Saturday, February 26, 2011

Playing The Waiting Game With Hologic

According to the U.S. National Cancer Institute, one in eight women will be diagnosed with breast cancer sometime during their lifetime. It's a big issue because breast cancer tends to be an aggressive form of oncology and unless it is detected early, your survival rate is slim. However, with technological advances in screening systems and a much more aware public in regards to preventive behavior, you now have a 98% survival rate when the cancer is diagnosed early and still localized to the breast.

Hologic (HOLX) has the lion's share of the U.S. mammography equipment market with a 65% share and is rapidly expanding overseas. They are also a one-stop-shop for hospitals looking to purchase diagnostic and medical imaging systems for women's healthcare that go beyond mammography with business segments in GYN Surgical and Skeletal Health. On February 11th, the FDA approved Hologic's tomosynthesis system for 3-D mammograms and this appears to be the wave of the future with competitors lagging Hologic's already impressive lead in not only market share, but technology, too. As a recent analyst report from Citigroup Global Markets states: "With tomo now approved, we believe the next closest competitor (GE) is at least 1-2 years behind.".

Citigroup Global Markets rates the stock a 'Buy' with a $24 price target on it, and they aren't alone with their positive assessment of Hologic. Out of the 26 analysts that cover Hologic, 13 have a strong buy rating, 7 have a buy and 6 say to hold the security (as reported on Yahoo Finance). The mean price target is $23/share, and, at it's current quote of $20.50, you may get a 10%-15% pop in it this year, but I am wondering if maybe it is too soon to pull the trigger on Hologic.

Hologic has a great story behind it and as CEO Robert Cascella said in the last conference call: "...tomosynthesis has the ability to do to the digital, what digital did to the analog, and that is to create a market dynamic of of technological obsolescence.". When the FDA approved 3-D imaging earlier this month, they cited two studies done by board certified radiologists that showed a 7% improvement in their ability to distinguish between cancerous and non-cancerous cases. A big improvement over the traditional 2-D systems. I agree with Mr. Cascella that more women will opt for the 3-D imaging because, let's face it, we are talking about life and death.

With a first-mover advantage, Hologic seems to have a significant head start. However, a November 26, 2010 ValueLine report claims that it will take at least 18 months after FDA approval of Hologic's 3-D imagining machines for the Medicaid and Medicare systems to create a reimbursement code for the test. In ValueLine's Febraury 25th report on Hologic, they state that it isn't until after what typically is usually a two year process for Medicaid and Medicare to make a decision on reimbursement that private insurers will follow suit. CEO Cascella uttered similar remarks in his conference call saying they were a few years away from a full roll out which should impact initial usage.

A lot can happen in two years, not only with Hologic, but also with the overall stock market. Based on valuation, Hologic to me seems fully priced with a 2011 P/E ratio of 16 and a 5 year consensus CAGR of 8.5% by the 26 analysts that cover it. That's a PEG ratio of 2 which is very expensive for even a growth stock, let alone a stock that has has not improved on the earnings front for three consecutive years. Earnings/share for 2008, 2009 and 2010 were $1.18 per year. Zero, nada, zip for earnings growth.

I realize the market is always looking ahead when pricing a stock and I don't want to spoil the show, but this stock has been buoyed by the market's ascent and, if the market has a correction, Hologic could be had for a much more advantageous price somewhere down the road, especially if it's not supposed to get in gear for two years. All of the analysts that are giving you Buy and Strong Buy signals are just sandbagging you and paying lip service. This is a good, solid company with an excellent product resumé and would be an excellent holding in any portfolio. It may even be an acquisition candidate, so if you want to dance while the music is still playing, by all means, buy it. However, if you don't want to get caught up in the hype, then a little patience is required.

Wednesday, February 23, 2011

Veeco Instruments: What Would Peter Lynch Do?

Veeco Instruments (VECO) has had many incarnations since its founding in 1945 by two Manhattan Project scientists as the Vacuum Electric Equipment Company. In its current form, Veeco Instruments' main source of revenue is their leading position in the marketing and manufacturing of LED (light emitting diode) and solar process equipment along with a smaller percentage of their business dedicated to data storage. According to CFO David Glass in the 2010 Q4 Conference Call, 2010 was the best year in Veeco's history, and the 13 analysts that cover Veeco seem to believe that growth is in its future with an average estimate of 13.33% CAGR for the next five years as reported on Yahoo Finance. With a modest P/E Ratio of 10 and its core business segments positioned for robust growth, is this the kind of stock you want to own? On the surface, it seems like a no brainer, but let's examine the situation more closely.

