Wednesday, December 30, 2009

The Oughts—A Lost Decade?

While we’re eager to move forward, the start of the ‘10s is a good moment to reflect on where we’ve been. And this decade was anything but boring.

The world didn’t end as advertised with Y2K. And three months following that non-event, the exuberance of the Tech boom gave way to a crash. March 2000 marked the decade’s first bear. A short, shallow recession followed a year later—March 2001 through November 2001—though the bear market was fairly brutal, ending with a second bottom in March 2003.

A bull market followed for over four years. And, as is typical, a variety of fears failed to derail the bull.

2003: The Iraq War began. Some mutual funds were found to be engaging in overnight trading, which erupted into a major scandal and fears of widespread corruption. SARS was feared to explode into a deadly pandemic. World stocks rose 33%.

2004: The US dollar started tanking, and the whole world feared America’s big and ballooning triple deficits—trade, budget, and current account—would drag the world into another recession. It didn’t happen. World stocks rose 15%.

2005: Oil was on the rise—hitting a historic $70. Those who believe high oil is bad for stocks braced for a bear market that never came. Then, Hurricane Katrina effectively wiped out a US city, doing billions of dollars in damage, and displacing hundreds of thousands. Global stocks had an OK year—up 9.5%

2006: North Korea started saber rattling in earnest, even testing nuclear weapons. The dollar was weak yet again. The Iraq War entered its third year and things looked bleak. And there was nonstop talk of a US housing bubble. World stocks boomed 20%.

2007: The war in Iraq dragged on as housing bubble fears reached a fevered pitch. Banks who’d made bad bets on subprime loans began raising capital. No one knew it then, but globally, stocks had reached their peak and began grinding down. Still, for the year, stocks rose 9%—besting other similarly liquid alternatives.

By December 2007, the US entered its second recession of the decade and the world followed. Stocks ground slowly down, picking up speed in 2008. With Lehman’s failure, stocks began falling in earnest. Though earlier in the year, Bernanke and Paulson hatched late night deals to save AIG and Bear Stearns, they simply let Lehman go—with no explanation for the distinction. A true crisis followed as credit markets froze, exacerbating the recession and what had been a fairly smallish bear.

The decade was bookended by recession, leaving world stocks overall flat—hence the “lost decade.” But this implies stagnation—not what we saw. Steep drops were supplemented by significant rises—the bull market of 2002-2007 saw a return of over 150%. Few would’ve wanted to miss that.

While it’s human nature to want to assign meaning to nice round numbers, analyzing stock returns by 10-year periods is arbitrary—it just so happens this period included two big bears. Negative returns over a 10-year period are rare in stock market history. And when they have occurred, they’ve unfailingly been followed by positive returns.


Thursday, December 24, 2009

The Yield Curve Signals Bigger Growth

What's a yield curve and why is it so important?
Well, the curve itself measures Treasury interest rates, by maturity, from 91-day T-bills all the way out to 30-year bonds. It's the difference between the long rates and the short rates that tells a key story about the future of the economy.
When the curve is wide and upward sloping, as it is today, it tells us that the economic future is good. When the curve is upside down, or inverted, with short rates above long rates, it tells us that something is amiss -- such as a credit crunch and a recession.

The inverted curve is abnormal, the positive curve is normal. We have returned to normalcy, and then some. Right now, the difference between long and short Treasury rates is as wide as any time in history. With the Fed pumping in all that money and anchoring the short rate at zero, investors are now charging the Treasury a higher interest rate for buying its bonds. That's as it should be. The time preference of money simply means that the investor will hold Treasury bonds for a longer period of time, but he or she is going to charge a higher rate. That is a normal risk profile.

The yield curve may be the best single forecasting predictor there is. When it was inverted or flat for most of 2006, 2007, and the early part of 2008, it correctly predicted big trouble ahead. Right now it is forecasting a much stronger economy in 2010 than most people think possible.
So there could be a mini boom next year, with real GDP growing at 4 to 5 percent, perhaps with a 6 percent quarter in there someplace. And the unemployment rate is likely to come down, perhaps moving into the 8 percent zone from today's 10 percent.

The normalization of the Treasury curve is corroborated by the rising stock market and a normalization of credit spreads in the bond market. I note that as the curve has widened in recent weeks, gold prices have corrected lower and the dollar has increased somewhat. So the edge may be coming off the inflation threat. If market investors expect the economy to grow, inflation at the margin will be that much lower as better growth absorbs at least some of the money-supply excess created by the Fed. My hunch is that inflation will range 2 to 3 percent next year.

It also could be that the health-care bill about to pass in the Senate is less onerous from a growth standpoint -- and certainly less onerous than the House bill. For example, the Senate bill does not contain a 5.4 percent personal-tax-rate surcharge, which also would apply to capital gains. So if the Senate bill becomes the final bill, it will be less punitive on growth. That could explain the fall in gold and the rise in the dollar. We'll still be stuck with a tax hike from the expiration of the Bush tax cuts, but at least we won't have a tax hike on top of that. That's the optimistic view, at any rate.
But really, pessimists have missed the big rise in corporate profits, the resiliency of our mostly free-market capitalist economy, and the monetarist experiment from the easy-money Fed. The optimal policy mix on the supply-side is low tax rates and King Dollar. We don't have that. So as good as 2010 may be, with investors moving to beat the tax man, it could be a false prosperity at the expense of 2011.
But let's cross that bridge when we get there. Right now, rising stocks and a wide and positive yield curve are spelling strong economic growth in the new year.


Investing During Stagflation.

At some point, even if the economy is slowing, the Fed will have to step in and fight inflation. The question becomes: How much employment and growth do you sacrifice today in order to not have to deal with inflation in the future?Unfortunately, the 1970s also give us the formula for solving the inflation problem: Higher interest rates. Then-Fed Chairman Paul Volcker bled double digit inflation out of the economy in the early '80s by raising the overnight bank lending rate (and thus the prime rate) to as high as 20%. While no one is predicting a repeat of that scenario, there's little doubt interest rates will have to go up. That raises the question of how to be invested when interest rates are rising, even as the economy struggles to grow and inflation is still running amok.Once again, if you believe that the coming decade will look a lot like the 70s, you can find reasons to believe all major investment classes will perform similarly. In a stagflationary environment, stocks, bonds, and real estate are likely to underperform commodities and gold. In fact, during the stagflation of the '70s , bonds were called "certificates of confiscation" by many professionals in fixed income. From June 1970-1980, the best performing asset classes were oil (+34.7%), gold (+31.6%), U.S coins (+27.7%) and silver (+23.7%). The worst performers were T-Bills (+7.7%). foreign exchange (+7.3%), bonds (+6.6%) and stocks (+6.1%) In summary, hold only short term domestic bonds. Keep a diversified equity portfolio, but focus on companies that are immune to, or can benefit from inflation. That means favoring growth stocks over value.

Crude Outlook: 2010-11

Oil prices staged a remarkable rally this year on the back of a weak dollar and a nascent economic recovery. In 2010, it's likely that these same factors will combine with an increase in global energy demand to push oil prices back up over $100 a barrel.

