CREF stock, 5 years ending October 12, 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
"The stocks that are selected for a portfolio should have expected returns which more than compensate for risk taken...."
"However, it was peculiar that this 'non-event' [informal SEC investigation] triggered the resignation of the company's [CVS] Controller and Treasurer, the two top-ranking accounting officers of the firm. Why would these top two accounting people leave for an immaterial mishap? Somehow this occurrence did not pass our 'smell test'....
"Although the stock had been very good to us during the past 30 months, returning upwards of 60% over that time frame, we reviewed our assumptions about the company. We identified past execution issues dating back to 2001 that resulted in the company taking a $353 million, or $0.29 per share, restructuring charge, causing a 13% year-over-year decline in earnings per share.... Quite obviously, one event in 2001 may have had no connection to the other event in 2006. However, our intuition prevailed, and we thought it was justifiable to act on the departure of two top-ranking accounting employees. As such, we decided to secure our profits and sell our stake in CVS.
"CH Robinson was another stock owned in many of our client portfolios. In November of 2003, we initiated a 2%-position in this transportation services and logistical solutions company.... At the time, the stock was not necessarily deemed to be cheap, trading at a forward 12-month price-to-earnings ratio of about 26x (below its median average of 27x and peak multiple of 32x).... Over the next nine quarters, the company handily exceeded both our and the market's expectations for growth, beating the consensus estimates for earnings in eight of the nine quarters."
My point in reprinting these excerpts is not to show you how clever the investment advisors are (indeed, they are) but the game being played. Indeed, this game is no different than the one being played by all of Wall Street, it seems, which is to try to beat other money managers by chasing corporate earnings, then cash in on the capital gains when you're proved to be right. So much for the Warren Buffett approach of buying solidly-growing companies at a fair price and holding onto them for a long, long time.
I am old enough to remember the 1970s bear markets when this earnings-chasing model collapsed, because investors (correctly) concluded that inflation was cannibalizing the guts of corporations and the reported earnings did not compensate for this loss. But today's money managers aren't old enough to remember this disaster. Their mentors chased earnings, and they chase earnings, and it never occurs to them that someday this investment style may fail and therefore be abandoned in favor of another.
The main problem with earnings-chasing is that the strategy is very recession-sensitive. The recession arrives; corporate earnings collapse; the herd's expectations of the "appropriate" level of earnings also shrinks; stock prices follow earnings and shrunken expectations downward; and instead of the expected capital gains investors are saddled with capital losses, no matter how "clever" the money managers are.
It seems to me, wouldn't it make more sense to pay attention to the early warning flags of an impending recession, and at least stay on the sidelines for awhile until the storm arrives and expectations are reduced to be more in line with historical values? I would think so; but money managers are paid to be fully invested, and will follow prices up or down.
Another problem with the earnings-chasing, herd-following investment style of committees and mutual funds is that it may not be suitable for the owners of the investments. When my stepmother was alive, after allowing for management fees and taxes she received a net annual income ("take-home pay") of about 1% of her assets under management. That doesn't seem very fair to me when T-bills are paying in excess of 5%.
Sure, if she had been in her 60s it might have made sense for her to accept the lower dividend yield of a portfolio of stocks in exchange for future capital appreciation and dividend growth. But when she reached age 90, it seems to me that at that point her investment managers should have had her mostly in bonds and other high current income-producing securities. Instead, as you will recall from the January issue of The Contrarian's View, I inherited a small pile of 46 common stocks paying, for the most part, tiny dividends or no dividends at all.... and including that most conservative and appropriate investment for widows and orphans, eBay.
As long-time readers of The Contrarian's View certainly know by now, my investment style is completely different from the earnings-tracking herd. It also has shifted completely from some interesting strategies when I was much younger (such as Regulation T short sales of common stocks against warrants held long) to a much more conservative style, now that I'm retired. It also recognizes that stocks have essentially been overpriced, and dividend yields historically low, since about 1993, and one should fully expect stock prices to eventually revert to, or below, their historical average in relation to GDP.
In addition, it is my opinion that we now have to worry about levels of systemic risk (something the earnings-chasing herd apparently never thinks about) because the markets are now so highly leveraged that a mistake by our central bank, or a screwup by a hedge fund, bank, insurance or mortgage company could conceivably trigger a financial collapse.
So, the way I look at it is: I have this small pile of money which needs to be carefully guarded, because I'll never live long enough to replicate it should I lose it. Since "cash" pays pretty well right now (and I can use the income for living expenses), that's where I keep it, preferably in U.S. governments so I don't have to pay Mass. income tax on the interest it earns.
Once in awhile I will seek out stocks, preferably with hefty dividend yields, which appear to me to be undervalued because they're grossly out of favor with the herd, and therefore likely to rise in price when the herd comes to its senses. If the speculation doesn't work out, dump it. If it does, I can sell enough to more or less recoup my original investment, and let the rest ride. Even if a stock should go to zero in a subsequent killer bear market, I'll still have my original little pile of cash.
