Market Perspectives

Europe's Large Banks - Are The Titans Crumbling?

2011-10-22T08:50:00.001-07:00

Winds of confusion and despair swirl around Europe's largest banks. Bank stocks plunged sickeningly late last summer as the euro crisis worsened. Its been a skittish, rumor-driven market ever since.
Adding to the confusion Central banks (US Federal Reserve, European Central Bank, Bank of England, etc.), sovereign wealth funds, the International Monetary Fund (IMF) have all become involved. The European Financial Stability Fund (EFSF) is Europe's latest savior. Such an entanglement of financial entities. How can anyone know the truth?
Dexia (DXBGF.PK), previously Belgium's largest financial institution, has become the first (but probably not the last) casualty of the crisis. It is being nationalized.
Which institutions actually own European sovereign debt? Read more here

Investing In Small- And Mid-Cap North American Oil Producers

2011-08-22T08:48:00.000-07:00

Light oil is the crème de la creme of crude. Why? You need look no further than your garage. It's simple: Nothing is better than high quality, low sulfur sweet oil for making gasoline.
Automobiles are everyone's favorite mode of transportation. But It's not just developed countries anymore. Newly prosperous Asian countries are quickly building roads. And, predictably, Asians are buying automobiles in droves, rapidly boosting gasoline demand. Think how the U.S. expanded auto ownership in the 1950s.
Chinese auto ownership is currently less than 2% of U.S. ownership. But, Asians can't wait to catch up - and they have plenty of U.S. dollars to do it. Read more here

7 High Yielding Stocks to Defend Against a Market Downturn

2011-06-08T08:44:00.000-07:00

What to do? Dismal economic figures and soon to end government stimulus seems to finally have crippled the 3 year old bull market. U.S. markets are now faltering or declining and commodiites are stagnating.

A healthy cash position is warranted. I've previously written how inverse ETFs can help (see here). High yielding securities may also provide protection. The high yield (even if reduced) is a natural defense against disinflation. Consider the following: . . . Read more here

5 High Yielding Israeli Stocks

2011-04-27T07:34:00.000-07:00

Looking for yield? Look to Israel -- a prosperous, democratic country, known for its innovative, high-tech companies.

When the Great Recession hit worldwide in 2008, Israel largely escaped. Why? Israeli banks had avoided toxic debt and the Israeli government wisely stimulated with tax cuts -- not money printing.

Yes, I know what you are thinking. Why invest in the most reviled (at least by its neighbors) country in the Middle East? Good question . . . stay with me . . . we will revisit the issue.

Consider these 5 high yielders:

Cellcom Israel Ltd. (CEL)

Israel's largest cellular communication company . . . Read more here

Saudi Arabia Posts Major Production Decline

2011-04-27T07:30:00.000-07:00

Saudi Arabia, the world's top oil exporter, posted an almost 10% monthly production decline in March says a Thursday Wall Street Journal Online article.

Saudi Oil Minister Ali Al-Naimi said Sunday that oil production from the kingdom was 8.292 million barrels per day in March, down about 800,000 barrels a day from 9.125 million barrels per day in February.

A Strange and Confusing Situation
Last February, with great fanfare, Saudi Arabia pledged to increase production -- making up lost Libyan exports. Now, we hear March production was actually down big time. Read more here

Russian Oil: Investors Should Proceed With Caution

2011-04-16T04:03:00.000-07:00

uick, which country produces more oil than any other? If you know that, can you name its largest oil and gas companies?
Odds are (unless you're an oil and gas enthusiast) you don't know.
Russia is the world's largest oil producer -- pumping 10.12 million barrels/day (mb/d) out of the ground. Saudi Arabia is second with 9.8 mb/d, the U.S. comes in third with 9.06 mb/d, and Iran a distant 4th with 4.1 mb/d (See complete list here).

The Russian company Rosneft (RNFTF.PK), producing 2.18 mb/d of Russia's 10.1 mb/d, is Russia's top producer while Lukoy (LUKOY.PK) holds the largest reserves. Russian oil flows . . . Read more here

5 Best Positive Cash-Flow Oil Companies

2011-04-15T03:57:00.000-07:00

Millions of acres in oil shale prospects ... production continues to expand ... good times are just beginning ...
You've heard the stories. Almost every exploration and production company seems to have at least one. Here are 5 of the better ones. For this article, let's just stick with the stuff that really matters: Cash income, specifically free cash flow. I screened a dozen or more energy companies looking for those with the best market capitalization/levered free cash flow -- call it MC/LFCF -- over the last 12 months. This information is readily available in Yahoo Finance's Key Statistics. The lower the number, the more undervalued the equity.
Of the couple dozen energy companies I looked at, the following five had the best MC/LFCF -- all under 20. . . Read more here

Japan: The Good, The Bad, and The Ugly

2011-03-19T11:04:00.000-07:00

Japan is reeling from a devastating 9.0 earthquake and an accompanying 30 foot tsunami (a Japanese term meaning harbor wave). The tsunami tossed cars and ships around like toys, flattening towns and cities in minutes. The death toll is expected to top 10,000.
And now engineers are struggling to control radiation from damaged reactors -- a slow-moving nightmare that just won't go away.
The Good
The People. The Japanese are a hardworking, extremely resilient people. No matter how much destruction, how much suffering, how many deaths, they will bounce back. Remember, this country rose from the ashes of World War II (including losing two cities to nuclear bombs) to become the second largest economy in the world (only recently has China claimed the number 2 spot).
The Corporations. Can you think of anyone who makes cars better than Toyota (TM) or Honda (HMC)? Complete article on SeekingAlpha here

5 Reserve Rich Energy Companys at Bargain Prices

2011-03-19T11:00:00.000-07:00

Oil is near $105 a barrel. Is it too late to invest in oil companies? I certainly don't think so! Consider these 5 reserve rich small caps. Three are bargains at current oil prices. Two, if not now, will be bargains when natural gas prices rise.
One company has $100/share in reserves, yet is priced at only $20/share. Another has 2,400,000 acres (3,750 square miles) of mostly unexplored oil shale prospects. A third, now getting into oil, is loaded with natural gas reserves . . . but sells for 7% of what it did in 2008.
Best of all, none of these companies' reserves is in volatile North Africa Complete article on SeekingAlpha here

Using ETFs to Profit From Rising Interest Rates

2011-03-19T10:58:00.000-07:00

Inflationary alarms -- increasingly loud -- are sounding worldwide. Europe, Canada, Great Britain, emerging markets such as China, India and Brazil have, or are contemplating, raising interest rates.

My recent article on crisis investing noted 4 sectors you should be in: oil, real estate, gold, and inverse interest rate ETFs. Here we will look at the fourth -- and most speculative -- sector: interest rate sensitive ETFs.

Walking the Edge of the Precipice

For now, the U.S. continues to pursue an easy money policy. Read the Full Article Here

Crisis Investing -- 4 Sectors You Must be in Now

2011-02-24T12:16:00.000-08:00

Spring comes early in central Florida. Wrens sing, wild jasmine flowers in the woodlands. Today, as I write this, I'm in a quiet, small town cafe. Both customers and the early-morning sun are slowly filtering in -- a peaceful, idyllic scene.
But ... reality is in the headlines. North Africa aflame. Dire warnings of fiscal catastrophe here at home. Conservative governors clashing with suddenly indignant public employees. One gets the feeling that things could spin quickly out of control.
So how does one invest in this environment? Read the Full Article Here

Collapsing Bonds? Look at the Trends Now!

2011-02-24T12:04:00.000-08:00

Did collapsing bond markets last November signal the end of the three decade-long bond bull market? Almost all bond ETFs peaked on or near November 4 of last year. Since then some (perhaps unexpected) trends have emerged.
ETFs are useful trend indicators. Since they are composed of dozens, even hundreds, of securities, individual security movements have little effect on price. Lets look at five ETFs to see what is happening. Read the Full Article Here

Housing's 50% Off Sale -- Time to Buy the Home Builders?

2011-02-14T05:49:00.000-08:00

Commodities are shooting up -- 20% or more -- in just the last 3 months. The most common explanation? Accelerating inflationary expectations. No sign of this in the U.S. housing market though. That market drags along near multi-year lows. Indeed, the one asset the Fed wants to inflate, housing, shows few signs of revival.
But, is the housing market now bottoming? Well, maybe. After falling over 50% the last 3 years Zillow says my central Florida house has actually increased in value two months running now. Nothing to get too excited about -- total increase is less than 3%. Nonetheless, it is welcome news.
Why It Is So Hard to Reflate the Housing Market . . . Read the Full Article Here

How Former Canadian Income Trusts Can Protect Bond Investors From Dollar Debasement

2011-02-10T13:00:00.000-08:00

Bonds, especially Treasuries and municipal bonds (munis), are a major component of American retirement portfolios, be it pensions, IRAs, annuities, or mutual funds.
The recent sharp fall in bond prices, which started last November, has sent tremors through fixed income markets. With an apparent end to the 30 year old bull market in bonds, it may be time to look at alternatives.
How Safe Are Treasury and Municipal Bonds?
Treasuries, munis, and other bonds may have hit their highs early last fall. Since then -- about the same time Quantitative Easing 2 (QE2) kicked in -- things have been mostly downhill for bonds.
Treasuries have the full backing of the U.S. government, Read the Full Article Here

Natural Gas: The Last Undervalued Commodity

2011-01-04T09:10:00.000-08:00

The worst commodities of 2010 just might be the best in 2011. It often works that way. So, what was the worst of 2010? Natural Gas (down some 20%) and cocoa (down some 7%) take the loser's prize! And, sure enough, both are off to a roaring start in 2011.

We all love (and maybe even dream of investing in) cocoa -- aka chocolate. But, for now, let's ignore that tempting choice and look at natural gas.

Why Is Natural Gas So Cheap?
Natural gas prices are low for good reasons. Read the Full Article Here

Peaking Bond Markets: The Reversal of a 30 Year Trend

2010-12-08T10:30:00.000-08:00

Is the three decade long bull market in bonds over? It certainly seems that way. Bonds have been retreating across-the-board since early November. QE 2, which was supposed to bring rates down, simply isn't enough -- even in the targeted middle range of the yield curve.

So what happened in early November? I don't know. Maybe it was the announcement of QE 2. Look at Vanguards Total Market ETF: BND.

Consider:

Treasuries are in an downtrend across the spectrum: See the 2 year here, the 5 year here, the 10 year here, and the 30 year here. All show declines after early November peaks. The benchmark 10 year in particular shows an alarming drop.
Municipals suddenly collapsed and show no sign of recovery. PCK, a leveraged California Closed End Municipal fund is down almost 20% since November 7.
Corporates (LQD) mirror the declines. Surprisingly, junk bonds (JNK) have held up somewhat better.
Emerging Markets (EMB) are not immune.

Pundits have long touted the debasement of the U.S. dollar but now the unease is spreading. Perhaps last month's precipitous drop in munis was a wake-up call. It will take a lot to change the public's view of bonds as a "safe" investment, but that may now be starting.

The Fed seems to be losing control. Former Fed Reserve Chairman Alan Greenspan warns that on going deficits will lead to a bond crisis. Mr Bernanke is between a rock and a hard place. Tightening may crash markets. But . . . QE contributes to the perception (reality?) of dollar debasement -- driving interest rates up anyway. To make matters worse, QE's newly printed dollars flee U.S. shores, contributing to overseas inflation which may precipitate currency wars.

All fixed income instruments will follow treasuries down if rates rise. You may find a possible haven in convertible bonds. Blue-chip, dividend paying, stocks may be your best bet for a "safe" investment from here on out. Do your own due diligence.

The bond market is huge ($91 trillion worldwide) -- more than twice the size of equity markets. If prices continue to decline, some this money will flow into equities and commodities, pushing up inflation. Commodities are arguably in a bubble while blue-chips are probably not (yet). Once inflation gets started, it is very difficult to stop. You can argue over what is inflation but precise definitions of inflation are meaningless to most people. If the price of fuel goes up . . . it is inflation to them -- even if wages are stagnant or falling.

Keep an eye on the Fed. It seems QE is needed on a ongoing basis to prop up the economy. At the slightest sign of tightening (such as the pending expiration of the Build America Bond program) markets head south fast. Bernanke says he is not going to allow deflation, yet the Fed has to pump harder and harder just to stay even.

The ground world economies are standing on is getting steadily narrower, sooner or later we will fall either into the pit of deflation or the excesses of inflation. Either way it won't be fun.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours

Are Municipal Bonds Cracking?

2010-11-15T06:21:00.000-08:00

Look at last week's price action in PIMCO's Municipal Income Fund ETF (PML). Municipal bond markets plunged. Not surprisingly, the California ETF (PCK) shows the most precipitous drop.

It might be argued that muni markets are merely reflecting similar declines in treasuries (TLT). Fair enough. Bond holders, though, are probably are more interested in the fact that their bonds have declined rather than why they are declining.

Warren Buffet warned back in June on the Muni Bond market. Defalt, so far, have been rare but local and State municipalities are struggling to meet their obligations.

There was a time -- before the 2008 crash -- when triple AAA rated, insured munis were seen as the safest of safe investments. Times have changed. Only Assured Guarantee (AGO) still insures municipals but the company has been recently downgraded from AAA to AA. Ambac (AMBK) is in bankruptcy. MBIA (MBI) is entangled in litigation and no longer writes new policies. The financial guarantee business today is but a shadow of its past.

Even though defaults in the muni markets have been rare so far the Feds zero interest rate policy has thrown a cloud of uncertainty over all bond markets. Declining tax revenues, rating downgrades, loss of insurance, rumors of bailouts, all contribute to uncertainity and suspicion that all is not as well as claimed.

It may be wise lighten up on all medium to long term bonds at this juncture. Greece, Ireland and Portugal may not be as far removed from New York, Illinois, and California as we might wish.

QE2 or the Titanic?

2010-11-06T17:30:00.000-07:00

Someone has awaken the band, found the girls, and broken out the drinks! Thanks to Ben Bernanke's Quantitive Easing 2 (QE2) November 3rd announcement the risk asset party is in full swing again.

The Fed's planned purchase of $600 billion in Treasuries and QE1 rollovers over the next 8 months already has it fleeing into equities, commodities, and emerging markets -- before the QE even starts!
The elections put Congress out of the stimulus business. Not to worry . . . . The Fed's QE2 ship, captained by Mr. Bernanke, is launched and steaming off into dark, uncharted waters -- with or without congressional support.
Since the U.S. dollar is the world's reserve currency, you might say Mr. Bernanke is Captain of the World. Worldwide FOREX, bond, equity and commodity markets all soar or fall on the slightest nuances from him. To argue if it right for one man to have so much power is, at this point, moot. He simply has it.
Who wins with QE?

Banks: They get liquidity and more time to repair their balance sheets. The interest free money is reinvested where it earns more (rate arbitration -- profits come from the spread). Why risk loans to the private sector when you get a risk free return from Uncle Sam? According to Shahien Nasirpour in the Huffington Post U.S. banks own $1.6 trillion in taxpayer-backed assets such as Treasuries and Fannie and Freddie debt.
Some of the public: Rising markets benefit those who have the foresight be invested in them. The hope, of course, is that inflating asset values will eventually spread to the increasingly desperate real estate sector. No sign of that happening yet though.
Corporations: They are floating bond issues while interest rates are low -- get while the getting is good. The stock market recognizes this and is rising. High unemployment allows corporations to keep wages low and employees working on over drive.

Who loses with QE?

Savers and other frugal people: Interest rates are at record lows. I didn't even bother listing the $2 interest income I made last year from a savings account. The Fed is forcing us into risk assets and anyone who holds cash in U.S. dollars or cash equivalents such as treasuries loses. If bond markets crack and interest rates skyrocket (as they will if inflation picks up) anyone holding fixed income denominated in U.S. dollars takes big losses.
The U.S.: Dollar devaluation sparks up commodity prices and exports inflation world-wide. The recession stricken U.S., however, does not have the room to increase wages to compensate increasing fuel and food prices. You already see the signs -- more people walking or bicycling (that may actually be good), more gardens, more roadside produce stands, empty malls, shuttered businesses, large numbers of homeless, etc. The bottom line: One way or another, the U.S. standard of living is declining.

Other QE risks.

Currency war: QE in the U.S. raises all kinds of red flags abroad. Both European and Japanese Central Banks may be forced to intervene (retaliate?), precipitating a "currency race to the bottom". No wonder precious metals seem to be rising nonstop -- a certainty in a world of uncertainty.
Capital outflows from the U.S.: It flees to friendlier shores. Badly needed domestic investment shrivels and the U.S. economy languishes.
Never enough QE: The $1.6 trillion QE1 did not revive the U.S. economy, so how will QE2's $600 billion? Additional QEs will probably be implemented. The Fed is independent and can buy whatever it wants, mortgage backed securities, bonds of all types, equities, you name it. Eventually the U.S. will be forced to give up these futile attempts at stimulus; rates will go up and markets down as reality is faced. The unfortunate fact is that QE has never worked in the long run. Maybe this time will be different but don't bet on it.

Investment ramifications.

Real assets: Maybe stay with ETFs to avoid single issue risk. Precious metals (GLTR), agriculture (DBA), and energy companies (VDE) are but a few. Click on the ETF tab on the Seeking Alpha website for additional ideas.
Minimize fixed income investments (bonds): Upside risk is limited while the downside risk is infinite. If you have safe treasury bonds and the incomes covers a fixed rate mortgage . . . maybe keep those -- some hedging is always a good strategy in times of uncertainity.
Go with the trend: As long as the Fed keeps its Zero Interest Rate Policy -- ZIRP-- you might consider some high dividend REITS such as Annaly Capital Management (NLY) and Chimera Investment (CIM) which benefit from ZIRP. This is a risky area though as things can change quickly.
Protection: You can protect yourself from rising interest rates with TBF and TBT but be aware of daily rebalancing erosion .

As always, do your own due diligence in picking investments. Everyone's investment strategy and needs are different. Only you can decide what is best for you. This article only presents my thoughts on macro trends and is not a recomendation to buy or sell. But, whatever you do, watch the bond market and Mr. Bernanke closely in the coming months and year.

Disclosure: Small positions in CIM and TBT

7 Speculative Chinese Small Caps

2010-10-19T15:02:00.000-07:00

Looking for investments outside the U.S.? You are not alone. With the dollar plummeting almost daily money seems to be fleeing U.S. shores faster than the Fed can print it.

Check out the Wild West . . . err, I mean Wild East of stocks. East as in China, the elephant of emerging markets. Now look at small-caps. Scared yet? After the Tuesday's action you should be! Some Chinese small-caps fell 9-10%. But wait . . . Yes, you can find value and growth in Chinese small-caps.

Consider China Sky One Medical (CSKI) -- PE under 4, no debt, yoy revenue growth of 27%, and a Price/Sales ratio of 1. Look at Duoyuan Printing (DYP) with its PE ratio of 1.4. Then there is Fuqi International (FUQI) which you can buy for only slightly more than its $6.27cash per share. Both sell for less than 70% of annual sales and have P/E ratios less than 4. Similar Chinese small-cap values exist in CELM, CSR, LLEN, and UTA.

With those numbers how can you not like these stocks? . . . I know! I know! Mr Market can be quite ingenious at finding ways of torpedoing the most obvious "buys". But, like I said, this is the Wild East and anything can happen. What goes down fast can go up just as fast.

Risks? Where do we start? Jim Chanos says China is the next Enron. Sudden currency changes, an unpredictable government (I hesitate to use the word communist), and accounting irregularities are but a few of the potential negatives. Volatility is frightening -- the smallest rumors can rocket up or torpedo prices.

Wealth management firms such as Northern Trust (NTRS), burned by the 2008 crash, play it conservative. They will never recommend these Chinese small-caps for their clients -- it would violate their fiduciary responsibility. Individuals can, however -- if played right --, tap into some of the fastest growth markets in the world with these stocks at what by most standards are currently bargain prices.