With its main stream of income stemming from the solar and LED divisions, Veeco primarily resides in the semiconductor industry which is highly cyclical. Renown value investor Peter Lynch has a counter intuitive rule of thumb when investing in cyclical securities in that you buy when the P/E Ratio is high and sell when the P/E Ratio is low. Lynch's theory is that you buy when the P/E Ratio is high and the stock price is low because Wall Street has caught on to these equities, and many times has begun accumulating them before the market makes a big run and takes the stock along with it. When a cyclical security has a very low P/E Ratio with record profits, the street is anticipating a downturn and may be ready to bail on it. A good example of when looking at a high P/E, low priced stock is Veeco back in 2008.

In 2008, Veeco hit a low of $3.50 a share and had an annual average P/E Ratio of 28 with decelerating earnings and sales growth according to ValueLine. When the market began recovering in 2009, Veeco's share price had a parabolic rise, increasing ten fold to $35, then jumped again in the first few months of 2010 to $54/share. This was probably in anticipation of earnings/share increasing from $.20 in 2009 to $4.58 in 2010. It is difficult to buy at the bottom, but if you did, a ten or twenty bagger would have been a tidy profit. Even purchasing Veeco at $10, you would have made a lot of money if you would have sold at the top. This begs the questions: Is this the top and is this the right time to sell? That depends not so much on what Peter Lynch would advise, but what Uncle Sam has to say.

The solar industry is less sensitive to the economy than other cyclical sectors because it is driven predominantly by government spending. In President Obama's State of the Union address to Congress in late January, he referred to his administration's push into renewable energy as our Sputnik moment. However, any excess spending by Congress is a bit of a political football and the days of federal and state backing of the renewable energy industry may be numbered. The Senate recently agreed to extend cash grants to solar and wind power companies through 2011, but there is no guarantee that the gravy train will go on indefinitely. In fact, earlier this month Veeco was the recipient of a $4.8 million grant by the Department of Energy to help beef up their R&D efforts which may have contributed to the stock's run up back to $52 just a few trading sessions ago. This past week Veeco came back to the ground a bit, but that may have just been profit taking.

At its current valuation of $45/share, Veeco has a forward P/E Ratio of 9 and a PEG Ratio of .7 if you use an earnings growth rate of 13% like the analysts that cover it are predicting. That's a compelling appraisal for a value investor. If the government doesn't take away the punch bowl and continues to subsidise the renewable energy industry, then Veeco will probably continue to climb higher. How much higher? Who knows, but 13% CAGR is what you want in a growth company and that's not to say that the earnings rate won't go higher. Of Veeco's business, 68% goes overseas and that's in its favor, but, the industry is subsidised in foreign countries, too, and we're not the only government running up deficits. I believe that government spending on a worldwide basis is going to curtail, but that's my two cents.

If Peter Lynch were making the decisions, he probably would have sold the stock long ago, but that's only my speculation and you can't turn back the clock. The main premise for this stock is deciding what the governments will do. If you think they will keep doling out money, then by all means, stick with a solid company like Veeco. If you believe that there will be some belt tightening in the near future, then all bets are off and everybody out of the pool.

Monday, February 21, 2011

Spanning The Globe

If you've been following this blog, you may have noticed an expansion in the type of coverage I've been giving the stock market in the past two months. Recently, I've included articles on individual securities, done book reviews and discussed investing apps for Smartphones along with my usual market coverage. This is being done for a few of reasons. Last year I published infrequently during the Summer and Fall because I thought I was being too repetitive with my market commentary and lost some traffic to the Web site. I can only go so far writing about the two ETFs in the portfolio and my belief that we are headed for a double dip if not go lower once QE2 runs its course. I enjoy writing about investing, so I'm rolling up my sleeves and will not necessarily crank out postings, but will make an attempt to do do something on a weekly basis to keep readers interested.

The catalyst for this decision was my acceptance as a contributor to the Seeking Alpha financial Web site in early January. I've been simultaneously posting this blog on their Web site since October of 2009 and wanted to see if I could crack into their network for a much larger readership. The first week of this year I submitted them an article about Apple which they found acceptable for their audience and I am indebted to them for including me as a contributor. Seeking Alpha has over 600,000 registered users that have a passion for security and market analysis and let's face it, as a writer, you want to be read. It's helped business here on Google Blogger and I'm back to getting a number of hits from the United States as well as overseas. For your convenience, you can also access The Ithaca Experiment on Facebook, too, if that is your preference. Any stocks you want covered, just send me an e-mail with your suggestion. I'll see what I can do. Thank you for your time and readership.

