This morning, on a whim, I stopped for an early lunch at McDonalds (MCD). I ordered two regular hamburgers and an iced coffee -- hazelnut, my favorite. The charge? $3.17! I looked at the receipt. I was charged $.99 for the two hamburgers and $1.99 for the coffee.
I started thinking about that. Why would McDonald's only charge me $.49 for a hamburger? That is about the same price I paid in St. Louis over 25 years ago.
The iced coffee I could understand. You can get Starbucks type beverages for less -- a good way to get "prestige" on the cheap. Of course the atmosphere isn't quite the same.
But, that $.49 hamburger? After studying the posted prices over the counter I finally found, in small print near the bottom, the regular hamburger price. It was marked $.69! Well, that only deepened the mystery. Why would they only charge me $.49? Some kind of senior discount maybe? I'm 60. The sales clerk did not ask my age and I could find no promotion advertising a hamburgers or senior specials.
Times are tough, If people can get 2 hamburgers for $.99 and skip the drink this would be a great way of getting meals on the cheap. I'm not sure this stuff is good for you but it is cheap!
For what its worth: at the next table two teenage girls were splitting what looked like a large order of fries and a medium drink. Apparently McDonalds is doing well with this type of stuff.
Wednesday, November 11, 2009
Tuesday, November 10, 2009
ETFs for Bear Markets
The dollar keeps falling while "real" assets such as gold, oil, and equities continue to march ever upward. Its great to go along for the ride but keep in mind that "all good things must come to an end someday". Sometimes a violent end! When the tide turns ... and you know it will ... how can you position yourself?
Just about anyone with an elementary school education can make money when equities, commodities and bonds all go up at the same time. However, investments that do well when things go the other way are much harder to find. Here are some ideas on how to hold your own, if not profit.
First, get into a healthy cash position, then consider these ETFs. Most did well or at least held their own in the 2008 bear market. Two are currency ETFs. Currency markets are much larger and independent of equity markets.
So, when will the equity-commodity-bond market run end? Consider these potential early warning signs: long term treasury rates start rising, the Fed is really ending Quantitative Easing, and an improving US economy which may cause the US Federal Reserve to raise rates. For now the "herd" is jumping on the band wagon -- and more are boarding every day -- so enjoy the party. But, be ready to jump when the music gets out of tune and the wagon starts swaying.
Disclosure: I have a small "precautionary" position in SH
Just about anyone with an elementary school education can make money when equities, commodities and bonds all go up at the same time. However, investments that do well when things go the other way are much harder to find. Here are some ideas on how to hold your own, if not profit.
First, get into a healthy cash position, then consider these ETFs. Most did well or at least held their own in the 2008 bear market. Two are currency ETFs. Currency markets are much larger and independent of equity markets.
- UUP Yes, the much maligned US dollar. Just how low can it go? Well, don't answer that question, but do consider that UUP was probably the best performing ETF in the second half of 2008.
- CYB The Chinese yuan. This is an interesting play. Currently the yuan is pegged to the US dollar but any change will most likely have the yuan appreciating versus the dollar. Note that the yuan mostly held its own during the second half of 2008. China is also printing money but doesn't have the deficit problems the US does.
- TIP and BND TIP invests in inflation protected US bonds and did not do well the second half of 2008. However, if you see a stagflation scenario ahead TIP may be a good place to be. BND tracks a "broad, market weighed index" of bonds and except for a violent but brief spike down in September, when everyone was panicking, held its own throughout 2008.
- DOG, SH, PSQ and RWM. These inverse ETFs are a convenient way for investors to "short" the market and a great place to be in falling markets. But, remember these ETFs are subject to tracking error and values decay over periods of time. Also, see the comment about "bear" ETFs below.
- GLD Gold is commonly thought of as an inflation hedge. Yet, more than anything, it is a store of value in uncertain times. If you see greater than normal financial and social unrest ahead -- and most of us do -- you may want some gold investments.
So, when will the equity-commodity-bond market run end? Consider these potential early warning signs: long term treasury rates start rising, the Fed is really ending Quantitative Easing, and an improving US economy which may cause the US Federal Reserve to raise rates. For now the "herd" is jumping on the band wagon -- and more are boarding every day -- so enjoy the party. But, be ready to jump when the music gets out of tune and the wagon starts swaying.
Disclosure: I have a small "precautionary" position in SH
Monday, October 26, 2009
SunTrust, Signs of a Solid Investment?
The heat and humidity in central Florida was unbearable a few weeks ago -- summer refused to leave. A dome of sauna-like high pressure blanketed the state.The air conditioned lobby of the local SunTrust (STI) branch was a welcome relief.
