Archive for the ‘Economics and Markets’ Category

4 Reasons Why the “4 Reasons Today’s Tech Scene Differs from the ’90s Bubble” Aren’t Really Reasons

03/29/2011

I hope that the title of the article didn’t scare you. Yet I felt compelled to share with you the same confusion many in the social media world are currently going through with regard to company valuations.

I got to the article “4 Reasons Today’s Tech Scene Differs from the ’90s Bubble” through the article “Buffett Declares Social Media Valuations Overpriced“, in which Buffett, in eerily similar fashion to the Tech Bubble 1.0, claims “it’s extremely difficult to value social networking site companies” and that “some will be huge winners, which will make up for the rest.”

As a student of investor sentiment I love to point out when investors’ hearts jump far ahead of their minds. One of my favorite books of all-time is “Extraordinary Popular Delusions and The Madness of Crowds” in which Charles McKay journeys through the greatest examples of herd-mentality people’s money has been subject to.

I’ve become quite keen of bubbles. Both finding them and pointing out false ones. Tops are more fun than bottoms, simply because bubbles are so much more entertaining.

It’s a funny thing money, because it’s something we work our whole lives for and yet it can drive us completely insane. We gamble when we have everything to lose and we shy away from the greatest of opportunities.

Back to the article.

If you insist that Facebook is worth $85 Billion today you deserve to be made fun of. Let’s begin.

Alexander Hotz is a freelance multimedia journalist and public radio junkie based in New York City. Currently he teaches digital media at Columbia University’s Graduate School of Journalism.

So now we have a case of Buffett vs Hotz. Who do YOU think is going to win? That’s right. The 80 year old investor or some young “public radio junkie”. Sorry, Alex but my money’s on Buffett.

We currently have the following valuations:

Quora $1 Billion

Twitter $10 Billion

Facebook $85 Billion

Alex mentions 4 reasons why “this time is different”.

1. Startup Costs

“[In the 1990s], when you started a company, more money was pumped into office space, servers and equipment,” said Mimeo.com Founder Jeff Stewart. “Today, when you build a company, you don’t own a server — you might even have mobile office.” With so much infrastructure now in the cloud, entrepreneurs can focus more on the product than they could in the past. For their part, investors don’t need to invest as much, so at least in comparison to the 1990s, oftentimes the risk is less. Bottom line — it costs less to start a company today.

There are 3 immediate issues I have with that paragraph.

a. It’s not true. Yes infrastructure costs have lowered significantly yet other costs and other distractions have taken its place. Today, marketing, lead generation, code writing and technical expertise have taken the front seat – aspects just as time consuming as taking out the trash or actually selling product.

b. This doesn’t help us. If startup costs have dropped that means that the incentive for other competitors to compete has risen. What stops some potential college drop-out from spending his night writing better code than your oh-so-genius team?

c. This isn’t a reason. So let us assume that you do have a patent-pending for your state-of-the-art tech-savvy game-changing app. How do you make money? If there’s no money, there’s no valuation. Period. I’ll write that again because it will recur throughout this article. If there’s no money, there’s no valuation.

2. Public vs Private

In the 1990s, tech companies raced to secure a lucrative IPO. When the bubble burst in March 2000, those who got burned weren’t just angel investors and VCs, they were less experienced investors who had jumped on the tech bandwagon.

Today, younger companies aren’t in a rush to go public. Think Facebook’s “special purpose vehicle” with Goldman Sachs. What’s more, today’s public tech companies are market stalwarts. “You can’t call Amazon or Google or Apple overvalued,” said OrganizedWisdom CEO Steve Krein. “[In the 1990s] you could have called DoubleClick, Amazon and Yahoo overvalued.”

Krein agrees with Fred Wilson that the startup world has some “frothiness” or excess capital, but comparisons to the 1990s don’t take into account where the investors are coming from.

Firstly, investors are investors. And history has proven the astute “experienced” investors to be the ones who are often the most foolish ones. You may insist that small investors won’t get burned this time and, I agree, that’s a good thing. But that doesn’t in any way validate the stupidity of the affluent who we know spend millions of dollars on other stupid stuff like art, CDOs and credit default swaps.

