Archive for the 'Economy' Category

Inflation or No Inflation?

Published
by
Doug
on August 17, 2008
in Commodities, Economy, Energy, Inflation and Stocks
. 0 Comments

Mish has listed some good reasons for why there is no cause for inflation fears. If a global slowdown is awaiting us in the future, this of course would mean that commodities and materials would continue their fall in prices.

However, at the moment, its difficult to see what appears to be great opportunities in the energy-related sectors. One stock that I’ve been eying is closed-end fund Tortoise North American Energy Corporation (TYN).

Recently, TYN has been trading at a steep discount to its NAV. For the past couple of weeks TYN has traded at 15-20% discount. I’m fairly certain the large increase of the discount to NAV is due to the large commodities correction: people simply wanted out of TYN. Also, TYN’s price has visited an all-time low and it has a very good distribution rate of 8.14%.

I believe TYN would be a good target for an activist like Bulldog Investors or Western Investment for the simple reason that TYN has traded at a steep discount since its inception in 2005. If an activist investor were to become interested in closing this large discount, I think hedging would be relatively easy.

A Modest Proposal From Macro Man

Published
by
Doug
on July 23, 2008
in Economy, Humour and Money
. 0 Comments

Always speaking in the third person, Macro Man puts forth a modest proposal - perhaps even more modest than a Jonathan Swift-like proposal - to fix the economic and financial malaise that’s hit the United States over the past few years:

What he’s come up with is a modest proposal that should restore the fiscal health of the United States, reduce a large portion of future liabilities, and set the country on the road to economic health and prosperity. The assumptions that Macro Man used in his calculations are pretty modest, and while the identities of some of his suggested participants are a tad ambitious, he’s confident that his sums could work out in real life.

The first port of call is to take profit on a number of 18th century transactions conducted by the US Government. Top of the list is the Louisiana Purchase, which was consummated in 1803 for the princely sum of $23,213,568. To derive a current marketable value, Macro Man calculates an annual cash flow by multiplying state GDPs by 18% (the proportion of US nominal GDP that the Federal government receives in tax revenue) and assigns a modest P/E multiple of 8 to the result. Perhaps some banks or Donald Trump would assign a higher multiple to these one-of-a-kind assets, but Macro Man prefers to dwell in the realm of reality.

In any event, selling the Louisiana Purchase back to the European Union would get rid of Arkansas, Colorado, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, North Dakota, Nebraska, Oklahoma, South Dakota, and Wyoming. Using the methodology described above, Macro Man reckons the US Government could raise $2.34 trillion. Good thing the euro’s so strong! You’ll agree that the price seems eminently reasonable…after all, it’s less than 50 times as much as InBev paid for Anheuser-Busch.

Macro Man continues on. The cash that could be raised in this method would be quite substantial.

Rebel Yid’s Random Predictions

Published
by
Doug
on June 30, 2008
in Economy, Elections, Energy and Politics
. 0 Comments

Rebel Yid has posted a list of random predictions. I’d like to address each one of them.

McCain will defeat Obama by 6 % points. McCain will be propelled by significant reduction in troop deployments and successes in Iraq. Obama will suffer further setbacks after debates with McCain.

Can an old, conservative white dude beat a young, liberal black guy named Barack Hussein Obama? As the election process progresses, Obama will lose the halo and McCain will prove himself in debate, but I think 6% is far too generous. I think McCain will win by 3% at most.

Oil will be below $100 per barrel in 6 months. High prices will deflate when market absorbs news of new supplies, and financially sound alternatives; particularly improvements in battery technology.

No argument here. The higher oil goes, the faster it will fall.

The mortgage banking debacle will bottom on the news of several consolidations and purchases of regional banks by larger players, one of them being Warren Buffet’s Berkshire Hathaway and its companies.

Yes, there will be a bottom, and yes, the bottoming process will most likely begin with consolidations and purchases by larger players. I wonder if Berkshire will purchase a bank? Wells Fargo? Wachovia? SunTrust?

Food prices will spike on the Midwestern floods, but will recover quicker than the market expects and drops below current costs.

Interest rates will slowly but steadily climb as the dollar recovers strength, oil prices reverse their climb, and speculative premiums disappear in commodities.

If the dollar can find any sort of meaningful strength, oil and commodities will reverse to the downside.

The price of hybrids will fall as production increases to satisfy higher demand and the costs of better battery technologies are spread over the larger consumer base. New delivery systems and business models will also reduce the price of battery driven automobiles.

