A sideways correction, so far

J.P. Morgan famously responded when asked about the direction of stock prices: “They will fluctuate.”

That’s as true now as ever. From the low point on October 3rd to the recent high on April 2nd, the S&P 500 advanced nearly 30%. Following a move that big, a correction of some kind was . . . → Read More: Markets Fluctuate]]> Markets Fluctuate

A sideways correction, so far

That’s as true now as ever. From the low point on October 3rd to the recent high on April 2nd, the S&P 500 advanced nearly 30%. Following a move that big, a correction of some kind was a high probability. So far the correction has been a quiet affair, falling no more than 5% and producing the pattern you see below:

There are various ways to interpret this price action, but the most likely answer is that the market needs to “digest” this major advance before prices can move higher.

Best regards,

Evan McGoff

Investors are highly suspicious of Chinese government economic statistics and rightfully so. The large State Owned Enterprises (SOEs) are headed by well connected political hacks and local governments know what Beijing wants to hear.

Still, there are several indicators that can be used to measure Chinese . . . → Read More: What does Macau tell us about China’s economy?]]> What does Macau tell us about China’s economy?
China will avoid a recession

Investors are highly suspicious of Chinese government economic statistics and rightfully so. The large State Owned Enterprises (SOEs) are headed by well connected political hacks and local governments know what Beijing wants to hear.

Still, there are several indicators that can be used to measure Chinese growth. The best known is the Hong Kong based index of container movements, which does a good job of tracking trade.

We think Macau gaming revenues might be added to this list. I took the picture of Macau at night, on a very busy weekday. The chart next door shows monthly gaming revenue, now five times as big as Las Vegas.

Why can we trust Macau’s numbers? Mainly because several US based corporations operate casinos there and the numbers they all report rhyme with gaming authority figures. There are simply too many reporting sources—they can’t all be cooking the books.

In terms of measuring the economy, nothing is more discretionary than spending on travel and gambling. When times are tough gaming revenue doesn’t collapse, but it can stop growing, just as it did in Las Vegas during 2008-09.

So even after 18 months of monetary tightening in China and a year of weak to falling real estate values, the Chinese continue to belly up to the tables in Macau.

We think Macau may be a better indicator of middle class growth in China than the numbers issued in Beijing. Government figures focus on the results at SOEs and real estates sales, while doing a poor job of measuring the small business sector in China. And a walk down any street in the Chinese cities I’ve seen reveals millions of hard working business owners (and non-taxpayers) whose results are measured by no one. As these people succeed in business one place their cash shows up in official figures is Macau.

So far the numbers in Macau show no sign of a recession in China. But when things start going bad in the People’s Republic we think Macau will be one of the first to feel it.

Best regards,

Daniel A. Ogden

Apple has 51 new stores on the drawing board, adding to the total of 361 stores worldwide. Of those 51 new locations, 28 are scheduled to open in China and Hong Kong. At the moment there is one Apple store in Hong Kong and 5 in mainland . . . → Read More: Apple Translates Well]]> Apple Translates Well
“I think there’s room to expand,”  Jim Cramer

Apple has 51 new stores on the drawing board, adding to the total of 361 stores worldwide. Of those 51 new locations, 28 are scheduled to open in China and Hong Kong. At the moment there is one Apple store in Hong Kong and 5 in mainland China.

Here are a couple of pictures from the Hong Kong store.

We remain heavily overweight in Apple stock. As long as it remains cheap relative to its earning power, we will maintain our position. Someday Apple stock will no longer be cheap and someday the company will stumble. But for now, we’ll enjoy the ride.

Why in Hong Kong?

I have been meeting here with local brokers, hedge fund managers, and investors, asking the perpetual questions: “Is China for real and is there trouble on the horizon”?

We need to know the answers to these questions mainly from a defensive standpoint. Our portfolios have benefitted tremendously from the growth in Asia and we think there’s more to come. But even companies not directly involved in Asia have been helped because Asian growth is boosting the entire world economy.

If Asia falters, as so many investors expect, then global growth, as well as US growth, will suffer. We need to avoid being surprised.

Best regards,

Daniel A. Ogden

For many investors things just don’t add up. Why is the stock market so strong when the economy seems so wimpy? How can consumers be spending so much with unemployment over 8%?

This chart might explain some of the confusion. (We hope it doesn’t add to it!)