Saturday, February 19, 2011

Celgene: biotech baron or barren biotech?

Celgene (CELG) has been a dog of a stock for the past five years, trading in a range of approximately $45-$60 a share. The global producer of orally administered cancer and inflammatory disease drugs did spike up to around $75/share in 2007 and again in 2008 for extremely brief periods, but for the most part, has flatlined. This is a head scratcher because Celgene is not only one of the premier large-cap biotech companies, but it is also profitable with a P/E Ratio of only 17.5 and a projected earnings growth rate of between 20%-26% according to most analyst estimates. That's a PEG ratio (price/earnings/growth) of less than one which is a screaming value for a growth stock. If you traded it correctly since 2006, you could have made money, but that is difficult to do. Long-term buy and hold investors that have stuck with Celgene have made a big, fat goose egg. Is there a reason for that?

Going back to 2006, Celgene stalled because of a valuation issue. In that year its P/E Ratio ascended to well over 200 after the share price ran up from $5/share in 2003 (its first year of profitability) to $60/share. Then there was the global financial crisis in the years that followed where very few if any stocks did very well. In the past year, it's been under pressure for a multitude of reasons.

In July of 2010, Celgene spent $3 billion is stock and cash to buy Abraxis BioScience in order to beef up their portfolio of cancer fighting pharmaceuticals. Wall Street thought they paid too much for the company and the stock took a hit. A few months later in December, a study came out showing that their chief drug Revlimid caused secondary malignancies in some patients. These secondary malignancies were a small percentage of the overall study, but, this caused more pressure on the price of the security despite the fact that the study showed patients survival rate greatly improved with Revlimid. Then in January of this year, Celgene missed it's earnings by two cents and shares fell again. Finally, a majority of the healthcare sector has been out of favor because of the uncertainty of about how much government intervention will be allowed in what is being coined as Obamacare in some circles. All is all, Celgene is going through a rough patch.

I like to buy solid companies when they are under the radar and according to Investor's Business Daily, Celgene is an unloved security. On a scale of 1-100, their Relative Price Strength Rating is a paltry 12 for Celgene. No one wants to buy it so it just sits there selling at $53/share with a 52 week low of $48/share. However, on that same 1-100 scale, Investor's Business Daily rates it a 93 for Earnings Per Share Growth. It takes a backseat to very few companies where the fundamentals are concerned. In a recent rating report they state, "The company's strengths can be seen in multiple areas, such as its robust revenue growth and expanding profit margins.". In a 10/22/2010 article in Investor's Business Daily, they glow about the acquisition of Abraxis BioScience and say: "Celgene is building a 'franchise' in cancer drugs.". With domestic healthcare spending expected to be around $4 trillion and 20% of GDP in the next decade, and, with its large global footprint, Celgene is well positioned to take advantage of the burgeoning oncology market.

What you have to ask yourself is do you have the patience to sit on this stock for awhile till the wheels get back in motion? Celgene is most certainly on the ropes and you could be waiting indefinitely for it to start moving again. That's what value stocks can do, just stay in neutral, but as Warren Buffet says, value and growth are joined at the hip. I think if you have a two year horizon, you'll make money with it, but only you know what your risk/reward tolerance is. In the near term, I'm from the school that thinks we are due for a significant correction, so you may get the stock at a more advantageous price. That's what I'm waiting for. If I were in individual equities, this is the kind of stock I'd like in my portfolio.

Thursday, February 17, 2011

Get Off My Cloud

It seems like everything I do is done with cloud computing these days. I use the Internet to pay my bills, send letters, do my banking, trade stocks, file taxes and buy books. My local cineplex doesn't even publish movie times in the newspaper anymore. You have to go on-line to see what's playing and when the show starts. If you've heard the term cloud computing bandied about and are not sure what it means, it's a very simple concept. Any computer programs you use that require a browser and on-line access as opposed to residing on your computer's hard drive are considered part of the cloud. It's been around a long time, but for investors, the sector has caught fire the past two years. This is especially true with software for the corporation and rightfully so because this is where a lot of growth is.

