1. Robert Shiller on the Possibility of a Double Dip Recession: In his weekly NYT column, Professor Shiller argues that a decline in consumer confidence has the potential to cause a double dip recession. I would draw a distinction between investor and consumer confidence. I would not anticipate that Europe's sovereign debt problems will have much, if any, impact on the spending habits of American consumers. Those types of issues will have some impact on the confidence of investors, as will the flash crash of May 6th. While I would never downplay the importance of social psychology on economic issues, the longer term issue has less to do with "animal spirits" than the real effect of a European economic slowdown, caused in part by government policies on taxation and spending, on the still fragile global economic recovery. In other words, continued high unemployment in the developed countries and the end of worldwide government fiscal stimulus would be more significant causes to a double dip recession than the more amorphous changes in consumer confidence.
Considering the magnitude of government fiscal and economic stimulus, the recovery to date is not exactly inspiring.
2. Kraft (own): Barrons had a favorable article on Kraft in this week's edition. Prior to my recent buy, I was in a trading mode for Kraft. (e.g.: BOUGHT Kraft at $22.26 SOLD 100 KRAFT). Kraft shares have been at best uninspiring since it was taken public by Phillip Morris in 2001. I decided to go long term after Kraft finalized its purchase of Cadbury. ITEM # 4 Bought 100 KFT at 29.86
The primary reason for moving to a more long term perspective was Kraft's Cadbury acquisition, and its total return possibilities over the next five years given its dividend. If the CEO Rosenfield is close to being correct in her forecast of 9 to 11% annual earnings growth, then there is room for some multiple expansion, as noted in the Barron's article, along with a resumption of dividend growth. The addition of Cadbury will give Kraft higher margin products and a more significant position in emerging market countries.
In this article, the author notes that William Ackman thinks that Kraft could rally to 45 within two years. I would not rule that out, but would view a 38 to 42 price at some point in 2012 to be realistically possible. At a $40 price, that would represent a 33% gain in the share price plus the dividend which would bring me close to 20% annualized. Baring a double dip recession or worse, the downside is probably limited given the dividend and the stable nature of Kraft's business. This is not to say that the stock will not experience another temporary dip into the mid 20s, or lower, but that such a dip should be temporary in nature.
The current forecast is for an E.P.S. $2.33 in 2011. KFT: Analyst Estimates for Kraft Foods At 15 times earnings, this would suggest a price of around 35 sometime later this year, as investors start to focus more on 2011. If earnings estimates in the later part of 2011 predict a 10% in 2012, say to $2.56, this would bring me to the lower end of my $38-42 price range at 15 times forward earnings. With some multiple expansion during part of 2012, almost to 17 times, this would bring me to the top end of the $38 to $42 range.
3. End to the 1982 Secular Bull Market: I date the end of the prior secular bull market in October 1997. Admittedly, I may be the only person interested in stock market cycles who does not date the end of the prior long term bull cycle in 2000. In numerous posts, including the one from last Sunday, I discuss the reasons for being contrary on this point. One reason has to do with the formation of an Unstable Vix Pattern in 1997. Prior to 1997, the VIX had been moving continuously below 20 since forming a Stable Vix Pattern in 1991. During that Stable Vix Pattern period, the S & P 500 was in a steady climb: VIX and S & P Compared 1990 to 1997 Events in the later part of October 1997 decisively broke that Stable Vix Pattern when the S & P 500 came close to 1000. The S & P 500 now, almost 13 years later, is at 1135 and it would not be surprising to anyone to see it at 1000 again. Hopefully, this link will display the historical data for the S & P 500 in the last six months of 1997: ^GSPC: Historical Prices for S&P 500 INDEX
The VIX formed an Unstable Vix Pattern in 1997. It stayed in that pattern until 2003. The rise in the market in 1999 occurred with the VIX in an Unstable VIX Pattern, marked mostly by reading in the 20s, which I call a non-confirmation event.Vix Asset Allocation Model The VIX was not confirming the validity of the market move and was instead signaling investors to sell the parabolic increase. The Vix would briefly return to some movement below 20 during this 1997 to 2003 period, and this would actually be a sell signal in the overall context of an Unstable Vix Pattern. The first movement below 20 after the formation of the Unstable Vix Pattern was in February and March 1998 when the VIX returned briefly to readings below 20. ^VIX: Historical Prices for VOLATILITY S&P 500 The S & P 500 had then rallied from the events in late 2007 to trade in a range of 1000 to 1100: ^GSPC: Historical Prices for S&P 500 INDEX,RTH
The defining characteristics of the long term secular bear market are a lot of up and down motion, at least one catastrophic phase of losses exceeding 50%, and a long period where the investor has not made any progress by being invested in the market. After adjusting for inflation, the annualized return would be negative during such period even after reinvesting the dividends. All of those conditions are met starting in October 1997. The S & P 500 has had a lot of whipsaw up and down movement since then but has not made in progress in advancing the capital position of buy and hold investors. Unless the investor could time the market moves since October 1997, both up and down, the investor would have been better off buying 10 year treasury notes in early 1998 and selling out of stocks entirely. The ride since 1997 has been a roller coaster going nowhere, as distinguished from a steady, mostly a 45 degree angle slope, of a long term bull market: See S & P Charts from 1950 to 1966; and 1982 to 1997)
The events in the later part of 1997 also marked the first widespread manifestation of the underlying cause of the long term secular bear market which followed. One fuel for the 1982 secular bull market was the growing use of debt to promote growth. Eventually, the use of debt by both governments and consumers, particularly in the U.S., to generate economic growth reached problematic levels in the weaker economies first, as problems in Thailand spread to other nations. 1997 Asian Financial Crisis Eventually, the disease of excess borrowing and spending would lead to the collapse of Long Term Capital and another debt fueled crisis in 1998. Long-Term Capital Management Oddly, rather than learning anything from these events, both governments and consumers in developed nations continued to borrow and spend increasing sums of money until they too fell victim to the Asian contagion. The emerging market countries, on the other hand, started to pursue more fiscally responsible policies.