Do you own due diligence -- small cap stocks are volatile everywhere, especially so in China. My approach is to take small positions in several companies, sell those that fall 10% or so, but let the winners run. Who knows? You may tap into a Chinese superstar.

Think positive to avoid the Chinese market's Dr. Loveless like twists and turns. James West and Artemus Gordon protected and won the day for the U.S. Maybe you can't protect the U.S. but you may be able to protect and enhance your portfolio with these stocks.

Trashed Real Estate, Soaring Gold

2010-10-07T08:34:00.000-07:00

The prop wash from Ben Bernanke's helicopters has yet to spread dollars on the struggling U.S. real estate market. Gold, though, up over 30% in the last year, is a major beneficiary,

Three years ago a typical Florida house (Tampa area) sold for $240,000 and gold was around $450/oz. Now the house value has been cut in half to $120,000 while Gold has tripled and is closing in on $1,350/oz. It took 535 ounces of gold to buy the house in 2006, today it only takes 90 ounces. Why such a large about face?

Since both houses and gold are "real", non-printable assets one might conclude either houses are extremely undervalued and/or gold is extremely overvalued. Is it just a matter of time before the pendulum swings back and the gold/house ratio rises again?

Gold is very much a global commodity, of course, while houses are the quintessential local asset. You can easily move a pound of gold or more around around the world. The real estate goes nowhere.

U.S. real estate has very low liquidity right now. Loans are difficult to get. Anyone can buy gold in vaious amounts easily, either through ETFs such as GLD or SLV. Physical gold is available in the form of bullion or coins at the local coin store or numerous web sites (Be careful)! In 2006 all you needed was a pulse to get a real estate loan while precious metal ETFs were just coming on the scene.

Years ago I went to a real estate seminar. One of the things we learned was how to value houses using the income approach. The "rule of thumb": A good middle class 3 bedroom/2 bath/2 car garage house in a good (not great) neighborhood is a buy if it sells for less than 100 times the monthly rent. For example, if the house rents for $800/month a price of $80,000 (or better) makes it a good buy.

So, with that in mind, how do things look today? The above central Florida house, renting for $800/month, can again be had -- with some negotiation -- for about $80,000 or less. In 2006 the house was valued at about $160,000 -- way above the "rule of thumb" above -- an obvious red flag to those who paid attention.

I believe real estate is now in the process of bottoming and will eventually follow gold higher. Inflation, as evidenced by increasing commodity prices, now seems to be edging out deflation. Real Estate appreciation will follow. However, it will be slow due to liquidity issues and the poor U.S. economic recovery.

Disclosure: I own real estate, no positions in ETFs mentioned

America's National Parks and the U.S. Dollar

2010-10-04T05:25:00.000-07:00

"No one is speaking English" whispered my companion. as we hiked through the Bryce National Park last week. We encountered a surprising stream of hikers on the back country trails.

Young (take it with some perspective, I'm 61), fit, and friendly, the trekkers seemed everywhere. Germans, Dutch, Asians, Australians, and people from I have no idea where, all cheerfully waving as they strode by. Americans that actually live in the USA? Well, I'm sure some were around, but if so, they made themselves scarce -- perhaps whiling away the time in nearby Las Vegas.

The torch of leadership in the world is changing. The U.S. still has its natural wonders and a flood of visitors is eager to see the unrivaled beauty of the American West. The allure of the wild west draws back which fled over seas.

Consider: It is hard to believe you could mail a letter in the U.S. with a 1 cent stamp at one time. Now it takes 44 cents (with rumors of more to come). At least National Parks haven't devalued like stamps and other paper assets such as the U.S. dollar.
The U.S. still has its natural wonders. A flood of overseas visitors is eager to see the unrivaled beauty of the American West. The Wild West entralled Europeans 150 years ago. Now, the rest of the world has joined them.
However, the torch of leadership in the world is changing. The U.S. dollar has lost 10% of its value just since last June. Our leaders seem hell bent on devaluing it even more as they try to perpetrate the illusion that we can have $30/hour manufacturing jobs and compete with people who work for $3.00/hour or less.

We are a deeply indebted nation and Asians (remember the "starving Chinese" your mother told you about) are calling the shots. Fortunately, we grow, most of our own food, so no need starvie. Yet selling food overseas may soon become more profitable.

You got this crazy scheme: The U.S. government prints money and then lends it to banks at zero percent interest (ostensibly to "stimulate" the economy). The banks take the cheap money, buy longer dated treasuries (who else would buy them?) for risk free profits on the spread as they try to repair their balance sheets. With the possible exception of "Cash for Clunkers" very little ends up in the hands of the American public. The longer this charade goes on, the more impoverished America becomes.

We simply cannot afford social security, national healthcare, high minimum wages, highly paid government employees anymore but our leaders don't seem to get it. The dollar is strong only when European crisis erupts -- they have similiar, possibly worse problems.

Even more disturbing a weakening dollar robs Americans of their savings by stealth. The bank statement may look good but the dollars buy less and less. Forget about traveling overseas. Cash and treasuries are a loosing game to everyone but the banks. Most of us just aren't aware of it yet.
As the U.S. continues to sink into a recessionary quagmire you might consider investing in international blue chips, commodities, and emerging market ETFs, assets which have more than paper backing them.

Nervous about picking foreign stocks? Use ETFs! Since ETFs invest in multiple companies, most practically eliminate corporate risk by investing in dozens if not hundreds of companies. You may wish to consider EEM (ishares MSCI Emerging Markets Index), GMF (SPDR S&P Emerging Asia Pacific), BKF (ishares MSCI BRIC Index), or DGS (WisdomTree Emerging Mkts SmallCap Div).

Its a little riskier but TBF and TBT provide protection and profit opportunities against the inevitable rise in U.S. interest rates as reality sets in. And the flood of overseas tourists visiting the U.S? Thank them! They are returning some of the vast amount of dollars that have fled to foreign shores in recent years.

Disclosure: Long BKF, DGS, TBT

An ETF Portfolio for Both Yield and Safety

2010-08-25T12:55:00.000-07:00

How can you find yield and safety in today's Zero Interest Rate Environment? That is the question retirees and many others are asking? Conventional wisdom says "You can't . . . the only safety is in cash or treasuries." Historically that has indeed been the case.

However, the U.S. government is currently doing everything possible to keep rates low, and of course we all know you can't fight the Fed. First the Fed drove down short term rates to zero. Now, they are targeting longer maturities. This is a war on savers!

So, are cash and treasuries truly safe? Considering the U.S. debt situation the short answer is: "no." Remember deflation and even stagflation is the fixed income investor's friend -- your dollar buys more. If inflation or currency devaluation occur you do not want to be caught long bonds! Governments almost always print their way out of a debt crisis, igniting inflation. The portfolio below, however, provides inflation protection in addition to yield.

The portfolio consists of 7 ETFs and has a yield (equally weighted) of 5.67% and shows a 29.7% YTD gain. Compare this to SPY's 2% yield and 1% YTD gain. Also, remember, since we are talking ETFs you greatly eliminate corporate or individual sovereign risk.

.EMB Emerging Market Bonds (4.7% yield, 15.5%YTD return)
LQD Investment grade Corporate Bonds(4.7% yield, 8.6% YTD return)
JNK High Yield Bonds -- aka junk bonds (9.7% yield, 37.7% YTD return)
DGS Small Cap Dividend Emerging Markets (4.8% yield, 83.2% YTD return)
PEY High Yield Dividend Achievers (4.3% yield, 3.6% YTD return)
IFGL International Reit (9.5% yield, -3.5% YTD return)
VPU U.S. Utilities (3.8% yield, 11.3% YTD return)

Depending on your particular situation you could over or under weight individual ETFs. Think a big crash is coming? Maybe stay away from JNK. Think Emerging markets will prosper? Overweight DGS. Already own substantial real estate? You could stay from IFGL. Talk to your financial adviser before investing.

A few comments: JNK is probably the riskiest. Yet, hi-yield bonds have strongly out performed the supposedly safer SPY over the last year. DGS, PEY, IFGL, and VPU have real assets and provide inflation protection and growth potential in addition to yield. All but IFGL show positive growth over the past year, prospering in today's dis-inflationary environment. Strong emerging market exposure minimizes risk to heavily indebted developed countries.

Sure, you can hide out in cash and treasuries but you miss the income and capital appreciation potential of the above portfolio plus you run a significant risk of currency devaluation or inflation. Hiding in a fox hole may only get you buried some day, maybe some day soon.

Again, investors should do their own research and consult with their own financial adviser before acting on any thoughts expressed here.

* Disclosure and Other Useful Phrases *

2010-08-24T12:02:00.000-07:00

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Hot Summer, Hot Bonds

2010-08-17T19:46:00.000-07:00

Unrelenting summer heat has broiled most of the U.S. into a stupor. Russia had extremes of heat and drought not seen in hundreds of years. Global warming theories are again on the front burner.

The SP500 has wandered aimlessly all summer and now is about where it was in early June. The U.S. dollar has mostly fallen, though firming recently. Commodities, as show by the CRB Spot All Commodities Index, are strong and rising. Equity volume is light, cash positions high.

Many "went away in May" and are sitting out this hot summer in cash or treasuries. Is this a smart thing to do? Well, the stash under your mattress may be safe as long as ex-spouses, burglars, mice and the federal government stay away. I would be most worried about that last one.

But, wow! Look at the bond markets! In case you haven't noticed, everything is on a tear. Treasury, corporate, sovereign, and municipal bonds, all are trending (in some cases rocketing) up. U.S. 10 year treasuries as shown by IEF recently topped 98 with the yield dipping below 2.6%.

Even traditionally risky bonds are in a strong upswing. Consider junk (aka hi-yield) issues. JNK has risen signifigantly over the last 3 months -- no recession predicted here.

Emerging market bonds also continue to out-perform.

As an (perhaps unrelated) aside, note that Obama's economic advisers are jumping ship. Peter Orszag, director of the Office and Management and Budget (OMB) resigned in late June while the ebullient Christina Romer, chair of the White House Council of Economic Advisers plans on stepping down in September. Both Orszag and Romer say they are leaving for personal reasons, not job frustrations. Well . . . draw your own conclusions.

So what to make of it all? Do record low 10-yr yield indicate a flight to safety ahead of coming crash? Or, do steadily rising hi-yield (junk) bonds, strong commodities and emerging market indexes indicate a recovering world economy and strengthening inflationary trends?

It may be a mistake to fight a strong trend but I would watch bond markets very carefully. U.S. treasury upside potential is limited while downside risk is very high -- if bonds crash. It may not be to early to take a position in TBF or TBT (short and ultra-short 20+ year U.S. treasuries ETFs). At the very least keep a close eye on this market. Also, you may wish to consider ENY, the Canadian Energy Income Index, which has both yield (3.6%) and real assets of Canadian oil and gas. Gold (GLD) will be strong with currency market disruptions.

With the U.S. government facing northward of $100 trillion dollar in debt obligations eventual massive money printing seems inevitable. It just isn't here yet. Things could end badly with high inflation or possible currency (U.S. dollar) devaluation.

The hot summer of 2010 will soon be a memory but if bonds go south a lot of other (unpleasant) things will heat up fast. We will then long for the days when just the weather was hot.

The Thrill Ride Thats ATPG

2010-06-17T11:52:00.000-07:00

Like roller-coasters? Then you will love high-beta ATP Oil and Gas Corporation (ATPG). After bottoming around 2.5 in early 2009 it rocketed up to 23 by April of this year. But, by mid May it was back below 8.3. Currently bouncing around in the 11 - 12 range. Consider yourself warned! This stock is not for the faint of heart.

Why the huge drop since April? Well, the BP spill disaster suddenly brought into question the feasibility of deep water drilling. ATPG has invested heavily in deep water rigs such as its 7-story ATP Titan at its Telemark Hub. Since the companies focus in the last few years has been deep water many investors apparently feel ATPG is in trouble

ATPG is also highly sensitive to oil prices, oil prices which are now considerably off April's high of $87/barrel. Now, throw in high debt invested in deep water rigs and you have a recipe for extreme uncertainty. Since the company's main focus is in the Gulf of Mexico (they also have a North Sea presence) the shock waves of the disaster are severely rocking ATPG.

This perfect storm of a drilling moratorium, the almost certainty of increased regulations, lower oil prices, and high debt has combined to swamp ATPG's stock. However, even perfect storms subside eventually and the U.S. really needs oil. Any oil! Deep water oil is one of the few oil frontiers left in North America, perhaps the world. The BP disaster gushes up to 60,000 barrels a day. The oil is spewing up under its own pressure, pressure so strong even the industry's best engineers can't tame it. This has been going on for two months and looks like it will be going on for a considerable time yet. We need this stuff. Trouble is we need it in tankers, not the ocean.

Although ATPG had no part in the disaster it will surely be affected by drilling moratoriums and inevitable increased regulations. Recently a 6 month moratorium was put on deep water drilling. Louisiana wants it lifted sooner. Those who know how government operates say it will be a year or more before it is suspended. Markets hate uncertainty.

In a press release on June 4 (see release here in its entirety) ATPG provides an update on how the company is affected by the drilling moratorium. Two wells at the Telemark Hub and one natural gas well at the Canyon Express Hub originally scheduled for 2010 will have completion and production pushed back to 2011.

The company sold $1.5 billion senior secured second lien notes in April. Most was used to refinance debt with approximately $131 million to increase liquidity. Capital Expenses of between 50 to 100 million will be saved due to the suspension of the three wells while moratorium costs are estimated at under $30 million. ATPG has show resilience in managing debt in the past, having gotten through low oil and stock prices in early 2009.

Right now anti drilling fever is at a peak as oil executives are grilled by Congress on TV. Oil prices are low due to dollar strength. The anti drilling chorus will probably decrease over time, especially as Americans see increasing gasoline prices due to supply curtailment. Considering the unaddressed deficit situation situation in the U.S. will probably drive the U.S. dollar considerably lower over time. These longer term trends will work to the advantage of ATPG.

ATPG has done well. In 2009 it replaced 376% of production with new reserves. The company claims to have a 98% success rate in bring production from fields. ATPG does not do exploring, rather they purchase properties with proven reserves, then bring them into production

Oil prices appear to be heading up long term (but possibly down in the short term due to recessionary factors). The moratorium on drilling will be removed eventually. Uncertainty and risk? Yes! But the potential for large price increases in ATPG stock while the downside is limited. My advice wait for a big down day in the price of oil then buy!

The roller coaster ride isn't over. If you want to buy I recommend the dips (big ones), then be prepared to bail at the peaks. Its kind of like Six Flags and Las Vegas combined.

A Lot to Lose

2010-05-04T10:23:00.000-07:00

The immensity of the unfolding disaster in the Gulf of Mexico is only now beginning to sink in. Wildly varying estimates show as much as 200,000 barrels of crude oil a day into the ocean. We are in an early stage of an unprecedented environmental disaster.

The St. Petersburg Times' Headline of Sunday May 2 says it all: "A Lot to Lose". Once the oil hits the Gulf Stream is will be dispersed from off the Louisiana, Mississippi, and Alabama coasts to around Florida, up the U.S. east coast, then across the Atlantic toward Great Britain and Europe. One can only speculate on the detromental effects on fish, shrimp, birds and shell fish. We can only hope for the best.

Don't own BP stock? Think this doesn't affect you? Think again! Florida's pristine sand beaches, the price of seafood, the birds, the sea turtles will all suffer. And then there is this: You better believe that everyone who drives will be paying more for gas because of this catastrophe. Sarah Palin's "drill baby drill" image and Rush Limbaugh's "Eco-Nazi" rants are about to get a long over due dose of reality.

Suddenly the Gulf of Mexico (GOM), one of the two bright spots (the other is North Dakota) in U.S. oil production, has dimmed. Oil production has been growing in the GOM recently. Now, with new drilling temporarily halted, that trend may reverse. New drilling is needed to replace depleting old fields. Caution and additional safety measures, which may or may not work to prevent this type of catastrophy, will drive costs up.

Since the U.S. absolutely needs oil economic considerations will eventually prevail and drilling will continue. We will pay for it not only at the pump but in diminished quality of fisheries and beaches.

Who to blame? BP, who operated the now sunken rig? Transocean (RIG) who owns the rig? Cameron (CAM) who apparently made the malfunctioning blow out protectors? Alan Von Altendorf, who is well versed in the field, forecasts costs to BP of $10 billion, RIG $1 billion. You can read his article here. STO, and HAL are also impacted. You can bet legions of attorneys will be arguing this one for a long time. They are all already dropping the ambulances and flocking to the Gulf coast billions of dollars beckon.

And this is how it always seems to play out doesn't it. The road to peak oil is not a smooth slow upward trend. Rather it goes in forward and back in jolts. We are now seeing a jolt up, it is never a simple trend. A full blown global crisis (markets are wildly down as I write this) may again drive oil prices dramatically down. In the long run supply/demand issues and global fiat money printing will win out and drive oil prices much higher though.

Back in the 1960's we lived with the environmental illusions that as long as we picked up our litter, didn't carve initials in trees, followed Smokey the Bear's admonishments about disposing of cigarettes butts, and ate government recommended three square meals a day, all would be well forever.

Now thick oil on our beaches, hardwood trees dying by the thousands across the U.S. Midwest from exotic insects and fungi, and 62% of Americans overweight or obese shows us just how delusional we have been.

_______________________________________________________________________

BP is said to be in panic mode, turning to its competior Exxon for help. Just what can you do when the shutoff valves a mile deep don't work and before your very eyes you watch.

Non peak oil people can point to the gushing oil and say: "See, we told you so" the oil is there we just need to harvest it correctly. And of course they are right, all or the above.

But it just takes one error, one uncontrollable factor to threaten and potentially destroy so much as we are now finding out.

The good life goes on and on and then suddenly, it doesn't.

But yet once you drop the simple explanation you see no one ever gets it exactly right when it comes to the future. Pollyannish claims of American ingenuity and omnipotence keeping us happily . . . . But this has already failed. We continue

Revised uninsured liability forecast:
BP: $6 billion clean-up, $1 billion litigation, $3 billion compensation, $4 billion lost revenue
RIG: $500 million legal expense, $500 million lost revenue
CAM: $100 million legal expense
HAL: $300 million legal expense
STO: $2 billlion lost revenue Norwegian offshore drilling moratorium

With three miles of rock and a mile of ocean overlay extreme pressure can build in deep wateroil and gas deposits. Blow-out protectors are supposed to control these high high pressure surges but all it takes is error either human or mechanical and a disaster can result as we are finding out.

Bang! Zoom! Straight to the Moon!

2010-04-13T13:34:00.000-07:00

On hearing the latest jobs report Larry Summers told the Financial Times "we are now moving toward escape velocity." The Great Recession is rapidly receding in the rear-view window. Whether we reach the moon, fall out of orbit, or end up lost in space remains to be seen though. "One of these Days America . . . " yes, we will find out.

After the bang of money creation we are zooming. Stocks are up 70% in a year, gold, federal debt, interest rates, all seem to be nearing "escape velocity". The boosters have ignited, the rockets are thundering, and off we go, pushing rapidly into the deep black depths (or is it debts) of space.

163,000 people found jobs last month, 48,000 of them as census counters. Bill Bonner comments "If you could create wealth by having people count one another, perhaps we could create even more wealth by having them count the stars in the heavens." Put em to work in Montana, no light pollution.

Alice never did get the ". . . Pow! Right in the Kisser!". Let's hope Larry Summers is so kind.

Note: The "Bang! Zoom! . . .", "One of these days ...", and "Pow! Right in the Kisser!" phrases are paraphrased from "The Honeymooners", a 1955 TV sitcom starring Jackie Gleason as Ralph and Audrey Meadows as Alice. I took the liberty of substituting "America" for "Alice".

