Investors breathed a sigh of relief on Tuesday morning when Best Buy (NYSE: BBY) delivered a fairly impressive quarter. Shares, which had been close to a 52-week low, are up more than +6%. Were it not for the large group of investors that see real danger in the consumer economy, shares would have posted even stronger gains. Six months from now, when Best Buy is discussing holiday season sales, those concerns should be officially put to bed. Meanwhile, shares are awfully cheap, which sets the stage for one of the best retail plays ahead of the holiday season.
Before we look ahead, it's important to see what is driving profits in the near-term. To be sure, consumer spending remains cautious: same-store sales fell -0.1% in the quarter, which is actually below the +2% growth rate in consumer incomes seen in recent periods. There is also a dearth of hot new items that consumers must own right now.
But that's about to change. In the next few months, expect to hear about a wave of new consumer electronics devices, especially those that make it even easier for consumers to enjoy all of their music, movies, web-surfing, etc., on one platform. We're now starting to see DVD players with Wi-Fi capabilities and web browsers. In coming months, an increasing number of Internet-connected TVs will hit the shelves. And a new generation of stereos that also act as Internet/media hubs will also reach stores in coming months. Best Buy will be selling them with the tagline “Connected World.”
Best Buy is also gearing up for a big push this fall into mobile devices. Major wireless phone companies are expecting to start rolling out high-speed 4G phone services in major cities. There's more: video game sales have been in a funk recently, but a new gaming platform from Microsoft (Nasdaq: MSFT), known as Kinect, is expected to be released this fall. Add it all up, and consumers will have ample reason to visit stores as we head toward the holidays.
Despite heavy investments to prepare stores for these new electronics segments, Best Buy deserves kudos for tightly controlling expenses. Quarterly profits of $254 million ($0.60 a share) were more than +50% above year-ago levels. Analysts thought Best Buy would earn only $0.44 a share.
Action to Take –> Focusing on recent expense controls or near-term product releases obscures a much larger point. Best Buy is the destination for consumer electronics, especially as several key rivals have gone out of business. Walmart (NYSE: WMT) will always present formidable competition, but there's ample room for both of these firms to profit.
Best Buy trades for around 10 times (likely upwardly revised) fiscal (February) 2011 profits, and shares represent the best of both worlds: near-term value and long-term growth. Despite today's surge, shares are a long way from fair value. I expect shares to move past the 52-week high of $48, either this fall in the face of a robust holiday season, or in 2011 as consumer spending finally picks up.
– David Sterman
David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
Back in the mid-1980s, I was a bit of a computer nerd.
I was not only fluent in basic (a programming language now deader than Latin), but also probably the only kid in school who new what DOS stood for. That would be “disk operating system” for those of you who grew up in the Windows era.
So years before Microsoft (Nasdaq: MSFT) became a household name, I was a fan of the software giant. I even thought about picking up a few shares of the stock. Alas, my allowance went to things like baseball cards instead.
Not a day goes by that I don't regret it. With a staggering +13,906% return since the end of 1986, I might be basking on a yacht in the Caribbean right now. And that's why millions of investors keep a watchful eye for any rising star that could potentially be the next Microsoft.
But I'm about to let you in on a little secret: Microsoft is still a powerful wealth creator, and the market has given us a rare opportunity to turn back the clock.
Back in September 2000, there were 5.5 billion shares of Microsoft changing hands at $70. That meant the market was valuing the company at $385 billion. Today, after a 2-1 stock split, there are 9.0 billion shares trading at $25, for a market cap of $217 billion.
That's right, Microsoft is nearly $170 billion cheaper today than it was a decade ago. That's an eye-popping discount. Of course, there are plenty of stocks that have gone backwards during the past 10 years, however, most are just a shadow of their former selves.
But that's not the case with Microsoft — which has quietly grown by leaps and bounds.
Back in the mid-1980s, I was a bit of a computer nerd.
I was not only fluent in basic (a programming language now deader than Latin), but also probably the only kid in school who new what DOS stood for. That would be “disk operating system” for those of you who grew up in the Windows era.
So years before Microsoft (Nasdaq: MSFT) became a household name, I was a fan of the software giant. I even thought about picking up a few shares of the stock. Alas, my allowance went to things like baseball cards instead.
Not a day goes by that I don't regret it. With a staggering +13,906% return since the end of 1986, I might be basking on a yacht in the Caribbean right now. And that's why millions of investors keep a watchful eye for any rising star that could potentially be the next Microsoft.
But I'm about to let you in on a little secret: Microsoft is still a powerful wealth creator, and the market has given us a rare opportunity to turn back the clock.
Back in September 2000, there were 5.5 billion shares of Microsoft changing hands at $70. That meant the market was valuing the company at $385 billion. Today, after a 2-1 stock split, there are 9.0 billion shares trading at $25, for a market cap of $217 billion.
That's right, Microsoft is nearly $170 billion cheaper today than it was a decade ago. That's an eye-popping discount. Of course, there are plenty of stocks that have gone backwards during the past 10 years, however, most are just a shadow of their former selves.
But that's not the case with Microsoft — which has quietly grown by leaps and bounds.
When a recession hits, especially as hard as this one has, the last investment you want to make is in financial stocks. This would be true even if banks and mortgage companies hadn't been at the center of the maelstrom. You want to increase your portfolio exposure to hard assets in difficult times. These are assets that retain their value over time. Yes, they may fluctuate in value during the recession, but when the sky clears, they will retain more value than other investments and have even more upside ahead.
Oil is the most important of these assets. It's a good idea to hold oil producer stocks anyway, but you need increase them even more in a recession. [Read: The Best Stocks to Hold Forever] Gold has also worked very well this time around, but that hasn't always been the case.
Diamonds are another way to go. But before learning about a great stock involving diamonds, it's important to know how the diamond market works.
First, diamonds are actually not intrinsically valuable. Clever marketing by London-based DeBeers created the diamond myth — that it is a precious and valuable jewel. Operating for decades as a near-monopoly, DeBeers also instituted onerous supply controls. By pumping up demand and restricting supply, DeBeers created a precious hard asset out of worthless carbon. That situation still exits today.
