CREF Stock, 5 years ending May 26,2006
CREF Equity Index, 5 years ending May 26, 2006
The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Selections are free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Mailed paper subscriptions are currently not being accepted (current paid subscribers will continue to receive their paper issues). Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
"I still own some Florida real estate in the Melbourne area. About a year ago I witnessed an event equal to people buying gold at $800 per ounce back in 1980. I planned to buy a new.... home in Melbourne at about $120,000 (1450 square feet, two-car garage, etc.) The company raised the price to over $200,000 and held a raffle. Six hundred people showed up. Couples with strollers bought these houses like 'hot cakes'. They appeared to not care about price, but affordability".
Affordability.... exactly so. Don't bug me with details, just tell me the monthly payment. Well, mortgage interest rates are going up, so affordability is going down.... and pushing down prices.
I remember seeing the old title search for my wife's parents' Winter Park (FL) home, which they had built for them in the early 1960s. It came with a bright orange cover and ran to about 300 typewritten pages for the plot of land. Most of the pages traced the history of the lot through the 1923-26 Florida land boom, as the property was flipped from buyer to buyer on the way up, sometimes within days, then as the property defaulted to the previous buyer (for nonpayment of seller-held mortgages) on the way down as the bubble burst. In the end, the original 1923 seller got his property back intact! Fascinating.
An update on our soon-to-be-divorced (thank God!) friend in the San Diego area who is selling their executive-style home [June 2005 issue]: Originally listed at $790+K last summer, the asking price has just been dropped to $698K. The house has not yet sold largely because her know-it-all soon-to-be-ex husband did not agree to drop the asking price in a timely manner, as suggested by the real-estate agent, as the housing bubble popped.
I have seen this house, and at $698K it's a good buy compared to others in the neighborhood..... except, of course, the San Diego housing bubble continues to deflate and all of the house prices are exorbitant in comparison to where they're likely to wind up.
The pattern of ascent and descent of the prices of the
homebuilders' stocks closely resembles the 1998-2002 Internet bubble, and we've gone only about a
third of the way on the downside. This pattern
suggests that the housing bust is likely to be anything
but gentle.... perhaps the worst this country has seen
since the 1930s. If you think that this won't in turn
trigger a recession, then perhaps you should consider
purchasing that (overpriced) bridge in Brooklyn.
This year, three of last year's restaurants were out of business, and another half-dozen turned her down, giving as their reason "the economy is bad". By which they mean, of course, their business sucks.
I wonder, are the restaurants here in Worcester, the
financial backwater of America, the "canary in the
coal mine" for the country's immediate-future
economic prospects?
Going back to January 1, 2000 the Dow is only down 1%. Six years have passed and the Dow is down 1%. In the same time period, oil has gained 200% or $50 a barrel. Gold has gained 120% or $346 an ounce. The XAU is up 129%, the XOI is up 136%, the CRB is up 75%, and the dollar is down 14% over the past six years. I just can't imagine how the media goes on about the bull market in stocks given what has actually happened over the past six years. - Marc Sexton
In their breathless enthusiasm about the market's push to six-year highs, analysts might benefit investors by noting that stocks have lagged the return on lowly Treasury bills for nearly eight years, and thereby remind them that valuations matter. From mid-1998 through Friday's [May 5] close, the S&P 500 index has delivered total returns of just 3% annually. The index remains well short of the all-time high it achieved in 2000. The Russell 2000 index has performed better over the past 8 years, achieving white-hot total returns averaging 7% annually. Of course, the notion of "multi-year highs" can be deceptively exciting, as if the market should be chased at these levels for fear of running away forever. From a broader perspective, however, the market has simply gone from rich valuations six years ago, to rich valuations today. Unfortunately, investors are probably less than half-way through a long, exciting trip to nowhere. - John Hussman
