Rocky never provides investment advice. But for once he’ll violate this rule and offer some advice to Congressman Ron Paul.
Members of Congress must file financial disclosure forms which show all of their assets and investments. Rocky studied Rep. Paul’s portfolio from 2003 to the present. http://www.legistorm.com/memberdisclosure/413/Rep_Ron_Paul_TX.html
Ron Paul’s portfolio violates every principle of sound money management. It is not prudent. It is not sensible. It is volatile. It is speculative. And it may give a window into Ron Paul’s perspective on the economy and free enterprise.
From 2003 to the present, Ron Paul’s stock portfolio owned only gold stocks. He owned some real estate. He had some cash. And he owned mutual funds that make money ONLY WHEN the stock market declines. He did not own any gold bullion. And more recently, he purchased more gold mining stocks and added to his bearish bets on the stock market using leveraged bearish funds.
In 2003, the value of his portfolio was between $860,000 and $2,300,00. (The disclosure form only provides a range of values.) In 2010, his portfolio grew to $2.4 million and $5.5 million. (Gold stocks have declined between 15% and 30% in 2011, so his portfolio has declined commensurately. He will declare that loss next year.)
So, over an an 8-year period his portfolio has appreciated by about 12%/year. (And after this year’s losses for gold mining stocks, it will be a bit less than that.)
Not so bad, eh?
If, instead of being such a wiseguy, he had instead just purchased gold bullion, his return would have been 55% better — returning an impressive 18.5% per year! (It’s very strange that Ron Paul doesn’t own any bullion. And a skeptic might wonder whether he owns bullion, but failed to disclose it.)
[Disclosure: If one extrapolates the profile of his portfolio, one must conclude that he either nailed the bottom of the gold market, or he has really lousy long term performance. Remember that (even after this 10 year old rally) gold has appreciated at only about 5% for the past 30 years, while stocks have returned about 11%, and long bonds have returned high single digits. More troubling, however, is the notion that a President of the United States would personally profit from a DECLINING stock market and a declining economy! Even Barack Obama's assets include some S&P Index Funds....]
Knowing that he’s been a gold bull for years, Rocky’s friends keep asking: “What you do think of gold, NOW?” (These people actually think that Rocky and certain other TV commentators can predict the future.)
Rocky’s answer: “I have no idea, and have NEVER had any idea about what the price of gold will do tomorrow.”
But does he still own gold?
“Yes, and I also own some stocks. And I own some real estate. And I own some bonds. And I own a copy of last week’s People Magazine. And I have no idea what the price of these will do tomorrow either. My experience has been that pundits who claim perfect knowledge of the future are generally either liars or idiots. (Whoopi Goldberg is the exception to this rule.) What I’m doing is called diversification.”
But when will he sell gold?
“The PRICE of gold is irrelevant. As I’ve written on this blog, I will sell gold when the gold story (or more accurately, the market’s perception of the gold story) changes! Gold’s ascent is a confluence of negative real interest rates; undisciplined central bank behavior; a growing loss of confidence in government policies and financial systems; loss of Swiss bank secrecy; an accumulation of economic wealth by individuals in parts of the world without stable property rights and rule of law. Can gold drop $100 tomorrow? Sure it can! Can gold drop $300 next week? Sure it can! Can gold drop $1000 next year? Sure it can! But so long as these FUNDAMENTAL factors remain in place, the underpinnings and demand for hard assets that are beyond the reach of governments will remain.”
“Almost all of my really smart friends are very bearish right now. They all think this move is idiotic. Many think this is a bubble. And eventually they will be right. But eventually could be a really really long time. And it could include a trip to unimaginably higher prices first. Their skepticism is not predictive of anything. And importantly, they are not betting that gold will decline either. All it tells you is that they aren’t long gold and missed this move. I’ll admit that I get nervous when prices rise quickly. And historically, buying after a sharp rally isn’t a good idea. But why should any of this market chatter affect my long-term porfolio construction/diversification? After all, I’m not afraid to admit that I have absolutely no idea what prices will do tomorrow.”
[Disclosure: Rocky NEVER gives investment advice. He's owned gold for a long time. And he owns some hedges that will protect him if gold drops sharply while he's asleep. And some day, he will sell his gold. But whether it's at $2,000/oz or $10,000/oz is out of his control. It's in the control of millions of other investors around the world, and how they react to the policies of their central banks and governments.]
