 | | The Daily Reckoning | Wednesday, May 30, 2012 |
- Pain in Spain: Bond yields spike as investors panic,
- How to play a rigged stock market to your favor,
- Plus, Bill Bonner on the trends that matter, Facebook's flop and plenty more...
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|  | | | | An Unhealthy Relationship | | Risk Outpaces Reward in the Current Market | | |  | | Joel Bowman | Reckoning today from Buenos Aires, Argentina...
“I suspect we may be near or at least very soon approaching the peak,” opined a friend over lunch.
What peak? Where? And when?
More on that below...
Stocks are getting clobbered again today, Fellow Reckoner. The Dow was down another 150 points last we checked, giving back all of yesterday’s fleeting, counter-trend gains...and then some.
By our reckoning, yesterday was one of only a half dozen or so “up” days for the month...against a whole lotta down...down...down days — about 770 points down, to be not-quite-exact.
“Sell in May and Go Away!” proclaim the old hats.
As it turns out, the best day to sell your stocks this month was the very first day, May Day. If you did so, you could have pocketed the cash... waited...and bought all your shares back today for a 5% discount.
Sounds pretty good, right? Except for one, increasingly obvious problem...now you have all your shares back!
If stocks (with the benefit of hindsight) were a prudent “sell” one month ago, what makes them a hopeful “buy” today? A 5% discount? Doesn’t seem like much of an incentive to us.
As we know, investors get paid to shoulder risk...the “risk premium,” as they say. It’s the “minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset.” So what are the risks involved for investors today vs. a month ago? Are things more, or less, volatile? A quick look at Europe seems to argue for the former case.
Yields on 10-year Spanish bonds blew out to a euro-era high on Wednesday. That’s not good. Analysts seem to agree (for whatever that’s worth) that a yield of 7% is unsustainable for a country to finance itself over the long term (whatever that means). This morning, the yield on Spain’s 10-year bonds was 6.67%.
The spread between the yield on Spanish bonds and German “safe- haven” bonds also reached a record — 5.6%.
Oh, and yields on Italy’s 10-year bonds also crept up over 6% — the first time they’ve done so since January.
Meanwhile, Greece is...well, Greece is toast, a crisis vacation hotspot at best. News in this morning shows the National Bank of Greece, the olive-squeezers’ biggest lender, registered a 1st quarter loss of 537 million euro. If you’re surprised at this, the latest in a string of “disappointments,” you’ve either had too much ouzo...or not nearly enough.
All this suggests that investors are coming to the conclusion — slowly — that we first aired in these pages some years ago. Your academically unwashed editor remembers penning a piece about the crack up of the euro back when he was burning joss paper and dunking dumplings in Taipei’s backstreet BBQ dives. Must’ve been 2010, the year of the Tiger. We were almost embarrassed at the time to write about the possibility of the spendthrift PIIGS tearing the continent asunder...but only because we thought we were late on the story.
Yet here we are, two years later, and the bobble head politicians are still reading, flaccid mandibles flapping in the breeze, from their dog-eared playbooks of fiscal claptrap and economic voodoo. Worse still, their words are reported, quoted and swallowed without even a garnish of irony.
Not that Europe boasts a uniquely “doomy” forecast. This, from the WSJ:
With the latest reports, a new economic threat is emerging: That activity is slowing in sync around the globe and not just in a few markets with their own isolated problems. Europe, struggling with the risk of a Greek pullout from the euro area and broader fiscal problems, is the epicenter of global economic concerns right now. But reports of economic trouble are turning up in China, India, South Africa, Brazil and elsewhere. | A “synchronized global slowdown” Bill called it in yesterday’s issue. “Bummer!”
No, Fellow Reckoner, a 5% discount should not be enough to entice you back into the game. Stocks on the S&P 500 still drag around with them an optimistic (read: delusional) p/e ratio of roughly 15. Value investors would like to see that cut in half before they even get their ankles wet.
Of course, that all depends on which stocks you’re looking at, as our resident value investor, Chris Mayer, explains below...
| | | | Addison Wiggin’s brand new book, The Little Book of the Shrinking Dollar, is turning a few heads...
