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Dr Stocks' Investment Strategy
Heavy Weather
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
MAY 2009
The bulls were running hard since the lows we've seen in March. Frankly, I was surprised by the excessive strength we saw in some sectors, most notably in financials. In a way, I underestimated the determination of governments to throw unlimited amounts of money at the problem, and the complicity of central banks which have been busy in the printing department. Banks, insurers, car manufacturers, airlines, home owners: everybody is calling for and counting on a government rescue.
And it seems Mr. OB in the White House has nothing much against Big Government. Besides propping up every failing business of any size, OB also wants to introduce a costly health care plan, extend the war in Afghanistan, subsidize green energy and offer free apple pie to everybody.
Who will pay for all this? Why, big business and rich folks of course.
The present strategy could work if an economic recovery becomes self-sustaining quickly, and growth returns. But there are many more shoes to drop, in credit card and commercial loans for instance, and the hundreds of trillions of derivatives still floating around cast some shadow on the rosy picture. Money was being made available too cheap for too long, and a lot of questionable "investments" ensued.
This problem should actually not be tackled by throwing more free money around. But it looks as if most governments can't say no to anybody asking for help. In fact one group has been shafted badly: the secured creditors of Chrysler (and other big, soon to-fail companies). Bankruptcy laws have been cast aside in favor of government and union interests. This will have bad consequences for future corporate bond issues.
In order to avoid short-term pain we have mortgaged the (perhaps not so) distant future. My gut feeling is that it will all end badly. The house is being undermined, and, although it still looks ok when watched from a distance, it might collapse just suddenly. The real businesses of this world are still hurting badly. Just look at major Japanese companies: they are announcing billions in losses, from Toyota to Toshiba, from Sony to Hitachi. And elsewhere it's not much better.
Bottom line: the recent rally was fantastic, but it probably was just one of a few bear market rallies which appear during every protracted slump. Our best hope can only be to catch some parts of future rallies, bargain hunting and liquidating at opportune moments. Easier said than done, of course. But that's the way it is. In life, winning is not mandatory.
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The Iceman Cometh
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
MARCH 2009
My prediction right now is: we're going into a worldwide depression.
The main reason for this dire outlook is the complete failure of the Obama administration as well as most other governments to tackle the crisis on hand.
Obama, it's becoming clear, is a gifted speaker - with not many ideas of his own. His treasury secretary Geithner is more or less absent from the scene and everybody else is simply procrastinating. The only treatment which has been prescribed so far is the money shower: throwing money at each and every problem which appears on stage. Trillions are the new billions, deficits are exploding, states and countries are going bankrupt.
I hear recommendations to buy treasuries for safety, but I don't buy it. There is a not insignificant danger that the treasury markets might collapse under an onslaught of new paper. Banks are kept alive in intensive care, staring at us like zombie whoofs, unwilling and unable to lend money as required.
Unemployment will continue to grow everywhere, soon reaching double digits in the USA and higher still elsewhere. In this scenario the stock markets would have further to fall, house prices ditto and most everything else too.
If chaos and fear spread, gold should be one of the few refuges. But it has to be kept in a safe place, because bankrupt governments might be tempted to confiscate it as an act of desperation and "social justice".
Besides gold, I think some agricultural commodities such as wheat might do okay. Oil will also keep most of its (presently diminished) value. Other than that, I don't know and, while it might be tempting to pick up some seemingly cheap debris, it's hostile territory out there.
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Let the damned chips fall
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
FEBRUARY 2009
How did we end up in such a mess? Hundreds of billions of taxpayers' money poured down the ratholes of speculators, banks and failed companies. There are still about 600 trillion USD in notional derivatives outstanding, of which roughly 30 trillion are the most toxic credit default swaps ( CDS ). We're talking about sums which exceed the total gross national product of the USA, Europe and Japan - combined!
So why are governments calling on taxpayers to bail out the speculators and bankrupts? The endlessly repeated answer to this question is the alleged danger of a total financial and economic collapse - if some big banks are allowed to fail. But what if we spend a few trillion of newly printed money in endless rescue operations to find out that the holes are still much deeper than anybody dared to say? The end result will not only be the bankruptcy of some banks, but the bankruptcy of whole countries.
Look at the Iceland horror story: The country is on the hook for hundreds of billions of dollars and in such desperate straits that a third of its population is contemplating emigration. A much better way forward would be to let the people who got us into this swamp pay. That's capitalism as it should be. Let some banks fail and wipe out their stock- and bondholders. Let the speculators who dealt in CDS's for profit and not for genuine hedging purposes ( the vast majority ) deal with their own mess. The money which has been earmarked for further stimulus and rescue operations could be used to support the jobless and set up some new, clean banks.
Of course the politicians will not follow this Schumpeterian course of creative destruction. Instead they will muddle through and waste a few trillion in the process. Whichever way it goes, we can't trust the banks and we can't trust the politicians. Therefore I recommend a continuous position in gold, the only currency which doesn't depend on somebody else's promise or guarantee. While paper money can be created by the bucketload at essentially no cost, it takes horrendous efforts to gather gold. I've been in a gold mine near Johannesburg a few thousand meters below ground. The temperature is hot, the tunnels are low and narrow, the work is extremely hard and dangerous. Gold is rare and valuable. It has been accepted throughout history in contrast to every other money which has become worthless sooner or later.
The other commodity which is valuable and difficult to get is oil. At present, it is cheap because of speculation and a temporary drop in demand. Therefore I also recommend now oil-related assets, companies like Royal Dutch or direct investments, for example USO (traded at the New York stock exchange as an ETF).