According to market research firm IDC, global revenues associated with applications deliverable under a software-as-a-service (cloud computing) model are projected to increase from an estimated $8.1 billion in 2009 to $20.6 billion in 2014. That's a compound annual growth rate of just over 20% for five years. One such company that is benefiting from this surge in the adaptation of on-demand software is (CRM) with it's shares rising from $62 to just over $140 in the past year. Make no mistake about it, (CRM) is in the sweet spot for growth being a leading provider of sales, marketing and customer service enterprise software. They also recently acquired Heroku, the leading cloud application platform for next generation social and mobile applications, and, Dimdim, a maker of real time communications technologies. They have positioned themselves well for "Cloud 2", which is the evolutionary progression of software-as-a-service, and should be a formidable company for a long time.

The question is, do you want to buy the stock? The majority of analysts covering (CRM) think you should according to Yahoo!Finance. Out of the 41 analysts that follow it, 24 have either a buy or strong buy recommendation, while the remaining have a hold rating except for 2 that give it a sell. After crunching the numbers, I joined the very small minority and also say to take your profits if you own it. Although it's growing by leaps and bounds, it's valuations are sky high.

I like to use ValueLine for analysis because I've found them to be fairly accurate throughout the years and will do so for this presentation along with consensus analysts estimates at Yahoo!Finance. According to ValueLine, at $140/share, (CRM) has a trailing P/E Ratio of 291 based on earnings of 48 cents/share for 2010. For 2011, the projected earnings are 75 cents for ValueLine and $1.17 based on the average analyst estimate on Yahoo!Finance. This gives it a P/E ratio on the conservative side of 186 and for the median analyst estimate a P/E of 120. That's way too lofty for my blood, but this is a growth stock and you should always take the PEG Ratio (price/earnings/growth) into consideration when evaluation high fliers.

Yahoo!Finance has 17.9% growth projected for next year and ValueLine has a compounded annual earnings growth rate for the next 3-5 years at 28%. Let's just call it a 30% growth rate for the sake of simplicity and do the math. At a P/E of 186, the PEG Ratio is 6.2. At a P/E Ratio of 120, the PEG Ratio decreases to 4. That's double or triple what it should be for you to hang on to your shares when using a PEG Ratio of 2 as a sensible point at which to take a profit. I got that PEG Ratio of 2 from Jim Cramer in his book, Jim Cramer's Mad Money: Watch TV, Get Rich, when he was doling out valuation tips. If only he would take his own advice. On Tuesday, February 8th, Cramer gave (CRM) a two thumbs up, strong buy on the lightning round segment of his show. I know he's got a lot of stocks to cover, but he's got this one wrong. Standard & Poor's stock report gives (CRM) a beta of 1.48 and if this market corrects, the stock will go down in value. I wouldn't short it. It's too good of a company, but I wouldn't own it either.

Tuesday, February 15, 2011

Zombie Economics

There's that old cliché that you can't judge a book by its cover and that's certainly true of John Quiggin's Zombie Economics from Princeton University Press. The jacket looks like a comic book or a poster for a psychotronic film which is unusual for the usually stodgy looking economics book, but don't let that dissuade you from believing this is not a serious or well written piece of work. Peppered with humorous quotations, theory and history, Quiggin has assembled a compelling read about the misguided intellectual economic assumptions of the last forty years and also gives possible solutions to our current financial dilemma.

The book is divided into five chapters which deal with various economic theories that have permeated the academic economic landscape for the past half a century: the Great Moderation, the Efficient Markets Hypothesis, Dynamic Stochastic General Equilibrium, Trickle-down economics and Privatization. Each chapter gives you the background of the birth, life and, finally, the death of the theory caused by the ongoing global economic crisis. Quiggin also discusses the reanimation of these theories in contemporary economic circles and gives alternatives to the academic status quo which in essence is same dog, different fleas. Throughout Zombie Economics, the author takes pot shots at his contemporaries with quotes like: "It is clear there is something badly wrong with the state of economics. A massive financial crisis developed under the eyes of the economic profession, and yet most failed to see anything wrong.". Although Quiggin is among this ilk, he attempts to defuse the bomb by coming up with common sense suggestions to help better our financial system.