With stockpiles still high and energy demand rebounding sluggishly, most forecasts are calling for the "black gold" to edge up into the low-triple-digit price range. That's 40% higher than where oil is trading right now - but is still well below the record high of nearly $150 a barrel that was established in 2008.Money Morning Chief Investment Strategist Keith Fitz-Gerald is even more bullish. He believes that a price of $100 a barrel is "easily attainable" and says that some sort of unforeseen market shock could cause crude oil to spike as high as $150 barrel by the end of 2010."Overall consumption is going up, not down, and the dollar is the other wrinkle. A weaker dollar generally means higher oil prices," Fitz-Gerald said. "But oil prices will surge next year not just because of the recovery, but because of a global macro event that could send prices soaring as high as $150 a barrel."
Investors who prepare for this possibility will have a shot at windfall profits. At the same time, however, consumers will feel the pinch.Take pump prices. Rising crude prices will help boost the average retail price of regular-grade gasoline from $2.35 a gallon this year to $2.83 in 2010, and pump prices will approach $3 a gallon during next year's driving season, the U.S. Energy Information Administration predicted in a forecast report released earlier this month.Utility bills will also increase, as heating oil and electricity prices escalate, the EIA and other forecasters say.
Conflicting DataIf investors are feeling whipsawed by oil-price forecasts that are bullish one day and bearish the next, that's not a surprise. The lack of uniformity in the forecasts is understandable - given the mountains of often-conflicting data analysts have to work with.For instance, commercial-crude-oil storage among industrialized nations of the Organization for Economic Cooperation and Development (OECD) stands at about 60 days of demand. The Organization of Petroleum Exporting Countries (OPEC) has said 52 days of forward demand cover was reasonable.What's more is that an estimated 90 million barrels of oil are being hoarded on seaborne tankers by speculators looking to profit from bigger long-term gains. Of course, supply has been ample all year. But that hasn't stopped oil prices from rising for most of 2009. In fact, since hitting its low for the year - $34.03 a barrel - on Feb. 12, crude oil has zoomed 116%.The weak U.S. dollar has sustained the oil bull to this point. The dollar has tumbled about 18% against the euro since Feb. 12, and the Dollar Index - which measures the dollar against a basket of currencies - has slid more than 8% this year. And going into 2010, the dollar will likely continue on its downward course.
The Downtrodden DollarThe expansive monetary policy pursued by the U.S. Federal Reserve over the past two years has sucked the life out of the greenback.The Fed has pumped in excess of $2 trillion into the U.S. economy since the financial crisis began more than two years ago. It has lowered its benchmark federal funds rate to a record-low range of 0.0% to 0.25% and has stepped up purchases of U.S. Treasuries and mortgage-backed securities. As its most recent meeting concluded Dec. 16 Fed Chairman Ben S. Bernanke said the fragility of the U.S. recovery demands that interest rates be kept low for "an extended period" of time. "With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the committee expects that inflation will remain subdued for some time," Fed policymakers said. Unfortunately, the Fed will soon discover, expectations may not match up with reality.With the dollar in a nosedive and its prospects for a turnaround dim, investors are fleeing the currency and taking refuge in hard assets."The dollar is the single most important factor in the market," Eugen Weinberg, senior commodities analyst at Commerzbank AG (OTC ADR: CRZBY), told Bloomberg News. "It's not the fundamentals. The weaker dollar is a really big concern for many investors and they try to protect themselves by buying into commodities."Indeed, commodities prices across the board have soared in response to the dollar's decline. Gold futures have added 38% this year and could climb as high as $2,000 an ounce next year. Silver prices have jumped, as well, and are at their highest level since July 2008 at about $20 an ounce.Industrial materials - bolstered by stronger-than-expected economic growth, particularly in China - have also seen increased investor demand. Aluminum prices have surged more than 60% since March, when the global rally in stocks began, and copper prices are up more than 70%. "There is security in hard assets ... the U.S. economy and the dollar aren't looking too pretty," Kimberly Tara, chief executive at fund manager FourWinds Capita Management, told Reuters. "It is clear that the ability of the dollar to rally in the near future is extremely limited and that does impact where investors want to put their money."
Economic Growth Accelerates, But Oil Production Stagnates While the dollar is poised to carry on its decline, the global economic recovery is picking up steam. The OECD, in its most recent economic outlook released in November, more than doubled its 2010 forecast for developed nations, saying that strong growth in Asia - particularly China - would help pull the "more feeble" West out of its financial malaise.After predicting in June that the combined economy of its 30-member nations would grow 0.7% in 2010, the OECD raised its forecast for developed economies, projecting growth of 1.9% next year and 2.5% in 2011. Economic output will contract by 3.5% this year."We now have the numbers that support a recovery in motion," Jorgen Elmeskov, the OECD's acting chief economist, told Bloomberg. "It's still a slow recovery because of considerable headwinds from the need to adjust the balance sheets of households, enterprises and financial sectors."While pointing to China as the main catalyst for a global rebound, the OECD also cautioned that the recovery in developed nations remains fragile."The upturn in the major non-OECD economies, especially in Asia and particularly China, is now a well-established source of strength for the more feeble OECD recovery," said the OECD, whose only two Asian members are Japan and South Korea.U.S. gross domestic product (GDP) should expand by 2.5% in 2010 and Eurozone growth will accelerate to 0.9%, the group said. In June, the OECD had projected 0.9% growth for the United States and flat growth for the Eurozone. The OECD said Japan should expect GDP growth of 1.8% in 2010, instead of earlier forecasts of 0.7% growth.By contrast, China's economic output is projected to expand at a10.2% rate in the new year.The OECD also released its first 2011 forecasts, suggesting 2.8% growth for the United States, 1.7% growth for the Eurozone, 2% growth for Japan, and 9.3% growth for China.As economic growth rebounds, so, too, should oil demand. The International Energy Agency (IEA), the oil watchdog for the West, forecasts a sharp pickup in oil demand in 2010, up 1.5 million barrels per day (bpd) from this year's level.OPEC is more restrained in its forecast, but believes consumption will increase by 800,000 bpd in 2010. That's only about half the increase predicted by the IEA. But that isn't necessarily bad for oil prices: It will enable OPEC to keep a lid on production.During the precipitous price decline that oil experienced from 2008 to 2009, OPEC - supplier of 40% of the world's oil - issued three production cuts totaling 4.2 million bpd, an amount equal to almost 12% of its capacity. Despite some foot-dragging from Iran and Venezuela - two countries that rely heavily on oil revenue to fund massive social programs - OPEC has gotten an uncharacteristically high rate of compliance. Last month, OPEC pumped about 2 million bpd less than it did a year ago. "With global demand growing and OPEC holding production flat, stockpiles are going to come down, and that's bullish for prices," Mike Wittner, the head of oil market research at Societe Generale SA (OTC ADR: SCGLY) told Bloomberg.Wittner, an energy analyst at the U.S. Central Intelligence Agency (CIA) during the 1980s and the IEA in Paris between 1997 and 2002, said purchases by hedge funds and investors seeking protection from inflation will support prices. "In contrast to some other banks, we acknowledge quite openly, and believe, that non-fundamental factors do play a role in setting oil prices," he said.Oil prices will end 2010 near $88 a barrel, according to Wittner. But some analysts are more optimistic.Technical analyst Richard Ross, head of global technical strategy for Auerbach Grayson, told Forbes that the price of crude oil will trend upward to $85, then $90, settling in at as much as $103 per barrel by next summer.Ross noted that prices of $103 a barrel would represent a 61.8% retracement of the entire bear market decline in oil, and as such, serves as a vital statistical indicator for traders and analysts.But each of these price scenarios is based on conventional supply-and-demand scenarios. What happens if there's an unexpected "shock" to the global energy economy, asks Fitz-Gerald, the Money Morning chief investment strategist who also the author of the best-selling investing book, "Fiscal Hangover."For instance, Iranian troops last week entered southern Iraqi territory and temporarily took control of the al-Fakkah oil field. They left the field within days of the incursion, but the incident should serve as a stark reminder to investors that oil production is still vulnerable to political instability in the Middle East. And it's highly unlikely that 2010 will pass without incident."Don't think for a minute that was casual," said Fitz-Gerald. "It was a highly provocative move designed to see what the U.S. response would be."An incident such as that could be enough to send oil prices back up to the record level of $150 a barrel, he said.
Profiting From the 2010 Oil SpikeMany companies benefit from high oil prices, but one of the best plays this year could be U.S. oil major ExxonMobil Inc. (NYSE: XOM).A recent cover story in Barron's called Exxon the Goldman Sachs Group Inc. (NYSE: GS) of the energy business, except "Exxon out-Goldmans Goldman.""Like Goldman, Exxon has a distinctive ‘best-and-brightest' corporate culture, and relentlessly focuses on return on investment and efficiencies at the expense of egos," Barron's said. Indeed, with a world-leading market capitalization of $325 billion, Exxon isn't hiding from anyone. However, the company that set a world record with $45 billion in after-tax profit in 2008 has underperformed this year. While oil prices have surged 60% since Jan. 1, shares of Exxon have dropped more 14%. Its peer companies have seen their shares advance by more than 33% during that same period.The company is currently trading at 16 times earnings - a bit below the industry-average Price/Earnings (P/E) ratio of 17.5.The consensus estimate for 2010 is for the company to earn nearly $6 a share. At current valuations, that projects a price of $96. Were the company to deliver on the projected $5.95 a share in 2010 earnings - and to trade at the industry multiple of 17.5 - Exxon shares would trade at more than $100 each. That would represent a 48% return from yesterday's (Monday's) closing price of $68.51.No matter which valuation is used, it's pretty clear that Exxon's shares have some room to run.The energy giant had proved nearly 23 billion barrels of oil and natural gas at the end of 2008. Its total energy resources - proven reserves as well as deposits that don't yet qualify as proven - are the equivalent to 72 billion barrels of oil and gas. Exxon has improved its competitive position with its proposed purchase of XTO Energy Inc. (NYSE: XTO), the largest U.S. natural gas producer, in an all-stock deal valued at $31 billion. The buyout is to close in the second quarter of the new year. The XTO purchase will give Exxon the equivalent of about 45 trillion cubic feet of natural gas throughout the United States and puts the world's largest publicly traded oil company in prime position to expand in shale gas, the fastest growing area in the natural gas sector. Since 1977, Exxon has returned 15% annually, including reinvested dividends, versus 11% for the Standard & Poor's 500 Index, Barron's reported. The company's dividend has doubled in the past 10 years, and could increase by another 5% or more this year, according to the magazine. Money Morning's Fitz-Gerald suggests that investors focus on operators of oil transit systems such as pipelines and shipping. These companies stand to make profit transporting oil and gas almost regardless of their price.For instance, on Feb. 12, Fitz-Gerald recommended Kinder Morgan Energy Partners LP (NYSE: KMP) to subscribers of Money Morning's sister publication, The Money Map Report. Kinder Morgan is one the largest pipeline operators in the United States. Its stock has jumped 35.92% since Fitz-Gerald's recommendation. (Click here for more information on stocks in the Money Map portfolio.)A riskier play might include a look at Petroleo Brasileiro SA (NYSE ADR: PBR), more commonly known as Petrobras. Petrobras has made headlines with the massive discoveries made off its coast in recent years. While deep-water fields like these are costly to develop, they may see a lot of attention if oil prices make another run. For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (NYSE: USO) or the iPath S&P GSCI Crude Oil Total Return Fund (NYSE: OIL).