The Coming Boom in Oil Service

2010-03-27T19:39:00.000-07:00

With a deafening roar the greenish black gunk spewed 150 feet into the air, drenching men and machinery alike. Welcome to east Texas in 1901. The Spindletop oil discovery produced some 100,000 barrels/day (they expected 5), more oil than anyone knew what to do with at that time. The gusher heralded the start of the great east Texas oil boom. By 1903 the price of a barrel of oil was 3 cents.

But 1901 is so very long ago. Oil is now $80/barrel, gasoline $2.80/gallon, and both are heading up. A voracious, continually growing, worldwide fleet of 600 million plus vehicles, each suck up their quota every day with no end in sight. Oil companies drill through miles of rock and salt, often under thousands of feet of sea water, all doing so in a desperate attempt to find more of the elusive black stuff.

Now, in 2009, the easy pickings are mostly gone. Salt domes like Spindletop are tapped dry (Spindletop itself quit producing in the 1930's). Lots of hydrocarbons remain in the earth, but they are increasingly difficult to extract. Consider:

The U.S. (lower 48): Texas produces more oil than any other U.S. state but production peaked at 3.5 million barrels/day in the early 1970's. Now, Texas production is below 1 million barrels/day and steadily dropping. With the exception of North Dakota and the Gulf of Mexico, the same is true for the rest of the U.S.

Alaska: Prudhoe Bay, the largest oil field in North America, has produced some 13 billion barrels since 1977. BP plc estimated that as of August 2006 only some 2 billion barrels of recoverable oil was left in Prudhoe Bay.

Canada: Canada is the U.S.'s largest oil supplier. I covered Canadian oil production in a previous SA article. It covered the same scenario: conventional oil production is in decline. Potential exists in oil sands and shale, but environmental issues cloud the promise.

Mexico: The woes of Cantarell, one time the second fastest producing oil field in the world (behind Saudi Arabia's Ghawar), are legendary. Production peaked at 2.1 million barrels/day in 2003, and by 2009 it was at 774 thousand barrels/day and falling rapidly. Schlumberger (SLB) is now working with Pemex to slow the decline in Mexican production.
An interesting aside: It is thought that Cantarell exists only because of an asteroid strike some 65 million years ago (the same one that wiped out the dinosaurs). The strike created a large rubble field deep in the earth with good porosity in which oil collected.
The North Sea: North Sea oil production peaked in 1999 and A Wall Street Journal article on January 13, 2010, said about North Sea fields:

... oil and gas fields are in steep decline and nearing the end of their production lives.

The Middle East: The Middle East, especially Saudi Arabia, is somewhat of an unknown. The Saudis, currently pumping 8 million barrels per day, claim to have 4 million barrels per day of spare capacity. But, can you believe the notoriously secretive kingdom? Even assuming the Saudis are right, a worldwide economic resurgence could easily absorb this extra capacity. Ghawar, Saudi Arabia's, and the world's, largest oil field, needs increasingly large water injections to keep the oil flowing. Among other Middle Eastern states only Iraq may be able to ramp up production (and then only if it is able to keep the violence under control).

There is always the risk of geopolitical issues flaring up in the Middle East. Currently, things are relatively calm, and we have $80/barrel oil. Iranian Shiites have aspirations on Sunni oil, Al Qaeda is still around, and Israeli/Arab issues go unresolved. If any of the above flare up you can say goodbye to $80 oil - I don't need to tell you which direction it will go.

Elsewhere: Brazil, Russia, Africa, Indonesia, Venezuela are all large oil producers. All, except Brazil, have plateauing or declining production and/or exports. Several large off shore fields have been discovered in Brazil recently, but they are miles deep in the ocean, under salt and rock.

Throw a worldwide money printing binge into the mix, as governments try to inflate away their debts, and it seems certain the dollar denominated assets such as oil must rise.

This article is not meant to prove or even argue peak oil. Rather, the point is no matter what or who is right about peak oil, it will take more and more effort (read oil service) to keep oil flowing.

The oil services sector supplies the expertise that supports the massive worldwide infrastructure continually turning raw petroleum into useful products, such as the gasoline you put into your car. Whether it be horizontal shale, deep sea basins, getting more out of older fields, transportation or refining, none of it would happen without the oil services sector.

Oil Service Companies
Schlumberger (SLB) is a dominant player, and with a market capitalization of over $75 billion, it dwarfs competitors such as Haliburton (HAL) and Baker Hughes (BHI). Schlumberger is a quality leader in almost all aspects of the oil service industry. Recent acquisitions of Smith International (SII) and Nexus Geosciences enhance expertise in drilling and seismic services. If you were to pick just one, Schlumberger would probably be the best choice.
Transocean (RIG) and Diamond Offshore (DO) specialize in offshore contract drilling, while National Oilwell Varco (NOV) is more a "nuts and bolts" type company, designing, manufacturing and selling products used for the production and transportation of petrochemicals.
Exchange Traded Funds (ETFs)

If you wish to avoid corporate risk consider oil service ETFs. Three of the larger ones are: iShares Dow Jones US Oil Equipment Index ETF (IEZ), Oil Services HOLDRs (OIH), SPDR S&P Oil and Gas Equipment Services ETF (XES).

iShares Dow Jones US Oil Equipment Index ETF

IEZ has holdings in over 40 companies and is market-cap weighted. The three largest holdings: Schlumberger, Haliburton, and National Oilwell Varco comprise almost 40% of capitalization.
Since holdings are weighed by market capitalization, IEZ keeps most of your investment in the the larger, high quality companies, yet still gives some exposure to the smaller ones.
IEZ has a market cap. of $407 million and an expense ratio of .47%.
Oil Services HOLDRs

Like IEZ, OIH is concentrated in the larger oil service area. Transocean is the top holding at 15%. There are only 16 securities in this ETF. The three largest: Transocean, Schlumberger and Haliburton total around 35% of holdings. If you are considering investing in OIH you should be aware of the unusual features of the HOLDR Merrill Lynch products. Here is a good article on how they differ from most ETFs. Since you can only invest in round lots of OIH, you will need a minimum of $12,100 more or less at current prices to invest.
OIH has a market cap. of $2.28 billion and an expense ratio of .06%. The expense ratio is low because of the unique way that it is calculated (see the above article link for an explanation).
SPDR S&P Oil and Gas Equipment Services ETF

This oil and gas equipment and services ETF holds 24 securities, but no one security comprises more than 5-6% of holdings. Smith International is currently the largest holding. Although XES has many of the same companies as IEZ and OIH, there is a greater weighting of smaller to midsize companies in XES.

XES has a market cap. of $342 million and an expense ratio of .35%.

A Cautionary Note:

If you believe a double dip recession, crash, or even signifigant market decline are on the horizon, you may wish to stay away from this volatile sector. The sector shows even more volatility than oil prices do.

Disclosure: Author long XES

On Canadian Black Gold

2010-01-13T11:16:00.000-08:00

"A New Saudi Arabia of Oil" scream the headlines. You've seen the hype. But, how do you separate truth from headline? Well, we do know there are staggering amounts of hydrocarbons in the western sedimentary basins of North America. It is no coincidence that the U.S. imports more oil from Canada than any other country. While Saudi Arabia has 264 billion barrels of oil reserves, Alberta's Athabasca oil sands alone total some 1.7 trillion barrels of hydrocarbons.

Canada's oil and gas are vital for the U.S. The quiet rolling western prairies are safe, peaceful and close. One doesn't deal with egomaniacs like Venezuela's Chavez (though some might nominate Alberta's premier Ed Stelmach), Nigeria's violent saboteurs, or bomb-toting Middle Eastern jihadists. With that in mind, let's take a closer look at the Canadian portion of these "staggering" North American reserves.

Canadian oil originates from three sources: Conventional oil, oil sands, and newly recoverable oil from "tight" strata. "tight" refers to oil (or gas) locked in low porosity/permeability formations of shale, siltstone, or sandstone. Historically, conventional oil production has predominated. Now, by necessity, that is changing.

Conventional Oil and Gas

Mobil Oil discovered Pembina, Canada's super-giant oil field, in 1953. Located in the Cardium Formation, some 100 kilometers southwest of Edmonton, Alberta, Pembina still produces more conventional oil than all other Canadian fields combined, it has given up over 1.2 billion barrels of oil in its 50 year history.

Canadian conventional oil, about half of all Canadian production, is a desirable light to medium grade. Only 17% of Pembina's conventional oil has been recovered, yet production has been declining since the 1970's. It's there, you just have to crank harder and harder to get it.

It is no secret that worldwide conventional oil production is also in decline. Saudi Arabia, which claimed two years ago it could produce 15 million barrels per day, has yet to even come close. Saudi production has never exceeded 10 million barrels per day, even with the $120 plus/barrel environment of 2008. Saudi Arabia's Ghawar, the largest oil field is the world, seems to be in decline (see here). Saudi crude is rumored to be increasingly sour, with increasing sulfur and water content.

Even in decline, Canadian conventional oil production will continue to supply oil for U.S. and Canadian markets for quite some time. Water and carbon dioxide flooding continue to push more oil out of Pembina. Penn West Energy Trust (PWE) is a large producer of conventional oil and gas in the Pembina area.

Oil Sands

The extensive Athabasca oil sands and other smaller oil sand fields north of Edmonton are (as noted above) estimated to hold more than 1.7 trillion barrels of hydrocarbons -- the largest petroleum resource in the world. The catch? Oil sand hydrocarbons are bitumen, a thick, gooey, tar-like substance. Bitumen lies in vast beds near the surface of north-central Alberta. Huge shovels and trucks strip off the boreal forest vegetation and surface soil to get to it after which, capital intensive processing and refining are necessary to produce gasoline and other end products. Often more BTU's must be input than are derived.

Oil sand development raises serious environment questions. The surface forest is destroyed, leaving a barren, moon-like landscape over thousands of acres. Greenhouse gas emissions are high. The Pembina Institute has taken the lead in monitoring oil sand environmental issues. Some people question if it will be worth the environmental, ecological and financial cost.

Alberta's oil sands currently produce approximately half of Canadian Oil, most of it is exported to the U.S. Despite the drawbacks, declining conventional oil production and rising prices have led to increasing oil sand production in recent years. The trend is projected to continue, provided the environmental issues can be addressed.

Many companies, both domestic and foreign, have stakes in the Canadian oil sands. Suncor (SU) and Syncrude Canada (joint venture of several oil companies) are major participants. ConocoPhillips (COP) has big plans. Imperial Oil (IMO), Canada's large integrated oil company, has a major presence.

Tight Oil Formations and Multi-stage Fracturing

Multi-stage fracturing (MSF) is where all the excitement is now. MSF in horizontal bores has revolutionized North American gas production and may do the same with oil.

MSF has the potential to draw billions of barrels oil from previously inaccessible tight formations. Tight formations often contain large quantities of oil and gas but, due to low porosity and permeability, have historically been hard to get at. MSF creates flow paths in tight strata from which oil and gas can be harvested. By creating fractures MSF makes accessable smaller, previously uneconomical, oil and gas collections . The hydrocarbons flow into the induced fractures while proppants, such as sand, ceramic, or other particles, prevent the fractures from closing.

Candian (and U.S.) tight oil often has a very desirable gravity (API 39-45), better than Pembina conventional oil (API 37), and comparable or better than WTL (API 39.6). Since MSF technology has significantly reduced extraction costs it may be a game changer for western Canada.

Keep in mind that tight oil production rates often decline quickly and the water component rises over time. For now, better technology is trumping this. Here is an excellent 2008 article on U.S. Bakken tight oil economics. Recent technological improvements continue to point toward ever better recovery rates, with up to 24 stage MSF improving productivity.

The success of MSF in the Pembina area will probably be duplicated in other fields, potentially drawing billions of addition barrels of previously inaccessable oil from tight formations. MSF is now being tried in over 20 Canadian formations.

The Candaian company Petrobakken's (PBKEF.PK) website claims it is ". . . primarily a pure-play, southeast Saskatchewan, light oil-focused company with targeted 2009 exit production of more than 37,000 boepd, more than 95% light oil". Petrobaken is now also moving into Cardium light oil with its proposed acquisitions of Berens and Result Energy.

One might also consider investing in Canadian Royalty Trusts (CANROYS). Penn West , mentioned earlier for its conventional production, also has large tight oil lands as a bonus. Enerplus (ERF) is another CANROY which pays high distributions and has large land holdings in tight oil areas. Some of best land potential for MSF is on the flanks of convention oil fields such as Pembina.

CANROYS have special taxing considerations so consult your tax advisor. Also, since distributions track the price of gas and oil they can change quickly. Both Penn West and Enerplus plan to convert to corporations in the next few years as new taxes on CANROYS take effect.

Summary

MSF has revolutionized natural gas production in the U.S and, though unheralded, North America is now self sufficient in gas. Can MSF do the same for oil? Can MSF make up for declining conventional oil production? Can it make environmental sacrifices for oil sands unnessary? It's a tall order but recent trends are encouraging. MSF will, at a minimum, stem and help reverse the decline in North American oil production. U.S. oil production, for the first time in 30 years, is now up (see my earlier article here).

Don't underestimate geopolitical considerations. Declining exports from both Mexico and Venezuela make Canadian deposits even more valuable for the U.S. Western Canada (and U.S.) are as safe an oil and gas investment as you can find now-a-days. A major flare up in the Middle East will send Canadian and U.S. oil and gas companies stocks soaring.

You have a choice of income paying CANROYs with large land holdings, established integrated companies such as Imperial Oil, or new exciting tight oil plays such as Petrobakken.

Thanks to "The Big Fat Greek Crisis" the US dollar is now strengthening against all risk currencies including the Canadian dollar. This is driving commodity and natural resource company prices down so the coming weeks may present an excellent entry point into Canadian oil companies. Do your own research.

Tags: SU, COP, IMO, PBKEF.PK, PWE, ERF

A Reversal: US Oil Production is Now Up!

2009-12-10T07:25:00.000-08:00

Surprised? I was, . . . but its true! In decline since 1970, the American Petroleum Institute reported US oil production has now turned up, with October production of 5.36 million barrels per day, the most since 2005. See the article here. Even Exxon (XOM) is "coming home" with its proposed acquisition of XTO Energy -- XTO has a large position in North Dakota Bakken Shale acerage.

The Cheyenne River Indian Reservation in western South Dakota is wild, desolate . . . and beautiful! Three million acres of rolling prairies and buffalo, just as trappers and the first settlers saw it. Much of the surface soil here is shale, Pierre Shale. In the 1970's I found 80 million year old ammonites exposed, right on the ground. The high clay content makes the soil poor for agriculture (probably why it was given to the Sioux Indians as a reservation in 1889). Due to surface exposure, the original oil and gas components here are long gone, but not so for the deeper shale and sandstones deposits to the north, where a bonanza in oil and gas has been found.

Further north (meaning North Dakota, Montana, Saskatchewan) oil production is skyrocketing. North Dakota may be sitting on one of the largest pools of oil in North America. Bakken Shale oil production alone may reach 500,000 barrels per day in 2011, up 50% from two years ago. And now, beneath the Bakken a new, apparently just as prolific, oil formation, called the Three Forks, is being explored. The Three Forks is rumored to contain just as much oil as the Bakken. Also, newly exploited to the northwest, in Canada, the Cardium formation is showing an abundance of oil. SA author Keith Schaefer has written extensively on the Cardium.

Multi-stage fracturing, or fracing, of horizontal wells in tight shale formations is providing an unexpected abundance of gas and oil. This new and rapidly evolving technology involves insertion of various liquids or gases (water, carbon dioxide, nitrogen, air etc.) along with proppants into horizontal bore holes in "tight" rock formations such as shale. The liquids or gases create fractures in the shale and proppants (sand, ceramics, etc.) keep the fractures open. Oil and gas then flow into the fractures and can be harvested. For more information on the technology read here.

Mid-Continent shale may have as much as 500 billion barrels of oil (admittedly a wildly optimistic estimate but if so think Saudi Arabia). While it is true that much of this oil may not ever be recoverable, increasing prices and the aforementioned technology is rapidly improving the odds.

And, don't forget the Gulf of Mexico. Although drilled heavily, companies are also producing more oil from the Gulf. Major projects are now coming on line while old fields, due to technological advances, are producing more than expected. New discoveries keep coming, read about BP's recent "giant" find here. At the same time, smaller companies such ATP Oil and an Gas (ATPG) are prospering by extracting more oil than ever thought possible from old fields. Technology is truly evolving and allowing us to find and produce ever more oil and gas.

So, is all the "gloom and doom" of Peak Oil talk just that -- only talk? Well, not so fast, the US increase is minuscule when compared to worldwide daily demand of approximately 85 million barrels of oil. Oil demand, while stagnating in developed countries, is jumping fast in developing countries. Car sales are exploding upward in India and China as road infrastructure is built out. The "American Dream" of car ownership is now becoming the Chinese or Indian dream. With Asian populations many times that of the US the potential is enormous.

A few years ago severe shortages of natural gas were predicted in the US and several LNG port projects were started in anticipation of imports. Now, construction has slowed or halted, and the facilities are languishing -- mostly due to US shale gas production. It seems unlikely the same could happen with oil any time soon, but keep your eye on US domestic production.

Below are some US companies with significant stakes in Mid-Continent (read North Dakota) shale oil plays:

Continental Resources (CLR), at $6.7 billion market cap and 605,000 net acres is in both the Mid-Continent and Gulf Coast regions. 82% of the shares are held by insiders, with Harold Hamm, CEO, holding most of it. Continental under Hamm, excited by the potential, has recently made a major move into the Bakken in North Dakota,

EOG Resources (EOG), at $23 billion market cap and 513,000 net acres is in the Mid-Continent and Gulf Coast regions. EOG, an international company, is probably the least speculative way to invest in the Bakken.

Whitting Petroleum (WLL), at $3.4 billion market cap and 89,000 net acres is in the Mid-Continent Whiting is also in the Permian Basin, the Rocky Mountains, Gulf coast and Michigan. Whiting is exploring the Three Forks formation under the Bakken.

Below are some Canadian companies that have significant western shale oil stakes.

Crescent Point Energy (CPGCF.PK) is active in the Canadian Bakken and "believes it has a drilling inventory of 3000 wells to drill."

PetroBakken (PBKEF.PK) recently combined with TriStar Oil and Gas and supposedly has an inventory of 1,300 Canadian Bakken wells.

Also, many of the Canadian Royalty Trusts have significant land holdings in Canadian shale areas. An added bonus: they often offer attractive dividends.

A cautionary note: I am not recommending any of the above equities. Everyone's situation is different so use your own due diligence and investigation before investing. It is true that there is a lot oil in North American "tight" shale, and technology is improving the cost of getting it out. However, a sharp drop in world oil prices could make the shale oil, which is still fairly expensive to pump, uneconomical and many shale oil companies may be adversely affected.

Disclosure: Long BP and PBKEF.PK

Not Telling Jennifer . . .

2009-12-02T12:16:00.000-08:00

"I'm not telling Jennifer" he said. This from the man selling wooden chopping blocks last summer at a Michigan craft festival. He was responding to my query concerning sales tax.

Not tell Jennifer? . . . Who is Jennifer? . . . His wife? . . . Co-worker? . . . Why would she care?

Then I got it. Jennifer Granholm is the governor of Michigan. Conditions in Michigan are really bad right now and may be looking worse for the future. The state, businesses, residents . . . everyone is scrambling! Unemployment is 14.3%, up from 8.7% a year ago.

A recent, and rather frightening article, predicts that Michigan's General and School Aid funds will need to be cut almost 50% by 2017 (see here) if the budget is to be balanced More and more residents are rebelling, clamoring that state employees and social welfare recipients also need to start sharing the pain. Its a mess.

