The Eurozone Crisis: Why You Don’t Need to Worry About Spain
by Alexander Green, Investment U Chief Investment Strategist
Monday, April 30, 2012: Issue #1762

There is concern that Spain will drag the rest of Europe into recession. But ultimately, the financial markets will force politicians to do the right thing.

The Eurozone is back in the news again and – needless to say – it isn’t good.

The problem is Spain. Unemployment is almost 24%. Among those under 25, it’s 50%. Last year, the budget deficit was 8.5% of GDP. Tax revenue is down sharply. And the IMF projects that this year’s deficit is going to be another stunner.

This is a much bigger problem than Greece… or Ireland… or Portugal. Why? Because Spain’s economy is more than twice as big as those three countries combined.

Germany and France want Spain to bite the bullet and follow austerity measures. But the Spanish government is acutely aware that its citizens don’t want austerity, they want growth. They want jobs.

There is concern that Spain will drag the rest of Europe into recession. Remember: Europe is about one-fifth of the world economy (roughly equal with the United States). The 27 members of the European Union are the world’s largest importer (excluding exports to each other).

So while politicians dither, the clock keeps ticking. And investors on both sides of the pond keep wringing their hands. They shouldn’t.

Yes, politicians throughout the West are famously spineless, afraid to act (and therefore offend some special interest group) and always ready to kick the can down the road, especially past the next election. But, ultimately, the financial markets will force them to do the right thing.

How can we be sure? Because it always happens, and it’s happening now.

Opinions and talk are worth about what you pay to hear them. But investment capital is precious. And it doesn’t stick around where it’s treated poorly.

Note that interest rates on Spanish government bonds have already pushed up to 6%. This is a warning shot across the bow. Spain well knows that it cannot afford to keep borrowing at 7% or higher. At that point, its deficit becomes immediately unsustainable.

The Lesson All Politicians Learn

Ultimately, markets force politicians to make the tough decisions. At last they can tell their constituents the truth: “We simply have no other choice.”

All politicians learn this in the end.

Bill Clinton’s most famous quote wasn’t “I smoked it, but I didn’t inhale” or “The era of big government is over” or “I did not have sexual relations with that woman, Miss Lewinsky” or even “It depends on what the meaning of the word ‘is’ is.”

As Bob Woodward reported in his book The Agenda, Clinton was astounded to learn that he couldn’t just take whatever executive action he wanted or pass populist legislation to stimulate the economy. The markets would tell him what he could and couldn’t do.

Or as Clinton put it, “You mean to tell that the success of the economic program and my re-election hinges on a bunch of ****ing bond traders?”

Ah, daylight at last.

I’m not saying Europe isn’t a mess right now. It is. I would certainly stay away from European banks or Spanish bonds or euro-denominated debt of any kind right now. But in the end, financial markets will force Europe’s politicians to act responsibly.

And that’s a good thing.

Good Investing,

Alexander Green

Warren Sapp: Don’t Be a “Sapp” With Your Finances
by Alexander Green, Investment U Chief Investment Strategist
Monday, April 23, 2012: Issue #1757

It’s hard to feel sorry for Warren Sapp… Yet bankruptcy documents show Sapp had a propensity to make poor investments. Don’t make the same mistakes!

It’s hard to feel sorry for Warren Sapp…

As a defensive tackle at the University of Miami, he was a consensus All-American who won multiple awards. He was an NFL first-round draft pick in 1995. And during his professional career, he earned seven trips to the Pro Bowl and a Super Bowl ring in 2002.

These accomplishments brought financial rewards, as well. Sapp reportedly grossed $60 million playing football. And today he earns nearly $116,000 a month as a sports broadcaster for the NFL network. That’s why some were taken aback at his recent bankruptcy filing.

Yet bankruptcy documents show Sapp had a propensity to make poor investments – including an 18,000-square-foot Florida mansion – and spend liberally, including more than 240 pairs of athletic shoes (still in the boxes).

His situation is hardly unique, of course. Baltimore Colts quarterback Johnny Unitas filed for bankruptcy protection in 1991. In more recent years, so did NFL veteran quarterback Mark Brunell and New Orleans Saints running back Deuce McAllister.

Football players are hardly alone. Other celebrity bankruptcies include Willie Nelson, Mike Tyson, MC Hammer, Toni Braxton, Cyndi Lauper, Tom Petty, Kim Basinger, and Ed McMahon.

