Ignore These Charts at Your Peril

November 29, 2012

  • Two charts you should see when tweaking your portfolio before year-end
  • Hidden opportunity: Chris Mayer pinpoints a class of stocks that routinely outperforms the S&P
  • From QE4 to gold manipulation, a 5-style wrap-up of what’s moving markets
  • Flash memory makes hard drives obsolete… but a new and potentially profitable development is threatening flash
  • From sea to shining sea: more worthy nominees for the Fiscal Cliff National Monument

  “You really need to see these charts when readjusting your portfolio for 2013,” advises Jim Nelson of our income desk.

“Millions of mom and pop investors lost a fortune during the big financial collapse of 2008,” he explains. “Stocks are viewed as incredibly risky. That’s the kind of thing that takes years to get over…even with average attention spans now measured in milliseconds.

“But the real story comes from the other side of this coin. Even though it was debt instruments that caused the free fall in the first place, investors still prefer bonds. And not just a little bit.”

As evidence, Jim furnishes this chart of the amount of money invested in stocks and bonds. Gains or risk aren’t reflected here — merely the cash at play.

“Since 2006, back at the height of the housing bubble, some $572 billion fled the stock market. And $767 billion jumped into the bond market.”

True, some of that’s baked into the cake as baby boomers start to retire and follow the hoary old advice about cutting back on stocks and loading up on bonds as you age.

Which might be OK if a 10-year Treasury yielded something — anything — better than this morning’s 1.62%.

And no, corporate bond yields are no better. The safest corporate debt out there broke below the 2% level this year. Back in 2006, you could pull down 5-6%.

Nor are capital gains on those bonds making up the difference. If you’d bought the iShares Investment-Grade Corporate Bond Fund (LQD) in 2006, you’d be no better off than if you’d bought an S&P 500 index fund. (OK, you’d have somewhat less volatility. Big deal.)

  “So that’s the state of the investment landscape these days,” Jim sums up: “Millions of investors have flocked into bonds, causing yields to collapse. Meanwhile, stock returns have kept pace with bonds, despite losing $572 billion in investment capital.

“There’s still one key difference we haven’t yet brought up,” he adds, with the sound of a drumroll in the distance. “And it’s a big one: Income from stocks hasn’t experienced the free fall bond yields have:

“Besides the obvious spike right in the middle due to crashing stock prices during the 2008 collapse, yields have only gone up during this same 2006-to-today period.

“Right now, stocks are yielding, on average, a full percentage point higher than bonds. The other big difference between the two is that bond interest is fixed. Stock dividends can go up, which makes them more enviable to own during periods of high inflation.

“All of this points to one clear conclusion,” says Jim: If you are in the bond camp just because of what happened in 2008, you’re missing the bigger picture.

Of course, as the second chart shows, you can’t play “the market” and hope to generate income substantially better than Treasuries or corporates. You have to pick your spots: Here’s one strategy to help you do just that.

  Major U.S. stock indexes are adding to yesterday’s gains. The Dow has pushed past 13,000 again. Small caps are performing best of all — the Russell 2000 up nearly 1%.

Among the numbers in traders’ sights this morning:

  • First-time unemployment claims: Back below the 400,000 level as the Hurricane Sandy spike slowly diminishes. But the four-week moving average continues to climb, to 405,250
  • Pending home sales: Up 5.2% in October, to a five-year high
  • GDP: The Commerce Department’s latest guess at the third-quarter figure is sharply higher than the first one — an annualized 2.7%, instead of 2.0%. Alas, the biggest “growth” factors are actually drags — inventory build in the private sector, and higher federal government spending.

Yesterday’s run-up, good for 110 Dow points, coincided with a trial balloon from the Fed. “Federal Reserve officials are likely to continue buying long-term mortgage-backed and Treasury bonds in 2013,” wrote The Wall Street Journal’s Jon Hilsenrath — the Fed’s favorite conduit for officially sanctioned rumors.

Thus the scenario mooted in our virtual pages last week — Operation Twist becomes full-on money printing on Jan. 1 — is looking more likely.

 Precious metals are clambering back after yesterday’s whupping: Gold is at $1,726, and silver has pushed past $34.

Of yesterday’s move down: “Talk about ammunition for those who suggest the gold price is being suppressed or manipulated by central banks and allied bullion banks,” writes Mineweb’s Lawrence Williams, an old hand in the metals biz.

“There seems to be little other logical explanation for this kind of activity. It could even turn long-term suppression deniers into GATA adherents… You probably shouldn’t let the manipulators, whether government-backed or not, put the frighteners on you but see such short-term price falls as an opportunity to buy, rather than as a reason to get out of gold,” Well said…

100  “Buybacks are good for you,” writes Chris Mayer — reassessing long-held skepticism.

“While I like companies that buy back their stock when the stock is clearly cheap, my general impression was that too many companies routinely purchase their stock even when it is not cheap.”

What’s changing his mind is research by one of many far-flung contacts — Andrew Stotz in Thailand. “Andrew found that companies that buy back their stock outperform the S&P 500:

“As Andrew notes:

  • Buybacks are a popular use of excess cash
  • Companies tend to repurchase when they are flush with cash, the market has crashed or they have fewer future investment projects
  • Buyback stocks have outperformed the S&P 500 almost every year.

