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 $24 a million btu natural gas there is ample room for the price of natural gas to rise and still be a bargain for consumers.
Tuesday, July 21, 2009
Sunday, July 19, 2009
Gartman calls the end of the recession "official"
THE DOLDRUMS HAVE STRUCK BUT THE
YEN AND THE US$ CONTINUE GENERALLY
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
built.”
YEN AND THE US$ CONTINUE GENERALLY
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
built.”
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
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
Sunday, May 10, 2009
Equality of Outcome vs Equality of Opportunity
May 6, 2009
Nothing New Under the Sun
by Victor Davis Hanson
Pajamas Media
The Same Old Equality of Result
Rather than nitpick about Obama’s envisioned brave new world, I think it wiser to see it in the larger context of age-old divides over the nature of Western democratic and liberal society. Nothing that we have seen proposed since January 20 is novel; everything is merely the promise of the past outfitted with a new snazzier veneer of hope and change.
Take his domestic policies. What overarching philosophy seems reflected in raising taxes, borrowing trillions to spend trillions more on new entitlements, creating a new health care bureaucracy, cap-and-trade, allotting trillions more for education, and the expectation of the appointment of more liberal judges?
It’s old…
In a word, it is adherence to the idea of equality of result rather than an equality of opportunity, the age-old debate that goes back to the Greeks. From Aristotle’s Politics and Plato Laws, we learn of the original dilemma: a stable city-state of roughly similar property owners, who vote as equals, and fight as comrades in the phalanx, tragically, but inevitably, soon becomes tragically unequal.
Divide the land up equally to found the polis; give everyone an similarly-size plot (klêros); and then health, luck, brains, accident, strength, ambition, character, and a myriad of other factors, some understandable, some capricious, conspire to create inequality. I agree with Aristotle; I have seen it with families and communities in which equal inheritances soon led to radically different outcomes, as one sibling on rocky ground thrives, while another in deep loam starves; one town with abundant resources goes broke, while another without natural advantages thrives.
As Aristotle saw, some lose, some expand their original homesteads, and suddenly we have Hoi beltistoi and Hoi polloi — and the rallying cry that someone’s liberty to do as he pleases means that egalitarianism of the lowest common denominator becomes impossible.
American vs. French
The notion of freedom then butts up against equality, as if they are as often antithetical as symbiotic. (N.B.: note the French Revolutionary sloganeering of “fraternity” and “egalitarianism” versus the American Revolutionary emphasis on “Give me liberty, or give me death”, “Don’t Tread on Me!”, “All men are created equal” [by opportunity rather than by result]. And note Obama’s references to the French ideal.)
In response, the state has two choices to preserve its original ideal of equality (and we see elements of this further debate voiced in the Old Oligarch, Aristotle, Plato, Hobbes, Hume, etc, as well as in histories of the middle and late Roman Republic).
The Therapeutic
1. The state and culture at large can be coercive to ensure an equality of result — in the modern liberal world by high redistributive taxes, generous means-tested entitlements, inflationary monetary policies to diminish the power of capital (in the ancient world by forbidding the alienability of land, mandating the maximum size of estates, coining cheap bronze/silver coated money in vast amounts, redistribution of property, cancellation of debt, etc.).
Such efforts at commonality are what we are now witnessing with income tax hikes, $1.7 trillion dollar deficits, inflationary federal spending and borrowing, along with huge new entitlements. Its extreme form is the European Union, its extreme, extreme manifestations are the failed -isms and -ologies of the bloody 20th century where authoritarian elites broke the requisite eggs for the omelet of “for the people” and in service to “equality.”
The Tragic
2. Or instead of the therapeutic mode, we get the tragic acceptance of innate inequality combined with the notion of personal responsibility to care for one’s fellow citizen.
That is, in the American version of equality of opportunity, we accept some will always end up poor, some rich, some in-between due to factors both in, and beyond, our control. But rather than sacrifice liberty to use the coercive powers of the state to enforce equality, we set a foundation at the bottom, a safety net to ensure a minimum level of support for the poor, and laws at the top to prevent buccaneering and piratical behavior — in theory.
Then the tragic view accepts that some will be very wealthy, but assumes that the race for individual riches will, first, create greater prosperity for society at large (the much caricatured “trickle down”). And, two, a host of private mechanisms exists to channel individual bounty back for the general welfare: the status; and/or sense of right of giving to non-profits, charities, etc; the shame of living it up to an excessive degree; the patriotic call upon one to invest their riches in the public good; the informal practice of lending and giving to family and friends, etc. In other words, millions risk dying to leave temperate, naturally rich equality of result Mexico to enter the once equality of opportunity United States.
Been There, Done That
It seems to me that on three occasions during the last seventy-five years we have someone who really did believe in the therapeutic, equality of result — FDR, LBJ, and Jimmy Carter (Truman, JFK and Clinton proved to be centrists in comparison).
FDR had the rhetorical gifts and personal genius to implement such an agenda; LBJ and Carter tried, but were inept and poor messengers. And now we have a fourth avatar, who, given the current alignment of the planets, has a real chance to complete the FDR mandate — not in the dark days of the Great Depression replete with real want and starvation, but in a recession during the greatest age of affluence in the history of civilization — making both success and failure obsolete, and turning us into a sort of egalitarian polis much like Sweden or France.
I Don’t Owe You Any More
Turn on the radio: ads blare out how to renounce mortgage debt; get out of maxed out credit-cards; short the IRS; be eligible for a subsidized government loan, or new entitlement. Other ‘buy gold’ ads warn: plenty of danger, but no money in passbook accounts, stocks, real estate, as the debtor gains on the creditor, and capital earns little in comparison to protected salaries. To match a $100,000 government salary (as an upper-level bureaucrat), the despised capitalist, at a 2% interest payout on his stash, would need $5 million in accumulated cash: advantage bureaucrat.
Ironies Galore
Obama rather brilliantly counts on two great constituencies (other than the professional Ivy League technocracy whose responsibility is to figure out how to borrow and tax the money, lavish it on constituencies, and do rather well themselves as government overseers). One is the hyper-rich, the Kerrys, the Soroses, the Gateses, and their appendages in universities, government, foundations, and the media. These power players either make enough to be unconcerned with high taxation, or are so well connected politically (cf. the machinations of a Daschle, Dodd, Geithner, Rangel) that the coercive state rules simply do not apply.
Instead the hyper-wealthy receive a sort of psychic gratification in helping the ‘poor’, and romanticizing the underprivileged, thereby alleviating the guilt of being blessed, and at relatively small cost — and so they quite enthusiastically support the equality of result state.
Again, the poor present no challenge, offer no threat to the hyper — wealthy, but are thankful client recipients of ensured government largess. In contrast, the fellow elites have the necessary taste and education to satisfy the demands of aristocratic society.
And The Upper Middle Class?
But those in between, and especially those of the upper-middle class — the hardware store owner, the dentist, the paving contractor, the successful restaurateur, the real estate agent? These grasping who wish and aspire and may reach a mythical $250,000 salary some day (again, the threshold where one becomes the hated “they”), well now, they are not poor, need no government or private help, and offer no psychological alleviation of guilt to the elite. Romanticize a gardener or farm worker, or even clerk or teacher, but how does one mythologize a successful optometrist or insurance agent?
And yet they are not usually sophisticated in the snobbish sense, not opera-goers, not familiar with museums, not symphony buffs. Their children don’t necessarily attend Stanford or Harvard. In other words, they are near-to-wells, wannabes, without requisite culture, deserving of neither cultural awe and acceptance nor noblesse oblige.
A leftist elitist would always prefer the dubious (and now upscale, tax avoiding) huckster Al Sharpton, Tawana Brawley and all, to Sarah Palin, former mayor of Wasilla and Idaho University graduate. Joe the Plumber, the Cuban upper-middle class of Miami, the local talk show host, anyone who wants to get ahead, but shows so visibly the scars of the struggle to do so, lacks the refinement and taste of the more affluent, yet is in the crosshairs of the Obama revolution.
The only impediment to our new polis? There are not simply enough of these entrepreneurial dinosaurs to pay the taxes to feed the new $3.6 trillion annual beast. One can take all the income of the $250,000 “them”, and there won’t be enough to pay down the $9 trillion in new debt.
In short, Bush = lower taxes, more spending, and more debt; Clinton = higher taxes, more spending, and less debt; Obama = more taxes, more spending, and a lot more debt — and the same old dream that we can make everyone equal in the end — or else!
©2009 Victor Davis Hanson
Nothing New Under the Sun
by Victor Davis Hanson
Pajamas Media
The Same Old Equality of Result
Rather than nitpick about Obama’s envisioned brave new world, I think it wiser to see it in the larger context of age-old divides over the nature of Western democratic and liberal society. Nothing that we have seen proposed since January 20 is novel; everything is merely the promise of the past outfitted with a new snazzier veneer of hope and change.
Take his domestic policies. What overarching philosophy seems reflected in raising taxes, borrowing trillions to spend trillions more on new entitlements, creating a new health care bureaucracy, cap-and-trade, allotting trillions more for education, and the expectation of the appointment of more liberal judges?
It’s old…
In a word, it is adherence to the idea of equality of result rather than an equality of opportunity, the age-old debate that goes back to the Greeks. From Aristotle’s Politics and Plato Laws, we learn of the original dilemma: a stable city-state of roughly similar property owners, who vote as equals, and fight as comrades in the phalanx, tragically, but inevitably, soon becomes tragically unequal.
Divide the land up equally to found the polis; give everyone an similarly-size plot (klêros); and then health, luck, brains, accident, strength, ambition, character, and a myriad of other factors, some understandable, some capricious, conspire to create inequality. I agree with Aristotle; I have seen it with families and communities in which equal inheritances soon led to radically different outcomes, as one sibling on rocky ground thrives, while another in deep loam starves; one town with abundant resources goes broke, while another without natural advantages thrives.
As Aristotle saw, some lose, some expand their original homesteads, and suddenly we have Hoi beltistoi and Hoi polloi — and the rallying cry that someone’s liberty to do as he pleases means that egalitarianism of the lowest common denominator becomes impossible.
American vs. French
The notion of freedom then butts up against equality, as if they are as often antithetical as symbiotic. (N.B.: note the French Revolutionary sloganeering of “fraternity” and “egalitarianism” versus the American Revolutionary emphasis on “Give me liberty, or give me death”, “Don’t Tread on Me!”, “All men are created equal” [by opportunity rather than by result]. And note Obama’s references to the French ideal.)