First thing: You notice the signs, signs everywhere, in the lobby, in the hall, behind the tellers. More signs than customers, all touting SunTrust's "SOLID" message. I considered whipping out my camera to snap a picture or two for this post but ... thoughts of being spread-eagled and searched in some administrator's office quickly put that idea to rest. You can, however, see examples of SunTrust's SOLID message yourself on SunTrust's web site here.
Mid-December of last year -- in the middle of the crash -- I posted a SA article on how business, at least from a customer's perspective, appeared normal at SunTrust. See the earlier article here. SunTrust's stock then was in the upper 20's and dropping -- it was destined to hit a low of 6 in March of 2009. Now, on October 26 it is just below 20.
The bank recently posted it's 4th straight quarterly loss, revenue is down 21%, non-performing loans up 65% and charge offs up 26% (see here).
From a customer's perspective the changes are more subtle. Well, there are the signs, "SOLID" is everywhere. Some signs, such as "SOLID ADDS MORE OOMPH" -- I'm not sure what the meaning is.
Gone are the Home Equity Loan promotional signs. Indeed, SunTrust froze my own HEL account several months ago. I did see a small sign on a desk touting auto loans.
I was struck by the quiet and lack of customers, maybe it was the late Tuesday morning time frame. Only two of the seven lobby offices and one one of the five lobby desks had staff. Six months ago there were Saturday hours, now gone.
During past visits I noted stacks of loan applications on lobby desks. Now, the desk I sat in front of had only some kind of subpoena -- quickly whisked out of sight. Even the pens looked like they came from Wal-Mart.
Residential, and commercial real estate values are down close to 50% from 2006 in the northerly suburbs of Tampa. Considering the 100% loans originated in those boom years all kinds of stuff is now "underwater". This must be a huge problem for SunTrust and other area banks. Foreclosures are skyrocketing.
Nearby is a new 16 unit strip mall, quite attractive, completed well over a year ago. So far it boasts only one tenant, a doughnut shop. Someone has to be losing a lot of money here. Don't know if it's SunTrust financed, you don't see the "Financed By" signs around anymore.
With ZIRP financial institutions can purchase longer term treasuries and profit from the spread. This may explain the market for10 year US Treasury Bonds, paying 3.5% despite years of trillion dollar deficits staring us in the face. Thank you taxpayers, just don't expect to get it back on your savings accounts.
The biggest beneficiaries of tax-payer bailouts pay the least interest on savings. Back of America (BAC) pays .1% a year, Wells Fargo (WFC) .05%, Chase (JPM) .01%. See here. Hmm ... let's see now. $5,000 in a Chase saving's account (or Washington Mutual, which is now JP Morgan Chase) would earn $5 for the year. Las Vegas, here we come!
And Suntrust? Well, SunTrust paid me 1 cent (rounded up?) interest last month on my $162 savings account. At this rate I will report a grand total of 12 cents in interest income on 2009 taxes! Sure hope the IRS isn't expending too much time and effort pursuing interest income cheats this year!
Yet Bernanke has to keep rates low. To increase short term rates would devastate the profit spreads, crashing housing, equity and bond markets yet again. We would be right back to last fall. Question is: how long will US savers put up with these abysmal rates? Recent market jitters are unnerving.
So is SunTrust a "SOLID" investment? Despite the signs, I would have to say no. Not picking on SunTrust, same goes for other banks. Considering the craziness and shenanigans going on with interest rates and the Fed's MBS purchases (which could end) I would avoid investing in any US financial institutions at this point.
Reality is not far from the air conditioned lobby. A few blocks away, a well dressed, unhappy looking middle aged woman is sitting on the sidewalk, clutching a large flooring special sign, attempting to fend off the mid-day sun. These people are hired to jump around, wave at passing motorists, entice them to buy. Sitting down on the job? Well, you try jumping around and waving all day in Florida's heat and humidity. But, hey -- she has a job.
Disclosure: I have no positions in the stocks mentioned above unless you count my SunTrust accounts.
Thursday, October 15, 2009
Why the Big Market Run Up?
Since March lows stocks have rocketed up 50% or more and the trend shows no sign of abating. Back in March there was almost universal pessimism. So what has changed?
Have fundamentals really improved? Unemployment is still going up. Tax receipts are falling drastically and state and local government must make cuts as they cannot "print money". I guess California at least gave it a try with those infamous "IOU"s. How green will the shoots stay if government money slows or stops?
