The UK is finished
The United Kingdom's Chancellor of the Exchequer Alistair Darling says British bonds aren't as risky for investors as famous investors like Bill Gross and Jim Rogers say they are.
Gross wrote to investors in his monthly outlook that "the U.K. is a must to avoid. Its Gilts [bonds] are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower."
Jim Rogers told Bloomberg recently that the U.K. is "finished."
Though I was a tad critical of Rogers in Tuesday's Digest, I agree with him and Bill Gross on this one. Governments never say, "The currency is just fine," unless there's a huge problem with it. Trouble is, they keep telling us the currency is fine... as they continue to print more of it.
The U.K.'s Darling says the government has "the fastest deficit reduction plan of major economies. We are going to halve the deficit in four years." So whom do you believe: the man who knows more about bonds than anyone on Earth (Gross) or a government official promising to reduce deficits?
High debts and a weak currency... Gee, that sounds familiar... where have I heard that before? Oh yeah... Right here in the good ol' U.S.A. And in Japan. And in Greece. And Ireland. And a bunch of other countries around the world, I'm sure.
It's just human nature that, once you get your hands on the money-printing and borrowing power of government, you're going to abuse it. It's like trapping a man and a woman on an island for a year and asking them not to have sex. Even if they don't like each other much, sooner or later, nature will triumph and they'll get it on. The analogy works well, considering the same folks who occupy the seats of power are in the headlines for sleeping with anything on two legs as often as for running big debts and deficits. I guess when you're in the screwing business, you're in the screwing business and that's all there is to it.
I, for one, have no desire to fornicate with the government. That's why I keep telling everyone to ignore the ups and downs of the price of gold and just keep buying the stuff. I bought some more a couple of days ago. And I'll keep buying it. It's how I save and protect my money from my fellow humans.
If you read Atul Gawande's Checklist Manifesto, you'll be entertained and you'll discover a tool few investors use, but ought to at least consider. It's a quick read, too, less than 200 pages.
The book is filled with stories about checklists saving lives and preventing disasters in the aviation, construction, and medical professions.
In the operating room, the first item on the checklist is for everyone in the room to introduce himself and say what his job is. Then, they all agree on exactly what the procedure is, including making sure they're operating on the correct side of the body, on the right organ, etc. After they're done, they count the number of sponges so they don't leave one in the patient.
The last story in the book is about a man whose vena cava, the main vessel returning blood to the heart, was accidentally torn during a routine surgery. The patient's life was saved by a pre-surgery checklist. The list included making sure there was enough blood available to keep him alive if the vessel was torn.
The book also contains a section on investors like Extreme Value reader and hedge-fund operator Mohnish Pabrai and his friend Guy Spier. Both men use extensive checklists to prevent them from making investment mistakes.
It makes sense for investors to use a checklist, because investing can be a subjective, complicated affair. The checklist can help you quickly handle tasks that, though dull and apparently easy to get right, might just save you from making a big mistake.
For example, every now and then, somebody buys the wrong stock because of a discrepancy in the name of the company or the ticker symbol. I remember this happening years ago, when I recommended a stock called Gold Fields. There were two companies by that name. The one I recommended did well, but some folks wound up buying the wrong one, which didn't do as well.
The most important thing on a value investor's checklist is an answer to the question, "Is there an adequate margin of safety?" If you can't answer with a resounding yes, you don't buy. I have a watch list of stocks I'll buy if they get cheap enough. They're all good businesses, but they're not good investments until the price is right... so I wait. If you're a momentum trader, you'll have a different checklist, but you should definitely think about using one.
If doctors need to check for those kinds of errors, you and I could probably stand to take an extra minute to make sure we're buying the right stock, among other basic aspects of investing.
Charles Biderman is not, as far as I know, a whack job conspiracy theorist. He's a successful man, a corporate CEO. He makes his living keeping track of market data. His firm, TrimTabs, tracks "equity market liquidity." That's Wall Street speak for figuring out who's buying and who's selling stocks. Biderman is the opposite of me. I'm a value investor. His idea is stock prices don't move based on value, but based on money flows. If there's more demand for stocks, prices will rise. If there's less demand, prices will fall.
For all his experience and the data he's got at his fingertips, Biderman can't figure out who pushed stocks up from the panic lows of last March to the rarified heights of today. Biderman said on CNBC, "Somebody's buying, taking [stock] prices up... we just don't know who."
Biderman's decades of experience tells him that, over the past nine months or so, things haven't happened in the stock market the way they usually do. Historically, after the market has fallen, the first buyers to return in force are public companies themselves. They see their own stock selling cheap and step up the share repurchases. Perhaps some other corporate buyers come in, like insurance companies.