Sunday, December 13, 2009

Jim Rogger Interview.

Q: Why do you think that we are going to have a short-term rally in the dollar? What’s behind this thinking?
A: Everybody is pessimistic, I am pessimistic too and that’s why there might be a rally.
Q: Long-term you used to worry about deficit, you are still worried about the debt that this country has?
A: Gigantic spending in Washington, incompetence in Washington where they don’t know what’s going on, they are making our situation worse. I see nothing to turn the dollar around.
Q: What you mean incompetence in Washington? Where is the most incompetence? What would you like to see done differently?
A: The Federal Reserve has tripled its balance sheet full of garbage, which you and I are going to have to pay for. They have gone out and printed gigantic amounts of money, why do we want the Fed they are making the situation disastrous for all of us.
Q: I guess you don't think that Bernanke should be reconfirmed?
A: Hopefully. Of course not.

Q: What about Tim Geithner? Treasury as well has been putting out this entire stimulus and now the troubled asset relief program (TARP) programme?
A: Mr Geithner is a smart person from what I understand but he has been wrong about everything for the last 15 years. Why are we listening to him? Why are we listening to any of those guys? They are making our situation worse. They said in writing yesterday that the solution is to spend more money, that’s what got us into the problem, too much debt too much consumption and now we are going to solve it with more debt and more consumption? That’s like telling
Tiger Woods, you got another girlfriend then you solve your problem.
Q: The one way we got into this— all this debt and leverage– the President Obama said the other day – we have to spend our way out of a recession. He said it?
A: It’s making the situation worse for us. We are all going to pay the price for this in one-two or three years. The next time we have problems in the economy, which will not be too long, we don’t have any bullets left, we have shot everything we have. What are they going to do? Quadruple the debt, print more money. We don’t have any trees left.

Q: What are the major implications? I want to ask you about Dubai, I want to as you about Greece as well as Spain. Are you worried? Tell me how this manifest itself that we are going to see?
A: We are going to have more currency turmoil and crises. You already see Vietnam devalued last week, Brazil put on special taxes for currencies, you are seeing what is happening in Dubai, Greece is in trouble, Ukraine, Argentina, Spain, there are plenty of people we can put to the list. We are going to have currency turmoil, we are going to have more debt problems. In the meantime, everybody has printed money and then what are they going to do when the problem start giving us great turmoil.
Q: The sovereign debt fears are growing; the S&P put Spain on debt negative watch, Fitch cut trading on Greek sovereign debt. Yesterday David Paterson in New York – just a press conference called – saving New York from insolvency?
A: They put the US, UK on debt watch; we are all in serious trouble. I mean in Asia there are still creditors, in the West unfortunately debtors.
Q: So do you invest in an environment where all of this gloom and doom and these headlines keep coming out?
A: I own gold as you know. But I am not buying gold. Gold shot up and whenever something shoots up it probably would go down for a while. So if gold goes down I hope I am smart enough to buy some more, other commodities are probably better like silver, agriculture. So I urge you to learn about foreign currencies as well, because there are going to be great opportunities.
Q: I am going to go through some of these investment ideas with you one by one. So let me first focus on gold. You are saying you own gold, you are not going to buy more gold right now because of the level that it is but you are not going to sell it is basically the point?
A: If gold goes to USD 1000 per ounce, I am smart enough to buy more.
Q: So do you think the fact that the Indian central bank, Mauritius — we are seeing different buyers recently. Does that change the gold story? What is behind this move or is it just the dollar hedge?

A: Until last year central banks around the world were selling gold. New you have the opposite; they stopped selling and they are starting to buy as well. That’s a huge shift in the gold market and many other people are worried about paper money as well. So I think gold will certainly go to couple of thousand dollars an ounce over the next decade. That’s not a very radical assumption only 4-5-6% a year, it would have to go up. So I am sure gold will be a great investment over the next decade.
Q: Do you own any stocks?
A: The US markets are up 70% in the last 8-10 months and I don’t like to buy anything like that. I am skeptical of the economy going forward. If the world economy gets better commodities are going to be a great place because there are shortages developing. If the world economy doesn’t get better they’re going to be printing a lot more money, so commodities and real assets are the place to be.

Q: Do you see a bubble in some emerging markets, you are living in Singapore, you are travelling all around, you have seen the Asia growth story on the ground and it is really alive. But people say much money has moved in to these emerging markets and it’s a bubble what do you think?
A: I sold all of my emerging markets two years ago except China. They went down, they’ve come back up, its not a bubble yet. The Chinese economy is one tenth the size of Europe and Asia. There will be bubbles in China and Brazil but now at the moment.
Q: Where do you think is the most important place to avoid right now, is it the stock market?
A: I would say it’s the bond market, the long term government bond market. Would you lend money to the US government for 30 years at 4-5% in US dollars? Who would?
Q: So you think the US bond market is a bubble?
A: Not yet. But its going to be and that is the next bubble that I see forming in the world because they are down and driving up as fast as they can and they are buying on themselves and that is not good for anyone.
Q: Are you more worried about inflation or deflation?
A: Inflation. Throughout history when people have printed huge amounts of money its led to rising prices. Also, in the commodities market we have shortages developed. Food is the lowest inventory in decades. You cannot get loans to open mines, we are having great shortages developing in commodities. Shortages combined with printing money will lead to more inflation.
Q: A lot of people feel that the biggest risk for the stock market in the US is the Fed coming in? When would expect Bernanke and company to raise rates?
A: The markets would raise rate before Mr Bernanke, he is not smart enough, he will follow the market. Just watch the currency markets you will see the rates start to go higher. We will start seeing turmoil in the currency markets and then rate would go higher on their own.
Q: You think that is a 2010 affair?
A: I know we are going to have the currency problems in 2010, we are certainly going to have atleast the semi-crisis. But its already starting as we said with Vietnam and all other countries. We are going to have serious problems in many countries and in currencies.
Q: What are the implications that our viewers will feel or will see of some of these debt worries?
A: If I am right you are going to see the dollar rally, which will be a good chance for some to buy some of the currency ETF or buy some commodities, they maybe better opportunities. If we start having turmoil, which I expect the dollar is going to rally for a while because everyone will have to cover their shorts and the dollar will go up and you can put your money into other foreign currencies.
Q: One thing we didn’t mention was Europe, the US and Britain untouched, Britain is trying to keep their AAA Credit rating what you think about Europe?
A: The UK is not going to keep its AAA rating. They are already worried about the US and certainly should be worried about the UK, the Prime Minister there has been rolling things. Its going to be a very bad situation, I use to own sterling for about 30-40 years but I own no sterling now, it grieves me to see what is happening in the UK.