That takes us to Harry Winston Diamond (NYSE: HWD). Rather than simply own a retailer like Tiffany & Co. (NYSE: TIF), which is highly dependent on discretionary consumer spending, Harry Winston not only sells diamond jewelry — but it also owns a 30% stake in a world-class Canadian diamond mine. Given that many diamond mines are in unstable war-torn nations in Africa, this kind of stability is very big for Harry Winston.
Right off the bat, ownership stake in the mine allows Harry Winston to provide Tiffany with $50 million worth of diamonds each year, so that's money in the bank before any fiscal year even kicks off. The other advantage is that the company can turn the diamond mining spigot on and off in response to demand (demand has been weak the past two years). That allows Harry Winston to better control what it spends on capital, since it costs a lot to mine diamonds.
The retail operation is not as great as I'd like it to be, but the company brought in a new retail operations president, and he's positioning the company for +20% revenue growth going forward and aiming for 15% gross margins. His plan is to introduce new products such as watches and bridal lines, and to reposition the Harry Winston brand. A look at the company's conference call will provide more detail, but this should be a big boost for the company going forward and add to the bottom line.
The company's financials are in great shape, with $125 million in cash offset by $265 million in long-term debt, and interest expense easily being met by operational cash flow — even in these difficult times. And actually, they aren't even as difficult as they were a year ago: Sales were up +62% year-over-year in the most recent quarter, coming off an +89% increase in volume. This wasn't just limited to Harry Winston, either — the entire industry appears to be rebounding.
Action To Take –> It's hard to believe, but at the height of the panic in March of 2009, Harry Winston was trading at only $2 per share, well-below what its tangible assets were worth. Today the stock sits at just above $12, but book value is at $9.05. Right now, the stock represents a chance to own a premier hard asset, combined with an improving retail business, for just slightly more than the value of the assets.
With diamond production increasing and consumers returning to stores, a +20% annual increase in earnings is very possible going forward. I see Harry Winston trading above $20 within five years, plus investors have a hard asset to buttress their portfolio. It's a buy.
– Frederick M. Steier
Frederick M. Steier is a reporter and experienced stock and broader market analyst. As a writer for the Louisville Courier-Journal, Frederick analyzed individual stocks and…
When a recession hits, especially as hard as this one has, the last investment you want to make is in financial stocks. This would be true even if banks and mortgage companies hadn't been at the center of the maelstrom. You want to increase your portfolio exposure to hard assets in difficult times. These are assets that retain their value over time. Yes, they may fluctuate in value during the recession, but when the sky clears, they will retain more value than other investments and have even more upside ahead.
Oil is the most important of these assets. It's a good idea to hold oil producer stocks anyway, but you need increase them even more in a recession. [Read: The Best Stocks to Hold Forever] Gold has also worked very well this time around, but that hasn't always been the case.
Diamonds are another way to go. But before learning about a great stock involving diamonds, it's important to know how the diamond market works.
First, diamonds are actually not intrinsically valuable. Clever marketing by London-based DeBeers created the diamond myth — that it is a precious and valuable jewel. Operating for decades as a near-monopoly, DeBeers also instituted onerous supply controls. By pumping up demand and restricting supply, DeBeers created a precious hard asset out of worthless carbon. That situation still exits today.
That takes us to Harry Winston Diamond (NYSE: HWD). Rather than simply own a retailer like Tiffany & Co. (NYSE: TIF), which is highly dependent on discretionary consumer spending, Harry Winston not only sells diamond jewelry — but it also owns a 30% stake in a world-class Canadian diamond mine. Given that many diamond mines are in unstable war-torn nations in Africa, this kind of stability is very big for Harry Winston.
Right off the bat, ownership stake in the mine allows Harry Winston to provide Tiffany with $50 million worth of diamonds each year, so that's money in the bank before any fiscal year even kicks off. The other advantage is that the company can turn the diamond mining spigot on and off in response to demand (demand has been weak the past two years). That allows Harry Winston to better control what it spends on capital, since it costs a lot to mine diamonds.
The retail operation is not as great as I'd like it to be, but the company brought in a new retail operations president, and he's positioning the company for +20% revenue growth going forward and aiming for 15% gross margins. His plan is to introduce new products such as watches and bridal lines, and to reposition the Harry Winston brand. A look at the company's conference call will provide more detail, but this should be a big boost for the company going forward and add to the bottom line.
The company's financials are in great shape, with $125 million in cash offset by $265 million in long-term debt, and interest expense easily being met by operational cash flow — even in these difficult times. And actually, they aren't even as difficult as they were a year ago: Sales were up +62% year-over-year in the most recent quarter, coming off an +89% increase in volume. This wasn't just limited to Harry Winston, either — the entire industry appears to be rebounding.
Action To Take –> It's hard to believe, but at the height of the panic in March of 2009, Harry Winston was trading at only $2 per share, well-below what its tangible assets were worth. Today the stock sits at just above $12, but book value is at $9.05. Right now, the stock represents a chance to own a premier hard asset, combined with an improving retail business, for just slightly more than the value of the assets.
With diamond production increasing and consumers returning to stores, a +20% annual increase in earnings is very possible going forward. I see Harry Winston trading above $20 within five years, plus investors have a hard asset to buttress their portfolio. It's a buy.
– Frederick M. Steier
Frederick M. Steier is a reporter and experienced stock and broader market analyst. As a writer for the Louisville Courier-Journal, Frederick analyzed individual stocks and…
A clear trend has emerged in the health care sector. Large companies are having an awfully hard time finding ways to grow. As an example, I recently took a look at the dimming outlook for industry giant Medtronic (NYSE: MDT). [Read more.]