I have no doubt that if the small guy could get in on this mayhem, he’d buy Facebook faster than he bought Enron and Pets.com 12 years ago.

Then he mentions Google, Apple and Co., which makes my head spin. Of course Google wasn’t overvalued in 1999. It didn’t exist! So while investors were piling into Yahoo and Juno their ultimate rival wasn’t even a prototype!

The second mistake is a bit more complex. You can’t use the survivor to prove the challenge. You can’t take the 1997 Bulls and claim that the Michael Jordan draft pick was a home run. Apple has come a long way since 1999. Jobs had just joined the company again after 10 years of struggling profits and a stagnant share-price.

3. Hubris

A less tangible difference between the 1990s and today’s startups is the dynamic between the up-and-comers and the established titans. “[In the 1990s] there was a sense of confidence that the new companies would knock off the old companies,” said MeetMoi.com CEO Andrew Weinreich. “Imagine Time Warner, the most venerable of media companies, literally giving away half of itself to an Internet startup AOL. If you were in a startup, you really thought that you would knock off existing players.” Today, the big players are the survivors of the dot com era.

I have to give it to him. He had the substance of a real argument until the last line. Which survivors are we referring to? When people talk about Google being taken over by Facebook, what does that say about hubris?

Finally, since when does hubris a necessity for a valuation bubble. All we’re saying is that investor aren’t discounting anything for the future. Webster’s  defines a “Bubble” as “a state of booming economic activity (as in a stock market) that often ends in a sudden collapse”.

When VCs are throwing (literally) money at these new tech startups there is a definite chance of a sudden collapse in economics activity, at least in Silicon Valley.

4. The Bubble Isn’t a Profitable Joke

In 2000, entrepreneur Philip Kaplan created the satirical website FuckedCompany.com (a take on Fast Company), lampooning the absurdities of the startup world. “When you have a profitable business built around making fun of the bubble, that’s an indicator,” said Stewart. The site made some serious money off the woes of the floundering dot com world. Today, while satirical blogs and social accounts are plentiful, none of them come close to the profitability of lampooning the last bubble.

Do we really need jokes to prove investor insanity? Mind you, every child knows that (bubblegum) bubbles take time to grow, but only an instant to pop. Investors should bear in mind the same. That one day there will be a joke, the next it won’t be so funny.

So is there a bubble?

No.

Guess you weren’t expecting that answer. The fact is that if investors are going this crazy now, it’s due to continue for some time. True, there are no jokes, there are no naysayers (and thus stark advocates) and it’s not the hottest topic on CNBC. Most of all, there aren’t enough people claiming it’s a bubble (yes, a bubble needs a conscience). Not yet at least. But once the IPOs start rolling out and the small investors do get wind of what’s going on, it will end, and badly.

Wait I say.

Wait for the “Facebook taking over Apple” articles.

Wait for the momentum, when volatility increases.

Wait for the young and inexperienced investors to sit on the set of CNBC and tout the reasons for their madness.

Wait until earnings become paramount, while balance sheet quality, cash flow from operations are ignored.

Wait until these “low cost” startups begin to run low on the mountains of cash they acquired.

Wait for when the accounting seems compromised, when large amounts of earnings stem from accruals rather than cash flow from operations.

Wait for the article that say “This time is different”, “P/E ratio’s don’t matter” and “If you don’t invest now you’ll die a broke old man”.

When Buffett said that he “didn’t get tech,” he didn’t mean that he didn’t understand technology; he just couldn’t understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.

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The Economy: Is It Really Getting Better?

03/03/2010

What We See

People are optimistic, The Dow remains above 10,000, inflation fears seem over-estimated, and the financial crisis seems isolated in places like Greece, California, and random long-expected lay-offs.

I just met with a manufacturer of fashion apparel and she was telling us how many designers who were previously afraid to launch their collections are now coming out of the woodwork with some very risky and ultra-modern designs. So we have throngs of risk-taking designers in the already cut-throat industry of fashion design. IS the economy picking up?