Generally, a position should work out (or not work out) in six months to a year. After recouping the original investment, the part left to ride can be reviewed again in about three years. (If an investment hasn't met your expectations for it after about three years, it most likely never will; you should dump it.)
It's pretty hard to lose money this way (though I may not make much, either; hopefully, enough to provide some protection against inflation).
You can see my strategy at work this month in the "Inheritance" portfolio. I thought it might be wise to pay attention to my own estimate of the currently high level of systemic risk, and reduce my exposure to stocks where appropriate. You will recall, last January I went bargain-hunting and bought three telecoms with hefty yields: Citizens Communications, Iowa Telecom and Valor Communications (now Windstream). In the intervening 9+ months, these have risen about 15% in price, which gain I decided to capture by selling enough to approximately get my original investment back. The remaining shares I own (the "profit") are gravy, which I can leave at risk, hopefully to continue to recover and grow.
At the same time, I decided to dump the Deluxe. This company has been taking longer than I expected to work outs its problems. It probably eventually will, but in the meantime its business is fully exposed to the onrushing severe recession, and I didn't feel like riding the stock downward in the soon-to-arrive bear market.
I also went bargain-hunting again, but not much turned up; most all stocks are way overpriced. The most promising stocks (with high dividend yields) seemed to be to be the Canadian energy trusts. These were riding high last January, after a favorable ruling from Canadian tax officials and when everybody was projecting $100-per-barrel oil. Since then, commodities prices generally have softened, and the $20-per-barrel "mideast political unrest" premium built into the price of oil has momentarily completely disappeared. Investors seem to expect peace to break out all over the mideast.... this is very unlikely to happen; crises can erupt again most any time.
In addition, the collapse of the hedge fund Amaranth because of its mispricing of natural-gas futures caused dumping of positions and a briefly-depressed price for natural gas, so it seemed like an ideal time to buy some PrimeWest, an energy trust with an inventory of about 2/3 natural gas wells, 1/3 oil wells. (In my Roth IRA I also bought Penn West Energy Trust, which has a more balanced mix of natural gas, oil and tar sands.)
The softening of commodities (especially energy) has also brought down the price of gold to what I consider to be a buying range (under $600 per ounce). In the recent past, gold has tracked commodity prices; in the future I expect it to behave more like real money, as central banks have for the most part depleted their gold holdings and the influence of their selling is waning. I decided to take some of my interest earnings not currently needed for living expenses and buy shares of the Gold Miners ETF. Even though this pays squat for dividends, I look at this primarily as an insurance holding against hyperinflation (because of the leverage implicit in gold mining stocks versus the price of gold itself), and I may buy more from time to time if the price is right.
Currently in the "Inheritance" portfolio the Citizens
Communications, Iowa Telecom, L-3 Communications, Windstream and Wells Fargo positions are all
ones in which I have recouped the original investment (either my stepmother's or mine) and am
letting the profits ride. The only inherited position
where I remain fully invested is FPL Group.
Wrong.
In the fifteen and a half years we have owned the condo the real-estate taxes on it have increased by about three-fourths, which is in line with the general gentle rise in real-estate values and the decline in the purchasing power of the dollar. In the mail recently we received our new assessed valuation, and it is up by 65% in one year, because the assessors have revalued everything at bubble prices.
With all properties revalued, one would expect the tax rate to drop. No such luck. Remember, Florida residents are "locked" into assessment increases of no more than 3% per year for their homes (along with the $25K homestead exemption); thus any tax increases are borne mainly by out-of-state property owners, investors, and people who recently bought homes at bubble prices.
So the real-estate tax bill on our condo will climb by almost two-thirds in just one year, 2006 to 2007. An obscene increase. We think we can still afford to keep the condo, but we are not happy campers.
A friend who owns a condo in south Florida has seen his tax bill climb from about $800 to $4500 over the past 20 years.
To the pressures aggravating the popping of the
housing bubble, in Florida you can add the drying-up
of resales because people are imprisoned in their
current homes; they can't afford the tax bill if they
move to a new place.