In a way ,the state brings on its own problems. We collect sales tax on summer rentals in Michigan. What I found quite astounding was how difficult it was to set up forwarding the payments on to the state. You need to fill out forms and jump through a lot of hoops -- and thats to send money to them!

The state doesn't seem to have a provision for individuals to pay sales or use tax, even if they owe it. The forms are all company oriented, and there is less and less traditional employment in Michigan. After unproductive phone calls and emails I finally gave up and just put my last name in the "Company Name" field. Not sure if it was correct, but they are accepting and cashing the checks.

Untaxed, unregulated, unlicensed, unreported . . . America's underground economy keeps growing. The Christain Science Monitor recently estimated the shadow economy to be as big as $1 trillion or 8% of GDP (see here). Every uptick in unemployment, every tax increase, and every new regulation drives the figures up.

If you are unemployed and ambitious you do what it takes to get by. Telling Jennifer is all too often just not a priority.

Bargains at McDonald's

2009-11-11T12:28:00.000-08:00

This morning, on a whim, I stopped for an early lunch at McDonalds (MCD). I ordered two regular hamburgers and an iced coffee -- hazelnut, my favorite. The charge? $3.17! I looked at the receipt. I was charged $.99 for the two hamburgers and $1.99 for the coffee.

I started thinking about that. Why would McDonald's only charge me $.49 for a hamburger? That is about the same price I paid in St. Louis over 25 years ago.

The iced coffee I could understand. You can get Starbucks type beverages for less -- a good way to get "prestige" on the cheap. Of course the atmosphere isn't quite the same.

But, that $.49 hamburger? After studying the posted prices over the counter I finally found, in small print near the bottom, the regular hamburger price. It was marked $.69! Well, that only deepened the mystery. Why would they only charge me $.49? Some kind of senior discount maybe? I'm 60. The sales clerk did not ask my age and I could find no promotion advertising a hamburgers or senior specials.

Times are tough, If people can get 2 hamburgers for $.99 and skip the drink this would be a great way of getting meals on the cheap. I'm not sure this stuff is good for you but it is cheap!

For what its worth: at the next table two teenage girls were splitting what looked like a large order of fries and a medium drink. Apparently McDonalds is doing well with this type of stuff.

ETFs for Bear Markets

2009-11-10T07:09:00.000-08:00

The dollar keeps falling while "real" assets such as gold, oil, and equities continue to march ever upward. Its great to go along for the ride but keep in mind that "all good things must come to an end someday". Sometimes a violent end! When the tide turns ... and you know it will ... how can you position yourself?

Just about anyone with an elementary school education can make money when equities, commodities and bonds all go up at the same time. However, investments that do well when things go the other way are much harder to find. Here are some ideas on how to hold your own, if not profit.

First, get into a healthy cash position, then consider these ETFs. Most did well or at least held their own in the 2008 bear market. Two are currency ETFs. Currency markets are much larger and independent of equity markets.

UUP Yes, the much maligned US dollar. Just how low can it go? Well, don't answer that question, but do consider that UUP was probably the best performing ETF in the second half of 2008.
CYB The Chinese yuan. This is an interesting play. Currently the yuan is pegged to the US dollar but any change will most likely have the yuan appreciating versus the dollar. Note that the yuan mostly held its own during the second half of 2008. China is also printing money but doesn't have the deficit problems the US does.
TIP and BND TIP invests in inflation protected US bonds and did not do well the second half of 2008. However, if you see a stagflation scenario ahead TIP may be a good place to be. BND tracks a "broad, market weighed index" of bonds and except for a violent but brief spike down in September, when everyone was panicking, held its own throughout 2008.
DOG, SH, PSQ and RWM. These inverse ETFs are a convenient way for investors to "short" the market and a great place to be in falling markets. But, remember these ETFs are subject to tracking error and values decay over periods of time. Also, see the comment about "bear" ETFs below.
GLD Gold is commonly thought of as an inflation hedge. Yet, more than anything, it is a store of value in uncertain times. If you see greater than normal financial and social unrest ahead -- and most of us do -- you may want some gold investments.

If you are a day trader you can see a list of Yahoo Finance's "bear" ETFs here. Remember, most if not all, of these are for day traders only because of daily rebalancing. Held long term, they not only can, but will, destroy your portfolio. Click the "Return (Mkt)" tab on the Yahoo site to view the "Red Sea" of three year returns, losses run up to 70, 80, even 90 percent. Only one, UDN, shows a positive three year return -- wonder why?

So, when will the equity-commodity-bond market run end? Consider these potential early warning signs: long term treasury rates start rising, the Fed is really ending Quantitative Easing, and an improving US economy which may cause the US Federal Reserve to raise rates. For now the "herd" is jumping on the band wagon -- and more are boarding every day -- so enjoy the party. But, be ready to jump when the music gets out of tune and the wagon starts swaying.

Disclosure: I have a small "precautionary" position in SH

SunTrust, Signs of a Solid Investment?

2009-10-26T09:54:00.000-07:00

The heat and humidity in central Florida was unbearable a few weeks ago -- summer refused to leave. A dome of sauna-like high pressure blanketed the state.

The air conditioned lobby of the local SunTrust (STI) branch was a welcome relief.

First thing: You notice the signs, signs everywhere, in the lobby, in the hall, behind the tellers. More signs than customers, all touting SunTrust's "SOLID" message. I considered whipping out my camera to snap a picture or two for this post but ... thoughts of being spread-eagled and searched in some administrator's office quickly put that idea to rest. You can, however, see examples of SunTrust's SOLID message yourself on SunTrust's web site here.

Mid-December of last year -- in the middle of the crash -- I posted a SA article on how business, at least from a customer's perspective, appeared normal at SunTrust. See the earlier article here. SunTrust's stock then was in the upper 20's and dropping -- it was destined to hit a low of 6 in March of 2009. Now, on October 26 it is just below 20.

The bank recently posted it's 4th straight quarterly loss, revenue is down 21%, non-performing loans up 65% and charge offs up 26% (see here).

From a customer's perspective the changes are more subtle. Well, there are the signs, "SOLID" is everywhere. Some signs, such as "SOLID ADDS MORE OOMPH" -- I'm not sure what the meaning is.

Gone are the Home Equity Loan promotional signs. Indeed, SunTrust froze my own HEL account several months ago. I did see a small sign on a desk touting auto loans.

I was struck by the quiet and lack of customers, maybe it was the late Tuesday morning time frame. Only two of the seven lobby offices and one one of the five lobby desks had staff. Six months ago there were Saturday hours, now gone.

During past visits I noted stacks of loan applications on lobby desks. Now, the desk I sat in front of had only some kind of subpoena -- quickly whisked out of sight. Even the pens looked like they came from Wal-Mart.

I like SunTrust -- even if they did freeze my HEL account. Staff are mostly friendly and helpful, the lobbies well air conditioned (important in Florida), and branches are convenient. The website layout is easy to follow and I like the logo (see picture above).

Residential, and commercial real estate values are down close to 50% from 2006 in the northerly suburbs of Tampa. Considering the 100% loans originated in those boom years all kinds of stuff is now "underwater". This must be a huge problem for SunTrust and other area banks. Foreclosures are skyrocketing.

Nearby is a new 16 unit strip mall, quite attractive, completed well over a year ago. So far it boasts only one tenant, a doughnut shop. Someone has to be losing a lot of money here. Don't know if it's SunTrust financed, you don't see the "Financed By" signs around anymore.

With ZIRP financial institutions can purchase longer term treasuries and profit from the spread. This may explain the market for10 year US Treasury Bonds, paying 3.5% despite years of trillion dollar deficits staring us in the face. Thank you taxpayers, just don't expect to get it back on your savings accounts.

The biggest beneficiaries of tax-payer bailouts pay the least interest on savings. Back of America (BAC) pays .1% a year, Wells Fargo (WFC) .05%, Chase (JPM) .01%. See here. Hmm ... let's see now. $5,000 in a Chase saving's account (or Washington Mutual, which is now JP Morgan Chase) would earn $5 for the year. Las Vegas, here we come!

And Suntrust? Well, SunTrust paid me 1 cent (rounded up?) interest last month on my $162 savings account. At this rate I will report a grand total of 12 cents in interest income on 2009 taxes! Sure hope the IRS isn't expending too much time and effort pursuing interest income cheats this year!

Yet Bernanke has to keep rates low. To increase short term rates would devastate the profit spreads, crashing housing, equity and bond markets yet again. We would be right back to last fall. Question is: how long will US savers put up with these abysmal rates? Recent market jitters are unnerving.

So is SunTrust a "SOLID" investment? Despite the signs, I would have to say no. Not picking on SunTrust, same goes for other banks. Considering the craziness and shenanigans going on with interest rates and the Fed's MBS purchases (which could end) I would avoid investing in any US financial institutions at this point.

Reality is not far from the air conditioned lobby. A few blocks away, a well dressed, unhappy looking middle aged woman is sitting on the sidewalk, clutching a large flooring special sign, attempting to fend off the mid-day sun. These people are hired to jump around, wave at passing motorists, entice them to buy. Sitting down on the job? Well, you try jumping around and waving all day in Florida's heat and humidity. But, hey -- she has a job.

Disclosure: I have no positions in the stocks mentioned above unless you count my SunTrust accounts.

Why the Big Market Run Up?

2009-10-15T10:42:00.000-07:00

Since March lows stocks have rocketed up 50% or more and the trend shows no sign of abating. Back in March there was almost universal pessimism. So what has changed?

Have fundamentals really improved? Unemployment is still going up. Tax receipts are falling drastically and state and local government must make cuts as they cannot "print money". I guess California at least gave it a try with those infamous "IOU"s. How green will the shoots stay if government money slows or stops?

In my opinion this is a tax payer fueled rally. A massive infusion of newly printed money (backed by US taxpayers) is flooding the system. The major recipients of this largess, the banks, get this money loaned to them at 0%. They then do what all good bankers do, reinvest the money at higher interest rates and profit from the spread. With global crash fears ebbing, money is leaving the safety of short term treasuries, going into longer term treasuries, equities and commodities, all riskier assets.

The suspension of mark-to-market accounting has allowed bank held bad loans (still there and growing) to be kept on the books at face value. Now we have banks reporting profits, even though the quality of the asset side of the balance sheet has not improved. Question is: Can profits generated from investment income compensate for buried-in-the-balance-sheet bad loans? If Bernanke, and Geithner keep interest rates at 0% perhaps profits can be generated for a while yet by this risky carry trade. Let's hope they don't start leveraging.

Unfortunately, US taxpayers will pay a terrible price. Government deficits have quadrupled with no end in sight ($Trillion dollar deficits from now on?). The simple fact is we cannot realistically pay off this debt short of debasing the US dollar and that may exactly what Bernanke intends to do. He doesn't dare raise rates, he may have no choice about leaving short term rates low. I always wondered why hyperinflated economies didn't stop the printing when the initial debts were devalued. You know stop at 50-100 percent inflation, why go on to thousands or millions percent like Zimbabwe. Maybe policitcally they had no choice.

Investors know this is dooming the dollar and it is dropping like a rock (see here) while non-printable assets such as gold (see here), oil (see here), grains, and stocks steadily march upward. Even real estate is showing signs of bottoming.

Devaluing the dollar will cost all Americans dearly. It will increases the price of just about everything and sets the stage for hyperinflation. Think of gasoline at $10 or more a gallon, a loaf of bread at $10, a big night out with the family at McDonald for $40. Health care? Well, we don't even want to go there. Savings and fixed income instruments would be devastated.

We have always had to deal with inflation to some extent. The problem now is it threatens to spin out of control. Hitting that magic window of 1-3% inflation may no longer be possible. People in the know are loading up on non-printable dollar denominated assets while most Americans are blithely unaware of the storm clouds of debt towering on the horizon.

A Timber-Backed ETF for an Historic Commodity

2009-09-29T10:01:00.000-07:00

Up until 100 years ago our ancestors needed timber almost as much as water to survive. Keeping warm, building shelter, constructing tools, all called for timber. It was necessary for survival and life itself. Indeed, plant material was (and still is) the basis of all life.

You can invest in timber by buying wooded acreage. Periodically (like every 10-15 years) a timber company will pay to harvest your trees. A much simpler and more efficient way though, would be to buy CUT, Claymore Securities' timber ETF According to Claymore, CUT seeks investment results that track the Beacon Global Timber Index (see here for index information).

CUT invests at least 90% of its money in worldwide holdings of timber and wood product companies. As of September 28, 2009, no company constituted over 5% of holdings, so your are well diversified. Included are some well know companies such as Meadwestvaco (MWV), Rayonier (RYN) and Weyerhouser (WY). A little under 1/2 of all holdings are in US (27%) or Japanese (19%) companies.

In the 1800's indiscriminate lumbering of pine (White Pine image at left) reduced much of America's, especially Michigan's, virgin pine to a wasteland of stumps and dry brush. This in turn sparked rampaging wildfires, both in the cities (Chicago fire of 1871) and cut over lands, the effects of which can still be seen.

Today, timber is harvested for packaging, paper, building materials, heating and furniture construction. Home construction and furniture making are cyclical industries while packaging is highly dependent on the economy. Many of CUT's holdings are packaging companies.

Is CUT a good buy? You can make an argument either way. On one hand timber is a real, not paper (I know, I know ... bad choice of words), asset which will always be in demand. If nothing else you can always burn it for heat. Indeed wood heat is becoming preferred in rural areas as a replacement for expensive propane.

On the other hand, packaging demand, dependent on recession spooked consumer spending, is in a slump. Since CUT has almost tripled off its 52 week lows one must question the near term prospects, especially in a deflationary environment. CUT, going forward, will undoubtedly mirror the health of the worldwide economy.

You can find more about CUT at this page on Claymore's website.

Disclosure: No Holdings in any of the above.

A Cold Wind Blowing

2009-08-31T17:23:00.001-07:00

It has been a cool summer in the west central Michigan. I can count on one hand the number of days this fast departing summer had temperatures reaching the low 80's. Now, in the last days of August, temperatures drop into the 30s overnight. Cold fall winds are blowing in early off Lake Michigan and the long gray winter suddenly doesn't seem far off.

Like the weather, the Michigan economy is gloomy. Folks sell firewood, apples and yard sale trinkets to get a small amount of cash. How much of that gets reported to Uncle Sam? Wouldn't help anyway.

Toys from more prosperous times line roads. Boats, travel trailers and other paraphernalia can be had for a song. Not many cars, I guess the clunkers program got most of them. Deteriorating roads make for rough driving. Walk into a store: You will find solicitous clerks but few customers.

With an unemployment rate over 15%, real estate values continuing to drop, and a cold winter approaching things seem bleak. One hopes the red, orange and gold leaves of October will help.

Oil as an Investment in Deflationary Times

2009-08-12T09:02:00.000-07:00

We all know that in an inflationary environment oil and other real assets are good places to put your money. It is easy to find asset classes which keep pace with inflation. Gold, oil, real estate, stocks, collectibles, maybe even your car and your boat. Your choices seem endless.
But what about in today’s deflationary environment? Investments that do well in a deflationary environment are much more difficult to find. Here are some possible candidates with my comments in italics.

Cash - No upside, but safe, liquid and purchasing power increases with time. Example: If you had sold a Florida house 3 years ago for cash, put the cash in a savings account you can now buy two houses with the money.
Quality long term government and corporate bonds - This was a great place to be the last 1/2 of 2008, but the trend runs its course as interest rates approach zero. Even worse, with trillion dollar deficits and quantitative easing you know this game will end someday.
Currency plays such as the US Dollar (UUP) or Japanese Yen (FXY) - These currencies do well when the fear factor is strong and markets tank.
Inverse ETFs such as SDS, SH, DOG, and DXD - Great for short term trading, but if you are not a day trader stay away, especially the double inverses. SA has numerous articles on why.

I propose a 5^_th item, Investments in companies rich in oil and other natural resources. Consider Oil Rich Stocks such as OXY, PBR, and EOG. For diversification, but with a higher natural gas component, consider XLE.
Remember “inflation is always and everywhere a monetary phenomenon”. Prices are determined by supply/demand, not just inflation/deflation. Worldwide, the supply of “easy” oil is falling quickly, even as demand stagnates. The large middle eastern fields are in decline. It is telling that when oil was over $100/barrel Saudi Arabia and the rest of the middle east was unable to up production much. Therefore, oil prices could continue to rise, even in recession.
Economies such as China, India and Indonesia are again strengthening, if not booming. Tens of millions of first time customers are looking to buy autos, this has to be bullish for oil.
I would stay away, for now, from the natural gas etf UNG. There is an oversupply of this relatively inelastic commodity thanks to technological advances in production. Eventually, natural gas will start replacing oil as it becomes relatively cheaper, but the process will take time. How many natural gas powered vehicles have you seen on the road lately?
Of course the current rally is not only in natural resources, it is also in world markets. It is best not to buck a trend. However, nothing goes up forever. The test will come when market indices decline, then we will see to what extent oil follows. For this reason, I would stay at least 50% in cash. You may find better entry points later.
With dark under-currents of impending doom and crash rumors swirling just below the surface (See numerous SA articles) I would keep a close eye on the rear view mirror. At least with natural resource positions you have something which, short of Armageddon (and we will all be dead then anyway), will always be in demand for the foreseeable future.
Disclosures: Long SH, OXY and FXY

Peak Oil Investing

2009-07-10T08:53:00.000-07:00

Think back to July of 2008 oil was over $140/barrel and a lot of talk on “Peak Oil” (the point in time when the maximum rate of global petroleum extraction is reached) was floating around. By late December a hard hitting recession (depression?) and a strengthening dollar drove prices under $35/barrel. Suddenly there was very little peak oil talk. Today oil is around $60/barrel - and dropping. It is time to again visit peak oil thinking.
Several factors influence oil’s price. The fundamentals, of course, are supply and demand. Wars and rumors of wars, especially in the oil rich Middle East, can drive prices sharply higher in just minutes. Quantitative easing, technological advances, Middle East stability, market manipulation, “herd mentality”, all influence oil prices. So, any discussion on peak oil must also consider non-fundamentals.
Oil fields, once put into production, go into decline as the easiest to recover oil is drawn off first. In fields all over the world, the “easy stuff” is now largely gone. Even the massive Saudi Arabian fields are in decline. This is true of course for all resources. Consider copper: In early settlement days large copper ingots were found simply lying on the ground in parts of Michigan as gold nuggets were found in parts of California.

Arizona Copper Mine

No one finds gold or copper lying around for the taking any more. We need to dig massive, miles wide, holes in the ground thousands of feet deep. South Africa goes deeper and deeper to tap their prolific gold fields, yet production is in decline. Yes, I know this article is about oil, not gold or copper. The principle is the same though, we must exert greater and greater effort to extract natural resources.
New discoveries can drastically affect prices. In 1901, in southeastern Texas, after drilling down over a little over 1000 feet, the Spindletop oil well suddenly exploded up, oil gushing 150 feet into the air. Spindletop, originally expected to produce 50 barrels a day, initially produced an unheard for the time 100,000 barrels a day, more oil than anyone knew what to do with. By 1902 the price of oil had declined to an all time low of 3 cents a barrel. Previously most US oil had come from the less prolific Pennsylvania fields. Read about Spindletop here. Now, with over one billion cars worldwide predicted by 2010, we know exactly what to do with with oil and gasoline.
We still occasionally find huge oil fields. However, they are miles deep, under the ocean, rock and salt or locked in tight shale formations. Read Kurt Wulff’s SA article about the large Petrobras finds off Brazil here. In the US it has recently been estimated North Dakota’s Bakken shale may contain up to 500 billion barrels, yet only 3-4 billion is recoverable at today’s prices (see here). Conclusion? Another “Spindletop” effect is extremely unlikely.

