Tuesday, December 30, 2008

More Discussion on Capitalism

I wanted to add an additional article that I found to the discussion of free-market capitalism and its role in the current economic crisis. This comes from Yaron Brook and Don Watkins via the Ayn Rand Institue. Ayn Rand is the author of classic novels such as Atlas Shrugged, The Fountainhead, and Anthem.

Stop Blaming Capitalism for Government Failures
Yaron Brook and Don Watkins

Speaking of the financial crisis, French president Nicolas Sarkozy recently said, “Laissez-faire is finished. The all-powerful market that always knows best is finished.”

Sarkozy was echoing the views of many, including president-elect Obama, who assume that the financial crisis was caused by free markets--by “unbridled greed” unleashed by decades of deregulation and a “hands off” approach to the economy. And given this premise, the solution, they say, is obvious. To solve this crisis and prevent another one, we need a heavy dose of Uncle Sam’s elixir: government intervention. Whether it’s more bailouts, stricter regulation, a new round of nationalizations, or some other scheme, the only question since day one has been how, not whether, government is going to intervene.

And the issue is wider than the financial crisis. Millions of Americans don’t have health insurance? Well, says Obama, that’s because we’ve left the health-care system to the free market. The solution: a complete government takeover of medicine. A few companies engaged in accounting fraud? It must be because we didn’t impose enough regulations on businessmen. The solution: rein in corporations with Sarbanes-Oxley.

But while capitalism may be a convenient scapegoat, it did not cause any of these problems. Indeed, whatever one wishes to call the unruly mixture of freedom and government controls that made up our economic and political system during the last three decades, one cannot call it capitalism.

Take a step back. In the lead up to the “Reagan Revolution,” the explosive growth of government during the ’60s and ’70s had left the American economy in disarray. A crushing tax burden, runaway inflation, brutal unemployment, and economic stagnation had Americans looking for an alternative. That’s what Reagan offered, denouncing big government and promising a new “morning in America.”

Under Reagan, some taxes were reduced, inflation was subdued, a few regulations were relaxed--and the economy roared back to life. But while markets were able to function to a greater degree than in the immediate past, the regulatory and welfare state remained largely untouched, with government spending continuing to increase, as well as some taxes. Later administrations were even worse. Bush Jr., often laughably called a champion of free markets, presided over massive new governmental controls like Sarbanes-Oxley and massive new welfare programs like the prescription drug benefit.

None of this is consistent with capitalism. As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.” Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud.

America came closest to this system in the latter half of the nineteenth century. The result was an unprecedented explosion of wealth creation and consequent rise in the standard of living. Even now, when the fading remnants of capitalism are badly crippled by endless controls, we see that the freest countries--those which retain the most capitalist elements--have the highest standard of living.

Why then should capitalism take the blame today--when capitalism doesn’t even exist? Consider the current crisis. The causes are complex, but the driving force is clearly government intervention: the Fed keeping interest rates below the rate of inflation, thus encouraging people to borrow and providing the impetus for a housing bubble; the Community Reinvestment Act, which forces banks to lend money to low-income and poor-credit households; the creation of Fannie Mae and Freddie Mac with government-guaranteed debt leading to artificially low mortgage rates and the illusion that the financial instruments created by bundling them are low risk; government-licensed rating agencies, which gave AAA ratings to mortgage-backed securities, creating a false sense of confidence; deposit insurance and the “too big to fail” doctrine, whose bailout promises have created huge distortions in incentives and risk-taking throughout the financial system; and so on. In the face of this long list, who can say with a straight face that the housing and financial markets were frontiers of “cowboy capitalism”?

This is just the latest example of a pattern that has been going on since the rise of capitalism: capitalism is blamed for the ills of government intervention--and then even more government intervention is proposed as the cure. The Great Depression? Despite massive evidence that the Federal Reserve’s and other government policies were responsible for the crash and the inability of the economy to recover, it was laissez-faire that was blamed. Consequently, in the aftermath, the government’s power over the economy was not curtailed but dramatically expanded. Or what about the energy crisis of the 1970s? Despite compelling evidence that it was brought on by monetary inflation exacerbated by the abandonment of the remnants of the gold standard, and made worse by prices controls, “greedy” oil companies were blamed. The prescribed “solution” was for the government to exert even more control.

It’s time to stop blaming capitalism for the sins of government intervention, and give true laissez-faire a chance. Now that would be a change we could believe in.

If you agree with this line of thinking, there are some great sources out there for reading.

Ayn Rand Institue

Ludwig von Mises Institute

Lew Rockwell.com

Campaign For Liberty

Capitalism Under Fire?

In this portion of the economic cycle, we typically see all sorts of causes and reasons for fault. This time, its no different...

We've seen "the fall of the U.S." theories...

As if Things Weren't Bad Enough, Russian Professor Predicts End of U.S.

Its an interesting theory, but pretty light on the substance. This guy fails to take into consideration the actual climate in America.

And of course "the death of free-market capitalism" calls...

Laissez-Faire Capitalism Should Be as Dead as Soviet Communism

Again, awfully light on substance. Its so easily to rip on free-market capitalism during recessions, but people often forget about the wealth created by capitalism which probably is the reason the writer had a job to begin with. Some like to have it both ways. Its easy to tear down a system when its vulnerable, but it isn't really the system, but rather those manipulating it. We don't really have free-market capitalism, but rather a government that works for special interests.

Here's a good opinion piece that digs through this argument, and makes some valid points:

Capitalism Is Worst System Except for the Rest

Here are some important quotes from this piece:

Before you can declare free markets a failure, you have to establish that they exist, says Paul Kasriel, chief economist at the Northern Trust Co. in Chicago.

“We do not have free markets in credit in the U.S. or anywhere else that I know of,” he says. “The price of short- term credit is fixed by central banks. It would only be by accident that a central bank would fix the price of short-term credit” at the precise level that a free market would.

All sorts of unintended consequences flow forth from central bankers’ fixing of a short-term rate. Hold the rate too low, and it leads to a misallocation of capital into, say, housing or dot- com stocks. That’s what happened in the late 1990s and again in the early part of this decade.

“We are now experiencing the economic and financial market fallout from (Alan) Greenspan’s interference with the free market,” Kasriel says.

One supposed nail in capitalism’s coffin is the assertion that deregulation created the problems. This is curious, given that banks, which are at the root of the credit crunch, are among the most highly regulated institutions.

“There is a small army of people overseeing the banking industry,” says Paul DeRosa, a partner at Mt. Lucas Management Corp. in New York. And yet “we’ve had a banking crisis every 15 years since 1837. The number of people devoted to regulation doesn’t seem to matter.”

Regulators from the Federal Reserve, Securities and Exchange Commission, Office of the Controller of the Currency and New York State Banking Commission are “on the premises 365 days a year,” he says.

The regulatory structure may have been antiquated and overlapping. That’s no excuse for the regulators to be caught napping.

Censuring the free market is a way of deflecting blame from the true source, according to Dan Mitchell, senior fellow at the libertarian Cato Institute in Washington.

“The genesis of the problem is bad government policy,” Mitchell says, pointing to everything from easy money to “affordable lending schemes” to the “corrupt system of subsidies from Fannie Mae and Freddie Mac” to the tax code’s favorable treatment of debt (the interest is deductible) versus equity.

Fannie’s and Freddie’s generous campaign contributions (anywhere else, these would be called bribes) encouraged Congress to look the other way as the two housing finance agencies used their implicit government guarantee to increase their leverage and buy riskier mortgages.

To me, this is an important piece of the puzzle. Clearly there were some major mistakes made, and they will change the landscape of the financial industry forever, but lets think twice before we declare capitalism dead.

Tuesday, December 23, 2008

US Weakness Means Opportunity for China

I found an article worth reading from the Wall Street Journal about the US financial weakness and the opportunity for China to gain relative strength in influence and economic power.

As a whole, I tend to agree with this thesis. China has the resources, specifically people. They have a huge young population that is moving to its cities. They are also a nation of producers meaning they will always be exporting goods, or at least until someone makes them cheaper. I've heard Jim Rogers say time and again that selling China today is like selling America in 1908. I believe he's right.

Article: U.S. Woes Open Door for China
Source: Wall Street Journal

2008 Recap/Look Ahead

2008 was a really tough year for investors. There's really no other way to put it. We started the year with strong selling in January, followed by a brief rally. Then we had Bear Stearns in March, which opened a lot of eyes, but not enough, as investors viewed the market drop as a "great time to buy financial stocks." It was actually... until about June. From there, things deteriorated pretty steadily into the fall and the climax and subsequent bailout. And so here we are...

