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Saturday, July 25, 2009

Views of a Contrary Investor

I see discussions of short term percentage gain or loss in investing all the time. I rarely see similar long term discussions. Important? Maybe not. But is the fact that there is simple asymmetry between percentage gains and losses actually considered? If it really was, I think a fair number of investors would change their thinking, at least a bit.

If you invest for two years, one up 10% and one down 10% (either order) you end up losing 1%. If you had twice the variability (up 20%, down 20%), you end up losing 4%. If you have a real rollercoaster ride like we’ve had recently and have a +40% and -40% year, you end up losing 16%. And that’s just in a two year time frame. Over a couple decades or so, this is no small matter.

Here’s a different example. Suppose you had five and a half years in which you had an annual return of +24%. But you also had 4 years of -30% performance. 5.5 years compared to 4 years is a bigger ratio than 30% to 24%, so it could look close to a wash on first blush. Actually you’d end up with a loss of 36%. I didn’t pick these numbers randomly. They’re the combined rates of return for the two cyclical bull and two cyclical bear cycles for the S&P 500 in the current secular bear market (counting the last 4+ months as the second bull cycle) since March 2000. For retirees the loss is even worse because nearly a decade has been lost too, and there’s much less time to make it up.

It’s been noted that there’s a fine line between investing and gambling. It’s also been noted that gamblers as a whole notoriously inaccurately report their betting results. This is true even though they know the games are all rigged and casinos very consistently report gaming profits. I’m only suggesting that there’s a psychological driver that can keep us from being objective when it comes to some numbers.

Focus on the short term is the name of the game for TA. It can work well, until it doesn’t. The trends and indicators traders use can be useful for the well informed, and there are people making a lot of money using it. But it’s a combination of skill and getting more right calls than wrong ones, because technicals simply change at some point and go in another direction. They always do that at some point whenever they have been going in a direction for some time that the fundamentals aren’t going in. Ironically, the longer term you use in TA the better the predictive power. I recall seeing a discipline using the 20 and 50 week moving avg. which would only involve trading every few years. It actually resulted in very few bad signals.

But if you go out to the very long term, you can find very durable trends that you can use to guide you. The problem of course is that all of this takes a lot of patience. I suspect, more than anything else, the gambling/investing crossover has some merit here. Gambling is done to make money quickly or at least to have fun. The most successful long term investors tell us success comes with patience and discipline. Now there’s a conflict.

The most useful long term trend I know about is the two century pattern of secular market oscillation. The characteristics of the trend are that the length is fairly uniform, and the investment results over for the opposing cycles are hugely different. In other words you could reliably make money for years during one phase of the cycle and avoid most of the loss in the other phase of the cycle. But very few people have any interest in this phenomenon and it basically gets ignored.

The other very useful long term trend I know of is the fact that the variance in performance of a given security is due much more to the variance of its asset class than its individual characteristics. And the variance in performance of a given asset class is much more due to the variance in the economic fundaments than characteristic differences from other classes. So the greatest bang for the DD buck in the long run is to learn about the big things. This too is pretty unappealing. None of this is any fun. And it takes too long to get any results.

A knowledge of secular market history and characteristics would put a lot of beliefs and myths into a better perspective IMO. We live and work in a shorter time frame, and get our expectations conditioned accordingly. In the last secular bull market (1982-2000), the only cyclical bear market was the very brief one because of the 1987 crash. 17 plus years of bull market and a few months of bear market. Everybody was making money, especially the risk takers. But to a lesser extent, the same thing was true of the prior secular bull market (1949 – 1966) – 15 years of bull market and only 2 yrs. of bear market.

But the secular bear markets are a long tough grind, which have the added characteristic of being cruel because there is actually more bull market time in them than bear market time. In the intervening secular bear market (1966 – 1982), there was 6.7 yrs. of cyclical bear market but 9.7 years of cyclical bull market.

Maybe surprisingly, the compound annual growth rate for the bear years was almost the mirror image of the bull years (-21% vs. +20%). But as you might guess the result wasn’t a real gain because of how percentages work against you. Actually the overall CAGR was about +0.6%. But there’s nothing positive about 17 years of almost no nominal gain in the face of rapidly rising inflation. Real gain was distinctly negative.

Even in the current secular bear market (2000- present), there has been the 5.5 years I mentioned of cyclical bull market and “only” a bit under 4 years of cyclical bear market. Small consolation, and again cruel, as cyclical thinking still has investors with a shorter term outlook anticipating a fairly timely recovery of the lost ground.

