Archive for August 2010
30
Jeremy Siegel: Treasury Bonds Today Are a Sucker Bet
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Jeremy Siegel: Treasury Bonds Today Are a Sucker Bet
by Alexander Green, Chief Investment Strategist
Monday, August 30, 2010: Issue #1334
The investment advisory industry is full of gurus – and various charlatans – claiming that they made incredible stock market calls.
But Wharton Professor Dr. Jeremy Siegel made perhaps the greatest call of all time at the right moment and for the right reasons. Those who listened to him saved themselves many thousands of dollars – and untold agony.
Now Dr. Siegel is making another bold prediction. You can only ignore it at your peril. Here’s why…
Siegel Shocks the Market
On March 13, 2000, The Wall Street Journal ran an op-ed piece from Dr. Siegel entitled “Big-Cap Stocks Are a Sucker Bet.” The column shocked the investment community.
Here was the man, author of the investment classic Stocks for the Long Run and who provided the intellectual underpinnings of the greatest bull market in history, claiming that the greatest stock market darlings weren’t just overvalued. They were a “sucker bet.”
Siegel focused on the 33 largest firms based on market capitalization – those with values greater than $85 billion. Of these, 18 were technology stocks. He noted that their market-weighted P/E equaled 126. What’s more, he pointed out that half of the large-cap technology stocks had P/Es over 100. For these stocks, the market-weighted P/E was 208.
These prices were totally unjustifiable. There was no way that these companies could grow fast enough to support such insane valuations.
Are You Heeding Siegel’s Current Warning?
That month, the Nasdaq – home to these tech giants – hit its all-time high of 5,132. From there, it imploded. Many of the stocks he singled out in the column – like Yahoo! (Nasdaq: YHOO) and JDS Uniphase (Nasdaq: JDSU) – plunged over 99%.
Even today – more than 10 years later – the Nasdaq is 60% below its high.
It’s great when a knowledgeable analyst like this rings a clear warning bell at the top. So understand that he’s doing it again today.
Earlier this month, he wrote another Wall Street Journal op-ed piece. This one is called “The Great American Bond Bubble.”
Siegel says: “What is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.”
As a result, they’re plowing money into Treasuries and Treasury mutual funds.
This will almost certainly end badly.
Unless we have a full-blown deflationary depression, these bonds are a horrible bet, offering minuscule yields and huge downside risk. Many investors don’t realize how badly they can get clobbered in super-safe Treasuries when the bond market turns down. (And those holding leveraged bond funds could see 40% or more of their principal vanish in a matter of months.)
As Siegel concludes: “Those who are now crowding into bonds and bond funds are courting disaster… The possibility of substantial capital losses looms large.”
What does Siegel propose that income investors hold instead?
Don’t Be a Sucker: Invest in This Asset Class Instead
Large-cap dividend stocks.
He points out that the 10 largest dividend payers in the United States are:
AT&T (NYSE: T)
Exxon Mobil (NYSE: XOM)
Chevron (NYSE: CVX)
Procter & Gamble (NYSE: PG)
Johnson & Johnson (NYSE: JNJ)
Verizon (NYSE: VZ)
Phillip Morris (NYSE: PM)
Pfizer (NYSE: PFE)
General Electric (NYSE: GE)
Merck (NYSE: MRK)
And together…
- They sport an average dividend yield of 4%, substantially more than what 10-year Treasuries are paying.
- Their average P/E ratio is 11.7 versus 13 for the S&P 500.
- Aside from the mountain of cash they’re sitting on, their prospective earnings will cover their dividends by more than 2 to 1.
Despite fears of another stock market dip, income investors are wise to switch from Treasuries to high-dividend stocks. It might not feel like the right thing to do, but neither did buying stocks at the market low 17 months ago.
In short, I couldn’t agree with Dr. Siegel more. Treasury bonds today are a sucker bet.
Good investing,
Alexander Green
18
The Most Politically Incorrect Column Ever
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The Most Politically Incorrect Column Ever
by Alexander Green, Chief Investment Strategist
Wednesday, August 18, 2010: Issue #1326
Could reading Investment U cause you to switch party affiliations or change your vote?
