January 24, 2014
- Stress relief for the global elite: A collective “Om” arises from Davos
- Is a correction underway? Is the market overpriced? Guenthner, Mayer answer the burning questions
- Going global: Byron King with an eye-popping map of shale energy’s potential
- Two Canadians with polar opposite opinions on their health system (Americans, take note)
- “False and misleading!” a reader cries…
“We have to create equanimity. We have to listen to each other. We have to care deeply, collectively, about our society as a whole. Otherwise we will create a world not worth living in.”
Our customary Friday foray into weirdness takes us to the World Economic Forum’s annual shindig in Davos, Switzerland. One of the big sessions yesterday featured the actress Goldie Hawn extolling the benefits of meditation as a stress-buster.
Breathe deep…
Among the global elite gathered in Davos, “there’s maybe a greater recognition that the levels of stress of the last five years are not going to go away,” says WEF chief business officer Robert Greenhill.
Well, yeah: Look at the underperformance of companies whose executives jet over there every year…
Far be it from us to knock meditation; your editor has practiced it in one form or another for close to 20 years. Even sprung the $1,000 back in the day for formal Transcendental Meditation training. (It’s now $2,500 — way outpacing the cost of living. If you’re interested, find a book instead.)
No, we were struck by the self-justification of the elites for their sudden interest. A Bloomberg account described “how anxiety over stress and its impact on business is mounting among the Davos set, who’ve spent the last five years dealing with crises from the collapse of Lehman Bros. to the Syrian civil war — all connected 24/7 to their beeping, buzzing smartphones.”
Memo to the Davos crowd, world improvers every one of them: Meditate all you want, but you’ll never find inner peace until you let go. Give up the illusion that you’re capable of tweaking events to your liking — preventing bankruptcies and civil wars and bad weather and dandruff. Tend your own garden; others can easily take care of their own.
Hey, a man can dream…
The elites might be tied to their mobile devices even more than usual today: Volatility is creeping further into global markets. As we write…
- Major U.S. stock indexes are down another 1%. Another 50 Dow points and 16,000 is history
- Hot money is flooding into bonds; the 10-year Treasury yield is down to 2.73%
- Likewise gold: It’s up again today, to $1,268.
The narrative most of the financial media have latched onto this morning is emerging-market currencies: They’ve gotten whacked two days in a row, starting with the Argentine peso.
Argentina’s penchant for crisis every decade or so is returning more or less on schedule. Someone on Reddit noticed the cost of a Galaxy S4 smartphone leaping yesterday from 7,999 pesos to 11,518 in a mere six hours.
When a currency collapses before your eyes…
On New Year’s Day, the black-market exchange rate between the peso and the dollar — the “blue dollar,” they call it — was $10. This morning, it’s up to $13.10.
“Is this the beginning of the correction so many people are anticipating?” asks our Greg Guenthner of U.S. stocks yesterday and today. “There’s no way to know just yet.”
Yes, that’s an unsatisfying answer. It’s why “Gunner” will never be invited on CNBC. He doesn’t look for clean narratives — for instance, the Argentine peso — to explain market moves. He’d rather make money — which is why he’s a trend follower.
Trend followers apply some of the tools of technical analysis — the study of chart patterns — but they do not try to predict what “the market” or any particular asset will do. They make no attempt to identify the “top” or “bottom” of a market before it happens — or even as it’s happening. Only after an identifiable bottom is it time to buy. Only after an identifiable top is it time to sell.
“All markets move in trends,” says Greg. “As long as there are plenty of buyers and sellers operating in an open and liquid market, you can use trend-following techniques in your investing process. By analyzing price charts and projecting trend lines, you have the chance to spot major market turning points before the average investor catches on.”
Using those techniques, Greg spotted trouble in gold as early as last February when it broke below $1,650. By mid-June, he was calling a short-term target of $1,200-1,250 — which played out before month’s end.
But if you want to know whether a correction in stocks is underway now — sorry, the verdict isn’t in yet. Beware anyone who says otherwise.
“Is the stock market expensive or isn’t it?” asks our Chris Mayer. Evidently, our editors are fond of posing rhetorical questions today.
For what it’s worth, Chris finds the question irrelevant. He’s on the prowl for bargain-priced stocks — and, in his high-end service, stocks that have a near-term catalyst. “But since it is getting harder and harder to find bargains,” he says, “it may help to understand why that is.
“Most of the time,” he explains, “people look at some version of the price-earnings ratio for the stock market. That’s dumb.”
An analogy might help: “Say you have a house worth $250,000. On this house, you have a mortgage of $200,000. You have ‘equity’ of $50,000 in the house. Now, let me ask you: What’s your house worth?
“The correct answer is $250,000.
“But in the stock market, people use the $50,000 number. They look at the price of a stock, which reflects only the equity of the business. They compare that price-earnings and book value and sales and so on. That’s just like trying to value your house using $50,000 as the starting point.”
After all, most companies carry debt. “Overall, it’s a lot of debt.”
“You have to look at stock prices plus debt — usually net of cash,” says Chris. “In Wall Street parlance, this is the enterprise value.”
So to answer Chris’ original question, consider this metric: Enterprise value divided by sales. “Sales are good to use because they are more stable than profits, which bounce all over the place. And anyway, we know we are in an era of abnormally high profit margins.”
