Quick, what is the best investment today if you want to preserve capital from risk? Bonds? What about tomorrow? Bonds? What about in 10 years? Still bonds? Always bonds? This is lunacy.
Right now your credit risk on bonds (the risk the issuer will go belly up) is tiny. However your interest rate risk (the risk rates will rise, eroding your capital) is huge. Bond prices trade in inverse to their yield. If you wanted to be safe, you could buy a newly issued bond and collect today’s meager coupon on it (the interest rate) and rest assured that in 5, 10, 20, 30 years, when the bond expires, you’ll get your money back, but if you can’t hold to maturity you might not get as much as you hope if rates rise.
Suppose you buy a bond paying 1%, suppose in 5 years bonds of the same time now pay 2%. A reasonable think to happen right? Sure, a 1% rise in rates over 5 years. No big deal, right? Well, if you have to sell that bond, and not hold it until maturity (lets call maturity 10 years), who is going to buy it? No one will buy it at the original price you paid, because they can buy a brand new bond paying double. You need to sell at a price that gives the purchaser a market yield. I hope you can follow along because this is an important point, your bond is now worth 50 cents on the dollar, you have lost half your money in exchange for a 1% yield on a “safe” investment.
And yet, the world over, people tell retirees bonds are safe. This is ludicrous advance.
What about treasuries (US government bonds) they’re safe right? No, this is an example specifically about treasures. Today the 10 year bond pays around 1.8%, in 2000 it paid 6.66%. If you bought a 10 year treasury today and rates only returned to 2000 levels you would lose over 66% of your money.
In 2008 it was about 3.8%, if it returned just to that level you’d lose 50% of your money. If bond prices just RETURN TO HISTORIC AVERAGES you could lose so much of your money. Buying a bond today is like shorting a stock AFTER it has gone down to 95% to $1 a share. Your upside is tiny, your potential downside is catastrophic.
And yet, millions and millions of retirees and soon to be retirees blithely put money in target date funds which idiotically continue to put high allocations into bonds. I read in Forbes that over 40% of all 401k dollars are in target date funds. That is so much money it is starting to move the needle and I think it is a reason why bonds yields are still so low. Trillions of dollars stupidly buying bonds because conventional wisdom is that bonds are always safe (always! Who ever says anything is always safe?!?!). There is, in fact, a bubble in bonds, and it will eventually burst.
What does this mean? 1. If you held a short position like I outlined above, a stock declines 95%, is now just $1 a share, would you continue to sell it short? No, of course not, so why be in bonds? GET OUT OF BONDS. Plenty of investment options are safer than bonds right now, including stocks. Oh yes, the stock market can go down, it did in 2008, and then by 2011 it was back up. The stock market is volatile, but it is safe. Bonds are not volatile, but they’re incredibly dangerous. When yields go up, they won’t go back down after 3 years, they’re likely to never in your life time be this low again, you will not be able to wait it out, you will be screwed.
2. Don’t use target date funds because they are stupid and evil. They’re dumb instruments for dumb investors and they are going to burn people, badly.
3. Be a smart investor and invest contrary to this trend, you will score big when bonds return to historic averages. Currently this trend is predicated by the huge baby boomer population. They’re all in these ridiculous target date funds (that also charge you a management fee for their idiocy), but the generation behind them is smaller. Assuming we’re at “peak target date” the pool of bond buyers will shrink both as the generation size drops, and as baby boomers spend money in retirement. Once a downward trend starts this will accelerate as bond prices fall (yields rising) baby boomers have to sell more and more each month to get their desired monthly income. It creates a procyclical situation (fancy words for death spiral) very similar to the 2008 housing crisis. I can’t tell you when this will happen, but I can tell you it will happen. Bonds will fall, and it will be disastrous for retirees (and possibly college savers, my kid’s 529 plan has target date nonsense too, I avoid it). So you would want to look for inverse bond ETFS. Here is a list, do your research, I own none of this (yet, I think I will buy one, but not sure which). TBF, TMV, TBX, DTYS, do your research and pay attention to expense ratios.
