Puff, Puff 2 August 31, 2001February 20, 2017 Sorry about the Dow slipping under 10,000. As I’ve mentioned several times before, when Alan Greenspan, concerned about dangerously high stock valuations, gave his famous ‘irrational exuberance’ speech in December 1996, the Dow was 6400 and the NASDAQ was around 1250. Five years of hard work and brilliant technological advance later, perhaps we’ve grown into those valuations and they’re no longer irrational at all . . . though markets being the over-reactors that they are, there’s always the worry – not the prediction, but the possibility – that they will overshoot on the downside as they did on the way up. So we may have seen the bottom here at 9900, but you should be prepared for the possibility that we have not. Note that the Japanese Nikkei Dow is now down nearly 75% from its high 11 or 12 years ago, whereas our own Dow has about quadrupled. The Japanese market was wildly overvalued, and may even now not have bottomed. But there has been a roughly 16-fold shift in these two Dows, with ours quadrupled and theirs cut to a fourth of its former self. I’m not suggesting that most people do anything with that information; but I do think it provides some interesting perspective. Bill Dunbar: ‘Excuse me, but NOBODY IN THIS COUNTRY could not know that tobacco is bad for you. Is it the government’s job to decide what consenting adults can and can’t do? Even if it may be bad for them? I am a non smoker, but as long as I’m not forced to breathe it, people should be able to do what they want. I think that the concept of suing a company for selling a legal product is absurd. If people consider tobacco so evil, then get the votes in congress to outlaw it. I think in this environment many of the things that we take for granted would never be introduced if they were invented today. Consider the automobile. If it were invented today, do you suppose that you could buy one anyplace and almost anybody with even passable eyesight would be easily able to get a license to drive one? No way. The issue of liability would get it killed before it even left the drawing board. So many things we all enjoy wouldn’t be here. Scuba gear, chain saws, lawn mowers, motorcycles, the list is endless.’ ☞ Well, I appreciate the frustration, but let’s take this piece by piece. << Is it the government’s job to decide what consenting adults can and can’t do? Even if it may be bad for them? >> ☞ No! << I am a non-smoker, but as long as I’m not forced to breathe it, people should be able to do what they want. >> ☞ I agree! If you’re not bothering others – and if you’re willing to cover the cost of the ‘externalities’ of your behavior (e.g., pay more for health insurance, so I don’t have to cover the extra cost of your care) – you should surely be left alone to do what you want. << I think that the concept of suing a company for selling a legal product is absurd. >> ☞ Well, phrased that way, it does sound absurd. But would you pass a law exempting tobacco companies from being sued? How about exempting all other corporations that sell legal products, as all do, while you’re at it? I think judges and juries should be free, having considered the merits of the cases brought before them, to throw them out as absurd. But I’m not sure your judgment should preempt theirs (and of course you are not suggesting that it should). Perhaps more to the point, I don’t think the tobacco companies would have had much to worry about from these lawsuits if over the years they had been forthright in disclosing the lethal and addictive properties of their product. Instead, of course, they engaged in a massive disinformation campaign on an issue that directly affected the health of millions of people. If you haven’t already seen it, rent or buy a copy of THE INSIDER with Russell Crowe and Al Pacino. It might change your mind. Had the companies been forthright, state legislatures or Congress might decades ago have restricted the companies’ right to advertise and promote their product so aggressively to children. It would have remained a legal product, but the companies might have been restricted from handing out “loosies” in school playgrounds and using cool cartoon characters to advertise their brands. The practice of paying movie companies to place cigarettes in the mouths of teen idols might have been restricted – or, understanding the repercussions, editors and producers might voluntarily have done less to make smoking seem sexy. Cigarette taxes, which help discourage new smokers, might have been raised sooner and higher. << If people consider tobacco so evil, then get the votes in congress to outlaw it. >> ☞ Prohibition is a terrible idea. First off, this is supposed to be a free country. Second, prohibition just doesn’t work. << Consider the automobile. If it were invented today, do you suppose that you could buy one . . .? No way. The issue of liability would get it killed before it even left the drawing board. So many things we all enjoy wouldn’t be here. Scuba gear, chain saws, lawn mowers, motorcycles, the list is endless. >> ☞ Well, somehow bungee jumping made it past this wall of liability, and rollerblades, and Lasik surgery (they’re operating on your EYEBALL!), and those RAZOR scooters, and radiation-emitting cell phones and (most importantly) fat-free cheese . . . so I’m not sure you’re entirely correct. But I do agree cigarettes probably would not have made it to market, had we known then what we know now. David Smith: ‘You write: You always thought that the leading cause of preventable death was stupidity – and there are certainly examples. But it’s not. It’s tobacco. I would argue that it is indeed stupidity: because the vast majority of current smokers DO know about the dangers of tobacco.’ ☞ Unfortunately, most smokers start their addiction between the ages of 8 and 14. I’m not sure we can just say it’s the 8-year-old’s fault for lacking an appreciation of his mortality. Once addicted, even for exceptionally smart people, it is very hard to quit. (But my exceptionally smart friend Jane did it, after 20 years of trying – so you can, too!) HAVE A GREAT WEEKEND
