar for dollar. (Ticker SPY if you've never traded this, just an S&P index ETF). But the math on Cisco is pretty compelling.
Generally I started peaking at this name a month ago when it got blasted 18% after reporting its October numbers. The stock fell from over $24/share to about $20, then drifted down to 19 and change. Reasons for the selloff: declining margins, concerns over the company losing market share, and generally a weak revenue outlook (lower spending in the public sector and Europe) were the culprits.
So, the bad news is priced in and here is why I think so. The company earned $1.36 per share on a TTM basis. This is after huge stock compensation expenses, and also excludes interest income and interest expense numbers (there were negligible anyway). In addition, net cash on Cisco's balance sheet is $25BB. Yes, thats $4.35 per Share in pure cash. 22% of the market cap of this company is in the form of cash.
So, that leaves you paying $15.80 a share for a business that did $1.36 in earnings on a trailing basis. That implies its trading at 11.6x earnings. (yes the $1.36 excludes interest income/expense). Next year, analysts are forecasting $1.61 in EPS. I ran some numbers myself, and generally the company guides to a long term revenue growth outlook of 12-17% per year. Lets use 12% next year, despite the fact that sales grew 19% year over year in the October quarter. Lets also assume margins compress to 18.5% from 19% TTM. (note that over the past 5 years, margins have averaged over 20% per year.)
Net net I get $1.52 in EPS for 2011. So on a business you are creating at 15.80/share (netting the cash against the stock price), you are paying a little over 10x (Worst Case EPS) for a company that will grow 12-17% annually (thru the cycle acc to management). Assuming this can get back to a 15x multiple company, that implies a $27 stock, for upside of 35% in the next year. For an unlevered, blue chip, growth company with massive piles of cash, that make this one a buy to me, even in a market that looks well overbought.
As far as the downside goes, I would suggest that they flat line at 1.35/share in another recession. Using 9x earnings, a very low PE, net of cash, still gets me 16.50 per share. That's downside of 18%. However, I think the probability of them beating the streets forecast of $1.61 per share is very real, and if they did say 1.75, then at 15x you could see a $30 stock for 50% upside. Good risk reward.
Now, I should mention that the stock is up today given a Barron's article touting the company over the weekend. I wont rehash it but the main points are:
- The company has actually gained market share in 12 of 15 of its major products in the past year.
- Its much more diverse than just a router/networking company, which today is only 16% of revenue.
- The street's EPS forecast next year of $1.61 is using low end of the company's guidance, and is likely to be exceeded.
- Its cheap at 12x earnings (altho I note that they exclude the cash here).
I would add that the company authorized a $10BB stock buyback just last month, and for a $114BB market cap company, that is almost 10% of the stock outstanding. In addition, the company has stated they intend to implement a dividend next year, one that will be at a "competitive yield" I think they said. Given that the company generated $1.93 in FCF/ share (Depreciation and amortization are far higher than Capex), there is a lot of room here to pay a meaningful dividend.
Did I mention that $1.93 in FCF equates to a 12% Free Cash Flow yield per share? Lots to like. Marketwise, not a lot to like, so hedge it appropriately.
If you want a copy of the barrons article, let me know.
Monday, December 27, 2010
Monday, December 20, 2010
Investing Outlook for 2011
Ok, I am the first to admit that really any forecast that goes out beyond 3 months, is really pretty worthless. That said, dont stop reading! I do think it makes sense to re-evaluate the markets at year end, come up with some possibilities for next year, and do a little handicapping.
So, first of all here are some of the risk factors we face next year. Some of these we have seen warning signs in the markets. Some of these are arguably not likely in 2011:
1. Municipal bond market: There is a real possiblity that someone will default next year and scare the heck out of the markets. California faces a $25BB budget shortfall in 2011, Harrisburg PA nearly defaulted on their bonds, and the Build America Bond tax subsidies are expiring. Spreads are widening, and, unlike the Federal Govt, states are required to balance their budgets every year. If a state goes, will the Feds bail them out? I assume so but getting there will be ugly.
2. Spain: while the ECB (European Central Bank) just bailed out Ireland and Greece, Spain could be next. And while Greece is roughly the size of Mississippi's economy ($300BB in GDP), Spain is 5 times bigger. Its the 9th biggest economy in the world. I think a crisis is possible, but they may survive until 2012 or even 2013 without a bailout. The problem is Germany has vowed they WON'T bail out Spain, although at some point, they likely will be forced to. More discussion of unwinding the Euro will ensue, fear and risk aversion always follow.
3. US Treasuries: Moody's put our gov's bonds on negative watch. That has never happened before, and usually means a downgrade within 12-18 months. Every time a European soveriegn was downgraded this year, it wasn't pretty. Even without a downgrade however, I have never seen so much media attention on our deficit problems (this is good). Rates spiking to 4.5-5% would not be good, however, for equities. I mean, everyone knows the value of a stock is the PV of its future cash flows right? What happens when you use a higher interest rate there? PEs fall....
4. China Breaks Down: There are a number of warning signals of a property bubble brewing in China. Real estate prices in Beijing and Shanghai are up 50-100%. Cost of a starter housing in Beijing an hour from downtown, cost 10x average salaries there! In late 2008-2009, the Chinese government forced banks to lend a TRILLION dollars, many loans of which are starting to show signs of stress (NPL's are up, non performing loans). In response, the Chinese govt will likely raise capital requirement next year, meaning less lending, less spending, slower growth. A major bust in China would be terrible for the markets.
So, similar to 2010, I think we'll see a smattering of crises. The odds of that are very high. Barron's panel of experts (at one point I was part of their surveys!), suggests the market will be up 11% next year. S&P earnings per share are running $85/share on a trailing basis. That is a 15 PE ratio. Next year, expectations are for 93/share, gains of 9%. So, yes I think the best and most likely case is that we'll trade up around 10% in 2011.