Rocky noticed that his friends see bubbles in bonds, in gold, in stocks, in cotton, sugar and grain prices. In fact, his friends see bubbles EVERYWHERE!
It appears that there may be a bubble in bubbles. And a look at “Google Trends” confirms this bubble. However, this bubble-in-bubbles popped early in 2010 — on the 50th Anniversary of Bubble Wrap!
[Disclosure: Rocky never gives investment advice. When asked if or when the current "bubbles" will burst, he started foaming at the mouth.]
Rocky’s eye for market trends is often sharper than his eye for fashion trends. Yet, as cotton prices reach record highs, he speculates that reasonably-priced polyester may soon come back into vogue.
Fortunately, Rocky’s wash-and-wear polyester leisure suit remains crisply pressed in the back of his closet – next to the pink ruffled tuxedo shirt which last saw action at his high school prom. (Which coincidentally was a time when gold was spiking too.) Moths find old wool suits irresistable, but just like a Hostess Twinkie, a leisure suit can remain “fresh” for thousands of years.
[Disclosure: When Rocky experiences a Saturday night fever, he takes an aspirin and goes to bed early.]
Rocky received an email that Shore Bank had been seized by the FDIC, and his account had been safety transferred to “Urban Partnership Bank.”
Rocky previously sang the praises of Redneck Bank which sends new depositors a free beer can holder, pays 2% on its money market account, and has NOT been seized by the FDIC. Redneck Bank is from a “red” state.
In contrast, Rocky surmises that Chicago-based Shore Bank got “in too deep” with the loan “sharks,” and was eventually was swept out to sea. Some news reports even suggest that the Chicago-based bank had questionable ties to President Obama and other pols. See: http://biggovernment.com/centralillinois912project/2010/08/05/shorebank-now-under-scrutiny-by-the-feds-federal-bailout-also-unlikely/
The email from Urban Partnership Bank isn’t too promising either. It begins:
It has been a very busy Monday here at Urban Partnership Bank, formerly ShoreBank. We are pleased to share with you that our new bank remains committed to meeting your banking needs and to the mission of serving low and moderate income communities. We will also continue to support energy efficiency and environmentally-friendly development.
[Disclosure: Rocky wishes that the "mission" of taxpayer-funded FDIC-insured banks was to lend money only to credit-worthy individuals and businesses. Instead of focusing on energy efficient lightbulbs, perhaps checking the loan documents should be a higher priority? Rocky also notes that without FDIC insurance, he would not have an account at Shore Bank. This is an example of "moral hazard." ]
Rocky observes that when he pinches a balloon on one end, it expands on the other end. This simple revelation has implications for his friends who continue to buy corporate bonds at ever lower yields, while ignoring the effects that it has on the stock prices of the same companies.
Bill Miller writes in his latest commentary, “US large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was 1 year old then, but did not have then sufficient sentience or capital to invest.”
Rocky doesn’t remember 1951, so he ran some tests on Dow Jones Industrial Average stocks and bonds to test Mr. Miller’s hypothesis, and found that the conclusions are impressive — even if one makes the improbable assumption that there is ZERO real earnings growth over the next ten years.
(During the 2008/2009 financial crisis, corporate bonds were getting hammered too, so one could not have done this analysis in 2008. Also, so long as the US population continues to grow, it’s extremely difficult to have zero economic growth, so this is a very conservative assumption.)
Rocky’s choice : (1) Buy an equal-weighted basket of the 10-year debt of “quality” companies or (2) Buy an equal-weighted basket of the stocks of the same companies. Buy and hold for ten years.
Analysis of choice #1 (bonds):
The average return is 3.9%. This is the best case and assumes no defaults, leveraged buyouts, or other credit events.
Analysis of choice #2 (stocks):
The current average dividend yield is 2.9% per year on the stocks.
The current average earnings yield is 6.3%.
So if one owns this stock basket and there is no earnings growth and no dividend growth, and the economy is Japanese-like, with intermittent recessions and growth, the return is 2.9% + 6.3% = 9.2% per year for the next ten years. (Which is remarkably close to the long-term average return for stocks.) Here Rocky assumes no bankruptcies and assumes a terminal p/e which is unchanged. But it also ignores the possibility that the economy could do much much better (or much worse).