Some things we learned in 2008:

  • You really can't trust analysts and other so-called "experts." Most are just playing the Wall Street game in which the goal is to pull as much money into the system as possible. These experts are actually just market cheerleaders who all benefit from "assets under management" in some capacity.
  • For individual investors, 2008 represented a change in strategy from Buy-and-Hold, to Buy-and-Hope, to Buy-and Hold Your Nose, to What the heck happened to my money?
  • When true market panic hits, there are no safe havens for your money. Commodities provided insulation for quite awhile, but when there is a global recession, energy prices, agriculture prices, and basic materials all experience demand destruction. Cash became risky as well as we saw negative yields on treasuries, bank failures, and a weakened dollar. Gold experienced swings with global currencies weakening against the dollar and investors speculating. US multinational corporations, which did wonderful in 2007, finally weakened as the global economy slowed, the weak dollar stopped contributing to earnings, and credit was much harder to come by.
  • Companies we thought we conservative by nature fell into the same trap of chasing extra earnings by taking on excessive debt and risk. You can look back at every market crash and subsequent economic decline, and they are all manifested by the same factors: Excessive debt, increased risk, too much speculation, and people engaging in business outside their circle of competence (for example, mortgage-backed securities, CDO's etc).
  • You cannot create prosperity through false growth. Inflating assets above their true value only creates bubbles and the increased wealth doesn't last. Few people end up profiting in the end, and many people lose.
  • Although bailouts help to calm panic, they rarely work, as they typically condone the risky behavior that got the company in that position to begin with. It will be almost impossible to track where the money truly is going, and its doubtful we'll get it back. Its impossible to decide who deserves a bailout, and who does not. Once you allow politicians to start spending additional taxpayer dollars, they won't stop. We'll see a lot more taxpayer dollars going out to who knows where in 2009. We should not reward backward-thinking management that cannot adapt to the changing global economy.
  • Its very difficult to invest when the rules are constantly changing. To paraphrase Mark from Fund my Mutual Fund, investing in the current environment is like playing football with the goal posts constantly moving. This has become a traders market, as things change by the hour.
  • The world is much more inter-connected then we thought it was. European and Asian markets have been impacted just like the U.S. has, and there was no dislocation from what was thought to be a "US problem."

Looking ahead to 2009, there are a ton of question marks, and few certainties. Here's a few things I see happening in our world in 2009:

  • The economy is in for a rough year. If 2008 was the year that the financial industry took a major hit, 2009 will be the year the economy gets hit. We're going to see a lot more unemployment, and this won't be able to help other areas of the economy such as housing, retail and credit. In order for people to pay off debt and start buying things again, they need steady income because we're not a nation of savers.
  • Luxury goods will continue to be swapped for generic-type names. Just as late 2008 was good for Wal-Mart and McDonalds, 2009 will see that trend continue. People are going to stop paying twice as much for a Mac than a PC. Discount retailers will continue to see increased business, and specialty retailers who are more expensive will continue to lose sales. Not out of choice, but necessity.
  • Obama's economic stimulus plan will help cushion the blow in employment and GDP will come out better than it would have. But its not necessarily real growth. The stock market will rally a few times, especially in infrastrucutre stocks, as more details are reveled about where the money is being spent.
  • We'll continue our push to alternative fuels, but it will be dampered by the lack of capital and lower energy prices. Money is needed to fund research and building of these projects, and although it will continue, it will be slowed. Lower energy prices also replace the extra incentive to switch sooner. Speculation will still be engaged among solar, wind, and other various stocks, but volatility will remain. Stock declines will be good opportunities to pick at small positions if you're so inclined.
  • The stock market will rally at various times throughout 2009 when there is a lack of news, or during the economic stimulus period, but nothing sustained. I think we'll retest our market lows, and at some point take another move down. This will be impacted by how bad unemployment gets and if more industries and local governments need taxpayer assistance. I believe we're going to see consumers strapped, and local governments running out of money. These types of event are what will shock the market in 2009 as opposed to 2008 when it was investment banks. At this time, I see no compelling reason to buy stocks other than fairly attractive valutions. Until we get a better picture of earnings, and how emerging markets will perform, its difficult to buy with much conviction. I do think Chinese stocks (as well as a few other emerging countries) will be worth buying again, but they may not recover for awhile. Obviously US blue chips will be good buys, but there isn't a huge hurry to get in as I think we'll see cheaper prices. Focus on companies with little to no debt, and companies that don't rely on debt to finance operations, or to make profits. The fundamentals of most financial companies have become impaired, and it will impact earnings for awhile.
  • It will be a tough year for the economy and many people, but the U.S. will pull through. For the most part, we have a nation of optimists with a strong resolve and work ethic. It may take some time, but it will get better, I'm fully confident in that. The U.S. will play a different role in the world during the next couple of years and beyond, but thats not necessarily a bad thing.

I hope you all have a wonderful holiday season, and a healthy and prosperous 2009!

Saturday, December 20, 2008

More News on the Geothermal Front

Geothermal energy is continuing to gain traction as a viable solution to our alternative energy needs. I recently did a profile on one of the leaders in the geothermal space, Ormat Technologies (ORA). Here's a roundup of some of the latest geothermal news:

Surprising magma find captivates geothermal scientists
Three developments in the geothermal world this month have caused more excitement in the field than these rock lovers tend to see in half a year. First up, drilling engineers accidentally tapped into a magma chamber in Hawaii while searching for new geothermal energy sites, geologists reported last week. The exceedingly rare discovery occurred in a geothermal field that was under development for power production.
The magma find provides an unexpected window into the process by which rock from the ocean floor forms into continental rock. Most of Hawaii is made of cooled lava, called basalt, which also makes up some of the ocean floor. The magma, however, is composed of elements that are more similar to the geology of continental rock, rather than basalt. Discerning the differences between the two types of rock could be key to unraveling the secrets of how continents form. A geoscientist quoted by National Geographic described it as his own Jurassic Park, on par with finding dinosaurs frolicking in the wild. The only downside is that the significance of the magma site for scientific research may sideline efforts to build more geothermal power plants for Hawaii. But never fear, the geothermal energy field is practically thriving right now. Two new plants are about to begin producing power in Nevada, with production capacity of about 65 megawatts. That's enough energy to cover roughly 40,000 households and cuts carbon-dioxide emissions by about 300,000 tons of CO2 per year, says Enel North America, the company financing the plants. A typical coal plant produces about 500 MW of elecitricity, so the two new facilities aren't exactly the stuff of legend. However, many geothermal plants start small and then get expanded once they prove themselves by consistently producing power. And in Africa, where geothermal energy production has long been viewed as a promising but far off technology, it may have just gotten a big boost. Preliminary studies, reported at the climate talks in Poznan, Poland, have found that the Rift Valley in East Africa could develop about 4,000 MW of electricity. Historically, geothermal energy has routinely been hindered by the high costs of drilling. With data as overwhelmingly positive as this, however, geothermal developers may finally start to sniff out a business plan for Africa.

Article Source.

Although the economic troubles are causing energy exploration funds to dry up a bit, renewable portfolio standards are going to force states to spend money on new forms of power generation. I'm going to keep an eye on geothermal as I believe its one of the best sources and has a lot of potential.

Some Good Weekend Reading

I've always been a frequent reader of Mises.org, or the Ludwig von Mises Institute. They provide a tremendous resource of free articles, commentary, and books on economic issues. I would call them "economic purists", and believe me, we need more of them around right now. An article I'd like to pass along today is a discussion of the credit problems and the risk of deflation, or lack thereof. It was written by Jeff Bonn. Here's a couple of impressive quotes from the article, but it is worth reading in its entirety:

Credit is not wealth: it is at best someone else's wealth. At worst, credit
is purely fabricated currency.

The same mistakes that were made during the Great Depression are being made
now. The call to prop up prices will grow to a din as the self-interests of
businesses push themselves on the Federal Reserve and Treasury.

The business and economics establishment will soon call for a new New Deal,
and all the socialist policies of FDR will be dusted off and respun to the
unwitting public, and the years that follow will be ones of pain, high prices,
and a real fall in the standard of living.

As long as our central government has the ability to dole out these favors,
there will be special interests lining up to receive them.

Its important to look back at history when making the economic decisions that will impact tomorrow. Unfortunately, our leaders in Washington become so wrapped up in the short term effect, and perceived effect, that they can't even see what they're doing to the future.

Here's the entire article, and take a look at the entire site, it will be worth your time.

Friday, December 19, 2008

Feel Good Headline of the Day

With economy in shambles, Congress gets a raise

A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay.

Instead, they will get a $4,700 pay increase, amounting to an additional $2.5 million that taxpayers will spend on congressional salaries, and watchdog groups are not happy about it.