However, does that make me want to run out and buy stocks? Not really. We saw a low of 12.7x PE's this year back in June, and today we are at the high's (15x). Nowhere in the world have we addressed the solvency issues facing all the G20 borrowers of the world. All we have done is fix liquidity problems with government backstops and printing money. This day of reckoning is out there, and fears will at some point scare stocks this year. But we wont have to really face it for awhile (my bet is 2015 to 2020, financial armegeddon).
As far as the US and another recession, I don't think its likley. I suspect GDP grows slowly 2-3% , and the markets move upwards on the back of better earnings. Consumer savings rates & unemployment have stabilized in the US, meaning we wont see a major backup in consumer spending. Government stimulus is still on the table (now more with tax cuts). Dollar devaluation will continue with deficits (own GLD, or better yet, take a look at this fund, TPINX to get short the dollar).
So, net net, my plan is to wait for the inevitable dip, look for some good tech stocks (pick any big cap one), and put some capital to work. I'll keep you posted.
Good luck and happy holidays!
So, first of all here are some of the risk factors we face next year. Some of these we have seen warning signs in the markets. Some of these are arguably not likely in 2011:
1. Municipal bond market: There is a real possiblity that someone will default next year and scare the heck out of the markets. California faces a $25BB budget shortfall in 2011, Harrisburg PA nearly defaulted on their bonds, and the Build America Bond tax subsidies are expiring. Spreads are widening, and, unlike the Federal Govt, states are required to balance their budgets every year. If a state goes, will the Feds bail them out? I assume so but getting there will be ugly.
2. Spain: while the ECB (European Central Bank) just bailed out Ireland and Greece, Spain could be next. And while Greece is roughly the size of Mississippi's economy ($300BB in GDP), Spain is 5 times bigger. Its the 9th biggest economy in the world. I think a crisis is possible, but they may survive until 2012 or even 2013 without a bailout. The problem is Germany has vowed they WON'T bail out Spain, although at some point, they likely will be forced to. More discussion of unwinding the Euro will ensue, fear and risk aversion always follow.
3. US Treasuries: Moody's put our gov's bonds on negative watch. That has never happened before, and usually means a downgrade within 12-18 months. Every time a European soveriegn was downgraded this year, it wasn't pretty. Even without a downgrade however, I have never seen so much media attention on our deficit problems (this is good). Rates spiking to 4.5-5% would not be good, however, for equities. I mean, everyone knows the value of a stock is the PV of its future cash flows right? What happens when you use a higher interest rate there? PEs fall....
4. China Breaks Down: There are a number of warning signals of a property bubble brewing in China. Real estate prices in Beijing and Shanghai are up 50-100%. Cost of a starter housing in Beijing an hour from downtown, cost 10x average salaries there! In late 2008-2009, the Chinese government forced banks to lend a TRILLION dollars, many loans of which are starting to show signs of stress (NPL's are up, non performing loans). In response, the Chinese govt will likely raise capital requirement next year, meaning less lending, less spending, slower growth. A major bust in China would be terrible for the markets.
So, similar to 2010, I think we'll see a smattering of crises. The odds of that are very high. Barron's panel of experts (at one point I was part of their surveys!), suggests the market will be up 11% next year. S&P earnings per share are running $85/share on a trailing basis. That is a 15 PE ratio. Next year, expectations are for 93/share, gains of 9%. So, yes I think the best and most likely case is that we'll trade up around 10% in 2011.
However, does that make me want to run out and buy stocks? Not really. We saw a low of 12.7x PE's this year back in June, and today we are at the high's (15x). Nowhere in the world have we addressed the solvency issues facing all the G20 borrowers of the world. All we have done is fix liquidity problems with government backstops and printing money. This day of reckoning is out there, and fears will at some point scare stocks this year. But we wont have to really face it for awhile (my bet is 2015 to 2020, financial armegeddon).
As far as the US and another recession, I don't think its likley. I suspect GDP grows slowly 2-3% , and the markets move upwards on the back of better earnings. Consumer savings rates & unemployment have stabilized in the US, meaning we wont see a major backup in consumer spending. Government stimulus is still on the table (now more with tax cuts). Dollar devaluation will continue with deficits (own GLD, or better yet, take a look at this fund, TPINX to get short the dollar).
So, net net, my plan is to wait for the inevitable dip, look for some good tech stocks (pick any big cap one), and put some capital to work. I'll keep you posted.
Good luck and happy holidays!
Thursday, December 16, 2010
Shorting SPYs, Some Muni's Thoughts
The market has had a tremendous run since September 1st, up 18.5% including dividends. I think running a very conservative portfolio right now is important, so am cutting my exposure a bit more via shorting some SPYs. Looks like I traded them a little over 124. Generally speaking, I am running under 30% net long equities now (down from peak of 50% in October), 30% net long bonds. Bondwise, I own short duration corporate bonds (CSJ) or emerging market so as to be short the dollar. The selloff in treasuries continues, with the 10yr now at 3.53% compared to 2.5% just last month. TLT (long dated treasury proxy), is down 13% in a little over a month!
I think selling any loser names or reducing risk is a good idea. I get a lot of "this market is going to tank in january" vibes from friends in the business. My technical service at IBD suggests that the Nasdaq has now had 5 distribution days in the past month (selling on heavy volume, a negative indicator). They put the market trends at "upturn under pressure."
On another topic, lately there has been a lot of talk of municipal bonds or muni's. I spent a long time as a credit guy, but mostly in corporates so my expertise is limited here really. But noting that Bill Gross bought $4.4mm of muni funds last week, I thought it was worth taking a look. I do like to buy beaten up names when conditions look oversold.
First of all, lots of munis are VERY long dated (ie with maturities out 20-30 years). That means you have a ton of duration risk (ie if interest rates in general move up, you get hammered on your muni bond's prices). Further, I am generally bearish on treasuries, and believe rates will be in the 4-5% range within 6-12 months. Right off the bat, this doesn't bode well generally for them in my opinion.
