Monday, December 31, 2007

The Agriculture Trade



Since it's still the holiday season, how about another food post on New Year's Eve day. I haven't really talked about agricultural commodities on here except for a brief comment in January of 2007. At that time the deafening roar in the media and on Wall Street was that corn was going to be the next gold or thereabouts. I wrote at the time that I had a bet with farmer who was also affected by the media frenzy that soybeans would outperform corn in 2007. It's now almost a year later. From the date of that post corn is up a measly 25 cents give or take. And soybeans are up over 50%. Not a bad trade. Of course, that wasn't exactly a difficult call. The fundamentals supported soybean outperformance regardless of the deafening roar of frenzied media and the Wall Street hype machine. But did and do fundamentals support either commodity at these price levels? We are told so by Wall Street. And, we are generally told investment markets are all seeing, all knowing and efficient. It must therefore be true. But, wait a minute. Didn't equity markets lose $13-odd trillion in value post the 2000 bubble? Eh, what's a few trillion here and there? I have to digress a minute. This cult-ish intelligentsia view of the equity market is hilarious. In 2006 I heard a well known prognosticator hypothesizing that the stock market might be telling us another terrorist attack was going to happen. That had to be one of the most unintelligible comments I have heard to date. Now we've assigned some type of omniscience and clairvoyance to an auction medium? I prefer a Ouija board if I am going to conjure up the spirits.

I'm a farm boy so what is happening with agricultural commodities isn't exactly a foreign topic to me. And, I am also a consumer so it isn't exactly difficult to see food commodity prices are up substantially in many products including dairy and grains. As an aside, has anyone heard a single investment professional question the validity of this 20 year commodity bull market thrust upon us by Wall Street? Fundamentals required to support a twenty year commodity bull market are in extreme jeopardy. I'm more inclined to believe as I have written that we might see a lengthy period of vicious and very large swings in commodities. Of course, even that outcome isn't a foregone conclusion. In any event, I expect very large commodity price swings will decimate most investors. I wouldn't want to be one of the investors that has sunk hundreds of billions into base commodity futures and trillions into commodity related stocks unless I had done so as substantially lower price levels. Much like the other toxic trash Wall Street peddled to pension funds, investors and government agencies, I expect commodities too will blow up. I've seen many of Wall Street's quantitative studies used to pedal commodity investments based on historical performance versus equities. They are very flawed. But the color charts are pretty. After this initial cyclical swell caused by herding behavior, there is substantial risk on a go forward basis. Personally, I'd be happy to have ridden this trade to stratospheric heights and excuse myself from the party.

Above are charts of two companies in the agriculture business. One is Gehl and the other is Deere. I believe Gehl is the largest non-tractor agricultural equipment manufacturer in the U.S. with a very strong global growth footprint and similarly Deere the largest tractor manufacturer in the U.S. Also with a strong global footprint. Both of these companies are exposed to other markets including infrastructure, the new Wall Street focus.

Gehl was a very strong performer this cycle being up over 700% until mid 2006 when it cratered. Yet, since a low in the fall of 2006 Deere is up 300%. So, how is this divergence accounted for? How could two companies in the same markets be responding so differently to the same fundamentals? If agriculture was a sustainable booming market that we are led to believe, what has happened to Gehl? Is this a poorly managed company? Is it a company specific problem? Is their non agriculture business negating booming gains in agriculture? Or is it because Gehl is a company not generally followed by the herd on Wall Street, therefore more likely trading on fundamentals predicting the real outcome of the agricultural trade? Is there a mania in Deere driven by ample liquidity in its stock that has attracted quantitative hedge fund traders who use mindless metrics to drive investments to the stratosphere? Are those same quantitative models used to drive the underlying commodities to the same stratospheric valuations with no regard for future economics or fundamentals? The same models used to drive all global assets to stratospheric levels with no regard for future economics?

So, what again is the premise of this agriculture trade that has driven commodities and related stocks to levels similar or even more substantial than the technology bubble? That emerging markets are now rich beyond our wildest dreams and they will now be consuming nectar and ambrosia ad infinitum? Or is it all Alan Greenspan's fault? Has he created a global bubble that has consumed every corner of the world by running the printing presses in his basement? Uhhm. I don't think so on either count.
posted by TimingLogic at 1:18 PM links to this post

Wednesday, December 26, 2007

Crock Pot Barbecue Rib Recipe: A Lesson In Risk Management

How about a "lite" post on economics and risk management now that we are in holiday season. I knew I wanted to post this when I flicked on TV last week and reporters were showing a $25,000 dessert and a $73,000 cell phone as part of a segment on what gifts were hot for the holidays. If a $25,000 dessert isn't a sign of incredible avarice not seen in my life time, I don't know what could be. And, why is it $25,000? Because it contains edible gold leaf. Eating gold? What were those seven deadly sins again?

And, guess where one can buy this dessert? New York City. Home to the gluttonous bankers of Wall Street who have been making wild sums of money by doing unthinkably stupid things with your money. Being that we are in the early stages of Wall Street greed and gluttony being severely punished, how about a contrarian view? A big mound of barbecue for less than $10 and a few minutes preparation time.

This recipe is basically from good ole Betty Crocker with a few twists. The recipe makes enough barbecue for four large portions at a grand total price of about $6-7 if you use western style ribs. It's just as good as any restaurant and you can tweak the ingredients to personal taste.

