Tag Archives: economy

A Major Problem With Analyzing Infrastructure Projects

Summary There are risks associated with businesses relying on government projects. Colt is an example of a business disrupted by losing government contract. What all investors have to be aware of for companies with a lot of government business exposure. There are an increasing number of calls for governments around the world spending a lot more money on infrastructure projects, as growth in the private sector continues to slow down. One of the tactics used to twist the arm of politicians is to point to decaying bridges and the last time they were upgraded, and similar pressures, asserted and leaked to the media to attempt to create a groundswell of public pressure to spend the money. Then there is the job creation side of it too. What lawmaker wants to be identified as one who resists the creation of more jobs; and in the case of government, those will generate above-market wages and benefits, even though in the longer term paying for all of it isn’t sustainable. With a lot of emotion on both sides of the issue, it lands on investors to sort through it and figure out if they can benefit from it. China’s ghost cities In recent history there probably isn’t anything more wasteful than the “ghost cities” created by China, which have few people living in them and no industry for jobs. They were built in order to create construction jobs, and once they were completed, the debt to develop them remained with nothing to generate revenue in the form of taxes, or to produce business momentum in the private sector. It was a classic catch-22. There were no people to inhabit the city, so there was no businesses that would want to locate in them. People were looking for jobs and businesses were looking for people to buy their products or services. Neither inhabited the cities. So the cities just sit there lying relatively bare with no reason for people to live in them. They’re simply brick and mortar built in the form of houses and buildings sitting empty. We know it won’t take long for nature to start reclaiming these cities. Political issues Since almost everything surrounding infrastructure projects are related to politics, there are all sorts of problems associated with them that the private sector usually doesn’t have to deal with; at least to the degree the public sector has to. For example, there are legal requirements for companies the work is farmed out to that they must adhere to if they want to have a chance at winning the business from the government. This plays out in a variety of ways, depending on the country. There of course is the strong potential for corruption, again, the level of which is determined by the specific region of the world infrastructure is being spent on. Also at issue over the longer term, is all of this infrastructure is very costly and debatable as to the real value it provides for citizens. That means it all has to be repaid, and that means either higher taxes or more printing of money by a central bank. That’s important because public sentiment can quickly change, which could have an impact on the future of a company doing business with the government. What’s the problem? Where the major challenge with all of this is at the level of exposure a company has in regard to government projects. That can be infrastructure or otherwise. One recent example on the government contract side was the loss of an $84 million contract by Colt three years ago, which ultimately led to its bankruptcy. Being able to provide guns to the military, once it had won the contract, meant during that time it had a monopoly on military gun sales for the duration of the contract. Once the contract was not renewed, it wasn’t able to compete in the direct to consumer market because its prices were higher than their competitors. Another reason example that’s shaking up the markets some was after the expiry of the Export-Import Bank, which Congress decided not to renew. General Electric (NYSE: GE ) has been the proxy of how it can have an effect on companies, as numerous contracts came under immediate threat because companies relied upon the Bank for financial support. Companies as large as General Electric won’t have trouble attracting financing because of its size and the type of jobs and projects it can bring to other regions of the world, but that’s not the point. The point is when dealing with governments, politics and fickle politicians can make abrupt decisions that can disrupt a business and an industry, specifically when relying on government contracts or government financing for a significant portion of a business. I’m not talking about changing laws here, I’m talking about losing government contracts or financial support that had a heavy impact on the performance of a business, and were expected to continue. Conclusion There is no doubt the global economy is slowing down, and one of the actions being called for is for governments to increase infrastructure spending. Not only does this include a lot of risk, as shown above, but many investors have ethical issues with the government taking on that type of debt and spending on dubious projects that have questionable value. That said, there are a number of companies that win contract year after year, and it’s a big part of their business success. Again, General Electric is an example of that. At issue for some investors is having to set aside personal preferences and analyze the company as it is, even if it is growing via government largesse. I’ve seen some investors look for minutia in order to find something wrong with these companies, even if they’ve locked in contracts that guarantee revenue for a number of years. For the reasons mentioned earlier, I tend not to invest in companies with a lot of reliance on government spending, because I see it as very risky. At the same time, it depends on the size of the company and the type of projects it’s engaged in as to the level of risk. It’s doubtful a company that started improving bridges would lose the contract in the middle of the work. What can’t be assumed is once a portion of the work under contract is completed, new work will be awarded to the company. That’s Colt’s story. And it’s not an unusual one when dealing with government. Infrastructure projects are highly controversial and scrutinized by a lot of special interest groups. It normally doesn’t hurt the brand of a company to be involved in them. The risk is spending money on the business with the expectations of doing further business with the government, and having another company get the business. Companies with significant exposure to government projects are okay as long as the investors understands the terms and duration of the contract. What can’t be counted on that once it’s completed the company will get more government business. That makes it hard to analyze the business because of capex needed to perform the job, and the resultant fallout if it no longer has the revenue stream to pay off its added expenses. Government infrastructure projects may sound good for the economy, but they aren’t always good for a company or investors. Invest accordingly.

