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Where to Invest for the next ten years 4 comments
The NYSE Index fell -4.63% this week and it fell because Oil, Commodities and Financials all tanked. The U.S. Dollar went way up yesterday and as I have shown in the past, when the Dollar goes up, the market goes down. The problem as I see it is that investors are doing the exact opposite of what they are supposed to be doing, thinking with a day to day mindset, instead of with a ten year game plan in mind.
I see the U.S. Dollar being very weak over the next 10 years as the printing presses at the U.S. Mint are working 24/7 to keep up with government spending. The government has basically been given a credit card with no limit on it and they are taking full advantage of it, by rewarding failure (AIG, GM etc..) and will probably double the size of the government over the next decade. As those printing presses continue creating more money supply, the law of supply and demand will kick in and since there is little demand and abundant oversupply, the dollar will only get weaker as every month passes, because no one wants to own it.
This scenario will eventually get ugly someday (when the final bill comes due) but not for 20 years and our grandchildren will get the bill, not us. The government is moving in a Socialist direction and the only safe place to be in is Stocks ( I don't invest in Commodities myself, so I will not write about them here, but if you know what you are doing there you could make a lot of money as well buying them). I say this because you only pay taxes on your stocks when you sell them and then at only at a 15% capital gains rate, if you hold them for more than 1 year and 1 day. The dividends you receive from those stocks will also be taxed at a 15% rate, so stock investing is the only place to be. Now to back up my theory with some facts.
Investing in Money markets will kill you as inflation will grow at 2% and you are making just .50% in Money Markets so you are losing 1.5% in real terms when you factor in inflation.
Because local and state governments are losing so much money in tax receipts, you can not make money in Real Estate anymore, because municipalities are going to increase property taxes significantly over the next decade and force older residents to sell their homes and move to lower property tax cities. I remember this happened in 1987 to my father, who bought his house in Westchester County, New York in 1972 for $60,000. The property taxes then were $1000 a year and in 1987 he was forced to sell the house because his taxes shot up to $15,000 and being retired he felt that they were out of control. In 2007 I went and visited the current owner of the house and the taxes then had shot up to $35,000. When my father bought his house he paid 1.6% property taxes on it each year and when he sold it he was paying 3.75%. The current owner paid $800,000 for the house and pays 4.375% in house related taxes. But his problem currently is that the house is no longer worth $800,000, but is now worth about $550,000, so his real tax rate is now 6.36%. The municipality where the house is located is strapped for cash and can not afford to lower taxes, so how is this guy who bought this house for $800,000 ever going to get his money back. Who in their right mind would buy a house with a real property tax rate of 6.36% on it? There is your real problem with Real Estate and the reason why nobody is buying houses even with 4.99% 30 year fixed mortgage rates.
So you can't put your money in CD's as you lose money in real terms because of inflation and you can't buy Real Estate because the property taxes will kill you and only get worse because your home value will stop appreciating and Inflation will keep going up. So if your house depreciates 5% per year and inflation goes up at 3%, you are losing 8% on your investment in real terms every year in addition to the 5% property tax that everyone will eventually be paying to bail out government spending. So any investment in Real Estate will lose you 13% per year in real terms. If you invest in Bonds and lock in a 30 year rate of 4%, inflation will eventually eat up 3% of that and if interest rates go up (as the dollar is in oversupply) you could lose 30% of your principal on the bonds, for money goes where it can get the best interest rate. So if Interest rates go to 8% in 3-5 years from now, the principal on that 4% bond could go down 50% as people will sell your bond and buy one that pays 8%. In the Jimmy Carter years, bonds were paying 15% interest rates, so it can happen and as a result there is a huge potential loss to ones investment in bonds unless you hold them to maturity (but who wants to do that).
So investing in U.S based stocks like Microsoft (MSFT) & Johnson & Johnson (JNJ) is the only way to go as they benefit enormously from the weak dollar scenario because every product they sell overseas gets sold in a currency that is appreciating against the U.S. dollar. When these firms repatriate that money back into U.S. dollars in order to report their earnings , they will make a killing as they will get an additional boost to their EPS. And since those companies consistently grow at nice rates on Main Street, you might never need to sell them and never have to pay any taxes on them(except for dividends). So in conclusion know that stocks are the only place to be over the next decade as inflation is coming back and the dollar will continue to get weaker with every dollar spent by government.