Right now everybody is waiting for President Obama's rescue package, but after it's been passed it will be discounted quickly, and we'll move closer to the edge.
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New Year Deliberations
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
DECEMBER 2008
It was a difficult year and the next one will be not much easier.
For starters, experts' opinions are all over the place. Some are expecting a severe depression and deflation ( gold would suffer ), some are expecting inflation ( gold would prosper ), some say stocks are cheap ( they dropped already a lot, some markets are down by 70% ), some say they're expensive.
Take your pick.
Worried investors have bought boatloads of government bonds, which are yielding exactly zero on the shorter end. Government bonds, in my opinion, are for suckers: To buy them means you hand over your money to people who are running the biggest Ponzi scheme of all ( think about the future of pensions and social security as an example ) for no return. Governments are the biggest borrowers and the greatest liars and now people are handing money over to them for free. Anyway, what's the value of money when it's essentially being created by the click on a computer and backed only by government promise? We have seen paper money coming and going, mostly going.
If not by outright cancellation then at least by inflation. That leads us to gold: keep some of your money in gold, physical gold preferred ( who knows whether one day the gold funds declare that they have less gold in the warehouse than reported ? ). It might well be that gold is not the best investment, especially if we're really going to suffer a big depression.
Therefore, don't go overboard. I'd recommend a maximum of 25% of investible investments in gold, not more.
Regarding stocks: yes, they're cheap and we will see some rallies from depressed levels. My advice: sell into rallies and buy them back after fresh falls. Historically, stocks have dropped to 8-10 times reported earnings during severe recessions and we're not there yet. In the worst case, stocks might drop another fifty percent from today's levels. But that doesn't mean you should just sit on the sidelines ( or buy those damned government paper ). You should actually trade the paper as mentioned above.
How have we ourselves performed last year? As of today Xam Capital has lost 12 %, measured in dollars, since the beginning of 2008. In euros we are more or less unchanged. It's not a glorious performance but it could have been a lot worse.
So, here's one to the coming New Year! We are, as always, looking at the bright side of life. Cheers!
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An Unwanted Holiday
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
NOVEMBER 2008
"Holiday" is a word with generally positive connotations. But with all things great and good, there are some unfortunate exceptions. A holiday with Miss Purzelmouse on Blowfly Island might be one of them.
But as you know we are pretending to be a financial column and that's why we are talking today about Bank Holidays. And what we have in mind is not a harmless fun day for branch bankers, but a situation where you won't be able to get to your money.
See, at present we are experiencing one of the greatest wealth destructions in history. Over 30 trillion USD have already been lost in international equity markets. Add to that another quadrillion of losses being suffered by banks loaded with toxic assets nobody understands and is able to value properly. How does our bank holiday connect to that?
Well, it is entirely conceivable that the whole western banking system is in fact bankrupt.
This despite desperate efforts to prop up tumbling banks and insurance companies with emergency cash injections, deposit guarantees and all kinds of balance sheet hocus pocus. Just remember the 500 trillion of derivatives still hanging around like a pestilential cloud, and the dimensions a comprehensive bank rescue would have to reach to make us all safe. For perspective: the annual GDP of all the world's countries is only 50 trillion USD.
One worst case scenario would therefore be that the US and perhaps other governments declare a "bank holiday", meaning banks close down for a certain period of time. When they reopen, depositors might have only access to a fraction of their money. Withdrawals could be rationed, penalized or delayed. Have we got your attention now?
Of course, the above disaster scenario is not very likely to happen, but it can't be ruled out either. And therefore we now recommend to increase the share of hard assets in your portfolio.
Gold is obviously a possibility, perhaps the best available right now. Other hard assets like commodities, oil, real estate etc. are also advisable. How big a share such hard assets should occupy in your asset tableau, is a personal choice. If it's more than half of your total worth, you will sleep better.
We are not saying the end of the world is near, and you should retreat to a farm or cave. In fact, we are still taking advantage of the huge swings in equity markets to trade our book - which is mostly in commodity companies. But overall caution is necessary, as bombs are exploding in places near you.
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Drinking Beer in a Madhouse
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
OCTOBER 2008
Let's assume you own a pub through which you're selling 1,000 pints of beer a day. Unfortunately the general economy is weakening a bit and you might only be able to pour 980 drinks. Would that be a good reason for you to panic and sell your business for 60 or 80% below the current value? If you answer with yes you're probably reading this message in a monkey house, and we wish you a nice stay there.
But this fruitcake behavior is the accepted reality in the commodity and stock markets where supposedly rational investors have munched too many magic mushrooms. As we've opined in our last message, when people lose their heads it's time to start buying. The time, we think, is now. Get into the market, buy blue chips in stages and look forward to a little Christmas rally. Of course we still have to look across our shoulders because here and there guys are still screaming "Fire" and some people might be trampled in the recurrent mini panics.
At Xam Capital Ltd. we have been bears for a very long time but yesterday we started buying in a meaningful way. We certainly put our money where our mouth is.
Regarding the German market and the fantastic voyage of Volkswagen shares we don't shed a tear for the hedge funds which lost their shirts ( and underpants too ). We all knew that there is this oddity of so-called cash settled options in the German market ( see recently the Continental/Schaeffler case ) which enables predators to buy up companies without announcing that to the world. This makes it possible for speculators like Porsche to make billions of euros by manipulating share prices. Our guess is that a few others might try the same trick ( until it will be outlawed ). Daimler, for example, would be a perfect target.
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