In response, the state has two choices to preserve its original ideal of equality (and we see elements of this further debate voiced in the Old Oligarch, Aristotle, Plato, Hobbes, Hume, etc, as well as in histories of the middle and late Roman Republic).
The Therapeutic
1. The state and culture at large can be coercive to ensure an equality of result — in the modern liberal world by high redistributive taxes, generous means-tested entitlements, inflationary monetary policies to diminish the power of capital (in the ancient world by forbidding the alienability of land, mandating the maximum size of estates, coining cheap bronze/silver coated money in vast amounts, redistribution of property, cancellation of debt, etc.).
Such efforts at commonality are what we are now witnessing with income tax hikes, $1.7 trillion dollar deficits, inflationary federal spending and borrowing, along with huge new entitlements. Its extreme form is the European Union, its extreme, extreme manifestations are the failed -isms and -ologies of the bloody 20th century where authoritarian elites broke the requisite eggs for the omelet of “for the people” and in service to “equality.”
The Tragic
2. Or instead of the therapeutic mode, we get the tragic acceptance of innate inequality combined with the notion of personal responsibility to care for one’s fellow citizen.
That is, in the American version of equality of opportunity, we accept some will always end up poor, some rich, some in-between due to factors both in, and beyond, our control. But rather than sacrifice liberty to use the coercive powers of the state to enforce equality, we set a foundation at the bottom, a safety net to ensure a minimum level of support for the poor, and laws at the top to prevent buccaneering and piratical behavior — in theory.
Then the tragic view accepts that some will be very wealthy, but assumes that the race for individual riches will, first, create greater prosperity for society at large (the much caricatured “trickle down”). And, two, a host of private mechanisms exists to channel individual bounty back for the general welfare: the status; and/or sense of right of giving to non-profits, charities, etc; the shame of living it up to an excessive degree; the patriotic call upon one to invest their riches in the public good; the informal practice of lending and giving to family and friends, etc. In other words, millions risk dying to leave temperate, naturally rich equality of result Mexico to enter the once equality of opportunity United States.
Been There, Done That
It seems to me that on three occasions during the last seventy-five years we have someone who really did believe in the therapeutic, equality of result — FDR, LBJ, and Jimmy Carter (Truman, JFK and Clinton proved to be centrists in comparison).
FDR had the rhetorical gifts and personal genius to implement such an agenda; LBJ and Carter tried, but were inept and poor messengers. And now we have a fourth avatar, who, given the current alignment of the planets, has a real chance to complete the FDR mandate — not in the dark days of the Great Depression replete with real want and starvation, but in a recession during the greatest age of affluence in the history of civilization — making both success and failure obsolete, and turning us into a sort of egalitarian polis much like Sweden or France.
I Don’t Owe You Any More
Turn on the radio: ads blare out how to renounce mortgage debt; get out of maxed out credit-cards; short the IRS; be eligible for a subsidized government loan, or new entitlement. Other ‘buy gold’ ads warn: plenty of danger, but no money in passbook accounts, stocks, real estate, as the debtor gains on the creditor, and capital earns little in comparison to protected salaries. To match a $100,000 government salary (as an upper-level bureaucrat), the despised capitalist, at a 2% interest payout on his stash, would need $5 million in accumulated cash: advantage bureaucrat.
Ironies Galore
Obama rather brilliantly counts on two great constituencies (other than the professional Ivy League technocracy whose responsibility is to figure out how to borrow and tax the money, lavish it on constituencies, and do rather well themselves as government overseers). One is the hyper-rich, the Kerrys, the Soroses, the Gateses, and their appendages in universities, government, foundations, and the media. These power players either make enough to be unconcerned with high taxation, or are so well connected politically (cf. the machinations of a Daschle, Dodd, Geithner, Rangel) that the coercive state rules simply do not apply.
Instead the hyper-wealthy receive a sort of psychic gratification in helping the ‘poor’, and romanticizing the underprivileged, thereby alleviating the guilt of being blessed, and at relatively small cost — and so they quite enthusiastically support the equality of result state.
Again, the poor present no challenge, offer no threat to the hyper — wealthy, but are thankful client recipients of ensured government largess. In contrast, the fellow elites have the necessary taste and education to satisfy the demands of aristocratic society.
And The Upper Middle Class?
But those in between, and especially those of the upper-middle class — the hardware store owner, the dentist, the paving contractor, the successful restaurateur, the real estate agent? These grasping who wish and aspire and may reach a mythical $250,000 salary some day (again, the threshold where one becomes the hated “they”), well now, they are not poor, need no government or private help, and offer no psychological alleviation of guilt to the elite. Romanticize a gardener or farm worker, or even clerk or teacher, but how does one mythologize a successful optometrist or insurance agent?
And yet they are not usually sophisticated in the snobbish sense, not opera-goers, not familiar with museums, not symphony buffs. Their children don’t necessarily attend Stanford or Harvard. In other words, they are near-to-wells, wannabes, without requisite culture, deserving of neither cultural awe and acceptance nor noblesse oblige.
A leftist elitist would always prefer the dubious (and now upscale, tax avoiding) huckster Al Sharpton, Tawana Brawley and all, to Sarah Palin, former mayor of Wasilla and Idaho University graduate. Joe the Plumber, the Cuban upper-middle class of Miami, the local talk show host, anyone who wants to get ahead, but shows so visibly the scars of the struggle to do so, lacks the refinement and taste of the more affluent, yet is in the crosshairs of the Obama revolution.
The only impediment to our new polis? There are not simply enough of these entrepreneurial dinosaurs to pay the taxes to feed the new $3.6 trillion annual beast. One can take all the income of the $250,000 “them”, and there won’t be enough to pay down the $9 trillion in new debt.
In short, Bush = lower taxes, more spending, and more debt; Clinton = higher taxes, more spending, and less debt; Obama = more taxes, more spending, and a lot more debt — and the same old dream that we can make everyone equal in the end — or else!
©2009 Victor Davis Hanson
Friday, April 10, 2009
The Key to Personal Freedom
Due to rising unemployment and the sharp contraction in the economy, personal bankruptcies are hitting record levels, up more than 50% from a year ago.
There is another factor here too, of course. Millions overreached.
In some ways, this is understandable. It's natural to want to improve our circumstances, enjoy the best life has to offer and "go for the gusto."
Without moderation, however, our wants have no natural limits.
True, some of us have fewer desires than others. Yet conservative spenders don't necessarily lack ambition, imagination or even money. More often than not, they have spent years cultivating an attitude of restraint.
Freedom, after all, is not the absence of responsibility. It is the absence of restraints imposed by others. To be truly free, however, we must generally impose severe restraints on ourselves.
That often means delayed gratification... or settling for less... or simply doing without.
This is bitter medicine to the thousands of consumers who hang on to their material desires like caterpillars to a cabbage leaf. Especially when the media glamorizes the materialistic lifestyle, their neighbors - who may be two payments from the edge - are living high, and advertisers bombard them daily with subtle - and not-so-subtle - messages meant to stir their cravings.
There is a reliable defense, however. And it begins with your frame of mind.
If you or someone in your family suffers from the "urge to splurge," here are four steps to help reclaim your personal freedom - and, perhaps, your credit rating:
1. Recognize that we are wired to feel dissatisfied with our circumstances. It's in our genes. An early human who was content with what he had - who spent his days lazing on the African savannah admiring the clouds and thinking "ahh, life is good" - was far less likely to survive and reproduce than his neighbor who spent every waking moment trying to gain some advantage.
2. Understand the psychology of desire. We all tend to "miswant" - to want things we don't really need and won't appreciate once we acquire them. Remember how your last major purchase failed to "do it for you" and you're less likely to believe that this time will be any different.
3. Stop regarding life as an ongoing competition for social status. Opt out of the game - even if everyone else seems to be playing it - and you can't be controlled or disappointed by the opinions of others. Do work you enjoy, even if it's lower paying. Spend your time and money collecting great memories rather than more stuff.
4. Instead of focusing on what you want, try appreciating what you already have. Nothing cures your craving for the next bauble like the thought of losing your partner, your children, your health, or the things you already own.
In "On Desire: Why We Want What We Want," William B. Irvine argues that many of us lack "a sense that we are lucky to be living whatever life we happen to be living - that despite our circumstances, no key ingredient of happiness is missing. With this sense comes a diminished level of anxiety; we no longer need to obsess over the things - a new car, a bigger house, a firmer abdomen - that we mistakenly believe will bring lasting happiness if only we can obtain them. Most importantly, if we master desire, to the extent possible to do so, we will no longer daydream about living the life someone else is living; instead, we will embrace our own life and live it to the fullest."
Sounds simple enough. Yet we face a powerful headwind.
Modern culture and our own heritage have programmed us to want ceaselessly, spend liberally and compete for resources in order to keep up with the Joneses. Millions today suffer from so-called "status anxiety."
Their prison, however, is entirely self-imposed. Unbeknownst to most of them, the key is right between their ears.
Any of us can make the conscious choice to turn our backs on the consumptive lifestyle and live simply, happily and with dignity.
Idealistic? Perhaps. But then freedom often is.
There is another factor here too, of course. Millions overreached.
In some ways, this is understandable. It's natural to want to improve our circumstances, enjoy the best life has to offer and "go for the gusto."
Without moderation, however, our wants have no natural limits.
True, some of us have fewer desires than others. Yet conservative spenders don't necessarily lack ambition, imagination or even money. More often than not, they have spent years cultivating an attitude of restraint.
Freedom, after all, is not the absence of responsibility. It is the absence of restraints imposed by others. To be truly free, however, we must generally impose severe restraints on ourselves.
That often means delayed gratification... or settling for less... or simply doing without.
This is bitter medicine to the thousands of consumers who hang on to their material desires like caterpillars to a cabbage leaf. Especially when the media glamorizes the materialistic lifestyle, their neighbors - who may be two payments from the edge - are living high, and advertisers bombard them daily with subtle - and not-so-subtle - messages meant to stir their cravings.
There is a reliable defense, however. And it begins with your frame of mind.
If you or someone in your family suffers from the "urge to splurge," here are four steps to help reclaim your personal freedom - and, perhaps, your credit rating:
1. Recognize that we are wired to feel dissatisfied with our circumstances. It's in our genes. An early human who was content with what he had - who spent his days lazing on the African savannah admiring the clouds and thinking "ahh, life is good" - was far less likely to survive and reproduce than his neighbor who spent every waking moment trying to gain some advantage.