Ingredients

3 1/2 lbs of pork ribs.
1/4 cup of brown sugar
1 tsp salt
1/2 tsp pepper
2 garlic cloves or equivalent garlic powder
1 medium onion
1/2 can cola
1 1/2 cups barbecue sauce. I like regular Open Pit for two reasons. 1) It is thick and sugary so it caramelizes in the crock pot. And 2) Because it has a smoky flavor so I don't need to use liquid smoke. Isn't liquid smoke made of nuclear waste?

What to do:

--Put ribs under a broiler until browned on all sides. 20 minutes or whatever it takes. This isn't making Epogen so don't worry about exactness. Or similarly put them on a grill to brown them on the outside. You really want to crisp or render the fat. It also removes much of the fat.
--Pour the cola in the bottom of the crock pot.
--Cut up the onion and throw it in the crock pot.
--Combine the rest of the ingredients and brush on ribs.
--Dump the ribs in the crock pot and turn the crock pot on high for about 4 hours. This time is variable and depends on your slow cooker. It could be longer.

You'll have plenty of sauce left over. Brush the ribs very hour or so with the extra sauce. Then, after the 4 hours or so dump all of the sauce on the ribs and cook for a final hour or so. I wait till near the end of cooking time because I don't want the sauce to caramelize or "burn" too early. You'll know when they are done. The ribs will be tender and the sauce thickens to be caramelly and gooey. If you don't like thick sauce, then try a thinner barbecue sauce.

You can also make this recipe on low heat as well but I use high heat as I believe it caramelizes the sugars in the sauce better. The low heat recipe would be about 8-10 hours. And if you are at work, you can dump all of the barbecue sauce in at the beginning.

Finally, I use western style ribs because you can usually find them for 99 cents a pound on sale anywhere in the U.S. (even in California) and they are all meat. No bones. Baby back ribs are also significantly more expensive: usually $5.99 a pound and up. And they are typically half bone by weight. Thus baby back ribs translate into about $12 a pound for the meat. That's 12x more expensive. Usually each westerns style rib weighs a pound to a pound and one half. You could actually use more ribs in this recipe but you'd have less sauce to slather all over the ribs. Or double the sauce recipe or whatever. If you use baby back ribs or regular ribs, you'll have to peel the membrane off of the inside of the ribs as well. That's another reason not to use them. That's a pain.

Your family can eat gourmet grub like a king on a price a pauper could afford. And, in times of uncertainty, what better risk management tactic makes this much sense?

Happy holidays!
posted by TimingLogic at 11:00 AM links to this post

Thursday, December 20, 2007

Happy Holidays

I probably won't be posting for a week or so. That is, unless I get into a hysterical typing mood. I hope I've somehow positively impacted your life in 2007. That maybe I've helped you look at many topics differently or that I've imparted something unique. I appreciate you reading my rants. I do love to write but 2008 might not be as prolific as 2007. We shall see. If anything on here is of any value, I'd ask you to share my blog with your friends or associates.

Hopefully, we'll all have a few weeks to recharge our batteries, spend some quality time with people important to us and maybe even spread a little holiday cheer. And, please don't forget those who are less fortunate.

Finally, a short video message from Santa himself.

posted by TimingLogic at 10:55 PM links to this post

The Auto Industry And The New Energy Bill

The Detroit News has an article highlighting the effects of slowing auto sales. Many fail to consider the tentacles the auto industry has into all aspects of the economy. From banking to suppliers to rails to trucking to real estate to suppliers to basic materials to semiconductors to retail and on and on. The secondary and tertiary jobs and associated economic impact are still quite staggering. Even after decades of job losses. The old adage "What's good for GM is good for America" still holds true. Although, we might now consider what is good for America is good for GM. That being transformational change in energy and transportation technology that could play very constructively into the economics of a refocused U.S. auto industry. An industry that is finally bottoming after forty years of gawd-awful management failures that caused a massive loss of company and employee wealth. These companies would have gone bankrupt long ago were they not monopolies or relative oligopolies.

Now we get a new energy bill in the U.S. There are many pieces to the bill but there are two primary objectives in scope. One, it raises the requirements on auto mileage requirements by about 40% over a period of time and two raises biofuel production to about 25% of today's total gasoline consumption in the U.S. Both are a tax on society. Each person needs to decide if the impact of that tax is worthwhile. Of course, the U.S. auto industry has become the pariah of environmental advocates. There is a plausible argument to be made, as Daniel Howes points out, they are unfairly being targeted to carry the burden of change. Personally I support these changes because the auto industry is still comparatively oligopolistic and stifles competition. Or put another way, the American government has shielded these companies with policies of corporatism. That may be bad and that may be good. But, given millions of Americans have lost their jobs over the decades due to what is likely the worst, most insular management outside of communism, I'm not sure that shielding had the intended consequences. (I find it ironic that the above article by Howes quotes Nancy Pelosi for blaming the auto industry for being major polluters when it has been her party's support of corporatism that has substantially created this very fact. And, as Howes points out, her state disproportionately contributes their share of greenhouse emissions. This is not a political statement of support or lack thereof for any political party. I actually like Nancy Pelosi. I'm simply pointing out an irony of political pandering that takes place every day by all politicians.) Plus the barriers to entry in this business are quite large on many fronts including massive capital requirements. In fact, Japan's auto business has really only succeeded in this space because of their government's protection and investment over the years as has been the case with American auto manufacturers. But everyone needs to realize there will be both intended and unintended consequences to each government mandate. Intended consequences of higher mileage requirements are obvious. What are the unintended consequences? They might not all be negative.