In my opinion this is a tax payer fueled rally. A massive infusion of newly printed money (backed by US taxpayers) is flooding the system. The major recipients of this largess, the banks, get this money loaned to them at 0%. They then do what all good bankers do, reinvest the money at higher interest rates and profit from the spread. With global crash fears ebbing, money is leaving the safety of short term treasuries, going into longer term treasuries, equities and commodities, all riskier assets.
The suspension of mark-to-market accounting has allowed bank held bad loans (still there and growing) to be kept on the books at face value. Now we have banks reporting profits, even though the quality of the asset side of the balance sheet has not improved. Question is: Can profits generated from investment income compensate for buried-in-the-balance-sheet bad loans? If Bernanke, and Geithner keep interest rates at 0% perhaps profits can be generated for a while yet by this risky carry trade. Let's hope they don't start leveraging.
Unfortunately, US taxpayers will pay a terrible price. Government deficits have quadrupled with no end in sight ($Trillion dollar deficits from now on?). The simple fact is we cannot realistically pay off this debt short of debasing the US dollar and that may exactly what Bernanke intends to do. He doesn't dare raise rates, he may have no choice about leaving short term rates low. I always wondered why hyperinflated economies didn't stop the printing when the initial debts were devalued. You know stop at 50-100 percent inflation, why go on to thousands or millions percent like Zimbabwe. Maybe policitcally they had no choice.
Investors know this is dooming the dollar and it is dropping like a rock (see here) while non-printable assets such as gold (see here), oil (see here), grains, and stocks steadily march upward. Even real estate is showing signs of bottoming.
Devaluing the dollar will cost all Americans dearly. It will increases the price of just about everything and sets the stage for hyperinflation. Think of gasoline at $10 or more a gallon, a loaf of bread at $10, a big night out with the family at McDonald for $40. Health care? Well, we don't even want to go there. Savings and fixed income instruments would be devastated.
We have always had to deal with inflation to some extent. The problem now is it threatens to spin out of control. Hitting that magic window of 1-3% inflation may no longer be possible. People in the know are loading up on non-printable dollar denominated assets while most Americans are blithely unaware of the storm clouds of debt towering on the horizon.
Have fundamentals really improved? Unemployment is still going up. Tax receipts are falling drastically and state and local government must make cuts as they cannot "print money". I guess California at least gave it a try with those infamous "IOU"s. How green will the shoots stay if government money slows or stops?
In my opinion this is a tax payer fueled rally. A massive infusion of newly printed money (backed by US taxpayers) is flooding the system. The major recipients of this largess, the banks, get this money loaned to them at 0%. They then do what all good bankers do, reinvest the money at higher interest rates and profit from the spread. With global crash fears ebbing, money is leaving the safety of short term treasuries, going into longer term treasuries, equities and commodities, all riskier assets.
The suspension of mark-to-market accounting has allowed bank held bad loans (still there and growing) to be kept on the books at face value. Now we have banks reporting profits, even though the quality of the asset side of the balance sheet has not improved. Question is: Can profits generated from investment income compensate for buried-in-the-balance-sheet bad loans? If Bernanke, and Geithner keep interest rates at 0% perhaps profits can be generated for a while yet by this risky carry trade. Let's hope they don't start leveraging.
Unfortunately, US taxpayers will pay a terrible price. Government deficits have quadrupled with no end in sight ($Trillion dollar deficits from now on?). The simple fact is we cannot realistically pay off this debt short of debasing the US dollar and that may exactly what Bernanke intends to do. He doesn't dare raise rates, he may have no choice about leaving short term rates low. I always wondered why hyperinflated economies didn't stop the printing when the initial debts were devalued. You know stop at 50-100 percent inflation, why go on to thousands or millions percent like Zimbabwe. Maybe policitcally they had no choice.
Investors know this is dooming the dollar and it is dropping like a rock (see here) while non-printable assets such as gold (see here), oil (see here), grains, and stocks steadily march upward. Even real estate is showing signs of bottoming.
Devaluing the dollar will cost all Americans dearly. It will increases the price of just about everything and sets the stage for hyperinflation. Think of gasoline at $10 or more a gallon, a loaf of bread at $10, a big night out with the family at McDonald for $40. Health care? Well, we don't even want to go there. Savings and fixed income instruments would be devastated.
We have always had to deal with inflation to some extent. The problem now is it threatens to spin out of control. Hitting that magic window of 1-3% inflation may no longer be possible. People in the know are loading up on non-printable dollar denominated assets while most Americans are blithely unaware of the storm clouds of debt towering on the horizon.
