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. ]