Keith Fitz-Gerald Archives - Page 3 of 13 - Money Morning - Only the News You Can Profit From
Enjoy the Rally While it Lasts, Super Mario Draghi’s Bazooka is a Dud
Not too long ago I mentioned that whatever European Central Bank President "Super Mario" Draghi delivers, it had better be big.
Because the only way he could hope to shore up the beleaguered e uro, wrest control of interest rates from the modern day financial pirates that dominate credit default swaps and break the impasse between skittish investors was with a monetary "bazooka."
We certainly got one yesterday when he announced an unlimited bond purchase program designed to do exactly this.
The S&P 500 shot up 26.13 points while the Dow and Nasdaq both tacked on 216.01 and 62.80 points respectively. European markets also moved sharply higher on the news as well while Spanish and Italian yields tumbled at maturities of every length suggesting traders relaxed their risk aversion stance considerably.
Under Draghi's plan, the ECB will be buying unlimited amounts of short-term sovereign debt while also sterilizing that debt– ostensibly to stave off concerns about hyperinflation and further money printing.
Up to now, the ECB has only purchased troubled EU bank bonds as a buyer of last resort. So this is a big change now that Draghi is talking about stepping up as a sovereign debt buyer, albeit also of last resort.
Draghi noted interestingly that the ECB will retain exclusive decision making on when to engage in purchases, the amounts purchased and when to stop. This effectively puts the politicians on notice that further bickering will not be tolerated.
Further, Draghi did not rule out purchases of Greek, Portuguese and Irish bonds when those countries regain practical access to the bond markets.
There are a couple of things that stand out here…
A Cause for Fear-Not Celebration
First, things are so bad that insiders are using euphemisms to describe Draghi's plan which is officially referred to as a "blueprint" and called "Monetary Outright Transactions."
I don't know about you but if it smells like a duck, walks like a duck and quacks like one, too…odds are pretty good it's a duck.
It doesn't matter whether you are talking quantitative easing or bond purchasing. The fact that things are so bad that central banks – first the BOJ, then the Fed, now the ECB – have to wade in as lenders of last resort should be a cause for fear rather than celebration.
If not now, then a few years from now, when it all comes back to roost.
Three Top-Notch Choices for Yield-Starved Investors
My dad held up his hands and shrugged his shoulders. "But what can I do in a yield-starved environment?" he asked.
"Plenty, actually," I told him.
In fact, there are a wide-range of choices available for income-hungry investors who are struggling to overcome the Fed's disastrous zero-interest rate policies.
Obviously, though, the suitability varies widely depending on individual liquidity, credit and yield requirements.
Here are some of the more interesting options I've been exploring lately:
Near-Term Tax Free Fund (NEARX): From U.S. Global Investors, this fund is billed as an alternative for investors who want safety but are willing to take on a bit more risk.
I like the fact that the fund is a very consistent performer with more than 10 years of positive numbers in the record books. I also appreciate that the fund has been around since December 1990, particularly since I view it as a possible substitute for traditional money market funds or even CDs.
Morningstar gives NEARX 4-Star ratings overall in the 3-, 5-, and 10-year categories, while Lipper bestows 5 stars for preservation, expense and tax efficiency.
The fund's goal is pretty straightforward. It invests in municipal bonds with short-term maturities issued by state and local governments nationwide.
Examples include holdings from the City of Chicago, the Commonwealth of Puerto Rico, and the City of San Antonio Texas Water System Revenue.
The strategy is pretty simple. With at least 80% of its net assets invested in investment-grade munis, it's exempt from federal income tax — including my personal "favorite" middle-class eviscerator, the alternative minimum tax.
Maturities are kept to five years or less to avoid the volatility associated with longer-dated issues and the threat of rising interest rates. The average maturity is 3.40 years, while the average duration is slightly lower at 3.06.
30-Day SEC Yield: 1.03%
Expense Ratio: .45%
Note: Don't be unnecessarily put off by the 1.03% yield. Remember this is a tax-exempt fund.
On a tax equivalent basis, the yield jumps to 1.77% for an individual in the 35% tax bracket. That's actually higher than the yield on 10-year Treasuries as of press time.
iShares Morningstar Multi-Asset Income Index Fund (IYLD): From iShares, this fund is a more aggressive choice for income-hungry investors. It tracks the underlying Morningstar Multi-asset High Income Index, which is itself comprised of equity, fixed income and alternative income exchange-traded funds (ETFs).
Five Ways to Consistently Bank Gains and Manage Winning Trades
Most investors become so focused on their losers that they have no idea how their winners are performing…until they become losers and start paying attention to them.
As far as I am concerned, that's bass-ackward.