How could all these famous people – with all those millions – find themselves financially upside down, owing more than they own? The two culprits are almost always the same: overspending and poor investments. They can strike anyone, regardless of net worth… unless you take these basic precautions.

Let’s cover overspending first. Most people imagine that if they just had more money they could save a lot. But expenses have a strong propensity to rise to meet the income available. Today you’re probably earning much more than you did 10 or 20 years ago. But your expenses have probably risen faster than inflation and perhaps faster than your income.

Thomas Stanley, author of The Millionaire Next Door, has studied this phenomenon intensively. He found that the overwhelming majority of successful, high-net-worth individuals follow the same basic formula. They maximize their income, minimize their outgo, and religiously save and invest the difference.

No matter how high your income, it’s still possible – as Warren Sapp and others discovered – to overspend. If you can avoid their overconfidence or lack of self-control, you have won the primary battle.

Still, one major hurdle remains: managing your investments sensibly. This is a topic we discuss five days a week here at Investment U. But I can boil the fundamentals down to just three basic rules:

1. Diversify – Not just to reduce your risk but to maximize your chance of holding big winners.
2. Stick to quality – Buy high-quality stocks and bonds and forget about penny stocks, options and futures.
3. Gird yourself to take the long-term view – To avoid abandoning your strategy when the market gets bumpy, as it always does from time to time.

Can it really be this simple? Yes and no. You’ll notice that successful dieting is equally straightforward. Every day of your life, you either take in more calories than you burn or burn more calories than you take in. (Glance in the direction of your belt buckle to see your running total.)

Investing and dieting are not rocket science. But sticking to core principles – at the dinner table or in the market – is not always easy.

However, the rewards are great if you do. Because no one wants to be a “Sapp.”

Good Investing,

Alexander Green

Argentina and YPF: 17 Stocks to Sell Immediately
by Alexander Green, Investment U Chief Investment Strategist
Friday, April 20, 2012: Issue #1756

If Argentina is willing to nationalize its leading oil company, YPF, which company (or companies) is next?

Ever wonder what happens when greed meets stupidity in the stock market? For a profound example, take a look at the recent free fall in Argentina’s largest oil and gas company, YPF (NYSE: YPF).

The country’s President Cristina Kirchner recently took a watershed step in expanding the state’s grip on the economy, saying she will send a bill to Congress to nationalize the firm.

Predictably, shares of YPF – and other Argentine stocks – gapped down on the news.

Kirchner declared that this historic move must be made because the petroleum industry is of “national public interest.” Of course, what industry isn’t? Banking? Telecommunications? Manufacturing? Agriculture?

Kirchner insists that YPF’s low production is forcing the country to spend heavily on imported energy at a time when it is experiencing a scarcity of dollars due to capital flight. And why is Argentina hemorrhaging capital? Because of boneheaded moves like this one.

YPF’s majority shareholder, Spanish energy group Repsol, is not taking this theft lying down. The Madrid government has threatened swift retaliation. And Spain’s Prime Minister Mariano Rajoy stated the obvious when he said the Spanish company’s controlling stake in YPF – which Repsol was planning to sell to China’s Sinopec – was being expropriated “without any justification.”

Given that most successful developing nations are privatizing industries rather than nationalizing them – and given that investment capital always flows where it is treated best (and conversely flees those countries where it is treated badly) – why would Kirchner do this?

One answer is stupidity. The other is hubris.

There is absolutely no reason to think that a bunch of politicians and bureaucrats – or their appointees – could run YPF better than Repsol, one of the world’s leading energy groups. (Just as there is no reason to think the U.S. government can do a better job than private equity groups of backing speculative solar companies like Solyndra.)

And if Argentina is willing to nationalize its leading oil company, which company (or companies) is next? Here’s a potential hit list, 17 Argentine companies that trade on the NYSE or Nasdaq. If you’re holding any of them, sell them immediately.

The tragic part of this power grab – which has undeniable populist appeal in some quarters – is that it will only undermine investor confidence and do lasting damage to the Argentine currency, the Argentine economy and, ultimately, middle-class Argentinians.

This move is not just greedy. It’s profoundly dim. But then, Ronald Reagan said it best:

“The best minds cannot be found in government. If they could, the private sector would hire them away.”

