Thursday, November 27, 2008

A Look Ahead

Let us look ahead.  Not next quarter, or the one after that.  Not next year, not the year after.  We are constantly told by Wall Street and Washington to look at the "Long Term".  5, 10, 20 years.  

Earlier this year I made the mistake of thinking that the deflationary pressures in the Anglo world's (and the Euro zones) Real Estate and debt instruments (declining credit expansion, then contraction and availability) would not be able to overwhelm the energy shortage.  I thought the only thing that could have brought this about were poor monetary policy decisions by the Fed, ECB or some other extraneous event.  Recently, I even began to think that house prices were not too far from a bottom because I believed that the Fed would be able to "reinflate".  Oh, well.  At least I was not confident enough to put my money, or anybody else's money, where my mouth was.

Successive U.S. bailouts of various companies or industries are not a means to prosperity.  I firmly believe that the actions our government are taking are intended to slow the rate of change so that the American people do not panic and turn this into an outright collapse.  I certainly hope they succeed - I value the freedoms I have (though I would like to stop the erosion of these), law and order, public safety, clean water, etc... that we Americans take for granted but are by no means assured.  I also firmly believe that Messrs. Bernake & Paulson, and Obama's economic team know precisely how bad the situation is, and I believe they are going to borrow and spend and print and beg and steal... whatever is necessary "by whatever means necessary" in order to prevent that collapse.  Each dollar bill should come with a disclaimer similar to security prospectuses: 

"There can be no assurance that we will achieve our objectives".

Encouraging consumption, rather than savings and investment, only digs the hole we find ourselves in deeper. (As we all know, when you find yourself in hole - stop digging).  The U.S. has been able to maintain its standard of living through the export of its currency as the world's reserve currency, but we are doing our best to destroy the future value of the very thing standing between us and disaster (not that it is sustainable for long).  Were it not for the US$'s role in world trade, the U.S. would be in the same boat as Argentina, and I am here to tell you that that circumstance will not last for the "Long Term".  So why pretend that it will?

I was never a "Tin Foil Hat" kind of "Gold Bug" guy.  Then a couple of years ago it dawned on me that if the U.S. energy supply declined for ANY REASON economic growth would stop, and then contract.  The only reason to hold U.S. denominated investments versus hard assets was continued economic expansion.  Now that expansion has come to an end.  Suddenly, I felt an overwhelming desire to exchange some $'s for Gold.

I know a number of folks feel that Obama is going to do this, that, or the other thing... and then it is back to the socialist utopia that the Left has been agitating for for decades.  I am willing (and I have) to bet big that this will not happen, and that when the Obama honeymoon is over and the economy is still deteriorating the U.S. markets and currency will be in a shambles.  This will not be Obama's fault, nor GWB's, Bill Clinton, nor Bush, Reagan, Carter, Nixon, Johnson, Kennedy, etc... WE have collectively done this to ourselves, and assigning blame will not save a drowning man, nor your career or investments.  In the environment I foresee a political crisis is all but certain, and a political crisis would spell US$ and market disaster.  Not that a political crisis is necessary for this outcome - it just speeds the rate of change drastically.  
The "Long Term" investment horizon we are pitched by Wall Street's hucksters and Washington's narcissists just ain't the "Long Term" we are going to get.  

"False Promises" will by necessity be replaced by hard assets.  People know what the value of a bushel of corn or wheat, an ounce of Gold, a barrel of Oil, or an acre of farmland is in any given market anywhere in the world.  The value may vary by local, market conditions, etc... but for the fellow needing one or more of these commodities value is established., and trade can commence.  Not so financial assets, all of which are based on a promise from the contra party, the party on the "other side".  These will turn out to be, for the most part, "False Promises", indeed (in my humble opinion at THIS moment).

Hard assets will be the flavor for the next decade or two (or three).  For my money, rallies are an opportunity to sell financial assets, and this collapse in commodity prices is giving folks who missed the last commodity run a second chance.    Either way, by mathematical necessity, we will become poorer in the aggregate.  Sometimes, losing less than you might have otherwise is the best you can do.  Of course, those who can get this right will prosper wildly.  

Meanwhile, back at the economy...

As I said earlier, we cannot "bailout" our way to prosperity.  We can affect the nominal rate of change, but that's about it.  House and commercial property values are going to decline for years, and then stagnate for years more.  That means more deflation, a contracting economy, and lower stock prices in real terms.  In short order, declining energy availability will rear its ugly head, further contracting economic output.  As this unfolds, it appears that our government is bound and determined to deficit spend our way to prosperity, which, if they were prescient and got EVERYTHING right, they might actually be somewhat helpful (as opposed to a complete disaster).  I would bet against this at every turn.  

It is my opinion at THIS moment that the U.S. economy is going to worsen over time for many years, with all of its concomitant effect on everything else.  That does not mean we will never have a rally in the market, or a couple quarters of expansion with politicians and Wall Street waving the "All Clear" flag - we will.  It DOES mean that these are merely short term opportunities, and that you should not get sucked back into the "Long Term" pitch.  

Good Luck

Mentatt (at) yahoo (dot) com

Tuesday, November 25, 2008

The Greatest Wealth Transfer of All Time?

If American's biggest investment (overhead) is their home, and folks can now buy a home for 40% LESS than 2 years ago... Isn't SOMEBODY benefitting?

You bet.

Young people, young families, people without "family money", will not be strapped to the gills with both parents working 3 jobs just to get into their first home.  

This is a crisis?

It is, if your wealth is represented in financial assets, because ALL financial assets have at their base the credit and mortgage market.  If your wealth is derived from a butcher shop on main street... not so much.

The problem for the system and the financial markets is that at the same time that the collateral value of real estate to the banking/lending market is declining, the demand for automobiles - the other major demand for debt - is contracting rapidly as well.

This does NOT have to be your problem.  

Arranging your life in a very local way can help you to lower your personal overhead much faster than the economy can drop your income.  

Good luck!

Mentatt (at) yahoo (d0t) com

Hysterical

This is HYSTERICAL!!!!!!

Monday, November 24, 2008

Your Average Wall Street Professional and the Energy/Credit Crisis

Let us take the average, and I know there is no such thing, Wall Street professional (Broker, Banker, Salesman, Trader), and game his future career in the energy/credit crisis.

Same assumptions on U.S. Oil imports as my previous post (a decline of 8% per year) and GDP (decline of 3%+ per year for 5 consecutive years once the Oil import decline begins).

Our hero lives in Metro New York City.  He is 40, a bit younger than our professional from Boca Raton, married, one child and they are thinking about another, he works 60 hours per week (including internet research), commutes 12 hours per week, and bears a tax burden that would choke a boa constrictor. He is nearly broke - relatively.  He thinks he has assets of just over $1mm, down from $4mm.  He lost big when his company stock, Lehman Brothers, Bear Stearns, Merril Lynch, Citigroup, etc... fell out of bed.  Unfortunately, half of his net worth is the "equity" in his home, which he has deceived himself into believing still exists.

His income was $500k to $1.5 per year.  Yes, that is a big range, but that is the way it works for the well paid foot soldiers of Wall Street.  Remember, I am not talking about the "Master's of the Universe" here.  I am talking your average working stiff on the professional staff with 15 years experience.  The "Racoons" as they were known (while the big shot's were out at dinner parties we were back at the office doing the night garbage - hence "Racoon").  Anyway, I use the past tense to describe his income because that income level is gone, and it ain't coming back, to Wall Street's army of buttoned down BS artists.  

So what do 100,000 very well paid, highly educated financiers do for a living in a world in which the financial services industry is contracting like a nudist swimming in cold water?  What do their skill sets transfer to?  These guys are the equivalent of the Rust Belt worker in the 1970's and 1980's.  I can just see one of these highly testosteroned maniacs being "retrained" in a tech school classroom learning HVAC repair! Now there's a picture.