Puff Puff August 30, 2001February 20, 2017 You always thought that the leading cause of preventable death was stupidity – and there are certainly examples. But it’s not. It’s tobacco. So what should be our stance as a nation on this most American of all products, once our largest cash crop and leafily adorning our greenbacks to this day? From the Wall Street Journal: ‘Big Tobacco, on the ropes politically and legally only two years ago, today faces an acquiescent administration, a Congress intent on honoring the investment tobacco made in them, and a friendlier bunch of regulators – some of whom are more like wholly owned subsidiaries. The crackdowns domestically have subsided and this administration is determined to help American tobacco spread its virulence around the world…” — Albert R. Hunt, The Wall Street Journal, August 2, 2001 To remain healthy, the tobacco industry needs to replace thousands of dead smokers each day with new children smokers. The last administration wasn’t sympathetic. This administration is. Writes Hunt: “[T]obacco has never had a better friend in the attorney general’s chair than John Ashcroft.” And, writes Hunt, don’t expect much from the FTC. “Two appointments at the Federal Trade Commission, under new Chairman Timothy Muris, tell all. Howard Beales is the head of the consumer-protection bureau. He was a George Washington professor and consultant to RJR when he wrote a piece insisting that the old Joe Camel ads certainly weren’t designed to encourage teenagers to smoke. (Of course, Howard, they were aimed at the GW faculty.) David Scheffman, the head of the FTC’s economic bureau, testified that the tobacco companies never schemed to suppress research on safer cigarettes because, being such good citizens, they surely would have wanted healthier products.” It is truly a grand time to be rich and powerful in America.
Borrowing to Buy Munis August 29, 2001February 20, 2017 Toby Gottfried (re buying TIPS for Your IRA at the October 10 Auction): ‘Vanguard will do it for $25. Here’s their commission schedule.’ ☞ Of course, your IRA has to be with Vanguard for this to work. Certainly not worth trying to switch it from Fidelity just to save $25. Bruce Barton: ‘I will be taking out a home equity line of credit to remodel my kitchen and bathroom (which sorely need it). The cost of remodeling should be around $30,000. My line of credit will be around $50,000. The interest rate quoted is Prime (around 6.75%, I believe). Does it make sense to take the full $50,000 and invest the remaining $20,000 in a good municipal bond fund for which I would not have to pay any taxes? I figure that the rate owed on the loan would be under 4% (after tax deductions for the home equity line of credit), and if I could get 5 – 6% (or more) on a muni fund, I would be ahead of the game. Could this work?’ ☞ No. In the first place, the IRS disallows the interest deduction on a loan taken to buy tax-free bonds. In the second place, even if you were not caught and fined and beheaded, the spread you would realize between the after-tax cost of borrowing and the income from the bond fund would amount to very little on $20,000. And in the third, if the prime rate goes up, your interest payments on your home equity loan would rise but not – unless it were a low-yielding short-term municipal-bond fund – your tax-free income. So what had started out as a small positive spread could turn into a negative one. Don’t miss Paul Krugman in yesterday’s New York Times. That nice fiscal prudence we had developed over the last several years? With its nice balance between great times for the best-off but not such bad times for the working poor? And the hope of more resources for education and a good prescription drug plan for seniors? This administration has different priorities.
More TIPS Tips August 28, 2001February 20, 2017 Roses are red, Violets are blue; Yesterday’s column Counted as two. So very briefly: Last week I wrote about the possibility of TIPS in a retirement account, leaving some of you to wonder (a) how you can buy them at auction in an IRA; and (b) whether there would ever even be another issue of these inflation-protected Treasury bonds. If you open a retirement account at a brokerage house, your broker may buy at the Treasury auction on your behalf. Writes the estimable Less Antman: “Fidelity, which is the broker I use in my advisory practice, will do so for a fee of $50.” Max Stone: “Your article seemed to indicate there was some question about whether any more TIPS will ever be issued. There has been some controversy over that topic (see an excellent article in the July 15 NY Times, by Beth Kobliner, on this topic, although since it is more than 30 days old you need to pay to access their archives), but the auction date for the next issue has been set: On Oct. 10, 2001, there will be an auction of the 30-year TIPS (see this site for a more complete Treasury auction calendar). You may want to alert readers to what is possibly their last chance to buy long-term TIPS without a dealer markup (and it’s often a hefty one, which is a little crazy given the low volatility of the instrument, but I guess dealers have to eat as well). Thanks, Max! Where would I be without my readers?
