Friday, November 30, 2012

Thoughts on Investing from Jeremy Grantham

9. In the end it’s quite simple. Really. Let me give you some encouraging data. GMO predicts asset class returns in a simple and apparently robust way: we assume profit margins and price earnings ratios will move back to long term average in 7 years from whatever level they are today. We have done this since 1994 and have completed 40 quarterly forecasts. (We started with 10-year forecasts and moved to 7 years more recently.) Well, we have won all 40 in that every one of them has been usefully above random and some have been, well, surprisingly accurate. These estimates are not about nuances or PhDs. They are about ignoring the crowd, working out simple ratios, and being patient. (But, if you are a professional, they would also be about colossal business risk.) For now, look at the latest of our 10-year forecasts that ended last December 31 (Exhibit 1). And take heart. These forecasts were done with a robust but simple methodology. The problem is that though they may be simple to produce, they are hard for professionals to implement. Some of you individual investors, however, may find it much easier.

Obama's fiscal cliff proposal and its consequences

Morning Journal--The age of financial repression


   This Week’s Data

            November retail sales advanced only modestly over disappointing October sales.  Sandy impacted the first two weeks of the month.

            October personal income was flat versus expectations of a 0.3% rise; personal spending fell 0.2% versus estimates of a 0.1% increase.  Both numbers were impacted by Sandy.


            The age of financial repression (medium and a must read):



  International War Against Radical Islam

            Who won the battle of Gaza (medium):

The Morning Call---Is the fiscal cliff now discounted? What about Europe?

The Morning Call


The Market

            Yesterday, the indices (DJIA 13021, S&P 1415) continued their rally after some early morning turmoil.  Both finished for the second day above the upper boundary of their short term downtrends (12453-12950, 1350-1396).  A close today above those upper boundaries will confirm a break and the Averages will re-set to a short term trading range.

            Should this occur, candidates for an upper boundary would be (1) their 50 day moving averages [13190/1419] and (2) two former support now resistance levels [13302/1422 and 14190/1576].

            The indices remain within their intermediate term uptrends (12847-17847, 1356-1952)

            Volume fell, breadth was mixed.  The VIX declined, finishing below its 50 day moving average and the upper boundary of its short term downtrend but above the lower boundary of its intermediate term trading range.

            GLD recovered some of Wednesday’s loss but remains below its 50 day moving average and the lower boundary of the very short term downtrend for the second day---which confirms the break of this trend.  There is some good news in that the bounce made Wednesday’s low a higher low than the previous one in early November.  Nonetheless,  our Portfolios Sold at the close one half of the shares purchased Tuesday morning.  GLD remains above the lower boundaries of its short term uptrend and the intermediate term trading range.

            Bottom line: the bulls have the reins right now, however much I may disagree with their reasoning.  As a result, I am gutting today out to be sure the short term downtrends are confirmed as broken.  Even if they are, the new trading ranges would have a lower boundary of the mid November low (12463/1343) and a potential upper boundary of the 50 day moving averages (13190/1419).  In other words on a technical trading basis, more downside than upside and no reason to be chasing stocks at current prices especially with them trading above Fair Value (as defined by our Model).

            The Santa Claus rally (short):


            Yesterday was another decent one for economic data: the bad news was the November retail sales were anemic; but the first two weeks were impacted by Sandy.  The good news was that (1) revised third quarter GDP was up considerably, though some economists are complaining about the make up of its components and (2) jobless claims were down albeit not as much as expected.  So none of these stats were unmitigated positives or negatives; but they were weighed to the positive side.  That works for our forecast.

            That said, the pin action followed the political narrative on the fiscal cliff.  Early in the day, prices were off on some disappointing comments from Boehner; then rallied as more positive comments surfaced in the afternoon.  However, after the close, the WSJ reported that it had a copy of Obama’s negotiating points, the important ones being (1) $1.6 trillion in tax increases and (2) $50 billion in INCREASED spending---no wonder Boehner was a sour puss.  Clearly, if the trend in prices remains highly correlated to fiscal cliff news, the Market will open down this morning.

