An Ominous Warning Sign…
Wow! Peace for our time, the media reported yesterday.
The stock market celebrated with a 227 point jump in the Dow. Gold slouched away.
We would have thought that every possible stock buyer had already placed his order. Where did the money come from to push the indexes even higher yesterday?
It was borrowed. That’s another record that has been broken lately: margin debt. Never before has so much money been borrowed specifically to buy equities.
As a ratio of GDP, margin debt only saw these heights twice before in recent history: in 2000 and in 2007. In dollar terms, total margin debt stood at $481 billion at the end of January – 20% higher than it was at the peak of 2007… and nearly 3% of GDP.
But be warned: Hearts and records break from time to time, but never without some pain. The crying begins immediately after a broken heart. After a record high S&P 500, on the other hand, it can take some time.
700 Times Earnings!
So many records are breaking in the tech sector it sounds as though a beer truck smashed into a recording studio. Facebook set the pace. First, with its own public offering; and then, with its purchase of mobile text messaging outfit WhatsApp.
Who would have thought that a free app – used by young people to send insipid messages to one another – could fetch $19 billion?
Now, anything seems possible. Maybe trees really do grow to the sky. Maybe there are silver linings without clouds. Maybe biotech stocks, recently priced at 700 times earnings and up 16% so far this year, are still bargains.
And maybe… just maybe… Janet Yellen knows what the hell she’s doing.
Speaking of earnings, they too are in record territory. Recent earnings reports for S&P 500 companies showed profits at their highest level since 1946 – 30% above the postwar average.
Earnings went up about 10% over the last 12 months, while sales went up hardly at all. This, too, must be a record of sorts; for the first time ever US businesses seem to be able to produce immaculate earnings, unsullied by actual sales growth.
Reported on the front pages of the Wall Street Journal and the Financial Times (the two journals of record for the late, degenerate capitalism of the 21st century) is another record…
From the Wall Street Journal: “Blowout Haul for Buyout Tycoons”
The nine founders of the four listed US private equity groups took more than $2.5 billion between them last year, both papers reported… with Apollo Global Management’s Leon Black alone receiving $546 million.
This surely must be a record. More than half a billion in compensation for a single year. And what a business model! Sharp private equity firms buy lame companies, borrow beaucoup money in their names, and then resell the debt-saturated companies to naïve investors!
Oh… did we forget something?
Oh, yes… Ben Bernanke and another world record! Without record intervention – including more than $3 trillion in liquidity from the Fed’s inexhaustible well – poor Mr. Black might have found few takers for his stray cats and dogs.
Meanwhile, consumer price inflation has set a record of its own. Not by going up, mind you, but by going nowhere. Bloomberg reported last month:
The personal consumption expenditures price index, minus food and energy, rose 1.2% in 2013, matching 2009 as the smallest gain since 1955.
Consumers, without the pressure of a rising CPI behind them, have shown little ability to join the party. Instead, they shiver in their rooms and wonder how to pay the electric bill.
As reported in the Wall Street Journal yesterday, they spend more on what they need than on what they want. Spending on health care and fuel rose in January, as consumers “cut back on discretionary products.”
That makes us think that something else is broken – not a record, but the economy. And with so many things broken, we can’t help but wonder when the whole shebang falls apart.
The Best Buy in the World Today?
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Imagine a country that is one of the world’s top energy exporters… has a ridiculously low debt-to-GDP ratio of just 8.4%… just under $500 billion in foreign exchange reserves… and an unemployment rate of 5.5%.
Now, imagine that this country’s stock market trades well below book value and is priced at just seven times average inflation-adjusted earnings from the previous 10 years (the cheapest in the world after Greece, according to this metric).
Now, imagine that this country’s stock market also trades at just five times 12-month reported earnings (again, the cheapest in the world after Greece, according to this metric).
You with me?
Now, imagine that this country’s stock market throws off a dividend yield of 3.7% – a full percentage point higher than the income you’d collect from loaning 10-year money to Uncle Sam.
Now, imagine that this country’s economy is forecast to grow to $7 trillion by 2050 – nearly four times what it is today.
And imagine that this country’s economy is set to surpass that of Italy, in terms of economic power, in 2017… and whizz past Britain, France and Germany sometime between 2020 and 2030.
You still with me?
Now, imagine that if you had bought a simple index-tracking ETF for this country’s stock market at the end of 2002, and held for 10 years, your average compound return would have been 11.3% a year, measured in dollars. This compares to an average compound return of 5.2% a year from holding the MSCI USA Index over the past decade.
Have I got your attention?
Now, imagine that this country… and this stock market… is one of the most hated in the world.
Of course, I’m talking about Russia.
Regular readers will know that Bill and I are bullish on Russia over the long run. What’s so interesting about the Russian stock market today is that despite its bargain-basement prices… and strong fundamentals… nobody is interested.
Even card-carrying contrarians are dumping their Russian stocks!
This perhaps shouldn’t be a surprise. As Bill’s old friend and legendary contrarian investor Rick Rule pointed out to us recently, “One of the things you notice is that everyone wants to be a contrarian, but only when it’s popular.”
This is just the way the human mind works. It’s easy to consider yourself a contrarian when prices are rising… and sentiment is bullish.
But as soon as prices start to fall… and sentiment turns bearish… investors’ contrarian instincts fail them. We don’t recommend you bet the farm on Russia. There are plenty of risks in the Russian market today.
But for investors with a true contrarian leaning, a small stake in Russia at today’s beaten down prices could be one of the most profitable investments over the next decade and beyond.