Whenever stocks seem poised for a tumble, we see that mysterious hand (of the free market) jump into the futures pits and buys with abandon. Unfortunately, stock prices are not even keeping up with inflation for the past five years, unless you have owned commodity-based companies and gold/silver stocks. For me this is a good reason why Mr. Greenspan was so supportive of not regulating the derivatives market. With lots of leverage and an unlimited supply of cash, they can get the results they want...a modestly positive yield curve with interest rate derivatives and a stock market that refuses to go down in the futures pit, good news or bad. I believe firmly that we live in an era of managed markets...the financial system depends on it, but relentlessly rising commodity prices are telling the true story. You can play games with paper money, but buying tangible assets is another story. - Mike Hartman
When Bernanke presses the pause button popular wisdom says that US stocks will embark upon a record-setting relief rally. While this could happen.... there is another scenario to consider: Bernanke pauses because the US economy goes bust. - Brady Willett
From the looks of world markets expressed in US Dollars and considering valuations, you would think that the market is discounting world peace and healthy economic growth and prosperity into the hereafter. While practically all of us wish this were true, this does not seem plausible. I've also never experienced a market that was led by precious metals and commodities also accompanied by sustained real advances in consumer related businesses; yet that is what we now have. In Europe, an environment of tepid economic growth at best; European stocks (expressed in US dollars) have recently gone upward in a parabolic manner. I have only two reasonable fundamental explanations for the behavior of the markets. Either what we are seeing is the nominal rise of worldwide assets expressed in US dollars due to a central-bank-induced world-wide liquidity bath, or worldwide markets are discounting the near-term arrival of the messiah. - Martin Goldberg
Americans, consciously or unconsciously, are betting on inflation. They are hoping their favorite swindlers at the central bank will continue to engineer a gradual devaluation of the dollar so as to ruin their creditors rather than themselves. The dollar lost half its value during the Greenspan years alone. And now, the Bush administration is adding more debt than all the other administrations in U.S. history combined. Inflation looks like a sure bet...a "done deal." ....How nice it would be if the empire's creditors would go gently into that good night! ....according to lumpen-American economic theory, the creditors just stand there, stock-still, while the big inflation bus runs over them. Not only do they not sell their U.S. bonds and dump their U.S. dollars, they continue adding to their inventory, like collectors of Cabbage Patch dolls long after the fad has moved on. God bless 'em. But we doubt the lenders are quite as dumb as the borrowers believe. In fact, there could come a time - any minute, in fact - when the lenders wise up. The dollar could end its gentle decline... and drop like a stone. Then, the lending would cease, too. The U.S. economy would come to a halt, and all those people who are finding it difficult to keep up with their interest payments would suddenly find it impossible. The defaults and bankruptcies would multiply. American debt may be wiped out by inflation, but Americans will probably be wiped out first. - Bill Bonner
Due to the gigantic leverage implicit to carry trade, a modest rise of the yen, euro and Swiss franc against the dollar by just 2-3 percentage points is enough to abruptly torpedo the whole carry trade in these currencies, triggering a fire sale of unimaginable proportions of both dollars and U.S. bonds. In our view, this is plainly written on the wall, and a true miracle is needed to avoid this debacle.... There is no way to know the depth and pervasiveness of the U.S. carry trade funded in foreign currencies. In our view, it must be immense, simply because there exist no domestic savings to fund the rampant credit expansion. The whole U.S. financial system is built on carry trade, borrowing short and lending long. - Kurt Richebächer
The US has successfully transitioned itself to a bubbleocracy where speculation is central activity of the economy. The rich and wealthy speculate through hedge funds and private equity, the middle and upper class through real estate and stocks and the working class through lottery tickets and gambling. From the lowest to the highest economic strata of society, speculation has become the central preoccupation of the nation. However, the most populous economic stratum in society is the middle class and hence the primary path to being a bubbleocrat has been through speculation in real estate. - Paul Mampilly
I think there will be a very short, sharp correction of ten to 15%, in the worst case reaching a floor of around $575 an ounce. In the long-term I'm still very bullish on gold because I think the US dollar is dying and I don't see what can replace it. But the latest rise is quite simply unsustainable. - Peter Grandich [Nick's comment: Peter has a good track record for calling short-term turns in the gold market.]
