PHIL TOWN

Where is This Market Going?

WHERE IS THIS MARKET GOING?

When Phil Town was on The Millionaire Inside show with Erin Burnette, he was totally impressed with her.  Obviously, so was CNBC.  They have her fast-tracked and doing the cool stuff.  She’s been traveling lately – Dubai, London.  Checking out where its all going. Are we in a recession headed for a depression or did the stimulus package work magic without ever getting any money into the economy?  She interviewed a money manager who thinks we’re off to the races.  There is an old saying in India – “Your world is as you are.”

And isn’t that just the way stock markets work?  The price of an investment is all about the buyer and seller’s joint agreement on the near term future.  If it looks rosy to both, the price will be high.  If not, not so much.  

Apparently, the mere fact that governments world wide have shown an unlimited willingness to write checks to keep things going has done wonders for buyer-seller perception of the future.  Like – there’s going to be one.  And since there’s going to be one, businesses are going to be able to sell stuff, have revenues and pay employees who will, in turn, go buy stuff from other businesses who will have revenues and pay employees who will….  Well, you get the idea.  

However, value, as I’ve said ad nauseum, is not the same as price.  Coke has a long term value.  It also has a short term price.  They are not the same.  Its price is dependent quite a lot on perception, right now, of what’s going to happen in the near term.  If the sky is not going to fall, well then, price is likely to go up from where it was when the sky seemed likely to land on us.  

So where is this market going?  On March 10^th at 6600 I said its about value.  The market was going to go up because price is not value and the value was quite a lot higher than the price.  At 9800, the price is up so now its about price and price is about ‘as you are’.  The fearful are starting to turn greedy and that means they are becoming buyers.  So where’s it going?  Up.  For a while.  This is now a trader’s market.  Be nimble, kids.  We want to be selling to greed and buying from fear.  Fear is going away.  For a while.  Don’t be caught getting greedy.  If you followed me in March, you’re investments are up 50% in six months.  That is considered good.  

Remember:  Pigs get fat.  Hogs get butchered.  This market is now about price, not value.  Be nimble.  And be ready.

Now go play.

Phil Town

Phil Town's Inflation Strategy Part Dos

INFLATION STRATEGY PART DOS

In 1929 we had less than $1 Billion in circulation in the US because we were tied to the gold standard.   This meant we could not print dollar bills and pretend it was money.  Each $20 of US paper money was backed by an ounce of gold from 1833 when the standard was set and that relationship was unchanged until 1930.   From 1930 until 1970 our government gradually weaned us from the gold standard by increasing the exchange rate to $35 an ounce and thereby artificially increased the number of dollars in the economy to about $10 billion.  In 1971, after years of over-spending on the Vietnam War and The Great Society, Nixon took us off the gold standard.  By 2000, in just 30 years, the government added $990 billion to the money supply.  By 2008, after the 9/11 shock, a severe stock market drop and the recession of 2001-2003, the money supply dropped and then rebounded to $1000 billion.  Since then, in one year, the Bush and Obama governments have doubled the money supply to $2000 billion.  In one year they added more dollars to the economy than in the previous 30 years of inflationary spending.

This money was printed.  It wasn’t earned by inventions that save labor and materials.  It was printed and tossed into the economy.  The impact hasn’t hit yet but it will.  As lending opens up, there will be more demand for products and more demand for higher wages.  You can not have a free lunch.  If all you had to do to become a wealthier nation was to print money, Zimbabwe would rule the earth.  They printed billion dollar bills.  And now it takes $30 billion to buy a loaf of bread.  That is the impact of inflating the currency.  Eventually the money becomes worthless.

So what do you invest in when that happens?  You invest in things that are necessities and things that can raise price as their costs of labor and materials rise. For example, food is a necessity.  The cost to grow food depends on the price of oil because farmers use oil-based fertilizers and drive big tractors that burn a lot of diesel. Oil is being consumed at a rate that is depleting the remaining reserves at 7% per year.  Without a big oil field discovery, in ten years there will be half the oil there is now.  Can you imagine where oil prices will be and thus food prices?

Oil.  Food.  Farmland.  Mining operations.  Railroads.  Coal.  Anything that can raise its prices as its costs go up.  For example, Burlington Northern railroad has a near monopoly on moving coal from the west to the east.  It will raise its shipping rates as union wages and diesel fuel costs rise and the shippers will pay it because they have to have electricity and coal is the fuel for energy plants.  Farmland will rise in price as commodity prices rise. 