One such suggestion is to create a "narrow banking" system. This new order would begin with the old guard in finance such as banks and insurance companies. These institutions would offer: "...a set of well-tested financial instruments with explicit public guarantees for clients.". Quiggin goes on to say: "Publicly regulated (and guaranteed) banks and other financial institutions should be prohibited from engaging in speculative trade on their own account and from extending any form of credit to institutions engaged in such speculation.". The author does not suggest that, " is necessary to prohibit risky investments, or even prevent speculators from developing and trading in risky new financial assets. What is crucial is that these operations should not threaten the stability of the system as a whole.". He goes on to say they should be left to sink or swim, like in the true free market. So what you can infer is that he is promoting a two pronged approach that is in part controlled by the government and the remainder left to the ebbs and flows of the market.

There are many common threads throughout the book. Right from the get go, it's very apparent he is in utter disagreement with a majority of his colleagues about the success of "Reaganism", "Thatcherism", or what ever you want to call the economic policies of the past 40 years. Quiggin, an economics professor at the University of Queensland in Australia, is very much a champion of the poor and middle class and feels the rich have only gotten richer with the free market approach to capitalism. Quiggin is really in the middle of the road because he feels there should be a combination of prudent government intervention along with some laissez-faire policies.

I learned a lot from this book. Concepts like the Greenspan put, Black-Scholes model, Minsky's Keynesian theory, random walk financial markets and cost-push inflation were just some of the topics explained in not so much conversational language, but easy enough to understand academic-speak. It's not a page-turner, it's an economics textbook, so you have to read it in small increments if you want to absorb much of the beneficial information in Zombie Economics. Many times when you are watching Bloomberg or CNBC, the jargon that comes out of the mouths of some of the talking heads can go right past you. This book makes me better prepared to understand in detail what they are talking about and it can do the same for you, too.

Friday, February 11, 2011

Review: Mobile Economic Apps

Too much information can be a bad thing. Not only does it contribute to paralysis by analysis, but it can also commandeer much of your time when trying to stay on top of the investment game. With the advent of the Smart Phone, investors have simplified their lives considerably because many of the applications that run on these devices amalgamate and parse information that was once considered a daunting and time consuming task. I'm always on the lookout for new apps and earlier this week on The New York Times Exonomix blog, University of Chicago economics professor Casey Mulligan did a posting about applications for Apple mobile products. In the article, professor Mulligan basically lists apps and writes brief descriptions of their functions that would benefit you if you are interested in economic indicators on the go. Out of the ten or so applications that were covered, two caught my eye and I am taking a closer examination of them to see what all of the buzz is about. These two applications are Economy by Cascade Software Corporation and A2ZEconomy by

Economy from the Cascade Software Corporation is the more established of the two apps and I'll start with that one first. The application blew me away. All of the information that I had to hunt and peck for from the Federal Reserve Bank of St. Louis is right there at my fingertips now. The latest values of key U.S. economic indicators like housing, employment, manufacturing, inflation and trade deficit are on one easy to use application. It even includes weekly updates of Canadian and Mexican currency exchange rates and M2 Money Supply information. It deserves all of the accolades it has gotten and more. Available for the iPod Touch, iPhone and iPad and costs only $1.99. The current rendition of the program is version 3.1 and from using it for three days, it looks like they've gotten all of the bugs out of it.

I can't say the same for A2ZEconomy when it comes to bugs, but have to cut it some slack since it's fairly new to the market, only launching in the Fall of 2010. They need another version or two to get the kinks out, but I liked this equally as well as Economy because it gave me additional financial statistics at my immediate disposal. As they say on their Web site: "This application provides up-to-date business and economic indicators from a diverse array of government sources, including the U.S. Census Bureau, U.S. Bureau of Labor Statistics, Federal Reserve Board of Governors, U.S. Treasury, U.S. Department of Commerce and many others.". I've been using it in tandem with Economy and between the two, have the data I need to make me a better informed investor without going to a dozen government Web sites.

Both applications have interactive graphs, but A2ZEconomy has some additional features that I really enjoyed. Most notably, the ability to e-mail their graphs in PDF format to yourself so you can get a better look at their material on your desktop computer. They also have a Web based application that they are BETA testing at What I didn't like about A2ZEconomy is that I discovered the two bugs while working with it. The first one is in their 'Favorites' section of the application where you relegate your most used indicators. It froze up on me and I had to sync my iPod to get it working again. The second bug I discovered is much to their detriment because it didn't allow me to upgrade from their free version to a subscription based app where you are able to access more indicators.

