JR Snell Capital Management, LLC

Looking back over the last couple of months worth of posts, I’m thinking that it might appear that I’m a little opaque as to what areas of what markets you should be focusing on.

I’m not, so I’ll clear things up before I go AWOL for the week. First, understand that anything can happen over the short-term. What we always work on here in our laboratory is more macro-type thoughts for overall “big picture” positioning for ourselves and our clients. That’s what this is about.

[Sidebar... I think I might have mentioned that we are all about the "return of thought" when managing investments... That is, come up with a prospective course that we believe things will take and position for it. A little more active than reactive, and certainly not passive.]

If there’s no magic bullet or secret formula to this investing thing, the elephant in the room says that those investors who wish to survive (and thrive) in tomorrow’s markets might have to think for themselves (gasp)… or (at the very least) think for themselves enough to know they should hire those people who think for themselves.  – From “How We’re Fixing It”

First, the average inflation rate for the last 100 years or so is about 3.0%. The TIPS market (Treasury Inflation-Protected Securities) is showing the breakeven inflation rate at 1.9%… significantly lower than the 3.0% average. Translation: The market says that economic stimulus and other Fed stimulators (very low interest rates) will not work as planned… Translation: Extended period of very slow or non-growth. Translation: Buy TIPS because the treasury structured them to provide downside protection against deflation (which, of course the Feds assumed would never happen)… and this is really one of the very, very few investments that I can think of that offers this.

We’ve been buying the individual bonds for clients and mixing it up between 7 and 14 year maturities. If you can’t buy the individual things, you can consider the ETF (TIP)… This ETF makes sense for smaller accounts, but they have some additional internal management fees which is why we shy away from them in larger accounts

Following this premise, it wouldn’t hurt to accumulate some longer treasuries… like in the 20 year (give or take 5) range. I hear people whining about only getting 4.20% on a 20 year treasury… but I think if a person accepts what might be the ”new normal”… 4.20% might not look that bad, in hindsight.

We’re not married to holding on to the things for 20 years though. If we were presented with some outsized gains on our treasuries over the next year or two, we wouldn’t be afraid to take the profits and find a new home for the proceeds.

Dividend-spewing, old-line, consumer staples stocks look tasty for a couple of long-term reasons. First, we can get between 3 and 4% on many of these stocks (i.e. HNZ) and their business model isn’t so sensitive to the economic cycle.

Don’t get me wrong… anything and everything will go in the tank if the economy falls off a cliff again (people will even go without ketchup if things get bad). But generally, if our extended-malaise scenario becomes fact, then these consumer staples companies will still be chugging along same as always.

Just be sure to do your homework and feel comfortable that the stocks you’re choosing have low debt and decent enough margins to keep coughing up the dividend if things stay marginal for a long time. Email us if you need some help in this area.

Technically, in the stock market we’re acting a little short-term “toppy”… meaning it’s not a good time to be going after your favorite growth stock. Long-term? At the moment, none of the classic, fundamental, long-term stock market indicators are suggesting that now is a good spot to become a new “buy-and-hold” type of investor. Sorry. Be patient.

The upside to the “new normal” is that we can afford to be patient in the stock market. These days, nothing is going to run away from us for very long. No matter what the economy does, we still believe in volatility. Since volatility is how we’ve always made our money in the stock market, we still believe that there is money to be made in stocks.

As far as the thoughts of chasing stocks for fear of being left behind? We’re content to let everyone else risk heartburn while we just pick at the turkey.

Yesterday (11/19/09) on Capital Hill, Rep. Kevin Brady R-Texas got into a little a little “tiff” with Timothy Geithner (Treasury Secretary) during a Joint Economic Committee hearing.

It seems that Rep. Brady rankled Mr. Geithner a bit by insisting that he resign, blaming him for rising unemployment, growing federal deficits and accounting flaws in the number of stimulus jobs created, among other economic problems.

All of the articles that I’ve read about the exchange focused on how unusually forceful Mr. Geithner was and how hot the debate ended up getting. Included in most articles is this statement by Mr. Geithner:

“The economy fell into the worst crisis in generations after almost a decade — certainly, eight years — of basic neglect of basic public goods, in health care, in education, in public infrastructure, in how we use energy.”

Whaaaaaat?  I thought it was a credit crunch, lax regulation, an irresponsible banking system colluding with an irresponsible public piling on debt they couldn’t afford to buy things they didn’t need. Since when was the current economic crisis caused by not addressing health care? Or education? Or how we use energy?  That’s pretty far out there… even for you Tim.

Seriously, Timmy… If this is what you believe caused the economic crisis, then maybe you should step down. That kind of a statement is either simple felony stupid or reckless historical revisionism to get political points.

