Global Market Comments
August 16, 2013
Fiat Lux
Featured Trade:
(WHY I LOVE/HATE THE OIL COMPANIES), (XOM),
(KNOWING THE PRICE OF EVERYTHING AND THE VALUE OF NOTHING)
(WHY BUFFET HATES GOLD), (GLD), (GDX), (ABX)
Exxon Mobil Corporation (XOM)
SPDR Gold Shares (GLD)
Market Vectors Gold Miners ETF (GDX)
Barrick Gold Corporation (ABX)
The first thing I do when I get up every morning is to curse the oil companies as the blood sucking scourges of modern civilization. I then fall down on my knees and thank God that we have oil companies.
You?ve got to love ExxonMobil (XOM), which constantly trades places with Apple (AAPL) for being the world?s largest company. This is why petroleum engineers are getting $100,000 straight out of college, while English and political science major are going straight on to food stamps.
I recommend (XOM) and other oil majors as part of any long-term portfolio. The price of oil has gone up in my lifetime from $3 a barrel up to $149, and then back down to $107 today. The reasons for the ascent keep growing, from the entry of China into the global trading system, to the rapid growth of the middle class in emerging nations. They?re just not making the stuff anymore, and we can?t wait around for more dinosaurs to get squashed.
Oil companies aren?t in the oil speculation business. As soon as a new supply comes on stream, they hedge off their risk through the futures markets or through long term supply contracts. You can find the prices they hedge at in the back of any annual report.
When oil made its big run a few years ago, I discovered to my amazement that that (XOM) had already sold most of their supplies in the $20 range. However, oil companies do make huge killings on what is already in the pipeline.
Working in the oil patch a decade ago pioneering the ?fracking? process for natural gas, I got to know many people in the industry. I found them to be insular, God fearing people not afraid of hard work. Perhaps this is because the black gold they are pursuing can blow up and kill them at any time. They are also great with numbers, which is why the oil majors are the best managed companies in the world.
They are also huge gamblers. I swallow hard when I see the way these guys through around billions in capital, keeping in mind past disasters, like Dome Petroleum, the Alaskan oil spill, Piper Alpha, and more recently, the ill-fated Macondo well in the Gulf of Mexico. But one failure does not slow them down an iota. The ?wildcatting? origins made this a faith based industry from day one, when praying was the principal determinant of where wells were sunk.
Unfortunately, the oil companies are too good at their job of supply us with a steady and reliable source of energy. They have one of the oldest and most powerful lobbies in Washington, and as a result, the tax code is riddled with favorite treatment of the oil industry. While social security and Medicare are on the chopping block, the industry basks in the glow of $53 billion a year in tax subsidies.
When I first got into the oil business and sat down with a Houston CPA, the tax breaks were so legion that I couldn?t understand why anyone was not in the oil racket. Every wonder why we have had three presidents from Texas over the last 50 years, and are possibly looking at a fourth?
Three words explain it all: the oil depletion allowance, whereby investors can write off the entire cost of a new well in the first year, while the income is spread over the life of the well. This also explains why deep water exploration in the Gulf is far less regulated than California hair dressers.
No surprise then that that the industry has emerged in the cross hairs of the debt ceiling negotiations, under the ?loopholes? category. Not only do the country?s most profitable companies pay almost nothing in taxes, they are one of the largest users of private jets.
It is an old Washington nostrum that when things start heading south on the domestic front, you beat up the oil companies. It?s the industry that everyone loves to hate. Cut off the gasoline supply to an environmentalist, and he will be the one who screams the loudest. This has generated recurring cycles of accusatory congressional investigations, windfall profits taxes, and punitive regulations, the most recent flavor we are now seeing.
But imagine what the world would look like if Exxon and its cohorts were German, Saudi, or heaven forbid, Chinese. I bet we wouldn?t have as much oil as we do today, and it wouldn?t be as cheap. Hate them if you will, but at least these are our oil companies. Try jamming a lump of coal into the gas tank of your Prius and tell me what happens.
Love Them, Hate Them or Both?
As a fanatical follower of the price of everything, I have long been an avid viewer of the television program, Antiques Roadshow, for 14 years, and the English version of the show well before that. This is where you learn what stuff like majolica is. Many aspiring collectors come into the open appraisal events hoping they have inherited something of untold value from their late Aunt Gertrude.
The show has had its ups and down, and was once ensnared in a scandal where appraiser deliberately overvalued objects to boost ratings. But some of the stories that come with these objects are amazing, and their educational value can?t be underestimated. Once, they really did discover an original seal of the United States, missing since the British burned Washington DC in 1814.
The knowledge that I gained over the years has allowed me to swoop in and pick up incredible bargains, everywhere from Sotheby?s auctions to local garage sales. Some of my better deals have included buying a pair of prewar German Zeiss binoculars for $10 (I recently saw an identical pair inside U-505 at the Museum of Science and Industry in Chicago). I also managed to score three cases of 1909 and 1915 Massandra port and sherry, last own by Czar Nicholas II of Russia, for $25 a bottle. Current market price: $1,000. The taste is amazing.
So it was with some amusement that I noticed yesterday that the show recently made its greatest find in history. A man in Tulsa, Oklahoma appeared with five tea cups that he had purchased at a local antique store in the seventies for a couple of bucks. The Chinese antiquities expert was aghast, informing the surprised owner that these dated from the 17th century, were made from extremely rare rhinoceros horn, and were estimate to worth $1-$1.5 million.