To be quite frank, I was very happy with the enormous amount of indicators with A2ZEconomy's free service, but was curious as to what they had to offer with the premium version. They have an annual subscription fee of $14.99 and if you don't want to make that long of a commitment, they offer monthly, quarterly and semi-annual packages. Just like Economy, A2ZEconomy is available for the iPod Touch, iPhone and iPad, and as a bonus, is also on the Android operating system, too. Both of these companies are small and I hope they make it. Both applications can be downloaded at the iTunes store.

I'm a bit behind the curve when it comes to some technology adaptation, but have owned an iPod Touch for two years now and find it's an indispensable tool for keeping track of my investments. In an earlier post, I wrote about Turing Studio's mobile app PortfolioLive for portfolio and watch list tracking. Don't know what I'd do without it. PortfolioLive, along with the usual suspects when it comes to news feeds, apps like Bloomberg, CNBC, Associated Press and The New York Times, enables me not to be tethered to a desktop computer all day. Now with Economy and A2ZEconomy, I have more arrows in my quiver. I know they've made my life a heck of a lot easier and I hope they can do the same for you as well.

Thursday, February 10, 2011

A Combustable Situation

Last week on the CNBC Web site Jeff Cox wrote an article, "Ready for 'Splash Crash', the Ultimate Market Meltdown?". The Splash Crash is the bratty child of the Flash Crash, just another step further in the evolution of High Frequency Trading. In the Flash Crash that occurred on May 6th, 2010, it is purported that High Frequency Trading caused the DOW to drop close to 1,000 points in the matter of minutes because of a lack of liquidity when a large sell order attempted to execute. This temporary decline in the markets was limited to one asset class - securities. However, with the Splash Crash, sophisticated and intertwined algorithms have taken a leap forward and will supposedly drag down a multitude of asset classes simultaneously - stocks, currencies, bonds and commodities.

This Splash Crash is a hypothetical situation and the probability of it happening is remote, but there just the same. The conventional wisdom of some traders is that this is a Black Swan event and they are preparing for the inevitable, not necessarily folding their tents, but keeping on their toes and rolling with the punches in case the market does take a nosedive. I disagree that this is a Black Swan event. It's a Gray Swan event. With a Black Swan event, situations that are considered impossible or unknown happen, like an extra-terrestrial landing on the White House lawn. A Gray Swan event dictates that the possibilities of the unexpected scenario are already known, but considered highly unlikely. With the markets going full steam ahead, some whiplash could be in store if in fact this Splash Crash or another Flash Crash does materialize. The chances of this occurring are slim, but it's good to be aware of the situation.

There is never an iron clad solution of what to do with your money in regards to the market, but the pearls of wisdom coming from a majority of analysts is to go long large-cap global securities. I don't like to overplay my hand, but I'm writing for an audience and it is no secret that I'm short some indexes and also hoarding cash. One of my holdings is the Direxion Small Cap Bear 3X Shares (TZA) and as of February 24th, they will be doing a 1 for 3 reverse split. This is the second reverse split that has happened to this ETF while I've owned it. It's been a dog to say the least, but I'm still holding on to it. If you own a security for a specific company and it does a reverse split, you should sell that stock immediately because the fundamentals of the company aren't good. The Direxion Small Cap Bear 3X Shares (TZA) mirrors the Russel 2000 three times to the downside and that index is not fundamentally weaker, it's just rallied so much that the price of the ETF has dropped off a cliff. I'll stick with it because it is a small percentage of the Ithaca Experiment portfolio and I still believe that it will rally. I may not recoup all of my losses with this one, but I'll take my chances.

Saturday, February 5, 2011

The Global Debt Trap

John Wiley & Sons recently translated and published Claus Vogt's and Roland Leuschel's German bestseller Die Inflationsfalle for the English speaking audience with a new title of The Global Debt Trap: How to Escape the Danger and Build a Fortune. This is Vogt's and Leuschel's second book collaboration and probably a continuation of their first venture, 2004's Das Greenspan Dossier, another German bestseller which was never translated for the American reader that predicted the 2008 real estate bust and subsequent market crash. The authors are steeped in the Austrian School of economics tradition and it reflects in their outlook and writing. Although I don't agree with a lot that they say, they are smart people and penned an interesting, but incomplete read.