What We Get

Sometimes in science, and in economic models we can often assume what something is by what it’s missing. In this case: Fear. Is there caution? Absolutely. But the open-eyed cold-faced pessimism we saw in March of last year seems to have gone into a long winter hibernation. This is the problem. Fashion designers, manufacturers and central bankers are all sharing the same sense of false security.

Here are some reasons why:

  • The VIX (which tracks market volatility, otherwise known as the “Fear Index”) is touching all-time lows. This means people are discounting any chance of risk in the market.
  • Gold and Silver are slowly and quietly creeping up towards their all-time highs, a sign that financial security is again coming under question.
  • Commercial Real Estate, Rising Unemployment, Too Low Interest Rates, Government Irresponsibility, and High Stock Valuations are all playing a major role in the potential for another crisis.

Here are some insights from top banking insider and billionaire, Andy Beal: http://bit.ly/ahi5s4.

When was the last time you prepared for any worst case scenario?

What We Do

One of the best and easiest lessons I ever learned in finance was as follows, bear with me:

Income (money that comes into your pocket) – Expenses (money that leaves your pocket) = Cash Flow (“my money”)

With this in mind there are 3 things you have to do:

1) Stop Spending! Buy used, buy less, buy what you need. This is a timeless and necessary action if you ever want to be happy financially. A used book on Amazon is rarely any different than a new one… but its far cheaper.

2) Get out of debt! There’s no good reason to spend 101% of your income(s). Start paying cash, pay off far more than your minimums, and stop paying someone else 15-30% for everything you buy.

Everyone knows the first two suggestions but few focus on this next one...

3) Make More! Don’t just mope and cry about how you now have money in the bank, but feel broke. Get out there and challenge yourself! Make some more sales calls, do things to get promoted, start your own business (YES in a recession). If you want to have anything significant in life, you’ve got to go get it. Be proactive and MAKE it happen!

No matter what happens, you will always be you, and there will be good times, and not so good times. Your job is to ensure that you and your family are protected and comfortable, both financially and emotionally, no matter what life brings!

Why Invest in Gold?

02/25/2010

By Levik Dubov

Simple Answer:

The reason why investors own precious metals, is to insure themselves from a debasement of currency at a greater rate than available market returns. Few people actually own precious metals physically, and those who do often do for the wrong reasons.

Gold is not a reliable vehicle for appreciation, yet it is an outstanding store of value. The sensible capitalist does not “invest” in gold. He merely safeguards his wealth in the form of non-financed physical-assets in times when currency competency comes into question, and waits until either the inflation subsides or an opportunity of adequate returns to be restored.

As one hedge fund manager recently put it: “All investments have their day, and right now gold is having its day”.

In-Depth Analysis:

For all those who aren’t familiar with Talmudic-style dissection, Get ready!

Some people are natural cynics and approach everything with a good dose of skepticism. (These people often spend years owning nothing but AAA-bonds and Market Funds). Others are opportunists and approach everything with a gullible zeal. (These people are often looking for the next Microsoft). We see ourselves as mere realists, in an attempt to approach everything with a logical and objective frame of mind.

To understand results we must first find reason…

Questions Scott Adams poses:

I am referring to a recent article by famed Dilbert cartoonist, Scott Adams. I enjoy his posts very much and I hope this article will clarify his perplexities regarding precious metals investment.

1. “People aren’t good at predicting the future, no matter how obvious the future path seems”.

It is for precisely this reason, that when things do change, (such as the turn of the English Empire), so few expect it and are prepared. Ask people interested in precious metals, exactly how many ounces of physical metal they own. You’ll notice how few people truly stand behind the words they’ve spoken. As a matter of fact, just glancing through the comments on Adams’ blog, it seems that most of the forum comes across as hypothetical folks who either own too little of a position, or are influenced by invalid reasoning.

2. “Warren Buffett isn’t putting all of his money in gold”.

I will get to the reason behind this in a moment, but it must be understood that Mr. Buffett is a “Common Stock Man”. That’s what fascinates him, that’s what engages him, that’s what he does best. So why should he invest in gold when he has found far greater returns in an under-valued marketplace?