The full article, if you need to read any more.

Thursday, December 18, 2008

Rally Likely Short Lived

We appear to have a little Santa Claus rally on our hands. Stocks move sharply higher on no news, and flat or slightly lower on bad news. This may seem like good news for investors, but I'd urge caution before throwing too much money back in the market. Here's why:

-Fund managers are trying to salvage what has been a horrendous year for most. With lighter trading volume because a lot of money has been pulled from the market, its easier to make stocks move higher with less trading right now. These guys would like to make their yearly numbers look a little better if they can.

-Obama's stimulus plans are driving up stocks that may not even benefit. There have been some pretty big figures thrown out there (I've heard as high as $850 billion), but there has been no real specific detail. We've heard "infrastructure" and thus anything related to that industry has been trading with some strength.

-Take a look at last year. We had a steady stock rally around this same time. And this was when there were very few perceived risks compared to now. Do I have to remind anyone what happened last January?

Is this trade-able right now? Yes. Traders are making some money right now. But there is too much negative on the economic side, and there is probably more coming, so I can't say I'm putting much money into the market yet.

Tuesday, December 16, 2008

A Third of Hedge Funds Face "Wipe Out"

I done a few posts on hedge funds, and their influence over this market. They've been facing massive redemptions and forced selling, which has contributed immensely to the volatility in the market. Now that things have calmed down a little, some of the data will be appearing from the wreckage:

Almost a third of hedge funds will shut or merge after the $1.5 trillion industry posted its worst ever performance this year, according to IGS Group, which advises hedge funds on raising money.

“The failure rate is going to go up, the closure rate is going up, and the merger rate is going up,” IGS Chief Executive Officer John Godden said in an interview in London. “It’s going to be a 30 percent wipe out.”

It's all part of the cycle of deleveraging. All this is going to do is take away more capital from the market, and quite frankly that's what it needs most. In the next administration, I'd imagine we're going to see a lot more regulations for hedge funds, as well as less tax loopholes. These funds will still be the preferred investment vehicle for high net worth individuals and endowments, but without question, the industry is going to go through some changes.

Article Source.

Exiting the Oil Trade

I went ahead and exited the oil trade. OPEC announced that they will cut 2 million barrels of production tomorrow. This appears to be a "buy the rumor, sell the news" trade. Economic weakness is probably going to trump the production cut and keep pressure on oil prices. If you're looking for a oil company to buy and hold, its still a good time to buy. I believe supply issues will become important once we see some economic recovery, and prices will climb again.

ABB: A Nice Order Rolls In

I did a profile on Swiss industrial giant ABB last week, and today they announced a new order.

Swiss electrical-engineering company ABB Ltd. (ABB) said Tuesday it won a $87 million order in the U.S. to expand the capacity of the power transmission system.

ABB said the order is to expand and strengthen the power transmission network in the area of Los Angeles, California, so that it can deliver more electricity from renewable sources.

This is exactly the type of order I've been expecting ABB to get. I think we will see many more as alternative energy projects are rolled out in the next couple of years.

Link to the press release.

Disclosure: Long ABB

Friday, December 12, 2008

Jim Rogers: Most US Banks "Totally Bankrupt"

One of the most successful investors of the past couple decades has had some pretty strong criticism of the US response to the banking crisis. In a recent interview, Jim Rogers had this to say about the bailout:

"Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt," said Rogers, who is now a private investor.

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."

"Governments are making mistakes," he said. "They're saying to all the banks, you don't have to tell us your situation. You can continue to use your balance sheet that is phony.... All these guys are bankrupt, they're still worrying about their bonuses, they're still trying to pay their dividends, and the whole system is weakened."

Something to think about as the US ponders the next round of bailouts, this time to the automakers.

Full article, via Reuters, can be found here.

ABB: A Look at Electricity Infrastructure

Swiss industrial electrical giant ABB (ABB) is at the heart of the infrastructure discussion right now. They also should be at the heart of discussion of solutions for energy efficiency and sustainability. The combination of the two puts ABB in a great position moving forward.

A bit about the company:

-ABB is a leader in power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact. The ABB Group of companies operates in around 100 countries and employs about 120,000 people.

They operate in five segments: Power products, power systems, automation products, process automation, and robotics. Click here for a description of each.

ABB has attracted a lot of attention within the past couple of years because of its global reach, particularly in emerging markets. According to their website, in Q3 of 2008 orders were broken down in this fashion:

  • Europe 43%
  • Asia 28%
  • Americas 21%
  • Middle East and Africa 8%
Here's a presentation from the company with more detail (pdf).

Positives for the company:

  1. Their businesses are in industries where there is currently a lot of focus among governments and private corporations. Governments are trying to replace old power grids and promote energy efficiency through stimulus spending and tax credits. Private corporations and utilities are spending money on alternative energy products like solar and wind power and need solutions from companies like ABB to pull these projects together.
  2. Their growth is coming from emerging economies. Many are cash rich and have growing populations with a consistent need for these products.
  3. The U.S. is likely to build or upgrade their power grid to integrate alternative energy products and increase efficiency. ABB is likely to play some role in this, and it could be a large one. Another stock that could play a role is Quanta Services (PWR). Obama's likely energy department head has already pitched the idea:
-How about renewable energy? Dr. Chu already had a taste of Washington power-brokering, in a briefing with current Energy Secretary Samuel Bodman and Treasury Secretary Hank Paulson. He pitched them on the idea of an interstate electricity transmission system to be paid for by ratepayers. That would solve one of the biggest hurdles to wide-spread adoption of clean energy like wind and solar power.

Here are some links with more detail on this potential project:

WSJ Enironmental Capital Blog Post.
Common Tragedies Blog Post.

Negatives for the company:

  1. We are in what appears to be a significant recession. Funding for additional projects typically gets cut off during economic slowdowns. There is no evidence that growth won't slowdown for ABB.
  2. Emerging economies haven't been spared by what was thought to be a "US problem." Many emerging countries are seeing economic slowdowns as strong or worse than the U.S.
  3. Energy prices have dropped. Funding for alternative energy projects might get shelved with fuel prices falling across the board.
Some notes about the stock:

The stock hasn't been spared during the recent economic turmoil. It was slashed from a high of $33 earlier this year to around $10. It has rallied a bit in the past week with other infrastructure stocks after Obama's preliminary plan was announced.

They have a lot of cash on the balance sheet and should have no problems weathering the economic turmoil.

Earnings are expected to be flat with estimates for 2008 being $1.67 and 2009 being $1.65. They could rise substantially if the economy recovers in 2009, and could see a boost from infrastructure spending in the U.S.

Valuation wise, the stock is cheap. Its trading at less than 7x 2008 earnings.

I think the stock is a good buy at current levels. To me it is more attractive than its competitors, GE (GE) and Siemens (SI), as both have some problems right now. GE has a lot of financial exposure and isn't a direct play on the industry like ABB. Siemens is facing some profitability issues and needs some re-structuring. I'd take a look at Quanta Services, but the stock carries a pretty good premium at 22x earnings. Overall, I like ABB the best in this industry.

Disclosure: Long ABB

Hedge Funds Deleveraging Too

According to Bloomberg, some of the brightest, most successful hedge fund managers got into trouble too.

-In the close-knit hedge fund community, where confessions of a mistake are rare, billionaires Louis Bacon, Kenneth Griffin and Paul Tudor Jones are retreating from borrowed-money bets, private equity and emerging market debt and championing more transparent stocks, bonds and currencies.

Hedge funds got into the same cycle of "everyone's doing it, so we need to to stay competitive." But with massive losses and forced selling due to fund redemptions, Hedge funds now will get back to basics, and this should help to stabilize the market a bit.

I wrote about hedge funds and their potential problems this earlier this year. These funds help create asset bubbles with excess leverage, and they increase market volatility by swapping in and out of stocks and sectors with lightning speed.

-“Managers got away from their core expertise as they got bigger and had to put the money to work,” said Brad Balter, whose Boston-based Balter Capital Management LLC invests in hedge funds. “The industry lost its way, and this is a reset.”

So deleveraging is happening all over. And although its painful, it is absolutely necessary. The same holds true for financial institutions, and in some ways the auto industry. If your model isn't working, a bailout will only prolong the inevitable collapse. The strongest companies are those who can take prudent risks, but avoid falling into the trap of excess leverage.

Full Bloomberg article here.

My August '08 post about hedge funds.

Thursday, December 11, 2008

WSJ: Mutual Fund Inflows Slow

The Wall Street Journal's Marketbeat blog had an interesting post about mutual fund inflows.

