Monday, November 26, 2012

Steve Cortes on the Investing Landscape and Strategies for Right Now

Fellow Chicagoan Steve Cortes, a market maven frequently seen on CNBC, has a valuable new book out on the current investment landscape and the investing strategies best suited to it.  His book is titled Against the Herd: 6 Contrarian Investment Strategies You Should Follow.  He supports each of his theses with a fair amount of facts, figures, and analysis.  The book is well-written and easy to follow, and I find his arguments well-presented.

Cortes thinks that China has peaked and is on the decline: an aging population, a consumer market that has crested, unsustainable fake, “crony” capitalism, and a profound lack of financial transparency in its business and economic data.  So avoid China and those whose fortunes depend on it such as Australia, a major supplier to China of basic resources, and US exporting firms such as Caterpillar, GM, UTX, and Union Pacific.  Japan is going nowhere but down, caught in population and sovereign-bond death spirals.  Cortes is anything but a gold bug; he feels if one believes in significant inflation soon to come one should buy the stock of big multi-national companies with most earnings outside the US (but not primarily China or Japan, or course).  However, Cortes believes that the US faces a more serious threat of deflation than of inflation, and he feels housing will not recover any time soon.   

Cortes makes a good argument, one to which I already subscribe, that most individual investors should avoid, or at least minimize, stocks.  I wish he could pound that into the heads of directors of most 401k plans, which offer for retirement investments mostly stock funds to the exclusion of much access to bonds, bank loans, preferreds, MLPs, and equity REITS.  Cortes says that “In the last 25 or so years, the cult of equities became an easy sell, because three massive macro forces merged into a powerful foundation for a secular rally....  The [current] macro investor, willing to ascertain trends for what they are, not what we might wish, will regretfully conclude that macro forces present in the equity boom that commenced in the 1980s are not only missing now but are very unlikely to reappear in the coming years.” 

Cortes is bullish on the USA and foresees a multi-year rally for the US dollar, catching global capital too exposed to emerging markets and not enough in the USA – “In a world awash with risk, beset by inflationary pressures, and far too pessimistic on America’s prospects, the US dollar represents a woefully under-owned and under-appreciated asset.  I see decades of dollar strength ahead as the emerging market dream becomes closer to a nightmare.” 

Cortes argues that “solid interest earnings represent the best long-term capital growth strategy – a mix of treasuries, corporate bonds, and some municipals makes sense for most investors....  Analysts who cite low annual returns for bonds compare apples to oranges in making analytical mistakes....  In a world of deleveraging and benign pricing, treasuries will shine.” 

Cortes thinks that “treasuries, with no risk, and corporate bonds, with acceptable risks, should make up nearly all the portfolio for nearly every investor.”  As evident from my previous posts, most of my allocation is to debt securities (although not treasuries given their low yield), particularly at this time via a leveraged closed-end fund vehicle.  “Regular” equities, essentially all via funds, make up less than 5% of my portfolio, but midstream energy-related firms, mostly MLPs (via CEFs) plus the Kinder entities KMR and KMI, make up almost 20%.    

I recommend Cortes’s new book – well-written, arguments well-supported, and thought-provoking.  It’s helped my thinking about investing for right now and, no doubt, for the years to come. 

Thursday, November 8, 2012

Microcosm of a Romney Loss – Obama Won In Republican Chicago-suburban DuPage County, & Abortion Looms Large

DuPage County sits west of Chicago’s Cook, and is historically Republican with mostly middle to upper middle class suburbs.  It is often the Illinois county with the highest Republican raw vote totals in the state.  And in November 2012 Obama won there in what should have been Romney territory.  Yes, Romney’s national vote was almost that of Obama’s, but his weakness in a typically Republican suburb of a large northern city serves as a microcosm of why he lost.

DuPage County voters historically have been fiscally conservative and socially liberal.  And, like the rest of America, has changing demographics – Democrat-voting emigrants from Chicago and Cook County are moving in,  attracted by the more successful Republican-run communities (yet after they arrive they continue to vote for the same Democrat party responsible for the mess from which they’ve fled (link) – go figure that one.

In Illinois in 2012, a weak, liberal Democrat incumbent governor was challenged by a fiscally conservative Republican, a state senator and an experienced campaigner with a warm persona.  He was, though, pro-life.  Then, as now, Illinois was a financial mess, and voters in DuPage County strongly backed the two Republican candidates running for the state financial control offices – controller and treasurer.  The Republican candidate for controller, Judy Barr Topinka, was a well-known politician strongly liberal on social issues.  She pulled the highest Republican vote total in DuPage County and won the state election.  But Republicans in DuPage County split their vote.  The pro-life Republican candidate for governor, Bill Brady, received about 25,000 votes less than Topinka in the county, but lost statewide by only about 19,000 votes (link).  Had Republican voters in DuPage County given Brady as much support as they gave Topinka, Brady would have been elected.  One big difference between Brady and Topinka – abortion, an issue neither would be able to significantly impact in the positions they were running for.