What they should be doing is figuring out how to harvest their winners, especially now that the six-week rally we've enjoyed appears to be losing steam.
If you've been raised under the old axiom of "cut your losses and let your winners run," this may seem counterintuitive.
But, if you really want to succeed in today's markets, you have to consistently sell your winners. That way, you continually cycle your capital into brand new opportunities.
It's not much different than what regularly happens in the produce department at the grocery store. Places like Safeway Inc. (NYSE: SWY) always replenish the tomatoes and the like to keep them fresh.
You should do the same with the "inventory" in your portfolio because if you let your stocks sit on the shelf too long, they'll eventually go bad – just like fruit that's past its expiration date.
Here are some of my favorite tactics to help you lock in profits instead of letting irrational behavior and emotion take over when the markets suddenly have a mind of their own.
1.) Recognize every day is a new day
This one is very simple. If the original reasons why you bought something are no longer true, ditch it – win, lose or draw.
You can't risk falling in love with your assets any more than you can let them rust – yet that's exactly what most investors do. They buy something then assume that it will somehow plod along on autopilot.
This is a variation of what I call the "greater fool theory" as in some greater fool is going to come along at a yet-to-be-determined point in the future and pay you more for a given investment than you paid to buy it.
I can't imagine what these folks are thinking.
Today, more than ever, you've got to continually re-evaluate your investments to ensure that they stand on their own merits and are worth the risk of continued ownership.
What Skirt Lengths Tell You About The Stock Market
Over the years I've written a number of articles about trading indicators.
They have ranged from the commonly used variety – like moving averages, crossovers, the VIX, death crosses, and Bollinger Bands – to the esoteric, including the tallest buildings, Big Money Polls, financial astrology and, more recently, magazine covers.
You'd think the tools market technicians typically use would generate the most interest. But inevitably, it's the more unusual indicators that people are most attracted to.
Why?… I have no idea. I am not a social scientist.
But I can tell you this – having spent tens of thousands of hours computer modeling almost every indicator you can conceive of, the most consistent and best performing indicators are almost always behaviorally-based.
What I mean by that is that there is inevitably an element of human behavior that is either: a) responsible for the indicator itself; or b) contributes significantly to how it functions and why it's relevant.
My grandmother, Mimi, a seasoned successful investor in her own right after being widowed at a young age, used to chalk this up to what she called the "complexity problem" – as in, if it's too complex for me to understand, it's a problem.
She didn't use the term like I do today in a non-linear sense. She simply reasoned that if something was too complex to explain to her, it wasn't worth her time or her money.
Skirt Chasing and the Stock Markets
And that brings me to women's skirts.
What the Last Roman Emperor Would Tell President Obama Today
Over the course of 700 years, the ancient Roman Empire grew from a small republic to one that stretched from London to Baghdad at its peak.
As one of the world's first true superpowers, the Empire's achievements included the world's first standing professional army, economic prowess, intellectual growth and governance principles that are commonly regarded as the basis for modern society.
But it is also remembered for its spectacular collapse in less than a century under the weight of bad debt, an overextension of the Empire, a collapse of morals that led to a deluded and self-absorbed political elite and reckless public spending that far outweighed collections.
Given the parallels to our situation, I can only imagine what Romulus Augustus, widely considered to be the last of the Roman Emperors, would tell President Barack Obama today about how to prevent the wholesale destruction of our own "Empire."
But it would probably go like this…
Cara praeses Obama, (Dear President Obama)
Like mine, your world is changing fast. No doubt it's very different from the one you thought you'd inherited. Your success will depend on new thinking and an eye to the future taken from lessons of the past.
I wouldn't be offended if you have never heard of me.
I oversaw the dying days of what you know as the Classic Western Roman Empire. My fall in September 476 marked the end of centuries of greatness and the fall of ancient Rome.
Some historians consider my departure as the beginning of the Middle Ages. I understand the nature of collapse: how it begins, how it progresses, and where it all ends.
As a historical footnote to a once great empire, here's my advice to you, Mr. President.
What 700 Million People in the Dark Says About Investing in India
For years now I've preferred China over India.
When invariably asked to compare the two as investments, my answer has always been the same.
Somewhat tongue -in-cheek, I'd point out "that India has trouble keeping the lights on from one end of the country to the other."
Little did I know that those comments made in jest would actually become reality.
Earlier this week, a massive power blackout left more than 700 million people without power in India as not one, but three, regional electrical grids failed.
If that isn't a glaring sign that India isn't ready for prime-time I don't know what I can say to make you see the light – pun absolutely intended.
Don't get me wrong. There are clearly a few select Indian companies worth the risk.
