Almost 50 Years Ago. I had the honor of working at one of the premier chemical research laboratories in the country, the DuPont Experimental Station just outside Wilmington, Delaware. My first assignment was as part of a team working on a substitute for para xylene, a starting material for Dacron, polyester fiber. The main reason a substitute was needed was the high price of para xylene. Virtually every oil company was swimming in the stuff, yet the price was deemed way too high for the existing demand. Our project was focused on para tolualdehyde (hereinafter called PTL). Our initial lab work in obtaining high yields of this compound was very promising and economic projections indicated that we could produce this material for substantially less than we were paying for para xylene. As I worked on this project, I was puzzled that DuPont allowed publication of some of our work, directly opposite to the air of secrecy that surrounded most of our research. Because of the success of the laboratory work, a pilot plant was constructed to demonstrate the feasibility of producing this material on a commercial scale. Again, press releases told the world of the success of this pilot plant operation. I was doing lab work in support of this project when one day our department manager walked into my laboratory and told me to cease all work on the project, it was being abandoned. Why? Because the price of para xylene had steadily dropped to the point that we could no longer make PTL at a price to compete with para xylene. Several years later, I worked in research for a major oil company and was told that para xylene was no longer the high profit compound that it had been before DuPont forced the price down by their PTL project. Finally, a light bulb went off and I discovered that DuPont never really wanted to make PTL, although I'm sure they would have if their hand had been forced. The main objective was to be able to buy para xylene at a much lower price. This objective was accomplished without ever making a single drop of PTL on a commercial scale.
Why Did I Tell That Story? Because I get so weary of the political arguments, one of which says that even if we did exploit all the energy resources at our disposal it would make a difference of only 2 cents per gallon of gasoline. If DuPont can force a huge drop in the price of a commodity by initiating a project to manufacture a substitute, what could the world's largest consumer of petroleum do if they convinced their suppliers that they were no longer going to be held hostage by suppliers who would do whatever they can to disrupt our way of life?
Lawmakers are Split Along Party Lines. I have always said that this is a scientific issue and shouldn't be a political one. I am doing some research on both sides of the argument and trying to be objective. One conclusion is definite. Al Gore's statement that the debate over global warming is over makes no sense. I have read arguments by very credible scientists that call into question the statement that man made carbon dioxide is responsible for global warming. I have recently read an argument that says we have experienced no global warming during the past 10 years. It's hard to get enough of the raw data to determine who is right but it is obvious that the debate is not over. Each side seems so entrenched in their opinion that it is unlikely that even the most objective of scientists, much less politicians, can ever be open minded enough to look at the data objectively.
Look At My Post of July 13. I told you that oil prices would come down, or at least stabilize. Before I brag too much, I have to tell you that I didn't have a clue when or how much. We all know that world-wide demand is falling in response to high prices. While it may rebound some, I believe the overall trend is down. I am still going to maintain some exposure to energy stocks. I don't think we need $140 per barrel oil to make some, if not most, of these companies favorably priced. I am still in high dividend stocks. I recently added Pfizer to some portfolios, including my own. At less than 10 times earnings and increasing demand from aging baby boomers, firmly entrenched health care stocks appear to be a "port in the storm."
Saturday, July 26, 2008
Sunday, July 13, 2008
WHISTLING THROUGH THE GRAVEYARD.
I'm Not Afraid. Like hell I'm not. Its been a tough market and there are several sticky problems that just won't go away. This situation could be with us for awhile. On the other hand, there are some who are in a state of panic to the point that they believe that our country is rapidly declining and in danger of becoming a second rate power. John McCain's economic advisor Phil Graham said last week that we aren't in a real recession, just a psychological one. Shades of President Carter and his "crisis of confidence" speech. While I don't necessary agree with Dr. Graham, he has a point. This recession, like many others before this, is accompanied by a feeling of gloom and pessimism. While I don't want to understate the problem we're having, it may not be all that bad compared to others. I did a bit of research to compare our financial markets with several other large countries. You can draw your own conclusions as to how we are doing.
We Aren't The Only Ones With Falling Markets. Several of our clients have urged us to move money from the US markets to overseas markets, especially China and India. Here are some statistics to consider.
Using the S&P index as a guideline, our stock market has dropped 15.9% year-to-date.
The Chinese market has dropped 45.7%
India's market is down 34.9%
Great Britain is down 18.5%
France is down 27%
Germany is down by 23.7
So much for transferring our investments overseas. Our gross domestic product, while not growing as rapidly is more than the next three countries combined.
