Posted on 01/13/2003 3:25:05 PM PST by arete
Suddenly, dividends glitter. But the only thing that will substantially improve yields isn't a tax cut, it's more reasonable stock prices. Until then, I think there's more upside in gold.
We may just have rung in 2003, but Wall Street can't seem to tear itself away from the mania of years gone by. Hype and hope still trump the fundamentals that warrant neither. In addition, visions of dividend morsels distract folks from the caliber of earnings that drive them. In the frenzy to pay up for overvalued stocks, they ignore a store of value that has survived a couple of thousand turns of the calendar -- gold.
It seems to me that the current stock-market rally has less of substance behind it than many of the rallies we've experienced thus far in the bear market. The battle cries sound familiar: Now that we have been down three years in a row, surely we can't be down four years in a row. Of course, after the market had been down two years in a row, people thought a third down year was unthinkable. And let's not forget about the other excuses that fall into what I have called the category of arm-waving: the third year of the presidential cycle, or the seasonal period, or the fact that bullish analysts have been fired, etc. Arm-waving still seems to carry the day. It certainly isn't value, as values in the aggregate don't exist.
Pabulum vs. palpable profit-sharing
Further, there appears to be a great deal of excitement over the Bush stimulus package, with tech stock buyers buoyed by the dividend-tax-cut-will-save-us belief. (See my comments in "Big Bush plan, little Street reaction.") In and of itself, the belief is a meaningless mantra. If you’re talking about dividends, focus on the earnings that go into them, and not all this nonsense about better-than-expected guidance. After all, a company's earnings are what you're supposed to have a stake in when you buy its stock.
As I have said frequently, stocks aren't "plays" or "themes." They are fractional shares of businesses and should be viewed as such. In addition, you have to consider the relationship between a company's earnings stream and its market capitalization. That's why valuation measures such as price-to-earnings and price-to-sales are important. They are what I talk about, in general, when I say that stocks are still too expensive. The bottom line is, don't expect to see dividends boosted materially anytime soon. In fact, if dividend yields are going to be a requirement for investors going forward, it will take lower stock prices – substantially lower prices -- to boost yields. It just brings us back to valuations all over again.
Of cushy cash divans and perishable dividends Much has been made of the potential for lots of tech companies to pay dividends because of all the cash they're sitting on. While they do have that cash, most of it was a function of the tax deduction companies received from employee option expenses when stocks were rising. It’s true that they could pay out some one-time dividends, or maintain some small dividends for a while. But this is not a sustainable trend. Ultimately, dividends have to be paid out of a sustainable earnings stream. Tech companies usually drain this by the very nature of their cash-consuming businesses.
While in technology land, I’m surprised at how little has been learned by the people who've been at the receiving end of a lot of pain. I expect that more pain is in store as earnings season unrolls this month and we learn about guidance going forward. Whether that outcome has been discounted by the market, we will know in the coming days, but my view is that it has not. Just to amplify my thoughts from a few weeks ago, I anticipate another down year for the stock market, and a very ugly year for the economy.
Not bullish, but potentially so …
That said, I would like to mention a rather compelling case for property/casualty insurance stocks made by Joe Rosenberg, the chief investment strategist for Larry Tisch's Loews (LTR). In a recent interview with Kate Welling (who does a better Q&A than anyone else) of Welling@Weeden, he talked about why a lot of these property/casualty insurance companies may have the wind at their back prospectively. The companies that he favors are Chubb (CB), St. Paul (SPC) and Travelers Property & Casualty (TAP.A). Of course, I'm sure he also likes CNA (CNA), though being a director kept him from speaking about it. In any case, his comments piqued my interest, and I'll try to devote more time to this area in the future (I won't be buying these stocks, as I find better opportunities on the short side, for the moment.) Meantime, people who must own stocks might want to research that industry.
Also in the potentially bullish department, this could be the year to make a commitment to Japan. Regular readers know I have been keeping my eye on that market for the past couple of years, weighing that one of these days might be the time to put some money to work there. I haven't pulled the trigger yet, but 2003 might finally be the year.
Leg up in gold fishnet stockings
Now for some thoughts about one of the most topical subjects these days, gold. In the past few weeks, it has seen a pretty good-sized move from around $325, a level at which I observed the noteworthy buying taking place. (Gold was above $350 an ounce at week’s end.) I think that the critical question is whether the gains that we have seen in the last week or so comprises just the tail end of the recent move, or whether it marks the start of a whole new leg up in gold. I do not know the answer, but I will be trying to determine this for myself in the next couple of days. My hunch is that it might be the time to take some trading profits (but not to touch one's core position). However, I don't want to prejudge that until I see the information.
In any case, I think it makes sense to take a step back to talk about gold itself. There seems to be a fair amount of misperception about what an investment in gold stands for. In my opinion, a gold purchase represents a lack of confidence, or fear. People buy gold because they lack confidence in their government or their currency, or they fear for their safety. Obviously, in the mania, people didn't perceive a need for gold, because what could express confidence better than valuing worthless companies like Internet stocks at valuations in the tens, twenties, if not hundreds of billions of dollars. It's no surprise that when people were doing that, they had no use for gold.
