March 3, 2014
- A Ukraine forecast fulfilled
- The president’s screaming buy signal five years ago today
- What about “profit and earning ratios” now? Beware S&P 1,470
- Profiting from the plight of Milton Waddams and his red Swingline stapler
- Taking the pulse of the world’s factories… another golden headache for California couple… police priorities… and more!
Hmmm… Traders don’t appear to be freaking out too much over the fate of Crimea this morning.
The major stock indexes are all down about 1% as we write. Gold has poked its nose above $1,350 for the first time since October; we’ll see if this key level can hold. The big movement is in crude — up nearly 2% as we write, to $104.58, the highest in nearly six months.
In Russia, the reaction is much more dramatic. The Micex stock index tumbled 10% today. The ruble has crashed to an all-time low against the dollar. In response, the central bank jacked up its benchmark interest rate from 5.5% to 7%.
As Russian reinforcements enter Crimea, the scenario Byron King spun out for us on Friday is unfolding in real-time this Monday…
- Crimea is going its own way. “‘Crimea Secession Likely’: Ukraine Expert,” reads an affirming headline this morning at the website of Germany’s respected Radio Deutsche Welle
- And the Western powers can do little more than stamp their feet in light of the “Kosovo precedent” in 2008. Or, for that matter, the Iraq precedent in 2003.
Although Secretary of State John Kerry appears oblivious to that latter precedent: “You just don’t in the 21st century behave in 19th-century fashion by invading another country on completely trumped-up pretext.”
Yeah, he really said that.
Besides, if Washington were truly gearing up for a war to roll back the Russkies, they wouldn’t have called yet another snow day for federal employees… but they did.
A short distance up I-95 in Baltimore, we carry on, albeit mostly from home offices. And this morning, we turn our gaze back five years to the day…
“What you’re now seeing,” said President Barack Obama on March 3, 2009, “is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”
OK, so his handlers couldn’t drill the lingo into him quite right. We presume he meant “price-earnings ratios.”
No matter. The rest was history. Six days later, the S&P 500 bottomed at the infamous 666. It has since climbed 178%…
Gee, it’s almost as if he knew something others didn’t…
Two critical events took place in the two weeks following the president’s buy signal…
- The Federal Reserve nearly tripled the size of “QE1.” What began in late 2008 with $600 billion in bond purchases suddenly mushroomed to $1.65 trillion
- The Financial Accounting Standards Board (FASB) proposed easing corporate accounting rules. It was a gift to the too-big-to-fail banks: No longer would they have to assign current market prices to the assets on their balance sheets (“mark to market”). They could instead assign hypothetical future prices that were, of course, higher.
In theory, FASB is a private nonprofit entity. In reality, it is highly subject to political influence. On March 9 — the very day the S&P bottomed — word slipped out from Washington that Reps. Barney Frank and Paul Kanjorski planned to schedule a subcommittee hearing clearly aimed at strong-arming FASB into changing the rules.
Which it did three weeks later.
So five years and 178% later, how about those P/E ratios?
“Starting valuation is crucial to your investing results,” 5 Min. PRO strategist Dan Amoss reminds us. “For long-term investors not interested in trading, overpaying for stocks near the peak of bull markets is a surefire way to lose money. Secular, or long-term, bull markets are best defined as a period of rising valuations, while bear markets are the opposite.
“Near bull market peaks, investors become so optimistic that they pay silly earnings multiples for stocks. A simple way to view a P/E multiple is the ‘payback period’ for the return of the capital you part with in order to buy a stock.”
Dan recently spotted a paper by James Montier at asset manager GMO. It argues investors in the S&P 500 should expect negative returns between now and 2021.
Montier examined the “Shiller P/E” ratio developed by Nobel laureate Robert Shiller. Sometimes it’s referred to as cyclically adjusted P/E (CAPE). It’s a 10-year average — and right now it’s well above historical trend. “Montier used ‘trend’ earnings to display an even tighter relationship between predicted returns and realized returns seven years later. The model predicts seven-year compound annual returns of negative 3.2%.
“In that scenario,” Dan explains, “the S&P would fall from today’s 1,850 to 1,470 in the year 2021. There would probably be lots of steep declines and sharp rallies in the interim. But Montier’s point is clear: The S&P 500 faces a strong valuation head wind.”
