Commodities move
Geopolitical shocks
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Showing posts with label commodities. Show all posts
Showing posts with label commodities. Show all posts
Wednesday, June 28, 2023
Thursday, February 24, 2022
Sunday, November 22, 2015
The Limerick of Finance for 11/22/15
Trading futures contracts is okay
For companies with cash to pay
Hedging the supply chain
Avoid volatile pain
Commodities always in play
For companies with cash to pay
Hedging the supply chain
Avoid volatile pain
Commodities always in play
Thursday, September 10, 2015
The Haiku of Finance for 09/10/15
Hard asset benchmark
One for all commodities
Or pick more than one
One for all commodities
Or pick more than one
Picking Correct Hard Asset Benchmarks
Hard assets deserve more attention than they get. Commodities, real estate, and perhaps even infrastructure are often lumped together into a very broad asset class. Picking them apart into sensible components requires identifying benchmarks for apples-to-apples comparisons.
Commodities are a very broad subject. Base metals, precious metals, energy sources, foodstuffs, and other materials have radically different uses. The Bloomberg Commodity Index Family is both broad enough and specialized enough to track the sector. The Commodity Research Bureau Indexes represent a less flexible allocation but is nevertheless included in other commercial index products. Picking a broad proxy like the CRB matters for fund managers who run portfolios large enough to include all of the benchmarks components. A fund managing that only hedges with energy futures or metal futures needs more specialized benchmarks tracking just that one thing.
Timberland and farmland are not the same thing in real estate. The end products, final markets, and supply chain inputs (fertilizer, climatology, etc.) are all different. Comparing timber REITs and farmland REITs means using their separate benchmarks. The real estate sector makes it easy. The NCREIF Timberland Index and NCREIF Farmland Index are as different from each other as corn stalks and black walnut trees.
Infrastructure may or may not deserve consideration as a separate asset class. It shares many risk characteristics with equity yet is often funded like a fixed income fund. The problem with benchmarks like the S+P Global Infrastructure Index is their tendency to track actively traded equities that build or maintain infrastructure. It is difficult for infrastructure-related investment products to make pure-play claims if they cannot hold ownership in the infrastructure projects themselves. Muni bond issuance remains the primary funding method for publicly-owned infrastructure. It makes no sense for an investment manager to benchmark a muni bond portfolio against an equity infrastructure index.
Institutional investment managers are often the dumbest people in finance, aside from financial advisers in retail wealth management. They led the charge into alternative assets decades ago with the Swensen Yale model. Some of them probably rode the recent commodities bear market all the way down. Herd mentalities drive smaller endowments and pension funds to mimic the poor portfolio models of the largest universities. Many things can go wrong with an asset allocation leaning heavily on illiquid hard assets. Doing right by any fund's beneficiaries involves picking the correct benchmarks and understanding which hard assets they track.
Commodities are a very broad subject. Base metals, precious metals, energy sources, foodstuffs, and other materials have radically different uses. The Bloomberg Commodity Index Family is both broad enough and specialized enough to track the sector. The Commodity Research Bureau Indexes represent a less flexible allocation but is nevertheless included in other commercial index products. Picking a broad proxy like the CRB matters for fund managers who run portfolios large enough to include all of the benchmarks components. A fund managing that only hedges with energy futures or metal futures needs more specialized benchmarks tracking just that one thing.
Timberland and farmland are not the same thing in real estate. The end products, final markets, and supply chain inputs (fertilizer, climatology, etc.) are all different. Comparing timber REITs and farmland REITs means using their separate benchmarks. The real estate sector makes it easy. The NCREIF Timberland Index and NCREIF Farmland Index are as different from each other as corn stalks and black walnut trees.
Infrastructure may or may not deserve consideration as a separate asset class. It shares many risk characteristics with equity yet is often funded like a fixed income fund. The problem with benchmarks like the S+P Global Infrastructure Index is their tendency to track actively traded equities that build or maintain infrastructure. It is difficult for infrastructure-related investment products to make pure-play claims if they cannot hold ownership in the infrastructure projects themselves. Muni bond issuance remains the primary funding method for publicly-owned infrastructure. It makes no sense for an investment manager to benchmark a muni bond portfolio against an equity infrastructure index.
Institutional investment managers are often the dumbest people in finance, aside from financial advisers in retail wealth management. They led the charge into alternative assets decades ago with the Swensen Yale model. Some of them probably rode the recent commodities bear market all the way down. Herd mentalities drive smaller endowments and pension funds to mimic the poor portfolio models of the largest universities. Many things can go wrong with an asset allocation leaning heavily on illiquid hard assets. Doing right by any fund's beneficiaries involves picking the correct benchmarks and understanding which hard assets they track.
Thursday, December 27, 2012
The Haiku of Finance for 12/27/12
Hail future farmers
World diet will demand more
Millions to be made
World diet will demand more
Millions to be made
Friday, August 10, 2012
Tuesday, July 10, 2012
Monday, May 28, 2012
Financial Sarcasm Roundup for 05/28/12
It's Monday. That means it's time for my extreme sarcasm about business activity. U.S. markets were closed today due to Memorial Day but that doesn't mean my big fat mouth needs to be closed.
Marubeni is supposedly getting close to buying Gavilon. I've never heard of either one of these firms. Marubeni is some big Japanese grain dealer and Gavilon is a U.S. competitor. There isn't much to this story besides another consolidation play in a commodity dealer. It kind of reminds me of consolidation in the steel industry; now India and China dominate a very limited global field.
Now France wants Eurobonds, while the Economist opines in favor of Continental federalism. I need to burst the Economist's bubble. Only total federalism will establish the Continent-wide taxation system necessary to pay off any Eurobonds. Half-measures won't cut it and German taxpayers won't go for full federalism once they realize how badly it will ruin their credit. Putting some Eurobonds into tranches that partially cover participating states' obligations and are partially funded by strong creditor states (i.e., Germany) reminds me of the U.S.'s experience with Fannie and Freddie's amalgamated obligations. The key difference is that the U.S.'s housing CDO debacle was backed by the full faith and credit of Uncle Sam and his ability to levy taxes. Europe's half-effort won't cover squat. It will of course leave a lot of stupid hedge fund managers holding empty bags they thought were full of Euro-tranched super bonds.
U.S. national income is increasingly benefiting business profits and not worker income. There's plenty of research on how global wage arbitrage is pushing down wages in the U.S. One academic canard in financial thinking would call for workers to invest more of their income in the stocks of their employers to recapture some of this lost income momentum. I wouldn't go for such a canard just yet; U.S. stocks aren't bargains relative to earnings even though they're trading at inflation-adjusted levels last seen in the late 1990s. My point is that U.S. workers don't have many personal growth options through wage enhancing things like education or wealth enhancing things like conventional investments in U.S. equities. Stagnated workers can win by thinking outside the box, using tools created and traded in resilient communities.
Smart investors are starting their stampede out of junk bonds. I should throw in the caveat that maybe these are the people smart enough to let hedge funds buy up junk bonds and junk funds on the downslope to junk bond obliteration. This news makes me nostalgic for the early days of 2007 when I kept reading glowing headlines about the junk bond market's growth. I wondered then when it would all crash and realized I didn't want to be anywhere near junk bonds when they hit the floor. Well, crash they did later in 2007. The credit market seizures that started hitting in August 2007 were memorable. History doesn't repeat but it does rhyme. I'm not in junk bonds now, nor will I enter them until long after the U.S. bond market has crashed and America's likely hyperinflationary episode ends.
