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prudentinvestor

prudentinvestor
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  • AAII Investor Update: Dividends and Buybacks- A Good Use of Corporate Cash? [View article]
    Charles, you forgot to highlight a very significant difference between dividends and stock buybacks. Dividends benefit all shareholders equally. Buybacks greatly benefit option holders, usually executives. A buyback that increases a stock's price by 1% may increase the value of an option by 50% or 100% or 500%, depending on how close the option strike price is to the market price of the stock. The shareholders only see the 1%.

    Executives, and their crony boards, frequently engage in buybacks as a means of looting their shareholders, who are oblivious of the fleecing because pundits and analysts, who are "part of the team" usually cheer the buybacks on TV and media.

    Educated individual investors would do well to steer clear of companies that do massive buybacks, and gravitate towards companies that respect the intelligence of their shareholders and pay dividends.
    Sep 17, 2010. 08:40 PM | 2 Likes Like |Link to Comment
  • Why You Do Not Want to Invest in the 'New' General Motors [View article]
    Having owned many GM cars (including one currently), I have resolved to never buy another because of the way my bonds were "nationalised" to buy UAW votes. In fact, I'll never buy another car built by UAW workers, and I'll never buy another bond issued by any company that has a unionised workforce with large pension and healthcare liabilities.
    Aug 31, 2010. 08:30 PM | 8 Likes Like |Link to Comment
  • Looking for Dow 9,000 [View article]
    I am not sure if we'll see DOW 9,000 or 11,000 first, but my prognosis is that we'll see DOW 8,000 before we see DOW 12,000.
    Aug 31, 2010. 08:25 PM | 2 Likes Like |Link to Comment
  • Investor Sentiment Is Awful: Time to Buy? [View article]
    Stock prices may seem "reasonable" only to those who believe the recent 15-year bubble was "normal".

    By all historic norms, stocks are quite expensive. Realistic consideration of current demographic, economic, and political trends, leads to the conclusion that stocks should be even below historic norms. Thus, the reality is that stocks have a long decade of slowly grinding down ahead of them, and individual investors are simply displaying wisdom by staying cautious, rather than hurl their life's savings into the abyss. This caution does not suit the large banks' trading desks, who desperately need suckers to reward them for the giant pump up they heroically performed since March, 2009.
    Aug 31, 2010. 08:18 PM | 1 Like Like |Link to Comment
  • More Evidence That Housing Has Stabilized [View article]
    You make an excellent point. Housing is still quite overpriced by all historic norms. Obviously, those who think the recent bubble was normal may believe that prices have now "come down to reasonable levels", but those with any long term perspective can see that prices still have a long decline before they meet the truly normal trend line.
    Aug 31, 2010. 08:10 PM | 5 Likes Like |Link to Comment
  • Obama and the Fed are "killing the real economy to save the banks," Chris Whalen asserts. By allowing banks to heal their wounds through low rates, they embrace a policy of deflation that has horrible consequences for all manner of savers - retirees, companies, non-profits, municipalities - in a "massive, reverse Robin Hood scheme."  [View news story]
    "....“In every Fed easing event during my career in finance (1986, 1992, 1998, 2002), it was the wave of refinancing of debt after the Fed eased interest rates that put permanent disposable income into the hands of households,” notes a former Fed official ...."

    The thinking of the former Fed official is emblematic of our current predicament. Anyone who thinks that consumer spending should be predicated on house refinancing, rather than the consumer's income, has his head buried on the sand. An economy cannot flourish if its main product is refinancing. Prosperous economies produce real, useful goods and services, not mortgage refis.
    Aug 31, 2010. 07:55 PM | 13 Likes Like |Link to Comment
  • Have We Seen Capitulation? [View article]
    What a bizzare title! We did not even see capitulation at the very depths of the March 2009, except for 2-3 days and by very few panicked investors. Real capitulation lasts for months or years, and results from people having NO DESIRE to hold equities. We have not seen it since the 1970's.