Companies, universities, inventors and government labs are working feverishly on energy solutions for biofuels and auto efficiciency as are other research institutions across the globe. Many alternative energy research projects are really quite amazing in their scope and attempted solutions. There are major technical hurdles but there are always major hurdles in the fields of research. And, research is often an ugly process whereby mistakes, miscalculations and surprises actually lead to discoveries more beneficial than the work intended. So, not only will we likely see advances in areas of focus, but energy research may yield surprising discoveries yet to even be considered. I'll continue to infrequently post some energy related topics on here but my rationale for the last handful of energy posts is more to dampen general opinions of fear that we are running out of oil and going to hell in a hand basket because of it. I don't intend to turn this into an energy or green blog as it's not my focus and there are many out there much more capable than I could ever be.

Re the energy bill auto mileage changes, I saw former Senator and generally brilliant Bill Bradley talk some time ago. I have no desire to calculate the accuracy of his statements but as I recollect, he opined that if the U.S. had mileage standards similar to Europe or Japan, we would not need to import any foreign oil. Does anyone have any more specifics to share? Regardless, the spirit of the comment is that we are far from doomed in our energy requirements. (Has anyone read Bradley's most recent book?) It's of no relevance but I find it rather ironic that the current incarnation of politics in the U.S. has had what I would presume is the most aggressive energy policy of any in history even before the passage of this bill. Yet no one seems to realize how much the U.S. government is underwriting alternative energy projects and research. I think someone needs a new press secretary.

While not a major component of the energy bill, it also phases out incandescent light bulbs. Right now, that means replacement with fluorescent light bulbs. The government Energy Star web site says if every American replaced one light bulb with a fluorescent, we'd save the world. There is a minor problem with that statement since fluorescents contain mercury. There needs to be a recycling program if this is the case or we'll be dealing with more unintended consequences than this being a tax on society. But, in any event, I believe this is a transitional technologyand we will probably end up with LED lighting of some sorts which has the potential for even higher efficiencies. A recent study showed that over a twenty year time frame, the adoption of LED lighting could save the U.S. $115 billion in energy costs and reduce atmospheric waste by 278 million metric tons. That's no small feat for a lightbulb and it is only representative of U.S. savings.

The point to the above remarks is not the precision of any numbers but the significant savings that could be achieved with minor advancements in efficiency and technology. As I've said so many times, it is extremely likely oil is a bubble and most certainly there is no scientific basis for peak oil. Even if there were, it isn't going to mean the end of civilization as some would have us believe.

Finally, re the Detroit News article above, the link to the Detroit News main automotive page is on the right side of my blog. The site has recently had a redesign with the addition of significant new content. Under the "Autos" tab there are now eight pages of automotive content. Much of it is updated daily. I believe the Detroit News auto journalists are some of the best in the world covering wide ranging topics impacting the auto industry. Nice site and cogent commentary. And, you get the side benefit of reading about the depressing state of finances in Michigan's government and their awful job job market. How much fun is that? As I've said before, if I were a billionaire, I'd be sopping up downtown Detroit real estate at brutally low prices. Detroit is a city with great recovery potential and there is no reason to believe Motown is down for the count.
posted by TimingLogic at 9:25 AM links to this post

Monday, December 17, 2007

The Federal Reserve's New Liquidity Injections And Other Ramblings Learned From The Dalai Lama

The Fed's actions this past Wednesday won't cure what ails the global economy. It wouldn't have fixed the problems a month ago, a year ago or any other time. Those who are now blaming the Fed for upsetting their predictions of global growth ad infinitum have found their scapegoat. The Fed. Fed actions might delay inevitability some period of time but that's about it. As we've discussed, the Federal Reserve doesn't control the economy. But, they do make a convenient scapegoat: everything the bulls have been telling you about forever growth in the global economy is now wrong because the Fed did it. Or so they will say.

The Fed does serve a generally constructive role even though you'd never believe it from reading much commentary. For every argument criticizing a decision the Fed made, one could probably present as compelling a counter argument as to why they did it. Not that I agree with all of their decisions or support all of their policies. But, that doesn't make me right either. Do they make mistakes? Sure. Is hindsight 20-20? Of course. But, frankly as I wrote quite a while ago, I couldn't think of a better chairman for today's ills than Ben Bernanke. Even though he is being ridiculed by many. Especially for not telegraphing his actions to financial markets. Well, to a certain extent, there is an argument to be made that Wall Street takes unfair advantage of the attempted transparency of the Fed. So, I'm not sure that being open to market forces deciding future policy is such a bad modus operandi when dealing with Wall Street. Greenspan learned to deal with this dilemma with doublespeak. Will Bernanke adopt a similar position over time? As long as all Fed actions are clearly transparent concomitant to their actions and Fed officials are openly articulating their thought processes in real time as has been the case, it allows them to refine their position with open criticism and feedback from market forces. That could lead to better and faster policy decisions. To date I believe it is very hard to argue with Bernanke's leadership. But to understand my support for Bernanke, you must realize that I don't hold the Fed responsible for the economy nor do I have some misguided belief that the Fed controls, fixes or saves the economy. If you somehow still hold to this myth of Fed omnipotence and their involvement being the primary fault that the world economy is losing steam, then please tell me how short term rates below market rates for a short period of time post 2000's market crash translated into what will very likely be posthumously called the biggest global asset bubble in history? Yet, it is likely the most commonly accepted position amongst stock market and economic bears that everything we are experiencing was because Greenspan did exactly what I stated above. He lowered rates below market rates briefly. And this caused billions of people in China, England, Brazil, Mexico, Germany, Spain, Australia, India, Canada, Russia, the U.S. and the rest of the world to create this bubble at the same time? The bear case using this argument is entirely inaccurate as is their constant bleating that the Fed is printing money. But it sells for many reasons. Of course, I could be entirely inaccurate and this might not be a global asset bubble. Valuations for assets on a global scale not witnessed at any time in history might just be a new state reflecting new global wealth. That is really quite funny. But, that too is also a position held by many who are bullish.