Marubeni is supposedly getting close to buying Gavilon. I've never heard of either one of these firms. Marubeni is some big Japanese grain dealer and Gavilon is a U.S. competitor. There isn't much to this story besides another consolidation play in a commodity dealer. It kind of reminds me of consolidation in the steel industry; now India and China dominate a very limited global field.
Now France wants Eurobonds, while the Economist opines in favor of Continental federalism. I need to burst the Economist's bubble. Only total federalism will establish the Continent-wide taxation system necessary to pay off any Eurobonds. Half-measures won't cut it and German taxpayers won't go for full federalism once they realize how badly it will ruin their credit. Putting some Eurobonds into tranches that partially cover participating states' obligations and are partially funded by strong creditor states (i.e., Germany) reminds me of the U.S.'s experience with Fannie and Freddie's amalgamated obligations. The key difference is that the U.S.'s housing CDO debacle was backed by the full faith and credit of Uncle Sam and his ability to levy taxes. Europe's half-effort won't cover squat. It will of course leave a lot of stupid hedge fund managers holding empty bags they thought were full of Euro-tranched super bonds.
U.S. national income is increasingly benefiting business profits and not worker income. There's plenty of research on how global wage arbitrage is pushing down wages in the U.S. One academic canard in financial thinking would call for workers to invest more of their income in the stocks of their employers to recapture some of this lost income momentum. I wouldn't go for such a canard just yet; U.S. stocks aren't bargains relative to earnings even though they're trading at inflation-adjusted levels last seen in the late 1990s. My point is that U.S. workers don't have many personal growth options through wage enhancing things like education or wealth enhancing things like conventional investments in U.S. equities. Stagnated workers can win by thinking outside the box, using tools created and traded in resilient communities.
Smart investors are starting their stampede out of junk bonds. I should throw in the caveat that maybe these are the people smart enough to let hedge funds buy up junk bonds and junk funds on the downslope to junk bond obliteration. This news makes me nostalgic for the early days of 2007 when I kept reading glowing headlines about the junk bond market's growth. I wondered then when it would all crash and realized I didn't want to be anywhere near junk bonds when they hit the floor. Well, crash they did later in 2007. The credit market seizures that started hitting in August 2007 were memorable. History doesn't repeat but it does rhyme. I'm not in junk bonds now, nor will I enter them until long after the U.S. bond market has crashed and America's likely hyperinflationary episode ends.
Tuesday, May 01, 2012
Friday, March 09, 2012
MF Global Ripped Off Big Players Too
Individual clients of bankrupt commodities brokerage MF Global can take some cold comfort in the news that big corporations also got their pockets picked. Major corporations that used futures to hedge commodity prices through MF Global comprised a fifth of the client funds that "vaporized." The good news is that these players have the deep pockets for class action lawsuits and the political pull to ensure regulators don't sweep this under the rug.
I actually once considered opening a futures account with Refco, MF Global's predecessor firm, years before it collapsed. I decided against it mainly because I'm not some heavy commodity user who really needs a hedge. There are plenty of ETFs in oil, metals, and agriculture to satisfy the diversification needs of most normal investors.
Trust is in short supply. Even big companies can't trust their brokerages anymore. I hope these Fortune 500 victims get together and strategize some lawfare that will bury the MF Global malefactors in a big pile of . . . well, you can insert a fanciful agricultural commodity here.
I actually once considered opening a futures account with Refco, MF Global's predecessor firm, years before it collapsed. I decided against it mainly because I'm not some heavy commodity user who really needs a hedge. There are plenty of ETFs in oil, metals, and agriculture to satisfy the diversification needs of most normal investors.
Trust is in short supply. Even big companies can't trust their brokerages anymore. I hope these Fortune 500 victims get together and strategize some lawfare that will bury the MF Global malefactors in a big pile of . . . well, you can insert a fanciful agricultural commodity here.
Friday, March 02, 2012
Fed Vs. Banks On Hard Assets Foreshadows Inflation Preparation
There's more than meets the eye in news of banks fighting the Fed to retain their ownership of commodity storage facilities. Forget the debate over how far the Volcker Rule should go in requiring banks to maintain capital. That's for the equity side of the balance sheet. This commodity stuff is about the asset side of the ledger.
Banks know as well as anyone - well, probably better than the average person - that the Fed's dollar debasement policy will eventually push serious inflation into the economy. Inflation destroys the value of fixed income instruments. Banks have every reason to be concerned about how badly inflation will hurt the book value of loans they've issued. Holding hard assets on their balance sheets can ameliorate the effect of inflation on their loan portfolios. How much it will help will of course vary by institution, but those TBTFs that went hog-wild with home mortgages have the most to lose from inflation. They know who they are. BofA's rush to buy Merrill Lynch may be a saving grace if the bank can hold onto whatever hard asset store Mother Merrill is allowed to retain..
The Fed may not have much choice but to accommodate banks' desires to continue holding commodities, even if they are restricted in trading them. Think of a hard asset hoard as a balance sheet backstop that gives the Fed time to delay further QE. Keeping this grandfather exemption for bank holding companies will give the Fed room to focus liquidity backstops on banks that didn't do much trading with commodities. Helicopter Ben needs to think about how he can make the Fed's job less difficult as we approach the next round of the financial crisis. Think hard, Ben. Think hard assets.
Full disclosure: No positions in any company mentioned.
Banks know as well as anyone - well, probably better than the average person - that the Fed's dollar debasement policy will eventually push serious inflation into the economy. Inflation destroys the value of fixed income instruments. Banks have every reason to be concerned about how badly inflation will hurt the book value of loans they've issued. Holding hard assets on their balance sheets can ameliorate the effect of inflation on their loan portfolios. How much it will help will of course vary by institution, but those TBTFs that went hog-wild with home mortgages have the most to lose from inflation. They know who they are. BofA's rush to buy Merrill Lynch may be a saving grace if the bank can hold onto whatever hard asset store Mother Merrill is allowed to retain..
The Fed may not have much choice but to accommodate banks' desires to continue holding commodities, even if they are restricted in trading them. Think of a hard asset hoard as a balance sheet backstop that gives the Fed time to delay further QE. Keeping this grandfather exemption for bank holding companies will give the Fed room to focus liquidity backstops on banks that didn't do much trading with commodities. Helicopter Ben needs to think about how he can make the Fed's job less difficult as we approach the next round of the financial crisis. Think hard, Ben. Think hard assets.
Full disclosure: No positions in any company mentioned.
Monday, December 12, 2011
Hoarding And Stealing Dr. Copper
Hard assets devotees believe commodities help diversify a portfolio. Some people take this to extremes. Penny hoarders accumulate mini-mountains of the copper coinage in the hope that the coins' metal content is a better investment than the face value of the currency. Folks are plotting ROIs on proposed changes in federal law that would allow them to liquefy these assets for their melt value. That seems like a very long-shot chance but high copper prices encourage people to try their luck.
