Thursday, October 25, 2012

THE END OF GROWTH



I found an interesting video about growth and how growth itself is unsustainable.  In this video, Professor Albert Bartlett shares his very rational and realistic understanding about simple math and how growth has some unsettling implications on the way we live as a nation and as a human race.

THE END OF GROWTH
http://www.planbeconomics.com/2012/10/14/professor-albert-bartlett-on-the-end-of-growth/



As I expected when I first started watching the video we do end up in some of the usual places that liberal professors go.  Ultimately, Professor Bartlett found his way to the concept of population control and resource scarcity.  I think if we let him continue and were off camera we'd witness the professor explaining the benefits of abortion, euthanasia, and championing China's one child policy.   Fine, I'll put up with that as his story is one that applies to just about everything we deal with in the markets and investing.

Clearly, uncontrolled growth (even slow growth) causes really big problems three and four generations out.  This is why we need to have seriously responsible leaders in the Congress and the Presidency to deal with government spending, inflationary costs, and declining energy resources.  Unfortunately, we don't have these leaders, we have children that would rather line their own pockets with stock picks based on insider knowledge and we insist on candidates that tell our special interests "Yes" when they should all be told "No".

Below are three or four key areas where growth will cause major life-altering changes in the way we live;

US Debt
Energy usage versus available resources
Food
Water

Just another pleasant topic to lift you up for the day!

TRADING UPDATE
We've seen a 3% to 4% drop in equities this week as earnings reports continue to come in with misses despite earlier downward revisions and guidance.  In fact, even future guidance is suggesting lower earnings as well.  I am beginning to hear mixed stories from my clients about business orders and what larger customers are doing, but I still continue to hear that small businesses are fearful and they will not hire till they get through the election.  Many of these owners are very against President Obama even though their current business seems to be improving.  Notice what I just wrote, business is improving, but they don't give Obama credit, they feel like the recovery is just due to normal cycles.  

We may be back to the sector rotation where instead of cyclicals, industrials, financials, and technology are the place to be, we are seeing a move to utilities, consumer staples, and healthcare.  This is a recessionary fear rotation and is evident by the way that CAT and others have been clobbered.

Treasuries also have started to rebound and even high yield and corporate bonds have sold off a bit.

TAXING FUTURE
I don't want to forget to highlight that many of the "safe haven" sectors and dividend payers we've highlighted and invested in over the last two year may also become the target of significant selling pressure even if they fit into the healthcare, defense, consumer staples, and utility space.  The reason for this is that many investors will attempt to take their tax lumps right now in 2012 before capital gains rates go from 15% to 20%.  Add in the Medicare tax for high earners, and this could go as high as 23.8%.  In all, investors will pretty good gains in these dividend paying stocks may be inspired out of a fear of higher taxes to sell in the next two months to avoid higher capital gains rates in the future.  Significant selling will obviously bring the markets down.

In addition to tax-based selling, we are seeing firms guide earnings lower, in fact 100% of healthcare companies and 100% of energy related companies that have reported earnings have ALL guided future earnings prospects down!!!  That can't be good.

FACEBOOK
Stop.  Before you buy Facebook remember these three things.  Facebook is no longer cool.  Second, who is buying stuff on mobile and who really wants to buy stuff through their Facebook page?  (Goatmug does not have a FB page by the way).  Last, more than 1 BILLION SHARES will be unlocked for employees and investors to sell in November and December.  WHY WOULD YOU BUY BEFORE THAT TSUNAMI HITS THE SHORE?  I am happy for those that saw a 25% increase in the price of Facebook this week, just know that you'll be able to buy this stock 75% lower than today in less than one year.


GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

Tuesday, October 23, 2012

DEBATABLE RESULTS - ROTATION


I think it is clear that the election is important, yet I get a depressed feeling when I see the two candidates trade jabs and lie to each other and this country.  The false choice that each present is quite clear as Romney agreed with Obama throughout the evening, illustrating how it doesn't really matter who you choose.

Before you make a bunch of comments that suggest that I am one sided, negative, or simply misinformed, I'd interject that Obama is actually quite like Bush and in fact more bellicose than I would have ever expected given his pacifist words.  Likewise, Bush shocked us all when he went soft on immigration and attempted to do amnesty light and ran up tremendous deficits and grew government.    Ultimately, we have to identify the men and women behind the scenes like Karl Rove or David Axlerod that set the agenda and create the platform for Presidents to stand upon.

To lighten my mood I've provided this nifty little video that I've had in the queue for a while.  This post has nothing to do with any market related topics and is simply here to make me laugh at how humans are just entertaining.




The guy in the video is a CEO and founder of a Korean company.  Unfortunately I've heard his business skill is not as good as his singing, dancing, and video production.

