Archive for the ‘Market View’ Category
March 2011 Market View: Invest with your Head
Overview:
With recent volatility, I think a note on basic investing is valuable. First, markets move both up & down. Don’t get too elated when they make big moves up or too anxious when they make a big move down. Ask yourself if anything has really changed or is this a short-term reaction of traders. The difference between traders and investors is, over time, investors make money and traders do not. This does not mean that we will not reduce the size of positions and gather cash for future bargains, but wholesaling out of the market is almost always fruitless. The usual result is you catch a lot of the downside, or all, since no one can forecast the top or bottom, but usually you miss more of the upside than you missed of the down, resulting in a lot of activity which almost always results in lower returns and higher taxation.
I’ve examined years of client returns and this is almost always the case. It is human nature to want to be fully invested when things seem to be going strong and to be fully in cash when the market has a few bad days. The more one acts on those emotions, almost certainly, the lower the returns will be.
2011 Market Outlook
2011, What’s in Store…
Happy New Year and may 2011 investing be as profitable as 2010 which saw our accounts quadruple the returns of the World Stock index and double the U.S. markets, which were the best in the world last year. As we enter 2011 we can expect a mixed bag of opportunities and challenges. Emerging markets continue their growth while the U.S. hangs on and Europe fights for survival under mountains of debt and devaluing currencies. Since August, when Ben Bernanke, Fed Chairman, began telegraphing his intention to launch QE2, Treasury and corporate bond prices have dropped sharply, while the stock markets have climbed higher. This has the effect of prolonging our current positions of commodities, precious metals and stocks (those companies which have hard assets and/or sell to emerging markets). This trend can continue until interest rates rise high enough to compete with this list. At that time, bond fund investors will have been decimated and bonds will sell at discounts that should offer us very attractive returns as we rotate parts of our portfolio to the newly advantaged sectors.
One of the biggest errors in investing is the view that the economy and the markets act as one. It is important to understand that the European and U.S. markets are made-up of hundreds of multi-national companies (MNCs) whose revenues have grown so large that they dwarf the GDPs of many countries. The MNCs earn their profits outside their host country avoiding countries with adverse taxation (such as the U.S. which now has the highest corporate tax rates of any competitive country). It is estimated that there are more than 20,000 MNCs operating in the global economy, with over 100,000 overseas affiliates running cross-border businesses. Through a tactic known as “transfer pricing”, MNCs allocate income to subsidiaries in tax havens while attributing expenses to higher taxing countries. Governments will no longer be able to rely on corporate taxes as a means for more spending. However, countries like Brazil are realizing this now and have reduced corporate taxes and are reaping the benefits of full employment. They are actually importing labor as there are more jobs than people. Read the rest of this entry »
November 2010 Market View: The Demise of the Bond Fund
THE ECONOMY:
QE2 is all over the news these days and I am not referring to the transatlantic ocean liner. Quantitative Easing, part II, Ben Bernanke style, includes another $600 Billion of money-printing with another $200B-$300B of rollover (notes due and being refinanced). The Fed’s idea was to keep interest rates near zero by purchasing Treasuries in mass quantities. The Fed also believes that this additional money-printing will increase asset prices, making Americans richer so that they may resume “consumerism” and possibly even create some private-sector jobs.
Interestingly though, the Fed told us in advance, what they would be buying. Upon the announcement of the 
imminent purchases, big banks used near 0% money provided by the Fed, to buy the same Treasuries the Fed would soon begin to purchase. Interest rates dropped, but since the Fed began its purchases, the Banks began to sell. Interest rates have spiked higher with each Fed purchase rather than drop, all due to the Banks cashing in on their ability to front-run the Fed. Even asset prices have not gone the Fed’s way, though I believe Mr. Bernanke will ultimately win on this front – at least in the short-term. Thus far, equities have about broken even, while bonds, and especially bond funds, have taken a beating (evidenced by the muni bond ETF chart here).
Ironically, the Fed might better be able to keep rates low and spur asset prices by ending QE2, or at least purchasing some other assets. So far, QE2 looks more like a transfer of taxpayer dollars to the Big Banks than it does any kind of real stimulus.
