Money Magic

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I enjoy games of chance. I’m particularly fond of casino scenes in movies—tuxedos for men, slinky dresses for women, slow-burning cigarettes, and dry martinis all-around. In real life, casinos are about as alluring as a mud bath. In Europe, for example, you’ll find a casino in every sleepy spa town—massages and “water cures” are meant to give a virtuous sheen to otherwise seedy places. Not a Daniel Craig—or even a  David Niven in sight.

The luck factor is probably one of the reasons I’m interested in stock markets too. There are many other things I’d rather do than actually work for money.  Just pick a winner and off to the races we go! (Of course, it never quite works out that way—darn gravity.)

Sleight-of-hand is not only found in Monte Carlo casinos though. It’s alive and well in many corporations. This past week, quarterly results have started to trickle in. You can get an eyeful of some pretty nifty accounting in their filing reports.

I’ll admit that I’ve tortured myself in many ways: self-doubt, bikini waxes, watching two episodes of Vinyl…but I have yet to savor what is sure to be the retina-frying experience of exhuming a financial statement. When the quarterlies arrive at the door, I immediately deposit them straight into the recycling bin. Warren Buffett may have the patience to pick through financial statements with his mental tweezers; I would rather watch Casino Royale, or paint dry.

Here are a few common sleights-of-hand:

Share buybacks. When corporations buy their own shares it reduces the number of shares outstanding and it makes metrics such as cash-flow-per-share and earnings-per-share look much better than they otherwise would.

Extraordinary items. The “footnotes” section of the annual report is a dumping ground for all kinds of juicy expenses, some of which may be on-going. Items such as restructuring, acquisition, severance, write-downs of impaired assets, and data breaches all have an impact on profitability but are often shooed-away, (“don’t worry your pretty head about these darling”), as non-material.

Lower tax rates. While this is not accounting trickery, per se, by moving a company’s domicile to a low-tax country, such as Ireland, a corporation pays less overall tax. This gives their earnings a rosy hue. But these better looking numbers may have nothing to do with improved earnings through actual growth.

So, how good are today’s corporate earnings for reals?

Some investment brainiacs say that deflation is not out of the question. So, unless you’re James Bond, here’s a hot tip: don’t throw all your chips in.

Pop Life

C Balloon Dress

What’s it going to be—inflation or deflation? Everyone has her own opinion and there’s a good case to be made for either outcome. Governments have been printing money for some time now. According to the recent investment letter from Francis Chou, money printing is growing at an annualized rate of 7.2 percent. Extra low interest rates are causing asset bubbles in real estate and some equities. Fair-to-middling companies with decent dividend yields are in high demand, jacking up their share prices accordingly. Some government bonds carry a negative yield, or, in other words, you pay to invest in them.

On the other hand, you don’t have to be an economist to see that global growth is ticking down. China’s ghost cities, Canada’s woeful oil and gas sector, Brazil’s fiascos, India’s dubious GDP metrics. The U.S. is growing but ever so gingerly. The world is a different place than it was in 2007. It will take some time to absorb the excess supply of commodities. And, then there’s the aging demographics in North America and Europe that could potentially put the brakes on business start-ups, spending and investing. When the inflation rate is less than zero, hello deflation. Deflation is accompanied by high unemployment levels, low prices, and reduced private investment and government spending. Once a region dips into deflation it’s like swimming in a sea of molasses. Japan floundered for a decade.

At a recent lunch hosted by Burgundy Asset Management, I cornered one of their investment honchos and posed the inflation/deflation question. He felt that deflation is the bigger short-term risk. However, others say that, longer term, inflation is not out of the question to absorb all that printed money. (Longer term can mean a decade or more away.)

In his annual letter to shareholders, Chou recounts Sir Winston Churchill’s skirmish with MP Bessie Braddock. During one of Churchill’s benders, Braddock told him, “Winston, you are drunk, and, what’s more, you are disgustingly drunk.” Upon which Churchill replied, “My dear, you are ugly, and what’s more, you are disgustingly ugly. But tomorrow I shall be sober and you will still be disgustingly ugly.” 

Golden Slumbers

Photo Courtesy of Hakon H

For years I stalked a gold YSL messenger bag. The first sighting was at the YSL boutique on 57th Street in New York. It was perched like a goldfinch on a shelf just out of my reach. The fabulosity of the gold glitter adorning an otherwise utilitarian city bag tickled my Marie Antointette/Madame Bovary genome. “Dare I”, I wondered?

I daren’t. Instead I opted for a perfectly respectable taupe shoulder bag in a kind of pebbled patent leather. Still, occasionally my mind drifted to the gold YSL that got away. I wondered how it was; where it was?

Occasionally it popped up on eBay, spit up like ambergris, on the waves of fashion. But ambergris, (for those readers not into perfumery, it is otherwise known as whale vomit), the ones that came up for auction were all ‘pre-loved’ as the resale lingo goes. In other words, the bags had been around town. And, friends, gold sparkle is not known for its durability.

In other news, gold, that investment stalwart, has fallen on hard times. Often viewed as a hedge against inflation, many investors liked to have at least a smidge in their portfolios—along with the rows of canned beans in their cellars. The rampant, multi-year bond buying program to the South stoked fears of rising inflation but that has not come to pass. If anything, interest rates are drifting lower raising fears of lowflation or deflation.

Still, in tumultuous times humans find emotional comfort in tangible things like gold, real estate, sable coats, and, as Dennis Gartman, a U.S. economist and editor of the widely followed The Gartman Letter,  put it thusly, [things] “that if dropped on your foot shall hurt.” He’s also long steel, railroads, aluminum and, yes, even gold.

Some investors are adamantly opposed to owning gold. Warren Buffett makes a compelling case for avoiding this asset class entirely. According to Buffett gold has two significant shortcomings: it’s of no use and it’s not procreative.

Yes, it looks pretty on a wrist or finger but if you purchase an ounce of gold in 2014, in 2020 you will still own exactly one ounce of gold. But, if instead you buy 100 shares of Apple this year, there is high probability that your 100 shares will have earned you substantial dividends, as well as an increase in market value during the ensuing six years. Apple is constantly growing and innovating; the gold bar is not. (By the way, this same reasoning applies to currency-based assets like T-bills etc.)

Over the years I’ve taken small nibbles in gold in both large caps and micro caps. Unlike Buffett, I am agnostic on gold. Sometimes I own it, sometimes I don’t. Currently my only position is in a small gold mining company operating out of Burkina Faso. It doubled recently and I sold off half and now I’m left with the “market’s money”—and just as well given circumstances there which are fully reflected in the today’s share price.

Still, there’s something alluring about tangible things that come out of the ground.

Lately I’ve been flirting with graphite—the unsexy carbon. It could have great commercial applications in batteries for electric cars. There’s also a buzz about aluminum as a replacement for steel in car manufacturing to decrease weight and meet government-mandated fuel efficiency targets.

Graphite? Aluminum? Yes, they very far from the glamourama of 57th Street. But fashion never sleeps and neither does Mr. Market. So, until the next gilded age, try a more somber palette.