Some might quarrel that Rocky is double counting … when he includes the dividends. So he says, “ok, let’s forget about the dividends.” Then, the stock basket’s earnings yield is 6.3% and the bond basket yield is still 3.9%, so it’s a pickup of 240 basis points per year for the risk/reward of owning stocks. Or, put another way, over a 10 year period, 10 x 2.4 = 24% … which means that the earnings yield could decline by more than 20% over the next decade and Rocky would still be better off in the stock market than in the bonds of the same companies.
None of this is making Rocky rush out to buy oodles of stocks tomorrow morning — because it’s certainly possible that stocks AND bonds may decline over the next ten years. However, for an investor in corporate bonds, this is an important result — particularly since in a SEVERE deflation or economic crisis, corporate bonds can get hurt badly. Note that Rocky did not include government bonds in this analysis — only corporate bonds.
Lastly, if stocks keep declining and corporate bonds keep rising, the relative values will become more attractive, however, at some point, corporations will issue new debt and use their cash to repurchase shares … and that’s what will keep the relationship between corporate bonds and stocks in line. Perhaps not at these relative valuations … but at some point.
Column1 = stock ticker
Column2 = dividend yield
Column3 = earnings yield. That is, earnings/price for the trailing 12 months.
Column4 = that company’s yield-to-maturity on its 10year corp bullet bond.
Column5 = earnings yield minus bond yield.
[There is a bit of fudging because Intel has no debt, so Rocky arbitrarily gave it a 3.2%. And he extrapolated some companies who had debt maturing in 8 years or 12 years.]
Data source: Bloomberg
|Dividend||Earnings||10 Yr Corp||Earnings YLD|
|Yield||Yield||Yield||minus 10 Yr Bond Yld|
|AA UN Equity||1.1||-5.6||5.7||-11.3|
|AXP UN Equity||1.7||3.7||4.5||-0.9|
|BA UN Equity||2.7||3.5||3.3||0.2|
|BAC UN Equity||0.3||2.5||5.8||-3.3|
|CAT UN Equity||2.6||3.8||3.9||-0.1|
|CSCO UW Equity||0.0||5.6||3.6||2.0|
|CVX UN Equity||4.0||7.4||4.5||2.9|
|DD UN Equity||4.5||6.0||3.6||2.4|
|DIS UN Equity||1.1||6.7||3.2||3.5|
|GE UN Equity||2.7||8.2||4.9||3.3|
|HD UN Equity||3.4||5.9||3.2||2.7|
|HPQ UN Equity||0.7||8.1||3.2||4.9|
|IBM UN Equity||2.1||7.6||4.0||3.7|
|INTC UW Equity||3.0||6.0||3.2||2.8|
|JNJ UN Equity||3.8||7.2||3.7||3.5|
|JPM UN Equity||0.5||6.5||5.1||1.4|
|KFT UN Equity||4.0||7.5||4.3||3.2|
|KO UN Equity||3.3||5.4||3.3||2.1|
|MCD UN Equity||3.1||6.4||4.2||2.2|
|MMM UN Equity||2.6||5.7||3.2||2.4|
|MRK UN Equity||4.3||8.8||3.4||5.4|
|MSFT UW Equity||2.1||7.3||3.0||4.3|
|PFE UN Equity||5.0||11.1||3.1||8.0|
|PG UN Equity||3.2||7.2||3.4||3.8|
|T UN Equity||6.7||7.6||4.5||3.1|
|TRV UN Equity||2.9||12.6||4.2||8.4|
|UTX UN Equity||2.5||6.6||3.5||3.1|
|VZ UN Equity||7.2||7.2||4.8||2.4|
|WMT UN Equity||2.4||6.9||3.7||3.2|
|XOM UN Equity||3.0||5.9||4.1||1.8|
|Equal Wgt Avg||2.9||6.3||3.9||2.4|
[Disclosure: Rocky is not recommending that anyone do anything that involves money or bonds or stocks or shoelaces. But he's watching this relationship and has started to gradually move some of his "high quality" corporate bonds into the stocks of the same companies -- as the relationship becomes ever more attractive. He also notes that if you pinch a balloon TOO hard, it will burst. ]
The Company said the waffle shortage lowered the company’s fourth-quarter sales by 2 percent, and the stock is down 5%. See: http://www.bloomberg.com/apps/news?pid=20601103&sid=aqjyWpquFFmI
Rocky noticed the signs at his local grocery store that apologized for the Eggo shortage. Luckily, as part of his Y2K disaster preparation, Rocky kept a stockpile of waffles and Tang in his generator-powered underground bunker.
