An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. ”
-Benjamin Graham
In other words, look for high quality businesses with models which consistently generate predictable free cash flow over the years. The value of any financial investment is determined by the present value of the cash you can take out of it during its on going business life. Think of free cash flow in simple terms as the cash generated by a company that if you own the whole company you are free to allocate wherever you want or the company is free to allocate wherever it wants. An example of that, is Warren Buffet's Berkshire Hathaway which is a free cash flow giant that bought into private and publicly traded free cash flow generating companies. These companies produce dividends that allow Berkshire Hathaway to reinvest it and grow it. Since we don't own these companies, we look at how the companies are reinvesting the free cash flow whether by paying us dividends, reinvesting and growing the business or in other cash flow generating businesses, or buying back their own stocks ONLY when the price of the stock is undervalued or at a fair price that is expected to grow in the foreseeable future. Similarly, if we find such a business that we can understand, and is trading at a price cheaper than the sticker price for an economically justifiable reason, then it is a BUY. Another company that I would like us to have a look at is Facebook. If we zoom in to Facebook's balance sheet, we could see that their total cash position is experiencing a consistent upward trend. Since 2018, it has increased its total free cash from $41.711 billion to $54.85 billion in 2019, that is only in ONE YEAR. Such companies are of solid fundamentals and intrinsic value, and should not be missed when offered at a discount.
I learned that cash is king and companies with poor liquidity, regardless of it’s age and strong business model, can suffer severe consequences during unpredictable economic shocks like the Covid-19 pandemic/epidemic. Many of the companies were reinvesting their cash, not expecting an external threat such as the coronavirus, which caused them to fall short on their operational expenses and short term debt obligations and caused companies such as Hertz, Papyrus, and Earth Fare to file bankruptcy or liquidation. Moreover, what worked for me was the Top-bottom investment strategy. When I saw the coronavirus infection rate accelerating and how its affecting the global financial markets and the ways to counter it and restrict its spread (such as quarantine), I assumed its direct effect on demand for products of different sectors which drew my attention to the operational gearing ratio. I immediately reallocated my capital from high capital intensive businesses, due to their relatively high fixed costs caused by the depreciation of their non current assets and servicing costs, to less capital intensive businesses whose profits are less sensitive to changes to its output.
While investing principles in terms of generally evaluating and analyzing the business something will not necessarily change, a lot of the consumer habits will, something which would surely affect the nature of businesses and its operations. During quarantine, we had seen ZOOM officially become bigger than the top 7 American airlines combined due to businesses using the app to conduct their meetings and run services such as educational webinars that would have rather been physical. This can also affect the real estate industry where business might adopt the idea of home offices and reduce office spaces which can impact the commercial property leasing business. Other habits such as exercising have increased due to the available free time of many forcefully unemployed people and this can increase demand on sports garments and equipment and possibly increase gym memberships. In addition, people are further growing an already growing habit of ordering food delivery. As a result, Mc Donalds partnered up with Grubhub, as the fast-food giant looks to make delivery a $4 billion business for the company this year.
The stock market is filled with individuals who know the price of everything, but the value of nothing. ”
-Phillip Fisher
Patterns are all around us. Visible regularities of form are depicted in nature and recur in a vast spectrum of contexts. Fibonacci sequence is an example found in nature and surprisingly human behaviour as well, which is well explained in the book "The Wave Principle of Human Social Behavior and the New Science of Socionomics"- Robert Prechter. As Jesse Livermore also said: “Patterns repeat, because human nature hasn’t changed for thousand of years” and “There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.” Going back in time, the major silver coin used during the first 220 years of the empire was the denarius. With finite supply nature of silver and gold entering the empire, Roman spending was limited by the amount of denarii that could be minted. To finance war activities, Roman officials found a way to decrease the purity of their coinage, they were able to make more “silver” coins with the same face value. With more coins in circulation, the government could spend more. And so, the content of silver in the coins dropped over the years. Adding more coins of poorer quality into circulation did not help increase prosperity – it just transferred wealth away from the people, and it meant that more coins were needed to pay for goods and services. With soaring logistical and admin costs and no precious metals left to plunder from enemies, the Romans levied more and more taxes against the people to sustain the Empire. Hyperinflation, soaring taxes, and worthless money created a trifecta that dissolved much of Rome’s trade.The economy was paralyzed and later the Western Roman Empire would cease to exist by 476 A.D. Similarly, The French Revolution brought with it a massive inflation of the paper money called Assignats. History repeated itself during the Nixon era, when the breakup of the Bretton Woods system was executed, which fueled high inflation during the '70s, “Nixon shock”. Today the same scenario is happening again with trillions of dollars and other currencies being printed and minted into the economy that will lead to the debasement of these currencies and possibly witness the end of the US dollar standard or shall I say the US dinarii standard.
