Hi Selva, I understood what you wrote, but am barely qualified to comment even just this portion <<In conclusion, I feel, we are on the crest of something much worse than anyone imagined ... makes the allure of our golden metal all the more alluring>>
and add "cash" as mentioned here:
moneycentral.msn.com
Contrarian Chronicles
2 possibilities and a hidden jewel: cash
As the market detoxifies, it's yield that tempts. Those who do their homework on REITs and bonds can find places where risk and reward are nicely in balance. Meanwhile, cash is upgraded to 'accumulate.'
By Bill Fleckenstein
Even as the market has wilted under skepticism's glare, some on Wall Street dig in their heels in a show of bravado. Creatures of optimism, the dip buyers find "opportunity" in every piece of bad news. Dead fish persist in cheering stocks whose high prices make their poor fundamentals an all-the-more risky bet. Meanwhile, short-sellers do their homework, only to hear the same refrain about bringing stock prices down. Of course, they can also find an idea or two on the long side, when the risk/reward equation is attractive. And that's what we'll offer with this column.
I'd like to share a thought that came to me one recent morning, when we saw yet another shot higher at the opening bell. Since the market hit its peak of 5,000 on the Nasdaq ($COMPX) in March 2000, people have tried to buy every dip the whole way down. On the overwhelming majority of mornings, we have seen that at work when the futures come in higher, or attempt an immediate rally if they open lower. One would think that at some point, people would be disabused of this notion. Maybe some sort of an interim low will be established when people finally stop buying the dip with such regularity.
Pointy fish head embodies irrational protuberance
In any case, on that same morning, the Philadelphia Semiconductor Index ($SOX.X) was the leader to the downside, down about 5%, as one of the leading dead fish cut his numbers on. Now, it's important to make a note of this: In April 2001, this deadest of the dead fish declared that things were so bad, it had to be the bottom. Then he went on to rationalize that view for the longest time. So, this particular dead fish's change of tune will give some other people who have been incorrectly bullish on chip stocks some cause for concern. I am sure some people will say, "If he gave up, it must be the bottom," but I don't happen to believe that.
As long as we're talking about dead fish, another one was gurgling that morning about IBM. He kept his $120 price target and made some comments to the effect that accounting concerns regarding IBM (IBM, news, msgs) are irrational. To put this fellow's analytical skills into perspective, he was very bullish on Gateway (GTW, news, msgs) from about $55 to the roughly $4 it now trades at. It is stunning to me how unbelievably pathetic the dead fish community is, in the aggregate. I know this is not news to people, but as I have watched events unfold and chronicled them on a daily basis since the fall of 1996, I still am just astonished at how incompetent these people seem to be.
Field-day event: sour-grape picking
Turning to the news, I saw one rather misguided story recently in The Wall Street Journal that I thought I'd clarify. In "S&P 500 Follows Nasdaq to Multiyear Low," the head of stock trading at T. Rowe Price is quoted as saying, "Those who want to put a negative spin on things are really having a field day. It is like the shorts are shooting fish in a barrel. It is really easy to push stocks around." In his view, short-sellers are making up stories and driving stocks lower. (I would just point out an old expression on the Street that probably sounds very quaint now, because most stocks don't pay any dividends. But in view of corporate America's skullduggery, I think this adage is most timely: "The bears don't cut the dividends.")
Now, I can't speak for all short-sellers, but I can say that to the extent this may occur, it is quite rare, in my opinion. I think it a little disingenuous to blame the problems that we're having on short-sellers. They are a function of too-high prices, and a lot of corruption that came before. For the most part, during the mania, only the short-sellers would stand up to say that the king had no clothes.
These same people weren't complaining when analysts willy-nilly raised their stock-price target every single day and exploded stocks higher. The implication seems to be that stocks can never go up for the wrong reasons, but they can go down for the wrong reasons if the shorts spread rumors. I'm not saying all short-sellers are princes, but the insinuation that they make stocks go down is just completely wrong-headed.
Complimentary beverage with leverage
Well, that 'short' discourse aside, it's on to the long side, where I'd like to share two ideas with readers of the Contrarian Chronicles. While in New York a few months back, I visited a company that I thought might make for an interesting recommendation. Upon returning home and doing some more research, I have concluded that it merits investigation on the part of all readers. Recently, I purchased some shares for myself. The company's name is Annaly Mortgage Management (NLY, news, msgs). This is a yield vehicle that I think will be in big demand over the next couple of years. Annaly is a real estate investment trust (REIT), and borrows short and lends long. In essence, it is a virtual bank, the difference being that it only "lends" money for mortgages, i.e., it buys them. (It buys triple-A rated government-sponsored mortgage securities.) The company uses leverage as well. So it makes the spread between borrowing at short rates and lending at slightly longer rates. Basically, what you are buying is the Annaly fixed-income management team.
Now it might seem strange that I am recommending something that is leveraged and owns mortgage paper, but I think people are being compensated to do just that. Thanks to its organization as a REIT, Annaly isn't taxed at the corporate level, and virtually all the money that it makes is paid out to the shareholders. So, if one has an employee benefit plan, i.e., an IRA, 401-K, or profit-sharing plan, this is a perfect way to capture a fat dividend and keep all the money after taxes.
