February 2017 – Page 12

Here’s One ‘Alternative’; But It’s Extremely Unpopular

It’s my usual custom whenever I land at a major airport to stop by the rental car counters and inquire how much it costs to rent a vehicle.

For me this is a sort of informal, albeit imperfect, economic indicator.

High prices suggest strong demand from plenty of business travelers and tourists, which will likely have a positive economic impact.

Cheap prices, conversely, suggest that there’s something wrong.

Well, there’s definitely something wrong in Mexico.

When I stopped by the counter the other day at Mexico City’s airport, I was stunned to learn that my rental car would cost a whopping $1 per day.

$1.

I’m serious, that’s not a type-o. I’m not missing any zeros.

$1 was the daily rate to rent a full-size Mercedes C Class vehicle. It was unbelievable; the car depreciates more than that in a couple of hours.

And the rest of my experience in Mexico has been similar.

Food costs nothing. Rent costs nothing. Everything is just astonishingly cheap… if you’re spending US dollars.

In Mexican peso terms, prices have actually gone up a bit.

But because the peso has lost more than 25% of its value against the US dollar over the past two years (most of that since the November US Presidential election), foreigners get an unbelievable deal here.

This is an anomaly that absolutely will not last.

When I went to Russia last summer at a time when the ruble was just under 70 per dollar (versus its long-time average of 35), I told you that the Russian ruble was unsustainably cheap.

So cheap, in fact, that some of the ruble coins were worth less than their metal content.

Similarly, I wrote to you from South Africa a number of times when the rand had reached an ALL-TIME low against the US dollar and was also unsustainably cheap.

Neither of these anomalies lasted; both currencies are up more than 20%.

It’s highly unlikely that Mexico will stay this cheap indefinitely, and why my analysts and I are looking at assets in the country.

Note- I’m not recommending that you buy anything in Mexico, or even the currency. I don’t even like currency speculation.

I primarily want to point out that there can often be very lucrative opportunities whenever something becomes unsustainably cheap.

Last week I wrote to you a few times about how OVERVALUED, i.e. unsustainably expensive, the US stock market has become.

Big companies have been borrowing billions of dollars to artificially inflate their stock prices and manufacture phony dividends.

And the average company in the S&P 500 now trades at a multiple of 26.5x its annual profits— 70% higher than the long-term average of 15.6.

What’s even more interesting is that Vanguard, the investment management company famous for its low-cost mutual funds, announced two weeks ago that it just hit $4 TRILLION in total assets under management.

This suggests retail investors are piling into the stock market at its all-time high.

Again, few people ever became rich buying what’s popular.

One alternative is to buy what’s UNPOPULAR, i.e. high quality assets that are unsustainably cheap.

In real estate, for example, I always look for properties that are selling for less than the cost of construction.

(We’ve found a number of these in Mexico– Sovereign Man: Confidential members, stay tuned.)

With stocks, we look for profitable companies whose share prices have been beaten down by the market to absolutely absurd levels.

As I explained in a podcast last month, I look for well-managed companies with minimal debt that have a low, single-digit multiple of Enterprise Value to Free Cash Flow.

Our Chief Investment Strategic Tim Staermose is even more strict, sniffing out companies that are selling for less than the amount of cash they have in the bank.

One example we’ve cited in the past was an Asian company called Nam Tai, which had a $261 million bank balance, plus another $200+ million in real estate assets.

Yet the market value of the company was just $204 million– $57 million LESS than the company’s bank balance.

At that ratio it was like buying a dollar for 78 cents.

And, unsurprisingly, Tim and his subscribers doubled their money.

His latest is even more extreme– a profitable Japanese company that pays a healthy 3.6% dividend, yet is selling for an astonishing 48% discount to its bank balance.

It’s like buying a dollar for less than 59 cents.

Even if the stock price simply returns to parity with its net cash, we’re looking at a potential 70% return. Plus we get paid 3.6% while we wait.