3. “My failure to imagine how the debt can be contained might be just that: a failure of my imagination”.

When it comes to debt there is far too many variables to consider (i.e. Chinese Bond-ownership, Dollar Replacement, Federal Bankruptcy, Currency Revaluation, The Gold Standard). In other words, the ownership of gold stands not as an investment with the intention of appreciation, but as an clever insurance policy against a catastrophic hyper-inflation or currency debasement.

Explanation:

In “The Intelligent Investor” written by Benjamin Graham (Buffett’s famed mentor), which was revised as of 1971, Graham says in Chapter 2, “The Investor and Inflation”, in the article “Alternatives to Common Stock as Inflation Hedges”:

“The standard policy of people all over the world who mistrust their currency is to buy and hold gold… the holder of gold has received no income return on his capital”.

He adds in summation:

“There is no certainty that a stock component will insure adequately against such inflation” [emphasis ours].

A few points need to be highlighted:

1) Graham informs us that the hoarding of gold was an age old practice. This made total sense as in fore-times bank panics, currency debasement and depressions occurred just about once a decade.

2) He cites the years between 1935-71 as “proof” that gold has been a lousy and inadequate investment class. However, between the years of 1969 and 1981, gold appreciated phenomenally, outperforming each and every other asset class by a wide margin. Had Graham witnessed this spectacle there is strong reason to believe that he would have reconsidered his position, and may have made room for precious metals in a conservative portfolio.

3) In that paragraph he also frowns upon investing in real estate claiming that it is subject to “wide fluctuations” and “serious errors”. His only advice to such business is:

“Be sure it’s yours before you go into it”.

What Graham is telling us here, is that any asset is a bad investment if done for speculative reason, or with improper judgement.

4) In his closing remark, Graham even warns that even while common stocks offer great opportunity, they may nevertheless fail to overcome the challenges of inflation, or currency debasement.

What’s Changed?

Much! Too much actually. As a matter of fact, from an economic standpoint America is no longer similar to the America Graham was familiar with. For one, America has lost its status as the world’s largest manufacturer of goods, and has gained a frightening lead in terms of consumptions and spending. (For those familiar with European history, this is how 16th Century Spain lost its position as the world leader in trade and commerce).

The world of currencies have also changed drastically. While I will not delve into the fascinating history of barter, trade and the properties of monetary exchange here, one enormous variable differentiates the Pre-1974 and the Common Eras. In ancient times, every single transaction took place with an element of exchange in mind. Whether it was sea shells, or cattle, or wooden sticks, the value of any transaction or credit was accurately measured in terms of a monetary exchange unit. With the agreement to terminate convertability from gold to Dollars in 1974, this all changed. No longer would the U.S. Dollar, the “ineffable” reserve currency of the world, be exchangeable for the gold metal.

Thus began, the current era of a universally-accpeted fiat (non-commodity based) currency. No longer would each transaction be measurable in accurate terms. And no longer would any Government, foreign or domestic, be compelled and obligated to abide to the regulations of supply and demand. So long as We The People would accept and stand loyal behind the mere faith and credit of the United States Government, so long would our ever-glorified Dollar endure.

4.
“What happens to the price of gold if people simply change their minds about its value?”

Adams’ question seems pertinently logical. However, there is one crucial question that he fails to address…

What is a currency?

The following I adapt from the works of Doug Casey:

In the 4th century BC, Aristotle defined 5 reasons why gold is money, and they are just as valid today as they were then. A good form of money must be: consistent, convenient, durable, divisible, and have value in and of itself.

Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.
Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.
Durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.
Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.
Value of itself. The lack here is why you shouldn’t use paper as money.

A 6th reason that Aristotle may have overlooked since it wasn’t relevant in his age, and nobody would have thought of it: It can’t be created out of thin air!