I’ve said for months now that a bond fund meltdown is on the way, though I expect the real pain to be inflicted when the Fed no longer has Congressional support for debasing the dollar. It is likely that there will not be a QE3, so come June when QE2 is spent, that will likely be the end. At that time, or as recent results have indicated that it could happen sooner, rates will rise. Once you lose a big buyer of bonds, interest rates rise as the bond prices fall. That spells disaster for bond funds and also those 401(k) darlings called “Target Date” funds which carry a large percentage of bonds.
Don’t confuse a bond fund for a well-structured ladder of bonds. Individual bonds have maturities and a ladder of bonds will have bonds maturing each year so if interest rates rise, your bonds still mature at full value (par / $1,000 per bond). You can spend or reinvest interest and as bonds mature, you can purchase new bonds at the higher interest rates. Say you have a seven-year ladder with approximately 1/7th of your bonds maturing each year for the next seven years. A year from now, 1/7th of your bonds mature and your ladder has remaining bonds which will mature each of the next six years. The interest from all the bonds may be used for income while you use the funds from maturing bonds to purchase additional bonds that will mature in seven years, thus keeping your seven-year ladder in tack.
Bond funds have no maturity. You cannot simply wait for your bonds to mature to get full value. If interest rates rise, the bonds will drop in value and it is reflected in reduced share prices. Some of the fund’s investors will sell, causing the bond fund manager to liquidate some bonds prior to maturity, in order to raise cash for investor redemptions. As rates rise further, the number of redemption requests increases and the fund’s manager must sell even more bonds at a loss. Since this occurs at all (or near all) funds at the same time, it becomes a buyer’s market. That is the time where we can step forward and build our bond ladders at bargain prices.
If you have any bond funds in your retirement plans at work or you know someone who owns bond funds, please share this with them. Don’t let history fool you. The last 30 years have been a bond fund’s dream world where interest rates fell from around 20% in 1980 to near 0% in 2010. It makes many an investor believe that bond funds are always safe because that is all they have known. Well, that was then and this is now. We can profit from owning bonds, but the only near-certain way going forward, is by buying bonds from distressed bond funds, at bargain prices.
NOTES:
RMD’s must be taken by December 31st. If you have turned 70 ½ this year or previously, you must take your Required Minimum Distribution from your IRA’s and other Qualified Plans.
Roth Conversions taken this year qualify for deferred taxation, one half of the taxable amount added to 2011 income and the second half added to 2012 income. It is a great opportunity for many of you.
GOLD – The Saga Continues:
I read an interesting quote about gold, by Warren Buffet recently. He said “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Mr. Buffet missed the tech boom because he “does not understand it”. I think he is missing the point of gold too, although somewhat humorously, since the same Martians might find it equally puzzling that the Fed can take a $100 tree that has been cut down and turned into paper that we color with green ink and then pass it off as 600 billion dollars.
What Mr. Buffet and others are missing is that gold, silver and other hard assets are anti-currency investments. Gold has been the true currency for thousands of years and it has only been the last 39 years that we have experimented with fiat currencies. Unlike gold, governments have found it very easy to print more money, making it worth less in the terms of gold or other hard assets.
Of course, I also favor silver, copper, coal, trees, grain and water, along with a host of other hard assets that are used in industrial activity or for food. The pipelines and the rare earth metals are two more examples and have been all the rage in recent months – I am glad to say we were well ahead of the curve on them. In fact, the pipelines have made consistent money for us for many years – they continue to offer attractive dividends, growth, and a hedge against a devaluing dollar.
BOTTOMLINE:
For now, we will continue our theme of investing in companies with hard assets and companies selling goods and services to the growing middle classes of the emerging economies. The anti-currency trade is alive and well. If Washington gets its house in order, we will adapt, but many of these sectors will benefit in that environment as well.
I’ll continue to look forward to buying bonds at deep discounts. In the meantime, I hope everyone enjoys Thanksgiving.
Frank
512.345.6789
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Information included in this electronic newsletter is not to be taken as investment advice. The information is general in nature and may not be appropriate for your individual situation.