Apache Corporation, A Solid Investment?

2009-05-19T08:52:00.000-07:00

No, oil and gas exploration company Apache Inc. (APA), is not directly tied to ancestral Native American lands in the American southwest - though I guess all US lands are ancestral Native American lands. Nor, as far as I can determine, is the Apache tribe involved in management in any way. Instead, the name was picked by using the first letters of the last names of Truman Anderson, Raymond Plank and Charles Arnao, the three founders of the company in 1954. Helen Johnson, an early employee, was awarded a $25 United States savings bond for suggesting the “che” be added, thus the “Apache” name. Raymond Plank has just retired this year after 54 years of service.
Apache Corporation has grown rapidly in the 54 years since its founding and is now a $26 billion (market cap) international oil and gas exploration, production and development company. The company reached the $100 million earnings mark in 1996 and $1 billion mark in 2003. Starting in 1999 Apache has had a steady string of acquisitions. The acquisitions are continuing. In April of this year agreement was reached with Marathon (MRO) to acquire 9 Permian Basin oil and gas fields. This company seems to do acquisitions quite well.
Apache is active in seven regions around the world: the Gulf Coast (onshore and offshore), USA Central, Canada, Egypt, Australia, the North Sea and Australia. On the the companies’ web site there is a map showing the seven regions they operate in (see it here). By clicking on the captions on the map you get a summary and details of what the company is doing in that particular region.
Competitors include Exxon Mobil (XOM), BP plc (BP), and Anadarko Petroleum (APC) among others.
Apache, as of December 31 2008, had estimated proved reserves of 1,081 million barrels of crude oil, condensate and natural gas liquids along with 7.9 trillion cubic feet of natural gas. Reserves are located in mid-continent USA (25%), Canada (22%), Gulf of Mexico area (14%), Egypt (14%), Australia (12%), North Sea (8%) and Argentina (5%). Apache claims they replaced 122% of production in 2008.
Apache had a $5.25/share loss first quarter of 2009. In the Earnings Transcript release Tom Banks, President of Corporate Planning and Investor Relations, said “Loss was the result of the continuing deterioration in north American gas prices at the end of 2008 which recorded 1.98 billion non-cash after tax reduction in the carrying value of oil and gas properties” Also, revenue growth is down 48% year over year due to lower oil and gas prices (Yahoo Finance). In general, however, Apache is regarded as a conservatively run company and should weather the current downturn better than some of its competitors. Total cash is $1.38 billion and total debt $4.91 billion (Yahoo Finance).
I like to read annual reports. The annual report always puts a positive spin on things, of course, but it does give you a feel as to where company enthusiasms lie. The reports are usually available on the company website under “Investor” sections. Unfortunately, the Apache website said the 2008 annual report was not yet available and when I clicked on the links to the 2007, 2006 and 2005 reports I got a “page not found” message. Having done some web design I know it is very simple to create pdf links, so not sure what is going on here.
Apache seems to be a good, solid company in which to invest. Oil and gas reserves are tangible assets that will hold value, it not appreciate, in today’s climate of currency devaluations. Unlike gold, oil and gas have actual uses (think your car). Oil, currently near $60 a barrel and natural gas still only marginally higher than 52 week lows, may drop if the current market upswing is just a bear market rally as many, including myself, think. On the other hand, if you think that all “real” assets are on a tear due to currency debasements now may be the time to invest in apparently solid companies such as Apache selling for a little over 1/2 its 52 week high.
Disclosure: Long APA

How You Can Lose with Annuities and Whole Life Policies

2009-05-05T12:24:00.000-07:00

“Look, Bruce!”, my 85 year old mother-in-law exclaimed, waving a letter over her head. “My annuity is now up to $85,000. I just can’t withdraw my money for 6 months. I don’t need it now anyway, though”. That got my attention. Why couldn’t she withdraw? Turns out, Standard Life of Indiana, her annuity company had sent her a second letter. That letter informed all policy holders Standard Life was now under an “Order of Rehabilitation” with the state of Indiana. The letter went on to assure policy holders that all annuity contract terms would be honored except “partial and full surrenders clauses”. This is kind of like a bank holiday for an insurance company.
For more information policy holders were referred to the website: www.standardlifeofIndiana.com. On the website the first question in the FAQ section is “What happened to Standard Life Insurance Company?” — a good, if not particularly encouraging starting point. Other questions address issues such as financial condition and safety. The answers were reassuring but vague and short on specifics.
The court filed “Order of Rehabilitation” document is more direct. Basically, Indiana state Insurance Commissioner Jim Atterholt and his appointees now have control of Standard Life of Indiana. All power formerly vested to the directors, officers and managers now resides with the State Commissioner. For those who would like to see the court filed document go here. The rehab action is essential so as to prevent a run on the company while the state figures out just what the assets are worth. A minimum of six months is needed and that time period may be extended.
Standard Life of Indiana may have been a good company at one time. However, It was acquired in the 1990’s by Capital Assurance Corporation, a private company. Obviously, they made investment mistakes and were caught in last years slump. I don’t know what the outcome will be for Standard Life’s 40,000 policy holders such as my mother-in-law. It is probably safe to say that after the bad investments are written down and the legal and other state fees are assessed policy holders will take a significant haircut.
Now, I do not know a lot about annuities and the Standard Life of Indiana action is not new (the court document was filed December 18, 2008). I do know that funds invested in fixed annuities and whole life policies go into the companies’ balance sheet and will take a hit along with the balance sheet.
The purpose of this article is to alert fixed annuity and whole life policy holders: You cannot assume you 100% safe. The products are only as good as the company and its investments. Annuities and life insurance is often sold to financially unsophisticated and/or elderly people. Even with state regulation, the potential for abuse in these non-transparent investments is present
I would be careful with all fixed annuity and whole life products, especially those held by AIG affiliates (AIG), and large annuity providers such as Genworth (GNW), Hartford (HIG) and Allstate (ALL).
It is not easy to find the financial standing of many annuity and whole life holders. Some, such as Standard Life of Indiana, are privately held. Others are large company subsidiaries (with different names) or international firms such as Allianze or Aviva. Many large banks with shaky balance sheets hold annuity money. The rating firms gradings have been over optimistic in the past. Those sophisticated in financial analysis may be able to track this stuff down but the vast majority of annuity and whole life policy holders are clueless.
Disclosure: No positions in any of the above mentioned companies

2009-04-23T12:12:00.000-07:00

Families showering together may offend some sensibilities. However, the April, 2009 issue of National Geographic Magazine has a photo (legs only, sorry) of a family doing just that. Not only do they shower together, they do it standing in flat plastic containers to catch the soapy run off. The run off is then used to water the garden. This is one of many measures promoted by the state of South Australia to conserve water in the drought stricken area. Water is so precious every last drop is reused as often as possible.
Often called Blue Gold, water is the ultimate commodity. Why? Simple, without it, for ourselves and our crops, we die. Life cannot exist without water. Yet, we often take clean water for granted. We waste it and dump toxins in it. In an increasingly crowded world that has to change.
Watts Water (WTS) a $780 million cap company has been around since 1874 and supplies water control systems in North America, Europe and China. The company has been in China since 1994 but saw Chinese revenue decrease in 2008 due to currency, tax, wage and transportation issues.
The company website is www.wattsind.com The site provides access to SEC filings, annual reports from 2001, dividend and stock data, press releases, webcasts and other company information.
WTS manufactures valves and related products which insure water quality, conservation and control. Recent focus has been on valves which prevent water back-flow. Back-flow controls prevent dirty water from contaminating clean supplies.
Smartmoney magazine discusses how Watts Water may benefit from the US $789 billion stimulus plan. See the article here. Competitors include Flowserve Corp (FLS) and some private firms.
Watts had negative publicity last month as it cut jobs but increased executive compensation (see article here). Also, there are some litigation issues which have dragged on for several years (see the 2008 annual report).
Watts has a PE of 13.7, price/sales ratio of .53 and a well covered 2.1% dividend. There have been 22 years of consecutive dividend payments. Recent market rallies show WTS participating strongly.
China is suffering from major water quality problems while President Obama’s stimulus programs will benefit water infrastructure products in the US. In a world increasingly needing clean water WTS seems to have a bright future.
This seems to be a solid, long established company. Recent problems in China, litigation and perhaps ill timed layoffs and executive compensation issues may warrant some caution, however.
Disclosure: Long WTS

Derivatives: Gambling at Public Expense

2009-04-15T12:10:00.000-07:00

If, unknown to you, certain parties had bets totaling millions of dollars on the chance your $200 thousand house will burn down in the coming year, would you be upset? I suspect so. Some of those parties may need money, may send an arsonist over, maybe not even tell you in time to get your family out. Well… Welcome to the world of derivatives. Only, forget the $200,000 house, start thinking in the billions and trillions.

Now, sit down, these figures may shock you: The face (notional) value of derivatives held by US commercial banks is over $200 trillion dollars and the total derivative market over $700 trillion. Don’t believe me? Click here for the US government’s recently released fourth quarter OCC Report. Read the first two bullets. Remember, this is just derivatives held by US commercial banks, the total derivative market is, as mentioned above, over $700 trillion (see here).
How much is $700 trillion dollars? Temple University math professor John Allen Paulos says: “A million dollars a day for 2,000 years is only three-quarters of a trillion dollars” Well, think about it a minute or so, then go figure $700 trillion.
Okay, critics of this article’s viewpoint will be quick to point out this is not new news and derivatives can be unwound, it is a zero sum game. Derivatives are useful for farmers, miners and many others, hedging future market commodity risks. They increase liquidity and facilitate transactions. Credit Default Swaps (CDSs) can be used to measure perceived risk of an asset. The purpose of this article is not to demonize all derivatives, rather it is to point out the danger in the speculative components, especially when the public dime (bit of an understatement that) is involved.
The question is: What are commercial banks doing with over $200 trillion of derivatives? This amount is over three times larger than world GNP , more than all the world’s combined stock and bond markets.
You may wonder; what the hoot is going on here? Credit Default Swap (CDSs) didn’t even exist 14 years ago. Now they are a $62 trillion dollar market. Interest swaps started slowly in the 1980’s, the five banks above alone hold $162 trillion worth. Why is this rapidly growing market so huge? Is it necessary? A recent Newsweek article mentioned the derivative market may be in the quadrillions soon.
I can see only one explanation: large scale speculation. Another, perhaps more accurate term, would be gambling.
The OCC report tells us which banks are deeply involved in derivatives, it is five large commercial banks. They are JP Morgan Chase (JPM), Citigroup (C), Bank of America (BAC), HSBC Bank USA, and Goldman Sachs (GS). Some 82% of the holdings are interest rate swaps. Swaps are risky with winners and losers. Goldman Sachs is the most deeply involved.
Goldman recently reported much higher than expected first quarter earnings. How much of the earnings is due to AIG (taxpayer) CDS payments to Goldman? I don’t know. Don’t ask Goldman’s CFO David Viniar, even he is “mystified”. Mr Viniar says the trades “netted to zero”. Perhaps the reason the payments netted to zero is because taxpayers, via AIG, made good for AIG to Goldman’s benefit. Now they want to repay TARP - a nice public relations move. If Mr Viniar is “mystified” by his own firms trading how much more so are taxpayers. Why does this remind me of Enron’s CFO statements of awhile back?
Glass-Steagal was repealed in 1999, allowing banks and others, equipped with sophisticated computer systems, to plunge into derivative trading. A worldwide, unlimited casino opened up. Hedge funds, banks, insurance companies all taking advantage.
Derivative trading is a huge, unregulated market, run around the world by the self-appointed elite. They use OPM (other people/countries money) skimming off profits. Forget lotteries, forget sports betting, forget Vegas. This stuff is the ultimate! Look at the sums involved. A powerful elixir those in power cannot resist playing with. Gambling at this level for personal accounts may be acceptable - what else can you do with sums that large? Holding the world economy as hostage and involving taxpayers as backups for losses, however, is criminal.
This high-stakes gambling, like all gambling, has winners and losers. Consider Bear Sterns, AIG and Lehman Brothers as the losers. In a deleveraging world, we may be getting more and more losers. It doesn’t take much of a shift in a $700 trillion market to wipe out world class companies in days, look at AIG. Look at what may have happened to Citigroup without taxpayer money.
The large commercial banks are heavily into interest rate swaps, with a combined notional value of over $150 billion according to the OCC report. If these systemically important institutions start losing on their interest rate bets, which the OCC Report said happened in the fourth quarter, will we the taxpayers be on the hook to bail them out again? Remember the interest rate swap market is much bigger than the CDS market brought down AIG.
Forbes magazine, in their March 16, 2009 issue, has an article on how Lawrence Summers (currently heading the White House’s National Economic Council) entered into interest rate swaps at Harvard University which “burdened Harvard with a multibillion-dollar bet on interest rates that went against it”. The Forbes article goes on to say that bad derivative bets may have adversely affected universities and hospitals around the nation.
So, how dangerous are derivatives? Warren Buffett called Credit Default Swaps “financial weapons of mass destruction”. AIG proved him right. AIGFP insured CDS derivatives, lost their bets, didn’t have the money to make good, even all of AIG couldn’t make good. So the American taxpayer was told they must make good, to the tune of hundreds of billions of dollars. American taxpayers are the losers, financial institutions world wide are the winners. Now, after AIG, tell me how you can possibly think derivatives are not dangerous. And, doesn’t it strike you as strange: few are talking, even now, about reining in the derivative markets? Perhaps defenders of derivatives can explain to us who “don’t understand” what possible good comes from this bloated market.
Systemically important institutions have no business being major players in this market. Certainly, taxpayers have not agreed to participate, much less bail out the losers. This is why US taxpayers are organizing “tea parties”.
The US government has printed, borrowed or promised some $14 trillion so far. And guess what: It hasn’t worked!The London protesters suddenly don’t look so foolish, they at least aren’t bankrupting companies and countries. AIG, FANNIE, FREDDIE, JP Morgan, Bank of America, Citigroup will soon want even more taxpayer money. Will we have the courage to say no to this insanity?
Disclosures: none

Southwestern Energy’s Fayetteville Shale Focus

2009-04-06T12:06:00.000-07:00

Arkansas, a oil and gas producing state? Yes! Southwestern Energy Company (SWN), an $11billion dollar (market cap) exploration and production company, is here. Focusing on natural gas extraction from the Fayetteville Shale in the north central part of the state, the company has been a major player since 2004 when production started.
In addition to the Fayetteville play, the company has conventional wells and acreage in other parts of Arkansas, Texas and Oklahoma. Southwestern also has midstream gathering and marketing subsidiaries.
Southwestern has an attractive, well organized and informative website at www.swn.com At the site investors can find, among other things, news, annual reports, SEC filings plus they can request information. There is a two page summary fact sheet which provides the highlights of Southwestern’s revenues and reserves.
Chesapeake Oil (CHK) and BP plc (BP) also are active in the Fayetteville. BP plc acquired an interest in Chesapeake’s Fayetteville assets for $1.9 billion in late 2008 . Chesapeake sold the stake to bolster its cash position.
Fayetteville Shale is black, organic rich, rock of Mississippian age (approximately 325 million years ago) and lies at a depth of 1,500 to 6,500 feet in north central Arkansas. Typically a well is drilled vertically to just above the shale layer, then drilled horizontally for some 3,000 or more feet. The horizontal boreholes intercept pre-existing vertical fractures. Then, with the help up hydraulic fracturing, gas flows up the vertical fractures into the horizontal borehole from which it can be collected. If you are interested you can view here, a short (10-15 minute) video of the process put out by Northern Oil & Gas.
Southwestern’s stock price, currently around 31, is below the July, 2008 high of 52, but well above the low of 19 in October of 2008. The stock is up since October despite declining gas prices over the same period.
Since some 91% of the stock is held by institutional and mutual funds, thus redemption requests may negatively impact price.
Southwestern’s total proved reserves have increased from 1,026 bcfe (bcf equivalent) year end 2006 to 2,185 bcfe December 31, 2008. Most of the increase has come from the Fayetteville shale, which now accounts for 1,545 bcfe or 71% of proven reserves. Southwestern’s natural gas production from the Fayetteville has increased from 53.5 bcef a day in 2007 to an anticipated 229-232 bcef a day in 2009. Reserve replacement was 386% in 2006, 474% in 2007 and 523% in 2008. Southwestern seems to be finding lots of gas.
As of 12/31/2008 total cash was $196.28 million ($.571/share) and total debt was $734.5 million. With the help of hedging, the company, unlike some of its peers, was profitable in the fourth quarter of 2008. Levered Free Cash Flow (amount of cash available to stock holders after interest payments on debt), however, was -$831.98 million.
Despite low gas prices Southwestern is still planning a capital program of $1.9 billion for 2009 with the major focus on the Fayetteville shale. They plan to drill up to 650 wells. Since, unconventional shale gas in recent years has been found to have lower F&D costs than conventional gas, hence the proliferation of horizontal drilling.
Howard M. Korell, Chairman and CEO sold some $3.2 million in stock the week of March 19-25, 2009. Mr. Korell sold this stock some 3 weeks after the upbeat teleconference of February 27, 2009. Mr. Korell intends to retire in the first quarter of 2010. There are no reported insider buys so far this year.
Natural gas prices continue near record lows, currently the price is below $3.70/Mcf (Mcf is 1000 cubic feet). Since late February, the price of oil has rebounded some 50% while the price of gas continues to decline.
Industrial use, residential heating and electricity generation are the major markets for natural gas. Recession has reduced industrial demand, the onset of warm weather is dropping heating demand and recession has also somewhat lowered utilities demand. At the same time, thanks to companies like Southwestern, supplies are increasing, a “perfect storm” driving down gas prices.
We will probably continue to see low gas prices for the next several months. On the other hand, with the increasing scarcity of oil, I expect natural gas demand to eventually grow as it replaces oil as an energy source. T. Boone Pickens envisions natural gas replacing or augmenting oil for powering vehicles, a great idea, but this is still in its early developmental stage.
Another wild card is soon to come online LNG production worldwide. LNG imports, their cost basis and potential impact on US prices probably can only be estimated at this point.
Although Southwestern is rapidly growing reserves and is a low cost producer at around $3/Mcf (scroll down here to see chart), low gas prices will drag on income. Already some of the higher cost producing companies are shutting down rigs as natural gas prices drop below production cost. This will eventually tighten supply. Long term this is bullish for Southwestern. Dollar devaluation of course (if it occurs) will only make natural gas reserves more valuable.
Demand trends and Southwestern’s levered free cash flow, for now, are bearish. I would keep on eye on natural gas prices and Southwestern’s debt costs. A gas price upturn , say above $4.40 mcf, may indicate an entry point into this stock. Long term investors who don’t want to time the market could consider any significant price dip as an entry point.
Disclosure: None