This is not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

Buffett’s Investment in Silver, Style and The Finale of an Era:

Buffett It should be noted, that Buffett did make a significant investment into Silver (not gold) in the late 90s, one that has come under sharp scrutiny in recent years, as few are knowledgeable of exactly what led Buffett to purchase over 100 million ounces of physical silver on the open market, and moreover what ever happened to the holding. Those who know him, have even mentioned his fascination with silver over the decades. All in all, we cannot say that Buffett “only” invested in common securities.

We may also add, that the majority of Buffett’s tenure as the “world’s greatest investor” coincided with an era that was quintessential for the class of Common Stocks. The 50s, 60s, 80, and 90s, were all part of a two-part secular bull-market that captivated the attention of Wall Street and Main Street, concluding in the most absurd valuations for up-and-coming Tech start-ups that had neither money nor model. However, one may realize that Buffett’s years of 50-100% returns are far behind him. With over $100 Billion under his management, investment opportunities are slim as: a) Stocks have become a staple of investment and speculation, thus raising valuations to their highest in modern history, and b) The potential for significant returns diminish greatly as the ability for a multi-national corporation to grow is minimal, if not non-existent. This is known in economic circles as The Law of Diminishing Returns.

All in all, it can be assumed that the heyday in common stock are over, as long as current valuations remain at their elevated levels, and investor exuberance and hopeful optimism remain.

Depleting Commodities:

In summation, I’d like to point out why investors and speculators have begun a gradual influx into commodities and precious metals in particular. In brief: They’re disappearing. This doesn’t mean that there will be none left soon, the same way that Peak Oil doesn’t mean that there’ll be no more oil. It simply means that these goods will no longer be available at these prices. This may sound reminiscent to anyone who experienced oil sky-rocket from $1.50/ barrel to over $40 in the late 70s. When the government capped the price level, supply and demand kicked in: Boom! No more gas! Extended lines of anxious cars waiting to be fueled but to no avail. There is no more gasoline left at the price it sells for.

This is why investors flood commodities when inflationary scenarios take hold. Because with all the over-investment into service companies, manufacturing facilities, tech stocks, real estate developments and paper currencies, people have completely forgotten the elements all that possible: physical goods. Oil, Lumber, Cotton,

So take Adams’ post as you wish. But bear in mind that markets aren’t very intuitive. They tend to evaluate the here-and-now and the probable, and don’t have much patience for abstract and the possible.

I only restate the famed Ben Graham’s empirical warning: “Be sure it’s yours before you go into it”.

Good investing!
Levik

Gold and Silver Update

09/16/2009

When Fundamentals clash with Technical Charts who to follow? What role does the Gold-Silver ratio play? What happens if Gold breaks above $1000? What does that mean for Silver? And what should the prudent investor do?

How Intelligent Investors Think

We are approaching another critical point for the Precious Metals Trader. Notice how I say “trader” not “investor”. An investor doesn’t follow a position. He buys low – when demand is virtually non-existent, and sells high – when demand is irrationally justified. A trader on the other hand, may profit from medium term trends. What’s interesting is that more often than not, the investor wins. The reason for this is that generally markets follow trends. “Generally” implies most of the time, however when they do buck the trend they do so with “shock and awe”. Thus, we must approach this current scenario like an investor/long-term trader, and not like a little kid out to make a few dollars.

Many recall the March 2008 highs. Note that Silver is still 20% below its 2008 high and 65% below its all-time. At the time, we did not sell and our reasoning was very clear and even in hindsight “justified”. “If the downside is significant we can always wait it out. Yet if prices pivot to the upside – and they have strong reason to do so – then there will be no way for the investor to re-enter the market”. Basically, you can’t jump onto a moving train. (Well, you could, but its not advised).

One note on the matter: We don’t really “invest” in gold or silver. Gold is the ultimate currency and should be the default holding of any investor. Only an investment of significant upside and strictly limited downside should be wagered for its value.

Outlook

What we see now is similar to March 2008 in the sense that the Technicals look bleak, while the Fundamentals look increasingly resilient. Gold has just broken-out above $1000. This has stood as a significant resistance level and its abolition holds the keys necessary to bring thousands of traders and funds into the market again. These are mostly people who are waiting on the sidelines to see if the rally is sustainable.

