Nicholas Jacobs

Value, medium-term horizon
Nicholas Jacobs
Value, medium-term horizon
Contributor since: 2013
With a P/E of about 9, DFS certainly looks cheap, but there's a reason. Investors are reducing their risk because many observers think we're heading into a recession. A recession would increase the delinquency rate on consumer card balances, killing a big part of Discover's profits.
Of course the folks preparing for a recession could be wrong, and if there isn't one and the economy continues to improve, DFS could turn out to be a great investment. Going long DFS isn't just a bet on how well Discover's management executes, it's also a bet on the direction of the economy.
I agree that Discover is relatively cheap. If this were a good time to buy stocks, DFS would be one of the stocks to consider seriously.
The question is: is this a good time to buy stocks? I see too much risk in today's stock prices. An interest-rate hike this year is already priced in to some extent, but nobody really knows exactly what the impact on stock prices will be when the banks no longer have access to almost free money. We could see a sharp correction across the board.
That's true - thanks for the correction.
There are circumstances in which the C and D series can be called earlier, depending on specific events, but under normal circumstances the company can't call them before May 2017 and September 2017, respectively. The A series is callable at any time.
I agree, and most analysts seem to be ignoring them.
There are several exciting developments in biotech at present, including the one you mention. Following them in detail is not my investment focus, so I can't usefully comment on this one (there are investment newsletters which specialize in biotech), but it is certainly a valid approach that can be successful.
You are correct that the Pfizer bid was partly motivated by tax considerations, but AstraZeneca's pipeline was a factor too, especially its cancer drugs in development.
Novartis is roughly twice as big as AstraZeneca, but being "world-class" does not always equate to success for the investor (over the past 18 months, AZN has actually proved a better investment than NVS).
I think we agree that AZN is now overpriced, but an investor can get substantial returns by holding an overpriced security while it becomes even more overpriced. Of course, such a strategy requires constant attention to a trailing stop and does not fit into everyone's investment approach.
I think there is a very strong case that gold will go higher, probably much higher, in the long term: .
However, I do not agree that gold has "finally bottomed". After its huge, decade-long rise, a bigger and longer correction than we have so far seen is possible - even probable. The price action over the last month or two does not look like the resumption of an uptrend to me. Take a look at the 30-day chart on
Accumulating physical gold on a regular basis - "dollar averaging" - is my preferred strategy. It definitely is not time to "back up the truck". I think it likely that we will see even lower prices in the next year, and it would be a pity to be unable to take advantage of them.
I agree that dividends will drop, but that does not necessarily mean these REITs are overpriced, because a substantial drop in dividends is already reflected in the prices.
For example, NLY closed at $11.58 today. A long-term yield of 5% would be excellent right now, so the price of $11.58 suggests a dividend expectation of about $0.58/year, or a quarterly dividend around 14 or 15 cents. The most recent quarterly dividend was 35 cents. So a drop in the dividend of nearly 60% is already baked in to the current price.
[Disclosure: I recently opened a long position in NLY.]
Steve, you are right about the attractive P/E and the financial soundness of RGR. But it's misleading to state the "yield" based on the most recent year's dividend, because that was a one-off, special dividend. Going forward, we will see much lower dividends. The company is now using its cash to expand production and has stated an intention to carry more inventory.
If, as the numbers on background checks strongly suggest, we see a fall in demand just as several firearms companies are ramping up production, that will hit RGR hard. To challenge this article's analysis, it's not enough to point out that last quarter was a "blowout quarter". What matters to an investor is the next few quarters. And the opening of a new facility to expand production only makes sense if demand is increasing.
Good article, David. None of this is rocket science - the pieces are all pretty obvious - but put them together, and it's not overblown to call it a crisis. A crisis that most people are ignoring.
I agree with your description of the problem, but not all of your suggested solutions would help.
The 1936 Commodity Exchange Act did not "make derivatives illegal", it simply required certain derivatives to be traded on organized exchanges. Derivatives have a real economic purpose - for example, agricultural futures enable a farmer to lock in a price for a crop before it is harvested, which is essential for the farmer to be able to plan ahead.
