"But Big Oil and Big Coal have always been as skilled at propoganda as they are at mining and drilling. Like the tobacco industry before them, their success depends on keeping Americans stupid." - Jeff Goodell
Quick question - who is the energy giant of the world at present? No it is not Saudi Arabia or Russia or any of the other OPEC nations, it is the United States with strong support from Canada. Fraking for natural gas and opening areas to drilling plus new drilling techniques has unleashed a new global powerhouse in the world of energy. The United States is awash with natural gas and is producing more oil per day than Saudi Arabia (some people question this last metric but all agree that if it is not producing more oil right now it will be by the end of 2015). I have argued that this change in the balance of power is more important than anything else we have witnessed in the past 20 years as not only does this shift the global balance of power once again firmly towards the United States, it could be the source of renewed wealth and growth in a country in dire need of a way out of the hole dug by years of overspending.
Let's first look at the job requirements for this energy boom. There are reports of a shortage of welders to weld the pipes and other steel structures required, ships, storage units, refineries, dredgers to keep the Houston water way deep enough to allow larger vessels to navigate the ports, ports, engineers, construction crews, LNG plants and more all needed to support this huge and growing industry. Wages are spiraling higher in this industry as the shortage of skilled workers is being felt. The industry is hiring thousands of people who are relocating to places like North and South Dakota and various other inland states. Small towns are bursting at the seams trying to accommodate the influx of people. All in all it is a great time to be in the oil trade in the United States.
The export of refined oil is also growing and refineries are running at full capacity. More are needed to keep up with both the global demand for refined oil and the supply of oil flowing in from the north (the bulk of the refiners are in the southern states). As the Keystone pipeline is locked up in congress oil is being shipped in trucks, barges, ships and railroad cars. With all this oil moving around the country it is surprising that there have not been more catastrophes, particularly when you learn that a lot of the railroad cars shipping the oil are old and do not have the safety features of newer cars. The reason is that there is no requirement to have new cars built but I would imagine that this law will soon be changed.
Assuming that congress or the environmentalists do not shut this industry down, the longevity of the business could be enough to suck up a large enough portion of the population to make a dent in the stubborn unemployment numbers. While I doubt that congress will create policies to shut off this massively important and hugely influential lobby group, the environmentalists may slow down growth with lawsuits and other maneuvers (just look at the Keystone pipeline project). They are alarmed (with good reason) at the impacts that another massive spill could have; not to mention the issues with fraking such as leaking oil into aquifers, earthquakes and the release of toxins into the atmosphere to name just a few. That said it appears that this industry will win out and that the economic benefits will be felt for years to come.
So if that is the case then there is suddenly a huge shift in global power. Russia for example has relied on its energy and particularly its natural gas shipments to Europe to bully its way to concessions. The United States and northern African nations now have more than enough natural gas capacity to provide Europe with natural gas. As time progresses Europe should and is building LNG facilities to allow for shipments of LNG to come from these nations undermining the Russian threat. While this will take a while it certainly is something I am sure is at the back of the Kremlin's mind during these tense times.
The Middle East has always been a hot spot and the United States has spent trillions of dollars over the years trying to secure its oil requirements. With this requirement waning it will be interesting to see how this impacts future administrations and how they view conflict in that region. Certainly the United States will want to ensure a peaceful region and continue to purchase energy from the Middle East but with a stable supply of energy at home it may make it less prone to attack and more prone to sanctions. A smaller military requirement would also save the country tens of billions of dollars a year and go a long way to getting the budget back in order.
So while I am not going to go out and say that this is our way out, what I will say is that handled correctly the explosion in the energy business in the United States is going to have a profound economic and social impact on the globe over the next twenty plus years. Let's hope that the industry manages itself with integrity and that congress uses the new influx of tax dollars to invest wisely rather than fritter away another, if not their last, opportunity.