If the [homebuilding] group is in the process of topping out, I have to think that this is an ominous message for the whole real estate/home building sector. And as this is the area that has bolstered the U.S. consumer buying craze, well, it's something to think about, wouldn't you say? - Richard Russell
Yesterday morning I took my car to get worked on. They gave me a loaner, so while I waited I drove to the nearby Borders bookstore. When I got there, I made my usual bee-line for the business/financial section. Two years ago, there were two full rows of stock market books in this store. Now there was only a half a row. However, there are now almost two full rows of books telling you how to get rich buying real estate. They included titles such as Real Estate Miracles, Why Real Estate Will Go Up in Value for 10 Years, The Baby Boomer Vacation Real Estate Boom, The Weekend Millionaire's Secrets to Investing in Real Estate: How to Become Wealthy in Your Spare Time, Flipping Properties: Generate Instant Cash Profits in Real Estate, How to Buy Real Estate and Walk Away with Cash, and the aptly-titled Real Estate for Dummies. Judging by what I see in this bookstore it would seem that the masses have grown disinterested in stock speculation and are trying their hand at being real estate moguls. - Mike Swanson
During both 2004 and 2005, 80 percent of San Diego homebuyers used adjustable-rate mortgages (ARMs). There is nothing inherently shocking about this statistic -- until you consider the fact that those two years saw fixed mortgage rates lower than they'd been in two generations. Why would any buyer -- let alone the vast majority of buyers -- blow the opportunity to lock in lifetime-low mortgage rates for good? Why would they instead subject themselves to the payment increases resulting from the nigh-inevitable rise in adjustable mortgage rates? The answer is simple. Many buyers didn't see the need to lock in low rates because they didn't think they'd be in the mortgage for very long. Some assumed that they would sell their homes at huge profit and move to the next coach up on the housing gravy train. Others figured that they would soon refinance their mortgages to pull out all that equity they'd gained. In either case, a fixed-rate mortgage would be pointless. So why not stretch to get a little more house by employing an ARM? It doesn't make a difference whether or not these buyers intended to occupy the purchased home. They took on the risk of eventual payment hikes in order to increase their "bets"-- the prices of the homes being purchased -- in the hopes that price appreciation would cover the increased mortgage bills and lead to even bigger payouts. For better or for worse, they were very much engaged in speculation. - Rich Toscano
When the real estate market rolls over it's not like the stock market where they can send the Plunge Protection Committee into the futures pit, and try to prop up the market. Once a person's home is foreclosed on there's nothing the Fed can do to alleviate that. So, I think once [interest rates climb] beyond 5%, they're going to have to start cranking up the bilge pumps and bring in the US air force, we're going to need more than helicopter money. - Jim Puplava
Long term prices of houses simply can not rise above people's means to pay for them. That is a simple economic fact. Here is another simple economic fact: Family incomes are falling. The negative savings rate and rising foreclosures are more proof of stress in the system. - Mike Shedlock
Housing has done well for most people, but you have to live somewhere. The only way most people can release the gains in their houses is by leaving the country, dying, or borrowing against them. Of the three choices, most have chosen the third, which is why the next few years of this century promise to be more disagreeable than the first six. - Bill Bonner
In my book public enemy No. 1 are the central banks. I think the world will be much better off under a gold standard. Other than that, I think the asset inflation is much more dangerous than consumer price inflation because asset inflation is driven by a huge credit bubble. Then asset prices become very expensive and when asset prices go down it leads to recession. So the Central Banks will support asset prices and see to it that they keep on going up. So they will inflate more and more and eventually you will come to an economic collapse. - Marc Faber
In order for the present monetary system to be accepted by the public, inflation must remain concealed. If the public discovered the truth, there would be tremendous uproar. Accordingly, central banks keep up the propaganda by claiming that inflation is tame and under control. I'm sorry to disappoint you, but what's under control is not inflation but inflation FEARS. By artificially suppressing the Consumer Price Index through complicated adjustments, central banks continue to please the public. - Puru Saxena
