SUMMARY - "PIG" :
The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://www.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
Income $ 1,218
Expenses $ 1,378
----------
Income (loss) $( 160)
Per share income (loss): $ (6.15)
Not only was there a loss in 1995, but there is a history of losses extending back more than ten years, in some years exceeding $10 per share. With such an extended period of losses, you may wonder what the balance sheets look like. Here they are:
Tangible assets: $ 3,654
Liabilities:
Short-term debt $ 366
Owed on accounts $ 53
Long-term debt $ 4,533
Unconsolidated debt of
subsidiaries $ 1,055
Pension and
health benefits $ 3,330
Owners' equity $ (5,683)
----------
$ 3,654
Book value, per share: $( 218.58)
You may wonder what the stock of this essentially valueless enterprise is selling for. Perhaps quite a bit in today's frothy market.... maybe it is an Internet stock. Well, the bad news is.... rather than selling it short, you, your spouse, and your 1.8 children already own 380 shares, and they are nontransferable. Furthermore, like those pre-Depression bank stocks whose owners were liable for the banks' losses, you are liable for the ongoing losses of this albatross you can't get rid of.As you have certainly guessed by now, the figures are in billions of dollars (except per-share amounts), and the "outfit" is the Federal government. The figures I show are only rough estimates, because the government cooks its books so thoroughly it's impossible to tell what the real numbers are, and nobody knows what the "tangible assets" of the government are really worth. But I'm sure you get the idea. And, just in case you hesitate to do the math, I'll do it for you: Your family's "stock" is worth a negative $83K.
Generally, it's not a good idea to sell the government short, as it has the power to tax, print and inflate itself out of a hole (the few times I've tried it, I've been burned). But as the figures show, the government long ago exhausted its creditworthiness based on the solvency of its operations, and it retains its excellent credit rating only because it can force you to cover its losses (by whatever means it chooses) when the going gets rough. But even force has its limits, because if the government extracts too much from its subjects it will impoverish them and receive less than if it were not as cruel.... so it is unwise for the government to extend itself beyond what it can extract by force in the future.
As I write this, the Federal government is still in a partial shutdown as a Republican-majority Congress haggles with a Democrat president over "balancing the budget" in seven years. This is pure political foolishness.... any private organization with balance sheets resembling the Feds' would quickly pare expenses and renegotiate its debts, or its creditors would shut it down; you would not see its managers "promising" to bring things into balance in seven years, while copious red ink flowed in the interim.
And we hear commentators say that a Federal debt default would be "no big deal" if a (very hypothetical) budget-balancing agreement is reached. Well, I beg to differ, but a debt default is a big deal.... you're trading an instant loss of income, liquidity and credibility for a promise of future performance. In the corporate world, the equivalent is a company which suspends payments on its debt and preferred stock; its securities are instantly marked down to a level where they trade as zero-coupon items valued on how well investors believe management can straighten things out. It seems to me a similar "markdown" would occur for government debt.... a drop in market value and a corresponding rise in interest rates.
What I do find significant about the current budget battle is that (apparently) a majority of the electorate, through their elected representatives, do not want to increase the debt load. In effect, the Federal government has run out of money, because it is up against the limits of its force. If things had continued on without change, the government (based on experience in the banana republics) would have exhausted its borrowing resources about the year 2005; but shifting political winds mean that resistance to further borrowing is here today.
So while the politicians haggle, the Feds keep their operations running by writing IOUs against the few reserves they have. And we have become so accustomed to perennial budget deficits, and a national debt that increases with no apparent pain, that when "cracks" appear that clearly show the government has run out of money (that is, its subjects refuse to pay any more), nobody notices. Perhaps we will, like England with the regime of Maggie Thatcher, be fortunate enough to reverse course and pull ourselves back from the abyss before a default progresses from scare talk to reality; let us hope so. The alternative is that, with nobody really paying attention, control is lost and we enter a period of economic turmoil similar to that in today's Russia.
If the managers of a publicly-traded corporation ran it the way the Federal government is run, they would be sent to jail for fraud. Your only recourse (short of armed revolution) is the ballot box.
Of course, my first question was, if she was financing the house at a presumably fair value of $31K, why was the house being sold by the FDIC for $15K to a "flipper" whou would double his money in a week without adding any value? "You don't want to know" was her reply. This lucky soul must certainly be well connected. (Your tax dollars at work.)