Good Investing,

Alexander Green

Is This Bull Market Over?
by Alexander Green, Investment U Chief Investment Strategist
Monday, April 16, 2012: Issue #1752

Lately the market has been wilting like last week’s roses, drooping in one session after another. Is the bull finally headed out to pasture?

The market had a strong first quarter this year. The S&P 500 rallied 12% on the heels of an 11% gain in the fourth quarter of 2010. In fact, it has more than doubled from its bottom on March 9, 2009.

But lately the market has been wilting like last week’s roses, drooping in one session after another. Is the bull finally headed out to pasture?

Don’t count on it. While no one can forecast the short-term zigs and zags in the market, there are three good reasons to believe there’s still life in this bull:

1. History shows that pullbacks don’t generally follow a strong first quarter. The S&P 500 has soared 10% or more in the first quarter eight times since 1945. According to Standard & Poor’s, the market rose three-quarters of the time in the following quarter. And the one other time the market rose 10% or more in both the fourth and first quarters, stocks gained 5% the next quarter.
2. First quarter profits are likely to be another record. Don’t forget that corporate profits have hit all-time records in each of the last eight quarters. And – while the reporting season is just getting under way – this time isn’t likely to be any different. Yes, the gains will be more modest this time thanks in part to higher oil prices and tougher year-ago comparisons, but we’ll almost certainly see more all-time record profits for the first quarter and a few big surprises could send stocks higher again.
3. Investors are still afraid. That’s actually a good thing. As John Templeton declared, “Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.” You talk to anyone lately who’s euphoric about the economy and the stock market? Me neither. And people aren’t investing their money that way, either. According to The Investment Company Institute, investors yanked $1.2 billion out of stock funds in February after taking out $423 million in January. History shows a near perfect correlation between equity fund redemptions and stock market performance. It’s when investors starting throwing cash at the market that you need to worry. And we’re a long way from that.

When you look at the fundamentals, it’s surprising just how negative the average investor is. After all, we’re enjoying low interest rates, low inflation, expanding markets overseas (especially in the developing world) and all-time record corporate profits.

What’s keeping most investors at bay, of course, is volatility. And not just lately. Investors have been clobbered by two massive bear markets in 12 years. The 2000 to 2003 bear market took stocks down 49%. It was the worst market since the Great Depression – until the 2007-2009 bear market showed up. That ripped 57% from the leading market index.

Last year, the S&P 500 fell 3% or more six times, and on one gut-wrenching day in August, 6.7%. That made microscopic money market yields look attractive.

Of course, volatility is the price of admission in the stock market. If equity accounts rose as smoothly as bank accounts, everyone would be fully invested. But they’re not. Not even close.

Paradoxically, that’s another reason stocks actually look pretty good here.

Good Investing,

Alexander Green

“People who live in a Golden Age usually go around complaining how yellow everything looks.” –Randall Jarrell

A few weeks ago at our 14th Annual Investment U Conference in San Diego, I discussed and recommended a number of investment opportunities in the U.S.

Afterwards, an attendee pulled me aside and privately declared that my optimistic outlook was not just wrong but naïve.

He then recited the litany of woes broadcast daily and recycled hourly by the national media: the weak economy, high unemployment, rising energy prices, the continuing housing slump, troubles in the Eurozone, tensions in the Middle East, political gridlock in Washington, the growing national deficit and so on.

(By the time he was done, I could have sworn he said the sun was too bright and the birds were singing too loud.)

“You really need to look at The Big Picture,” he said. Indeed, let’s do that…

We all know the recent downturn was severe and the recovery has been long and slow. But the United States still has the most dynamic economy in the developed world. The best research centers, universities and companies are here. Our country still attracts more immigrants and investment capital than any other. And the industries of the future, from biotechnology to nanotechnology, are centered here.

Many people are still hurting. Yet, despite the gloomy headlines, the majority of us have it pretty darn good.

Consider that in the first half of the twentieth century, most people earned a subsistence living through long hours of backbreaking work on farms or in factories. In 1850, the average workweek was 64 hours. In 1900, it was 53. Today it is 42 hours. On the whole, Americans work less, have more purchasing power, enjoy goods and services in almost unlimited supply, and have much more leisure.

Formal discrimination against women and minorities has ended. There is mass home ownership, with central heat and air-conditioning – and endless labor saving devices: stoves, ovens, refrigerators, dishwashers, microwaves and computers. Senior citizens are cared for financially and medically, ending the fear of impoverished old age.