            Under the category of Investing for Survival (medium):

            An optimist’s view of the fiscal cliff (long):

            The phantom austerity of our political class (medium):

            Ann Coulter may have the long term solution to the fiscal cliff problem, although it will cause short term pain.  The GOP stands back, agrees the Obama won the election, give Him what He wants but makes it clear (1) that the dems now own the economy lock, stock and barrel and (2) why their policies are misguided.

Bottom line:  I continue to believe that we are going to get a resolution to the fiscal cliff; though there are two associated issues: (1) the terms of the compromise; and  I have seen nothing that would lead me to believe that the agreement will be anything but non-optimal---including the above linked to article which I consider optimistic. (2) when we get it; and if it is not done or almost done by Christmas [Obama’s ‘hoped for’ deadline], it will still get done early 2013.  To be sure, that will likely scare many investors.  But, all other things being equal, a sell off based on that fear would be a buying opportunity.

Of course, all things are never equal and the risk posed by multiple eurozone sovereign and/or bank insolvencies, in my opinion, is much more significance than the fiscal cliff (1) because it is more likely than the fiscal cliff and (2) the economic consequences are unquantifiable where as we have enumerable studies precisely outlining  the economic costs of going off the cliff.

Update on Greek bank revolt (medium):

Meanwhile, Greek pensioners rage at officials who invested much of their pensions in Greek bonds (this is long, just read the first couple of paragraphs to get the jest of the story):

***over night, economic reports out of the EU show unemployment at record levels and retail sales plunging.

With stocks now slightly above Fair Value, there is no compelling case for buying stocks.  On the other hand, there is no reason not to add to those stocks on our Buy Lists, absent the eurocrisis.  Unfortunately, conditions in the EU continue to deteriorate and I can’t quantify to the downside.  And that spells trouble with a capital T.  I love our Portfolios’ cash positions.

            How cheap are stocks (short/medium):

Thursday, November 29, 2012

HollyFrontier (HFC) 2012 Review

HollyFrontier Corp, which is the result of a merger of Holly Corp and Frontier Oil in July 2011, is one of the largest independent petroleum refiners in the US producing gasoline, diesel, jet fuel, asphalt and specialty lubricant products.  Consolidated historical figures are not yet available; however, earnings per share are expected to grow from $6.42 in 2011 to $6.60 in 2012 while the dividend per share should increase from $.33 to $.50.  Return on equity in 2012 will be roughly 25%.  HFC should benefit from:

(1) economies of scale from its expanded infrastructure,

(2) margins are benefiting from heavy crude differentials as well as price differences between inland and coastal crude,

(3) stock buybacks.

            The major negative is lack of volume growth.

HFC is rated B++ by Value Line, has a 24% debt to equity ratio and its stock yields 1.5%.

Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                Yield      Growth Rate     Ratio       Since 2002

HFC           1.5%          17%              9%               NA*
Ind Ave      3.7              6                  31                 NA 

                Debt/                        EPS Down       Net        Value Line
                Equity        ROE      Since 2002      Margin       Rating

HFC          24%           21%            NA*             6             B++
Ind Ave     13              17                NA              7            NA

• historical numbers not available


            Note: HFC stock made great progress off its November 2008 low, quickly surpassing the downtrend off its July 2007 high (red line) and the November 2008 trading high (green line).  Long term the stock is in an uptrend (straight blue lines).  Intermediate term it is in an uptrend (purple lines).  Short term it is in an uptrend (brown line).  The wiggly blue line is on balance volume.  The Aggressive Growth Portfolio owns a 50% position in HFC. The upper boundary of its Buy Value Range is $19; the lower boundary of its Sell Half Range is $54.


Greg Mankiw on the fiscal cliff

Morning Journal--More on the impending student loan crisis


   This Week’s Data

            October new home sales fell slightly but September sales were revised down 5.3%.