“I strongly recommend this book,” wrote Chuck Butler, President of EverBank World Markets, in his Daily Pfennig newsletter this morning. “And at 223 small pages,” he added, “it’s a quick read. It’s all spelled out for you. Things I’ve talked about for years, and now it’s right here in a great book! Kudos to Addison Wiggin!”
And Chuck isn’t the only one who seems to think so... Dr. Marc Faber was recently quoted as saying, “The Little Book of the Shrinking Dollar is not an academic paper published by some ignorant economists. Not only does Addison convincingly and disturbingly argue that ‘every paper currency in the history of civilization has eventually lost its entire value,’ but he also offers ways to protect our wealth.”
Long story short, this book is making waves. You owe it to yourself to read it. In fact, we think it’s such an important read, we’re actually giving away free copies! Click here now to grab yours before it’s too late.
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| | The Daily Reckoning Presents | | The Stock Market is Rigged | | |  | | Chris Mayer | The stock market may be rigged...but not always against you.
Lots of people believe the stock market is a playground for well- connected insiders. This is an old complaint...but it is one that seems to hang particularly thick in the air these days. The Facebook IPO only confirmed people’s suspicions that the game is unfair. Here was the biggest IPO in the history of US markets. And we learn that big banks and hedge funds got the early dope that Wall Street analysts dropped their estimates for Facebook’s earnings only days before the IPO. The small investors, who were not in the know, were led like pigs to slaughter.
Facebook’s stock is down 29% since it opened at $42.05 per share on May 18. This grim result is causing a lot of howling about the IPO process and those “damn Wall Street banks.”
Of course, you could take the view that investors who fool around with hyped IPOs get what they deserve. My sympathies lean in that direction. If you play with fire, you might get burned. Regardless, I agree with this comment in yesterday’s Wall Street Journal:
What could have been a model example of the market’s strengths — an eight-year-old company with 900 million users raising billions of dollars from a cross-section of the investing public — ended up as a case study of the power wielded by insiders over outsiders. | In short, Facebook is another black eye for a market that already has a lot of black eyes. In the last dozen years, we’ve suffered through two 50% drops from peak to trough, plus a long list of scandals and shenanigans. Facebook just added to the feelings of disgust and revulsion people already felt toward the stock market.
You can see that revulsion in what people do. They’ve been yanking a lot of money out of the market — something like $1.4 trillion since 2007 and record amounts last year. This year, the outflows continue with gusto.
Some people cite these outflows to say the market can’t or won’t rise. I think that’s a lot of baloney. Michael Santoli of Barron’s had a good column about this over the weekend:
Bears, who claim that broad investment flows are needed to hold up stocks, should note that the US market just doubled in three years with retail selling into the move. | Stocks, as an asset class, then, perhaps are getting a bad rap.
People remember the headline-grabbing stories about certain stocks that “blew up.” But meanwhile, there are many stocks that just keep plodding along. There are many, many companies with good managers and decent businesses that give a fair shake to their owners. On a portfolio basis, such stocks can make the little guy a lot of money over time.
But you have to know where to fish. IPOs, such Facebook’s, are not an ideal fishing hole.
In my investment letter, Mayer’s Special Situations, we look for opportunities that are off the beaten path, where the odds clearly tilt in the investor’s favor. Two classic Special Situations are “spinoffs” and “thrift conversions.”
A spinoff is when a parent company decides to carve out a business and give stock in this business to its shareholders as a standalone entity. Much research over the years shows that such stocks outperform the broad market.
A thrift conversion occurs when a little savings and loan (S&L or thrift) goes public. It does so by offering shares in its IPO depositors. These are not typical IPOs where the money raised goes to the selling insiders. Instead, all the money raised (less underwriting fees) in a thrift conversion goes back into the bank. At the end of the day, shareholders own the cash they put in plus a bank.
Again, research shows that thrift conversions are consistent winners over time. I have recommended five different thrift conversions to my subscribers and, so far, all five are in the plus column.
Are thrift conversions boring? Yeah, kind of. But then again, they come with a lot less risk than many stocks. Thrift conversions are for patient people who like to make money patiently... and hate losing it.
The process of how these particular Special Situations come to be almost guarantees that the odds favor you as an investor. Nothing works 100% of the time, of course. But it’s like poker. If you start with aces, you have the odds in your favor.