Quality healthcare was almost non-existent 85 years ago. In 1927, President Calvin Coolidge’s sixteen-year-old son Calvin Jr. developed a blister playing tennis without socks at the White House. It became infected. Five days later, he died. Before the advent of antibiotics, tragedies like these were routine.

Advances in medicine and technology have eliminated most of history’s plagues, including polio, smallpox, measles and rickets. There has been a stunning reduction in infectious diseases. Heart disease and stroke incidence are in decline. A new study from the Centers for Disease Control reports that overall rates of new cancer diagnosis have dropped steadily since the mid-1990s.

We complain about the rising cost of healthcare. But that’s only because we routinely live long enough to depend on it. The average American lifespan has almost doubled over the past century.

We take a lot for granted today. Light is a good example. To get an hour of artificial light from a sesame-oil lamp in Babylon in 1750 B.C. would have cost you more than fifty hours of work. The same amount of illumination from a tallow candle in the 1800s required six hours’ labor. Fifteen minutes of work was the trade off for an hour from a kerosene lamp in the 1880s. Yet for an hour of electric light today, the average American labors half a second.

Or take transportation. For millions of years, we only got somewhere by putting one foot in front of the other. Six thousand years ago, we domesticated the horse. In the 1800s, going from New York to Chicago on a stagecoach took two weeks’ time and a month’s wages. Today you can fly to virtually any major city in the world in under 24 hours and – even with oil near recent highs – for less than a thousand dollars.

And speaking of oil… How many reports have you heard about gas surging to more than $4 a gallon recently? Contrast that with how little you’ve probably heard about the price of natural gas. Four years ago, it was $13. Today it sells for $2. The average American who heats with natural gas saved about $1,000 last year.

Or take computing. In 1987, a megabyte of memory cost $5,000. The Mac II sitting on my desk – with one megabyte of memory and a running speed of 16 megahertz (which Apple described as “blindingly fast”) – cost $5,500. Today an exponentially smaller, faster and better machine costs less than a tenth as much. As for memory, you can buy a terabyte drive today for less than 60 bucks.

Scientists say human beings evolved to have a heightened sense of fear and suspicion. (Those who lived on the plains of Africa without this quality didn’t leave many descendants.) Yet by seizing on the negatives, we often miss the good things happening around us.

In their new book Abundance, technology gurus Peter Diamandis and Steven Kotler offer an alternative view:

“What does the world really look like? Turns out it’s not the nightmare most suspect. Violence is at an all-time low, personal freedom at a historic high. During the past century child mortality decreased by 90% while the average human life span increased by 100%. Food is cheaper and more plentiful than ever (groceries cost 13 times less today than in 1870). Poverty has declined more in the past 50 years than the previous 500. In fact, adjusted for inflation, incomes have tripled in the past 50 years. Even Americans living under the poverty line today have access to a telephone, toilet, television, running water, air-conditioning, and a car. Go back 150 years and the richest robber barons could have never dreamed of such wealth.

“Nor are these changes restricted to the developed world. In Africa today a Masai warrior on a cellphone has better mobile communications than the President of the United States did 25 years ago; if he’s on a smartphone with Google, he has access to more information than the President did just 15 years ago, with a feast of standard features: watch, stereo, camera, video camera, voice recorder, GPS tracker, video teleconferencing equipment, a vast library of books, films, games, music. Just 20 years ago these same goods and services would have cost over $1 million…

“Right now all information-based technologies are on exponential growth curves: They’re doubling in power for the same price every 12 to 24 months. This is why an $8 million supercomputer from two decades ago now sits in your pocket and costs less than $200. This same rate of change is also showing up in networks, sensors, cloud computing, 3-D printing, genetics, artificial intelligence, robotics and dozens more industries.”

Despite relentless media negativity – designed to attract viewers and thus advertisers – most of society’s trend lines are overwhelmingly positive.

We enjoy economic, political and religious freedoms denied to billions throughout history. All forms of pollution – with the exception of greenhouse gases – are in decline. Our culture gives us an unprecedented ability to store, exchange and improve ideas. And we benefit enormously from the ultimate renewable resource: human imagination and creativity.

Free markets deliver an enormous bounty based on specialization and exchange. Just a small example: Our forebears couldn’t conceive our typical salad bar today because they couldn’t imagine a global transportation network capable of providing green beans from Mexico, apples from Poland and cashews from Vietnam together in the same meal.

