Archive for February, 2015

Oil versus Apple

Thursday, February 26th, 2015

February 26, 2015

So, with oil selling in the low $50 range and representing 8% of SPY, where are the headwinds ?

Just as I indicated in my post of November 21, 2014 ” Who is Afraid of the Big Black Swan ” ,  the equity market is still the only logical place to put money.  Our 10 year Treasury is yielding less than 2% thanks to the demand arising out of even lower interest rates in Europe and Japan.

Full employment and a healthy housing market are goals of the Fed and it doesn’t pay to fight the Fed.

Since November Spy has advanced almost 5%, well on its way to creating the wealth effect for the American consumer who represents 70% of GDP. And, as expected,  the American  consumer is awakening , the brainpower of  American ingenuity is meeting every challenge to the point where you may be driving an Apple car sooner than you think !

I’m ignoring all ” FIRE ” ! calls until I see bond interest yields  competing with earnings yields.  Everything else is noise.

All that remains to be accomplished is an invigorated housing market.

And the housing market is  where there is a bit of a problem to be overcome.

People are not buying because they are able to sell their existing housing

We are back to 20% down payments and,  banks are sticky with their credit.  Who can blame them.  Would you lend someone at 3.5% for 30 years when you don’t know what your cost of money will be a few years from now.  Banks are not walking their ” come on in ” talk.

And, it seems to me rental construction will revive before residential construction.  Why ?  the amount of student loans outstanding has created a formidable obstacle to capital formation for use as a down payment by couples in their twenties and thirties.

My post of December 26 ,2011 put forth a suggestion to solve this problem.  My idea was to allow early withdrawals from 401K type plans without penalty if the money goes toward a housing down payment.

Who loses on this ?…….  Brokers and wealth managers.    Certainly, the five too big Banks won’t fight  the idea of all those mortgage securities being created.  But  not so fast.  The biggies first want remove the ” push out ” provision of  Dodd- Frank legislation which removes FDIC protection for the biggies on  activities  involving swaps….credit insurance gambling   ( gambling ? …trust me, 40 to 1 leverage is gambling ).  Selling and trading portfolios of mortgages is where its at for the biggies, and you can include Morgan Stanley , Deutche Bank,and  UBS  as wanting to be in the ” tranche “game with Citi, JP Morgan Chase and Goldman.

So, it looks as if  renting rather than owning will be driving housing for awhile.

Until then, equities look like the way to go.  Looking back only a couple of years, I am amazed at how my methodology  of selecting stocks has changed. I have always heard that Warren Buffett needs to ask only a few questions before he knows whether or not he wants to buy a company. I do believe I have narrowed in on that answer but, I won’t pass it along until its been rigorously road tested by me.  That,  and everything involving a concept called ” shareholder yield ” as opposed to earnings yield and dividend yield.

I’ll be back.

Richard Maurice Gore