Even Gasoline Hasn't Increased That Much. We're all nervous about the high price of fuel and how badly it is going to affect our economy. In 1974 we were paying 40 cents per gallon. Now we're paying four dollars. Sounds horrible doesn't it. In fact, an increase of that magnitude amounts to only a 7% compounded rate of return. The real difficulty is that the increase has not been gradual but has occurred in the past 2-3 years. I sound like Phil Graham when I say that much of the impact has been psychological. We've stuck our heads on the sand and took advantage of unrealistically low prices. We squandered our money on great big cars and bought houses that were way too large and luxurious for our needs. Many, like myself decided they could have two homes. Its been fun but now we have to pay for it. Reminds me of a song written in the 70's when gas prices rose rapidly. It was written by Jerry Jeff Walker and entitled, "Goodbye Easy Street." We thought our way of life was ruined back then but it turned out not to be not such a big deal after all.
I Believe Oil Prices Will Come Down or Level Off. This will happen either for the wrong reasons or the right ones. The wrong reason will be a huge drop in demand due to a worldwide recession. The right reason will be similar to what occurred in the 1980's when the car companies increased the mileage of the cars they produced. Many small measures were taken by consumers to reduce their energy consumption and exploration and production activity increased dramatically. We can do this again. In addition, we can get serious about renewable energy sources.
All Is Not Sweetness and Light. I am aware of the seizure of Indy Mac Bank. I also know the Federal Reserve has announced strong measures to prevent the failure of Fannie Mae and Freddie Mac. This is unfortunate but not a total disaster. Remember the RTC (Resolution Trust Company) formed to deal with the Savings and Loan crisis of the late 80's. Strong measures are often called for and these don't mean that we are "going to hell in a handbasket".
My Investment Policy Remains Intact. 1. Emphasize investments that provide cash flow. 2. Increase cash allocation. 3. Re-invest prudently. I am currently diversifying into areas expected to be more recession resilient ( I bought Pfizer at 17.5 and a 7+% yield). We are buying REIT preferred stocks. (These have higher yields than most stocks and a preferred claim on earnings to be distributed as dividends). Like many others, I will spend more time at home. (I have virtually everything I want right here.) I will be back in Colorado at the end of August for an extended stay. Contact me by e-mail or call our office if you want to arrange a meeting.
We Aren't The Only Ones With Falling Markets. Several of our clients have urged us to move money from the US markets to overseas markets, especially China and India. Here are some statistics to consider.
Using the S&P index as a guideline, our stock market has dropped 15.9% year-to-date.
The Chinese market has dropped 45.7%
India's market is down 34.9%
Great Britain is down 18.5%
France is down 27%
Germany is down by 23.7
So much for transferring our investments overseas. Our gross domestic product, while not growing as rapidly is more than the next three countries combined.
Even Gasoline Hasn't Increased That Much. We're all nervous about the high price of fuel and how badly it is going to affect our economy. In 1974 we were paying 40 cents per gallon. Now we're paying four dollars. Sounds horrible doesn't it. In fact, an increase of that magnitude amounts to only a 7% compounded rate of return. The real difficulty is that the increase has not been gradual but has occurred in the past 2-3 years. I sound like Phil Graham when I say that much of the impact has been psychological. We've stuck our heads on the sand and took advantage of unrealistically low prices. We squandered our money on great big cars and bought houses that were way too large and luxurious for our needs. Many, like myself decided they could have two homes. Its been fun but now we have to pay for it. Reminds me of a song written in the 70's when gas prices rose rapidly. It was written by Jerry Jeff Walker and entitled, "Goodbye Easy Street." We thought our way of life was ruined back then but it turned out not to be not such a big deal after all.
I Believe Oil Prices Will Come Down or Level Off. This will happen either for the wrong reasons or the right ones. The wrong reason will be a huge drop in demand due to a worldwide recession. The right reason will be similar to what occurred in the 1980's when the car companies increased the mileage of the cars they produced. Many small measures were taken by consumers to reduce their energy consumption and exploration and production activity increased dramatically. We can do this again. In addition, we can get serious about renewable energy sources.
All Is Not Sweetness and Light. I am aware of the seizure of Indy Mac Bank. I also know the Federal Reserve has announced strong measures to prevent the failure of Fannie Mae and Freddie Mac. This is unfortunate but not a total disaster. Remember the RTC (Resolution Trust Company) formed to deal with the Savings and Loan crisis of the late 80's. Strong measures are often called for and these don't mean that we are "going to hell in a handbasket".
My Investment Policy Remains Intact. 1. Emphasize investments that provide cash flow. 2. Increase cash allocation. 3. Re-invest prudently. I am currently diversifying into areas expected to be more recession resilient ( I bought Pfizer at 17.5 and a 7+% yield). We are buying REIT preferred stocks. (These have higher yields than most stocks and a preferred claim on earnings to be distributed as dividends). Like many others, I will spend more time at home. (I have virtually everything I want right here.) I will be back in Colorado at the end of August for an extended stay. Contact me by e-mail or call our office if you want to arrange a meeting.
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