The Bullish Case for Stocks and 20 Specific Recommendations Skip the Math If IT Throws You August 27, 2001February 20, 2017 But first . . . The only thing the press can focus on this summer is Gary Condit. But did you see Paul Krugman’s column in the Times Friday? There’s actually some hugely important stuff going on, as the Bush administration redistributes wealth to the rich and powerful and, separately (not part of Krugman’s column), puts the brakes on what it seems to view as all this silly concern for the environment. (Not that they’re not concerned; they just think the rest of the world’s concern is overdone.) A recent e-mail I saw noted how much better the air and water are than they were 30 years ago, and I think the point of it was – I’m not quite sure – ‘so what’s everybody getting all crazed about?’ But to me what the nice improvements in air and water quality say is that the efforts we’ve been making pay off, and that it’s nuts not to keep leaning gently toward protecting and improving the environment. Yet there was the Bush administration – which had already halved the budget for alternative energy research . . . and which had put a hold on the new arsenic standard, 10 years in the setting, that matched the European standard of 10 parts per gazillion – now relaxing environmental rules for the gold mining interests. This is good for me, as a guy who owns a few shares in two gold mining companies (not my brightest investment, but that’s another story). But is our need for gold so great we should relax these rules? Gold’s value derives specifically from its scarcity. Lowering costs to encourage mining more of it only makes it less scarce. What is accomplished? Ah, but it’s good for gold-mine owners. This is a grand time to be rich in America. But that’s not what the Krugman column was about – or this column, either. Adam: ‘All the Solid Tech stocks have been slammed and I was thinking, pick them up and forget about them and I will make $$ down the road with them. Bottom line is there are no Bidders, why not get a Mercedes for cheap, what do you think?’ ☞ What I think is: Be careful. It may well work with some stocks. I am all for buying stuff no one wants, when it seems to represent good value. But – to take just one widely known Solid Tech stock that’s been beaten down – even at today’s seemingly pathetic bargain price, Cisco is valued at more than four times General Motors . . . at double Ford and GM combined. So it’s not as if, even at 18 down from 70 a year ago, they’re totally giving it away. In which context come two interesting e-mails . . . Sergei Slobodov: ‘I came across this graph representing some 16 years of NASDAQ vs the Dow. In retrospect, one can easily identify the tech bubble (looking more like a volcano) of 1999/2000. It also shows that, historically, the NASDAQ and Dow go hand in hand, more or less, with deviations here and there. This may also suggest that the worst for the tech stocks is over, since the NASDAQ is back to the expected levels of parity with Dow. Of course, there is nothing to prevent the Dow dropping back to 7000 or so, as you caution, and taking NASDAQ with it.’ ☞ True. Not that I am predicting 7000 (or lower), just that I’d be a lot more comfortable buying there than here. Short-term, stock prices need bear no relation to any sort of underlying value. Cisco at 50 a bit more than a year ago was cheap relative to the 70 it eventually hit – a quick 40% gain, for crying out loud! We were fools not to buy it! But were we really? I do not claim to know what any given stock, or the market, is ‘worth.’ But I am old-fashioned enough to try to make some sensible guess. Others – who did very well for a while but have done less well lately – don’t seem to care much about that at all. They see it as more of a video game. I am not accusing my pal David Durst of this. David is a sophisticated fellow with several years experience trading for top financial institutions. He suggested Safeguard Scientific (SFE) to me at $1.32. It went as high as about 100 a few years later, with some nice spin-offs along the way – it’s quite a feeling to make more than 70 times your money in just a few years – before slipping back to today’s $3.89 (no, I was not smart enough to sell most of it at 100, and, yes, I still have some at $3.89). So I listen to David. Last April 22, he recommended these 21 stocks: ARBA ARTG AVNX CATS EXTR FDRY FIBR GX INKT MRVC MFNX NTAP NOVL NUFO ONIS PRCM RBAK STOR TERN WFII XLA. I put $10,000 into each – hypothetically, not for real. A mere four months later they were down an average of 50%. Of my hypothetical $210,000, I had lost $105,000. (A bit of that hypothetical loss was trimmed Friday.) Last week, he wrote with a bullish case for stocks, and even included 20 recommended names. I’m not buying