Another factor, that will definitely play a key role in the longer-term is the fact that Central Banks are now buying gold, not just selling it. This create a fascinating equilibrium in a once Dollar-dominated monetary system. The game may be up, this time for good. In addition, mining companies, such as Barrick, intend to de-hedge their positions in gold shorts – which were profitable when Gold was falling in the 80s and 90s but with rising prices has now turned against them. These two development are decade changing events and will alter the precious metals market for years to come.

Finally, there is not a lot that the U.S. and the Dollar have to gain from expensive gold. It destroys their credibility and instills fear in the hearts of fiat-borrowers. This being the case, it would be of no surprise if governments make one last-standing effort to contain the gold price. Problem is, that while this was once going with the flow, its now battling an uphill trend – a strong one to say the least.

When Fundamental and Technical indicators clash one must look at Sentiment. This is the one differentiating fact between 2008 and today. While March 2008 was met with great fear and anxiety regarding the future of the economy causing extreme bullishness in precious metals, September 2009 is met with confidence and calm, to the point of skepticism that Gold can old above $1000.

The fact remains, that the precious metals are over-bought and reaching stress levels on the upside, but these factors are merely short term. The overall trend remains up and amidst the strongest buying month of the year, the top may not yet be upon us.

The Gold-Silver Ratio

Many market followers don’t reallize that silver is due to outperform simply due to its recent under-performance and under-valuation relative to gold. Geologists estimate that the in-ground Gold-Silver ratio stands at something between 8-20. This means that there is approximately 8-20 times more silver than gold. Yet above ground reserves have dwindled significantly in recent years as much of the metal has been used industrially or has gone into private hoards and won’t come out until prices increase over-and-above current estimates.

The ratio, now at about 60 as of this writing, is still high relative to its suggested variant. This means that if one could expect a mean ratio of say 45, then with Gold hovering at $1000, Silver can still rally straight up to $22. If Gold rallied to $1650, as many expect within the next 12 months, we can expect to see Silver as high as $36. Again this is all if we revert to a mean ratio. But markets tend to over-extend their pre-defined impacts. Only time will tell.

Summary

There is no question that the bull market is intact. As for corrections, “they’re as predictable as snow storms in winter”. Yet, when it comes to making sound financial decisions, the ones that don’t require much thinking are those that warrant action. The best action is often no action. I saw many people who call themselves “investors” pile out of Gold in 2008. Yet, they did so for the wrong reasons. No one saw the collapse of Lehman Brothers sweeping the market causing a massive full-scale sell-off affecting each and every asset class – precious metals included.

On the flip side, had the market rallied on the COT short-squeeze, or had a major buyer stepped into the market, they’d probably still be locked out of the market forever. This time is no different. Maybe prices will decline, maybe they’ll rally… but its a bull market you know!

A Story

In Reminisces of a Stock Operator, the famed trader Jesse Livermore teaches many valuable lessons about markets and trends. In one event, he was told the following

“When you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It’s a bull market, you know.”

Thoughts on the Economy

08/16/2009
I don’t like to post on markets that often, as I reserve this blog for more optimistic success-related material that focus more on proactive personal-development than on reacting to news and sentiment.

Nevertheless, in the dog-eat-dog world we live in, I believe its highly important to have a sound knowledge of what the external forces that govern our lives entail.

The one theme I keep noticing time after time in the selective articles I read (no major media, only hand-picked analysts who have proven themselves over time) is: Deflation or Inflation?

Unfortunately, many many people are misinformed when it comes to money. It’s not that they lack an MBA or didn’t understand what they’ve been reading, rather that they misinterpret what seems to be a paradox, but goes hand in hand in reality.

Deflation in Austrian terms is defined as an contraction in the loans of credit provided by a Government (pulling down assets). Inflation is its cousin-scenario where credit is expanded wildly (pushing up assets).

The mistake many make is in confusing the value of the Dollar and the credit/money supply. One is demand, while the other is supply. They may work either together or against each other.