Hoarding copper pennies is a benign form of investing in liquid hard assets. They would be useful in a hyperinflationary scenario if low-denomination currency became worthless and copper recyclers were willing to risk melting them down. The second-hand copper market may already tolerate lawlessness given the sharp rise in recent incidents of copper theft. All of those torn-out copper wires, pipes, and fixtures are going somewhere. There's a buyer for every seller. I'm disappointed that law enforcement agencies aren't staking out metal recycling centers.
Penny pinching is one thing; penny hoarding is a big thing. There can be too much of a good thing.
Nota bene: This author does hold a small amount of pennies, in a tin can at the world headquarters of Alfidi Capital. They are currency, not a spare store of metal. I typically drop a few into the hats of street musicians in San Francisco, especially if they're talented.
Hoarding copper pennies is a benign form of investing in liquid hard assets. They would be useful in a hyperinflationary scenario if low-denomination currency became worthless and copper recyclers were willing to risk melting them down. The second-hand copper market may already tolerate lawlessness given the sharp rise in recent incidents of copper theft. All of those torn-out copper wires, pipes, and fixtures are going somewhere. There's a buyer for every seller. I'm disappointed that law enforcement agencies aren't staking out metal recycling centers.
Penny pinching is one thing; penny hoarding is a big thing. There can be too much of a good thing.
Nota bene: This author does hold a small amount of pennies, in a tin can at the world headquarters of Alfidi Capital. They are currency, not a spare store of metal. I typically drop a few into the hats of street musicians in San Francisco, especially if they're talented.
Sunday, December 11, 2011
Notes From The San Francisco Hard Assets Conference 2011
This year's Hard Assets Conference was as big as they come. The last weekend in November always brings a ton of mining experts to The City. Enough time has passed for the information discussed there to be actionable in the markets, so now it's time to review the show. I'll summarize the main points of lectures I attended below, with my own observations in italics.
Ian McAvity, "Deliberations on World Markets"
- The euro was designed to blow up in a crisis and North American markets are amazingly complacent about its implications. All this time, I thought the eurozone was just another fox-hunting club for aristocrats.
- Alan Greenspan's money creation did not help the stock market, citing Shadow Government Statistics' revised unemployment numbers.
- Another debt ceiling showdown may shock markets.
- Retail investors are still selling equity mutual funds. Maybe so, but somebody's still buying. I wonder if pension plans and professional money managers are the dumb money.
- Ian predicts the DJIA will be under 8000 in 2012 and that gold is undervalued versus equities. Specific price targets are usually trouble for market commentators. I'll go along with a general bearish case but I'm not as brave as Ian to predict a specific goal for the market. Fair value based on mean reversion to a P/E ratio at its historic average of 14 implies DJIA may eventually go as low as 5000 or so. Whether gold is undervalued depends on whether it resorts to its own historic mean price in the low 600s per ounce.
- Plotting the price of gold against the DJIA indicates a technical trend of higher highs and lower lows. My MBA-trained mind says those price moves are just a random walk. The market doesn't do what you want it to do.
- Ian thinks gold mining stocks lag moves in bullion and that only majors will provide good buying opportunities. I think Ian should attend some of the company presentations at this conference. Juniors with properties that have decent ore grades and logistical factors can break out.
- The US and UK are arrogant to treat the rest of the world like colonies. China and Brazil may lead a currency revolt. True, but China would have to de-link the renminbi from the US dollar first, making its exports less competitive at a time when its main import markets - the US and Europe - are slowing down.
Keith Schaeffer, "Oil & Gas Investments Bulletin"
- Oil patch activity via horizontal drilling and fracking will change juniors. You betcha. This is already happening, with players in the Bakken formation and elsewhere paying top dollar for labor.
- The market prices the value of discoveries in mining more quickly than in oil and gas.
- Shale formations resemble potash plays; relatively uniform geology means the market can price discovery more quickly. Good observation, Keith.
- "Price per flowing barrel" juniors are picking up steam. My interpretation is that juniors who actually produce at a mature wellhead deserve better valuations than those still in exploration.
- The US has several years of cheap natural gas ahead, with more discoveries possible. We can thank fracking for this good news. Tell your elected officials to keep the EPA out of a proven technology.
Frank Holmes (U.S. Global Investors), "Looking For Super S-Curves"
- The average currency crisis lasts four years, based on 47 preceding crises in the last 400 years. "This time it's different." The last world reserve currency to be dethroned was the British pound after WWII, but the transition was eased by the ready emergence of the US dollar as a replacement. There is no such alternative on the horizon now.
- Many majors have such good fee cash flows they don't need to tap capital markets. I hear you, Frank. Too many juniors run out of cash too soon because they don't raise capital to match forecast spending. Majors usually don't have that problem.
- China and India will see their share of world GDP catch up to their share of the world's population. Not if they face resource constraints first. China has coal and rare earth metals but needs oil and hydroelectric power. India needs local infrastructure for "last mile" water delivery.
- Rising US interest rates today would destroy the price of gold. A surprise dollar collapse would cause such a spike. Gold bugs ignore this at their peril.
- Frank thinks gold is not a bubble now because the spike in gold prices in the early 1980s was driven by futures market buying, while today buying is cash driven. Really? What about allegations that GLD is stuffed with futures contracts and not bullion? I shudder to think what a crisis of confidence - even if unfounded - around GLD's holdings would do to gold bugs.
Adrian Day, "The Resource Boom: Is It All Over?"
- Long cycles in copper's price history imply the boom isn't over. But isn't Dr. Copper a reliable indicator of economic activity? Guess what happens to copper when the Great Recession gets cranking again.
- Adrian says even 5-6% annual GDP growth in China makes it attractive versus the rest of the world. Adrian, China has needed at least 9% per year just to avoid social unrest, based on their population growth. If GDP doesn't keep pace with population, unrest will destroy much of what the country has built.
Axel Merk, "Currency Wars"
- The gold/inflation relationship implies inflation expectations are decreasing. If that holds, investors are in for a shock when the Fed and ECB try to save their respective sovereign solvency by printing away.
- Chinese companies have pricing power due to artificial government support, so companies that compete successfully in China can raise prices even if the US dollar declines. I'm not sure if the "successful" companies he means are those Western companies with operations inside China; I'm assuming so. Chinese companies selling inside China shouldn't care what the dollar does unless their supply chains have sources in the US.
- Central bank balance sheets are proxies for currency printing. The ECB has a different mindset than the Fed and is not necessarily inclined to QE-style printing. The Fed has no desire to mop up excess liquidity by raising interest rates, as that would be as politically suicidal here as in Europe. Interesting insights.
- Axel advocates the "currency as asset class" philosophy. I'll only agree up to the point that currency falls under "cash," as I still subscribe to the classic asset class definitions of debt, equity, and cash. Everything else for me is a subcategory of those three things. I truly believe currency is only useful as a hedge of other cash positions, not a something to use as a long bet or portfolio diversifier.
- The S&P is not a true international diversifier, as 90% of S&P listed companies hedge their earnings in dollars. This is a good argument for owning international equities rather than international currencies as a diversifier.
Rick Rule (Global Resource Investments): Keynote
- He endorsed Frank Holmes' view that increasing freedom in emerging markets would lead to growth.
