Author: John Hunter

The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects

The fundamental truth right now is that the overall economy in Europe, the USA and Japan is weak and has some serious long term problems. But the connection between that and company weakness is not incredibly strong. Many companies have huge cash hoards, built up through the large profits they continue to make. Yes, the economy entering a serious downturn will hurt many companies. A railroad is going to lose some sales if retail sales decline (and so they don’t have to be shipped). Airlines (historically problematic companies to begin will) will struggle. Banks that pay exorbitant amounts to senior staff have trouble making money without handouts of taking huge risks that then result in more handouts once the risks fail (as usually a bad economy will expose the risks they have taken). Companies that can only do well based on large top line growth will suffer. But that isn’t all companies.

When you look at companies like Google, Apple, Tesco, Danaher, Amazon even Toyota I really don’t see many problems looking forward. They seem perfectly capable of staying profitable, even growing profits, even in the face of economic decline in Europe, the USA and Japan (if that happens: it is possible, but not certain – very low growth is possible). Companies that have very good prospects at staying profitable, even getting more profitable going forward are hardly the type of investment I want to sell. Especially not to put it in the bank and get 0%, or a money market fund and pay someone for the privilege of having my money.

The options for investing today don’t look so great. But I really don’t see any reason to be concerned about owning stocks that have good prospects to do well even if the quite a few large economies do poorly in the next decade. In fact I am happy to own them. Frankly the biggest worry I have is that the senior executives will loot the owners profits with exorbitant pay (this is not a worry at Toyota and less of one at Amazon). I would worry more about owning index funds in such an environment. But even as bad as things look now, I am not sure they will really turn out as bad as we fear – especially for many companies, for some yes, but many are well prepared for change).

And the prospects in emerging markets look incredibly good to me. Yes they will slow their growth a bit if the large economies stall, but I think it is foolish to avoid investments in China, Singapore, Brazil, Korea, India, Ghana, Malaysia, Indonesia. In fact that is where companies like Google, Tesco, Apple, Toyota and Amazon are going to be making lots of money. Emerging markets are volatile and the companies in them are too. This will continue.
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August 9, 2011
Ken Fisher Disputes Some Investing Tips

His point on dollar cost averaging is sensible. Markets go up, more than down, overall [the statistically best approach] if you have a lump sum to invest the best strategy would be to invest it all now. There is added risk with this however, which he would accept. Also it doesn’t change the main reason people end up dollar cost averaging (by default, with retirement savings from each paycheck).

over long time horizons bonds are actually riskier than stocks… [also] there are more rolling 3 year periods where bonds lose money than there are where stocks lose money.

He discusses these ideas, and many more in his book: Debunkery: Learn It, Do It, and Profit from It-Seeing Through Wall Street’s Money-Killing Myths.

Related: Curious Cat investment books – Investment Risk Should be Evaluated as Part of a Portfolio, Rather than Risk of Each Individual Investment – Save Some of Each Raise

August 7, 2011
USA add 117,000 Jobs in July and Adjusts Previous Growth in May and June Up 56,000 More

The report on employment released today was not good news but it was less bad than feared. Total nonfarm payroll employment rose by 117,000 in July, and the unemployment rate was little changed at 9.1%, the United States Bureau of Labor Statistics reported today. Employment growth in July, follows little growth over the prior 2 months. Total private employment rose by 154,000 over the month. Sectors experiencing growth include: health care, retail trade, manufacturing, and mining. Government employment continued to trend down.

Some good news is found in the adjustments to the last two months job numbers. The change in total nonfarm payroll employment for May was revised from +25,000 to +53,000, and the change for June was revised from +18,000 to +46,000. That adds 56,000 jobs to the 117,000 jobs added in July and brings to the total for this report to 173,000 additional jobs. Still not great but much better than the last 2 months. The economy needs to add 125,000 a month to keep up with population growth.

And currently the economy needs to add much more to make up for all the jobs lost due to the too big to fail institution created credit crisis. The damage done to the economy by those institutions and continuing to be done in order to support those companies remains enormous. I believe we need to see 230,000 jobs added a month consistently (in order to be making ground up for the damage done), before we can believe we are doing well.