2. Understand the psychology of desire. We all tend to "miswant" - to want things we don't really need and won't appreciate once we acquire them. Remember how your last major purchase failed to "do it for you" and you're less likely to believe that this time will be any different.
3. Stop regarding life as an ongoing competition for social status. Opt out of the game - even if everyone else seems to be playing it - and you can't be controlled or disappointed by the opinions of others. Do work you enjoy, even if it's lower paying. Spend your time and money collecting great memories rather than more stuff.
4. Instead of focusing on what you want, try appreciating what you already have. Nothing cures your craving for the next bauble like the thought of losing your partner, your children, your health, or the things you already own.
In "On Desire: Why We Want What We Want," William B. Irvine argues that many of us lack "a sense that we are lucky to be living whatever life we happen to be living - that despite our circumstances, no key ingredient of happiness is missing. With this sense comes a diminished level of anxiety; we no longer need to obsess over the things - a new car, a bigger house, a firmer abdomen - that we mistakenly believe will bring lasting happiness if only we can obtain them. Most importantly, if we master desire, to the extent possible to do so, we will no longer daydream about living the life someone else is living; instead, we will embrace our own life and live it to the fullest."
Sounds simple enough. Yet we face a powerful headwind.
Modern culture and our own heritage have programmed us to want ceaselessly, spend liberally and compete for resources in order to keep up with the Joneses. Millions today suffer from so-called "status anxiety."
Their prison, however, is entirely self-imposed. Unbeknownst to most of them, the key is right between their ears.
Any of us can make the conscious choice to turn our backs on the consumptive lifestyle and live simply, happily and with dignity.
Idealistic? Perhaps. But then freedom often is.
Monday, February 16, 2009
Investing and the Use of Leverage
Investing and the Use of Leverage
Many investors see the current bear market and economic slowdown as a reason to sell stocks. We believe the opposite action should be taken and that investors may think about using leverage to increase their potential net worth. Here’s why:
The current situation for real estate, bonds and equities
In Canada, the real estate market has been buoyant these past several years and has begun to slow as prices have levelled off. People who wanted to purchase a home have done so and they are probably content to stay in that residence for the next 10-15 years. Therefore, the real estate market is not as appealing an investment as it once was. We think that future returns should continue to be decent but are unlikely to mirror those of the past decade.
We believe that the bond market, perceived to be a safe haven from a collapsing U.S. economy, is now overbought. That’s because real returns (after tax and inflation) are now negative.
Currently, the 10-year Government of Canada bond yield is 3.4%. After 50% tax (interest income) and inflation (2.25%), the real return is –0.55%. This means that investor spending power against tax and inflation is falling, not growing.
As a result, we believe there’s more risk inherent in the bond market and that risk could increase if the U.S. Federal Reserve Board quickly raises rates once the financial sector stabilizes – an increase in interest rates causes bond prices to fall.
Equities, meanwhile, have been in a bear market (down 20% or more from the market peak last October) as the economy has entered a contraction phase of slower or even negative growth. But this economic phase should not last forever. We think there’s a tremendous opportunity for growth in the equity market.
The opportunity in equities
While stock market corrections are unsettling, investors must understand that four things remain static, even in a bear market:
1) Stock prices will fall in a bear market but the capital is not lost unless it is sold. It’s more important for investors to remember that they are making an investment in a business with an expectation of a payback on that capital over time, usually through a combination of dividend payments and price appreciation.
2) If the financial health of the company is solid, dividends should continue to be paid, giving investors income to buy more shares at cheaper prices, waiting for the day when the stock market recovers.
3) As dividends rise, stock prices ultimately follow.
Consider a stock that trades at $20, pays a $1 dividend and yields 5% ($1 divided by $20). If the dividend subsequently rises $0.20 a year for five years to $2:
At $20, the yield will be 10%. Given such a high yield, investors would be attracted to buy that asset. For the stock to return to its previous 5% yield, the share price would have to rise to $40, eventually earning a positive capital return for the investor in addition to their growing income stream.
4) A “slingshot effect” usually occurs and the market rebounds before investors recognize it. Just before the U.S. invaded Iraq, the stock market reached its last low on March 11, 2003. Nobody wanted to own equities then because the fear of war tends to wreak havoc on economies, causing markets to tumble.
It wasn’t until 2005 that many investors felt comfortable enough to buy equities again. Unfortunately, this was a huge missed opportunity. The “slingshot effect” in this case was a 45% stock market decline from 2000 to 2002 followed by a 50% rally from 2003 to 2005.
Those investors who stayed in equities and used the market decline as an opportunity to buy more stocks, earned better-than-average returns when the market recovered.
We believe that opportunity has re-surfaced in the stock market.
1) Some dividend yields are as high now as they have been in 35 years.
2) If there is another 20% drop in the market, price-earnings ratios would be at their lowest since 1975, a period that signalled the beginning of the greatest bull market of the 1980s and 1990s.
3) Globalization has given corporations a chance to sell into greater and more diverse markets, especially in emerging markets where per capita incomes have risen much faster than in the more mature G7 countries.
There are generally three stages in a bear market:
• The first - when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
• The second - when most investors recognize things are deteriorating, and
• The third - when everyone is convinced things can only get worse.
Certainly we’re well into the second of these three stages. There’s been lots of bad news and many write-offs. More and more people recognize the dangers inherent in things like innovation, leverage, derivatives, counterparty risk and mark-to-market accounting. And increasingly the problems seem unsolvable.
One of these days, though, we’ll reach the third stage, and the herd will give up on a market turnaround. And unless the financial world really does end, we’re likely to encounter the investment opportunities of a lifetime.
What is leverage?
Leverage is the action of taking the value of an asset or the steady income stream of a salary and borrowing against it. For example, individuals can take out an investment loan based on a percentage of the equity in their house - the difference between the appraised value of the house and any mortgage outstanding.
Another way is to borrow against your annual income. If you have consistent earnings, the bank will lend you a percentage of your annual income based on your ability to pay, net of all other expenses.
The purpose of leverage is to have more capital available to earn a greater return over time than if you just had a small amount of cash savings to invest.
It’s even more attractive because the government allows you to deduct a portion of the interest paid on your income tax return.
For example, if you own a house worth $600,000 and the mortgage has just been paid off, the bank may lend you up to 80% of the appraised value of the house in the form of an investment loan, or $480,000.
With the loan, you now have over $1 million of total assets that can grow and compound over time.
Given that interest rates continue to trend lower, the low cost of capital is making it attractive to use leverage through an investment loan.
For Canadian investors, the Bank of Canada is expected to keep pace with the Fed and reduce interest rates. This should lower the prime rate offered by the banks.
For example, if you take out a loan at 6%, the after-tax cost of capital would be roughly 3%. If that capital is invested in a stock that yields greater than 3% after-tax, the interest can be covered by the dividend income and the residual amount can grow through time and compounding to an amount greater than the loan.
What rules should be followed when using leverage?
While leverage helps capital grow over time, there is a downside. That occurs if the investment falls during the period of the loan. If the investment went to zero, there would be no capital growth but the debt would still have to be serviced.
That’s why it’s important to use some disciplined rules if you decide to use leverage:
1) Buy only dividend-paying stocks.
These companies should be more mature (large-cap, blue chip names) and have a proven track record of annually raising dividends.
Another benefit of dividend-paying stocks is that the yield should help set a floor as to how low the stock price may go, relative to current bond yields.
Non-dividend-paying stocks have no guarantees of growth. Unlike dividend payers, their share prices will be determined by their earnings. If the earnings disappear, the share prices will plummet.
2) The holding period should be 10-15 years.
Using leverage isn’t a get-rich-quick scheme. When buying stocks (with or without leverage), it’s important to let the companies grow through economic cycles.
This becomes clear if you leveraged at the worst possible time in the market, such as when the technology bubble burst in 2000. For anyone leveraging their portfolios in 2000-2001, a significant amount of time was needed for the investments to increase in value.
3) Borrow only what you can afford to pay monthly.
Do not extend yourself by borrowing too much. Decide first how much you can afford monthly to pay on the loan. The bank can then determine how much they will lend you.
4) If you currently have a mortgage, don’t leverage further.
Your mortgage is the highest after-tax cost you will face in your lifetime. It is more important to pay off this debt as soon as possible. Once the mortgage is paid, you can then decide if you wish to leverage the equity in the house in the form of an investment loan. A simple method is to borrow an amount that makes the monthly payments similar to your previous mortgage payments.
5) Retirees should not leverage.
During retirement, it is essential to be debt-free. Using leverage would be a dangerous strategy because there is no guaranteed income stream like a salary and bad investments could wipe out your retirement nest egg or worse, force you back to work.
6) The new Tax Free Savings Accounts – TFSAs may be an attractive use of leverage.
These accounts were introduced in the recent federal budget and should begin in 2009. The guidelines are that individuals may put $5,000 annually into this tax shelter. Because there is no tax liability and funds may be withdrawn without penalty, the after-tax cost of using leverage would be minimized.
For investors who can afford to leverage, who have the time-horizon to use it and who understand the inherent risks behind the strategy, we believe this may be an ideal time to do so.
Many investors see the current bear market and economic slowdown as a reason to sell stocks. We believe the opposite action should be taken and that investors may think about using leverage to increase their potential net worth. Here’s why:
The current situation for real estate, bonds and equities
In Canada, the real estate market has been buoyant these past several years and has begun to slow as prices have levelled off. People who wanted to purchase a home have done so and they are probably content to stay in that residence for the next 10-15 years. Therefore, the real estate market is not as appealing an investment as it once was. We think that future returns should continue to be decent but are unlikely to mirror those of the past decade.
We believe that the bond market, perceived to be a safe haven from a collapsing U.S. economy, is now overbought. That’s because real returns (after tax and inflation) are now negative.
Currently, the 10-year Government of Canada bond yield is 3.4%. After 50% tax (interest income) and inflation (2.25%), the real return is –0.55%. This means that investor spending power against tax and inflation is falling, not growing.
As a result, we believe there’s more risk inherent in the bond market and that risk could increase if the U.S. Federal Reserve Board quickly raises rates once the financial sector stabilizes – an increase in interest rates causes bond prices to fall.
Equities, meanwhile, have been in a bear market (down 20% or more from the market peak last October) as the economy has entered a contraction phase of slower or even negative growth. But this economic phase should not last forever. We think there’s a tremendous opportunity for growth in the equity market.