4. What does a world look like where retirees who thought they were secure are suddenly less so? Could they reenter the work force? Would they move away from posh retirement homes to more bare bones ones? Would there be fewer elective lifestyle surgeries? These would be the 2nd stage investing ideas for this trend.
The Efficient Market Theory says that, through the wisdom of the crowd, it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. There is something to be said for that, and perhaps it might have been right, but it isn’t today, and possibly can’t be.
The proponents of this theory tend to be those behind indexed products, such as ETFs that track an index. But they’re part of the problem. So much of the money in the investment world isn’t educated money, it is stupid money. This money comes in 401ks, IRAs, 501cs, and every other tax advantaged program that carries with it typically little selection in the realm of investment options. My own 401k has about 12 fund options. My kid’s 501c’s have I think 3 or 4 options (basic target date portfolios ranging from conservative to aggressive). This money isn’t thinking very hard about where it is going, it will match the market if stuck in a pure index fund, but if it gets into a sector based or less broad ETF it has a chance to beat the market or lag the market, and if you want to beat the market you need to be on the otherwise of the trade when they lag.
Why is this money stupid? Because index funds and sector funds are stupid in that they invest in bad companies. They also invest in good companies, but they still invest in bad companies. If you’re able to pick stocks and not invest in bad companies, you’ll beat the index. Easier said than done right?
But, sector funds are even more stupid, because they’re poorly designed.
Let us consider the tech sector. Apple, Google, Amazon, Facebook, Intel, Microsoft, IBM, and Cisco. A technology sector based ETF would include all these businesses. And SO MUCH MONEY is invested in these ETFs that these companies often trade together, but are they related, at all, to each other? Google and Facebook are advertising companies, more related to media companies than technology. Yes they each have side technology products, but the lion’s share of revenue and profits is advertising based. Apple is a consumer products company, more technology related than Facebook or Google though, they also get a lot of their revenue from the sale of music and other content. Amazon is essentially two companies, a retailer that happens to function online, and a web services company. One half of the company is fully not technology, the other half is. Microsoft is mostly technology with some offshoots (Bing for ads, x-box as a content platform and consumer product), IBM is strictly tech, and so is Cisco.
So suppose you have an investment thesis that business IT investment is going to increase, so you invest in a tech sector ETF, you’re going to end up buying a lot of stocks that have little to do with your thesis. Likewise you might think that business IT investment is going to slow, so you short a tech sector ETF, not realizing you’re also shorting ad juggernauts Facebook and Google which have little to do with business IT spending.
Energy ETFs are even worse examples of inefficiencies, and the primary motivator for my post here today. Oil prices have plummeted, energy sector ETFs are down like crazy. People either short them, or sell them, and here is the problem. Not every company in an energy sector ETF is vulnerable to the price of crude oil. In energy sector ETFs you’ll have large integrated companies (people who do everything), you’ll have upstream drillers and explorers, you’ll have downstream retailers gas stations, and you’ll have midstream pipelines and refiners. So, what are the effects of cheap oil? Will people use less oil or more oil when oil is cheap? More oil, okay, so why do you want to sell short a gas station? People are more likely to come fill up when gas is $2 a gallon than $4 a gallon? Maybe if your markup is percentage based and not flat per gallon you lose a little money, but most gas stations make their profit on foot traffic coming in and buying candy bars and cigarettes and more people filling up means more foot traffic. Will refiners lose money if oil demand increases? To the extent they have exposure to the price of oil in that they store it they might, but generally they don’t have much exposure.
Then pipelines? Pipelines are toll booth operators making money purely on the volume of traffic, not the value of the cars. Pipeline stocks went on a tear in the fracking revolution because of increased volumes, but now they’re getting hammered because of… increased volumes. It makes no sense. I’ve seen many smart people say they’re looking at pipelines right now. All these people selling or shorting energy sector funds are selling and shorting pipelines which should actually do better right now if consumers use more hydrocarbons, and with prices falling they should use more.
Of course the people who really get hammered are the drillers, and the people who supply equipment to the drillers. To the extent you can find an oil driller only ETF sure, sell that one, but a pure energy sector ETF you’ll be tossing the good out with the bad.