- Income growth in lower socioeconomic classes drives commodity growth because they buy more material "stuff" to improve their lives.
- Chinese per capita energy consumption has grown but is still only 9% of US energy use. Hey oil shale frackers, have you made any contacts in China yet? Just asking.
- Legacy supply issues from a bear market in 1982-2002 constrain resource supply now due to a lack of investment then. Investors in hard assets tend to ignore things like capex requirements, which is why they get burned on junior mining companies that can't fund their exploratory budgets. I'll say it again . . . the major producers don't have this problem.
- The 2-3 year lag between a mining company's preliminary economic assessment and its bankable feasibility studies bring arbitrage opportunities. Buyouts happen at the bankability stage but discoveries happen before then. I didn't know that. Thanks Rick!
- Another liquidity crisis can destroy production finance, especially for capital intensive sectors like resources. Rick Rule is far from the only speaker here to warn that another credit shock will create an enormous buying opportunity in stocks. I've noticed a common theme of "bumpy ride ahead" at the Hard Assets Conference.
- Investors should seek more advantageous terms from junior companies. Issuers like to give investors 2 1/2 year warrants but reserve five year full options for themselves. I would call that evidence of an asymmetric information advantage of the company over the investor.
John Thomas (Diary of a Mad Hedge Fund Trader), "Rare Earths In The Global Context"
- The stock market now discounts worse GDP growth.
- High frequency trading accounts for 80% of the trades in the oil market, driving huge price swings.
- Rare earth elements are illiquid; prices peaked on April 29, 2011, mainly driven by China's actions.
- The US dollar has been declining in value since the birth of the Fed in 1913. The many Ron Paul fans at this conference will like that one.
- Housing will fall until 2030 when Millennials will want to buy homes. Right now 85M Boomers want to sell their homes to 65M Gen-Xers.
- Fracking has unlocked a huge US natural gas supply. LNG exports to China will boom. This makes me think of Japan's dependence on US oil in the 1930s. The US oil embargo against Japan triggered their strategic decision to attack the US. There is a huge lesson here for strategists looking for an inflection point that can trigger US-China conflict. I believe resource access for China and India is one such inflection point, and possibly the single most severe one.
- John recently visited China to see if they were manipulating rare earth prices. Key leaders there gave the official line that they wanted to give manufacturers an advantage in finished goods. The Chinese government is tracking down unauthorized rare earth miners to get them to register in advance of consolidation.
- John is bearish on the platinum group metals because a likely recession next year will hurt the automobile market. PGMs are used in catalytic converters. Here's another expert forecasting a recession in 2012. Pay attention, investors!
- I asked John if he thought the Congressional budget "super committee" deliberately failed to come to agreement. John didn't think they conspired, but we shouldn't count on anything from our capital other than higher taxes. I do think some surprise budget cuts are in store for discretionary spending.
Mickey Fulp, "Mercenary Geologist"
- Rio Tinto wants badly to get into the Athabasca Basin and they've never lost a bidding war.
- Mickey doesn't like insiders who sell their own stock when the company is under duress.
Readers, I have to tell you that I've learned a ton from Mickey's lectures at the Hard Assets Conference and its predecessor events. His website is a terrific free education.
Paul van Eeden, "Looking for Value" Keynote
- The bottom four quintiles of earners have seen declines in their percentage of the economy's overall income, even while the top 1% has seen huge after-tax income growth. Don't tell the Occupy Wall Street crowd. They might try to enter the exhibition hall.
- The bottom 99% owes 73% of the debt in the US but their consumption drives the economy. This tells me that the postwar US model of debt-based consumption as a driver for growth is about to expire. No middle class can survive burial under huge college loans that can't be torn up in bankruptcy court. The next wave of growth - once Great Depression 2.0 has run its course - will have to be based on production.
- Metals prices indicate the equity bull market is over. China's new "ghost cities" drove its manufacturing growth; this is an unsustainable model. Construction of capital goods without demand is malinvestment. China's growth story experiment is thus destructive of capital. Finally, some sanity on China. I drank from the China punch bowl for long time until recently learning that much of the story is based on fraudulent finances, hidden debt, and trains to nowhere. Now I'm stuck with FXI until China jump starts its consumer economy, if ever.
- Chinese consumers can't afford overbuilt apartments (bought by speculators), so they fall into disrepair. Yikes, looks like consumers will be on their backs for a while.
- Chinese GDP is calculated on production, not consumption. Wasteful production of unneeded goods counts toward China's growth miracle.
- Paul thinks the Fed isn't dumb enough to force inflation up to intolerably high levels. The thing about such high inflation is that it can come accidentally when you're just shooting for moderate inflation that will devalue sovereign debt. The Fed may not be dumb enough to force this, but I don't know if they're smart enough to avoid it.
- Gold bullion prices typically move first, then majors, then juniors. Juniors won't rally until the bullion price resets. Boy am I glad this guy was a speaker. The hits just keep on coming. Please bring Paul back next year for more contrarian wisdom.
Al Korelin, "What Twenty Years . . ."
- Al believes the equity markets are unsound and invests exclusively in hard assets. That's pretty harsh; he's even more of a skeptic than me.
- Middle East instability can make gold skyrocket. Always remember that oil is priced in dollars, for now anyway.
Jack Lifton, Technology Metals Research
- Jack restated the contentions of his recent article on junior rare earth companies. Jack's bottom line is that only handful of publicly traded rare earth miners can produce all of the world's needs. I won't repeat much of what Jack said because frankly the man is so brilliant that I don't think I could do him justice. Read his articles for yourself to get the best view in the world on rare earth metals.
John Kaiser, Kaiser Research Online
- He says gold's price rise is sustainable. I disagree. Everything reverts to mean sooner or later. That mean for gold is in the low 600s.
- Gold miners' low share prices (relative to bullion) reflect anxiety that hyperinflation will make cash flows evaporate. Excellent. I would add that the majors have hedged their dollar exposure and will suffer less than juniors in such a scenario. Pay attention, investors.
- The US's sovereign debt load makes us strategically weak and out military spending is unsustainable. However, a US recession will hurt "parasite economies" like China due to their export-driven models. That means the US can expect a GDP lead over China that will last another 20-30 years. Hmm, that last bit is interesting, original thinking.
Michael Berry, Morning Notes
- Michael covered a lot of familiar ground on unpayable sovereign debt, China's malinvestment, the Fed's balance sheet, coming austerity in the developed world, and emerging markets' booming demand for commodities. I frequently read his free "Discovery Investing" commentaries. They are a good look into junior miners.
Frank Trotter, EverBank Direct
- EverBank believes the big economies drive the world economy, not emerging markets. He sounds like a contrarian at this conference given the many speakers who think the future lies with emerging economies.
- The euro gave peripheral countries a "free ride" so they could borrow at lower rates. Germany is not necessarily willing to take a big hit to GDP just to bail out the PIIGS.
- Positive drives of a currency's value include budget, debt, and trade numbers all in positive directions. Norway is #1 by this standard but Canada and Australia also look good. IMHO, these fundamentals are a more valuable set of metrics for currency investors than the "pips" traders watch.
John Nadler, (Kitco), "Silver's Cloudy Lining"
- The silver market is in surplus with record volume in 2010. Government silver stockpiles have declined for years.
