The Paper Armageddon Portfolio, One Year Later
As some of you may recall, I published an article here at TFMR one year ago in August of 2013 titled The Paper Armageddon Portfolio. In this piece I outlined a rationale for investing in certain sectors from a “hard assets/tangible value” perspective that would reflect the TFMR understanding of the ongoing Keynesian process of QE, artificially low interest rates, market manipulation, and dollar devaluation. Within those sectors, I selected multiple stocks from companies I felt would outperform the sector as a whole. The general idea was to come up with a list of companies who were poised to not only survive the current debt creation/paper ponzi economy, but would potentially offer solid returns in the coming paradigm where tangible and productive assets will be worth far more than today’s paper promises. So one year later I thought it would be worthwhile to check back in on this investing thesis to see how these picks and sectors fared and to discuss what we might learn from their performance over the last year.
The article I originally posted is here, but to summarize, I outlined four sectors oriented around hard assets and/or the real-world production of tangible goods. The four I chose were 1. Farmland, 2. Timber and grazing, 3. Energy and commodities, and 4. Railroads (which I surmised would be poised to grow in a high fuel costs/post-Petrodollar environment, and to take market share from the currently dominant but fuel inefficient trucking industry).
Let’s assume that, as I recommended in the article, Turdites looked at this list and spent a few weeks doing their own research and due diligence on these companies, then chose to invest a few weeks later. Here is a breakdown of the 1 year performance of these individual stocks I chose within these sectors in my original list. Each entry shows ticker symbol, price change over the last year, % gain, dividend yield, then what a $10,000 investment in that stock would be worth today, and finally how much dividend one would have been paid:
Ticker Price change % gain Div% Current value + Div.
CRESY- 8.00 to 11.62 (+45%) Div 2.9% --- 10k invested = $14,500, +290
SCPZF- 2.65 to 3.03 (+14.3%) Div 0% --- 10k= 11,430
LAND- 16.26 to 12.31, (-24.2%) Div 3% --- 10k=7,580, + 300
Timber and Grazing:
TPL- 85.76 to 200, (+133.2%) Div 0.2% --- 10k = 23,320 + 200
PCH- 38.56 to 42.70, (+10.7%) Div 3.4% --- 10k = 11,070, +340
PCL- 43.7 to 40.91, (-6.3%) Div 4.3% --- 10k = 9,370 +430
DBC- 26.74 to 24.96, ( – 6.6%) Div 0% --- 10k = 9,400
WHZ- 12.87 to 12.12, (-5.9%) Div 20.5% --- 10k = 9,410, +2,050
SDR- 13.5 to 6.7, (-50.3%) Div 24.4% --- 10k = 4,970 +2,440
CP- 82.5 to 200.46,(+142.9%) Div 0.7% --- 10k = 24,290 + 70
GWR- 86.5 to 98.01, ((+13.3%) Div 0% --- 10k = 11,330
NSC- 72.16 to 106.75, (+47.9%) Div 2.2% --- 10k = 14,790 +220
Total: Hypothetical $120,000 invested (10k each stock), 1yr total ROI =31.5%, now worth $157,800 (current stock value + Div)
Not too shabby- a healthy 31.5% gain for the year strongly outpaced the S&P just for the original list. But the hive-mind of Turdville is far smarter than any of us are by ourselves, and one of the things I asked in the original article was for Turdites to examine and comment on these companies and make suggestions they thought would be helpful for the list. During this discussion, Turdites noted that there were serious concerns or problems with three of the companies I listed, and I found their rationale for avoiding these companies to be both well informed, and quite persuasive. I noted this in the comments section, and based on my fellow Turdites critique, I excluded three of these companies from this list ( LAND, WHZ and SDR) in my own investments.
Not surprisingly, the brilliant folks here had smelled the stinkers and these companies wound up being dogs over the last year. By dropping these as the comments section suggested, the returns on the final “Turdite informed” portfolio were really quite something: For a hypothetical 90,000 invested, (10k each stock), 1yr total ROI = 56.25%, now worth $140,630 (current stock value + div).
So the picks within this investment thesis, run through the filter of the razor-sharp Turdville comments section, produced a 1 year gain of 56.25%. Boom, bitchez!
. . .
So what can we take away from all this? Well, I would suggest a couple of things but as usual, the best conclusions will be found in the comments section here, and I would encourage all of you to offer your impressions of what we might learn. For me, this is what I take away from this exercise:
1. Big money believes in the overall Turdville hard assets investment thesis
We don’t hear much about this on MSNBC (big shocker, right?) but these returns so far outpace the broader indexes that I suspect we are seeing big money trying to quietly build positions in companies that either own physical assets (like timber or grazing lands) or are positioned to thrive in a high energy costs environment (railroads). For decades now, financials have been the place to be for big money, but that is not where money is flowing over the last year- this list kicked butt over any financial sector index fund you can find. So one takeaway is that, although the hard assets investing community in general is still given the “tinfoil hat” treatment publicly in mainstream financial commentary, large money flows tell us that more and more deep pockets are quietly coming around to our way of thinking. They are positioning themselves for what we have seen coming for years now, but this movement is still not talked about much… yet. If one were cynical, one might think that big money would not allow the press to inform John Q Public about this until big money was already positioned for the ride. And we are nothing if not cynical!
