Reasonable Short?

I heard an interesting point yesterday. Pull a 3 year chart of the XRT, which is one of the retailer ETF's (exchange traded funds).

http://www.google.com/finance?client=ob&q=NYSE:XRT

Does it make sense that a basket of retailers would be trading in the market at roughly the same level as before things cliffed last September? For several reasons I would argue no, but I'd be curious to hear your thoughts.

The components of the XRT can be found here:

https://www.spdrs.com/product/fund.seam?ticker=xrt

-2outof4

Would Shorter Political Terms Change "Short-Termism?"

Einhorn shorts U.S. 'short-term thinking' - NY Post reports David Einhorn is bullish on gold because he's bearish on Obama. Members of President Obama's prized economic team, including Treasury Secretary Tim Geithner, are "quintessential short-term decision makers," Einhorn said, explaining his sudden fondness for gold. Watching Geithner, Federal Reserve Chairman Ben Bernanke and White House economic advisor Larry Summers on television recently, "my instinct was to short the dollar," Einhorn joked at the Value Investing Congress. Instead, he decided to invest in gold, even though futures hit a record price of $1,072 an ounce last week. Gold does well when "monetary and fiscal policies go awry," said the hedge-fund manager best known for shorting toppled investment bank Lehman Brothers. Specifically, Einhorn trashed the team's "too-big-to-fail" policy requiring taxpayers to prop up large, troubled institutions, like banks. "Our authorities have taken the view that kids will be kids," he said, comparing the officials to the parents of teenagers who know they will be rescued any time they get caught. He suggested public officials break up large financial institutions that appear on the brink of collapse rather than bail them out. Einhorn also said Geithner's regulatory reform plan was akin to efforts to stop terrorism by "frisking grandma and taking away everyone's shampoo." He scoffed at the idea that the government might try to regulate complex financial instruments like credit default swaps, believing they should be wiped out. He said regulating the swaps is like "trying to make asbestos safer."

On a side note, Mr. Einhorn has made a couple of 2outof4 appearances now!

-2outof4

Thanks Barney

Where is our financial education?

The myth of the perpetually rising home price lives on:

http://www.businessinsider.com/20-year-old-buys-home-with-183000-fha-loan-and-just-35-down-2009-10

This girl's efforts could be directed so much more sensibly!

-2outof4

No More Overseas Vacations

The funk that I've been in and part of the reason there have been fewer posts recently is partially a result of politicians' attempt to reflate American assets by deflating the currency, and the lack of political will to reverse the trend.

At this rate, the US Dollar (USD) is going to lose its position as the currency of trade.

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

So what you say? This is what:

http://online.wsj.com/article/SB10001424052748703298004574458923186941870.html

I sat in a meeting today where a respected Wall Street strategist said the only way out of the current economic situation is to inflate assets. I think that is a horrible idea. As has been stated here many times, we need to work our way out of it and not try to legislate out of it.

Seeing crap like this, at the 9:55 mark, boils my blood and frankly depresses me:

http://abcnews.go.com/Video/playerIndex?id=8746931

As usual, free money will be spent - it has a tendency to do that! But it is not in the long-term interest of Americans or the USD. I'm beginning to wonder if either party cares.

-2outof4

My Beer Gut is Not Your Problem!

I ate one of the best cheesesteaks of my life last night complete with onion rings and ice cream. If I have a heart attack this afternoon, do you think Mrs. 2outof4 is going to sue my local cheesesteak joint?

Nancy Pelosi and Co. need to heed Mr. Kent's advice. Get your kids off the couch and back to more active lifestyles. Americans need to take responsibiltiy for their health without looking for scapegoats, and once again choosing market winners.

http://online.wsj.com/article/SB20001424052748703298004574455464120581696.html

Two maintenance guys got on my office elevator this morning and when they got of one floor later, one said to the rest of us, "I bet you hate the guys that only ride one floor." I don't them at all, I just think they are extremely lazy. Maybe if they took the stairs a couple of times daily, they could enjoy that tasty Coke!

-2outof4

Golden Nuggets

Hello. Happy Friday! I have two recommendations for you today.

The first is a book, 'The Million Dollar Portfolio: How to Build and Grow a Panic-Proof Investment Portfolio' by David and Tom Gardner, the guys behind Fool.com (http://www.amazon.com/Motley-Fool-Million-Dollar-Portfolio/dp/B002M3SOZ6/ref=sr_1_1?ie=UTF8&s=books&qid=1253897791&sr=1-1). I think it is a reasonably easy to read text regarding investing as an individual investor. I am about a third of the way through, and already feel like it has been worth the read.

Sometimes it is important to go back and reread things you think you know. I never dismiss opportu reinforcement and reminders of sound ideas.

The second rec comes from the reading and a piece of news flow that hit the tape yesterday - McDonald's (ticker: MCD) raised its quarterly dividend from 50 cents to 55 cents. That means the MCD annual dividend is now set at $2.20. At the current share price that results in a dividend yield of 3.9% ($2.220/$56.99).