Had I been a lecturer at a university in the past, and if I had, at the time, the opportunity to grade student Ben Bernanke, we would have today a different Fed chairman. I would have had to let him fail his final exams. I would have told him that he might be better off to learn the trade of a printer than that of an economist. In a printing shop he could have printed everything, from porno to books on Christian fundamentalism, but at least the world would have been spared from having him at the US Federal Reserve. - Marc Faber
Anybody have Paul Volcker's phone number? We need help sooner rather than later. The Fed needs to step up and defend the dollar. So far, that's a no-go as it would bust asset prices. The Fed is in a really tough position...The wild spending orgy from the Republicans in D.C. is finally beginning to hurt. - Richard Morrow
Bernanke is not inheriting the best of situations. How would you like to be responsible for an economy that's dependent upon $700 billion of foreign money every year? I don't know what I would do about it, but he's going to have to do something about it sooner or later. - Paul Volcker
A government that can spend all it wants is a tyranny in waiting. A government that can destroy a currency on a whim is despotic. This situation must change, and the direction of change should be clear. The Fed should go the way of every government bureaucracy, straight into the landfill of history. - Lew Rockwell
Economic and financial history is a subject that is sadly no longer considered worthy of study in academia today. Instead, economics and finance today is a "hard science" filled with magical formulas derived from efficient market theory that purports to explain everything, until it doesn't. - Paul Mampilly
If you want to know the kind of idiocy that is being taught in upper-level economics these days, economics student Anna says that she spends her time taking "the second order partial derivatives of a generic Cobb-Douglas equation and then solving for the input equations in terms of the constants". Hahahaha! This is economics? Hahaha! But this is the incredible stupidity that passes for economics these days, and then you wonder why I am always standing on the side of 49th Street, yelling at people in cars "Your money is doomed and you are doomed!" - Richard Daughty
Even today, individual income taxes account for only approximately one-third of federal revenue. Eliminating one-third of the proposed 2007 budget would still leave federal spending at roughly $1.8 trillion -- a sum greater than the budget just 6 years ago in 2000! Does anyone seriously believe we could not find ways to cut spending back to 2000 levels? Perhaps the idea of an America without an income tax is not so radical after all. - Ron Paul (R-TX)
Does anyone really stop to think about what would happen to the current economy if Congress enacted a plan to pay off the gargantuan federal debt, not to mention fund the trillions in unfunded Social Security and Medicare promises made? The consequences of such an action would lead to a second Great Depression. Federal spending that for generations has greased the wheels of commerce cannot be reduced in the face of the gargantuan debt obligations that must continually be paid or rolled over. - Dan Amoss
Add up the whole thing -- Social Security and Medicare in all its parts -- and discover that this year of 2006 is the first year of a 75-year funding disaster of European proportions. Never mind the widely publicized and far-off dates when trust funds go broke. They serve only to make us complacent. This year is the first year that the Social Security tax surplus fails to cover the general revenues needed for Medicare. - Thomas G. Donlan
Thirty years ago, offices started using cubicles to house workers. Cubicles are still the largest selling office furniture, despite a huge range of management experts who say that they create a bad business environment. Why do they persist? In 1968, the Treasury Department created new depreciation schedules that subsidize cubicles at the expense of separate offices. Companies can depreciate office furniture (including cubicle walls) in 7 years, whereas permanent office structures are given a 39.5-year rate. In other words, the costs of cubicles are more quickly recoverable than offices. This one change alone is what turned our workplaces into pictures out of Brave New World instead of the comfortable and humane places that they should be. - Lew Rockwell