Friday, March 28, 2014
Friday, March 21, 2014
Yellen's Unemployment Focus
"We know we're not close to full employment, not close to an employment level consistent with our mandate, and unless inflation were a significant concern, we wouldn't dream of raising the federal funds rate target." - Janet Yellen Federal Reserve Chair
The quote above is from Janet Yellen's first Federal open Market Committee and I have to say that it is refreshing that at least she is speaking in relatively easy to understand sentences. Remember Alan Greenspan? One of my favorite quotes from him was, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." He was the master of disguising his meanings and for some reason everyone loved him mainly because the stock market went on a tear to remember.
Yellen has a different problem to Greenspan in that no matter what she says or does it will be incredibly hard to get the economy kick started and remove the Federal Reserve stimulus and the excess money printed by her predecessors without creating either a very bad recession or huge inflation. Greenspan on the other hand was the first to print money so the impact was huge with small denominations of cash. Bernanke took printing to an unprecedented level and after it had little impact (other than to the stock market) he handed over the reigns to Yellen to try to deal with the coming issues. So it was interesting to listen to the new Federal Reserve Chair talk about her main concern at the present time which is unemployment. Her belief is that interest rates should remain low until such time as unemployment picks up and she detailed the metrics that she is looking at to track improvement. Fortunately I think she is on the right track with her employment metrics but I have little faith that her policies will have much impact.
1. U-6 - The U-6 is a broad measure of unemployment that I have been following for years. This measure captures the underemployed (those who would prefer a full time job but have to work part time as there are no full time positions open). By this measure the unemployment rate is 12.6% a far worse level than the 6.7% reported by the unemployment number.
2. Long-term unemployment - This measure looks at people out of work for 6 months or longer. In 2010 this stood at 45% of the unemployed and has since improved to 37% but is well above the 17% pre-recession number.
3. Labor force participation rate - This measure I have also tracked for years. The number reflects people able to work versus the number working and in December it fell to its lowest level in 35 years. This is terrible for growth prospects as less people working means lower GDP and economic growth prospects.
4. Quitting and hiring - People only quit their jobs if they think that a better opportunity presents itself (being fired is a whole different story of course). Therefore the more people that quit the better the health of the job market and thereby the economy. Yellen also wants to look at hiring as this also shows a poor or robust economy. So far the numbers have revealed that while the "quitting" index has improved, the number of hirings is still woefully inadequate. To me this measure smacks of people not only being fed up with their job but also relying on social handouts rather than showing opportunity.
5. Wage growth - Growth in wages has been anemic. As I have discussed in earlier blogs earnings are at the equivalent of 1980 earnings (when factored against inflation) and their current growth of 2% is still not keeping up with inflation. While the Federal Reserve has as its benchmark an inflation rate of 1.2% you and I know that this number is a very poor reflection of the true increases in our daily cost of living.
With inflation low and unemployment anemic, the Federal Reserve has a lot of latitude in what it can do to stimulate the economy. The question therefore is will the new Fed Chair implement policies to take the bull by the horns and unfortunately that answer is an unequivocal no!
As you can see from the unemployment metrics the economy is not on a good footing. Employment leads to wages, wages lead to spending and spending leads to a healthy economy. Until these measures can improve her mindset is to keep rates low as that is the key to boost economic growth. It is interesting then that she continues to cut the amount of monthly stimulus as past Federal Chairs have looked at stimulus as the only way to engineer growth and keep interest rates in check. Maybe she realizes the futility of these methods or maybe she is just testing the market to see how low she can go in terms of stimulus before things take a turn for the worse. Either way she will not be able to keep rates low without artificially supporting them with more money and in all honesty as Bernanke showed, neither of these policies will stimulate employment.
So once again we have a Federal Chair that monitors the numbers but does not provide a policy that will address the underlying issues. Until such a policy is put in place it is just a matter of time before she is forced to increase monetary stimulus in a another futile effort to grow the economy. While she is new she should take the opportunity to implement new policies but it appears that she will continue down the same path until there is a problem. Why try to improve something until it breaks? To me this is equivalent to standing in front of the Hoover Dam waiting for the wall to break even while you see cracks appearing so I choose to move out of the way of the coming floods.