Derivatives: Gambling with Taxpayer Money

2009-04-01T12:01:00.000-07:00

f parties, unknown to you, had multimillion dollar bets that your $200 thousand house will burn down in the coming year, would you be upset? I suspect so. Some of those parties may need money, may send an arsonist over, maybe not even tell you in time to get your family out. Well… Welcome to the world of derivatives. Only, forget the $200,000 house, start thinking in the billions and trillions.
Now, sit down, these figures may shock you: The face (notional) value of derivatives held by US commercial banks is over $200 trillion dollars and the total derivative market over $700 trillion. Don’t believe me? Click here for the US government’s 4th quarter OCC Report, released last Friday. Read the first two bullets. Remember, this is just derivatives held by US commercial banks, the total market is, as mentioned above, over $700 trillion (see here).
How much is $700 trillion dollars? Temple University math professor John Allen Paulos says: “A million dollars a day for 2,000 years is only three-quarters of a trillion dollars”   Well, think about it a minute or so, then go figure $700 trillion.
Okay, these figures are scary and many derivatives are useful and can be unwound. Derivatives are also useful hedges for farmers, miners and others to smooth out market fluctuations. They increase liquidity and facilitate transactions. Credit Default Swaps (CDSs) can measure perceived risk. The purpose of this article is not to demonize all derivatives. My question is: why do commercial banks doing with over $200 trillion of them? This amount is almost four times larger than the total GNP of the entire world, more than all the combined stock and bond values of the world. Their is only one explanation and that is large scale leveraged speculation. Another, maybe more accurate term, would be gambling.
Which banks hold much of these derivatives? The OCC report tells us. It is five large commercial banks. They are JP Morgan Chase (JPM), Citibank (C), Bank of America (BAC), HSBC Bank USA, and Goldman Sachs (GS). Some 82% of the holdings are interest rate swaps. Swaps are risky with winners and losers. Goldman Sachs is most deeply involved.
Now, like me, you may wonder what the hoot is going on here? Credit Default Swap (CDSs) didn’t even exist 14 years ago. Now they are a $62 trillion dollar market. Interest swaps started slowly in the 1980’s, the five banks above alone hold $162 trillion worth. Why is this rapidly growing market so huge? A recent Newsweek article even mentioned the market will be in the Quadrillions soon.
Glass-Steagal was repealed in 1999, allowing banks and others, equipped with sophisticated computer systems, to plunge into derivative trading.    A worldwide, unlimited casino opened up. Hedge funds, banks, insurance companies took advantage.
Systemically important institutions have no business being major players in this market. Certainly, taxpayers have not agreed to participate, much less bail out the losers.
The claim is made that derivatives are just paper entities in which assets and liabilities zero out. Well, yes, there is truth to that. But, this high-stakes gambling, like all gambling, has winners and losers. Consider Bear Sterns, AIG and Lehman Brothers, all losers. In a deleveraging world, we are getting more and more losers. It doesn’t take much of a shift in a $600 trillion market to wipe out huge companies in days, look at AIG. Look at what would have happened to Citigroup without taxpayer money.
So, how dangerous are derivatives? Warren Buffett called Credit Default Swaps “financial weapons of mass destruction”. AIG proved him right.
Forbes magazine, in their March 16, 2009 issue, has an article on how Lawrence Summers (currently heading the White House’s National Economic Council) entered into interest rate swaps at Harvard University which “burdened Harvard with a multibillion-dollar bet on interest rates that went against it”. The Forbes article goes on to say that bad derivative bets may have adversely affected univerisites and hospitals around the nation.
AIGFP insured CDS derivatives, lost their bets, didn’t have the money to make good, even all of AIG couldn’t make good. So now the American taxpayer was told they must make good, to the tune of hundreds of billions of dollars. American taxpayers are the losers, financial institutions world wide are the winners. Now, after AIG, tell me how you can possibly think derivatives are not dangerous. And, doesn’t it strike you as strange: few are talking, even now, about reining in the derivative markets?
The megabanks are heavily into interest rate swaps, with a combined notional value of over $150 billion according to the OCC report. If these systemically important institutions start losing on their interest rate derivatives, which the OCC Report said they did in the 4th quarter, will we the taxpayers be on the hook to bail them out again? Remember the interest rate swap market is much bigger than the CDS market which got AIGFP into trouble.
Derivative trading seems to be a huge, unregulated market, run by the self-appointed elite all over the world amongst themselves. They use OPM (other people’s money) skimming off profits. Forget lotteries, forget sports betting, forget Vegas. This stuff is the ultimate! A powerful elixir those in power cannot resist playing with. Doing this for there personal accounts is one thing but Holding the world economy as hostange and involving taxpayers as backups for losses, however, is criminal.
One wonders how much of the pre TARP scare mongering last fall was true.   Now, the bailouts are bankrupting our nation and there is no end in sight. We need to start listening to people like Richard Shelby and Ron Paul, not Paulson, Geithner and their cronies at the big banks and Goldman Sachs. It is time to make those responsible take their losses.
The US government has printed, borrowed or promised some $14 trillion so far. And guess what: It hasn’t worked! The London protestors suddenly don’t look so foolish, they at least aren’t bankrupting us. AIG, FANNIE, FREDDIE, JP Morgan, Bank of America, Citigroup, Goldman Sachs want even more of our money, there is no end in sight.   This is insanity!
Disclosures: none

ATP Oil and Gas Corporation, Both a Value and Momentum Play

2009-03-25T08:34:00.000-07:00

ATP Oil & Gas Corporation (ATPG) is small ($178 million market cap.) oil and natural gas acquisition, development, and production company engaged (mostly) in the Gulf of Mexico. It also has a significant presence in the North Sea.
Competitors in the Gulf include Apache (APA), Forest Oil (FST) and Newfield (NFX).
Reserves: ATP Oil & Gas Corporation’s estimated net proved reserves on December 31, 2008 were 713.6 billion cubic feet equivalent. At $4 per 1000 cubic feet this works out to a reserve value of $2,582 billion or roughly $70 a share. The reserves were “comprised of 321.7 billion cubic feet of natural gas and 65.3 million barrels of crude oil.” or approximately 2/3 oil and 1/3 natural gas by value. For more detailed reserve reports see the Ryder Scott reports for the Gulf area here and the North Sea area here (pdf formats). A press release on March 2, 2009 claimed that ATPG replaced 214% of its oil and gas production in 2008 (see here).
Financials: Total cash is $215 million or $5.97/share. Note, that as of March 25 cash per share is more than the share price. Total debt is $1.37 billion. Trailing PE is 1.46 and forward PE is 5.37. Of course, forward PE’s are only estimates and can be wildly off. $472 million in recent asset sales have boosted the cash position, so debt should be manageable in today’s low oil and gas price environment.
Insiders: According to Yahoo Finance there are no publicly reported insider sales since the first of the year. There has been over $900,000 acquisitions and purchases since the first of the year.
Summary: Reserve data, financials, and insider transactions all look bullish to me. Both oil and gas have been rising the last few weeks. Even as I write this post, ATPG is on a tear. The stock bottomed at $2.75 in early March. Now, on March 25, at over $5 a share, it is up over 80%. With close to $70/share in reserve value, the stock still seems significantly undervalued. This could be both a resource and momentum play.
The company seems to have weathered to the 2008 oil and gas price downturn well with asset sales and decreased production.
It should be noted that, due its large Gulf of Mexico presence, ATP Oil & Gas is susceptible to hurricane damage. The company claimed that Hurricane Ike in 2008 had “minimal impact”.
Disclosure: Long ATPG

A Clash of Cultures: AIG's New Owners

2009-03-19T08:32:00.000-07:00

Most Americans cannot even remotely fathom why a company that is near bankruptcy will hand out bonuses. This is especially true when those companies only exist today because they were bailed out by taxpayers.
Apparently in “Wall Street Culture” bonuses are an integral part of compensation. But, in “Main Street Culture” bonuses, if they even exist, are reserved only for extraordinarily good job performance. But now, suddenly, thanks to TARP, Main Street owns Wall Street, or at least some of it.
Companies such as AIG, Citigroup, Bank of America and to a lesser extent, other TARP recipients have a new owner: “We the People”. And, unlike the former owners, the wiped out share holders, these new owners have fiery spokesmen in Congress.
The culture of entitlement is now being told what to do by Joe the plumber, Jill the waitress and Mike, the laid off auto worker. They don’t vote proxies but they can and do email and write their congressmen.
Well, Congress is having a real hissy fit. Thursday night I watched representative Earl Pomeroy from North Dakota grandstanding on TV. Earl told AIGFP employees “you disgust us, by any measure you are disgraced professional losers…”. On and on he went. He must have been either an attorney or an actor in his pre congressional days. Probably an attorney, I don’t think North Dakota has many actors.
Reportedly, 11 AIG executives have resigned over the bonus brouhaha. And now, Thursday evening, the House passed a bill - boy, that was fast - to tax bonuses up to 90%. Apparently, there is to be a surtax, on bonuses paid to employees earning more than $250,000 if the institution received more than $5 billion U.S. in bailouts.
Congress is doing what it does best (or worst): passing legislation. Congressional members can’t wait to tell their constituents they voted against the “outrageous bonuses” come next election. It would be political suicide to be on the other side of this issue.
Of course, all this is mostly show. The bonus amounts are minuscule compared to bailout amounts. The country would much better served by debating how to avoid future AIG type debacles.
So, AIG and other TARP companies: Welcome to government ownership. You will have to play by different rules from now on. Instead of a free wheeling entrepreneurial culture you will have to learn to deal with red tape, committees, delays and political pandering. Get used to it.
Yet, look at it this way. None of the AIGFP employees and many of the AIG’s non Financial Products employees would probably even have jobs if it wasn’t for the US taxpayer. Would you want “Derivatives Trader at AIG” on your resume? AIG and other TARP recipients, you brought this on themselves. Now you guys are morphed into beauraucrats. Take your cue from Mr. Pomeroy. Speech lessons anyone?
Disclosure: Taxpayer ownership only.

McMoRan Exploration Company, Bonanza or White Elephant?

2009-03-17T08:29:00.000-07:00

McMoRan Exploration (MMR) is small ($300 million market cap.) exploration and production company that owns or controls interest in some 603 oil and gas leases in the Gulf of Mexico and onshore Louisiana and Texas. Proved oil and natural gas reserves as of December, 2007 totaled 363.9 bcfe (billion cubic feet equivalent).
McMoRan Exploration has its origins in Freeport-McMoRan Copper & Gold Inc.’s (FCX) oil, gas and sulpher operations which were split off in the 1990s. Several board members serve on the boards of both companies.
McMoRan has been engaged in the development of the Main Pass Energy Hub, an offshore Liquid Natural (LNG) gas distribution and storage facility (see www.mpeh.com). The hub is intended to function as a port to offload and store LNG.
As of December 31, 2007 the company had $93 million total cash ($1.327 cash per share) and $374 million in debt. Like many energy companies, McMoRan reported a loss the last two quarters of 2008.
Researching the company I found potential negative and potential aspects.
The Negative: It was difficult to find much information on McMoRan’s Main Pass Energy Hub. The mpeh.com website, has lots of pictures, but the most recent update that I could find, under the “Whats New” link at the top of the home page, had a 2008 heading but the latest post was April 4 of 2007 — not very new and not in 2008. Either they have a very poor web people or the site is suffering from profound neglect.
Of course, imported LNG no longer is as important to the US as predicted just a few years back. Significant natural gas reserves have been found domestically in recent years. Current low gas prices (now under $4 per 1000 cubic feet) have to be a negative for LNG activity. The hub site’s home page prominently cautions the project is “subject to significant risks, including determining the feasibility of developing the project, securing significant project financing, and obtaining regulatory approval“. From the photos it looks like a lot may have already been invested in this former sulphur mining site,
I am open to the view that this hub may be a gem, waiting to be uncovered, rather than a white elephant. The company could help with new website updates or press releases concerning the hubs current status.
The positive (maybe): Business Week, in their February 16, 2009 article on Exxon, mentioned that McMoRan took over a deep, abandoned Exxon well (Blackbeard) and, drilling even deeper, found significant oil deposits. The article says Mr. James R. Moffett, co-chairman of the company, declared that McMoRan “… may have found , between a half-billion and several billion barrels of oil” in Blackbeard.
It is also worth noting that Mr. Moffett on March 4 and 5 of 2009, purchased some $2 million dollars worth of common stock in the company at prices of $3.76 and $3.90 a share (Yahoo Finance). This may explain the recent uptick in stock price.
I would be cautious with McMoRan. It will be interesting to see if the former Blackbeard well is as rich in reserves as Mr. Moffett seemed to think. If so, score one for McMoRan over Exxon. If not, maybe the rumored discovery is just good PR in a down market. I look forward to reading the 2008 annual report to see the latest on the former Exxon well.
Disclosure: Long MMR (for now)

EOG Resources and the Bakken Shale

2009-03-12T08:28:00.000-07:00

EOG Resources (EOG), a large oil and gas exploration and producing company, is a major driller in North Dakota’s Bakken Shale. The companies’ former name was Enron Oil and Gas. It was spun off in 1999 from Enron Corporation (yes, that Enron). Unlike its disgraced parent, EOG has prospered and now has a market capitalization of $14 billion.
EOG is active in the US, Canada, offshore Trinidad, and the North Sea. In the US it has interests in the intercontinental region, Fort Worth Basin, Upper Gulf Coast area, Permian Basin, Rocky Mountain area, south Texas. Gulf of Mexico, and Appalachian Basin with approximately 3,204,000 net undeveloped acres.
As of December 31, 2007 EOG’s reserves were roughly 75% natural gas (7.75 trillion cubic feet equivalent) and 25% oil and natural gas liquids (179 million barrels). In the intercontinental US region the company has a strong presence in North Dakota’s Bakken Shale play. This, because of the massive reserves found right here in the US, has been in the news a lot in recent years.
The Bakken shale underlies some 200,000 square miles of land in North Dakota, Montana and Saskatchewan in depths up to 10,000 feet. Basically it consists of shale overlain by sandstone and dolomite, overlain by more shale. The oil tends to accumulate in the porous siliciclastic dolomite layer. OIl is not new here as it was discovered back in 1951, but until recently, due to cost, recovery has been slow. In 2007 EOG produced 1,452,789 barrels of oil from the shale. Just one year later, in 2008, EOG wells produced 8,613,534 barrels of oil, a 493% increase (see bakkenshale.blogspot.com). New technology, such as horizontal drilling, has allowed greater exploitation of this formation in recent years.
L.C. Price, a geologist working for the U. S. Geological Survey (USGS) estimates Bakken shale may hold as much as 500 billion barrels of oil. This is a massive, almost like Saudi Arabia! However, even under the best conditions, the previously linked report says extraction is profitable only at a price of $50/barrel or more. Even with the latest technology, the USGS in their April 2008 report says only 3-4.3 billion barrels may be recoverable, less than 1%. Nonetheless, the USGS says Bakken shale “is the largest “continuous” oil accumulation ever assessed by the USGS”.
Some of EOG’s oil wells near Parshall, North Dakota rank among the most prolific land drilled wells in the US, producing over 1000 barrels a day. This bonanza has made the rural area around Parshall quite prosperous, almost in a Beverly Hillbilly manner.
If you have confidence (as I do) that technology will continue to improve and the price of oil will go up, you may wish to invest in companies active in Bakken Shale. In addition to EOG check out ConocoPhillips (COP). ConocoPhillips, with their Burlington Resources acquisition, has a large Bakken presence. As an aside, ConocoPhillips also owns some 13% of LUKOIL CO (LUKOF.PK), a Russian company with massive oil reserves. That, of course, is a story for some other time. Also, check out Continental Resources (CLR) and Hess Corporation (HES) as they also have stakes in the Bakken.
Disclosure: No positions at this time.

Quicksilver Resources's Barnett Shale Gamble

2009-03-04T08:27:00.000-08:00

No, Quicksilver Resources (KWK) is not a silver or mercury mining outfit. Nor is it to be confused with Quiksilver Corp. (ZQK), an apparel company. Rather, it is a $900 million, market cap., independent energy company. Quicksilver acquires, explores for, drills for and produces natural gas.
Quicksilver’s big story in 2008 has been its foray into Barnett shale gas of the Fort Worth basin of Texas. Here it competes with much larger companies such as Devon Energy (DVN), Chesapeake Energy (CHK) and XTO Energy (XTO).
In August, 2008 Quicksilver spent $1.3 billion for Barnett Shale assets in Denton and Tarrant counties, just as natural gas prices were peaking. For a billion dollars in cash plus 10,400,468 shares of common stock the company picked up 13,000 net acres potentially “containing more than 1 trillion cubic feet of recoverable natural gas resources including approximately 350 billion cubic feet of proved reserves” (see report here). At the time, natural gas was around $13 per 1000 cubic feet. Now, the price is only a little above $4 per 1000 cubic feet. Not surprisingly, Quicksilver, in the 4th quarter, took an impairment charge totaling $633.5 million on its oil and gas properties and lost $2,79 per diluted share.
This ill timed foray into the Barnett has in all likelihood contributed to the severely impacted the stock price. Currently, at $5.20/share, the stock is down almost 90% from its 52 week high of $44.98. Total debt of $2.61 billion dwarfs total cash of $2.85 million. Quicksilver was downgraded by Jefferies and Co. from buy to hold on February 26 of this year.
The Barnett shale is composed of sea deposits laid down in the Mississippian age, some 350 million years ago. New technology ,such as horizontal drilling, has opened up the Barnett shale to production in recent years. The “tight” structure of the shale has trapped a plentiful supplies of gas, but with the shale’s structure and 7,000 depth, it can be difficult and costly to tap.
Some of the most plentiful gas reserves in the Barnett shale are found directly under the city of Fort Worth. Churches, parks, the American Cancer Society, golf courses, residential areas and even the girl scouts have participated in the bonanza. Since the bust in natural gas prices in the last half of 2008, however, much of the bloom has come off the boom.
Drilling in the Barnett, as elsewhere, is down considerably. Companies like Quicksilver, with heavy investments in natural gas, may be just hanging on, waiting for higher prices to improve their balance sheets. The gas has been there hundreds of million years, it can afford to wait. The question is: can Quicksilver afford to wait?
Disclosure: No positions

Things That Go Bump in the Night

2009-03-01T08:26:00.000-08:00

The party was a great success! All talked of the spectacular time they had. A wonderful blend of music, camaraderie, exquisite wine and food, enchanting women. A truly memorable day in the country, warm in the late summer sun.
But now, the the band is gone, the last of the guests have left. Having finished cleaning up, you are alone. Peace and quiet settles in on the old, secluded country house, a spur of the moment purchase a few years ago.
A hush. A pause. Something. A small gust of wind, a stirring of leaves, you look up. There, off to the northwest, low on the horizon, thick dark clouds are gathering. Remembering half-heard murmurings during the party of coming evening storms you hasten to secure the windows. Afterward, in the deepening twilight, flashes of lightning reveal distant, towering thunderheads. A vague sense of unease, quickly dismissed, sweeps over you. Tomorrow, with the morning sun, its back to the city, friends, and home.
Later, settled on the sofa watching TV, a bulletin scrolls across the screen. There was a prison break. Several men from the nearby penitentiary, armed and dangerous, they say. The proximity of the prison had been a troubling thought when purchasing the old house. However, a flush bank account, a great price and the beautiful setting sold you. You start thinking: What to do? The lights flicker once, twice, then darkness. Ever more brilliant, lightning now heralds the approaching storm. Thunder rumbles ominously. The feeling of unease is back. This time it stays.
With only candles throwing a feeble light, you know morning will come. It always does. The crashing thunder, and now outside, a flit of shadow, some rasping at the gate. Dawn suddenly seems impossibly far off.
So, here we are. The party is long over, the financial storm is on us. Crashing markets, unemployment, bankruptcy, are no longer just rumors. Talk of Depression is rampant. Banks, guardians of our wealth, are floundering, even in danger of collapsing. Commentators talk imminent demise and terrifying deficits. Our houses are suddenly liabilities. The best: General Electric, Johnson and Johnson, American Insurance Group and Pfizer totter on news of large dividend and stock value reductions. Authorities warn precautions need to be taken but go silent on what, where, when and how. We are left uncertain, questioning, hoping, fearful.
Disclosure: None, I don’t dare own any of the above.