The opportunity in equities
While stock market corrections are unsettling, investors must understand that four things remain static, even in a bear market:
1) Stock prices will fall in a bear market but the capital is not lost unless it is sold. It’s more important for investors to remember that they are making an investment in a business with an expectation of a payback on that capital over time, usually through a combination of dividend payments and price appreciation.
2) If the financial health of the company is solid, dividends should continue to be paid, giving investors income to buy more shares at cheaper prices, waiting for the day when the stock market recovers.
3) As dividends rise, stock prices ultimately follow.
Consider a stock that trades at $20, pays a $1 dividend and yields 5% ($1 divided by $20). If the dividend subsequently rises $0.20 a year for five years to $2:
At $20, the yield will be 10%. Given such a high yield, investors would be attracted to buy that asset. For the stock to return to its previous 5% yield, the share price would have to rise to $40, eventually earning a positive capital return for the investor in addition to their growing income stream.
4) A “slingshot effect” usually occurs and the market rebounds before investors recognize it. Just before the U.S. invaded Iraq, the stock market reached its last low on March 11, 2003. Nobody wanted to own equities then because the fear of war tends to wreak havoc on economies, causing markets to tumble.
It wasn’t until 2005 that many investors felt comfortable enough to buy equities again. Unfortunately, this was a huge missed opportunity. The “slingshot effect” in this case was a 45% stock market decline from 2000 to 2002 followed by a 50% rally from 2003 to 2005.
Those investors who stayed in equities and used the market decline as an opportunity to buy more stocks, earned better-than-average returns when the market recovered.
We believe that opportunity has re-surfaced in the stock market.
1) Some dividend yields are as high now as they have been in 35 years.
2) If there is another 20% drop in the market, price-earnings ratios would be at their lowest since 1975, a period that signalled the beginning of the greatest bull market of the 1980s and 1990s.
3) Globalization has given corporations a chance to sell into greater and more diverse markets, especially in emerging markets where per capita incomes have risen much faster than in the more mature G7 countries.
There are generally three stages in a bear market:
• The first - when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
• The second - when most investors recognize things are deteriorating, and
• The third - when everyone is convinced things can only get worse.
Certainly we’re well into the second of these three stages. There’s been lots of bad news and many write-offs. More and more people recognize the dangers inherent in things like innovation, leverage, derivatives, counterparty risk and mark-to-market accounting. And increasingly the problems seem unsolvable.
One of these days, though, we’ll reach the third stage, and the herd will give up on a market turnaround. And unless the financial world really does end, we’re likely to encounter the investment opportunities of a lifetime.
What is leverage?
Leverage is the action of taking the value of an asset or the steady income stream of a salary and borrowing against it. For example, individuals can take out an investment loan based on a percentage of the equity in their house - the difference between the appraised value of the house and any mortgage outstanding.
Another way is to borrow against your annual income. If you have consistent earnings, the bank will lend you a percentage of your annual income based on your ability to pay, net of all other expenses.
The purpose of leverage is to have more capital available to earn a greater return over time than if you just had a small amount of cash savings to invest.
It’s even more attractive because the government allows you to deduct a portion of the interest paid on your income tax return.
For example, if you own a house worth $600,000 and the mortgage has just been paid off, the bank may lend you up to 80% of the appraised value of the house in the form of an investment loan, or $480,000.
With the loan, you now have over $1 million of total assets that can grow and compound over time.
Given that interest rates continue to trend lower, the low cost of capital is making it attractive to use leverage through an investment loan.
For Canadian investors, the Bank of Canada is expected to keep pace with the Fed and reduce interest rates. This should lower the prime rate offered by the banks.
For example, if you take out a loan at 6%, the after-tax cost of capital would be roughly 3%. If that capital is invested in a stock that yields greater than 3% after-tax, the interest can be covered by the dividend income and the residual amount can grow through time and compounding to an amount greater than the loan.
What rules should be followed when using leverage?
While leverage helps capital grow over time, there is a downside. That occurs if the investment falls during the period of the loan. If the investment went to zero, there would be no capital growth but the debt would still have to be serviced.
That’s why it’s important to use some disciplined rules if you decide to use leverage:
1) Buy only dividend-paying stocks.
These companies should be more mature (large-cap, blue chip names) and have a proven track record of annually raising dividends.
Another benefit of dividend-paying stocks is that the yield should help set a floor as to how low the stock price may go, relative to current bond yields.
Non-dividend-paying stocks have no guarantees of growth. Unlike dividend payers, their share prices will be determined by their earnings. If the earnings disappear, the share prices will plummet.
2) The holding period should be 10-15 years.
Using leverage isn’t a get-rich-quick scheme. When buying stocks (with or without leverage), it’s important to let the companies grow through economic cycles.
This becomes clear if you leveraged at the worst possible time in the market, such as when the technology bubble burst in 2000. For anyone leveraging their portfolios in 2000-2001, a significant amount of time was needed for the investments to increase in value.
3) Borrow only what you can afford to pay monthly.
Do not extend yourself by borrowing too much. Decide first how much you can afford monthly to pay on the loan. The bank can then determine how much they will lend you.
4) If you currently have a mortgage, don’t leverage further.
Your mortgage is the highest after-tax cost you will face in your lifetime. It is more important to pay off this debt as soon as possible. Once the mortgage is paid, you can then decide if you wish to leverage the equity in the house in the form of an investment loan. A simple method is to borrow an amount that makes the monthly payments similar to your previous mortgage payments.
5) Retirees should not leverage.
During retirement, it is essential to be debt-free. Using leverage would be a dangerous strategy because there is no guaranteed income stream like a salary and bad investments could wipe out your retirement nest egg or worse, force you back to work.
6) The new Tax Free Savings Accounts – TFSAs may be an attractive use of leverage.
These accounts were introduced in the recent federal budget and should begin in 2009. The guidelines are that individuals may put $5,000 annually into this tax shelter. Because there is no tax liability and funds may be withdrawn without penalty, the after-tax cost of using leverage would be minimized.
For investors who can afford to leverage, who have the time-horizon to use it and who understand the inherent risks behind the strategy, we believe this may be an ideal time to do so.
An Investor Receiving Dividends Can Choose What to do With the Money
Dividends - Asymmetric Information
January was a poor month for markets across the globe with most major indexes falling between 5 and 7 percent. The period from September to January has been one of the most volatile on record and the gloomy economic news continues unabated. However, during this period of gloom and turbulence no less than 15 of our holdings increased their dividends. Clearly some corporations are capable of coping with the current economic environment, and are optimistic about their long-term prospects. Dividend increases should not be taken lightly and are a powerful signal of management's view of the future.
Unless management is confident of a business's long-term prospects they would not commit to paying out cash. Based on the current news one could argue that conserving cash might be the way to go, but dividend increases speak to long-term prospects. This is a case of asymmetric information - management might know more about the business outlook than the market or investors. To quantify the impact of dividends on long-term returns consider that a full 2/3rds of long-term equity returns have come from dividends and dividend reinvestment. Look at this decade to date. Dividends paid to investors have added a full 10% to market returns since January 1, 2000 compared to simple price appreciation. Dividends may seem small, but over long periods they add up to a significant amount.
Dividends may seem quaint in this day and age. Any finance textbook demonstrates that an investor should be indifferent between receiving dividends and having a corporation buy back its own stock. Here is how this equivalency is supposed to work.
Companies buy back stock thereby reducing the number of shares outstanding. As a direct result, earnings per share increase, and all else equal (meaning the p/e ratio remains the same), the price of the stock goes up and presto, there is your dividend. If an investor actually wants cash, then they just sell a portion of their holdings.
But if the last few months have shown us anything it is that what is supposed to work in theory does not always work in practice. We have a couple of issues with this view of returning money to shareholders through stock buybacks. First, is one of control.
An investor receiving dividends can choose what to do with the money; save it, reinvest in other companies or buy more of the corporations stock. But make no mistake about it- the control is in the hands of the investor. In contrast share buybacks are controlled by the corporation. They are not scheduled to occur on a quarterly basis and can be terminated at any time.
In fact, most announced buybacks are never completed. Contrast the ease with which buybacks can be announced, delayed or terminated with cash dividends. To suspend a cash dividend is the last thing management will consider and can sometimes indicate a serious problem at the corporation.
Second, dividends impose a capital discipline on corporations. To maintain a dividend commitment a corporation must remain focused on cash generation. Moreover, it curtails the potential for cash to be put in marginal or risky ventures.
Dividends represent a commitment to long-term shareholders. Finally, dividends encourage and reward long-term ownership. The concept of owning a company is all but lost on many investors. Indeed as the average mutual fund portfolio turnover reaches 120% per year (average holding time of 10 months) portfolio managers are just speculating on the price rather than buying solid businesses as a long-term investment. It is not surprising that turnover is one of the best predictors of performance - the higher the turnover, the lower the performance.
Dividends are an important driver of investment performance and increasing dividends are a powerful signal about future prospects. Through your Toron portfolio you are an investor in businesses for the long term and not a speculator about where the next quarter's price will be. This discipline will help grow your portfolio over the long haul.
Arthur Heinmaa, CFA Managing Partner
January was a poor month for markets across the globe with most major indexes falling between 5 and 7 percent. The period from September to January has been one of the most volatile on record and the gloomy economic news continues unabated. However, during this period of gloom and turbulence no less than 15 of our holdings increased their dividends. Clearly some corporations are capable of coping with the current economic environment, and are optimistic about their long-term prospects. Dividend increases should not be taken lightly and are a powerful signal of management's view of the future.
Unless management is confident of a business's long-term prospects they would not commit to paying out cash. Based on the current news one could argue that conserving cash might be the way to go, but dividend increases speak to long-term prospects. This is a case of asymmetric information - management might know more about the business outlook than the market or investors. To quantify the impact of dividends on long-term returns consider that a full 2/3rds of long-term equity returns have come from dividends and dividend reinvestment. Look at this decade to date. Dividends paid to investors have added a full 10% to market returns since January 1, 2000 compared to simple price appreciation. Dividends may seem small, but over long periods they add up to a significant amount.
Dividends may seem quaint in this day and age. Any finance textbook demonstrates that an investor should be indifferent between receiving dividends and having a corporation buy back its own stock. Here is how this equivalency is supposed to work.
Companies buy back stock thereby reducing the number of shares outstanding. As a direct result, earnings per share increase, and all else equal (meaning the p/e ratio remains the same), the price of the stock goes up and presto, there is your dividend. If an investor actually wants cash, then they just sell a portion of their holdings.