With the move announced Wednesday the Fed is in the early stages of that generally constructive role. That is attempting to save the banking system and our deposits. Those professing moral hazard and the fact that society shouldn't bail out the messes created by Wall Street are surely correct in theory. (By the way, Herbert Hoover and many government officials held this belief in 1930. They were also right in theory. Unfortunately, 9,000-odd banks failed in the 1930s. Nice theory.) In reality, failure to save those who have benefited greatly from creating this mess would mean society could lose much of our life savings deposited in these institutions. Is a bank bailout fair? Of course not. Does this type of bailout cause banks to do things they wouldn't do if we didn't have a central bank? Maybe.

The reality is that we had bank failures, and alot of them, before we had a central bank. Banker stupidity is not the result of a central bank as many believe. Bankers have been and always will be stupid. Remember that profound bit of enlightenment. The Dalai Lama shared that great piece of wisdom with me in a dream. Something happens to the intelligence of people when they get their hands on other people's money. Just run down the list of global financial institutions this cycle and that becomes apparent. And, it will become more apparent as the rot spreads to names and countries not yet implicated. By the way, this is also why the majority of politicians are timelessly foolish. Another profound vision from the Dalai Lama. Profundity abounds on this blog. Eh?

Why does it seem like most every economist and market participant believes the Fed will save us? Or, as Jim Rogers believes of China, that the communist central bank will save their economy from the consequences of a bubble if they only act to cool the stock market right now? So, where does this belief in divine intervention from the Fed come from? It is what we are taught in school. And that is what is reinforced every single day of our lives by media and 'experts'. But then we are all taught to believe many things that are simply not true. The Dalia Lama is all over this post.

(I'm going off tangent for a brief commentary on an odd historical parallel. There are many people disenchanted with the U.S. right now, Rogers being a prime example, and I'm not interested in debating the merits or demerits of current politics. Mostly because I can never seem to find much merit in any politician. But I really find the actions of Jim Rogers incredibly interesting from historical parallels. As I recall, Rogers has gone so far as to characterize Americans as not wanting to work and having a sense of entitlement--I'm paraphrasing his exact words since I didn't keep the video interview so I apologize in advance for any misinterpretations should there be any.--I find those characterizations rather odd because they don't describe anyone I know. Be that in the U.S. or anywhere else. Are they based on reality or personal bias?

The fact that he is moving his family to communist China and wrote a book espousing communist China's greatness while predicting the demise of the U.S. reminds me of an eerily similar situation with Charles Lindbergh and Nazi Germany. Ironically or maybe more appropriately, bizarrely, that act happened the last time a nondemocratic country arose on the world stage as a great power. There are many more parallels to these two time frames but that would take way too much time to discuss.

How much does history repeat itself? Will the parallels end there? Will trade become a major contention and lead to global conflict as I have talked about? Is Rogers now Chief Sycophant for the Chinese communist Ministry of Propaganda as Lindbergh turned out to be for Nazi Germany?
It all seems very odd and historically relevant. Rogers has made a point to make all of his actions very public. And, while doing so has made many dubious statements including such ridiculous notions as the Fed is printing money. Therefore, he is surely exhibiting extreme confidence in his position. A confidence based on reality or personal bias? What is his personal bias? Much of this makes me wonder if Rogers' actions are akin to a great prize fighter. One who cannot seem to retire while on top due to great hubris. Rogers could have retired as an investing legend after writing his book on the coming commodities boom post 2000. Instead, will his legacy be one where arrogance pushed him to fight one too too many fights? Human nature and history surely are fascinating if not often predictable.)

A very brief comment on the topic of commonly held beliefs. The very fact that I was wrong about investments and wrong alot when I was young led me to enlightenment. I was wrong because I listened to 'experts'. That very act in itself resulted in common and recurring failure. That is why I created my own investing and trading models. I had to "unlearn" what I was taught to be true by commonly held beliefs of experts. Now I more generally use their beliefs to refine my contrapositions. And, given no preponderance on Wall Street or economists have ever predicted a recession, being contrary isn't such a bad position. The definition of insanity is doing the same thing over and over and expecting a different result. Relying on Wall Street to enlighten time and again is by conclusion, insanity. Therefore, must have been insane. I'm better now.

On that note, think for yourself. Learn from others but no one knows more about what is best for you than you in every aspect of your life. To stand alone is not a bad thing. It means you have principles. That you walk your own path. That you have given thought to your position. That you are a free thinker. That you add significant intellectual value to society, your business and your life. In many ways free thought has more to do with the success of America's economy than any other variable. And, it most definitely has more to do with our success than Wall Street. A place where Warren Buffett tells us lemmings abound. Bankers and lemmings. Not a good mix.