them myself, even though some of them are so much cheaper than they were four months ago, because I don’t now enough about them. I am definitely not recommending them to you either. Nor do I picture the market jumping 25% any time soon, as David argues it may. But I was wrong about Cisco when, at 50, I thought it was overvalued and it jumped to 70 – so who knows? Maybe the market is overvalued here as I think it is but will jump 40% anyway. At the least, if I hadn’t already, I would probably be scared enough by David’s message to cover most of my shorts. David writes: When we last “spoke” back in early June, I was focusing on the fact that the market had rallied 40% off the April-4 low on the NASDAQ. Well, we’ve given back about 2/3rds of that gain and everything looks pretty scary right now. Most of the folks that I am speaking to are happy to be just sitting on the sidelines and waiting for better news. To be sure, sitting on the sidelines has been a comfortable position over the last year. On September 1, 2000, almost exactly one year ago, things looked pretty good. The NASDAQ was sitting at 4235. The dot-com bubble had burst months earlier, but the rest of the market was looking OK. The NASDAQ index was off a mere 17% from it’s all time high of 5132, and at the time, things were looking quite rosy. Then came the earnings warnings. [Today, the NASDAQ is around 1900.] Ooohh, those August turnarounds! So what’s in store for the market right now? Well, there is a technical indicator that is screaming BUY right now and I think that it bears watching. As you know, I don’t think much of technical analysis. It’s not that charts don’t have any value; it’s just the question of how to read them. There is an old saying: “Give the same chart to five analysts and you are likely to get at least 10 opinions” …and some of them just might be correct! But there are some indicators that have an uncanny record. One of these is the ARMS (aka TRIN) index. A market technician by the name of Dick Arms came up with this little formula sometime in the mid-1970s and its simplicity is beautiful. The math goes like this: Divide the actual number of rising stocks by the actual number of declining stocks. Next, divide that number by the number you get by dividing the advancing volume by the declining volume. Here is an example: DAY 1: 2000 stocks advancing (total volume 600m shares). 1000 stocks declining (total volume 300m shares). 2000/1000 = 2 600/300 = 2 2/2 = 1.0 So the ARMS index for that day is at 1.00 — which indicates neutral market action. The interesting part of this indicator is that it can easily read neutral, despite the fact that the market probably went up a whole lot on the day in question. (Notice that there were twice as many rising stocks as decliners). The reason it reads neutral is that the ratio of up volume to rising stocks is perfectly correlated. Twice as many rising stocks, twice as much volume in those stocks … pretty much as you would expect. Of course, there are times when that doesn’t happen. Here is another example: DAY 2: 1500 stocks advancing (total volume 300m shares). 1500 stocks declining (total volume 600m shares). 1500/1500 = 1 300/600 = .5 1/.5 = 2.00 In this example the ARMS index for that day reads 2.00 — which indicates a bearish (down) market. It is true that there were the same number of stocks declining as advancing (and the averages were probably flattish on this day); but since the total volume in the declining stocks was double that of the total volume in the rising stocks, the underlying activity indicates selling pressure, and this is significant . . . and often overlooked. The action on this day was clearly concentrated on the declining stocks, even though there were an equal number of stocks rising as falling. This indicator is great because it gives an indication of buying pressure vs. selling pressure — regardless of market direction, and irrespective of how large total volume is on any given day. It enables you to evaluate where the real sentiment of the market is. A reading above 1.00 indicates selling, and a reading below 1.00 indicates buying. After a long, relentless move in one direction, the market usually reverses direction. The most important thing about this indicator is that it rarely goes haywire. There are lots of market indicators that are giving buy and sell signals back and forth every few weeks. Most of the time, however, this indicator reads pretty close to neutral. It’s value to us on a day to day basis is really not great. I know that a number of futures traders and day traders use this as a very short term indicator for overbought/oversold markets; but these guys are in and out of the market every 10 minutes and that has little to do with us. Instead, I look at the 10-day moving average