Why the worst is not behind us
You shouldn’t believe those who say the economy has hit bottom, says this redoubtable bear, but you can make money if you invest carefully.
“The worst is behind us.” We’ve heard those words a lot lately.
And why not, after three months of rising stock markets and the “green shoots” of an improving economy poking through?
Because they’re not true, that’s why. So says one observer who took a dim view of the situation even before the subprime crisis broke, and hasn’t been prone to undue optimism any time since.
Mr. Irwin T. Yamamoto has established himself as one of America’s leading bears. Often dismissed as a scaremonger before the credit crisis, he has earned a good deal more respect in the past two years.
What’s more, his portfolio has made money before, during and after the crisis. In the 12 months through April 2009, for instance, his portfolio was up 21 per cent. So far this year it is up 14 per cent.
In short, when Mr. Yamamoto speaks, we listen.
So we turn to The Yamamoto Forecast to discover what is and is not behind us. And we will look closely at the portfolio that has been leaving indexes in the dust.
A wave of inside selling
Look carefully at those who are saying the worst is behind us and that the deepest pain has already been felt, cautions Mr. Yamamoto.
Before buying into their assumptions, “remember these are the same people who proclaimed that a recession would be averted.”
As before, they are missing some key points. One is insider trading. “If the worst is behind us, then why was there a wave of selling by corporate insiders in the current rally? After all, these executives should possess exclusive information and pertinent data about future prospects for their companies and the overall economy.”
Recently, figures indicated that insider selling had reached its sharpest weekly level since June 2007.
No, it’s not a perfect indicator, the editor admits. Insiders often sell to balance their portfolios. But the timing of this flurry is very suspicious.
“If the perception of a final bottom in the financial markets and the business landscape is true, then why sell? An astute investor would want to be heavily invested at the beginning of a new bullish cycle.”
The fairy tale
But wait, aren’t U.S. banks profitable again? Didn’t they report amazing first-quarter profits? “If you believe this fairy tale, we have a bridge or two that might interest you,” retorts Mr. Yamamoto dryly.
The banks’ profits are nothing more than accounting sleight-of-hand, he says. Goldman Sachs “conveniently” altered its earnings calendar.
Bank of America bulked up on notes from its purchase of Merrill Lynch, and on a huge one-time sale of shares in China Construction Bank.
What about the operational, day-to-day income? “There are trillions, not just billions, of toxic waste being hidden in the secrecy of the banks’ books,” warns the editor. Disregard the first quarter reports.
“This mirage did not include the massive losses they haven’t written off yet with regard to commercial real estate, future mortgage resets and credit card losses.”
And this fall, you’ll be hearing more bad news.
The upcoming explosion
Commercial real estate is the next big thing. Unfortunately, $270 billion in commercial property loans are due this year. In the next three years, $1 trillion worth of these loans will mature.
Since mortgages for these properties tend to be five to 10 years, many of the loans from 1999-2007 will be coming due. “Some industry experts see two of every three commercial mortgages not being repaid,” says Mr. Yamamoto.
The failures have started. General Growth Properties, the second biggest mall developer in the U.S., filed for bankruptcy protection in April.
And Wall Street has not yet factored in this upcoming explosion in commercial real estate.
Well that’s enough tough love for now. Let’s see how you make money when the worst is still with us.
Don’t go chasing
For a long time, Mr. Yamamoto’s portfolio was simplicity itself — 90 per cent cash and 10 per cent in a bear fund that shorted the S&P 500 Index. While the markets flamed out, he did just fine, thank you.
In recent months, he has opened up the portfolio. 65 per cent is still in cash (bank money-market accounts), and the rest in securities. But Mr. Yamamoto urges his subscribers to buy these securities only at his suggested prices, those at which they were first recommended and bought.
Here is the lineup. Hawaiian transportation, agribusiness and real estate firm Alexander & Baldwin (NYSE-ALEX) makes up 10 per cent of this portfolio. Bought in two lots at a dollar cost average of $18.79, it trades at $24.80.
The other securities each take up five cent of the portfolio. Discount broker Charles Schwab (NASDQ-SCHW) was bought at $12.38 and now trades at $18.33. Oilfield services giant Schlumberger (TSX-SLB) came in at $36.14 and is now at $58.10. Oil and gas well driller Helmerich & Payne (NYSE-HP) was bought at $19.98 and trades at $34.90.
iShares FTSE/Xinhua China 25 Index (NYSE-FXI), which represents the 25 largest companies in China, was purchased at $22.69 and sits at $38.50. Finally, Rydex Inverse Government Long Bond (RYJUX), bought at $13.18, trades at $15.53.
As you can see, they have all turned a profit. But Mr. Yamamoto is firm. “Don’t go chasing after a stock,” he tells his subscribers. Wait for the stock to drop back to the recommended price. It will be a better bargain.
And who’s to disagree with him? If the worst is not behind us, better bargains must still lie ahead of us.
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