According to Federal Reserve data, the typical American family today has a balance of only $3,800 in cash in the bank, has no retirement account whatsoever, owes $90,000 on their mortgage, and owes $2,200 in credit card debt. - Martin Weiss
So far, the U.S. consumer alone has carried the baton through record-high indebtedness and consumer spending; with home prices no longer appreciating, you have to wonder where the future borrowing-power will come from. In my view, the United States looks more and more like a bubble economy, a banana republic of some sorts, which is desperate for ever-rising asset-prices for its very survival. Should American home and stock prices stall, let alone decline, the fate of this great bubble will be sealed. Depreciating asset-prices will act like a dagger in the heart of this artificial recovery, so the Federal Reserve must continue to inflate at all costs. - Puru Saxena
With every bubble comes fraud. The two go hand in hand, and housing is not unique in this respect. We are only beginning to scratch the surface of the fraud that supported this bubble. Lending standards are going to tighten as a result, and will continue to tighten as more and more of the fraudulent activity is exposed. - Mike Shedlock
For several years, the country has been in the strange position of having a very, very negative net foreign investment position...but a positive balance in its net annual external investment account payments. That is, for some reason never fully explained, Americans owed more to foreigners than was owed to them by foreigners...the yanks got the better of the payment flow - that is, until the 2nd quarter of this year. Two weeks ago, the whole thing went bad...after 90 years, the United States has now got on the wrong side of its capital service payments as well as its capital holdings. And now, because Americans do not save enough money, the country has to go abroad to borrow the money...to pay the interest on the money it borrowed before. And, since Japan is the country with the most U.S. debt...and China is the country most eager to lend of late, the United States must borrow from China in order to pay Japan. - Bill Bonner
To be a successful talking head, forget about logical arguments. Sound bites and bullet points are the way to go. The key is not consistency, but opportunism; the goal is to make the facts say what you want them to say. Take oil, for example. If the price of oil is going up, that is bullish because it indicates strong global demand. If the price of oil is going down, that is supposedly bullish too because it acts as a tax cut for consumers. Never mind that the second argument contradicts the first. If rising oil is bullish because it indicates healthy demand, then shouldn't falling oil be negative in terms of weakening demand? There are many more subtleties to consider here; the point is that for the talking heads, just about anything oil does is good news. In fact, just about anything at all that happens is good news. To the man with a bullish hammer, all the facts are nails. - Justice Litle
America would clarify matters for voters if corporations and PACs were limited to buying only one candidate
per race - this giving money to both sides is a farce. - George Ure
I attribute most of this to the herd's expectations of rising future earnings, even as current earnings soften. And the reason investors remain bullish? Part of it I attribute to "electionitis" - efforts by The Powers That Be to make everything economic look as rosy as possible before the November elections. But most of it I attribute to the Fed's faux tightening. Although the Fed has raised short-term interest rates to more than 5%, and the rise in the monetary base (fuel for the various Ms) is flattening, M-3, which the Fed no longer reports but which is tracked by independent sources, is still rising at an 11% annual clip. This tells us that credit creation continues unabated, even though the fuel for it (monetary base) is leveling off. The bubble continues.... and since it no longer is housing, that money sloshing around has to go somewhere, so the stock market is again the bubble-du-jour.
When will the bear market finally return? Probably shortly after the November elections. It is highly unlikely to be delayed beyond January 2007.
OK, happy buy-and-hold-forever campers, it's time to check in again with the five-year performance of TIAA-CREF funds.
Ooh, ooh, look! The stock crowd is actually making money! (A little bit.) Of course, that's measuring from October 2001, shortly after 9-11 and near the bottom of the last bearish jag. But as you can see, the real success stories have been bonds and real estate.
CREF stock, 5 years ending October 12, 2006
CREF equity index, 5 years ending October 12, 2006
CREF inflation-indexed bond, 5 years ending October 12, 2006
TIAA real estate, 5 years ending October 12, 2006
The current odds for systemic failure are about 2 in 3
(67%), and a stock-market crash during this
unfavorable period is possible. This "window"
closes about the first week of December;
then (if there is no failure during that time) we get a
few weeks' holiday break from intense risk.
A. "Inheritance" - real (normalized) "dividend and interest distribution" portfolio:
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $110,184.65 (see below)
Increase: $10,184.65 [+10.18%]
COMMENT on "Inheritance": Because I wrote so extensively about the changes to this portfolio in this month's lead essay, I won't bother to recap them here.
The portfolio cost (normalized) is $107,949.87 with $84,350.03 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $20,073.29
Increase: $9,374.29 [+87.62%]
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: $35,547.26
Increase: $ 6,771.07 [+23.53%]
COMMENT on Roth IRAs: Other than the addition of Penn West, there is no change from the last issue.
D. TIAA/CREF 403(b) and (non-Roth) IRA retirement plans: My TIAA-CREF and Fidelity retirement investments, both the part from which I am making monthly withdrawals and the parts that are "resting", are invested as follows: TIAA traditional, 54.55%; T-bills and money-markets, 26.82%; CREF inflation-indexed bonds, 14.79%; TIAA real estate, 3.82%; TIAA-CREF High-Yield II, 0.02%
TIAA-CREF values, 12Oct2006: stock, 229.38; equity-index, 91.15; MM, 23.48; bond, 78.22; inflation-indexed bond, 46.46; real estate, 268.89; TIAA current yield in SRA, about 4.92%. COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of July 25, 2006.
COMMENT on NASDAQ "Timer's Trend": We're on a BUY signal given October 4, 2006.
NEXT ISSUE - will appear toward the end of November 2006.