Monday, January 12, 2009

David Swenson's comments on Inflation/ TIP-WIP-Floaters/ how will the dollar react?/Summers-Tarp-Bank stocks/alcoa

1. DAVID SWENSON on Inflation: The WSJ interviewed David Swenson, the chief investment officer for Yale's endowment, and Mr. Swenson made a point for the TIP saying that the massive fiscal stimulus can not help but "produce massive inflationary pressures" He also says that it may take a year or two for it to show up

A reader of these posts would have seen similar sentiments expressed many times.  I do believe that the massive monetary stimulus by the Federal Reserve and the massive fiscal stimulus will have a significant inflationary impact, but deflation is the soup du jour now. Since the main worry now is deflation, this does provide an investor, who has a longer term perspective than a few months, to buy inflation protected securities without paying much for the inflation protection. I have been detailing my buys in this area for months now in these posts.

2. Value of U.S. Dollar & Foreign Government Bond ETFs: Likewise, I can not see the U.S. dollar holding its value for much longer with the printing presses operating at full tilt, and a budget deficit projected to be 1.2 trillion without any stimulus and 1.5 trillion with the stimulus for the fiscal year ending in September 2009. I am not betting against the dollar right now by buying foreign currencies for the reasons explained in a prior post.

Asset Allocation Problems: foreign currencies, stocks and bonds

For 2009, the dollar may rise or fall, and I do not have a strong belief either way. I know that I am not being compensated hardly at all for the high risk of holding foreign currencies  by the current interest rate differentials after a worldwide lowering of short rates.  However, even though it is cloudy now and possibly for a few more months, I can not see a good outcome for the dollar resulting from flooding the world with trillions more of them.  I can not stop or change what is happening.  All anyone can do is to invest according to what we know now and expect for the future.   As I discussed in a prior post, my re-entry into BWX after selling it at a good profit earlier in 2008 was due in part to my changing perception about the longer term value of the dollar. Buying BWX, whose value was only partly dependent on currency fluctuations and had other positive characteristics, seemed a prudent way to invest against the dollar now.    

The allocation to WIP, less than 1/2 the size of the commitment to BWX,  includes as its rationale both predictions about the long term future, a rise in inflation due to a massive worldwide stimulus, fiscal and monetary, and a bearish view on the dollar. Allocations made last year to other securities like the floaters, both the ones linked directly to CPI and others tied to a percentage above 3 month LIBOR provided that would be higher than a guaranteed rate, were in part based on extremely favorable pricing at the time of purchase as well as concerns about long term inflationary problems being created now. (several floaters also have a deflation protection component in the guaranteed rate especially at the favorable prices purchased by me)

I am repeating these comments made many times to drive home a point. While it is not certain that massive inflation and a fall in the value of the dollar will follow the current deflationary worries, it is certainly a possible even probable outcome so allocation shifts need to be made in anticipation of such likely or at least reasonably possible future events, particularly with the pricing for the some inflation protection in bonds is miniscule compared to comparable non-inflation protected securities.  Hyperinflation is certainly a possibility also if the dollar has a precipitous fall on top of the inflationary impacts arising just from the monetary and fiscal stimulus. 

3.  Downgrade of Spectra Energy: The Jefferies analyst, Paul Fremont, who downgraded Spectra Energy has a 2009 earnings estimate of only $1.05, compared to the consensus estimate of $1.5. I'll check back next year to see how well his pessimism held up. If that estimate proves accurate, the stock will be under pressure but it is still hard for me to see much downside from the current level.  If he is way off base, I will just completely ignore him in the future.  

4.  Tarp:  Obama's plan for using TARP money to aid banks as outlined in the Summers' memo is a major negative for common shareholders of banks needing further government money. If a bank needs more money from TARP, as many of them probably will, then you are probably looking at a penny a quarter dividend similar to the restriction placed by the government on Citigroup.  Bank of America slid to a closing price of $11.43, down 12% today. BAC: Summary, on an apparent recognition that its dividend may go the path as the Citi dividend.  

5. Alcoa:  Alcoa started the earnings season off on a down note by losing more money than analysts expected, suffering  1.19 billion loss for the 4th quarter.

The bad news will likely continue for this company for the remainder of the year. The only issue is whether the bad news is already priced into a share price hovering at early 1995 levels. My gut says yes, but the current price does not reflect a continuation of the downturn well into 2010. Some of the moves that the company is making now may very well make it stronger, leaner and more competitive during the next up cycle, as Alcoa claim. The WSJ points out that many of its smelters, particularly in the U.S., are higher cost than some of its competitors.

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