            The Fed released its most recent Beige Book which was generally up beat though it took pains to point out the impact of Sandy in multiple geographic and economic sectors.

            Revised third quarter GDP came in up 2.7% versus expectations of up 2.8% and the initial report of up 2.0%; the GDP deflator was up 2.7% versus estimates of up 2.8% and the initial report of up 2.8%; corporate profits were up 18.6%.

            Weekly jobless claims fell 13,000 versus forecasts of a 26,000 decline.


            More still on the impending student loan crisis (medium):

            More on Fed policy (short):



Another example of the sheer lunacy of our environmental policy (medium):

            And this example of the collusion between the political class and the financial class (medium):
  International War Against Radical Islam

            Egypt’s new despot (medium):

            Susan Rice’s talking points (medium):

The Morning Call---Don't get too jiggy + Subscriber Alert

The Morning Call


The Market

            The indices (DJIA 12985, S&P 1409) spiked higher yesterday after an early morning decline.  They both (the S&P for the second time) traded above the upper boundary of their short term downtrends (12475-12965, 1349-1399).  Our time and distance discipline is now operative.  Closes above these upper boundaries on Friday will confirm a break.  Their 50 day moving averages remain overhead (13194/1420).  They also continue to trade within their intermediate term uptrends (12835-17835, 1354-1950).

            Volume rose; breadth improved.  The VIX fell, remaining below its 50 day moving average and between the upper boundary of its short term downtrend and the lower boundary of its intermediate term trading range.

            GLD got seriously whacked, closing below not only its 50 day moving average for the second day in a row but the lower boundary of its short term uptrend.  Tuesday’s purchase, however small, still looks like a very bad trade; and the best strategy for dealing with bad trades is to terminate them immediately.  So absent a big rally today, I will Sell the shares Bought on Tuesday at the close---with the full recognition that this was a trade and that I could re-initiate it at any time.

            ***pre market open it looks like GLD has already recovered half of yesterday’s loss.

            Bottom line: I was being more prescient than I thought when I said yesterday that  ‘one big up day would alter that assessment’ that assessment being ‘re-syncing of the S&P with the Dow in their short term downtrends is obviously not a positive’.  That said, the break of those downtrends has not been confirmed; and the aforementioned statement regarding ‘one big up day’ applies equally to one big down day.  In other words, the Averages remain at a pivot point which, in my opinion, is not an occasion to be taking action whether buy or sell. 


            Yesterday’s economic news was neutral: positive weekly mortgage purchase applications,  a very negative revision to September new home sales and a mixed to positive report from the latest Fed Beige Book.  The September home sales number was by far the most important but not enough to impact our forecast.

            Our political class was center stage with both Boehner and Obama mewing about a compromise on the fiscal cliff.  To say investors reacted positively would be an understatement; and they may be right.  To be sure, the electorate will get some sort of compromise on the fiscal cliff.  However, at the risk of being repetitious, the issues are what will be the terms of compromise and when will we get it. 

In my opinion, for the Market to move higher, the compromise needs to include at a minimum $2-3 of spending cuts for every $1 of tax increases, those cuts have to come largely from entitlements and it is clear that the timetable for agreement will yield a solution by 12/31/12.  This may all happen; my bet is that it won’t.  That, therefore, makes me very cautious---forgetting that the EU muddle through scenario gets iffier and iffier everyday.

            Peter Orszag on tax cut proposals (medium):

            More on tax cuts and revenues (medium):

            More details on the latest Greek bailout scheme (medium):

            And the first snag (medium):

            One final joyous Holiday note, the WSJ reported that the Fed may be ready to provide more easing---I guess they missed the bankruptcy notice of the Bank of Japan. 


