Contrarian Finance - Articles on contrarian finance, the stock market, and general tips on being smart with money and wise in investing.

Need a Safer Place to Stash Your Cash?

Contrarian-Finance — Fri, 19 Sep 2008 23:39:08 -0400

Here's a nice little article from Jon Markman detailing 5 banks that are good bets for stashing your hard earned cash:

http://articles.moneycentral.msn.com/Investing/SuperModels/5BanksSafeFro...

I don't personally use any of the five, I use USAA, whom I highly recommend. But most folks won't qualify to use USAA, so be sure to check out the article.

We Have Learned NOTHING

Contrarian-Finance — Fri, 19 Sep 2008 23:27:50 -0400

(Note: I originally posted this on my other blog, but I'm posting it here as well because I think it's quite relevant to finance, etc, etc. Just humor me, OK?)

Well, as we so easily forget history in this country, we are now likely doomed to repeat it. Lehman Brothers is bankrupt, and by this time Wednesday, AIG probably will be as well. And how did this whole subprime mess come to be in the first place?

BEGIN RANT

You can really point to one main issue: how freaking STUPID our government is.

OK, OK, I know I need to back that up. So here goes. In October 29, 1929 the market crashed, a date that is widely accepted as the beginning of the Great Depression. In 1933, largely in response to Black Tuesday and the subsequent banking collapse of 1933, Congress pass the Glass-Steagall Act of 1933 which established the Federal Deposit Insurance Corporation (FDIC) and enacted certain reforms.

You can read up on it here: http://en.wikipedia.org/wiki/Glass-Steagall_Act

In particular, it introduced the separation of bank types according to their business (commercial and investment banking), primarily to curb speculation. Gosh, is this starting to sound familiar to anyone?

Now, from Wikipedia:

On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal was to allow commercial and investment banks to consolidate.

The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities. Citigroup played a major part in the repeal. Then called Citicorp, the company merged with Travelers Insurance company the year before using loopholes in Glass-Steagall that allowed for temporary exemptions. With lobbying led by Roger Levy, the "finance, insurance and real estate industries together are regularly the largest campaign contributors and biggest spenders on lobbying of all business sectors [in 1999]. They laid out more than $200 million for lobbying in 1998, according to the Center for Responsive Politics..." These industries succeeded in their two decades long effort to repeal the act.

Wow. I mean, WOW. And Congress can't even feign ignorance of history, as they did a study in 1987 about the pros and cons of a repeal. Quoting Wikipedia again:

The argument for preserving Glass-Steagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses that originally produced the Act

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

Let's run down the list here, in terms of recent market action.

Well, Citigroup, Countrywide, Wamu, Lehman, AIG, etc, etc, are all great examples here
Uh, yep. See #1.
Really? Enormous losses? Crazy. How about Bear Stearns, Fannie Mae, and Freddie Mac for examples of recent bailouts.
WTF? The "crash of real estate investment trusts"!!! OMG. Now we've even got real estate in the mix.

Oh, I love it. From 2000 on megabanks, run by allegedly "Really Smart Guys", had their common sense completely dominated by their greed. I especially love the part about "managers thus may not be conditioned to operate prudently in more speculative securities businesses." Well, I'd say that one line just about sums it up, don't you think?

Which brings me back to how freaking stupid our Government is. They knew ALL of this, and yet they passed the repeal of Glass-Steagall ANYWAY.

If we really want some "Change We Can Believe In", we need to vote out every last stupid Congressman (or Congresswoman) or Senator who voted for this repeal (if they're still in office, of course).

In case you're wondering, here are the members of Congress who need the boot:

http://clerk.house.gov/evs/1999/roll570.xml

And here are the Senators:

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm...

Find your District and State. If those idiots are still in Office, I politely, but firmly, suggest you contact them and let them know how disappointed you are in their lapse of judgment in 1999. And that furthermore, they will not have your support in 2008, in light of recent events.

Oh, and don't forget to tell them how STUPID they are.

END RANT

Don't Call it a Comeback

Contrarian-Finance — Mon, 19 May 2008 17:11:23 -0400

Well, it's not a recession (yet) and if you ask me, there may not be one at all. That doesn't mean we won't trudge along for a year or more while the housing market gets back on track, but slow is quite different from negative GDP. Suck on that, would-be-fearmongers aka Presidential Hopefuls.

Here's the latest on Bloomberg: U.S. Economy: Leading Economic Indicators Index Rose (Update3).