There was once a kind, old puzzlemaker who possessed magical powers. The puzzlemaker's greatest pleasure came from creating enchanting picture puzzles for the children who lived in his neighbourhood. These puzzles were no ordinary puzzles. They had magical properties - when the final piece was snapped into place, beams of light would radiate from the images, filling the children with joy. all they had to do was gaze at the picture. Nothing more. For the kids, it was better than eating 10,000 chocolate chip cookies and drinking 10,000 glasses of milk. One fine day the puzzle maker truly out did himself. He painted his most spell-binding picture ever, using magical paints flecked with star dust and special brushes whose handles were encased in gold. The puzzlemaker was so excited by his creation that he decided not to carve the picture into individual puzzle pieces. Instead he wanted the children to experience all the magic immediately.
As he finished packaging the picture, a little boy walked into the shop hoping to find the puzzlemaker's latest creation. The puzzlemaker excitedly handed over the package. The boy's bright -eyed smile suddenly disappeared. His face turned a little sad.Clearly, he was disappointed at something. "What's wrong?" the puzzle maker asked. The little boy explained that building and creating the puzzle was the actual fun part! The puzzlemaker understood immediately. And with as much love and care as he had put into creating the original image, the puzzlemaker cut and disassembled the picture. He then lovingly scattered the individual pieces into the box. He then gave the children what they really wanted more than anything else - the joy and accomplishment of building the magical puzzle themselves.
To provide the Vessel with the opportunity to create its own fulfilment, the endless world was disassembled and transformed into a picture puzzle. By allowing the Vessel to reassemble the puzzle of Creation, we, the Vessel, become creators of our fulfilment and the call of our joy, thus fulfilling our deepest desire and most profound need.
Similarly, we face the same scenario and Man seeks to fulfil his deepest desire of control and interferes in all aspects of nature including THE ECONOMY.
This interference in the economy of continuously kicking the can down the road with its governmental influenced monetary policies has proven throughout history not to solve the problem but inflate it, delay it, and make it worse (as the pattern again suggests: The higher the rise the deeper the fall). Until we level up and learn from the past, give up our ego, and let THE INVISIBLE HAND correct the situation in a healthy manner, Karma will always repeat itself.
Adam Smith used the metaphor of an invisible hand to represent the instincts of human nature that direct behaviour. The unseen forces that move the free market economy. Through individual self-interest and freedom of production as well as consumption, the best interests of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade. As part of laissez-faire approach, the market leads itself to find its equilibrium without government or other interventions forcing it into unnatural pattern. This natural cyclical flow can result in healthy and controlled corrections in the markets that tend to recover faster from less damaging downfalls.
Some of the critics raise the red flag that voluntary trades in a free market produce unintentional and widespread benefits, selfish individualism, and Pareto efficiency. I believe the nature of Capitalism is innovation-oriented and growth conducive which gives the fair chance to all individuals of the society and promotes competitiveness among the nation's participants, and global prosperity. For the less fortunate, progressive tax policies alongside with charity promoting tax concessions can be a preliminary solution. Arguably as history shows, the intervention of the governments does no good in that area either. The government stimuli prepping up the markets supporting companies and businesses with poor financial health is a perfect example of devaluing the nation's currency and moving value from the hands of the poor to the more fortunate irresponsible-government dependent companies that seek bailouts recession after another.
