Gary Gordon Blog
Who’s the Better Economic Forecaster – Me Or the Yield Curve?
I’ve been arguing that investors should overweight stocks over bonds, in large part because I don’t forecast a near-term recession. To say the least, things have not exactly played out like I expected over the past two months. Recession talk is all the rage, and of course the stock market has sucked. Time to revisit the analysis. Could I be wrong? I know that sounds crazy, but the possibility must be considered. I’ll review my recession forecasting tool and compare it to the shape of the yield curve, another popular forecasting tool.
The bubble is dead. Long live the next bubble.
Swatting at the Recession Story Flies. Now It’s (Pun Alert) Buzziness Debt.
Sticking with My Stock Overweight, But Recognizing the China Risk.
The Sad Story of My Own Investor PTSD – The Wayfair Saga. But I’m Sticking With My Housing Stocks.
Avoiding investor PTSD is hard to do. I failed miserably with Wayfair, as this post explains. But I’m hanging in there for the long-run with housing stocks.
Earnings are the “catalyst” for my beloved mortgage insurance stocks. And Radian delivers.
“Yes, the stock seems cheap, Gordon. But what’s the catalyst?” My best guess is that a relentless stream of earnings that over time will convince more and more investors that the housing market is far healthier than they fear and the mortgage insurers, rather than in imminent danger of earnings hits, will grow their earnings consistently over the next five years. In my last blog post I noted MGIC’s strong Q3 earnings, and said that Radian and National Mortgage Insurance’s earnings this week would do the same.
I was right. This morning, Radian reported operating earnings per share of $2.68 annualized, compared to a Wall Street forecast of $2.52. And last night, National Mortgage delivered $1.84 annualized versus a $1.64 forecast. MGIC should reasonably trade at $20 a share, up 60% from its current price. And Radian should be at $32, or up 70%.
MGIC and Radian – the reward/risk tradeoff doesn’t get much better. Thanks, nervous investors.
Since October 17, when MGIC, one of my favorite housing-related stocks, reported strong earnings, its stock price fell by 10%. So did its peer Radian. This puts MGIC’s earnings yield (2018 expected earnings per share divided by stock price) at 13%, and Radian’s at 14%. Could MGIC’s stock really be lower in two years than its current $11.65 price? $20 a lot more realistic by then. Little chance of a decline (the risk) and a reasonable chance of up 70% (the reward). For Radian, I believe the upside is more like 100%.
Introducing the Skinny Tail Mini Investment Fund. My Investor PTSD idea turns out to be a real thing.
Don’t Buy Bonds Yet. Stick With Stocks. The Chart That Shows the Next Recession Is a While Away.
Last week the 10-year Treasury bond yield hit 3.2%, its highest yield since 2011. And last week the stock market got beat up pretty good. So is it time to shift some investment assets from stocks to bonds? I believe the answer is “No”, for two reasons. First, bond yields still stink relative to inflation. Second, I expect the US economic expansion to continue for the foreseeable future. If so, stocks are highly likely to outperform bonds.
Homebuilding – This Time Really Is Different. (Yes, I’ve Gone There.) Buy Pulte Homes (PHM)
Pulte Homes’ stock closed last night at $23.86. Stock analysts polled by Yahoo Finance expect Pulte to earn $3.84 a share next year, so the stock is selling at a 16% earnings yield. That huge yield clearly indicates that investors expect home construction to fall off the cliff in the not-too-distant future. That is an understandable view considering that the US is in its 10th year of an economic expansion, and new home sales in its 8th year. But I argue here that this housing cycle is quite different, and both the economy and homebuilding in particular have at least several good years ahead that will make it worth buying Pulte at its current price.
The Stock Buyback Libel. The Buyback King That Beat Amazon. And a Buyback Stock Call – Pulte Homes.
Stock buybacks can add significant value to investors if done consistently and at the right prices. I show the remarkable buyback success story of a mystery company, one that outperformed Amazon over the past 18 years. Today, Pulte Homes (stock symbol PHM) seems like an excellent way to play this theme.
Good News! The Fed’s Debt Update Says to Stick With Stocks.
I show in my book Debt Cycle Investing that debt growth has a lot to do with economic cycles, and therefore with business profit cycles, and therefore with investment cycles. Boiling it down, when debt growth is likely to accelerate, it is best to allocate more of your investment assets into stocks and less into bonds, and of course vice versa. The enterprising investor therefore should constantly assess the odds that the trajectory of debt growth changes up or down.
The primary source of debt data is the Federal Reserve in its quarterly Flow of Funds report. In my opinion, the latest update on September 20 provided comforting news for stock investors.
The New York Times Doesn’t Include All the News That’s Fit to Print! My News!