"Do not fear to be eccentric in opinion, for every opinion now accepted was once eccentric."
-- Bertrand Russell
posted by TimingLogic at 5:19 PM links to this post

Thursday, December 13, 2007

300 MPG Car For Under $30,000?



I highlighted the Aptera last year. Although at that time Aptera was claiming 330 miles per gallon. The company has a nice web site here.

So, would you drive it? I would. Who cares if it would turn into a pile of toothpicks if hit by an eighteen wheel truck. I talked about a need to possibly change safety standards or restrict use for vehicles with less robust safety standards. I wouldn't drive it on the highway in Los Angeles rush hour traffic but this type of innovation and entrepreneurship is exciting.
posted by TimingLogic at 3:18 PM links to this post

Wednesday, December 12, 2007

California And The Three R's: Real Estate, Recession and R'unemployment

Ruh ro, Raggy, we've got a mess brewing in Kalyfornia. So many of you didn't watch Scooby-Doo when you were younger. How about Johnny Quest? Not the remakes but the originals. Sort of James Bond and Indiana Jones wrapped into one.....for kids. Dr. Quest was the main reason I chose to focus on the sciences in college. Somehow that didn't translate into slaying monsters and evil doers. Okay, enough stupidity.

As you may or may not have noticed many municipal bonds and associated funds have weakened. Some alot. I recently saw a mutual fund manager talking about the "deals" in municipal bond valuations. Well, if you believe in Goldilocks and a soft landing, then that may be so. That would mean models predicting a recession is as close to certainty as certainty can be would fail for the first time in nearly a century. I guess a soft landing could happen. I could also win the lottery. Given the chances of me winning the lottery and the economy quickly recovering likely have similar probabilities, excuse me for being unimpressed with the general consensus still expecting a soft landing. Wall Street's herd mentality suffers from impulse control. They can't wait to climb all over each other and call this economic softness as finito and plow back into anything that has fallen including municipal bond funds. Goldilocks and Santa Claus are experiencing the same fate this year. They were both run over by a reindeer. A reindeer driving a Mack truck.

So, should we see a deflationary environment that I have been espousing while others are still squawking about inflation, (how we still hear this is surprising to me.) it doesn't take a rocket scientist to figure out that real estate will be part of that deflationary funk. Falling home prices, a weak commercial and residential real estate market, increased bankruptcies, higher commercial vacancy rates, lower asset valuations and lower rents will put tremendous pressure on municipalities and states that have been freely spending real estate related tax receipts like water flows from the eternal spring. California is seriously exposed to a significant housing correction. Couple that with mismanaged state and municipal finances and it doesn't seem so sunny on the west coast. Now, it has been some time since I looked so I'm going from memory but as I recall, there are enough licensed real estate agents in California such that one is available to serve something like every thirty working residents. It's like having your own personal concierge but no money to pay them. Not that they are all practicing agents. But, the statistic seems unusually high. California has become disproportionately reliant on real estate over the last decade. Of course, that has been reported enough that we knew that.

Has anyone every thought of incenting government agencies to save money by tying pay to efficiency, lower budgets, productivity enhancements and cost savings? Ironically, people generally do respond to increased earnings potential and a desire to positively impact their employer and the country. Government might actually find a way to live within a budget as consumers and companies do. And do so well before a crisis emerges. Then they wouldn't have to raise taxes in weak economies as reduced tax receipts threaten their castles of bloat. All while the rest of us are choking down gruel. Oh well, don't expect government to ever recommend such an incentive system. It must come from the people demanding reform. A universal truth about any bureaucracy is that it will first do what is necessary to protect its existence. Or to even enhance it. Doesn't matter what the bureaucracy is or whether it is constructive or destructive. Companies, organizations, government, Wall Street.....

I can't recall exactly but I believe it was the California Treasurer that recently said they saw no chance of a recession. And, what is that based on? I'll tell you what; a finger in the wind and political rhetoric. If that is true, might someone tell me why California's unemployment rate is up 23%? Using unemployment figures, California entered a significant slowdown over a year ago. Ironically, some of my long term analytics also confirmed that the global economy started to slow very significantly in the same time frame. Regardless, California's economy is weak and going to become weaker. And, at this exact time, California is issuing uninsured bonds as have many municipalities. Great deals in municipal bonds and state bonds? Uninsured bonds? Hey, we are good for it. Trust us. Wink, wink. Did you ever wonder why a Wall Street Journal poll showed 70% of Americans believed the country was in a recession yet Wall Street was so giddy? Could it be the fact that people were losing their jobs while hedge funds were cranking up more and more leverage to drive asset markets higher?

The Governator has inherited a fiscal mess that has been building for some time. It's time to have some serious pow wows in the smoking tent. What color will the smoke be? My estimation is red. The same color as the budget numbers for the state and many of its municipalities. I expect many states and municipalities will see their credit ratings adjusted. Negatively. Just at the time every person on Wall Street is jumping on the bridges, roads and infrastructure investment theme. And, how are these items going to be paid for with lowered credit ratings and lower tax receipts? More debt? Uninsured debt? Even if infrastructure investment would come to pass, how does that play into said stocks that are hugely overvalued? I'm not sold on municipal bonds or the infrastructure theme that is becoming another of Wall Street's group grope. Both are based on what they hope will happen versus what is actually happening. We've seen this movie before. It's a movie with a bad ending.
posted by TimingLogic at 1:48 PM links to this post

Sunday, December 09, 2007

Countrywide Rises On Federal Subprime Plan. Will It Work?