- From late September into early November, portfolio, mutual and hedge fund managers faced a wave of redemptions. With the stock market in free fall thanks to a global economic and credit crisis, and banks making all types of investors aggressively rein in their leverage levels, this push of redemptions helped erase more than a decade of gains for the Standard & Poor’s 500. All told, TrimTabs Investment Research posted mutual fund outflows of more than $80 billion in the five weeks ended Oct. 29.

- But in the last few weeks, the wave of money that had been coming out of mutual funds and portfolios has started to trickle back into the market, albeit slowly. In the week ended Nov. 26, for example, mutual funds posted $10.4 billion in inflows, with the Dow Jones Industrial Average marking a 6% gain for the period.

- “We’ve seen some meaningful flows on a daily basis into our funds. And we’ve seen it throughout the last couple weeks as it’s been net inflow mode for a couple of weeks now,” said Michael Petroff, a portfolio manager with mutual fund company Heartland Advisors.

This doesn't necessarily bode well for the stock market though. This is mostly due to no great options for investing cash.

- For example, interest in ultra-safe U.S. Treasurys has surged in recent days to the point that the yield on the three-month T-bill traded at 0.007% recently and even briefly dipped below zero Tuesday.

I doubt many investors are excited about borrowing money to the government interest free. I believe that many investors are more likely to be talked into jumping back in the market with the lack of other options.

The period of forced selling due to fund redemptions appears to have pretty much slowed. This should help to slow down the market volatility, which should bring back more individual investors.

Of course all of this will take time, but this is part of the process of de-leveraging.

Oil Trade Working Well

On Monday, I pointed out an opportunity for a short-term oil trade. Its working out pretty well so far, as crude oil has moved higher all week from around $40 to current levels of $47.

The main reason for the trade, which is OPEC's likely production cut next week, has been noticed by many traders. In fact, the strength in these stocks suggest that it might be worth selling the hype on this trade. I'm thinking this mainly because there are very few compelling reasons to buy stocks or sectors right now, and lots of people are looking at this trade. I do believe OPEC will make a major cut in order to increase oil prices, but if it doesn't exceed expectations, which are now heightening, these stocks could sell off again. Its a situation to monitor closely. If you're in on this trade, I'd probably use a trailing stop. That way if the news is good, you still own the stock, but if it disappoints, you can lock in some profit.

Here's the closing prices and current prices of stocks mentioned Monday:

National Oilwell Varco (NOV): Mon: $22.37 Current: $27.31
Schlumberger (SLB): Mon: $40.78 Current: $43.93
Exxon Mobil (XOM): Mon: $79.60 Current: $81.70
Noble (NE): Mon: $23.51 Current: $27.00
Transocean (RIG): Mon: $54.25 Current: $61.45

Disclosure: Long NOV

Wednesday, December 10, 2008

Alternative Energy: A Look at Geothermal

Of all the alternative energy sources being discussed, I think geothermal gets the least amount of discussion, especially considering the positives.

For those who don't know, geothermal energy is energy from heat stored in the earth. It is captured in various ways, but it typically involves drilling into the earth's core and extracting hot water and steam from different depths.

There are a couple of big advantages with geothermal.

1)To start, fuel isn't needed to heat or cool a home, or generate electricity. This cuts down on the need for fossil fuels to be burned.

2)Geothermal is competitive price-wise. There are extensive upfront costs, but for generating electricity, its similar to wind and much cheaper than solar. For home systems, it typically cuts yearly costs dramatically, and takes 5-10 years to payoff, depending on the size of your system.

3)The big advantage it has over wind and solar is its ability to provide base load power. This basically means it runs 24/7. Base load is the minimum amount of electricity that utilities need to supply for things to run. This is HUGE. The wind doesn't always blow, the sun doesn't always shine, but the earth's heat doesn't shut off.

Combining 24/7 geothermal with other various sources can provide a workable combination for power generation. Plus, you can use the same land for multiple uses often times. In the U.S., the best areas for geothermal are on the West coast, which is also the best areas for solar power. It is feasible to run geothermal below ground and solar above ground on the same land.

So where does that put us as investors? Through my research, the best company I've found is called Ormat Technologies (ORA). Company Description: It operates in two segments, Electricity and Products. The Electricity segment develops, builds, owns, and operates geothermal and recovered energy-based power plants, and sells electricity. The Products segment designs, manufactures, and sells equipment for geothermal and recovered energy-based electricity generation; and remote power units and other power generators, including fossil fuel powered turbo-generators and heavy duty direct current generators.

Some positives for the geothermal industry:

-The states are taking the lead by passing Renewable Portfolio Standards requiring specific amounts of energy be derived from renewable sources by a specific date. California is one of the first to kick in with 20% required by 2010. 27 states have taken on this plan, and geothermal should play a big role. Plus, the entire world is taking on many mandates like this, and Ormat supplies products and services worldwide.

-The federal government will be rolling out programs to stimulate renewable energy. First, there's Obama's economic stimulus plan coming in 2009, and geothermal should fit into it somewhere. There are also tax credits for businesses and individuals to adopt these programs.

-There is a lot of funding and venture capital floating around for renewable energy programs. Google has been a big proponent of geothermal, via their philanthropic wing, google.org. They've given over $10 million in grants to research geothermal power.

As for Ormat's stock, its expensive, but cheaper than it was six months ago. With oil prices dropping and the economy weakening, many renewable projects are being put on hold, but it should come back stronger, and soon. The stock is trading at 20x 2009 projected earnings. They are estimated to grow earnings from $1.10 in 2008 to $1.51 in 2009, via consensus estimates. I don't currently own the stock, but I'd look at taking a position if the price gets a little more attractive. Overall, I'm a buyer of geothermal energy and I think it will play a big role in the world's transformation to renewable energy.

Disclosure: None.

Here's a good article about the benefits of geothermal.

Also, a presentation via Ormat's website (PDF).

Tuesday, December 9, 2008

Obama's Economic Stimulus Plan

There's been a lot of talk about Obama's new economic stimulus plan. The word "infrastructure" keeps getting thrown around, and I think its getting misinterpreted. Because we keep hearing infrastructure, every stock in that space is getting a pretty good bump. Here are some of his words:

"Hence Mr. Obama's emphasis over the weekend on spending on "infrastructure" -- build roads, modernize schools, expand Internet access, improve buildings' energy efficiency, put better technology in hospitals."

"The need for a big economic jolt means "we can't worry short term about the deficit," Mr. Obama said on NBC's "Meet the Press." "We've got to make sure that the economic stimulus plan is large enough to get the economy moving."

I'm not sure how much of the money is going into the "build roads" part of the conversation. I think we're going to see investment in internet infrastructure to help make a network of collaboration. Also, I believe a lot of it will be geared toward energy efficiency. New heating and lighting systems in government buildings, and encouraging businesses to do the same through tax credits.

Based on what I've read, I also think there is going to be some federal money to jump start the alternative energy movement. My guess is Washington is going to help invest in a new or updated power grid. This will allow rural areas, which can help in power generation (wind and solar power are often generated in remote areas) to be connected to the cities that need the power.

As an investor, I'd be looking in those areas. Internet Infrastructure: How about Cisco (CSCO). I think Google (GOOG) is going to play a role in this as well. Take a look at www.google.org for some of their ideas.

Power Grid: You have to think of GE (GE) a bit here, but they're too big for me. I've been behind ABB (ABB) for awhile in this space, and I think its a good buy here.

Its anybody's guess for solar stocks. I think the industry as a whole will get promoted, but the stocks aren't cheap. I'd probably look for an ETF here.

Also, I like geothermal energy. Its much cheaper than solar and is pretty accessible right now. I'm going to do a specific post about this, but the stock I'm looking at for this is Ormat Technologies (ORA).

Here's some more reading about Obama's plan.

Disclosure: Long GOOG,ABB.

Monday, December 8, 2008

Oil Ready for Short Term Rally

Oil prices, and oil stocks, are ready for a short-term rally here. OPEC is scrambling to deal with the major slowdown in global demand. Most likely they will decrease production output to help prices recover. Remember in July when President Bush went to Saudi Arabia begging for production increases? What a difference a couple of months can make.

The pattern I see here is:

A) Right now-oil stocks oversold with oil prices around $40.
B) OPEC cuts production. Oil moves to somewhere between $50-75/barrel. Oil stocks rally.
C) Rally wears off, sometime early 2009. Stocks fall again as recession-caused demand destruction continues. Oil stocks back to current levels.

By the way, this is also the pattern for financial stocks, and homebuilders, and automakers. We're seeing a potentially trade-able pattern, but a pattern of lower highs and lower lows.