One friend is a human resources professional (what used to be called "personnel"). She has not been able to find employment in her field for several years; instead, she has had a string of temp clerical/office jobs with small companies which deserve to stay small due to inferior management. Another friend was an engineer for Digital Equipment; he's been out of work for 18 months, and they are struggling by on his wife's teacher's salary. A third friend was a COBOL programmer (on IBM mainframe computers), and his unemployment is about to run out. The company that forced him into "retirement" is interested in hiring him back as a temp (no benefits, of course) to assist in the transition from mainframe to PCs.
My own "downsizing" came in the early 1980s when I was employed by a computer company which shall remain nameless here. Three weeks after a perfectly satisfactory performance review, I was given another "surprise" review at which, it seemed, what I was doing was inadequate. Now I had not changed, of course; the company had shifted its position. After several weeks of 16-hour workdays, and weekend time, during which my presence at the company was tolerated because of the prodigious amount of work I was doing, I managed to escape to the college job I still have. Two months later, I found out from an employee of the computer company who had good "grapevine" connections that the order had come down from on high to downsize by getting rid of older employees whose benefits were costing the company too much. Of course this is illegal, and the company didn't want to raise its unemployment-insurance premiums through outright layoffs, so it had to be done surreptitiously, by hassling the targeted employees. So it was, at the ripe old age of 42, I found myself the target of age discrimination.
My wife was also recently harassed out of her librarian's job at a nearby regional high school by inept management which apparently prefers the image of being surrounded by technology to the substance of providing information to kids to help them learn, at which she is very good. Fortunately, and in spite of a dearth of jobs for high-school librarians, she was able to find a very rewarding librarian's job at a normal school; but it is in a less-affluent town, so the pay is less. (My wife works for the joy of teaching teenagers, not for the money, and she is delighted to be useful again; but from an economic point of view, she has been "downsized".)
My first exposure to age discrimination was standing in the unemployment line during the 1975 recession (in my case, I had been laid off by a small company going through hard times), and hearing men in their 50s and 60s complain that they had been laid off by a local electronics company even while it was hiring younger replacements. Frankly, I didn't believe them, because I naïvely believed no company would do anything so clearly illegal (as well as unethical). But this was in the days before ERISA pension reform, and the electronics company had an enormous economic incentive to dump its older employees a few years before retirement, so it would not have to pay them retirement benefits. Today, I believe them.
It would seem that legislating against age discrimination is about as effective as legislating against racial discrimination; where people have the will to discriminate, they can find a way around the rules. What has surprised me is that the baby-boomers and pre-boomers find themselves being downsized at all, because we are followed by the "baby-busters", which in theory means the skilled labor market should be very tight. But the pace of technology, and the pressures of worldwide competition, have become so intense that it would appear nobody's job (no matter how well you perform) is secure.
Statistically, unemployment is not very high. Of course not.... people have to eat, so they get jobs doing something. What the statistics don't show is if people have jobs up to their levels of skill and interest; or whether, to the slow erosion of the real standard of living since the mid-1970s, and the gradual whittling-away of the middle class, we should also add the erosion of job satisfaction.
Commentators blithely make predictions of Dow 5600, or 6100, or even more, by the end of the election year 1996, conveniently extrapolating the current trend in true herdlike fashion. (Election years are, generally, good years for the stock market, but there are some notable exceptions.) I find myself fighting the urge to stand up and shout, "The Emperor has no clothes!".... no, that's a fairy tale... actually, so is the stock market.... the correct message is, "Stocks are ridiculously overpriced" by every measure of value except earnings.
And I, for one, am not convinced that we have successfully accomplished the much-sought-after "soft landing". By definition, recessions always arrive unexpectedly (because if they were predictable, they would be discounted in advance and thus would not occur). Economic indicators are telling me that the consumer (two-thirds of GDP) is cautious, and that we are skirting on the edge of a recession, if not already tipping into one. I think the next recession is likely to be labor-induced; that is, people are so fearful of hanging onto their jobs that they refuse to keep things going by taking on a higher debt load. (The savings were exhausted a long time ago.)
Meanwhile, the budget impasse is delaying the release of key statistics, so the Federal Reserve is, in effect, flying blind. Once the budget brouhaha is over, the Feds will return to the debt markets for $100 billion of additional borrowing to replace those nice IOUs they wrote themselves... putting upward pressure on interest rates (and, finally, putting the official national debt over $5 trillion). If the Federal Reserve eases further, to accomodate the additional government borrowing or to try to head off an incipient recession, that will put pressure on the dollar, and wipe out all those friendly foreigners who have been borrowing short-term from the Japanese at 0.5% to buy four-fifths of our newly-issued Treasury securities at 6%.