Secondly, there are 2 types of muni's: General Obligation (GO Bonds), and Revenue Bonds. Revenue bonds are backed by a specific project or stream of revenue, and in my opinion are the way to go. GO Bonds are backed by the taxing authority of whichever state they are issued by, but many states bear an enormous pension problem so that is part of your liability.
Just to get my head around how bad the pension problem is, in NJ for example, consider the following. An elementary school teacher today starts out with a $45,000 salary roughly speaking. After 20 years, they are making almost $100,000 per year. Wow not bad. The state withholds 7.5% of their income which goes to the general state pension fund. I did the math, over a 30 year career, the state of NJ would have collected about $153,000 toward your pension (assuming your salary went up to the 100k level, straightline).
Now the formula for retiring means you can quit at 55 and get 55% of your highest 3 years of salary. So if you live to be 80, that mean you'll receive $52,000 per year for 25 years. Thats future state costs of $1.3 MILLION! Vs contributions of $153,000. Ok yes, you are correct in thinking that the state earned returns on that money over 30 years, so the $153,000 of contributions would be higher. However the states actual returns in the last decade were 2.5%, vs an expected return of 8.25%. So, its more like $200-300k at the end of day. On an aggregate basis, NJ today has $67BB in its pension fund, with annual payouts approaching $10BB. Doesnt take a genius to realize that it will be broke in 6.7 years, plus whatever returns they generate. (or less whatever they lose!).
So, state GO bonds may be lots better in your state, but generally speaking, seems like a lot of work to make 5%, with a whole lot of risk. The muni market overall is 2.8TT, and one estimate is that state pension liabilities are another 2.8TT.
Revenue bond wise, I gave up. I couldnt find an ETF or a closed end fund investing in a selected basket of revenue bonds. Yes, I'd love to be secured by a good tollroad or water plant, but wasnt able to find one. If you do, please let me know. If you are interested in muni's, MUB is a non-levered ETF that has gotten absolutely destroyed, but at a 3.75% yield, i'll pass. (perhaps owning UTF is just as good, see an earlier post).
Regarding the bond master, Bill Gross bought several funds: PMX, PCQ, PCK, PZC, PMF. These are Pimco closed end funds, 3 of which are in California, and their yeilds look good (8%). However, they use leverage to get there, and all look very rich to its historical NAV premium. (driven by Bill Gross's buys, these are rallying, while the underlying NAV of the bond fund is still falling!). For example, PMX is at a 19% premium to NAV, and its 3yr average premium to NAV is 8%. You are paying $10.35 for this, when the NAV of the portfolio only adds up to $8.71. Bill Gross is very good, but understand he was buying PMX below $10/share, when the NAV was around $9.50 / share.
Too bad I couldnt get a borrow on any of these shares! If you own muni's, be careful. I didnt even mention what the expiration of the Build America Bonds program will mean for muni demand in 2011. But it can't help.
I think selling any loser names or reducing risk is a good idea. I get a lot of "this market is going to tank in january" vibes from friends in the business. My technical service at IBD suggests that the Nasdaq has now had 5 distribution days in the past month (selling on heavy volume, a negative indicator). They put the market trends at "upturn under pressure."
On another topic, lately there has been a lot of talk of municipal bonds or muni's. I spent a long time as a credit guy, but mostly in corporates so my expertise is limited here really. But noting that Bill Gross bought $4.4mm of muni funds last week, I thought it was worth taking a look. I do like to buy beaten up names when conditions look oversold.
First of all, lots of munis are VERY long dated (ie with maturities out 20-30 years). That means you have a ton of duration risk (ie if interest rates in general move up, you get hammered on your muni bond's prices). Further, I am generally bearish on treasuries, and believe rates will be in the 4-5% range within 6-12 months. Right off the bat, this doesn't bode well generally for them in my opinion.
Secondly, there are 2 types of muni's: General Obligation (GO Bonds), and Revenue Bonds. Revenue bonds are backed by a specific project or stream of revenue, and in my opinion are the way to go. GO Bonds are backed by the taxing authority of whichever state they are issued by, but many states bear an enormous pension problem so that is part of your liability.
Just to get my head around how bad the pension problem is, in NJ for example, consider the following. An elementary school teacher today starts out with a $45,000 salary roughly speaking. After 20 years, they are making almost $100,000 per year. Wow not bad. The state withholds 7.5% of their income which goes to the general state pension fund. I did the math, over a 30 year career, the state of NJ would have collected about $153,000 toward your pension (assuming your salary went up to the 100k level, straightline).
Now the formula for retiring means you can quit at 55 and get 55% of your highest 3 years of salary. So if you live to be 80, that mean you'll receive $52,000 per year for 25 years. Thats future state costs of $1.3 MILLION! Vs contributions of $153,000. Ok yes, you are correct in thinking that the state earned returns on that money over 30 years, so the $153,000 of contributions would be higher. However the states actual returns in the last decade were 2.5%, vs an expected return of 8.25%. So, its more like $200-300k at the end of day. On an aggregate basis, NJ today has $67BB in its pension fund, with annual payouts approaching $10BB. Doesnt take a genius to realize that it will be broke in 6.7 years, plus whatever returns they generate. (or less whatever they lose!).
So, state GO bonds may be lots better in your state, but generally speaking, seems like a lot of work to make 5%, with a whole lot of risk. The muni market overall is 2.8TT, and one estimate is that state pension liabilities are another 2.8TT.
Revenue bond wise, I gave up. I couldnt find an ETF or a closed end fund investing in a selected basket of revenue bonds. Yes, I'd love to be secured by a good tollroad or water plant, but wasnt able to find one. If you do, please let me know. If you are interested in muni's, MUB is a non-levered ETF that has gotten absolutely destroyed, but at a 3.75% yield, i'll pass. (perhaps owning UTF is just as good, see an earlier post).