- Average cash cost of production for the top 30 producers worldwide is now $5.20/oz. This is extremely important to note. Producers in the bottom quartile of production costs are more likely to add shareholder value. It pays to be a cheap operator.
- Investment demand has absorbed all surplus production; almost all of this demand came from silver ETFs.
The final event is always the Bulls and Bears keynote panel. Rick Rule, James Dines, Paul van Eeden, Ian McAvity, and Adrian Day held court. Rick moderated and kicked off by asking his panelists to nominate black swans that kept them worried. Count the swans: the end of our Bretton Woods system; a bank crisis that shocks China's growth and causes social unrest; resource scarcity; India awakening; Africa developing; overnight euro destruction.
The panelists anticipate the failure of the eurozone. These are very well-informed experts who have made a living for decades by being on the right side of the markets. I take their conclusions seriously. They were also very strongly supportive of gold's continued rise, except Paul, who thinks it will collapse to $850/oz. I can't call the end of gold's bull run. All I can say is that I'm not in love with any asset; my GDX holdings are just another asset class. I reduced my concentration in GDX as gold climbed.
Rick ended this year's confab by asking for things that could go right. Where are the white swans? The panelists responded: Congress could enact an austerity budget; technology innovation over decades could solve the growth crisis; the Fed could return to sound monetary policy (yeah right IMHO!); an outbreak of fiscal integrity in DC and justice in due course for the victims of the MF Global collapse. That last comment got a rousing response from the audience of hard -core hard assets investors who remained until the very end!
Thanks for another great year, Hard Assets Conference. I should also note that Jim Dines once again had an excellent booth staffed with attractive female models. That's one investment that never goes out of style.
Ian McAvity, "Deliberations on World Markets"
- The euro was designed to blow up in a crisis and North American markets are amazingly complacent about its implications. All this time, I thought the eurozone was just another fox-hunting club for aristocrats.
- Alan Greenspan's money creation did not help the stock market, citing Shadow Government Statistics' revised unemployment numbers.
- Another debt ceiling showdown may shock markets.
- Retail investors are still selling equity mutual funds. Maybe so, but somebody's still buying. I wonder if pension plans and professional money managers are the dumb money.
- Ian predicts the DJIA will be under 8000 in 2012 and that gold is undervalued versus equities. Specific price targets are usually trouble for market commentators. I'll go along with a general bearish case but I'm not as brave as Ian to predict a specific goal for the market. Fair value based on mean reversion to a P/E ratio at its historic average of 14 implies DJIA may eventually go as low as 5000 or so. Whether gold is undervalued depends on whether it resorts to its own historic mean price in the low 600s per ounce.
- Plotting the price of gold against the DJIA indicates a technical trend of higher highs and lower lows. My MBA-trained mind says those price moves are just a random walk. The market doesn't do what you want it to do.
- Ian thinks gold mining stocks lag moves in bullion and that only majors will provide good buying opportunities. I think Ian should attend some of the company presentations at this conference. Juniors with properties that have decent ore grades and logistical factors can break out.
- The US and UK are arrogant to treat the rest of the world like colonies. China and Brazil may lead a currency revolt. True, but China would have to de-link the renminbi from the US dollar first, making its exports less competitive at a time when its main import markets - the US and Europe - are slowing down.
Keith Schaeffer, "Oil & Gas Investments Bulletin"
- Oil patch activity via horizontal drilling and fracking will change juniors. You betcha. This is already happening, with players in the Bakken formation and elsewhere paying top dollar for labor.
- The market prices the value of discoveries in mining more quickly than in oil and gas.
- Shale formations resemble potash plays; relatively uniform geology means the market can price discovery more quickly. Good observation, Keith.
- "Price per flowing barrel" juniors are picking up steam. My interpretation is that juniors who actually produce at a mature wellhead deserve better valuations than those still in exploration.
- The US has several years of cheap natural gas ahead, with more discoveries possible. We can thank fracking for this good news. Tell your elected officials to keep the EPA out of a proven technology.
Frank Holmes (U.S. Global Investors), "Looking For Super S-Curves"
- The average currency crisis lasts four years, based on 47 preceding crises in the last 400 years. "This time it's different." The last world reserve currency to be dethroned was the British pound after WWII, but the transition was eased by the ready emergence of the US dollar as a replacement. There is no such alternative on the horizon now.
- Many majors have such good fee cash flows they don't need to tap capital markets. I hear you, Frank. Too many juniors run out of cash too soon because they don't raise capital to match forecast spending. Majors usually don't have that problem.
- China and India will see their share of world GDP catch up to their share of the world's population. Not if they face resource constraints first. China has coal and rare earth metals but needs oil and hydroelectric power. India needs local infrastructure for "last mile" water delivery.
- Rising US interest rates today would destroy the price of gold. A surprise dollar collapse would cause such a spike. Gold bugs ignore this at their peril.
- Frank thinks gold is not a bubble now because the spike in gold prices in the early 1980s was driven by futures market buying, while today buying is cash driven. Really? What about allegations that GLD is stuffed with futures contracts and not bullion? I shudder to think what a crisis of confidence - even if unfounded - around GLD's holdings would do to gold bugs.
Adrian Day, "The Resource Boom: Is It All Over?"
- Long cycles in copper's price history imply the boom isn't over. But isn't Dr. Copper a reliable indicator of economic activity? Guess what happens to copper when the Great Recession gets cranking again.
- Adrian says even 5-6% annual GDP growth in China makes it attractive versus the rest of the world. Adrian, China has needed at least 9% per year just to avoid social unrest, based on their population growth. If GDP doesn't keep pace with population, unrest will destroy much of what the country has built.
Axel Merk, "Currency Wars"
- The gold/inflation relationship implies inflation expectations are decreasing. If that holds, investors are in for a shock when the Fed and ECB try to save their respective sovereign solvency by printing away.
- Chinese companies have pricing power due to artificial government support, so companies that compete successfully in China can raise prices even if the US dollar declines. I'm not sure if the "successful" companies he means are those Western companies with operations inside China; I'm assuming so. Chinese companies selling inside China shouldn't care what the dollar does unless their supply chains have sources in the US.
- Central bank balance sheets are proxies for currency printing. The ECB has a different mindset than the Fed and is not necessarily inclined to QE-style printing. The Fed has no desire to mop up excess liquidity by raising interest rates, as that would be as politically suicidal here as in Europe. Interesting insights.
- Axel advocates the "currency as asset class" philosophy. I'll only agree up to the point that currency falls under "cash," as I still subscribe to the classic asset class definitions of debt, equity, and cash. Everything else for me is a subcategory of those three things. I truly believe currency is only useful as a hedge of other cash positions, not a something to use as a long bet or portfolio diversifier.
- The S&P is not a true international diversifier, as 90% of S&P listed companies hedge their earnings in dollars. This is a good argument for owning international equities rather than international currencies as a diversifier.
Rick Rule (Global Resource Investments): Keynote
- He endorsed Frank Holmes' view that increasing freedom in emerging markets would lead to growth.
- Income growth in lower socioeconomic classes drives commodity growth because they buy more material "stuff" to improve their lives.