The Cash Is King Playbook

We’re seeing something really unusual in the financial markets this year. As I’ve noted recently , there’s almost nothing that’s working this year. No matter where you’ve diversified your savings you’ve likely lost money with the exception of cash. If we look at the two primary asset classes, stocks and bonds, cash has only outperformed both in the same year 10 times in the last 90 years. So this is a pretty unusual event. But there’s some potential good news on the horizon. When this occurs both stocks and bonds tend to bounce back very strong. In the 10 times this has occurred in the last 90 years stocks have followed up with average 1, 2, and 3 year returns of 14.34%, 18.76% and 16.72%. Bonds have done a bit worse with a 1, 2 and 3 year average return of 10.24%, 7.7% and 6.17%. A balanced portfolio has also generated abnormally high returns with a 1, 2 and 3 year average return of 12.29%, 13.23% and 11.44%. As is often the case with diversification, it’s not timing the market that counts. It’s time in the market. So, while cash looks particularly smart today the historical figures say that cash won’t be king for long. Share this article with a colleague

Investors Have Been Selling But Haven’t Yet Decided What To Buy

“The stock market is almost magical because it always leads the economy. It goes down long before the economy drops and then heads higher long before the economy rebounds. It always has.” -Kenneth L. Fisher If you look at the details of fund flows during the last several months, then you will discover that there have been net outflows from many funds of U.S. risk assets. This includes most U.S. equity and U.S. bond funds. As more and more time passes from the all-time peaks for many U.S. equity indices, investors are progressively realizing that the likelihood for additional gains is less than the probability that we have begun what could eventually become a full-fledged bear market. The S&P 500 reached its highest point of 2134.72 on May 20, 2015, which was more than five months ago. Investors hate to tamper with the status quo if they are comfortable with it, so very few people sold near the spring highs. In recent weeks, there have been notable outflows especially on days when U.S. equities have been declining. The more that time passes and additional lower highs are registered for the S&P 500, the Nasdaq, the Russell 2000, and similar indices, the more that people will realize that their portfolios are losing money rather than making money. Since the losses have been modest overall, these outflows haven’t nearly approached the record withdrawals which were made during the first quarter of 2009. However, there has been a notable total decline in the money committed to U.S. risk assets, while the amount of money in safe deposits including money market funds has surged in recent months. One interesting observation is that, prior to the recent climb in the popularity of safe time deposits, these had reached all-time low levels relative to the amount of money invested in riskier assets. It is likely that, obtaining only around one percent interest or less on their bank accounts and near zero in their money market funds, many investors were encouraged to shift into far more speculative alternatives. They convinced themselves, with the able assistance of financial advisors, that they were nearly as safe in high-dividend blue chip U.S. stocks or high-yield corporate bonds as they were in the bank. In reality, they have been taking enormously greater risk, because most of these assets lost more than half their value during their respective bear markets of 2007-2009. However, most advisors politely didn’t bring up this inconvenient fact, and most people would rather not think about what is possible while focusing instead on what is ideal. Now that reality has slowly begun to reassert itself, investors have been moving back into time deposits-but haven’t yet taken more than a tiny percentage of this money and invested it in other assets. Historically, whenever there is a recent surge in safe time deposits, most of the money ends up being reallocated into securities which are perceived to contain greater upside potential. The only exception tends to be near the very end of a bear market, when risk assets are plummeting and investors are frightened into safety at any cost. Since we are far from such a situation today, asset reallocation usually means chasing after whatever has recently been climbing the most in percentage terms. If 2015 ends with a net loss for most U.S. equity and bond funds, then those funds which have enjoyed net gains will stand out noticeably among a sea of red. Other investors look for whatever has rebounded the most from its recent bottom, or for various kinds of moving average crosses and other signals. Therefore, whichever assets outperform from now through the end of 2015 are likely to be especially visible and to receive increasingly positive media, analyst, and advisor coverage. The persistence of such upbeat discussion will be accompanied by strong inflows. So far, there haven’t been any sectors which have featured many such standout assets. However, this could change soon, because there is such a huge disparity between the world’s most overpriced assets and the most undervalued ones. The list of overvalued securities includes many U.S. stocks and bonds and global real estate. The most compelling bargains can generally be found among commodity-related and emerging-market assets which in many cases have been trading at lower prices than during their worst levels of 2008-2009. Because they are so inexpensive, they can gain enormously in percentage terms and yet remain far below their respective peaks from the first half of 2008 or in many cases from April 2011. If this happens, then they will be able to continue to gain dramatically until the final