Another relatively stupid energy related effect of all this can be seen with solar or alt-energy stocks. Last I knew we didn’t light our homes with oil and we didn’t drive our cars with solar panels, the two industries are not heavily related, and yet they trade in tandem and have for years, that makes no sense. Then look at people like Tesla. On face value I think people will be less incentivized to buy alternative fuel cars in a world of cheap oil… BUT no one who buys a Tesla ever did it to save money. These are expensive status symbol cars, saying people buy a Tesla to save money on oil is like saying someone buys a Ferrari to save money by being able to get to work faster. The payback time on buying a Tesla versus a regular car even at $4 a gallon gas is practically forever, I’m sure Tesla’s sales will be fine with oil at $50 a barrel, and in the end this may benefit them if the cheap oil causes legacy automakers to balk at investing more in electric vehicles, allowing Tesla to get ahead even more technologically. But Tesla has been hammered lately.
In short, sector based ETFs like to pretend they’re smart by allowing you to easily focus on some thesis or idea, but in reality they’re stupid because the sectors they track are so ill defined, and identifying where they fail can lead you to investment opportunities.
Final thought: Infrastructure construction companies. Gas taxes, which are percentages, will receive less revenue in a world of $50 a gallon oil, gas taxes are almost entirely earmarked for infrastructure maintenance and construction. Politicians continually talk up the need for more infrastructure spending, but outside of any direct legislative action there will be less money this year to work on roads than in previous years, that will matter to some business out there, figure out who and you have another trade idea.
Disclosure: Long APPL, GOOG, FB, TSLA, AMZN, and lots of MLP pipelines.
Wow, the markets have been horrible lately haven’t they? These daily drops remind me of the fall of 2008, all over ebola, why?
Have you seen the movie Contagion? That is actually a very good and accurate exploration of what would happen with a deadly global pandemic. Do you watch Doomsday Preppers? That is a show many like to make fun of, but they too often touch on these topics.
The biggest risks are in fact economic here, and the reason is fear. Odds are you’ll never get ebola, no one you know will ever get ebola, but what happens when there are enough cases that people start getting afraid of getting ebola?
Airlines stop flying, for one, people in general stop traveling, for two, and if it gets really bad, people stop going to work, people stop going to school. At the first early stages people will panic and, wearing protective gear, buy everything on the supermarket shelves. Then the trucks stop driving, and they do not restock. That is the risk, society grinds to a halt and everyone bunkers down in their home afraid to leave. Obviously one of your best investment bets would be a short index ETF, but I do have some long ideas.
So suppose people stay home all day, what will they need? Stuff, and entertainment. I think ecommerce could do well in such an environment. So long as the ecommerce companies can convince their employees to keep coming to work they should be able to beat out brick and mortar. Who is going to go to a mall in an ebola area? Seriously? Amazon even delivers some nonperishable groceries.
This then leads us to delivery companies. UPS runs mostly on natural gas, and I imagine they could easily adapt their driver uniform to be a brown hazmat suit. The natural gas is a big deal as it is delivered largely by pipelines, not by delivery trucks, and it will not be hurt by any sort of overseas disruption to supply. On the otherhand, UPS drivers are unionized, and the union might protest and prevent their drivers from working. Fedex ground drivers are independent contractors and might be more likely be enticed to keep working, however their more independent nature might make it harder for them to adapt to be able to do safe deliveries, plus they all need regular unleaded. I’m not sure which one would do better, I’d lean towards UPS, but it could be a toss up. I do know the demand for their services should increase.
Then there is entertainment, if you’re stuck at home all day you need something to do. Amazon again could benefit, as could the cable providers and of course Netflix. Anyone more to do with TV than movies in a theater would do well. No one will go sit in a movie theater if they fear infection. Also, no one will go a theme park, no one will go to a sporting venue. Live entertainment will be dead. Entertainment in the home is where it is at. Microsoft might do well. Disney… I’m not sure. They have movies, and theme parks, but also a strong TV presence. On balance I’d pass I guess (though I own Disney now, and I’m very bullish outside of end of the world scenarios). Any entertainment that entertains you at home would be a buy, other forms would be a sell. Google should do pretty good.