But the most important part of this deep value strategy isn’t the prospective returns. It’s the “risk-adjusted” return.

Even though stocks are overvalued and at their all-time highs, it’s possible the market goes up another 20%. Perhaps even 50%.

However it’s also possible it drops 40% or more. At this level the “risk-adjusted” return is not especially compelling.

But if you buy a dollar for 59 cents, i.e. shares of a healthy, well-managed, profitable company whose share price is unsustainably cheap, then most of the downside has already occurred.

This is why deep value investing is a sensible, long-term strategy: you reduce your downside risk while leaving the door open for plenty of upside.

It’s a great alternative to buying expensive, popular investments.

All it requires it requires is a bit of education (try Benjamin Graham’s The Intelligent Investor) and the willingness to put in the work.

Do you have a Plan B?

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This Is How You Juice Up Stocks (Video)

By EconMatters

We discuss the 11:00 am (CST) move in Bonds, Equities, Gold, VIX, and the Currency Markets in this video. It all starts with cheap Central Bank Money! Are these the kinds of incentives Central Banks should be allowed to let happen by creating excessive leverage with borrowed money to juice of bigger stock market bubbles? Central Banks need to be aware of the financial system risk that their extreme policies are leading to in Financial Markets. Janet Yellen, this is not what I want occurring in Financial Markets, this is not the role of Central Banks. Did we not learning anything from the 2008 financial crisis? You know this is unsustainable right? This ends the same way every time in a Financial Market Crash!

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North Korea Executes Five Officials With Anti-Aircraft Guns

One week ago, following news that China had banned coal imports from North Korea in retaliation to Kim Jong Un’s latest ballistic missile test, we mused that North Korea’s regime appears to be in jeopardy, even though we had no explicit knowledge of tensions inside the top echelons of the country’s political system. It now appears that those concerns may have been justified.

According to AP, North Korea executed five senior security officials with anti-aircraft guns because they made false reports that “enraged” leader Kim Jong Un, South Korea’s spy agency said Monday. The spy agency told lawmakers that five North Korean officials in the department of recently purged state security chief Kim Won Hong were executed by anti-aircraft guns because of the false reports to Kim, South Korean lawmaker Lee Cheol Woo said. It’s not clear what false reports they allegedly made, and the NIS didn’t say how it got its information as South Korean spies have a spotty record when reporting about high-level events in its authoritarian neighbor to the north.

North Korea fired Kim Won Hong in January, presumably over corruption, abuse of power and torture committed by his agency, Seoul said earlier this month. The fallen minister had been seen as close to Kim Jong Un. North Korea has not publicly said anything about Kim Won Hong or about the alleged executions in his department. Lee also cited the NIS as saying that Kim Won Hong’s dismissal was linked to those false reports, which “enraged” Kim Jong Un when they were discovered.

The comments by South Korea’s National Intelligence Service in a private briefing to lawmakers come as Malaysia investigates the poisoning death of Kim’s estranged elder half brother, Kim Jong Nam. That investigation is still going on, but South Korea says it believes Kim Jong Un ordered the assassination, which took place Feb. 13 at Kuala Lumpur’s airport. According to an earlier report by CNN, Kim Jong-un ordered two North Korean ministries to orchestrate the plot.

“The assassination of Kim Jong Nam was an act of systematic terror ordered by Kim Jong Un,” South Korean lawmaker Kim Byung-kee said in a televised address. “The operation was conducted with two assassination groups and one supporting group.” Kim Jong-nam was killed earlier this month in a Malaysian airport. Two women were seen on video smearing a substance, identified as VX nerve agent, on his face in the airport.

North Korea has said it was not involved in the murder of Kim Jong-nam and claimed South Korean media is putting out “fake news.” That said, since taking power in late 2011, Kim Jong Un has reportedly executed or purged a large number of high-level government officials in what rival Seoul has called a “reign of terror.”