In that column, I added that, “it's been a great era to invest in smaller medical device companies.” These firms (which should be widened to include the companies in the field of health care diagnostics) seem better equipped to move nimbly in new markets, and some have proven to be attractive buyout candidates. Well, I've been tracking three companies that I think make great investments — with or without a buyout. All three are expected to boost sales around +20% to +30% both this year and next, and all three are well off of their highs seen a few years ago.
eResearch Technology (Nasdaq: ERES)
I first took a deep look at this company, which helps test the cardiac side effects on new, un-tested drugs, back in May after it had made a smart acquisition in the respiratory monitoring space.
[See: Big Pharma's Best Friend is about to Get Bigger]
Shares have been flat since then, but quarterly results have surely been impressive. The company surged past forecasts in the June quarter, thanks in part to the newly-acquired respiratory division. As a result, earnings estimates have been raised for both 2010 and 2011. Most importantly, I think analysts are still underestimating all of the benefits of this deal, and I expect 2011 profit forecasts to rise higher in coming months.
The key to that bullish outlook is a swelling backlog. Both of eResearch's divisions are bringing in new business at a fast pace, and the company's recent book-to-bill ratio was 1.5, which means that for every dollar in sales the company had in the June quarter, it secured $1.50 in new contracts. Backlog now stands at $300 million, which implies that the company should have little trouble matching estimates through 2011. And as new contracts come in, the 2012 slate is filling up as well.
Demand is so strong because of changes at the Food & Drug Administration (FDA). An increasing number of drugs have been rejected for insufficient analysis of side effects, known as toxicity. By using eResearch's software and hardware in the testing process, drug companies can provide a much deeper set of data for regulators to analyze.
I expect shares to move toward the $11 mark during the next year, which translates into 20 times next year's likely profits. That represents a solid +40% upside from current levels.
A clear trend has emerged in the health care sector. Large companies are having an awfully hard time finding ways to grow. As an example, I recently took a look at the dimming outlook for industry giant Medtronic (NYSE: MDT). [Read more.]
In that column, I added that, “it's been a great era to invest in smaller medical device companies.” These firms (which should be widened to include the companies in the field of health care diagnostics) seem better equipped to move nimbly in new markets, and some have proven to be attractive buyout candidates. Well, I've been tracking three companies that I think make great investments — with or without a buyout. All three are expected to boost sales around +20% to +30% both this year and next, and all three are well off of their highs seen a few years ago.
eResearch Technology (Nasdaq: ERES)
I first took a deep look at this company, which helps test the cardiac side effects on new, un-tested drugs, back in May after it had made a smart acquisition in the respiratory monitoring space.
[See: Big Pharma's Best Friend is about to Get Bigger]
Shares have been flat since then, but quarterly results have surely been impressive. The company surged past forecasts in the June quarter, thanks in part to the newly-acquired respiratory division. As a result, earnings estimates have been raised for both 2010 and 2011. Most importantly, I think analysts are still underestimating all of the benefits of this deal, and I expect 2011 profit forecasts to rise higher in coming months.
The key to that bullish outlook is a swelling backlog. Both of eResearch's divisions are bringing in new business at a fast pace, and the company's recent book-to-bill ratio was 1.5, which means that for every dollar in sales the company had in the June quarter, it secured $1.50 in new contracts. Backlog now stands at $300 million, which implies that the company should have little trouble matching estimates through 2011. And as new contracts come in, the 2012 slate is filling up as well.
Demand is so strong because of changes at the Food & Drug Administration (FDA). An increasing number of drugs have been rejected for insufficient analysis of side effects, known as toxicity. By using eResearch's software and hardware in the testing process, drug companies can provide a much deeper set of data for regulators to analyze.
I expect shares to move toward the $11 mark during the next year, which translates into 20 times next year's likely profits. That represents a solid +40% upside from current levels.
As the demand for natural resources has jumped and is expected to continue to do so due to increased wealth in developing nations and a growing global population, State Street recently launched the SPDR S&P Global Natural Resources ETF (GNR) to enable investors to gain access to the sector.
The new ETF will track the S&P Global Natural Resources Index, which is an index comprised of 90 of the largest publicly traded companies, based on market capitalization, in global natural resources and commodities businesses that meet certain investibility requirements .   Companies that are included in global natural resources include those which are engaged in agriculture, integrated oil and gas, oil and gas drilling, oil and gas exploration and exploration, oil and gas refining, coal and consumable fuels, diversified metals and mining, steel, aluminum, gold and other precious metals.Â
As one can see, it is clear that as developing nations continue to grow and per-capita income in these regions of the world grows, consumption and demand for energy and agriculture products and ways to produce these commodities will increase.Â
In regards to GNR, the index includes primarily developed market stocks with float-adjusted market capitalization of at least $1 billion. Furthermore, exposure to US based companies is limited to 40% of the index and exposure to emerging markets is limited to 15% of the index. Currently, the US constitutes nearly 30% of the index, Canada nearly 13%, the United Kingdom 11% and Australia 8%.Â
As for sector allocations, the index’s top three allocations include 28.63% of its assets to integrated oil and gas, 17.48% to chemicals and 15.65% to diversified metals and mining boasting Exxon Mobil (XOM), BHP Billiton (BHP) and Potash Corp Of Saskatchewan Inc (POT) as its top three holdings. Â
Lastly, GNR will carry an expense ratio of 0.40% and will be in direct competition with the iShares S&P North American Natural Resources Sector Index Fund (IGE), which is more concentrated on integrated oil and gas companies than GNR and has a heavier concentration of US based holdings.
As the demand for natural resources has jumped and is expected to continue to do so due to increased wealth in developing nations and a growing global population, State Street recently launched the SPDR S&P Global Natural Resources ETF (GNR) to enable investors to gain access to the sector.