After all, what is their training?  Discounted cash flow analysis was never the rocket science that Wall Street's public relations firms convinced everybody it was.  Many of these guys invested $300k in an education that I could have taught them, and their dog, over a long weekend (provided they were sober).  This was one of the ways Wall Street could justify their outrageous compensation when compared to folks that actually do something productive for a living. Most of these guys couldn't change the Oil in their car. (It might seem that I am being a bit harsh, but it wasn't the Foot Soldiers that created this environment.  The Masters of the Universe from our establishment families and institutions pulled this set of wool over America's eyes.)

But I digress...

New York real estate values, are crashing, and are NEVER coming back.  They were artificially inflated by the money pipeline coming into the region and industry in the form of every mortgage underwritten across America, and that pipeline has been permanently shut off.  The Wall Street minions living out in the suburbs are going to have to make other arrangements with which to make a living.  The problem is that pesky mortgage payment and the OUTRAGEOUS property tax bill.  It does not take a rocket scientist to see how that is going to turn out.  Remember that Talking Heads song, "Life During Wartime"?  Just kidding.  A little drama never hurt a good story.

The defaults and foreclosures and homes lost in this group is going to stagger the region.  New York is/WAS the financial capital of the WORLD.  There is a worldwide financial crisis... ergo, New York is going to be synonymous with that crisis in every way.  All of the other industries feed off of the food chain brought in by Wall Street.  That food chain is no more.

So what does a 40 year old guy who is used to making too much money do when he is stranded in a region with hundreds of thousands of others that are in the same boat as he is?  How does he sell his $2mm home?  To WHO?  Where does he work? HOW LONG BEFORE HE COMES TO THE CONCLUSION THAT THIS IS A PERMANENT SHIFT IN HIS REALITY?

For the family living in a mobile home in a trailer park in Lebanon, Tennessee the adjustment just isn't going to be that bad.  For the Yuppie Wall Street professional living in his McMansion, driving his Range Rover to the club for a round of golf this weekend, and living the fast lane life, the REAL adjustment is going to be mental.  His very identity is going to be shaken to his core. 

Most of us tend to identify ourselves by what we do for a living.  We are "Investment Bankers" or "Bond Traders", not "Fathers" or "Boy Scout Leaders".  The identity crisis is going to be as big a problem as the financial crisis.  Again, I recommend my readers search out Dmitri Orlov's excellent white paper "Anatomy of a Collapse" on the web.

Good Luck!

Mentatt (at) yahoo (d0t) com



Sunday, November 23, 2008

Your Average Middle Class Millionaire and Energy/Credit Crisis

I have been contemplating for several years how the energy/economic crisis would unfold and how it would affect myself and my contemporaries, friends, and extended family (I come from a huge family).  I received an email from an enlightened fellow who, in his email, proceeded to beat me about the head and shoulders for not having the courage (he used another word - "b--ls") to lay it out more clearly and stop my noncommittal commentary...

Fair enough.

Let me use as an example the life of a professional living in Boca Raton, Florida, mid forties, 2.1 kids, wife, dog, 3 leased cars, and 2 private school tuitions. He makes $400k per year,  his financial assets are worth is $2 million and he owns a small business/practice and a $750k house with a $400k mortgage.  He works 50 hours per week, commutes 7 hours, plays golf 3 hours per week, and has 12 minutes of sex twice a week.  (If you think housewive's are "desperate", they have NOTHING on these guys.  Ever see Chris Rock's act on being married?)

This pretty much sums up the lives of most of my contemporaries in Boca Raton, FL.  (Some have more money, some less... in the end they will ALL be in the same boat, just keep reading.) 

Along with the above assumptions, I need to make 1 more.  Oil imports into the U.S. continue to decline by 8%+  per year for the next 5 years, just as they have for 2008 from 2007 (see table 1).  Of course the credit crisis might interrupt this metric temporarily, but that is like having cancer cure your tuberculosis.

Given the above data set, it would be my best guess that U.S. GDP would decline in real terms by 3% + each year during the next 5 years.  Given that, what happens to the value of our typical professional's portfolio of assets?

First, the economic production available to him from his business/practice would contract... I would guess 50%, more or less (remember, a 20% economic contraction over 5 years would not contract evenly for the owners of the means of production).  Ergo his income will be cut in half if he is one of the lucky ones that is able to remain in business.  25% of the business/practices will fail.

The value of his home would decline to its utility value of shelter, all of the equity will have evaporated.  Any property tax/insurance liability above that would be just that - a liability that should be subtracted from his net worth. Some would argue this has already happened to house prices in South Florida.  The folks making this argument are probably Real Estate brokers.  

That leaves his financial assets.  Stocks, bonds, money markets and cash.  Care to take a guess as to the value of the stock market in my scenario? The markets would be trading similarly to privately held business, giving no value to potential future growth.  Say 3 to 4 times cash flow. If the entity's were self liquidating... some number less than that.  My best guess would be a Dow under 5000 and an S&P under 600, perhaps a great deal less.  Of course this is in REAL terms, nominally the number might be quite different depending on the extent of deflation/inflation.  (By the way, PRAY for inflation.  Ot it is all over but the gun shot.)

The value of the bonds?  That will depend on the value of the currency the bonds are denominated in, weather the bonds are sovereign (Treasury) or corporate, and the monetary environment (inflation, deflation).  Same with his cash.  Corporate bonds are better than the equity holders in this environment, but only marginally so, and in the end... not at at all.  They merely slow the rate of change.

What about his automobiles?  Cars are worth no more than the fuel supply.

So why would/should this middle aged/middle class millionaire ("MCM") continue to participate in this?  Clearly he shouldn't, but that does not mean he won't.  Denial, fear of ridicule, lack of vision, his wife, his kids, "deer in the headlightsism", etc... are all contributing factors keeping this guy to a grindstone that is doing no more for him than grinding his face off - with little to show except a couple hours of golf and a couple minutes of boring sex/marital bliss.

We are amusing creatures, aren't we?

The thing is, we DON'T know anything for sure.  But we have 1 year's worth of data.  If we get another data set in 2009 that continues to support this outcome I think it would mean that the probability is high enough to take "evasive maneuvers".

But what does that mean, exactly?

Should everybody move to a small farm and go Amish?  NAFC.  Well, I am not talking about everybody, I am talking about people with the MEANS to do something - if they were so inclined. But what should that something be?

Clearly, in a low Oil availability scenario, the "Best Possible Arrangement" ("BPA") shifts from where our MCM is now, to some where else.  Right now, it is hard to have it better than to live in sunny South Florida, in one of the most desirable locals.  Would that be the BPA if unemployment were 20% and gasoline was in very short supply?  I don't think so.  For example, in such an environment, if the AC unit at the MCM's McMansion were to break down, how long (IF it happens at all) would it take to repair/replace the unit (it is HOT down here). What is a South Florida McMansion without AC worth?  Is his McMansion walking/biking distance to his place of business? What about the grocery store?

It would seem that if our MCM KNEW FOR SURE that this outcome was a certainty that he would move to a home that was an efficient cost of resources versus what utility our MCM gained from the abode.  Shelter, ability to provision and maintain, egress, etc...

What about his business?  Take a look through history.  Ice houses when refridgeration came a long?  Buggy whips at the advent of the age of automobiles?  Does this describe you? (It certainly describes my business).  So our MCM must look at his income AND his assets coming under attack...

So perhaps a home in the downtown area of a small, walkable city center, located in a moderate clime.  Perhaps a business nearby that is an essential - food merchant, dentist, carpenter, maintenance & repair, etc... you get the idea...

Since our MCM lives in a hurricane vulnerable area ("HVA"), he really should, but NONE do, prepare for the direct hit of a major hurricane.  Anybody living in an HVA must accept the fact that at any given hurricane season they will have to put their key in the door, pack as much of their momentoes in the family car as they can, and never come back.  It has been 3 years since Hurricane Katrina - have you seen New Orleans?  And their was no shortage of diesel to fix New Orleans with.  New Orleans has less than 1/10 the population of Southeast Florida's Megatropolis.

