2013 Outlook: Stock Bulls May Have Room To Run, Bond Vigilantes Lurk [View article]
In terms of "value versus various assets", what specifically do you have in mind? Could you refer me to some work on this or charts? I would consider it to be "gold supply versus the monetary base".
Gold is already making a comeback in monetary affairs--CBs accumulating gold for reserves is de facto a gradual move toward a (partly) gold-based standard or at least, a USD reserve currency alternative. What else would you call it--are they accumulating it to get into the jewelry business?
As far as the near-term trajectory, gold and collectibles prices are clearly a function of real interest rates--if negative interest rates remain negative or become even more deeply negative, gold will continue to rally. So far, there are no signs of any policy reversal here--if there is a reform here (i.e. positive real rates / strong dollar policy), then it's time to get out of gold.
I like select hard asset stocks and real estate here, but if there's very high inflation, stocks will outperform cash and bonds but will most certainly not outperform precious metals--review your history. As Bill Gross says, "stocks will be singed, bonds will be burnt to a crisp"--stocks will suffer multiple compression as nominal long rates rise (while gold will only suffer if real rates rise--10% inflation and 8% long rates will not cause gold to fall but will cause stocks to fall). On real estate, I worry about the effect that higher long rates will have on pricing--but, if you can buy with 30-year fixed low rates, you should do fine either way--it will come out in the wash.
2013 Outlook: Stock Bulls May Have Room To Run, Bond Vigilantes Lurk [View article]
You can pick up a copy of his recent book Currency Wars. There are also various media interviews on youtube.
Comparing the gold price to CPI baskets and historical ratios thereof misses the fact that over the credit-led investment boom of the past 20 years, we've had massive capacity expansion of most things (including global labor force) that directly or indirectly comprise the CPI indices as well as the money supply.
We've not had massive increases in the supply of gold--the supply grows steadily at about 3% per year. Marginal production costs are of less relevance to gold than industrial commodities or oil because gold is not consumed and does not have the elasticity of supply that most other commodities have. Gold price has quadrupled over the past 10 years while annual gold output has not moved at all over that time frame. Comparing it to the CPI is like saying that unique pieces of fine art, etc. looks expensive now relative to the CPI.
It's also critical to consider whether it will re-emerge as a monetary base/anchor--note that central banks are re-accumulating. I'd refer you to Rickards work there as well.
The most exciting returns are to be had from an asset class where those who know it best love it least. What does it say when the first pick by Bill Gross at the Barron's Roundtable is gold? Gross isn't calling for an imminent bond bear market, but he doesn't see much upside either. For a fixed-income substitute, he recommends (what else) his BOND ETF, which trounced the competition in its first year and just added the use of derivatives to its toolbox. [View news story]
"It doesn't have much intrinsic value . . . it can sit there and look pretty. It doesn't really do anything that produces real value."
Sounds a lot like my last girlfriend. She wasn't even much use in electronics applications either.
2013 Outlook: Stock Bulls May Have Room To Run, Bond Vigilantes Lurk [View article]
James,
Good article, I would concur with much of that though it's an open question how robust and long-lasting the growth rebound will be (obviously, this plays into your recommendation on cyclicals--I'm agnostic there and prefer energy and value tech (e.g. EMC, CSCO, QCOM). Have you noticed that over the past few years, each time there's even a mild rise in long-term rates (look at the TLT chart), that seems to short-circuit both economic momentum and the stock market, and also causes European debt problems to rear up again?
It's happened in each of the last 3 years and on a fairly predictable seasonal timeframe. As the TLT has started to decline noticeably as we enter February, this bears watching.
I do disagree with your point on gold being very "expensive"--the methodologies I've seen on this use an analytically flawed, US-centric inflation model to come up with such valuation estimates. I would refer you to James Rickards' work on gold which I believe is far more compelling.
More Overbought Warnings From BoAML [View article]
People are over-analyzing all of this. The grinding current rally looks identical to the monetary debasement driven seasonal rallies of 2010, 2011 and 2012. What do you see that makes it look any different from any of those? It will top out at the end of March, perhaps 4-5% higher than we are now.