The new ETF will track the S&P Global Natural Resources Index, which is an index comprised of 90 of the largest publicly traded companies, based on market capitalization, in global natural resources and commodities businesses that meet certain investibility requirements .   Companies that are included in global natural resources include those which are engaged in agriculture, integrated oil and gas, oil and gas drilling, oil and gas exploration and exploration, oil and gas refining, coal and consumable fuels, diversified metals and mining, steel, aluminum, gold and other precious metals.Â
As one can see, it is clear that as developing nations continue to grow and per-capita income in these regions of the world grows, consumption and demand for energy and agriculture products and ways to produce these commodities will increase.Â
In regards to GNR, the index includes primarily developed market stocks with float-adjusted market capitalization of at least $1 billion. Furthermore, exposure to US based companies is limited to 40% of the index and exposure to emerging markets is limited to 15% of the index. Currently, the US constitutes nearly 30% of the index, Canada nearly 13%, the United Kingdom 11% and Australia 8%.Â
As for sector allocations, the index’s top three allocations include 28.63% of its assets to integrated oil and gas, 17.48% to chemicals and 15.65% to diversified metals and mining boasting Exxon Mobil (XOM), BHP Billiton (BHP) and Potash Corp Of Saskatchewan Inc (POT) as its top three holdings. Â
Lastly, GNR will carry an expense ratio of 0.40% and will be in direct competition with the iShares S&P North American Natural Resources Sector Index Fund (IGE), which is more concentrated on integrated oil and gas companies than GNR and has a heavier concentration of US based holdings.
My daughter, for some reason, decided that breakfast is the best time of day to tell me that she needs me to give her a wad of money, more money than I earned in a freaking month when I was her age, and for some stupid “back to school supplies†or to “have the sutures removed,†or something, I can’t remember the stupid details, but whatever it was, I remember that did not want to pay for it.
I knew I had to change the subject, so I, all distractingly casual, say to her, “I read about some guy saying that perhaps the British pound was not as weak as the pessimists say, as its price was $1.40US, and it has been higher, and it has been lower. Of course,†I say with an insiders-wink like I am some kind of savvy insider, “I knew the guy was a currency trader by the way he hoped to prosper on such small moves in the foreign-exchange markets.â€
She looks at me with this stupid look on her face, and she says to me, “I don’t care. Are you going to give me the money or not?â€
Ignoring her rude interruption, I continue, “Whereas guys like me notice that gold is up when priced in both the pound and the dollar, and will continue to do so because…?†I trailed off, looking at her and arching an eyebrow as a clever, non-verbal way of asking her why the pound and the dollar will continue to fall in terms of gold, which I hope will make her stop thinking about how she needs me to give her my money and start thinking about how governments can create more fiat currency but they cannot create gold, and that is why gold will gain in value against paper currency.
Instead, she again looks at me with a petulant look on her face and her mouth full of Corn Flakes, and she again says, “I don’t care. Are you going to give me the money or not?â€
I continue in a lighter vein, “Comparing the merits of two fiat currencies that will both lose purchasing power in terms of gold is like saying that one pile of poodle poop is better than some other pile of terrier poop, or the other way around, I am not sure which, but one of them is definitely the one to buy. Hahaha!â€
So, Little Miss Prissy looks at me with this pained expression, and sounds just like her mother when she says, “Ewww! Gross! Do we have to talk about dog poop at breakfast, or do you just like grossing me out so that I’m gagging all over myself?â€
Suddenly, I leap to my feet in a surprising and startling move, snarling, “Do I like grossing you out? Is that what you want to know? Do I enjoy it? Is that what you are asking me, you little snot?â€
She looks up at me with this startled, frightened look on her face, thoughts of getting money out of me having long since disappeared. Enjoying the scene, I pause for a delicious moment, towering over her in a menacing way, heightening the drama, before I say, “No, I don’t enjoy it! But because both the British and the Americans have stupid governments who are heavily-indebted and yet are deficit-spending more and more incomprehensibly large amounts of money, and both countries have stupid central bankers creating the malignant, monstrous amounts of money to accomplish this insane spending, this means that both of them, meaning us, are doomed as a result! We’re Freaking Doomed!â€
Again, she gets this bored look on her face and starts to say how she doesn’t care, when I cut her off by shouting, “You’re doomed! You’re dead! That’s probably why you stink! I thought maybe you pooped in your pants, and that is why you stink, or maybe your stench is caused by your not bathing, but not that you stink because you were dead! And I would have to be crazy to give money to a dead girl who is rotting and who is stinking up my house! Stinky! Stinky! Hahaha! I’ll call you Stinky Girl!â€
Predictably, she sputters in frustration and runs from the room, shouting, “I hate you! I hate you! I hate you!†the whole time, instead of thanking me for the Valuable Mogambo Lesson (VML) in the value of gold versus fiat currencies that are being created in such staggering quantities.
So I used the money I saved to buy a little more gold, silver and oil, because with socialist deficit-spending morons like the Obama administration distributing the new money created by the Federal Reserve, these three assets are guaranteed winners and, and because, the dollar is a guaranteed failure.
And if there is one thing I like about betting on a guaranteed winner, it is that it makes winning so easy that you giggle to yourself, “Whee! This investing stuff is easy!â€
Dueling Currencies originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
My daughter, for some reason, decided that breakfast is the best time of day to tell me that she needs me to give her a wad of money, more money than I earned in a freaking month when I was her age, and for some stupid “back to school supplies†or to “have the sutures removed,†or something, I can’t remember the stupid details, but whatever it was, I remember that did not want to pay for it.
I knew I had to change the subject, so I, all distractingly casual, say to her, “I read about some guy saying that perhaps the British pound was not as weak as the pessimists say, as its price was $1.40US, and it has been higher, and it has been lower. Of course,†I say with an insiders-wink like I am some kind of savvy insider, “I knew the guy was a currency trader by the way he hoped to prosper on such small moves in the foreign-exchange markets.â€
She looks at me with this stupid look on her face, and she says to me, “I don’t care. Are you going to give me the money or not?â€
Ignoring her rude interruption, I continue, “Whereas guys like me notice that gold is up when priced in both the pound and the dollar, and will continue to do so because…?†I trailed off, looking at her and arching an eyebrow as a clever, non-verbal way of asking her why the pound and the dollar will continue to fall in terms of gold, which I hope will make her stop thinking about how she needs me to give her my money and start thinking about how governments can create more fiat currency but they cannot create gold, and that is why gold will gain in value against paper currency.