Regarding the bond master, Bill Gross bought several funds: PMX, PCQ, PCK, PZC, PMF. These are Pimco closed end funds, 3 of which are in California, and their yeilds look good (8%). However, they use leverage to get there, and all look very rich to its historical NAV premium. (driven by Bill Gross's buys, these are rallying, while the underlying NAV of the bond fund is still falling!). For example, PMX is at a 19% premium to NAV, and its 3yr average premium to NAV is 8%. You are paying $10.35 for this, when the NAV of the portfolio only adds up to $8.71. Bill Gross is very good, but understand he was buying PMX below $10/share, when the NAV was around $9.50 / share.
Too bad I couldnt get a borrow on any of these shares! If you own muni's, be careful. I didnt even mention what the expiration of the Build America Bonds program will mean for muni demand in 2011. But it can't help.
Monday, December 13, 2010
Need a Money Market Type Fund?
Alright, I often opine about the wreck of a balance sheet that is our US government. Its true, so you can't really sleep at night owning long dated treasury bonds, or a long duration fixed income bond fund either in my opinion. (Or maybe you can, ignorance is bliss). Muni's are also problematic, but that is a state by state situation, and generally I know that NJ, California, Michigan, Illinois are all generally something to avoid. Other states I don't really know, but muni's are a mess. Either way, rate moves higher will hurt bond fund performance and I think its inevitable over the next few months and years.
So, then problem is, you are stuck owning a money market fund, or a bank savings account paying you barely above 0%. So what can you buy to get a little more yield? CDs are one option, one smart buddy recommend Ally Bank CDs because you can redeem them cheaply if rates rise. Keep it under the $500,000 (joint account) limit, and under 5 years. These guys are long residential mortgages and car loans, you may need that FDIC guarantee one day!
The ones below are the best I have found after much searching, I recommend a mix of the 2.
CSJ: This is an ETF, so trades like a stock, very liquid. They own short duration corporate bonds, 1-3 years to maturity, all investment grade. I'd much rather own this compared to short dated G7 government bonds. Yieldier, and corporates actually have decent balance sheets. Its traded down a bit, now its around 103.20. With the backup in yields, this has fallen, but not much. Today its yielding 2.61%. If you want to see the change in its NAV, here it is...boring but better than 0.02%, and far more liquid than a bank CD.
Historical Quarterly NAV Returns
2010
Q1 1.30%
Q2 0.55%
Q3 1.77%
Q4
---
2009
Q1 1.16%
Q2 5.08%
Q3 2.99%
Q4 1.17%
2008
Q1 2.09%
Q2 -0.28%
Q3 -3.01%
Q4 1.19%
2007
Q1 0.58%
Q2 1.77%
Q3 1.67%
Worst case: you would have been flat in 2008, not bad considering the market fell 38%.
PUBDX: Called the Pimco Unconstrained Bond fund, this one is perfect if you have no clue where you want to be duration-wise. (And if you dont know what duration is, then buy this one). Basically, these guys are able to be long or perhaps even short duration (which is the same as being short long-dated bonds). Right now they have an effective 3.0 year duration (average maturity cash flow weighted). They are up 5.9% ytd, and have held in quite well given the recent sell off in treasuries. (Note that Pimco's long duration govt bond fund is down 6% in the last 3 months vs this one is flat). I actually think short term that we get a bounce in treasuries (eg rates fall a bit). Either way, this one is well managed, currently yielding 2.2%. Smartly, these guys were very long duration last year, earning 12.8% in 2009.
I think a mix of these 2 would make a lot of sense. I know people are scared of the market. I would be more scared of generic government or long duration bond funds. Its awful to say, but usually the retail investor tends to be wrong over time, chasing returns. The correlation of capital into stock funds mirrors almost EXACTLY the market. That is, when the S&P hits new highs, cash going in to buy stock funds hits new highs too. When returns are negative, people take money out. And redemptions peaked at the bottom. This is the opposite of what you are supposed to do!
Bonds have been great performers throughout the crisis. Hence, flows into bond funds have been on a streak that mirrors the streak of cash going into stock funds leading up the 1999 stock market bubble. This is a good article if you have bought bond funds...I do believe the great bond bull run is over. (also more reason to own TBF).
http://www.marketwatch.com/story/the-shifting-tides-of-bond-fund-flows-2010-11-29
So, then problem is, you are stuck owning a money market fund, or a bank savings account paying you barely above 0%. So what can you buy to get a little more yield? CDs are one option, one smart buddy recommend Ally Bank CDs because you can redeem them cheaply if rates rise. Keep it under the $500,000 (joint account) limit, and under 5 years. These guys are long residential mortgages and car loans, you may need that FDIC guarantee one day!
The ones below are the best I have found after much searching, I recommend a mix of the 2.
CSJ: This is an ETF, so trades like a stock, very liquid. They own short duration corporate bonds, 1-3 years to maturity, all investment grade. I'd much rather own this compared to short dated G7 government bonds. Yieldier, and corporates actually have decent balance sheets. Its traded down a bit, now its around 103.20. With the backup in yields, this has fallen, but not much. Today its yielding 2.61%. If you want to see the change in its NAV, here it is...boring but better than 0.02%, and far more liquid than a bank CD.
Historical Quarterly NAV Returns
2010
Q1 1.30%
Q2 0.55%
Q3 1.77%
Q4
---
2009
Q1 1.16%
Q2 5.08%
Q3 2.99%
Q4 1.17%
2008
Q1 2.09%
Q2 -0.28%
Q3 -3.01%
Q4 1.19%
2007
Q1 0.58%
Q2 1.77%
Q3 1.67%
Worst case: you would have been flat in 2008, not bad considering the market fell 38%.