- Chinese per capita energy consumption has grown but is still only 9% of US energy use. Hey oil shale frackers, have you made any contacts in China yet? Just asking.
- Legacy supply issues from a bear market in 1982-2002 constrain resource supply now due to a lack of investment then. Investors in hard assets tend to ignore things like capex requirements, which is why they get burned on junior mining companies that can't fund their exploratory budgets. I'll say it again . . . the major producers don't have this problem.
- The 2-3 year lag between a mining company's preliminary economic assessment and its bankable feasibility studies bring arbitrage opportunities. Buyouts happen at the bankability stage but discoveries happen before then. I didn't know that. Thanks Rick!
- Another liquidity crisis can destroy production finance, especially for capital intensive sectors like resources. Rick Rule is far from the only speaker here to warn that another credit shock will create an enormous buying opportunity in stocks. I've noticed a common theme of "bumpy ride ahead" at the Hard Assets Conference.
- Investors should seek more advantageous terms from junior companies. Issuers like to give investors 2 1/2 year warrants but reserve five year full options for themselves. I would call that evidence of an asymmetric information advantage of the company over the investor.
John Thomas (Diary of a Mad Hedge Fund Trader), "Rare Earths In The Global Context"
- The stock market now discounts worse GDP growth.
- High frequency trading accounts for 80% of the trades in the oil market, driving huge price swings.
- Rare earth elements are illiquid; prices peaked on April 29, 2011, mainly driven by China's actions.
- The US dollar has been declining in value since the birth of the Fed in 1913. The many Ron Paul fans at this conference will like that one.
- Housing will fall until 2030 when Millennials will want to buy homes. Right now 85M Boomers want to sell their homes to 65M Gen-Xers.
- Fracking has unlocked a huge US natural gas supply. LNG exports to China will boom. This makes me think of Japan's dependence on US oil in the 1930s. The US oil embargo against Japan triggered their strategic decision to attack the US. There is a huge lesson here for strategists looking for an inflection point that can trigger US-China conflict. I believe resource access for China and India is one such inflection point, and possibly the single most severe one.
- John recently visited China to see if they were manipulating rare earth prices. Key leaders there gave the official line that they wanted to give manufacturers an advantage in finished goods. The Chinese government is tracking down unauthorized rare earth miners to get them to register in advance of consolidation.
- John is bearish on the platinum group metals because a likely recession next year will hurt the automobile market. PGMs are used in catalytic converters. Here's another expert forecasting a recession in 2012. Pay attention, investors!
- I asked John if he thought the Congressional budget "super committee" deliberately failed to come to agreement. John didn't think they conspired, but we shouldn't count on anything from our capital other than higher taxes. I do think some surprise budget cuts are in store for discretionary spending.
Mickey Fulp, "Mercenary Geologist"
- Rio Tinto wants badly to get into the Athabasca Basin and they've never lost a bidding war.
- Mickey doesn't like insiders who sell their own stock when the company is under duress.
Readers, I have to tell you that I've learned a ton from Mickey's lectures at the Hard Assets Conference and its predecessor events. His website is a terrific free education.
Paul van Eeden, "Looking for Value" Keynote
- The bottom four quintiles of earners have seen declines in their percentage of the economy's overall income, even while the top 1% has seen huge after-tax income growth. Don't tell the Occupy Wall Street crowd. They might try to enter the exhibition hall.
- The bottom 99% owes 73% of the debt in the US but their consumption drives the economy. This tells me that the postwar US model of debt-based consumption as a driver for growth is about to expire. No middle class can survive burial under huge college loans that can't be torn up in bankruptcy court. The next wave of growth - once Great Depression 2.0 has run its course - will have to be based on production.
- Metals prices indicate the equity bull market is over. China's new "ghost cities" drove its manufacturing growth; this is an unsustainable model. Construction of capital goods without demand is malinvestment. China's growth story experiment is thus destructive of capital. Finally, some sanity on China. I drank from the China punch bowl for long time until recently learning that much of the story is based on fraudulent finances, hidden debt, and trains to nowhere. Now I'm stuck with FXI until China jump starts its consumer economy, if ever.
- Chinese consumers can't afford overbuilt apartments (bought by speculators), so they fall into disrepair. Yikes, looks like consumers will be on their backs for a while.
- Chinese GDP is calculated on production, not consumption. Wasteful production of unneeded goods counts toward China's growth miracle.
- Paul thinks the Fed isn't dumb enough to force inflation up to intolerably high levels. The thing about such high inflation is that it can come accidentally when you're just shooting for moderate inflation that will devalue sovereign debt. The Fed may not be dumb enough to force this, but I don't know if they're smart enough to avoid it.
- Gold bullion prices typically move first, then majors, then juniors. Juniors won't rally until the bullion price resets. Boy am I glad this guy was a speaker. The hits just keep on coming. Please bring Paul back next year for more contrarian wisdom.
Al Korelin, "What Twenty Years . . ."
- Al believes the equity markets are unsound and invests exclusively in hard assets. That's pretty harsh; he's even more of a skeptic than me.
- Middle East instability can make gold skyrocket. Always remember that oil is priced in dollars, for now anyway.
Jack Lifton, Technology Metals Research
- Jack restated the contentions of his recent article on junior rare earth companies. Jack's bottom line is that only handful of publicly traded rare earth miners can produce all of the world's needs. I won't repeat much of what Jack said because frankly the man is so brilliant that I don't think I could do him justice. Read his articles for yourself to get the best view in the world on rare earth metals.
John Kaiser, Kaiser Research Online
- He says gold's price rise is sustainable. I disagree. Everything reverts to mean sooner or later. That mean for gold is in the low 600s.
- Gold miners' low share prices (relative to bullion) reflect anxiety that hyperinflation will make cash flows evaporate. Excellent. I would add that the majors have hedged their dollar exposure and will suffer less than juniors in such a scenario. Pay attention, investors.
- The US's sovereign debt load makes us strategically weak and out military spending is unsustainable. However, a US recession will hurt "parasite economies" like China due to their export-driven models. That means the US can expect a GDP lead over China that will last another 20-30 years. Hmm, that last bit is interesting, original thinking.
Michael Berry, Morning Notes
- Michael covered a lot of familiar ground on unpayable sovereign debt, China's malinvestment, the Fed's balance sheet, coming austerity in the developed world, and emerging markets' booming demand for commodities. I frequently read his free "Discovery Investing" commentaries. They are a good look into junior miners.
Frank Trotter, EverBank Direct
- EverBank believes the big economies drive the world economy, not emerging markets. He sounds like a contrarian at this conference given the many speakers who think the future lies with emerging economies.
- The euro gave peripheral countries a "free ride" so they could borrow at lower rates. Germany is not necessarily willing to take a big hit to GDP just to bail out the PIIGS.
- Positive drives of a currency's value include budget, debt, and trade numbers all in positive directions. Norway is #1 by this standard but Canada and Australia also look good. IMHO, these fundamentals are a more valuable set of metrics for currency investors than the "pips" traders watch.
John Nadler, (Kitco), "Silver's Cloudy Lining"
- The silver market is in surplus with record volume in 2010. Government silver stockpiles have declined for years.
- Average cash cost of production for the top 30 producers worldwide is now $5.20/oz. This is extremely important to note. Producers in the bottom quartile of production costs are more likely to add shareholder value. It pays to be a cheap operator.