Most importantly, our MCM must find a way to enjoy his LIFE.  Ask anyone who is STRUGGLING to make ends meet if they are enjoying this very beautiful day.  Not so much. The current actions being taken by our Federal officials this very moment have only ONE AGENDA - keeping people willingly in debt and making their payments.  They don't give a good hooty about keeping people in their homes.  Arranging one's life - home, business, family, etc... so that one might enjoy themselves without some of the self inflicted burdens we seem to enjoy strapping onto our backs.  This will absolutely REQUIRE the cooperation of the MCM's wife and family - but really his wife.  In a world where 85% of retail transactions are consummated by women it would seem likely that his wife is the critical element in this menagerie.  And if you think our MCM picked out the family home or had much say in its appointments, you are a politically correct goofball.  Remember, we are talking about my friends here in Boca Raton.  Hubby works, wife drives the kids around.  These are not dual income families.

In the final analysis:  If we knew for sure that U.S. Oil imports were going to decline 8%+ EVERY rational person would take action, given the means.  Since most people lack the means, this is much like triage in war.  Some don't need help with their minor problem.  Some cannot help themselves.  Others have the means, motivation, and intellect to do something, even if the something eventually proves to have been incorrect.

This is my vision of the future.  Perhaps not right away, or perhaps we are already in the 2nd year of the 5 year contractionary period I describe.

How you interpret your environment is your business, your liability, your asset.

Good Luck!

Mentatt (at) yahoo (d0t) com






   

Thursday, November 20, 2008

Auto Maker Jobs?

Anybody think that today's equity market sell off has ANYTHING to do with Automotive jobs?

The U.S. Finance, Insurance,  and Real Estate industries, what someone smart called the "FIRE" economy, has a much, much bigger payroll, and the FIRE industry workforce is going to be more than decimated, perhaps quadruple decimation - 40% fewer people working in the FIRE industry by the end of 2010.

(Decimate comes from the Roman habit of motivating losing Legionaires by selecting every 10th member of a losing battalion and executing them on the spot in front of the others.  The root of decimate is Latin for the number 10.)

Forget for a moment how much you detest Real Estate brokers, Stock brokers, and Insurance brokers.  These people made up a huge percentage of income in the economy and tax receipts for the government.  

Add these soon to be members of the newly ungainfully unemployed with folks in the same position in housing and automotive and you are looking at an unemployment number far in excess of 10%, and a loss in aggregate payroll $'s of much, much more.

I am afraid "Hope" and San Francisco "political sensibilities" are going to do little to balance the budgets of the various local, state, and federal governments.  Those fun little social programs, Social Security and Medicare, are funded by payroll taxes.  The end, IN REAL TERMS, of the various social programs that too many people have come to depend on is near.  Sorry, but with the collapse of the Real Estate and stock markets, there are no "Rich" left to tax.  If this keeps up, their won't be much of a middle class left to tax, either.

The folks in favor of wealth redistribution have succeeded, though not in the way they might have intended.

Actually that is not fair.  I just could not help myself.  Much of the "wealth" that was just lost never really existed.  We just got around to recognizing that sad fact.  For at least 15 years we have been arguing over an illusion of wealth.  Oh, it was real enough to benefit the very few, but if you think that Microsoft is (was) really worth more than all of the harvests of all of the food in the world in a given year you must have bats in your belfry.  Of course, that begs the question of future food costs and values...

But I digress.

If the markets continue their decline, we will be in serious trouble - fast.  Pray that the rate of decline slows or that the market finds its footing.  It is not the market that is the problem.  The market is just taking the economy's temperature.  If the market finds the economy has a fatal condition... like too much debt, unfunded pension liability, unsustainable budget deficits, an energy shortage, etc... well, it will let you know it.

No matter what, we have passed a critical point.  It will take years to put humpty dumpty together, and by that time the U.S. will be in the teeth of the final Oil crisis.

This is it.  Get your s--- together.

Good Luck!

Mentatt (at) yahoo (d0t) com




Sunshine up your Skirt

Things are not looking good in Mudville.  

A literal collapse in the financial system could well be taking place.  Of course it might not, but the fact is many, many sober, rational people believe that the possibility is EXTREMELY high.

But never mind that.

This is as good a time as any, and maybe better than most, to focus in on the good things we have.

The American economic system was built on "confidence".  And confidence is in short supply. PE's don't matter, balance sheets don't matter, cash per share does not matter.  If confidence comes back, we might turn this battle ship just a BIT.  If it does not, we will not.  Simple like that.

Under NO CIRCUMSTANCE are things going back to "The Way We Were".

Back Soon.

Mentatt (at) yahoo (d0t) com

Wednesday, November 19, 2008

Nothing Doing

A friend of mine called recently to tell me that I should change the name of my blog to the "American Energy, Credit, and Financial Crisis".  He forgot "Political".

The market continues to point to a recession of biblical proportions.  I would not add to equity positions, even my beloved energy sector, unless you have one tough stomach.  If we have the kind of contraction the equity market seems to think, Oil could be $40 - or lower - and this would be anything but bullish for the equities in the space.  This is not to say that a rally could not appear out of no where.

Right now, there is no clear path.  I have never been so pessimistic.  The Mad Scientist thinks that that kind of negative sentiment indicates that we are close to a bottom, and as recently as last week, I thought a bottom might be at hand.  Maybe so.  Then the market is going to bottom without me.  I will reconsider this after the new year.  I see things through the eyes of a guy pushing 50.  I won't give away the Mad Scientist's age, but he still has black hair.

The sad fact is that our financial system appears to literally be falling apart before our eyes - at least by my definition.  I have written here several times that there is a point of no (short term) return.  I don't care if the market's come back after my lifetime.  The U.S. economy cannot survive in any form we might recognize with a 5,000 Dow.  That level would indicate no new aggregation of capital.  Companies die, just like people.  We need new companies birthed to take their place in the economy.  Dow 5,000 means that ain't happening, and it means the survivors are much smaller than a Dow 10,000.  The impacts on employment in the U.S. would be devastating.  Could small business make up the difference?  Not a chance, and those jobs just don't pay nor provide the benefits that Corporate America does.  We are talking about the "Third Worldization" of the U.S.A., Europe, and Japan.

This would take place over the next few years.  The problem is, we still have Oil shortages coming soon to an OECD nearest you.  Yes, Oil is $50 or so, and Oil could go to $20 for all I appear to know.  That does not mean we will not maintain consumption very, very near (worldwide consumption, that is) to what we are consuming right now.  It DOES mean that exploration and production of NEW oil fields has ceased for all intents and purposes.  Take the 2, the economic crash due to the loss of our credit AND our equity markets, and throw in a perpetually worsening Oil shortage, cook and stir, and out comes Dmitri Orlov's (if you don't know Dmitri, now would be an EXCELLENT time to search the web for his paper, or order his book, on the collapse of the Soviet Union and its parallel's to the U.S.) vision of collapse for the U.S.

The U.S. is currently experiencing deflation, something that, until very recently, I thought extremely unlikely, given the U.S. ability to print money.  This is the worst possible outcome given the circumstances.

And the hits keep coming...

Despite a deflationary recession, the U.S. trade deficit is still $650 BILLION +or- even though Oil import costs have crashed.  Add to this the $60 Trillion in unfunded Social Security and Medicare liabilities, $2.5 TRILLION in unsecured credit card and other consumer debt, the U.S. pension system is critically underfunded (in default),  the coming bankruptcy of the Big 3 Automakers, AIG ALONE consumed $150 BILLION of the TARP program, and the Fed's refusal to discuss or disclose $2 TRILLION in loans (the Fed is a privately held bank, after all... Don't believe me?  Google to the rescue!  The U.S. Government does not own the Federal Reserve... now the question is:  Who does?), the loss of Wall Street (you might consider this no great loss...), and the Fed's explicit guarantee of the money market system... I am getting ill just writing this.

Well, add it all up.  

They thought this all up at Harvard Business School.  Great call, guys.