Disclosure : Long JNJ, MSFT
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice.
It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.
Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.
This post has 4 comments:
Lag effects, such as the enormous cost and inflation aftermath of the Vietnam War, and
outrageous and profligate misadventures of the Nixon administration and their business allies, like wage controls without price controls ; and
usurious, profligate , virtually unsecured loans to S. America by our major banks - that badly backfired; and
major price gouging, and prior debilitating oil embargoes etc. are seldom mentioned when the stated high interest rates during the Carter admin. are noted.
To fully appreciate Lag effects, folks might do well to avail themselves of the 10 years of history prior to the Carter admin, before casually mentioning interest rates (or inflation) as a single data point in an article.
PS: Admired your work on Free Cash Flow that you shared with us. Many Thanks.
Your analysis of FCF as a basis for investing in select stocks probably has some merit and may well help to enhance investment returns over time and perhaps mitigate some risk.
However, we are of the view that "timing" is even more important to total returns than is any other factor. Simply put, buying stocks at entry prices that are too high (as opposed to entry prices that are relatively cheap), will never result in superior investment performance, even if the stock purchased is a great stock.
See for example, Doug Short's analysis below:
www.dshort.com/charts/...
So while FCF may well be a helpful tool, it is not sufficient to determine great times to buy a stock. One also has to consider the overall valuation, market trends, relative price, etc. As an example, you recommend MSFT as a buy, based on FCF. We would disagree that MSFT is a good buy at it's current price of about $28. The point being not that MSFT is not a good stock and not that MSFT indeed may not be significantly higher in perhaps 10 years. The main point is that MSFT is highly likely to decline in price, probably back into the $15-20 price range, somwhere in the next 1-18 months. Is that a certainty to happen, no. But conventional metrics and the fragile state of US and world economics indicate it is probably much more likely to happen than not to happen. At that point, if it happens, MSFT would probably be a great LT buy and generate superior investment returns.
Our view is simply that stock prices are not attractive at this point in time for virtually any equities and that much better entry points will present themselves in the relatively near future. Time will tell.
Aside from my prior comment, I completely agree with your position on bonds in the current environment.
Thanks for the good and useful article.
seekingalpha.com/insta...
Regards,
Mycroft
On Oct 31 04:05 PM untrusting investor wrote:
> Peter,
> Your analysis of FCF as a basis for investing in select stocks probably
> has some merit and may well help to enhance investment returns over
> time and perhaps mitigate some risk.
>
> However, we are of the view that "timing" is even more important
> to total returns than is any other factor. Simply put, buying stocks
> at entry prices that are too high (as opposed to entry prices that
> are relatively cheap), will never result in superior investment performance,
> even if the stock purchased is a great stock.
>
> See for example, Doug Short's analysis below:
> www.dshort.com/charts/...
>
>
> So while FCF may well be a helpful tool, it is not sufficient to
> determine great times to buy a stock. One also has to consider the
> overall valuation, market trends, relative price, etc. As an example,
> you recommend MSFT as a buy, based on FCF. We would disagree that
> MSFT is a good buy at it's current price of about $28. The point
> being not that MSFT is not a good stock and not that MSFT indeed
> may not be significantly higher in perhaps 10 years. The main point
> is that MSFT is highly likely to decline in price, probably back
> into the $15-20 price range, somwhere in the next 1-18 months. Is
> that a certainty to happen, no. But conventional metrics and the
> fragile state of US and world economics indicate it is probably much
> more likely to happen than not to happen. At that point, if it happens,
> MSFT would probably be a great LT buy and generate superior investment
> returns.
>
> Our view is simply that stock prices are not attractive at this point
> in time for virtually any equities and that much better entry points
> will present themselves in the relatively near future. Time will
> tell.
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