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Dr Stocks' Investment Strategy
House Of Pain
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
SEPTEMBER 2008
Equity markets worldwide have been turned into torture chambers. Banks, property and construction have been strangled first, then commodities and now just about everything else is being ploughed under. It has become quite common to see individual blue chips drop by 10% on a single day. Companies which looked solid just a year ago have lost more than half of their value. It is painful for stock holders - and it won't be fun for most others, either.
In terms of strategy, it's probably wise to keep one's powder dry for a while longer, although it might be tempting to pick up some cheap looking paper. The general air of panic in the air and the huge daily drops could mean a bottom is coming into sight. But some bottom pickers will end up with dirty fingers, that's inevitable.
Our advice here would be to look at individual companies which are still good cash generators, have little or no debt and rely on a solid business model. Investors with a longer-term outlook can probably buy some of them right now. Dividend yields are looking reasonable when compared to interest rates. At least if you compare to safe investments like short-term treasuries. Of course it's easy to gain high interest rate returns by buying junk paper. On some GM bonds, you can get clearly over 20% p.a., and on some issuers from countries whose name ends in "-stan", probably more. But that's for lovers of two-shot Russian roulette, not investors.
The dollar had a remarkable recovery over the last four weeks, up by about 10 % against the euro. It seems a new dollar up-trend has developed and, apart from the usual setbacks, will continue to perhaps 1.35 ( against the Euro).
With regard to the US elections, we stick to our previous forecast of a Republican win. But in any case, it will be a paper-thin win. If McCain wins, we expect defense, resources and pharma stocks to do well. In case of an Obama win, alternative energy plays and generic drug manufacturers (e.g. Teva) might do well. Whatever happens, the world is in recessionary mode, sentiment is gloomy and day-to-day life is no bed of roses. But out of deeply blue moods and abysmal events, something good might come. Super low interest rates will help, thank God and Bernanke.
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Quick Or Slow, Down We Go
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
JULY 2008
A market crash can be quick and sharp, like the one in October '87, or it can drag on for years, like Japan's, in the doghouse since 18 years. The bear market we're presently in looks like a slow mover. Yes, many markets are down 20%, but what's 20% when they could drop by half?
Sounds far fetched? It is entirely possible that company profits collapse over the next 12 months. If that happens, prices and p/e ratios will not look cheap any more. Let's look at some facts: In the USA, the chickens have come home to roost. The government is pumping hundreds of billions into failed banks and reckless borrowers - just to keep them afloat. But it's not a liquidity problem we're faced with, it's bankruptcy. Many banks and semi-governmental institutions would be stranded without capital if they'd be realistic about their balance sheets. Consumers are already stranded and will have to cut back till it hurts.
Apart from the USA, we have disaster scenarios in various other countries who thought it clever to stop producing most anything in favor of property and finance games. Excesses as seen over the last few years are usually ending in recessions. There's no reason to believe it will be different this time. The wall of money that has flooded the world will guarantee us more inflation. Traditionally gold and real estate have been good hedges against inflation. Despite the relatively high price of gold, we still think it's one of the safest and best assets to buy and hold now. Distressed property can also be recommended, but there's no need to hurry. Foreclosures and other opportunities will be with us for another year or two.
Stock markets, as mentioned above, will probably go down much further. But in between the slide there will always be short-term trading opportunities where one can pick up a fallen asset on its bounce back. Some banks and also oil companies are good candidates. Look for example at Citibank, UBS or Occidental Petroleum - who all live on roller coasters.
Not much is safe right now, but pharmaceuticals are likely to be a bit more quiet than others. Roche, Novartis, Schering Plough and Teva could be worth a second look. If oil prices go down further, airlines will be beneficiaries. Lufthansa is a good consolidator in Europe and due to an ongoing strike, the share price is reasonable. But such a bet should be rather limited. After all oil prices could well go up again in a few weeks time.
And lastly: whenever oil service companies like Schlumberger, Halliburton, Baker Hughes or National Oil Well Varco go down by 10-12 % from a recent high, they should be bought.
