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Dr Stocks' Investment Strategy
A Hard Rain is Coming
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
JULY 2010
Like abandoned donkeys in the desert markets have moved around aimlessly for quite some time. Long-term 'buy-and-hold' investors have not much to show for their patience. In real terms, adjusted for inflation, and accounting for dividends ( they were higher then ) the S&P is now doing worse than during the depression of the 1930's: We are presently down 35% from the peak in march 2000.
And what about the glorified emerging markets? Take Shanghai: it is now trading at about the same index level as it did in 2001. Bonds and gold did rather well in comparison.
What awaits us now? Lacking the oracle powers of Paul the octopus we can't be sure but our gut feeling is captured in the headline of this column. A hard rain might be approaching as consumers in the West are tired and their governments run out of money to prop up the crumbling edifice. Printing money could help us for a while but it would end in a disaster. A realistic scenario is perhaps a long sideways-down movement which, in the end, could shave 10-30% from present valuation levels. Not a pretty picture. The only countervailing force preventing a rapid descent of asset prices is the ridiculously low interest rate level. Old fashioned people who still save some money are being thrown under the bus on which politicians, bankers and various crooks are riding happily.
Apart from the usual cyclical problems we are caught in the fundamental upheaval of globalisation. Historically the West was a gated, capitalistic community which could draw on cheap raw materials and labor from the Third World which it had more or less colonised. Now there are more than an additional three billion people who have also embraced a capitalistic market economy and they are competing for resources and amenities with us. Moreover, they are willing to work for 10% of the wages we have gotten used to. Our exposed industrial sector which has to compete in a borderless world is faced with a nearly impossible task. That's one reason why we have high unemployment rates and deindustrialisation in many places. At the same time our protected sectors, the government and service industries, are drawing high incomes which can hardly be earned through the remaining productive manufacturing activities. Hence we have been piling up debts, living beyond our means for a long time. The inevitable adjustment process is and will remain painful and dangerous. For the markets this means extended periods of volatility.
In our opinion it is advisable to stick with global winners. Companies which are exposed to the emerging countries, especially the BRIC-type ones. Although we see short-term weakness in resources we still see the sector in a positive light and would use such weakness as buying opportunity. Apart from resource stocks we also look at pharmaceuticals and high-tech names with interest. Established luxury brands, the likes of Mercedes Benz and BMW, are also benefiting from new demand. A crash is rather unlikely in our view but setbacks will be common. Take advantage of the swings. There's not much else to do right now.
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Scarecrows
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
JUNE 2010
Money is still being given away for free. Trillions of it. Not to you and me, and certainly not to anybody who really needs it, but the vampire squids of this world, the Goldmans and Schmoldmans, are rolling in dough. Technically bankrupt governments, including most in the EU, the USA and Japan can still borrow long term at slightly above 3% p.a. even though nobody would seriously expect them to ever pay back their mountains of debt. Like all Ponzi schemes this also will end in disbelief and speechless anger.
Why is money available so cheaply to the privileged? Because they've messed up big and now everyone is scared. Talk about scarecrows: US house prices collapsed, banks nearly followed, states are in a hole, inflation is coming, ... or was that deflation? Pensions are not safe any more, and so on. No wonder we're running scared. Should we invest money in the stock market? The Dow is where it was 11 years ago ( "Nice to see you again!" ). Many markets are far below that. Currencies? Will the dollar reach parity with the euro or head into the opposite direction and collapse? Straight-faced "experts" are arguing either way and make split-tongued snakes look good in comparison. Is gold going to 2,000 or 5,000 or is it in a bubble? Nobody recommends bonds, except the deflation crowd which is still buying them. What kind of life is it where you work hard for so long - just to see your assets melt away under your eyes, taken by financial shenanigans and inexplicable events?
If you like out-of-favor companies and hold enough cigarette stocks already, may we suggest BP? There is definitely no more despised company available right now. Our opinion is that it will survive, if necessary by letting its North American subsidiary go bankrupt. Other oil companies are also worth a bet, because oil prices are going up again. Drilling new wells has definitely become much more risky and expensive, thus restricting the future flow of the devil's ink. Coal and uranium are also interesting commodities. Despite being a crowded trade, we're still riding on the gold train; not surprising, given all the cynicism around.
Equity markets remain interesting, to say the least. Despite going nowhere, they are tossing and turning and offering good opportunities for traders. The Bernanke put (the fact that Helicopter Ben is a confirmed Keynesian and money printer) is in place and should limit the downside. The movements, though, are stomach churning. What if you can't handle it? In that case big pharma would like to hear from you.