Warning: curvaceous yields ahead
Based on the latest quarter’s dividends, which in all likelihood won't be what the next four quarters hold, Annaly yields over 15%. That's right, over 15%. The company's stated goal is to earn the long bond, plus a few hundred basis points. If it is able to meet that, its returns will in all probability be superior to the stock market over the next five years -- arguably, with less risk. (In fact, Annaly has beaten the S&P 500's ($INX) total return in each of the past three years: in 2001, it returned 101.9% to the S&P 500’s -10.92%.)
The risk for Annaly would come from a persistent flat or inverted yield curve. Obviously, it would be difficult to earn a big spread if the yield curve was flat, and things would be worse if it inverted. Similarly, there could be a problem in the mortgage market that could cause the company some interim grief, as well. So, people should recognize their own tolerance for leveraged interest-rate speculation. This is a suitable slice of a portfolio, potentially, but it shouldn't be a huge chunk of anyone's net worth, at least in my opinion.
Cushioned REIT-urns
That said, if one studies Annaly's record since June 1997, and if one thinks about all the wild and crazy things that have happened to the fixed-income market in the last five years and then sees what the company has been able to produce in that extreme environment, one could be pretty confident, as I am, that even when events sour, it will do a pretty good job. The company's trailing 12-month earnings are about $2.40. If, supposing, Annaly only earned enough to generate 5%, it would have to make $0.90, and one can see that this would allow for a huge drop, relative to where earnings are.
Annaly had quite a good first quarter and a record dividend declaration, and the stock has squirted a bit. If one wants to buy it, one needs to do so carefully. Since it's an income vehicle, if you buy it "sloppy," you can't make the money back by a massive stock-price movement over time. About two weeks ago, it saw some unusual trading activity, which near as I can tell, had to do with noise surrounding the beginning of the quarter, or the Russell 2000/Russell 1000 index perturbation, and the fact that the stock was ex-dividend July 1. I don't think anything has changed there. In any case, I suggest that people dig into this one and see if it's suitable for their portfolio.
Charter school open house
Now, let's move to the debt side, for a potential buy idea situated at the epicenter of some of today's problems. Please hear me out before throwing any tomatoes in my direction (though I'm used to that) and consider doing a little research on the debt of Charter Communications (CHTR, news, msgs), a leading cable operator controlled by Microsoft co-founder Paul Allen. Here we have a situation in which the equity market has assigned the company a market cap of about $1 billion and yet the debt trades as though bound for bankruptcy. Obviously, both markets can't be right. If the equity has any value, the bonds have no problem. But if the equity has no value, the bonds could still be money good. I have no interest in buying the common stock. But I think the debt is intriguing -- specifically, a couple of broken converts: the 4¾ of 2006 and the 5¾ of 2005.
Recently, I bought some of the 4 ¾ of 2006 at between $48 and $42, for a yield of about 10% plus. If the company doesn't go belly up, it will return almost twice your money in four years (for a yield to maturity of over 23%, depending on the price you pay). I'm willing to put up the money if I think there's a high probability I'll see my loan paid off. If, in fact, I only get the $0.50 on the dollar, I would even be happy with that over the next four years. Now, it's not an idea for widows and orphans, and obviously, any security so priced comes with more risk than most people would like to believe. But I would rather own something like this than the average stock.
Bottom-up, top-down convertible talk
Cable stocks, EBITDA stories and companies with a lot of debt have come under much pressure. This particular entity encompasses all three of the above (The stock is down 83% in the last 12 months), but I believe that at the end of the day, its debt will be money good. The negative issues on cable are the fact that satellite broadcasting has stolen some of the industry's most profitable customers, that the switch to digital was an expense that has borne little fruit thus far, and that the programming companies have a leg up over the suppliers like cable. Though all this is true to a degree, I think cable assets have a price. I'm not sure exactly what that is, but if one were to expunge the equity and just examine the value at which the debt trades, this comes to about $2,400 a cable subscriber, given that the average cable bill is about $500 a year. (Of course, what really matters is how much of that $500 is retained as real cash flow, a number easily argued over. Charter says it's about $250, which implies a cash flow yield of 10%.) This seems like a reasonable price and is roughly what cable subscribers were valued at in 1993, which gives no value to the $5 billion the company has spent upgrading its assets.
Charter only has about 18 months of spending left in the conversion to two-way enable (data delivery, interactivity, VOD, VOIP, etc.), which is what costs all the money. I'm not saying this is necessarily going to pay off in a big way, but the spending will have been done, and I would think that these subscribers ought to be worth more than analog subscribers were in 1993. In any case, I'm not advocating that people just go out and buy Charter's bonds, but I do think they merit further research. Probably, the story will get worse before it gets better. In my opinion, however, the risk and rewards are pretty nicely in balance, contrary to what I generally see in the equity market.
Of pro forma & over-performa
That brings me, finally, to a point about cash, a storehouse of reward for all those who care to look in that direction. It's worth noting that if you'd put all your assets in cash or T-bills beginning in 1998, you'd have more money now than if you'd invested it in an S&P index fund. Of course, if you funneled all your assets into the Nasdaq, you'd be even worse off. On a five-year basis, cash has now outperformed the stock market. If, in the fall of 1998, I told you that this would occur, you wouldn't have believed me.
William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney. At time of publication, William Fleckenstein owned Annaly Mortgage Management and the 4 ¾ debt due in 2006 of Charter Communications. He also held a short position in IBM. Positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money. |