But the stock mania was a false reference point. Today’s world is nowhere near what people believed it was when phrases like "new era" and "new economy" were being bandied about. The world is a dangerous place, with plenty of risk to go around. We are at a moment in time where people appear to understand that given the risks, an insurance policy position in gold is warranted.
Not paper-trained
Here I am not speaking of the risks of terrorism or a war with Iraq. What I am referring to are the risks associated with paper money. The money that you carry around in your wallet or use via your credit card obviously is created at warp speed by the government. The Fed has told you in no uncertain terms that it will do everything to fight deflation. It is not alone. The heads of the European Central Bank, the Bank of Japan, and the Bank of England will all be run by new people in the course of the next six months, and they appear to be of the same mind as Fed Governor Ben Bernanke, aka Mr. Printing Press.
So, while credit cards and cash may be good mediums of exchange, they are pretty pathetic stores of value. Gold, for those of you who aren't aware, has been money for several thousand years. It's pretty tough to find a paper currency regime that has lasted for more than 50 years, and that's giving some of them the benefit of the doubt. In my opinion, then, what stands behind the move in gold is the recognition by many investors around the world that all this paper -- whether one is speaking of paper currencies or paper stock certificates -- is not what it was cracked up to be.
Mining metallic molasses
Gold-mining companies cannot increase supply very easily. With low gold prices threatening to drive companies out of business, there has not been a tremendous amount of exploration in the last four or five years. And, once a potential new property is found, it takes time (measured in years) to prove it up, get the financing, and bring it into production. If it happens to be in America, you have the EPA to deal with, which takes even more time. So, new production cannot be brought on easily. Further, not only are gold miners not in a position to bring on new production readily, but many have already sold giant amounts of their future production forward already. At present, they are probably being squeezed, as those positions are marked to market.
The most ready source of gold is the central banks, which have been busy puking it up for some time. There is never a better group to be on the other side of, ultimately, than bankers, and nobody better to take the other side of, on that score, than central bankers, even though they do have a fair amount of ammunition they can bring to any subject.
Of course, in discussing supply, it must also be noted that virtually all the gold that has ever been produced still exists, since very little of it is ever destroyed. I should add that, when talking about gold, I also am referring to silver, that being a much smaller market. In the coming weeks, I hope to have a chance to talk more about silver, a market I like even better than gold.
No-lode funds
I think we are very early in this process, and gold has a long way to go, both in time and price, before it's time to take the other side of the gold market in a major way. When people start bragging to you about the gold stocks they own (the way they bragged about Internet stocks, or stocks in general, or the way they talk about their real-estate holdings), then it will be time, perhaps, to leave the party. But we're certainly not there yet.
In the next few weeks, I will also talk about how one might go about valuing gold stocks, offering the simple methodology that I use. But for those of you who would like more in-depth information, the single best source that I can recommend is John Doody, who writes The Gold Stock Analyst. He does superb work, and his comments are invaluable background information for anybody who wants to make an investment in this area. The cost is $350 a year and well worth the money.
Meanwhile, as people consider an investment in gold, I would just add the following advisory: The mining business is a very difficult business. It operates in far-flung countries, and not all of its managements are that good. Having been bullish for a long time on Pan American Silver (PAAS), of which I am a director, and Newmont Mining (NEM), I have had plenty of time to research many other companies. I don't care what happens in this gold/silver bull market. There are many of them that I would never be willing to invest in because of how I feel about their managements, such as Coeur d'Alene Mines (CDE). The lesson here is that, as with stocks in any other sector, it's very important to do your homework when it comes to these mining stocks.
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 the time of publication, William Fleckenstein held long positions in Newmont Mining and Pan American Silver. 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.
All we do anymore is trade paper and call it the economy. The stock market is not the economy. The economy is people out there working at real jobs that make real things and earning real wages -- it isn't trading paper promises on Wall Street.
Richard W.
Comments and opinions welcome.
Richard W.
Obviously, the current administration is seeking to prop up the stock market, this too will fail since most stocks are trading well above twenty times earnings, and we have all come to learn how predictable earnings are, haven't we?
It is said, in a bull market stocks climb a wall of worry, in a bear market stocks slide down a slope of hope. I can't feel the love but I sure smell hope burning a hole in the pocket of the next generation of designated bag holders.
I think that's a good thing if we ever expect to see the end of this bear market.
Where might that high end be? Is is $400/oz, $600/oz or $800/oz?
Richard W.
Noteworthy is his sussing out the problem with CDE. ;^)
But the thing he's most correct about is this:
"...it's very important to do your homework when it comes to these mining stocks."
AMEN!!.....I don't see any sense in owning a piece of paper issued by some guy I never met saying he's holding some gold for me at a place I've never been.....I see gold/silver as a last ditch reserve if everything else goes to hell.....and in that case, I want the real thing....
Good luck to everyone
Stonewalls the Ant
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