Tuesday, November 18, 2008

Searching for the the "Perfect Bottom"

My favorite analyst, our very own Mad Scientist Dr. Saif Lalani, emailed me today:

(Nothing contained herein is a recommendation of any kind.)

The mother of all crisis?

I would like to reiterate that on a personal note I don't care if stocks go lower or higher. I continue to find stocks at levels where I do not care to check their quotes the next day. I am finding enough attractive stocks that I am actually getting more and more excited as something that I buy goes down. I hope to buy more of Mosiac (MOS) under $30 a share. Maybe Intrepid Potash (IPI) will go to low single digits so I can load up on it. Maybe JASO will trade under its net cash value so I can buy a stock at a P/E of 2 growing at 30% a year for free. Ensco (ESV) is trading below tangible book value which is probably understated by at least 50% because of depreciation rules.

Finding a perfect bottom is virtually impossible but if you are fortunate enough to buy a stock pretty close it you should not care. Kind of like this picture, the perfect bottom may be elusive but I see enough to get excited.

I won't include a copy of the picture the Mad Scientist included with his communication. Kids!

Of course, if the world's financial system does not collapse, the Mad Scientist is probably correct in his optimism.  And at these levels, exchanging certain equities for US$s is less than appealing.  My bet is stocks will be higher a year from now.  But I cannot bring myself to add to equities here (I have enough).  Perhaps I am behaving like the average individual investor - waiting for the market to rise before I buy (buy high, sell low).  Maybe it is too late to sell and too early to buy.  Then again, I look at certain energy producers and servicers trading at 4X next years earnings,  (my OWN estimate.  I do not listen to sell side "analysts") with little to no debt and fat dividends and I do get excited.  Also, I continue to try to add to Gold by selling naked puts (I should mention that on the Gold I DO hold I sell out of the money covered calls to generate income and to lower my cost basis.  I will continue this strategy, but the calls will be WELL out of the money).  

On the other hand, the U.S. equity market is so grossly oversold that a truly massive rally could come at any moment. 

Of course, I reserve the right to change my mind on a moment's notice.  Markets change, data changes, things change.

Good Luck!

Mentatt (at) yahoo (d0t) com


Anonymous said...

Hi Greg,

This is off the subject of the post, but I have a nagging question about fractional reserve banking that has bugged me forever. I understand that if a bank has $100, and loans up to the reserve requirement, say 20%, that this gets re-loaned and re-loaned. If everyone has a 20% reserve requirement, $100/0.2=$500 dollars will be created. Cool.

My question is about the original $100, or about any money borrowed from the Fed. It has to be paid back with interest. So, if it is borrowed at 5%, at the end of a year $105 is owed to the Fed to keep that $500 in circulation, and $110+ the next, etc. This spreads out through the system. It expands exponentially. Doesn't this make a credit collapse a mathematical certainty???? How does it work? I've never seen an adequate answer.


Coal Guy

bureaucrat said...

For all of the evidence of deflation/depression that is around us (and will be around us for awhile), I will give you guys this: I've been storing food and consumables for the past year -- paper products, liquid products like soap and contact lens solution, rice, sugar, meat, Ramen noodles, cereal, soup, etc. etc., and I've come to the conclusion that because of the water content of almost everything, you typically can't store much for over a year before it "goes bad." At some point in the future, people are just going to have to start buying again, just for "human survival". At that point, the demand goes up, the prices go up, and alllll the oil and gold investments start looking good again. But, I can wait a little while longer ....

Greg T. Jeffers said...

A lot of folks, including me, think that it is a mathematical certainty that at SOME POINT the credit system collapse, but not because of interest paid to the Fed.

Give me some time, and will tackle the issue in a future post.

Greg T. Jeffers said...


Ever traveled in the 3rd world?

You would be surprised at what people do not need.

Back soon

bureaucrat said...

America is FULL of examples of wasted spending and stuff we do not need. I've been living a very spartan existence (except for occasional restaurants) for several years now. I have two 30-year old friends who have brand new BMWs. I have one friend (also age 30) who, with a partner, built a brand new $1,000,000 house (there are no kids). I have my friends who guzzle beer and smoke like chimneys. I have one friend who drops his DeVry classes (cost $1,800 per, lost) cause they "didn't fit." There is a tremendous amount of waste in the American human system (let's not even talk about driving/oil versus walking), and with a little luck, I will not become a third world resident. :) We can consume less.

fallout11 said...

Good question Coal Guy.

Allow me to direct you to an Austrian School of Economics parable, Bernard Leitaer's now-famous parable "The Eleventh Round", from his book 'The Future of Money'.

Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, people walked around with chickens, eggs, hams, and breads, and engaged in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, like harvests or whenever someone's barn needed big repairs after a storm, people recalled the tradition of helping each other out that they had brought from the old country. They knew that if they had a problem someday, others would aid them in return.

One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral the six chickens he wanted to exchange for a big ham, he could not refrain from laughing. "Poor people," he said, "so primitive." The farmer's wife overheard him and challenged the stranger, "Do you think you can do a better job handling chickens?" "Chickens, no," responded the stranger, "But there is a much better way to eliminate all that hassle." "Oh yes, how so?" asked the woman. "See that tree there?" the stranger replied. " Well, I will go wait there for one of you to bring me one large cowhide. Then have every family visit me. I'll explain the better way."

And so it happened. He took the cowhide, and cut perfect leather rounds in it, and put an elaborate and graceful little stamp on each round. Then he gave to each family 10 rounds, and explained that each represented the value of one chicken. "Now you can trade and bargain with the rounds instead of the unwieldy chickens," he explained.

It made sense. Everybody was impressed with the man with the shiny shoes and inspiring hat.

"Oh, by the way," he added after every family had received their 10 rounds, "in a year's time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives." "But where will the 11th round come from?" asked the farmer with the six chickens. "You'll see," said the man with a reassuring smile.

Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.

So when a storm threatened the crop of one of the families, people became less generous with their time to help bring it in before disaster struck. While it was much more convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all the participants.

There are really only three ways this story can end: inflation, bankruptcy, or growth. The same choices face any economy based on usury. The villagers could procure another cowhide and make more currency, in effect printing more rounds, but the stranger would immediately know this by inquiring as to the price of chicken; or one of each 11 families could go bankrupt, as Lietaer observes; or they could increase the number of chickens so that new "rounds" would have the same value as before, but this requires both ever-expanding resources and ever-greater effort (peonage) to satisfy existing debt.

In a real economy, all three pressures operate simultaneously. The bankruptcy pressure drives a built-in insecurity, which in turn drives people and institutions to "make" more money through inflationary or productive means. Of these two choices, inflation is only a temporary solution (as we are discovering today). It can only push the grow-or-die imperative slightly into the future.

fallout11 said...

..and making more money via growing the economy is only possible temporarily, i.e. the world and everything in it is finite.

During the centuries that usury was considered "sin" by the world's major religions, economies were mostly steady state, regulated ultimately by that all important resource, energy. Specifically solar energy, which fell on a finite quantity of arable land in a finite amount, allowing a finite amount of biomass to be grown and consumed (as food, burned as fuel, used as construction material, fed to livestock, etc). Land was, ultimately, the creator of wealth, because land is what harnessed the only source of energy on the planet. Hence usury could not be supported, there was no way to expand the "energy budget" until the industrial age (made possible by a second energy source.....coal). The extra energy which became available for use is what enabled the industrial age in the first place. But fossil fuels are finite, unlike greed (and the ability to create money out of thin air).

All previous fractional and fiat currency systems in history have collapsed. Every last one. Now you know why.