Wednesday, December 9, 2009

Big Picture: Timing The Stock Market!!

Timing requires a big-picture, top-down perspective. Here's how I look at the big picture: Identify the largest constituent elements that move the stock, sector, industry or economy you are measuring. For housing, I look at the availability of credit, the cost of credit, the trajectory of growth, and the sustainability of those trends.

In 2007, I used Countrywide Financial Corp. and IndyMac Bancorp. Inc. (OTC: IDMCQ) as proxies for credit availability, and I used interest rates on adjustable rate mortgages (ARMs) and the profitability of big banks as a proxy for the cost of credit. I followed the trajectory of growth around the country simply by reading the real estate sections of newspapers. By the fall of 2007, it was easy to see strains on the proxies I was watching, even though closer to home everything looked rosy.

Both Countrywide and IndyMac faltered. That told me there was a problem with the sustainability of credit extension, especially in the subprime-mortgage market where both had made a giant push. You didn't need to read their balance sheets or income statements, the newspapers were full of telltale stories. There was plenty of evidence that teaser rates were giving way to higher rates and strains were developing on borrowers.

At the same time, big banks were having a harder time syndicating and selling off covenant-lite debt pools of leveraged loans. And there was plenty of noise about banks' shaky structured investment vehicles (SIVs), created to finance and hold risky mortgage-based assets off of their balance sheets. It became obvious that none of the trends that propelled housing were sustainable. You could just have easily seen it, too.

The tipping point for me was a couple of big quarterly losses at Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The ultimate proxy for the entire housing market was flashing red; it was time.

No, I didn't catch the top. But, I told the readers of my blog to get out of the markets entirely and into cash in February 2008. Not cash proxies like money market funds. I mean cash.

If you were employing a timing strategy, even if you missed the exact turn - as I did - you would have locked in built-up profits, as opposed to losses.


Tuesday, December 1, 2009

Future of Crude.

John Felmy has been the chief economist of the American Petroleum Institute (API) for years. He’s well respected. And I appreciate his experience. But the two of us disagree more often these days.

We most recently locked horns at Malone University in Canton, Ohio, last week, where we were debating the future of oil. (Actually, when the invitation was made, I was supposed to debate Sarah Palin. But she pulled out to go on the road and pitch a book she didn’t write.)

Nonetheless, something disturbing emerged from the debate.

I still find John a pleasant enough fellow, but the mantra coming from the API, the mouthpiece of the oil industry, is wearing thin. They want us to believe that the oil market is still fine, still humming along, still providing the best energy value. You’ve heard the argument before: Gasoline is cheaper than milk or bottled water.

This time, John tried the latest API version of this sleight of hand: Whatever price you need to pay, oil is still cheap, still plentiful, still the energy of choice.

Sorry folks, the API just doesn’t get it. And what it refuses to get is becoming one of the most important factors investors in the energy sector will need to watch – carefully. This is all about supply and demand. But it’s not the traditional lecture from Econ 101.

This one is going to roll out differently.

Over the next several months, oil will begin losing its balance. As it falls off the wagon, risk will escalate. And that will require greater due diligence by investors. But as the risk increases, so will the number of opportunities. I’ll show you how to profit from them as they surface.

But first, here’s the problem with the API’s approach.

“Suspect” Figures Are Way Off

As John grudgingly admitted in our exchange, the API’s figures are becoming “suspect.” I have a less charitable view. (Unlike John, I don’t work for them.)

The API figures are way off.

They still portray a view of demand (low) and supply (high) that will not continue to square with reality. We have had lower demand for months only because of the financial crisis and the credit crunch. But this has had nothing to do with the oil market as such.

Others are catching on.

The Paris-based International Energy Agency (IEA), for example, has already admitted its supply estimates were too optimistic while its view of demand was too conservative. The IEA revisions have been paralleled in similar moves by the London Centre for Global Energy Studies (CGES), Russia’s Institute for Energy Strategy (IES), and even Washington’s usually impervious Energy Information Administration (EIA).

There’s a reason for this.

Worldwide oil demand, while sluggish, is nonetheless returning more quickly than anticipated. In addition to the usual suspects – China, India, a resurgence in the Far East – OPEC countries are retaining more of their own production to diversify their economies. Russia is facing rising domestic needs at the same time it tries to avoid a significant decline in crude production. Mexico is witnessing a meltdown in its oil sector while its domestic needs also rise. And new major markets are exploding in places like West Africa and South America.

Notice this is not happening in the United States or Europe. These countries are no longer the driving forces in the oil market. The most developed markets are not calling the shots, despite still being over-weighted in the data collected. The IEA finally got that. So did CGES, IES, and even the EIA.

But not the API.

Indeed, the paid spokesperson for the American oil industry continues to see crude oil as the main option. True, it gives lip service these days to alternative and renewable energy. Moreover, given its position as the in-house spokesman for the hydrocarbon sector as a whole, it is also praising the virtues of natural gas as the immediate choice when we transit from crude oil.

Unfortunately, the API still fails to provide an accurate picture. Perhaps in the final analysis, this happens because its clients are the oil producers.

Oil’s (Profitable) Reality

We currently have about 86 million barrels a day in worldwide crude oil demand. That still represents a figure below pre-crisis levels. However, all of the organizations mentioned above (with the exception of the API) are now estimating a rise to around 87.5 million over the next year, with increases accelerating thereafter.

Current global supply, on the other hand, will max out at 91-92 million barrels. That gives us a small cushion – just a few years – before the real fireworks start. Period.

Because new volume coming on line will barely replace declining production from older fields, we have little prospect of avoiding insufficient supply producing a spike in crude oil prices. This is not necessarily a bad development from the investor’s perspective, since a volatile market will provide profit opportunities, especially if the direction in price remains sustainable over any period of time.

The impact on other market sectors, of course, will be less positive.

The key here is to recognize the major benchmarks and triggers, along with early changes in what they tell us. These will not all be moving in the same direction as the unwinding ratchets into high gear. But we will be able to identify when they are changing and, more importantly, how to profit from them.


Saturday, November 7, 2009

No Big Deal: US Budget Deficits will be lowered.

On Nov. 3, birders sighted the rare skinny parrot hawk, which repeats back calls about fiscal probity. Said President Barack Obama on that date: "The government is going to have to get serious about reducing our debt levels."
Yes, deficits are large. But a lot of this debate is for the birds.
But there's a larger reason we shouldn't let the deficit hawks ruffle our feathers: As the volume of squawking has risen, the situation has actually become less dire. And even without drastic action, the situation will improve materially in the coming year.
Much of the horrific explosion in the national debt—the deficit soared from $248 billion in 2006 to $1.4 trillion in the recently concluded Fiscal Year 2009—can be pinned on cyclical factors. When the economy goes in the tank, it creates a fiscal double whammy, gutting tax receipts and boosting demand for government spending programs that are both ordinary (increasing unemployment benefits) and extraordinary (bailouts, stimulus). Spending rose 18 percent and revenues fell 16.6 percent in fiscal 2009—the worst decline seen since the 1930s, with corporate income taxes plummeting 55 percent. Had revenues been steady, the deficit would have been only (only, he said) $1 trillion.
But signs of recovery returned with the spring. As the financial system came back from the brink, banks paid back billions in TARP funds. In its mid-session review, issued in late July, the Office of Management and Budget dialed back its estimate for the fiscal 2009 deficit from $1.84 trillion in May to $1.58 trillion, due in large part to the trimming of cash piles set aside to help Wall Street. The stock market rally, recovering corporate profits, and an economy that began to expand at a 3.5 percent rate in the summer have translated into higher-than-expected tax receipts. And so, as the treasury department's Financial Management Service reported, the final numbers came out better both on spending and receipts—with a $1.42 trillion deficit, $138 billion smaller than was forecast in July.
The consensus of economists and politicians has continually underestimated the strength and timing of the recovery. So as the recovery rolls on, we'll continue to see more upside surprises. On Nov. 2, the Treasury Department announced it would need to borrow $276 billion in the fourth quarter, 42 percent less than it thought it needed in July. All those Goldman Sachs bonuses will be taxed at the highest marginal rate. Add in the prospect of more TARP repayments and job growth, and the United States is likely to experience a sharp cyclical upturn in tax receipts. The Obama administration forecasts that the economy will grow next year at a 2 percent rate and produce a $1.5 trillion deficit. But if the economy grows more rapidly, at 3 percent or 3.5 percent, it's plausible that the deficit will shrink by 10 percent to 20 percent on its own.