Will there be a small February correction before that? We didn't really have one on 2010 or 2012. We had one in 2011, but that was sparked by Fukushima. It's not worth taking chips off the table in anticipation of a temporary 4-5% February correction that we may or may not get.
We'll probably go sideways for 2-3 weeks, then one more thrust higher through March. That's probably the time to hedge and go market neutral.
2012 In Review: How Good Was S&P 500 Performance? Who Got It Right? [View article]
I would say that 2012's returns were driven by multiple expansion which in turn was driven by the financial repression / negative real rates. This is likely to continue, and we're seeing more of the same this year. It will end badly at some point, as the market is not cheap, there is no more room for interest rate compression (i.e. zero-bound) and there are still major structural problems out there. This is all a big historical policy experiment, and no one really knows how it will turn out, but long-term returns on the S&P from here will be very modest even if there's a big bull spike this year.
I'm dealing with this environment by being fully invested, but concentrating in the few spots where I see value and/or growth (right now, mostly energy and MLPs, with some legacy big-cap tech) and hedging by shorting the SPY against this long portfolio during the seasonally weak period (i.e. spring-to-fall).
I think this takes most of the short-term risk out, as I'm not aware of any big decline ever occurring during the seasonal strength period. More fundamentally, even unhedged, I'm confident that my stocks/MLPs will generate strong long-term returns right despite any 2008-style dislocation. Dodging any market crash with hedging will just be icing on the cake.
This rally is a carbon copy of the seasonal rallies of 2010, 2011 and 2012. I'm enjoying it but intend to be hedged/market neutral by the end of March.
Japan's Economic Woes Are Good For Gold [View article]
PompanoFrog,
The Chinese gov't / central bank is hoarding gold as a hard asset hedge away from the US dollar which is being continually debased--if they further finance dollar hegemony, it will be domestically destabilizing as it will drive up their domestic inflation rate, i.e. damage the rest of the economy just to buy more time for the lower end export sector which is becoming less competitive anyway due to rising labor costs. Individuals in China hoard gold as protection against high domestic inflation (negative real interest rates) particularly now that local real estate is no longer seen as a safe or one-way bet.
On your point about about the production and development of new mines--gold isn't consumed like oil and other commodities--the amount of gold produced each year is very small in relation to the total amount out there--even a significant increase in marginal production is unlikely to swamp growing global demand. You analyze it like we're talking about oil or wheat or something.
#4 is perhaps the most significant in relation to portfolio positioning as this is a monetary debasement-driven reflation rally. I don't think #4 will occur, but if it does, it will likely be a negative for all risk assets (stocks, gold, etc.) as well as long-duration bonds. I think the Fed will be late in hiking rates / withdrawing liquidity, perhaps intentionally so.
As for the "unexpected negative consequences" in #5, note that the Fed does not give a flying f*k about food price riots in Egypt, Syria, etc. Fed monetary policy is driven by domestic economic and political considerations. From the Fed's perspective, if the foreign countries have inflation problems, they can let their currencies appreciate.
Intel Margins Offer Investors Insight To The Future [View article]
Hi Ray,
I tend to concur that INTC is a "hold" here. To be honest though, most of my tech stocks (INTC/MSFT/EMC/CSCO/QCOM) such as this, despite low valuations, are giving me itchy feet as they have under-performed the rest of my portfolio since I got back in a few months ago and have all of this uncertain secular overhang. It seems like these tech companies are all fighting each other over a stagnant pie. Compare that to North American energy infrastructure where there's more than enough profitable growth opportunity for all the big players plus new entrants.
CSCO has done very well, and QCOM has been in-line, but INTC and MSFT have just stagnated as has EMC. When the rest of my equities portfolio (all MLPs plus some energy) roars higher day after day, with strong, predictable growth, and throws off huge tax-advantaged dividends to-boot, it's hard to be enthusiastic about stuff like INTC.