Bottom line:  I don’t share yesterday’s investor euphoria.  I believe that getting the compromise will feel like a root canal but unfortunately the result will likely not bring the relief.  Further, virtually every day the eurocrats edge closer to economic suicide even on those days that they would have us believe they had just parted the Red Sea and were leading the EU into the Promised Land. 


I love our Portfolios’ cash and if I have to sell some GLD, they will just own more cash.

       Subscriber Alert

            Three stocks (Atrion [ATRI-$201], Balchem [BCPC-$35] and Sun Hydraulics [SNHY-$26]) on the Aggressive Growth Buy List traded above the upper boundaries of their respective Buy Value Ranges.  Accordingly, they are being Removed from that Buy List.

            The Aggressive Growth Portfolio owns shares of BCPC and SNHY.  No shares will be Sold.

Wednesday, November 28, 2012

Buying and storing gold offshore

Buying and storing gold and silver offshore by Mark Nestmann

The perception that America’s debt is a safe investment gave this country the upper hand during the 2008-2009 financial crisis. It made it easier for us to borrow money and for the Federal Reserve to buy bonds to keep interest rates low.

Today, that confidence has all but evaporated as a dithering Congress can’t agree on a balanced long-term budget. Politicians have taken the debt ceiling hostage, stirring up a whirlwind of uncertainty over America’s ability to manage its deficit.

This is driving foreign and domestic investors into “safer” investments that have real value… like precious metals.

Gold, for instance, has unique properties that make it an unmatched medium of exchange. It is the anti-fiat money currency. Silver should continue to perform well, thanks to its dual role as both an industrial metal and currency metal.

Owning physical gold and silver in the form of coins and bullion will help to conserve your purchasing power as paper money loses its value. But where do you store it?

Gold and silver should be held in a diversified way. You can hold it in your home (coins in a safe), with a family member you trust, or in a safety deposit box at a bank.

But for real safety, peace of mind and asset protection, you should really keep at least some of your gold and silver overseas. This is not just for tax reasons, but for insurance.

Here are seven strategies you can use to safely purchase and store your precious metal holdings offshore…

Strategy 1: Buy locally overseas and store in a secure residential location. Do you live or own property overseas? If so, you can buy precious metals locally and then store them at your offshore home, in a secure location. A floor safe is ideal… one capable of deterring a professional thief for at least an hour or two. For that, expect to pay several thousands of dollars or its equivalent in foreign currency. Installing the safe is a job for a pro. If you can’t find a trusted local contractor, you can transport a U.S. contractor to your overseas location to install it for you.

For U.S. persons, this is a completely non-reportable way to buy and hold precious metals… although you must report and pay tax on any profits when you sell.

There are some drawbacks, however. You’ll likely pay full retail price for the metals along with local sales or value-added tax.

Finally, when you sell, depending on the form of the metals you own, you may need to pay to have them assayed. This is most commonly required for bars (less so for coins).

Strategy 2: Buy locally and store in an offshore bank safety deposit box. You don’t need to live offshore to use this method. You merely need to open an account at a foreign bank and rent a safety deposit box there. Make a personal visit and purchase precious metals from the bank or a private dealer and store them in the box.

U.S. persons who use this arrangement must report the foreign account to U.S. authorities if the aggregate value of all foreign accounts exceeds $10,000. However, under current law, you don’t have to report the metals in the safety deposit box as long as only you have access to it. (This may change depending on how final regulations interpreting newly expanded offshore reporting requirements are written.)

Again, you must report and pay tax on any profits when you sell. Thefts from safety deposit boxes are also less common than from residences.

Strategy 3: Buy locally and store in a box in an offshore private vault. This works basically the same as strategy 2, except that there is no need to open a bank account and report it to U.S. authorities.

Strategy 4: Buy locally and store in a secure storage facility offshore. You won’t have exclusive access to your metals this way, so you’ll need to report this arrangement as a foreign account to U.S. authorities. You’ll also need to pay custodial fees on the value of the metals held on your behalf.