Wednesday, November 4, 2009

Buffett's Biggest Bet!!

Yesterday, Warren Buffett stormed back into the headlines with the largest deal in his 44-year career at the helm of Berkshire Hathaway. The “Oracle of Omaha” announced that he was buying the 77.4 percent of Burlington Northern Santa Fe that he didn’t already own – paying $26 billion or $100 per share of the railroad (a 30 percent premium over the previous day’s closing price), and assuming roughly $10 billion in Burlington debt. Including his previous holding in Burlington, this is a $44 billion investment for Mr. Buffett, and is quite a bet for the investment icon.

The acquisition accounts for virtually all of Berkshire’s available cash, and combined with the assumed debt, the company could face credit rating downgrades from the major agencies that could affect other parts of the insurance giant’s operations (Berkshire’s debt was already on negative watch by Standard & Poor’s). And when arguably the world’s best investor puts this much on the line, it’s certainly worthwhile to stop and take notice in order to determine the scenario in which Mr. Buffet sees this bet paying off.
Warren Buffett has been calling the acquisition an “all-in wager on the economic future of the United States.” Of course, this is a tremendous endorsement of the U.S. economy as Burlington Northern plays a very large (and growing) role in it. Just look at the map of the railroads and you’ll see what Buffett means – Burlington’s routes move goods to and from Canada, to and from China-linked ports, to and from ports that trade with Europe – and, of course, they crisscross a big part of the U.S., moving goods across the country.

We will, however, take it one step further. From our standpoint, we see the acquisition as a play on higher commodity prices and tremendous future inflation. Rails see higher demand as oil prices rise and the costs of the alternative form of transportation, trucking, move higher. Because railcars don’t run on oil products, but rather coal, they have a clear competitive advantage; Coal also is a commodity which, relative to oil, is more plentiful, as well as domestically available.

Oil prices are dictated by worldwide demand. Regardless of continued economic weakness at home, energy prices have shot up from their lows as international/developing economies demand has returned. Burlington is not only protected from these price increases, but benefits from them as well with increased business. As the economy eventually improves, and shipping rates increase – railroad companies, Burlington included, will benefit. With higher demand, the rails also gain pricing power – and can increase their rates to compensate for rail maintenance and expansion.

Of course, the purchase is also shrewd because the replacement value of Burlington Northern’s assets has been estimated as high as $180 a share. To help pay for the acquisition, the board of Berkshire Hathaway has decided to split the B shares – a move that will make them more accessible to the retail investor. This is another timely move by the Oracle.

This purchase also jives with Buffett’s investment in the Brazilian real – a currency which, courtesy of a resource-based economy, has one of the brightest futures around. The investment also provides a counterbalance to Berkshire’s fixed income investments (a must for insurance companies who need to keep less-volatile investments on hand to meet claims), which protect against a deflationary event. All in all, we applaud the choice and continue to recommend Buffett’s vehicle, Berkshire Hathaway (Growth Portfolio), as a good stock for the long haul.

Courtesy: Stephen Leeb

Global Economy is Firing on All Cylinders

What a difference 12 months can make.
Just one year after every national economy on earth was in deep trouble, a powerful global rebound is underway. In fact, the global upswing is a lot stronger than most investors realize.
So don’t let a few days’ decline here and there cause you to lose sight of one of the most important investing trends investors will find today.
According to ISI Group researchers, the transformation has been a dramatic one. A year ago, every national economy on earth was declining at the same time – some dramatically. Today, however, every economy is now improving – though at different paces.
ISI points out that last week’s highlights included China’s third-quarter gross domestic product (GDP) rising at a 12% quarter-over-quarter rate, and Korea’s economy rising at around 8.2%. McDonald’s Corp. (NYSE: MCD) sales in China were reported up 30%. China retail sales are up 24% annualized in the past nine months. And China industrial production is up 21% in the last 10 months. Across the China Sea, export orders and industrial production in Taiwan are up at around a 51% annualized pace.
Over in the developed world, we’re seeing much of the same: The U.S. leading indicators are rising at the fastest pace since 1983. Canadian retail sales are up 3% annualized in the last eight months. And Japanese exports are up at a 31% annualized pace in the past half year, while Australia is smokin’, with auto sales alone up 12% annualized.
Amid this drama, copper prices are up 120% this year, while commodity memory chips (dynamic random access memory chips, known as DRAM), are up 71%.
Here in the United States, chain store sales are up at a 5.5% pace over the last 10 months and are likely to be much better than the National Retail Federation is predicting, which is negative 1%. And employment? Glad you asked. As mentioned last week, unemployment claims have declined 127,000 in the past six months, which amounts to a faster rate of descent than seen in the last two jobless recoveries.
I want to throw out a shocker of an idea for you to think about until next time. ISI points out that payroll losses have been improving (i.e. falling less) by 77,000 jobs per month on average over the past six months. If that keeps up, payrolls will rise by 137,000 in January next year. And if that occurs, regression analysis suggests that GDP growth for the quarter will come in at around 4%.

Is it possible? Well, virtually everyone seems to think it’s impossible – which increases the likelihood that it could occur. But if you look at trends of unemployment claims, temp employment surveys, layoff announcement tallies and the like, they are all moderating in syncopation.
Pessimists will call this just a lull and a fake-out, but I would just note that improvements have become the norm overseas. As mentioned last week, ISI reports employment is already on the rise in Sweden, Korea, Brazil, Russia, Finland, Japan, Australia, Taiwan and Canada, in order of strength.
The theory is that employment was cut too much last year as companies anticipated a depression. Models of behavior suggest that employment should have only been cut by 3.5%, and instead almost 6% of jobs were cut away. This is why productivity and earnings gains have been so amazing.
Ultimately, and perhaps as soon as right now, companies will start hiring again to reverse their “throw everything overboard” mentality of last year. That will have the effect of moderating earnings gains, but it will also put money back into workers’ pockets and in turn, help boost revenue.
In summary, don’t let the short-term setbacks we’ve seen of late cause you to lose sight of the big picture: Long-term global growth trends are in place. As shown in the chart above, it would be natural for the rapid ascent of the past eight months to taper off into a sideways consolidation before its next leg higher. A total collapse is always possible, but it’s just not the most likely scenario now, no matter what the bears say.

Central banks lead subtle shift away from dollar.