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A Cloudy Sky
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
JUNE 2008
Over the last couple of years, the US consumer was basically the default buyer of the excess stuff produced in China and other fast developing countries. The money supply was generous and easy loans greased the wheels in many corners. Now we have however reached an inflection point where the credit spigot is being shut off, risks are being avoided, house prices are falling, interest rates are rising and the general party atmosphere is dying down.
Inflation is a serious problem. No longer a silent creeper, it has entered the consciousness of many folks who can see their paychecks losing muscle by the day. Up to very recently, governments have just manipulated statistics and treated the public like morons by telling them inflation was, say 2 or 3 percent, when everybody could see that the relevant rate was twice as high. But now inflation has become front page news. Sooner or later central banks have to ratchet up their rates. This, in combination with high energy prices and socialist taxation levels, will stifle the economy. The most likely scenario is stagflation, a horror we have already seen in the seventies of last century.
It won't be an easy situation to navigate. Many assets will stagnate or fall in price. Even commodities could disappoint. Presently I don't foresee a lost decade, rather a few lost years. Considering that over the last 8 years many indices ( certainly in the US and here the Nasdaq in particular ) have practically gone nowhere, this is not a bright outlook. I think the banks will remain in the doghouse for some time to come.
The winners will be those who can ride a seesaw, a market going nowhere while swinging wildly. That calls for deft traders who enter and exit hazardous places where furniture falls and ceilings collapse. It will probably be a good time for guys with money who are looking for property in Las Vegas or Spain, slightly used sports cars and other pretty but essentially superfluous things.
The most interesting item and the most difficult to forecast is oil: my guess is it may fall short term and rally again later. Oil is valuable and probably worth 130 usd/barrel or more. But its high price chokes off our economies which are built on oil. The recent jolt is now spurring a serious hunt for alternatives. But fossil fuel will still be important 20 or 30 years from now.
With regard to the forthcoming elections in the USA I'd presently bet on McCain. If he wins, oil and defense companies will be winners. And the dollar could rally.
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Game Over
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
APRIL 2008
Until about 10 years ago, banks were basically satisfied with their usual business, taking deposits from the public and lending it out to credible users. But in order to dramatically increase their profits and justify hundred-million dollar paydays, they had to enter a new business. Big time gambling under the rule: Heads: I win. Tails: you lose. They leveraged themselves to the hilt, signed derivative contracts in the trillion dollars and dealt in fantasy loans and paper.
Hey, it was good while it lasted. But just like cocaine addicts the greedy idiots in pinstripe costumes needed ever larger doses for their kicks and felt like invincibles.
The failed Wall Street house of Bear Stearns alone had 14 trillion dollars worth of derivatives outstanding. JPMorgan, which rescued Bear with 30 billion USD of public money, is the largest issuer of credit default swaps and has thus guaranteed a lot of bad stuff. It probably had to rescue Bear or pay out to the buyers of its guarantees. It is a rather complicated picture, but it's clear that many, if not most banks in the world are connected in a spider web of derivatives, swaps and questionable securities. And the whole pile of junk was financed with up to 30 times leverage, meaning for every single dollar available from investors the managers borrowed another 30 dollars, just to spice up the game and increase their take.
But this game is over now.
We think that banks have still a long way to go down, and even if they can eventually sort out the garbage in their balance sheets, they won't be able to generate big profits from the mad gamble they were engaged in previously. Eventually, bank shares will be a good investment. But they have to hit bottom first and be left for dead for a while.
What does all that mean for the real economy and for stocks other than financials?
Emerging markets, especially in South East Asia, could do relatively well because excess money won't flow to the US as before, but will look for new destinations. Countries like Thailand, Taiwan or Singapore are thus comparatively attractive. Gold and commodities in general have become more volatile but still offer good opportunities.
A few days ago, there was an interesting report in the Financial Times: the so-called Empty Quarter (a giant desert in Saudi Arabia), which was supposed to hold immense gas reserves, turned out to be, well, empty. This confirms our long-held belief that oil and gas are bound to stay expensive. We therefore hold on to most energy investments despite the wide-held view that a US recession must knock down prices in the sector.