He’s currently checking the prices on Ebay to see whether he can unload his waffles at a profit.
A representative of the National Waffle Association, (yes, it exists), declined to comment on Rocky’s arbitrage activities.
[Disclosure: Trophy Wife is not fond of frozen waffles for breakfast. She's strictly a fresh banana and Special-K kind of gal.]
Rocky lacks any substantive insights on today’s AIG grilling of Treasury Secretaries Geithner and Paulson by the House Oversight and Government Reform Committee. So he’ll instead focus on the important stuff.
Rocky notes that both Geithner and Paulson appeared to be wearing waterproof scuba diving watches.
Geithner’s watch came before the camera as he was pointing his index finger at the committee in a Clintonesque “I did not have sex with that woman, and even if I did, it was in the best interests of American Taxpayers” moment.
Paulson’s watch came before the camera when the Committee ran over Paulson’s self-imposed time limit, and he “graciously” agreed to stay for an extra eight minutes. The eight minutes ran to ten minutes, and Paulson objected. The Committee Chair graciously acknowledged Paulson for providing an extra two minutes.
If Paulson and Geithner had been Secretaries of the Navy, the waterproof watches would make more sense.
Perhaps Geithner chose a waterproof watch to protect against a waterfall of tears. In contrast, Paulson was probably enroute to a flyfishing date with Robert Rubin, Tiger Woods and Dan Rather at “The Perfect Cast,” a resort who’s list of celebrities is a who’s who of the morally challenged.
A popular investment platitude is “The trend is your friend, until it ends.”
The above chart shows the yield of the US 30-yield treasury bond. For the past twenty years, buying the bond as its yield approached its 100 month moving average has been a winning strategy. Right now, that strategy demands a purchase of bonds — with a stop-loss a little bit above. (Remember that bond yields and bond prices move in opposite directions.)
However, if the bond yields more than 4.75% when Dick Clark rings in the New Year, this long-term “secular” trend will have ended. Historically, broken secular trends are dangerous beasts, and the first leg of the reversal can be violent.
[Disclosure: Rocky is agnostic about whether Dick Clark should have retired 20 years ago. He is also agnostic about the short-term direction of the bond market. Because he accepts that "the trend is his friend," he may buy a few bonds -- before he leaves his office to buy his New Year's Eve party hat. When Rocky wakes up in 2010, he'll find out whether the 20-year-long bond bull market remains alive -- or has joined Guy Lombardo in heaven. See: http://www.last.fm/music/Guy+Lombardo/Christmas+Through+the+Years/Auld+Lang+Syne]
Yesterday, the Federal Reserve reported that consumers reduced their debt by a remarkable $21.6 Billion during July. Click here for the story: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avvF5aNtrCfc
Bearish economists will seize upon this data to show that the consumer is retrenching; final demand will not grow; and the economy may lurch back into a sink hole.
Bullish economists will seize upon this data to show that consumers are finally behaving prudently, their balance sheets are being repaired, and the seeds are being sowed for a more-balanced, sustainable expansion.
Rocky will seize upon the data and say, “If you extrapolate the acceleration of this decline, consumers will be entirely debt free in a couple of years. That seems pretty unlikely.”
A picture is worth a thousand words:
Seeking wisdom and insights, Rocky will interview some dirty rats behind his town garbage dump this evening.
Cambridge University researchers have discovered that rats are skilled gamblers — and successfully play the odds in a casino. The researchers conclude that the “average” rat may be a better speculator than Rocky!
For a laymen’s discussion of the “rodent revelation,” click [here].
To read the article at the Journal of Neuropsychopharmacology (spelling checker just crashed), click [here]. (Subscription required.)