PUBDX: Called the Pimco Unconstrained Bond fund, this one is perfect if you have no clue where you want to be duration-wise. (And if you dont know what duration is, then buy this one). Basically, these guys are able to be long or perhaps even short duration (which is the same as being short long-dated bonds). Right now they have an effective 3.0 year duration (average maturity cash flow weighted). They are up 5.9% ytd, and have held in quite well given the recent sell off in treasuries. (Note that Pimco's long duration govt bond fund is down 6% in the last 3 months vs this one is flat). I actually think short term that we get a bounce in treasuries (eg rates fall a bit). Either way, this one is well managed, currently yielding 2.2%. Smartly, these guys were very long duration last year, earning 12.8% in 2009.
I think a mix of these 2 would make a lot of sense. I know people are scared of the market. I would be more scared of generic government or long duration bond funds. Its awful to say, but usually the retail investor tends to be wrong over time, chasing returns. The correlation of capital into stock funds mirrors almost EXACTLY the market. That is, when the S&P hits new highs, cash going in to buy stock funds hits new highs too. When returns are negative, people take money out. And redemptions peaked at the bottom. This is the opposite of what you are supposed to do!
Bonds have been great performers throughout the crisis. Hence, flows into bond funds have been on a streak that mirrors the streak of cash going into stock funds leading up the 1999 stock market bubble. This is a good article if you have bought bond funds...I do believe the great bond bull run is over. (also more reason to own TBF).
http://www.marketwatch.com/story/the-shifting-tides-of-bond-fund-flows-2010-11-29
Friday, December 10, 2010
Gold and Treasuries
This is mostly a copy of an email I sent last week discussing gold. As a sidenote, I did want to point out that shorting treasuries (buying TBF) is a very similar trade to being long gold. Sure, not over the past 2 years as treasuries have rallied for 1) flight to quality reasons, and 2) Fed buying. Demand from the Fed has clearly been a very powerful, yet artificial demand factor. One trillion times. Furthermore, the chinese have stopped buying treasuries, and if you look at their gold imports, its up 6 fold year to date vs all of last year.
As far as Fed buying, though, QE will probably continue for awhile. (First out of "deflation fighting and stimulus" and eventually out of necessity). So I dont know if treasuries break down meaningfully in either 5 months, or 5 years. The new bit of information I wanted to pass along though was from a McKinsey study on historical treasury yields. Basically they showed that (given current inflation and growth rates), 10 year treasuries should be yielding 4.5%, much higher than where we are today at 3.25%. In essence, real yields are at near all time lows. There isnt much room for them to move lower. The only bull case for treasuries is that the US fixes its balance sheet (not remotely likely), and that we fall into deflation.
As far as deflation goes, I dont buy it. Cotton is up 85% ytd, silver 80%, coffee, 50%, oats, 44%, wheat 37%, corn 34%, soybean oil 33%, lumber 31%, gold 26%, OJ 26%, cattle 23%, soybeans 21%....and so on.
Here is my prior email on NEM...its now a little lower than where I got in so I thought this was still relevant:
"Bought a position in NEM, Newmont Mining, a large cap gold mining company. If you don’t own gold, GLD or some kind of gold miner, then I think you should consider it. There is really no hope for the dollar long term, our deficits and Debt to GDP numbers are abysmal.
On this topic, I am sure you have seen the debt debacles going on in Ireland, with Spanish sovereigns and also Belgium / Portuguese bonds selling off pretty dramatically in the past couple weeks. Germany didn’t help by suggesting that in the future, bondholders should take a haircut on Euro government bonds in a restructuring. Why should taxpayers bail out bondholders they ask? I hate this kind of skewed logic. If taxpayers borrow money, then taxpayers should pay it back. That’s how capitalism works. Anyway, today tho the ECB is caving and extending liquidity to euro banks thru Q1 of next year. Do I need to say that the G20s system today of adding debt to solve a debt crisis ultimately is a house of cards?
While average Eurozone Debt/GDP is 84%, with deficits at 6% per year of GDP, interestingly the US is worse. We have 10% deficits and already are at 95% debt to GDP. The old rule of thumb was that at 140% D/GDP, the slippery slope becomes overwhelming, global capital markets tend to shut down, rates then skyrocket, and you are forced to restructure and implement austerity measures to fix your deficits. This is followed by a horrible recession/unemployment. Latvia last year went thru this, and unemployment went from 7% to 20%, and GDP fell 10%. Ouch. However their currency devaluation solved their current account problem, going from a 27% deficit to a 7% surplus now. The US could go higher than the 140%, which is probably around 4 years away, but its very scary after that. Here are the worst countries in terms of debt…notice Greece and Italy are worse than the US, but we are worse off than Ireland and Portugal….
Japan
204%
Greece
130%
Italy
130%
United States
100%
France
99%
Portugal
97%
United Kingdom
94%
Ireland
93%
Germany
85%
Austria
82%
Netherlands
82%
Spain
74%
Asia1
41%
Latin America3
35%
Central Europe2
29%
So, our slow moving train wreck of a dollar means you should own non-dollar, preferably, non-indebted country currency. Or gold. The NEM chart looks great, and fundamentally its one of the few gold stocks that actually generates FCF. Trades at a 14x earnings, vs S&P at 18 and the industry at 30x. Its 1% div yield is small, but its something. They generated 1.04/share in FCF after capex even, meaning the stock trades at a runrate FCF yield of 7%. The stock has way underperformed gold b/c the market didn’t like its Q3 numbers. While NEM beat on an EPS basis, they guided to slightly lower gold production, 5.3-5.4mm ounces for the year from 5.3 – 5.5mm ounces for the year, and costs look like they are going up. Not a major miss, and mainly b/c of production issues at its Australian mine. TTM, its ROE is 18%, not bad vs the industry at 12%. High ROE, solid FCF, reasonable multiple."
