Thursday, April 28, 2011

Stock Market

If you take out the financial sector, the stock market has recovered all of its losses - and then some.

You can HATE and gnash your TEETH... but I gotta take my hat of to a number of very unpopular fellows.  Yea, their activities caused some negative consequences... but nothing like what we were looking at just 2 years ago.

The financial and political system has survived - and it almost didn't. From here on in it is all about the rate of change - even the end of the Oil age can be handled if it happens slowly enough.

That means that clothes will need to washed, teeth brushed, and the commodity bubble will have to be unwound (just look at the consumer staples sector - it is above its 2008 high and I think will lead the market higher).  The end of resource constraints this is not - this is merely the "pause the refreshes", one that, I THINK, will provide the entry point for commodities that stocks gave back in 2009. The unwinding will likely take things down further in that space than you thought possible - do NOT try to catch a falling knife, me thinks.

Some things that have surprised me:

1. $125 Oil did not kill retail (forget WTI... it doesn't really exist... average world Oil prices are in the mid $120's).
2. Interest rates around the world did not take off (and I doubt they will).
3. Technology companies still command outrageous multiples.
4. Silver/Gold ratio as low as it is.
5. That the U.S. government could get away with its vast budget deficits for so long (there is NO INFLATION in housing or wages - what you are seeing in commodities is a mirage. A GOOD mirage if you are long, but a mirage non the less.

What I think it means:

A: Commodities futures contracts will need to be unwound. This will be the story of this decade.
B: High quality corporate bonds and Treasuries will do well to well enough.
C: High dividend sectors like consumer staples and utilities will do well to well enough.
D: Commodity equites are going to get murdered.
E: Real Estate will not be coming back anytime soon.

What we don't know: How Oil will be rationed amongst the industrialized powers. How the markets will react to the end of QE2.

What I think I am going to do: Buy the dips in consumer staples, utilities, and other big dividend names. Sell any rally in the commodity equities. Sell dips, too. Buy quality bonds, sell commercial real estate. Buy residential apartments and mobile home parks. Sell precious metals. Even Gold. There will be a better entry point.

It is all back to Oil. The housing crisis has happened. It is not going to get better, but not a whole lot worse for CREDIT reasons. That does not mean that an energy shock cannot make it much, much worse.

It is all about Oil. And unless there is another political crisis in a big oil exporter, my bet is Oil will come in with the rest of the commodity complex.

As always, I reserve the right to change my mind on a freaking dime.


Stephen B. said...

I think the thing with $125 oil not being as damaging as the last time we visited these prices is that emotionally, people weren't prepared back when. That is, there was a tremendous shock and scare value at seeing $4 gasoline. Even though high gas prices are painful, people (at least some to most people) can adjust somewhat and this time they have the memory that they didn't all die and croak when they saw those high oil prices. Sure it still hurts, but people came to realize that $125 oil/$ gas wasn't quite the end of the world that so freaked them out last time, causing them to put away their charge cards away 3 years ago.

Now, on the other hand, if we linger at these high levels (as we will) the economic bleeding will slowly drain some blood and over time, that will prove painful, somewhat. What would really kill us is a run to new, truly, psychologically high prices (say, north of $170).

Until then, it's all good I guess.

For now, the run up is more orderly, and that's a good thing.

As for the investment ideas you laid out for yourself, I guess I'd agree except to say that being an apartment owner is tough. I did that once, and believe me, it wasn't my cup of tea. I don't think there is a lower life form than a residential tenant. Though here in MA, our landlord-tenant law favors the latter quite heavily and that certainly factors into my opinion on the issue.

Stephen B. said...

Another thing on the stock market...

It seems to me things have really quieted down. I've known several folks that have exited the business. As well, so many trading firms have shuttered their doors. I'm also thinking of some online places I know of that traders gather in Internet chat rooms during the trading day, (mIRC, and and not surprisingly, those rooms have been cut in half or more. The hedge fund guy that ran Activetrader, basically retired at 40, however... he made a killing trading small bios, and he walked away from trading, as far as I can see, last year.

I get the feel that, after a decade of outrageous action, the trading community is returning to the small core of traders that it was previously.

I guess, baring total governmental and financial meltdown, that's the way it's going to be going forward.

Dan said...

I figure that we can withstand a higher oil price because the financially weaker took their lumps in 08 and are either in a better position or unemployed. If they were living paycheck to paycheck to pay for a McMansion they couldn’t afford then their rent is probably less than their mortgage was and they can now take a larger hit on gas and groceries before landing back in the dock. If they are unemployed their consumption is probably negligible anyway so their spending habits won’t change much. similarly the weaker businesses are now gone.

On the other hand as a result of the bailouts, and a few decades of grossly irresponsible behavior, the government and Fed and a hell of a pickle. We currently have an average interest rate of 2.99% on roughly 14 trillion in debt giving us an interest expense a little north of 400 billion. With the average 37 points over the 7 year rate what percentage of outstanding is < 270 days? These clowns all went to the same business schools and learned that it is more “efficient” to roll commercial paper than match durations. What I’m saying is that it’s not so much that they can keep rates down but that they have no choice but to keep rates down at all costs or the jerk will kill them. Part of that cost is giving up control of the value of the dollar.

Also, did you see where KSA’s production is down 10% from last month? Any thoughts on whether this is a one off or if Ghawar is going the way of Cantrell?

Anonymous said...

Another problem is the fed can't unwind or they will go into negative equity. That will look very, very bad. They will hold this 2.8-2.9 trillion for a long time. This bubble is not going to pop, infact I think it blows bigger. QE3 anyone?


westexas said...

Following are what we show for global net oil exports for 2002 to 2009 (oil exporters with net oil exports of 100,000 bpd or more in 2005, which account for 99% plus of global net oil exports).

Note that global net oil exports increased at about 5%/year from 2002 to 2005, and then we had flat to declining global net oil exports. I suspect that this inflection point was quite a shock to oil importing countries, especially developed oil importing countries.

From 2005 to 2009, I have added Chinidia's combined net oil imports. The difference between the two is what I define as Available Net Oil Exports (ANE), i.e., global net oil exports not consumed by Chindia.

As you can see, ANE fell from 40.8 mbpd in 2005 to 35.7 mbpd in 2009. A plausible estimate is that ANE could be down to about 27 - 30 mbpd by 2015.

Global Net Oil Exports (BP + Minor EIA data):

2002: 39 mbpd
2003: 42
2004: 45
2005: 46 - 5.2* = 40.8 (ANE)
2006: 46 - 5.5 = 40.5
2007: 45 - 6.1 = 38.9
2008: 45 - 6.6 = 38.4
2009: 43 - 7.3 = 35.7

*Chindia's combined net oil imports

This table shows the detailed data for 2005 to 2009:

dennis said...

I'm far from informed about finances. I respect your knowledge and views. I just have a bad feeling. I fear they have just postponed the day of reckoning. Those things that surprised you could very well still happen. I'll keep washing the clothes and brushing my teeth and hope the commodity bubble doesn't hurt as much as the housing bubble did. Thank you for your posts.