And what about gold?  I’ll write more about that next.  And how to find the right investments for these categories.  Oh, and whether you should be buying companies in the US or in China while all this is going on.

Now go play.

 

Phil Town

Payback Time vs. Trading

I love a thoughtful email and this is a good one (see below).  John has been doing some thinking and digging and wants to know why we shouldn't buy and hold a wonderful business we buy on sale instead of trading it.  Its such a good Rule #1 question, John, that I wrote a whole new book about it.  The book is called Payback Time and comes out in March 2010 from Random House.

The short answer is that you are right.  Its better to hold a wonderful business that you bought on sale than to trade it.  Trading has a transaction cost, can be inaccurate in the short run and will certainly cost you some of your profit.  It also has the advantage of getting you out of a stock that is about to take a huge nose-dive.  Trading is insurance against screwing up.  Its not perfect but it is pretty good insurance and it reduces the amount of effort you have to put into determining whether the business is a good one and whether you got the price/value thing right.

Payback Time presents the buy and hold strategy in a whole new light with step by step instructions for implementation.  It starts with the same requirement to get a wonderful business at a great price.  But since we're holding, we're not trading, we HAVE to get the price right.  So I bring in the concept of pricing from Private Equity that I call the Payback Time Price.  Its the price of the business that will be repaid in a very short number of years out of earnings.  The Payback Time Price keeps you from screwing up badly.

Imagine you were going to buy a private business for $1 million.  The business earns $200,000 a year after tax.  It isn't growing.  Therefore, in 5 years you have your money back (assuming you don't need any additional working capital to keep it going).  Notice that from that point on, you don't have any money in this deal.  You are playing with house money.  Your money is off the table.  Now, if the business goes south, you can't lose money.  Once you've got your money out, you are golden.  

Is it a Bad Sign When a Company Merges with Its Competitor?

Nick posted this comment on the Phil Town blog a few days ago. It's a good question for those of you looking to buy a company that's about to merge with a competitor.

Hey Phil Town,

I know you are really busy but I am unsure of what to do. I have been doing research on a company called Watson Wyatt Worldwide (WW). It is a service-based company that specializes in human capital consulting.

The company seems like a really great business but I just came across an article that says that Watson Wyatt is about to merge with its main competitor, Towers Perrin.

What should I do? Towers Perrin is not a publicly traded company, so I have no way of knowing whether or not it is a good company.

I want to invest in Watson Wyatt, but now I am afraid to because I feel like there's no way to know whether Watson Wyatt will be as fiscally sound in the future? Any advise would be greatly appreciated.

Thanks,
Nick

My answer:

Phil Town on PE Ratios - Stick to What You Learned in Rule #1

Phil Town gave a previous post here that was a response to one reader's question. 

But let's not get too enthusiastic about PE.  We don't care what the PE is.  Really.  I don't really even look at it when I'm looking at a company. 

The reason the PE is irrelevant is that it doesn't necessarily reflect the true value of the business.  It's an indicator of what Mr. Market thinks, for sure, but then we know Mr. Market is bi-polar and can easily be either depressed or manic about a given company and be completely wrong about the price relative to the value. 

PE is quite a lot like "Dollar Cost Averaging" - brainless.  So stick to what I taught you in Rule #1 about figuring out the value of the business and don't get bothered about PE ratios.

Now go play.

Phil Town

Timing When to Buy or Sell Based on Tools

Phil Town answered this in the comments yesterday, but I think it's worth reiterating here:

It's easy to decide if it's too late to buy or sell based on tools.  You have three tools (MACD, Moving Average, Stochastic) and all of them have to say the same thing at about the same time.  Say within a couple of weeks or less. 

So first one tool goes green (gives you a buy signal) then another one... so now all you're doing is waiting unemotionally for the third signal.  It could be any one of the three.  If it's the Stochastic then when it goes green, you buy the next day. 

But what if you missed it?  Then you wait and see if if the price returns to the Moving Average line and bounces off.  If it bounces off you buy, if it doesn't the you'll get your first red, right, so you don't buy.  You wait. 

Now go play.

Phil Town

For Those with 401(k)s: is Now a Good Time to Re-enter?

I got this question last week from long-time reader, Jon:

Any tips on re-entry on company type plans for those who exiting with the tools in 2008? Whether we should look more at stockpiling a little at a time with some percentage of funds (whether the market is going up or down), or look at tools as an entry, such as a 200MA. The limits of moving funds within in these planes makes this process more difficult.