A few years ago I posted in other places a number of times about my deep concern with the long term investing environment we were in. I took some real criticism for being so conservative and being satisfied with trying to earn no more than an 8% return while the domestic equity market was turning out a 14% gain.

I have nothing that isn’t obvious to suggest as a way to achieve good long term results.. But here goes. It really does take more to make up a loss than it took to make it the first time, so don’t lose it. The best investment advisors are the ones with the longest experience. Pay attention to the big picture, even study it. Of course the real world consists of an overwhelming number of market participants with a short term outlook, people trying to make money quickly, and most of the attention focused on bottom up thinking. This is after all a post from a contrarian investor.


Tuesday, July 21, 2009

Low Price for Natural Gas May be Just What is Needed

The low price for natural gas may be just what is needed to expand markets in the transportation and electric generation sector.

Instead of pouring printed money into uneconomic alternative energy, American political leaders could have Government Motors apply its efforts to building vehicles to run on the proven technology of clean natural gas. Utility executives can make the easy choice of simply running natural gas through generating capacity already in place rather than agonizing over the expense and political uncertainty of new coal and nuclear capacity.

While natural gas cannot meet all the transportation and electric generation needs entirely at once, there appears to be the capacity to supply all of the expected growth and more. Considering that $3 a gallon gasoline is equivalent to $24 a million btu natural gas there is ample room for the price of natural gas to rise and still be a bargain for consumers.

Sunday, July 19, 2009

Gartman calls the end of the recession "official"


Firstly, let us turn our attention to the chart at the
bottom left this page of weekly jobless claims. Clearly
now they have “spiked” lower. We were willing to
“give” the weakness in claims last week some room for
seasonal problems attendant to the closing of various
auto plants around the country and to the July 4th
holiday itself.

Obviously now, after another week
has passed and the weakness of the previous
week was followed hard upon by even greater
weakness… even greater “spikiness,” we’ve
concluded that this is indeed the sign we’ve
needed to officially call for the end of the current
recession… and so we are making that call.

The recession has ended. In light of the spike in
jobless claims AND in light of the recent upward
turn in the Ratio of the Coincident to Lagging
Indicators, we are making this statement as
clearly and as unequivocally as we are able to
make one. The recession is over. The worst of the
economic news shall all soon be behind us.

Make no mistake about this, however, it will be
months… even perhaps a year or more… before the
NBER meets and officially decides that the recession
has ended. Our long standing clients will recall that in
late ’04 when the Ratio turned down we said that
history mandated that we call for a recession sometime
in ’07 and we stood by that statement time and time
and time again, even to the point of being laughed at.

When jobless claims began to rise in mid-’07, we went
on record stating that the recession was only months
away… again to laughter. Finally, when Chinese
stocks first broke from their highs and when the US
stock market began to show clear signs of weakening
in late ’07, we said that the recession had begun…
always to derision by others.

Eventually, however, the NBER said that our views were the proper views and
that the US economy had indeed entered recession in
late ’07. They did not make that statement officially,
however, until only quite recently, more than a year
after the recession really had begun.

The recession is now over. But do not expect the
economic data to reflect that fact for many, many
months into the future. Unemployment is still going to
rise and rise dramatically. Indeed, we’ve every belief
that unemployment will not top out until it has touched at least
10% and we’ll not be surprised to see it “trade” to 11% or even
12% before its bull run is finished.

Too, we can expect retail sales to be very hard to
forecast for the next several months, for the consumer
remains distraught and concerned about his/her future.
In that environment, any propensity to ramp up spending
will swiftly meet head-on with continued rising propensities to save. Until the employment “stats” turn for the better, consumer spending stats will follow to
the downside. Such is the historic nature of things
economic, and despite the SEC’s, the NFA’s, the
NASD’s and FINRA’s admonitions that past performance is not indicative of future performance, in the economy the past is indeed prologue to the future.
In the future, given that it was housing and autos that
took us into recession, we’ll be brave and say that it
shall be housing and autos that take us out.

So long as the population here in the US continues to grow… and
it will unless Americans have chosen to give up sex,
which we doubt; and unless the Congress moves to
enact legislation that will clamp down upon
immigration, which it may do but which we fervently
hope it will not do; so go sit down and be quiet, Mr.
Buchanan and Mr. Dobbs! Please!!... we cannot live for
long with housing starts reported each month to be at
annualised rates of less than 0.7 million units. Too, the
average automobile in the US is growing very old and
the entire fleet is going to need replacement sooner
rather than later.