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A Deflowered Central Bank
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
MAY 2010
The track record was good but short. For a dozen years the European Central Bank ( ECB ) managed the euro in the austere spirit of the German Bundesbank and didn't allow politicians to interfere in its monetary politics. What a pleasant contrast to the US Federal Reserve which seemed to be at the beck and call of the treasury department. But a hard currency line needs a lot of discipline and an independent central bank is not to everyone's liking. The French President Sarkozy, whose ego is in inverse proportion to his short limbs, always tried to get his fingers on the monetary wheels but the Germans held him back. Now, under the pretext of a mediterranian debt crisis,little Napoleon got his triumph. Not only was the Maastricht treaty ignored and broken, the no-bail-out clause violated and taxpayers burdened with a trillion of new debt, but most importantly, the vandals succeeded in raping and sacking the ECB. Its French president Monsieur Trichet agreed to buy any and all junk bonds which might be offloaded unto his bank by sovereign bankrupts and their banks.
As any teenager can tell you, the first time is always more difficult than the follow ups. We can, therefore, expect the euro to turn into a soft currency from now on, melting away just like Salvador Dali's clocks. Is this a bad thing? It needn't be, as long as we are aware of the fact and protect ourselves accordingly. The coming inflation will have its winners and losers, as always.
Who are the winners? Banks and big, multinational companies who are habitually guaranteed, bailed-out and provided with free money if they make a mistake or behave foolishly. Providers and holders of gold and other hard assets should also come out smelling roses. The middle class, or what's left of it, will hold the short end of the stick. On them will fall an increased tax burden, stagnating incomes and rising prices, relentless offshore competition and other assorted evils. People depending on fixed incomes from pensions or bonds are bound to be losers too.
Germany alone, in itself a state on the way to bankruptcy, has just agreed to guarantee 123 billion euros for the delinquent southern states. To describe Germany as on the way to bankruptcy may sound alarmist or over the top, but when one considers the unfunded trillions in pensions and health costs, in combination with a greying and slumping population, it becomes obvious. Many cities and regional councils are already busted flat right now.
Most Asian and some other developing countries are in a better position than the self-indulgent West. They never introduced free schooling and health care, pensions or unemployment benefits and other such goodies we've been accustomed to. They looked rather backward for it, but every day less so. That's why, for example, the Singapore dollar looks much more healthy than either the euro or the usd.
Should one still buy gold at present high prices? Our advice, just in case you've not followed our advice of the last few years, is: yes! But don't overdo it and buy it in steps to get a reasonable average price.
Are shares still a good investment? Yes also, because low interest rates will be with us for an extended period and companies still reap the benefits of globalisation. Inflation doesn't matter much to them as they can adjust their prices ( that's actually why we have inflation ) and some losses in stagnat countries will be easily made up by gains in fast growing developing countries. Smoking and driving cars might not be good for you and the environment but as long as people do it the companies involved will make money.
That's why Philip Morris and Shell are making good money despite the granola eaters' abhorrence. As an investor, don't fight the market and don't fight human nature.
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An Education
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
MAY 2010
Greece is like a pampered, misbehaving child who threatens to burn down the house if you don't give her another pack of sweets, pronto. Indulging the child has now given us a screaming little terror.
Politicians everywhere have promised - and spent too much - and a childish electorate has always rewarded them with another term in office. Now we are coming to the end of this road. Greece is the canary in the coal mine, but the toxic methane has already seeped out and is threatening the whole area.
We are watching a fight between the ideas of two long-dead economists - the Austrian Schumpeter vs. the Englishman Keynes. To put it very simple, Schumpeter advocates to let the incompetents, imbeciles, profligates and unlucky self-destruct. Out of this destruction, something new and healthier will be born, eventually. Keynes holds against that and proposes to smother every major crisis caused by nature or human folly by means of massive money creation. Carpet bomb the idiot losers with tons of money and pain will go away.
And this works in the short term. But Schumpeter wins in the long run. Because throwing money around like a drunken sailor will definitely lead to debasement and bankruptcy. But what do we care about all that? We just observe and recommend. At this particular moment in time, it's obvious that the euro is still on its way down and gold still shines. There are also some upcoming opportunities in banks (Goldman, Deutsche), oil (BP) and other stumbling giants. We'll just have to wait a little bit longer, sitting on some cash dollars.
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It ain't over until it's over ( till the fat lady sings )
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
APRIL 2010
We're still in bullish mode, climbing a wall of worry at snail speed. Unless there is a surprise event derailing the slow climb, up it could go on for a few more months. The fat lady in this performance is the Fed and the curtain won't fall until she sings the interest rate blues. Presently there seems to be little likelihood of that happening soon.
Inflation seeds have definitely been sown, but the seedlings have not yet germinated. It could be a year or two till they become clearly visible. That means we can still be invested in equities, but with some precautions. Cash levels should be kept elevated, at least at 25% we'd think. Another 10% or so would be kept in precious metals, mainly gold. The rest can stay in stocks, but make sure you hold quality stocks. Dividend payments are an important consideration. There are quite a few blue chips out there, paying more than 10-year treasuries. We want to be paid for waiting.