One of the attractions / value components of these companies is their huge cash hoards / strong balance sheets, but I wonder if that isn't an eroding asset given the accelerating currency debasement.
From my perch, hard assets (gold, silver, real estate) and hard asset oriented quality equities (pipelines, railroads, real estate, oil companies, etc.) are the only place to be in this cycle.
2 High Yield Picks From The Pages Of This Week's Barron's [View article]
Bruce is dead on. Go with best-of-breed managements particularly as the space is growing more crowded and competitive. The best big-cap MLPs are EPD, PAA and Kinder Morgan. On the GP/C-corp side, I also like ENB and WMB.
Taking A Contrarian Stance On Barrick Gold [View article]
I'm bullish on gold and bearish/agnostic on gold miners. Gold has doubled over the past five years, yet looking at ABX's financials, they have been unable to generate any economic return over this period. Maybe they'll do better going forward, but their track record is uninspiring. What's more, most of the other major gold miners seem to have the same sorts of problems.
Your point on current PE is completely off-base--you obviously have no idea how to properly value equity securities (a long duration asset valued on the basis of its stream of cashflows over time, discounted into the future). It's fools like you who were buying inflated tech stocks in 2000 and homebuilder stocks in 2006 because they looked "cheap" based on current year earnings (or earnings projections). Similarly, you were probably running in terror in late 2008/early 2009 because stocks looked "expensive" based on depressed current PEs.
I would recommend reading up on securities valuation, and if you're bullish on gold like I am, buy physical bullion--much safer. If you want more "juice" you can leverage and/or buy long-dated call options on GLD. Actually, if you insist on playing the miners, I would do so with long-dated call options rather than buying the stock. Put most of your investment in physical bullion instead.
Taking A Contrarian Stance On Barrick Gold [View article]
Bret,
Over the past five years, the average earnings for ABX has been $1.1B. Yet, the stock has a $34B market cap giving it a normalized PE in the low 30s.
There is no indication of sustainable free cashflow growth, yet the debt has ballooned over the past five years, and even the share count is up 15%.
And all of this during a period in which the gold price has doubled.
It's amazing, so many people touting gold miners, yet no one does a rigorous bottom-up business and cashflow analysis to determine stock valuations.
These are crappy businesses and uninvestable, in my view. Sure, you can play them for a trading pop, but let's not confuse this with value investing or assert that this is "undervalued" based on one year's forward earnings estimates--that's not how you value equity securities.
2013: The End Of Gold's 12-Year Winning Streak [View article]
Why do you focus on US inflation rates (rather than currency debasement and real rates) in analyzing gold prices? Has nothing to do with it--this is a common misperception. It's all about real interest rates--we have had and continue to have negative real interest rates--that's what has been driving the gold bull market.
Whether it's 14% inflation with 12% interest rates (e.g. the '70s) or 2% inflation with 0% interest rates (the past few years), these negative real rates are what drive gold prices. With the other major economic blocs pursuing similar policies (and add Japan to the list going forward) to combat a deflationary world awash in overcapacity, the structural underpinnings for the gold bull market remain in place.
I would also say that the frothy bullish sentiment has been creamed off over the past 18 months of sideways consolidation, and we're probably due for another big leg up soon.
My 2012 Investment Game Plan: Year-End Lookback [View article]
I've noticed that a lot people seem to blindly buy into gold miners when the gold and gold miner stock ratio gets out-of-whack compared to selected historical averages on the theory that there must inevitably be a "catch-up". However, it seems like they fail to conduct bottoms-up earnings and cashflow analysis on these companies to make a case that there is true "value" in such stocks.
My take is that these are just crappy businesses--they seem unable to generate economic returns even when gold multiplies in value over a multi-year period. Accordingly, I'm staying away--they're purely speculative "investments", and you should stick with physical gold and silver.