Even the world’s poorest are being pulled upward. According to the World Bank, the number of people living on less than $1 a day has more than halved since the 1950s. That still leaves billions in destitution, but according to scientist Matt Ridley, author of The Rational Optimist, at the current rate of decline the number of people in the world living in “absolute poverty” will be statistically insignificant by 2035. The spread of microfinance and cellphone technology in many developing countries, for example, are creating countless opportunities and greater prosperity.

To know how much better off you are than your distant ancestors, you have to recognize how they lived. In his essay A History of Violence, Harvard psychologist Steven Pinker writes:

“Cruelty as entertainment, human sacrifice to indulge superstition, slavery as a labor-saving device, conquest as the mission statement of government, genocide as a means of acquiring real estate, torture and mutilation as routine punishment, the death penalty for misdemeanors and differences of opinion, assassination as the mechanism of political succession, rape as the spoils of war, pogroms as outlets for frustration, homicide as the major form of conflict resolution – all were unexceptionable features of life for most of human history. But, today, they are rare to nonexistent in the West, far less common elsewhere than they used to be, and widely condemned when they are brought to light.”

Thank your lucky stars that you won the lottery simply by being born in the modern era. This is not to downplay our current challenges, including the most predictable crisis in the nation’s history: huge and growing state and federal deficits.

Yet you’ll notice that the extreme forecasts always begin with the words, “If nothing is done…”

Something will be done. Only the most hardened cynics believe that politics will ultimately trump the national interest. The solutions are not politically easy, but they exist. Simpson-Bowles and other bi-partisan commissions have already set the stage for fiscal sanity. State governors like Chris Christie and Andrew Cuomo are now tackling deeply entrenched problems, such as pension shortfalls, that threaten to destroy state budgets. It won’t happen in this election year of political polarization and heated rhetoric, but reform at the national level is coming.

I know some, like the gentlemen in San Diego, will disagree. And it’s true that we all have gaps in our knowledge, biases and blind spots. However, it would be nice if the prophets of doom conceded that as well.

The truth is most of us have it better than we could have imagined a few decades ago. Most of us live long lives, in good health and in comfortable circumstances. By almost any measure, we are living better than 99.9% of those who came before us. Yet we routinely tell pollsters that life is hard and things are getting steadily worse.

As the essayist Randall Jarrell observed:

“People who live in a Golden Age usually go around complaining how yellow everything looks.”

Carpe Diem,

Alexander Green

Bond Funds: The Worst Investment You Can Possibly Make
by Alexander Green, Investment U Chief Investment Strategist
Friday, March 30, 2012: Issue #1741

Avoid bond funds in 2012. These investors are about to get slaughtered.

At our 14th Annual Investment U Conference at the beautiful Grand Del Mar in San Diego last week, I discussed a number of attractive investment opportunities available right now.

But I also warned them about one of the worst investments you can make. Take a minute now to make sure you don’t have it in your portfolio right now.

As I mentioned in a recent Investment U column, we’re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Three decades ago, Fed Chairman Paul Volcker pushed the prime rate up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. From that pinnacle, long-term yields have plummeted to 3.1% today. Bond prices have soared accordingly.

But the financial crisis is over and the economy is beginning to show a pulse. Higher inflation may be just around the curve. And as yields move up, bond prices move down. And perhaps way down.

Just about the worst thing you can own when interest rates are moving up is a leveraged bond fund. When a fund manager borrows short term at low rates in order to buy additional long-term fixed-income investments for his fund, it’s the equivalent of buying stocks on margin. It works fine while bond prices are flat or rising. But when bond prices fall – as they will when interest rates rise – these shareholders take a shellacking. If you’re not sure whether the bond funds you own are leveraged, don’t guess. Call the funds and ask.

And if you owned a leveraged closed-end fund, don’t even call. Just get out, especially if the fund is trading at a premium to its net asset value (NAV).

Recall that closed-end funds are not like Fidelity or Vanguard mutual funds. Like ETFs, they trade on an exchange and can be bought and sold throughout the day (not simply redeemed at the closing price like open-end mutual funds).

However, closed-end funds can see their prices fluctuate well above or below their net asset values (NAV). When a fund trades above its NAV, it is said to be trading at a premium. And when it trades below the NAV, it is trading at a discount.