While the creation of multiple asset bubbles, first in stocks and then real estate, exacerbated the problem, the underlying problem during the long term bear market has been excessive borrowing and spending both by governments and consumers in developed countries, with some exceptions (notably Canada, Australia, & the Netherlands) It would be impossible for any sensible person to look at the spending and borrowing numbers for the U.S. consumer and government and to use any terms other than "profligacy" and "irresponsible" to describe it.
While there is little focus on the big picture issues in the financial press, the proper classification of a market as being in a long term bear or bull pattern is by far the most important criteria to investment success. I do not think that this a profound observation but simply an obvious one.
The duration of the long term bear cycle will depend on a remedy being implemented to solve the primary underlying cause of the bear cycle. The underlying cause of the long term bear market from 1966 to 1982 was too much inflation. When the U.S. Federal Reserve raised the federal funds rate to very high levels under the leadership of Paul Volker, it was apparent that this issue was going to be resolved by the summer of 1982. The federal funds rate hit 20% in 1981. Just compare the federal funds rate during the 1970s and early 1980s to now, along with the CPI figures: {Federal Funds Rate Historical datawww.federalreserve.gov & CPI Historical Data: Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis} The prime rate reached 21.5% in December 1980. www.federalreserve.gov The problem was solved and the 1982 secular bull market was born. The problem now is not inflation. Simply put, the problem is debt and leverage. Have those problems been sovled yet?
I discussed in several previous posts the book by Carmen Reinhart and Kenneth Rogoff, "This Time is Different". They make the observation that it takes about 6 or 7 years for the excess leverage to unwind: Item # 1 Bill Gross: The New Normal. This may be true for countries like Greece, Italy, Spain, Great Britain, Portugal and probably the U.S. unless we do a course correction of our current path. But the government debt problems are in mostly developed countries that will not be the main drivers of growth over the next several decades anyway. I would not become too obsessed with their problems, even though the sovereign debt issues are clearly driving the market now. The focus of growth will be in Asia (excluding Japan), South America and possibly parts of the Middle East and Africa and will include nations who deficits as a percentage of their respective GDPs are reasonable and manageable (see interactive map: GDC). So I do not anticipate that the next bull market will have to wait for the developed countries to complete the deleveraging process but simply to make some progress along those lines. The market is obsessing too much now about a few European countries. The current century does not belong to Greece and Portugal, or to Spain and Italy, but to China, Brazil, India and other emerging economies.
4. Empire State Manufacturing Survey: The NY Fed released its survey of manufacturing activity in the NY region. The general business conditions index fell 13 points to 19.1: Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York The new order index fell 15 points to 14.3. While the numbers are still above zero, showing expansion, the pace of expansion has started to slow, somewhat abruptly.
5. Bought 50 JZH at $21 (see Disclaimer): JZH is a Trust Certificate representing a beneficial interest in a senior bond issue from Prudential maturing in 2033. I started to discuss this security when it was trading at under $10, sort of a no brainer type of purchase: TRUST CERTIFICATE JZH: PRUDENTIAL SENIOR BOND I still own the shares bought at $9.75 which gives me a current yield of about 15.38% per year until maturity on 7/15/2033 or an early call. Since the underlying bond has just a 5.75% coupon, I would view it as unlikely that this bond will be called. I also own 50 shares in an IRA bought at about the same price. I sold 100 shares in two fifty share lots, with the last sell at $21.5 last October. I was transitioning into the Prudential senior bond PFK, a CPI floater, that was selling then at less than $20. Bought 100 PFK at $18.46/ Bought 90 PFK in IRA at $18.94 /Added 50 PFK at $17.83 I viewed PFK to be a better value for my dollars at less than $19 than JZH at $21+. PFK has since rallied to its par value while JZH has been stuck mostly in the low 20s.
I decided to add back 1/2 of the JZH previously sold since I am comfortable with the credit risk and satisfied with a long term current yield of over 7%, as my standards for bond yields have gradually succumbed to the Fed's Jihad against savers. I would cry Uncle, even "Uncle Ben", if I thought that it would do any good.
The coupon on JZH is 6% on a $25 par value. The current yield at a total cost of $21 would be around 7.14%. The yield to maturity would be approximately 7.68%. Morningstar Bond Calculator Interest payments are made semi-annually in January and July. This is a link to the prospectus: www.sec.gov The FINRA data shows that the lower coupon underlying bond in JZH is currently selling at near its par value: FINRA This bond is rated A by S & P and Baa2 by Moody's according to the Finra. Most of the trading this year in the underlying bond is in the 90 to 100 range, and there can be a good percentage movement up and down even during a trading day. RB could only say, "What do you expect an Old Geezer to do in this kind of market".
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