One of the things about the stock market that most people miss is that most stocks (and many sectors and sub-sectors) trading out there do not merit investment consideration, at least not in a concentrated alpha-seeking portfolio, as they have crappy business models and/or management and will never generate strong returns. There's a lot of stuff out there that just stays alive by repeated capital market infusions or simply "treads water" by dumping all of its operating cashflow back into the business without any cashflow growth to show for it.
Stay away from the garbage, and don't assume that just because it got listed, it's investable. Underwriters can sell anything at any price in a hot market (or even a not-so-hot market). Just like humanity, the stock market is a huge pile of garbage with a few nuggets of gold (talent) in there (paraphrasing George Carlin).
Slightly off-topic, why are you always analyzing gold as though its price is set by marginal supply like oil or tin? Gold is not consumed--the amounts coming out of the ground (which, by the way, have not increased much over the past 10 years) are small compared to the total amount existing. That's why it has historically served as a store of value and a monetary anchor.
Gold prices are a function of real interest rates--negative real interest rates (like the past several years, and also the '70s) are bullish for gold. These days, every major economic bloc is enforcing (or pursuing) negative real interest rates.
As to why the gold miners are retrenching, well, most of them seem to be grotesquely mis-managed if their long-term financial perfomance is any indication so I'm not sure why anyone would put faith in the forecasts of their managements.
2013 Outlook: Stock Bulls May Have Room To Run, Bond Vigilantes Lurk [View article]
Gold is already making a comeback in monetary affairs--CBs accumulating gold for reserves is de facto a gradual move toward a (partly) gold-based standard or at least, a USD reserve currency alternative. What else would you call it--are they accumulating it to get into the jewelry business?
As far as the near-term trajectory, gold and collectibles prices are clearly a function of real interest rates--if negative interest rates remain negative or become even more deeply negative, gold will continue to rally. So far, there are no signs of any policy reversal here--if there is a reform here (i.e. positive real rates / strong dollar policy), then it's time to get out of gold.
I like select hard asset stocks and real estate here, but if there's very high inflation, stocks will outperform cash and bonds but will most certainly not outperform precious metals--review your history. As Bill Gross says, "stocks will be singed, bonds will be burnt to a crisp"--stocks will suffer multiple compression as nominal long rates rise (while gold will only suffer if real rates rise--10% inflation and 8% long rates will not cause gold to fall but will cause stocks to fall). On real estate, I worry about the effect that higher long rates will have on pricing--but, if you can buy with 30-year fixed low rates, you should do fine either way--it will come out in the wash.
2013 Outlook: Stock Bulls May Have Room To Run, Bond Vigilantes Lurk [View article]
Comparing the gold price to CPI baskets and historical ratios thereof misses the fact that over the credit-led investment boom of the past 20 years, we've had massive capacity expansion of most things (including global labor force) that directly or indirectly comprise the CPI indices as well as the money supply.
We've not had massive increases in the supply of gold--the supply grows steadily at about 3% per year. Marginal production costs are of less relevance to gold than industrial commodities or oil because gold is not consumed and does not have the elasticity of supply that most other commodities have. Gold price has quadrupled over the past 10 years while annual gold output has not moved at all over that time frame. Comparing it to the CPI is like saying that unique pieces of fine art, etc. looks expensive now relative to the CPI.
It's also critical to consider whether it will re-emerge as a monetary base/anchor--note that central banks are re-accumulating. I'd refer you to Rickards work there as well.
The most exciting returns are to be had from an asset class where those who know it best love it least. What does it say when the first pick by Bill Gross at the Barron's Roundtable is gold? Gross isn't calling for an imminent bond bear market, but he doesn't see much upside either. For a fixed-income substitute, he recommends (what else) his BOND ETF, which trounced the competition in its first year and just added the use of derivatives to its toolbox. [View news story]
Sounds a lot like my last girlfriend. She wasn't even much use in electronics applications either.
