Daily Updates
It hasn’t been an easy environment to invest in. Fundamentals seem not to mean anything. The market paints with a super broad and emotional brush. Everything seems to go up and down at the same time.
It’s fascinating to see how people cope with the volatility. Their choices and behavior lead to some very odd market price constellations.
A money manager friend of mine sent me a note from Noah Blackstein, the manager of the Dynamic Alpha Performance Fund. He notes that the market is seeking yield and low-beta securities. In English, this means that people are looking for income and for stocks that don’t move as much as the market.
Beta is the common measure of volatility. If a stock has a beta of 1, it means it moves in step with the overall market. A beta of 1.5 means it moves 50% more than the market. So if the market went up 10%, this stock went up 15%. A low beta of 0.50 means the stock moves only half as much as the market. It’s this last fish that is the choice catch in today’s market.
Because of that, stocks with the desired attributes have become expensive. Blackstein offers up a pair to show his point: Microsoft versus Southern Com… “Microsoft trades at 9 times EPS, has a five- year EPS growth of 13% and yields 3.1% and sits with a balance sheet full of cash. Southern Co. trades for 17.5 times earnings per share, has a five-year growth rate of 3% and yields 4.4% with a ton of debt.”
It’s worse if you look at Canadian companies compared with US companies. He offered up Enbridge, a pipeline company, with a 2.7% yield and a price-earnings ratio of 24 times. It has lots of debt. The stock is up 30% this year. Microsoft, by comparison, yields more (3.1%), offers a lower price-earnings ratio (9) and is stuffed with cash. The stock is down 9%.
Why?
Now, here is the key. Microsoft has a beta of 0.78, versus Southern’s 0.38 and Enbridge’s 0.15. Market participants are willing to pay up for a stock that won’t have them reaching for a bottle of Maalox when the overall market is extremely volatile. Low beta has won out. “How can this be anything other than a low-beta bubble?” Blackstein writes.
Here’s the thing, though: Though short-term market prices have all kinds of burps that make no sense, the market does sort things out rationally over the long haul. Stocks of bankrupt companies eventually hit zero. Undervalued stocks eventually become fully valued.
The fundamentals may not mean much in the day-to-day and week-to- week trading, but they get sifted out over the course of a few years. This is the basis of all intelligent investing.
I’ve written about Doug Barnett, who runs the Thai Focused Equity Fund, to my Mayer’s Special Situations readers before. His fund had phenomenal performance in a market that is very volatile. Stocks soar and dive on rumor and take emotional roller coasters that test the resolve of its shareholders. But over the long haul, the market does discriminate. Barnett’s record of 18% annualized returns proves it does. As Doug said, “You get compensated for having a more- volatile path to achieve your goals.”
The second pillar on which to build is the insight that you often make money taking the other side of popular trades. Or more specifically, you get very good prices to take the opposite of a popular trade. This is the bedrock of contrarian investing, which seeks out a hardened consensus and bets against it.
Therefore, if the market wants yield and low volatility, then it follows that you will get more value for your money by taking stocks with no or little yield and high volatility.
So… You would want to avoid utility stocks. Even though they look attractive based on the 10-year Treasury yield (which, frankly, is a Fed-manipulated number), they are the classic low-beta-yielding securities the market loves right now. They suffer in comparison to what else you might buy (see again the Microsoft versus Southern Co. comparison).
You would, instead, look at smaller-cap stocks, which are traditionally high beta. By the way, you can find betas easily. You’ll see it, for example, on Yahoo! Finance under the “Key Statistics” section.
Junior mining stocks and small-cap oil and gas producers are stocks that have been whacked hard of late. These are areas where pricing is good. For most of these, the betas are around 2. Most small-cap stocks have high betas, and hence, the market is shunning them.
I would also say you can still get good yield in high-beta stocks.
Of course, you have to wait it out. If you are going to fret short- term swings, you are going to fray your nerves, sell near bottoms and pretty much make yourself miserable and poorer. You have to decide whether you can play the game or not, and if you do, you have to be willing to suck it up and hold on…
Regards,
Chris Mayer
for The Daily Reckoning
Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas.
Special Report: How Will Your Life Change If The U.S. Gov’t Can’t Borrow Another Dollar? Complete political and social unrest could be just the beginning. You owe it to your family’s safety and security to watch this urgent video report right now. There might not be much time for you to act… Don’t wait, watch now.