Central banks with trillions of dollars in reserves that are already stepping up euro and yen purchases will likely continue doing so in coming years, driven by worries over the stability of the greenback.
A record US budget gap and the rise of dynamic developing economies like China suggest the dollar, down over 20% since 2002 on a trade-weighted basis, has further to fall.
Of course, the dollar comprises some two-thirds of global reserves and will remain dominant in most holdings, as attempts to dump it would destroy the value of central bank portfolios.
But with the speed of reserve accumulation increasing after a crisis-induced lull late last year, policy makers can choose to park more new cash in euros and yen without having to sell existing dollar assets.
"I think 2009 will be remembered as a watershed moment for currencies," said Neil Mellor, strategist at BNY Mellon, which has some USD 20 trillion in assets under custody. "I don't think there will be an imminent move, but it is quite clear there's a plan to shift reserves to a more balanced portfolio."
Barclays Capital research showed that central banks that report reserve breakdown put 63% of new cash coming into their coffers between April and July into non-US currencies.
"There's an incipient desire to reduce the dollar share of reserves, and central banks will use any opportunity to do it, provided it doesn't cause the dollar to fall out of bed," said Steven Englander, chief U.S. currency strategist at Barclays.
International Monetary Fund data shows the dollar's share of known world reserves has been declining since it stood at 72% in 1999, the year the euro was introduced. As of the second quarter of 2009, it accounted for 62.8%.
To be sure, some of that shift is driven by the dollar's decline against a basket of currencies over that period.
But the Barclays data, which removes valuation effects, shows the second quarter was the only one in which central banks accumulated more than USD 100 billion in reserves and put less than 40% into dollars, down from a 70 percent quarterly average back to 2006.
Overall reserves rose 4.8% to USD 6.8 trillion in the second quarter, the IMF said, the first increase in a year.
Policy makers acknowledge the dollar will remain a linchpin of global finance for many years to come. But it has fallen steadily on a trade-weighted basis over the last decade, a troubling sign for China, Russia, India and other big US creditors holding trillions of dollars of US Treasury debt.
Worries about record deficits, run up as the United States borrowed hundreds of billions to stimulate an economy ravaged by financial crisis, has further diminished foreign demand for US assets, making it likely the dollar will weaken further.
For a graphic of the dollar's declining share of known reserves and rising US budget deficit, click
And as others catch up to the United States, the dollar will share the stage with other currencies, said Barry Eichengreen, an economics professor at the University of California at Berkeley.
"The big beneficiary in the short run will be the euro, as only it has the requisite liquidity," he said. "But there's no reason why we shouldn't look forward to the advent of a multipolar reserve currency system."
The euro's share of known reserves hit 27.5% in the second quarter, from 18% in late 2000, IMF data showed. Analysts say it could exceed 30% in coming years.
The yen and sterling also stand to gain, while currencies from commodity exporters such as Australia may see more buying, Mellor said, particularly by energy-hungry emerging economies such as China, which holds USD 2.3 trillion in reserves.
Barclays' data showed claims in "other currencies" beyond the big four -- dollar, euro, yen, sterling —rose more than 10% between April and July.
China does not report currency composition but is widely thought to hold around 70% in dollars.
Russia, the third biggest reserve holder with USD 419 billion in its war chest, says it holds some 47% in dollars and 40% in euros but wants to buy more of other currencies.
Central banks are also turning to gold, which Wells Fargo global economist Jay Bryson said may partly explain gold's surge to record highs.
Taiwan, the fourth largest reserve holder, has said it is considering buying more gold, while China said in April it had increased gold holdings by 75% since 2003. This week, India bought 200 tones of gold from the IMF for USD 6.7 billion.
Central banks do face limits on how they diversify their reserve holdings. Most currencies are simply not deep enough to accommodate massive sudden inflows and outflows.
Even a big shift from dollars to euros begs the question of which country's debt to buy. No European government bond market is as deep as the U.S. Treasury market, and bonds with the highest yields are from countries with the weakest economies.
"If you buy a 30-year Italian government bond, is Italy still going to be in the euro zone 30 years from now?" said Bryson. "Probably, but there is a risk there."
And while China's economy is on track to one day become the world's biggest, the yuan won't be a viable reserve candidate until China loosens controls and lets foreigners invest freely.
"That is a matter of decades, not years," said Anne Krueger, a former IMF deputy director now at Johns Hopkins University's School of Advanced International Studies.
Edwin Truman, a senior fellow at the Peterson Institute for International Economics and a former Federal Reserve economist, says it's "not so much a drift away from the dollar as it is a drift to other currencies."
"Will the dollar share of reserves be lower five years from now?" he asked. "If I had to guess, I'd say, 'yes.' Will it be because of a massive stampede out of dollars? Probably not."


Why the Dollar’s Rebound Will Be Short-Lived.

The dollar yesterday (Thursday) rallied from 14-month low against the euro, but that rally will be short-lived as U.S. monetary policy is likely to remain loose, even as other central banks raise interest rates.
A recovery of investor risk appetite has slammed the dollar in recent months, driving the currency to a rate of $1.5017 against euro on Wednesday, compared with $1.25 in March. But yesterday, analyst Dick Bove’s downgraded outlook for Wells Fargo & Co. (NYSE: WFC) and China’s less-than-stellar third-quarter growth spurred a greenback recovery.
The euro fell as low as $1.4944 against the dollar in early morning trading, as investors became more skeptical of the global economic recovery. Still, many analysts believe the dollar will rather hastily resume its decline.
The euro’s proximity to $1.50 suggests that the market is not taking the current correction as too serious,” Michael Klawitter, senior currency strategist at Commerzbank in Frankfurt told CNNMoney. “Quite a few investors are buying euros on dips.”
And they have good reason to because despite having a so-called “strong dollar policy,” U.S. policymakers understand that a weak dollar is benefiting the economy by keeping liquidity high and boosting exports.
The Fed’s Weak Dollar Policy
The Reserve Bank of Australia earlier this month became the first developed economy to tighten monetary policy. Canada, which has shown signs that it is emerging from the economic downturn faster than the United States, may be next. And now China – whose gross domestic product (GDP) expanded by 8.9% in the third quarter – is turning its attention from economic expansion to inflation, as well.
“The policy focus of the next few months is to balance the need to maintain stable and relatively fast growth, the need to adjust the economic structure and the need to better manage inflationary expectations,” China’s State Council said in a statement signaling a looming policy shift.
However, it’s a far different story in the United States where price pressures remain low and the recovery remains mild.
After contracting by 6.4% in the first three months of the year, the U.S. economy shrank by a revised 0.7% in the April-June period. But analysts remain skeptical, given the soaring unemployment rate and moderate effects of the Obama administration’s stimulus.
About 7.2 million jobs have been shed since the recession began in December 2007, driving the unemployment rate to 9.8% in September. Some economists estimate that the jobless rate could peak as high as 10.5% next summer.
Meanwhile, the President Obama’s $787 billion stimulus plan – which the administration claimed would keep unemployment below 8%, and push it below 7% by the end of 2010– has brought little stability to the job market.
Only about a quarter of Obama’s stimulus, or $164 billion, has been paid out. About half, nearly $400 billion, will be paid out over the next 12 months in the build-up to mid-term elections, and the remainder will be disbursed in 2011.
Indeed, the outlook for a quick recovery in the United States is dim, which means the U.S. Federal Reserve will almost certainly maintain its expansive monetary policy until it sees more progress.
In fact, Federal Reserve Bank of St. Louis President James Bullard last week said that a falling unemployment rate is a precondition for an increase in the benchmark interest rate from near zero.
You want some jobs growth and unemployment coming down,” Bullard said in an interview with Bloomberg Radio. “That is a prerequisite” for an increase in interest rates.
The Fed’s Beige Book, which was released Wednesday, offered even more justification for the dollar’s downward trajectory.
All 12 district banks observed “little or no” price pressures, while demand for bank loans was “weak or declining.”
“The Fed Beige Book confirmed the absence of pricing pressure in the United States and activity was merely starting to recover from depressed levels – thus the Fed is showing no signs of removing the punchbowl of low rates,” analysts at ING said in a research note. “Thus core trends remain intact and USD rallies should be sold into.”
Indeed, the Fed actually has a lot of short-term incentive to keep interest rates low and the dollar weak.
To begin with, a cheaper dollar makes U.S. exports more affordable to the rest of the world. And that has helped to shrink the U.S. trade deficit.
The U.S. trade deficit shrank by 3.6% in August to $30.71 billion from a downwardly revised $31.85 billion the month before. The July trade gap was originally reported as $31.96 billion.
It’s true that a drastic drop in the value of the dollar would make imports much more expensive for U.S. consumers and make it more expensive for the government to finance debt. But some analysts argue that so long as the dollar’s decline doesn’t turn into a rout, it actually benefits the economy.
As long as it doesn’t crash, a gradual, orderly decline is healthy,” C. Fred Bergsten, director of the Peterson Institute for International Economics, told The New York Times. “The dollar went up 40% between 1995 and 2002, so this is a necessary rebalancing.”

Sunday, October 18, 2009

US in a V shapped Recovery.

The U.S. economy may be experiencing a “V-shaped” economic rebound.
All the talk about a slow, muddle-through economy in 2010 to 2011 may be rubbish.

Favorite positions to take advantage are still exchange-traded funds (ETFs) with heavy overseas and economic exposure. Right now that includes iShares Global Financial Sector Exchange Traded Fund (NYSE: IXG) and iShares Metals & Mining (NYSE: XME); on dips it includes iShares Emerging Markets (NYSE: EEM) and Vanguard FTSE World Ex-USA Small Cap (VFWIX). And after a brief period of underperformance, tech stocks might be ready to roll again, especially hardware like SPDR Semiconductors (NYSE: XSD).

