Deprogramming from the Cult of Equities

August 20, 2012

  • The “rigged game” of Wall Street and how to ignore it…
  • After Bill Gross gives last rites to “the cult of equities,” Chris Mayer has practical guidance to help you deprogram
  • Fighting the American Revolution all over again: The return of the 1760s’ hated “writs of assistance”
  • A new mock trade for the week… readers stick it to “people who don’t get it”… a solution to California power outages… and more!

  “I hear more and more people say the market is rigged against them,” writes Chris Mayer. “They say it is a game for insiders to fleece gullible outsiders.

“Wall Street has not helped this image at all. There seems to be no end to lurid scandals or crises of confidence in the system.”

We chronicle many of them here in The 5 — Knight Capital’s “trading glitch,” or the “disappearance” of customer money from MF Global. “The Facebook IPO may have been the last straw,” ventures Big Picture blogger and Vancouver favorite Barry Ritholtz in his latest Washington Post column.

  “The cult of equities is dying,” wrote Bill Gross last week.

“Like a once bright-green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of ‘stocks for the long run’ or any run have mellowed as well.”

It’s tempting to chalk that up to the “bond king” talking his book… except that he’s been down on bonds of late too.

And as Barry points out, the evidence is all around: Investors continue to bail from stock mutual funds. CNBC’s ratings are in the toilet. Smart Money magazine is transitioning to a web-only format.

  “Well, maybe…” Chris avers.

“I’m with David Goldman, who writes in the Asia Times under the pen name Spengler that Gross is only ‘half-right.’ The market, as always, has its enthusiasms.

“Stable, predictable cash flows and yields are popular,” says Chris. “Unstable, uncertain cash flows with no yield are not.” As evidence, Goldman points to utilities — up 30% in the last two years… and mining stocks, down 24% over the same span.

“Eventually, this will break,” Chris adds parenthetically. “Timing is, as always, uncertain.”

  “I wonder,” Chris goes on, “if the points Gross raises are even relevant.

“Investors have been yanking their money out of stock mutual funds since the crisis. The market has more than doubled since. And it is now within spitting distance of all-time highs.

“Volume, liquidity, public participation in equities… All of these are overrated concepts. Market values can move dramatically with hardly any volume at all and be just as real as a change accompanied by lots of volume.”

And despite the scads of scandals.

130  “However,” Chris adds, “I believe there are ways to invest safely and feel good about it. You can ignore the scandals. You can ignore Wall Street.”

And doing so does not entail stuffing cash in a mattress or burying gold in your backyard. (Not that we disapprove of either practice.)

In recent months, Chris has suggested funds and private partnerships that invest the way he does. “There are many worthwhile and interesting opportunities out there that are not listed on our portfolio page. I try my best to dig up not only stocks, but simply great investment ideas.”

One of his more unconventional ideas is one we touched on last month — “thrift conversions.” That’s when a savings and loan converts to a publicly traded bank. They’re up an average 27.1% since Chris got his premium readers into them at the start of 2011.

Chris also says selected stocks remain attractive — provided they meet the exacting standards of his CODE system. We last touched on it a year ago. It’s worth revisiting…

  • Cheap: Low entry price, better upside potential
  • Owner-operators: History shows that managers who have skin in the game turn in better performance; their interests coincide with your own
  • Disclosures: The business must be “easy to understand” and make their financial statements accessible
  • Excellent financial condition: Must have limited debt and the cash reserves to withstand rough seas in the economy.

[Ed. Note: All of our editors maintain a proprietary screen when evaluating their recommendations. Byron King has his “ABCD” technique evaluating resource plays. Jim Nelson runs his income plays through a seven-point filtering system. Greg Guenthner and Jonas Elmerraji evaluate five factors running their “CXS” screen for penny stocks. Patrick Cox and Ray Blanco are satisfied with nothing less than the potential for life-changing gains with their tech and biotech picks.

For less than 36 more hours, you have the chance to access all of their plays via the Agora Financial Equity Reserve. For a select few of our readers, this suite delivers everything they want (all our stock picks)… and nothing they don’t (like options services).