A wise man once said, “You can judge a man by the company he keeps.” Rocky finds this platitude unsatisfying. Rocky also wants to see the man’s “abode.” Oops, typo. Make that “commode.”
Secretary of the Treasury Tim Geither continues to (unsuccesfully) market his New York suburban home. The listing is now on Zillow. Click here for details and pictures.
Mindful that former Federal Reserve Chairman said that he did his best thinking in the bathtub, the world can now see the room [click here] in which Secretary Geithner dreamed up the TARP. The computer on which he botched his income taxe return [click here.] And most importantly, the room to which he fled, when he learned that Lehman filed for bankruptcy [click here.]
While Mrs. Geithner sits by the phone waiting for a call from the producers at MTV Cribs and House Hunters, Trophy Wife asks, “What’s with those blue bathroom tiles anyway?”
John Maynard Keynes, the famous English Economist whose theories are back in vogue, wrote: “In the long run, we are all dead.”
Rocky Humbert, the obscure American curmudgeon and speculator, writes: “In the long run, prices revert to their long-run mean.”
This morning’s Case-Schiller Housing Index (-19% annualized) shows that housing continues to revert to its long-run mean.
This chart shows the major asset classes since 1987. Black=Housing. Red=CPI. Yellow=stocks. Green=commodities.
“I’m sick and tired of picking up the newspaper and reading about another idiotic use of taxpayer money while our country is on the brink,” said Senator John Kerry. He made the comment after learning that Northern Trust (a TARP recipient) upheld their committment to the Northern Trust Golf Open.
For the first time in recent memory, Rocky and Senator Kerry agree on something. However, their agreement is not about business and charity decisions at Northern Trust, one of the few profitable banks (2008 net income = $640 million). Their agreement is about the idiotic use of taxpayer money.
For some “idiotic” examples, visit Time Magazine’s 2008 Top 10 Outrageous Government Earmarks: [click here for the list]
Rocky thought that the purpose of a stimulus package is to increase consumption. He wonders why would the Senator discourage a private, profit-making enterprise from engaging in that exact activity? If Northern Trust cancels their consumption while the Government spends stimulus dollars, it’s like moving money from the left pocket to the right pocket. Perhaps the Senator is upset because Northern Trust won’t sit nicely in his left pocket?
On a positive note, Rocky appreciates the Senator’s Rocky-esque pose in his picture. But there’s much more to “being Rocky” than just raising one’s fists.
The Federal Reserve made a dramatic change in procedure today. In their quest to provide more “openess and transparency,” the Fed now provides their “long range” (five to six year) forecast for US economic performance. Click here for the official Fed release.
The first Five Year Plan was released with their Monthly Minutes at 2:00pm today. The results:
Real GDP: 2.5 to 2.7 percent
Unemployment: 4.8 to 5.0 percent
Inflation: 1.7 to 2.0 percent
Upon reading the forecast, Rocky was tempted to aggressively buy stocks, real estate and US dollars for all of a yoctosecond. Instead, he put his phone down, and devised his own five-year forecast with a probability of accuracy no worse than the Fed’s.
1) Global peace.
2) End of famine.
3) Dow Jones 36000
4) American Idol is canceled by Fox Broadcasting.
It’s good to be an optimist.
Rocky wrote last month that he was buying the Gasoline crack spread because he thought it was a good investment both technically and fundamentally. Since he entered the trade, Rocky’s investment has returned 550% (unleveraged). Rocky never gives investment advice, he just “calls them as he sees them.” Hence the purpose of this update is not to gloat or celebrate, but rather to point out the inconsistency of an article in this morning’s Wall Street Journal.
Mark Gongloff writes a modestly gloomy piece, “Falling Gas May be Gone as a Stimulus:”
“Falling gasoline prices were for months a rare and welcome bright side to the economic meltdown. They aren’t falling anymore….Gas has risen even as crude oil prices have tumbled…and demand for gasoline has fallen amid a deep recession. Higher gasoline prices sometimes crowd out consumer spending on other suff, but they will bolster January retail sales numbers due Thursday.”
He concludes: “…if gasoline has found its floor, it will be one less support for any economic recovery.”
