1. Pessimists Will Always Interpret information, and cherry pick data, to support their predisposition/Barron's Roundtable Mid-Year Update: It would be rare indeed for me to read the weekend Barron's and to feel ebullient about much of anything. The headline this weekend is that the panelists for the Roundtable, who are for the most part perpetually bearish, irrespective of the up and down economic cycles, believe that we have come too far too fast. But, the DJIA just broke into positive territory for the year last Friday. While my memory is not so good anymore, I do still recall that 2008 was a pretty bad year. And, maybe some history is in order, just looking at a DJIA chart for say the last 12 years, and concluding that we were sitting at a higher level in April 1998 than at the close last Friday at 8800. That does not seem very far to me over the last 11+ years. But, then when you do your best to see the glass as perpetually empty, then none of that really matters anyway.
Felix Zulauf views the recent observations of green shoots to be the result of inventory restocking, or nothing that will last for very long. As you would expect, he views that the current rally as just about done, and a possible 50% retracement of the rally from the March lows sometime in the fall. Scott Black says the market is overvalued based on 17.5 times earnings from a bottoms up basis. Valuing a stock based on its earnings in a recession is only consistent with a pessimistic outlook for the future, that is, no normal recovery in earnings. And, that is what most of the Barron's panelists believe, that any recovery will be temporary and fleeting so valuing companies based on the here and now earnings is reasonable. The market in their view is too expensive with the S & P 500 and DJIA back at 1998 levels based on their negative future outlook for many years to come. Maybe we should all just hide under covers for the remainder of our lives.
A common characteristic of those with a perpetual pessimistic outlook is to interpret data in a way that it either confirms their pre-existing and perpetual negativity or explains away apparently contradictory information so as not to contradict the negative outlook. So, a rise in commodity prices, particularly for base metals like copper and aluminum, is not due to increase in demand, nor is it an indicia of the healing process at work. That would be inconsistent with the gloomy worldview. So, it is imperative to interpret those "green shoots" in a manner that negates their potential contradictory nature. Instead, the rise is explained in a manner that does not contradict the perpetually dour worldview. Commodities are not rising in response to economic recovery but simply due to the all of the money created by the central banks having to find a home somewhere. This process of interpreting information is done for whatever new facts arise which contradicts or negates the perpetually pessimistic outlook.
2. Microsoft: Two of the panelists, Fred Hickey and Meryl Winter, recommended Microsoft based on the possible strength of its next upgrade cycle starting in earnest with the release of Windows 7. This seems like an obvious point to me. I discussed it when I added Microsoft at $17.79 in January 2009. Bought 50 MSFT at $17.79
Item #5: /ADD 50 MSFT/
My target on Microsoft is around $30 within the next year. I would not expect much more given the size of the company and may sell my few shares south of 30. I also have positions in Verizon and Yamana Gold recommended by Hickey. Barrons.com
3. Break-Even on TIP Narrows: After the successful thirty year bond auction, the ten year treasury stopped its decline and started to rally. I monitor and compare daily the prices of two treasury ETFs, one is for the 7 to 10 year treasuries (IEF) and the other is the TIP. The duration of the TIP ETF is similar to IEF. IEF gained .53% on Friday whereas the TIP fell .19%. IEF also had a better percentage move on Thursday. I drew the conclusion that the break-even spread for the TIP had narrowed some after crossing 2% earlier in the week. The market was thus pricing in less inflation over the next ten years than earlier in the week. An article in the WSJ on Saturday confirmed this observation, noting that the ten year break even spread had narrowed from around 2.08% to 1.93% by Friday. WSJ.com I used the proceeds from selling some American General Finance bonds to add 30 shares to my TIP position when I saw the TIP weakening compared to the non-inflation protected security. I view any narrowing of that spread to be a positive for the purchase of TIP since I view the likely average inflation rate over the next ten years to be likely greater than 2%. At least the TIP gives me a hedge against inflation being a greater threat down the road than the market currently anticipates when pricing both the inflation and non-inflation protected securities. Since I am concerned that the nominal yield is not being correctly priced given a reasonable inflation forecast over the next ten years, I am not likely to commit more funds to TIP until one of the considerations discussed in a prior post are met. Advantages and Disadvantages of Treasury Inflation Protected Securities:
I would add this note. While a smaller break-even number would be a positive consideration for me to buy the TIP, my main reason for owning it now has nothing to do with the break-even spread being .5%, or 1.5%, or 2%, but that all of those spreads may turn out to be wrong. Ultimately, the future is unknowable with any measure of certainty, nor will I place much confidence in the market's prediction about the future course of events. All that I know now is that the world is being flooded with money and the ultimate impact of the massive worldwide fiscal and monetary stimulus programs may end up causing more inflation than the market is currently estimating by a wide margin.
4. Inflation Risk: A number of the Roundtable panelists talk about inflation risks, and the potential of inflation down the road resulting from the worldwide fiscal and monetary stimulus. I see inflation as a risk, and a potentially serious risk to my investments. Inflation will otherwise have no impact on me personally. Several of the panelists recommend owning gold. I own the physical metal and have not added to my position since gold crossed $300 an ounce. I just try to buy anything on an opportunistic basis. So, I am not likely to add to gold or silver at the current prices, and will just hoard what I acquired years earlier in a safe deposit box, waiting and watching. I was tempted to sell some when gold crossed a $1000 per ounce but decided to wait for a higher price before parting with any of it. I really would not even call those assets an investment. It is really a hedge against governments destroying the value of paper money and debasing their debt through inflation. When I think about what is happening now, a picture comes to mind that I first saw many years ago, of a German carrying a wheelbarrow full of money to a bakery to buy loaf of bread, which was taken a few years before the start of WWII. I do not need to be certain about the future in order to prepare for scenarios now that may come to pass, provided I at least assign a reasonable possibility to such a scenario. It is hard for me to see a positive end to what was necessary to avoid a second Great Depression, so we may just be in a hiatus period, moving out of the frying pan into a different kind of fire.
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