Remember it was just over 2 years ago we were losing hundreds of thousands of jobs a month. We are doing much better now, but fixing how broken things were is not easy. Between January of 2008 and February of 2010, the economy lost 8.75 million jobs. Since February 2010, 1.94 million jobs have been added. That means we have still lost 6,810,000 jobs and when you consider we have to add 125,000 a month to keep up we have 43 * 125,000 = 5,375,000 we haven’t added bringing a the total of jobs needed to over 12,000,000 (the number we need to add to get back to where we were). But truthfully we probably were at a bubble induced level at the peak so 12,000,000 is probably an overestimate of how many jobs we need to gain back.
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August 5, 2011
Curious Cat Investing and Economic Carnival #14
Welcome to the Curious Cat Investing and Economics Carnival: find useful recent personal finance, investing and economics blog posts and articles. If you want to have an post considered for the next carnival please submit it to quixperito: money.
- A Retailer’s Perspective on Amazon’s Amazingly Awesome Quarter by Scot Wingo – “This quarter provided more mounting evidence that Amazon is essentially running away with market share in e-commerce. Consequently, we believe retailers urgently need to think of an Amazon Strategy – partner, compete, co-opetition? Amazon is becoming so big and growing so fast, you almost can’t afford not get on this train.”
- Government Debt as Percent of GDP 1998-2010 for OECD countries by John Hunter – There has been a dramatic increase from 2008-2010. The USA is up from 41% of GDP to 61%. Spain is up from 34% to 52% (but given all the concern with Spain this doesn’t seem to indicate the real debt problems they have. Economic data contains quite of bit of noise, unfortunately.
- Cause of Decline in U.S. Financial Position by Barry Ritholtz – “The Pew Center reported in April 2011 the cause of a $12.7 trillion shift in the debt situation, from a 2001 CBO forecast of $2.3 trillion cumulative surplus by 2011 versus the estimated $10.4 trillion public debt in 2011. The major drivers were:
  Revenue declines due to two recessions, separate from the Bush tax cuts of 2001 and 2003: 28%
  Defense spending increases: 15%
  Bush tax cuts of 2001 and 2003: 13%
  Increases in net interest: 11%
  Other non-defense spending: 10%
- How This Blog Earns Full-Time Income from Part-Time Work by David Weliver – “for the most part, I’ve tried to focus on simply writing on topics that are unique, helpful, that answer specific questions. (It’s easy enough to be helpful, I think, but with billions of web pages out there, being unique is a never-ending challenge).”
- How to live off investment income – 1. Set up a cash buffer account between your regular monthly spending, and your income-spewing engines. 2. Work out how much of your annual investment income you will/can spend. The rest of the money you will reinvest…
- A Risky Investment Isn’t a Bad Investment by Kevin McKee – “If you want all the potential for Apple-esque gains, you need to be prepared to accept Enron-esque results. That’s the magic of risk; it goes both ways. Would I hold 100% of my portfolio in company stock? No.”
August 3, 2011
Top USA Markets for Buying Rental Property
Buying investments when prices are low is often a good investment strategy. Sometimes the prices just get lower, so it doesn’t always work. But, most likely the USA housing market will turn around, at some point. Buying real estate before prices start to rise may well be a very profitable investment. And rental property can be a very good investment, even without price appreciation, if the rental income provides a nice cash flow. This is especially true with interest rates so low (so a decent cash flow is very attractive compared to other investments). Of course, real estate investing also has challenges.

The HomeVestors-Local Market Monitor Best Markets to Invest in Rental Property ranking forecasts the expected performance of rental real estate properties, specifically single-family homes maintained as rental properties. The rankings show the extra return, or risk-return premium, that an investor must demand from rental property in a local market. The risk-return premium can be added to the regular capitalization rate to produce a risk-adjusted cap rate at full occupancy for a local market. The ranking is calculated based on three-year forecasts of home prices (reflecting underlying home-price appreciation potential) and gross rents (as a proxy for potential investor cash flow). Of course, this is based on the creators expectation (and therefore hardly to be relied upon – they have no track record to measure against yet) but it is interesting.

The Top 10 markets in the new ranking are:
- Las Vegas, Nevada
- Detroit, Michigan
- Warren, Michigan
- Orlando, Florida
- Bakersfield, California
- Tampa-St. Petersburg, Florida
- Phoenix, Arizona
- Ft. Lauderdale, Florida
- Rochester, New York
- Stockton, California
Obviously their expectations favor cities that have seen drastic price declines. And that makes sense, as long as those cities rental markets are steady and housing prices stabilize.

An interesting piece of data: HomeVestors and Local Market Monitor estimate that approximately 14% of single-family homes in the USA are maintained as rental properties.

I do believe rental property investments in many markets in the USA may well be quite wise. Investing in rental properties is much more difficult than say stocks and has some high costs (if you chose to higher a property manager, for example). Real estate also requires a long term (5+ year commitments) to have reasonable expectations of successful investing results.