It's no secret I don't have a lot of use for the Bush administration. But I will tell you this: Under the circumstances, I don't believe we had any real choice but to invade Iraq. The invasion was a success. Iraq is better off without Saddam Hussein. And our military forces are kicking butt on the terrorists there - rather than here. Iraq, therefore, despite many mistakes and some setbacks, remains one of the great accomplishments of the Bush administration. - Joseph Farah
Realizing that perceptions of Iraqi weakness could invite attack, from Iran in particular, Saddam wanted the world to think he possessed WMD. But eventually he realized that to fend off the coalition, he needed to convince Western states that his regime no longer possessed those very weapons. As coalition forces geared up for war in late 2002, Saddam decided to cooperate with the United Nations to establish that his country was clean of WMD, as he put it, so as "not to give President Bush any excuses to start a war". This lucid moment, ironically, fell victim to his long history of deceiving the United Nations; Iraqi steps to comply with the inspections regime had the paradoxical effect of confirming Western doubts that the cooperation was a ruse. For example, intercepted orders "to remove all traces of previous WMD programs" were misinterpreted as yet another ploy, and not the genuine effort they really were. Saddam's belated attempts at transparency backfired.... Coalition intelligence agencies, not surprisingly, missed the final and unexpected twist in a long running drama. Neither those agencies nor Western politicians lied; Saddam was the evil impostor whose deceptions in the end confused and endangered everyone, including himself. - Daniel Pipes
Ahmadinejad speaks today like Hitler before taking power. He speaks of the complete destruction and
annihilation of the Jewish people.... We are dealing with a psychopath of the worst kind.... - Ehud Olmert
[Israeli prime minister]
Because the 5-year window now begins in 2001, where stocks had descended about halfway between their 2000 tops and 2003 bottoms, holders actually have a small gain to show after five years, though most of it is from reinvested dividends.
Compare this with the bond funds:
As you can see, although bond-fund performance has been flat for the past twelve months as interest rates rise, for the past five years bond-market performance still widely outstrips the stock market's. It does make you wonder why stock performance gets such widespread press (market bull for a "bull market", I guess) when the real bull markets have been in bonds, commodities and metals.
Speaking of bull markets, the stock-market "bull" has expired. We are now in transition from the 2003-2006 mini-bull jag of a multi-decade bear market, and about to embark on the next bear leg. Technical indicators suggest that an intermediate bottom will be reached in mid-June to early July, followed by a choppy summer and renewed selling pressure in the fall. An October or November crash is possible, though not likely at the moment.
It's still to early to tell if the fall 2006 bottom will be followed by another mini-bull in 2007, or whether selling will continue into a major 2007 bottom. A great deal depend on just when the Fed starts slashing short-term interest rates to counteract a rapidly-collapsing housing bubble.
As the world's stock markets "crack" under the
strain of global interest rate increases, in my opinion
the risk of systemic failure is currently about 55%.
A. "Inheritance" - real (normalized) "dividend distribution" portfolio::
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $108,789.78 (see below)
Increase: $8,789.78 [+ 8.79%]
COMMENT on "Inheritance": New to the portfolio this month are two sick puppies..... er, sorry, I mean turnaround candidates. The first, Deluxe Corp., is the nation's major printer (manufacturer) of checks. Yes, the kind sent to you by your bank for use with your checking account. Deluxe is a century-old company, and for many years was the bluest of blue chips, as check use climbed relentlessly year after year. But a funny thing happened on the way to the Internet; younger folks growing up electronically-connected tend to favor paying bills online.... or perhaps more accurately, paying by credit or debit card, then having the monthly credit-card payments debited from their accounts. Who needs checks for this?
This is a real generation-gap thing. Older folks are accustomed to having and expecting printed proof of their financial transactions. Younger folks could care less; computers never make a mistake, right? I still shudder when I see supermarket shoppers swiping their store cards, then their debit cards through the card reader, thereby tying together all of their item purchases, their personal information and their financial information into a neat little package ripe for identity theft, data mining or other misuse. Ugh.