Broadly speaking, derivatives are beneficial as long as they are used to transfer risk from people engaged in real economic activity to speculators. We need deposit-taking banks to be safe, so they must not be allowed to speculate; Glass-Steagall should never have been repealed. (By the way, Glass-Steagall had been weakened by creative legal interpretations long before it was formally repealed; what we need, to be clear, is the separation between deposit-taking commercial banks and investment banks which was the original intention of Glass-Steagall.) Deposit-taking banks still need to use derivatives, but they should use them only to eliminate risk. For example if a bank gives you a fixed-rate mortgage, it is exposed to the risk that interest rates might rise above that fixed rate. It must be allowed to transfer that risk to a speculator using a derivative, for example a swap. The counterparty (speculator) would have to put up collateral, which the deposit-taking bank would seize in the event of default.
The "problem behind the problem" is that the existing situation is very desirable for the people who run the big banks, and they have huge influence over Congress. Gambling with depositors' money provides the profits which "justify" their multi-million-dollar bonuses, but those profits also enable the bankers to exert tremendous political power, through campaign contributions and PACs.
The smart money has already left, or is leaving, the banks of most Eurozone countries.
I think you may be missing the point, Erick. Obviously a car-repair shop wouldn't print off a transmission or an engine, and in any case, those are both assemblies of many different parts. But there are a huge number of discrete parts in an automobile. It is impossible for a repair shop to stock a complete parts inventory for (say) the last 8 years' models of even the top ten manufacturers. Now, for a recent model, parts can be ordered and shipped pretty quickly. But for an older model, a replacement part could be difficult to source. A 3D printer could be a solution. I don't know whether this is the wave of the future or not, but it is certainly not a ridiculous concept.
Speaking for myself, I wouldn't short it as soon as Monday. This market is rallying, and in a rising market, I think it's unwise to be short anything. I'd wait for a technical signal that the rally is breaking down.
But it depends on your risk tolerance of course.
GAAP does require R&D costs to be expensed in the year in which they are incurred, but this is one of the points where IFRS (International Financial Reporting Standard) differs from GAAP. Under IFRS, R&D expenditure can often be capitalized.
As you point out, it is often more logical to regard R&D as generating an intangible asset than being an expense. GAAP is a bit inconsistent, because if a company buys the results of R&D from another company, that's treated as a capital asset, whereas if it develops the same results internally, the cost is expensed. When analyzing a company's financial statements, it's sometimes a good idea to add R&D expenditure (or part of it) to the intangible assets before considering the value of the company. After all, the price paid in a takeover would have to include the value patents, copyrights, and general know-how the company had acquired from its R&D.
Good point. The calendar year isn't completely arbitrary, though - it's the tax year for most US residents, for example.
And I'd question your statement that November 15 is just as arbitrary as January 1. How did you pick November 15? Did you choose a completely random date ... or did you pick a date that would show at least one down year? If so, it isn't arbitrary at all!
By the way, another objection which could be made to the "12 straight up years" is that it's only true of the price in US dollars. In any other major currency, there have been down years (you can find data on
What I'm really trying to express here is that for such a big move over such a long period, you'd expect a major correction at some point. Not just a drop from $794 to $747.50, and not just intra-year volatility, but a year-on-year correction in the range of 25% to 50%.
If that happens in 2013, I'd see it as a buying opportunity.
Historical gold prices for 2008 are available at .
The London gold price for January 2, 2008 was $846.75 and the price for December 30, 2008 was $869.75. So I do not count 2008 as a down year.
It's difficult to know what would have happened without QE. To the extent that the first QE was seen as stabilizing the financial system, it would have reduced the attractiveness of gold as a safe harbor, thus making the uptrend less steep, as you suggest. On the other hand, subsequent QEs inject more money into financial markets, and in the long run that is one of the drivers of the uptrend.
You're right - thanks for the correction. Last year's dividend was nearly 6%, and the note to the table said the numbers were based on trailing earnings. Yahoo's dividend figure seems to be a forecast of this year's dividend.
In any case, I'll make a point of not relying solely on Yahoo Finance for dividend yields in future.
I'm surprised this article didn't mention the Perth Mint (in Australia). For many years, this has been a preferred place to own gold. I believe you can open an account there with as little as $10k.
In the short term the article is probably right. Technical factors do suggest that the gold price could collapse soon.
But the authors do not understand the long-term picture. Gold is not a commodity. Gold is a currency, and it is the only one that cannot be printed by politicians. In the long run, therefore, it is the only store of value you can trust.