The blue line . . . → Read More: America’s Two GDPs]]> America’s Two GDPs
Housing and government drag down the total

For many investors things just don’t add up. Why is the stock market so strong when the economy seems so wimpy? How can consumers be spending so much with unemployment over 8%?

Best regards,

Daniel A. Ogden

Higher taxes on investment income and gains are scheduled to kick in at the end of this year. While we all have differing opinions about the wisdom of these increases, there is little doubt that they will have a depressing effect . . . → Read More: Another year of tax uncertainty]]> Another year of tax uncertainty
Why most of this year’s gains might come in the first half

Higher taxes on investment income and gains are scheduled to kick in at the end of this year. While we all have differing opinions about the wisdom of these increases, there is little doubt that they will have a depressing effect on the stock market and our portfolios. And those effects will be felt well before the end of the year.

Here’s a list of what will happen.

• The top rate on long-term capital gains rises from 15% to 20%.
• Dividends will be taxed at ordinary rates — as high as 39.6% up from 15%.
• As part of the new health-care program a 3.8% tax on investment income gets introduced for incomes over $200,000.
• The top marginal personal tax rate rises to 39.6% from 35%.
• A limit on itemized deductions will add a further 1.2% to the top rate.
• A new 0.9% Medicare tax on incomes over $200,000 gets imposed.
• The top estate tax rate goes from 35% to 55%. (The estate tax exemption falls to $1 million from $5 million).

Keep in mind that these increases are already written into law—if Congress does nothing or the President vetoes Congressional action, these will be the tax rates on January 1, 2013.

It is nearly impossible to know for sure what this will do to stocks—after all, we aren’t the only ones who know this is coming. But higher taxes will not encourage investors to hold stocks with big gains beyond December 31, so some weakness should be expected.

So far 2012 has been a bang-up year, but the gains look like they may be loaded into the early months.

Best regards,

Daniel A. Ogden

For a very long time there’s been a debate among investors: How should you invest in Asia? In companies based there or US companies doing business there?

We’ve a done a little of both. However, we still like US companies for their relatively clean bookkeeping and transparent governance. . . . → Read More: Asian Consumers]]> Asian Consumers
Three companies that are making us money in Asia

For a very long time there’s been a debate among investors: How should you invest in Asia? In companies based there or US companies doing business there?

We’ve a done a little of both. However, we still like US companies for their relatively clean bookkeeping and transparent governance. But finding businesses that can do well in Asia can be tricky. Asians don’t mind counterfeiting all kinds of intellectual property and they can make life miserable for companies they’d prefer to copy rather than buy from.

Last year we added three stocks to the portfolio, which are taking advantage of the massive growth in Asian consumer spending. Unlike construction spending, where growth is slowing, consumer spending in Asia is accelerating and will grow at a high rate for years to come.

The industries that lend themselves best to investing are tourism, luxury brands, and gambling. The three companies we own are priceline.com, Ralph Lauren, and Las Vegas Sands. All three stocks are up more that 25% in 2012 after sleep-walking through the last half of 2011.

Priceline.com owns booking.com—the busiest website in the hotel business. Most of the business conducted on “booking” is in Asia and this is now the largest business at Priceline.com. Asians have just started to travel in large numbers and, just like everyone else, they are looking for the best deal through Internet shopping.

Ralph Lauren continues to expand in Asia, where RL stores do more business per year than anywhere else in the world. The Asian desire for luxury brands is unmatched anywhere and Ralph Lauren is one of the most profitable businesses in the industry.

Las Vegas Sands operates casino based developments in Las Vegas, Macau, and Singapore. The Asian properties now account for 80% of the profits at LVS even though none existed 8 years ago. Other development opportunities exist in Asia. LVS managed resorts include hotels, shopping Malls, high-end dining, meeting and convention facilities and, of course, casinos.

Over time Asian spending will increase as urbanization moves forward in China, incomes grow throughout the region, and a higher proportion of the population can afford the luxuries these companies provide.

Meanwhile, as the market grinds higher, signs of weakness increase. We still think the likelihood of a minor correction in March is quite high, but no signs of a major top are in place. Small investors continue to sell stocks as they buy bonds—a sign of continued fear and pessimism. These are not the emotions found at market tops.
We remain encouraged about the potential gains in our portfolios.

Best regards,

Daniel A. Ogden

This month Apple’s stock closed above $500 per share and CNBC announced its “market cap”, or total value, had reached $475 billion. That number rang a bell, and sure enough, that was the peak in market value for Cisco Systems in early 2000.