    There shall be no capitulation this time around. It can only occur in unfettered markets with true price discovery. For better or for worse (depending on your point of view), in a market back-stopped by the Fed, it cannot happen.

    However, as all things return to a hover around a semblance of their intrinsic value over time, what we shall see is a long, slow grinding down of equity prices to reflect the macro economic and demographic reality of the coming decade. Perhaps by mid-decade people will lose interest in equities and cause a "capitulation" then.

    Meanwhile, happy trading!
    Aug 27, 2010. 09:18 AM | Likes Like |Link to Comment
  • What can Bernanke say from Jackson Hole that may actually make a difference? He needs to send an unambiguous message that the Fed will do whatever it takes to prevent a deflation nightmare. Unfortunately, the gathering is more likely to resemble a goat rodeo than Bretton Woods.  [View news story]
    Seems that something along these lines has already been happening for some time !
    Aug 26, 2010. 09:10 PM | Likes Like |Link to Comment
  • What can Bernanke say from Jackson Hole that may actually make a difference? He needs to send an unambiguous message that the Fed will do whatever it takes to prevent a deflation nightmare. Unfortunately, the gathering is more likely to resemble a goat rodeo than Bretton Woods.  [View news story]
    The reality is that asset prices have risen too far in relation to consumer prices and wages.

    To return to equilibrium, we need either asset deflation (already happening), sharp wage & consumer price inflation, or a bit of both.

    Consumer price inflation is already happening, and we don't have any deflation there. If anything, shadowstats number of 7% +/- appears far closer to everyday reality than the official near-zero CPI.

    Attempting to create faster consumer inflation will result in great misery for those on fixed incomes, and due to globalization, even those with jobs will not be able to command wage increases that keep up with high inflation.

    IMO, the best (or least bad) course for the nation is to cease and desist from further policy distortions of our economy. We already spent far too much to fight asset deflation, and it would be best at this juncture to accept the natural unwinding of a massive asset price bubble.
    Aug 26, 2010. 09:06 PM | 6 Likes Like |Link to Comment
  • 'Contained Depression' [View article]
    You make a good argument about why prices will decline in the future, but I'll believe it when I see it. The reality here and now is that prices are rising, except for the unwinding of the housing price bubble.
    Aug 25, 2010. 09:57 PM | Likes Like |Link to Comment
  • 'Contained Depression' [View article]
    Seeking Alpha Sheep, I agree with your observations.

    Although I commend Mish on his thoughtful and intellectual analysis, and I enjoyed this article as well as most of Mish's writings, it seems to me that reality and this intellectual economic analysis do not agree.

    My anecdotal observations of the rising cost of groceries, utilities, taxes, insurance, tuition, health care, etc, all tend to agree much more with "Shadowstats" which shows CPI in the 7% range as opposed to the near-zero official CPI.

    www.shadowstats.com/al...

    The only deflation has been in housing prices between 2006 and today, but these had risen so much faster than CPI from 1996 to 2006, that viewed over a longer time frame (1996-2010), there is no deflation in housing prices either, just a partial reversal in 2006-2010 of the extreme over-inflation in housing that took place from 1996-2006. Indeed, even after all the recent drops, the Case-Schiller index is still at 135 +/-.

    Thus, the reality is that apart from housing retracing its extreme over-inflation, other costs of living are currently in inflation, and not in deflation, and this reality trumps the otherwise compelling intellectual arguments presented in Mish's article.
    Aug 25, 2010. 09:51 PM | 1 Like Like |Link to Comment
  • Existing Home Sales Plunge in July [View article]
    The bubble was so mindless and so massive, that it takes time for reality to sink in. After all the drops, housing is still overpriced. The Case-Schiller is still hovering around 135-140, meaning we still need another 25%-30% drop just to return to historic norms.

