It seemed like a good time to do a sort of summary piece on matters other than precious metals.
With the market opening down on the same old-same old Greece etc meltdown news, I actually put cash to work today near the day’s lows, not that there was much rebound off them. Following the theme of my bullish recommendations of last summer, I bought more (paper) gold bullion and more shares in a development-stage gold stock; the latter purchase because of the encouraging sight of gold stocks finally rising with the price of gold despite the general stock averages declining. (Historically, gold mining shares are more correlated with stock prices in general than with bullion on a short-term basis.) I also bought back into AAPL. (I also covered the shorts I recently put on BAC and the market at a profit.)
On Sept. 1 last year, I blogged bullishly about two investments I liked and owned in a post titled Gold ‘n Apple. I like them both and bought back into AAPL today around $367, which I jumped out of last year around $340 both because of and also on profit-taking before the Jobs health issue.
Looking at the quarter-to-quarter earnings trends in recent years, I am guessing that AAPL is selling for about 12X calendar 2011 earnings. The stock will almost certainly get hit if the hurricane season sell-off I fear actually comes to pass (but perhaps from $420 to $380), but both gold and AAPL fit the theme that they are far removed from the debt- and derivatives-related shenanigans that have been associated with the US and international financial issues that have been bedeviling us since at least 2008. (Gold of course is trading as the anti-shenanigans investment alternative.)
I also bought shares in a reinsurer that lost money so far this year due to the natural disasters throughout the globe but that trades far below tangible book value and that recently reaffirmed its financial position. The stock yields 2.5%, trades at a price it first hit early last decade when its book value was far lower, and tends to move independently of the stock market at large, interest rates or any parameter I can identify. A pure value play, one to hold for a good while, I would hope. Unfortunately, I cannot find many of these. People think pharmaceuticals are value stocks. I half agree. The half disagreement is based on two threads. One is that they are busted growth stocks. The other is that they are hugely dependent for their enormous profit margins on various government and other insurance payment schemes. Please note that besides medicine, the only financial topic that I claim true expertise on is pharmaceuticals and medical devices, based on extensive personal business and investing experience. If the Feds were actually to force/allow people to pay for brand drugs based on what they were truly worth to the individual taking into account the individual’s ability to pay, you could not see a new diabetes drug come to market at $6/day and sell well with as much possibility of harm as benefit, given how limited the testing was on which the FDA based its marketing approval. How many people could/would pay over $2000 after-tax dollars per year just to lower some levels on a blood test a little bit when there is no outcomes data that the drug does the taker any good? So to be clear, the earnings component of so much of these and many other companies is largely dependent on deficit financing. If the Treasury goes down, forget about these stocks for a long time, I would think.
Taking that theme one step further, the reinsurer I now own a tiny fraction of recently reported negative earnings. But with the stock reacting downward on that on unknown news and given that earnings always unpredictable in that business, I don’t care about its P/E ratio. That’s my sort of stock, one ignored by the Street and apparently worth a lot more dead than alive. Conversely, various super-high fliers are reporting rapid earnings gains. But a stream of earnings gains does not an attractive market valuation make, meaning that price/earnings/growth ratios can fail you for various reasons. Do you doubt this? If so, please look at the dividendless NASDAQ index in the 1990s and compare those levels to what the same index sold for in 2002 and again in 2008-9. Not many who gambled big and rode the NAZ way, way up were fortunate enough to exit near the top. The current relative lack of retained equity is one of the major stock market elephants in the room that the “stocks are cheap” (low P/E) advocates ignore. Earnings gains related to massive money-printing are evanascent relative to long-term values of a corporation.
As Econophile and I recently talked with each other about, one of the good things that information technology stocks have going for them is that they are about as far away from governmental marketplace distortions in general as any large area of the stock market is. Thus AAPL has a special appeal to me; people simply want its products and are willing to defer consuming other goods and services to pay in cash or good credit to own Apple’s products. AAPL, of course, trades at a forward P/E of perhaps 11, which is an implied earnings yield of the reciprocal of 11, or 9%. It has no debt and tons of cash, some of which cannot be paid out as dividends without having tax paid when it is repatriated to the US, but it still has a ton of cash after that expense. It is the opposite of the 1999 Cisco, which traded at times at 150X earnings at a time when Treasurys paid around 6%. And forget YHOO at its peak, at 100X sales.
Some months ago, I estimated what AAPL’s per share earnings would now be if it had followed IBM’s strategy and retired a good chunk of its stock each year since it recovered mid-decade, rather than building its enormous cash balance. Let us say single-digit P/E on current fiscal year (ends Sept. 2011) earnings?
Finally, people who will happily own GLD, SLV, PSLV or PHYS, and thus accept not only no dividends but ongoing expenses that take away from their asset value, and who of course may own AAPL which pays no dividends, shy away from owning the only relative bargain in Treasury-land. For people who do not need to live off of their investments, such as wealthy retirees or working people who are spending less than they earn, zero coupon Treasurys yield about 0.3% per year more than coupon-paying (par) Treasurys. Yet they quite arguably should yield less. That is because they will earn greater capital gains if rates drop and because the rate that is quoted for par Treasurys assumes that coupon payments get reinvested not at today’s cash rates of zero but at the rate of the bond. Thus one is getting gypped if one is saving one’s interest payments rather than spending them. The zeros inherently solve the reinvestment problem. For example, solving the reinvestment problem makes them suitable for small self-directed retirement plans in which interest payments are too small even after a few years to justify a new purchase of a stock or a new bond.
For better or worse, with the future of gold being unknowable, the present reality is that the international global trade and monetary system is for the most part based on the US Treasury market. Brazil, for example, owns as a country almost no gold. It owns lots and lots of Treasurys. If the US Treasury bond market goes the way of that of Greece, would Brazil suddenly be bankrupt? The US could start over as Russia did after its 1998 blow-up. What would Brazil, with a nonconvertible currency, be left with? The world could see chaos that would make that of 2008-9 appear as a mild summer rainshower.
Thus it is my opinion that however illogical it is, there are powerful forces that want to keep Treasurys not only viable but contained within their 30+ year rate downtrend. Note my view that the US was not headed for hyperinflation and that interest rates post-2008 crash were likely headed flat to lower is not new. Here is a quote from a blog post I wrote in January 2009:
Tuesday, January 6, 2009
Land of the Setting Sun
(Though with nukes and military bases in about 92 countries.) . . .