Democrats will cave on the energy front and support more domestic drilling, more refining capacity and more nuclear power plants. This will happen largely as a result of these energy issues becoming the forefront of the election, and will be seen as a major reason for Obama’s defeat.

I’m not so sure about the price of hybrids falling this year, but perhaps next year. I also agree that Dems will cave on the energy front. A lot of “conservative” Dems were elected two years ago and I think this group is far more amenable to domestic drilling, increasing refinery capacity and even nuclear power.

Global warming will become a dead issue under new evidence and climate trends. It will quietly go away as every other environmental doomsday scenario has.

It’s hard to imagine that global warming will ever go away.

A new model for higher education will start to make current college institutional structures obsolete, as higher tuition costs do not translate into better educations and the college value paradigms collapse.

Foreign language education becomes a booming business.

A new model for higher education will eventually become dominant, but this will be a trend that will be at least three decades in the making. Also, foreign language education will NOT become a booming business any time soon.

Iran unseats Ahmadinejad and adopts a more pro western stance, but still out of pride does not want to reverse its progress on atomic energy. The political change will be viewed as the most successful application of an economic boycott in history.

I’d like to believe this will happen, but it’s hard for me to imagine that the mullahs would have allowed Ahmadinejad to be elected if they did not approve of his views. But when Ahmadinejad is replaced, his successor will be much more moderate in tone.

Foiling Conventional Wisdom, Another Google Freebie, and More Financial Troubles Ahead

Published
by
Doug
on June 4, 2008
in Economy, Investing and News
. 0 Comments

Mark Hulbert writes about a new study that has found that over the long term, stocks dropped from an index generally outperform those that are added. The study is entitled “The Long-Term Impact from Russell 2000 Rebalancing.”

Google recently announced it is provding free, real-time quotes on NASDAQ securities. I suspect that it won’t be long before there are free real-time quotes for all securities on the other major exchanges.

Alphaville reports that Lehman is not doing so well and people are starting to lose confidence in it once again. Lehman might soon go the way of Bear Stearns.

Mish writes about more evidence that shows we are in a recession, namely pointing to a NYT article describing how state and city government have not yet cut back on their budgets. When budgets are cut back, the economy will worsen.

America and Macon Going to the Pawn Shops

Published
by
Doug
on May 1, 2008
in Economy and News
. 0 Comments

The economy is clearly not what it once was. Americans and Maconites are cutting back on spending and are stopping by the local pawnshops and eBay to pick up some extra cash in exchange for the crap they don’t need.

Americans unload prized belongings to make ends meet. (AP)

Pawn shops receive more traffic as times become financially tougher. (Macon.com)

Low Spending Is Taking Toll on Economy. (New York Times)

Big Retailers Scaling Back Expansion Plans and Shutting Stores. (New York Times)

Capitalists Turn to Intervention and Socialists to Laissez Faire

Published
by
Doug
on March 31, 2008
in Banks, Credit, Economy, Federal Reserve, Government and Money
. 0 Comments

Ben Bittrolff of The Financial Ninja provides more excellent analysis and commentary on the current crises in the financial sectors.

First, Bittrolff argues that the Fed has done nearly all that it can do to prevent a total collapse of confidence in the financial systems and markets when he writes, “The Fed has almost run out of ammo. Much like George Soros on Black Wednesday, when he ‘broke the Bank of England,’ global capitalists are damn near close to breaking the Fed. 60% [of the $700 billion in Treasury securities on his balance sheet] has been committed and it doesn’t seem to be working. Another push and things could unravel quickly…”

Second, it seems inevitable that Citigroup will be breaking itself up over the coming years. Bittrolf sees Citirgoup’s separation of its credit card business from its banking business is the first step of the pending dismantling of Citigroup.

But, what struck me the most is this simple statement: “It is truly humorous that the Socialists across the pond are the one’s considering taking the ‘laissez faire’ approach while the CHAMPIONS of Capitalism over here are pounding the table for mass intervention.” I don’t think there could be a more telling signal of the immense troubles of the financial sector.

Weak Economy Slows Cargo and Idles Railcars

Published
by
Doug
on March 30, 2008
in Charts, Economy, Stocks and Transportation
. 2 Comments

The AP reports that BNSF Railway Co., the nation’s top hauler of container rail freight, is parking miles of railcars in Montana and elsewhere because there isn’t enough freight to keep them rolling:

Cars that often carry 40-foot containers of goods shipped from Asia stand like an iron fence between the Missouri River and this Montana burg known for world-class fly fishing. They stretch as far as Sandee Cardinal can see when she stands outside her home on the river’s west bank between Helena and Great Falls.