--------------------------------------------------------------


This makes a great deal of sense if economic growth is no more - which I have argued is a distinct possibility (probability).  For my money, I want yields twice the average, as well as some out of the money near term covered calls for a hedge, and only in energy and precious metals (I know, a broken record).

If you don't have to staying power, patience, or belief system in the Energy conundrum we face, then the equity space is not for you.


Good Luck!

Mentatt (at) yahoo (d0t) com









An Important Article - Economize, Localize, Produce

A friend of mine from TheOilDrum.com, Jeffrey Brown (otherwise known as Westexas in the community) wrote an EXCELLENT article about the best course of action in the coming environment.  And at the time, well before the financial crash and the spike and subsequent crash in Oil, people thought he was being silly.  An alarmist.  After all, what could he know?  He was a geologist, not an economist/sociologist.  (One of the problems with credentializing EVERYTHING is that folks absent the credentials are discourage from THINKING about and CONTEMPLATING issues within the credentialized field.  Whatever happened to problem solving?)

This is where I was going in my previous post.  

Remember the "New Economy" BS from the dot com era? There is going to be a new economy alright.  Finance, Insurance, and Real Estate is going to see its employment contract.  The market will direct employment and opportunity to where it is needed.  

Get there first.

------------------------------------------------------------

The economy might have gone through a bout of credit contraction, and that bout might last a bit longer, but at some point the Fed and Treasury's actions will have the desired effect.  I remain long high dividend paying energy stocks and Gold.  If/when the Fed/Treasury succeed I believe that this is the place to be.  I know Treasuries are the darlings of the Market now, but do you really want to own a security with a .25% coupon with 4% inflation?  Sounds like a government guaranteed loss to me.  Of course, this where we all should have been in August... 

Speaking of Gold.  I don't give investment advice in this forum.  Gold, is a hard currency as well as a commodity and I am not precluded from discussing Gold.  So...

Gold, unlike Worldcom or Enron, will NEVER go to zero.  Too, Gold will never pay a dividend nor interest.  Gold is a store of value, not an investment.  One ounce of Gold will only be worth one ounce of Gold.  Therefore, it is all in the price you pay whey you buy.  Good luck with that.  I always try to add to my Gold position after periods of steep decline.

Good Luck!

Mentatt (at) yahoo (d0t) com

Tuesday, November 18, 2008

Uh-Oh...

The end of economic growth is upon us.  So is SPAM, and not the stuff in your inbox.

Think about that.  

Static production.  Increasing population.  Monstrous public debt.  Unreasonable expectations of government by the masses. Declining Oil supplies.  Crashing equity markets.  A financial system held together with duck tape.   Welcome to the United States of America.

The budget crisis in California and New York states are only the very beginning of a political crisis that would have staggered the imaginations of the American people - only it won't be their imagination.

The state and local tax burden is FAR above what the economic output of the taxpayers can bear.  The media concentrates on the Federal Budget Deficit and the Trade Deficit, but for better or worse, the Federal Government can print its own money as well as run a continuous deficit.  Not so the states, cities, counties, towns, and villages across America.  They are DROWNING IN RED INK while their tax payers are not far from revolt.

Sales taxes are down BIG.  Property taxes are a tremendous burden.  Income taxes from capital gains will be non existent for YEARS.  So where will the money come from?  Local Governments cannot make people spend money - it won't be coming from sales taxes.  Unless the local governments hire the people directly - it won't be coming from income taxes.

That leave property taxes.  

Oh, yea local governments?  People are walking away from their homes in DROVES.  The tax rates were based on property values in many municipalities... how are those values looking lately?  Still, the homeowner is THE CAPTIVE TAX TARGET.  This is where the extortion will be attempted.  AND IT WILL FAIL.

As the recession digs deeper and deeper into people's 401k, savings, investment portfolio, and small business they simply won't have the money to pay for the liabilities that the local governments have foistered upon their residents.  The revolt is coming, and it won't be pretty.  Municipal workers are going to be laid off, and their retirees are going to get stiffed.  


Speaking of getting stiffed... The U.S. pension system is technically defunct.  Under no circumstances can the pension system meet its obligations.  The first round of this battle was televised tonight with the testimony of G.M., Ford, & Chrysler before a joint committee of Congress.  The big pension funds used a 9% average return on their investment portfolio to meet their obligations.  How many of these funds have returned 9% each and every year for the past umpteen years?  Exactly ZERO.  Hence, they are F*&^%ed.


The local governments provide "essential services".  Of course, we are going to have a new definition of "essential services", but they won't look anything like they do now.  The money won't be there, but the people that got used to receiving these "essential services" are not going to be happy about getting shut off.


These are just a few of the special interest groups that will be part of the greatest political crisis since the Civil War.

The Federal Government did the right thing in shoring up the banks.  No banks, no system.  No system = anarchy.  But the Federal Government will NOT be doing the right thing by bailing out the Auto makers, the Airlines, the Truckers, the Butchers, Bakers, and those silly Candlestick makers.  There is no cure for bubbles.  The only thing to do is not blow them in the first place.  Americans will of necessity be required to save, produce, and economize in all things.  The sun will still shine, the waves will still role in... but denying the certainty of this correction through government bailouts will only lead us to complete ruin.

That won't stop the government.

The government will continue to pump, and spend, and borrow... anything! Except accept the inevitable.  And even if they did, I think we have gone too far - there is no turning back.

The next decade will make the 60's look uneventful.  The stock market (with the exception of energy and perhaps gold miners) has doomed in REAL terms.  Same with the debt market.  Think about it... I just laid out the municipal disaster coming to a city near you.  Would you own their debt obligations (muni bonds) in the environment I foresee?  Not unless you have rocks in your head.

Deflation will eventually yield to hyper inflation, and that will meet at the corner of the Energy Crisis, the stock market crash, the pension collapse, foreclosures, municipal defaults, and... get this... food supply issues.  Just take a hard look at what is going on over in Russia RIGHT NOW - their markets have crashed over 80% and their currency is going over the precipice.  Then remember that Russia has plenty of Oil and Natural Gas, a population with very low expectations, and little debt.  The American collapse is going to make that look like a prom date.  

Cash may be king for the moment.  But the king is lying beneath the Sword of Damolces, and the string just broke.  Everything seems fine - until the sword arrives.  

The world is divided into 2 kinds of people:  Those that divide the world into 2 kinds of people, and those that don't.  

Just kidding.

The world WILL be divided into 2 types of people.  What side do you wanna be on?

Good Luck!

Mentatt (at) yahoo (d0t)com






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




Monday, November 17, 2008

Three Great Friends

"There are three great friends: an old wife, an old dog, and ready money." Ben Franklin

But Ben's life had been spent before the age of Oil, or he might have amended that famous line.

The U.S., already suffering an 8%+ decline in Oil imports might soon find itself without the benefit of Oil from it's second largest supplier.  Mexico may become an Oil importer in 4 years.  Oil importers do not export Oil - an uncanny grasp of the obvious.

The U.S. could soon find itself scrambling to make up 11 percent in lost oil imports.
Mexico, the third-largest foreign supplier of U.S. oil, faces the real possibility of having to halt oil exports in four years, a former top Mexican energy official was reported as saying Tuesday in Mexico’s El Universal newspaper.

The I.E.A.'s World Oil Report is out, and while telling the world that they are very concerned... they do not see a problem finding, developing, and producing a new Saudi Arabia every 3 years or so, or a new Kuwait each and every year FROM NOW ON.  Well, that is what the world Oil complex needs to do to meet the IEA's supply projections.

So we got that going for us.

Right now the world economic contraction is outpacing the Oil supply issue.  At some time in the near future, next year, the year after, maybe even the year after that... that circumstance will change.  The timing is unknowable at the moment.

And so we wait.

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The U.S. equity market are at a monumental inflection point.  The U.S. economy, and its currency, cannot survive without the U.S. equity market.  The U.S. equity market cannot survive at certain levels - levels not far from here - with out the Federal Reserve stepping in and buying stocks in addition to all of the debt that the Fed has acquired.  

Think about that.