“For those of us who like to buy our stocks cheap, this may be the worst opportunity set in 25 years,” chimes in our value maven Chris Mayer.
Chris spotted the following chart from Farnam Street Capital, comparing the present moment with the peak of the dot-com bubble in 2000. “Back then, the ‘average’ stock was more expensive than now on an earnings basis. But it was easier to find stocks that were not expensive.
“Today, there are fewer stocks in the cheap end of the curve — at least on an earnings basis.
“If you want a graphic reason why finding cheap stocks is harder now, this is as good as any I’ve seen. It pays to wait and be patient.”
“Even so, there are always some things to look at,” says Chris, “and U.S. real estate has some interesting opportunities.
“A while back, a reader asked me about how more and more people were working from home and how that might affect the demand for office space. I gave the easy answer that demand for office space would decline. And the easy answer, for once, is right… sort of.”
In the 1970s, the average employee took up 600 square feet of office space. Today? Less than 200.
We’re all Milton Waddams now…
“But office rents keep going up,” Chris observes — thanks to higher occupancy rates and the high cost of new construction. Supply and demand. “It’s another hangover of the 2008-09 crisis. There have been few new office buildings put up since.
“So at the end of the day, the rent paid per square foot has gone up. And this has more than made up for the lower demand overall. Looking out to 2018, rent growth for high-barrier-to-entry markets could be 25-35% over that time frame.
“Despite that outlook, office REITs trade at a discount to their underlying real estate. A year ago, they carried a premium. There might be an interesting opportunity in there somewhere… I’ll keep searching!” Updates to follow in Capital & Crisis…
U.S. manufacturing appears to have come through February’s rough weather OK.
The ISM manufacturing index rang in this morning at 53.2 — up from the month before, better than the “expert consensus” was looking for and respectably above the 50 dividing line between expansion and contraction.
A similar measure for the eurozone slipped to 53.2. China’s slumped to 50.2… and a broader Chinese measure from HSBC sank to 48.5, a seven-month low.
Beware a golden windfall.
First came word last week that an anonymous couple from Northern California had found a stash of 19th-century gold coins worth as much as $10 million on their property. Then came word they’d have to fork over nearly half of the sale proceeds to the IRS and the California tax authorities.
Now comes word via the U.K. Daily Mail that the couple might have run afoul of the law by not reporting the find to police within a “reasonable time” and posting a notice in the local newspaper.
“According to one Gold Country sheriff’s department,” says the Mail, “the matter is taken so seriously that the couple could be called in for questioning and ‘could face arrest.’ The law is open to interpretation, however. It only applies to ‘lost,’ not ‘abandoned,’ property.”
Confused yet?
“In other developments,” says the Mail, adding insult to injury, “they could also face legal action from the U.S. government and the descendants of the original owner. Both the Treasury Department and the owner’s living relatives could stake a claim to the loot.”
Yikes.
“After news of the couple who found $10 million in gold coins on their property will likely owe taxes on half the value,” a reader chimed in after Friday’s 5, “Gov. Brown of the Socialist People’s Republik of California immediately announced they would be exhuming John Sutter for back taxes for his 1848 find.”
The 5: [Rimshot…]
“Whatever happened to legal tender laws?” another reader inquires. “If you ‘find’ a $50 fiat bill on the road, how does that become ‘income’ subject to ‘income tax,’ and why should you pay higher taxes if you instead find a $50 gold coin?
“If I found a jar of gold coins, I can’t imagine paying anything more than the tax owed on the legal tender face value, and thereafter use that as my cost basis should I sell any later at a higher value. Who on Earth determines what ‘fair market value’ might be, or how that imaginary number trumps legal tender face value if you don’t actually sell them? Over time, the lucky finder could give away up to $13,000 per year (or whatever the annual tax-free gift tax limit is) in face-value coins to friends or family members.
“Certainly, there must be some kinds of swaps or commodity-collateralized loans or similar TBTF corrupt bank practices that these individuals could utilize to protect the intrinsic value of their ‘booty,’ or even borrow tax-free cash against a gold coin gift contract, instead of being taxed to death immediately.”
“This only shows you how hard it is becoming to have the great American dream,” a third reader writes.
“Had this happened to me, I’d get coin-collecting books, research the values and then slowly sell them. All in different states, one or two at a time, depending on their value. Meanwhile, I’d be having a pretty good time!