What about education? Online education providers I think would be a buy, traditional schools and college campuses are petri dishes of infection. Are there any publicly traded K-12 online education providers? I don’t know, but there are college level ones, they would be a buy. Of course, most colleges and universities today also offer online courses to compliment their brick and mortar, so it may be a bit of a wash. But more students would definitely be enrolling in those programs, the technology providers that enable or manage those systems would be a buy.
Likewise makers of telecommuting, telepresence, or telemedicine technologies would be a buy. What is the ultimate rubber glove or mask? Being in another building entirely, maybe being in your home office, and working from there. There are a variety of companies in this space.
Copper could see added use, and this is one of the stupidest things in the world. Copper has natural antimicrobial and antiviral capabilities, germs just can’t live on copper surfaces. So of course, all hospitals use brushed stainless steel touch surfaces because its pretty…. In my opinion the government should issue a regulation mandating copper touch surfaces on all new hospital equipment and in new buildings, they’re no more expensive than stainless steel, and the science on it is solid. Why they haven’t done this yet I have no idea, we’ve known about the antimicrobial benefits of copper for a long time. I once spoke with a healthcare architect about it and he said all the fixture manufacturers picked stainless steel and they would have to retool for copper and simply aren’t willing to make the change, and their customers, the hospitals, largely aren’t asking for this for whatever reason. Ebola is the least of it, hospital acquired infections are a big deal. Schools could also benefit from all copper doorknobs and whatnot. I’m not a fan of government regulation in general, but this is one issue where I think some smart regulation could kick the industry in the pants and get the gears turning to do something that will provide a serious benefit.
I could also see a benefit for private security contractors, police forces could be overwhelmed with rioting or looting or enforcing quarantines and curfews, and even the national guard, it may come to the government hiring private security contractors for use on domestic soil.
Those are my ideas for silver linings in this bad situation. Mostly I think that the age old wisdom will hold true, this too shall pass. If you bought a short index fund you could get killed when the ebola scare passes and markets rebound, but if you really think it won’t pass, these are my ideas. Disclosure long Amazon, long Disney, no other positions in anything mentioned.
Last Friday unconfirmed reports surfaced of Google chatting with eBay about buying up to 40% of the company.
This is apparently not true, it was denied, and why would it have been true? Why would Google buy eBay? There aren’t many synergies there, at most its Paypal and Google Wallet, but why would Google want to run an online auction site?
Supposedly this was seen as a reaction from the Apple Pay announcement by Apple, people, and in general I mean the people who are in love with everything Apple, see this as a Paypal killer. I don’t. I’ve already talked about who I think can kill Paypal, and that is Facebook.
Best case scenario for Apple, everyone with an iPhone will use Apple Pay, but that is still a minority of the market. How many phones have Facebook on them? Not to mention, as I said in the linked to post, Facebook is uniquely positioned to be the arbiter of identity, which is so important in payments because of fraud.
But I do think eBay is a ripe acquisition target. The auction service itself hasn’t shown much growth, essentially it functions for used clothing, that’s about it. Interesting handmade things are instead sold on Etsy, and I’d say eBay is drowning in listings of just plain old cheap products made in China. How often do you search eBay and see pages and pages of listings for the same stupid little product? Trying to get more “store” like sellers was a big mistake with eBay, it made their site far less useful. Then there is Paypal, which is so very vulnerable to attack. Paypal grew, and built a moat, because of the tight (almost anti-trustish) integration with eBay, but that moat only exists so long as eBay keeps itself popular as a platform, and I see that waning.
What company could buy eBay? Amazon. The synergies would be ridiculous, can you imagine? Granted, that might be a big meal for Amazon to swallow, but if it could be done, the combined company would be excellent. Amazon definitely is interested in auctions, they ran auctions for awhile (do they still? I don’t know, it has been so long since I checked, they don’t push them anymore if they still have them anyways), but they never got much traction. Way back when Amazon and eBay were like prize fighters duking it out, and eBay solidly won on the auction format…. but since then Amazon has shown itself to be the better run company and I think Amazon could do much more with eBay’s platform than eBay has.