Feast on this chart from David Hay at Evergreen Capital Management. “What Hay’s chart shows is that the market currently values a dollar of sales at really high levels. The result may be the same as a price-earnings ratio, but using enterprise value is theoretically sound.
“Is the stock market expensive?” asks Chris one last time. “As Sarah Palin would say, ‘You betcha!'”
“It’s a target-rich environment for energy investors,” says our Byron King, who counts energy among his specialties.
“New technologies and immense levels of capital spending are creating vast new wealth across the oil and natural gas sectors. But for all the hype, you can’t just toss darts at investment ideas.”
It was two years ago Byron regaled us with his “Re-Made in America” thesis — a technological transformation driven by the revival of U.S. energy. 2014 is the year Byron believes it will go global. “Every month, I see astonishing news from other energy gas plays in one geologic basin or another across North America and, indeed, the world.”
Basically, there’s “unconventional” gas to be had anywhere on the map that’s not in black.
“In 2014, we’ll see ‘discovery fever’ move south into Mexico,” Byron predicts. “There, the government is on the verge of opening up vast areas of energy-rich land to outsiders — meaning companies besides the Mexican national oil firm, Pemex.”
Exciting stuff.
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“What, may I ask, is so wrong with the Canadian health care system?” a reader writes from the Yukon after yesterday’s item about Obamacare.
“The U.S. spends about 17% of GDP on health; we, about 10.5%, but with far better outcomes, owing to prevention, early interventions, follow-ups and the simple single-payer system. Interestingly, the Doctors who originally went on strike to oppose it 50 years ago wouldn’t trade it now. Why? No accounts receivable.
“Yes, we pay higher taxes, and yes, there are wait times, but yikes, how can you beat free insurance coverage? In short, you wait or you pay, you choose your own doctor or your HMO does, supported by an army of clerks. Plus, our drug prices are much cheaper and, in my case, free as a senior. Believe me, I’m no socialist, but (hey, there had to be a ‘but’) I think we have made better choices on health care.
“Keep up the good work — and no ‘but.'”
“I’m from Canada and left that country because of the socialist regime,” writes another reader. “I know that the Canadian health system is in a shambles and will be forever.
“I have family that are awaiting needed surgeries and can’t get them because insurance ‘quotas’ have been met this month for knee replacements, hip replacements, etc. Too bad for you… wait another month (or five or six). We’ll give you more pain meds to tide you over until we can get to you (conveniently supporting Big Pharma, do you think?).
“My husband and I were married with no kids… and subject to an income tax of 35% off the top, followed by the additional goods and services tax — resulting in an additional 10-17% tax. So much for ‘free’ health care. I lived it for 35-plus years… nothing is free! Let’s hope it doesn’t get to that… but bloated government officials have never been known to do the right thing.
“The only fair thing would be to put all political leaders on the same health ‘insurance’ plan they want the rest of us saps to get. I don’t think this experiment would last long if they were forced to endure what we’re expected to.
“Keep the issues coming… I read every single one of them from start to finish. The best reading ever!”
“Your teaser line is false and misleading!” a reader objects to the Laissez Faire Club’s solution set for Obamacare.
“The report itself contains this heading for Chapter 2: ‘The three words that allows [sic] you to opt out of the worst parts of Obamacare.’ [With your solution,] the insurance policy is still subject to the rules of the ACA, so there is no way to completely avoid Obamacare (other than via certain limited exceptions built into the law).
“And while this report was not intended to get into all the details of the ACA, there should have been some mention of the fact that many people will get high levels of coverage for a very low insurance cost (lower than a Bronze HSA) if their modified adjusted gross income is less than 250% of the federal poverty level for their family size.
“I am a health insurance broker and not a fan of Obamacare. However, the reality is that we are stuck with it, however miserable its botched implementation is making our lives. Maybe you could reconsider the title of the report. It’s not really an antidote; it’s a good guide for living with Obamacare and making intelligent financial and personal health choices.”
The 5: “False and misleading?” replies Club director Doug Hill. “Ummm, we never say ‘completely avoid Obamacare’ anywhere in our report.
“As you point out, the ACA is here to stay. We merely show the initiated reader how to avoid the worst parts of Obamacare. You know, stuff like a lack of choice when choosing your plan, higher deductibles and premiums skyrocketing as much as 305% for some people.
“Then as time wears on and more doctors leave the subsidized industry, wait times will increase, prices will rise more and choices will be limited further.
“Of course, I am assuming access to quality care is important to you.
“And while you are correct people can qualify for subsidies and lower premiums, why should we write about that? We don’t want to step on the president’s turf.
“As for the name of the report, you’re right, it rolls off the tongue. 5 Min. Forecast readers can gain access to A Good Guide for Living With Obamacare and Making Intelligent Financial and Personal Health Choices by clicking here.”
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. That Davos crowd: They think they’ve got everything figured out. Climate change? Nothing a carbon tax can’t fix.
The world improvers (an exquisite term coined by Agora Inc. founder Bill Bonner) never rest. But neither do we when it comes to finding comprehensive solutions to everything from Obamacare to NSA spying to run-of-the-mill income taxes. Stand up for your liberty, starting now, starting here.