Bear's argument (from a fundamental perspective) continues to be that weak employment figures will undermine consumer buying during the holidays; consumers are saving more and spending less, and can’t get bank loans; and companies are deleveraging. And then from a technical perspective, bears also harp on the lack of volume in this up move. But there are three key counterpoints:

First, employment is a lagging indicator, and may be in secular decline. We’ve been through this a dozen times so I won’t lay out all the points. But the main idea you may recall is that companies first go overboard in hiring (2004-2007), then they go overboard in firing (2008-2009), then they start to enjoy having fewer employees to pay (2009), and only later do they realize that to grow again they’ll have to start re-hiring (2010-2012). At this point in the cycle, investors give companies bonus points for cutting expenses, and that means reducing headcount. So don’t look for real investors to penalize companies’ shares during periods of reduced employment.

Second, consumer saving is paradoxically terrible for consumers and a boon for banks and businesses, which is another reason stocks have been buoyant. You see, when families start to save a lot they tend to put their money in a bank savings account for safety. They’ll earn 1% if they’re lucky. On the other side of that 1%, laughing like crazy, are bankers who then turn around and loan that money out to big business at 6%-plus, or buy bonds yielding 4% to 12%. The banks are making a killing on consumer savings, which is really sad, but it’s the truth. This is one reason we are overweight banks in our ETF portfolio.
Later on in the cycle, when the Federal Reserve starts to deploy its so-called “exit strategy” and begins to raise interest rates, the “spread” between what banks pay for money and what they can receive in corporate loans will narrow. And only then will banks turn their attention back to consumer loans, giving a new boost of fuel to that leg of the recovery.

Third, the volume is relatively low. I believe that the reason for this is that because the public is just not on board with this new bull cycle – yet. I’m not going to go through the math of all the cash sitting in money market accounts. But all of you reading this today, who care about stocks and are taking matters into your own hands, are in the minority.
Most of the public just doesn’t care. They still feel wounded and abused by the market during the decline last year, and don’t trust their money managers, and don’t trust the recovery. So until the public starts to feel more comfortable again – probably when the Dow Jones Industrials gets back to around 12,500, which is where it was in the summer of 2008 – volume is probably going to stay light. Just ask your friends at work if you don’t believe me.


Thursday, October 15, 2009

Deccan Gold Mines

Deccan Gold Mines is the first private sector gold mining company and rather the only gold mining company listed on the Indian stock exchanges. The company has got blocks spread across four states. The total area of the blocks is more than 10,000 sq kilometers.

Talking of gold mining business gold mining company has to pass through three stages before they can commercially start mining gold. The first stage is called reconnaissance permit where they seek the approval of the authorities to do exploratory activities on say 200-300 sq kilometer of the block. Second stage is prospecting license wherein they short list about 25 sq kilometer or 30 sq kilometer out of the total area where they would like to do the further exploratory studies and the third stage is called mining lease where in they short list about half a sq kilometer or one sq kilometer where they would actually like to drill and take gold out or rather rock out and then refine it and produce gold.

The company has filed application for about six blocks for mining license. As per the management the actually mining of the company is expected to start in the last quarter of FY10-11 which is January to March of FY11 and if you look at the valuations of this company as of now the company has got zero revenues. It has a market cap of Rs 200 crore but going by what the management has been saying that. Management says that they are able to derive about 4 tonne of gold per annum assuming on a conservative basis that they are able to do only 2 tonne and taking a price of about Rs 15,000 per ten grams this would translate into revenues of about Rs 300 crore. Typically internationally the gold exploration cost is about USD 350-400 per ounce which in this case will translate into Rs 5000-5500 per ten grams. Assuming initial expenses to be high we still believe that on a conservative basis the operating profit of the company could be in the region of 40-50% which means on a revenue of about Rs 300 crore the company can do about Rs 120-150 crore of operating profit so as of now there are no profits but market cap is only Rs 200 crore which is less than 2 years of the companies operating profit.

The valuation is low mainly because of two reasons. One is the uncertainties involved in the business and also the uncertainties with regard to the regulatory clearances for this company. The second relates to the psychology of the investor. Most people do not want to buy these companies now when the production is still one, one and a half years away. Everybody thinks that they are going to buy the company as soon as the company is going to start production but people will realize that smart money would already have accumulated the stock at lower levels.

I am not advocating buying the stock just now at upper circuits. I would not advise doing that but I think one can keep an eye on the stock. I would ideally believe that Rs 25-30 levels would be a good level to get into the stock but one can chose to do staggered purchases for this stock. Rather than thinking that they will buy everything when the production starts, start accumulating at this point of time. I would like to say that this is the one for a very high risk investor because of the uncertainties involved in the business and also somebody with a time frame of about 3-5 years.


Tuesday, October 13, 2009

Jobless-Recovery Threat.

Jobless-Recovery Threat
In the "Executive Decision" segment, Cramer spoke with Dan Dimicco, president and CEO of Nucor (NUE Quote), to get a better handle on the state of the economic recovery. Dimicco came out with guns blazing, saying that all of the demand the economy has seen thus far is inventory-related and not job-related. He said those in Washington are not focus on the real crisis, and that's jobs. The threat of a jobless recovery is much more severe than anyone realizes, he said.

Armed with charts of the past five recessions, Dimicco illustrated that with every recession since 1980, the recessions have been getting deeper and the recoveries taking longer to get back to the original employment levels. And with the current crisis, the numbers are off the charts, as the job losses continue to mount, he said. Dimicco said everyone's top three priorities need to be jobs, jobs and jobs. He said health care and global warming don't hold a candle to the problem of jobs. Dimicco said our country could do itself a great service by cutting off foreign oil and using its own natural gas and oil until alternative energy becomes feasible. This alone would create tens of thousands of jobs and help move us towards the road to recovery, he said. Cramer commended Dimicco for his efforts to get Washington to focus on jobs. He said he's joining in Dimicco's crusade and hopes viewers do as well, as jobs are not a Democratic or Republican issue but an American issue.


Tea Sector.

What is the production and consumption of tea globally? What would be India’s share? What is your outlook for the tea industry?
The total annual production of black tea globally is estimated at 2.3bn kg. The main producing countries are India (980mn kg), Kenya (350mn kg), Sri Lanka (325mn kg), other African countries (140mn kg), Vietnam (140mn kg) and Bangladesh (60mn kg). Tea production has been stagnant in the last 3 years globally, since area under tea plantation has not increased significantly. Tea plantation has a gestation period of 5 years thereby tea production is expected to remain stagnant / insignificant increase over next 4 to 5 years. Tea consumption growth is estimated at the rate of 2% per annum globally, whereas in India, consumption is growing 3 to 3.5% per annum. Currently, the total production is unable to meet consumption and consumption growth thereby creating shortage in the global markets
India produces 40% of the world's black tea.

What is the size of the Indian tea industry – in value and volume terms?
The total black tea production in India is estimated at 970 to 980mn kg per annum. The average price for the year 2008-2009 was Rs90 per kg, as explained earlier due to mismatch of demand and supply and strong consumption growth tea prices in India are expected to rise further and this cycle should last at least 3 to 4 years.

Comment on the seasonality of the tea industry?
Tea production in North India is seasonal in nature. There is no production from mid-December to mid-March due to winter. July–October period is the peak season of production with approximately 60% of tea being produced. The quarter ending September is the best quarter while the quarter ending March is a negative one.

What are your current realization levels? What are you expectations for FY10?
Our current averages are Rs140 per kg. We are expecting the annual averages to be between Rs130 to Rs135 per kg.

What were your inventory levels in FY09? What levels you expect for FY10? What is the logic behind holding inventory when there is a shortage in the market?
Black Tea Inventory as on March 31, 2009 was 3.2mn kg and estimated to be the same at the end of FY10. There is cycle and seasonality involved in the tea. The major consumption months are the winter months and the production months are non-winter ones, so normally there will always be an inventory. We produce 60% in four months, so it is only when one has to look at from the overall perspective that by the year end what will be the additional shortage. So inventory will always be there as far as tea industry is concerned.


Thursday, October 8, 2009

Solar Outlook.

The PV (photovoltaic) industry has been hit hard during these challenging economic times with demand dropping approximately 50% this year from 2008 levels and a severe oversupply situation occurring, giving rise to fear, uncertainty, and doubt as to the future of the industry.