Instead, she again looks at me with a petulant look on her face and her mouth full of Corn Flakes, and she again says, “I don’t care. Are you going to give me the money or not?â€
I continue in a lighter vein, “Comparing the merits of two fiat currencies that will both lose purchasing power in terms of gold is like saying that one pile of poodle poop is better than some other pile of terrier poop, or the other way around, I am not sure which, but one of them is definitely the one to buy. Hahaha!â€
So, Little Miss Prissy looks at me with this pained expression, and sounds just like her mother when she says, “Ewww! Gross! Do we have to talk about dog poop at breakfast, or do you just like grossing me out so that I’m gagging all over myself?â€
Suddenly, I leap to my feet in a surprising and startling move, snarling, “Do I like grossing you out? Is that what you want to know? Do I enjoy it? Is that what you are asking me, you little snot?â€
She looks up at me with this startled, frightened look on her face, thoughts of getting money out of me having long since disappeared. Enjoying the scene, I pause for a delicious moment, towering over her in a menacing way, heightening the drama, before I say, “No, I don’t enjoy it! But because both the British and the Americans have stupid governments who are heavily-indebted and yet are deficit-spending more and more incomprehensibly large amounts of money, and both countries have stupid central bankers creating the malignant, monstrous amounts of money to accomplish this insane spending, this means that both of them, meaning us, are doomed as a result! We’re Freaking Doomed!â€
Again, she gets this bored look on her face and starts to say how she doesn’t care, when I cut her off by shouting, “You’re doomed! You’re dead! That’s probably why you stink! I thought maybe you pooped in your pants, and that is why you stink, or maybe your stench is caused by your not bathing, but not that you stink because you were dead! And I would have to be crazy to give money to a dead girl who is rotting and who is stinking up my house! Stinky! Stinky! Hahaha! I’ll call you Stinky Girl!â€
Predictably, she sputters in frustration and runs from the room, shouting, “I hate you! I hate you! I hate you!†the whole time, instead of thanking me for the Valuable Mogambo Lesson (VML) in the value of gold versus fiat currencies that are being created in such staggering quantities.
So I used the money I saved to buy a little more gold, silver and oil, because with socialist deficit-spending morons like the Obama administration distributing the new money created by the Federal Reserve, these three assets are guaranteed winners and, and because, the dollar is a guaranteed failure.
And if there is one thing I like about betting on a guaranteed winner, it is that it makes winning so easy that you giggle to yourself, “Whee! This investing stuff is easy!â€
Dueling Currencies originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
While the several sovereign debt crises in the euro-area have taken markets largely by surprise–thus leading them to be labeled as unforecastable, “Black Swan†events–we see a potentially much greater risk ahead, that Germany, at some point, will reconsider its commitment to the bail-out framework agreed with other EU states in May.
In financial jargon, the term “Grey Swan†has come to mean a risk event which is considered highly unlikely and hence disregarded by most but, for those who have the necessary expertise and who take the trouble to look and do the proper analysis, it is regarded as, in fact, likely enough to have a material impact on asset valuations and, if it should occur, will lead to abrupt swings in asset prices due to the surprise factor involved. If so, the crises to-date are likely to escalate and spread into additional euro-area countries, causing a general, global credit crisis perhaps as large as that catalysed by the Lehman Brothers bankruptcy in Q4 2008.
Earlier this month, in a previous report, we discussed how European monetary union (EMU) did not eliminate intra-EMU currency risk but rather transformed it into credit risk. In recent weeks, this credit risk has surged again, with spreads for Greek, Portuguese and Irish bonds soaring relative to benchmark German government bonds, known as Bunds. Why now? Has the economic situation or state of government finances in these countries suddenly deteriorated again? Well, no. Things were bad before and they remain bad now. There are, however, two good reasons why spreads are widening, one related to credit markets generally and the other more specific to EMU.
Let’s consider first what has been happening in credit markets generally. Following an improvement in credit conditions and tightening of spreads during the summer, when it appeared that the global economy was continuing to recover, there was a sharp deterioration in a broad range of leading indicators which began in July and then intensified in August. As such, it was perfectly reasonable to expect that credit markets and risky asset markets generally would suffer a setback, with spreads widening back out.
However, whereas the widening in credit spreads generally has been rather modest, spreads for the weaker EMU sovereigns are back to their crisis highs of the spring. At first glance, this seems rather odd, because back then it was still far from clear whether the European Central Bank (ECB) would step in to provide support or whether the EU would agree some sort of bailout package. But step in the ECB did, together with the EU, which at an emergency summit over the weekend of May 8-9 agreed a bailout framework for Greece and other countries potentially in need. So why are Greek, Portuguese and Irish bond spreads to Bunds back to their crisis wides, implying a significant risk of default?
To help answer this question, we need to turn the focus away from the weaker EMU sovereigns and place it on the strongest anchor of EMU, namely Germany. German economic performance has been impressive this year to say the least. Growth is the strongest it has been for many years. Unemployment has declined substantially. Exports have been particularly strong, notwithstanding a relatively strong currency and weak demand in most European countries. This has been possible because Germany is a leading producer of capital goods, in strong demand in the rapidly growing manufacturing economies of China, India and Brazil, and also numerous smaller ones. Indeed, German exports have been one of the biggest beneficiaries of all the stimulus that the US has thrown at the global economy in the form of low dollar interest rates. While the intent of US policymakers was no doubt to stimulate domestic demand, much of this stimulus has leaked out of the US economy because credit impairment and weakening confidence has led to a substantial increase in the private-sector savings rate.
One of the many accounting identities of economics is that savings = investment. But this does not need to hold at the local level. Global capital flows can be substantial, in particular when there are major shocks, such as the collapse of the US housing market and impairment of the banking system. For years, global capital flowed to US firms and households. Yet now the US private sector is de-leveraging and, facing unusually high tax and regulatory uncertainty as well as an impaired banking system, US businesses are understandably reluctant to take this savings and invest. But for savings to equal investment, there must be investment somewhere, and it has been showing up, among other places, in German exports to rapidly growing developing countries.