2013 Outlook: Stock Bulls May Have Room To Run, Bond Vigilantes Lurk [View article]
Good article, I would concur with much of that though it's an open question how robust and long-lasting the growth rebound will be (obviously, this plays into your recommendation on cyclicals--I'm agnostic there and prefer energy and value tech (e.g. EMC, CSCO, QCOM). Have you noticed that over the past few years, each time there's even a mild rise in long-term rates (look at the TLT chart), that seems to short-circuit both economic momentum and the stock market, and also causes European debt problems to rear up again?
It's happened in each of the last 3 years and on a fairly predictable seasonal timeframe. As the TLT has started to decline noticeably as we enter February, this bears watching.
I do disagree with your point on gold being very "expensive"--the methodologies I've seen on this use an analytically flawed, US-centric inflation model to come up with such valuation estimates. I would refer you to James Rickards' work on gold which I believe is far more compelling.
More Overbought Warnings From BoAML [View article]
Will there be a small February correction before that? We didn't really have one on 2010 or 2012. We had one in 2011, but that was sparked by Fukushima. It's not worth taking chips off the table in anticipation of a temporary 4-5% February correction that we may or may not get.
We'll probably go sideways for 2-3 weeks, then one more thrust higher through March. That's probably the time to hedge and go market neutral.
2012 In Review: How Good Was S&P 500 Performance? Who Got It Right? [View article]
I'm dealing with this environment by being fully invested, but concentrating in the few spots where I see value and/or growth (right now, mostly energy and MLPs, with some legacy big-cap tech) and hedging by shorting the SPY against this long portfolio during the seasonally weak period (i.e. spring-to-fall).
I think this takes most of the short-term risk out, as I'm not aware of any big decline ever occurring during the seasonal strength period. More fundamentally, even unhedged, I'm confident that my stocks/MLPs will generate strong long-term returns right despite any 2008-style dislocation. Dodging any market crash with hedging will just be icing on the cake.
This rally is a carbon copy of the seasonal rallies of 2010, 2011 and 2012. I'm enjoying it but intend to be hedged/market neutral by the end of March.
Japan's Economic Woes Are Good For Gold [View article]
The Chinese gov't / central bank is hoarding gold as a hard asset hedge away from the US dollar which is being continually debased--if they further finance dollar hegemony, it will be domestically destabilizing as it will drive up their domestic inflation rate, i.e. damage the rest of the economy just to buy more time for the lower end export sector which is becoming less competitive anyway due to rising labor costs. Individuals in China hoard gold as protection against high domestic inflation (negative real interest rates) particularly now that local real estate is no longer seen as a safe or one-way bet.
On your point about about the production and development of new mines--gold isn't consumed like oil and other commodities--the amount of gold produced each year is very small in relation to the total amount out there--even a significant increase in marginal production is unlikely to swamp growing global demand. You analyze it like we're talking about oil or wheat or something.
5 Bold Predictions For 2013 [View article]
As for the "unexpected negative consequences" in #5, note that the Fed does not give a flying f*k about food price riots in Egypt, Syria, etc. Fed monetary policy is driven by domestic economic and political considerations. From the Fed's perspective, if the foreign countries have inflation problems, they can let their currencies appreciate.
Intel Margins Offer Investors Insight To The Future [View article]
I tend to concur that INTC is a "hold" here. To be honest though, most of my tech stocks (INTC/MSFT/EMC/CSCO/QCOM) such as this, despite low valuations, are giving me itchy feet as they have under-performed the rest of my portfolio since I got back in a few months ago and have all of this uncertain secular overhang. It seems like these tech companies are all fighting each other over a stagnant pie. Compare that to North American energy infrastructure where there's more than enough profitable growth opportunity for all the big players plus new entrants.
CSCO has done very well, and QCOM has been in-line, but INTC and MSFT have just stagnated as has EMC. When the rest of my equities portfolio (all MLPs plus some energy) roars higher day after day, with strong, predictable growth, and throws off huge tax-advantaged dividends to-boot, it's hard to be enthusiastic about stuff like INTC.
One of the attractions / value components of these companies is their huge cash hoards / strong balance sheets, but I wonder if that isn't an eroding asset given the accelerating currency debasement.