of this indicator for the NYSE. I didn’t figure this out myself. A while ago I saw Dick Arms interviewed and he pointed out that this is the best way to use his famous indicator. The problem with following this 10-day moving average is that it is not very exciting. There are years, DECADES even, where it hangs out in neutral territory. But on those occasions when it gets extreme, boy, is it important. This is one of those times. The ARMS index 10-day moving average moved over 1.50 on Aug 15th and stayed there for 5 consecutive days – hitting a high of 1.66 on Aug 17. Over the last 30 years, I have calculated that the 10-day moving average has gone over 1.50 only four times; each of those times was a phenomenal buying point. In each case, the stock market rallied at least 25% over the next 9 months. Looking at recent history: The ARMS index 10-day moving average rose over 1.50 in Oct 1997, and the DJIA rally from trough to peak over the next 9 months was 31%. (The NASDAQ rallied 38%.) Again in Oct 1998 the index gave a buy signal and by the following May, the DJIA was up 49%. (The NASDAQ rallied 111% by the following July). The last time that the 10-day moving average rose over 1.50 was in March of this year. It’s difficult to remember, but we actually did have a huge rally after that reading was recorded. In fact, between April 4 and May 22 of this year, the NASDAQ rallied 44% – while the DJIA rose 25% between its March 22 low and the May 21 high. So what now?? I am going for broke (and will probably end up that way) but I am fully invested and even leveraged up right here and now. I recognize that the market can and may take another big hit over the next month or two. This ARMS index reading doesn’t necessarily mean that the market will rally immediately. In fact, in most cases, the market has gone a fair bit lower before beginning to move up. But it’s just too difficult to time these things precisely. Market sentiment right now is incredibly bearish. The put/call ratios (another good contrary sentiment indicator) are saying that we are due for a rally soon. Trading volume is low and nobody is really paying attention any more. These are all classic signs of a major market bottom. The FED started cutting rates 9 months ago, this is going to start to affect the economy soon. The US Dollar has weakened a bit and that will help earnings for companies doing business overseas. Finally, the huge write-offs that so many tech companies have taken over the last few quarters is setting them up for a great 2002. There was an article in the Wall Street Journal last week that showed how all the technology company profits made between 1995-2000 were wiped out in the last 18 months of losses. That is true because of the huge asset write-downs that were taken this year, not because of actual cash losses. What most people are forgetting is that these managers are setting themselves up to be heroes next year. They are bringing expectations down. They are writing off assets at an almost ridiculous rate. On July 26, tech powerhouse JDSU announced a 2001 loss totaling $51 Billion. The vast majority of this loss was due to write-offs associated with acquisitions made over the last few years. But what this effectively does is set themselves up for a great 2002. Most managers realized long ago that its better to get all the bad news out of the way all at once, and then show the world (or at least Wall St.) how brilliant they are by managing to snap back so quickly. It’s a very old game. I think that they are playing it to the hilt right now. Finally, and in no particular order, here are my twenty favorite stocks right now: WFII STOR NUFO MRVC LMNE INKT FIBR AVNX AVCI ONIS AMCC BEAS EXTR NTAP EMC TXN NSM CREE GLW SSTI. So there you have it. I think David did a terrific job laying this out for us. But at the very least, promise me you won’t buy any stocks or mutual funds on margin, or before paying off all your high-interest credit-card balances. Because you’ll notice that no place in the ARMS analysis is there a calculation of ‘value.’ And in the long run, value is probably what matters most. And don’t forget Paul Krugman’s column Tomorrow: A Tiny Column By Way of Apology for Taking So Much of Your Time Today
Summer Rerun August 24, 2001February 20, 2017 For a little perspective, I thought you might want to be reminded where we were a little more than four years ago, with the Dow at 7,782. I think most stocks were overpriced then, even though they went way higher, and I think most stocks are overpriced now. Of course, I’m usually wrong, so you have very little to worry about. TIPS – AFTERTHOUGHT John Bakke: ‘An even easier way to get TIPS in your tax-sheltered account is the Vanguard Inflation-Protected Securities Fund.’ ☞ Indeed. I should have mentioned that.