Hardly. Political affiliations are generally a combination of values and interests. Few individuals seriously question their notions of right and wrong or have trouble identifying those policies that further their own self-interest.
That’s why political discussions – even the few conducted at relatively low decibel levels – seldom result in anyone changing his or her mind. But according to Dr. Daniel B. Kline, a professor of economics at George Mason University, perhaps some of us should…
How Would You Fare on This Question?
In the May issue of Econ Journal Watch, Dr. Klein cited a recent Zogby International survey, which found that self-identified liberals do very poorly on questions of basic economics.
Zogby asked 4,835 American adults to answer eight survey questions on simple economics and asked respondents to also identify their own political leanings from liberal/progressive to conservative/libertarian.
Consider one of the questions: “Restrictions on housing development make housing less affordable.”
Survey participants were asked if they: 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree: or 5) are not sure.
An answer was only considered wrong if it was flatly unenlightened. (In this instance, “somewhat disagree” or “strongly disagree” were considered wrong. Answering “not sure” was never counted as incorrect.)
An “F” for the Left
Of course, basic economics acknowledges that whatever redeeming features a restriction may have, anything that increases the cost of production or reduces supply will increase the cost to consumers.
Yet 60.1% of respondents who identified themselves as liberals missed this question, as did more than two-thirds (67.6%) who called themselves “very liberal.”
Likewise…
- The majority of liberals disagreed that mandatory licensing of professionals increases the price of services.
- They disagreed that rent controls lead to housing shortages.
- They believe that a company that holds the largest market share in its industry is “a monopoly.”
And so on…
Respondents who identified themselves as very conservative or libertarian missed an average of 1.38 of the eight questions. Those who identified themselves as very liberal or progressive missed an average of 5.26 (a clear “F”.)
The Most Dangerous Economic Myth
Of course, everyone is entitled to their own opinion. But everyone is not entitled to their own facts.
Klein concludes that, “The left has trouble squaring economic thinking with their political psychology, morals and aesthetics.”
I have a strong suspicion that most readers agree. Why?
Because our mail shows that the overwhelming majority of investment readers -perhaps more than 90% – identify themselves somewhere on the conservative/libertarian end of the spectrum.
In some ways this is mystifying. After all, we all have financial needs. We all dream of retiring comfortably some day. But, here again, liberals and conservatives have different views about how this goal should be achieved.
Conservatives have a strong conviction that it is their own responsibility to work, save and invest to ensure some measure of financial independence. Yet surveys regularly show that the majority of liberals feel it is the responsibility of their employer or the federal government to provide for them in retirement.
Of all the economic myths, this one may be the most dangerous. Yet the fact that you’re even reading this column suggests there’s not a 1-in-10 chance you believe it.
Perhaps you should pass it along to someone who does.
Good investing,
Alexander Green
11
Buying Stocks: Don’t Succumb to The Siren Song of the Naysayers
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Buying Stocks: Don’t Succumb to The Siren Song of the Naysayers
by Alexander Green, Chief Investment Strategist
Wednesday, August 11, 2010: Issue #1321
Comedian Dennis Miller used to joke that he was at the airport when his ship came in.
A year from now, plenty of investors are likely to feel the same way. Why?
Because they’re ignoring the good news out there right now and not buying stocks. Instead they’re succumbing to the siren song of the naysayers.
And while no one can know for certain what the stock market will do in the year ahead, there are good reasons to believe that stocks may be substantially higher.
That’s because there are two traditional indicators that investors are wise to heed:
- Don’t fight the Fed
- Don’t fight the tape
Let’s take a closer look at each of these and I’ll show you why…
Don’t Battle with Bernanke
As we all know, the Federal Reserve has taken short-term interest rates to near zero. Moreover, Fed Chairman Bernanke has repeatedly said that he expects to keep them there “for an extended period.”
This is a green light for Fed-watchers. Low interest rates…
- Make it cheaper for corporations to borrow.
- Reduce the cost of owning stocks on margin.
- Make cash and time deposits unattractive relative to stocks.
A stock investor today certainly isn’t fighting the Fed.