The comments, graphs, forecasts, and indices published in Stock Market View are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we have investors who enter various investments at different times. If you have a friend, co-worker or family member who you feel could benefit from Stock Market View, please feel free to forward this edition.
To make sure you don’t miss our urgent updates, add Frank@FrankBeck.com to your address book.
If you have received this from a friend and would like to receive the next six issues at no cost or obligation, please send an email to FreeStockMarketView@FrankBeck.com (you may click on the link to send the message).
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October 2010 Market View: The Declining Dollar, the Yuan, and Rare Earth Metals
ECONOMY
In March 2009, the Fed began its “shock and awe” experiment with “quantitative easing” (QE-1) buying $1.75- trillion in Treasury and mortgage backed securities (MBS’s). The fed funds rate was slashed to 0.25%, yet US-banks weren’t lending the excess cash to the private sector. Even after the first round of QE ended in March of this year – and nearly a year after the recession “technically” ended in June of 2009 – the US-economy is still sputtering. Now it appears the Fed will begin QE-2, likely purchasing between 0.5 and 1.5 trillion dollars of Treasuries, mostly of longer maturities. Treasury bond yields already reflect the expectation of a half trillion dollar QE-2 with the 5-year yielding only 1.1% and the 10-year now below 2.4%. It will take more than that amount to drive rates lower still, further decreasing the value of the already devalued dollar – the apparent plan coming from Washington.
For Geithner, the White House, and Congress to suggest that a stronger yuan will make Chinese goods less competitive on the world stage (thus supposedly making ours more desirable) is the equivalent of a restaurant chef arguing that a shorter minute would reduce the amount of time necessary to cook a soufflé. In truth, money is only a veil, and if the yuan rises even more against the dollar, Chinese goods will continue to arrive here (thankfully) en masse much as Japanese goods did after 1971 when the yen began a 20-year climb against the dollar.
This is the case because while goods priced in yuan will be more expensive in dollar terms, the costs of goods necessary to manufacture Chinese products will by definition decline. In yuan terms everything will become cheaper for Chinese manufacturers, which means any yuan strength will be mitigated by reduced costs of production.
Absent a strong yuan appreciation, it’s possible that Congress will start a trade war that history says will prove unfortunate for 
stocks. Assuming a revaluation, a cascading dollar promises much the same.
Whatever the end result, gold is a go-to currency and is only expensive insofar as the dollar is very cheap. Washington is playing with currency fire right now, and sadly there’s no good outcome to hope for short of another currency crisis that leads to voter demand for a unit of account (a new currency) that is actually credible.
Another of the most important near term risks to the outlook is fiscal policy and, more specifically, the prospects for extension of expiring tax and benefit provisions. Roughly $270 billion in tax cuts are scheduled under current law to expire on December 31st. With the expectation of continued class warfare being waged by Washington, our forecast assumes that Congress extends the majority of these provisions, with only upper-income tax cuts left to expire. To gain the few Republicans needed to pass in the Senate, the “upper-income” might be raised from $250,000 to $1,000,000. However, with essentially no congressional action to date, the prospects for such an extension are uncertain so the extent of the tax hikes is still unknown. (With higher taxes likely, if you are considering a Roth conversion, you have slightly over two months left to take advantage of the two-year deferral of tax payments).
INVESTMENT OPPORTUNITIES
There are very few Apples, so investment opportunity, today, requires finding companies that are selling to the emerging markets or have needed resources or strategic hard assets. I’ve discussed emerging markets, high dividend stocks, hard assets, and natural resources in recent issues. This month I would like to discuss our recent (August) additions to our portfolios. They are off to a great start and I expect them to continue to do very well for several years. I am talking about our rare-earth mining companies.
RARE EARTH METALS
Maybe you’ve never heard of rare earth metals, but you use them every day of your life. They’re used in things like cell phones, semiconductors, lasers, fiber-optic cable, plasma TVs, hybrid cars, microwave ovens, and scud missiles. They — and just about anything electronic — contain some of the most obscure chemical elements on the planet known as rare earth metals.