WHEN IN DOUBT TAKE THE PROACTIVE ROUTE ”
-Samir Jezzini
Printing and minting of money is no new story in the history of economics and finance. For more details about the historic economic events of similar scenarios you can read my recent article “Man’s Hand VS The Invisible Hand” (link below). Let’s fast forward to year 2007! The Fed began reacting to the rise in unemployment with their closest-to-hand tool : cutting interest rates, in hopes to increase customer spending which leads to an increase in employment and economic output etc…The Federal reserve and other policymakers, and after the collapse of Lehman Brothers, feared that other major banks would fail. Consequently, knowing how costly the collapse of banks can be, the Fed stipulated the Congress to pass the Troubled Asset Relief Program (TARP), which was major bailout of the financial system. It also eased the access of the banks to cheap overnight lending to prevent additional bankruptcies. An unconventional tool called quantitative easing (QE) emerged, a term that stands for Large-Scale Asset Purchases which is the process of buying back as many of the longer-term debt issues as possible by the federal government and other governmental appointed institutions. Using that tool, the Feds no longer even need to print money, it just contracts the banks’ balance sheets and expands its own, increasing the banks’ liquidity which in return banks create loans and money supply is increased in the markets!
During Ben Bernanke's tenure in office, lots of money has been created, yet much of it was still controlled by the Feds. HOW? The required reserves ratio imposed on Banks as part of the regulatory framework, obliges banks to deposit an X percentage of the money with the central back which is not allowed to be lent out. At that time, the Feds were Paying interest on excess reserves as a useful way to pull money out of the economy if it becomes worried about inflation in the future. The safest investment on Earth!
Once again the Feds repeat almost the same steps in efforts to increase liquidity and counter the impact of the coronavirus on the economy (The economy was already suffering before the Covid-19 pandemic/epidemic which will be discussed in details in the next article). When the coronavirus came along, treasury markets cracks became clearer. The Feds who were already intervening in the repo-markets (A repurchase agreement – repo - is a form of short-term borrowing for dealers in governement securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations. – source: Investopedia) realized the situation and decided to further ramp it up. Amid fears about the impact of the coronavirus pandemic on the economy, and investors dumping Treasury securities seeking cash, the Fed stepped in to buy these government bonds.
On March 12, the Fed said it would offer $500 billion in a three-months operation. The following day, the Fed planned to inject $1 trillion more, split between a three-month operation and a one-month operation. It was prepared to offer up to $1 trillion every subsequent week.
Given that several of the stimulus programs have no defined cap, it seems a safe bet that, as the Wall Street Journal’s Nick Timiraos wrote last week, the Fed will remain on track to double its balance sheet — a $4.5 trillion jump — by the middle of this year. But even if you look only at current programs, the theoretical maximum is much, much higher.
There is an obvious correlation between liquidity and the stock markets (since 2009), and Trump’s re-election depends heavily on the rise of the stock markets. Trillions more are expected to fall from the sky instructed by the Trump’s administration, to prop up the markets and insure he wins the up-coming elections in November.
According to ustr.gov, U.S. goods imports from China totaled $539.5 billion in 2018, up 6.7% ($34.0 billion) from 2017, and up 59.7% from 2008. U.S. imports from are up 427% from 2001 (pre-WTO accession). U.S. imports from China account for 21.2% of overall U.S. imports in 2018.The escalation in the trade war between President Xi and President Trump leads to two different scenarios. The first scenario is where we see the tariffs imposed on the Chinese imported goods cause it to become more expensive to the U.S consumer which means inflation. The second scenario is if Trump decides to stick to his word and cut off the Chinese-American relationship! This means that the Chinese products won’t even reach the U.S consumer which will push the U.S consumer to look for alternatives which will be more expensive and therefore inflation! This lack of product provision will cause a supply shock to the American markets. Although demand is falling (temporarily – although retail sales show a recovery due to the reliance on product delivery and online shopping), it will fall at a slower pace than supply which will cause prices to soar and therefore inflation or hyper stagflation especially with the threat of a second coronavirus wave knocking at the door!
Half of the US dollar or more is held outside of the U.S. and when the Fed devalues the dollar - printing more money, the purchasing power will be shifted from the holders of the USD currency to whoever gets the newly printed money first which is in this case the U.S.! So it is like stealing from the rest of the world to bolster the US economy. Not only from the rest of the world, but also from the U.S. citizens to the major corporate and financial institutions who have the most direct access to that newly created money.
BAILOUT PLAN “GOING DIRECT” – (SNAP FROM AN ARTICLE PUBLISHED AT THE WALL STREET PARADE By Pam Martens and Russ Martens: June 5, 2020)
It’s called “Going Direct.” That’s the financial bailout plan designed and authored by former central bankers now on the payroll at BlackRock, an investment manager of $7 trillion in stock and bond funds. The plan was rolled out in August 2019 at the G7 summit of central bankers in Jackson Hole, Wyoming – months before the public was aware of any financial crisis. One month later, on September 17, 2019, the U.S. Federal Reserve would begin an emergency repo loan bailout program, making hundreds of billions of dollars a week in loans by “going direct” to the trading houses on Wall Street.