The quote above is from Janet Yellen's first Federal open Market Committee and I have to say that it is refreshing that at least she is speaking in relatively easy to understand sentences. Remember Alan Greenspan? One of my favorite quotes from him was, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." He was the master of disguising his meanings and for some reason everyone loved him mainly because the stock market went on a tear to remember.
Yellen has a different problem to Greenspan in that no matter what she says or does it will be incredibly hard to get the economy kick started and remove the Federal Reserve stimulus and the excess money printed by her predecessors without creating either a very bad recession or huge inflation. Greenspan on the other hand was the first to print money so the impact was huge with small denominations of cash. Bernanke took printing to an unprecedented level and after it had little impact (other than to the stock market) he handed over the reigns to Yellen to try to deal with the coming issues. So it was interesting to listen to the new Federal Reserve Chair talk about her main concern at the present time which is unemployment. Her belief is that interest rates should remain low until such time as unemployment picks up and she detailed the metrics that she is looking at to track improvement. Fortunately I think she is on the right track with her employment metrics but I have little faith that her policies will have much impact.
1. U-6 - The U-6 is a broad measure of unemployment that I have been following for years. This measure captures the underemployed (those who would prefer a full time job but have to work part time as there are no full time positions open). By this measure the unemployment rate is 12.6% a far worse level than the 6.7% reported by the unemployment number.
2. Long-term unemployment - This measure looks at people out of work for 6 months or longer. In 2010 this stood at 45% of the unemployed and has since improved to 37% but is well above the 17% pre-recession number.
3. Labor force participation rate - This measure I have also tracked for years. The number reflects people able to work versus the number working and in December it fell to its lowest level in 35 years. This is terrible for growth prospects as less people working means lower GDP and economic growth prospects.
4. Quitting and hiring - People only quit their jobs if they think that a better opportunity presents itself (being fired is a whole different story of course). Therefore the more people that quit the better the health of the job market and thereby the economy. Yellen also wants to look at hiring as this also shows a poor or robust economy. So far the numbers have revealed that while the "quitting" index has improved, the number of hirings is still woefully inadequate. To me this measure smacks of people not only being fed up with their job but also relying on social handouts rather than showing opportunity.
5. Wage growth - Growth in wages has been anemic. As I have discussed in earlier blogs earnings are at the equivalent of 1980 earnings (when factored against inflation) and their current growth of 2% is still not keeping up with inflation. While the Federal Reserve has as its benchmark an inflation rate of 1.2% you and I know that this number is a very poor reflection of the true increases in our daily cost of living.
With inflation low and unemployment anemic, the Federal Reserve has a lot of latitude in what it can do to stimulate the economy. The question therefore is will the new Fed Chair implement policies to take the bull by the horns and unfortunately that answer is an unequivocal no!
As you can see from the unemployment metrics the economy is not on a good footing. Employment leads to wages, wages lead to spending and spending leads to a healthy economy. Until these measures can improve her mindset is to keep rates low as that is the key to boost economic growth. It is interesting then that she continues to cut the amount of monthly stimulus as past Federal Chairs have looked at stimulus as the only way to engineer growth and keep interest rates in check. Maybe she realizes the futility of these methods or maybe she is just testing the market to see how low she can go in terms of stimulus before things take a turn for the worse. Either way she will not be able to keep rates low without artificially supporting them with more money and in all honesty as Bernanke showed, neither of these policies will stimulate employment.
So once again we have a Federal Chair that monitors the numbers but does not provide a policy that will address the underlying issues. Until such a policy is put in place it is just a matter of time before she is forced to increase monetary stimulus in a another futile effort to grow the economy. While she is new she should take the opportunity to implement new policies but it appears that she will continue down the same path until there is a problem. Why try to improve something until it breaks? To me this is equivalent to standing in front of the Hoover Dam waiting for the wall to break even while you see cracks appearing so I choose to move out of the way of the coming floods.
