The Barnard Observer
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Home Vault Misc Contact c2003-10 Thomas Barnard
Bernanke's Market
I started this issue of the newsletter a month ago, and I think it high time I push it out the door.
Bernanke's announcement that he intends to take the Fed into a second round of quantitative easing means it's his market. As Marty Zweig used to warn on Wall Street Week years ago, don't bet against the Fed.
There will be obvious fallout, the price of oil has gone up. Good for oil speculators, but at first blush not necessarily good for the economy as a whole. But maybe it will be a good thing in disguise. We need to fire up the alternative energy technologies. Only a higher price for oil will have any effect on this business.
And will QEII (Quantitative Easing II) shore up prices in general? Housing prices are still falling, and rents are weak. My intuition says no, prices may still fall. Demand is the main issue, and demand has been stolen in prior years with low interest rates, and lower interest rates now will not necessarily mean more demand. I mean, you have to ask yourself, what is Bernanke thinking? Does he plan to steal demand from 2012-15?
Secondly, there appears to be no new products to drive the economy in a remarkable way like the trio from the 1990s: cell phones, personal computers, and the internet. All three are staples now, and do not represent a new product categories. Tablets, a la iPad are not really a new class of product like the PC was in the early 1980s, and it appears they could possibly cannibalize notebook and laptop sales, though not quite yet.
So, while I do expect that stock prices may very well top old highs, the PE ratio of the S&P 500 according to Robert Shiller's spreadsheet is 21.17, high enough for a lousy recovery like the one we are experiencing. But Bernanke may cause a bubble to the high 20s, which is not necessarily a good thing. There could be a possible second downturn, which has all the ear-markings of being a doozy.
I mean that unemployment, which is still high even by the grossly understated by the government figure of 9.5%, could drive higher yet. Municipalities may be forced to cut staff.
Bernanke cannot solve all the problems of the economy by himself. He needs help. New products would certainly help, but a huge stimulus program for alternative energy would probably help the most.
Tax Cuts
I guess for the rich folks it's a sigh of relief, Obama will go along with Republicans who make a religion out of tax cuts. But it seems to me tax policy is a bit of a trick. The rich would rather pay low taxes now on earned income and capital gains, even if later this might well be their undoing. What I mean is: that if low taxes now mean deficit and problems for government bonds, and the market collapses, then the money they saved disappears in investments that decline by 50% because of this miscalculation in government finances, then the matter of the tax cuts seems stupid and short-sighted. But I'm not here to proselytize. We'll see together, but it looks like it might not be the best thing.
As a practical matter, the two year time limit on tax cuts will not give executives a long enough time frame to make necessary investments in plant and equipment, bringing me to:
Alan Greenspan and Long Term Investment
Alan Greenspan was on Squawk Box on CNBC recently, and he says that the econometric work he has done shows the bond purchases by the Fed are beginning to crowd out the private sector. And that enormous amounts of cash on corporate balance sheets reflects a lack of confidence on the part of CEOs going forward. His contention is that investment in plant and equipment means jobs down the road, and his work shows this is not happening.
Greenspan has been hawkish about raising tax revenue. He claims now the main reason he was for the Bush tax cuts is that the surpluses of the Clinton years threatened to reduce the national debt to zero, and the Fed does all its work with debt, so if there were no debt the Fed cannot do its work. Now he is afraid that the deficits will do all manner of harm.
Great Work-Arounds
Fusion works in the sun because its great gravity creates the density necessary to fuse hydrogen atoms into Helium, giving off energy in the process . Fusion works in hydrogen bombs because the atomic explosion greats artificially the great density of the sun caused by its great gravity. Scientists are trying to substitute for the great gravity of the sun, heat greater than the sun's and a huge magnetic field to keep it all together. They say the big problem is materials, and the magnetic field also causes problems.
Dow Theory Buy Signal
There is always some dispute about Dow Theory signals, but it appears that when the DJIA closed about 11,444.08, which happened this week. I'm thinking that the next year will be good for the Dow, but probably not without some scares along the way.
On the Downside
According to Mark Hulbert, insiders are dumping shares at a 7 to 1 ratio (share sold to bought), which is the highest such ratio since 2007.
There is still a Chinese housing bubble lurking out there.
I have it on good report there is going to be crisis when it comes to lifting the national debt ceiling.
According to Investors Intelligence, 56.8% are bullish and 20.5% are bearish (December 14, 2010). This is an inverse indicator. So, it's not bullish.
My Christmas Gift
I have been recommending Citibank, Citigroup (C) for quite some time now. Things have improved, and so for those who are not risk averse, I am going to recommend either the Jan 2012 $5 call options for the Jan 2013 $5 call options. You can also buy the stock, but the returns will be much, much smaller. I'm pretty sure there will be a good return next year, but I would expect the stock to level off after it makes its recovery.
The government sold its last shares for a total profit of $12 billion.
Vikram Pandit, who I have liked all along, is getting raves.
Probably they over-reserved for losses, they will recognize profits as the situation improves.
Jim Cramer says the press is going to leave them alone more, he's bullish on it.
It has one of the best brands in the world. I got an account there because it was so handy in Buenos Aires. I could only use my American Express cheques at their office, and it was a pain to get there. Citi had several handy branches.
It's not necessary to always come up with new ideas. Benjamin Graham liked GEICO in the 1920s, became a director of the company, passed this investment idea on in the 1950s to his student at Columbia, Warren Buffett, who bought a huge stake in the company when they ran into trouble in the 1970s, and ultimately bought the whole thing. Ninety years all in the same company.
December 17, 2010
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Sponsors
You keep nursing your 3%. I'm still elephant hunting. I'm only interested in game changers and truly unusual opportunities. Dad told me many times that what made the difference in his stock market investments were the elephants, the stocks that went up multiple times. Much harder to pick those now than 15 years ago when all you had to do was mention the internet. And you better believe it, I'm saving my best ideas for my partners.
Last newsletter my favorite pick was up 200% since the March lows, now its up 300%. There is still a long way to go. The billionaire behind it is down 80% from his first purchase, and probably still down 40% or 50% from his average price (which would be a 100% for you). I have seldom come across a stock which is better positioned than this one. I smell money. Bernanke wants a stock market increase so people will feel like buying houses.
I myself am still down on this stock. I probably have an average price near the billionaire's, which is why I can't recommend it for free. I've held this stock for six years. I've been doing all of this waiting for you. I know everyone feels stock recommendations should always be free like parking, but parking isn't free a lot of the time, isn't it?
Here is the agreement: Stock Recommendation Partnership Agreement. (No agreement no matter how well drawn is sufficient. If I don't know you personally, don't bother. If I do know you, now is a good time to check this out.)
Email: tbbarnard@yahoo.com
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M.E. Reiss Ltd. Select investment management. Email: mereiss@yahoo.com
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