The BlackRock planscalls for blurring the lines between government fiscal policy and central bank monetary policy – exactly what the U.S. Treasury and the Federal Reserve are doing today in the United States. BlackRock has now been hired by the Federal Reserve, the Bank of Canada, and Sweden’s central bank, Riksbank, to implement key features of the plan. Three of the authors of the BlackRock plan previously worked as central bankers in the U.S., Canada and Switzerland, respectively.
The authors wrote in the white paper that “in a downturn the only solution is for a more formal – and historically unusual – coordination of monetary and fiscal policy to provide effective stimulus.”
We now understand why, for the first time in history, the U.S. Congress handed over $454 billion of taxpayers’ money to the Fed, without any meaningful debate, to eat losses on toxic assets produced by the Wall Street banks it supervises. The Fed plans to leverage the $454 billion into a $4.54 trillion bailout plan, “going direct” with bailouts to the commercial paper market, money market funds, and a host of other markets.
The BlackRock plan further explains why, for the first time in history, the Fed has hired BlackRock to “go direct” and buy up $750 billion in both primary and secondary corporate bonds and bond ETFs (Exchange Traded Funds), a product of which BlackRock is one of the largest purveyors in the world. Adding further outrage, the BlackRock-run program will get $75 billion of the $454 billion in taxpayers’ money to eat the losses on its corporate bond purchases, which will include its own ETFs, which the Fed is allowing it to buy in the program.
Helicopter money is also spelled out in the BlackRock plan, which explains why simultaneously with the $454 billion Congress carved out for the Fed under the CARES Act, fiscal stimulus was also “going direct” with $1200 checks and direct deposits to the little people of America and Paycheck Protection Program loans and grants “going direct” to small businesses.
One feature of the BlackRock plan that is certain to get wide public pushback in the U.S. is the proposal for central banks to buy stocks (equities). The authors write this:
“Any additional measures to stimulate economic growth will have to go beyond the interest rate channel and ‘go direct’ – [with] a central bank crediting private or public sector accounts directly with money. One way or another, this will mean subsidizing spending – and such a measure would be fiscal rather than monetary by design. This can be done directly through fiscal policy or by expanding the monetary policy toolkit with an instrument that will be fiscal in nature, such as credit easing by way of buying equities. This implies that an effective stimulus would require coordination between monetary and fiscal policy –be it implicitly or explicitly.”
In the United States, approximately 85 percent of the stock market is owned by the richest 10 percent of Americans. Buying stocks would simply expand and accelerate the wealth and income inequality which is already at the highest levels since the 1920s – a time when Wall Street also owned large deposit-taking banks.
The Swiss National Bank, the central bank of Switzerland, where one of the BlackRock authors previously worked, already has massive holdings of individual stocks, including $94 billion in publicly traded stocks in the U.S. according to its March 31,2020 report that was filed with the Securities and Exchange Commission.
With all the above being said, we can now come to a conclusion and understand where the liquidity is being channeled to! With all small to medium and some major corporations being crushed, we see companies of different sectors like Apple, Tesla, Facebook and Microsoft at their all-time high while their earnings are plummeting. Why? Maybe it is easier to deal with a hand full of corporate only or maybe it is just “THE PLAN”! I’ll keep this question for you to research and come to a personal conclusion.
One longstanding line of criticism of the Federal Reserve holds the idea of a pure fiat currency! A legal tender-currency that is not backed by any precious metal and of no intrinsic value (Check out my article “Man’s Hand VS The Invisible Hand” - link below). The loss of confidence, as explained earlier, in the U.S dollar will cause the rush of investors to Gold and Silver as a safe haven and a more secure currency! After 2008, the price of gold rose from the lows of $692.50/oz to ab all-time high of $1,896.50/oz in 2011. You can imagine with all the money created (loss of value of the USD), the current economic conditions, the potential fall in the U.S dollar standard, the Chinese threat to drop the U.S dollar as a foreign currency reserve and the fact that Russia and China (the biggest gold exporter which is restricting the permissible exported amount of gold) are accumulating gold and buying mines all over the world, seem to be reasonable data to believe that a surge in the prices of gold and silver is almost eminent!