- Investment demand has absorbed all surplus production; almost all of this demand came from silver ETFs.
The final event is always the Bulls and Bears keynote panel. Rick Rule, James Dines, Paul van Eeden, Ian McAvity, and Adrian Day held court. Rick moderated and kicked off by asking his panelists to nominate black swans that kept them worried. Count the swans: the end of our Bretton Woods system; a bank crisis that shocks China's growth and causes social unrest; resource scarcity; India awakening; Africa developing; overnight euro destruction.
The panelists anticipate the failure of the eurozone. These are very well-informed experts who have made a living for decades by being on the right side of the markets. I take their conclusions seriously. They were also very strongly supportive of gold's continued rise, except Paul, who thinks it will collapse to $850/oz. I can't call the end of gold's bull run. All I can say is that I'm not in love with any asset; my GDX holdings are just another asset class. I reduced my concentration in GDX as gold climbed.
Rick ended this year's confab by asking for things that could go right. Where are the white swans? The panelists responded: Congress could enact an austerity budget; technology innovation over decades could solve the growth crisis; the Fed could return to sound monetary policy (yeah right IMHO!); an outbreak of fiscal integrity in DC and justice in due course for the victims of the MF Global collapse. That last comment got a rousing response from the audience of hard -core hard assets investors who remained until the very end!
Thanks for another great year, Hard Assets Conference. I should also note that Jim Dines once again had an excellent booth staffed with attractive female models. That's one investment that never goes out of style.
Friday, December 09, 2011
Sunday, September 18, 2011
Day Of Rage Ignites In America
The Arab Spring's Day of Rage phenomenon has arrived in the United States. A few hundred professional activists and unemployed do-gooders tried to occupy Wall Street on a day when no one's in business. That shows how unserious they are at this stage. Future protests will be more aggressive as economic conditions worsen.
The ruling elite has begun to acknowledge that things are getting worse. NYC's Mayor Bloomberg warns that unemployed college graduates are a paycheck away from becoming anarchists. The country club set needs to get nervous after hearing this from one of their own. Youth unemployment, income stagnation, and lack of upward mobility were necessary conditions for the Arab Spring but were not sufficient conditions. The black swan of the Federal Reserve's dollar debasement drove investor capital into metals and commodity foodstuffs. That was sufficient to spark the kindling for revolution.
The Day of Rage phenomenon is a form of class warfare, pitting economically marginalized workers against members of favored sectors. Wall Street is the most visible target but it will not be the last. Union-controlled automakers backed by government favoritism hand out juicy bonuses while making uncompetitive products. GM was not alone in getting a deal from Uncle Sam. Solyndra's bankruptcy reveals that a politically-connected investor moved ahead of other creditors. The Administration's investments in favored renewable energy companies are looking more and more like slush fund payoffs for campaign donors. This kind of cronyism was the rallying cry of protesters in Tunisia, Egypt, and Bahrain.
If the protesters are true to their public statements against cronyism, they'd enlarge their target set to include companies backed by government favoritism. Omitting blue-collar beneficiaries would be an indicator that the protesters are instigated by the professional Left against the visible symbols of the American ruling elite.
It is interesting to note that the original "Days of Rage" were a Weatherman/SDS revolutionary action in 1960s America. I don't think it is a coincidence that Arab Spring insurgent leaders branded their uprisings with this moniker after American left-wing organizers visited MENA countries. Some memes retain their power to motivate action even after a generation. Activist presence in MENA and on Wall Street begs the question of ultimate funding and strategic direction. Ask yourself who would benefit most from the downfall of U.S.-friendly monarchies and the U.S. financial system. Then ask yourself why well-meaning American activists - and their ideological sympathizers in government who are unskilled at performing link analysis - allow themselves to be used in this manner.
The ruling elite has begun to acknowledge that things are getting worse. NYC's Mayor Bloomberg warns that unemployed college graduates are a paycheck away from becoming anarchists. The country club set needs to get nervous after hearing this from one of their own. Youth unemployment, income stagnation, and lack of upward mobility were necessary conditions for the Arab Spring but were not sufficient conditions. The black swan of the Federal Reserve's dollar debasement drove investor capital into metals and commodity foodstuffs. That was sufficient to spark the kindling for revolution.
The Day of Rage phenomenon is a form of class warfare, pitting economically marginalized workers against members of favored sectors. Wall Street is the most visible target but it will not be the last. Union-controlled automakers backed by government favoritism hand out juicy bonuses while making uncompetitive products. GM was not alone in getting a deal from Uncle Sam. Solyndra's bankruptcy reveals that a politically-connected investor moved ahead of other creditors. The Administration's investments in favored renewable energy companies are looking more and more like slush fund payoffs for campaign donors. This kind of cronyism was the rallying cry of protesters in Tunisia, Egypt, and Bahrain.
If the protesters are true to their public statements against cronyism, they'd enlarge their target set to include companies backed by government favoritism. Omitting blue-collar beneficiaries would be an indicator that the protesters are instigated by the professional Left against the visible symbols of the American ruling elite.
It is interesting to note that the original "Days of Rage" were a Weatherman/SDS revolutionary action in 1960s America. I don't think it is a coincidence that Arab Spring insurgent leaders branded their uprisings with this moniker after American left-wing organizers visited MENA countries. Some memes retain their power to motivate action even after a generation. Activist presence in MENA and on Wall Street begs the question of ultimate funding and strategic direction. Ask yourself who would benefit most from the downfall of U.S.-friendly monarchies and the U.S. financial system. Then ask yourself why well-meaning American activists - and their ideological sympathizers in government who are unskilled at performing link analysis - allow themselves to be used in this manner.
Wednesday, July 13, 2011
Critiquing Some "Sovereign Investing" Concepts
A fellow private investor asked me today for my assessment of the following portfolio ideas for a hyperinflating economy:
- Physical gold and silver
- Agricultural commodities
- Cash-rich large-cap stocks
Those ideas were mentioned in today's edition of "The Sovereign Investor" email from Eric Roseman. Here's my critique. Physical gold and silver don't come in small denominations. They will be quickly depleted in a barter economy. Try dividing a gold brick into spare change at the grocery store and you'll see what I mean. Gold and silver have to produce some kind of yield - like dividends from mining stocks - to be practically useful.
Foodstuffs make excellent stockpiles of hard assets for hard times. I have many shelves full of canned goods and will keep adding to my pile. I would have to take a serious look at agriculture-related stocks' fundamentals (five year ROE, etc.) to complete this part of the portfolio.
Cash-rich large cap stocks can be deceptive; it all depends on what the balance sheet is hiding. GE was cash-rich in 2008 but took TARP money to avoid a bailout. Investors would have to sift through a cash-rich company's financials to figure out just how quickly that cash would be depleted if hyperinflation pushed up raw material costs faster than the firm can raise prices.
It's not bad advice in general because it covers several asset classes that are mostly non-correlated. The key is to translate these things into forms that are fungible and allow investors to pay for their daily existence without depleting their portfolios. John T. Reed's book on hyperinflation is a much better guide to assembling a portfolio.
Full disclosure: Long GDX with covered calls.