So those stock-market novices had better hope that, when the budget impasse is settled and the window shade is lifted on the economic picture, we don't see the economy heading south while interest rates head north. That would not be a friendly environment for stocks.... with the decline of earnings, their only prop, and with better rates of return from the "competition", they would certainly correct.... or over-correct.
1995 was an anomaly. Normally, with a price-to-dividend ratio of 35, and a ratio of T-bill-to-stock yields of 2, stocks are at a peak. Seldom do they rise to the even more ridiculous levels of P/D 46, and T/S 2.3, that we see now. In those few years in our history where the madness of crowds took over, and stocks soared to levels of extreme overvaluation.... 1929, 1968/69, 1972 and 1987.... all except 1987 were major tops preceding exceedingly severe bear markets. (And the 1987 insta-bear is the only one the current crowd of novices may have experienced.)
I stick by my statement that a stock-market crash, or more likely, shutdown, is a virtual certainty. (There is even talk of closing the market if the Dow drops below 3000. If they really did that, the market might close for good in the next crash.) Based on past crashes, the next one is not likely to occur until stocks have declined 12% to 15% from their ultimate peak (~5200?), which would put the crash occurring probably no earlier than May 1996.
Regardless of when the crash will occur, the risk of remaining in stocks is extraordinarily high. I, personally, "shut down" when the P/D ratio is above 35, and hide in money-market funds. Almost always, this is the right thing to do. Once in awhile, as in 1995, I leave too many profits behind; but I am not a fortuneteller, and I don't buy the argument that "this time is different", so I do what has worked reliably in the past. My contrarian nature does not allow me to buy overpriced stocks (any more than I would pay $23K for a car worth $8500) in the hope that I will be able to ride the tulipmanic surge, then nimbly exit before the deluge.
A. "Phoenix" -real portfolio, begun on October 1, 1995.
Original cost: $ 8,090.45
Present value: $ 8,166.69
Increase: $ 76.24 [0.94%]
Yield: $ 311.53 [3.87%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is +14.46%, for a compound annual rate of return of 1.51%.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG" :
Portfolio cost: $ 4,225.00
Present value: $ 5,001.23
Increase (decrease): $ 776.23 [18.37%]
COMMENT on "PIG": The professors decided not to buy anything in December, but just keep accumulating cash and wait for "better buying opportunities". What, the PIGs are suddenly becoming conservative? Is this a signal for a market top?
C. Fidelity IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $18,975.72
Increase: $10,649.53 [127.90%]
Current yield: $ 886.19 [4.49%]
The performance of this portfolio (including its predecessors) from January 1, 1987 to the present is +73.02%, for a compound annual rate of return of 6.29%.
F. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar92 stock @ 56.65 MM @ 13.41
29Apr92 MM @ 13.48 bond @ 31.19
19Jun92 bond @ 32.14 MM @ 13.55
29Jun92 MM @ 13.57 stock @ 56.74
24Jul92 stock @ 56.76 MM @ 13.61
29Oct92 MM @ 13.72 stock @ 58.61
23Dec92 stock @ 61.48 MM @ 13.78
16Jan95 MM @ 14.83 equity-index @ 26.44
20Jan95 eq-index @ 26.19 MM @ 14.84
Values, 29Dec95: stock, 91.46; MM, 15.66
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%
Gain, January 1 through September 30, 1995: 3.34%
Total gain since January 1, 1988 (7.75 years): 127.93%
Compound annual rate of return: 11.21% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained 179.14%, for a compound annual rate of return of 14.17%.
COMMENT on "Timer's Trend" : A 2% daily selloff in mid-December looked like it might generate a sell signal.... but it was a one-day wonder, and during this so-called "safe period" the signal remained positive, where it still is. However, that 2% drop is a good indicator of the high level of risk now being assumed by those remaining in stocks, and when the sell signal does finally come, and you mechanical trend-followers take your profits, you may find you would have done just as well by staying in a money-market fund since November 16. For the record, in 1995 "Timer's Trend", if mechanically followed to the end of the year (when it remained bullish), would have generated a profit of about 22% for the year.