I believe that what we are about to witness, on a grand scale, is a whiplash effect of contracting credit and strengthening currency on one hand, and a failing economy on the other. This will crush the average debt laden consumer as they battle with BOTH rising costs of interests and debt AND the rising costs of living due to monetary inflation.

This is due to a currency who’s printing presses are under no control and MUST outrun any effects of deflation – from real estate, stocks and Dollar buying. The irony here is that the Fed will soon have to choose between letting the Dollar appreciate on its own or pushing it down further. Chances are that they will always choose a falling currency over a rising one due to: a) its bi-centennial policy of monetary easing, and b) the fact that while the US has experienced an intense deflationary scenario (1930-38), we have yet to experience a “hyper-inflationary” one – induced by over-supplying credit and money – at least since Continental scrip was flushed away following the Civil War.

The savvy individual who will deflect such a predicament will be the low-debt high-asset frugal-consumer. This will eliminate high interest payments, appreciating assets and low expenses.

Note that the above applies to both the lower and upper class, since interest on debt and assets effect both the same.

Advice: Own Things! Real estate, commodities, physical gold and silver and strategic undervalued assets all comply. Areas of extreme caution: Stocks of companies that are either overvalued or financially unstable, toxic derivatives and high-interest debt.

~~~

It should also be noted that the generational-trends (10-17 year) remain intact: a) generally rising interest rates b) falling P/E ratios in stocks, and c) a falling Dow/Gold ratio.

This implies that Gold acts a safe haven regardless of whether the Dollar/Economy/Market does well since what we are expecting is not a monetary or nominal increase in price but an aggregate reversion to mean and true value.

Over the long run (next 7-10 years) bonds/fixed-income will mostly outperform capital appreciation for stocks, and hard assets will continue to outperform fiscal contracts.

The mindset will shift from growth to value and from wealth creation to wealth preservation. There will be those who do well, but only those who shy away from the general sentiment of things and focus on their own growth and productivity.

Friday Markets and Musings

07/31/2009

5 Freedoms you lose with universal health care: 1. Freedom to choose what’s in your plan. 2. Freedom to be rewarded for healthy living, or pay your real costs. 3. Freedom to choose high-deductible coverage. 4. Freedom to keep your existing plan. 5. Freedom to choose your doctors.

Jeremy Grantham, Marc Faber and Jim Rogers all agree: Stay out of China! As it is “dangerously unbalanced and very likely to come unhinged” over the next few quarters. China’s is much lower than reported, possibly at only 2%. “The Chinese government is one of the few governments in the world that knows its GDP numbers three years in advance. I’d be careful.”

Storing Gold Offshore
. Austria is the new Switzerland. Das Safe will ensure your gold – or anything else – anonymously, for $560 a year. all you have is the box key and a PIN code to access the secure room. Feel a little bit like Jason Bourne!

Oil seems ready to run back to $50. Inventory levels, technical charts, fundamental demand gaps due to employment and economics.

The bull market in bonds continues.

Jim Rogers isn’t shorting anything right now, not even treasuries. He doesn’t see anything “in great excess”, believes the Fed can steer the bond market for now and cites commodities as the best place to invest due to inflation concerns.

The Congress Indicator. Recess is about to begin. “About 90% of the capital gains over the life of the Dow Jones Industrial Average have come on days when Congress is out of session.”

Cure for radiation poisoning found?

8 Reasons Why Housing Hasn’t Bottomed

07/27/2009
From the Big Picture by Barry Ritholtz

Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that; Indeed, I don’t expect to see nominal increases for anytime soon.

Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe Housing will be any different.

Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue – Wages, and they have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses – a big source of Real Estate activity. Plus, more unemployment means more…

Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures – which are healthy in the long run but wrenching during the process of dislocation – are very likely. These will pressure prices yet lower. And Loan Mods are not working – they are re-defaulting in less than a year between 50-80%, depending upon the mod conditions themselves.