Related: Apartment Vacancies Fall to Lowest in 3 Years in the USA (April 2011) – Home Values and Rental Rates – Landlords See Increase in Apartment Rentals (June 2010)
August 1, 2011
Movies About the Financial Crisis

Although we usually write about investing advice, today we’re going to head in a slightly different direction and look at some entertaining films about the financial credit crisis. Hollywood was a bit slow, to get these movies released but now the movies on the crisis are coming quickly. Attempting to recover from the credit crisis is still dominating the economies of Europe and the USA.

Gold has been performing quite well as the markets worry about the aftermath of the credit crisis and the large amount government debt in many rich countries. Movies can provide some distraction from the worries about whether we should avoid risks in of the the stock market at the moment, if it’s a good idea to invest in gold via bullionvault.com or whether BRIC countries might really be where the action is. Movies certainly will have their version of action.

A popular movie about the financial crisis is ‘Inside Job’ (clip above). Directed by Charles Ferguson, who’d previously made the highly acclaimed ‘No End In Sight’ about the Iraq war, and given a voiceover by Matt Damon, the film won the Oscar for documentaries in 2011. It gained positive reviews all over the world for it’s simple explanations of a very complex topic.

Meanwhile on the other side of the Atlantic ocean, British director David Sington made ‘The Flaw’. This flaw in question refers to the admission by Alan Greenspan (former Federal Reserve Chairman) that his model of how the world works did not match up to the weird and wonderful nature of reality. Greenspan admitted that had mistakenly put too much faith in the self-correcting power of free markets. The film has not been as widely reviewed as Inside Job, but The Economist said that while it is unbalanced, it is worth a watch.

Wherever there is an obvious political point to be made, there is sure to be Oliver Stone not far behind yelling it out. ‘Wall Street: Money Never Sleeps’ stars young Shia LaBeouf as a Wall Street trader learning from the master: Gordon Gecko. The film even has a few cameos from figures from the financial world and is generally thought of as a good beginners guide to the crisis.

Finally, two films currently in production that look at the crisis. Firstly, Paul Giamatti will be starring in the fictionalization of Andrew Sorkin’s best selling investigation into the crisis, Too Big To Fail. George Clooney is also reportedly getting in on the act with ‘700 Billion Man’, centred on Neel Kashkari, a one time Goldman Sachs executive who helped build the gigantic Troubled Asset Relief Program, aka the financial bailout.

We can’t guarantee these films will be balanced, but they should be interesting. Enjoy.

July 29, 2011

12 Stocks for 10 Years: July 2011 Update

The 12 stock for 10 years portfolio consists of stocks I would be comfortable putting into an IRA for 10 years. The main criteria is for companies with a history of large positive cash flow, that seemed likely to continue that trend. I continue to be very satisfied with the portfolio and don’t see any reason for changes.

The current Marketocracy* calculated annualized rate or return (which excludes Tesco) is 7.2% (the S&P 500 annualized return for the period is 4.7%). Marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that (it is not like this portfolio takes much management), the return beats the S&P 500 annual return by about 4.5% annually (it would be a bit less with Tesco, but still close to 4%, I would think).

The current stocks, in order of return:

Stock	Current Return	% of sleep well portfolio now	% of the portfolio if I were buying today
Amazon – AMZN	410%	11%	7%
Google – GOOG	184%	16%	14%
PetroChina – PTR	125%	8%	6%
Templeton Dragon Fund – TDF	100%	9%	9%
Templeton Emerging Market Fund – EMF	74%	6%	6%
Danaher – DHR	47%	9%	10%
Apple – AAPL	40%	6%	7%
Toyota – TM	14%	10%	11%
Intel – INTC	6%	5%	6%
Tesco – TSCDY	-3%**	0%*	10%
Cisco – CSCO	-15%	4%	5%
Pfizer – PFE	-17%	5%	7%

The current marketocracy results can be seen on the Sleep Well marketocracy portfolio page.

July 25, 2011

Google up 13% on Great Earnings Announcement

Google is up over 13% in after hours trading on the great earnings announced last night.

We had a great quarter, with revenue up 32% year on year for a record breaking over $9 billion of revenue,’ said Larry Page, CEO of Google. “I’m super excited about the amazing response to Google+ which lets you share just like in real life.”

That is the start of the earnings release. You can sure tell Larry Page is interested in Google+ success.