At some point, that volume pushes stock prices up a little, and retail investors come back in. But Biderman says he's never seen a market like this one, where it just kept rising and rising on falling volume. He says the corporate buyers never came back. The retail investors – individuals like you and me – never came back.
But Biderman has an idea. He says, "There's only one buyer who's been buying all along... the government." Biderman admits he has no evidence for this. He just can't figure out who else it could be. He isn't the first person to notice "There's been a buyer comes in late in the day, just about all the time, for the last nine months."
Sun Microsystems' CEO, Jonathan Schwartz, was one of the first CEOs to start a blog. Now, he's become the first CEO to resign his post using Twitter. He even did it in a haiku (Twaiku?):
Financial crisis
Stalled too many customers
CEO no more
CNBC writer Cindy Perman suggested a rather amusing alternative haiku, based on Schwartz's long ponytail:
Financial crisis
The ponytail doesn't lie
CEO no more
Perman says Schwartz and his partners agreed not to cut their hair until Sun was profitable. The haircut wasn't meant to be. Oracle is buying Sun, and the ponytail is longer than ever. Maybe Schwartz can get a crew cut and start over at another company.
In case you can't get to the gym this week, Doc Eifrig has a solution... In his special report, "The Retirement Cheat Sheet to the U.S. Health Care System," Doc tells his readers about the world's No. 1 exercise...
I have a practice you can try most anywhere and anytime... in your work clothes, your gym clothes, even naked in bed. It's simple to do, but it takes a little time. And I mean just a little time – 12 minutes is all it takes!
If you want to quickly improve your health and happiness, this activity does it. The best part is it takes very little effort. Paradoxically, the less effort you exert, the more benefit accrues. Any guesses what it is?
To learn more about this and other ways to keep healthy and hear about medical myths Doc's uncovered, check out his Retirement Millionaire. Every month, Doc explains how to live the millionaire lifestyle – without all the costs – and provides other tips on how to enjoy a healthy, successful retirement.
In Doc's latest issue, he tells his readers about a drink you need to avoid, a way to chew your food to lose weight, and the bad news doctors forget to tell you. To access this issue, click here.
New highs: McDonald's (MCD), Steak 'n Shake (SNS).
In the mailbag... One subscriber appreciates the advantage of patience. And another offers one solution to unemployment. Send your messages to feedback@stansberryresearch.com.
"Dan – If I would not be already a subscriber to your excellent letter, I would subscribe today only to get your honest opinion about NOT buying through the last 6 issues. I prefer that you'll be honest and say NO rather then grab something for the sake of a letter... P.S. the same for other writers!... P.S. 2 It doesn't mean that there are no other opportunities elsewhere in the letter. The list is long and one can pick from the 'old' recommendations... Keep the good job!" – Paid-up subscriber NK
Ferris comment: Thanks, NK. I've had readers approach me at conferences around the country and tell me they'd rather I didn't make a new pick every month.
I'm glad you understand what I'm doing. Also, you're right to point out there are plenty of long ideas in the Extreme Value Model Portfolio. I publish the current buy list every Monday for Extreme Value readers. The most recent included 11 buys, in addition to our two longstanding mutual-fund picks and our two short sales. To get access to Extreme Value, click here.
"My brother was at a grain marketing conference yesterday (we are farmers), and one of the speakers told the crowd that anyone who owns gold or silver should sell now. He said the dollar would keep getting stronger and all commodities will suffer from this. He thinks the dollar will get to the 88-90 range. I'm curious to how you would respond to him." – Paid-up subscriber Steve Pierce
Ferris comment: I think the Federal Reserve has zero incentive to do anything but print, print, print. It'll keep interest rates low, and it'll keep printing money for as long as it believes it's necessary.
On top of that, there's no way the U.S. government will pay off any significant portion of its debt without printing lots of money to do it. Sure, commodity prices are volatile and could fall. But I hope you've noticed that every time a big asset bubble bursts, the government responds the same way, by printing money and making a bunch of new rules. The rules gum up the market, making the situation look even worse... providing a further incentive to print still more money.
"Jim notes that leaving the war zones will save a lot of money on defense. However, all of these soldiers returning to a no jobs economy will only inflate the unemployment roles. I don't believe discharged military personnel are included in unemployment statistics but they will get social services. Right now they pay taxes on their income. They will not be paying taxes when they hit the soup lines." – Paid-up subscriber Mark
Ferris comment: I don't think it makes any sense to suggest those soldiers should stay over there and possibly get killed or maimed rather than come back here and risk having to work at McDonald's for a few months until they find something better. We are pouring money into another Orwellian cesspool in Iraq and Afghanistan.
Regards,
Dan Ferris
Medford, Oregon
February 4, 2010