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
=============================TIMER'S TREND===========================
Mon 25 Sep 95 . I # | 4769.93 | .+ *
Tue 26 Sep 95 . I .# | 4765.60 | .+ *
Wed 27 Sep 95 . I# . | 4762.35 | + *
Thu 28 Sep 95 . I . # | 4787.64 | .+ *
Fri 29 Sep 95 . | .# | 4789.08 | .+ *
Mon 2 Oct 95 . I #. | 4761.26 | .+ *
Tue 3 Oct 95 . I# . | 4749.70 | + *
Wed 4 Oct 95 . I# . | 4740.67 | + *
Thu 5 Oct 95 . I # | 4762.71 | + *
Fri 6 Oct 95 . I #. | 4769.21 |+. *
Mon 9 Oct 95 .# I . {| 4726.22 |+. *
Tue 10 Oct 95 . #I . | 4720.80 + . *
Wed 11 Oct 95 . I . # | 4735.25 |+. *
Thu 12 Oct 95 . I . # ]| 4764.88 |+. *
Fri 13 Oct 95 . | . # }| 4793.78 | + *
Mon 16 Oct 95 . | #. | 4784.38 | .+ *
Tue 17 Oct 95 . | .# | 4795.94 | . + *
Wed 18 Oct 95 . | .# | 4777.52 | . + *
Thu 19 Oct 95 . | #. | 4802.45 | .+ *
Fri 20 Oct 95 . I# . | 4794.86 | + *
Mon 23 Oct 95 . #I . {| 4755.48 | + *
Tue 24 Oct 95 . I# . | 4783.66 |+. *
Wed 25 Oct 95 . #I . | 4753.68 + . *
Thu 26 Oct 95 #. I . | 4703.82 |-. *
Fri 27 Oct 95 .# I . | 4741.75 | - *
Mon 30 Oct 95 . I # | 4756.57 |-. *
Tue 31 Oct 95 . & . | 4755.48 |-. *
Wed 1 Nov 95 . I #. | 4766.68 |-. *
Thu 2 Nov 95 . I . # | 4808.59 |+. *
Fri 3 Nov 95 . | .# | 4825.57 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 6 Nov 95 . | .# | 4814.01 | .+ *
Tue 7 Nov 95 . I# . | 4797.03 | .+ *
Wed 8 Nov 95 . | .# }| 4852.67 | .+ *
Thu 9 Nov 95 . | # | 4864.23 | .+ *
Fri 10 Nov 95 . | #. [| 4870.37 | + *
Mon 13 Nov 95 . I #. {| 4872.90 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 14 Nov 95 . I# . | 4871.81 | + *
Wed 15 Nov 95 . I .# | 4922.75 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 16 Nov 95 . | . # }| 4969.36 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 17 Nov 95 . | . # | 4989.95 | .+ *
Mon 20 Nov 95 . | #. | 4983.09 | .+ *
Tue 21 Nov 95 . | .# | 5023.55 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 22 Nov 95 . | .# | 5041.61 | . + *
Fri 24 Nov 95 . | . # | 5048.84 | . + *
Mon 27 Nov 95 . | . # | 5070.88 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 28 Nov 95 . | . # | 5078.10 | . + *
Wed 29 Nov 95 . | . # | 5105.56 | . + *
Thu 30 Nov 95 . | . # | 5074.49 | . + *
Fri 1 Dec 95 . | .# | 5087.13 | . + *
Mon 4 Dec 95 . | . # | 5139.52 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 5 Dec 95 . | . # | 5177.45 | . + *
Wed 6 Dec 95 . | . # | 5199.13 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 7 Dec 95 . | #. | 5159.39 | . + *
Fri 8 Dec 95 . | .# | 5156.86 | . + *
Mon 11 Dec 95 . | #. | 5184.32 | .+ *
Tue 12 Dec 95 . | # | 5174.92 | .+ *
Wed 13 Dec 95 . | .# | 5216.47 | .+ *
Thu 14 Dec 95 . | #. | 5182.15 | .+ *
Fri 15 Dec 95 . | # | 5176.73 | + *
Mon 18 Dec 95 # I . | 5075.21* |+.~~~~~~~~~~~~~~~~~~~~~~~~~~
Tue 19 Dec 95 . I .# | 5109.89 | + *
Wed 20 Dec 95 . | .# | 5059.32 |~+~~*~~~~~~~~~~~~~~~~~~~~~~~~
Thu 21 Dec 95 . | . # | 5096.53 | + *
Fri 22 Dec 95 . | . # | 5097.97 | .+ *
Tue 26 Dec 95 . | . # | 5110.26 | . + *
Wed 27 Dec 95 . | .# | 5105.92 | . + *
Thu 28 Dec 95 . | .# | 5095.80 | . + *
Fri 29 Dec 95 . | . # | 5117.12 | . + *
=====================================================================
[, ] = 4% exponential change unconfirmed by 10% exponential (not a signal).
@ = market overbought or oversold. I or & (on baseline) = 10% exponential SELL.