Yet while German economic performance has been impressive, this highlights the extent to which a number of other euro-area members have lost economic competitiveness. Ever since EMU began in 1999, the gulf between Germany and the so-called “PIIGS†(Portugal, Ireland, Italy, Greece and Spain) has never been greater. This implies that, for EMU to be sustainable, Germany is going to have to provide far larger subsidies to these countries than the architects of EMU ever imagined.
Let’s look back briefly at the history of EMU. EMU blueprint arrangements comprised a large part of the Maastricht Treaty of 1992, which established the European Union (EU) out of what had previously been known as the European Coal and Steel Community (ECSC), the European Economic Community (EEC) and the European Community (EC). Yet long before the Maastricht Treaty was signed, France, Germany and the Benelux countries had envisioned a single currency as a means both to cement existing and promote future economic integration. Let’s now turn specifically to Germany for a moment.
Of all the post-WWII European economic success stories, Germany stands head and shoulders above the rest. It is difficult today for us to imagine what it must have been like in Germany in the late 1940s. First of all, Germany was divided and militarily occupied as the European front line in the Cold War between the US and the Soviet Union. Second, German industry had been completely and utterly devastated in the war. Third, a generation of potentially economically productive, young German men had been killed, placing an enormous burden on young and old survivors alike. Yet within 20 years, Germany would emerge as the most prosperous major country in Europe. What made this possible?
First, there was massive external assistance. The US needed West Germany as an ally in the Cold War and thus helped to rebuild the German military and the economy needed to provide for it. Second, Germany had a hugely successful industrial past which provided much of the blueprint for what could be rebuilt. Third, notwithstanding a socialist political streak in certain parts of the country, Germany had a culturally strong work ethic. Finally, and perhaps most pertinent to our discussion here, the West German Constitution (known as the Grundgesetz or Basic Law) provided not only for a completely independent central bank but also one with a single, overriding mandate of maintaining price stability.
During the 1950s and more so during the 1960s and 1970s, the contrast between Germany and southern Europe and even with France became increasingly stark. Whereas the Mediterranean countries responded to economic weakness with the occasional currency devaluation, Germany grew its economy faster notwithstanding a strong currency, as a result of high rates of business investment and worker productivity growth. Indeed, this combination became a virtuous circle: A strong currency meant that German firms could grow their global market share and profits only to the extent that they increased productivity. So they invested in their infrastructure, capital goods, education, research and technological development. When the going got tough, the central bank would not devalue the mark to ease the pressure. No, if industry faced a squeeze, they would need to find another way out. They would need to reorganise and innovate. Frequently this was done with the blessing and involvement of the government but, regardless, profit-seeking German firms, not politicians or central bankers, were in the driver’s seat.
When EMU was being planned, it was generally assumed that, once wearing the single-currency “straightjacketâ€, the Mediterranean countries, unable to devalue their way out of periods of weak growth, would focus on increasing their competitiveness instead. A German-style, independent monetary policy and associated hard currency would widen the German virtuous circle to include all participating countries. It was nice to think so, but something else happened on the way. As has been the case repeatedly in many parts of the global economy in recent years, asset bubbles began to form, in particular in real estate and euro sovereign debt.
Once EMU was a done deal, euro sovereign borrowing costs converged rapidly down toward the German level. Previously funding their debt at several percentage points above Germany, countries ranging from Ireland in the extreme European northwest to Greece in the southeast discovered that their borrowing costs were less than one percent greater than Germany’s. Faced with sharply lower borrowing costs, the governments of these “windfall†economies had the option of paying down debt and reducing deficits. In a few cases, such as in Ireland, Italy and Spain, for awhile they did just that. With governments requiring less savings to fund deficits, there was more available for private sector investment. But this led, in time, to large real estate bubbles in several of these “windfall†economies. Underneath the surface, something sinister was afoot. While public sector finances were looking rather better for a time and property prices were booming, workers’ wages were rising fast, faster than in Germany. This implied that these “windfall†economies were losing competitiveness. By the mid-2000s, there had been up to a 20% appreciation of the real effective exchange rate in the “windfall†economies, implying a 20% loss of competitiveness and yet, with borrowing costs low and asset prices rising, no one seemed to care.
At the time, I was working as a bond strategist for a major US investment bank in London and it was my job, among other things, to have a view on the relative attractiveness of the various euro-area government bond markets. Ever since EMU had begun, spreads for euro-area sovereign bonds relative to German Bunds had generally continued to converge even for the least competitive countries. In 2005 and 2006, borrowing costs narrowed to as little as 0.25%. This was completely inconsistent with the 20% loss of competitiveness in these countries, which implied far lower relative growth rates and difficulty with debt service in future. As such, we began to recommend that investors aggressively underweight these bonds. It may have taken a general global credit crisis to catalyse a reaction but now it is plain for all to see just how unsustainable the original EMU arrangements were from the start.
[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]
Is The German Eagle a Grey Swan? (Part One of Two) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
While the several sovereign debt crises in the euro-area have taken markets largely by surprise–thus leading them to be labeled as unforecastable, “Black Swan†events–we see a potentially much greater risk ahead, that Germany, at some point, will reconsider its commitment to the bail-out framework agreed with other EU states in May.
In financial jargon, the term “Grey Swan†has come to mean a risk event which is considered highly unlikely and hence disregarded by most but, for those who have the necessary expertise and who take the trouble to look and do the proper analysis, it is regarded as, in fact, likely enough to have a material impact on asset valuations and, if it should occur, will lead to abrupt swings in asset prices due to the surprise factor involved. If so, the crises to-date are likely to escalate and spread into additional euro-area countries, causing a general, global credit crisis perhaps as large as that catalysed by the Lehman Brothers bankruptcy in Q4 2008.