Rocky notes that this is a textbook example of glass-half-empty syndrome — reminiscent of a frightened blind man looking in a mirror. (Rocky frequently mixes his metaphors. Always shaken, not stirred.)
As gasoline prices reached $5 last summer, doomsday pundits wrung their hands and politicians spoke about intervention in the markets. Newspaper columnists predicted the end of the American way of life. Fortunately, Washington did not intervene, and high prices increased production and curbed consumption.
Last fall as gasoline prices collapsed, the same doomsday pundits pointed to the deflationary collapse of the economy — and all the evils the collapse will wrought. As commodity prices ticked lower, more people jumped on the bandwagon and viewed this as a coincident indicator of economic implosion. Eventually gasoline prices overshot to the downside late December (when Rocky entered his bullish trade); other industrial commodity prices are groping for a similar floor.
An algebraic representation of this phenomenon:
Prices high = pundits are bearish. Prices low = pundits are bearish.
Both when gasoline reached $5 and when the crack spread went negative, supply and demand came back into balance, and a new equilibrium was reached.
To conclude: Rocky believes that gasoline’s ticking up a bit is a POSITIVE sign for the economy. It also shows that markets, when left to their own, eventually find a sensible equilibrium.
Rocky shares the following letter, which is partly based on Keynesian economic principles articulated in the Broken Window Parable of Frederic Bastiat from an 1850 essay:
Dear Fellow American:
Almost ten percent of us are unemployed, and the economy is a mess. The ninety percent of us that still have a job are scared, and we read about the government borrowing and spending trillions of dollars as a “stimulus” to the economy. That debt will either be a burden to our children, or it will be wiped out by an inflation that destroys the value of our savings even more.
We can do something that is good for us, good for the economy and good for our children. Buy a lightbulb! Buy a toothbrush! Buy some laundry detergent!
This is not a joke. Please allow me to explain.
We all use some of the following:
2. Toothpaste / toothbrush
3. Laundry detergent, soap, shampoo.
4. Razors, shaving cream
5. Plastic bags, aluminum foil
6. Kitchen glassware, forks, knives
7. Canned tuna, canned coffee
9. Paperclips, staples, paper, pens
10. Blank computer CD’s
The money in our savings accounts are not earning any interest. So let’s spend some money on these things since we know that we will need them. Since they don’t ever spoil, let’s buy them NOW. Let’s buy enough so that we won’t need to buy more for the next year or two or three.
If every working American stocks up, there will be an immediate benefit to the economy. Factories that make them will stay open. Jobs will be saved. And if prices rise (which they probably will) over the next year or two, we will have saved money too. If you can find these items Made in America, even better. But it doesn’t really matter. We live in a global economy, and what’s good for the world is good for America.
March 1, 2009 is “Buy a light bulb day.” Please join us as we jump start the economy without the government’s involvement. Please share this message with your friends, family and co-workers.
Thank you for your time.
Brought to you by “BALBOA”
( Buy-A-Light-Bulb, Boost-America )
On a recent frigid Sunday morning, Rocky noticed a long queue of cars at the full service cash wash ($12), but the self-service car wash ($3) next door was completely deserted. Rocky hypothesized that this might be a leading indicator of improved consumer sentiment — and perhaps a bullish omen for the stock market.
Rocky needed a car wash, and he didn’t like to wait. He pulled into the deserted self-service car wash, and fed a five dollar bill into the change machine. Only a single quarter came out. The car wash owner explained that the change machine dislikes the new $5 notes, and the owner handed Rocky five $1 bills. (Rocky now had a 5% profit.)
Instead of taking his $0.25 windfall and driving away, Rocky turned the machine to “soapy wash” and began to douse his car with a high pressure stream of soapy bubbles.
The soapy stream lathered the vehicle, and instantly turned into a frozen coating of thick white custard — denser than the shaving cream an old-time barber uses. The liquid froze solid as it reached Rocky’s car!
The wash cycle ended after five minutes, and Rocky’s car had a white frozen shell. Rocky scraped the ice from his windshield and drove off, having mummified the encrusted road salt and sand under this new protective ice finish.
Rocky glanced in his rear-view mirror as he drove away, and saw shiny, clean cars pulling out of the expensive full-service car wash down the street. Perhaps a little early to aggressively buy stocks, he concluded.