Rare earth elements are actually not rare, with the two least abundant of the group 200 times more abundant than gold. They are, however, hard to find in large enough concentrations to support costs of extraction, and have an inhibitor in radioactive thorium which must be properly disposed.
The United States Geological Survey (USGS) has identified 17 elements that are considered rare earth metals, but nobody paid much attention to them until recent years because of the development of new technologies and electronic devices.
All high-tech military gear and most of the world’s advanced medical, and high-tech electronics simply won’t work without rare earth metals. These metals have very special physical and chemical attributes, including high degrees of magnetism, luminosity, superconductivity and environmental non-toxicity.
Rare earths are as strategically important as oil, copper, uranium, natural gas, and coal, yet until recently there was not much opportunity to invest in them. Ten years ago, the world used 40,000 metric tons of rare earth metals a year. Today, the world uses 125,000 tons, but is expected to grow to over 200,000 tons by about 2014 and projections are for demand to outstrip supply in the next few years. It isn’t that rare-earth metals are all that rare. The real issue is that for years China mined most of them and used very little. That has changed. China still mines more than 95% of all the rare earths mined each year, but they have moved from a marginal user, to the largest user in the world.
The U.S. Magnetic Materials Association said, “It is estimated that Chinese domestic consumption of rare earth materials will outpace Chinese domestic supply between 2012 to 2015. It is unclear whether rare earth material will be available outside China in the coming years.”
Recently, China’s Ministry of Industry and Information Technology announced that they are considering a total ban on exports of terbium, dysprosium, yttrium, thulium, and lutetium. It’s part of a plan that Deng Xiaoping started almost two decades ago when he said that rare earth metals would “Do for China what oil did for Saudi Arabia.” Can you imagine a government that actually makes decades long plans for economic growth? We should demand the same – our politicians (R’s and D’s) seem focused on only decades long entitlements.
The General Accounting Office said that the U.S. produced zero rare earth elements in 2009 and that it will take up to 15 years to rebuild our own domestic rare earth supply chain. “The United States has the expertise, but lacks the manufacturing assets and facilities to refine oxides to metals. Refined metal is almost exclusively available from China,” states the GAO.
In June of 2009, the U.S. House of Representatives passed HR 2647, the National Defense Authorization Act (NDAA). Section 828 of the Act included language concerning “the availability of rare earth materials and components containing rare earth materials in the defense supply chain.”
Section 828 noted that “less common metals” such as the rare earths and thorium were “critical to modern technologies, including numerous defense critical technologies and these technologies cannot be built without the use of these metals and materials produced from them and therefore could qualify as strategic materials, critical to national security.”
Rep. Ike Skelton, chairman of the House Armed Services Committee, said “China is a rapidly rising military and economic power and the fact is that they cornered the market on these rare earth metals that are essential for a lot of our advanced weapons systems as well as a lot of manufacturing in the United States.”
Reuter’s News Services notes:
The demand for dysprosium, terbium, neodymium, praseodymium and europium is set to grow by a minimum of 8 percent a year. Electric vehicle demand for dysprosium, neodymium and praseodymium is set to grow by an average of 790 percent in the next five years.
BOTTOMLINE:
I expect we will maintain and add to these positions over several years.
Frank
512.345.6789
———————————————————————————————————————–
Information included in this electronic newsletter is not to be taken as investment advice. The information is general in nature and may not be appropriate for your individual situation.
The comments, graphs, forecasts, and indices published in Stock Market View are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we have investors who enter various investments at different times. If you have a friend, co-worker or family member who you feel could benefit from Stock Market View, please feel free to forward this edition.
To make sure you don’t miss our urgent updates, add Frank@FrankBeck.com to your address book.
If you have received this from a friend and would like to receive the next six issues at no cost or obligation, please send an email to FreeStockMarketView@FrankBeck.com (you may click on the link to send the message).
Please feel free to share this letter with friends, in its entirety only.
Copyright Warning and Notice: It is a violation of federal copyright law to reproduce all or part of this publication or its contents by any means. The Copyright Act imposes liability of up to $150,000 per issue for such infringement.