Earlier this month, in a previous report, we discussed how European monetary union (EMU) did not eliminate intra-EMU currency risk but rather transformed it into credit risk. In recent weeks, this credit risk has surged again, with spreads for Greek, Portuguese and Irish bonds soaring relative to benchmark German government bonds, known as Bunds. Why now? Has the economic situation or state of government finances in these countries suddenly deteriorated again? Well, no. Things were bad before and they remain bad now. There are, however, two good reasons why spreads are widening, one related to credit markets generally and the other more specific to EMU.
Let’s consider first what has been happening in credit markets generally. Following an improvement in credit conditions and tightening of spreads during the summer, when it appeared that the global economy was continuing to recover, there was a sharp deterioration in a broad range of leading indicators which began in July and then intensified in August. As such, it was perfectly reasonable to expect that credit markets and risky asset markets generally would suffer a setback, with spreads widening back out.
However, whereas the widening in credit spreads generally has been rather modest, spreads for the weaker EMU sovereigns are back to their crisis highs of the spring. At first glance, this seems rather odd, because back then it was still far from clear whether the European Central Bank (ECB) would step in to provide support or whether the EU would agree some sort of bailout package. But step in the ECB did, together with the EU, which at an emergency summit over the weekend of May 8-9 agreed a bailout framework for Greece and other countries potentially in need. So why are Greek, Portuguese and Irish bond spreads to Bunds back to their crisis wides, implying a significant risk of default?
To help answer this question, we need to turn the focus away from the weaker EMU sovereigns and place it on the strongest anchor of EMU, namely Germany. German economic performance has been impressive this year to say the least. Growth is the strongest it has been for many years. Unemployment has declined substantially. Exports have been particularly strong, notwithstanding a relatively strong currency and weak demand in most European countries. This has been possible because Germany is a leading producer of capital goods, in strong demand in the rapidly growing manufacturing economies of China, India and Brazil, and also numerous smaller ones. Indeed, German exports have been one of the biggest beneficiaries of all the stimulus that the US has thrown at the global economy in the form of low dollar interest rates. While the intent of US policymakers was no doubt to stimulate domestic demand, much of this stimulus has leaked out of the US economy because credit impairment and weakening confidence has led to a substantial increase in the private-sector savings rate.
One of the many accounting identities of economics is that savings = investment. But this does not need to hold at the local level. Global capital flows can be substantial, in particular when there are major shocks, such as the collapse of the US housing market and impairment of the banking system. For years, global capital flowed to US firms and households. Yet now the US private sector is de-leveraging and, facing unusually high tax and regulatory uncertainty as well as an impaired banking system, US businesses are understandably reluctant to take this savings and invest. But for savings to equal investment, there must be investment somewhere, and it has been showing up, among other places, in German exports to rapidly growing developing countries.
Yet while German economic performance has been impressive, this highlights the extent to which a number of other euro-area members have lost economic competitiveness. Ever since EMU began in 1999, the gulf between Germany and the so-called “PIIGS†(Portugal, Ireland, Italy, Greece and Spain) has never been greater. This implies that, for EMU to be sustainable, Germany is going to have to provide far larger subsidies to these countries than the architects of EMU ever imagined.
Let’s look back briefly at the history of EMU. EMU blueprint arrangements comprised a large part of the Maastricht Treaty of 1992, which established the European Union (EU) out of what had previously been known as the European Coal and Steel Community (ECSC), the European Economic Community (EEC) and the European Community (EC). Yet long before the Maastricht Treaty was signed, France, Germany and the Benelux countries had envisioned a single currency as a means both to cement existing and promote future economic integration. Let’s now turn specifically to Germany for a moment.
Of all the post-WWII European economic success stories, Germany stands head and shoulders above the rest. It is difficult today for us to imagine what it must have been like in Germany in the late 1940s. First of all, Germany was divided and militarily occupied as the European front line in the Cold War between the US and the Soviet Union. Second, German industry had been completely and utterly devastated in the war. Third, a generation of potentially economically productive, young German men had been killed, placing an enormous burden on young and old survivors alike. Yet within 20 years, Germany would emerge as the most prosperous major country in Europe. What made this possible?
First, there was massive external assistance. The US needed West Germany as an ally in the Cold War and thus helped to rebuild the German military and the economy needed to provide for it. Second, Germany had a hugely successful industrial past which provided much of the blueprint for what could be rebuilt. Third, notwithstanding a socialist political streak in certain parts of the country, Germany had a culturally strong work ethic. Finally, and perhaps most pertinent to our discussion here, the West German Constitution (known as the Grundgesetz or Basic Law) provided not only for a completely independent central bank but also one with a single, overriding mandate of maintaining price stability.
During the 1950s and more so during the 1960s and 1970s, the contrast between Germany and southern Europe and even with France became increasingly stark. Whereas the Mediterranean countries responded to economic weakness with the occasional currency devaluation, Germany grew its economy faster notwithstanding a strong currency, as a result of high rates of business investment and worker productivity growth. Indeed, this combination became a virtuous circle: A strong currency meant that German firms could grow their global market share and profits only to the extent that they increased productivity. So they invested in their infrastructure, capital goods, education, research and technological development. When the going got tough, the central bank would not devalue the mark to ease the pressure. No, if industry faced a squeeze, they would need to find another way out. They would need to reorganise and innovate. Frequently this was done with the blessing and involvement of the government but, regardless, profit-seeking German firms, not politicians or central bankers, were in the driver’s seat.
When EMU was being planned, it was generally assumed that, once wearing the single-currency “straightjacketâ€, the Mediterranean countries, unable to devalue their way out of periods of weak growth, would focus on increasing their competitiveness instead. A German-style, independent monetary policy and associated hard currency would widen the German virtuous circle to include all participating countries. It was nice to think so, but something else happened on the way. As has been the case repeatedly in many parts of the global economy in recent years, asset bubbles began to form, in particular in real estate and euro sovereign debt.