In some cases you can arrange for “bonded” storage that avoids the need for an assay when you sell. Plus, theft from a secure storage facility is very uncommon… and it’s likely that if your metals are stolen, the bank or the insurance company will replace them.

Strategy #5: Buy from a foreign bank and have the bank maintain a custodial account for your metals.
Holding your metals this way means that both the account and the value of the gold stored in the vault are reportable. You’ll also need to pay custodial fees. On the other hand, you may obtain a more favorable purchase price and avoid local taxes when you buy. In some cases you can also arrange for “bonded” storage.

Again, theft from a bank vault is very uncommon, and it’s likely that if your metals are stolen, they’ll be replaced.

If you purchase metals directly from the bank, know the differences between “allocated” and “unallocated” storage. Allocated storage means that the bank has specific coins or bars that are set aside for you. Unallocated storage means that you have an ownership interest in precious metals the bank may not necessarily have on hand. Unallocated storage is less expensive, but also may entail greater risk if the bank becomes insolvent and is unable to deliver the metals it has credited to your account.

Strategy 6: Open a precious metals account online. Once again, you’ll have a reportable account and need to pay custodial fees. It’s likely you’ll be able to get a more favorable purchase price and avoid local taxes when you buy your precious metals online.

Selling rarely if ever requires an assay and your holdings are fully insured against loss. If you want to take delivery of your metals, however, you may be required to receive them in a form or denomination you don’t particularly prefer.

Theft is unlikely, as the metals will be held in a secure vault. Your holdings will also likely be insured against theft or other loss.

Strategy 7: Purchase a precious metals certificate.
This is one of the easiest ways to purchase precious metals offshore, although once again, you’ll have a reportable account. You can often make the purchase in the United States and have the metals stored offshore on your behalf. You receive a certificate indicating the quantity of metals you’ve purchased, and (if allocated) a list of your specific holdings.

This purchase method avoids local taxes and often lets you buy at a more favorable price. There’s also no need for an assay when you sell.

If you opt for allocated storage, you can take delivery of your metals anytime, or you can allocate your unallocated metals and take delivery once they’re fabricated.
In one certificate program offered by the Perth Mint, unallocated storage is backed by a government guarantee. The government of Western Australia guarantees that the unallocated metals held by purchasers of a Perth Mint Certificate are 100% backed by physical metals

Nassim Taleb (Black Swan) on his latest book

What is going on in gold?

Morning Journal---America's lost decade

Sorry for the delay


 This Week’s Data

            The International Council of Shopping Centers reported weekly sales of major retailers up 3.3% versus the prior week and up 4.0% versus the comparable period a year ago; Redbook Research reported month to date retail chain store sales up 0.8% versus the similar timeframe last month and up 4.5% on a year over year basis.  Both numbers were impacted by the timing of Thanksgiving and Black Friday.

            October durable goods came in flat versus expectations of being down 0.8% and September’s reading of +0.8%; ex transportation the stats were a lot better---up 1.5% versus estimates of down 0.4% and September’s report of +2.0%.

            The September Case Shiller home price index rose 0.4%, in line with forecasts.

            November consumer confidence came in at 73.7 versus expectations of 72.8 and 72.2 recorded in October.

            The Richmond Fed November manufacturing index was reported at +9 versus estimates of -8 and October’s reading of -7.

                Weekly mortgage applications fell 0.9% but purchase applications rose 3.0%.


            Thoughts on economic policy making (medium):

            A comparison of tax rates versus taxes paid in 1950 and today (medium):

            America’s lost decade (short):

            The latest on student loans (short and a must read):



            John Fund on voter fraud (medium):

            Welcome to the future of healthcare (medium):

Warren Buffett on the fiscal cliff

The Morning Call---Business as usual in Reid's Senate

The Morning Call


The Market

            The indices (DJIA 12878, S&P 1398) sold off a bit yesterday.  Importantly, the S&P finished the day below the upper boundary of its short term downtrend after trading two days above it.  That (1) negates the threat of a break of this boundary and (2) brings it back in sync with the DJIA.  Now both are within the boundaries of (1) their short term downtrends [12495-12979, 132-1401] and (2) their intermediate term uptrends [12820-17820, 1354-1950] ---note the proximity of the Dow to the lower boundary of this trend.  Both are well below their 50 day moving averages (13213, 1424).