2. Gold and Silver prices have yet to reflect these trends
No surprise to anyone here, but gold and silver should be doing extremely well in this environment and are vastly undervalued at current prices. The broader trends are confirming the overall investment thesis of TFMR- that the Keynesian debt creation economy has only one path it can follow and that path will eventually lead to a harsh revaluation downwards of all paper and paper based valuations. In short, we are in the process of leaving the world where paper ,debt, and Fed-driven fictional valuations are king, and are slowly entering a new paradigm where tangible and/or productive assets will rise to the top of the heap. The gains for the companies on my list reflect this. Gold and silver should be reflecting this, but aren’t… yet. For now, the monetary metals are the bargain-basement, blue-light special of the decade, and maybe the century. Stack ‘em up.
3. Why are hard assets/companies rising but the metals aren’t? The “M” word.
I am sure certain traders (especially those who rhyme with “pan”) will harf-up a hairball at hearing this, but I think the performance of this hard-asset portfolio over the last year, in contrast to what gold and silver have done, can be seen in a broader context as more evidence of the dreaded “M” word- manipulation. I posted on this a few months ago, but we all know that in normal times, gold acts the "thermometer of money creation", and both for its intrinsic value and as a hedge against the financial repression of artificially low interest rates, gold usually keeps pace or even outpaces currency devaluation. And yet, ever since the massive attack of September 2011 starting on the day of the Swiss Franc devaluation announcement, it has not. But it occurred to me that if the price of gold is being gamed (as it surely is) maybe we could find another proxy-measure that would show this... something that acts like gold would act, if gold were not so heavily manipulated.
I realized that farmland would share many qualities with gold and could be an excellent comparison. Like gold, farmland is a long-term store of value, and because it produces a crop it also has intrinsic value. Sales data are available, and it is so widely traded on such an individual basis (there are no effective institutions that can control or manipulate its price) that farmland might well act quite similarly to how gold would act... if gold were allowed to trade freely.
So I found a reliable dataset (the Iowa Farmland Value Survey) and charted the results against gold. The black line chart shows average farmland price per acre, for each year for the last ten years, against the weekly gold chart for the last decade:
The price of farmland tracked the price of gold incredibly closely year over year... right up until the famous attack on gold and silver in September of 2011. Since then, farmland has continued to rise but gold and silver have clearly been successfully shoved to the downside. To me, this chart shows quite plainly that the scale and intensity of PM manipulation was ratcheted up considerably starting at that time (as many of us who have followed these markets have sensed) and that it was successful in "breaking the relationship" between Fed-induced financial repression and gold price, at least for now. They were not able to do the same to farmland prices, however, and the continuing rise clearly reflects the ongoing process of currency devaluation. In short, farmland is doing what gold is supposed to do in a freely-traded market, presumably because gold (through paper manipulation) is easily controlled, while farmland sales and prices are not.
This also suggests to me that the snap-back for gold and silver could be quite something.
4. Even for tangible asset companies, current prices are high… so I’ll wait
I have to be honest, I could not bring myself to buy these companies today- the valuations are just too dang high! I noted in my article what a great company I thought Canadian Pacific is, but there is no way I’m paying 200 bucks per share for that sucker. The same goes for most of these companies. I may be wrong on this, but the entire market is so overvalued that I cannot in good conscience buy anything at these levels, so there will be no Paper Armageddon Portfolio II. What I will do, however, is to wait in the tall grass and bide my time. I believe this market is poised for a major correction and whether it happens in six weeks or in sixty, I want to have cash on the sidelines and be ready to invest, based on the hard assets thesis and working from this list of sectors. My personal plan is to begin to average in, but only starting after we see a +20% correction in the overall market then slowly average into positions for the long term, knowing full well that a correction could go as deep as 50% or more and that my early investments may be losers for a time. Obviously, we will need to be on our toes and be strongly invested in metals, tangibles, etc. in the mean-time, because there is no telling what may happen once the Fed’s carefully balanced perpetual dollar debt machine starts spitting gears. Nonetheless, for now cash is king and metals are a must. Keep ‘em handy and be ready to deploy both, when bargains arise and opportunity presents itself!
5. Get the stock certificates in-hand… Turdite Nick Elway shows you how
At the end of the comments in the original article, longtime Turdite Nick Elway posed a series of outstanding comments and instructions on how to actually obtain the stock certificates for shares you own. His posts unfortunately got buried at the end of the thread, but should be MUST READING for Turdites. Rather than having your broker “owe” you the stocks, you can separate your ownership of these companies from the middle man (who might be, and likely is, a bankrupt institution that you do not want to rely on if the financial SHTF).
Nick’s comments start here (http://www.tfmetalsreport.com/comment/337814#comment-337814) and continue down the page. Copy and print them out, because this is excellent information. Thank you Nick- you da man!!!
Stay frosty out there.