In general we suspect that markets worldwide will trend lower over time. We are reminded of the situation in Japan and Thailand in the nineties when, after huge credit expansions, it took a decade to find a bottom, despite low interest rates. It will go faster this time, because the Americans are not as hesitant as the Japanese to clear the desk. But it could well take us into 2009 till we see a bright horizon again.
Meantime, stay liquid, buy the dips, get out quickly again, that's what can be done for now.
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POLTERGEIST
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
JANUARY 2008
There are a lot of noises coming from the attic. Stocks go bump overnight and panic-stricken investors are leaving the haunted house. The Dow has "only" fallen by about 15 % from last year's highs but it feels like more. Some widely-held shares, mainly from the finance and high-tech sector, have been cut off at the knees. Considering the general uncertainty, what should investors do?
First, some considerations: The USA will experience a recession, but that's not necessarily reason for a full-fledged panic. Due to the weak dollar US exports will do reasonably well and results of multinationals will therefore look ok. Interest rates will drop noticeably and central banks are on standby to open the monetary gates. Our feeling is that the crisis is relatively well contained within the financial sector and that black box valuations will become clearer as the quarter proceeds. The turmoil might well continue for a few weeks longer but already now we can see some good buying opportunities. While still staying clear from the banks, brokers, car manufacturers etc. we wouldn't be shy about buying a few energy stocks, perhaps a bit more gold and one or the other blue chip which has been hit by the door as crowds were on their way out ( think for example: GE, Intel, Schlumberger, Occidental Petroleum, Conoco Phillips and so on ).
This is not a green light to load up on stuff, just a hint that one might stick the toes in again. Keep in mind that the big trends which have moved markets over the last few years, e.g. the growth in China, India etc. are still intact and will be with us for a long time to come. Inflation will be our companion for the next few years and stocks have traditionally been a good long-term hedge against its negative effects.
Be prepared for further trouble and adjust your positions as necessary. But remember: a poltergeist upstairs and some falling furniture are not a good reason for adults to throw in the towel for good.
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A Not So Quiet Time
BY MAG. DR. HANS-GEORG STOCKMAYR, LLP
DECEMBER 2007
When people lose money it's most often not really lost. It has just been transferred to somebody else, a crook, a thief, a gambling lord, the government or an ex-wife. So, where in fact has all the money gone which banks claim to have lost recently through bad lending practices? Not a day passes by when some or other bank doesn't announce it has lost hundreds of millions or even billions by lending to people who can not repay or by buying securities which turned out to be worthless. Does that mean that banks staffed with finance superstars earning tons of dollars have been done in by the bottom strata of society? Swindled by jobless dead-enders who have bought mansions despite having no assets to speak of? Possible, but highly unlikely. Perhaps you, dear reader, can set aside some quiet moments during the upcoming holidays to reflect on this arresting question.
Who's benefited from the mess, that's one part of the equation? The other is, who will pay? Certainly not Leona Helmsley who, besides being dead now, has previously and famously stated:"We don't pay (.). It's the little people who pay." Right. How will they pay? My guess is: through inflation Just a few days ago the European Central Bank has injected 500 billion euros to grease the system and the Fed is also pump priming like mad. This at a time when inflation is already running at multi-year highs.
All of the above and some more which we can't elaborate on in this limited space will guarantee us a wild ride in the near and intermediate future. But please, do yourself a favor and don't just run with the masses along the published consensus view. Rarely do people make money by following the consensus. For example: although the dollar is weakening and stock markets might collapse, the opposite could also happen. Whichever way things will turn out: buy and hold is probably not the right strategy for 2008. The coming year might resemble a Hollywood studio set where shouts of "Action!" seem to come from every direction. And in such a scenario one particular status is very desirable: to be liquid. Liquidity was undervalued for many years. It looks increasingly valuable now.
My guess is that patience will be a virtue. Things might look tempting when they are down by a quarter; but how do they look at half that price again? We'll have reached bottom only when most "advisers" will tell everybody to be extremely careful and don't touch anything. We haven't reached such a stadium yet.
Some quiet moments during the festive season should be used to reflect on one's financial position. Is it age-adequate, is it reasonably safe, is it taking into account current concerns? If panic strikes you shouldn't stand with the sheep but with the butchers.
Good luck, good health and happy holidays from all of us here.
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