It turns out that the previous record for an object was also Chinese, some? $1 million for some carved jade bowls. It has long been a rule of thumb that when a country sees of burst of strong economic growth, its antiques rise in value. I saw this happen to Japanese screens, swords, and woodblock prints in the seventies and eighties during their economic boom, and it is happening now with Islamic antiquities.
The Tulsa show will air on PBS in 2012. In the meantime, I will continue to visit the local garage sales with a sharp eye. I wonder about that copy of the Declaration of Independence I have lining an attic drawer upstairs. Could it be the real thing?
How about $300,000 Each?
The ?Oracle of Omaha? expounded at length today on why he despises the barbarous relic. The sage doesn?t really care if the yellow metal hit an all-time high today of $1,440. He sees it primarily as a bet on fear. If investors are more afraid in a year than they are today, then you make money. If they aren?t, then you lose money. If you took all the gold in the world, it would form a cube 67 feet on a side, worth $7 trillion. For that same amount of money, you could own other assets with far greater productive power, including:
*All the farmland in the US, about 1 billion acres, which is worth $2.5 trillion.
*Seven Exxon Mobil?s (XOM), the largest capitalized company in the US.
*You would still have $1 trillion in walking around money left over.
Instead of producing any income or dividends, gold just sits there and shines, letting you feel like you are King Midas.
I don?t know. With the stock market peaking around here, and oil trading at $115/barrel in Europe, a bet on fear looks pretty good to me right now. I?m still sticking with my long term forecast of the old inflation adjusted high of $2,300.
Maybe Feeling Like King Midas is Not So Bad
?Lacking standards, managements are tempted to shoot the arrow of performance, and then paint the bull?s eye around wherever it lands,? ? said ?Oracle of Omaha?, Warren Buffet, CEO and the largest shareholder in Berkshire Hathaway.
Global Market Comments
August 15, 2013
Fiat Lux
Featured Trade:
(CALIFORNIA MONEY DOWN THE DRAIN?)
(DEATH OF THE CONSUMER), (SPX)
?S&P 500 Index (SPX)
Who was the top paid state employee in California last year? The governor? The Chief Justice of the Supreme Court? How about the leader of the Senate?
Nope. It was a prison psychiatrist who took home an eye popping $838,706, most of it in overtime. I love it! The state drives people insane by sending them to jail, then tries to cure them with triple overtime. It is a wealth destruction mechanism that only a government could come up with.
These are among the revelations uncovered when state controller, John Chang, listed the salaries of all 256,222 state workers on a government website. Only the names were missing. In fact, over 500 state workers earned more than $250,000 a year, vastly more than they could take in with private sector jobs. At least nine made more than $500,000, the top ten taking in $5.8 million.
The data was made public after a huge outcry that followed the disclosure of the salaries of town officials in the small Los Angeles municipality, Bell, which topped $700,000. Those generous paydays resulted in criminal prosecutions. Maybe prosecutors should be casting a wider net?
Thanks, Sacramento! 
I often get asked why I never put out ?BUY? recommendations on consumer discretionary stocks. I promptly send them in search of the latest consumer spending figures at the Bureau of Economic Analysis, which do not paint a pretty picture (click following link ?http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm).
Since 2008, quarterly spending has come in at a scant 0.5%, the lowest figures since the Great Depression. You can blame deleveraging by the individual. While the government is telling us to spend more to stimulate the economy, we are in fact doing the opposite to put away more cash for a rainy day. They are also taking out an insurance policy against a future financial crash, which could come as early as next year.
You can find this in consumer debt, which saw a zenith of 130% of disposable income as recently as 2007. Today we are back down to 115%, possibly on our way to 70%, the 1970-2000 average. This is also reflected in the savings rate, which has risen from 1.2% in 2005 to 4.9% today, and may hit the long-term average of 8%.
If anything, these numbers are about to worsen dramatically as 80 million baby boomers retire. The over 65 crowd is not exactly known for the big spending, low saving ways, excluding myself.
I always tell people that being a former scientist and math major, I am a numbers guy. Just cut the BS, the spin, the apple and orange comparisons, and the ?independently? financed research, and give me the damn numbers. I can reach my own conclusions, even if you don?t like them.
The figures above are a major part of my own long term forecast for US GDP growth rate of 2.0%-2.5%. Decimating the middle class by shipping 25 million jobs to China assures decades long decline of standards of living. Should you expect anything more? Walmart (WMT) says that it now has a major problem in that its low-end customers are literally running out of money. This is not good for the industries specialized in this area.
Those looking for fodder that the US is coming down with the ?Japan Syndrome? and the two decades of lost economic growth this entails will find fertile ground here. US consumer spending still accounts for 70% of GDP growth. In Japan, it peaked in the late eighties at 20%. So the loss of the consumer will be far more damaging here than it is in the country that is suffering its third decade of flat economic performance.
In stock market terms, this means we may get a little more upside by the end of the year, possibly 70 points in the (SPX), but not much more. Off to a raging bull market we are not. The nimble may be able to profit from this, but for most it will be a snore.
?A house can be a nightmare if the buyer?s eyes are bigger than his wallet and if a lender ?often protected by a government guarantee?facilitates his fantasy,? said Warren Buffet.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more