Furthermore, this isn’t the first time Kim has resorted to such a dramatic form of execution: in May 2015, the country used an anti-aircraft gun to execute its defense minister who had been caught napping. That particular execution was witnessed by hundreds of people, and was meant to send a clear signal by the country’s ruler. It has been speculated that Kim Jong Un brings out the “heavy artillery”, so to speak any time he feels particularly threatened and uses this dramatic method of termination to subdue any perceived growing opposition. Which in light of recent events, would be understandable, and would suggest that the risk of a North Korean coup is substantially higher than some may think.

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America Has A Hole In Its Head

Via Howard Kunstler of Kunstler.com,

We need a new civil war like we need a hole in the head. But that’s just it: America has a hole in its head. It’s the place formerly known as The Center. It didn’t hold. It was the place where people of differing views could rely on each other to behave reasonably around a touchstone called the National Interest. That abandoned place is now cordoned off, a Chernobyl of the mind, where figures on each side of the political margin fear to even sojourn, let alone occupy, lest they go radioactive.

Anyway, the old parties at each side of the political transect, are melting down in equivalent fugues of delusion, rage, and impotence — as predicted here through the election year of 2016. They can’t make anything good happen in the National Interest. They can’t control the runaway rackets that they engineered in legislation, policy, and practice under the dominion of each party, by turns, going back to Lyndon B. Johnson, and so they have driven themselves and each other insane.

Trump and Hillary perfectly embodied the climactic stage of each party before their final mutual sprint to collapse. Both had more than a tinge of the psychopath. Trump is the bluff that the Republicans called on themselves, having jettisoned anything identifiable as coherent principles translatable to useful action. Hillary was an American Lady Macbeth attempting to pull off the ultimate inside job by any means necessary, her wickedness so plain to see that even the voters picked up on it. These two are the old parties’ revenge on each other, and on themselves, for decades of bad choices and bad faith.

The anti-intellectual Trump is, for the Right, the answer to the Intellectual-Yet-Idiots (IYIs) that Nassim Taleb has so ably identified as infesting the Left. It is a good guess that President Trump has not read a book since high school, and perhaps never in his entire life. But are you not amazed at how the IYIs of the Left have savaged the life-of-the-mind on campus, and out in the other precincts of culture where free inquiry once flourished? From the craven college presidents who pretend that race-segregated “safe spaces” represent “inclusiveness,” to The New York Times editors who pretend in headlines that illegal immigrants have done nothing illegal, the mendacity is awesome.

Something like this has happened before in US history and it may be cyclical. The former Princeton University professor and President, Woodrow Wilson, dragged America into the First World War, which killed over 53,000 Americans (as many as Vietnam) in only eighteen months. He promulgated the Red Scare, a bit of hysteria not unlike the Race and Gender Phobia Accusation Fest on the Left today. Professor Wilson was also responsible for creating the Federal Reserve and all the mischief it has entailed, especially the loss of over 90 percent of the dollar’s value since 1913. Wilson, the perfect IYI of that day.

The reaction to Wilson was Warren Gamaliel Harding, the hard-drinking, card-playing Ohio Main Street boob picked in the notorious “smoke-filled room” of the 1920 GOP convention. He invoked a return to “normalcy,” which was not even a word (try normality), and was laughed at as we now laugh at Trump for his idiotic utterances such as “win bigly” (or is that big league?). Harding is also known for confessing in a letter: “I am not fit for this office and should never have been here.” Yet, in his brief term (died in office, 1923), Harding navigated the country successfully through a fierce post-World War One depression simply by not resorting to government intervention.

Something like the same dynamic returned in 1952 when General Eisenhower took over from Harry Truman and the defeated Democratic nominee Adlai Stevenson quipped, “The New Dealers have been replaced by the car dealers.” Ha! If he only knew! After all, who was on board as Ike’s Veep? None other than Tricky Dick Nixon, soon to be cast as America’s quintessential used car salesman.