Tuesday, September 29, 2009
A Timber-Backed ETF for an Historic Commodity
Up until 100 years ago our ancestors needed timber almost as much as water to survive. Keeping warm, building shelter, constructing tools, all called for timber. It was necessary for survival and life itself. Indeed, plant material was (and still is) the basis of all life.
You can invest in timber by buying wooded acreage. Periodically (like every 10-15 years) a timber company will pay to harvest your trees. A much simpler and more efficient way though, would be to buy CUT, Claymore Securities' timber ETF According to Claymore, CUT seeks investment results that track the Beacon Global Timber Index (see here for index information).
CUT invests at least 90% of its money in worldwide holdings of timber and wood product companies. As of September 28, 2009, no company constituted over 5% of holdings, so your are well diversified. Included are some well know companies such as Meadwestvaco (MWV), Rayonier (RYN) and Weyerhouser (WY). A little under 1/2 of all holdings are in US (27%) or Japanese (19%) companies.
In the 1800's indiscriminate lumbering of pine (White Pine image at left) reduced much of America's, especially Michigan's, virgin pine to a wasteland of stumps and dry brush. This in turn sparked rampaging wildfires, both in the cities (Chicago fire of 1871) and cut over lands, the effects of which can still be seen.
Today, timber is harvested for packaging, paper, building materials, heating and furniture construction. Home construction and furniture making are cyclical industries while packaging is highly dependent on the economy. Many of CUT's holdings are packaging companies.
Is CUT a good buy? You can make an argument either way. On one hand timber is a real, not paper (I know, I know ... bad choice of words), asset which will always be in demand. If nothing else you can always burn it for heat. Indeed wood heat is becoming preferred in rural areas as a replacement for expensive propane.
On the other hand, packaging demand, dependent on recession spooked consumer spending, is in a slump. Since CUT has almost tripled off its 52 week lows one must question the near term prospects, especially in a deflationary environment. CUT, going forward, will undoubtedly mirror the health of the worldwide economy.
You can find more about CUT at this page on Claymore's website.
Disclosure: No Holdings in any of the above.
You can invest in timber by buying wooded acreage. Periodically (like every 10-15 years) a timber company will pay to harvest your trees. A much simpler and more efficient way though, would be to buy CUT, Claymore Securities' timber ETF According to Claymore, CUT seeks investment results that track the Beacon Global Timber Index (see here for index information).
CUT invests at least 90% of its money in worldwide holdings of timber and wood product companies. As of September 28, 2009, no company constituted over 5% of holdings, so your are well diversified. Included are some well know companies such as Meadwestvaco (MWV), Rayonier (RYN) and Weyerhouser (WY). A little under 1/2 of all holdings are in US (27%) or Japanese (19%) companies.
Today, timber is harvested for packaging, paper, building materials, heating and furniture construction. Home construction and furniture making are cyclical industries while packaging is highly dependent on the economy. Many of CUT's holdings are packaging companies.
Is CUT a good buy? You can make an argument either way. On one hand timber is a real, not paper (I know, I know ... bad choice of words), asset which will always be in demand. If nothing else you can always burn it for heat. Indeed wood heat is becoming preferred in rural areas as a replacement for expensive propane.
On the other hand, packaging demand, dependent on recession spooked consumer spending, is in a slump. Since CUT has almost tripled off its 52 week lows one must question the near term prospects, especially in a deflationary environment. CUT, going forward, will undoubtedly mirror the health of the worldwide economy.
You can find more about CUT at this page on Claymore's website.
Disclosure: No Holdings in any of the above.
Monday, August 31, 2009
A Cold Wind Blowing
It has been a cool summer in the west central Michigan. I can count on one hand the number of days this fast departing summer had temperatures reaching the low 80's. Now, in the last days of August, temperatures drop into the 30s overnight. Cold fall winds are blowing in early off Lake Michigan and the long gray winter suddenly doesn't seem far off.
Like the weather, the Michigan economy is gloomy. Folks sell firewood, apples and yard sale trinkets to get a small amount of cash. How much of that gets reported to Uncle Sam? Wouldn't help anyway.
Toys from more prosperous times line roads. Boats, travel trailers and other paraphernalia can be had for a song. Not many cars, I guess the clunkers program got most of them. Deteriorating roads make for rough driving. Walk into a store: You will find solicitous clerks but few customers.
With an unemployment rate over 15%, real estate values continuing to drop, and a cold winter approaching things seem bleak. One hopes the red, orange and gold leaves of October will help.