months of 2016 or the early months of 2017. It is too early to say whether this kind of activity will occur or not, although historically most U.S. bull markets end with a period of rising inflationary expectations. It is rare for the economy to go into a recession without first experiencing an inflationary binge. During the most recent bear market of 2007-2009, we had a sharp and unexpected inflationary climb for roughly one year from the summer of 2007 through the summer of 2008. Since literally a hundred central banks worldwide including the U.S. Federal Reserve are eager for higher inflation, we are likely to get exactly what they want. Wage inflation has been moderately accelerating in the U.S., while prices have been generally slower to follow suit. Most investors are continuing to moderately sell their previous favorites, while sitting on the fence in indecision about what to do with the money. If you follow the fund flows during the next few months, you are likely to learn a lot about what will happen for another year or more. There are supporting clues from the media, which have become less enthusiastic about U.S. assets but continue to generally favor them because they appear to many to be the only game in town. Most news articles regarding commodities or emerging markets are gloomy, especially when there have been recent price declines for anything in these sectors. It appears that precious metals and the shares of their producers may already have bottomed, while energy producers are possibly following suit while emerging markets are mostly bringing up the rear. If all of these are able to outperform, then especially with the best-known U.S. benchmark indices continuing to struggle, investors will begin to take notice of the top-performing securities and will become increasingly eager to own them. The financial markets have always been a paradox, in which more people are eager to buy something after it has doubled than before it has done so. It is surely the same this time, so most people won’t actually participate until it is too late to enjoy the lion’s share of the potential percentage gains. If an asset goes from 10 to 50, then buying it at 20 might seem to surrender only one fourth of the profit since 20 is one fourth of the way from 10 to 50. However, the gain from 10 to 50 is 400% while the increase from 20 to 50 is 150%, so you actually give up 5/8 of the total profit instead of just 1/4. The financial markets are inherently geometric rather than arithmetic, which is why it works out this way. The key is that those who buy before a rally end up gaining far more than those who wait until a rebound has been “confirmed”. Also, there is really no such thing as confirmation; whenever something has allegedly established a new uptrend, it often first suffers a sharp short-term correction to punish those who were tardy in jumping aboard the bandwagon. Tax tip: If you own shares or funds which are trading near multi-year bottoms and you are a U.S. resident, you can take advantage of their currently depressed prices if these assets are in your 401(k), 403(b), SEP-IRA, Keogh, traditional IRA, or other non-Roth retirement account. You can convert these shares from your account to a Roth IRA and pay taxes based upon their present low valuations. As these eventually rebound, all future gains will be completely tax free. In the event that these shares don’t recover but end up retreating further in price, you can choose to undo your conversion, which is known as a recharacterization. You can then wait at least 30 days, or until the following calendar year-whichever is later-and then convert them again. There is no limit to how many times you can repeat this process and there are no income or other restrictions in making such conversions and recharacterizations, as long as each recharacterization is done on or before October 15 of the year following the date when the conversion had been done. It’s like being able to go back in time and “unbuy” something which doesn’t go up in price. It’s heads you win, and tails you also win. Unfortunately, I do not know of an equivalent strategy which is permitted in any other country besides the United States. Disclosure: In August-September 2013, and at various points during 2014-2015, I have been buying the shares of emerging-market country funds whenever they have appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares-and more recently energy shares-especially following their most extended pullbacks. I have also been accumulating HDGE whenever U.S. equity indices are near their peaks; HDGE is an actively-managed fund that sells short U.S. equities. I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own (NYSEARCA: GDXJ ), (NYSEARCA: KOL ), (NYSEARCA: XME ), (NYSEARCA: COPX ), (NYSEARCA: SIL ), (NYSEARCA: HDGE ), (NYSEARCA: GDX ), (NYSEARCA: REMX ), (NYSEARCA: EWZ ), (NYSEARCA: RSX ), (NYSEARCA: GLDX ), (NYSEARCA: URA ), (NYSEARCA: IDX ), (NYSEARCA: GXG ), (MUTF: VGPMX ), (NYSEARCA: ECH ), (NYSEARCA: FCG ), (NYSEARCA: VNM ), (MUTF: BGEIX ), (NYSEARCA: NGE ), (NASDAQ: PLTM ), (NYSEARCA: EPU ), (NYSEARCA: TUR ), (NYSEARCA: SILJ ), (NYSEARCA: SOIL ), (NYSEARCA: EPHE ), and (NYSEARCA: THD ). In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position to roughly 3% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG but I have been repurchasing it following its recent collapse because there has been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&P 500 to eventually lose about two thirds of its recent peak value, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM have only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (NYSEARCA: IWC ) marginally surpassed its zenith from March 6, 2014. The S&P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have “forgotten” or never learned the lessons of previous bear markets are doomed to repeat their mistakes.