We have said before and we shall say
again that we’ll l soon have shortages of housing and
perhaps even shortages of autos. Again, that’s the
nature of things as the empiricist economists project
recent trends years into the future and forecast no
demand, while we know that all things economic ebb
and flow, moving from shortage to over-production and
to shortage again.

In this light we note that housing starts for June will be
reported this morning and they will be down, despite
our “call” above for the end of the recession. As our
clients will remember, starts rose smartly in May, but
we must see the May increase in its proper light: in
historical terms this supposedly 17% increase
from the April lows was a mere mote in the eye o
the downward trend in place since mid’06 when
starts topped-out just above 2.0 million
annualised units. 2.0 million annualised starts
for any protracted period of time is unsustainable.

That has been proven time and time and time again
over the past fifty years, and starts of less than 0.5
million are also unsustainable. We are there now.
Starts will turn for the better sooner rather than later.
The lows very probably were made in April, but the
new uptrend in starts will not be evident until such time
as we see something above 0.7 million annualised
units and the monthly data rushes upward through the
6 month moving average noted in the chart this page.

The consensus is looking for today’s starts figure to be
somewhere near .53 million annualised starts and we’ll
not argue with that “guess-timate” too loudly. We’d like
to see something above 0.6 million, but we won’t… not
until next month perhaps.

To this end, we’ll keep a much close watch in the
coming months on the building permits figures, for
permits always lead actual starts. Permits, however,
are horribly erratic because just because a permit is
issued does not mean that a “start” must start. The
consensus is looking for permits to be up a bit from the
May figure, calling for something close to 0.55 million
units. We’ve no reason to argue; we’ll await the actual
number however… it might be interesting.

Finally, regarding housing, the supply of new homes
for sale was recently reported at 10.2 months, down
from the record high of 12.4 months January, but far,
far above the 4 or 5 month supply that was the norm
back in the earlier part of this decade. This onerous
supply of new homes will be worked off before builders
shall have the confidence to begin building again…
and long before the nation’s banks will even consider
lending on building again!

This latter concern is probably the most important concern, for without
lending the entire industry is tainted. Banks will lend
when banks lend; it is that simple. Bankers will wait
until the other banker down the street has chosen to
act, and once the new process of lending to real estate
turns it will turn swiftly. It will be as if the present
problems were wholly forgotten, despite the promises
otherwise. Banking has always been thus; it shall
always be thus. Anyone want to bet otherwise?... We
thought not:

To make our final point, the NAHB homebuilder index
was reported out on Wednesday, rising 2 points to 17.
This index is like that of the ISM: it ranges between 0-
100, with 50 as the growth/no growth point. A figure
above 50 means the industry is strengthening; a
number below 50 means it is shrinking.

At 17 the industry is clearly still shrinking but up from 15 it means
that the shrinking is proceeding at lesser pace. This is
not then a “green shoot.” It is rather than the old shoots
are withering less quickly. “Green-ness” lies some way
into the future, but it will come. For the building
industry, at the moment, the line from “A Field of
Dreams” is turned around. Rather than “If you build it
[they] will come,” it is instead “If they come, it will be

Friday, July 17, 2009

Producing Fuel from Algae

Last year I wrote that I felt Oil from Algae was the technology to watch.

Well Exxon is now investing $300 Million into research (Via SGI) in this technology. I consider Exxon to be "smart money".

SGI is harnessing photosynthetic microbes (i.e., algae) to produce a range of liquid fuels and chemicals directly from sunlight and carbon dioxide. Algae produce significantly higher amounts of biomass and oil as compared to terrestrial crops, can be grown on land that is not suitable for agriculture, can thrive in sewage or other types of waste water, and are efficient at capturing and recycling carbon dioxide, a major greenhouse gas.

Current methods to produce fuel from algae include processes that resemble farming. Algal cells are grown, harvested, and then bioprocessed to recover the lipids from within the cells. In contrast, in one of our solutions, SGI has engineered algal cells to secrete oil in a continuous manner through their cell walls, thus facilitating the production of algal fuels and chemicals in large-scale industrial operations. Our first product in this area is a biocrude to be used as a feedstock in refineries