TRADING UPDATE
The DJIA is down 250 points as I'm typing after Dupont, UPS, and 3M reported poor earnings.  It seems that the safe-haven dividend paying multi-nationals are being taken to the woodshed.  It is possible that a major sector rotation is now underway.  FB reports after the close and AAPL (who is responsible for almost 95% of the gains for the entire SPX for this year) is going to unveil an I-Pad Mini (who cares). I don't think either of these two events will revive the markets today.   Ultimately, no matter which candidate gets elected the increase in tax rates bodes very poorly for the stock market and so you need to begin crafting your equity exit post election or pre-New Year.


GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

Thursday, October 11, 2012

TRANSITORY INFLATION REVISITED (FOOD)

THE FED'S WAY OF THINKING
I find myself reflecting back on the old days of my early career in Finance when Alan Greenspan shared wisdom and knowledge in a manner that left all of us wondering, "What the heck does that mean?".  Greenspan's watch over the US economy earned him the nickname The Maestro since he was able to save us from the financial cataclysm of the 2000 (remember when the world would end because the year changed from 1999 to 2000?).  Greenspan guided us through recession and even gave us a wonderful housing bubble to comfort us after the tech collapse.

Greenspan's cryptic and smooth delivery left a high bar for all following Federal Reserve Chairmen to follow and it is obvious that Ben Bernanke is not quite as eloquent as his predecessor.  As we reflect back, we now know that Greenspan is actually not The Maestro, but probably should be called The Destroyer as his policies clearly contributed to the real estate collapse of 2006 to 2008.  On his watch he avoided oversight and management of banks and lending institutions that pursued profit without concern for solvency.

THE SAVIOR
Bernanke has done a remarkable job "saving" the existing system by performing heroic measures that are by anyone's assessment, simply extreme.  The new Fed Chairman has done the impossible and so he is credited by many as the savior of the financial world.  This blog has often declared that the extraordinary steps taken by Chairman Bernanke really are going to be the undoing of the world financial system as the actions really have only delayed the inevitable and probably made the collapse even more dramatic and far reaching.

THIS TOO SHALL PASS
I wanted to remind readers of the famous discussion Bernanke had where he defended his policies and stated that if there was actually an inflation in terms of food or gasoline, the impact was "Transitory".  In addition, Bernanke stated confidently that if there was discernible inflation in the system, the Fed would aggressively intervene and address the situation.  

(please see the Bloomberg story from April 2011) -

In an effort to check in on how Mr. Bernanke keeps his promises, lets examine an interesting graph I put together using data from the UN Food and Agriculture Organization.  The arm of the UN tracks world food prices so that we may look and see if in fact prices are going up or down over time.

FOOD FIGHTS
As you can see clearly, in April of 2011, food prices were rocketing much higher and this has to be one of the most significant reasons for the "Arab Spring" last year.  Starving people don't tolerate bad leadership for long, and these food prices caused them to take action.  Bernanke was able to step off the gas and we notice that astonishingly Bernanke was correct, prices moderated almost at the same time he gave his speech.  2012 has been a year of decline of food prices, but since September of 2012 and the announcement of QE 3, we have seen the UN Food Price Index reverse and begin to move higher.




Since I don't want to present data that tells an incomplete story, I've also posted a chart below that gives us a view of the nominal prices of the food index (as shown above), but also presents the inflation adjusted values.  The adjusted values still highlight that the food index is close to 30% higher than 2009 levels.  Let me say that again, food costs are close to 30% more than  3 years ago.


Nominal vs Real




The FAO data also has a breakout of the component commodity food prices and I have posted them here too.




Sugar continues its fall, but meat, dairy, and cereals all have move higher since their lows in January.

TWO CHOICES - BEN PICKS INFLATION!
As I wrap this up, the point I am trying to make is that Bernanke told us that inflation was moderating and seemed "transitory".  Almost in tandem with his statements, inflation worldwide reversed course and prices came off significantly.  In 2012, we have seen a reversal to this trend and we now see that food inflation is now heading higher.  It will be interesting to see additional data for October as it will include more of the results of the QE 3 announcement.

At this point the consumer worldwide is paying more for food and we all need to question Bernanke as to how long "transitory" really means and how he plans to aggressively intervene to stop inflation while he is aggressively holding rates at ZIRP through mid 2015.  My guess is that he will gladly let inflation stay awhile longer (forever) rather than stop his zero interest rate policy.  Our government and the Federal Reserve would gladly export food inflation and instability throughout the world to keep the financial system alive for a little while longer.


GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

Wednesday, October 10, 2012

HISTORICAL VIEW - TRANSPORTS AND TULIPS

BLAME IT ON THE BOTS
Late last month I penned a posted titled, "5% Drop in the Transports Dead Ahead".  Like many of the posts that I hang out there, the HFT bots must have read the headlines and conspired to make me look a bit foolish on timing as the market has been able to tread water and the transports didn't immediately lose 5% with 3 minutes of posting like it should have!

