Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
9:00 AM EST, Wednesday, March 11, 2009. One
day's 379 point (5.8%) rise does not mean
We've reached bottom;
2. The stockmarket is poised for a huge boom from here.
Happy days are here again.
bear markets are marked by sharp violent, short upswings.
chart of daily Dow shows yesterday's blip in perspective. You can see other
violent blips in the last few months -- all of which led to nothing.
as an investment? Look at this chart carefully.
What does it tell us?
It tells us gold has already enjoyed a boom. The chart looks like the classic
"bubble." Except that it's upward spiral has been broken. From this
next chart, we can see that gold's rise occurred after (or because) of the
creation of the GLD ETF, which made it easier for everybody and their uncle
to own "gold."
And the last
thing we know is everyone and their uncle in the investment newsletter and
blog business has been pushing gold as an alternative to holding dollars.
Yet gold, of late, has been a lousy investment -- unless your timing was impeccable
and you bought around the middle of last November.
will affect the stockmarket going forward? Part 1. Company dividends.
Here's the Economist on the slashing of dividends.
Stockmarkets grapple with savage reductions in companies dividends
IT FELT like
death by a thousand cuts. Already this month has seen plenty to rattle stockmarkets,
from dreadful economic news to the continuing bloodshed at American International
Group, an insurer. Commodity firms were given a reprieve on March 4th by
hopes of a big stimulus package in Chinathough all they got was reaffirmation
of the countrys 8% growth target. Meanwhile, a new fear haunts the
markets: the mounting number of firms slashing their dividends.
and insurance companies will chop their payments is now understood, but
the pain has spread. General Electric (GE) has cut its dividend for the
first time in 71 years, Dow Chemical for the first time since 1912. In Europe
previously reliable payers like Telecom Italia and Anglo-American, a mining
firm, have reduced their payouts, and even BP has said it cannot increase
its dividend at todays oil prices. Income investors were left to ponder
Eurotunnel, the operator of the rail link between France and Britain, which
will pay the first dividend since its creation in 1986. Its $9m may buy
a few tissues for those mourning the loss of $9 billion of annual payouts
from GE alone.
Based on experience
since the second world war, investors had cause to be more optimistic. Although
stock prices and earnings move up and down violently, dividends have been
more reliable, typically falling from the peak of a cycle to its trough
by only one-tenth in real terms. Furthermore, the share of American earnings
paid out as dividends has declined from a post-war peak of almost two-thirds
to about one-third in 2007, with many firms preferring stock buybacks (which
have now ground to a halt). That should have given companies a bigger buffer.
other structural trends worked against income-lovers. Firms debt levels
rose, increasing the volatility of earnings. And the quality of the profits
fell. Financial companies contributed about one-third of the $736 billion
of dividends paid globally by quoted firms in 2007. Standard & Poors,
a rating agency, reckons that dividends in America could fall by about a
quarter this yearthe steepest drop since 1938. Even this may understate
the decline. Financial firms payouts will collapseeven relatively
well capitalised banks like JPMorgan Chase have reduced their dividends.
And more of the industrial firms that make up the other two-thirds of total
dividends will cut too. Pessimists point to 1931-35, when dividends per
share in America fell by 45% from peak to trough.
For many firms
dividend cuts are an unpleasant task that should not be shirked. There is
no point in starving a business and endangering a firms balance-sheet
in order to meet macho dividend commitments. The counter-argument, that
cuts remove an important discipline on managers, hardly holds true today,
when all firms are counting the pennies. That being so, when firms announced
cuts why did their share prices slump? The reason has a lot to do with signalling.
value must be the present value of all future dividendsotherwise stockmarkets
would be a giant Ponzi scheme. But in theory shareholders should not care
whether dividends are paid out today or later. Just as taking money out
of a cash machine does not make you richer, nor does extracting cash from
a firm you own. Investors who need income to meet pension payments, for
example, can raise it just as well by selling a small part of their holdings
instead of receiving dividends. It is true that dividends, rather than capital
appreciation, have provided a big chunk of long-term equity returns. But
this partly reflects the choice of firms to pay out a big chunk of their
earnings. Had they paid out less, capital appreciation would, in theory,
have been commensurately higher.
The main reason
why investors are worried is that dividends are a guide to managers
views of when earnings might reach their trough: they do not want to pay
the dividend out of borrowing, or worse, cut it again. Occasionally this
floor is breachedin 1933 American earnings per share dropped below
dividends. Today, GE has cut its quarterly dividend from 31 cents per share
to ten cents. That is partly to reduce gearing, but also suggests managers
low confidence in analysts forecasts for earnings of about 30 cents.
Likewise if American dividends fall by a third from their recent peak, thenassuming
they set a floor for profitsearnings would bottom out at about two-thirds
below the level of 2007. That would be a drop on a par with the 1930s and
far below most forecasts. An overblown scenario perhaps, but the scare over
dividends suggests that many investors are still too optimistic.
will affect the stockmarket going forward? Part 2. The economy.
Nouriel Roubini's RGE Monitor group is presently updating its 2009 Outlook.
You can read the
rest of RGE Monitor's preliminary forecast. Click
2008 behind us, it is worth taking one last look at economic activity in
the last quarter of the year. As RGE Monitor forecasted, the contraction
in real U.S. GDP in Q4 2008 (-6.2%) was the most severe since the early
1980s and pushed yearly growth for 2008 down to 1.1%.
