What happens to stocks if the U$D goes the way of the old peso

[DemonD]

As a devout lover of stocks (again, I'm not Cramer, just an individual guy who likes to buy small stakes in quality companies), part of the reason I invest is that I see my money as actually safer being put into, say, a blue-chip megacap stock that I trust. Now I don't entrust all my money to just one company, and I don't just buy them willy-nilly. But my investing thesis is that my actual US Dollars are safer being turned into small parts of quality organizations as opposed to depreciating by inflation in a bank account. (Although the 5% plus online bank accounts nowadays are pretty nice.)

Part of my theory is the confidence I have that if the US dollar goes absolutely dead, ala the mexican peso, I will still own shares in certain companies, and those shares will be worth something in some sort of denomination, whether it's euros, yen, yuan, pesos, or a New american dollar.

The question is is this confidence unfounded? What happens to my shares of a company if the US dollar completely goes away? (Assuming that the company I owns is still around after such a disaster)

[Finster]

Re: What happens to stocks if the U$D goes the way of the old peso

As a devout lover of stocks (again, I'm not Cramer, just an individual guy who likes to buy small stakes in quality companies), part of the reason I invest is that I see my money as actually safer being put into, say, a blue-chip megacap stock that I trust. Now I don't entrust all my money to just one company, and I don't just buy them willy-nilly. But my investing thesis is that my actual US Dollars are safer being turned into small parts of quality organizations as opposed to depreciating by inflation in a bank account. (Although the 5% plus online bank accounts nowadays are pretty nice.)

Part of my theory is the confidence I have that if the US dollar goes absolutely dead, ala the mexican peso, I will still own shares in certain companies, and those shares will be worth something in some sort of denomination, whether it's euros, yen, yuan, pesos, or a New american dollar.

The question is is this confidence unfounded? What happens to my shares of a company if the US dollar completely goes away? (Assuming that the company I owns is still around after such a disaster)

I don't think your attitude is unfounded at all. Just be wary of an important caveat. Many modern corporate managements have taken a cue from the government and engaged in inflation. Just as the US is the issuer and sponsor of the USD, a corporation is an issuer and sponsor of its stock. Inflation and devaluation of the dollar come about by the government continually issuing more of those dollars and thus covertly transferring wealth from dollar holders to itself.

Corporate managements have acquired the same ugly habit. They self-deal stock under the guise of "management incentive" through options programs so complex it takes a battalion of attorneys and accountants to decipher. Then they use corporate cash to "buy back" stock in the marketplace to help mitigate the dilution visited upon other shareholders. This is another covert transfer of wealth from shareholders to themselves.

Choose your investments with this in mind. The more the public resists buying stock from corporations who engage in such fraudulent practices, the less common those practices will become.

[jk]

Re: What happens to stocks if the U$D goes the way of the old peso

the danger to your stocks resides in the likely effects of moderate-high inflation accompanying slow economic growth: stagflation. profits will be hit hard by rising rates and labor costs on the one hand, and limited pricing power on the other.

i believe we are currently near the end of a cyclical bull market in the midst of a secular bear market which started about 6 years ago. all the metrics and calculations i've seen predict that the market will return less than tbills over the next 6-10 years, but is likely to be very exciting along the way. the definition of secular bear i'm using here is a prolonged period of multiple contraction and rising dividend yields.

the likely historical analogy is the 1970's. if your stock prices go sideways for 10 years even as profits rise, you are left with the tiny dividend yield and your capital eaten away by inflation. remember, the dow went from 1000 in 1966 to 1000 in 1982, but lost 75-80% to inflation over this period.

[SeanO]

Re: What happens to stocks if the U$D goes the way of the old peso

Choose your investments with this in mind. The more the public resists buying stock from corporations who engage in such fraudulent practices, the less common those practices will become.

I question whether determining which companies are engaged in "fraudulent" practices is really possible at this point. Most have become so complex that I doubt the folks running them even know. And I don't think these companies have become too complex out of necessity or even in an effort to better serve their market... I think they have become too complex out of the same bureaucratic cancer that affects government, combined with service providers (accountants, attorneys, etc) needing to justify fees and occasionally executives hiding fraud. Even then, I'd guess that like the real estate broker who pushes an appraiser to get a deal done, many of these folks never realize they've crossed a line... it has just become business as usual.