Once EMU was a done deal, euro sovereign borrowing costs converged rapidly down toward the German level. Previously funding their debt at several percentage points above Germany, countries ranging from Ireland in the extreme European northwest to Greece in the southeast discovered that their borrowing costs were less than one percent greater than Germany’s. Faced with sharply lower borrowing costs, the governments of these “windfall†economies had the option of paying down debt and reducing deficits. In a few cases, such as in Ireland, Italy and Spain, for awhile they did just that. With governments requiring less savings to fund deficits, there was more available for private sector investment. But this led, in time, to large real estate bubbles in several of these “windfall†economies. Underneath the surface, something sinister was afoot. While public sector finances were looking rather better for a time and property prices were booming, workers’ wages were rising fast, faster than in Germany. This implied that these “windfall†economies were losing competitiveness. By the mid-2000s, there had been up to a 20% appreciation of the real effective exchange rate in the “windfall†economies, implying a 20% loss of competitiveness and yet, with borrowing costs low and asset prices rising, no one seemed to care.
At the time, I was working as a bond strategist for a major US investment bank in London and it was my job, among other things, to have a view on the relative attractiveness of the various euro-area government bond markets. Ever since EMU had begun, spreads for euro-area sovereign bonds relative to German Bunds had generally continued to converge even for the least competitive countries. In 2005 and 2006, borrowing costs narrowed to as little as 0.25%. This was completely inconsistent with the 20% loss of competitiveness in these countries, which implied far lower relative growth rates and difficulty with debt service in future. As such, we began to recommend that investors aggressively underweight these bonds. It may have taken a general global credit crisis to catalyse a reaction but now it is plain for all to see just how unsustainable the original EMU arrangements were from the start.
[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]
Is The German Eagle a Grey Swan? (Part One of Two) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
With the Federal Reserve determined to keep interest rates at near record lows, many investors are turning to dividend yielding investments to generate income and for good reason.Â
In fact, nearly 14 percent of the companies that are in the S&P 500 are paying more in dividends than the average yield being offered in the bond markets. One reason for this is that companies went into cost-cutting measures during the Great Recession cutting headcount and minimizing inventories. As a result many companies are sitting on piles of cash and are issuing dividends to distribute the cash out.
 Some notable mentions here include Altria Group Inc (MO) which has a yield of 6.48%, AT&T (T), which has a yield of 6.02%, Verizon Communications (VZ) which has a yield of 6.31%, Lorillard Inc. (LO) which has a yield of 5.53%, Qwest Communications (Q), Entergy Corporation (ETR) which has a yield of 4.17%, Waste Management Inc. (WM) which is boasting a yield of 3.69% and Chevron Corp. (CVX) which has a yield of 3.63%. These are all companies that appear to have relatively sound strategies and are likely to continue to issue healthy dividends.
In addition to providing an income stream, dividends are known to be used as a recession safety net and an inflation hedge in times of economic recovery. Although there are numerous benefits behind investing in dividend producing securities, it is equally important to remain diversified. This can be done through the following ETFs:
First Trust Morningstar Div Leaders Idx (FDL), which has an overall yield of 4.38% and includes AT&T, Chevron and Verizon in its top holdings.Â
WisdomTree Dividend ex-Financials (DTN), which has a yield of 4.01% and includes Qwest Communications and Altria Group in its top holdings.
iShares Dow Jones Select Dividend Index (DVY), which has an overall yield of 3.79% and includes Lorillard Inc., Entergy Corporation and Chevron in its top holdings.Â
In addition to remaining diversified, it is important to be mindful of political uncertainties that could put a damper on the appeal of dividends.  The Bush tax cuts, which called for dividends to be taxed at 15% are set to expire at the end of this year and could result in dividends being taxed at ordinary income rates, which could get pushed up to 39.6% for the wealthiest Americans.Â
Lastly, it is a good idea to have an exit strategy when investing in equities, regardless of their appeal to protect from downside risk. Such a strategy can be found at www.SmartStops.net.
With the Federal Reserve determined to keep interest rates at near record lows, many investors are turning to dividend yielding investments to generate income and for good reason.Â
In fact, nearly 14 percent of the companies that are in the S&P 500 are paying more in dividends than the average yield being offered in the bond markets. One reason for this is that companies went into cost-cutting measures during the Great Recession cutting headcount and minimizing inventories. As a result many companies are sitting on piles of cash and are issuing dividends to distribute the cash out.
 Some notable mentions here include Altria Group Inc (MO) which has a yield of 6.48%, AT&T (T), which has a yield of 6.02%, Verizon Communications (VZ) which has a yield of 6.31%, Lorillard Inc. (LO) which has a yield of 5.53%, Qwest Communications (Q), Entergy Corporation (ETR) which has a yield of 4.17%, Waste Management Inc. (WM) which is boasting a yield of 3.69% and Chevron Corp. (CVX) which has a yield of 3.63%. These are all companies that appear to have relatively sound strategies and are likely to continue to issue healthy dividends.
In addition to providing an income stream, dividends are known to be used as a recession safety net and an inflation hedge in times of economic recovery. Although there are numerous benefits behind investing in dividend producing securities, it is equally important to remain diversified. This can be done through the following ETFs:
First Trust Morningstar Div Leaders Idx (FDL), which has an overall yield of 4.38% and includes AT&T, Chevron and Verizon in its top holdings.Â
WisdomTree Dividend ex-Financials (DTN), which has a yield of 4.01% and includes Qwest Communications and Altria Group in its top holdings.
iShares Dow Jones Select Dividend Index (DVY), which has an overall yield of 3.79% and includes Lorillard Inc., Entergy Corporation and Chevron in its top holdings.Â
In addition to remaining diversified, it is important to be mindful of political uncertainties that could put a damper on the appeal of dividends.  The Bush tax cuts, which called for dividends to be taxed at 15% are set to expire at the end of this year and could result in dividends being taxed at ordinary income rates, which could get pushed up to 39.6% for the wealthiest Americans.Â
Lastly, it is a good idea to have an exit strategy when investing in equities, regardless of their appeal to protect from downside risk. Such a strategy can be found at www.SmartStops.net.
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