OK, OK, I'm getting off-topic here. The point is, as we old geezers die off check use is declining, and with the post-9/11 "Check 21" law, whereby you now have to beat your bank into submission to get your checks returned to you, it would seem that checks are going the way of the dodo. Now one could just say, sorry, Deluxe, at 100+ years your time is up, the long-term tendency is for companies to go out of business and now it's your turn; technology has made you obsolete. But Deluxe is putting up a fight; a few years ago it took on a load of debt to acquire New England Business Systems in an effort to diversify into general business forms.
This strategy is having some success. Revenues are still climbing; paper forms are not yet obsolete. The debt load is being whittled down, and it appears the dividend is safe. A recent change of managers at the top also piqued my interest.
The second sick puppy - sorry, turnaround candidate - is Maine & Maritimes, which used to be known as Maine Public Service, an electric utility. They claim they are the nation's smallest publicly traded power utility, and I have no reason to doubt this. Minuscule is the word that comes to mind, and their tiny size has (in my opinion) worked against them as they try to adapt to the deregulation of the electric power industry and become a transmission-only company.
Northern Maine (and New Brunswick) is a tough place to sell electricity. A friend once told me that northern Maine has only two seasons, winter and July (and black flies ruin the first two weeks of July). Freakish weather, such as the three-week-long ice storm in 1998 or the unusually warm 2005-2006 winter, can really wreak havoc on a utility's bottom line. The economy is primarily fish, potatoes and wood, none of them exactly high-growth industries. Try as I may, I simply cannot make an argument for growth (in excess of inflation) for M&M; the stock should be bought primarily for its turnaround prospects.
The low point for the company's cash flow is this year. Beginning in 2007 M&M will begin to recover deferred stranded costs from its discontinued ownership in generating plants, and earnings and cash flow should recover sharply. Last year, management committed to maintaining the 25-cent quarterly dividend, but failed; the last two payments (January and April 2006) have been skipped. I think that the dividend is likely to be restored by 2007 when cash flow recovers.
In the meantime, the stock sells at half book value.
As I previously indicated, I decided to sell enough of the L-3 Communications to recoup most of the money manager's original investment, and let the profits ride. L-3 does not really satisfy my criteria for a high-dividend-yield portfolio, but it's an interesting company (somewhat recession-resistant, due to its defense-industry component) and I thought it was worth hanging onto for awhile to see how this money-manager's pick turns out.
The iShares MSCI Emerging Market exchange-traded fund was stopped out (at 11% below its high price for the year) as the Asian stock markets began their mid-May plunge. I made a nice short-term profit on this money-manager's pick.
Adjusting for the stocks sold, the portfolio cost (normalized) is $107,511.68 with $73,168.65 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $21,171.64
Increase: $10,472.64 [+97.88]
COMMENT on "PIG": I continue to "roll over" 3-month T-bills, one per month.
C. Roth IRAs - real portfolio:
SUMMARY - Roth IRAs:
Original cost: $28,776.19
Present value: $ 34,499.18
Increase: $ 5,722.19 [+19.89%]
COMMENT on Roth IRAs: Boring, boring.... rolling over 6-month T-bills.
D. TIAA/CREF 403(b) and IRA retirement plans; I switch between indexed stock/bond/money funds:
Gain for the period January 1, 1988 through March 31, 2002 (14.25 years): 223.43%. Compound annual rate of return for this period: 8.59%. (Gain excludes the impact of additional monthly cash contributions.)
A portion of my TIAA-CREF funds are currently in the process of being transferred to Fidelity Investments. Once this is complete, I will try to "pick up" the reporting of the performance of my TIAA-CREF retirement plans.
TIAA-CREF values, 26May2006: stock, 216.99; equity-index, 85.63; MM, 23.05; bond, 75.84; inflation-indexed bond, 45.43; real estate, 252.977; TIAA current yield in SRA, about 4.92%. Current money-market yield is 4.62%. COMMENT on NYSE "Timer's Trend": We are currently on a SELL signal of May 12, 2006.
COMMENT on NASDAQ "Timer's Trend": We're on a SELL signal given May 10, 2006.
NEXT ISSUE - will appear near the end of June or in early July 2006.