More significantly, Google web site revenue up 39% increase over second quarter 2010 revenues of $4.50 billion. Google Network Revenues (Google’s partner sites, through AdSense programs), $2.48 billion, which was 28% of total revenues, in the second quarter of 2011 (up 20% from 2010 – good, but, Google up 39% on their own sites is amazing).

GAAP earnings per share increased 35% compared to 2010. Margins did decrease, but not a huge amount: and less than many feared (Google continues to invest large amounts in future prospects).

GAAP operating income in the second quarter of 2011 was $2.88 billion, or 32% of revenues. This compares to GAAP operating income of $2.37 billion, or 35% of revenues, in the second quarter of 2010.

Those are great results anytime. When you remember that money in saving accounts get less than 1% now that type of growth is even more impressive. And when you consider how large Google is now it is even more impressive. Apple is achieving similarly impressive growth as a huge company – but it is very rare.

Google ended the last quarter with over $39 billion in cash. I do think they should pay a dividend (I worry they will feel pressure to spend the cash they have and due to the large amount of cah make some foolish decisions). I continue to own Google stock. And it is the largest holding in my 12 stocks for 10 years portfolio.

Related: Google’s Earnings Grow 17%, but Investors Unhappy (last quarter) – Google Posts Good Earning But Not Good Enough for Many – Great Google Earnings (March 2007)

July 15, 2011
Curious Cat Investing and Economics Carnival #13
Photo of house in Norway, 1977 by Bill Hunter.

The Curious Cat Investing and Economics Carnival has been published infrequently over the last few years. My plan is to start publishing it much more frequently starting now.
- Personal Finance Basics: Long Term Disability Insurance by John Hunter – “people are much less aware of the importance of long term disability insurance. The census bureau estimates that you have a 20% chance you will be disabled in your lifetime.”
- Fed’s Low Interest Rates Crack Retirees’ Nest Eggs by Mark Whitehouse – “A long spell of low interest rates has created a windfall worth billions to banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.”
- How to profit from the coming Greek default by Matthew Lynn – “Sell the U.S. banks but buy the dollar. If everyone knows Greece will have to default, what’s keeping them from pulling the plug? That’s easy. The Germans and the French won’t want to ‘re-profile’ all that Greek debt until they know their banks have largely sold both the debt and the credit-default swaps associated with it to someone else.”
- Buy Cheap Bonds with Safe Spread by Bill Gross – “Investors shouldn’t give their money away, and at the moment, the duration component of a bond portfolio comes close to doing just that – not because a bear market is just around the corner come July 1, but because it doesn’t yield enough relative to inflation.”
- How to retire with no savings – “Once you hit age 50, your chances of being jobless start to rise rapidly. You don’t get to choose when you retire. The job market or your ailing body will decide for you. Most retired Americans are getting by on incomes that you’d probably consider appropriate for the Third World. And even if they wanted to work until they died, they can’t.”
- Words of wisdom from Warren Buffett’s legendary sidekick – “You have to be a lifelong learner to appreciate this stuff. We think of it as a moral duty. Increasing rationality and improving as much as you can no matter your age or experience is a moral duty. Too many people graduate from Wharton today and think they know how to do everything. It’s a considerable mistake.
July 14, 2011
Truly Free Credit Report

You should review your credit reports annually (at least) to correct any errors. Also doing so can be a tool to help you spot identity theft.

The real free credit report site (for those in the USA), annualcreditreport.com, is provided by government regulation (so those that don’t believe in regulation would maybe rather use one of the sites advertising “free” credit reports). But I suggest using the government provided reports and I would suggest spreading the requests out during the year (you get 3 a year, 1 from each of the nationwide consumer credit reporting companies).

The site also has a large frequently asked question section including:

How do I request a “fraud alert” be placed on my file?
You have the right to ask that nationwide consumer credit reporting companies place “fraud alerts” in your file to let potential creditors and others know that you may be a victim of identity theft. A fraud alert can make it more difficult for someone to get credit in your name because it tells creditors to follow certain procedures to protect you. It also may delay your ability to obtain credit. You may place a fraud alert in your file by calling just one of the three nationwide consumer credit reporting companies. As soon as that agency processes your fraud alert, it will notify the other two, which then also must place fraud alerts in your file.

Where can I find out more about credit reports, my rights as a consumer, the Fair Credit Reporting Act and the FACT Act?
Please visit www.ftc.gov/credit

Related: Credit Card Tips – Personal Finance Basics: Avoid Debt – Save Some of Each Raise – Personal Finance Basics: Long Term Disability Insurance

June 26, 2011