Two-year mortgage holiday? Life's a beach when you're a home owner

(Image by: magnus)

What has the UK government got against young people? Why is it obsessed with pulling up the drawbridge to anyone who’d like to buy a home but who can’t afford (or won’t pay) credit bubble prices?

I will declare my interest: I rent, having decided several years ago that housing was too expensive. I believed I was making a sensible decision, weighing up the risks of losing my 25% deposit in a frothy market.

I could afford to buy, but I decided to keep saving and wait for house prices to come back to sane levels.

Well, I had it all wrong. Apparently, the correct thing to do was:

• Lie about my income on a self-assessment mortgage application
• Buy a house I could only afford if interest rates stayed low for 30 years
• Furnish my new house on credit cards
• Wait for the taxpayer to bail me out
• Go bankrupt without any stigma if things turned pear-shaped

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Bloomberg is reporting that more than 2,000 companies around the world have cash balances exceeding their market capitalization. That’s more than eight times as many cash rich companies as when the last bear market bottomed in 2002.

With these companies, a $1 share is worth more than $1, just in terms of the cash held by the company. The actual business of the company is thrown in for free.

And these aren’t tinpots but rather big global companies that hold more cash than they’re worth:

Bank of New York Mellon Corp. in New York, Danieli SpA in Buttrio, Italy and Seoul-based Namyang Dairy Products Co. hold more cash than the value of their stock and debt as the slowing world economy wiped out $32 trillion in capitalization this year. Companies in the MSCI World Index trade for an average $1.17 per dollar of net assets, the lowest since at least 1995, and 39 percent sell at a discount to shareholder equity, data compiled by Bloomberg show.

Of course it’s not a one-way bet. The market is pricing the companies expecting falling profits or big losses that start to eat into their reserves.

But that’s always a danger with stock investing – you don’t normally get to buy a $1 for less than $1 to calm your nerves.

Apple and Microsoft: two cash-rich tech aristocrats

Besides the ‘free’ companies, the article also looks at Microsoft and Apple, two companies in the S&P 500 that have more than $20 billion in cash and securities and less than $2 billion in debt (excluding financial companies).

Now that’s not more than their market caps ($192 billion buys you Microsoft and $82 billion secures Apple). But it’s a very healthy cushion to fall back on. Both companies look excellent buys to me.

Techs never really recovered from the dotcom bust, in terms of getting their old pre-bubble ratings back. The tech sector is currently about as cheap as it’s ever been, yet as a group these giants still enjoy deeply embedded advantages and are churning out billions in cash from relatively small capital bases and workforces.

Here in the UK I’ve been buying shares in the Polar Capital Technology Investment Trust, which holds a wide range of tech shares from around the world and is overweight in the big US companies. It has just bounced off an all-time low, and must now be even cheaper, relatively speaking, then when I started buying, given the fall of sterling versus the dollar over that time.

Of course if you’re based in the US you can buy these cheap tech shares direct and not worry about the currency risk at all. I envy you!

The economy is going to get worse before it gets better, but I think it’s very hard to make a bear case at these levels, with dividend yields well over stupidly expensive government bonds in the US and the UK. You must make your own mind up, of course.

Bloomberg says the cash rich equivalents in 2002 rose 115% over the next year.

Food for thought. I’ll ferret out some cash-rich UK companies for an article in the next few days, so please do subscribe for free to ensure you get the article when it’s written.

Government bonds are being touted as the safest place for your money during the latter stages of this financial crunch. I’m no economist or financial adviser, but I think that’s a load of baloney.

Cash is the way to guarantee preserving the nominal value of your wealth (inflation and bank runs aside).

Government bonds are assets that fluctuate in value. Just like any other asset, making or losing money with government bonds boils down to:

• The price when you buy them
• The price when you sell them
• The income you get from holding

Government bond yields have plunged. At the time of writing:

• Long dated yields in Europe and the UK are at their lowest in 50 years
• The yield on the 10-year German Bund is below 3%
• 10-year Gilts in the UK dropped from 3.77% to 3.32% in a week
• US 10-year Treasuries touched a 53-year low of 2.52%
• 30-year US Treasuries yield only a little over 3%
• Short-dated US Treasuries are yielding less than 1%

Priced to imperfection

The corollary of falling yields is rising prices. Another way of saying ‘yields have plunged’ is ‘the price of buying bonds has gone up’.

If you pay more for your government bonds than their face value, you will experience a capital loss if you hold them to maturity. If you want to avoid this, you need to expect to be able to pass them on to another investor before then.

Long-dated UK Gilts are as expensive as they’ve been since just after the Second World, and you’re paid a pittance for holding them. Do you really fancy your chances of selling them for a profit?

Is it rational to expect a 3% yield to compensate an investor for the next 30 years? Will inflation never again hit 4/5/6%? In my humble opinion these yields and the resultant prices are absolutely bonkers.

Dividend yields in the UK from the FTSE All-Share are substantially higher than Gilt yields. In a theoretical sense, Gilt investors are saying equity investors can have all the likely growth in the dividend yield to come for free. As David Stephenson of Wise Investments told CityWire:

On a valuation basis, markets appear even cheaper than they were a month ago.  The UK Equity Market is yielding 5.5% and the Gilt/Equity yield ratio has fallen to 0.79, a massive 20% below where the market reached in 2003, the bottom of the last bear market.

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