If you already subscribe to one or more of our premium services, your savings can be substantial. “I already received Mayer’s Special Situations and Breakthrough Technology Alert,” a satisfied member writes. “If I wanted to renew both of those, it would basically have cost me close to $2,000. So for the same price, I was able to receive these two publications and five other ones for life.”

Make that seven as of this summer. The Equity Reserve is a better value now than ever… and your window of opportunity to join is closing fast. The offer is open until midnight tomorrow. For a comprehensive rundown of the privileges and benefits that come with membership, please review your invitation here.]

  Major U.S. stock indexes are starting the new week the way they ended the old one — directionless. The S&P sits at 1,416 — three points shy of the April 2 high.

Meanwhile, S&P futures sit at 1,417. “It is probing new highs and this provides us a great opportunity to generate income,” says Abe Cofnas, introducing this week’s “mock trade.”

Abe’s counting on S&P futures to end the week at 1,390.5 or higher. Price of the position: $87.50 Potential payout: $100. That’s a 14.2% gain in a week. We’ll let you know how it turns out on Friday.

  Gold is moving up slightly as a new week begins. At last check, the spot price was $1,620. Silver’s making a big move — up nearly 2%, to $28.60.

  From Georgia comes news that brings to mind the earliest stirrings of the American Revolution — and not in a good way.

A judge in Murray County resigned last week, under fire for “distributing pre-signed blank arrest and search warrants to local law enforcement officers,” in the words of an account at Law.com.

Judge Bryant Cochran evidently made a habit of that for his police buddies: It was too much for Georgia’s Judicial Qualifications Commission, which appears to believe the Fourth Amendment still counts for something.

But with Cochran’s resignation, the investigation is over: The commission will release no further details.

“Makes one wonder what a more-through and public investigation would turn up,” writes Eapen Thampy of Americans for Forfeiture Reform. “I have heard of cases where judges accepted asset forfeiture kickbacks from local law enforcement for similar services…did Cochran have a similar payday?”

Worse, how widespread is the practice? And didn’t we as Americans already fight this out some 250 years ago?

Why yes: In 1760, Britain began carrying out its “writs of assistance” in the Colonies — asserting the authority to enter anyone’s home with no advance notice and no probable cause, the better to enforce anti-smuggling laws.

The fiery attorney James Otis challenged the writs in court — unsuccessfully, but leaving a powerful impression on John Adams, who was in attendance. “The child independence was then and there born,” Adams wrote years later, “[for] every man of an immense crowded audience appeared to me to go away as I did, ready to take arms against writs of assistance.”

In that same spirit, we announce the merger — effective today — of our publications Whiskey & Gunpowder and Laissez Faire Today. If you’re currently a Whiskey patron, you don’t have to do a thing: You’ll start getting Laissez Faire Today this afternoon. Today’s essay is by Jeffrey Tucker, with the provocative title “50 Shades of Government.”


“Should seniors be able to rob young people of their earnings in order to enjoy a luxurious retirement,” he writes, “or should seniors be especially taxed and punished for using more than their fair share of society’s health care resources? Whichever way that debate ends up, liberty itself suffers, and the property rights of everybody are less secure.”

If you’re not already signed up for Laissez Faire Today, you can do so on the right-hand side of this page.

 In other courtroom matters, Addison has managed to escape jury duty. For another day or two.

In 2010, both he and I ended up reporting for jury duty the same day. After a close shave, I was struck from consideration for a murder trial at day’s end. But Addison was roped into a civil suit that was a farce on every conceivable level.

Today, Addison was kicked out after barely an hour because he was wearing shorts and flip-flops. “Not excused, mind you, sent away,” he relates via IM.

“The security guard was laughing at me. ‘You can’t come to jury duty in shorts, what are you thinking? Go to room 239.’

“Standing in a line outside 239, a woman walks by and tells all of us we can’t stand in the hall.

“‘Uhh… where are we supposed to stand?’

“‘You? You’re different, you have shorts on. You stay there.’ The woman who looked at my summons didn’t even look up to see whether I was actually wearing shorts or not.'”