Like the weather, the Michigan economy is gloomy. Folks sell firewood, apples and yard sale trinkets to get a small amount of cash. How much of that gets reported to Uncle Sam? Wouldn't help anyway.
Toys from more prosperous times line roads. Boats, travel trailers and other paraphernalia can be had for a song. Not many cars, I guess the clunkers program got most of them. Deteriorating roads make for rough driving. Walk into a store: You will find solicitous clerks but few customers.
With an unemployment rate over 15%, real estate values continuing to drop, and a cold winter approaching things seem bleak. One hopes the red, orange and gold leaves of October will help.
Wednesday, August 12, 2009
Oil as an Investment in Deflationary Times
We all know that in an inflationary environment oil and other real assets are good places to put your money. It is easy to find asset classes which keep pace with inflation. Gold, oil, real estate, stocks, collectibles, maybe even your car and your boat. Your choices seem endless.
But what about in today’s deflationary environment? Investments that do well in a deflationary environment are much more difficult to find. Here are some possible candidates with my comments in italics.
Remember “inflation is always and everywhere a monetary phenomenon”. Prices are determined by supply/demand, not just inflation/deflation. Worldwide, the supply of “easy” oil is falling quickly, even as demand stagnates. The large middle eastern fields are in decline. It is telling that when oil was over $100/barrel Saudi Arabia and the rest of the middle east was unable to up production much. Therefore, oil prices could continue to rise, even in recession.
Economies such as China, India and Indonesia are again strengthening, if not booming. Tens of millions of first time customers are looking to buy autos, this has to be bullish for oil.
I would stay away, for now, from the natural gas etf UNG. There is an oversupply of this relatively inelastic commodity thanks to technological advances in production. Eventually, natural gas will start replacing oil as it becomes relatively cheaper, but the process will take time. How many natural gas powered vehicles have you seen on the road lately?
Of course the current rally is not only in natural resources, it is also in world markets. It is best not to buck a trend. However, nothing goes up forever. The test will come when market indices decline, then we will see to what extent oil follows. For this reason, I would stay at least 50% in cash. You may find better entry points later.
With dark under-currents of impending doom and crash rumors swirling just below the surface (See numerous SA articles) I would keep a close eye on the rear view mirror. At least with natural resource positions you have something which, short of Armageddon (and we will all be dead then anyway), will always be in demand for the foreseeable future.
Disclosures: Long SH, OXY and FXY
But what about in today’s deflationary environment? Investments that do well in a deflationary environment are much more difficult to find. Here are some possible candidates with my comments in italics.
- Cash - No upside, but safe, liquid and purchasing power increases with time. Example: If you had sold a Florida house 3 years ago for cash, put the cash in a savings account you can now buy two houses with the money.
- Quality long term government and corporate bonds - This was a great place to be the last 1/2 of 2008, but the trend runs its course as interest rates approach zero. Even worse, with trillion dollar deficits and quantitative easing you know this game will end someday.
- Currency plays such as the US Dollar (UUP) or Japanese Yen (FXY) - These currencies do well when the fear factor is strong and markets tank.
- Inverse ETFs such as SDS, SH, DOG, and DXD - Great for short term trading, but if you are not a day trader stay away, especially the double inverses. SA has numerous articles on why.
Remember “inflation is always and everywhere a monetary phenomenon”. Prices are determined by supply/demand, not just inflation/deflation. Worldwide, the supply of “easy” oil is falling quickly, even as demand stagnates. The large middle eastern fields are in decline. It is telling that when oil was over $100/barrel Saudi Arabia and the rest of the middle east was unable to up production much. Therefore, oil prices could continue to rise, even in recession.
Economies such as China, India and Indonesia are again strengthening, if not booming. Tens of millions of first time customers are looking to buy autos, this has to be bullish for oil.
I would stay away, for now, from the natural gas etf UNG. There is an oversupply of this relatively inelastic commodity thanks to technological advances in production. Eventually, natural gas will start replacing oil as it becomes relatively cheaper, but the process will take time. How many natural gas powered vehicles have you seen on the road lately?
Of course the current rally is not only in natural resources, it is also in world markets. It is best not to buck a trend. However, nothing goes up forever. The test will come when market indices decline, then we will see to what extent oil follows. For this reason, I would stay at least 50% in cash. You may find better entry points later.
With dark under-currents of impending doom and crash rumors swirling just below the surface (See numerous SA articles) I would keep a close eye on the rear view mirror. At least with natural resource positions you have something which, short of Armageddon (and we will all be dead then anyway), will always be in demand for the foreseeable future.
Disclosures: Long SH, OXY and FXY
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