STRONG RELATIONSHIPS
Seriously though, as soon as I posted it, I began to look at the action in the transports over longer time frames and make some notes that I wanted to share.  The first point I wanted to show is that the transports are important!  There is a pretty strong relationship between the transports and the stock market, and darn it, between the real economy too.  While I remind myself daily that the stock market is not the economy and the other way around, in longer term time frames the economy does matter to the market.  Ben Bernanke seems to think so as well, since he believes strongly that the market can drive the economy.  If he didn't, he wouldn't have spent trillions increasing his balance sheet to buy treasuries and MBS to make everyone feel like the economy is better.  Remember, feelings may lead to reality....he hopes.

I  think I have to reinforce here that the transports really are the ultimate indicator of the real economy, thus I have often posted the rail traffic and tonnage data in past years when it was easier for me to post. That is the important linkage, that at the end of the day, rails and freight and air deliveries are a direct result of the production and health of the economy.  If UPS, Fed Ex, Con-Way, JB Hunt, and Kansas City Southern all show a slowdown, my guess is that the general economy is slowing down.  Stocks will typically try to predict that slowdown unless there is some process that interferes with the pricing discovery in the market (QE3 anyone?).

So, where are we going?  Check out this chart which contains twenty years worth of prices for the transports.  In the back ground of the chart I have included the SPX in purple.



DIVERGENCES AND HOW THEY PLAY OUT
I searched this chart in an attempt to find periods of time where the transports declined, but the SPX did not.  Previously, we had an instance in 1992 where the transports dropped for almost an entire year and the SPX simply moved sideways to higher.  At the beginning of 1993, the transports ripped much higher.  This seems to be the one point of divergence that wasn't corrected.

TULIP MANIA
The other significant period where the transports dropped and the SPX did not was the time frame from early 1999 to early 2000.  This of course was the blow off top of the tech bubble where you were an idiot if you didn't have your entire net worth wrapped up in CMGI, JDSU, Peapod and Pets.com.  During that phase, transports fell and the SPX ramped higher.  We all know that in March 2000, reality somehow interjected itself into the market frenzy and despite the rally in the summer, Mop and Pop ultimately ended up holding the bag for the great tech swindle.  

TRADING UPDATE
So, the point of my post here is not to revise my article stating that the transports were going to decline 5%.  In fact, this breather serves to reinforce that exact notion that the transports are tired and cannot generate enough momentum to break overhead resistance.  The tired trading is shown here below and I still look to 4700 as the target for the transports.  Additionally, I have to highlight that the 14 day EMA is now well below the 40 day EMA.  This is entirely bearish from a longer-term swing trade view for the transports.  The question we need to ask ourselves is, "Is this 1992, or is this 1999.  Let's hope it's 1992, because I don't think Mom and Pop can stand another summer of 2000.







GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

Tuesday, October 9, 2012

FREE FALLING

UPDATE - 1:45 EST - MISSION ABORTED - I will keep you updated.  See the disappointment on Felix's face.



NEW HEIGHTS
Today, we can witness an attempt to break a 50 year old record.  Later this afternoon, Felix Baumgartner will free fall from 120,000 feet (23 miles) in a quest to achieve four milestones.

1)  Felix will break the sound barrier (record is 614 mph)
2)  Jump from the highest altitude ever - previous record is 102,000 feet
3)  Eclipse the longest free fall time of 4 minutes and 36 seconds.
4)  Felix will also shatter records by having the highest blood caffeine content ever recorded as Red Bull is the sponsor for this attempt and he has been receiving Red Bull via IV for the last 24 hours (ok, I made that up, but it sounds good).

The entire jump and process will be shown live.  Watch the amazing attempt here...


WATCH THE EVENT LIVE

Space capsule
Here is an image from businessinsder of the capsule he'll use to get to altitude.
http://www.businessinsider.com/

ADVENTURERS AND LEADERS?
In the same spirit that Felix attempts his feat, I wish we could find a brave politician that would lead us on a quest to spend less and save more, cut expenses, grow manufacturing, and destroy special interest lobbying in Washington.  Unfortunately, Romney or Obama are not the leaders that yearn to achieve these great feats.  It seems the debate has thrown the political contest on its ear and I now find myself interested in watching the race closely although I feel strongly that there will be little meaningful difference between candidates and final outcomes no matter who is elected.