I was just reviewing and reorganizing my “…for further study” page and I tripped upon this quote. I had to post it again because I am still baffled and befuddled by what this means.

Maybe what it means is what he says? Is it even reasonable to postulate that our current economic conundrum is the simple result of one man’s mistaken economic theory? Could it all be that simple? 

REP. HENRY WAXMAN (D-Calif.): And my question for you is simple: Were you wrong?

ALAN GREENSPAN: And what I’m saying to you is, yes, I found a flaw….a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN: That is–precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

A couple of months before I started writing blog entries, I “looked into the abyss” on my own personal trading screens here at the office.  It was mid-September or so, right after the Fed let Lehman fail and before the significance of what just happened was really felt by anyone but a few… yet.

Early the morning of the 15th of September as I look at my screens, I’m thinking that I’m seeing a “blip”… you know, a data error, an internet outage, the ghost in the machine… whatever.

Specifically, what’s confusing is that the couple of trust preferreds that I follow (like bonds, but traded on exchanges in $25 hunks rather than the off-Broadway $1000 chunks that a regular bond trades), traded at around $15.00 or so a minute ago and now many of them are now being “bid” at an odd $.50 or so. For a few minutes, I thought the system totally freaked. After a while the 50 cent bids finally were replaced by 3 to 5 dollar bids… then up to about 7 to 8 bucks… finally settling in at about two-thirds of what was bid the day before.

Of course today, I now know it wasn’t the ghost in the machine… it was the abyss. I had looked “over the edge”. I had seen the financial “white light”.

And apparently Hank had seen it too. He met with Congress, made the talk show rounds (white as a ghost, btw) and said SOMETHING to Congress and they gave him the money. So, what was the SOMETHING that scared him so badly?

OK, so thanks to Representative Kanjorski of Pennsylvania (maybe he was talking out of school??), we’ve got a pretty decent idea what happened that day. He says that…

“On Thursday, September 15, 2008 at roughly 11 a.m., the Federal Reserve noticed a tremendous draw-down of  money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two. Money was being removed electronically.

The treasury tried to help with $150 billion. But could not stem the tide. It was an electronic run on the banks The Treasury intervened, but, had they not closed down the accounts, they estimated that by 2 p.m. that afternoon. Within 3 hours. $5.5 trillion would have been withdrawn and collapsed within 24 hours the world economy.”

Watch the video, his explanation starts at about 2 minutes and 20 seconds into it. I also double-checked some additional congressional testimony tapes where Rep. Kanjorski questions Mr. Paulson about this very thing because I didn’t want to foist some “conspiracy theory” crap off on my loyal readers. In the tapes, Mr. Paulson does not deny what happened.

[[He also mentions that there was only the 'lone gunman' and there was no alien autopsy.... Sorry gang.]]

Now we know.

Last night’s treasury auction demand was so high that investors bid the rate negative. There’s a solid rundown of the situation here.

According to Bloomberg, If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56. 

Deflation impacts everything

As if it wasn’t easy enough to lose money in the stock market, now you’re guaranteed to lose money in short-term treasuries! I’m not sure that this is what everyone has in mind when they talk about Treasuries being “guaranteed” investments.

For those worried about the possibility of deflation, this should be a little reality check… It’s heeere. The point at which people are willing to PAY money to lend it should be a sign that maybe a huge contingent of very smart folks think that cash will be worth more in the future than today.

Here’s other evidence…

• Stocks? Deflated… down 40% or so, depending on the day.
• Real Estate? Deflated… down 20%-40% depending on where you’re looking.
• Gold? Deflated… It’s an inflation hedge and it’s down 20% plus recently.
• Oil? Deflated… down around 70%
• Garbage? Deflated… Don’t laugh, it’s true. They’re calling it the “Trash Crash”!

The Trash Crash? Yes, mixed paper has dropped to $20 to $25 a ton from $105 in October, tin is down to $5 per ton from $327 a year ago, cardboard that sold for about $135 a ton in September is now going for $35 a ton, plastic bottles have fallen from 25 cents to 2 cents a pound, aluminum cans dropped nearly half to about 40 cents a pound, scrap metal tumbled from $525 a gross ton to about $10.

Ouch… throw in the fact that most larger US cities have recycling programs whose costs are offset by what they get for the recycled material, and you’ve got another municipal owie to deal with.

So, yeah… wake up… deflation’s here, now, already. Rather than fret about it, I’m going to focus my energy with my clients and on this blog putting forth and implementing strategies to deal with it and maybe profit from it. I’m interested in now trying to detect if we’re in for an extended period of deflation or and what signs will I need to see that shows us the trend is reversing?

For now, I’m thinking about selling off about $4 million in 3 month Treasuries that I bought for clients about 2 months ago. They’re selling very near face value a month before maturity. Who’d a thunk it?