The Fed cannot ALLOW the U.S. equity market to trade at a S&P 600.  The Fed would have to buy stocks.  Initially, that circumstance might be bullish for the US$, but would be akin to a fatal shot of heroin.  The initial high would be magnificent, the system failure to follow would be no less spectacular.

Now, I am not recommending any particular strategy... but the above scenario leaves savers and investors with little reward for holding cash. So let us "game theory" this just a bit:
  1. The equity markets stay flat.  Market's move up or down, or remain in a range... they do not stay flat.  But let us say in this case it does.  I have no idea how that affects the currency.
  2. The equity market rises.  Money is drawn to assets and away from currency.  The currency loses appeal (and value).
  3. The equity market falls.  The Fed steps in, prints more money and/or the Treasury floats more bonds in order to create an equity TARP.  This hardly bullish for the $.
  4. The equity market falls.  The Fed does nothing.  Raising capital becomes nearly impossible in both the credit and equity markets.  The U.S. economy contracts violently, again, hardly bullish for the US$.
There are very few working wealthy left to tax, and there will be fewer still in coming years.  America's leaders need to help Americans become productive workers, not tax consuming whinners.  Yes, life is not fair.  Americans are NOT created equal.  Most are born into resourceless families, and are bombarded daily with overnight rags to riches "Hollywood" stories, stories of wealth and fame that will not happen to 99.99999% of Americans, courtesy of our brilliant media.  But people want it.  They see it on TV and in the Movies.  No wonder Americans are obese, angry, and violent.   We hear much of "black on black" violence and "white on black" violence, but let me ask you something:

Have you EVER heard of "Amish on Amish" violence?  How about "Hasidic Jew on Hasidic Jew" violence?  I am not advocating a religious answer.  I am pointing out that the American Media, and Hollywood, has "poisoned the well".   James Howard Kuntsler calls it the something for nothing culture, with Las Vegas as its Holy City.  Old Jimmy is on to something here.

The government needs to level the playing field and foster a sense of personal responsibility and optimism in the individual, rather than "The Man" is keeping us down.  Work, thrift, and perseverance are the answer(s).  Come on Obama, Lay a "ask not what your country can do for you" kind of inauguration speech on me.  America needs to hear it.

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The massive contraction of jobs in the U.S. Financial Sector is now underway.  I feel badly for young people who just borrowed $300k to get an undergrad degree and MBA in finance from our "best" universities.  They can't even bankrupt themselves out of those student loans.


Good Luck!

Mentatt (at) yahoo (d0t) com


Saturday, November 15, 2008

Debt

I have been a believer in energy companies and precious metal mining companies.  

There is, however, a chasm at work in this sector.  Leverage.

Particularly in the midst of a credit crisis, even companies with attractive assets can wind up in trouble.  While I cannot give specific advice on COMPANIES in this forum, I can point out a couple of metrics that really matter (but of course are not EVERYTHING).

The first is the Debt to Equity ratio.  Any number above 1.0 means that the organization is employing significant leverage.  Here is a link to the financial statistics for GE at Yahoo Finance.  Scroll down to the "Balance Sheet".  Notice the Debt/Equity ratio?  Now compare this to Exxon's.  

Also, get to know a company's current ratio to be sure that there are no short term issues lurking that could cause you grief.  Remember, when you buy a company for the dividend the bond holder's come before the shareholder's and their dividend.  The greater the leverage, the greater the risk of a dividend cut in the middle of a credit crisis or economic downturn (all else being equal).

A low multiple stock using moderate or no leverage with a low price to sales ratio would give me a great deal more confidence to continue to consider the company's long term prospects.  

When things are this bad the prices of most stocks are probably well deserved.  In the middle of all of carnage there is a good chance that some companies with great futures are having their share prices savaged, too.  You gotta find these companies, or you you gotta stay in cash.

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I continue to advocate Gold and Silver for some portion of your holdings.  

Good Luck!

Mentatt (at) yahoo (d0t) com

Deflation, Inflation, The U.S. Banking System, Consumerism...

The World is in the grip of Deflation.  Most of us, including the Federal Reserve, the ECB, the Bank of Japan, and the rest of the Central Banks missed this over the past year, and those that thought it was in the cards did not really know when or how much - or they would have bet BIG.

The various Central Banks, the U.S. Treasury and the rest of The Powers That Be have thrown ALMOST everything at the problem.  They have yet to pull the rip cord of MASSIVE TAX CUTS or government spending (I can't wait to hear the justifications and rationalizations from the LEFT when Obama is forced to cut taxes "for the rich".  Of course it will be OK if Obama does it; if GWB does it it only proves that he is the Anti-Christ.  Hypocrisy knows no bounds).

There are only 2 possible outcomes:
  1. TBTB succeed in causing inflation (massive inflation), or;
  2. TPTB fail, and the world continues on the Deflationary spiral we are now on.
In the past, one would have had to think that TPTB would succeed.  Until now, I thought it would be a slam dunk.  Now, I am not so sure.  

I think contingencies must be made for both outcomes.

In the absence of a significant FISCAL stimulus plan (so far we have had only monetary stimulus), I give TPTB only a better than even chance of succeeding in 2009-2010.  Yes, they may succeed EVENTUALLY without the fiscal stimulus many years out, but that is a lot like "we cured the fever but the patient died".

The Left, which now controls EVERYTHING at the federal level, has been promising their constituents some powerful punishment of "The Rich" with confiscatory tax policy.  That is how they got elected.  They are going to need some funding to pay off their supporters (not picking on the Left here, the Right does the SAME S--T).  The economy desperately needs fiscal stimulus in the form of tax cuts and targeted tax credits (we don't need a single new bridge - maybe maintain the ones we have... we do need electric rail).  Unfortunately, neither Pelosi, Frank, Reid nor Obama have EVER started their own business, expanded it, and met a payroll.  Easy!  I am not picking on our new President, to whom I wish every success, just pointing out that the sensibilities of the people running the party in power.  They do not come from the TAX PAYER side of the aisle.  Their constituents are TAX RECEIVERS.  Cutting taxes as the vehicle to save our economy would seem a stretch for these folks, but hey - you never know.

If the fiscal stimulus is not forthcoming - immediately - I think our deflationary spiral might continue throughout 2009.  And that would not be good, if I may make use of the understatement.  Said deflationary spiral would destroy the remaining equity in American's homes, and would turn most of the commercial property owners up side down as well.  Corporate bonds would default in record numbers, and the equity market would collapse.  At some point, it would become too late to work the fiscal magic, at least for this generation. 

So we got that going for us.

Now maybe I am just gloomy today.  Or maybe I just got up on the wrong side of the bed.  Whatever.  I think that folks with a lifetime of savings and investments need to understand the potential outcomes, and the best course of action for any given case.  I think caution and a deep skepticism of the communications coming from our officials is in order, because so far they have not been particularly good at reading the tea leaves or speaking frankly.

Keep a close eye on the weekly Oil import data at the EIA's website, the U.S. Treasury's bond auctions, the Fed's money supply numbers, and the business conditions in your own backyard.  As you know, I am particularly keen on the Oil import numbers because, if they continue to fall (and I believe that to be the most likely outcome), all of our questions will have been answered. And we are not going to like the answers.  

Good luck!

Mentatt (at) yahoo (d0t) com







Friday, November 14, 2008

It is all about taxes

We don't need a new "bail out program".  The government can circumvent the banks, and the cross party risks, and the GSE's, and GM... all they need to do is cut taxes!  That's it.  No more, no less.

A 12 month moratorium on payroll taxes would put the money in the pockets of working people, right where the economy needs it.  We don't need an extension of unemployment benefits.  We need a payroll tax moratorium.  Company's would benefit - they pay HALF of the payroll tax, and working people would benefit.  No more cockamayme schemes from the U.S. Treasury.

Wanna know why this will NEVER happen?  Why the Government would rather let the country, and the world, slip into a depression (and risk war in the process)?  Because you can't put the shaving cream back in the can.  Our system of taxation is so unreasonable that ANY fix might lead the masses to insist on something rational, simple, understandable... and we can't have that, now can we?

