‘Fortress Companies’ – finding security with value investing
Latest News about traditional investments.
Kent Lucas, Editor of Taipan’s Safe Haven Investor, shares some of his keys for skillful value investing, as written for Taipan Daily.
Kent Lucas (Taipan Daily):
I’m sure many of you know all too well about the problem of insomnia. It affects four in 10 adults, according to the European Journal of Psychiatry. And a 2009 National Sleep Foundation study indicated that 67% of those surveyed experienced a sleeping problem at least a few days a week compared to only 13% in 1991.
I’m sure the wildly swinging stock market – down 50%, up 60% from the lows, etc. – hasn’t helped. Even as times get increasingly hectic, though, you want to make sure you’re getting enough quality sleep. It’s proven to help you function better during the day (and live longer).
The tie-in is that, when it comes to long-term investing at least, I’m here to help you sleep better at night. So today we’ll look at the importance of financial strength when searching for high-quality investment ideas.
The Financial Fortress
To that end, my game plan is investing in Financial Fortresses – rock-solid companies that can withstand economic fallout (and occasional serious beat downs from Mr. Market. (Picture a Sherman tank that can withstand serious artillery attack.)
There are many high-quality companies in outstanding financial position because of the many reasons, including having a “very wide economic moat,” that I previously discussed.
From my perspective, a Financial Fortress is typically an investment-grade company that either has
a) a great balance sheet
b) large cash flow generating capabilities, and/or
c) impressive asset efficiency
To give you some idea of what I mean, here is a sample list of companies that are cash-rich or otherwise don’t carry any long-term debt.
Fiscal Prudence
Companies with great balance sheets have low long-term debt levels or even no debt at all (with actual net cash on their books). This creates a solid cushion, enabling such companies to weather tough economic times or temporary challenges to the underlying business. Operating with cash on hand and little or no debt also allows for tremendous financial, strategic and operational flexibility to fuel growth and generate solid shareholder returns. And for our purposes of protecting and creating wealth, a company with a superior financial position increases the odds of generating above-market returns.
Some companies are just very conservative and refuse to take on significant amounts of debt. Among corporate financial theorists, there is plenty of research and debate in regard to potential optimal levels of debt, equity and so on.
For many if not most companies, taking on a certain amount of debt makes sense. Companies can manage what is known as their “capital structure” by issuing debt or raising new funds through equity offerings (issuing more stock) during a strong market period. Or, companies can be so profitable that they generate ample “free cash flow” from their day-to-day operations.
Click here for the rest of Mr. Lucas’ article on Taipan Daily.
Original source for this article: Contrarian Profits
What if They Stop Buying our Debt?
Latest News about traditional investments.
Doug Hornig, senior prognosticator at The Casey Report, analyzes the alarming trend of U.S. federal debt and its future implications.
“I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all.
Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers.
As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.
Chart of U.S. national debt holders, domestic and foreign
Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.
Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases — trade surpluses — has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase.
While foreigners are continuing to show up for the record-sized Treasury auctions, it’s due to the dollar retaining its status (albeit shakily) as the world’s reserve currency. But they have become quite cautious, generally investing towards the front end of the yield curve, which is a vote of no confidence in the buck’s future. As the chart below illustrates, sales of long-term bonds to foreigners are way down.Treasury bond sales graph
So what does all this mean?
It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over — and the unwinding process has just begun.
Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.
Projected U.S. Debt
As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on “auto-pilot” and quickly headed to the point where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.
The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.
The editors of The Casey Report have been alerting subscribers to this very possible scenario for quite some time. If foreigners stop buying U.S. government debt, the whole house of cards will come crashing down. But you can do a lot to protect yourself financially – run with the trend instead of swimming against it. Find out more about the accurate predictions of trend hunter Doug Casey and his team, and how to profit from them . . . click here.
Original source for this article: Contrarian Profits
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