But if the last few months have shown us anything it is that what is supposed to work in theory does not always work in practice. We have a couple of issues with this view of returning money to shareholders through stock buybacks. First, is one of control.
An investor receiving dividends can choose what to do with the money; save it, reinvest in other companies or buy more of the corporations stock. But make no mistake about it- the control is in the hands of the investor. In contrast share buybacks are controlled by the corporation. They are not scheduled to occur on a quarterly basis and can be terminated at any time.
In fact, most announced buybacks are never completed. Contrast the ease with which buybacks can be announced, delayed or terminated with cash dividends. To suspend a cash dividend is the last thing management will consider and can sometimes indicate a serious problem at the corporation.
Second, dividends impose a capital discipline on corporations. To maintain a dividend commitment a corporation must remain focused on cash generation. Moreover, it curtails the potential for cash to be put in marginal or risky ventures.
Dividends represent a commitment to long-term shareholders. Finally, dividends encourage and reward long-term ownership. The concept of owning a company is all but lost on many investors. Indeed as the average mutual fund portfolio turnover reaches 120% per year (average holding time of 10 months) portfolio managers are just speculating on the price rather than buying solid businesses as a long-term investment. It is not surprising that turnover is one of the best predictors of performance - the higher the turnover, the lower the performance.
Dividends are an important driver of investment performance and increasing dividends are a powerful signal about future prospects. Through your Toron portfolio you are an investor in businesses for the long term and not a speculator about where the next quarter's price will be. This discipline will help grow your portfolio over the long haul.
Arthur Heinmaa, CFA Managing Partner
Thursday, February 12, 2009
How They Took Down the Price of Oil
I figured out how they took down oil.....it went like this.....
1) They wanted to desperately take down the price of light sweet crude because its a bench mark for all pricing
2) There was (is) a shortage of light oil but a glut of heavy
3) so they pump light sweet to cushing from the SPR and replace it with heavy sour
4) The EIA week reports no change in SPR levels but Cushing is full of light sweet
5) Market concludes there is a glut of light sweet and they are right but for the wrong reasons
6) Don Coxe was right about the deliberate take down in oil
7) I just figured out how they did it
see
http://news.goldseek.com/GoldSeek/1234386901.php
I am a genius (but a broke one)
1) They wanted to desperately take down the price of light sweet crude because its a bench mark for all pricing
2) There was (is) a shortage of light oil but a glut of heavy
3) so they pump light sweet to cushing from the SPR and replace it with heavy sour
4) The EIA week reports no change in SPR levels but Cushing is full of light sweet
5) Market concludes there is a glut of light sweet and they are right but for the wrong reasons
6) Don Coxe was right about the deliberate take down in oil
7) I just figured out how they did it
see
http://news.goldseek.com/GoldSeek/1234386901.php
I am a genius (but a broke one)
Sunday, January 4, 2009
Ten Surprises for 2009
These are my Ten Surprises for 2009
1) Oil Trades above $140 per Barrell
2) Oil Trades below $30 per Barrell
3) GM merges with Chrysler
4) Italy leaves the Euro and returns to the Lira
5) British Pound trades Below $1 US
6) Natural Gas Price trades below $4 per MMBTU
7) Iran's government Falls
8) Cuba elects its first President as a democracy
9) The Canadian Dollar reaches parity with the US$
10)All major stock Indexes in North America break the 2008 lows
1) Oil Trades above $140 per Barrell
2) Oil Trades below $30 per Barrell
3) GM merges with Chrysler
4) Italy leaves the Euro and returns to the Lira
5) British Pound trades Below $1 US
6) Natural Gas Price trades below $4 per MMBTU
7) Iran's government Falls
8) Cuba elects its first President as a democracy
9) The Canadian Dollar reaches parity with the US$
10)All major stock Indexes in North America break the 2008 lows
Tuesday, December 30, 2008
Don Coxe Indicators
Don Coxe Indicators
In the November Basic Points, Don Coxe had four indicators to gauge when "Mama bear is done her worst".
1) TED Spread: "We suspect if it breaks 150 and stays there for at least a week, the financial crisis part of this drama, while not humdrum, will no longer command center stage".
The TED Spread is currently at 132 and has been under 150 for pretty close to a week (if not already a week).
2) The bank stock index continues to outperform the S&P.
1 Month: S&P -3%, BKX -13%
3)The VIX Index Retreats
Currently at 43.
Month Ago: 60
4) The YEN and the U.S Dollar Decline
US Dollar index currently at: 80.5
Month Ago US Dollar Index: 83.5
JPYUSD currently at: 90.5 (Yen has strengthened)
JPYUSD Month Ago: 93
In the November Basic Points, Don Coxe had four indicators to gauge when "Mama bear is done her worst".
1) TED Spread: "We suspect if it breaks 150 and stays there for at least a week, the financial crisis part of this drama, while not humdrum, will no longer command center stage".
The TED Spread is currently at 132 and has been under 150 for pretty close to a week (if not already a week).
2) The bank stock index continues to outperform the S&P.
1 Month: S&P -3%, BKX -13%
3)The VIX Index Retreats
Currently at 43.
Month Ago: 60
4) The YEN and the U.S Dollar Decline
US Dollar index currently at: 80.5
Month Ago US Dollar Index: 83.5
JPYUSD currently at: 90.5 (Yen has strengthened)
JPYUSD Month Ago: 93
Saturday, November 29, 2008
The End of the Finance Economy - I Hope
For what is ‘normal’? Were the decades of the 1990’s and 2000’s, which witnessed unprecedented prosperity in the financial sector, normal? Logic dictates that the answer is no. There was “too much finance”. So much so that the financial system was a farce.
The financial sector became far too large in relation to the real economy. The compensation of those who worked in the financial sector became increasingly disproportionate, and abhorrently so, relative to the wages being earned in the real economy making real things. Too many financial instruments were being derived on other financial instruments, becoming too far removed from anything that even remotely resembled real assets or real economic activity.
These were abnormal times, and were therefore unsustainable times. The heyday of finance was nothing more than a pyramid scheme, only viable until it was unable to reel in the last sucker.
The world has finally come to the realization that pushing paper to other paper pushers for the sake of paper pushing doesn’t, in fact, constitute real value-added economic activity. The myth of the financial system as an unbridled source of wealth has been exposed.
The financial sector became far too large in relation to the real economy. The compensation of those who worked in the financial sector became increasingly disproportionate, and abhorrently so, relative to the wages being earned in the real economy making real things. Too many financial instruments were being derived on other financial instruments, becoming too far removed from anything that even remotely resembled real assets or real economic activity.
These were abnormal times, and were therefore unsustainable times. The heyday of finance was nothing more than a pyramid scheme, only viable until it was unable to reel in the last sucker.
The world has finally come to the realization that pushing paper to other paper pushers for the sake of paper pushing doesn’t, in fact, constitute real value-added economic activity. The myth of the financial system as an unbridled source of wealth has been exposed.
Saturday, September 27, 2008
Money is the Most Egalitarian Force in the World Bestowing Power on Whoever Holds It
Novelist Joyce Carol Oates once wrote, "The only people who claim that money is not important are people who have enough money so that they are relieved of the ugly burden of thinking about it."
French existential writer Albert Camus agreed. He said, "It is a kind of spiritual snobbery that makes people think they can be happy without money."
In many ways, they're right. How can you feel genuine contentment if you are harassed by bill collectors, living paycheck-to-paycheck, or worried whether you have enough to retire?
Don't get me wrong. Money doesn't buy true love or friendship. It won't solve all your problems, fix your marriage, turn you into "a success," or make you charitable if you're not already charitably inclined.
But money is the most egalitarian force in the world, bestowing power on whoever holds it.
It gives you the freedom to make important choices in your life. No one is free who is a slave to his job, his creditors, his circumstances, or his overhead.
Money allows you to support worthy causes and help those in need. It allows you to do what you want, where you want, with whom you want. It's called financial independence. And it's a great feeling.
As author Tom Robbins once remarked, "There's a certain Buddhistic calm that comes from having money in the bank."
As my regular readers know, I think more about money than most.
I've given the portfolio a light-hearted name. But securing your financial independence is serious business. The money that you will retire on - or are already retired on - should not be treated like chips in a poker game.
The Gone Fishin' Portfolio is risk-averse by design. Yet it has compounded at 17.3% annually since inception.
I don't want to suggest that you can eliminate investment risk entirely. That's not possible. But investing for income is a realistic approach. No other investment system comes closer to guaranteeing you long-term investment success.
My goal is to allow you to redirect your time from worries about money to high value activities, whether that's work you enjoy, time spent pursuing your favorite activities, or just relaxing with your friends and family.
In "The Pleasures of Life," Sir John Lubbock writes, "All other good gifts depend on time for their value. What are friends, books, or health, the interest of travel or the delights of home, if we have not time for their enjoyment? Time is often said to be money, but it is more - it is life; and yet many who would cling desperately to life, think nothing of wasting time."
French existential writer Albert Camus agreed. He said, "It is a kind of spiritual snobbery that makes people think they can be happy without money."
In many ways, they're right. How can you feel genuine contentment if you are harassed by bill collectors, living paycheck-to-paycheck, or worried whether you have enough to retire?
Don't get me wrong. Money doesn't buy true love or friendship. It won't solve all your problems, fix your marriage, turn you into "a success," or make you charitable if you're not already charitably inclined.
But money is the most egalitarian force in the world, bestowing power on whoever holds it.
It gives you the freedom to make important choices in your life. No one is free who is a slave to his job, his creditors, his circumstances, or his overhead.
Money allows you to support worthy causes and help those in need. It allows you to do what you want, where you want, with whom you want. It's called financial independence. And it's a great feeling.
As author Tom Robbins once remarked, "There's a certain Buddhistic calm that comes from having money in the bank."
As my regular readers know, I think more about money than most.
I've given the portfolio a light-hearted name. But securing your financial independence is serious business. The money that you will retire on - or are already retired on - should not be treated like chips in a poker game.
The Gone Fishin' Portfolio is risk-averse by design. Yet it has compounded at 17.3% annually since inception.
I don't want to suggest that you can eliminate investment risk entirely. That's not possible. But investing for income is a realistic approach. No other investment system comes closer to guaranteeing you long-term investment success.
My goal is to allow you to redirect your time from worries about money to high value activities, whether that's work you enjoy, time spent pursuing your favorite activities, or just relaxing with your friends and family.