As far as Fed buying, though, QE will probably continue for awhile. (First out of "deflation fighting and stimulus" and eventually out of necessity). So I dont know if treasuries break down meaningfully in either 5 months, or 5 years. The new bit of information I wanted to pass along though was from a McKinsey study on historical treasury yields. Basically they showed that (given current inflation and growth rates), 10 year treasuries should be yielding 4.5%, much higher than where we are today at 3.25%. In essence, real yields are at near all time lows. There isnt much room for them to move lower. The only bull case for treasuries is that the US fixes its balance sheet (not remotely likely), and that we fall into deflation.
As far as deflation goes, I dont buy it. Cotton is up 85% ytd, silver 80%, coffee, 50%, oats, 44%, wheat 37%, corn 34%, soybean oil 33%, lumber 31%, gold 26%, OJ 26%, cattle 23%, soybeans 21%....and so on.
Here is my prior email on NEM...its now a little lower than where I got in so I thought this was still relevant:
"Bought a position in NEM, Newmont Mining, a large cap gold mining company. If you don’t own gold, GLD or some kind of gold miner, then I think you should consider it. There is really no hope for the dollar long term, our deficits and Debt to GDP numbers are abysmal.
On this topic, I am sure you have seen the debt debacles going on in Ireland, with Spanish sovereigns and also Belgium / Portuguese bonds selling off pretty dramatically in the past couple weeks. Germany didn’t help by suggesting that in the future, bondholders should take a haircut on Euro government bonds in a restructuring. Why should taxpayers bail out bondholders they ask? I hate this kind of skewed logic. If taxpayers borrow money, then taxpayers should pay it back. That’s how capitalism works. Anyway, today tho the ECB is caving and extending liquidity to euro banks thru Q1 of next year. Do I need to say that the G20s system today of adding debt to solve a debt crisis ultimately is a house of cards?
While average Eurozone Debt/GDP is 84%, with deficits at 6% per year of GDP, interestingly the US is worse. We have 10% deficits and already are at 95% debt to GDP. The old rule of thumb was that at 140% D/GDP, the slippery slope becomes overwhelming, global capital markets tend to shut down, rates then skyrocket, and you are forced to restructure and implement austerity measures to fix your deficits. This is followed by a horrible recession/unemployment. Latvia last year went thru this, and unemployment went from 7% to 20%, and GDP fell 10%. Ouch. However their currency devaluation solved their current account problem, going from a 27% deficit to a 7% surplus now. The US could go higher than the 140%, which is probably around 4 years away, but its very scary after that. Here are the worst countries in terms of debt…notice Greece and Italy are worse than the US, but we are worse off than Ireland and Portugal….
Japan
204%
Greece
130%
Italy
130%
United States
100%
France
99%
Portugal
97%
United Kingdom
94%
Ireland
93%
Germany
85%
Austria
82%
Netherlands
82%
Spain
74%
Asia1
41%
Latin America3
35%
Central Europe2
29%
So, our slow moving train wreck of a dollar means you should own non-dollar, preferably, non-indebted country currency. Or gold. The NEM chart looks great, and fundamentally its one of the few gold stocks that actually generates FCF. Trades at a 14x earnings, vs S&P at 18 and the industry at 30x. Its 1% div yield is small, but its something. They generated 1.04/share in FCF after capex even, meaning the stock trades at a runrate FCF yield of 7%. The stock has way underperformed gold b/c the market didn’t like its Q3 numbers. While NEM beat on an EPS basis, they guided to slightly lower gold production, 5.3-5.4mm ounces for the year from 5.3 – 5.5mm ounces for the year, and costs look like they are going up. Not a major miss, and mainly b/c of production issues at its Australian mine. TTM, its ROE is 18%, not bad vs the industry at 12%. High ROE, solid FCF, reasonable multiple."
Wednesday, December 8, 2010
Covering Schwab, Thoughts on Rates
In case you havent noticed, 10 year treasuries have had a huge move since early November. From 2.4% to 3.3% today. May not sound like much but thats a 10% price drop this quarter to date in long dated treasury bonds. What is interesting is that for the first time, perhaps ever, I am reading in the paper that treasuries are off on US debt concerns. For awhile I have been noting how heavy our countries debt load is, yet the market has ignored this for some time. (Goldman Sachs front running the Fed in my opinion!) Fed has been a huge buyer (via QE) and now owns ONE TRILLION dollars of our govt debt. However, it seems "bond vigilantes" are back. With our govt now cutting taxes in the face of 10% deficits, bondholders are rightfully getting nervous. We are the ONLY G20 country in the world still intent on stimulus and increasing deficits. All others are implementing changes to improve their fiscal situations, not implementing stimulus, which isnt really helping except to create asset bubbles in stocks and commodities.
I bot some TBF (short 10-20 yr treasury ETF) back in November, and hope some of you did too. Its still a great risk reward trade long term. I think with effective tax stimulus next year, Fed easing still, rates will keep moving up. I also have a long-short trade on in AMTD (long ameritrade) against SCHW (short Schwab). Lots of reasons, diverse multiples (13.5x v. 19x), daily avg trading revenue is growing 15% at ameritrade vs 5% for Schwab, identical ROEs (the most important metric)....both benefit however as rates move up. (and really, a year out, rates are heading to 4-5% on the 10 year).
Either way, I am covering the SCHW part of my trade and staying long Ameritrade. Its good if rates keep moving up. So far looks like i am up 15% in amtd, and down 8.7% in Schwab, so its been a good market neutral return of 7%. Both stocks are breaking out, so I am stop lossing the short side.
Side note: while the market seemed on a pretty decent uptrend, we had a bearish reversal late afternoon yesterday. Many democrats are opposing the tax deal that Obama agreed to, and it spooked the markets around 2:30pm. Hard to be heavy long or short with this kind of ambiguity. Obviously US bonds are a bad idea, muni's too. But its not so clear directionally where stocks are going. I am still 30% long equities though, generally I think its more likely our govt stimulates, cuts taxes and spends more in 2011. Its all we know.