“Like the late Tug McGraw said when he got his World Series check, ‘Ninety percent I’ll spend on good times, women and Irish whiskey. The other 10% I’ll probably waste.’ Any way I could, I would try to screw the parasitic, corrupt, incompetent socialistic government that I used to respect.”
“Don’t sing Bitcoin’s eulogy yet,” a reader writes after Byron King’s Overtime briefing Friday. “It could rise bigger, smarter, more secure and better. Same people who conceived of it are still around. Bitcoin will move on from Mt. Gox.
“As far a ‘good money’ is concerned, as long as it’s popular and ‘accepted’ as a payment of debt, it’s money.”
“Police aren’t confused about their priorities,” a reader addresses his fellow reader after Friday’s episode. “If you don’t understand what is going on, just follow the money. It cost the state money to come investigate your break-in. Giving a no-seat belt ticket to the family member made them money.”
“So Alabama has caught up with Albany, N.Y.!” adds one more. “Five years ago, my car window was shattered by a vandal while I led a self-help group in a midtown Albany church.
“The police asked me to drive to their nearest station, three miles away, to file the report. When I completed filing the report, the desk officer demanded, ‘What are you doing in Albany? My response was, ‘Leading a self-help group in a local church.’ He retorted, ‘Maybe you should move it to outside the city!’
“I took his advice to heart. I closed the group. I thank God I live outside the city and don’t pay toward his salary or retirement anymore!”
“This potential takeover of Crimea by Russia,” a reader writes, “seems very similar to what the U.S. did with Texas, taking it from Mexico some 150 years ago, don’t you think?”
The 5: Hmmm…
“I love how CNBC’s morning hosts have no clue about Ukraine,” writes another. “The female anchor over several days said something to the effect that she did not know why Ukraine is important when it comes to gas/oil.
“Well, there is a big old pipeline that goes through that country that feeds Europe, duh. Just another reason why we must be responsible for our own investments and do our own research.”
The 5: Really?
Oy. We’ll dive back into the energy angle ourselves tomorrow…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. Want to save $2,600 on your taxes this year? A two-page form can get you set up in as little as 30 minutes. Your savings are good next year and beyond, too. Learn how to get started right here.
The following important notice appeared on Saturday in The Daily Reckoning, penned by Peter Coyne. We’ve assigned Peter the task of casting a wide net to find the next great newsletter editor here at Agora Financial. Maybe it’ll be you. Or someone in your circle of friends and acquaintances. But you won’t know if you don’t read on…
Want to Be the Most Interesting Man in the World?
by Peter Coyne
Imagine traveling around the globe…
Visiting exotic countries and speaking to all manner of interesting businessmen… thoughtful investors… and ordinary folk.
Yes, you’re traveling for work, though it hardly feels like you’re working at all. (That’s what tends to happen when you love what you do for a living.)
Upon your return home, you walk up your driveway, rolling your carry-on behind you and looking just as refreshed as the day you departed. To your neighbors who see you through their windows, you’re the most interesting man in the world.
They know you work but never see you in a suit or tie…
They know you’re a writer, but they’re not sure how you’re able to live so comfortably…
They’re certain you recommend investment strategies… yet you’re not a money manager…
You travel all over the world… but simply to take a pulse of the places you’re visiting…
You’re in the publishing industry… yet they can’t find your work in Barnes & Noble or on Amazon…
To them, you’re a bohemian enigma, wrapped in a puzzle and dipped in a thick confusion coating. Their bewilderment is matched only by their envy for your carefree and comfortable lifestyle.
Such is just a smattering of the life of a financial newsletter editor. And seeing how we’re looking to hire an editor for a new newsletter we’re going to launch, it could be your chance to start a brand-new career starting today.
If you’re an avid reader of the DR [Dave’s note: or The 5]… then you know the type of writer we’re looking for.
Someone who understands how happenings on Wall Street and in Washington affect individual investors. After all, that’s who will be reading your newsletter.
To them, your subscribers, you’ll be their boots on the ground. They’ll look to your writing for clarity about the markets… for your unique insights… for your entertainment… and, most importantly, for your investment ideas.
So if you’ve got what it takes, we’d like to hear from you. Send an email including your contact info… a resume… and financial writing samples we can look at to peter@dailyreckoning.com.