For the trade, take a look at the usual suspects:

National Oilwell Varco (NOV)
Schlumberger (SLB)
Exxon Mobil (XOM)
Noble (NE)
Transocean (RIG)

Disclosure: None

Thursday, December 4, 2008

Economy in Trouble, Stocks to Move...Higher?

Yep, you heard it right. Economic bad news is coming in from all fronts right now, with job cuts being announced daily, as well as poor data. Since the market drop in October, the economy has pretty much frozen in a lot of areas. It will take some time to thaw, but stocks likely will be the first thing to move higher. Why? To quote Ken Fisher, "The stock market is a discounter of widely known information."

I always look at it this way: The stock market is pricing in the state of the economy around six months from now. Right now there is no sign of stabilization in the economy, so the market is still quite volatile. But while the economy might take a little while to recover, the stock market will make is quickest move as soon as it looks like things are done deteriorating.

For the first time in decades, the yield on the S&P 500 is higher than the 10 year treasury . This signifies pretty strong value in current stock prices.

The question you have to ask yourself when looking at today's prices is not will the stock market be higher in a month or two, but will it be higher in a year, or three years, or ten years? I believe the market will be significantly higher, and if you're investing with a time horizon above a couple of years, its a good time to buy.

Thursday, November 20, 2008

What's Causing These Intra-Day Market Swings

I talked about whats moving the market in yesterday's post. I just wanted to pass along an opinion piece in the Journal today that basically says the same thing with a bit more detail. Its by Andy Kessler, and you can find it here.

From a technical standpoint, we appeared to break through the resistance levels near 8000 on the Dow with this morning's sell off. But we've since moved higher, and I wouldn't be surprised to again see more of the same action. Re-test market lows, and then bounce. Its been fairly predictable if you're looking for short-term patterns to trade off of.

Wednesday, November 19, 2008

Panic Selling a Good Time to Buy

Historically, these periods of panic selling have proven to be excellent times to buy stocks. Right now we are not only seeing panic selling, which actually took place mostly last month, but forced selling. I think its more forced selling right now. Hedge funds and mutual funds are seeing massive redemptions, and many margin calls for individuals. During these periods the fundamentals get largely ignored. I heard Jim Rogers talking about this being a big factor in the commodities sell-off, and why this is a nice time to buy. He said commodities typically bottom first, and do well during periods of economic weakness as there is low supply. I can agree with that.

I'm still not touching bank stocks. Like I've said before, these companies have eroded any competitive advantages they may have had, and this will impact their earnings for many years.

I'm looking at a few stocks here. Eaton (ETN) is an industrial electrical company trading at 5x earnings and less than 1x book value. They have improved their business and balance sheet to preform well not on a cyclical basis but secular. They're working hard on energy efficiency, and I see a lot of money being spent under the new administration updating our power grid and increasing efficiency. If you need any further convincing, Warren Buffett has been buying this stock.

Same holds true for Swiss giant ABB (ABB). I've held this stock awhile, and under $10, where it closed today, its a steal.

I'd also dabble in some companies with no debt. Although they aren't immune from weakness in the economy, they don't have to worry about funding their operations by borrowing money, which is tough to come by right now. I picked up some Google (GOOG) today (they're sitting on $14bil in cash and no debt). I'm also looking to buy a little bit of T Rowe Price Stock (TROW). Again, earnings will be difficult here as money is being pulled from their funds, but they have a great company, no debt, and the market always gives this stock a premium, which should help it to recover quicker than many other stocks. Plus, a 3% dividend.

Its not a great economy, but if you're willing to holding through some ups and downs, its a pretty good time to buy stocks. But avoid the urge to buy banks or other trouble companies.

Friday, November 14, 2008

The Problem With Big Government and Bailouts

Now that the bailout has has some time to sink in, we're seeing some of its effects. As expected, the government is providing little to no oversight and transparency into where the money is going.

-Excerpt from Washington Post article-

"In the six weeks since lawmakers approved the Treasury's massive bailout of financial firms, the government has poured money into the country's largest banks, recruited smaller banks into the program and repeatedly widened its scope to cover yet other types of businesses, from insurers to consumer lenders.

Along the way, the Bush administration has committed $290 billion of the $700 billion rescue package.

Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.

"It's a mess," said Eric M. Thorson, the Treasury Department's inspector general, who has been working to oversee the bailout program until the newly created position of special inspector general is filled. "I don't think anyone understands right now how we're going to do proper oversight of this thing."

It was interesting to see the rush of all the companies who tried to get into the government program of buying companies common stock. Not just big banks, but insurance companies, regional banks, and other questionable industries. GE? I guess they have a finance wing. In my opinion, bailouts don't work. The government will continue to waste taxpayer money as long as we allow it.

Link to the complete article.

Thursday, November 13, 2008

Some Essential Reading

One of my favorite authors, Michael Lewis, writes for Portfolio Magazine, and has an excellent new piece out. If you're interested in how this whole mess began, this provides a nice viewpoint. Click here for the article.

Wednesday, November 5, 2008

Some Thoughts on the Election

A truly historic night in America. I don't need to recount the events, but I'd like to talk about what it means for investors and the market. The big positive here is the inspiration this victory is appearing to give many Americans. Confidence in the economy and our country has been waning, and its an essential element if we are to thrive.

It doesn't do anything to change the economic situation we are in however. There are many challenges ahead. I'm truly hoping the next administration realizes the problems with carrying massive deficits and encouraging Americans to do the same. It has happened before, and, like this time, it always ends badly. Obama's appointments to cabinet posts and other positions, specifically Secretary of the Treasury, and the next Fed Chairman, will carry monumental importance.

I see the market stabilizing and potentially rallying in the short term. The market hates uncertainty. Now that the big question mark is out the window, things can settle down a bit. But that can't change a tough economic environment. It will take some time before profits and the market can make substaintial moves.

Its the beginning of a new chapter. Its up to us how it plays out. So lets be optimistic and realize great success!

Tuesday, October 21, 2008

Ron Paul Fox Business Oct 14 2008

Another Stimulus? Who Would Benefit?

The markets rallied yesterday after news that Federal Reserve Chairman Ben Bernanke was in favor of a second economic stimulus bill. A bill that has been introduced by Democratic leadership. Who would benefit here? Bernanke is clearly trying to keep his job as we move into a new administration, and it will help him if he starts agreeing with Democrats. The problem with allowing Washington to spend taxpayer money, they'll continue to do it. And that's what we're seeing. First, the government sponsored loans to prevent Bear Stearns from collapse, than the seizure of Fannie Mae and Freddie Mac, then the huge bailout bill, then the buying of equity stakes in banks, and I could go on. It won't stop either. That is the problem with going down this path.

Its time that we wake up and realize that these bailouts aren't going to help us in the long run. The economy goes through cycles. Excess risk and poor management leads to bankruptcies. If you don't allow the bad companies and their management to fail, they will only repeat the process in the next business cycle, making it worse. I agreed with securing people's bank deposits. Beyond that, I'm not in favor of additional government action.

Friday, October 17, 2008

Buffett is Buying, But Should We Be Buying?

Warren Buffett confirmed that he is indeed buying more US equities during this crazy period of volatility. The question though, is is it a good time for you and I to buy US equities? The answer is yes. And no. And maybe. Does that help? Here's the thing. Many stocks are at their cheapest level in years. Sentiment in the market is near all time lows, and much of the bad news is already out. This typically signals a good time to buy some stocks. But it depends on your situation. Are you dealing with money that you won't be needed to touch in the next couple of years? Because that's the kind of money that should be moving into the market now. If you're not retiring for many years, or are willing to hold through more periods of volatility and uncertainty, than yes, its a good time to buy.

But if you're looking at a shorter time period, or are looking for a quick trade, its not a good time to buy. There are too many factors working against you. Hedge funds and mutual funds are under great stress right now, as they are facing investor redemptions and margin calls. This forces them to dump large amounts of stock which is contributing to these wild swings. I read earlier this week that hedge fund king Steven Cohen is moving largely to cash. He's holding billions in investor's money. So it could be a bumpy ride as much of the economy is soft, and we still haven't seen the end of the banking crisis.

But to someone like Buffett, who holds stocks for decades while knowing he won't need the cash in the meantime, its a great time to buy. He can wait it all out knowing he got a good deal on his current buys. He's betting on history, and that says that the US markets will come back.

For me personally, I'm looking to buy some stocks and index funds with my retirement money (which I won't need for many years), and am not buying in my cash accounts.

There's my two cents worth. Have a great weekend!