Book Review: Secrets of the Temple: How the Federal Reserve Runs the Country

Contrarian-Finance — Fri, 02 May 2008 17:18:36 -0400

This book, Secrets of the Temple: How the Federal Reserve Runs the Country by William Greider has been out for quite some time, but given the current state of the economy and the Fed, if you haven't read this book, now is the time. At almost 800 pages there is a lot a material to digest, but the time you'll invest will pay significant dividends.

The book details much of the history and formation of the Fed and gives tremendous insight into the real workings of this non government entity. If you didn't know that the Fed isn't part of the United States Government, well, that's just shows how much you need to read the book!

At it's worst the book reads like a history textbook, and at it's best, a murder mystery. I had no idea how fallible and unaccountable the Fed really is. Sure, the President and the Senate control the appointment of the Governors but they serve for 14 years!

If you don't understand why our currency continues to slide in value, or what motivation the Fed has for screwing over the average American, you simply must read this book.

On the other hand, maybe you're just too busy or too cheap to read the book. In that case, you can still read up on the Fed online, and here are some excellent references. They don't have the detail of the book, but are informative never the less.

Federal Reserve System - by Friends of the American Revolution
Historical Beginnings of the Federal Reserve - Federal Reserve Bank of Boston
The Federal Reserve System in Brief - Federal Reserve Bank of San Francisco
Dollar Crisis? Economic Forecasts Differ by Ideology - Economic Dreams - Economic Nightmares
Federal Reserve System - Wikipedia

See My Portfolio

Contrarian-Finance — Thu, 01 May 2008 12:46:16 -0400

It's lacking some data I want to provide, but here is a basic view of what's in my portfolio.

I'd like to eventually provide the relative weights for these positions as well, but at least you've got the list of what I own as a starting point. I am long all these positions, as a rule I don't short stocks, or mess with futures.

Stock of the Week - Vale (RIO)

Contrarian-Finance — Thu, 01 May 2008 11:28:27 -0400

This week's featured stock is another major Brazilian company. Vale (formerly Companhia Vale do Rio Doce or CVRD) is a diversified metals and mining company. They are well positioned to capitalize on the international growth of emerging markets like China and rising commodity prices.

Vale is a producer and exporter of iron ore and pellets and a producer of nickel. They also produce copper, manganese, ferroalloys, bauxite, precious metals, cobalt, kaolin, potash and other products. As you might have guessed, the company is headquartered in Rio de Janeiro, Brazil.

The company is not only entrenched in China (they have almost 25% of the Chinese iron ore market) but they are also running around buying up commodity assets. I detailed in a previous post why I love companies that not only refine raw materials, but also own the underlying materials, be that oil fields, iron ore or coal mines.

They have fantastic business fundamentals, their gross margin is a whopping 49.93%, and their net margin an equally stunning 35.80%. These are well above industry averages as well. Their debt ratios are at or below industry norms, nothing of note there. Revenues were 32.59B in 2007, with profits of 11.63B.

The dividend yield is a mere 0.6% though, so if you're buying this stock, you're looking for growth. Although their current payout ratio is only 16%, so there's plenty of room to raise the dividend rate in the future, but they seem acquisition focused for the near term.

I think they are fairly priced at the moment, with a current P/E of 16.5 (industry average is 18.1), and a price to cash flow ratio of 13.2 (industry average is 13.1). The ADR is trading at 37.75 as of this writing. Looking forward though, their forward P/E is just 12.3 leaving plenty of room for growth.

Also of important note is that Vale, Rio Tinto, and BHP Billiton together control almost 70% of the world iron ore market. So it won't surprise you when I tell you that Vale raised ore prices a staggering 65% back in February.

For some great analysis on how this affects China, read Kan's post on steel pricing.

Like many Brazilian stocks, Vale is pretty volatile, so I'd wait for a pullback of 5% or more to make an initial entry. The twelve month price targets range from a low of $43 to a high of $57. I personally think $50 is right on the money, as that would put their future P/E right back at that 16.5 level.

Buying the iShares Brazil fund (EWZ) is another way to get exposure to RIO, as some 20% of the holdings of EWZ are actually RIO shares.

Full disclosure: I own shares of RIO.

Additional Reading:

With Iron-Ore Price Hikes Like This, Who Needs a Monopoly? - WSJ Blogs
Have Commodities Stocks Peaked? - Seeking Alpha
Xta! Xta! The on/off bid from Vale - FT Alphaville

Updates: It's been brought to my attention that CVRD formally changed their name to "Vale" back in November 2007.

It's Official: We're Not in a Recession (Yet)

Contrarian-Finance — Wed, 30 Apr 2008 09:21:05 -0400

This was just posted on Bloomberg. It's first release of GDP data for Q1 2008 shows the economy growing at an annual pace of 0.6%. Since we need two quarters of negative growth, we're not in a recession... yet.