TIPS Tips and TiVo August 23, 2001February 20, 2017 But first, to correct an error from yesterday: Mike Dominy: ‘Your column today mistakenly stated that military members received matching funds for the Thrift Savings Plan. Only civilian government employees in the Federal Employee Retirement System get matching (up to 5%) contributions. The TSP is still a fantastic idea for military members because the contributions they make are deducted from their pay before taxes and all earnings are tax-free until withdrawal just like a 401K. This is actually the US Government’s version of a 401K for us government employees.’ ☞ Germaine Oliver (whom I quoted yesterday) adds: ‘The retirement the military gets at 20 years is what Uncle Sam uses instead of matching. But TPS is still pre-tax dollars, invested in index funds with extremely low management fees. Irresistible.’ And to address the glove compartment issue: Mike Elwood: ‘Back in the late 70’s when I got my first car (a 1963 Buick for $50!) I put ONLY a pair of gloves in the glove compartment. These would usually be discovered by some nosy person riding in my car. They would always ask ‘Why are these gloves in here?’ and I would smugly respond ‘Don’t you know anything? That’s the GLOVE COMPARTMENT!’ The joke got old and I haven’t had gloves in there for years.’ ☞ Yes. And I would have thought you were the very last person to put gloves there – until I heard from Wayne. Wayne Arczynski: ‘Actually, if you owned a sports car, you would understand that gloves are the only item that belong in the glove compartment. (Ok, maybe the manual and registration card too.) I’m not talking about the hundreds of wannabe sports cars out there. Next time you’re in a true roadster, check out the glove compartment. You may find … gloves.’ ☞ So you’re saying a 1996 Saturn is not a true sports car? Bum me out! And now to begin today’s column: TIPS Michael Choquette (Re: “Tomorrow: The Safest Investment in the World”): ‘I think the safest investment in the world is early payment of my mortgage principal. I’m anxious to see what you consider it to be.’ ☞ Well, that one’s awfully good, too. Even better: paying down your high-interest credit-card balances, if you carry them. But I was thinking of TIPS – Treasury Inflation-Protected Securities, first discussed here about 15 months ago. TIPS are, quite simply, the safest security in the world. Why? Because bonds have two big risks – the credit risk (that they could default) and the inflation risk (that they could pay off – but in dollars worth less than you envisioned). Well, of all the debtors least likely to default, the United States probably ranks first. And because the principal amount of these bond rises with inflation (but cannot fall below $1,000 with deflation), the interest you get in effect sits on top of inflation. The biggest catch: each inflation adjustment is taxed as ordinary income in the year it’s made, even though you don’t receive it until you sell the bonds. So TIPS only make good sense for a tax-deferred account. (For taxable money, consider Series I Savings Bonds.) I called my full-service broker at a very large firm to see about buying them for my Keogh Plan. He had never heard of them. It took a couple of weeks of phone tag and research on his part to get up to speed. (My deep discount broker was knowledgeable from the first call.) I tell you this not to knock full-service brokers, but to make this point: that if there’s little or no juice in a particular security for the brokerage firm, they have little or no incentive to train their reps in its virtues or steer you toward it. For the ins and outs of TIPS, click here. The simplest way to buy them is when new TIPS are issued, if they ever are, through Treasury Direct. If you don’t want to wait for the next new issue, you can call your broker and buy an existing issue in the open market. The $1,000 bond will be multiplied by a ‘factor’ expressing its inflation since issuance. For example, on the 10-year 4.25% bonds issued January 15, 2000, the inflation factor was recently 1.05706, so buying 100 bonds would have been buying not $100,000 of principal value, but $105,706. And it would have been on that amount, $105,706, at least until the next adjustment, that you would have been earning your 4.25% annual interest. The problem is that smart shoppers have already been attracted to the virtues of The Safest Little Security in the World, and so have bid up their price. When I checked this bond last week, you wound not have been able to buy it for 100 cents on the dollar ($105,706 in this example) . . . but rather for about 107 cents on the dollar. That extra 7% premium was the amount by which the market had bid up the price of the bonds above their intrinsic value. So for 100 bonds, you would have paid a little north of $113,000. In the future, that 7% premium could expand even more (or not) until eventually, inevitably, it shrinks back down to zero on January 15, 2010, when the bonds are redeemed at whatever is then their inflation-adjusted intrinsic value. So buying The Safest Little Security in the World in the open market this way now brings with it Two Risks, which make it a little less appealing. First, that – should you buy them today and decide to sell them next month – the 7% premium might have shrunk. Second, that the inflation already built into each bond could be deflated back down somewhat (but no lower than the $1,000 face value). These are not terribly big risks. The 7% will gradually shrink to 0% as we get closer to redemption (although it could widen first). But