But as a whole, the scope of this power failure suggests India has a long way to go before it achieves the global superpower status it seeks and a dominant position in your portfolio.
India Needs to Put its Own House in Order
Not that this will stop India from trying.
It's now the 8th largest military spender in the world, having tripled defense spending in the past 10 years. It's no secret India desperately wants to have a permanent seat on the United Nations Security Council.
And, it's making great strides in international diplomacy that it believes will pay off later in increased foreign recognition and direct investment.
But as this embarrassing power failure demonstrates, India would be better off getting its own house in order first before it steps onto the world stage.
Many investors take issue with these views. They cite the fact that India is the second-largest English-speaking nation in the world, that 58% of its economy is consumption-based, that it has huge numbers of tech-savvy and well-educated people.
I don't dispute any of that.
However, on the other side of the ledger is a laundry list of reasons for investors to be wary.
How to Protect Your Portfolio Against One of Wall Street's Greatest, Best Kept Secrets
"Can't anybody tell the truth anymore?" an exasperated Bob J. asked me at a recent cocktail reception.
"Evidently not" I told him.
Bob had seen me earlier that afternoon on Fox News. I appeared on the show to respond to a new study on corporate earnings by Professors Ilia Dichev, Shiva Rajgopal of Emory University and John Graham of Duke.
The study found that a full 20% of publicly traded companies lie about their earnings.
The shocking thing is that the figure wasn't much higher. Twenty percent strikes me as abnormally low. Earnings manipulation is one of Wall Street's greatest, best-kept secrets and has been for years.
In fact, CFOs I've met over the years have told me they could routinely swing things within 5-10% of the target earnings per share (EPS) if needed – a figure in line with the one cited in the study.
But lie is a big word.
As I noted during my interview, there are all kinds of reasons why companies manipulate the numbers, beginning with the terribly flawed system itself.
As appalling as this thought may be, the system actually encourages this kind of behavior.
Under the current system, the law requires quarterly performance reports when many publicly traded companies actually operate in business cycles that are 1, 3, 5, or even 7 years long.
This creates a disincentive to report what's actually happening and an incentive to "lie" about the numbers or at least "fudge" them, depending on your perspective. And, the longer the business cycle, the more a company must make estimates about quarterly results with the risk, of course, that things don't turn out as management expects.
So while some companies may have lost their ethical and moral compasses, what they are doing is entirely legal.
Why Companies Lie About Earnings
Having spent more than 20 years in the markets, I believe the reason for this comes down to three biggies, for lack of a better term. Companies may "lie" to boost stock prices, smooth earnings and jack up compensation packages.
Virtually every publicly traded company draws on reserves and engages in all kinds of financial hocus-pocus in an effort smooth things out.
Take Boeing Co. (NYSE: BA), for instance.
Four Ways To Not Lose Money In A Bubble Economy
Many experts claim we're not in a bubble economy because they can't see the "bubble."
Why is beyond me.
The bubble is so enormous right now that any serious bailout attempt would have to encompass the entire shootin' match or roughly $600 trillion to $1.5 quadrillion ($1,500,000,000,000,000) in order for it to work.
That's the total estimated amount of outstanding derivatives, credit default swaps and exotics outstanding at the moment according to various industry sources.
I say estimated because nobody actually knows for sure. Nearly five years into this crisis, the derivatives markets still remain almost entirely unregulated.
And, that's why the well-intentioned but completely misguided onesey-twosey's bailouts we've seen so far won't cut it despite the fact that they're already into the trillions of dollars.
I say this because, despite what most politicians and central bankers think, we are not staring at a series of independent bubbles blown into the wind, but a single, massive all-encompassing monster bubble that surrounds us all.
To put this into perspective, the total value of the United States' economy is approximately $15 trillion. The world's GDP is around $50 trillion while the total capitalization of world stock markets is only $100 trillion.
You can see the problem as easily as I can…there literally isn't enough money on the planet to bail us out, and I don't care who's got the keys to the printing presses.
How We Got Here is a Story in Itself
Bubbles this big don't form overnight.
What we've been handed is an overlapping bubble that's gotten progressively larger over time as our legislators, bankers and regulators have progressively "improved" the system over time.
What I Wish Ben Bernanke Knew About Japan
I've called Japan my "other" home since 1989 and in that time I've seen it change in ways that ought to scare the pants off you.
I say that not to ruin your day, but because I fear we are headed down the same exact road as long as Ben Bernanke and his central banking buddies think it's easier to print money than actually stimulate real growth.
In doing so, they are re-creating Japan's "Lost Decades" here at home with years of smoldering, piss-poor growth as our destiny.
Yet it doesn't have to be that way. We can still choose a different path.