Good Luck!

Mentatt (at) yahoo (d0t) com

Thursday, November 13, 2008

This is no way to run a Market

Some might be thrilled with a stock market up nearly 7% in a day.  Not me.  This is no way to run a market.

Clearly, the lunatics are running the asylum.  

Perhaps this is part of the bottoming process.  I certainly hope so.  I spoke with a dozen traders all over the Street today.  We had all pretty much to come to the same conclusion: that the market had to to turn here or we would be in deep doodoo.  Markets, like the blood in your body, do not need to go to Zero to kill.  The credit market is broken, and the equity market nearly broke down, too.  Was today a one day reprieve or a successful retest?  We shall see.

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Now comes today's 30 year Treasury auction.  It was not well received, to say the least.  And why would it be well received?  All of these bailout programs will need to be funded by the Treasury by issuing more and more debt.  Simple supply and demand, really.  Well, it is an ill wind that doesn't blow someone some good - Gold gained over $20 in the wake of the markets realization of the amount of debt coming down the pike.  The US$ and the Yen fell against the major currencies, whether because of the auction or the end of the unwind of the carry trade remains to be seen. 

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"Anything that can't go on forever, won't."

Back soon.

Mentatt (at) yahoo (d0t) com


The Banking System, Economy & Market

Markets trade at the margin.  It is the marginal stock, barrel of oil, ounce of gold, pound of steel that sets the price for ALL of the commodity.

The world banking system is not working effectively and, compounded with the decline in demand caused by "inadvertent savings" from the exportation of currency from high consuming countries to high savings countries via high oil price trade payments, the world economy has the pneumonia.


Don't blame Paulson.  Thank him for having the courage to admit he was wrong.  A typical American politician would have gone down with the ship rather than admit to a mistake.  There are NO instruction manuals for how to deal with the collapse of the fractional reserve banking system and end to the credit system of money creation.  Because that is what is happening here.  The end of that system will take several decades, but IT WILL END.  20 years from now it will likely be a relic from a distant past, with vestigial items dangling from that system from the new system, whatever that may be.

The real question for America, and the World, is can America's political environment support a platform for real and worthy adjustment to the new paradigm.  Considering the polarization in the country, somehow I don't get a warm and fuzzy feeling over this.  Still, I am hopeful.

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I received email from some angry Republican types regarding the election of Obama.  WE AMERICANS have got to stop sabotaging our Presidents.  What the Left did to undermine GWB was nothing short of despicable.  I will not be part of any such effort to hamstring Obama.  Not that the Right is innocent... remember their concerted attacks on President Clinton, complete with House Impeachment?  That little temper tantrum likely resulted in the tidal wave we are witnessing at the moment.  Every action has its unintended consequences.  America desperately needs a successful presidency out of Obama, and the next couple of presidents.  And spare me the email about Obama being a socialist.  That was just campaign talk to energize his base, just like the silly creationist talk we get from the Republicans.  With few exceptions, nobody running for office believes half the s--t they say.  Thank heavens for that.

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I have no ability to time this, but withdrawing the recent stimulus at some point is going to be as important as its injecting it.  The ability of the US$ to withstand these gyrations and manipulations cannot be over questioned.

Good Luck!


Mentatt (at) yahoo (d0t) com


Wednesday, November 12, 2008

TARP Down, TARP Down

WIth the Paulson speech today regarding the redirection (failure) of TARP, it is back to the sidelines.  No need to be a hero.  Things can get a whole lot cheaper.  Wait for more data.

Mentatt (at) yahoo (d0t) com

The US$

To my mind, the US$ faces 2 big problems:

  1. The risk that the stimulus programs work, and;
  2. The risk that the stimulus programs do not work.
If the programs work, and the Fed is successful in re-inflating the U.S. credit markets and economy, we risk significant inflation.

If the programs do not work, will foreign US$ holders want to hold the currency of the world's largest debtor experiencing a contracting economy and productivity?  NAFC.

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Capitalism is Dead.  The free market is Dead.  The level of denial on this front is staggering.

Capitalism, as we thought we knew it, is gone - and it ain't coming back.  Now pay close attention.  The political Left, now ascendent, will have a new group of "haves", but they will have their "haves" just the same (I was never an establishment "have" and have no affinity for the group). The political implications of this are staggering, and those implications are coming. 

I have been a life long Libertarian Republican, and I am completely embarrassed by what the Republicans have wrought.  We have out-socialized the Democrats.  How's that for irony?  And rather than take a hint from the voters and do just a smidgion of demographic research, the Republicans are threatening to continue their failed strategy of hypocritical PREACHING.  Maybe they will get the hint when the House of Reps has only a couple dozen Republicans left.

To be fair, I firmly believe much of the economic collapse, and resultant increase in budget deficits was caused by the first wave of the energy crisis which is not the fault of any political party.  Still, it is time to acknowledge the real problem and get to work.


Mentatt (at) yahoo (d0t) com

Wall Street Bonuses

If Wall Street execs at firms that accepted government money get one CENT in bonus compensation we will have been witness to the greatest swindle since the advent of the Third Reich.

I worked for these pompous jackasses.  Wanna know why they think they deserve to get paid MILLIONS for losing BILLIONS?  Because they are members of the elite/establishment - born into the right family, attended the right schools.  On the merits they offer little to nothing tothe  well being of the economy/country/people.  As a matter of fact, they have harmed us irreparably.

Now they want to get paid.

For the first time in history (I think) Congressman Henry Waxman and I are on the same side of an issue.  I pray he has the juice to strip the bark off of these dirt bags.

The financial system needs to be reconstituted.  New folks/new blood.  Let these guys quit - UNPAID.  There are plenty of bright folks ready, willing, and able to take their place.  These guys are just a step or 2 below child molesters (ok, a slight exaggeration), or maybe I am just showing my working class envy... Nope.  These guys need to be scraped off of the nation's shoe.

Rant over.

Mentatt (at) yahoo (d0t) com



Tuesday, November 11, 2008

Buyer's Strike

The market can remain irrational longer than you can remain solvent." - John Maynard Keyne

There is a Buyer's Strike in the U.S. equity markets.  Volume has shriveled up like an over 40 starlet starved of her botox.  No buyers, low multiples, high dividends... hmmm.... there is a pony in here somewhere.

Let me share with you my 20+ years of experience.

Investors buy high, and sell low.  They wait for markets to "stabilize" (go up 20% to 30%) before they buy so that they can get killed in the subsequent profit taking.

Investors over concentrate, don't hedge, never short, hold losers, sell winners, skip research... and wonder why they don't make money in the market.

Here is a little fund fact to know:

Over the past 50 years DIVIDENDS represented nearly 1/3 of the total return investors received.  Over the next 20 years, because stock prices of dividend payers have fallen so low, dividends could be well over 50% of an investor's return.  Look among the wreckage - you will find yields of well over 5%, some much higher, in a number of "best of breeds" - and these companies increase said dividend over time.  A covered call writing strategy on top of these names would make even the most cursed investor look like a genius. 

Everything is in the price you pay.  The world equity market has lost 50% of its value, peak to today.  The time to have sold equities and commodities was months ago.  The time to buy bonds was several years ago.  Don't compound one bad bad trade with another.  Forgive yourself.  If you cannot, email me, and I will forgive you by return email.  Your next brilliant idea has no idea how dumb your last one was.

For example:  In 1994, the beginning of the 1990's Bull Market I had a string of poor trades.  I could not find my ass with both hands.  I went back to the drawing board, and by luck or skill (does it matter?) I put together my hottest streak until I hit Crude Oil last year.  I remember investors shunning me during my hot streak.  They really screwed the pooch on that one.  What the hell did "Toys R Us" have to do with Michigan National Bank Corp (Toy was a big loser for me; Michigan National was the first of a series of picks that changed my career)?  Not a thing, except the broker recommending them.  

