Gary Gordon Blog
 

The bubble is dead. Long live the next bubble.

The bubble is dead.  Long live the next bubble.
Dec 05, 2018 by Gary Gordon
I have to add a corollary to my “investor PTSD” theory.  Yes, a financial disaster creates in investors an irrational fear of revisiting the scene of that disaster.  But I now add the corollary that investors quickly dust themselves off and confidently hop on to the next bubble.  Up next is the government debt bubble. 

Swatting at the Recession Story Flies. Now It’s (Pun Alert) Buzziness Debt.

Swatting at the Recession Story Flies.  Now It’s (Pun Alert) Buzziness Debt.
Nov 27, 2018 by Gary Gordon
I, Mr. Buzzkill, find myself in the unusual position of being in an optimist amidst an increasingly pessimistic view of the economy.  Looks like I'll be dedicating a lot of posts in the coming months to defending my optimistic outlook.  A recent article from CNBC warned of a looming corporate "debt bomb".  This post pressents facts that contradict that view.  I continue to suggest overweighting stocks, particularly as more of them hit attractive valuations.

Sticking with My Stock Overweight, But Recognizing the China Risk.

Sticking with My Stock Overweight, But Recognizing the China Risk.
Nov 20, 2018 by Gary Gordon
I continue to recommend overweighting stocks over bonds because the US banking system remains relatively conservative.  Recession therefore seems quite unlikely for the foreseeable future.  But China is in a debt bubble.  This article provides evidence, and addresses the consequences.

The Sad Story of My Own Investor PTSD – The Wayfair Saga. But I’m Sticking With My Housing Stocks.

The Sad Story of My Own Investor PTSD – The Wayfair Saga.  But I’m Sticking With My Housing Stocks.
Nov 05, 2018 by Gary Gordon

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.

Earnings are the “catalyst” for my beloved mortgage insurance stocks.  And Radian delivers.
Oct 31, 2018 by Gary Gordon

“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.

MGIC and Radian – the reward/risk tradeoff doesn’t get much better.  Thanks, nervous investors.
Oct 29, 2018 by Gary Gordon

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.

Introducing the Skinny Tail Mini Investment Fund.  My Investor PTSD idea turns out to be a real thing.
Oct 23, 2018 by Gary Gordon
Investors remain afraid that home sales, mortgage credit and airline excess capacity will return to crisis conditions.  Reality is quite different, as evidenced by solid earnings reports this month from homebuilders Lennar and Pulte, mortgage insurer MGIC and airlines United and Delta.  The difference between current investor emotion and reality should create a very large investment opportunity.  When will fat tail fears abate?  Who knows.  The inflation story says it takes a long time.  But I for one expect the wait to be worth it.  To keep it simple, my Skinny Tail Mini Investment Fund consists of Pulte Homes, MGIC and American Airlines.

Don’t Buy Bonds Yet. Stick With Stocks. The Chart That Shows the Next Recession Is a While Away.

Oct 16, 2018 by Gary Gordon

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)

Homebuilding – This Time Really Is Different.  (Yes, I’ve Gone There.)  Buy Pulte Homes (PHM)
Oct 10, 2018 by Gary Gordon

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.

The Stock Buyback Libel.  The Buyback King That Beat Amazon.  And a Buyback Stock Call – Pulte Homes.
Oct 03, 2018 by Gary Gordon

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.

Sep 26, 2018 by Gary Gordon

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!

The New York Times Doesn’t Include All the News That’s Fit to Print!  My News!
Sep 12, 2018 by Gary Gordon

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.

Does the inverting yield curve signal the next recession and stock downturn?  Nope.  Keep overweighting stocks.
Aug 22, 2018 by Gary Gordon
Yield curve inversions precede recessions.  Why?  The theory is that the Federal Reserve responds to a strong economy and rising inflation by raising its fed funds rate, which drives the short-term end of the yield curve.  The Fed’s idea is that pushing up interest rates will slow economic activity by reducing borrowing and spending.  In response, investors see the Federal Reserve’s behavior and buy bonds, betting that a recession is coming and that the Fed will eventually reverse its policy and drive interest rates lower down the road.  So higher short-term rates and lower long-term ones.  Does this theory hold water?  No, it does not.  The data tells a different story.

At Last. My Recommended Investment Asset Allocation.

At Last.  My Recommended Investment Asset Allocation.
Aug 07, 2018 by Gary Gordon

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.

Debt Cycle Investing – My Asset Allocation Idea.  And My Book Title.
Jul 31, 2018 by Gary Gordon

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.

Two Stories for the Price of One.  MGIC/Wayfair Update, and Trump’s Federal Reserve Problem.
Jul 25, 2018 by Gary Gordon

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 callYikes!  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. 

Trump’s Federal Reserve problem.  Why did President Trump go from hounding the Federal Reserve on the 2016 campaign trail for keeping interest rates too low to now scolding them for raising rates.  Four little letters explain the change of heart – D-E-B-T.  I explain.

Profit Story Part 3 – The Amazon Syndrome Threatens US Business Profit Margins

Profit Story Part 3 – The Amazon Syndrome Threatens US Business Profit Margins
Jul 18, 2018 by Gary Gordon

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.

The Profit Story Part 2: Oligopolies On the March.
Jul 02, 2018 by Gary Gordon

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?

The profit story part 1.  Will labor costs challenge profit growth?
Jun 20, 2018 by Gary Gordon

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.

Last week’s consumer news. What it means for your investment assets.

Last week’s consumer news.  What it means for your investment assets.
Jun 05, 2018 by Gary Gordon

What do you remember about last week’s news?  Certainly you remember Roseanne and Samantha. Possibly you recall the beginning of the NBA Finals.  Then there’s the economy nerds like me who hit the trifecta last week:

-        Wednesday May 30, the Q1 GDP report.

-        Thursday May 31, the April personal spending and income data.

-        Friday June 1, the May jobs report.

Yes, Roseanne and Samantha were a lot more entertaining, but the nerd trifecta was more important for your investment portfolio. 

In this post I use the trifecta data to get insights into two crucial investment return drivers – inflation and consumer spending.