From my perch, hard assets (gold, silver, real estate) and hard asset oriented quality equities (pipelines, railroads, real estate, oil companies, etc.) are the only place to be in this cycle.
2 High Yield Picks From The Pages Of This Week's Barron's [View article]
For E&P, go with LINE.
Taking A Contrarian Stance On Barrick Gold [View article]
Your point on current PE is completely off-base--you obviously have no idea how to properly value equity securities (a long duration asset valued on the basis of its stream of cashflows over time, discounted into the future). It's fools like you who were buying inflated tech stocks in 2000 and homebuilder stocks in 2006 because they looked "cheap" based on current year earnings (or earnings projections). Similarly, you were probably running in terror in late 2008/early 2009 because stocks looked "expensive" based on depressed current PEs.
I would recommend reading up on securities valuation, and if you're bullish on gold like I am, buy physical bullion--much safer. If you want more "juice" you can leverage and/or buy long-dated call options on GLD. Actually, if you insist on playing the miners, I would do so with long-dated call options rather than buying the stock. Put most of your investment in physical bullion instead.
Taking A Contrarian Stance On Barrick Gold [View article]
Over the past five years, the average earnings for ABX has been $1.1B. Yet, the stock has a $34B market cap giving it a normalized PE in the low 30s.
There is no indication of sustainable free cashflow growth, yet the debt has ballooned over the past five years, and even the share count is up 15%.
And all of this during a period in which the gold price has doubled.
It's amazing, so many people touting gold miners, yet no one does a rigorous bottom-up business and cashflow analysis to determine stock valuations.
These are crappy businesses and uninvestable, in my view. Sure, you can play them for a trading pop, but let's not confuse this with value investing or assert that this is "undervalued" based on one year's forward earnings estimates--that's not how you value equity securities.
2013: The End Of Gold's 12-Year Winning Streak [View article]
Whether it's 14% inflation with 12% interest rates (e.g. the '70s) or 2% inflation with 0% interest rates (the past few years), these negative real rates are what drive gold prices. With the other major economic blocs pursuing similar policies (and add Japan to the list going forward) to combat a deflationary world awash in overcapacity, the structural underpinnings for the gold bull market remain in place.
I would also say that the frothy bullish sentiment has been creamed off over the past 18 months of sideways consolidation, and we're probably due for another big leg up soon.
My 2012 Investment Game Plan: Year-End Lookback [View article]
My take is that these are just crappy businesses--they seem unable to generate economic returns even when gold multiplies in value over a multi-year period. Accordingly, I'm staying away--they're purely speculative "investments", and you should stick with physical gold and silver.
One of the things about the stock market that most people miss is that most stocks (and many sectors and sub-sectors) trading out there do not merit investment consideration, at least not in a concentrated alpha-seeking portfolio, as they have crappy business models and/or management and will never generate strong returns. There's a lot of stuff out there that just stays alive by repeated capital market infusions or simply "treads water" by dumping all of its operating cashflow back into the business without any cashflow growth to show for it.
Stay away from the garbage, and don't assume that just because it got listed, it's investable. Underwriters can sell anything at any price in a hot market (or even a not-so-hot market). Just like humanity, the stock market is a huge pile of garbage with a few nuggets of gold (talent) in there (paraphrasing George Carlin).
The Real January Effect [View article]
Slightly off-topic, why are you always analyzing gold as though its price is set by marginal supply like oil or tin? Gold is not consumed--the amounts coming out of the ground (which, by the way, have not increased much over the past 10 years) are small compared to the total amount existing. That's why it has historically served as a store of value and a monetary anchor.
Gold prices are a function of real interest rates--negative real interest rates (like the past several years, and also the '70s) are bullish for gold. These days, every major economic bloc is enforcing (or pursuing) negative real interest rates.
As to why the gold miners are retrenching, well, most of them seem to be grotesquely mis-managed if their long-term financial perfomance is any indication so I'm not sure why anyone would put faith in the forecasts of their managements.