Well, those were the days, and those days are over. So much has gone wrong here in the past thirty years and the game of salugi being played by the Dems and the GOP is not helping any of it. And that is why the two parties are heading toward extinction. We’re in the phase of intra-party factional conflict for now. Each party has its own preliminary civil war going on. The election of Obama era Labor Secretary and party hack, Tom Perez, as DNC chair yesterday has set the Bernie Sanders Prog troops into paroxysms of animadversion. They’re calling out all up-and-down the Twitterverse for a new party of their own. Trump faces his own mutineers on the Right, and not just the two cheerleaders for World War Three, John McCain and Lindsey Graham. Coming out of the Conservative CPAC meeting last week, just about his whole agenda was written off as (cough cough) politically impractical by the poobahs in attendance: reform-and-replacement of the Affordable Care Act, tax reform, the promised massive infrastructure-building stimulus orgy, the border wall, the trade blockages.

Anon, comes the expiration of the current debt ceiling, at around $20 trillion, in mid-March. Do you imagine that the two parties warring with each other in congress will be able to come to some resolution over that? Fuggeddabowdit. The Democrats have every incentive to let President Trump stew in this fatal brine like a Delancey Street corned beef. What it means, of course, is that the US Treasury runs out of ready cash in mid-summer and some invoices just don’t get paid, maybe even some bigly ones like social security checks and Medicare bills. Won’t that be a spectacle? That’s where Trump becomes a political quadriplegic and the voters start jumping off the dying parties like fleas off of two dead dogs.

By then, plenty of other mischief will be afoot in the world, including the fractious outcome of elections in France and the Netherlands, with the European Union spinning into its own event horizon, and currency instability like the world has never seen before. Enjoy the remaining weeks of normality.

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You Can’t Make the Fed Better Just by Hiring Different People

Via The Daily Bell

Trump’s Fed Can Start a Central Bank Revolution … President Donald Trump will select three members of the Federal Reserve board during his term in office, including a replacement chair for Janet Yellen when her appointment expires early next year. He should seize the chance to refresh the Fed with faces from the business community, adding executives to the roster of PhD economists who currently run monetary policy in most of the world. -Bloomberg

The Federal Reserve and its defenders are changing the subject. At one point Trump had talked about auditing the Fed and others had talked about using the audit to damage the Fed so badly that it would have to shut down.

But now the end result has shifted. The idea is not to shut it down but to make it better by hiring people from the business community instead of from academia.

More:”

Appointing executives to the Fed who’ve had to take fiscal and monetary policy into account when making decisions on where and when to build new factories or make other capital expenditure decisions makes sense.

Torsten Slok, the chief international economist for Deutsche Bank AG, sent around a chart last week showing how the composition of the Fed has become increasingly focused on PhD economists:

It’s little wonder that in this populist age central bank independence is under attack. As Bloomberg News reported on Monday, the rise of populism is putting pressure on central banks as “institutions stuffed with unelected technocrats wielding the power to affect the economic fate of millions.”

The emphasis on hiring business people for the Fed comes at a very good time. The Fed is in a great deal of trouble and only will become even more mired in difficulty,

We read somewhere that pre-Internet it was easy to confuse people about what the Fed did. But now with the Internet a click away, it is very easy. Everybody knows or seems to know.

The Fed basically fixes the volume and price of money. That’s indefensible. Price fixing is anti-market. It makes no sense to have an agency fixing the price of the US dollar.

But the Fed will fight to the bitter end to keep its anti-market privileges, which it pretends benefits the market.

There can be some changes of course. Perhaps the Fed has hired too many academics and not enough business people. That’s what the book “Fed UP” by Danielle DiMartino Booth maintains.

She believes if more business people are hired, the Fed will recover its former glory. How is this possible. The Fed was never glorious. It was always an entity that tried to fix prices for a small group of bankers.