Let’s take a closer look at the “don’t fight the tape” part…
Don’t Fight the Tape
The stock market is in a confirmed uptrend. Seventeen months ago, the Dow bottomed near 6,500. It has had its ups and down this year, but the big trend is up, not down.
- If you’re buying stocks, you’re with the tape.
- If you’re short the market or out of stocks, you’re fighting the tape. And that’s not good.
(The tape, of course, is a reference to the ticker tape of yore.)
Some investors tell me they’re not comfortable buying stocks during a recession.
Hello?
It’s true we’re not experiencing robust economic growth. But a recession is defined as two consecutive quarters of negative economic growth. We haven’t had a single negative quarter in the past year. In fact, GDP growth has averaged 2.84% a quarter over the past 12 months.
It doesn’t feel that way, of course, because housing is in a funk, unemployment is high and consumers are reluctant to spend. But for the third consecutive quarter, profits have mostly beaten expectations.
Why? Partly because companies have laid off unnecessary personnel, refinanced debt at lower levels and cut other costs. Even a modest uptick in revenue is causing a big jump in bottom-line profits.
Plus, businesses are benefiting from technological innovation, negligible inflation and booming new markets overseas, particularly in Asia and Latin America.
Feel the Fear… And Buy Stocks Anyway
Other investors tell me they can’t buy stocks because there is just so much gloom and doom out there.
Apparently, they don’t realize that negative sentiment is a powerful contrary indicator. (Or as Warren Buffett often says, you want to be fearful when other investors are greedy and greedy when others are fearful. And without a doubt, investors are fearful right now.)
Of course, there is a lot of negativity because this is an election year, too. Republicans are talking up how bad things are to increase their chances in November. Democrats are conceding that things are bad – and still blaming things on Bush – because they don’t want to seem out of touch.
Indeed, there is plenty to dislike about how the folks in Washington are running the show. But a decision to buy stocks is not an endorsement of any political party or a statement that all is right with the world. It’s merely an acknowledgement that business conditions – and profits – are likely to improve in the future.
If you disagree, that’s fine. But at least concede that you’re fighting the Fed, fighting the tape – and fighting the sentiment indicator.
Historically, that has not been a profitable strategy.
Good investing,
Alexander Green
by Alexander Green, Chief Investment Strategist
Monday, August 9, 2010: Issue #1319
Almost every day, friends and business associates forward me media stories about the economy or the financial markets and ask me to comment.
But my comment on every story – whether bullish or bearish – is always the same: “Perhaps.”
Perhaps the economy will experience a double-dip recession. Perhaps gold will hit $2,000. Perhaps the market will surprise everyone and rally in earnest.
But if this is too indefinite for you, let me emphasize a few certainties…
The Media’s M.O. is Bad for Your Bank Balance
It’s certain that the media doesn’t know who is right or wrong about the stock market, interest rates or currencies.
It’s certain that the “experts” they’re interviewing don’t know either. (Although there is a good living to be made by pretending to know.)
It’s certain that the media doesn’t exist to help you grow your portfolio or achieve financial independence. Rather, the media exists to sell advertising. The best way to maximize advertising revenue is to attract readers (and viewers). And the best way to do that is to have something – anything – sensational to say. Sensationalism grabs people’s attention – and that’s all sponsors really require.
This works beautifully for the media. But does it work for you? Of course not. The media is out to game you.
Hunting for a Good Stock? Ignore the Media and Ask These Nine Questions Instead
Never once have I met an investor who said he made a fortune in the market by constructing a worldview based on media reports and then shuffling his or her money around accordingly.
The very idea is absurd. So rather than listening to some pundit or self-styled guru who has the world all figured out, take a look at the smaller picture. In particular, if you want to make money in the market, seek out a great business and ask:
- Does the company have good economics? In other words, is it part of an industry that isn’t driven by price competition alone?
- Does the company have a consumer monopoly or brand name that commands loyalty?
- Are the earnings on an upward trend with good and consistent profit margins?
- Is the debt-to-equity ratio low, or the earnings-to-debt ratio high? Can the company repay debt, even in years when earnings are lower than average?
- Does the company have high and consistent returns on invested capital?