These are just two examples, but there are other investments — like “stub stocks,” for example — that routinely deliver the goods.
So is the market rigged? Yes. But it’s not always rigged against you.
Regards,
Chris Mayer
for The Daily Reckoning
Editor’s Note: Chris is one of our favorite analysts. Not only is his Mayer’s Special Situations one of the most engaging newsletters we read, it’s also packed with some of the best recommendations you’re likely to find...derived from countless hours of research and boots-on-ground analysis.
His latest presentation deals with what insiders call the “magic drug”...but it’s not a pill you swallow or anything your doctor will prescribe...it’s something far more interesting. Click here now to find out what it is...and beat the insiders are their own game.
| | | | | Bill Bonner, reckoning today from Baltimore, Maryland... | | Dead Presidents Stay Dead | | |  | | Bill Bonner | Yesterday, we promised to tell you more about our L-shaped non- recovery. It’s already lasted 5 years since subprime cracked up... It could last another 5...10...20...or even 100 years.
Okay, 100 is probably an exaggeration, but who knows?
“An About-Face for Investors,” says The Wall Street Journal.
As predicted in this space, the “Facebook debacle turns high hopes into potentially mood-souring skepticism.”
“Retreat from the stock market continues,” reports The New York Times:
“I’m just extremely skeptical about the ability of a retail purchaser to be able to play on a level field in the market,” said [Alex] Tsesis, who is 45 and lives in Chicago. “I’m just trying to get out of stocks.” | Investors had a chance to think over the long weekend. When the markets opened on Tuesday morning, they were ready to act. The Dow rose 125 points. Gold dropped $20. They dumped Facebook.
But it hardly matters. Up one day. Down the next. Who cares? The big trend is what matters. And the big trend now, we believe, is down. Down for stocks. Down for the economy.
When this happens, it can last a very long time. For evidence, we give you exhibit #1 — Japan!
Yesterday, The Financial Times reported that a thousand yen invested in stocks in 1985, “even including dividends and inflation... has made exactly nothing.”
Colleague Justice Litle elaborates:
“Stocks for the long run” is a mantra of conventional investors everywhere. It is also the name of a book by Wharton finance professor (and babbling permabull) Jeremy Siegel.
Whenever the market outlook grows cloudy, or even downright bleak, we are urged to remember: It’s the long run that counts.
And yet, how’s this for “long run:” A yen-denominated investment in Japanese stocks, made in 1985, has been dead money for 27 years. | Japan’s dead presidents have gone nowhere...and made nothing for investors. They have been dead...dead...dead...for an entire generation.
“If it can happen to Japanese stocks,” asks Justice, “could it happen to American ones?”
Certainly — there is no real reason why not.
America has already “turned Japanese” in respect to perpetual ZIRP (zero interest rate monetary policy). Structural unemployment issues, and the utter failure of stimulus programs — so much for “shovel ready!” — resemble the Japanese experience. Like their Japanese counterparts, American policy makers have no new ideas... only tired old bad ones. | Back in the USA, investors are leaving the stock market. Mutual fund outflows continue at a rate of about $3 billion a month. The Dow is almost back to where it began the year. Trading volume is subdued.
As of last Friday, Facebook shares were down about 16% from the IPO price. Yesterday, they kept going down, closing below $29. The WSJ continues:
“Facebook’s banged-up share price and the technical snarls that bollixed up the stock’s first day of trading on the Nasdaq...have left some small investors even more glum...” | They’re probably not nearly as glum now as they will be later. The Dow is still above 12,000; stocks may not be at their peak, but they are far from their bottom. You’ll know it when you get to a real bottom. Investors are so glum you have to hide their guns. That’s when you get P/E ratios of 5 and dividend yields of 5%. That’s when you get bargains. Someday, unless this really is a new era, they will be real bargains. This day they are not.
The WSJ is wrong...or perhaps premature. Investors have not done an about face. Not yet. They’ve wheeled around a few degrees from their comfortable bullish trajectory of a few months ago. But they will have to keep turning in order to change course by a full 180 degrees. Then, watch out below!
And more rambling, ramshackle, ransacking of opinions...