EQT Corporation and Appalacian Gas

2009-02-26T08:24:00.000-08:00

In 1859, just before the Civil War broke out, Edwin Drake, near Titusville, Pennsylvania, drilled the world’s first commercially successful oil well. Soon, several hastily thrown together companies were drilling all over western Pennsylvania. Some of the wells on hitting pressurized pockets, spewed spectacular gushers of oil, equipment and sometimes even men up into the air. Pollution was not a consideration in the last decades of the 19th century.
Then, in 1878, while drilling for oil east of Pittsburgh, Michael and Obadiah Haymaker struck commercial quantities of natural gas. Obadiah was later shot dead defending his property. Out of these rough origins the Equitable Gas company was formed in 1888. Rapidly growing industries in nearby Pittsburgh provided a ready market. Equitable Gas grew over the years and was renamed Equitable Resources in 1984. The company name was changed to EQT Corporation (EQT) in February 2009.
EQT is now an integrated energy company, one of the largest in the Appalachian area, with growing reserves and some 10,450 miles of gathering lines. The company operates in Pennsylvania, West Virginia, eastern Kentucky, and southwestern Virginia. 2007 revenues were $1.58 billion. EQT operates in two segments, Equitable Supply and Equitable Utilities. The supply segment develops, produces, and sells natural gas, crude oil, and natural gas liquids while the utility segment distributes natural gas to some 270,000 residential and 18,600 commercial and industrial customers.
Natural gas is produced from trapped gas in shale and coal beds in the Appalachian area. EQT anticipates significant growth in gas production from its Devonian age shale (ocean sediments laid down some 400 million years ago, now at depths of 2,500 to 7,500 feet in the area). Devonian shale underlies much of the northern Appalachian area. Especially promising is the deep lying Marcellus shale beds.
EQT’s current capitalization is around $4.1 billion, the stock price, at 31, is down considerably from the 52 week high of 76. EQT, with its utility component, may provide some buffering from the price volatility of natural gas. The dividend is 2.9% and seems to be well covered. The website www.eqt.com talkes about the Marcellus shale promise, has a section on investor information and will give you a link to recent annual reports.
EQT is increasingly using new technology, such as horizontal drilling, to develop reserves. In the 2007 annual report they say “At year end, proved reserves increased by 7% to 2.7 Tcfe.”. The company, as they explore the high pressure, deeper Marcellus shale, anticipates even greater growth of reserves and production in 2008. Cabot Oil (COG), Chesapeake Energy (CHK) and Range Resources (RRC) also drill the Marcellus shale with its exciting potential.
Natural gas is currently priced just over $4 per 1000 cubic feet, well down from its high over $12 in late June, 2008. At these prices, not unexpectedly, exploration and drilling is slowing dramatically. EQT, like Chesapeake, XTO and many others have found abundant reserves in the US shale. The cost of tapping these reserves continues to drop and promises a greatly expanded use of natural gas here in the US.
A few years ago, the thinking was the US needed large LNG ports to import natural gas for our needs. Thanks to domestic discoveries the last few years using new technology, such as horizontal drilling, that is no longer the case. The US can achieve energy independence in gas if not oil.

Real Estate Values and Taxes in Central Florida

2009-02-24T08:23:00.000-08:00

In Hernando County, Florida real estate values are now only about half of what they were some 3 years ago. A few days ago I spoke to an long time real estate agent from ERA Pearson Realty in Spring Hill. She tells me my house in Spring Hill, which was valued at just under $200,000 three years ago by the website www.zillow.com, will now fetch only about $110,000 –if I’m lucky. I did some quick checking on my own and yes, it is not difficult at all, to find houses for sale at 1/2 of what they were 3 years ago.
Does this mean our property taxes will, or should, go down some 40-50%? If so, and It seems quite obvious they should, what does that do to Hernando counties’ Tax base? If the county tax appraiser does not drastically reduce assessments, property owners will flood his office with requests for lower appraisals. They will have lots of evidence to back up their claims.
Even worse, the property value decline, both nation wide and here, shows no sign of bottoming. We can wish and hope, but wishing and hoping leads only to denial. We are paying dearly for the exuberance of a few years back.
This all makes for some rather sobering thoughts on how the county is going to cope in the coming few years with the apparently much lowered tax collections. Wall Street has crashed 50%. Real Estate has crashed 50%. Are state and local governments like Hernando County ready for their turn?

SandRidge Energy, Debt and Natural Gas

2009-02-16T08:21:00.000-08:00

A few years ago we drove to Big Bend National Park (a stunningly beautiful place) through the wild, arid terrain of west Texas.    En route I noticed operating oil and gas wells as we neared the park.
At the the time I didn’t know it, but this is a prime drilling area for SandRidge Energy (SD), operating from their Fort Stockton field office.   SandRidge is drilling and producing in the Pinon field in the heart of the geological formation known as the West Texas Overthrust (WTO).
SandRidge Energy is headquartered in Oklahoma City, its current capitalization is around $1.3 billion. The company focuses on exploration and production, but also gathers, treats, processes and distributes natural gas and oil. Gas constitutes some 86% of reserves. The bulk of activity is in the WTO area, though the company does oil and gas drilling elsewhere in the US.   Sand Ridge also gathers and sells CO2 - which is abundant in WTO gas deposits, for re-injection into wells to increase production. A major competitor is the much larger Apache Corp (APA). SandRidge was formerly known as Riata Energy and changed its name to SandRidge Energy in 2006. The website is www.sandridgeenergy.com
The WTO, according to the company’s annual report, is relatively unexplored due to difficult terrain, complex geology and a lack of infrastructure in the area.   SandRidge is hoping the geologically complex WTO has abundant undiscovered gas reserves and is concentrating its exploration efforts in the area.
According to its 2007 Annual Report, SandRidge had total estimated net proved reserves of 1,516.2 billion cubic feet equivalent as of December 31, 2007, up from 300 bcfe in 2005.   Recent natural gas prices are around $4.5 per 1000 cubic feet, so reserves, as of December 31, 2007, currently have an in ground value of $8.2 billion.   Compare the $8,2 billion reserve figure to the current market cap of $1.3 billion. SandRidge also has leases or interests in approximately 822,287 natural gas and oil acres. Data for 2008 should be coming out soon. It will be interesting to see how much reserves have increased over the last year.
Thanks to new technology such as horizontal drilling and 3-D seismic mapping, gas reserves, unlike oil, have increased significantly in the US and elsewhere over the last few years. This increase has given prognosticators, such as T. Boone PIckens, the promise of potential OPEC independence. But, the infrastructure for expanding the use of this new-found supply of cheap, clean burning fuel is only just starting.   Using natural natural gas to fuel vehicles, for example, is in its infancy. The promise is there but so far it is just a promise.
SandRidge’s common stock, at 7.9, is down 88% from its 52 week high of 69. The stock may make a good re-inflation bet. The main attraction to investing in this company seems to be its reserves and ability to grow reserves.
SandRidge, however, has close to $2 billion dollars in debt and only $898,000 in cash. Also, Levered Free Cash Flow is a negative $1.5 billion (see Yahoo Finance). Most of the debt was incurred in the 2006 acquisition of NEG oil and Gas. Declining gas prices and low cash on hand is not good in today’s credit environment.
Eventually, oil and gas prices will rebound. Any investment in a company with substantial reserves and high potential growth may be rewarding. In the mean time though, I would keep a close eye on the liquidity situation. SandRidge could also be a potential take over target.

Geithner's Rescue, Trying Again

2009-02-10T08:20:00.000-08:00

Today, Treasury Secretary Timothy Geithner unveiled his $2 trillion rescue program and the Senate passed a $838 billion bailout bill. All this was a big flop on Wall Street and the DJI was off 382 points, or 4.6%, to close at 7,889.
Apparently, bank shareholders don’t want to be rescued Geithner’s way. A look at the megabanks showed Bank of America (BAC) down 19.3%, to 5.56, JP Morgan Chase down 9.8% to 24.62 and Citigroup (C) was down 15.2% to 3.35.
Regional banks were hit even worse. Regions Financial (RF) was down 30.2% to 3.24, SunTrust was down 27.2% to 9.06, Fifth Third (FITB) was down 24.2% to 2.19 and Zions was down 19.5% to 11.95.
Of the 25 bank stocks I track, none were up and 20 were down over 10%. Want a “good” bank stock? Here is one: People’s United Financial (PBCT). Apparently this bank has avoided the mistakes of the large banks. There are undoubtedly other good ones out there, we just don’t hear much about them.
This imploding of our banking system seems unstoppable. Since almost all of us have accounts at these banks it is a cause for grave concern. Are our deposits at risk? The FDIC says no. Hopefully the FDIC is right.
The general rational given by commentators for today’s decline was that Geithner was too vague and his plan lacks specifics. What we need is a clear course of action as to how we are going to deal with the toxic assets on bank balance sheets. Until the US government and banks are courageous enough to face up to the losses, we will be stuck in this downward spiral.

Key Reasons to be a Dollar Bull

2009-02-05T08:15:00.000-08:00

Bailout news and fear of a growing money supply drives the dollar lower and real assets, such as precious metals and oil, higher. Talk of a bust in treasury markets, and coming inflation, is rampant. It certainly is possible that inflation may resurface at some time in the future, driving the dollar lower. That, however, is not the current reality. Since mid December the dollar has steadily tracked higher, Click here to see the chart of UUP. Following are some reasons to be bullish on the dollar:
Deflation Despite dire predictions of hyper-inflation due to bailouts and other rescue attempts, that is not happening now. Prices of most assets continue to decline, real estate, commodities, autos, consumer goods etc. Yes, the US government could print lots of money, but there are many constraints. Congress, foreign (Chinese) treasury redemption concerns and popular opinion are but a few. Washington cannot and will not pay off everyone’s bad debts, they can’t afford it. It will be interesting to see the congressional reaction when the US automakers show up in a month or two asking for more money, as they most surely will.
Least ugly belle at the ball It is true the US has major economic problems. Worldwide, however, the situation is even worse. The perception is that the US led the world into the recession and now will lead the world out. The unrest in Greece may be just a harbinger of things to come. Excepting the Japanese Yen, the US Dollar is among the strongest worldwide.
Euro problems The European union (and the Euro) have problems with the PIGS (Portugal, Italy, Greece and Spain) who are in a weaker situation than the Germans and the Dutch. Eastern European members are hurting badly. There is some question as to if the Euro can survive this crisis.
US Bailouts stalling Washington is running out of the will to do bailouts. Even now, Obama’s stimulus bill is running into strong headwinds in a squabbling congress. Something will probably be passed, but government wheels turn slow, and it will be too little, too late, for many companies. Without bailout money bankruptcies will rise, weeding out the inefficient. This is bullish for the dollar and best for the US in the long run.
Deleveraging Global deleveraging of dollar-based credit is sending dollars back to the US.
In order to resolve the economic crisis Washington has to pick between two extremes. The US government can monetize the debt (The Zimbabwe Solution) or take a path such as the Japanese took in the 1990s, keeping zombie corporations and banks alive (The Japanese Solution). My guess is we will be closer to the Japanese solution than the Zimbabwe solution and the dollar will continue to strengthen.

Residential Real Estate in Central Florida

2009-02-03T08:14:00.000-08:00

I own a rental property in zip code 34608 — about 30 miles north of Tampa, Florida. I have kept track of the property value closely for several years. As you can imagine, the swings have been quite dramatic.
The website www.zillow.com provides a convenient way of tracking the price of most homes in the US. Go there and check your property out, if you wish. According to Zillow, the value of my 10 year old, 1600 square feet, 3 bedroom/2 bath/2 car garage home, in Spring Hill, Florida was about $120,000 in January 2004. In June of 2006 it peaked at $196,000. Since then it has been in a steady fall and is now worth $137,000, a decline of approximately 30%.
Since this area of Florida participated in the boom of 2005 and 2006, the 30% decline is, not surprisingly, more than the national average. At this point, it looks like the decline will continue. However, if someone is interested, I will sell the house for $130,000. Rent is around $900/month, good tenants. Once the government gets serious about printing money (The Zimbabwe Solution) real things such as my house will strongly appreciate in value.

Thinking the Impossible: Bank of America to Zero

2009-01-28T08:12:00.000-08:00

Just about all of us recognize Bank of America’s (BAC) familiar red and blue flag logo. Millions of Americans have accounts there. Bank of America, along with Citigroup (C), and JP Morgan Chase (JPM) are arguably three largest banks in the US. All have serious problems.
The thought of Bank of America’s common stock becoming worthless was unthinkable just a few weeks ago. Now, however, the mega-banks are again in big trouble. Most US and European banks have dropped to new lows within the last week or two. Back in September, the month of the Merrill deal, Bank of America common was between 30 and 35. On January 23 of this year it touched 5.2. How could “America’s Bank” get in such dire straits?
Under normal conditions the index committee removes from the index a DJIA component which drops below $10. These aren’t normal conditions. So, Bank of America and Citigroup remain on the DJIA. Removing two of the top banks ( not to mention General Motors ) from the DJIA is politically undesirable at this time. Maybe a reverse split?
Acquisitions of Countrywide Financial and Merrill Lynch were, at the time, thought to be advantageous to Bank of America. Toxic assets held by these two companies, as the recession has deepened, are now found to be significantly larger than originally thought. This week we have John Thain, ousted Merrill chief, and Ken Lewis, Bank of America’s CEO, trading blame over the possible $50 billion mistake.
Nouriel Roubini (as re-published through John Mauldin) says the US banking system needs $1.4 trillion to recapitalize and in its current state is insolvent:

The US banking system is borderline insolvent in the aggregate and it will take a huge amount of public financial resources and complex and time-consuming work-out of insolvent institutions to restore its financial health and allow it to lend again in ways that support sustained economic growth.

The US Dept. of Treasuries OCC’s Quarterly Report (see page 23) shows just how deeply the mega-banks are into derivatives. Bank of America has assets of $1.836 trillion and derivatives of $39.979 trillion, (mostly swaps). With the demise of the Shadow Banking System ( non bank financial institutions), trading derivatives is much more difficult. If marked to market, one wonders just how much of a loss would be realized in this $39.979 trillion portfolio. Nobody, who will talk about it anyway, seems to know. It wouldn’t take much to wipe out $1.8 trillion in assets. Not surprisingly, there is a major confidence problem. With a continually slumping housing market, commercial real estate problems accelerating, increasing credit card debt defaults and a deep recession that’s driving foreclosures to record levels, you can only guess. Investors don’t like guessing.
Here is more of why Bank of America could go to zero. If the bank is insolvent, the US government will have to use not only TARP2 but also a TARP3 and a TARP4. Imagine the bickering in congress. Someone, somewhere, somehow, sometime, has to own up to the toxic assets. Only the US government (taxpayers) can do this (lucky us). With government funding, dilution can wipe out the common stock holders. With politicians calling the shots you can forget dividends and other “extravagances” such as bonuses, private jets etc.
The establishment of a “bad bank” to hold toxic assets is now being talked about, and Wall Street hails it as a possible solution. But how do you determine the price to pay for the toxic assets? Face value is a bad deal for tax payers while mark to market a bad deal for the banks. Either way today’s common shares may not be worth much, if anything.
Eventually, the US government may “nationalize” the the mega-banks along with some of the regionals. The Obama administration will have to keep the depositors happy and calm at all costs. They have to do this to avoid major social unrest, everything else is secondary. The toxic assets end up in a bad bank worth who knows what. The the mega-banks emerge somewhere down the line as recapitalized private entities. The FDIC will keep depositors and some bond holders happy (we hope). Everyone else: good luck and fasten your seat belts.

What is a "Black Swan" Event?

2009-01-26T08:10:00.000-08:00

Perhaps you’ve heard the term. Just what, however, is a “Black Swan Event”? The term was popularized by Nassim Nicholas Taleb in his 2007 book on probability, The Black Swan. As an aside, Black Swans (Cygnus atratus) are found in southern Australia and though not endangered are not well known. According to wikipedia A “Black Swan Event” has 3 components:

The event appears by complete surprise to most people, in a relatively short time.
The event has massive, often world wide, impact.
After the event has occurred, people attempt to explain it in hindsight.

Here are some examples of “Black Swan Events”:

World War I. — Who would have guessed that a relatively minor assassination would trigger a world war in which tens of millions would die.
The terrorist attacks of September 11, 2001. — No one saw it coming.
The Economic crisis that started in late 2008. — Some saw economic problems but hardly anyone predicted the severity.
The Rise of the Internet. — People had all kinds of predictions of the future but somehow totally missed this.

Our current Economic Crisis is an example of a “Black Swan Event”. Almost no one (with a few notable exceptions) saw it coming. It is having a major world wide impact. Now, in hindsight, people are attempting to explain it. Since this is still unfolding we don’t know yet how “black” this swan will be.

Systemic Risk

2009-01-20T08:09:00.000-08:00

I read an article awhile back but can’t remember who wrote it or where I read it. If I could, I would gladly give credit. The article compared major banks to Mafia run booking houses. Hmm! Well, at this point, lets just say it is a metaphor.
In any case, it went like this: If a gambler doesn’t make good on debts to his bookie he may very well get escorted to a dark ally and emerge with a broken leg or something of that nature. If he doesn’t pay a second time he may end up wearing concrete boots at the bottom of the East River. Problem solved, he never defaults again. Better yet, word gets out to other potential non-payers. They may reconsider.
Why does the Mafia rigidly enforce this rule? Are they nasty mean people? Well, maybe, but it is mostly just good business. If non-payers are treated leniently other debtors may not pay. The bookie could fail. If the bookie fails, other bookies (think counterparties) could also fail. The chain reaction goes on and the whole operation can come crashing down.
Likewise, if one bank does not get its payments from its counterparties (financial institutions), they in turn cannot pay their counterparties. One after another they fail. That almost happened after Lehman Brothers went bankrupt. Banks everywhere came close to not paying their counterparty obligations. That, my friend, is Systemic Risk, a failure of major banks worldwide. The US government will do practically anything to avoid that scenario, hence no more Lehmans and lots of bailouts. We the taxpayers are keeping the banking system functioning with bail outs. The question is can we continue to do it, as we most surely will have to.
What would have happened if we had allowed “Systemic Failure” last October? I don’t know. Maybe it would not have been worse than drawn out pain we are experiencing now. Maybe taking the hit fast and quick is better than the slow torture of drawing it out. It certainly would be easier on the tax payers.
Wikipedia’s definition of “Systemic Risk”: Systemic risk is the risk of collapse of an entire system or entire market and not to any one individual entity or component of that system.

Worldwide Banks Plunge Again

2009-01-20T08:04:00.000-08:00

Suddenly, banks are back in the news, and it is very bad news. Two of the three largest US banks, Citigroup and Bank of America, despite huge bailouts 2-3 months ago are once again starting to fail. How much the Obama administration will put in to keep them going is unknown. However, cash injections will probably come with conditions not favorable to common stock owners.
Regional banks are faring no better, SunTrust, FifthThird, Regions Financial, Zions and many others are all off 70% or more for the last 52 months with common stock trading lower than last November.
Nouriel Roubini the famous New York University professor says the US Banking System is insolvent with another $3.6 Trillion in losses coming. Yes, he is know as “Dr. Doom” but then again, he has been consistently right so far.
The fear is that financial institutions are nowhere done needing government help and the dilution of the equity will wipe out common share holders and threaten bond holders as the government takes preferred stock positions in front of everyone else. There is talk again of actually buying the toxic assets (thought we dropped that as a “bad idea”). Problem is, declining real estate values, both residential and now commercial, are causing more and more loans to go toxic each day. Credit card and consumer debt is also starting to go bad as deflation takes hold.
Banks are using government money to strengthen their balance sheets. They are doing very little new lending, so cash injections are not helping Main Street.
The news from Europe is terrible also. The Royal Bank of Scotland shares have plummeted. Deutche Bank are Barclays are all down big time. Talk of Nationalization is now heard in Europe. On Tuesday January 20, 2009 Allied Irish Bank (AIB) was down 60% that day alone to $1.5 a share. Allied Irish was as high as 47 within the last year.
How will it all end? Who knows. Perhaps a total reorganization of the banking system, certainly much more nationalation. More tax payer money for sure will be put in, again increasing the deficit dramticly. TARP2 isn’t near enough. Worse case scenario: maybe a worldwide bank holiday (you can’t withdraw your money).

