Why I Am So Bearish: Time to Be a Deep Value Investor, Part II

by: Mycroft Friedrich

Due to the popularity of my first article, I have received a ton of emails asking me to write a second part, but this time to also discuss some examples of Deep Value Plays, as well as display a list of shorts that my Mycroft Research System has generated. I will do so later in the article, but would like to touch on a few things first that have me quite concerned, not from a stock market perspective only, but as a U.S. citizen. A couple of weeks back I wrote an article about the Federal Reserve and their irrational intervention, but I was not aware of how independent they really were until my Client Kathy sent me this video yesterday , which put the fear of God in me.

After watching that video you can see that the Federal Reserve has little oversight and zero internal controls in place. They basically do whatever they want with trillions of dollars. You can see why Congressman Ron Paul wants to rein them in, and I agree with him 100%.

The next concern I have has to do with the total number of people on Food Stamps in the U.S.:

As you can see, things in this country are getting worse and not better and the USA is now feeding more in numbers than the entire populations of Canada and Greece combined. In order to gauge the level of poverty in this country, I looked up what it took to become eligible to receive Food Stamps.

Eligibility for the Food Stamp Program is based on financial and non-financial factors. The application process includes completing and filing an application form, being interviewed, and verifying facts crucial to determining eligibility. With certain exceptions, a household that meets the eligibility requirements is qualified to receive benefits. Legal immigrants who are children or disabled can now get food stamps, as can legal immigrants who have legally resided in the United States for at least 5 years. Other legal immigrants and any undocumented immigrants are ineligible for food stamp benefits. Also, many able-bodied, childless, unemployed adults have time limits on their receipt of food stamp benefits.

A household is defined as a person or a group of people living together, but not necessarily related, who purchase and prepare food together. Households, except those with elderly or disabled members, must have gross incomes below 130 percent of the poverty line. All households must have net incomes below 100 percent of poverty to be eligible. Most households may have up to $2,000 in countable resources (e.g., checking / savings account, cash, stocks / bonds). Households with at least one household member who is disabled or age 60 or older may have up to $3,000 in resources.

So we have 44 million Americans who do not have at least $2000 in savings outside of their home or car that they drive to get to work. I then wanted to see what the actual poverty line is in this country, and I came up with this table:

How a family of four with kids can survive on $22,050 a year amazes me, especially with food prices going through the roof?:

The only solution here is to put people back to work at good paying jobs, and that only comes when the Housing market improves. To have the lowest mortgage rates in generations and still have housing go down is a real “red flag” warning that clearly shows that the markets are totally ignoring the facts on Main Street.

Investors continue to bring the markets up every day even though Main Street is sending out dire warnings. One such warning is that foreclosures in this country are still rampant, and a missed opportunity was unfortunately made by using the original TARP money, which was granted by Congress, to bail out the banks and not the home owners that it was originally designed to help. As you can see from the data below, the banks have done very little to solve the problem of foreclosure:

USA Homes in Foreclosure Map

Foreclosures are cancer for the economy, because when someone buys a home they need to purchase a bed, TV, curtains, dishes etc... and in doing so, stimulate the economy. By artificially stimulating the economy with irrational intervention the Federal Reserve has kept rates low, but has done nothing to help the average homeowner in the process of foreclosure, only helping banks instead. This policy will backfire on them as the value of the dollar has collapsed, and this in effect shot raw commodity prices higher. So Uncle Ben tried to stop deflation but ended up with inflation instead, which has now created a worse devil that is called stagflation, a situation where the inflation rate is high and the economic growth rate is low. It raises a dilemma for economic policy since actions designed to lower inflation may worsen economic stagnation and vice versa. This can be measured by the Misery Index which is an economic indicator, created by economist Arthur Okun, and found by adding the unemployment rate to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country.

I am looking for a repeat of 1970-1980 coming up, as inflation will rocket higher once QE2 will stop.

So it is quite obvious in my opinion that we will soon officially enter a period of stagflation once QE2 stops as interest rates will rise, and it will become that much harder to buy a house-- so look for more foreclosures in the future. So the Federal Reserve -- by their actions in the last two and a half years -- in the end has actually achieved the exact opposite of what their mandate is, and will cause high inflation and high unemployment. What a mess, it leads me to my quote:

"He that tries to control the economy though irrational intervention will eventually destroy it"

So what is an investor to do? Well, Deep Value Investing in my opinion is the only way to go right now with a large position in cash to take advantage of bargains when the markets actually do correct.

The following is a small example of my work in this area using my Mycroft Research System:

I own all the stocks above and have written articles already on Radio Shack (NYSE:RSH) and Computer Sciences (CSC), so for those new to my Mycroft Research System, you can get an introduction by reading those articles. I plan to write an article on each one over the next month, but space is very limited here, so stay tuned for more details.

I was asked by many if my research showed any good shorts at the moment and the following table shows the results of my research in that area:

Click to enlarge

I don’t short stocks personally but instead have a 2% position in AdvisorShares Active Bear ETF (NYSEARCA:HDGE), which I wrote an article on a few months back. The data on both tables is from around a month ago and the results are from my research. It is important that everyone looking at the tables do their own due diligence before buying or shorting anything as the data is a few months old, and therefore things may have changed.

Disclaimer: Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. 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. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.

Disclosure: I am long CSC, FSS, GLT, GY, LXK, MRK, NOK, NYT, QTM, RSH, UVV, HDGE, FUJI.