I say "first release" because they'll revise the numbers over time as they get more data, so there is of course the possibility the could revise it to a negative (and thus recessionary) number later in the year.

It will be interested to see how the Street responds to this news, as it beats the consensus estimate of 0.5% growth, and points strongly to the "soft landing" or "slowed growth" scenario many are so desperately hoping for. Not that things are peachy for the good ol' American Consumer, who certainly is feeling the pinch of increasing unemployment, inflation, and (need I even mention?) gas prices.

To digress for a moment... I think people tend to miss the real impact of fuel prices though. The median income for Americans is something like $43,000 a year. And the average person drives about 12,000 miles a year, and the "Fleet Average MPG" is about 20. So Joe American is buying roughly 600 gallons of gasoline a year. Even at $5/gallon that's less than 7% of his gross income. Granted, going from 3.5% to 7% of your income is a real pinch.

But that's nothing compared to the pinch they'll feel at the grocery store. I couldn't find exact data on grocery budgets, but it seems like the average person is spending anywhere from $300-$600 a month. Even at $300 a month that $3600 a year trumps $5 gasoline as a total budget item. This article from the Boston Globe nicely summarizes my point. They also say that "Food accounts for about 13 percent of household spending compared with about 4 percent for gas."

Milk is up 26%, for example. I think what it boils down to though, is that everyone knows the price of gas, but how many people can quote you the price of a gallon of milk from memory?

Anyway, back on topic. I expect the stimulus package may actually have some positive effect in Q2, so I honestly don't expect a recession until Q3-Q4. My guess is, the Street will settle on the "soft landing" scenario, and feel good about it when the Q2 numbers come out. Then at some point, with unemployment still rising and the mortgage industry only being halfway through 3 years of subprime ARM resets, it will dawn on them that the recession is coming, only not as quickly as they had thought.

I think this year will be tricky market wise, but I expect 2009 to be much, much worse. Sure, there'll be some optimism surrounding a new administration, but in the face of the economic numbers (that I expect) the shine will come off pretty quickly. Then again, maybe it's just my own innate pessimism fueled by a lack of caffeine. Let's hope so.

Five or Six Reasons Why Oil Isn’t Coming Down… Yet

Contrarian-Finance — Wed, 23 Apr 2008 22:15:22 -0400

I just read a great post on the WSJ blogs titled "Five Reasons Why Oil Isn’t Coming Down… Yet".

In addition to the five reasons listed in the post:

Capacity
Heating Oil
The Weak Dollar
Speculation
Gasoline

I’ll give you a few more reasons why oil isn’t coming down any time soon. First, check out this chart of oil futures prices. Notice the textbook 'double bottom' at $88/bbl and then again at just over $100/bbl? Unless something fundamentally changes, and I can’t think what that would be, I can’t see oil below that $100 mark anytime in the next six months. I can’t see it below that $88 mark anytime in the next year or two.

And, second, while it’s certainly true that Petrobras will be bringing a lot of new oil to the market once Tupi and Santos are online, that won’t be for at least 5 years and could easily be 10.

So, here’s hoping you own some energy stocks to offset the pain of that $4/gallon gasoline you’re going to see this summer.

(Disclosure: I (continue to) own shares of Petrobras (PBR).

Book Review: Twilight in the Desert

Contrarian-Finance — Mon, 21 Apr 2008 12:04:40 -0400

If you haven't already read this book, you should consider doing so. I'm not going to write a full review, as there are already several good ones out there (see the links below). But if you've been following my commentary on Petrobras, and the economy in general, you'll know that I think having a basic understanding of the fundamentals of how oil is discovered, produced, refined and distributed is key to understanding the global and local economy. This book will educate you well on the first two points, and give tremendous insight into Saudi Arabia as well.

The main drawbacks of the book are also its greatest strengths: it's thoroughly researched and very technically detailed. Non-geologists (like me) may find it dry at times, but it's still good knowledge to have. The author offers very convincing proof that Saudi oil reserve figures are overstated, and shows that many other OPEC countries have the incentive to do so as well.

You can buy the book from Amazon, now in paperback. And here are two excellent (more detailed and lengthy) reviews:

Investing 101: Dividend Reinvestment Plans (DRIP)

Contrarian-Finance — Thu, 17 Apr 2008 16:02:13 -0400

In addition to the Stock of the Week and Book of the Week features, I’ve decided to publish at weekly educational article, either on Finance or Investing. This week is DRIPs 101.