Friday, March 14, 2014
Growth AND Value - Where More IS Better
When I was playing a lot of golf my golf coach would always make fun of the fact that when I made a change to my golf swing or setup that improved my game I would naturally and unconsciously do more of the change which would ultimately result in disaster. There was a tipping point when a small change was good but more was not better! I can still hear his words ringing in my ears "More is not better!"
This tip could be taken to a number of places and in most cases finance is one of them. Buying more of a losing stock is one example as all that more did was lose you more money. Adding more risk to an already risky investment is not better and neither is adding more debt to an otherwise overly levered investment. One place where it does ring true however is finding stocks with better growth prospects than its peers and having more value. Also if you add the two together; doubly more is doubly better (I know poor English but I could not resist).
Typically investors look for value stocks or growth stocks but it is only when you find a deep value stock that has extraordinary growth prospects then you truly have a home run. The idea of diversification is to scatter money around so that you might get lucky and hit one of these but this waters down the overall returns which is why people search for these stocks all their lives. I have found a few of these in my life and let me tell you they will exceed your wildest expectations of returns. The hardest part is not selling too early but that is the art. The science is finding these stocks.
Now before you get too excited I am not about to tell you the names of these companies for the simple reason that since finding DDD I have yet to find another one. If I do I will let you in on the secret but until then it is your job to search for the next one (and let me know) and believe me it is not easy and I have found that luck often plays a part. Take for example one fortuitous day when I met the CEO of Encore Capital, a local company in San Diego. Carl was an incredibly detailed person and he had the company whipped into shape during his tenure as the turnaround expert. The market capitalization as represented by the stock price was languishing at a third of cash flow. That is right, you could have purchased the entire company using only one third of one year's cash flows. The market had forgotten about this company. It was a deep value stock.
Now for those of you searching for deep value (as I have done most of my life) you will often times find that the stock price does not move for years. It remains deep value forever and you are not rewarded for your wonderful find. The reason for this is that while it may be a safe investment that is producing significant cash flow, the growth prospects do not warrant a premium over the market and for this reason it sits, stuck as a deep value stock forever, increasing in value slowly over time as the cash position improves. Holding this position results in opportunity costs and selling is hard because you are sure that the moment you sell it will take off. The result is lackluster performance.
Now Encore at the time was not only a deep value play but its growth prospects were huge. The market for their products was expanding and with it Encore's prospects. I therefore loaded up on as much of their stock as was possible without moving the price of the share and then once I was filled sat back and waited. Now as its growth started to accelerate right as I was buying it did not take long for the market to wake up to this fact and within 18 months the stock had appreciated by 1,500%!
So when you look for stocks make sure that you are digging around not only for value but also for growth. Value without growth often lags the market and growth without value increases the risk of the investment tremendously. Growth stocks can trade at price to earnings multiples in the hundreds as investors drive the stock into orbit expecting the growth to continue forever. The risk is that once the company fails to grow as quickly, not only does the stock take a hit from the reduced profitability but also from the narrowing of the multiple - a double whammy which shows the risk inherent in buying a growth stock when it has already left the starting blocks. You need to jump on the bandwagon early and this is why a search for value plays is necessary even if you are an inherent growth investor.
Finding a deep value stock with growth prospects is thus the best possible way to minimize the risk of the investment and maximize the return. This will require a lot of patience as I would be surprised if you manage to find more than 20 in your lifetime. I say that not to scare you away from looking but to let you know that the market is relatively efficient and will more often than not reward these stocks well before you find them. I also mention it because if you work hard enough at it and then find one, do not hesitate but back up the truck and load as much on board as you can as this will be a life changing investment.