What could make investors spin further against stocks? Two things:
First, Europe could blow up much worse than people expect. The eurozone has been on the brink of disaster for so long, most people think it will stay on the brink forever...as if there were an invisible barrier that keeps them from going over the edge.
We are connoisseurs of disaster here at The Daily Reckoning. Not that we like them; we just appreciate them. They clear away a lot of dead wood. And, yes, dead presidents. People invest badly. They spend unwisely. All is well ’til the disaster hits. Then, the dead presidents disappear.
One thing we’ve noticed is that disasters seem to take longer than you expect to start...and then they move faster than you anticipated. Remember the dot.com blow-up? You could see it coming for years. Then, when it happened...it blew up fast. Poof...hundreds of billions in dead presidents...gone!
So too the collapse of the housing industry — particularly those ‘low-docs, cash back, subprime mortgages’ — was visible long before it happened. We waited. We waited. And we waited some more. And then, when the catastrophe began, things happened so fast we couldn’t keep up with them.
The breakdown in Europe could happen fast too.
“I don’t know about you,” said a hedge fund manager we talked to last weekend, “but if I were in Greece, I’d be looking for a way to get my money out of the country. There’s a very good chance the Greeks will convert euro deposits to drachma. They will probably close the banks. The Greeks will probably riot and burn banks...if not bankers.
“So, what would you do if you were in Spain...or Italy? Wouldn’t you be trying to read the handwriting on the wall too? And wouldn’t you want to get your money out too?
“Of course you would. That’s why the Swiss are talking about imposing negative interest rates, to try to discourage other Europeans from exchanging their euros from Swiss francs.
“You don’t have to look very far ahead to see what would happen. Just wait ’til people start lining up in front of the banks to get their money out. If you were in Athens and you saw people lining up to get their money out of the banks...wouldn’t you get in line too? Most people would. And the banks don’t have enough money to honor all those depositors’ claims. So the banks have to go broke...and the whole thing falls down hard.”
According to the news media, everyone is making plans for when Greece says auf wiedersehen to the euro. But even an “orderly” exit of Greece from the euro is estimated to cost $1 trillion. And there isn’t enough money in all the banks in Euroland to pay for a disorderly exit.
Which is one reason we’re keeping our “Crash Alert” flag flying.
*** The other major reason for guarding against a crash is this: all the world’s major economies are approaching recession.
Old friend Marc Faber says he expects a global recession either in the last quarter of this year or early in 2013. Asked about the odds, Faber put them at “100%.”
One hundred percent does not sound like odds to us. It sounds like certainty. We doubt anything in economics is that sure. But let’s say the odds of a ‘synchronized worldwide recession’ are only 50%. That still puts a lot of empty space between today’s stock prices and a recession-inspired bottom. We wouldn’t want to be standing in that space, lest the market crash down upon our heads.
You know, dear reader, that it is futile to make predications, especially about the future, as Yogi Berra would say. But heck, we’ll take a guess. The euro zone won’t fall apart...at least, not completely. The Germans will give way. It won’t be pretty. No ‘elegant solution’ will be found. Instead, an awkward, ugly...even grotesque...combination of concessions, compromise, and craven corruption will keep the European project together. In fact, it will be more together than ever. Francois Hollande and Angela Merkel will find a way to preserve the union. Most likely, the Europeans will learn from the US. They will write a huge check to member states to cover...or partially cover...the debts of the past. The union will be responsible for the debts of, say, Greece or Ireland. It will be a scheme vaguely reminiscent of the Brady Bonds, or Alexander Hamilton’s takeover of state debt after the American Revolution, with new debt backed by the EU...of extremely long duration (long enough to allow inflation to cut down the real value of the bonds.) The debts of the future, on the other hand, will be the responsibility of member states (lenders beware!). Everyone can save face. Lenders (banks) will get their money (more or less). Borrowers can avoid disorderly defaults and bankruptcy (more or less). And Germany and France can hold onto their beloved European Union (more or less) ...and still not be on the hook for Greek behavior going forward.
But as to the second danger — that of a global recession and bear market — investors won’t be so lucky. The odds may not be 100%, but they are high enough so that a wise investor will take cover.
Beware the disappearance of dead presidents in a crash. Then, beware again: the dead presidents could stay dead for a long, long time.
Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
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