Quotes From Market Watchers.. I'm sitting by my computer trying to think of something positive to say about these markets. I am reminded of a quote from a well-known financial planner who says that this market reminds him of a "forest fire where all the animals are running in all directions looking for a safe place'. Needless to say, there doesn't seem to be one. Another quote says "the market bottom is reached when investors stop looking for the bottom and start looking for the exits". Given what I've heard from a number of clients lately, that occur ed some time ago.
Measuring Fear. A few posts ago, I talked about the VIX which is a measure of volatility and, ultimately, fear in the market. I talked about a level above 40 being the maximum fear level observed since the CBOE began measuring it almost 30 years ago. During this time, that level has been reached only three times and each time the market was higher six months later. We have now learned that a VIX of 40 is no where the maximum level of fear potential in the market. As of today it stands just above 75, and it has been as high as 80. This is a quantitative measure of just how difficult things are. I could never have imagined that it could have reached this point.
Are You Looking For a Reason for Optimism? Here's one. Although my IRA has been decimated, I can still buy the same number of barrels of oil with today's value as I could have at the high point. I filled my truck gas tank with only $25 yesterday. We are no longer having to send massive amounts of money to countries who would like to kill us. I can't help but believe that oil prices have reached the bottom of the current cycle. Hopefully, we can take heed from the warning we have received. Although the increases of the past few months have failed to hold, the threat still hangs heavy over our heads. They did it once, they can do it again.
The End of the Year is Rapidly Approaching. I can't say I am sorry to see 2008 leave us behind. As I look out the window, I see the beautiful East Texas woods (what Rita and Ike left us) and I never cease to be amazed at the miracle that surrounds me. Speaking of miracles, I have been taking a DVD course on the brain. One thing I have learned is that the vast majority of the images collected by the eye, fail to reach the brain but we continue to think we see everything around us. As I continue to try to develop a vision of the future, I am reminded of a quote from Steve Goodier, publisher of a newsletter entitled Life Support. "Vision is never about seeing the obvious. It's about looking ahead; about seeing what is not there -- YET. It's often about seeing the potential behind the obvious".
Heading To Denver. I'll be there in a couple of weeks and hope to see many of you while I am there. For now, I'll go take a walk in the woods and try to see as much as I can of the obvious.
Friday, November 21, 2008
Saturday, November 15, 2008
THE DREADED D WORDS.
Deflation. I have heard numerous comments about the current "loose money" policies of the Federal Reserve. Most say, we are going to have to face the consequences and the most likely result is hyper inflation. I know that money creation is always linked to inflation; however, it seems unlikely in view of some of the obvious deflationary pressures we are seeing. The most obvious to the casual observer is energy prices. Since July, crude oil has dropped 60%, unleaded gasoline has dropped 62%, and natural gas is down 52%. These are huge drops and it could be expected that these drops would filter down to other commodities. In just three weeks, steel, a basic building block of industry, is down 20 % with China and other countries exporting mega tons of the stuff into the US at cut rate prices. Aluminum is down by 29% and plants are closing in places like Booneville, Indiana where 770 jobs have been lost. Copper prices are no exception, having dropped by 31% in the past three months. Finally consider molybdenum, a hardening agent for steel. Prices are down by 60% since mid-October. That huge drop caused a the loss of several hundred jobs in the Colorado mountains as the long-anticipated re-opening of the Climax mine was put on hold indefinitely.
Since I have been following markets, I don't remember anything like this. Deflation is dangerous since it can cause massive job loses and lowering of wages as the newly unemployed workers tend to work for less than those currently employed. From what I have read about the great depression, this is what happened then. Hopefully, the central bank can manage monetary policy in such a way as to prevent it from happening again. To the extent that we can change our over- consumption habits to eliminate the excess consumption of the past, an adjustment could be healthy.
De-Leveraging. Acquiring leverage is fun. You can buy stuff without using your own money. Using leverage to buy income producing assets is often highly profitable while using it to buy consumption assets is almost always unprofitable. People who loan you money are very unreasonable. They want it back. They also want interest. When they are in trouble, they want it back faster. In the past, they were willing to roll it over when it became due. Now they are much less willing to do so. Most everyone (except the federal government) is in the process of de-leveraging. Real estate investment trusts, mortgage lenders, mutual funds, and hedge funds, are selling assets into a market where there is little demand, in order to repay loans that are being called due. Even prior to the due date, some loan documents give the lender the right to call the loan due if certain conditions are not met. There are also government regulations that keep some types of businesses, such as business development companies, from having too much leverage. When the value of assets fall, these rules can come into play. As much fun as acquiring leverage can be, the pain of de-leveraging is even greater. Companies previously considered as healthy can be forced into bankruptcy in extreme circumstances. Unfortunately, the market is concerned about some of the companies in our portfolio. An example is Prologis, a company I talked about in my last post. Even though the value of real estate in the portfolio is worth $30 per share, the share price is close to $6.00. When I bought shares of this for my own portfolio, I made a bet that they would be able to manage these assets during this period of deflation and de-leveraging, and emerge in a much healthier position. Hopefully, they can. As with anything you buy in today's market the risk that they can't is almost always there.