There is no easier (or more obvious) buy or sell signal than to buy these funds when they trade at big discounts and sell them when they go to a premium.

If those premiums are huge – as many are in the fixed-income sector right now – they are ticking time bombs that you definitely don’t want in your portfolio. Here are just a few that are particularly dangerous right now:

And then there is the biggest stink bomb of them all: PIMCO High Income Fund (NYSE: PHK), currently trading at a 60.4% premium to its net asset value. Over 60%! That is completely nuts. These shareholders are clearly asleep – and overdue for a rude awakening.

Even if your closed-end funds aren’t on this list, don’t be complacent. Call your mutual fund and ask if the manager is using leverage. Or visit a free website like www.cefconnect.com and check out the relationship of your closed-end funds to their net asset values.

It may well be the most important three minutes you spend on your portfolio this year.

Good Investing,

Alexander Green

Share Buybacks: A Buy Signal You Can’t Ignore
by Alexander Green, Investment U Chief Investment Strategist
Monday, March 12, 2012: Issue #1727

Share buybacks increased by 46% in 2011. Has there ever been a more bullish indicator?

There are a number of signals that bode well for price appreciation with individual stocks: growing market share, rising sales, strong earnings growth and improving margins…

But you shouldn’t overlook another excellent indicator: share buybacks.

According to Standard & Poor’s, U.S. public companies spent at least $437 billion last year buying their own shares back. That was 46% more than in 2010.

Is this a good thing? Absolutely…

Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days with the average money market fund paying five one-hundredths of 1%. And if the outlook is uncertain, a business owner doesn’t want to commit to building new facilities or taking on employees that aren’t needed. Nor is it necessarily in the best interest of shareholders to distribute this cash in the form of taxable dividends.

So buying back shares often makes good sense. Why? Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And, ultimately, that’s what drives share prices higher.

Of course, stock buybacks boost earnings per share only if they’re larger than stock issuance. Historically, that hasn’t always been the case. (Much executive compensation today comes in the form of stock options that have a dilutive effect on existing shareholders.)

But in recent quarters, the supply of shares outstanding has been shrinking. And, according to analyst Howard Silverblatt at Standard & Poor’s, during the current earnings season, 97 of the S&P 500 enjoyed a boost to earnings per share of at least 4% from repurchases alone.

More Buybacks Ahead

Expect to see more of these buyback announcements in the weeks ahead. Why? Because U.S. corporations are sitting on more than $2 trillion in cash. That’s enough to buy all of ExxonMobil (NYSE: XOM), Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM).

There are some caveats, however. Some companies announce their intention to buy back shares and then don’t follow through. If business conditions change, interest rates rise, or cash flow decreases, a repurchase program may never get completed.

The other thing to watch is the exercise of stock options, as mentioned above. If a company is only buying back enough shares to offset the dilution that occurs when executives exercise stock options, you won’t see the buyback boost earnings per share.

But, generally speaking, share repurchase programs are a decided positive. And right now, with money cheap and corporate earnings strong, buybacks are occurring at record levels. Attractive companies in the midst of major share buybacks right now include L-3 Communications (NYSE: LLL) and ConocoPhillips (NYSE: COP).

Having Your Cake and Eating it, Too…

Of course, some analysts would rather see corporate executives buying shares with their own money rather than the company’s money. And I don’t disagree…

But sometimes you can have your cake and eat it too. In a recent study, stocks that were subject to repurchases but not insider buying beat other stocks by nearly nine percentage points over four years. But stocks that were the subject of both repurchases and insider buying beat others by a whopping 29 points over four years.

Which companies have enjoyed share buybacks and insider buying recently? Two of them are Boston Scientific (NYSE: BSX) and Bank of New York Mellon (NYSE: BK).

These are the kind of companies that should handily outperform the market in the months ahead.

Good Investing,

Alexander Green

Robert Arnott claims that the U.S. aging crisis is a threat to future stock market prices. But do the numbers add up?

There’s a new scaremonger in town. And his name is Robert D. Arnott, a portfolio manager, asset-manager executive and Chairman of Research Affiliates in Newport Beach, California.

Mr. Arnott has a simple thesis. Over the next 10 years, the ratio of retirees to active workers will balloon. Retirees, of course, must eventually sell their stocks to support themselves. But there will be fewer young investors around to buy them. Ergo, returns on stocks over the next 10 to 20 years will be anemic.