For the first time in history, Silver Eagle & Maple Leaf sales will surpass domestic silver production in the U.S. and Canada in 2011.
also:
The ultimate crime in investing is not being wrong – it’s staying wrong!
I was not surprised to learn about Dennis Gartman’s change of heart and commend him for it. Not because he’s back on the side I’m on but for not committing one of the cardinal sins of investing – always being one-sided. I not only came to appreciate much about Dennis that I didn’t know and/or experience before my December challenge, but believe he’s light years ahead of the two stooges in my challenge. Dennis didn’t double-talk, twist facts and actually try to change history in his responses like the other two but rather took an extremely high road back then and now in his latest assessment.
I tip my hat to Dennis and am honored to now call him a friend (even if he bails again which if history is any indication, he will… but more power to him if and when he does).
We’re not out of the woods yet in this latest correction in the “mother” of all gold bull markets. Technical traders are likely to try and sell any rallies around here until such time their charts turn positive again. But like it has done again and again, the physical market has overcome the paper sellers and the greatest all-time gold bull market shall once again bloody the perma-bears and weak-knee bulls.
I credit people like Jim Sinclair and GATA (who just issued this release) for not only being mostly right while the so-called “establishment” gold people have mostly missed the greatest gold bull market in history, but for allowing me to wear this fine hat with them (Tokyo Rose is just jealous his head is too big to fit in one).
Click on the image or the link below to read this fascinating essay from Armstrong, who Michael Campbell will exclusively interview at the Outlook Conference.
I’ve had an opportunity to spend some time with my honorable father in-law (FIL) over the holidays and of course besides talking about the amazing ability for 18-year Glenfiddich to disappear seemingly before our eyes, the conversation turns to where it always does—gold! Despite my warning and lamenting that he should “think more about his loving daughter’s inheritance in these tough times,” he isn’t budging; not even an ounce has escaped from its walled tomb to be thrown on the market.
I shared the chart below with FIL yesterday, trying to make the case that parabolic charts are usually a bad omen when it comes to traded assets. Whether it be Netflix, crude oil, Swiss francs, silver or gold, when the slope becomes parabolic it should be time to get very nervous and look for places to start lightening up. Hogwash of course is effectively his answer. And he has some good points:
With continuing currency turmoil there must be some asset besides bonds that gets some money flow—and that should be gold.
Given the state of government stimulus, as JR and I have talked about in these pages the last couple of days, there should be a major systemic event flowing from somewhere; thus gold looks quite good.
Technical analysis is a joke (he believes). It explains why he purposely holds the charts upside down if I am around.
I recently read that central banks bought over 200 tons of gold in 2011, more than any year since 1981; I have noted that on the long-term “parabolic” gold chart above.
Some additional comments:
Bearish for Gold: Just as now, the dollar was starting into a strong multi-year bull market in 1981.
Bearish for Gold: Just as now, the economy was deflating thanks to Volcker’s high interest rates
Bullish for Gold: Interest rates are low; there is little yield competition gold has to face.
Bullish for Gold: US fiscal position is a complete mess; extremely weaker than back in the early eighties.
Bullish for Gold: Faith in the world reserve currency was much stronger back in 1981 than it is today, to say the least.
I am sure you can think of many other bull and bear arguments to fit with your view—I know FIL can. But does the chart suggest all of the arguments we can think of to justify our case either way are already embedded in the price? None of us know without the gift of hindsight. But if technical analysis can be useful for anything, it might be as a risk management tool (I think it is worth much more, obviously). In the keep it simple category: A chart reflects something that seems high relative to the past or seems low. That alone should be enough to force a reexamination of premises that suggest otherwise.
It looks parabolic to me! I just wish FIL would use stops. Anyone remember the Hunt Brothers?
About Jack Crooks, President, Chief Trading Officer of Black Swan Capital
Jack has over 20 years experience in the currency, equity, and futures arena. He is an investment advisor who has held key positions in brokerage, money management, trading, and research.
Jack is founder and president of Black Swan Capital LLC. He was also founder of Ross International Asset Management (specializing in global stock, bond, and currency asset management for retail clients) and General Manager of Plexus Trading (specializing in currency futures and commodities trading).
Prior to entering the investment arena, Jack worked in various corporate finance positions. He has written extensively on the subject of global currencies and international economics.
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