Market Musings Blog

China, Growth, and the Shanghai Composite

Posted on 08.14.12 by Michelle Rand in Foreign Investing

We’ve said it before, but we will say it again: Economic growth does not necessarily translate to a good stock market. China’s economy has grown strongly over the last few years and although the rate of growth has slowed recently, it has far outperformed the US.

Yet, the Shanghai Composite, China’s headline stock market index, is down 32% from a high it hit in November 2010. That’s the worst drop among the 21 developing country markets followed by Bloomberg. This period of time also marks the young index’s longest bear market. For comparison, the US Standard & Poor’s 500 is up almost 18% in the same time frame, and if dividends are counted, it’s far more than that.

Valuation has a bigger impact on stock returns than economic growth. Chinese stocks have been expensive. US stocks were cheap, and are still cheap.

Want to guess at what the Financial Times index of 100 largest European stocks has done over the same time frame? Ok, it’s not as positive as the US, but it is positive: a price return of +2.4%, and dividends would boost that. The Euro-mess hasn’t resulted in a bear market – yet. Just goes to show – the tortoise wins more often than we think.

Time to Think Inside the Box

Posted on 08.02.12 by Michelle Rand in Investment

We spend a lot of time thinking about things that other people don’t. The most common question we ask at strategy meetings is “What do other investors hate right now?” That’s our playground – whatever everyone else doesn’t like. Greek stocks, maybe. Europe. Auto parts companies. Condos in Beaverton. Whatever.

But sometimes it pays to think about the mainstream, or at least look at it through our own weird lens. One fact that stands out is that if I am counting correctly, we’ve had a number of so-so weather years, vis-a-vis growing crops. Not just here, but worldwide. We had a good corn year in 2011, but a bad wheat year. This year corn looks like a bust in the US. In 2010, Russia’s drought decimated its harvests. Looking worldwide, crop production has not kept up with population increases in the past few years, driving down grain reserves, and periodically causing price spikes.

Likewise, we’ve had at least four years of very low housing construction in the US, and at least two natural disasters that roiled the timber-lumber-construction chain: a tsunami in Japan and earthquakes in Chile. All these harms seem to be reversing; in particular, housing is picking up in the US. Nobody’s looking, but lumber and other timber product prices have been strong for several months now.

While crop prices are in the news, the media isn’t connecting the dots – linking up the year-after-year shortfalls in various crops in various places that are adding up to declining grain reserves; and I don’t think anyone except the odd timber geek is noticing the increasing number of log trucks on the roads and rising prices at Home Depot. Investing in agriculture in particular has been “hot” for a while, although many of the stocks have suffered a hangover with the soft economy. These probably deserve another look. And many timber companies haven’t participated in the market rebound since 2008 at all.

Right in front of us – two worthwhile investment ideas “inside the box.”

Cloud on the Horizon in Muni Land

Posted on 07.08.12 by Michelle Rand in Investment

Although default rates on municipal bonds have remained extremely low, the outcome of default and its effects on bondholders is evolving in the few cases that do exist. There are two facets to repayment of municipal debt: willingness to pay, and ability to pay. Analysts have believed that municipalities will always demonstrate willingness to pay in order to maintain access to the market at all; i.e., if a municipality ever wants to borrow again, it must pay its bondholders no matter what. Ordinarily, the fact that debt payments are usually a very small portion of a municipality’s budget makes payments a priority even if a municipality enters a fiscal crisis.

In Stockton, CA, which just filed Chapter 9 bankruptcy, this assumption will be challenged. Stockton is proposing a haircut to payments to bondholders in order to put its budget on the right path, espousing a philosophy that all stakeholders should “share the pain”. Through Ch 9, the municipality hopes to force its general obligation debt holders to take less in payments. Most of its GO debt is insured or backed by letters of credit, so most bondholders should not experience a hitch in payments. However, the precedent of seeking court approval for a reorganization plan that contains bond defaults – i.e., that does not place bondholders at the top of the creditor list – is ominous.