In "The Pleasures of Life," Sir John Lubbock writes, "All other good gifts depend on time for their value. What are friends, books, or health, the interest of travel or the delights of home, if we have not time for their enjoyment? Time is often said to be money, but it is more - it is life; and yet many who would cling desperately to life, think nothing of wasting time."
Sunday, August 17, 2008
Shale Gas Production Will Keep Natural Gas Prices in the $9-$11 Range
My thought is that the natuarl gas market is bifurcating.
That shale plays and tight sand plays are ones that can be profitable at probably an $8 NYMEX price. But what I think we see in many plays across the country that are what you would call conventional, those plays are at an increasingly large cost disadvantage to the shale plays. There are -- you think about our plays in the Barnett, Fayetteville, Haynesville, et cetera, we're able to drive costs down over time as we drill dozens, hundreds, even thousands of wells. If you look at companies that are out trying to find five and 10 well fields you just don't have the opportunity to drive your costs down.
You're always inventing kind of yourself as -- through these smaller targets. So I think if gas prices were to stay below $9 Henry Hub for some period of time I think that the shale plays probably continue to move forward, but I think you will see a lot of rigs drop out of what you would call conventional drilling. And another hought, people get fixated on what our Henry Hub price is.
Remember that basis differentials in the mid-continent in the month of July are about $1.30 to $1.40 per Mcf, when you start talking about compression and things like that $8 gas these days means probably something close to $6 at the wellhead. So there's kind of been a quiet or silent creep of about a dollar into basis differentials over the past 12 months on average that I think a lot of investors probably don't fully appreciate, that what companies get at the wellhead is kind of less and less related to what you read in the headlines at Henry Hub.
So I -- we think gas prices will stay in this $9 to $11 range. There will be times, like in July when -- there will be times when they're below it and of course the weather will matter a lot as well. But we're pretty confident that much below
nine you would see a drop off in drilling activity, particularly among the conventional drilling, then those pretty aggressive 35% to 40% first year declines are going to kick in and rebalance the market.
I saw something the other day where some analyst had come up with production in 2010 was going to be up by something like 8 Bcf to 10 Bcf a day and gas prices were going to be $6.25. That's that kind of analysis, I think, can only come at the dangerous intersection of Excel and PowerPoint. It can't happen in reality.
That shale plays and tight sand plays are ones that can be profitable at probably an $8 NYMEX price. But what I think we see in many plays across the country that are what you would call conventional, those plays are at an increasingly large cost disadvantage to the shale plays. There are -- you think about our plays in the Barnett, Fayetteville, Haynesville, et cetera, we're able to drive costs down over time as we drill dozens, hundreds, even thousands of wells. If you look at companies that are out trying to find five and 10 well fields you just don't have the opportunity to drive your costs down.
You're always inventing kind of yourself as -- through these smaller targets. So I think if gas prices were to stay below $9 Henry Hub for some period of time I think that the shale plays probably continue to move forward, but I think you will see a lot of rigs drop out of what you would call conventional drilling. And another hought, people get fixated on what our Henry Hub price is.
Remember that basis differentials in the mid-continent in the month of July are about $1.30 to $1.40 per Mcf, when you start talking about compression and things like that $8 gas these days means probably something close to $6 at the wellhead. So there's kind of been a quiet or silent creep of about a dollar into basis differentials over the past 12 months on average that I think a lot of investors probably don't fully appreciate, that what companies get at the wellhead is kind of less and less related to what you read in the headlines at Henry Hub.
So I -- we think gas prices will stay in this $9 to $11 range. There will be times, like in July when -- there will be times when they're below it and of course the weather will matter a lot as well. But we're pretty confident that much below
nine you would see a drop off in drilling activity, particularly among the conventional drilling, then those pretty aggressive 35% to 40% first year declines are going to kick in and rebalance the market.
I saw something the other day where some analyst had come up with production in 2010 was going to be up by something like 8 Bcf to 10 Bcf a day and gas prices were going to be $6.25. That's that kind of analysis, I think, can only come at the dangerous intersection of Excel and PowerPoint. It can't happen in reality.
Saturday, August 2, 2008
Semgroup LP's bankruptcy is one of the Main Factors Behind the Recent Decline in Oil
I strongly believe that Semgroup LP's bankruptcy is one of the main contributing factors behind the recent decline in the price of oil. In the short term, speculators clearly determine the price of oil. Semgroup had a large short position in oil which had to be covered. This drove the price of oil to $147 per barrell. Once all the short covering was complete the price of oil has stabilised.
I still believe that the longer-term fundamental factors reign supreme. The current high price of oil is in my opinion clearly justified by fundamental factors and while short term factors such as the Semgroup blow up are important they should not detract from the story behind the oil run up.
I am still invested 90% in oil and gas income producing assets.
I still believe that the longer-term fundamental factors reign supreme. The current high price of oil is in my opinion clearly justified by fundamental factors and while short term factors such as the Semgroup blow up are important they should not detract from the story behind the oil run up.
I am still invested 90% in oil and gas income producing assets.
Saturday, July 19, 2008
UBS Analyst: Energy Trusts Offer Exceptional Value
The way Grant Hofer sees it, even when you lose you win.
Mr. Hofer, the UBS Securities guy crunching data on royalty trusts in Calgary, thinks now is the time to take a good look at the group. The trusts he covers are down 8% over the past month (but still up 34% this year), and Mr. Hofer thinks “the sector appears to us to be very well positioned and offers exceptional value today.”
Cash yields, he says, have climbed 10.7%, which makes the trusts attractive, given payout ratios of about 50% in 2009. His numbers are based on $120 per barrel oil and $10.10/mcf for natural gas. Don’t think those prices are reasonable? No sweat.
In bold, he wrote:
Should commodity prices continue to pull back, we believe that the yield should provide attractive support for unit prices.
Vermilion Energy Trust (VET) and Crescent Point Energy Trust (CPGCF.PK) were his two favorites on Thursday, given their high weightings to crude oil and growth plans and because of their acquisitive ways.
Mr. Hofer’s target on Crescent Point is $45, and he expects Vermilion to get to $49. Vermilion, he thinks, will be “essentially debt-free” by the end of the year. “With its low payout ratio, 75% weighting to crude oil (unhedged), and sector-based netbacks, the trust remains our best overall pick in the sector.”
For those of you who like to dig deeper into the numbers, Mr. Hofer notes the trust group is trading at just 83% of net asset value.
He said:
This is the lowest level that we can recall (typically the sector trades at a premium to our conservative NAVs).
When analysts get excited, they (sometimes) come up with eye-catching headlines for their reports. Looks like Mr. Hofer falls into that category on this one. At the top of his report, he wrote: “Valuation update: Back up the truck!”
Mr. Hofer, the UBS Securities guy crunching data on royalty trusts in Calgary, thinks now is the time to take a good look at the group. The trusts he covers are down 8% over the past month (but still up 34% this year), and Mr. Hofer thinks “the sector appears to us to be very well positioned and offers exceptional value today.”
Cash yields, he says, have climbed 10.7%, which makes the trusts attractive, given payout ratios of about 50% in 2009. His numbers are based on $120 per barrel oil and $10.10/mcf for natural gas. Don’t think those prices are reasonable? No sweat.
In bold, he wrote:
Should commodity prices continue to pull back, we believe that the yield should provide attractive support for unit prices.
Vermilion Energy Trust (VET) and Crescent Point Energy Trust (CPGCF.PK) were his two favorites on Thursday, given their high weightings to crude oil and growth plans and because of their acquisitive ways.
Mr. Hofer’s target on Crescent Point is $45, and he expects Vermilion to get to $49. Vermilion, he thinks, will be “essentially debt-free” by the end of the year. “With its low payout ratio, 75% weighting to crude oil (unhedged), and sector-based netbacks, the trust remains our best overall pick in the sector.”
For those of you who like to dig deeper into the numbers, Mr. Hofer notes the trust group is trading at just 83% of net asset value.
He said:
This is the lowest level that we can recall (typically the sector trades at a premium to our conservative NAVs).
When analysts get excited, they (sometimes) come up with eye-catching headlines for their reports. Looks like Mr. Hofer falls into that category on this one. At the top of his report, he wrote: “Valuation update: Back up the truck!”
Tuesday, July 15, 2008
Using Oil & Gas Trusts to Beat Inflation
Using Oil & Gas Trusts to Beat Inflation
by Mike Stathis, Managing Principle, Apex Venture Advisors
According to Washington, the official inflation rate is around 4.1%. At this point, I think it’s obvious most consumers know this data is wrong. Of course some people accept anything Washington reports, especially the agenda-driven “experts” on television who bring in media hams as cheerleaders to spread the ludicrous propaganda of a strong economy.
You don’t need a Ph.D in economics or finance to know that inflation is approaching levels similar to those seen in the 1970s. In fact, those who have been formally trained in these disciplines are more likely to miss what is really going on because they’ve been programmed to think that fancy math is always superior to common sense. But they often neglect to consider the fact that new standards are continuously being devised to hide the real data - from inflation and unemployment numbers to GDP and poverty statistics.
Understand that most economists are in some way connected to the government. Economists in private industry often sit on Washington committees. Most academic economists too are pressured to accept government methods of data analysis without question, or else they risk losing federal grants, government consulting projects, or being appointed to sit on government committees.
Important Considerations
14% returns are much better than the market’s historical average of around 8%. So what’s the catch? Well, we obviously need to consider the risks before we make any decisions. In the end, you should understand your risk tolerance and investment horizon. After considering the risks, you will be able to determine a risk-reward profile for these investments. This is the general method to determine suitability for all investments. Let’s take a look at some of the more important variables to consider.
Oil Demand
Oil demand is obviously a very important consideration one must make. Some of the questions you might pose are:
Is demand growth accelerating?
What are the reasons for this acceleration and what are the risks for it to end?
What impact will alternative energy have on oil demand and when might a real effect be seen?
While America is the clear leader in annual oil consumption, China leads the world in oil growth demand. In other words, China is accelerating is demand for oil more so than any other nation. This is expected to continue for many years, with all of Asia on a similar course. Unlike America, where oil demand will always (until alternative and renewable energy sources are mature) be quite high due its extensive reach within the economy, China’s demand is primarily the result of its export trade commerce. As corporate America continues to enrich the living standards of China, we will soon see very strong Chinese consumers who, from auto ownership alone will create huge demands for oil. While it should be quite clear that America faces a continued weak economy for at least the next two to three years, it is unknown to what extent these effects will spill over to the rest of the globe. I would estimate that we will see a global recession. Thus, demand from China is likely to stall at some point. But going forward thereafter, you should expect China’s demand for fossil fuels to continue its long-term trajectory.