Making the Fed better means making it better at stealing.

Ms. Booth came along at a good time. Her book is being lifted up by desperate Fed workers who are trying to change the subject from shutting the Fed down to improving it.

It may result in a bestselling book but it won’t make a bit of difference for the Fed. So long as the Fed continues to fix the volume and value of money, impoverishing the middle class in the process, nothing is going to change.

Conclusion: The Fed will remain an evil, price fixing entity. Any changes will be merely cosmetic.

‘The World Needs Globalization, It Needs Trade’

Republicans Reeling in Fed?

Trump’s Complications in Draining the Swamp

and many more, just a click away …

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Out Of The Blue, March Rate Hike Odds Soar To Cycle Highs

Having drifted flat for weeks at around a 1-in-3 chance – despite endless jawboning from The Fed – March rate hike odds have suddenly surged higher today (to up to a 50% probability).

Dallas Fed’s Kaplan said this morning that a rate increase should happen sooner than later, adding that “[The Fed] wants to prevent a situation where we fall behind the curve.” As Reuters notes this is entirely consistent with his and colleagues’ recent comments, but somehow strikes a chord on otherwise uneventful day.

It seems the Fed Funds futures market suddenly decided to cvatch up to stocks?

Heavy volume…

Did someone get the nod today? Another Fed leak?

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Trump: “Nobody Knew That Healthcare Could Be So Complicated”

After meeting with GOP governors who, as discussed yesterday, appeared to have gotten cold feet about repealing and replacing Obamacare (or repairing and renaming) if it means millions of Americans – and potential voters – losing coverage, not to mention the end of billions in Federal funding for various projects, President Trump reached an important conclusion: Reforming the health care system is extremely difficult and as he admitted, “nobody knew that healthcare could be so complicated,” as Republicans have been slow to unite around a replacement plan for ObamaCare.

“I have to tell you, it’s an unbelievably complex subject,” Trump said after a meeting with conservative governors at the White House. The GOP governors were in D.C. this weekend for their annual conference and met with Trump to talk about various topical issues, however the focus of the conversation appeared to focus largely on healthcare.

As reported on Sunday, governors – as well as Congressional republicans – have been split on what should be done with ObamaCare’s Medicaid expansion, which brought health coverage to many even in deep-red states. While Trump didn’t publicly address that issue Monday morning, he said ObamaCare’s repeal and replacement will give states more flexibility “to make the end result really, really good for them.”

He had some encouraging words, however, saying that “we have come up with a solution that’s really, really good I think. Very good.”

One hopes that the rest of the governors, not to mention Congress, share his sentiment: after as all Trump himself admitted, it now appears that tax reform is being held hostage by the Obamacare repeal process, as the White House first needs claity on the revised Obamacare costs before it can propose a tax plan, “phenomenal” or otherwise.

Trump also dismissed the latest poll which showed support for ObamaCare at an all-time high – to be expected with a 14 Democrat oversample – with 48% viewing the law favorably compared to the 42% who don’t. The president responded to this as follows: “People hate it but now they see that the end is coming and they say, ‘Oh ,maybe we love it.’ There’s nothing to love. It’s a disaster, folks.”

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Swap Spreads Surge To 5-Year Highs As Debt Ceiling Despair Strikes

It appears David Stockman's warnings over the looming debt ceiling debacle has sparked some investors to face up to reality once again. The Treasury-Bill yield curve has inverted further and swap spreads soared to five-year highs.

The difference between 2-year swap rates and Treasury yields has widened back to 37.5 basis points which is the highest since March 2012. Societe Generale analysts led by Subadra Rajappa expect net bill issuance to drop by about $150 billion as Treasury shrinks its cash balance to $23 billion by the March 15 deadline.

And to make things even more clear, something odd is going on in the Treasury bill market..

Bloomberg notes that investors are willing to pay more for bills maturing in three weeks instead of two.