“What is that but a symbol of how America is down in the dumps right now?” Cardinal asked as she gazed at the cars that haven’t moved for about three months.

The cars parked are the type that haul cargo from ships on the coast to points inland, mainly imported goods — an area that’s starting to slow down due to the weak economy. Analysts say transportation usually is among the first sectors to show signs of a downturn in the economy and with Americans feeling pinched — employers eliminated 63,000 jobs last month amid declining consumer confidence — it could be a while before the idle cars move.

Another piece of bad news for this RR company is that Archer Daniels Midland is suing them.  ADM is accusing the 5 big railroads of violating antitrust laws in fixing their fuel surcharges. Does not sound good for BNSF, does it?

Well, here’s a chart of BNSF Railway Co. (BNI). You can make the decision for yourself whether or not you would buy long or sell short.

032808 chart of BNI

As you can see, BNI recently made a new all-time high, but if you were going to trade on this news and chart, I think there’s a high probability that BNI will retrace.

Is it Here? Is the Recession Here?

Published
by
Doug
on March 27, 2008
in Charts, Economy and Recession
. 0 Comments

Real Gross Domestic PRoduct 4Q 2007

I’ve got two views that seem to be opposed to each other, both from blogs I frequent. The first comes from Todd Sullivan of ValuePlays. Sullivan does not seem to believe a recession is imminent or that we are even experiencing a recession at the moment. He argues that growth is just slowing and that we as a nation are simply spoiled:

It has been almost two decades since the last true recession in the US. I know we experienced slowdowns in the mid 1990’s and early 2001-2002 but if we are being honest, those were just simply bumps in the road. In Q4 1990, GDP fell 3% and Q1 1991 followed with a 2% drop from there. We have not had consecutive negative quarterly growth since then. In short, we are spoiled. Prior to the 1990-1991 recession, people had only go back 9 years in their memories to remember the last one. We are currently approaching year 19 which means there are a whole class of investors who have never actually experienced a recession in their investing lives…

The second view comes from Tim Iacono of The Mess That Greenspan Made. Tim looks at the same data as Sullivan, but seems to be much more cynical about the markets and the inevitable direction of GDP:

Earlier today, the Commerce Department reported that economic growth in the last quarter of 2007 was unchanged at 0.6 percent and growth slowed to 2.2 percent over the entire year, the slowest pace in five years.

The outlook is for zero real growth in the first quarter, which ends on Monday, and a contraction of one percent is now expected during the second quarter.

Those shrinking blue bars in the chart below will make all the difference in upcoming reports. The long-anticipated decline in personal spending may be at hand, though the demise of the American consumer has been oft-predicted, yet never realized before.

I am inclined to agree with the more negative outlook, but I would not mind if a recession does not manifest itself.

Business Activity Will Save the Economy, Not Consumer Spending

Published
by
Doug
on March 24, 2008
in Business, Economics and Economy
. 0 Comments

Rich Karlgaard of Forbes.com writes about how South Korea’s newly elected President seems to understand economics better than any of our own presidential candidates:

Wouldn’t it be cool if America elected a president in November who said things like this:

“Business is the foundation of the economy, and the economy will recover only when business activities are re-energized,” Mr. Lee said in a wide-ranging interview over the weekend. “And business here means big and small companies–and the workers and management of the companies.”

Unfortunately, this guy is not available. He is South Korea’s President Lee Myung-bak, the former CEO of Hyundai Construction.

How is it that some foreigners understand the ideas behind freedom and capitalism better than America, the country that once believed in and acted upon such ideas and ideals?

JPM Buys Bear Stearns for $2/Share

Published
by
Doug
on March 16, 2008
in Banks, Credit, Economy, Federal Reserve and Money
. 0 Comments

JPMorgan Chase Buys Bear Stearns for $240 Million:

March 16 (Bloomberg) — JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street’s fifth-largest securities firm.

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”

I’m not really sure whether this is a good or bad thing. Bear Stearns stock was trading in the low 30s last Friday. Does this severe depreciation of value mean than things are worse than we could have even imagined? Well, judging by the index futures as of this posting, things are looking bad, but who knows what things will be like next by the end of next week.

Here’s a list of some other recent articles on this mess I’ve been reading.