Monday, October 6, 2008

Where to Go From Here

This is disheartening for Americans. We were talked into this bailout bill hoping that it would stop the bleeding in the markets. It doesn't appear that this is the case. I can understand if you've moved to cash with your investments. Its no time to take extra risk. But we have to do our best to think contrary to the crowd in these cases. A lot of stocks are cheap. I know its the same old argument, and I'm not buying into it yet. But sentiment is in the gutter, and the volatility index has reached levels where reversals in the market usually take place. So, if you want to buy, stick with companies that don't rely on borrowing money to finance operations. I'd also look at companies dealing globally. Every country's situation is different, and even though a global recession seems imminent, some countries are sitting better than others.

So, keep plenty of cash on hand, and if you're buying, take your time.

Tuesday, September 30, 2008

It's All Political

Yesterday's market plunge was an overreaction to uncertainty. The market hates uncertainty. Here's my thoughts on the bailout. Its a flawed bill, but its a flawed system. Wall Street is flawed, and Washington is flawed. But we have to deal with what we've got, and we have to get out of this mess. So some version of the bill will be passed to shore up confidence. Do I think the bailout will make money for taxpayers? No. Washington politicians are experts at ripping off taxpayers, and they do most damage when people aren't paying attention. Now that their every move is scrutinized, we can see how poor they really are at accomplishing things. Hearing about Pelosi's political speech just before the vote made me sick. Of all the times to try and get a leg up in the election, that was not one of them. They don't get it, pure and simple. We all heard Harry Reid's "no one knows what to do" quote.

That's all this is is politics. Its too close to an election. Obama and McCain won't even talk about it for fear of alienating voters. That's not what a leader does. A leader puts his country's need first.

The Dems. could have easily passed this bill yesterday, as they have a majority, but were too afraid politically. If the bailout was a failure, they needed Republicans to be on board so there would be equal blame.

Quit the blame game. Quit the politics. Get something done for a change.

Monday, September 22, 2008

Life in a Post-Bailout World

So bailouts are coming one after another. What a wonderful job being done by our representatives in Washington on this. Neither candidate has taken any sort of position on what to do. Senate Majority leader Harry Reid said it best with his classic quote "no one knows what to do." Quite true. I get the sense that they're basically handing the checkbook to Paulson saying "do what you have to do." I don't think anyone else knows what to do.

So what happens once the bailouts are done? Okay, we've "saved" the financial system. But was it a system worth saving? Its quite possible that these bailouts won't bring needed reform that is necessary. We might just be happy that we survived and move on.

But the truth is that we need change. But its not a matter of needing more regulation across the board. Banning short sales isn't the answer. That only prohibits markets from performing as they should. And quite truthfully, it can't stop stocks from declining further. If a company is doing poorly, it can be discounted heavily because there won't be buyers for the stock. Simple supply and demand. Bailouts are also a negative because they basically condone the behavior that got us into this mess. If management gets a company into a horrible position, they deserve to be fired. They deserve to have consequences. If I mismanage my small business, and take on way too much risk, and it backfires, its tough luck. When companies know that there is a backstop, they will take more and more risk, pushing the envelope. This will continue the pattern of bigger and bigger bubbles, and each popping causing bigger problems.

You can't be excited about investing in anything that depends on the strength of the dollar. The actions in the past week have given that a weak outlook. I'm a believer that commodities will bounce back a bit, and those have the best chance in a scenario like this. After that, I'd only look at deep value plays.

It could get tough here for awhile, and there's nothing wrong in sitting it out for a bit.

Thursday, September 18, 2008

An Attempt at Clear Thinking

Okay, so the market is pretty much chaos right now. There isn't anyone who won't argue that. Will Goldman Sachs and Morgan Stanley survive? I don't know. But does it matter at this point? We're about out of investment banks now. Truth be told, some clear thinking would help everyone right now. Who isn't frustrated? But its times like these, believe it or not, when the money is MADE. In case anyone didn't notice Warren Buffett picked up Constellation Energy Group for $26.50 per share. It traded at nearly $70 last week. Nice job, Warren.

In the aftermath of this crisis, you're going to have many people who will be very apprehensive with their brokers. A lot of people. These people are going to look at who got them into things like mortgage-back securities for investments, among other things. Who pushed them? The big brokerages and investment banks. (Lehman, Bear, Merrill, Morgan, Goldman). Yeah, those guys. So okay, Ken Lewis, you got a great company in Merrill Lynch this week. But their perception in the investment world will be changed. For Good. They are going to have a tougher time convincing investors to place money in their hands.

What am I getting at? Medium-level or somewhat discount brokerages are probably going to see a major rise in business. I'm talking about Charles Schwab, Fidelity, TD Ameritrade, and Etrade. I'm going to focus on Schwab(SCHW) a little. They have a well known, successful business model. Cheaper commissions than the big guys, but more service and features than the little guys. A good place to be if you asked me. They've been making a major push into the banking business, and it has worked. They offer high-interest checking with no ATM fees anywhere in the US. Its a pretty good program. Shares have sold off a bit this week (what hasn't?) to around $22. I like the stock here, and would love it if we see it lower due to overall market weakness.

So, there's my attempt at clear thinking for the day. Let's keep our eyes open like Buffett.

Monday, September 15, 2008

"This Time It's Different"...

Although its seems like capital has dried up with everyone these days, if you've got some, history shows that now is the time to think about putting it to work. This is purely odds, statistics and history. Although people like to say "this time it's different", it usually isn't. History is usually a good guide for these things.

Those who cried that this crisis would happen are finally getting major airtime. Specifically NYU professor Nouriel Roubini. Six months ago, his statements sounded crazy. Today, his statements have been proved mostly true, and now he's all over the news and they're using him for ratings. Funny how things change. And all the "financial crisis bears" are running around and talking about how right they were, as they obviously feel vindicated. And of course, they're all continuing to lay it on, saying "this is just the beginning." But major market disruptions, like today, often mark significant points in the stock market (usually market bottoms). What will the bears say to that? "This time its different." There's those words again.

I'm a believer in a "reversion to the mean" in many aspects of life. Things usually aren't as good as people say, nor are they as bad as people say. The market often swings like a pendulum from euphoria to fear, and its clearly making new highs on the fear index.

I understand there are major problems going on, and I'm very, very hesitant to step in as a buyer, but I'm looking. But when this all slows up a bit, and things normalize (again, it could be awhile) stocks will rally again. And that is when the easiest gains are made, that 15% off the bottom. So stay patient, live to fight another day, don't make crazy changes to your portfolio, and realize that this time, although it feels different, it probably isn't.

Panic is Not Necessary

We've all heard the headlines this morning. It is a major, unprecedented series of events. But lets take it for what it is. Yes, these events are causing not only a crisis among these institutions, but a crisis of confidence. But in today's world we're getting used to so called "crises", right? But as investors, or even just people, there is no point in panicking. Our economy may get worse before it gets better. Many companies are hurting, but many are doing just fine. Its times like these that we need to step back, take a deep breath, and listen to some wise words of people like Buffett. "Be fearful when other others are greedy, and greedy when others are fearful." Have truer words ever been spoken in the investment world. Those who have the patience and cash to buy quality stocks in moments like these often come out ahead.

I read a good column this morning by Brett Arends at the Wall Street Journal. Here's an excerpt from this column.

There are a few things I know and they are material now. First, the people who stay at the table and don't make stupid moves here are going to be the ones who make the money in the years ahead.

Second, no one knows how much worse things will get, how much further the market will fall, or when things will turn. And you should not trust anyone who says they do know.

Third, trying to get rich quick is one of the surest ways to get poor quick, and the only way to win this game is to keep investing little, often, and broadly.

Fourth, most great investors made their money buying in a panic. If this isn't a panic, I don't know what is. My old fund management pal Dan Bunting, in London, accumulated a few rules of thumb over 35 years at this game. Among them: "Always buy the market after a spectacular bankruptcy."

Fifth, there are a lot of good stocks out there that are pretty reasonably valued. Even long-standing bears, skeptics and curmudgeons are starting to say this. These stocks may not be dirt cheap. Times may get much worse before they get better. But if history is any guide, buying good stocks when they are reasonably priced and hanging on for five years or more has tended to be the best thing you can do with money.

And sixth: At some point this will end and when the market turns it will be rocket powered. There will be no easy chance to get back in. Invest little, often and broadly. And don't panic.

You can read the full column here.

So stay patient, don't speculate. Remember the wise words of those who've survived many situations like the one we are in now.

Sunday, September 14, 2008

Brother, You Asked For It

This is truly unprecendented. In case you haven't heard, Lehman is basically declaring itself bankrupt. AIG is searching hard for captial, and Merrill Lynch is bought by Bank of America. I hope people grasp the gravity of these events. These institutions have controlled corporate America for most of our nation's modern history. Its all changing now. It shows us the problems of too much leverage, too much cheap money, and the constant cycle of bubbles.