It's a mistake to lump business & bank debt in with government debt.
A highly-indebted business can simply declare bankruptcy, and most of its debt is wiped out. Shareholders lose everything, bondholders lose a bundle, but that's the end of it; there's no systemic threat. It's a little different when a big bank goes bust, and it's a completely different matter altogether when a government is judged incapable of paying its debts.
Boy, is this guy confused.
The first point is pretty elementary: you don't draw trend lines on a linear chart. You use a log scale, so that (say) a 10% price change is the same distance on the chart no matter what the price level is.
The second major point is that you can't measure what anything is "worth" in terms of dollars, or any other pure fiat currency. Thirty years ago, a house in (for example) the Berkeley hills would sell for about $100,000. Now, the same house will sell for maybe $800,000. So what is it "worth"? $100k or $800k? It's the same house, give or take 30 years of wear and tear and maybe a few repairs. It's not like the stock of a growth company; it can't really be worth more than it was 30 years ago.
Of course, gold isn't a good measure of worth, either. But it's better than dollars, because the amount in existence can't be multiplied at the whim of politicians.
There's a basic misunderstanding in this article. Gold and silver aren't commodities.
Gold and silver are natural currencies. Asking how much gold is 'worth' in US dollars makes no sense. You've got it backwards. Ask, instead, how much the US dollar is worth in terms of gold.
Fifty years ago, $1 was worth about 0.03 ounces of gold. Today, it's worth about 0.0006 ounces of gold. At that level, I believe the US dollar is overpriced. While it's at that level or above, I will convert some of my US dollar holdings into gold every month.
I suspect that if the financial situation gets really bad, as many people seem to expect, governments everywhere will turn to Keynesian doctrine to get rid of debt - they will print more money.
They can't print gold.
"Core" inflation is designed to under-report inflation. Yes, it's true that the oil price fluctuates, but there are other ways of compensating for that, like using a moving average for example. Just leaving it out when it is so important to the economy is plain wrong.
Food prices are going up too. Not that Krugman or Bernanke ever buy groceries of course. But to the rest of us, they matter. Now, food prices also fluctuate, but they can be adjusted for seasonal dependencies. Seasonal adjustment and using moving averages are not rocket science, they are standard statistical methods.
An inflation measure that totally ignores really important things like food and energy is just garbage.
So the European Central Bank plans to throw good money after bad. Why is that good for the Euro? It won't fix any problems; it will just postpone them, letting them get worse.
Sure, short GLD. Short a bundle of it. Make the price dip.
I'll be ready to back up the truck.
Three points:
1. We can't trust the government to tell us what inflation is. The CPI has been redefined to minimize the inflation rate, it's just a political construct.
2. But, I agree that QE has not been inflationary (yet). Most money is not created by the government, it's created by banks through the magic of fractional-reserve banking (briefly, if a bank lends somebody the money you deposited, the borrower can deposit it in some other bank and that bank can then lend it to someone else - this multiplies the amount of money in checking accounts).
3. However, everybody can see that prices of everything except housing and labor are going up. This is a new kind of inflation, caused by increased demand from the growing middle classes of emerging economies.
Inflation is currently 'moderate'? Nope. The CPI has gone up by just 1% in the last year, but the CPI has very little to do with inflation because it excludes food and gasoline, which have gone up a lot more than 1% in the past year.
Maybe in Bernanke's world, nobody needs to eat and nobody needs to drive to work. But in the world most Americans live in, we already have roaring inflation.
Glenn Rogers made a bad investment, taking a 'large position' in BAC; he then made the classic mistake of adding to a losing trade.
Now he's trying to talk the stock up, hoping he'll be able to unload to suckers who read his advice.
Nobody knows what the impact of Foreclosuregate on BAC is going to be. It probably won't bankrupt them; but nobody can be sure it won't. Taking any position - long or short - in BAC is extremely risky at this point.
All the analysts expect BAC to go up in the next 12 months. There is not one analyst who thinks the price will go down.
That's a strong SELL signal to me. Analysts as a group tend to be the least informed members of the financial community. If they could forecast stock prices, they'd be making money like Warren Buffett, not drawing salaries from banks and stockbrokers. When they all agree about something, doing the exact opposite will generally make money.
You're right, you are way ahead of the average American. Not just materially, but because you've obviously got something that most people nowadays seem to lack - common sense.