I bot some TBF (short 10-20 yr treasury ETF) back in November, and hope some of you did too. Its still a great risk reward trade long term. I think with effective tax stimulus next year, Fed easing still, rates will keep moving up. I also have a long-short trade on in AMTD (long ameritrade) against SCHW (short Schwab). Lots of reasons, diverse multiples (13.5x v. 19x), daily avg trading revenue is growing 15% at ameritrade vs 5% for Schwab, identical ROEs (the most important metric)....both benefit however as rates move up. (and really, a year out, rates are heading to 4-5% on the 10 year).
Either way, I am covering the SCHW part of my trade and staying long Ameritrade. Its good if rates keep moving up. So far looks like i am up 15% in amtd, and down 8.7% in Schwab, so its been a good market neutral return of 7%. Both stocks are breaking out, so I am stop lossing the short side.
Side note: while the market seemed on a pretty decent uptrend, we had a bearish reversal late afternoon yesterday. Many democrats are opposing the tax deal that Obama agreed to, and it spooked the markets around 2:30pm. Hard to be heavy long or short with this kind of ambiguity. Obviously US bonds are a bad idea, muni's too. But its not so clear directionally where stocks are going. I am still 30% long equities though, generally I think its more likely our govt stimulates, cuts taxes and spends more in 2011. Its all we know.
Tuesday, December 7, 2010
Buying UTF
The headline in the WSJ today is "Deal Struck on Tax Package." Bush-era tax cuts will be extended for 2 years, S&P futures are happily up 1%. The Santa Claus rally begins. I love the "comprises" that each the Republicans and Democrats agreed to. Republicans get to keep tax cuts in place (even for those making north of $250,000), while Democrats get to spend more money (benefit extensions). Taxing less and spending more, wow amazing how short sighted our politicians are. That is besides the point however. What IS important is that dividend tax rates will remain at 15% for 2 years, as opposed to increasing to ordinary rates (up to 39%). This is huge. Div yielding stocks should benefit quite a bit.
Along those lines, I just bot a little UTF (@16.54), adding to an existing position. This is a high dividend yielding closed end fund. Its listed, ie it trades on an exchange (unlike mf's), so its instantly liquid. They do employ a little leverage to juice returns and dividends. Its got 2.5BB in assets (stocks), vs 900mm in liability (debt to lever those stocks). so its 0.56x levered, or 156% long vs its equity. I earlier had bought this at 16.15, it ran up to 17.45, and now has fallen 7% in a flat tape. Its an infrastructure play, with 42% exposure to US stocks, 25% to Europe, and the rest to Canada, Australia, Japan, UK. I like the non-dollar exposure quite a bit.
Biggest positions: American Tower - a company that owns cell towers and leases capacity to the major cellphone carriers. Great company, built in growth as data usage continues to grow. Utilities comprise 40% of the fund overall, and this is a heavily beaten up sector with natgas prices in the dumps. They also own water infrastructure co's, toll companies, oil & gas pipeline operators. Lots to like, somewhat defensive, and sporting a 9% dividend yield. The other interesting thing is that UTF trades at an 11% discount to NAV.
As far as the sustainability of their dividend, this fund IPO'd in 2004, paying a 25.5c per share div each quarter. In 6 years, the dividend has increased by 41%, to 36c as of September. In fact, the dividend was raised in Sept from 24 to 36c. So the first 6 mo's of 2010, UTF traded at a div yield of 6.4%, now its over 9% with the increase. My target on the stock then is a 7% yield, or $20.50 per share. Thats 25% higher than where it is today, and with a 9% yield on top, I am looking to make 30-35% in a year. (For the CEF saavy-ists out there, I checked and there was no tax free return of capital on UTF meaning that CF isnt high enough to support the current dividend payments).
Bear case: utilities are basically like owning long dated bonds. They trade on dividend yields, and with yields at all time lows on the 10 year, utilities yields have nowhere to go but up (and prices down). I note however that utilities havent rallied along w/ treasuries, in fact it is the 3rd worst performing group in the past 12 months. Only beleagured financials and healthcare stocks have performed worse. On a PE basis, utilities trade now at 13x with 4.6% avg div yields. Cheap vs avg PE's of 15.
I'll look to stop loss this one down 10%, net of any dividends I get.
Along those lines, I just bot a little UTF (@16.54), adding to an existing position. This is a high dividend yielding closed end fund. Its listed, ie it trades on an exchange (unlike mf's), so its instantly liquid. They do employ a little leverage to juice returns and dividends. Its got 2.5BB in assets (stocks), vs 900mm in liability (debt to lever those stocks). so its 0.56x levered, or 156% long vs its equity. I earlier had bought this at 16.15, it ran up to 17.45, and now has fallen 7% in a flat tape. Its an infrastructure play, with 42% exposure to US stocks, 25% to Europe, and the rest to Canada, Australia, Japan, UK. I like the non-dollar exposure quite a bit.
Biggest positions: American Tower - a company that owns cell towers and leases capacity to the major cellphone carriers. Great company, built in growth as data usage continues to grow. Utilities comprise 40% of the fund overall, and this is a heavily beaten up sector with natgas prices in the dumps. They also own water infrastructure co's, toll companies, oil & gas pipeline operators. Lots to like, somewhat defensive, and sporting a 9% dividend yield. The other interesting thing is that UTF trades at an 11% discount to NAV.
As far as the sustainability of their dividend, this fund IPO'd in 2004, paying a 25.5c per share div each quarter. In 6 years, the dividend has increased by 41%, to 36c as of September. In fact, the dividend was raised in Sept from 24 to 36c. So the first 6 mo's of 2010, UTF traded at a div yield of 6.4%, now its over 9% with the increase. My target on the stock then is a 7% yield, or $20.50 per share. Thats 25% higher than where it is today, and with a 9% yield on top, I am looking to make 30-35% in a year. (For the CEF saavy-ists out there, I checked and there was no tax free return of capital on UTF meaning that CF isnt high enough to support the current dividend payments).