Below is the chart of Countrywide I posted a year ago this past week citing an Elliott Wave 5 wave count. I'm not necessarily an Elliott Wave advocate or guru but it was confirmed by the fundamentals. Wave 5 is an exhaustion wave portending a change in price direction. In other words, I wrote that Countrywide stock was likely doomed. Recently the price was down about 80% from the date of this post. No great revelation. It didn't take an act of omniscience to see this coming. Well, for some it may have but that's another story. Those people are like puppy dogs and believe good things happen forever. By the way, most investors in stocks fit that bill. Both professionals and well as individuals.


This past week government's central planners announced a plan to save homeowners and Countrywide's stock went up double digits. I've written on here that I am supportive of some type of attempt to keep people from being dumped to the curb by mortgage servicing companies. This is a once in one hundred year event and while doing nothing is the best scenario for the market to cleanse itself, we aren't talking about abstractions or markets as some of the cold-hearted types keep citing. Look, mistakes were made by lenders and buyers. The difference is that lenders who approved these risky practices have pocketed billions of dollars and the Fed is willing to bail them out. So, when people's livelihoods are at stake, I think an attempted act of decency isn't unrealistic. Would you want to spend Christmas in a homeless shelter? A possibility for some. Now, if some investors believe this is a breach of some type of contract and want to sue to stop this plan, well, I support them as well. That may sound contradictory but not really. I support the free markets but I also support an attempt to mitigate significant human crises be it plague, flood or the biggest real estate crisis in the history of the world.

But, the real reason government is acting isn't going to be discussed because it would create a panic. The real reason i s because government officials finally realize what I've been blathering about since starting this blog: one of the outcomes of this cycle is an extremely high risk for a serious banking crisis and the financial system cannot absorb this type of shock. Absorbing this shock could ensure we actually do have a banking crisis.
Don't believe anyone outside of the U.S. is safe because nearly every country has similar or larger real estate messes. Actually, I am more confident than ever emerging markets are the biggest messes. And, not just real estate. Let's digress a bit. "Emerging markets" is a phrase scammed up by Wall Street to describe those markets that are corrupt, opaque, without risk controls, with banking systems made of toothpicks and the like. Before they were called emerging markets, they were simply undeveloped economies. Economies that may never develop. That doesn't have the cache to convince you to invest your hard earned dollars so that Wall Street could make even more money. So, some spinmeister created the term "emerging markets". Now, we hear emerging markets are in great shape because of the currency reserves they've built. Hahahahaha. Dream on. Anyway, back to the comments about the banking system. Before you get on your moral hazard soapbox, realize the government is likely to get involved in trying to fix alot of "stuff" before this is all finished. That is both good and bad. Good because they will attempt to mitigate outcomes and bad because they will attempt to mitigate outcomes. How's that for circular reasoning?

But, will this housing plan work? Most definitely not to any large degree. And it will almost surely drag the mess out for a longer period of time. But, I suspect this is also part of any plan. The thinking is probably that if the mess is dragged out, there is some chance the economy will recover and the scope of this mess won't fully develop. Nice idea. Likely just the opposite will happen. Yet it's worthwhile to try something on a smaller experimental scale as this plan does. The biggest problem is the law of unintended consequences. As I wrote before, what is good for homeowners will be bad for banks. If it's bad for banks, it will ultimately be bad for homeowners. More of that circular reasoning? In other words, many actions could and will make the economic situation worse. Depending on go forward actions, the situation could likely get much worse because of intervention. But, it's going to get worse anyway. Am I making any sense? Not really. But, it fills up space.

What are some housing options discussed that would cause the least amount of pain to the economy? A 90 day freeze on foreclosures as espoused by some? Very, very, very bad for the economy as it could start an immediate and rapid economic tailspin by restricting all forms of economic credit even further. Banks would lend even less with an increasing nonperforming loan portfolio and the credit ratings agencies might actually do something like reduce bank credit ratings. Now, I realize it is hard to believe credit rating firms might actually do something given their incompetence this cycle. How about freezing rate increases for five years as Paulson is advocating? Again, this has a side effect of restricting credit. But, as I understand it they are targeting a smaller segment most worrisome for government officials. Those lured, and often using lecherous practices, into teaser rate mortgages. Likely less credit restrictive and depending on how they do it, maybe little impact on credit. We also have Robert Toll of Toll Brothers home builders out this week telling us that a better plan would be to allow Fannie Mae and Freddie Mac's limits on mortgages go to over $700,000 instead of approximately $400,000 today. What would that do? Amongst other things, it would leave quasi-government mortgage agencies holding more deflating mortgages in the most expensive and overheated markets. And allow more mortgages to be written on upside down property values that will likely leave buyers with negative equity for years to come. So, it would likely create more consumer duress and more bad debt.

So, here's something to think about. Long term mortgage rates in Japan have been in the 3%-ish range for quite some time. Should the U.S. have a Japanese style deflation, what impact would those rates have on the housing market and all of the expected resets to much higher rates that nearly everyone is expecting? Here's my point. If the powers that be would just sit tight and allow the markets to work, would some of this take care of itself? Would the markets accomplish what their fiddling is attempting to accomplish? Reduced demand and falling prices would translate into a free market response that would end up with..................lower rates. And, wouldn't that also help other home owners who would be given an opportunity to refinance at lower rates? What are central planners trying to do? Impact that same outcome. Just something to consider.