The . . . → Read More: Cheap Stock and High Prices]]> Cheap Stock and High Prices
When is a $500 stock cheaper than an $82 stock?

This month Apple’s stock closed above $500 per share and CNBC announced its “market cap”, or total value, had reached $475 billion. That number rang a bell, and sure enough, that was the peak in market value for Cisco Systems in early 2000.

The following table shows that the coincidences end there. Looking at the numbers you can see that Cisco at $82 was wildly more expensive than Apple at $500.

The reason is in the last column. Cisco earned just over $2 billion in 2000, while Apple earned $33 billion last year. So Cisco sold for over 200 times its earnings while Apple is selling at less than 15 times.

So when you hear that Apple is “expensive” (usually just referring to the price) don’t forget the earning power that supports that price. High prices aren’t that risky if they are well supported by the business.

One more point about triple digit stock prices. They can deceive us into thinking that stock moves are bigger than they really are. If Apple had 10 billion shares outstanding (instead of .95 billion) the stock would trade at $50 and the most recent move would have started at $38 instead of $380. Which sounds like more fun? A $12 move or a $120 move?

February is turning out to be a very good month for our portfolios and the market. However, the market has rallied for nearly ten weeks without much of a break, let alone a correction. A correction is over-due, but everyone we know is hoping for lower prices which would allow them to put more cash into stocks.

The market tends not to give investors what they are hoping for, so whatever correction develops over the next few days or weeks will probably be shallow, or short, or both.

Best regards,
Daniel A. Ogden

There are only two ways to make money in the stock market—slow and fast. The slow money comes from an increase in earning power over time. The fast money comes when investors change their minds about the future of that earning power.

The optimism or pessimism about . . . → Read More: Making Money in a Hurry]]> Making Money in a Hurry
Price/Earnings ratios recover from last year’s correction

There are only two ways to make money in the stock market—slow and fast. The slow money comes from an increase in earning power over time. The fast money comes when investors change their minds about the future of that earning power.

The optimism or pessimism about future earnings shows up in the PE ratio, or how many dollars investors will pay for each dollar of earnings. Since the end of 2011 there has been a dramatic increase in that ratio.

We have 8 stocks in our portfolios that are up more than 15% so far this year. All but one (Apple) have seen their PE ratios increase—some by a lot. We think these increases are justified, and in most cases today’s higher PE’s are still below where they were one year ago.

While these are the periods all stock investors dream about, we know that the fast money phase doesn’t last very long. If we take the first six weeks of the year and multiply by 8 to get an annualized gain, the numbers get silly. So we know things will slow down—at least.

The threat of some kind of financial accident in Europe remains, but in the last two month the odds of such an event have decreased enormously. In its place we have governments and central banks pouring on fuel for an asset boom of some significance.

We need to take advantage of this current environment so that when the inevitable crisis returns we have more assets to help cushion the blow.

Best regards,

Daniel A. Ogden

There are many reasons why the current recovery has been so weak, but very high on the list is debt reduction on the part of individuals and small businesses—so-called “deleveraging”. The Fed has driven interest rates down in an attempt to encourage borrowing, which leads to spending . . . → Read More: Loan Demand is Up…Finally]]> Loan Demand is Up…Finally
Consumers and small businesses lead the way

There are many reasons why the current recovery has been so weak, but very high on the list is debt reduction on the part of individuals and small businesses—so-called “deleveraging”. The Fed has driven interest rates down in an attempt to encourage borrowing, which leads to spending and business expansion.

But if everyone is paying down debt, or just sitting on cash, low rates don’t help.

That may be changing, as this chart from the Federal Reserve illustrates.

The chart shows the annual percentage change in consumer loans. During 2008 and into 2010 the line ran below zero, indicating debt reduction. In late 2010 loans began to increase, but at an historically weak rate. The last few months have witnessed a breakout into the 9% range of growth. Very strong and indicative of better growth ahead.

Fears of a double-dip recession proved to be mistaken and it is now obvious that the US economy is actually accelerating.

–Auto sales are up 50% from the low point in 2009
–Housing prices have stabilized in most markets
–We are now adding new construction jobs—the first time since 2005!

Our portfolios are geared for stronger growth and our performance so far this year makes us think we are on the right track.

Of course there remain many things to worry about—you know the list. But the health of the US economy is not one of them.

Best regards,

Daniel A. Ogden