What would be interesting is if some newly flush Internet company, like say Alibaba, made a bid for eBay, would that start a bidding war?
Microsoft could also snoop around but other than put an eBay app on the xbox and a bing search bar on eBay I don’t see much synergy there, but you know Microsoft, always looking for something to belt on the business.
I do definitely think eBay will not be an independent company for much longer. If not Amazon, who? Anyone else have any ideas? Post a comment.
Disclosure: Long Amazon, Facebook, Google, no other positions.
As an investor you need to be savvy, you need to be smart, and most importantly, you need to pay attention.
What year did you first hear about fracking? Shale gas? Or Williston North Dakota? If Bush was the president, congratulations, if not, you need to do better.
Way back when most people had not heard of these things I had, because I read business magazines, and watch business news, and absorb information like a sponge. I wanted to invest in natural gas, so what did I do, I bought pipelines in the form of MLPs, which are great dividend plays. I didn’t buy drillers or producers because I wasn’t investing based on the price of natural gas, I didn’t think drillers would make a ton of money. Pipelines however are a play on volume, and I thought the natural gas volume our country consumed would go up (at the very least, it wasn’t going to drop). I was right, I made a killing, even moreso thanks to this last Sunday’s news of the Kinder Morgan consolidation, a nice 15% pop on my MLP.
MLPs are supposed to be boring businesses that spin off income (sometimes nontaxable) but don’t necessarily grow much. Thanks to the recent growth in the US gas industry I’ve enjoyed both dividends and really nice capital appreciation, its been fun, and while I might still recommend MLPs (especially for people in a high tax bracket, near retirement, who expect to be in a lower tax bracket in retirement – and of course who would hold the MLPs in a taxable account). I think the easiest money there has been made.
So for myself I again started thinking, what happens when you have abundant cheap energy in the form of natural gas? For one thing manufacturing moves back into our country. Foreign automakers are now exporting US made cars from here, we’re one of the cheapest places in the world to manufacture because of our energy costs (please, don’t screw it up Washington). Labor might be cheap in China, but energy is cheap here, and cheap energy allows us to pay more for labor (so, hey liberals, stop fighting energy).
I ended up zeroing in on two companies, Dow Chemical and US Steel. These might not seem obvious natural gas plays at first glance, but they are if you look closer. Dow Chemical makes a ton of products, most of which need hydrocarbons for feedstock, they can use almost any hydrocarbon, it is merely a price issue, and when Nat Gas was over $10 MCF they were hurting, I remember seeing the CEO talk about trying to pass on increased costs to customers. Now what happens when Nat Gas falls to $2 MCF? That is like McDonalds if beef costs drop 80%. Profits will be made. Dow was a little beat-up, but not too bad. I also knew, being a Michigan resident, that the state had just repealed the patently stupid Michigan Business Tax (a tax on gross revenue, not net income, seriously, how stupid is that?) and was in the process of phasing out the Business Personal Property Tax (a yearly tax on equipment your business owns, like paying sales tax on your equipment every year). Dow is obviously a global company with facilities all over, but being headquartered in Michigan with plants here I knew they’d get at least some benefit from those changes, and the natural gas feed stock. Nice dividend too, so I bought some, and that also worked out well.
Then there is US Steel, once a $100 stock, now down, sharply, in a short period to under $20. Their problem was management and labor and they fell during the recession but opted out of the recovery because of poor management, but they also stood poised to benefit from cheap US energy. Have you ever seen a steel mill? One of the most amazing sites possible to see is an steel arc furnace go to work, when it first turns on, it is amazing. Have you ever seen a steel mill, did you notice the massive power lines heading in? Those things use a ton of electricity, and cheap natural gas means relatively cheap electricity here in the US vs overseas. That should give us steel makers a competitive advantage. Additionally, the manufacturing renaissance in the US also needs steel, and of course, the oil and gas industry itself (IMO the main reason the recession ended) needs steel. I’ve almost doubled my money now on US Steel (symbol of X by the way) in only around a year. They also have a decent dividend.