What does the equity market of November 2008 have to do with the equity market of July 2007?  Nada. Zip. Zilch.

I cannot make specific recommendations in this forum but the selling of late has created the opportunity to pick up some of the premier energy assets with dividends that will pay off in spades over the years.  That is, unless the energy crisis gets permanently called off.

I would not bet on that.

Remember, every asset (besides Gold) you hold is someone ELSES liability.  Those bonds you own?  Somebody owes you the money.  The cash in your wallet?  The Federal Reserve is on the other side... its their liability.  You gotta put your money somewhere.  Who (or what) do you want on the other side of the balance sheet?  For my money, I want Oil, Uranium, Gold, Food, etc... and I want it to pay me dividends.

This does not mean to say that I am calling a "bottom".  It does mean that I think we are pretty close (Housing is getting close, too).  A year from now, my bet is the market will be higher, and if you get 6% in dividends and another 10% to 20% in covered call premiums... it would be awfully hard to lose money.  Not that some folks won't be able to do just that, but it won't be easy.

By way of disclosure: I will be selling naked puts (trying to lower my entry price), and selling covered calls on the positions I already have (to bring in income and hedge my bets).

Good Luck!

Mentatt (at) yahoo (d0t) com


Mr. Market

The markets have excellent powers of predicting the future.  Unfortunately, the future they predict I would not wish on my worst enemy.  I very much hope the market is wrong.  Still, I am no believer in fighting the tape - and this tape is ugly.

Of course, you want to be buying at the darkest moment... but damned if I can parse the darkness.

I keep my eye on Gold.  Clearly, the U.S. is in the grips of deflation.  Is the rest of the world?  I made the mistake of fearing the printing presses more than deflation over the past several months.  All of the stimulus injected into the system has not been sufficient to counter the deflationary pressures as yet.  I believe that the Fed and Treasury will eventually win... getting the inning correct in this ball game will pay off in spades - so I keep my eye on Gold.

Gold is a commodity.  In a deflationary environment it should get beat up just like Oil, Steel, and Corn.  But Gold has different properties - in addition to being a commodity Gold is money, and money prices comparisons are a significant tool for judging where we are in the storm.  For instance, until the Yen stops rising, the carry trade is still being unwound.  During the unwinding, deflation will rule in the former carry trade currencies and their currencies will gain in price versus commodities, and worse - debt.

In deflation, a country's currency gains in value, making debt harder and harder to pay back.  Defaults surge, banks fail... sound familiar?  But there are other forces at work here.  Productivity (Oil supply might have something to do whit that), interest rates, budget and trade deficits (surpluses), etc... also affect the value of a currency, which in turn will affect interest rates (if the currencies country is dependent on foreign lenders), which will affect currency values, which will affect deflation/inflation.... see why they call this a cycle?

The problem for U.S. investors is that we are damned if we do and damned if we don't.  Which leads me back to Gold.  Gold should be falling like a stone for US$ investors along with the rest of the commodity complex.  It isn't.  Don't get me wrong.  Gold is down 25% or so from its peak, nothing to sneeze at.  Still, Gold is only down 10% or so from its 90 day average high - a much better measure.  Oil is down 50 % from its 90 day average high (that is the highest average price during any 90 day period for a given commodity).  Why?

Because, I believe, the US$ is simply the lesser of many evils at the moment, as measured against the other major currencies.  Gold is telling me that this moment will pass, and we US$ citizens will have to deal with the aftermath of years of silly fiscal and monetary policy as well as an energy crisis right out of The Omen.

This is not to say that Gold could not trade down another $100 per ounce - it could, and then again it might not.  Markets are not in the business of letting me make silly prognostications.  For my money, I will be selling out of the money puts on Gold - willing to buy at a lower price and getting paid for the privilege.  

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Read it, if you really want to know...

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The financial crisis, if you agree with Rubin's findings in the link above, were triggered by Oil (in my humble opinion, too).  This has huge political implications.
Yes. Oil depletion creates a real political dilemma for Barack Obama. If he acknowledges oil depletion – Peak Oil – then he will be expected to do something about it. Barack will have to challenge embedded political philosophy. He will have to find a way to change public opinion without causing a political crisis for the Democrats.
I feel for Barak Obama the way I felt for Ben Bernake.  I wish them luck, but I don't see how they are not damned for circumstances far beyond their control.  Of course, I fully expect Obama's compatriots on the Hill to get this exactly wrong in any (every) event.  A political crisis is extremely likely, if not the most likely, outcome. 

Back soon.

Mentatt (at) yahoo (d0t) com






Monday, November 10, 2008

Between a Rock and a Rock

GM, Ford, and Chrysler, the American Auto Industry... needs a bailout.  Given what was just done for AIG, Fannie, Freddie, Goldman, Morgan, etc... I won't argue that the Auto industry should not get some of the Government's largess.  The idea of saving jobs in the Auto industry is a noble, if not misguided, effort.  The idea of saving the PENSIONS of the UAW, or any employee of the Big Three or their suppliers at the expense of tax payers that have no such pension, no such health plan, is likely to be one of the causes of the coming political crisis (it just seems unlikely to me that we can have a credit crisis,  stock market crash, housing crisis, and an energy crisis, etc... and avoid a political crisis - particularly if the other crisis' lead to a food crisis).

We cannot legislate that Detroit be the winner of an electric car breakthrough.  Said breakthrough might come from some other corner, or not at all.  We also cannot legislate a FUEL supply.  Remember, we need FUEL - and we need said FUEL supply to keep on growing.  If said FUEL supply should go into terminal decline/then we do not need a single addition to the U.S. automotive fleet.  We have enough cars to consume our current supply at a 10% annual decline in oil imports.  

Let me ask The Powers That Be in Washington:  

What will we do with all of the cars that the jobs you "save" churn out if we don't have the necessary FUEL?

Central planning won't work.  Unfortunately, the "Free Markets' are not working either.

The Fiscal stimulus about to come out of Washington really needs to be "energy" aware.  If there was ever a time to "write your Congressman"... this is it.

Mentatt (at) yahoo (d0t) com


Friday, November 7, 2008

As Bad as it Gets

The unemployment numbers were a horror show. The revisions were worse.

The U.S. equity market lost 10% of its value in 2 days, and are down over 40% in the past 12 months.

Oil traded below $60 overnight.

My bet, AT THIS MOMENT, is that the equity market has priced in the worst. My mind could change, and I am not buying anything this morning. I will sell some out of the money puts on certain energy equities, picking up some premium and if put to me my entry price will be much lower than today's price.

Gold has held up very well considering the rates cuts by the Bank of England and the ECB (which helps the $, and Americans price Gold in $'s). I think the argument that we are at risk of inflation in the near term has been settled, but in a world of zero interest paid on cash, Gold loses that disadvantage (Gold does not pay interest - if cash does not either, Gold becomes more appealing all thing being equal).

I think people have to adjust their goals. I sincerely doubt many people now below the age of 55 will actually EVER be able to retire. The numbers of workers will simply be insufficient to support the consumption of retirees if the standard of consumption is presumed to remain the same, and that is before I throw in declining Oil supplie to the U.S. I think that savings will be more for "rainy days" rather than years of Golf playing in Florida while clipping bond coupons. Of course, wealthy folks will still be doing this but their numbers will significantly depleted.

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GM, Ford, and Chrysler should be bailed out AFTER a prepackaged bankruptcy. Bailing them out before hand just steals money from people that have no health insurance or pension plan and gives it the UAW retirees.

I might as well shout down a well on this one.

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The markets are pricing in a .5 % Fed Funds rate.

It was only 3 months ago the Fed was threatening to RAISE rates. We need to get through this crisis - and then we need to get RID OF THE FED.

This may seem inconsistent with my position that the Paulson plan was necessary; I think not. "There are no idealouges in a crisis". We needed a bridge from here to "there", but we still need to get "there". In the absence of that bridge, we might have had anarchy. That is NOT hyperbole.


Good Luck!