This tip could be taken to a number of places and in most cases finance is one of them. Buying more of a losing stock is one example as all that more did was lose you more money. Adding more risk to an already risky investment is not better and neither is adding more debt to an otherwise overly levered investment. One place where it does ring true however is finding stocks with better growth prospects than its peers and having more value. Also if you add the two together; doubly more is doubly better (I know poor English but I could not resist).
Typically investors look for value stocks or growth stocks but it is only when you find a deep value stock that has extraordinary growth prospects then you truly have a home run. The idea of diversification is to scatter money around so that you might get lucky and hit one of these but this waters down the overall returns which is why people search for these stocks all their lives. I have found a few of these in my life and let me tell you they will exceed your wildest expectations of returns. The hardest part is not selling too early but that is the art. The science is finding these stocks.
Now before you get too excited I am not about to tell you the names of these companies for the simple reason that since finding DDD I have yet to find another one. If I do I will let you in on the secret but until then it is your job to search for the next one (and let me know) and believe me it is not easy and I have found that luck often plays a part. Take for example one fortuitous day when I met the CEO of Encore Capital, a local company in San Diego. Carl was an incredibly detailed person and he had the company whipped into shape during his tenure as the turnaround expert. The market capitalization as represented by the stock price was languishing at a third of cash flow. That is right, you could have purchased the entire company using only one third of one year's cash flows. The market had forgotten about this company. It was a deep value stock.
Now for those of you searching for deep value (as I have done most of my life) you will often times find that the stock price does not move for years. It remains deep value forever and you are not rewarded for your wonderful find. The reason for this is that while it may be a safe investment that is producing significant cash flow, the growth prospects do not warrant a premium over the market and for this reason it sits, stuck as a deep value stock forever, increasing in value slowly over time as the cash position improves. Holding this position results in opportunity costs and selling is hard because you are sure that the moment you sell it will take off. The result is lackluster performance.
Now Encore at the time was not only a deep value play but its growth prospects were huge. The market for their products was expanding and with it Encore's prospects. I therefore loaded up on as much of their stock as was possible without moving the price of the share and then once I was filled sat back and waited. Now as its growth started to accelerate right as I was buying it did not take long for the market to wake up to this fact and within 18 months the stock had appreciated by 1,500%!
So when you look for stocks make sure that you are digging around not only for value but also for growth. Value without growth often lags the market and growth without value increases the risk of the investment tremendously. Growth stocks can trade at price to earnings multiples in the hundreds as investors drive the stock into orbit expecting the growth to continue forever. The risk is that once the company fails to grow as quickly, not only does the stock take a hit from the reduced profitability but also from the narrowing of the multiple - a double whammy which shows the risk inherent in buying a growth stock when it has already left the starting blocks. You need to jump on the bandwagon early and this is why a search for value plays is necessary even if you are an inherent growth investor.
Finding a deep value stock with growth prospects is thus the best possible way to minimize the risk of the investment and maximize the return. This will require a lot of patience as I would be surprised if you manage to find more than 20 in your lifetime. I say that not to scare you away from looking but to let you know that the market is relatively efficient and will more often than not reward these stocks well before you find them. I also mention it because if you work hard enough at it and then find one, do not hesitate but back up the truck and load as much on board as you can as this will be a life changing investment.
Friday, March 7, 2014
Making Sense of What They Say
Today's blog is a tongue in cheek look at some of the crazy things that are said by analysts and pundits on television screens and radio shows around the globe and how meaningless these sayings are. The funny part is that often we take these things seriously rather than realizing the stupidity of the situation. I hope you enjoy this light hearted look at the investment industry particularly as I am sure to have said numerous of these on my radio show and throughout my blog posts!
1. "We are cautiously optimistic." - and you are also an oxymoron as either you are cautious or your are optimistic but you can't have both!
2. "We are neutral on this stock." - Really? So you own the stock and are praying for a recovery or you are dumping it to some other sucker or you have really just wasted my time and yours by talking about this!