that just means people are looking at the 4.25% return atop inflation and deciding that they are willing to accept less. (Paying 107 for a 4.25% bond lowers its current yield to 3.97% because getting $4.25 a year on $107 works out to 3.972% . . . and lowers its yield to maturity – which is its true yield that factors into the calculation the loss of that extra 7% premium you paid – to 3.4%.) So the market for this particular bond is saying, “I would have loved to get 4.25% atop inflation when these things were issued but, spilt-milk and all that, I’m willing to settle for 3.4% atop inflation instead.” As for deflation, that’s even less of a risk I think, in this sense. Yes, we might have deflation – we really might. But in this example, with the inflation-accreted value of the bonds right now only up to about $1,057 for each $1,000 bond, your maximum exposure would be $57. But if we had terrible deflation (which I certainly do not expect), you’d be sitting prettier than a prom queen, because burgers would cost a dime, lakefront homes would go begging for $40,000 – and you’d still be guaranteed $1,000 for each of your bonds at redemption. The deflation risk would be greater for someone buying these 4.25% TIPS of 2010 in 2008, say, if the inflated intrinsic value had risen to $1900 a bond (because we had had several years of terrible inflation – which I also do not expect), and then the world economy plunged into a deflationary depression. There you would have been, paying $1,900 a bond in 2008, only to see them redeemed at perhaps no more than $1000 two years later. (I tell you all this not because I expect terrible inflation or deflation, but because by taking extreme examples, it may help to see how these bonds “work.”) The bottom line of all this? You might want to consider TIPS for a portion of your tax-sheltered money. Not if you’re young. But say you are 70 and not sure you want to bet all your retirement money on a stock market that is still, by some measures, very, very expensive. TIVO As many of you know, Charles and I are TiVociferous. When we’re someplace without TiVo, I get so angry that I can’t pause the news, or “backspace” to hear something I missed, or see one of my favorite shows just because I forgot it was on – or got back from dinner too late to see it. I got so enthusiastic about TiVo, I even bought a few shares of the stock. (Talk about a brainless speculation!). But with that conflict of interest disclosed: If you’ve been thinking of getting one, click here for a $100-off deal they just announced – $249 for the machine, and free shipping. (But don’t forget you must then pay either $10 a month or a one-time $249 fee for the service.) Note: If you are in credit card debt, forget it. And cancel your cable and get rabbit ears. First things first!
Deep Thoughts. August 22, 2001February 20, 2017 Think about this: A verb is a noun. Heavy! Or this: The glove compartment in your car. Have you ever – has anyone in recent memory ever – used this compartment for gloves? And yet it’s unquestionably the glove compartment. Or this: When Alan Greenspan floated that phrase ‘irrational exuberance’ in 1996, the Dow was around 6500 (today it’s 10,000) and the NASDAQ, around 1250 (today it’s 1800). Five years later, after much hard work and technological advance, levels like that may no longer be irrationally exuberant at all! (If they ever were.) We may have grown into them! But that would still leave us quite a way to go on the downside. (I’m not predicting it, just supplying a little perspective to those who assume 10,000 is the absolute floor.) In fact, if 6500 were fair value, and if markets tend to go to nutty extremes in both directions . . . well, have a nice day. Germaine Oliver: ‘The Thrift Savings Plan (TSP) is just coming on board for us military folks, but no one seems to give a hoot. I’ve not seen one word of it in the military press. There are five funds you can invest in, all of which mirror some index (S&P 500, Wilshire 4500, etc, etc), so this is IMPORTANT to take advantage of!!! Please trumpet this good news to all the world! Military members can now contribute to their own retirement!!!’ ☞ And, if I read the web sites right – click here or go to tsp.gov – TSP contributors will get the first 5% of their pay matched dollar for every dollar. You put in $500, Uncle Sam doubles it. All but irresistible. Enrollment for military personnel begins October 9. [Ah, but I don’t read the web sites correctly. Only civilian government employees in the Federal Employee Retirement System get those matching contributions. More on this tomorrow.] Dale Stancil (re the $720 nightcap): ‘Just tell Alan and Clark to go back to Paris next year when there won’t be any more pesky francs around, only euros. (Euro currency in circulation by 1/1/02, local money withdrawn by 2/28/02, local money completely demonetized by the end of 2002).’ Tomorrow: The Safest Investment in the World