What is a DRIP?

First, what heck is a Dividend Reinvestment Plan or DRIP, anyway? Well, the short answer is that a DRIP is a specific type of investment plan, whereby the dividends you would be paid from a given stock (say, Citigroup) are instead automatically reinvested in the company’s stock. Typically you can also buy stock directly from the company (well, through their agent anyway), in varying amounts (very small to somewhat large). And best of all, the fees are typically quite low.

Key Reasons to Invest through a DRIP

So let’s expand on the main reasons to invest using a DRIP.

The ability to start small. In most cases, a single share of stock is all you need to enroll.
Discipline. Since the money is reinvested automatically, you get the benefits of dollar cost averaging. Also the emotion is removed from the equation, so you won’t be tempted put that money into another investment (or worse still, spend it!)
Low or No Fees. Most plans reinvest the money for no fee at all. Many also offer the ability to purchase additional shares (make an additional investment) for little or no fee. Many also offer scheduled investing (via a direct withdrawal) where you can invest very small amounts (say, $50 a month) over time. See also, discipline.
Discounts. Some companies even give you a discount to the current market price for shares, either for new purchases, reinvested dividends or both.
No Brokerage Account Required. While some brokers offer some DRIP services, many do not. But it doesn’t matter, as you don’t need a brokerage account. Which also means you can avoid most or all of the typical brokerage fees.
Diversification. Because you can invest small amounts, you can also afford to own a larger number of companies. Diversification also helps reduce your portfolio risk.

By now you might be thinking, well if these DRIPs are so great, why have I never heard of them before? Well, because companies can’t advertise them (SEC rules) and brokerages don’t advertise them (why encourage you to save money by cutting out the middleman – them?).

Types of Plans

There are really three types of plans, and depending on which one your target company uses will affect how you go about getting the shares and enrolling. The three types of plans are:

Company Run Plans. Some companies run their own plans. These usually require you to own your first share already. Generally calling shareholder or investor services (check their website) will get you in touch with someone who can explain their rules and procedures.
Transfer Agent Plans. Most companies use a transfer agent to handle the plan for them. These are specialized companies that are more cost effective because they are running plans for many companies at once (hundreds of companies in the case of the largest agents).
Brokerage Plans. Some brokerages (like my broker USAA) offer fee free DRIPs in your brokerage account. However, you still have to pay a commission (in most cases) to make additional cash purchases, which is one of the best features of a DRIP. Also, I cannot stress enough… be careful of the fees!

Getting Started with Your DRIP

OK, so you’re convinced. Sounds like a great idea. How do you get started?

First you have to decide what stocks to invest in. Choosing the right stocks, and creating a balanced portfolio is beyond the scope of this article, but here are few key suggestions to keep in mind: Buy what you know, invest for the long term (at least a 10 year time horizon) and try to invest in at least 5-10 different stocks (if you can afford to). There’s a lot more we could talk about (like industry diversification and value versus growth, but let’s stay on topic). You can search the major financial sites for “Dividend Stocks” as a way to get the gears turning. And, of course (shameless plug), you could always browse this site for ideas.

Here are a few places to look for ideas:

Next you need to acquire your first share(s) of the stock, if you don’t already own them. Regardless, you will also need to have those shares registered in your name, not in the “Street Name,” which is typically how shares are held in a brokerage account. Some plans offer “Direct Enrollment” but be careful of the fees. Since you will likely be investing small amounts, at least at first, even a seemly small fee can eat up your returns over time. Most of the best plans have no fees, as in “none”.

Some companies specialize in helping you get your first share and get enrolled. Here are a few of the most trusted names in the business:

You can also go directly to the “Transfer Agent” for your company’s DRIP plan, which is my recommendation. Here are the big names (all service 500 companies or more, I’ve listed a few big names to give you a feel for their client base):

ComputerShare (Bank of America, Pfizer, IBM)
Mellon Investor Services (American Express, Burger King, Caterpillar)
American Stock Transfer and Trust Company (Honeywell, Raytheon)

Final Thoughts

A final note on fees: “How much is too much?” Well, personally, I think if the fees are more than 1.5% in total, you should stay away. Where did I get that number from? Well, the average mutual fund charges an annual fee of, you guessed, 1.5%. So if you can do better than a typical mutual fund, I’d argue you’d be better off just buying low cost index funds and be done with it.

Two more resources, if you want to do more reading on the concept of DRIPs is DRIPinvesting.org. They’ve got tons of great articles and links to other useful resources. Also, here's a great post on the whole process of getting setup with ComputerShare.

I hope you found this helpful. Good luck!