What the central banks, business and politicians need to do is find solutions that might be less credit restrictive or actually increase credit availability with the least amount of unintended consequences. In this environment, that is nearly impossible in my estimation. As I've said, it's all in the soup and the soup is already made. Now, we watch the global consequences of this cycle's stupidity.
posted by TimingLogic at 10:58 AM links to this post

Saturday, December 08, 2007

Solar Powered Car

Let's slide another post in here about alternative energy. I follow the auto industry quite closely. Recently an unnamed auto executive brushed off comments when asked about the prospects for a solar hybrid car. It was apparent from his response that he didn't think the technology was practical. Well, it sucks to be him because engineers in Switzerland, South Africa and Germany have developed a solar car in the video below. Solar powered concept cars have been around for many years including at GM which was a pioneer decades ago. Now, this video isn't a practical design......yet. But, with technological improvements in solar technology, energy storage, control systems, composites and the like could it be in five to ten years? The more relevant question is why wouldn't it be? Not only could the car be driven by solar power but it could be built such that the majority of materials are recyclable or biodegradable. Ford built a car quite a few years ago where a large amount of the non-drive train components were biodegradable and we've already highlighted Mazda's use of corn-based plastics. Remember my comments some time ago about GE hoodwinking Saudi Aramco by selling them their plastics business? Petroleum based plastics are going the way of the dodo bird.

I also think we need to start thinking about redefining transportation as entrepreneurs transform this space. An example: today's cars are engineered for safety standards required at highway speeds. That adds tremendous cost to vehicle engineering, componentry and production. The concept of a city car is finally developing momentum in the United States. So, does a vehicle restricted to non-highway use or restricted to special driving lanes on highways need to be engineered to such high safety standards? If safety standards for a new breed of transportation could be lowered with restrictions on its use, could entrepreneurs or companies bring vehicles to market at heretofore unheard of prices and efficiency? We highlighted a 330 mpg hybrid on here last year and the Chevrolet Volt electromotive technology this year. Could we some day have personal use city cars selling for $4-7,000? And, would you buy one as a second car or if you live in a large city, as a primary car? Those in the automobile industry wishing to restrict competition and innovation while maintaining profits obviously would fight any such progress but entrepreneurs and consumers would benefit as would job creation and economic vitality.

There is no stopping the movement away from petroleum products. The video is in German but a link to a short interview in English is below.



If you want to see a short interview in English with the head of the project, click here.

The solar taxi's web site in English is here.
posted by TimingLogic at 11:10 PM links to this post

Tuesday, December 04, 2007

Are We Running Out Of Oil? I Hope So!



In a lengthy post last week I said the U.S. had the ability to reduce its dependence on oil by 30-50% measured by per unit of GDP over the next thirty years. That is a swag but it's likely an understatement. Peak oilers or those who believe economic catastrophe is coming because the world is running out of oil have nothing better to do than play Chicken Little. Or, put another way are modern day Malthusians. They are missing the transformation taking place right before them. Personally, I look forward to the day we have no more oil. It can't come quick enough. But, it likely won't come at all because peak oil has no scientific basis. We've made many fools famous this cycle with Wall Street monetizing hard assets at a frenetic pace and with tremendous financial leverage.

Watch the video above. Stirling Energy is a company I first learned about in a BusinessWeek article a handful of years ago. Remember when you fried ants with that magnifying glass as a kid? Remember your ninth grade math when you learned to calculate the focal point of a parabola? Stirling is simply concentrating the sun's energy onto a gas chamber that is then heated by the sun to drive pistons. Pistons turn a shaft where a motor is attached. It's basically a steam piston engine and similar in concept to the action of your car's engine. Voila! Free energy. This is simple technology but with sophisticated modern day control systems and reliability. So, listen to what the CEO says near the end of the video. One hundred miles square of desert could be used to replace all of the energy needs in the U.S. The actual area of unusable desert land, costs and effort to accomplish this are a rounding error. Now granted, that isn't going to happen over night and we would still have many issues including the storage of energy for off peak hours but this is a very viable alternative energy source that will only be improved over time. As will its deficiencies. And, this is production level technology being deployed as I write this. It's not some future idea. Similar capabilities are being developed around the globe at a rapid pace. In Spain they are using similar technology to drive a steam turbine that typically has a better efficiency profile. I'm not close enough to the technologies to know the intricacies but it's exciting. And, this is simply one small cross section of energy research and capabilities being undertaken.

This particular technology may play a vital role or it may be superseded by something far superior. But, in any event solar power will play a role in future energy production. So, what else could you imagine with some type of solar energy system such as this? Smaller versions for your home if technically viable? Your city? Versions sitting on top of high rise condominiums and office buildings? Never buy electricity or heat again? Recharge your electric car at home......for free? The grocery store installs a system on the roof and allows you to charge your car for free while shopping in the store? Why free? An incentive to get you to shop at their store. A system on the roof of the building where you work? You recharge your car while at work. And, what does a distributed energy grid mean for the utility industry? Competition. Competition that will force them to change or die. There is so much technology in the process of being mated to green solutions, it is quite amazing.