- Physical gold and silver
- Agricultural commodities
- Cash-rich large-cap stocks
Those ideas were mentioned in today's edition of "The Sovereign Investor" email from Eric Roseman. Here's my critique. Physical gold and silver don't come in small denominations. They will be quickly depleted in a barter economy. Try dividing a gold brick into spare change at the grocery store and you'll see what I mean. Gold and silver have to produce some kind of yield - like dividends from mining stocks - to be practically useful.
Foodstuffs make excellent stockpiles of hard assets for hard times. I have many shelves full of canned goods and will keep adding to my pile. I would have to take a serious look at agriculture-related stocks' fundamentals (five year ROE, etc.) to complete this part of the portfolio.
Cash-rich large cap stocks can be deceptive; it all depends on what the balance sheet is hiding. GE was cash-rich in 2008 but took TARP money to avoid a bailout. Investors would have to sift through a cash-rich company's financials to figure out just how quickly that cash would be depleted if hyperinflation pushed up raw material costs faster than the firm can raise prices.
It's not bad advice in general because it covers several asset classes that are mostly non-correlated. The key is to translate these things into forms that are fungible and allow investors to pay for their daily existence without depleting their portfolios. John T. Reed's book on hyperinflation is a much better guide to assembling a portfolio.
Full disclosure: Long GDX with covered calls.
Wednesday, June 15, 2011
Oil Price Speculation Confirmed By Sleepy Regulators
Our Arab "friends" were on to something when they claimed hedge funds were making life difficult for them by gambling on oil prices. The CFTC confirms that the vast majority of investors in long futures contracts are not the end users of commodity products. Futures contracts are great for producers who want to hedge against price swings in the stuff they produce. Anyone else who wants in is playing games with things they don't understand.
Hedgies' attraction to commodity gambling is obvious. Greed for yield drives their pursuit of new asset classes to churn. One remaining question is whether or not the Fed's quantitative easing really is driving hedge funds to go long commodities, the results of which turn up in food price inflation around the world. We'd have to somehow link incentives for banks to keep their excess capital on deposit with the Fed to increased lending to hedgies. With those excess deposits unavailable for things like mortgage loans, are banks then forced to turn to their reliable money maker - margin to hedge funds?
This also begs a question of what regulators plan to do with their newfound knowledge of this high-stakes gambling. My bet is that they'll do nothing but talk. CFTC auditors all want to work on Wall Street too, just like their SEC cousins, so excessive zeal in cracking down on speculators won't help their careers. Nothing will change.
Hedgies' attraction to commodity gambling is obvious. Greed for yield drives their pursuit of new asset classes to churn. One remaining question is whether or not the Fed's quantitative easing really is driving hedge funds to go long commodities, the results of which turn up in food price inflation around the world. We'd have to somehow link incentives for banks to keep their excess capital on deposit with the Fed to increased lending to hedgies. With those excess deposits unavailable for things like mortgage loans, are banks then forced to turn to their reliable money maker - margin to hedge funds?
This also begs a question of what regulators plan to do with their newfound knowledge of this high-stakes gambling. My bet is that they'll do nothing but talk. CFTC auditors all want to work on Wall Street too, just like their SEC cousins, so excessive zeal in cracking down on speculators won't help their careers. Nothing will change.
Monday, April 18, 2011
Those Wild And Crazy Peak Oil Contingencies and Indicators
Spiking oil prices are a walk in the park compared to what America's Joe Six Packs will be smacked with if Peak Oil turns out to be real. Tune in here for a sneak preview.
Peak Oil may be hard to time precisely but its precursors are numerous. The Saudis say they're cutting back production due to oversupply. It's true that recent surges in the prices of energy and other commodities are primarily due to the Fed's quantitative easing, with all those excess trading dollars from money-center banks needing release somewhere. It still gives us a good image of what will happen when Saudi Arabia finally concedes that it can't increase production even if it wants to once its fields pass their peaks.
China's quest for the emerging world's resources has now prompted countermoves from Uncle Sam. The U.S. wants to subsidize the expansion of a Colombian oil refinery. There should have been a quid pro quo, like a requirement to sell the refinery's products to American distributors. So where's that deal? Did we not think this through? China's going to be the only player left standing if we don't step up our game.
Presidential wanna-be Donald Trump lets it be known that his ego is a suitable substitute for good judgment and international law. He wants to seize oilfields in Iraq and Libya. I hope he's the first one to volunteer for military service if he doesn't get elected. If he thinks it doesn't take hundreds of thousands of troops to guard Iraqi oil infrastructure then he's welcome to go and find out firsthand just what level of security that requires. That kind of ignorant, irresponsible, inflammatory rhetoric will become more common in America once our middle class realizes it has been permanently priced out of motoring at will. It will be an unfortunate day if such rhetoric is taken seriously enough to elect its sponsors.
Peak Oil may be hard to time precisely but its precursors are numerous. The Saudis say they're cutting back production due to oversupply. It's true that recent surges in the prices of energy and other commodities are primarily due to the Fed's quantitative easing, with all those excess trading dollars from money-center banks needing release somewhere. It still gives us a good image of what will happen when Saudi Arabia finally concedes that it can't increase production even if it wants to once its fields pass their peaks.
China's quest for the emerging world's resources has now prompted countermoves from Uncle Sam. The U.S. wants to subsidize the expansion of a Colombian oil refinery. There should have been a quid pro quo, like a requirement to sell the refinery's products to American distributors. So where's that deal? Did we not think this through? China's going to be the only player left standing if we don't step up our game.
Presidential wanna-be Donald Trump lets it be known that his ego is a suitable substitute for good judgment and international law. He wants to seize oilfields in Iraq and Libya. I hope he's the first one to volunteer for military service if he doesn't get elected. If he thinks it doesn't take hundreds of thousands of troops to guard Iraqi oil infrastructure then he's welcome to go and find out firsthand just what level of security that requires. That kind of ignorant, irresponsible, inflammatory rhetoric will become more common in America once our middle class realizes it has been permanently priced out of motoring at will. It will be an unfortunate day if such rhetoric is taken seriously enough to elect its sponsors.
Monday, February 28, 2011
Margin Compression Soon To Hit All Producers
Commodity price explosions aren't just igniting Middle Eastern protests against the rising cost of food staples. They're now impacting the margins of producers in the earliest links of the global supply chain. Witness the margin compression at PPG Industries over copper prices. Its market dominance in specialty coatings means it can afford to pass price increases to its customers. That's good for PPG's bottom line and bad for every single industrial user of its coatings.
Companies in competitive industries are in for a rough ride. The big U.S. automakers will face a very difficult climb back to health in the face of rising material costs. Indian car and bike makers are feeling the pinch from input prices. Companies at the very end of most value chains (that is, retailers and their servicers) will be in the worst possible position in 2011. Expect more stories of companies facing hard choices between raising prices for end customers or reporting lower earnings.
Companies in competitive industries are in for a rough ride. The big U.S. automakers will face a very difficult climb back to health in the face of rising material costs. Indian car and bike makers are feeling the pinch from input prices. Companies at the very end of most value chains (that is, retailers and their servicers) will be in the worst possible position in 2011. Expect more stories of companies facing hard choices between raising prices for end customers or reporting lower earnings.
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