- Does the company retain earnings for growth?
- Does the business have high maintenance cost of operations, high capital expenditure or investment cash outflow? (If so, that’s not good.)
- Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
- Is the company free to adjust prices for inflation?
Look for Facts, Not Fluff
As a stock market investor, these are things that are definitely worth knowing. And if you don’t have time to uncover the answers yourself, at least listen to someone who does.
And notice something important. None of the questions above make a good headline. They don’t grab your eye. They don’t force you to pay attention. At least not like “Dow 4,000!” does…
So don’t waste your precious time chewing on economic punditry. Warren Buffett said it best: “Let blockheads read what blockheads wrote.”
Good investing,
Alexander Green
2
The Only Thing That Guarantees Your Financial Independence
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The Only Thing That Guarantees Your Financial Independence
by Alexander Green, Chief Investment Strategist
Monday, August 2, 2010: Issue #1314
Reading Tom Shales in The Washington Post recently, it dawned on me why so many people who should achieve financial independence don’t – and probably never will.
I’m not talking about those who are uneducated, unskilled or just can’t pull their lives together because of drugs, alcohol or crushing personal circumstances. I’m talking about the millions of bright, talented people who have plenty going for them and should be financially secure but aren’t.
If you happen to be one of them, just listen to Tom Shales. He offers a case study in the mindset of personal failure…
The Blame Game
Shales recently reviewed a new primetime TV show by self-help guru Tony Robbins, bestselling author of Awaken the Giant Within and many other books.
I haven’t read Robbins’ books or seen his show and no doubt never will. But I do know his basic mantra: If you want to achieve something in this world, you’d better quit whining and pull yourself up by your bootstraps, especially during tough times like these.
Is this message old, corny, and utterly predictable? Of course. The truth generally is.
But Shales has a bigger beef. He’s irritated that Robbins is “filthy rich” from selling “you know, jillions of books.”
Moreover, he calls Robbins’ message of personal accountability “trash TV” and moans that, “At no point does Robbins suggest that it just might possibly be society that has failed… All the bankruptcies, foreclosures, ruthless credit card companies and crooked captains of commerce – they must just be coincidences.”
Someone pass me the world’s smallest violin…
In a Word: Responsibility
The flip side of Shales’ rant is that those of us who didn’t buy more house than we could afford… didn’t use our home equity as an ATM machine… didn’t get caught up in the mania to flip land and condos because “real estate always goes up”… didn’t max out our credit cards or accept credit we couldn’t manage… we were just lucky, right?
Personally, I find it hard to swallow codswallop like this and keep breakfast down, too.
Sure, there are plenty of good, hard-working people who lost their jobs and fell into tough times through no fault of their own. But the Declaration of Independence proclaims the right to pursue happiness, not a guarantee that “society” will provide it.
Like me, I bet you know plenty of people who lived well beyond their means during the boom times. Now they’re paying for their mistakes. It’s a chastening experience. But most will emerge from this downturn, wiser and hardier souls.
Snivelers like Shales, on the other hand, who blame economic misfortune on corporate corruption (a minuscule portion of all U.S. business activity), greedy lenders (who apparently hog-tied their customers and forced them to take out variable-rate mortgages at gunpoint), or society (”anybody but me,” in other words), are destined to fail and fail again.
Until you take responsibility for your own actions and decisions, you cannot succeed. It’s just one of the laws of life. So what does this mean to you as an investor?
Four Simple Steps to Financial Independence
In short here are four simple steps to achieving financial independence…
- It’s up to you to maximize your income and minimize your outgo.
- It’s up to you to live within your means, use credit wisely (or not at all) and save as much as you reasonably can.
- It’s up to you to outline your financial future and follow a workable plan to achieve long-term financial independence.
- It’s up to you to invest your money wisely, keep a sharp eye on taxes and expenses, or make certain that you delegate this responsibility wisely.
This is how ordinary people begin building wealth in order to achieve financial independence. Of course, it’s much simpler and easier to blame “society” or “the breaks” for your problems.
But carping and complaining isn’t terribly becoming and – as Tony Robbins surely knows – it doesn’t change things anyway.
Good investing,
Alexander Green