Mentatt (at) yahoo (d0t) com

Wednesday, November 5, 2008

"GM's Time is Very Short"

Roger Altman says this is it for GM, unless Federal Government bails them out.

This is different than the banking system. GM should not be bailed out. They should enter bankruptcy in a prepackeged formula, and the Feds might consider debtor in possession financing. GM (and Ford) need to stiff the UAW and you and I should not have to pay for it.

Now, with a Democratic Administration and Congress, I am shouting into the wind. They will get their bailout. Otherwise, it will appear that the Feds bailed out Fat Cat Wall Streeters and not blue collar auto workers. Nice pitch. Not a shred of truth, by that is how it is going to be presented.

If the U.S. provides money to cover the healthcare and pension income of the UAW workers, they should do it for me, you, migrant farm workers, toll collectors, butchers, bakers, and those nasty candle stick makers, too.

Wall Street does not exist any more. We don't need GM or Ford either. Somebody else would be MUCH better at coming up with the battery technology absent all the legacy liability. Let's stop "pissing up the rope".

The U.S. Pension Benefit Gauruntee Corp. is going to fail. PERIOD. Will all Americans be required to work till the end of their days so that retired UAW and municpal workers can enjoy decades of carefree retirement? Nope, because Americans won't tolerate it. NAFC.

Mentatt (at) yahoo (d0t) com

America

The United States of America has a fairly unique claim to fame.  Every 4 years we trudge out to the polls after enduring endless tongue wagging and silly promises and elect a new leader for the nation.

Here comes the cool part:

The change of power comes without anybody firing a shot in anger.

We get to vote for a leader, the majority wins, and the minority accepts this and wishes the new president well.  Take a look down through history - it will help you with the proper level of amazement you should have.

So here is my sincere hope and wish for a successful presidency for Barak H. Obama, soon to be the 44th president of the United States.  May his presidency be all of the things that the people hope for.  And let us dispel once and for all the idea that America is a racist nation.  After all, a bunch of White Christians just elected a black man with an Arabic name in the first non incumbent race since 9/11.  And his plurality extended across every income bracket.  Truth certainly is stranger than fiction.

But the election is over.  The People have spoken.  

The banking crisis has passed (judging from LIBOR drop of 17 days in a row).  

The Energy Crisis is still with us.  

Now is the time to communicate with our elected representatives, because the honeymoon won't last.  And time is of the essence.

Mentatt (at) yahoo (dot) com

Tuesday, November 4, 2008

President Eletc Obama

No Republican has ever won the Presidency without winning Ohio.  Barak Obama just won on Ohio.

Florida is going to Obama as well.

The Republicans are taking a first class ass kicking.  Well, the people have spoken.  

Let's look at some silliness on the other side.

Prayer groups were being formed by evangelical christians in North Florida, asking a Higher Authority to intervene on John McCain's behalf.  This gives me just as much pause as the "young and the poor" on Obama's side.  Dueling soap operas:  "The Young and the Poor" versus the "Superstitious and Self Deceiving".  (These guys must have skipped Jim Morrison's "You cannot petition the Lord with Prayer" lecture.)

First Obama's text messaging campaign to folks that couldn't name a single Supreme Court Justice to McCain's G-d Squad.  This election just goes from bad to worse.

Did any of these constituents prod their respective hero's into addressing the biggest issue since the advent of the Plague?  Not a one.

Maybe Obama will be a great President... or maybe McCain will pull it off (ha!) and do what an older, 1 term president should do - everything that a guy looking to get reelected wouldn't even consider.

What are the people going to do when it is cold and they need heating oil?  

But at least we've got feel good change, or feel good patriotism....

So we got that going for us.

Just in, Obama has won Pennsylvania, a must win state for McCain.  Congrats Presiden-elect Obama!  Godspeed!

Mentatt (at) yahoo (d0t) com


Read this quoted headline

"Obama counts on text messages to turn vote of youth, blacks, and low income voters".

Don't blame me. I did not write it, I merely site the article.

Let us leave the racial implications that blacks will not vote for a white man alone.

Let us speak instead about "youth" and "low income voters". (This is really gonna piss some people off. Too bad. It is what it is.)

Does this mean that the election will be settled by our least experienced (youth) and least productive (low income) citizens? Of course, they could not do any worse than the Ivy League educated scum bags that drove Wall Street into the muck and mire... but collectively, would you seek advice from teenagers and twenty somethings on something of great import in your life? Would you drive down to the tough part of town (I come from the great "unwashed", spare me your denigrations. Street cred I have - in spades) to take council from folks just about to polish off a 40 ounce bottle of beer in between drags (why is it "drag" of tobacco and "toke" from marijuana) on a cigarette? Does my charicature offend you? Really? Take a drive with me down Dixie Highway in Deerfield Beach tonight. Or my old neighborhood in New York. I don't like it either. Unemployed Alcoholics and drug addicts, neglected children, abusive parents... I used to volunteer in the area, but had an experience that led me to take my own safety over civic mindedness... Are these the folks that are deciding how we spend our tax dollars? Sure looks like it. Is that a bad thing? I think it is worth asking, in any event.

We have an energy crisis coming in like a slow movig Tsunami. Who has been elected to deal with it? What do they owe their supporters? That is, after all, how democracies work, isn't it? We continue to elect Lawyers to Mathematician's job, and wonder why the numbers are so f*&^ked up...

Yes, I know the folks mentioned in the Bloomberg article, the young and the poor, could not do any worse than the CEO's at Lehman, Bear Stearns, Goldman Sachs, Morgan Stanley ... but it bears thinking about.

Mentatt (at) yahoo (d0t) com

U.S. Auto Sales

U.S. Auto sales have plunged to levels that cannot support the auto industry under any circumstance.  The bailout cometh.

Total Oil imports into the U.S. have declined in 2008 from 2007 by over 8% year to date.  Cars will simply wear out slower and slower in the U.S. without the fuel needed to run up the mileage and destroy the vehicle.  Same with tires, glass, steel, car insurance, etc...

Get this:  If the decline rate in U.S. Oil supply remains at just over 1 million barrels per year (TOTAL petroleum products supplied declined to 19,645,000 barrels per day in 2008 from, 20,697,000 per day in 2007; imports declined from 12,176,00 barrels per day in 2007, to 11,168,000 in 2008) for the next 5 years; Then, the U.S. currently has ALL of the vehicles it will EVER NEED.  We will not need a single new car, truck, or aircraft.  We will need only to maintain the ones we have.  

Think about that.

We are in a similar position regarding housing.  Absent a massive immigration of folks from other lands (and why would they come here just as our resource picture goes off a cliff?), population growth and household/family formation will cease.  We have too many homes by over 20 MILLION or so (families with second homes will have need of only one home in the absence of a growing oil supply).  The U.S. needs another housing/condo development like it needs a hole in the head.  The level of denial here is incredible.

For example:

Yesterday I spoke with a Real Estate broker in South Carolina.  I put in a bid on some farm land and he was so offended by my bid that he let me know I was "just trying to steal something".  He went on to tell me that these properties had "tremendous development potential".  So I asked him:  What is the inventory of unsold homes in this region of South Carolina?  How many months/years will it take to work off this inventory?  What is the recent median price to family income of the region?  What are the employment trends in the region?  When he realized that I wanted EMPIRICAL data to support his position, he changed tack and insisted that he has been doing this much longer than I have and that I would not get a deal done at my price, or at least he HOPED SO.

Get that?  He HOPED.  In other words, he was advising his client that my bid was too low.   Based on what?  He told me my price would be back to 2003 levels.  Jeeash!  Can you imagine?  I wanted to buy property at prices that reflected economic potential rather than the "greater fool theory" hoping another buyer would come along and pay me more than I paid because he thinks another buyer will come along and pay him more than he paid, etc...

Oh, well.  Real estate brokers are not economists, investment professionals, mathematicians, etc...  They have harmed their clients greatly over the past decade.  Their industry stands in the way of advising their clients to price their properties at a point that would clear the market.  What else should I expect?


Mentatt (at) yahoo (d0t) com