Wow, I hope you didn't miss my urge to buy back in a few weeks ago.  Now it's time to to check the arrows on your 401(k) funds (and shift to SPY if you can do it in your 401(k) and put 1% per year in your pocket instead of some fund managers).

There is no entry now, I think.  We're at the 8000 point on the Dow and it is shaping up to be a ceiling just as it was a floor for over a month.  All the tools are sliding to a sell signal.  So this is not an entry point.  If it pops out of 8000 and you're doing FACs, I'd hit it.  If you're doing arrows, you are looking to sell here sometime, because you got in at somewhere between 6700 (on two greens and my blog) and 7400. 

I'd say prepare to exit.  It's going down unless there is some really good news somewhere to stimulate a lot of money sitting on the sidelines.  If not, a lot of profit taking is already underway.

Now go play.

Phil Town Rule #1

Phil Town on Stockpiling vs. Trading

Today I got this email from Jon:

Phil Town,

Will you be continuing to post on the current market and accumulation? With a ~20%+ move in market from the lows in such a short time and many stocks well above the 30MA how well is accumulation going to work in this case? It looks like you will talk more about FACs for entry's, or just back to trade vs consume?...

Can you comment on if you think the market will likely be rangebound or just start the climb back to the highs we've seen twice in the last 8 yrs or so. If your new book isn't out until Sept, I suspect you're not expecting it start getting overpriced between now and then?

thanks

The market price is just a general guideline to whether we can expect to find Rule #1 businesses on sale.  Right now the answer is yes. 

As the market climbs there will still be "load up the truck" deals that we can accumulate (I'm starting to call it "stockpile").  The higher it gets, the more I want to trade it. 

Stockpiling is a great strategy for everyone when the great businesses are really cheap.  Trading is hot when the market is moving up aggressively.  We're not back to that by a long shot.  Stockpiling is still the way to go unless you are very careful as a trader.  This thing can drop the bottom out on any major bad news, but the upside is very limited.  NOT a great time to be trading long on the trend.

Now go play.

Phil Town Investing

Apple Excerpt from Phil Town's PAYBACK TIME

In answer to the Apple valuation questions, an excerpt from my new book, PAYBACK TIME:

Leadership is about vision and values. All public businesses have management. Fewer have leadership.

As I’m writing this, Steve Jobs is stepping down from Apple for health reasons. I’ve worked with Steve and can tell you from personal experience that he can be a total son-of-a-bitch about what he thinks is right. He’s like Simon on “American Idol.” He has absolutely no concern for your personal feelings. What you are doing is either “cool” or “bullshit”. But it’s that laser-like focus on what he sees as “cool” that allows his company to connect technology with consumers better than any company in the world.

I pray Steve recovers quickly. America needs every hard-core, iconoclastic, SOB like Steve Jobs it can get. If Steve doesn’t make it back to work, it’s an open question whether anyone else can keep Apple’s products at the cutting edge of brilliant innovation. Last time Steve stepped down, the company was turned over to a sugar-water salesman and Apple nearly went down the tubes. When Steve was brought back, he saved the company. We’ll see if a real leader can step up to keep it saved now.

(To that end, you also need to be careful about buying into a company that’s so reliant on the brains of a single person. If that asset goes away, the entire business as an asset can go away, too.) Also be certain to not invest in businesses that have political climbers at the helm. They are not leaders. They are the polar opposite. They look to where the band wants to go and then get in front of it and wave their baton. The world has enough self-aggrandizing band-standers in politics. Be careful of investing with one.

Now go play.

Phil Town

Related Posts from the Phil Town Archives:

• What About Apple?  (2007)
• Phil Town Archives:  Posts filed under Management

DOING 4M COMPANY SEARCHES ON INVESTOOLS AND ON MSN MONEY

Richard posted a comment that requested Phil Town give detailed information about how to find a business that is on sale for 50% off. A stock's value is what I call the Sticker Price (and what Investools calls the "estimated target price" and what Warren Buffett calls "Intrinsic Value").  Rule # 1 investors buy at a Margin of Safety, or 50% off Sticker.

Good question, Richard, because this whole thing is academic if you can't find a wonderful business that you can buy cheap.

Finding wonderful businesses is easy.  There are tons of them. But finding wonderful businesses that are on sale takes some digging.