Anyone have any other ideas for downstream plays for the natural gas boom? Or any other big picture ideas? The trick to making really good money is getting in before everyone else does. What are the growth industries of tommorow?
Full disclosure: I’m long everything I mentioned here.
I am big time bullish on Facebook, but not for any reason you might expect.
Sure, their ad platform is great, much like Google’s is great, but they’re great in different ways. Google is a great way to advertise when you’re wanting to find customers who know they want something. A customer searches for “luxury sedan” on Google, you know they’re interested in luxury sedans, if you sell luxury sedans, advertising on Google makes a lot of sense.
Facebook is different, Facebook doesn’t allow you to target terms, it allows you to target interests (and ages, marital statues, education, country of residence, etc), but interests are the important thing. For instance I recently reviewed this cool new product called LifeStraw. This is a water bottle with an internal filter built within the straw, and the filter can filter swamp water and make it safe to drink. In my opinion, every outdoor enthusiast be he a hunter, hiker, camper, snowmobiler, or whatever else, should own one of these. So you go to Google and buy an add for “water purification bottle” or “filtering water bottle” or “portable water filter” and you probably aren’t going to get a good response. People don’t know they need your product, they aren’t searching for it. So you go to Facebook and run the ad against people who say, like “The Appalachian Trail” or the TV Show “Survivorman” or “Pack Rafting” or just “Camping.” So people who need and could want to buy your product are exposed it without them having to realize it.
Both ad platforms have their benefits, depending on your product or goals. Personally, with my product, I get a better response with Facebook and pay a mere fraction per click that Google charges me. In this I feel as if Facebook has a lot of room to grow. If they just reached parity with Google in my cost per click their revenue from me would at least quadruple.
But that is all beside the point. Why am I really bullish on Facebook? Because, more than any other site on the Internet, they can most accurately represent our identity.
Before Facebook identity wasn’t popular on the Internet, anonymity reigned. Facebook put your real name on your activity and people tend to behave differently (better) when using their real name in front of their family and friends (even grandma is on Facebook now afterall). So, what benefit does having a third party verifier of your identity bring? Well.. where on the Internet is trust most required?
Transactions, Paypal, payments. Selling things on the Internet is a crapshoot often, people can be using stolen credit cards, or they can just be liars. They’ll get the product and file a chargeback. You have no way of verifying hardly any detail about them, you have to trust them to be good people and many people abuse that trust. Facebook is unique situated to be a better Paypal, a better Google wallet, a better Amazon payments, a better Yahoo merchants. They have over a billion members, they need a payment platform for members to send money to each other, or to pay merchants.
There is also a Paypal connection, Peter Thiel, board member of Facebook, first outside investor, one of the first suits in the business, and the cofounder of Paypal. I don’t know if this is good or bad. Thiel is no longer involved in Paypal since having sold it to eBay, but I could see him either dissuading Facebook from crushing his first baby, or using his unique position to help Facebook crush his first baby. Either way, if Facebook entered payments, I would short eBay.
I also use Facebook to interface with my customers. I think Facebook is perhaps underestimated as a B2C platform. I often wish I could accept payments from customers directly on my Facebook page. To me that feature also seems inevitable.
Imagine if Facebook gets into transactions like these, and takes 3% of each. The Visa business model. That is why I’m bullish on Facebook. Facebook as a transaction platform, I think it is inevitable, and when it happens, it’ll drive huge revenue gains.
The other catalyst in the offing is ad syndication. Google drives a significant portion of their revenue from advertisements served off Google sites, through their AdSense ad network they syndicate ads to content sites all over the Internet (including this one). As Facebook’s platform matures and their inventory grows, they may seek to do that as well. Speaking as a website publisher, people in this field have been clamoring for Adsense alternatives, if Facebook takes that step that will provide another gap up in revenue.
These things are sea change announcements, like Apple announcing their first phone or tablet. Facebook’s ad sales have been growing, they keep blowing away estimates when they report earnings, but if these things come to pass it’ll be whole new categories of revenue. That is why I’m bullish on Facebook.
Full disclosure: I’m long Apple, Google, Facebook. I currently have no positions in any other stock mentioned in this post nor do I intend to open any.