At today's valuation of 13.3x FY10 earnings, net debt to total capital of 40%, a return on capital of 27% and a top five global brand, I think you could be happy purchasing MCD stock without the dividend yield. However, with the dividend yield, this is a no-brainer. You need to keep up with market developments and what is going on operationally at the company, but generally speaking this stock can be tucked away in your portfolio. If the stock manages just 2% capital appreciation per year over the next seven years, you would have made almost 50%. Slow and steady wins the race!

I know the fries kind of suck and the Angus Burger doesn't stack up to an In and Out Double Meat, but MCD has made some good menu adjustments and the drinks franchise is slowly coming to dominate as the value-oriented alternative to SBUX. That McCafe thing is tasty! For a stock, you could do a lot worse than MCD.

Have a good weekend!

-2outof4

Codifying Thoughts on Gold

I have chatted with several goldbugs recently - one can hardly escape their infomericals - and I have had questions regarding my own position on Gold.

Over the past couple of weeks I have had the chance to codify my thoughts on Gold. I also went to a coin store the other weekend to familiarize myself with the buying process.

In conclusion, I think it makes a lot of sense to own gold. The primary reason is that I do not see how we avoid inflation given the constantly churning dollar printing press. Most people agree gold holds its value during times of inflation. Therefore, the question then becomes how should I hold gold and how much of it.

This is where the codification of my thoughts comes in. I think it makes sense to look at Gold as an insurance policy. If it goes up in value then you will have been successful in your battle against inflation. If it goes down in value, oh well, you did not lose a lot of value from other assets.

When I was speaking to a family member who was going to test the waters, I said that if you want to buy some, buy an amount that you would not be upset about if you lost half the value. If you cannot be comfortable with the idea of insurance or paying something for protection that you may never benefit from, then Gold is probably not for you. Also, if for whatever reason Gold does drop precipitously, then you have the opportunity to buy more if you have not blown your spending power up (assuming you still see the inflation or other threat that caused you to buy it in the first place).

There are several ways to own Gold. The easiest for you and me are through the exchange traded fund ticker GLD, which you can buy just like a stock, or physical. Physical is a lot easier to buy than I had expected. A reputable coin store that I went to sold Krugerrands and US Eagle coins. They were one ounce coins quoted as the spot price (about $1,010/oz) plus a premium. The premium was $55/coin for Krugerrands and $65/coin for Eagles, which if you think about it, is a damn high commission.

The argument for the higher Eagle premium is that Americans still like to buy American. I was somewhat wary of the authentication "process." I was just told that the shop eyeballs them and there are very few frauds. So one would need to shop around and make sure this is in fact true. However, if I had a couple of thousand dollars on me, I could walk out with a couple of coins. The shops are far less intimidating than I thought. The staff should be happy to educate you.

I would love to hear your thoughts on inflation protection and Gold specifically. Have a great weekend!

-2outof4

Inflation Backfiring

On the commute in this morning I was reading one of my favorite investment newsletters - The High Tech Strategist by Fred Hickey. It is a worthwhile monthly publication and affordable to the average retail investor, not just institutions.

One of the interesting points he made, which ties to my current puzzlement regarding the recent surge in the stock market, is that we are experiencing inflation. Sure it is not in consumer goods prices. In fact, there may be a case we are experiencing deflation in consumer goods. But we are seeing inflation within other asset prices, see commodities, like gold and oil, as well as, stocks.

When money is dumped on the global economy at the rate the various global printing presses have been running, it is logical to see and fear inflation. A cynic might say our government's plan is to inflate our way out of all the debt we've piled on. But we are not seeing it in consumer prices because of job losses and wage deflation.

This phenomena has the exact opposite effect the Administration desires. It makes the rich richer and the poor poorer. The wealthy have assets that can benefit from the inflation while the poor do not. Therefore, in a time of asset inflation, the gap widens.

Maybe the US should check its misguided fiscal policy before clamoring for higher taxes on the wealthy and limits on pay. When you bow to populism without taking the outcomes into account, bigger problems can ensue.

-2outof4

Edu Costs to Infinity

This article puts some interesting numbers around a topic discussed many times on 2outof4:

http://online.wsj.com/article/SB10001424052970204731804574388682129316614.html

As we've said before, as long as money is made available for what seems like no cost at the time, it will be spent!

The solution: if the institution is depending on these Title IV funds from the government, the government has every right to protect the consumer and limit tuition increases.

-2outof4

The Captain Doesn't Want to Pay Taxes Either

This goes back to the FairTax and the kinds of distortion that a convoluted tax system can cause.

If the US tax structure was flatter/more simplified the good folks of Puerto Rico may be keeping these jobs:

http://www.latimes.com/business/la-fi-rum2-2009sep02,0,4042398.story

Lord knows the 2outof4 family will be contributing to the Diageo boon over the next three months!

-2outof4