If you want to invest in equities, I suggest finding someone with a business whom you know and trust and invest in them. A company is only as good as the people running it.

[blazespinnaker]

Re: What happens to stocks if the U$D goes the way of the old peso

As a devout lover of stocks (again, I'm not Cramer, just an individual guy who likes to buy small stakes in quality companies), part of the reason I invest is that I see my money as actually safer being put into, say, a blue-chip megacap stock that I trust. Now I don't entrust all my money to just one company, and I don't just buy them willy-nilly. But my investing thesis is that my actual US Dollars are safer being turned into small parts of quality organizations as opposed to depreciating by inflation in a bank account. (Although the 5% plus online bank accounts nowadays are pretty nice.)

Part of my theory is the confidence I have that if the US dollar goes absolutely dead, ala the mexican peso, I will still own shares in certain companies, and those shares will be worth something in some sort of denomination, whether it's euros, yen, yuan, pesos, or a New american dollar.

The question is is this confidence unfounded? What happens to my shares of a company if the US dollar completely goes away? (Assuming that the company I owns is still around after such a disaster)

I think the your condifence is sound, especially if you're investing in global multinational corporations who have invested significantly in outsourcing to china and india.

[blazespinnaker]

Re: What happens to stocks if the U$D goes the way of the old peso

Yes, trying to find corporations with management and directors who have an ownership mentality is great, though somewhat challenging.

[DemonD]

Re: What happens to stocks if the U$D goes the way of the old peso

Corporate managements have acquired the same ugly habit. They self-deal stock under the guise of "management incentive" through options programs so complex it takes a battalion of attorneys and accountants to decipher.

This is why I will not buy stock of, for example, Cisco, which from my DD is one of the if not the absolute worst in terms of stock options. Cisco has increased their revenues and profits and market cap quite a bit since the tech bubble burst, but dilution has pretty much made it worthless as an investment.

This, of course, is why I try to find companies that will not dilute too much. (I know they will dilute... it's a fact of life. Just not too much.)

This also is why I cast a vote on every statement that comes my way, and I am proud to tell anyone that I helped vote down some stock option granting for executives of one small cap company that I own a small position in.

Anyway thanks for the input... as always it will be well-heeded.

[SeanO]

Re: What happens to stocks if the U$D goes the way of the old peso

...This also is why I cast a vote on every statement that comes my way, and I am proud to tell anyone that I helped vote down some stock option granting for executives of one small cap company that I own a small position in.

DemonD,

Very cool, I think this is another great point, especially on election day. If you hold stock you are an OWNER of the company. If you owned a local restaurant would you leave it completely to management, and just wait and see if a check showed up? And if you didn't like the way things were going would you just complain to your friends? Of course not, you'd get involved. Yet somehow folks don't think this is neccessary if they own stock in a public company.

I get it. It often doesn't seem like our vote counts. Same thing with elections. As far as I'm concerned if someone can't take the time to research and be involved at more than the sound bite level then they shouldn't be an owner of a company, and they shouldn't get a say in how our country is run.

SeanO

[Finster]

Re: What happens to stocks if the U$D goes the way of the old peso

This is why I will not buy stock of, for example, Cisco, which from my DD is one of the if not the absolute worst in terms of stock options. Cisco has increased their revenues and profits and market cap quite a bit since the tech bubble burst, but dilution has pretty much made it worthless as an investment.

This, of course, is why I try to find companies that will not dilute too much. (I know they will dilute... it's a fact of life. Just not too much.)

This also is why I cast a vote on every statement that comes my way, and I am proud to tell anyone that I helped vote down some stock option granting for executives of one small cap company that I own a small position in.

Anyway thanks for the input... as always it will be well-heeded.

Excellent! That makes two ways to vote. I try to avoid companies that use stock options. Hard to since the practice is so ubiquitous, so I also do just as you do and make a point to vote every proxy I can. I want to know exactly how much I am paying the managers of my assets, and complex employee incentive plans, include most stock option arrangements, make it very difficult to ascertain. Unfortunately, this is the same reason they are so popular with managements. It facilitates confusion and obfuscation. I have nothing against compensating valuable service accordingly, but when that compensation occurs through less-than-transparent and straightforward means, it closer to fraud than compensation.