3. "We are waiting for more certainty." - Good luck with that, oh, and when you find certainty let me know as that is definitely the day I dump my entire position.
4. "He was tired of throwing his money away renting so he bought a house." - Wow he must have paid cash because otherwise he is throwing his money straight to the bank. (Obviously there is upside to owning a home that is not available to renters but then say it properly.)
5. "Today the market fell (or rose) by 85 points as investors exited (bought) on the news that ABC Corp earnings were worse (better) than expect." - Yeah right that is exactly why the market moved today, every other stock moved in tandem because of this one stock's earnings announcement. Please stop making things up.
6. "Earnings were positive except for a one time charge." - Then they were not positive they were negative and you my friend own that stock!
7. "Earnings missed estimates." - Why do earnings have to meet or exceed estimates? Obviously the estimates were wrong. Why do people buy stocks based on these estimates rather than the long term business outlook of the company (as Warren Buffet does) and why does the headline not say 'estimates missed earnings as the analyst once again failed in their prediction'?
8. "It's a stock pickers market." - So certain stocks have run and those are not part of the index in which you invested meaning that blindly investing in indices did not work this year. Let's hope that next year we can go back to business as normal burying our heads in the sand once again and expecting the future to take care of itself because we would hate to have to work to make money!
9. "There is a lot of cash on the sidelines." - I have looked and I cannot find a sideline anywhere. In fact when the person who sold their position took their cash to the "sideline" there had to be another person buying otherwise the stock would have gone to zero!
10. "The next Black Swan event will come from ..." - Poor Mr. Taleb, he must shudder every time someone mentions where the next Black Swan event will come from. The whole point here is that no-one knows where the Black Swans are and that is why they are so catastrophic when they appear. If we could predict the next Black Swan it would be a non event not a Black Swan event!
1. "We are cautiously optimistic." - and you are also an oxymoron as either you are cautious or your are optimistic but you can't have both!
2. "We are neutral on this stock." - Really? So you own the stock and are praying for a recovery or you are dumping it to some other sucker or you have really just wasted my time and yours by talking about this!
3. "We are waiting for more certainty." - Good luck with that, oh, and when you find certainty let me know as that is definitely the day I dump my entire position.
4. "He was tired of throwing his money away renting so he bought a house." - Wow he must have paid cash because otherwise he is throwing his money straight to the bank. (Obviously there is upside to owning a home that is not available to renters but then say it properly.)
5. "Today the market fell (or rose) by 85 points as investors exited (bought) on the news that ABC Corp earnings were worse (better) than expect." - Yeah right that is exactly why the market moved today, every other stock moved in tandem because of this one stock's earnings announcement. Please stop making things up.
6. "Earnings were positive except for a one time charge." - Then they were not positive they were negative and you my friend own that stock!
7. "Earnings missed estimates." - Why do earnings have to meet or exceed estimates? Obviously the estimates were wrong. Why do people buy stocks based on these estimates rather than the long term business outlook of the company (as Warren Buffet does) and why does the headline not say 'estimates missed earnings as the analyst once again failed in their prediction'?
8. "It's a stock pickers market." - So certain stocks have run and those are not part of the index in which you invested meaning that blindly investing in indices did not work this year. Let's hope that next year we can go back to business as normal burying our heads in the sand once again and expecting the future to take care of itself because we would hate to have to work to make money!
9. "There is a lot of cash on the sidelines." - I have looked and I cannot find a sideline anywhere. In fact when the person who sold their position took their cash to the "sideline" there had to be another person buying otherwise the stock would have gone to zero!
10. "The next Black Swan event will come from ..." - Poor Mr. Taleb, he must shudder every time someone mentions where the next Black Swan event will come from. The whole point here is that no-one knows where the Black Swans are and that is why they are so catastrophic when they appear. If we could predict the next Black Swan it would be a non event not a Black Swan event!
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