Owning Oil in Royalty Trusts

2009-01-14T08:00:00.000-08:00

The price of oil is again dramatically down, with lots of volatility. On January 13 WTI Crude dipped below $37 only to bounce back above $39 the next day. You can make — or lose — a great deal of money fast by trading the relevant Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). See UCO, SCO, DXO and DTO. If this is your cup of tea (I mean java), you like lots of excitement and are a market timing whiz take this route. Your brokerage firm will love it.
However, for those of us who like to sleep at night, there are alternatives. Cash or the US dollar is a good safe place when oil prices seem high. Or you can pick up at oil royalty trusts, when prices are down. There are both Canadian and US trust available. The trusts are obligated to pay out most of their earnings in dividends, 7-13% is typical. The high dividends keep them from jumping up and down as much as the ETFs and oil stocks
Dividends track oil prices, so today’s low oil prices may be a good time to purchase the trusts. Keep in mind that trust income often comes from fields which are in decline, meaning every year they may produce less oil. That is not a problem if unit price rises. Most depletion schedules go out some 10-20 years. Since all the action now is short term, I don’ look on depletion as a major concern.   Also, newer technology such as horizontal drilling coaxes more and more oil and gas from existing wells then ever before so potential reserves may rise.
As far as I know, world governments haven’t yet figured out how to print barrels of oil. Oil royalty trust reserves are buried treasure which you don’t need a map for. Again, while it is true that lower oil prices will bring lower dividends, you have a proven asset.   These assets are valued in paper units — dollars — which may be printed in large quantities in the near future. We will have more and more dollars chasing less and less oil. You will want to hold the oil not the dollars.
Royalty trusts have special tax considerations and may do best in deferred tax retirement accounts so you consulting your CPA is a good idea.   Here are some some oil trusts to get you started: BP Prudhoe Bay Royalty Trust (BPT), Permian Basin Royalty Trust (PBT), San Juan Basin Royalty Trust (SJT) and Sabine Royalty Trust (SBR).

Profiting from the Inevitable Oil Rebound

2008-12-29T09:29:00.000-08:00

The price of oil is down, way down. Last June’s $142/bl has been below $35/bl. Now may be a very good time to invest in oil stocks. On the other hand, prices still seems to be heading south. You have the “falling knife” risk. Yet, how low can it go? Unlike derivatives we are talking real assets here. At a certain point, pumping won’t pay. And, of course, low prices stoke demand. It is not a matter of if oil prices will rebound, it is a matter of when and to what extent. There is also the geopolitical risk and the “Peak Oil” scenario. Events in the Middle East can flare oil prices up on a moments notice.
Calling a bottom is risky. Hedging is one way to minimize risk. Thanks to easily bought and sold Exchange Traded Funds (ETFs) or Exchange Trade Notes (ETNs) you can hedge against price declines without actually shorting stocks. ETFs mostly eliminate the “corporate risk” as they often represent a “basket” of companies. ETNs are riskier as they are derivatives and are only as good as the provider.
Cash is a good place to be in today’s market. You could “hedge” against lower oil prices by holding cash in reserve. Another conservative hedge might be buying the US dollar, using the ETF UUP. The dollar and oil prices are inversely correlated to some extent. Holding UUP may be a good hedging strategy.
Using ultrashort ETFs as hedges is powerful, but risky. Things aren’t always what they seem. Often these instruments are trading tools not hedges. There have been several recent articles on the risks of ultrashort industry segment ETFs such as finance, real estate and oil.
For a more aggressive hedge you can use commodity and currency ETFs and ETNs. I compared the performance of the ultrashort oil exchange traded fund DUG, the exchange traded note DTO and the exchange traded fund SCO during 2008 using Yahoo Finance charts. See the chart here. Remember oil peaked in late June and has since declined 74% . The comparison is quite informative. You would not want to be an owner of DUG for the last three months despite its name and the rapid decline in oil prices. DTO performed very well, but carries the risk of an ETN (see above). SCO is a new ETF but seemed to have mirrored DTO’s performance over its short lifespan. Maybe SCO would be the best aggressive ETF hedge against lower oil prices.
Of course “Past results are not indicative of future performance” and I have a notoriously spotty record of timing, so you should do your own research. This article only gives you a “heads up” of where you might wish to start.
Disclosures: Long UUP

Wild Oil Prices

2008-12-22T09:27:00.000-08:00

The wild swings in the price of oil are truly baffling. Early July last summer saw prices above $140/barrel. Now, only 5 months later, the price is below $40/ barrel. Demand is down some 5-10%. So why a 70% price drop in oil?
First, a very brief oil primer. When oil and gas is pumped out of the ground you usually get a “witches brew” of compounds, from heavy tar like liquids to methane gas and a lot of stuff in between. “Sweet” oil is low in sulfur. West Texas Light/Intermediate (WTI) is light and low in sulfur high grade of oil. The tar sands of Canada hold lots of oil but it tends to be heavy and high in sulfur requiring more refining. One of the problems we have is that the easy to get light oils are in decline so more and more we need to tap the heavy, more costly oils.
What is usually called the “price of petroleum” is the spot (payment and delivery now) price of WTI/Light crude as delivered to the large storage facilities near Cushing, Oklahoma. Sometimes, it may also refer to the price of Brent as traded on the Intercontinental Exchange (ICE) in Scotland. Lower in quality grades sell for less. Iran has a lot of oil but it is of a heavier grade so costs less.
Now, back to the price fluctuations. It seems that even professionals have a hard time predicting these. Back in July, practically no one expected the high prices to last, even the most bearish predicted a price of around $80/barrel. Yet, today it is around $40/barrel. Why? Some obvious factors are speculation and the faltering economy. However, it is still perplexing.
Where things go from here is hard to say. Some say prices will go down to $25/barrel, while others say we will be bottoming soon. No one disputes the following however.

The price of oil has not broken out of its downward trend yet
The price is probably now well below average “production price” (maybe $45-50/barrel)
Give the above, at some time in the future, prices will again rise, possibly drastically.

Working at the Dump

2008-12-20T09:26:00.000-08:00

Signs of the times, as seen in the St. Petersburg Times.
On December 18, the St Petersburg Times ran an article about three recent job openings at the City Dump. The openings attracted over 130 applicants. Some of the applicants apparently were on their knees begging for the job. The pay? $9.50 an hour. I’ve been to dumps; lots of flies, birds, noise and all kinds of unpleasant smells. Can you imagine? Working outside, at the dump, it must be brutal in the Florida summer heat. I heard they supply gloves.
Also, on December 20 the Times‘ Hernando Section (Hernando County is about 30 miles north of Tampa) had an article on the Hernando Builders Association postponing their annual March Parade of Homes show because of the area’s “large inventory of unsold and foreclosed homes”. Only a couple years ago thousands attended. However, in March of 2008 attendance was “disappointing”. Since the outlook for March 2009 is “dismal” the show was postponed. No new date has been set.

SunTrust, Business as Usual

2008-12-18T09:25:00.000-08:00

SunTrust (STI) is a major Mid-Atlantic and Southeastern regional bank. The company has $175 billion in assets with a large residential and commercial real estate involvement. There are close to 1,700 retail branches throughout 9 states. The bank has significant holdings in Coca Cola (KO), which along with SunTrust is based in Atlanta.
I deal frequently with SunTrust. We have had accounts with them for several years. The company prides itself on excellent customer service. It is our experience that they do that very well. Personnel are unfailingly helpful and courteous.
Like any well run business SunTrust has kept a positive and upbeat attitude in the current crisis. In our community north of Tampa real estate has dropped up to 35% in value over the last year or so. Since SunTrust is a major lender in the area and throughout Florida this has to have an effect. So far, however, they project a “business as usual” image. Our home equity credit limits have not been frozen or reduced. We still get regular mailings from them about refinancing and other services.
Recently, branches have begun prominently displaying signs stressing how “solid” and “reliable” the bank is. The FDIC’s decision to increase deposit insurance from $100,000 to $250,000 is also mentioned. Their website, www.suntrust.com, has similar messages.
Suntrust, of course, is not immune to the economic climate. The stock is down some 60% from its 52 week high. Write-downs are increasing. Perhaps more ominously, they have twice tapped TARP funds, once in early November for $3.5 billion and then again in early December for $1.4 billion. With the dividend yield over 7% you have to wonder how safe it is.
Last Tuesday night we went to the new Shops at Wiregrass mall north of Tampa for some Christmas shopping. Large crowds, however, seemed mostly interested in watching the free Christmas tree light show. The numerous specialty shops were largely empty with bored clerks hanging around large red 50% off signs. With several mall owners like General Growth Properties (GGP) near bankruptcy, this does not bode well for banks heavily into commercial lending such as SunTrust. TheStreet.com in their “Banks and Thrift Screener” gives SunTrust a C- (Fair) rating. You won’t find any mention of that at the branches.

Deflation has Arrived

2008-12-15T09:24:00.000-08:00

Not too long ago (three months) everyone was worried about inflation. The price of gasoline was skyrocketing and food prices were increasing. As the financial crisis took a major turn for the worse in mid September things have changed big time. Look at the following trends. Even more ominously, as of the date of this post, these trends show no sign of reversal despite bailout after bailout.

Housing prices continue to decline
Gasoline prices are declining
Even food prices are declining
The stock market is declining
Employment is declining
All basic commodities, lumber, steel, precious metals, grains are declining.

Folks, this is deflation, a whole new ball game. At first you may be tempted to think this is good. It does feel great to fill your gas tank for under $20. However, if you lost, or are in danger of losing, your job things don’t look rosy at all.

End Game For General Motors and Chrysler

2008-12-12T09:22:00.000-08:00

At the time of this post GM and Chrysler are still optimistic that Bush and the Treasury Department will bail them out. I’m going out on a limb here maybe, but I think it is too late.
Hardly anyone is buying from these companies now due to all the negative publicity. The massive outflows of money continue with almost nothing coming in. A bailout will only create more scraps to fight over at tax payer expense. Consider:

Potential customers will wonder how long their warranties would be good
What about resale value?
How will the cars be serviced with dealerships closing?
Most importantly, even the best car companies, such as Toyota and Honda, are suffering severe sales declines. The recession is forecast to last at least through 2009

Ford might make it, they wisely said they don’t need money, yet. That makes them look good.
I take no pleasure in this. I own property in Michigan. It is unfortunate that both management and unions were blind to the gathering storm, now the wolf is at the door.

How I Learned to Stop Worrying and Love ATPG

2008-12-10T09:21:00.000-08:00

Dr. Strangelove himself couldn’t have contrived a more diabolical plot than my tango with ATP Oil and Gas (ATPG).
Way back in September (Was it that long ago?) I ran across an article touting ATPG as a potential 200% gainer. I have always been partial to oil and gas companies — good liquid assets you know. So, I took a gamble, buying shares at 22. However, I was foolish enough to not use a stop-loss. By October 10 my ATPG was down 40%.
Wow, I thought, surely now this has to be an outstanding value! Obviously Mr. Market is making a big mistake here and things will only improve. A little mental math now showed a potential 400% gain, Oh Boy! Other investors will soon become as enlightened as I am, and we will all be rich. So I did it, I bought more. What do they call that? “doubling down” or is it “dumbing down”? You see, I hadn’t read about that “falling knife” stuff yet.
On November 20, minus several fingers, I was mournfully watching my ATPG ticking south of 4, an 82% loss in little over a month, bleep bleep bleep! In my darker moments I ‘m thinking of flying to New York to look for the guy who wrote the original article. Rather difficult, however, as I: couldn’t remember his name, couldn’t find the article and now didn’t have the money for a plane ticket - even if I sold my ATPG.
Misery always love company so I decided the check ATPG’s message board on Yahoo Finance. Yep, my misery found plenty of company. The general consensus was that the dropping price had something to do with hedge fund selling. Perhaps I could out wait those hedge funds fellows. Sure enough, on November 26, things got much better, ATPG was up 50 % to over 7. I was ecstatic, never mind the fact that I was still down 70% from the original purchase. Then another drop. On December 9, more signs of life, up 20%, December 10 up 12% more.
Lessons learned? Like the naive investor I was, I didn’t use a stop-loss so had a wild ride down, hoping and wishing for recovery. I am now wiser. I learned that “hoping and wishing” doesn’t work in markets, neither does believing everything you read. Maybe, though, patience does.
From this point forward, my plan is clear. I am going to buy one of those ultra short ETFs and the next time the market plunges sell and plow all the proceeds into more ATPG Maybe, just maybe, all my money and then some will come back when all Paulson’s dollars find a home in real assets. With the money the government is pumping into the economy we should soon have hyper-inflation and all “real” assets such as oil (and ATPG) will sky rocket. Seriously, I really do plan on doing this, and then I will finally love ATPG
Maybe next I should write about how one can make 200% on ATPG. It gets even better, though. Here is an article claiming ATPG may have more than $15 billion oil and gas reserves and could be a takeover target for Exxon. December 9’s market cap is $255 million. So, you see, I really do love ATPG. Thank you Dr. Strangelove! … err, I mean Mr. Paulson!
Disclosure: Long ATPG

Watch the Treasury Long Bond

2008-12-05T09:20:00.000-08:00

TLT the exchange traded fund (etf ) that tracks the treasury long bond has been displaying some unusual movement lately. TLT has been one of the few ways to make money in the market over the last year.
The upward trend has accelerated over the last couple of weeks, tracking up 20% since November 17. The reason is fear, fear of deflation and depression, almost panic buying. In a deflationary environment this long term treasury will rise while its yield will decrease. See the chart to the left for the 1 year trend.
Be very careful here though. There are a lot of reasons why inflation may make a come back in the long, if not short term. Reasons include, all the stimulus and bailout programs, less buying of treasuries by foreign governments among others. If (when?) inflation comes back TLT will drop like a rock.

Why Housing Crashed

2008-12-01T09:17:00.000-08:00

St. Petersburg Times, November 30, 2008. The Headlines on the front page tell about a house, in a run down area of Tampa. A tattoo parlor owner bought it for a $100 deed, then sold three months later for $300,000, with the help of a zero down loan from a subsidiary of Washington Mutual.
Isolated example? No, far from it! The tatoo parlor owner did some 90 deals like this during the housing boom.
Two questions immediately come to mind: 1) Who would pay $300,000 for this run down house? 2) How in the heck did loan ever get approved? The article provided answers.
Sellers, buyers, and brokerage offices were often in collusion on the deal. Everyone got a piece of the loan proceeds. Buyers were often drug dealers said the article, who (surprise) don’t really care about their credit being tarnished when they default.
Perhaps even more importantly: Why were these loans approved? The article says fraud was often involved. Banks were after the fees and totally dropped the ball in checking on loan details and property specifics. Since the loans were bundled as Mortgage Backed Securities (MBSs) and sold, everyone made out like bandits except the purchasers of the MBSs. Now that we, the taxpayers, are bailing out the MBS holders (banks and financial firms) we are the ones left holding the bag.

The Turning Point, Deflation or Inflation?

2008-11-24T09:14:00.000-08:00

The US government is throwing hundreds of billions of dollars at the financial crisis. Look at Citigroup. Just over the past weekend, the government, in exchange for $27 billion in Citi preferred stock, will inject $20 billion of capital in the struggling firm and guarantee $306 billion in troubled mortgage assets. Next up will be auto makers with their new plan. For both Citigroup and the automakers “we the people” are again riding to the rescue. You see these companies “are too big to fail”.
Citigroup at one time was the largest bank in the US (world?). Read the Bloomberg article about Citigroup by Bradley Keoun here. The consensus is that if Citigroup failed it would be “disastrous” for the world economy. Maybe, but at some point these bailouts will be disastrous for the US dollar and taxpayer. How many toxic assets can the US taxpayer assume?
The only way out of this never ending mess may be reinflation, hopefully not hyperinflation. Help to the debtors will come at the expense of those who have been prudent. Those of us who are benefiting in the current disinflationary environment, with a strong US dollar, may be in for a rude surprise later if not sooner.
Expect a turning point soon, with a falling US dollar, increased gold and oil prices and a jump in long term interest rates as more programs are added to the $5 trillion already spent or promised. Obama can’t wait to add his bailouts come January. One has to ask: Just how much can the US government do? The piper will have to be paid at some time and that time may be sooner rather than later.

Florida's Pension Fund

2008-11-18T09:14:00.000-08:00

The headline in today’s St. Petersburg Times is “Pension fund plummets”. The State Board of Administration (SBA) manages Florida’s public investments. The investments peaked in September, 2007 at $187.5 billion and since then have lost 1/3 of their value. The largest component of the SBA is the Florida Retirement System Pension Plan. The decline has come both from the withdrawal of funds and investment losses. Their is some derivative exposure. The pension plan has lost more than 1/4 of its value, or $37.9 billion over the 13 month period since September 2007. Since more than 1/2 of the pension funds assets are invested in stocks the fund is at risk with the stock market declines.
The article goes on to note that “Florida isn’t alone. Across the country, the financial crisis is wreaking havoc on public pension funds”.

Billions on Trillions on Billions

2008-11-16T09:08:00.000-08:00

It is absolutely amazing at how many companies are lining up to get bailout money. Forbes columnist Robert Lenzner has an article on this, click here to read it Below is a summation. Would you invest in failing companies? No? Guess what? As a US taxpayer, you are!

AIG initially wanted $85 Billion, it is up to $150 Billion and climbing*.
Detroit Auto companies already got $25 Billion. Now they want $50 Billion.
General Electric got a $139 Billion guarantee (I thought they were blue chip?).
Fannie and Freddie say they need more than the $200 Billion they already have, perhaps a lot more.
Banks (Paulson won’t say who) have gotten $2 Trillion in emergency loans.
The BEST USA banks (JP Morgan, Wells Fargo, Bank of America and Citigroup) may need $350 Billion
Insurance companies like Hartford are buying small banks so they can qualify for bailout money, unknown billions here.
States and cities will be lining up next at the Treasuries bailout window, more unknown billions.
Read this weeks coming news to see who is next.

The Disaster in the US Auto Industry

2008-11-08T09:06:00.000-08:00

Ford (F) and General Motors (GM) reported earnings today. As expected, bad losses. Will a government bail out help? Will lower gas prices help?
The USA automakers have been on a downward spiral for years and this may be the end game. GM’s merger with Chrysler is apparently off for now. Detroit’s automakers are joining the long line at the oval office asking for money. Only $50 billion, nothing compared to AIG, right?
Well, we are in the process of nationalizing the banks, might as well do the auto makers too. Even the world’s best auto makers such as Toyota (TM) and Honda (HMC) are suffering severe sales decline. You wonder how General Motors, Ford and Chrysler can possibly survive?
As an aside, I read an article today from Forbes about how many Detroit auto company employees and retirees savings may be at risk as GMAC also deteriorates. See the article here. This would compound the tragedy.

Obama's Dilemma

2008-11-06T09:05:00.000-08:00

Well, we have elected Barack Obama as the 44th President of the United States. The Obama administration promises lots of change. Since we are going into recession, Americans are ready for change. Question is what and how? Probably, another stimulus package will be forthcoming.
Mr Obama promises tax breaks for all but the upper 5% of Americans, who would pay higher taxes. Tax increases in recessionary times have been shown to make the economy worse not better.
I once read how a laborer said he liked rich people. When asked why, he responded that rich men gave him jobs but poor men never did. This might be something the democratic legislature might wish to ponder. Of course, I guess we could all work for the government.
I must admit that the Republicans richly deserve their losses. Corporate scandals, golden parachutes for executives of failing companies, failed regulation of exotic financial instruments, have all left a bad taste in voters mouths.
I don’t envy Obama, he has inherited a mess! Maybe he will provide the leadership to resolve things. Lets just hope the cure is not worse than the disease