Here are 10 lessons from Japan I would share with Chairman Bernanke right now if I sat down with him:
1) All the cheap money in the world won't matter if banks hoard it and customers don't want it. You could lower interest rates to zero and it won't make a difference. Japan tried this to no avail. At this point, low rates are hardwired into the Japanese business system to the extent that any increase whatsoever is likely to cause a massive wave of corporate and personal bankruptcies. Don't let that happen here. You still have a chance to prevent this.
2) At some point somebody has to take the loss. You cannot pretend that the debt you've advanced is performing any more than the Japanese have. No matter how much money you inject into the system, the deleveraging process will continue until excess credit is bled out of the system one way or another. Defaults happened with alarming regularity before Central Banks tried to stave them off. There have been literally hundreds in Eastern Europe, Africa, Asia, and Latin America over the centuries. Spain and France failed six and eight times each in the 16th century alone.
3) Trying to manage any singular crisis will only result in a much bigger one down the road. The longer you prop things up, the worse they're going to get and the more consolidation you will see. Five of the 10 largest banks in the world were Japanese in 1990. Today the only bank to make the cut is 5th on the list (the Japan Post Bank Co. Ltd according to Bankers Accuity).
4) When politicians find it easier to borrow money than make hard policy decisions, they will because they prefer their short term re-election prospects over the long-term economic interests of the country. Japan has had 15 Prime Ministers in the last 12 years. Granted, their system works a little differently than ours, but continual reshuffling diminishes the effectiveness of any solution. Take advantage of the situation and act decisively before our elections risk a reset. You're supposedly apolitical. Prove it by acting with conviction instead of giving us more FedSpeak.
8 Reasons Why Mimi Would Sell Microsoft (Nasdaq:MSFT) and Dump Steve Ballmer
One day in 1983, my dad asked me a question over dinner after a long day at work.
He wanted to know what I knew about a little computer company called Microsoft. It was the brainchild of the son of one of his partners at Bogle & Gates, William H. Gates, Sr.
"Not much," I replied.
But I did tell my dad that I loved using MS-DOS in the computer lab with my friends. I was a card-carrying member of the nerd herd back in the day, so I spent a lot of time there and knew Microsoft's fledgling PC-based software pretty well.
My grandmother Mimi, though, had a different point of view. You've heard me mention her before.
She's the one who was widowed at an early age and became a savvy global investor long before people ever thought to look at the bigger picture.
Mimi didn't care that the buzz was about the MS-DOS language or even about computers. Having grown up in the Depression, she believed that what people would do with the technology was far more valuable.
She said she had confidence that Sr.'s son, Bill Gates Jr., understood this — which is why she invested heavily in the Microsoft IPO in 1986. Enough said.
Today, though, I think she'd voice an equally strong opinion about Microsoft (Nasdaq: MSFT) CEO Steve Ballmer. In fact, I think she'd fire him. Here's why….
8 Reasons Why Steve Ballmer Must Go
- Ballmer took over Microsoft 12 years ago when the stock was about $60. Now it struggles to maintain $30. Microsoft has $58.16 billion in cash and this is the best Steve Ballmer can do?
- Office and Windows are dying. Once the business world's de facto standard, both are being replaced by cheap, easy-to-operate software, much of which is actually free as well as compatible. This is a big problem considering that, according to the Wall Street Journal, roughly 85% of Microsoft's revenue is coming from just two products: Windows and Office.
- The company isn't innovating fast enough or aggressively enough. What's more, it's attempting to compensate for its own shortcomings with increasingly ill-conceived acquisitions. For instance, Microsoft forked over $605 million for 18% of the Barnes and Noble Nook e-reader and still has no real ability to compete with Amazon's Kindle. It also couldn't seal the deal with Yahoo. Despite a sizable head start using Yahoo's core search technology, Bing has a mere 15% of the search market today. Ballmer waited nearly four years to respond to the iPad and his "Surface" tablet was ho-hum when it could have been jaw dropping. One more: Microsoft paid $8.5 billion in cash for Skype. Apparently the fact that Skype was not profitable didn't matter. Ballmer's track record suggests to me that he buys businesses that nobody else "must have."
- Microsoft's Internet offerings remain wannabes and are highly priced at that. Take Yammer. Microsoft just paid $1.2 billion through the nose to acquire a company that was valued at $600 million last fall when it raised $85 million in a venture offering. Team Ballmer plans to integrate it into Office on the assumption that somehow the Microsoft marriage will endear the brand to customers anxious to socialize business. I think they're delusional. Most Microsoft users I know, including myself, are actively planning to move away from the legacy software we've used for years the first instant we can in favor of software we actually like to use!