While there is certainly much noise over alternative energy, the fact is that it will take many years before it makes a dent in the global oil demand. And it will come gradually, allowing OPEC and non-OPEC producing nations to gradually adjust output and resources so that they are able to control demand-supply and thus pricing. Even when alternative energy becomes highly competitive with oil and other fossil fuels (which might not be before 2020), keep in mind that we will always need crude for basic materials. It is a building block for many products.
Oil Prices
Without a doubt, crude is priced way ahead of itself. And while prices could easily correct downward by 30 to 40% over as little as a two-month period, you should understand a few things before you get spooked. As we have seen, oil demand does not necessarily have a high correlation with oil prices in the short-term. Although there is certainly a correlation, OPEC agendas, military conflicts, speculation and momentum-driven trading often causes huge swings in price.
Many independent oil experts believe the long-term price trend for oil is headed much higher. So while a price of $140 per barrel might be a couple of years ahead of itself, even with a 40% correction in the near-term, it is very likely that the fair value trading price of oil will back at this level if not higher over the next two years anyway.
Many of the oil trusts were trading near or above current levels when oil was below $100 just a few months ago. So if oil does correct, this does not mean the price of these trusts will decline proportionately. As I will discuss below, these companies lock in oil prices so they can provide consistent dividends. Therefore, the trading price of these trusts is not likely to collapse with a large oil correction, as long as management is able to lock in prices. However, investors ultimately determine prices of securities so we never know. And price volatility is a reality of investing. What we really need to focus on is the dividend. Therefore we should ask whether a large correction in price will affect the forward dividends. For reasons I will get to shortly, I feel the dividends for at least my favorite two Canadian oil sands trusts (PGH and PWE) are fairly safe.
Finally, understand that many Canadian oil trusts typically hedge or lock in oil prices at certain rates so as to ensure consistent dividends for investors.
Hedging Success and Strategies
When looking at the dividend payouts of these trusts, you might wonder why in the case of Penn Growth for instance, the dividend has remained fairly constant for several months even when oil was well under the $80 mark. Rather than gamble that oil will remain at $140 per barrel, management uses oil futures contracts to lock in what it feels are reasonable prices for oil. If you examine some of the previous statements and headlines for Penn Growth, you will see the company reported losses based on futures contracts. The reason was most likely because management bet against oil going up. They did this because they wanted to play it safe. While we can never be sure whether they will continue this strategy, I would expect them to because it is the most prudent way to deliver a consistent earnings stream to investors while minimizing the downside. Thus, it would seem reasonable to conclude that even a large correction in crude of say 30% over a one or two month period would not alter the dividend by much. In fact, if traders think otherwise, these trusts could sell off as they have recently, thereby increasing the dividend yield, assuming the future dividends remain fairly consistent.
Tax Changes
As a way to encourage investment capital into the new Alberta sands region, the oil trusts were exempt from corporate taxation. Since that time, billions of dollars from all over the world have flooded into the region and now the government wants a piece of the action. A couple of years ago the Canadian government announced that the tax treatment for its trusts would be changed starting in 2011. This caused these trusts to sell off in panic. However, I would not anticipate the dividends to be effected by much. The good thing is that this news is already known and factored into the price of these trusts. But that does not mean there won’t be another correction just before 2011.
Management
The ability of each management team to run these companies with prudence is always a risk we take as investors.
Risk Comparison
When we compare the risk of oil trusts, we should look at asset classes with similar rates of return. The first type of asset class that comes to mind is REITs. After all that has happened to the real estate market, I do not think I need to discuss the risk level here. On average, the Canadian oil trusts I have mentioned are yielding around 14% annually. The only other major asset class that even comes close to this is small cap stocks. However, you should note that even small caps only return around 11% on average, and that is over a long period, such as 20 or 30 years. As well, the volatility is higher and there are some small caps that go bankrupt. I certainly wouldn’t want to be in small caps during this market.
Even if you are willing to assume the risk of small caps given current market conditions, you would most likely need to actively trade these stocks in order to secure any chance of annual double digit returns over say a 5-year horizon. Otherwise, you could end up flat or even down over that period. In contrast, the oil sands pay monthly dividends. That’s money that comes every month; money that can help neutralize the declining purchasing power of the dollar. In conclusion, whether you want to go Canadian or American, oil trusts offer an excellent solution to counter the effects of high inflation. And during this period of economic uncertainty, perhaps one of the few things we can be certain of is that oil will remain high for many years.
Conclusions
Remember, before you can justify investing in oil trusts, the oil story is something you have to fully believe in because these securities are volatile. While trading opportunities are definitely available, you should be willing to hold them for several years. In fact, at current prices and assuming historical dividend payouts to continue, your cost basis (before taxes) would approach zero if you bought and held Baytex, Paramount, Bonavista, Arc, Advantage, Crescent Point, Enerplus, Freehold or Penn West over the next eight years.
by Mike Stathis, Managing Principle, Apex Venture Advisors
According to Washington, the official inflation rate is around 4.1%. At this point, I think it’s obvious most consumers know this data is wrong. Of course some people accept anything Washington reports, especially the agenda-driven “experts” on television who bring in media hams as cheerleaders to spread the ludicrous propaganda of a strong economy.
You don’t need a Ph.D in economics or finance to know that inflation is approaching levels similar to those seen in the 1970s. In fact, those who have been formally trained in these disciplines are more likely to miss what is really going on because they’ve been programmed to think that fancy math is always superior to common sense. But they often neglect to consider the fact that new standards are continuously being devised to hide the real data - from inflation and unemployment numbers to GDP and poverty statistics.
Understand that most economists are in some way connected to the government. Economists in private industry often sit on Washington committees. Most academic economists too are pressured to accept government methods of data analysis without question, or else they risk losing federal grants, government consulting projects, or being appointed to sit on government committees.
Important Considerations
14% returns are much better than the market’s historical average of around 8%. So what’s the catch? Well, we obviously need to consider the risks before we make any decisions. In the end, you should understand your risk tolerance and investment horizon. After considering the risks, you will be able to determine a risk-reward profile for these investments. This is the general method to determine suitability for all investments. Let’s take a look at some of the more important variables to consider.
Oil Demand
Oil demand is obviously a very important consideration one must make. Some of the questions you might pose are:
Is demand growth accelerating?
What are the reasons for this acceleration and what are the risks for it to end?
What impact will alternative energy have on oil demand and when might a real effect be seen?
While America is the clear leader in annual oil consumption, China leads the world in oil growth demand. In other words, China is accelerating is demand for oil more so than any other nation. This is expected to continue for many years, with all of Asia on a similar course. Unlike America, where oil demand will always (until alternative and renewable energy sources are mature) be quite high due its extensive reach within the economy, China’s demand is primarily the result of its export trade commerce. As corporate America continues to enrich the living standards of China, we will soon see very strong Chinese consumers who, from auto ownership alone will create huge demands for oil. While it should be quite clear that America faces a continued weak economy for at least the next two to three years, it is unknown to what extent these effects will spill over to the rest of the globe. I would estimate that we will see a global recession. Thus, demand from China is likely to stall at some point. But going forward thereafter, you should expect China’s demand for fossil fuels to continue its long-term trajectory.
While there is certainly much noise over alternative energy, the fact is that it will take many years before it makes a dent in the global oil demand. And it will come gradually, allowing OPEC and non-OPEC producing nations to gradually adjust output and resources so that they are able to control demand-supply and thus pricing. Even when alternative energy becomes highly competitive with oil and other fossil fuels (which might not be before 2020), keep in mind that we will always need crude for basic materials. It is a building block for many products.
Oil Prices
Without a doubt, crude is priced way ahead of itself. And while prices could easily correct downward by 30 to 40% over as little as a two-month period, you should understand a few things before you get spooked. As we have seen, oil demand does not necessarily have a high correlation with oil prices in the short-term. Although there is certainly a correlation, OPEC agendas, military conflicts, speculation and momentum-driven trading often causes huge swings in price.
Many independent oil experts believe the long-term price trend for oil is headed much higher. So while a price of $140 per barrel might be a couple of years ahead of itself, even with a 40% correction in the near-term, it is very likely that the fair value trading price of oil will back at this level if not higher over the next two years anyway.
Many of the oil trusts were trading near or above current levels when oil was below $100 just a few months ago. So if oil does correct, this does not mean the price of these trusts will decline proportionately. As I will discuss below, these companies lock in oil prices so they can provide consistent dividends. Therefore, the trading price of these trusts is not likely to collapse with a large oil correction, as long as management is able to lock in prices. However, investors ultimately determine prices of securities so we never know. And price volatility is a reality of investing. What we really need to focus on is the dividend. Therefore we should ask whether a large correction in price will affect the forward dividends. For reasons I will get to shortly, I feel the dividends for at least my favorite two Canadian oil sands trusts (PGH and PWE) are fairly safe.
Finally, understand that many Canadian oil trusts typically hedge or lock in oil prices at certain rates so as to ensure consistent dividends for investors.
Hedging Success and Strategies
When looking at the dividend payouts of these trusts, you might wonder why in the case of Penn Growth for instance, the dividend has remained fairly constant for several months even when oil was well under the $80 mark. Rather than gamble that oil will remain at $140 per barrel, management uses oil futures contracts to lock in what it feels are reasonable prices for oil. If you examine some of the previous statements and headlines for Penn Growth, you will see the company reported losses based on futures contracts. The reason was most likely because management bet against oil going up. They did this because they wanted to play it safe. While we can never be sure whether they will continue this strategy, I would expect them to because it is the most prudent way to deliver a consistent earnings stream to investors while minimizing the downside. Thus, it would seem reasonable to conclude that even a large correction in crude of say 30% over a one or two month period would not alter the dividend by much. In fact, if traders think otherwise, these trusts could sell off as they have recently, thereby increasing the dividend yield, assuming the future dividends remain fairly consistent.
Tax Changes
As a way to encourage investment capital into the new Alberta sands region, the oil trusts were exempt from corporate taxation. Since that time, billions of dollars from all over the world have flooded into the region and now the government wants a piece of the action. A couple of years ago the Canadian government announced that the tax treatment for its trusts would be changed starting in 2011. This caused these trusts to sell off in panic. However, I would not anticipate the dividends to be effected by much. The good thing is that this news is already known and factored into the price of these trusts. But that does not mean there won’t be another correction just before 2011.