            Volume was flat; breadth continued to falter.  The VIX bounced but remained below its 50 day moving average and between the upper boundary of its short term downtrend and the lower boundary of its intermediate term trading range---basically neutral.

            GLD traded down, closing below the 50 day moving average for the first day but continuing to trade above the lower boundaries of a very short term up trend, a short term uptrend and an intermediate term trading range. 

            The move back below the 50 day moving average is a bit disconcerting after the small addition our Portfolios made to their holdings.  For the moment, nothing will be done unless GLD breaks below the lower boundary of the very short term uptrend.



            Bottom line: yesterday’s re-syncing of the S&P with the Dow in their short term downtrends is obviously not a positive.  On the other hand, one big up day would alter that assessment.  So the Averages remain close to a pivot area which, in my opinion, is not an occasion to be taking action whether buy or sell.  Patience.

            Stock Trader’s Almanac reviews December’s past (short):


            Yesterday’s economic data were generally upbeat: weekly retail sales were strong but that was a function of the seasonal effect of Thanksgiving and Black Friday; durable goods orders were not that great although ex transportation, the number was good; the Case Shiller home price index, consumer confidence and the Richmond Fed’s manufacturing index were all positive.  That’s a good day and certainly supports our forecast.

            So why were stocks down?  Two guesses:

(1)    the announced ‘bail out’ deal of Greece [a] was highly conditional and [b] if every thing comes up roses, it is still in reality a restructuring/default---you pick the term.  You may recall that a Greek bankruptcy is part of our EU ‘muddle through’ scenario.  The problem here is that the eurocrats are pretending that it is not.  So instead of facing the situation straight up and allowing the markets to enforce the consequences, the eurocrats are dancing around the terms of the deal, obfuscating what will really occur, allowing underlying economic conditions to continue to deteriorate and ultimately making the situation worse than it already is.  If Spain, Portugal, Cyprus and Italy weren’t waiting in the wings for their turn at a bailout, this might not be so bad.  But...........

***over night: having just heaped a mound of steaming scata on the eurocrats, it appears that at least in the case of Spain’s banks they are trying to do the right thing, i.e. downsize/cease operations and force losses on the bondholders.  Let’s see if they follow through.

(2)    Harry Reid, that silver tongued devil, held a news conference and whined that the republicans weren’t cooperating in the fiscal cliff talks.  What he failed to mention is that it is his f**king job as majority leader to produce an agreement---like it has been his job to produce a budget for the last three years.  Pardon my ranting, but no CEO, coach, military officer would last a nanosecond in his job if he/she consistently failed to perform a major function of that job.  This guy is an incompetent weasel.  Instead of whining, he needs to be hammering out the terms of a compromise.  That said, this is likely just a part of a kabuki dance that will lead to what I think will be the ultimate solution---a half baked compromise that screws all but the growing dependent class.

            Bottom line:  it is amazing that the Market wasn’t down more.  But in the end, as annoying as it is to deal with the news flow out of the political class both here and in Europe, nothing really happened yesterday.  The eurocrats keep pretending to address their sovereign and bank debt problems but just create confusion.  Our own elected representatives seem to be looking over the eurocrats’ shoulders for clues on what to do next.   In other words, business as usual. 

I still believe that we will get a solution to the fiscal cliff; we are just not going to like it.  ‘Muddle through’ is still our assumed scenario for Europe; but a big reason is that I simply don’t know how to quantify the alternative.  My solution to this problem is to hold lots of cash and gold and wait for prices to discount what I can’t.

            The latest from John Mauldin (medium and today’s must read):