“For the most part,” Chris adds, “since the 1990s, the cash paid out for buybacks has exceeded the cash paid out in dividends. Part of this is tax efficiency, because dividends are taxed twice and capital gains are taxed at a lower rate than dividends. But there are other factors. In any case, many studies show that most of the fall in yield has been made up by buybacks.”

Chris has put this reality to work already for readers of his premium advisory. As noted yesterday, a stock he recommended only last week announced a buyback this week — sending shares up 4%, with much more on the way.

That’s exactly the sort of hidden opportunity Chris unearths in Mayer’s Special Situations. To learn about another — in which you can buy one stock and get another free — give this a read.

  Get set for the age of “instant-on” computers, advises Ray Blanco, eyeing a potential tech opportunity.

First the essential background: “Early computer hard drives were as big as washing machines,” Ray recalls. “Eventually, they shrank down to sizes that fit in a desktop computer.”

Now they’re on their way out: Hard drives spin around, so there’s only so much scientists can do to make them smaller and faster. Thus, NAND memory — you might know it better as Flash — is what dominates the fast-growing smartphone and tablet market. “It is also,” says Ray, “becoming the medium of choice for high-speed data access in demanding environments” along with higher-end PCs.

But Flash has its issues: Reliability suffers every time the industry goes through an upgrade cycle: “Smaller elements fail more often, which means that NAND Flash memories require more advanced controller circuits with predictive logic.”

Soon, says Ray, Flash will be on its way out too. One technology he’s eyeing “replaces the transistors used by NAND with carbon nanotubes. The stiffness of the nanotubes helps the memory elements retain their logical states, and they resist environmental conditions that can degrade the integrity of conventional memories.”

They also consume less energy, extending battery life. Best of all, says Ray, “you wouldn’t have to wait for memory to load data from a Flash or hard drive.” There’s your instant-on computer.

The most promising technology in this space is still in private hands. But it’s the sort of thing both Ray and Patrick Cox always keep an eye on.

[Ed. Note: For a very limited time, one of our finest package deals is still available — giving you access to Ray and Patrick’s tech plays and Chris’ Special Situations — along with our income plays and resource opportunities. We won’t drone on, since time’s short: Click here to learn how you can take advantage.]

  “There is no shortage of appropriate fiscal cliffs,” writes one of many readers with a plethora of excellent suggestions for a Fiscal Cliff National Monument.

“The Blackfoot have one on their reservation near Browning, Mont. The soil at the bottom of the cliff covers a mountain of buffalo bones, but all was not fun, games and carving at the bottom. Many of the buffalo arrived there wounded or broken, but nowhere near dead, and definitely very angry. As will many taxpayers not happy about being made into winter jerky.”

  “Here in Arizona, we have some of the most breathtaking (and tall) cliffs located in our own GRAND CANYON.

“What better location than this indescribable panorama for us to mark the place where everything economical in this country goes crashing to the ground. Then, we Arizonans could charge visitors to see the wreckage from a mile up. The ticket income could help our state to weather the result.”

The 5: You’re on to something. Marc Faber says the fiscal cliff is no big deal because instead we’ll have “a fiscal Grand Canyon” as politicians reach another kick-the-can agreement that solves nothing.

  “The fiscal cliff…” a reader supplies an ellipses by way of a drumroll, “is Mount Rushmore.

“Really, what else could it be? Completely artificial; quite obviously contrived; expensive to maintain; needs systematic attention; is an exercise in political marketing and national vanity; has the same faces as found on the currency; and those who tumble over the edge end up severely damaged, if not dead.

“It’s also completely avoidable. I can attest to that, because I lived in the U.S. for over 30 years and never bothered to go see it…and I’ve been to Fort Leonard Wood, Mo., Jackson, Miss. and Provo, Utah, among other unpleasant, creepy and/or forgettable places.”

  “Here’s a geologic formation in the Rocky Mountains in Montana’s Bob Marshall Wilderness Area. It’s referred to as ‘The Chinese Wall’ and stretches 40 miles and averages 1,000 feet in height from its base.

“Not only is it already named for the Chinese, to whom we owe so much ($), but it’s also already inside a national wilderness area.”

  “Clearly, the fiscal cliff is exemplified by the Palisades along the west side of the Hudson River facing New York City where the big, bad banksters reign!”

  “I don’t have a picture, but I envision the fiscal cliff as a landfill with a bulldozer pushing the pile of garbage ever higher and higher.

“If the dozer drives off the cliff it created, it will fall into a pile of garbage — albeit a lesser pile of garbage. If it backs down the slope instead, it may be less traumatic for the dozer operator, but there will be fresh garbage waiting below, and the easiest solution for dealing with it will be to push it up the very same hill, thereby making our pile of garbage even bigger.”

The 5: You sure you’re not a consultant or lobbyist on K Street?

  “Why is The 5 not 5?” a reader inquires — and he’s not alone.

“I have noticed recently The 5 ends before reaching 4:00. Is there any reason?”

The 5: Hmmm, this happened a few weeks ago. Rest assured our word count is as high as it’s ever been and you’re not being shortchanged. We’ll bang on the clock a couple more times to reset it.


Dave Gonigam

The 5 Min. Forecast

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