If you aren't familiar with the Austrian School of economics, it basically believes in the free-market economy, going back to the gold standard and the elimination of the central banking system. Think Ron Paul. Throughout the book the authors throw intellectual Molotov cocktails at the Keynesians, specifically Alan Greenspan and Ben Bernanke, and, state specifically that they have lead us down the road to hyperinflation, just like in Zimbabwe during the last decade or in Germany in the 1920's. As the authors write: "No one can pinpoint precisely when we will witness the endgame of this unlimited money supply explosion and debt orgy. But when lying sleeplessly at night, any thinking economist, no matter how sanguine, must know the so-called global monetary order is essentially unrealistic and unstable - that sooner or later, it will come to an unpleasant end.".

When will this unpleasant end happen? They don't give a timetable, but they feel it is going to happen sooner rather than later. Their first book Das Greenspan Dossier came out in 2004 and the real estate bubble burst didn't occur until 4 years after publication. That same 4 years was also accompanied by a cyclical bull market for equities. You would have missed out on a lot of profits if you were out of the market during that time. It only goes to prove that it's tough to time the market, but the next disaster that they are predicting will be worldwide in nature and as they summarize so succinctly, "In the final analysis, we are at a dramatic historical turning point - one that may rival the collapse of the Soviet Union in its scale and extent.". What they are calling for is a new world order.

That's the gist of the first half of the book, and I found their spin on things very provocative because I too believe that there is too much consumer and sovereign debt in the system right now. Something has got to give, however, I don't see the America and free world as we know it turning into some sort of anarchistic state as the authors suggest may happen. The first part of the author's thesis in The Global Debt Trap proved compelling, but the subtitle for the book is How to Escape the Danger and Build a Fortune and this is where I feel Vogt and Leuschel came up short.

Roughly the last third of the work is devoted to helping the reader reap big rewards when the financial Apocalypse comes, but I never felt like there was any safe place to put my assets if indeed I had anything left after the massive hyperinflation that is supposedly coming in the way the authors describe. They suggest putting 25% of your assets in gold, but also caution that when the central banks begin buying gold, it will be time to bail on that asset class, so gold is not something you can hold onto for the duration. Vogt and Leuschel also warn that the United States government confiscated gold from the public during the Great Depression; so spread your bullion to other countries, most notable Switzerland in case that scenario unfolds again. Easier said than done.

One area they felt that wouldn't necessarily be safe, but the lesser of all evils, is to invest in large cap multinational securities, because after the market crashes, these companies are the most likely ones to survive and their prices will levitate after the market craters and begins to rise again. I just thought there were too many holes in their suggestions and they tended to contradict themselves at times when it came to preserving your finances. The authors also didn't give concrete examples of what to invest in other than generalizations like when the market is sinking, use inverse ETFs. The Global Debt Trap is a good book, but not a great book. I have read other publications by writers influenced by the Austrian School of economics that were much better, but maybe that's because they didn't paint so bleak a picture of the future.

Wednesday, February 2, 2011

The Raging Bull

I came within a whisker of throwing in the towel yesterday on my short ETFs and going into cash as the market roared up on all major indices wiping out my gains from Friday. The stars are aligned in favor of the bulls and I've been on the wrong side of the trade for well over a year now and have paid the price. The reason to sell would be to stop hemorrhaging money and have a nice tax write-off, but it would also mean I'd jockey myself out of position to take advantage of a correction in the near term, if indeed a correction is ever going to come. I hear all of the bulls on the business networks talking their own book and according to them, we are going to keep rallying for the foreseeable future. I should probably just turn off the television, but I enjoy watching the business news, at least in small doses.

Even an exogenous event like the revolution in Egypt can't derail the market. The market usually doesn't like uncertainty and this is serious stuff that's going on over in the Middle East. It just made me think about my investment decisions. There is no way I regret investing in short ETFs because at not only the time that I purchased them, but increasingly more so now, I believe that the economy is being inflated by the government and is due for a crash once the printing presses shut down. The market is always looking forward and as inflation starts to creep back into the economy, the FED will have to increase interest rates and that should cool things down for awhile. When that will happen is not in the realm of my expertise, but I'm counting on it happening before the Ithaca Experiment portfolio gets so low that I will have to sell and go into cash.

If you have been following this blog, you may be asking yourself how much time am I willing to sit on my positions or how much more money can I afford to lose. Well, I'll stay the course for as long as I remain solvent. The market can rally considerably more until I will have to abandon ship in order to salvage something out of my original investment. I realize the market has had a terrific run the past 5 months - up over 20%, but I seriously doubt it can continue at this torrid pace. I figure I have about a year's time until I have to bail. In a year's time, anything can happen.