The U.S. is
most likely only half way through a severe recession. RGE Monitor is forecasting
four quarters of negative growth in 2009 and a yearly real GDP contraction
of around 4%. The fiscal stimulus package passed in February 2009 will not
be large enough to bring aggregate demand back on a path of positive growth
before Q1 2010. In other words, even if the second derivative of economic
growth were to turn positive throughout 2009, which would mean that the
pace of contraction will progressively slow, the contraction will stay with
us at least until the end of 2009.
in output throughout this recession will result in cumulative output losses
of 6%, making this the sharpest output loss in post-war U.S. history. Though
RGE projects positive growth year over year for 2010, growth
will remain significantly below potential and job losses will continue well
into 2010. RGE expects that the NBER will put the official end to the recession
around mid-2010. However, growth might very well be subdued for years to
personally guarantee a loan. True story:
A senior partner in a big law firm borrowed money to buy real estate. As collateral,
he put up his valuable bank stocks and personally guaranteed the loan. Because
his bank shares have fallen so precipitously, his bank is making what amounts
to a margin call. Sadly, our lawyer doesn't have the cash to meet the call.
He may be forced to file for personal bankruptcy. I suspect that this will
hurt his profitable law practice, of which he's senior partner. Had he not
personally guaranteed his loan, he would have lost the stock and the real
estate. But he would still have had his business and his reputation.
Venezuela sovereign bonds
close to 20% yield." That's
what the urgent email read.
Ten minutes later came the explanation, "The yield is highest just before
affected by oil's price drop and President Chavez's huge social spending.
The IMF figures inflation of 26% in 2008, rising to 31% in 2009. One U.S.
dollar equals 2145 Venezuelan bolivars. I don't believe you can easily short
savings time is annoying on Windows computers. Windows
computers store time in the weirdest of ways. Times displayed for Windows
files are figured as offsets to Greenwich Mean Time (GMT). When you set the
time on your PC, you are setting the value for GMT. When you select your local
time zone for the system, the appropriate number of hours are added or subtracted
to the stored GMT value. This adjusted time is displayed. When "Automatically
Adjust for Daylight Saving Time" is selected, an additional hour is added
to GMT during daylight savings time.
means Windows changes the time on all the files on your computer. So
far, so good. BUT... what if you want to back up the files on your computer
using a synchronize program like FileSync -- which I love. FileSync (and others
like it) work by checking times. They finger the changed files by looking
at the time. Newer time equals newer files. And then it backs them up, and
only then. But if daylight saving has changed the times on all the
files, then it will want to back up ALL the files. In my case it said I need
to back up 14,500 files versus only 60 or so I knew really needed backing
kludgy solution was to uncheck the "automatically adjust clock for daylight
savings changes" (which you find in Time Zone/Date and Time under Control
Panel). Then copy the 60 files. Then check it back -- which was necessary
to make Outlook's Calendar accurate again. I'm sure there is some logic for
the way Microsoft designed this -- but their web site doesn't explain why
or what to do about it. Fortunately, my stupid system works. Microsoft is
join me on this hiking trip? From the Mountains to the Sea Across
Frances Most Beautiful National Parks.
by a firm called Wilderness Travel, which describes it as:
dream journey brings us from mighty Mont Blanc to the palm-fringed Cote
dAzur, where the jagged Alps plunge into the blue Mediterranean.
way, we witness dramatic changes in the culture, scenery, and ecosystems
with each new hiking day. Setting off with sweeping panoramas of Mont Blancs
snowy summit, we hike in high meadows where cowbells echo and blue gentian
grows. Heading south, we follow part of the legendary GR5 trail that traverses
Europe, crossing two national parks (Vanoise and Mercantour). We then enter
the brightly colored hill hamlets that announce that the Mediterranean is
near. When we finally arrive on the welcoming Cote dAzur, we kick
off our hiking boots and head for a celebratory swim in the sea!
Best yet, "A
SIGNIFICANT DISCOUNT ON THIS TRIP IS AVAILABLE, DUE TO THE REBOUND IN THE
DOLLAR." For more, go to Wilderness
Travel's web site.
We recently celebrated Michael's birthday.
Anne was there.
She's Michael's special friend. We really like her.
As his birthday
present, she indulged Michael with a new Kindle 2. I bought him a pair of
socks. He's indulged enough.
back and smell the roses: The hibiscus are
in full bloom in the Coachella Valley. The perfume of orange blossom
has suddenly exploded. Better than anything Channel ever bottled up.
Quinta they held a charity tennis match
he Bryan Brothers
played Marat Safin and Novak Djokovic. Each of the players was armed with
a wireless microphone. They made comments during play. It was hysterical.
Safin has a good sense of humor. Boy, can these guys volley. The Bryan Brothers
Life is wonderful.
Einstein dies and goes to heaven only to be informed that his room
is not yet ready. "I hope you will not mind waiting in a dormitory. We
are very sorry, but it's the best we can do and you will have to share the
room with others" he is told by the doorman.
Einstein says that this is no problem at all and that there is no need to
make such a great fuss. So the doorman leads him to the dorm. They enter and
Albert is introduced to all of the present inhabitants. "See, Here is
your first room mate. He has an IQ of 180!"
"Why that's wonderful!" Says Albert. "We can discuss mathematics!"
"And here is your second room mate. His IQ is 150!"
"Why that's wonderful!" Says Albert. "We can discuss physics!"
"And here is your third room mate. His IQ is 100!"
"That Wonderful! We can discuss the latest plays at the theater!"
Just then another man moves out to capture Albert's hand and shake it. "I'm
your last room mate and I'm sorry, but my IQ is only 80."
Albert smiles back at him and says, "So, where do you think the stockmarket
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
click on my email address. You have to re-type it . This protects me from
software scanning the Internet for email addresses to spam. I have no role
in choosing the Google ads on this site. Thus I cannot endorse, though some
look interesting. If you click on a link, Google may send me money. Please
note I'm not suggesting you do. That money, if there is any, may help pay
Michael's business school tuition. Read more about Google AdSense,
here and here.