Trashed Real Estate, Soaring Gold

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

"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

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.

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Hot Summer, Hot Bonds

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

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

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.

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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.