If this sounds simplistic, congratulations. You probably have a brain and at least a modicum of common sense. This type of “stock market analysis” is really no analysis at all. More to the point, it doesn’t work. Just ask failed economic futurist Harry Dent, whom I’ve written about before.

While it’s inevitable that there will be 10 new senior citizens for each new working-age citizen over the next decade, that in itself doesn’t portend paltry equity returns.

For starters, let’s look at what’s happening to the world population as a whole. There are currently seven billion human beings living on the planet. At the current growth rate, that total is likely to hit eight billion within a decade.

Now, if you believe that investors in China, India, Brazil and other countries will have no interest in buying companies like Procter & Gamble (NYSE: PG), ExxonMobil (NYSE: XOM), or Coca-Cola (NYSE: KO) in the future, no matter how inexpensively they’re priced, I guess you might put some credence in Mr. Arnott’s thesis.

But that’s highly unlikely. Citizens of capitalist countries are getting wealthier and better educated all the time. And the world is becoming more integrated. Would you really have a problem buying shares of Toyota (NYSE: TM), British Petroleum (NYSE: BP) or Nestle (OTC: NSRGY.PK) if they were bargains?

Of course not, regardless of the demographic trends in Japan, Britain, or Switzerland.

Mr. Arnott doesn’t just miss the big picture about the future, however. He also misinterprets the past. In a recent Wall Street Journal interview, for example, he talks about the collapse of Japan’s stock market over the last 23 years and blames it on the country’s aging population.

I have a better explanation. When the Nikkei 225, Japan’s leading stock market benchmark, climbed to nearly 40,000 in 1989, it was a bubble of epic proportions. Many stocks traded at more than 100 times earnings. And real estate was even more absurd. Just the 1.32 square miles that encompassed the Imperial Palace in Tokyo were valued at more than all the real estate in California combined.

Now that’s nuts. Crazier still were the Japanese banks that loaned money against these wildly inflated property values. This led to a protracted banking crisis that Japan’s political class refused to clean up.

To imagine that the two deflationary decades that followed this mania were the result of an aging population is like blaming this year’s warm winter on your aching big toe. Yet Arnott insists we should hunker down since “[Japan’s] demography is 10 years ahead of ours.”

Want to know what will really determine stock prices in the future? Earnings. I challenge you to look back through history and find even one publicly traded company that increased its profits quarter after quarter, year after year, and the stock didn’t tag along.

Perhaps our aging retirees will buy less in the future and contribute less to U.S. corporate profits. But there are billions of consumers around the world hungering for homes, computers, cars, phones, health insurance, credit cards, pharmaceuticals and golf clubs. They’re likely to be an engine of world economic growth – and rising U.S. corporate profits – for decades to come.

Don’t let anyone scare you otherwise.

Good Investing,

Alexander Green

At our Oxford Club Chairman’s Circle conference at The Ritz-Carlton in Naples last week, I noted a decided optimism about the outlook for the bond market. This enthusiasm is almost certainly misplaced.

We’re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Recall that three decades ago, Fed Chairman Paul Volcker pushed the prime rate all the way up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. But from that pinnacle, long-term yields have plummeted to around 3% today. Bond prices have soared accordingly.

It isn’t just unlikely that today’s bond buyers will see annual double-digit returns going forward, it’s mathematically impossible. And yet I sense that many fixed-income investors don’t understand this.

It’s not unusual to meet an investor who has plunked money in a bond fund because “its long-term track record is excellent.” They don’t seem to realize that it’s also irrelevant. Never has the old saw, “Past returns are no guarantee of future results,” been more apropos.

This doesn’t mean you should avoid bonds altogether, of course. But if you’re going to buy bonds, now more than ever you need to be smart about it. Here’s what you should do:

1. Ladder your maturities. You should buy two-year, five-year and 10-year bonds. If rates go up – as they will eventually – your bond prices will fall, temporarily. But you will get your principal back at maturity and be able to reinvest your principal at higher rates. And paltry as bond yields are today, they still beat the heck out of the 0.05% that the average money market fund is paying.
2. Keep a close eye on expenses. In the world of fixed-income investing, keeping a Scrooge-like eye on expenses is essential. Why? Because it’s difficult to work magic in the button-down world of fixed-income investing. Managers rarely earn their fees. And 12b-1 fees can eat away at your returns like termites in an antebellum house. My advice is to stick with individual bonds, Vanguard funds (whose expenses are one-sixth of the industry average) and low-cost ETFs.
3. Avoid leveraged bond funds. Ever wonder how bond yields can be so low and yet the yield on your closed- or open-end bond fund is higher, even after expenses? Open your eyes. Unless you’re holding junk bonds, your fund manager is using leverage, the fixed-income equivalent of buying stocks on margin. By borrowing cheap, he or she is leveraging the portfolio to add yield. This works just fine while bond prices are flat or rising. But when bond prices fall – as they will when interest rates rise – these shareholders will take a shellacking. Consider yourself forewarned.