    Given the negative macro-economic environment, as well as the demographics of retiring boomers, one would expect prices to undershoot for some years, so a 35%-50% drop from here cannot be ruled out. Naturally, we can expect more misguided intervention to try to prop up unrealistic prices, further damaging the fragile macro-economic environment.
    Aug 24, 2010. 01:57 PM | 5 Likes Like |Link to Comment
  • Mortgage fraud is on the rise again, up a sharp 17% last year to account for $14B in loans, or roughly 0.7% of all U.S. mortgages. The effect of lawmakers tightening lending rules hasn't been fewer scams but rather more complex ones.  [View news story]
    From what I read, it appears that mortgage fraud significantly exceeds 0.7%, perhaps by an order of magnitude !!!
    Aug 23, 2010. 09:13 AM | 1 Like Like |Link to Comment
  • A Tale of Two Economies: Germany vs. America [View article]
    Charlie,

    You make very good points, but they don't change the fundamental advantage that German policies have wrought. Thus, the difference between your thesis and the author's is one of extent, not fundamental direction. Having worked with many German companies over the decades, I'd like to add an opinion to each of your mitigating points below:

    "...... 1. They would not have the success they have, without deficit countries like us. They benefit from consumption in other countries....."

    Of course this is true, but they are merely taking advantage of the fact that some countries have a culture of consuming more than they produce. I would no fault them for this, but rather fault our own policies.

    "...... 2. They currently have a currency advantage via the Euro. They don't need to manipulate it, but a currency that averages them with the likes of Greece is always going to be weaker than it would be if they were alone. That's a big export bonus, both within and outside the Eurozone.......".

    This appears true until you look at the long-term, which shows a weak USD/Euro, even at current levels. By design, the Euro initially had parity with the USD, and in the late 90's, USD/Euro was 1.1-1.2. Over the longer term, if you compare USD with SFr, or with the pre-Euro European currencies after considering their conversion ratio to the Euro, you will see a long-term pattern of a depreciating USD agains major European currencies since the 1970's. Thus, our exporters have had a currency advantage relative to Germany for decades, and still have this advantage today with Euro/USD > 1, which makes German manufacturers' labor hourly costs higher than their US counterparts.

    "..... 3. A lot of the differences in business culture are driven by the strength of medium sized businesses that are often family owned. One key aspect of this is that they tend to look longer term than the typical US business. They don't freak out about quarterly earnings. Long term planning leads to success......".

    Very true, but the strength of their smaller, family-owned industrial enterprises is partially due to the fact that their policymakers treat them on a level field vis-a-vis large German corporations. By contrast, US policymakers are influenced by lobbying from large US corporations, skewing the rules in their favor, while regulating and taxing our smaller productive enterprises into oblivion to compensate.

    "...... 4. The consumer culture is very different, but may change with the generations. It's not that long since it was illegal for stores to be open on Saturday afternoon. Talk about discouraging consumption. I'm not that in touch with the younger generation(!) but it seems to me that there are some changes coming through.... "

    The savings culture in Germany is alive and well with the younger generation, and although less frugal than those who grew up in the 50's and 60's, I doubt we will ever see US-style wasteful over-consumption in Germany.

    "...... 5. We hear a lot in the US about how terrible it is to have government intervention, or regulation in the economy. There's some merit to that argument, but the people who insist on its absolute truth need to explain Germany. They have a lot of government intervention, in everything from social spending to worker's rights, but they don't seem to be any the worse for it....."

    Very true, but the other strengths I mentioned above all make up for it.

    In summary, we need to take a long hard look at German policies, and consider borrowing a few pages from them.
    Aug 23, 2010. 09:01 AM | 2 Likes Like |Link to Comment
  • 20% of the Economy Cannot Carry the Other 80% [View article]
    Steve, I truly appreciate your work and insightful articles and comments, but please note that "effect" and "affect" have different meanings, unbeknownst to the spell-checker. Thanks.
    Aug 22, 2010. 10:28 AM | 3 Likes Like |Link to Comment
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