Back To Colorado In December. I will be available from December 5 to 14. Be glad to talk to any of you then. Please call Susan at 720-449-0200 and let her know you want me to call to schedule a meeting.
Since I have been following markets, I don't remember anything like this. Deflation is dangerous since it can cause massive job loses and lowering of wages as the newly unemployed workers tend to work for less than those currently employed. From what I have read about the great depression, this is what happened then. Hopefully, the central bank can manage monetary policy in such a way as to prevent it from happening again. To the extent that we can change our over- consumption habits to eliminate the excess consumption of the past, an adjustment could be healthy.
De-Leveraging. Acquiring leverage is fun. You can buy stuff without using your own money. Using leverage to buy income producing assets is often highly profitable while using it to buy consumption assets is almost always unprofitable. People who loan you money are very unreasonable. They want it back. They also want interest. When they are in trouble, they want it back faster. In the past, they were willing to roll it over when it became due. Now they are much less willing to do so. Most everyone (except the federal government) is in the process of de-leveraging. Real estate investment trusts, mortgage lenders, mutual funds, and hedge funds, are selling assets into a market where there is little demand, in order to repay loans that are being called due. Even prior to the due date, some loan documents give the lender the right to call the loan due if certain conditions are not met. There are also government regulations that keep some types of businesses, such as business development companies, from having too much leverage. When the value of assets fall, these rules can come into play. As much fun as acquiring leverage can be, the pain of de-leveraging is even greater. Companies previously considered as healthy can be forced into bankruptcy in extreme circumstances. Unfortunately, the market is concerned about some of the companies in our portfolio. An example is Prologis, a company I talked about in my last post. Even though the value of real estate in the portfolio is worth $30 per share, the share price is close to $6.00. When I bought shares of this for my own portfolio, I made a bet that they would be able to manage these assets during this period of deflation and de-leveraging, and emerge in a much healthier position. Hopefully, they can. As with anything you buy in today's market the risk that they can't is almost always there.
Back To Colorado In December. I will be available from December 5 to 14. Be glad to talk to any of you then. Please call Susan at 720-449-0200 and let her know you want me to call to schedule a meeting.
Friday, November 07, 2008
OIL PRICES THROUGH THE FLOOR
Gas Prices Soon Below $2.00 a Gallon. Happy days are here again. With gas prices down, consumers will soon be driving to the mall again and spending their money. The stock market will soon go back to 14,000 and we can stop worrying. NOT!! The reason oil has dropped more than 50% is a massive world-wide recession, the depth of which we still don't know. While the rise in oil prices didn't cause this recession by itself, it was a major contributor. It scared the dickens out of a lot of us who figured we would have to cut back in other areas in order to afford to continue to afford sufficient fuel to take us to places we need to go. Even with gas prices below $2.00 a gallon, the memory of $65.00 fill ups are fresh in every one's mind. Even the most optimistic among us believe prices will rise when, and if, the economy starts to grow again. Every one told me that prices wouldn't drop this time like they did in the late 80's because it was different this time. I agreed that it was different this time but guess what? It's different every time. Petroleum exporting countries need to sell a lot of oil and anything that causes a reduction in sales will result in a drop in prices so they can keep the revenue coming in but prices will rebound as soon as they believe the market will allow it.
Renewable Energy Will Save us. If you believe that, we should talk about this condo I have to sell. We have 250 million cars in this country that run on gasoline. There is no way we can cut our dependence on fossil fuels overnight. Tuning up our cars and putting more air in our tires won't save us either. I believe T. Boone Pickens statement that "we can't drill our way out of this". President-elect Obama grabbed onto that one in a hurry but he didn't give us the full benefit of Mr. Pickens statement that we still need to "drill, drill, drill" while we are developing renewable energy technology. I don't believe that "The Answer is Blowing In The Wind" either.
Mr. Pickens wants to put up a whole host of windmills to power our utility plants. Then he wants to use natural gas to power our cars. I believe we should work on this; however, the problems of establishing a nationwide system of outlets to fill our tanks with natural gas is immense. The cost of modifying our cars to use this fuel is also expensive, if not economically prohibitive. High pressure natural gas lines will be difficult for consumers to handle and their are safety issues with putting our cars on the highway with pressurized gas tanks.
I Sound Like A Pessimist, But I'm Not. I believe answers to our energy crisis are available. I just don't know what they are and I have no confidence that anyone else does either. One thing I do know is that we can't sit around and do nothing. We have to try several things at once. I still don't know whether or not climate change is a legitimate issue but I believe it will eventually take a back seat to the more serious issue of how we can maintain a reasonable standard of living in the wake of a shortage of affordable energy.