Some fixed-income investors tell me they feel safe for now since Bernanke has pledged to keep interest rates low through 2014. Think again. The Fed has only announced its intention to keep rates low. (Future economic conditions could quickly change that.) The Fed is also keeping long-term bond yields artificially low by buying these instruments to goose the economy.

Inflation could tick up. The Fed could raise rates and/or quit buying long-term Treasuries. In the end, the Federal Reserve sets short-term interest rates, but not bond yields and prices.

Know this. Understand it. And act accordingly. Bond investors today should be in a defensive posture, capturing higher yields than what’s available in cash instruments, but prepared for that point in the future when bond yields will rise and prices will fall.

Good Investing,

Alexander Green

At a conference here at The Ritz-Carlton in Naples, Florida, I heard an increasingly common question. An attendee asked me how anyone could feel good about investing in stocks with economic and political prospects so bleak.

I reminded him that men and women have been saying that the world is going to hell in a hand basket for, oh, the last 5,000 years or so. (As the old proverb says, the dogs bark but the caravan moves on.) It’s important to remember that so much pessimism exists today because the national media delivers a terribly skewed view of the world we live in.

As I have written in this column before, there are plenty of reasons to be bullish on equities, including low inflation, zero interest rates, rapidly developing overseas markets, cheap valuations and all-time record corporate profits.

But that’s just in the short term. There are even better reasons to be bullish longer term. Understanding this will make you a better investor.

Consider, for example, Matt Ridley’s book The Rational Optimist. Ridley, a scientist, journalist and professor at Cold Spring Harbor Laboratory in New York, points out that the world is actually improving dramatically and the pace is quickening, thanks to rising personal and economic freedom and evolving technologies, medicine and trade practices. Yes, the world is far from perfect, but it is getting better.

Peter Diamandis and Steven Kotler strike a similar note in their new book Abundance: Why the Future Will Be Much Better Than You Think. In an adaptation published in the February 13 issue of Forbes, they point out that the trend isn’t nearly as dire as many seem to believe. Quite the opposite, in fact:

“During the past century child mortality decreased by 90% while the average human life span increased by 100%. Food is cheaper and more plentiful than ever (groceries cost 13 times less today than in 1870). Poverty has declined more in the past 50 years than the previous 500. In fact, adjusted for inflation, incomes have tripled in the past 50 years. Even Americans living under the poverty line today have access to a telephone, toilet, television, running water, air-conditioning, and a car. Go back 150 years and the richest robber barons could have never dreamed of such wealth.

“Nor are these changes restricted to the developed world. In Africa today a Masai warrior on a cellphone has better mobile communications than the President of the United States did 25 years ago; if he’s on a smart phone with Google, he has access to more information than the President did just 15 years ago, with a feast of standard features: watch, stereo, camera, video camera, voice recorder, GPS tracker, video teleconferencing equipment, a vast library of books, films, games, music. Just 20 years ago these same goods and services would have cost over $1 million …

“Right now all information-based technologies are on exponential growth curves: They’re doubling in power for the same price every 12 to 24 months. This is why an $8 million supercomputer from two decades ago now sits in your pocket and costs less than $200. This same rate of change is also showing up in networks, sensors, cloud computing, 3-D printing, genetics, artificial intelligence, robotics and dozens more industries.”

Investors everywhere should familiarize themselves with these points of view. After all, you’ve heard the doomsayers (again and again). You owe it to yourself to hear the other side of the story.

Looking at broad trends and exciting new developments provides a powerful antidote to the fear generated by relentless media negativity. Plus, it gives you the knowledge and confidence necessary to capitalize on the hundreds of great investment opportunities that exist in today’s fast-moving financial markets.

The world truly is your oyster … but only if you have the optimism to see it that way.

Good Investing,

Alexander Green