Interesting that you should cite Cisco as an example. I posted recently on just that in the thread Show Me The Money!:

Is your stock really making a profit?

I mean, really???

I don’t mean did its management play the beat-the-analysts-estimate shell game.

Often you find some of the most excellent pearls in Barron’s Mailbag. The below letter appeared this week, and no stock investor should fail to heed its message.

Bundles Of Options

For those contemplating an investment in Cisco ("Cisco’s Bundles Of Joy", Oct. 9), bear in mind that Cisco spent the bulk of its profits the past 12 years to buy back 1.5 billion shares issued to employees in lieu of cash compensation.

Stock option exercises dilute shareholders. Rather than shrink the share count, as Cisco’s CFO claims, Cisco’s buybacks merely stemmed the tide of dilution. Stock repurchases that combat dilutions are a roundabout way of paying compensation.

Cisco employees hold another 1.4 billion stock options. A 22% ownership dilution threatens - not counting any future option grants - unless the company spends the next decade’s profits on share repurchases. Cisco shareholders are on a treadmill to nowhere.

Albert J. Meyer
Bastiat Capital
Plano, Texas

In other words, Cisco shifted a huge portion of employee compensation off the earnings statement by using stock options. This made profits appear far larger than they really were. Then the real expense of that compensation was touted as a return to shareholders, thus counting the money twice.

No wonder so many companies prefer share buybacks to paying dividends on their stock. Once real cash is actually paid to shareholders, there is no opportunity to take it back and use it over again. You have to make real profits in order to pay money out to shareholders without running the company into the ground. Floating new shares and diluting shareholders is the corporate equivalent of governments and central banks inflating and diluting the money supply, appropriating value from all holders of the respective securities without their knowledge or approval.

Demand dividends. If your company is really and truly making a profit, just say:

Show me the money!

[DemonD]

Re: What happens to stocks if the U$D goes the way of the old peso

Interesting that you should cite Cisco as an example. I posted recently on just that in the thread Show Me The Money!:

Yes... part of my due diligence of course was just reading your post. But I read an article recently about how cisco was running their business, and they are doing a great job.

Cisco is a great company to work for, and the company makes a lot of money. By all accounts, I can commend Cisco as a whole for being a genuinely good company.

But when you look at them as an investment, their dilution just makes your stomach turn. I checked some of the numbers myself, and to me putting money in cisco is akin to stuffing your cash under your mattress.

And yes... two ways to vote. Vote on the proxies, and vote with your dollars in terms of what equities (or commodities or bonds) you buy. I have yet to sell a position with under one year of ownership.

[Dan Amerman]

Re: What happens to stocks if the U$D goes the way of the old peso

Hello DemonD,

Let me add three other points for your consideration:

1. "Companies" don't represent protection from inflation, rather different businesses are likely to be impacted by inflation in different ways. Some will be badly hurt, and as such, their shares will likely do worse than if you had the money in a bank. For example, ownership of the bank shares may be a truly bad investment, because of a combination of most banks not fully hedging the possibilities of a major increase in rates, as well as issues like derivatives exposure. On the other hand, some natural resources companies may thrive in an inflationary environment. Look to the specific business, not the concept of stocks versus inflation.

2. The credit quality of the average company has been steadily falling. This means that companies are taking on more and more debt, using riskier financings -- essentially because they can, the excess liquidity in capital markets means credit risk premiums are at irrational lows. By being an equity investor, you are behind the banks in protection, which are extending the irrational loans. So, in exchange for historically low dividend ratios and funny accounting, you get some of the riskiest shares in history. Nice bargain? ;)

3. With due respect to Blazespinnaker, let me offer a quite different take on investing in multinationals that are dependent on outsourcing, in a potential hyperinflationary environment. The things about outsourcing is that much of it is on credit, because we can't pay for our imports of goods or services. Other nations take the dollar because, well, they are propping up the dollar. If they stop taking the dollar, the sources of the outsourcing dry up because we can't pay them, the multinationals lose their products, and drop like lead balloons into scenario 2 above.

Protection through holding a diversified portfolio of stocks is likely an illusion for the scenario you are considering.