There are Opportunities Out There. Look at Colorado residential real estate. Prices are down but sales are up and inventories are shrinking. A recent piece in the Denver Business Journal states that October single-family sales are up over 14% from a year or so ago. The rental market is still strong and you can get a break-even before tax cash flow. While it takes considerable skill to enter the "fix and flip" market, you should be able to get excellent returns on a long-term basis. It is possible to buy lower-end properties for less than $150K that would have sold in the $190's two years ago. If you sold out of the stock market, this might be a good place to deploy some capital. With inventories shrinking and builder activity at a minimum, the seeds of a recovery are well in place.
Stocks Are On Sale Also. Because our asset management clients are so risk averse right now, we are not aggressively pursuing stock market investments in those accounts. I am however, being somewhat more aggressive in my own accounts. My last investment was in an industrial REIT called Prologis. I bought in at $9.85 a share. That is about half of the value of the underlying real estate they own. The dividend is in excess of 21%. While I suspect that this will eventually need to be cut, I think that is already priced into the shares. Just to hedge my bet, I sold the option to buy it from me at $10 a share in December. I got $1.75 for this which makes my acquisition price $8.1 a share. I like this so well that I also bought the preferred stock that yields 11+%. I plan to hold the preferred as a long-term investment. If the price of the common rises above $10 a share, I will have to sell it but a profit of 23% for a little less than 2 months is good enough for me. Win or lose I will let you know how this investment performs.
Back In Texas. I made it back here about a week or so and have been busy cleaning up after hurricane Ike. I'm pretty sure a tornado came with it and blew down some 100 year old Magnolia trees. Oh well, I still have 16 left and the reduced shade will make my hibiscus bloom better.
Renewable Energy Will Save us. If you believe that, we should talk about this condo I have to sell. We have 250 million cars in this country that run on gasoline. There is no way we can cut our dependence on fossil fuels overnight. Tuning up our cars and putting more air in our tires won't save us either. I believe T. Boone Pickens statement that "we can't drill our way out of this". President-elect Obama grabbed onto that one in a hurry but he didn't give us the full benefit of Mr. Pickens statement that we still need to "drill, drill, drill" while we are developing renewable energy technology. I don't believe that "The Answer is Blowing In The Wind" either.
Mr. Pickens wants to put up a whole host of windmills to power our utility plants. Then he wants to use natural gas to power our cars. I believe we should work on this; however, the problems of establishing a nationwide system of outlets to fill our tanks with natural gas is immense. The cost of modifying our cars to use this fuel is also expensive, if not economically prohibitive. High pressure natural gas lines will be difficult for consumers to handle and their are safety issues with putting our cars on the highway with pressurized gas tanks.
I Sound Like A Pessimist, But I'm Not. I believe answers to our energy crisis are available. I just don't know what they are and I have no confidence that anyone else does either. One thing I do know is that we can't sit around and do nothing. We have to try several things at once. I still don't know whether or not climate change is a legitimate issue but I believe it will eventually take a back seat to the more serious issue of how we can maintain a reasonable standard of living in the wake of a shortage of affordable energy.
There are Opportunities Out There. Look at Colorado residential real estate. Prices are down but sales are up and inventories are shrinking. A recent piece in the Denver Business Journal states that October single-family sales are up over 14% from a year or so ago. The rental market is still strong and you can get a break-even before tax cash flow. While it takes considerable skill to enter the "fix and flip" market, you should be able to get excellent returns on a long-term basis. It is possible to buy lower-end properties for less than $150K that would have sold in the $190's two years ago. If you sold out of the stock market, this might be a good place to deploy some capital. With inventories shrinking and builder activity at a minimum, the seeds of a recovery are well in place.
Stocks Are On Sale Also. Because our asset management clients are so risk averse right now, we are not aggressively pursuing stock market investments in those accounts. I am however, being somewhat more aggressive in my own accounts. My last investment was in an industrial REIT called Prologis. I bought in at $9.85 a share. That is about half of the value of the underlying real estate they own. The dividend is in excess of 21%. While I suspect that this will eventually need to be cut, I think that is already priced into the shares. Just to hedge my bet, I sold the option to buy it from me at $10 a share in December. I got $1.75 for this which makes my acquisition price $8.1 a share. I like this so well that I also bought the preferred stock that yields 11+%. I plan to hold the preferred as a long-term investment. If the price of the common rises above $10 a share, I will have to sell it but a profit of 23% for a little less than 2 months is good enough for me. Win or lose I will let you know how this investment performs.
Back In Texas. I made it back here about a week or so and have been busy cleaning up after hurricane Ike. I'm pretty sure a tornado came with it and blew down some 100 year old Magnolia trees. Oh well, I still have 16 left and the reduced shade will make my hibiscus bloom better.
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