We think Stockton is being advised that market access will not be as much of an issue as previously assumed in the event of default. Evidence to the contrary is sketchy, which may support this theory. Corporations usually regain access post-bankrupcty; other troubled municipalities have regained market access fairly quickly, albeit sometimes with state help or with other factors at play. Greece has defaulted more than half the time on its government debt (including recently) but investors still loaned it substantial sums at mere basis points above what Germany paid, until about three years ago. The fact is, markets forget.

Time will tell how this case will turn out. But a decision embracing bond defaults will be particularly bad for California muni holders, and not wonderful news for the muni market generally.

Demoting the Euro Crisis

Posted on 06.29.12 by Michelle Rand in Foreign Investing, Investment

We decided to demote the Euro crisis from “crisis” status to “status quo.” Let’s face it: Greece has been in slow motion destruction for three years now. Spain and Italy have been grinding along on the edge for nearly as long. Ireland’s “crisis” is so boring we never hear about it any more, and Portugal, while quiet also, amounts to unexploded ordinance in the field. It might be found, and it might not.

Emotionally, it just doesn’t feel crisis-like any longer. It feels like chronic flu with occasional good days when randomly delivered medicine kicks in, like today’s announcement provided. Maybe it’s time we accept that for the foreseeable future, this is the way it’s going to be. Maybe, in fact, it’s time to ignore Europe.

The implications of acceptance are many-fold: first, we quit rushing to the Wall St. Journal every morning wondering if something finally happened overnight to bring things back from the brink. Instead, we assume there will be no miracles, no bursting forth of stock market valuations, for the time being. Buying good value during the times when the market gives you the opportunity to do so is the prescription. Rely on the fact that the market will tank periodically, and use that moment to flow money into stocks. Likewise, during the bull phases, take a little of the table.

Second, income stays important. If we’re going to be in a series of bull phases and bear phases that cycle over and over, a bird in the hand (dividends and interest) is worth a lot more than two in the bush (capital appreciation). If your portfolio generates $10,000 per year in income and you don’t take it out, then over three years, you will have reinvested at least $30,000 without lifting a finger. That’s a nice, reliable source of growth, no matter what Europe does.

Third, economic growth stays slow, but sane. That’s not an entirely bad thing. We don’t have any business borrowing tons of money against our homes to buy boats, RVs and vacations. Our grandparents didn’t act like that. We need to live more like our grandparents, and this economy is helping us do so, by injecting a dose of reality and caution into family budgets. And, as in the old days, some market sectors will benefit from this new sanity.

There’s a way to make money in every market environment; creative people can find it.

We interrupt this program to bring you more internet security tips —

Posted on 06.01.12 by Michelle Rand in Investment

Twitter recently sent a very informative message regarding their security protocol. I gleaned some interesting information from the note which sent me around the web to find other security tips.

We’ve already warned that passwords should be strong (see blog here). Charles Schwab & Co. recently told us that in the first quarter of 2012, they’ve experienced more wire fraud than in all of 2011, due to hackers obtaining client email addresses and intervening in the email flow between advisor and client. The hackers mimic the client once they have the flavor of the typical conversation, asking for a wire to be sent. If your email passwords are strong, this would be much tougher. So make sure to change passwords, and keep them strong.

Aside from passwords, there’s a little known opportunity to apply “do not track” to your browsing preferences. On your browser, you can specify private browsing. Visit here to find out more. Additionally, you can tell some advertisers NOT to track your browsing for the sake of pitching you “tailored” ads – those annoying sidebar ads that seem to relate to sites you’ve visited lately, or things you’ve purchased lately. Two organizations enforce “do not track” for advertisers: they are DAA standing for Digital Advertising Alliance (here) and the NAI, National Advertising Initiative (here). Go to those sites to remove and prevent “cookies” from advertisers who are in the business of capturing your private information.

Stay safe online!