But there is reason for hope, industry insiders assert.

To set the stage, it helps to understand how the PV industry got to this point. Jim Hines, research director for semiconductor and solar at market research company Gartner Inc explained that three major events coincided to thrust the PV industry into a severe oversupply situation. First, there was a build up of capacity that had been going on for a couple of years and culminated at the end of 2008. Second, overall economic conditions collapsed. And third was the situation in Spain, in which market players got ahead of themselves and local legislation changes altered the PV playing field there.

“The Spanish market was really a surprise last year," said Dr Henning Wicht, senior director and principal analyst at iSuppli Corp Deutschland GmbH. "There was much more installed than anybody could think. In one year, they installed approximately 2 to 2.5GW. This was the largest amount of solar to be installed in one year.

“The consequence was that there was a rush to get hardware to install solar power parks by a very precise date, which was the 28th of September, because every installation put in place after this date would apply to a lower feed-in tariff. So everybody was rushing for this date which led to a continuous strong demand of hardware modules, which made module producers believe that there was close-to-infinite demand. They were ramping every year. It’s not that they were relying on their production but everybody was ramping at 50 to 100% every year, for three to four years," he continued.

"From the supply/demand data we saw that in 2008, there was already more produced than installed, but this didn’t get through to the market because there was such strong demand, and people didn’t realize there was already more modules on the market than could be absorbed. Seeing a market increase by 50% in just one year makes people dream,” he said.

Indeed, iSuppli has reported that there are close to 8GW of modules to be produced but only 4GW to be installed in 2009.

“The question is, how can that happen? That means that every second module is going to the inventory,” Wicht pointed out.

In trying to assess a forecast, Gartner analysts said they discovered that the major drivers for the solar market are starting to realign themselves. “Even though this is a phenomenally horrible market for vendors right now, it has turned into a fantastic opportunity for end users," explained Alfonso Velosa III, research director for semiconductors at Gartner. "There were two things that needed to happen: end users wanting to buy the systems and the financing pipelines starting to loosen up. We are finally starting to see movement on both sides.

“It’s actually really starting to get good in that deals are starting to happen. The complication though is that, whether you are talking about the US or Europe, the sales cycle takes a long time,” he said, noting that European sales cycles usually take between 12 and 15 months, while US cycles typically range from 12 to 24 months.

Gartner global PV forecast on a gigawatt basis
2007 3.4GW
2008 5.4GW
2009 4.6GW
2010 6.3GW
2011 9.9GW
2012 14.3GW
2013 20.0GW
CAGR 2009-2013 44%
That said, Gartner currently forecasts relatively severe contraction based on a number of projects that are being completed in the second half of the year, Velosa said.

On a revenue basis, with the excess capacity in the PV supply chain, ASPs (average selling prices) have gone through the floor, leading revenue forecasts to be cut in half for modules.

Gartner estimates that right now the oversupply of polysilicon is on the order of 2.5 to 3 times the demand, and expects this pricing environment to continue for some time – certainly through next year and well into 2011. The situation is the same in the solar cell module market with almost 3X excess capacity, Velosa noted.

“We see excess capacity going through 2012," he said. "We so don’t see prices firming up, either on a polysilicon basis or a module basis until 2012 at the earliest, possibly even 2013 because we continue to hear about more expansion plans.”

Gartner also believes the stimulus money from the Chinese and US governments have the potential to keep the PV ASPs in a degraded state, which, when combined with all of the work going into improvements on technology, efficiency, and processing, will drive the competitive dynamics of the industry, with more attractive products for end users. In essence, the ASP erosion is helping the industry remain competitive.

Gartner global PV module forecast on a revenue basis
2007 $11.3B
2008 $18.8B
2009 $9.2B
2010 $10B
2011 $14.1B
2012 $18.6B
2013 $23.3B
CAGR 2009-2013 26%
“This is bad news in the short term for a lot of the suppliers and companies trying to get a foothold in the PV value chain, but longer term, it is going to be a positive for growth and for uptake in demand for solar energy, particularly PV," Hines pointed out. "It is what is needed to happen to drive costs down. The question becomes how to cross the chasm as a company that wants to participate in this market."

From a vendor point of view, Applied Materials Inc’s Jonathan Pickering, VP of marketing and business development for solar, said, “2008 calendar year was a banner year for the industry with tremendous growth in the end market. I think there’s still some lack of clarity about what the final numbers look like this year because it got off to a bit of a slow start and then there’s the seasonality effect.

“One of the challenges was that people were seeing pretty rapid declines in module pricing," he continued. "It’s like all of us: If we see prices going down, we tend to wait and see if they go down again the next month. On the flip side of that, for example, in Germany the subsidies are going to be ramped down and adjusted every year. People are watching that."

Pickering said that while it is too early to say for sure, it looks like the end market will be flat to down 10 or so percent this year. "What we are seeing is that several of the big manufacturers, certainly in China, are running pretty close to capacity – so people are really ramped up now, which wasn’t the case in the March-April timeframe,” he added.

Impacts on PV production widespread

In order to realign their businesses with the current market conditions, producers of solar modules and cells are reducing their expansion plans and even their current production, observed iSuppli’s Wicht. “This is why the original production roadmap, which was at 12GW for 2009, is coming down to the 8GW range,” he said.

Further, hardware prices are coming down significantly. “Last year, the average selling prices of modules was around $4 per watt. What we see and what our model forecasts is it in the $2.30 to $2.50 per watt range at the end of 2009, and we see that already now. For 2010, we expect that the market will start to stabilize in the sense that the demand will continue to grow and the supply/demand scissors is likely to come closer again,” Wicht offered.

“We still see that module prices will come down again in 2010 because there is a lot of capacity still ramping. Once the factory is built and the decision is made, the entrepreneurs and CEOs, by a large majority, are forced to continue, otherwise they lose their credibility. If they cannot achieve their announcements, that’s bad credibility. So they try to keep to their plans and try to sell at any point. It’s easier for the entrepreneur to say to his investors, ‘We are not making much profit this year as everybody else, but we continue with our expansion plans and we try to grab market share.’ This is the strategy most companies follow and only in extreme cases, they start to reduce their production,” he added.

Seeing signs of some pretty big orders being put into the system, Gartner is forecasting a stronger business for 2009 because of continued demand in the core German market, as well as the growth US and China markets.

“It really looks like the pipeline is picking up … with 2010 being a sharp recovery on a gigawatt basis,” Velosa said. “However, let’s be clear, this is still lower than the existing capacity, and we still see a 20% reduction in ASPs for next year.”

Since September 2008, there has been a 40% drop in ASPs and Gartner expects that number to fall further.

Applied is seeing a similar trend. “We are seeing signs of life. In Asia, there are continued levels of investment in crystalline and thin-film technologies. That’s encouraging,” Pickering said.

Other programs that many believe could help the PV market recover are certain provisions of the US government’s economic stimulus bill. These include an advanced energy Manufacturing Tax Credit, which is a new 30% investment tax credit to promote the manufacturing of clean energy equipment in the US. As well, a grant in lieu of the Investment Tax Credit or Section 1603 claims to be an alternative for businesses that could otherwise claim the production tax credit or the investment tax credit for certain qualifying renewable energy projects.

Further, Pickering noted that the American Clean Energy and Security Act of 2009 could help the industry. The act was passed by the US House of Representatives in June and contains certain solar provisions, including a national Renewable Portfolio Standard meant to encourage solar and other forms of renewable energy, along with a “Green Bank” to provide rebates, loan guarantees, and other financial mechanisms to finance solar energy technology and demand.

For more on the solar market, visit EDN's solar power Hot Topic page and view this "Solar's changing climate: Photovoltaics and the legislative effect" Webcast.
In addition, many states are considering feed-in-tariffs or performance-based incentives to accelerate the deployment of PV power.

“For the market to recover means margins building up in the market,” Wicht said. “What we have seen in the last years was that the hardware makers had the good margins – from polysilicon up to modules. And the installation and project developer companies they had to reduce their margin because the purchase price was high. What we see right now in the market is that the margin is not disappearing but it is shifting downstream.

"This is the message we try to pass: The market overall is not bad, it is a good market, and it’s very interesting if you’re in the solar installation business or even a solar investor … and can, for example, in the modules segment, buy modules at prices they never believed is possible.”