I'm now listening to Nouriel Roubini say that investment banks' model is "fundamentally flawed", and he says Morgan Stanley and Goldman Sachs may not even be able to survive. The problem with investment banks is that they require confidence from investors to stay afloat. That confidence has obviously dried up. Where large diversified banks (like Bank of America and JP Morgan) end up being okay is because they have deposits to fall back on. Investment banks have no such safety net.

Futures are down hard. Tomorrow will be a crazy day in the markets. It will reverberate throught the entire world.

Will this cause huge disruptions like a potential crash? Who knows. Most likely not. The Fed, the treasury and our government has done a good job of fooling the public into beleiving there is no reason to panic thus far, and I'm sure they'll figure out something for tomorrow. I'm guessing it was something like the Fed urged Merrill to sell tonight to take the heat off Lehman for folding. I'm sure they will be on tv trumpeting how great this Merrill-B of A deal is for the market.

What is funny to me is how the general public doesn't really care. They don't care about issues in the presidential election either. If we don't make our politicians and government employees accountable, believe me they won't do it on their own.

Its hard to feel bad for these bankers and people in upper management at these firms, as they don't deserve our welfare, but I do feel bad for the system. I feel bad that it was corrupted and allowed to come to this. And I feel bad that this whole thing will become a burden for us all, even though it was caused by the actions of a few.

To these bank heads, and federal leaders, I can only say "Brother, you asked for it!"

Wednesday, September 10, 2008

Are Oil Stocks Still a Good Investment?

There's a lot going on in the energy space. Will we drill offshore? Will we embrace Natural Gas as an alternative to gasoline for powering vehicles? Will alternative energy tax credits get extended to promote wind and solar? How low will Crude Oil prices drop? And will it ever bring down gas prices?

Well, to begin with, we got some news from OPEC today. They chose to cut their output. Bottom line is the like oil prices better at $120 or $140/barrel than at $103 or potentially lower. This seems all too strange. Wasn't President Bush recently going to Saudi Arabia to beg them to increase production? The bottom line here is you can say all you want about demand destruction, but for the mean time, these guys are still pulling the strings, and they like oil prices high.

Word is coming from Washington that the Democrats are now open to "limited" offshore oil drilling. But it will have to come in the form of a compromise, which would include Alt-Energy tax credits being renewed. I think both need to be approved here. We need change, and need it ASAP. Bottom line here is that alternative energies are great, and we need to encourage them to be developed, but we need a bridge because they aren't ready to supply it all yet. That bridge is more domestic oil and using natural gas for more uses.

It is unfortunate that there has been a disconnect with falling oil prices and gasoline prices. When oil went from $100 to $140, we all know what happened to gas prices. Now, when oil goes from $140 to $104, I think gas prices went from $4.10 to $3.80.

So, what do we need to know as investors? Well, I think there are some oil stocks to take a look at. I'm looking at XTO Energy (XTO) and National Oilwell Varco (NOV).

XTO has a strong presence in Natural Gas, and if Washington jumps on board with this fuel, this stock will do well.

National Oilwell Varco has an amazing business of supplying services and part to oil wells. If we approve more offshore drilling, it doesn't take a genius to figure out this one.

Tuesday, September 9, 2008

The Disillusioned Individual Investor

Given the state of Wall Street, Main Street, and every other street you could name, its easy to see how most individual investors have reached a state of disbelief. Our leaders are carrying out a policy of Socialism, but only for the rich shareholders and management of failing companies. The question that seems to pop up in everyone's mind is, of all people to bail out, why them? Its a good question really. We continually hear that it is done to prevent major disruptions in the markets, but what has the last year been? And yesterday I heard Hank Paulson say something like "this is the best solution for the taxpayers." Hmmm. I'll have to think about that one for a bit.

Here's a good rundown of the situation, if you're interested.

The question is, who's next? Lehman? Maybe an airline or automaker?

We hear both candidates talk about how they'll "change" Washington. Is that really believable? Take a look at this and get back to me.

Monday, September 8, 2008

A Sad State of Affairs

Wall Street is reacting favorably to the government seizure of Fannie and Freddie. But this is nothing to cheer about. It is quite the opposite. The question is, what's next? Because these actions don't prompt settling in the markets, they only create a "need" for more companies to be "bailed out, seized, socialized" or whatever you'd like to call it.

Fundamentally, it completely disrupts the risk/reward model in business. When big companies have a backstop against failing, they will take imprudent, excessive risks because there is no risk of failure. So thus, more bubbles are created, each one a little larger than the last.

The question is, who is next? Detroit's automakers have already been asking the government for money. How about the airlines? My money is on the automakers. Any after their previous actions, how could Paulson and Bernanke say no?

All this really does is patch up the problem so the next administration can deal with it. Its not going away. You can't have a solution until you fix the problem. The recent government action has just contributed to the problem.

The question now is how long until a Unification Board is assembled, and directive 10-289 is issued? Where is John Galt when you need him?

Tuesday, September 2, 2008

Just Taking What the Market is Giving

Sometimes you just have to take what the market gives you. Its hard to get excited about entering any substantial positions here, but I'm fiddling with a few smallish positions. The market goes up today, so I'd be expecting a reversal trend either tomorrow or the next day, as we can't seem to hold any kind of trend.

I'd look to buy some Ultrashort Financial (SKF) around $110. It was down in the $108's today but I don't like to jump into anything during the first half hour of trading as it tends to be quite sporadic. If the market rallies again this afternoon, thats something I'd look to pick up for a trade.

Beyond that, oil is the hot topic. With the hurricane not causing too much damage, oil prices are dropping further. The real key here is determining to what extent demand will change in the next few years. The drop in oil prices has mostly been related to that.

Again, I'd look to add small positions of some short-term values. Nothing more beyond that.

Thursday, August 28, 2008

Infrastructure Spending to Continue

There have been various theories about if the recession (or non-recession) will affect spending throughout the globe on infrastructure and energy projects. Some say it has to be affected because there is less money to go around (credit crunch, etc). That just seems like a weak, generalizing theory to me.

The reason I like infrastructure, and energy expansion is it is purely a necessity. This isn't corporations updating their software, or whether people will buy second homes. Those things are affected by less available money. We're talking about real people who need things like electricity, and fuel to power their homes and vehicles. There is no getting around spending money on these types of projects.

I've been a strong proponent of Swiss company ABB (ABB), given these themes. In a quote from their interim CEO, we hear:

"Asked whether ABB would grow faster than a roughly 3 percent forecast for the global economy for next year, Demare said: 'It is quite obvious that ABB will exceed that several times in 2009."

I like ABB because of its reach into various electrical systems sectors, including wind and solar. They get a lot of their revenue from Asia, among other places, and these are the countries that are taking the lead here. The US government is too busy debating whether or not to drill offshore, or about anything but the right issues, to enter this trend. So you'll want to be in a company that isn't relying on the US to lead this trend, but could still capitalize once the US catches on in a few years.

Full text of the article, via Forbes.

Disclosure: Long ABB.

Tuesday, August 26, 2008

The Recovery is Not Yet Upon Us

This market is going to grind into a pattern or level to slightly down, in my opinion. There aren't any upside catalysts. Growth won't resume until mid to late 2009 according to the Fed. I'm don't take everything they say as truth, but definitely listen to them more than media/blogger types.

Cash isn't a bad place to be, and to some extent, neither is short. Any rallies appear to be short lived, no matter which sector produces them. I still see earnings quality deteriorating in financial stocks, while energy stocks have earnings that will be steady. And in a market like this, steady earnings are pretty dang good. The problem with holding these stocks is you'll have to endure corrections/false moves/strange one-day reversals. If you can handle it, you should be fine.

I'm hearing Democrats jumping on-board with Natural Gas more and more. And this is a positive as it gives us more idea on how the election outcome will determine energy policy. Even if Nancy Pelosi doesn't really know what Natural Gas is, she is one of the main promoters of party policy.

Quite frankly, energy policy is my biggest concern going forward. It means so much economically, politically, and for the environment. It is the "ultimate issue" in my mind, and thats why I focus a lot of my time determining future policy and investments to profit from it.

There you have it. Have a great day!

Friday, August 22, 2008

Back to "Wishing Away" Inflation

Ah yes, another Bernanke speech. More evidence that he won't raise rates (he basically said so), and more talk of inflation moderating. So this is the pattern. They pursue actions that weakens the dollar and don't limit inflation. And to protect against, inflation, they say, inflation will probably moderate. So "actions" to weaken the dollar and protection against downside in the market, and "talk" to limit inflation. I see this a "wishing" inflation will go away while they try to protect fannie, freddie, and other various banks.