On Saturday, August 25, 2018, a day that will live in infamy (OK, maybe not), The New York Times published an editorial entitled “Inviting the Next Financial Crisis”. I disagreed with a core argument in the editorial, so I wrote a concise, and dare I say brilliant, letter to the editor explaining my position. I never heard back. I guess it's not too surprising, since I pushed back on a defense of debt-driven economic growth. That is something both political parties agree on, because the average citizen does. Read about my argument and what it means for investors.
Does the inverting yield curve signal the next recession and stock downturn? Nope. Keep overweighting stocks.
At Last. My Recommended Investment Asset Allocation.
My last post introduced you to my idea that debt growth is very important in determining how to best allocate your investment assets between stocks, bonds and cash. Based on my outlook for debt growth – and a few other variables – my current recommended asset allocation for the average investor are:
- Stocks – 70%
- Bonds – 5%
- Cash – 25%
How do I get there? I summarize my mechanics here, which are detailed in my book Debt Cycle Investing.
Debt Cycle Investing – My Asset Allocation Idea. And My Book Title.
This blog is designed as an extension of a book I just published called “Debt Cycle Investing”. The purpose of the book is to give you a profitable new twist on the allocation of your financial assets – stocks, bonds and cash.
I have no argument with traditional asset allocation rules of thumb. The standard rule of thumb for the average investor is 60% of assets in stocks and 40% in bonds. I adjust it to 55%/35%/10% to make room for 10% in cash. This rule is then quite logically adjusted for age by using the “rule of 100”, which suggests that your stock allocation should be 100 less your age.
But wouldn’t it have been awesome to have over-weighted bonds and under-weighted stocks prior to the two serious stock market swoons 2000 and 2006? “Sure it would have”, you should be saying, “but are there reliable signals to have helped me make those calls?”
Yes, I have identified some. Read on.
Two Stories for the Price of One. MGIC/Wayfair Update, and Trump’s Federal Reserve Problem.
The stock calls. This past May 23 I recommended that you buy MGIC (symbol MTG) and sell short Wayfair (symbol W). I don’t just recommend and run, like some people I know. I follow up in this blog. MGIC recently rallied on its strong second quarter earnings, particularly its excellent and improving credit quality and solid business growth. The recent price rise means that MGIC’s stock is not super cheap, just very cheap.
Wayfair’s stock price is up an astounding 44% since my sell call. Yikes! I’m not sure a single traded stock did that well over that period. Give me credit for not just being dumb, or even dumber, but the dumbest. What did Wayfair announce to generate this huge run? Not a gosh darn thing. Wayfair is still expected to lose – yes, you read that right, lose - $0.73 a share for its Q2. In fact, a Morgan Stanley report on Wayfair expects them to lose money until 2025. Investors are betting that beyond 2025 the company will have a glorious future.
Profit Story Part 3 – The Amazon Syndrome Threatens US Business Profit Margins
My last two posts discussed two drivers of the improved profit margins over the past few decades. Growing trade helps US businesses gain the upper hand over US labor. And growing oligopolies reduce competition and help businesses gain power versus their customers as well as those employees again.
This post delves into a counter-trend for profit margins, namely what I call the “Amazon Syndrome”. Amazon is obviously a remarkable company in several ways. One remarkable feature of Amazon has been its patience in delaying earnings in order to invest in logistics and the Cloud, and to build market share by underpricing competitors.This hugely delayed gratification of investors’ love of profits really is pretty unique in American business history. We investors like our profits, and we like them now. But Amazon held off for two decades. Its turns out investors fell in love with Amazon’s approach, which has spawned countless imitators. Has this changed US business practices enough to weaken overall US business profits?
The Profit Story Part 2: Oligopolies On the March.
In my last post I noted that over the past three decades business earnings materially benefited from increased trade, which weakened labor’s power. As a result, business profit margins over the last decade reached levels last seen during the golden ’50-60s era. I also mentioned that three other factors have been important to profit margins in recent years – (1) consolidation, (2) the “Amazon Syndrome”, and (3) government policy. In this post I’m drilling down into the consolidation story, which I hereby rename “The Oligopoly Story”. I conclude that oligopolies have been growing, although that trend may be in the process of reversing.
The profit story part 1. Will labor costs challenge profit growth?
This blog is all about helping you best manage your investment asset allocation between stocks, bonds and cash. Stocks are the major asset, and the biggest creator of value over the long run, so your stock weighting is therefore your most important decision. Let's start with the fundamentals, which for stocks is: What drives changes in their values? Primarily changes in business operating earnings per share (EPS). While GDP growth is the main driver of EPS growth, others are important, like labor costs, industry concentration, the "Amazon Syndrome" and government tax and regulatory policy. I'm reviewing them over the next few weeks. I begin with labor costs.