Granite Investment Advisors – Are Commodities an Appropriate Inflation Hedge?

Tuesday, January 28th, 2014
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” - John Adams The above quote does a wonderful job of highlighting what we believe to be one of the biggest fallacies investors are currently being bombarded with, namely the investment case for commodities or the reason to keep them as a separate asset class. We often hear from Wall Street strategists, analysts, the media, and some of you, our clients, wondering why we do not invest in commodities as a way to protect our portfolios from the detrimental effects of inflation. While all commodities are believed to offer protection against inflation, gold is considered to be a natural hedge. Commodity prices peaked in 2011 and have declined ever since, leading some to believe that now might be a good time to establish positions. We are of the school of thought that inflation will accelerate due to various global Central Banks’ policies and are always looking for bargains. As such, we decided to look into this in more depth. Our goal was to determine if the perceived inflation protection offered by commodities held true based on history, and if not, what investments can protect against inflation?

Tim Lesko on CNBC – How Apple has changed since Steve Jobs – 10/4/13

Monday, October 7th, 2013

Read Tim’s comments on CNBC.

CNBC – How Apple has changed since Steve Jobs

Tim Lesko – Memories of Facebook cloud Twitter’s IPO – 10/4/13

Monday, October 7th, 2013

Check out Tim’s comments on the Twitter IPO.

Reuters – Memories of Facebook cloud Twitter’s IPO

Tim Lesko on CNBC – Very Happy with Tim Cook: Pro – 7/24/13

Thursday, July 25th, 2013

Listen to Tim’s comments on Apple.

CNBC – Very Happy with Tim Cook

Don’t Sell America Short – The White Paper

Saturday, June 16th, 2012

With the 2012 Presidential election cycle now in full swing, there is no shortage of news reports that trumpet America’s economic, political, and social woes.  Some stories now compare America to Europe, implying that our economic decline will soon mirror theirs; some claim both of us are saddled with expensive social programs and bloated public employee benefit and pension obligations combined with anemic economic growth and burgeoning government debt.

But amid this barrage of negative news and quick fix prescriptions from candidates, we see some underlying strengths in America that make us enthusiastic investors in some of its most successful companies.  We would contend that too often the focus from our politicians, our economists, and our media is too short term in nature. 

Searching for Bottoms

Sunday, October 16th, 2011

You have heard us preach about the importance of looking past the sometimes contradictory daily noise generated by news reports of European contagion and double dip recession fears and extolling the virtues of the fundamentals of the companies that represented value in the past six months (see our September 2011 Insights, “We Invest in Companies, Not Economies”).

 You have also heard us acknowledge that, despite what look like compelling valuations of many US equities, the market has remained focused on the macro picture for the better part of the last six months: Greece and the European financial system; the Chinese economy and its impact on global trade; and the Middle East and North Africa social and political revolts.  All these factors, given the interconnectedness of today’s global economy, are concerns that circle back and affect our markets. 

We Invest in Companies, Not Economies

Friday, September 16th, 2011

As of the close of business on September 2, the S&P 500 was down 5.38% since the beginning of the year.  It feels much worse, doesn’t it?  To feel better, compare that decline of 5.38% to those of the stock markets in China and Switzerland which are both down over 15% or Germany, France, the Netherlands, and Brazil which are all down over 20%.  

Page one headlines are almost uniformly negative.  Europe’s sovereign debt and bank solvency crisis.  The US deficit, debt, and entitlement brouhaha.  US economic weakness.  Middle East and North Africa political, economic, and military revolts.  These crises make most investors feel even worse. 

The markets now trade on these macro news stories, ignoring the continued strength in US multinational company balance sheets and the record earnings and margins most have achieved over the past two to three years. 

Show Me the Money

Wednesday, March 16th, 2011

As far back as last summer (see our Insights “Searching for Return” in July 2010) we argued that “investors [should buy] large capitalization multinational companies with dominant market share and stable, predictable businesses” many of which pay dividends that are more attractive than yields available in the bond market.  That is still our position.  In fact, if you look at Exhibit 1 below you can see that dividend yields alone are as competitive with interest rates as they have been in thirty years. 

Today we make the case that many of those same companies should be more proactive in increasing both dividend payouts and share buybacks.  Quite frankly, many of them can afford it.  Dividends make up a significant portion of’ total return, provide some cushion to stock price volatility and, unlike most bond interest payments, may increase over time and thereby act as a hedge against inflation. 

The Search for Returns

Friday, July 16th, 2010

Tired of earning next to nothing on your money market accounts?  Wondering where those 4-5% CD rates went?  Concerned that bond yields might stay low for a long period of time?  If you are like us, you probably answered each of these questions with a frustrated “yes.”  

Let’s examine the yield landscape we find today:

Security 6 Months 1 Year 3 Year 5 Year 10 Year
CDs (FDIC) 0.17% 0.60% 1.80% 2.45% 3.15%
US Treasury Notes/Bonds 0.17% 0.27% 0.93% 1.68% 3.05%
Corporate Bonds (Aa rated)     1.53% 2.11% 3.48%

Clearly the market is not rewarding you for being a saver.  Fixed income investments, to quote Jeremy Grantham, are “desperately unappealing”.   Nominal yields are currently close to all time lows. And importantly, for investors who need income from their portfolios, this rate environment has made generating that income increasingly difficult.