These actions all carry long-term effects. Even if these institutions survive, look what we've done to our country's balance sheet.

Thursday, August 21, 2008

Will the Counter-Counter Trend Rally Last?

We're seeing what I'm calling a counter-counter trend, with oil and weak dollar stocks rallying. Normally, I'd just say this gets us back on the trend we've been on. But, with the action we've seen with sector rotation in the past month, who can believe any trend will stick? Those who've read my site know that I'm a believer of the medium-term trend of short financial stocks, short consumer stocks, and long oil service and infrastructure stocks. While I do think this will be the best investment strategy moving forward, it might not be the best one right now. These gains in oil stocks could easily evaporate by next week. So, as someone who doesn't "trade" a lot, I'd say you can move in and out of smallish positions in these counter-counter trend rallies to make some money, while we wait it out a bit.

I'd love to hear some other ideas/theories on how to play this market, so feel free to comment or email me.

Tuesday, August 19, 2008

Is it Time to Buy?

We're seeing a familiar trend, and thats no trend. Any good news quickly evaporates as we continue to get nailed by economic data, and poor outlooks from financial stocks. It has been pretty easy to spot. I haven't advocated buying banks at all, and I still don't. I see the market re-tracing downward again as we'll probably see another bank-related panic. Will the Fed provide a backstop once again? Probably. I'd say it will probably involve Fannie or Freddie.

As I've said before, the real problem with investing in many of these companies isn't that they'll go under, its their outlook for the future. Companies like Citigroup and Merrill and Lehman have leveraged so much of their future, and eroded their competitive advantages just to stay afloat now. Sure, it had to be done, but you shouldn't buy their stock just because it looks like they won't collapse.

I think the time to buy will be on the next major leg down. You'll know it because you'll feel like you're ready to throw in the towel. You'll feel like nothing works in this market, and the outlook is bad for everything. Some people might already feel this way, but when most feel this way, then you can find some bargains.

The outlook for solar has strengthened, and should only get better. The good news here, is many of the solar stocks have come back down out of the stratosphere, and could be bought. I haven't researched them enough to make any recommendations, but I'll take a look at it.

So is it time to buy? In a word, NO.

Friday, August 15, 2008

Strange Times

This market has been strange indeed. By now, everyone's well aware that there are no real trends right now, and they change by the day. It makes it difficult for investors to stomach. Warren Buffett's portfolio filing came out. Buffet stopped adding to his stakes in financial stocks, which is a first in some time. His buys were in utilities, industrials, and health care.

I also noticed Ken Heebner's portfolio. Its been lightened up a bit. He holds much less agriculture, metals, and steel stocks than in previous quarters. Its difficult to discern if this is a trend, or if he needs to move in and out of these names to keep his quarterly numbers up.

It makes it difficult to stick to the strategy, and I've done a little short term trading. No major positions of course, but small positions shorting financial stocks, and buying various names.

The announcement of the massive new solar farm in California is encouraging. It proves that utilities and corporations won't wait for Washington (who continues to sit on its hands) for direction here. As I've said before, if there's a need, the economy will find a way to provide it. We cannot count on our legislators here.

Well, nothing major as we head into the weekend. No big changes in strategy. Just going with the flow.

Have a great weekend!

Thursday, August 14, 2008

Wednesday, August 13, 2008

Don't "Over-Diversify" with ETF's

I'm a big fan of using ETF's (exchange traded funds) as a part of a successful portfolio. But its easy to fall into a false sense of security with many of these funds. Also, people tend to "over-diversify" with these funds. My theory for ETF's is use them as a tool for investing in areas where its hard to otherwise. I use ETF's to short various indexes or sectors. I'd also use an ETF to buy into an asset class with few US listed stocks (for example wind power companies).

But if you've identified a trend to want to capitalize on (say agriculture stocks for example), do your homework. Identify the best companies in that space, and if there are available stocks, which in this case there are, don't handcuff yourself by buying an ETF. For example, buying Mosaic(MOS) or Potash(POT) would give you much better returns than buying an ETF (MOO).

The problem with ETF's is they use a wide variety of stocks to offset risk. But often times, that means your fund is holding stocks of large, diversified companies. These companies may have some businesses in the space you're looking at, but may be at risk in other areas. I think of GE in a situation like this. You'd like to own it for their wind turbine business, or their infrastructure/aerospace business, but you have to buy their finance business as well.

So the big take-away here is use ETF's when there aren't good investment opportunities in a sector or trend you like. Don't use them when there are better alternatives.

Tuesday, August 12, 2008

Rational Markets? Doubtful

Based on the market action in the past few weeks, how could anyone say markets trade rationally? Fundamentals have been completely flipped upside down, with the worst companies being rewarded with gains, while the strong performers get trashed. This is giving me more evidence of my theory that hedge funds are ruining the market. They all trade with the same or similar computer models that track trends and move money into and out of the market so quickly that fundamentals and news make little or no difference.

In the mean time, it makes individual investors want to pull their hair out. I'm not giving up on the "game plan" just yet. The Big Picture had a good piece on oil prices this morning.

As much as I'm a proponent of a new energy policy in this country, talk of opening offshore drilling can't affect oil prices like it has. The dollar has strengthened on nothing but talk and speculation. Bernanke and Paulson have done nothing but promote policies that weaken the dollar. The pendulum has swung the other way and these stocks have over-corrected. And financial stocks have over-corrected too far on the high side given all the risks and unknowns.

Rational markets? I'd like to see some evidence of that.

Thursday, August 7, 2008

See-Saw in Financials to Continue

I can't say I was surprised that AIG (AIG) reported bad results. The extent of how bad it was is the surprising thing, and the market is responding accordingly. I've not been an advocate of buying these types of stocks for many reasons:

-Many companies are completely eroding their major competitive advantages (Think Merrill selling their Bloomberg stake, and numerous companies issuing extra stock).

-Mortgage backed debt is what got these companies into trouble in the first place. So how can they expect to recover until we see some signs of a bottom in nationwide housing prices? Or slowdown in foreclosures? Obviously these companies feel the aftershocks of what happens in the real estate market a few months later, and even though Wall Street trades on future results, its still too early to bottom fish.

Its also important to take a look at consumer behavior. I know retail has been weak, and I don't own anything in that space, I'd much rather go bottom fishing on a Target (TGT) or Kohl's (KSS) than a AIG or Citigroup.

Here's a good analysis of some middle-class retail stocks, via Trader Mark.

Wednesday, August 6, 2008

Portfolio Strategy...More of the Same

From what I've read, heard, and seen, there is plenty more ahead for financial stocks, particularly Fannie and Freddie. Don't overlook the headline from late yesterday about the treasury hiring Morgan Stanley to assess these companies. The treasury's rescue plan for Fannie and Freddie shouldn't be misinterpreted. True, its a backstop. The treasury has authority to buy and unlimited equity stake in the companies, which should prevent them from going under, but it can't prevent them from preforming poorly. So, now that Bernanke and Paulson have bailed out these banks and brokerages, they're going to use them at their disposal. My point here is that these stocks have been bid up too high in my opinion. I couldn't help but take a small stake in the ultrashort financial etf (SKF) yesterday.

I've been looking at the candidates' energy plans, and how to plan an portfolio. They differ somewhat in that McCain favors nuclear energy and some more drilling. Obama is in favor of clean coal, and creating initiatives to really push clean energy. Obama's plan is a little more idealistic, but that is okay for now. The key here is electricity, now matter how its produced, is going to see a rise in output as we move away from oil-based solutions. So we're going to need to increase and upgrade our power grid, and electrical efficiency will be critical, no matter who is president.

I've said it before, but I think Swiss electrical giant ABB(ABB) will be at the center of this theme. I'd also look at a company like Quanta Services (PWR), although the story with that stock is no secret at 25x 2009 estimated earnings. But ABB is a buy, right here, right now.

On oil...I like the opportunities in natural gas more than anything. Natural gas fits into a domestic, clean, energy policy, and I think either candidate will see this. Chesapeake(CHK),XTO Energy(XTO), or Sandridge Energy(SD) are the plays here.

I'm skeptical about integrated oil companies because of a few reasons. 1)the refining business will be tough with gasoline demand slipping, 2)Obama is going after big oil with a windfall profits tax. I totally disagreed with this method, but it may happen just the same.

So my portfolio strategy isn't changing much. I'm still skeptical about financial stocks. I see energy efficiency as a need more than anything, and we'll find the money to supply these changes. Other than that, the market has found a way to give almost any stock troubles.

Disclosure: Long ABB