And there have been downstream results.  With control of both state legislative chambers and the governorship, Democrats redrew the state Congressional map to strongly favor their side.  Under the new map, four incumbent Illinois Republican Congressmen just lost (Biggert, Schilling, Dold, and Walsh).  

The national economy is a mess, and Romney ran almost entirely on that issue.  It wasn’t enough.  Obama countered with a scare campaign about abortion and birth control pills.  Enough people must still blame Bush for the economy and must fear Republicans on social issues – even in DuPage County.

For years Illinois Republicans have been ravaged by an internecine war over abortion and social issues.  Some Illinois Republicans have savaged moderately pro-choice Republican candidates, only to repeatedly hand victory to  Democrats who are radical on the issue.  Republican anti-abortion zealots have compromised their party’s electoral success, ceding political dominance in the state to the Illinois Democrat party which supports and protects late term abortions, partial birth abortions, and infanticide after live birth botched abortions (link).  Rigid anti-abortion Illinois social conservatives have fought fiscal conservatives over the morning-after pill and have gotten legal infanticide instead.  Time for them to wake up to reality of what they have sown, form a coalition with fiscal, non-social conservatives, and win some elections.    

John M Greco

Wednesday, November 7, 2012

The 2012 Elections = Thoughts on the Big Night for Obama & the Democrats, and the Implications for Republicans

This election should not have been close given the results after four years of Obama and the Democrats, but not only did Obama win reelection Democrats gained seats in the Senate.  The 2010 Republican resurgence did not last.  How could this happen?  

·         Changing demographics = The American electorate is very different than the one that elected Ronald Reagan and even George W. Bush – ever less religious, ever fewer whites, ever more Hispanics, ever more single women, ever more food stamp recipients, ever more who work for government.   

·         The successful 50-year Democrat Dependency Agenda strategy is working well – to relentlessly increase the percentage of voters who are supported by government, either via a government job or a welfare check.  Add to that the single adult women, who now (I hear) outnumber married women and who look to big government as a surrogate husband, and the Democrats have a growing and reliable voter base.   

·         Romney ran on primarily one issue – the economy.  Apparently, that wasn’t enough.  Romney avoided or went light on most of the Obama scandals, including Fast and Furious, Obamacare and particularly the HHS mandates on abortion and birth control pills, and, surprisingly, Benghazi.  Enough voters seem to still buy the line that the bad economy is primarily Bush’s fault.  Also, after the first debate, Romney seemed to coast on the economy issue and went easy on Obama on all the others.  

·         Obama’s campaign attacked and smeared Romney as a person (rich, out-of-touch white guy who doesn't care for ordinary Americans and probably is a felon who gives people cancer), while Romney attacked Obama’s record on the economy.  As much as I hate to admit it, the Obama smear campaign seemed to have some effect.  Republicans can’t completely play by gentlemanly rules while the Democrats are in the gutter making inroads with low information, easily pliable voters.  

·         The power of the media’s relentless liberal bias is hard to counter, but Romney surrendered and accepted the premise by agreeing to four liberal debate moderators.  Sure, he and Ryan did well enough, but how much better would the results have been with neutral moderators?  Republicans need to aggressively challenge the premise – consistently liberal debate moderators, election after election, are symbolic of Republican self-defeating passivity.  

·         On the whole, social issues hurt Republicans, particularly abortion.  Most voters seem to be pro-choice, at least in the first trimester and after rape and incest.  Romney avoided the issue but the Democrats tried hard to make it a big one, and were significantly aided by the idiotic comments of Akin in Missouri and the misguided comments of Mourdock in Indiana, both Republicans once favored in Senate races but who lost tonight after stupidly falling for a Democrat Rope-a-Dope tactic which got them talking enough about abortion to eventually say something stupid. 

·         The Tea Party movement has brought much energy to the Republican party, but has been dysfunctional sometimes in ousting admittedly squishy Republicans but with good election prospects for more consistently principled conservatives who turn out to be bad candidates who lose elections (O’Donnell in Delaware, Angle in Nevada, and Mourdock in Indiana come to mind).        

·         Obama and many leading Democrats are exceptionally hostile to fossil fuels, yet coal-laden West Virginia and oil and gas-rich North Dakota and Montana today elect Democrats to the Senate.  Figure that out.     

The growing segments of the electorate and the Dependency Agenda voters are generally not sympathetic to the traditional American and Republican principles of limited government, individual liberty and self-sufficiency, and free enterprise.  Republicans who insist this is a center-right country delude themselves.  Some significant soul-searching and new strategies are needed, as well as candidates who will aggressively take issues to opponents.  

Obama may well feel emboldened for these next four years, but determined Republicans in Congress will have their say, to be sure, and will pursue the Obama scandals such as Benghazi, Fast & Furious, and Solyndra-like financial corruption that have been so well suppressed so far by the liberal press.  

Overall, as distressed and despondent as I am about having Obama for four more years, a free America can survive that – maybe not well, but survive it.  But whether a free America can long survive the evolving electorate that decided to double down on Obama's character and agenda worries me much, much more. 

John M Greco