An American in Paris August 21, 2001February 20, 2017 To celebrate their tenth anniversary, two normally sensible friends of mine decided to fly from Iowa to Paris on a bargain fare (the sensible part) and treat themselves to a weekend at the famous George V Hotel (get outta here!). The V is pronounced ‘cinq’ (which is pronounced ‘sank’) but stands for ‘very expensive.’ ‘Built in 1926,’ Alan reports, ‘the hotel was Eisenhower’s headquarters after the liberation of Paris in WWII. It was completely remodeled in 1999 and is now simply spectacular. I’m not a big fan of frilly-French furniture but I have to admit this was eye-popping – like living at Versailles.’ Ah, Paris. I don’t mean to show off, but I have actually been there myself. The Seine! The Eiffel Tower! And the money! They use francs! You get about seven of them for a single dollar. Is that cool or what? These days, they use Euros as well – a Euro is worth about 90 cents, and so about 6 francs – and in most places prices are shown both ways, although some show just one or the other. But – and here’s a really neat thing – the money is in color. But I digress. ‘Coming back from dinner Sunday evening,’ Alan continues, ‘we walked past a sumptuous sitting area in our hotel, where drinks are served as a pianist plays quietly in the background. Clark suggested we sit and have a glass of cognac before bedtime, so we did. I was feeling like it was very special and romantic so I wanted to order him a glass of the best one they had and surprise him as he was drinking it. (‘Hey, you know you are drinking a $60 glass of Cognac from 1806!’) So I did the ordering. The waiter came over to take our order and when I told him I wanted two glasses of that one he said, ‘Are you sure?’ and I said ‘Why? Isn’t it very good?’ (thinking he was trying to tell me there were better ones) and he said ‘No, it’s wonderful.’ So I ordered it. A few minutes later he brought it and Clark and I toasted each other and then I sprung it on him. ‘It’s from 1806!’ Sixty dollars for a smidgeon of cognac at the bottom of a large glass. We felt very decadent. ‘The young waiter came back and asked us how we liked it and we said it was wonderful. (Frankly I can’t tell one cognac from another, but Clark can.) He said that the hotel had only one bottle of it, that it was basically on the list for prestige value, and that I was only the fourth person to ever order it. He said he had never tasted it personally but he hoped to sometime. He had an awe toward it. (I thought about telling him, ‘Here, take a sip,’ but it was a much too fancy place for something so informal as that.) ‘After he walked away it dawned on me. (You have probably beaten me to the punch line of this story) … the price I saw was not 380 Francs per glass, but 380 EUROS. When I told Clark what I had done he gasped. We looked at the cognac and stared at each other for a moment, then just laughed in a nervous ‘oh my gawd, what have we done’ sort of way. I told him it was still my treat to him, even if it was six times what I thought I was paying. Oh well, it’s a memory we’ll never forget – and it makes a good (horror) story – at my expense – LITERALLY! Ouch.”
Bye-Bye Surplus; Hedging Your Portfolio (And a Search Capability) August 20, 2001February 20, 2017 “This Congress will protect 100 percent of the Social Security and [Medicare] trust funds. Period. No speculation. No supposition.” – Jim Nussle, Republican House Budget Committee Chairman last month “Yes, that was me. I still mean that today as much as I did then. Unfortunately the economy wasn’t listening.” – Jim Nussle, Republican House Budget Committee Chairman last Thursday Guess what, folks. The giant budget surplus that stretches as far as the eye can see and will help pay down some of our $5.7 trillion National Debt is gone. (Not that we have to pay it off, but it would be good, when we can, to pay it down so that in bad times there’s room for it to build back up.) Yet we’re now locked in to massive tax cuts for the wealthy as far as the eye can see. Much of this will presumably be rolled back sometime down the road – it’s hard to imagine we will really cut the estate tax for centi-millionaires to zero. But we had this lovely fiscal balance, which still allowed upper-income folks to do very nicely, thank you, and to grow their after-tax incomes faster than everybody else . . . and the Republican leadership felt that just wasn’t good enough – a prescription drug benefit for the elderly might have to wait or be trimmed or be shelved altogether – the research budget for alternative energy and better-mileage-cars might have to be halved, and money to boys’ and girls’ clubs cut back – but, first things first, let’s pass this urgently needed tax cut for America’s most fortunate. It’s a matter of priorities. It is a grand time to be rich in America. Pete Kirby (worried that the market may drop): ‘I am looking for a decent way to hedge my portfolio. I have looked at the QQQ [the NASDAQ 100 index tracking stock] and while its spread is narrow, the puts you can buy on it don’t drop very much even with a relatively large market drop. OEX puts [options you buy betting that the Standard & Poor’s 100 index will fall] track the market better but the spread you suffer between the bid and asked price of the option is not very attractive. Can you tell me why the bid/ask spread is so high on OEX options?’ ☞ No. But I can tell you that the best way to hedge the market, in my experience, is simply to sell some of your holdings. If you have to take a big tax hit to do so, it makes it less appealing. But ordinarily, even then, the simple way – selling some of your shares – winds up working out better than, in effect, buying insurance against a market decline. Insurance, whether purchased via puts on a stock index or in some other way, doesn’t come cheap. Well, as you may have noticed, Marc Fest (Quickbrowse founder and my very over-qualified webmaster) got tired of listening to all my reasons for not adding a search capability to this site and just went ahead and did it. See the new SEARCH field for this site at lower left. I really should raise the subscription rate for this so I can pay him TWO dollars a year instead of one.