US FREE FALL DEAD AHEAD
Ultimately, I feel like this is the Republican's last shot at Presidential governance and we only have to look at Venezuela to see why.  While it seemed that there would be almost no way that Hugo Chavez would be elected, he was.  I have no doubt that there was fraud, but there was also a very powerful force working as well.  This power was the power of promises to care for and provide and gift government largess to poorer people.  Chavez' socialist system continued to buy votes and votes and more votes.  It takes a mature person to vote against receiving free stuff to see that there might be a greater growth and good in the future.  It is hard to recognize that governments involvement in the social system often will destroy incentive and lowers the economic benefit for the entire country.  Unfortunately, I think we (the US) sit on the precipice just like Felix Baumgartner will later today.  The US is so close to tipping into the Socialist abyss where the 47% Romney mentioned grows to 50% and more and the message of self reliance and greater opportunity are easily replaced with government care and compassion and fairness.

TRADING UPDATE
I keep hearing more and more that the market is primed for a big sell off.  The more I hear that, the more I don't believe it.  I felt much better about that theory when everyone was bullish, but now, everyone is just waiting for the correction.  I will update more with a post on the markets tomorrow, until then, enjoy the live feed of Felix getting his caffeine high on and exceeding 614 miles per hour.



GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/ 

Tuesday, October 2, 2012

ROYALTIES, ZIRP, AND OLD LADIES - NATURAL GAS UPDATE



GIVE ME INCOME
A friend of mine has been blessed to have purchased some mineral rights many years ago.  Before her husband died, he told her to never sell the rights as he "knew" the land was very valuable.

Years after his passing, his words have been revealed to be extremely accurate as the income generated from the leasing of the rights has been a tremendous gift to this widow.  Since she has found that she has become the target of the Fed's war on income generating assets using their ZIRP bombs to destroy her retirement income, the royalty stream has become more important than ever.  Because the mineral right income is so critical to her ability to financially survive, she watches the price of natural gas daily.  I find that I check in on Nat Gas too especially whenever I speak with her.





She called me yesterday to ask about a health insurance policy and we spoke briefly about natural gas and also about how low it had dropped.  I mentioned that it had rebounded and after our conversation I pulled up the graph above.

In my view, it looks like natural gas may have bottomed and could easily hit $4.00 since it exploded through the $3.25 level.  Even the $5.00 2011 level could be within reach.  I had to look at the portfolio killer, UNG as well, it frankly, it looks like it has broken out too and even though I hate it, a conservative look at UNG would suggest a move to $25 would be easy.

MORAL BANKRUPTCY
My examination of natural gas also led me to find this article in Reuters today.
In the article Casualties of Chesapeake's Land Grab Across America, the authors highlight several interesting techniques that Aubrey McClendon, CEO of Chesapeake, has used to lock up parcels of land and mineral rights.  Unfortunately, the firm's approach to becoming the largest mineral right holder and leaseholder in the US has been one that has left several owners feeling they weren't treated fairly.

Specifically, Chesapeake has been said to sign contracts for leases and then many days or weeks later demands lower lease rates.  The main problem with this is that the signed lease effectively locks up the landowner and crowds out any competitor bids.  After the dust settles, Chesapeake returns and turns the tables on the owner threatening to back out completely if they don't accept the lower amount.

Second, when the driller cannot get a landowner to do business they have been using the court and legal system to effectively "steal" the land and minerals from the owners.  In these examples the company uses the notion that the lone landowner cannot deprive neighbors from using their property as they please.  The firm argues that the hold-out landowner is a block to the other owners and therefore uses legal statutes to access their land and drill.  In Ohio, the land is exploited and the landowner receives royalties.  In Texas, the landowner relinquishes their right to control the land as the firm drills AND they also forfeit the royalties!!!

I read about these practices and this only adds to my thoughts that McClendon is simply a bad guy. Recall early this year when it was discovered that he had taken out loans totaling more than $1Billion against oil and gas wells he shared stakes in with Chesapeake.  (This is scary considering losses in his portfolios could be detrimental to the positions of Chesapeake.  We saw some terrible leverage issues with the CFO of Cheniere (LNG) in 2008 as margin calls crushed the company stock).  Additionally we discovered that McClendon also was running a $200 Million hedge fund that traded commodities and had failed to disclose this.   We also learned about the serious corporate governance issues where personal expenses could have been paid for by Chesapeake (and its shareholders).....Tyco anyone?

So, while I think natural gas may be going higher, I'm surprised to see a chart of CHK (Chesapeake) and I'm not convinced that it too is going to new levels.  As I close, let's view the CHK chart and see what might be going on there.


CHK


The chart of CHK shows that there has been a solid gain in the stock since May 2012.  As it has moved higher, volume has fallen dramatically.  Personally, I feel like the bullish move in the stock is done.  IF it trades above $20.50 I believe it could go to $23, but I would expect to see a fall to $16 before we'd ever see a move higher than $20.50.

KEY TRADES
Long natural gas looks good, so I guess if you are stuck with UNG and all it's widow-maker traits, go for it!

Avoid a long CHK unless there is a powerful rise through $20.50.  If there is significant macro weakness a short CHK could work to test $16.

 

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/