Bonds are not our cup of tea, because medium term we expect higher interest rates and more defaults. Countries like Greece are basically bankrupt, carrying official current debts in excess of 100% of GDP and other obligations (pensions, social security etc. ) of 800% of GDP. That can never be paid back, and since neither devaluation nor monetization (through inflation) are an option due to Greece's Euro membership, default seems to be the only way out. That will cause a drastic downgrading of other sovereign debt - from Portugal, Spain, Ireland and Italy. In our humble opinion this can only mean that the Euro will become weaker against other currencies, especially the dollar.
It must be said that practically all advanced countries are proceeding to a place where the sun doesn't shine often. Greece is a horror in its own league, but most other western countries have also overpromised and are thus carrying longer term debts averaging about 400% of GDP. Does anybody earnestly think that those obligations will ever be paid? In fact they will somehow be paid, but the transaction money's real value will be a fraction of its present one.
All longer term indicators point to only one solution: debt liquidation through extended high inflation. Therefore we need our above-mentioned gold allotment. Perhaps we should even buy more than 10%. This is a question of each individual's risk appetite. Gold is definitely not risk free, and it yields no income from dividends or such. But it's an insurance against total disaster, when paper money collapses as it eventually always does.
A root evil of our times is the universal unwillingness to expose the population to truth and pain of any kind. Incompetents, imbeciles and the recklessly profligate are all being protected by governments and central banks against the consequences of their follies. It's not your fault if you live beyond your means and buy a house you can't afford. No, the evil bankers did it to you and it's the government's responsibility to bail out every speculator and idiot.
One is tempted to buy shares of Goldman Sachs because this greedy and arrogant kraken of finance plays the game we're in best. I haven't bought it yet, instead I like shares like Exxon, Shell, Roche, Deutsche Telekom etc. because they have strong cash flows, reasonable dividends and are almost certain to survive future catastrophes. For gamblers I'd add Citibank ( C at the NYSE ). In Asia I look at the Philippines - they will have an election next month and whichever way that goes, the Philippines are likely to get a better government than the present one.
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The EURO
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
FEBRUARY 2010
At its introduction a decade ago, the euro was not very popular, especially not in Germany. As it turned out, the European Central Bank (ECB) has managed the currency quite well, just like the Bundesbank did previously. But a strong currency is not a good thing for everyone. If you are used to living beyond your means, with easy money for the boys sprinkled around, you actually need a weak currency with good inflation to keep things cosy. A generous devaluation every now and then certainly helps. There should have been a big, cigarette pack-style warning sign on the euro: "Using this coin will make you lose your beloved printing press and thus end the easy life for you." Obviously Greece and a few others didn't think through the consequences of using a hard currency. Now they are facing some hard choices.
I don't think a default by Greece would lead to the end for the euro. If Orange County in California, or Chicago, or Idaho default on their bonds, it would not end the dollar. Let's assume we all used gold coins as our currency. What would it mean if some guys ran out of gold? Should we abandon gold then, and use sea shells, or paper instead? In fact, it's time to let everybody who can not manage his affairs properly, go bankrupt. The welfare state can not take care of all incompetents on top of the weak, old and lazy ones. In big European cities, more than 50% of the population is living on transfer and welfare payments. The pool of workers and employees who have to pay for all this waste and welfare is shrinking and getting angry. I say: liquidate the bloated welfare and waste and let the incompetents go bankrupt. In Greece's case that means: let the IMF handle it, they are the clean-up squad.
It is very likely that in the near to medium term speculators, who have smelled blood, will keep the euro under pressure. Therefore it might be advisable to keep a substantial part of one's investments in dollars for the time being.
Equities have not been great if you just held on to them over the last 10 years. They've gone nowhere. My guess is the next 10 years will be quite similar. Lots of ups and downs with a flat end result. I'm afraid that might be the lucky case. A worst case would probably look similar to Japan's: there, the market is down 75% over the last 20 years, and the future looks bleak. This is not a good time for "buy and hold". But I'd make an exception for some solid, dividend paying stocks like Nestle, Exxon, Pfizer and the like. Everything else needs to be watched carefully and has to be bought and sold on strict parameters. Some gold, at least 5-10% of a portfolio, should be kept regardless of short term noise. It's the one insurance that doesn't depend on somebody else's goodwill and solvency.
And finally: we have to come to terms with the fact that the US' and Europe's relative weight and importance are shrinking. 100 years ago, China had less people than Europe. In a few years, the middle class there will be bigger than the whole population of the old continent. But even China will suffer from an aging population, just like Germany, Italy, Japan and most other Western and North Asian countries. There will be, however, billions of young people in Africa, the Middle East and South Asia, most of them Muslim, for whom the old and still comparatively wealthy countries will be attractive destinations. This is already a fact, but we don't like it much, and we have no good solution for it. My advice is to think quietly about the long-term implications for all kinds of investments under that scenario.
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