Management
The ability of each management team to run these companies with prudence is always a risk we take as investors.
Risk Comparison
When we compare the risk of oil trusts, we should look at asset classes with similar rates of return. The first type of asset class that comes to mind is REITs. After all that has happened to the real estate market, I do not think I need to discuss the risk level here. On average, the Canadian oil trusts I have mentioned are yielding around 14% annually. The only other major asset class that even comes close to this is small cap stocks. However, you should note that even small caps only return around 11% on average, and that is over a long period, such as 20 or 30 years. As well, the volatility is higher and there are some small caps that go bankrupt. I certainly wouldn’t want to be in small caps during this market.
Even if you are willing to assume the risk of small caps given current market conditions, you would most likely need to actively trade these stocks in order to secure any chance of annual double digit returns over say a 5-year horizon. Otherwise, you could end up flat or even down over that period. In contrast, the oil sands pay monthly dividends. That’s money that comes every month; money that can help neutralize the declining purchasing power of the dollar. In conclusion, whether you want to go Canadian or American, oil trusts offer an excellent solution to counter the effects of high inflation. And during this period of economic uncertainty, perhaps one of the few things we can be certain of is that oil will remain high for many years.
Conclusions
Remember, before you can justify investing in oil trusts, the oil story is something you have to fully believe in because these securities are volatile. While trading opportunities are definitely available, you should be willing to hold them for several years. In fact, at current prices and assuming historical dividend payouts to continue, your cost basis (before taxes) would approach zero if you bought and held Baytex, Paramount, Bonavista, Arc, Advantage, Crescent Point, Enerplus, Freehold or Penn West over the next eight years.
Sunday, July 13, 2008
Oil & Gas Trusts are a Good Defense Against Naked Short Selling
I just listened to Jim Puplava's interview with Bud Burrell on naked short selling. It is a scary interview and quite frankly is quite worrisome. There are companies with more shares on brokers books then shares issued by the companies. This is basicly fraud.
My portfolio is mostly oil and gas trusts which pay healthy monthly distributions. A naked shorter would avoid these stocks because the stockholders would expect a monthly cheque which the naked shorters would have to cover.
I hope I am right.
My portfolio is mostly oil and gas trusts which pay healthy monthly distributions. A naked shorter would avoid these stocks because the stockholders would expect a monthly cheque which the naked shorters would have to cover.
I hope I am right.
Tuesday, June 17, 2008
Oil from Algae
With Oil prices hitting new highs there is lots of talk about alternate fuels. Ethanol from corn is a disaster and will not survive in the long run.
However, one biofuel I think has real potential is Oil from Algae. I like this concept because most of the oil we have today originated from ancient algae.
I like to keep things simple and quit trying to re-invent the wheel. Mother nature has been making oil for billions of years. Why don't we try and emulate mother nature and just speed it up.
The following is a video of an oil from algae experimental farm.
I will write more about this in the future.
However, one biofuel I think has real potential is Oil from Algae. I like this concept because most of the oil we have today originated from ancient algae.
I like to keep things simple and quit trying to re-invent the wheel. Mother nature has been making oil for billions of years. Why don't we try and emulate mother nature and just speed it up.
The following is a video of an oil from algae experimental farm.
I will write more about this in the future.
Friday, April 18, 2008
Retiring Baby Boomers are Screwed and Most Don't Know it Yet
According to the 2007 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) released last week, 60% of current retirees have less than $25,000 in total savings and investments.
Personally, I can’t imagine how they manage it. Sure, some of them have pensions. Virtually all of them are receiving Canada Pension. But heading into your “golden years” with less than $25,000 must be terrifying.
Those of us still in the workforce could use a little shaking up too. The same survey shows that 36% of workers have less than $10,000 in retirement savings! Another 13% have less than $25,000. In other words, nearly half of all workers have less than $25,000 saved for retirement.
Some of these folks could benefit from reading Aesop’s tale about “The Ant and the Grasshopper.” There are clearly a lot of grasshoppers among us.
I think I know why. Surveys show that nearly half of all workers – I think we can assume which half - believe their retirement costs are the responsibility of their employers or the federal government. Big mistake.
Yet pension plans are going the way of the Dodo bird. They've been replaced by RRSPs (the Trust Tax was a direct hit on RRSPs). Young workers will be expected to pay for this demographic time bomb. Guess what...they won't pay.
For political reasons alone, current retirees are safe. But we baby boomers can’t realistically expect future generations to pay the mountain of taxes required to support boomers into their 90s. It’s just a matter of time before the age of eligibility is raised, benefits are cut, or both.
However, if you’re working now you still have time to make the choices that will lead to a more comfortable retirement. As the American writer Elbert Hubbard said, “responsibility is the price of freedom.”
You have to forego current spending to receive future benefits. Essentially, you need to save as much as you can, for as long as you can, beginning as soon as you can. (Millions of boomers are learning that this means working longer than they originally planned.) You then have to take this savings and begin to create an income portfolio now. At first it will be slow but with the magic of compounding it will begin to grow.
When you take responsibility for your financial welfare, it’s empowering. You let go of the idea that it is someone else’s obligation to provide for you in retirement. It means making hard choices. But, trust me, no one at your company or or civil servant cares as much about your financial future as you do. They are trying to create their own financial future at your expense. For proof.....look at teachers pension funds. It won't do you any good unless of course you are a teacher.
Personally, I can’t imagine how they manage it. Sure, some of them have pensions. Virtually all of them are receiving Canada Pension. But heading into your “golden years” with less than $25,000 must be terrifying.
Those of us still in the workforce could use a little shaking up too. The same survey shows that 36% of workers have less than $10,000 in retirement savings! Another 13% have less than $25,000. In other words, nearly half of all workers have less than $25,000 saved for retirement.
Some of these folks could benefit from reading Aesop’s tale about “The Ant and the Grasshopper.” There are clearly a lot of grasshoppers among us.
I think I know why. Surveys show that nearly half of all workers – I think we can assume which half - believe their retirement costs are the responsibility of their employers or the federal government. Big mistake.
Yet pension plans are going the way of the Dodo bird. They've been replaced by RRSPs (the Trust Tax was a direct hit on RRSPs). Young workers will be expected to pay for this demographic time bomb. Guess what...they won't pay.
For political reasons alone, current retirees are safe. But we baby boomers can’t realistically expect future generations to pay the mountain of taxes required to support boomers into their 90s. It’s just a matter of time before the age of eligibility is raised, benefits are cut, or both.
However, if you’re working now you still have time to make the choices that will lead to a more comfortable retirement. As the American writer Elbert Hubbard said, “responsibility is the price of freedom.”
You have to forego current spending to receive future benefits. Essentially, you need to save as much as you can, for as long as you can, beginning as soon as you can. (Millions of boomers are learning that this means working longer than they originally planned.) You then have to take this savings and begin to create an income portfolio now. At first it will be slow but with the magic of compounding it will begin to grow.
When you take responsibility for your financial welfare, it’s empowering. You let go of the idea that it is someone else’s obligation to provide for you in retirement. It means making hard choices. But, trust me, no one at your company or or civil servant cares as much about your financial future as you do. They are trying to create their own financial future at your expense. For proof.....look at teachers pension funds. It won't do you any good unless of course you are a teacher.
Friday, April 11, 2008
Now is the Time to get Into Stocks
He's usually not known for mincing his words, nor for fear of raising his head above the cornfield others know as the global financial sector, but when Dennis Gartman called for a decisive change in the outlook for global equities last week his call will have caught the attention of many.
Is this the same Dennis Gartman who produced one bearish note after another bearish comment since mid last year -at times in strong and defiant opposition to raging market bulls who believed that temporarily rising share prices was a vindication of their own views? It surely is the same one. And to spice it all up a bit more, he was happily pointing out the call came with strong conviction.
Many more market analysts and commentators have -mostly cautiously- expressed a view that the worst could now be over for global equity markets. Few, however, have dared to go as far as Dennis Gartman (at FNArena, we don't know anyone ourselves and we certainly haven't seen anyone anywhere thus far).
The man himself has tried to explain it in the last two editions of his daily newsletter, the Gartman Letter:
"We are asked, "If you are so bearish still of the economy, how can you be bullish of equities?" The answer is very simple: It is called a capital market for a reason. Capital, created by the central banks, floods into the system as the economy wanes, but not being needed as inventories are worn down, as employees are laid off, and as business conditions deteriorate, that capital finds its way into equities.
"Therefore, equities rise even in the midst of recession. It is for this reason that the stock market is one of the "leading economic indicators." Conversely, as business conditions heat up; as inventories are accumulated and as employees are added to payrolls, capital is demanded by the economy itself, and that capital flows from the equity market at the margin.
"Therefore, equities begin to weaken long before the economy makes its top and turns to recession. If one keeps this simple, but elegant, notion in mind, it makes the game of investing in the midst of recession a great deal easier."
Gartman happily concedes more difficult economic times lay ahead. The bottom line remains, however, that stocks are heading higher.
Is this the same Dennis Gartman who produced one bearish note after another bearish comment since mid last year -at times in strong and defiant opposition to raging market bulls who believed that temporarily rising share prices was a vindication of their own views? It surely is the same one. And to spice it all up a bit more, he was happily pointing out the call came with strong conviction.
Many more market analysts and commentators have -mostly cautiously- expressed a view that the worst could now be over for global equity markets. Few, however, have dared to go as far as Dennis Gartman (at FNArena, we don't know anyone ourselves and we certainly haven't seen anyone anywhere thus far).
The man himself has tried to explain it in the last two editions of his daily newsletter, the Gartman Letter:
"We are asked, "If you are so bearish still of the economy, how can you be bullish of equities?" The answer is very simple: It is called a capital market for a reason. Capital, created by the central banks, floods into the system as the economy wanes, but not being needed as inventories are worn down, as employees are laid off, and as business conditions deteriorate, that capital finds its way into equities.
"Therefore, equities rise even in the midst of recession. It is for this reason that the stock market is one of the "leading economic indicators." Conversely, as business conditions heat up; as inventories are accumulated and as employees are added to payrolls, capital is demanded by the economy itself, and that capital flows from the equity market at the margin.
"Therefore, equities begin to weaken long before the economy makes its top and turns to recession. If one keeps this simple, but elegant, notion in mind, it makes the game of investing in the midst of recession a great deal easier."
Gartman happily concedes more difficult economic times lay ahead. The bottom line remains, however, that stocks are heading higher.
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