That’s because they don’t want to be caught empty handed while the Treasury slows debt sales to push its cash balance lower as part of the 2015 pact to suspend the debt ceiling. The spread between the March 9 and March 16 bills may get a “a little more noticeable” as Treasury cuts issuance and provides a “clearer sense of how long bill supply is going to be lower than normal” going into the March 15 deadline, Jefferies economist Thomas Simons said in a phone interview.

As Stockman warned over the weekend:

“I think what people are missing is this date, March 15^th 2017. That’s the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015. That holiday expires. The debt ceiling will freeze in at $20 trillion. It will then be law. It will be a hard stop. The Treasury will have roughly $200 billion in cash. We are burning cash at a $75 billion a month rate. By summer, they will be out of cash. Then we will be in the mother of all debt ceiling crises. Everything will grind to a halt. I think we will have a government shutdown. There will not be Obama Care repeal and replace. There will be no tax cut. There will be no infrastructure stimulus. There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for.”

Stockman also predicts very positive price moves for gold and silver as a result of the coming budget calamity.

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Yes Warren Buffet Stocks Are In A Bubble (Video)

By EconMatters

We discuss the valuation question in this video, and Warren Buffet`s assertion that stocks are not in a bubble. Warren didn`t you say to buy when there is Blood in the Streets? Warren Buffet says a lot of contradictory things, take everything he says with a massive grain of Salt. Nobody, professional or amateur investor should be buying stocks at these bubble levels, period!

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David Tepper Asks “Why Are Stocks And Bonds Acting So Differently”

With bond and stock markets having recently bifurcated, signalling two distinctly different outlooks on the future of the reflation trade, the confusion among the “smartest money” persists.

Close up this looks even more divergent.

Friday was the 6th day in a row that The Dow and the Long Bond have
risen in price together… equal record longest streak (1989 and 1994)

As we noted last night, in his latest statement to Reuters, DoubleLine’s Jeffrey Gundlach sided with bonds, pointing out that “stocks are out of sync with the stealth flight to safety. Lots of hope built in” and adding that “the 10-year Treasury will go below 2.25 percent … not below 2 percent.”

On the other hand, speaking to CNBC on Monday, another investing titan, Appalooosa’s David Tepper disagreed with Gundlach and said that he remains bullish on the stock rally.

“Still long stocks. Still short bonds,” Tepper told CNBC’s Scott Wapner. Just like Gundlach, Tepper mused rhetorically “why are stocks and bonds acting differently? It’s as if they’re reacting to two different economies.”

As noted over the past few weeks, as of mid-February, bond prices and stock prices have been moving higher together again, breaking from the so-called “Trumflation” trade that marked the period from the election through the end of January. One explanation for this bifurcation is that as retail investors, inspired by record gains, have been flooding the market using ETFs, even as other institutional clients have been selling, something JPM noted over the weekend.

For Tepper the answer may hide elsewhere, namely in residual central bank liquidity: “Could be there’s too much monetary policy still around the globe? Reaction in markets suggests it’s affecting the bond market more.” This echoes an observation made last week by Citi: the bank’s analysts noted that yields on German bunds have been tumbling as a result of the ECB potentially running out of monetizable bonds as soon as the end of the year, prompting traders to frontrun the ECB’s purchases, and dragging the 2Y Schatz just shy of -1.00% on Friday.

Tepper was not the only one who remains bullish on stocks: also on Monday Warren Buffett, talked up stocks and bashed bonds. U.S. stock prices are “on the cheap side” with interest rates at current levels, Buffett told CNBC’s “Squawk Box” on Monday morning, adding there is no sign of a bubble, although he warned that there is always a risk the market “could go down by 20% tomorrow.” For now, however, that does not appear to be a concern for the market which remains blanketed by a record sense of complacency about the near-term future, and certainly does not anticipate a bear market any time soon.

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