Inventory: There is a substantial supply of “Shadow Inventory” out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.

Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which…

Debt Service/Down Payment: Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt. All of these things act as an impediment to buying a home. At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants. Yes, the NAR Home Affordability Index shows houses as “more affordable,” but it conveniently ignores these real world factors.

Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government. Think back to the post-Depression generation that were big savers, modest consumers, who eschewed credit and borrowing. The damage is going to take a while to repair.

Notes:
When differentiating between real and nominal returns – we refer to returns before and after the effects of inflation (7% growth minus 3% inflation = 4% Real return).

Loan Mods refers to Loan Modifications, typically involving a reduction in the interest rate on the loan, an credit extension, a different type of loan or a combination of the three.

Advice:
Don’t bet on capital gains any time soon. If you’re an investor, focus instead on cash flow by making more in rent than you pay on your mortgage.

Better a bad job than no job. During good times people quit for better opportunities. Today there’s strong reason to remain where you are at least until employment picks up.

The fact that many are losing confidence is a plus for conservative and patient investors. Stock yields from dividends are becoming the most attractive in over a decade and with fear of opportunity comes an abundance of it.

Friday Markets

07/24/2009
Here are the top headlines of the week

Sorry I couldn’t provide the links. Will do so next time.

GE next big one to go?

Porter Stansberry: Who says that anyone who doesn’t own Verizon shouldn’t be able to call himself an investor and has called the demise of the original AT&T, GM, Fannie Mae and Freddie Mac, now says that Continental and GE are net to go. GE has relied on its A+ rating to manipulate its financial program. But now it seems to be following CIT by-the-click.

Doug Casey: Every investor should own at least some physical gold in their personal possession.

FDIC chairman Sheila Bair told a Congressman there would be at least 500 more bank failures 10 times as many as have already occurred this year.

Richard Russel on Gold: In order for the US to justify the recent surge in spending and bailout money, rather than renege on its death, they will instead rid it through inflation and taxation. The only way for the average citizen to defend themselves? Gold. “Gold will be the last man standing. Gold is the secret, unstated world standard of money. It can’t be devalued, multiplied out of thin air, cheapened or devalued or bankrupted. It has no debt against it and isn’t the product of some nation’s central bank. Gold is pure intrinsic wealth. It needs no nation to guarantee it. Gold is outside the paper system.” On Stocks: “It’s clear to me that we are in a rally within a secular bear market within the confines of a long-term or secular bear market”.

William O’Neil: Stocks are in the midst of a bull market that began in March. We say cut every single loss when a stock goes down 8 percent below the price you paid for it. It’s like taking a little insurance policy.

Joe Biden: ‘We Have to Go Spend Money to Keep From Going Bankrupt’

Gary Shilling: Stock Market Will Crash As US Consumers Retrench. The economy won’t start to recover until 2010 as the US consumer is cutting back fast. Spending will drop from 70% of GDP to 60% as consumers pay down debt and go on a saving spree. Most recessions have a positive quarter or two of GDP, so if we get one, it won’t mean anything. The S&P will plunge 35% to 600 by the end of the year. Buy Treasuries.

Gold Bullion or ETFs? Hedge fund manager David Einhorn of Greenlight Capital had roughly $390 million invested in the GLD (SPDR Gold ETF) and then sold all his shares in favor of physical bullion. If you hold for a long time, bullion is likely cheaper. If you trade short-term (or in smaller sizes), GLD is likely better.

Jim Rohn: “It’s about your philosophy, not the economy”.

10 Things you should know before buying a car

Buffett’s 3 Rules for investing. 1) “If it seems too good to be true, it probably is.” 2) “Always look at how much the other guy is making when he is trying to sell you something”. 3) “Stay away from leverage”.

Lobster is now cheaper than hot dogs! LOB (not a real ticker) down from $10 to 2.25.

Buffett Dumps Moody’s (and it’s about time). “Moody’s and its rivals did such an awful job on the debt and mortgage ratings game”.

Goldman Sachs: S&P 500 to Rally Most Since 1982. Improving earnings will spur the steepest second-half rally since 1982. Expects S&P at 1000.

Stocks Both Buffett and Soros Hold: ConocoPhillips, Wal-Mart, Lowe’s, Home Depot, NRG Energy.