Addison was told to return within five business days. Whereupon he’ll have new and equally nonsensical tales to relate…

 “I used to read The 5 every day, but will not anymore,” writes a reader who evidently arrived late to our Paul Ryan party.

“Reason being your failure to tell your readers about Obama’s health care plan, which takes $715 billion (spelled with a B) out of Medicare as of next year!!

“While knocking Ryan who is trying to get the spendaholics in Washington under control!!”

The 5: So you’re the guy who told Rep. Bob Inglis (R-S.C.) at a town hall meeting in 2009 to “Keep your government hands off my Medicare.”

 “When I was growing up (in England),” a reader writes, “my parents refused to discuss religion or politics in front of us.

“If discussing such crap in front of your kids leads to some of the moronic comments from your readers this week, then I am even more grateful to my parents than before. If any of your readers think that there is a difference between Obama and Romney, please ask them to list three of those differences for the rest of us to laugh at. People like that should go study George Carlin for a while. But of course, they wouldn’t get it.

“It seems the grown-ups are starting to respond to all the cheesy-whiners you’ve been enduring lately. As someone mentioned in the DR (probably Bill Bonner), if you stand back and look at the political news of the day, it’s not really any different than the news of the day a year ago.”

 “Political atheists,” a reader writes, “is how I see all the folks at Agora.

“I value all of the information from my free and paid subscriptions, as it never fails to advise me when political events might affect my future wealth and what might help to avoid it. There are those that still see politics as a solution to economic issues; they get their panties in a bunch when authorities that they assumed were of like political mind turn out to be free thinkers.

“I was there once in my life, but liberty and market-oriented people helped me find a better way. I think a few of them will be future freethinkers and even subscribers to your paid newsletters, as you have rocked the boat of their delusions by having the integrity to tell the truth.

“Keep it up; The 5 is good medicine for all of us (and elicits an appreciation for your wit, as well as an occasional gut-wrenching guffaw that mystifies my wife, as well). You are not only dispensers of some valuable analysis, but talented writers, as well.”

 “It seems the best solution,” writes a reader who can’t bring himself to give up on political solutions, “is to craft legislation that is aimed at both parties simultaneously, so that they are both handcuffed.

“Example would be push for term limits in the House and Senate. Another example is passing a federal balanced budget amendment. If just these two things happened, methinks the U.S. economy would take off.

“I for one would even pay our elected officials $10M or $20M or more for every year the budget was truly balanced.

“It would be far cheaper, we would have clarity moving forward in business and the minor issues being fought over in today’s campaigns would most likely self-correct because of increased tax revenue. The secret is to take the parties out of the equation.”

The 5: Which, alas, is why it will never happen… and the biggest bubble ever will inevitably burst.

 “I had a computer glitch this week withy my server and lost my daily 5 issues Monday-Wednesday. Is there any way they can be accessed?

The 5: Our voluminous archives, now going back five years, are available here.

time “Despite the California power shortage,” a reader writes with a follow-up from last Tuesday, “the discussions in the local media and at state government include permanently shutting down the Morro Bay natural gas fired power plant because it is not very environmentally friendly.

“The Morro Bay plant has been used to provide power during peak usage periods over the last two decades or so. Flying over it last Wednesday, it looked like all three units were generating.

“Diablo Canyon nuclear plant is always in the environmentalist cross hairs for similar reasons.

“And San Onofre — dead, probably.

“The rate payer will pay, as they always do.

“I have hedged by putting in my own photovoltaic system. According to my calculations, it pays 8-10% on my net investment, depending on maintenance costs and after the 30% tax credit.”

The 5: Are you sure your local zoning busybodies are OK with that?

Cheers,

Dave Gonigam

The 5 Min. Forecast

P.S. Wow… Shares of a certain clothing retailer dropped 2% on the open this morning, triggering Steve Sarnoff’s latest Options Hotline trade. In less than one hour, the put options jumped 44%.

We can’t guarantee every trade will move that far and that fast… but you do stand a very good chance of taking home a winner on your very first trade. You can get started here.

rspertzel

Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More