Bear case: utilities are basically like owning long dated bonds. They trade on dividend yields, and with yields at all time lows on the 10 year, utilities yields have nowhere to go but up (and prices down). I note however that utilities havent rallied along w/ treasuries, in fact it is the 3rd worst performing group in the past 12 months. Only beleagured financials and healthcare stocks have performed worse. On a PE basis, utilities trade now at 13x with 4.6% avg div yields. Cheap vs avg PE's of 15.
I'll look to stop loss this one down 10%, net of any dividends I get.
Sunday, December 5, 2010
Portfolio Breakdown
To start I felt it was worth posting where I sit from a portfolio persective. I typically own 10-20 stocks/funds/ETFs at a time, some long ideas, some short. Today I am running about 40% long bonds, 30% long equities and 30% cash. We are in month 26 of a bull market, the average bull lasting 18 months against the average bear market lasting 6 months. So, I am pretty conservative right now. I pared back a lot in October.
That said, this post is designed to allow friends, enemies, whoever is interested, the opportunity to read market commentary that I make, but most importantly to track my trading patterns, when exactly I buy and sell stocks/funds. My goal is to make 5-10% market adjusted returns, I am in the capital preservation business, so very very careful to mitigate losses. Here I really wanted to initially post the best LONG TERM ideas for those that dont want to trade too much. I am leaving out speculative, growth stocks, and short term ideas for now, but will post them as I transact them. So here is the bulk of my names right now:
WGRNX: my biggest stock mutual fund, Wintergreen is up 15% year to date. David Winters, the guy who runs the fund, is a very solid value investor. They are 25% in the US, rest in foreign stocks. Good track record, somewhat volatile, but that is unavoidable to some extent. I like having significant non-USD exposure generally, you will see that as a recurring theme in almost every name I own.
GLRE: David Einhorn is the smartest investor out there, as good as Buffet, and a lot younger. Its kinda pricey right now, trading at a big premium to NAV. I will add some again at some point, but this is one to follow and perhaps just buy a tad to get it on the sheets.
MSFT/IBM: these are both very cheap, in fact I have never seen tech stocks so inexpensive in my investing career. Long term I see very little that will hurt you. Eventually these management teams will figure out that investors prefer dividends to stock buybacks, and will reward them when they convert more to that mindset.
GLD: Own some gold…its such a popular trade that it scares me a bit, but this is one of those very rare cases where the general view is probably the right one. Gold will protect you as the dollar continues on its path to self destruction.
XOM: Exxon is still a very good LT bet, and while they just got longer natural gas at the wrong time, eventually this shift from oil to more natgas will pay off. You have to know that world is running out of oil, and in 10-15 years, oil will be at least $250 a barrel. I just sold my COP, its the same bet, and i'll probably get back in after a pullback.
JNJ / KFT: warren buffet owns both of these, they are cheap, have 3%+ dividend yields, and trade below the market at 12x…what is not to like? I like both at these prices today. People need food and medicine, always.
PLBDX: this is a bond fund…they own emerging markets debt, which sounds a little scary, but actually EM countries have far better balance sheets than most developed countries. NOW is a good time to buy some of this. Its my 2nd biggest position, and its down 6% in 3 weeks on the European debt crisis that is going on right now. This bond fund is up 17% ytd still though, and there is a lot to like about Pimco as manager.
EFT: this is a bank debt closed end fund, trades like a stock. Generally if interest rates go up, this fund will benefit from that, as bank loans are generally floating in nature.
That said, this post is designed to allow friends, enemies, whoever is interested, the opportunity to read market commentary that I make, but most importantly to track my trading patterns, when exactly I buy and sell stocks/funds. My goal is to make 5-10% market adjusted returns, I am in the capital preservation business, so very very careful to mitigate losses. Here I really wanted to initially post the best LONG TERM ideas for those that dont want to trade too much. I am leaving out speculative, growth stocks, and short term ideas for now, but will post them as I transact them. So here is the bulk of my names right now:
WGRNX: my biggest stock mutual fund, Wintergreen is up 15% year to date. David Winters, the guy who runs the fund, is a very solid value investor. They are 25% in the US, rest in foreign stocks. Good track record, somewhat volatile, but that is unavoidable to some extent. I like having significant non-USD exposure generally, you will see that as a recurring theme in almost every name I own.
GLRE: David Einhorn is the smartest investor out there, as good as Buffet, and a lot younger. Its kinda pricey right now, trading at a big premium to NAV. I will add some again at some point, but this is one to follow and perhaps just buy a tad to get it on the sheets.
MSFT/IBM: these are both very cheap, in fact I have never seen tech stocks so inexpensive in my investing career. Long term I see very little that will hurt you. Eventually these management teams will figure out that investors prefer dividends to stock buybacks, and will reward them when they convert more to that mindset.
GLD: Own some gold…its such a popular trade that it scares me a bit, but this is one of those very rare cases where the general view is probably the right one. Gold will protect you as the dollar continues on its path to self destruction.
XOM: Exxon is still a very good LT bet, and while they just got longer natural gas at the wrong time, eventually this shift from oil to more natgas will pay off. You have to know that world is running out of oil, and in 10-15 years, oil will be at least $250 a barrel. I just sold my COP, its the same bet, and i'll probably get back in after a pullback.
JNJ / KFT: warren buffet owns both of these, they are cheap, have 3%+ dividend yields, and trade below the market at 12x…what is not to like? I like both at these prices today. People need food and medicine, always.
PLBDX: this is a bond fund…they own emerging markets debt, which sounds a little scary, but actually EM countries have far better balance sheets than most developed countries. NOW is a good time to buy some of this. Its my 2nd biggest position, and its down 6% in 3 weeks on the European debt crisis that is going on right now. This bond fund is up 17% ytd still though, and there is a lot to like about Pimco as manager.
EFT: this is a bank debt closed end fund, trades like a stock. Generally if interest rates go up, this fund will benefit from that, as bank loans are generally floating in nature.
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