All of the people who believe the U.S. is going the way of the dodo bird are going to eat alot of crow at some point. The U.S. is not going away any more than France, Germany, Australia, Great Britain, Japan or other democracies are going away. Are there intermediate term problems? Sure. And, unfortunately, most of the problems are still not apparent. And they are not trivial. But, what also is still not apparent is many of the problems are global or much worse in other global markets. Or many global markets have larger problems. Will it cause economic strife? Yes and it could be quite significant. But, just when everyone starts babbling about the U.S. running an unsustainable trade deficit, the U.S. ist kaput, Americans are idiots or the dollar is going to zero we will eventually see the trillions of petrodollars sent to Venezuela and the Middle East and all of the trillions in military budgets spent defending those interests are going to be spent as investment in the U.S. as well as the rest of the world. And, just as it is an annuity for petroleum producers today, it will be an annuitized investment in global economies.

What better creator of sustainable wealth and jobs than renewable energy. That isn't a question. That is a fact. Think about it. Constantly improving technologies and infrastructure which adds efficiency or productivity to harvested energy dependent on these very factors. Annuitization is a very important concept that I don't believe most people have truly grasped yet. The implications create massive shifts in global economics and, therefore, volatility. Who has the most to gain? The U.S. for at least five major reasons. One, because we are resource rich and land rich; two, because we spend such a massive amount on national defense and many of those dollars won't be needed to protect international energy interests; three because we are the world's energy gluttons and therefore have the most efficiencies to be gained; four, because the U.S. companies will be a primary provider of these capabilities to the global economic community; and five because the U.S. has the most innovative and flexible economic system in the world. So, it will respond more quickly being an early innovator and adopter. And guess what? It really doesn't matter who is elected President or who wins the Congressional elections because progressive state governments and free markets have usurped Federal power by leading this movement. *******Thank God for the brilliance of those who founded this country and who advocated state's rights as a check against federal hegemony. Yes, a little known fact is that checks and balances were meant to be not only between the three federal branches of government but also against concentration of power at the federal level should all three branches come to believe in their infinite brilliance. Who cares if Washington politics are a mess? It has always been this way to varying degrees. Eventually it will fall in line when politicians wake up to the fact that their version of reality doesn't exist any more or when we reach crisis. And as polls show time and time again, their version of reality doesn't exist anymore.*******

We don't need government disincentives and economic punishment for businesses and entrepreneurs as policy. That is, unless government wants employers to lay off employees and to stifle business creation. I see many aspiring Presidential politicians making statements about what they will and won't support as far as energy technology. This is a dire mistake. The ingenuity, creativity and industriousness of humanity and markets will work their magic without politicians and their centrally planned solutions to capitalism that most often turn out to be inhibitors. Government has many roles in society but politicians, in particular, determining whether the world adopts nuclear, solar, biodiesel or any other energy sources is not one of them. Incenting the markets to work is a role government can play but there is no way a bureaucrat can or should determine winners in the market place and, therefore, should not be adopting any policies attempting to sway choice or market dynamics based on personal opinion of a topic they know little about. To assume that politicians are able to set technology direction or market direction is to assume a single entity or person can know more than the cumulative consciousness of the world's engineers, scientists, entrepreneurs, business leaders, citizens, inventors, capital markets and the like. That is a universal untruth. It is also a major reason why Chinese communism or fascism or whatever it is, will fail.

So, what will happen to the major oil producing economies of OPEC when energy independence starts to crystallize as a reality? That's for another post but at some point we will will likely be seeing the ultimate top in oil and those economies as I wrote in the last oil post. This massive oil bubble today could indeed be the ultimate peak of OPEC country wealth without political and economic reform. Or maybe it will be five years from now. Or whenever. But, it is coming and there is nothing anyone can do to stop it.

It might have been a novel concept if a politician would have used this approach as our foreign policy to rid ourselves of vested interests in repressive states. To use the intellectual and industrial might of the free world to become energy independent. Well, the markets are doing exactly what many erroneously looked and still look to politicians to do. But, then it almost always works that way. Of course, who knows. After 9/11 maybe the U.S. government started buying oil futures to drive up the price in order to get free markets to do exactly what they are doing. Or have given financial firms a free pass to invest with abandon in energy markets to drive prices higher to stir the juices of innovation while providing substantial profits for American companies in the interim. Okay, it's an interesting thought but as the AFLAC goat said, "Nah, Nah, Nah.". (I'm sorry but every time I see that commercial I have to bust a gut.)

Peak oil? Bring it on! The economic benefits are beyond most anyone's imagination.
posted by TimingLogic at 12:27 PM links to this post

Monday, December 03, 2007

Rally Update


This is part two relating to my last post. Are you convinced or unconvinced this rally had nothing to do with generally available news data as I wrote in the last post? Remember that stocks never go up or go down in a straight line. There are short term, intermediate term, long term and very long term movements. Those are measured in days, weeks to months, years and decades. Above is a short term buying pressure measurement. It started to turn up when? The day of the rally as stories in the press would have you believe? No. It bottomed and turned up on the 23rd. Five calendar days before the rally. This rally had little to nothing to do with stories reported in the press on the 28th.

As someone who is generally a contrarian on many issues, this is an important point I want to make. The press is notorious for assigning rallies to events reported that day. I have talked about this before. Most specifically on days the Federal Reserve announces rate decisions. In effect, the media tends to lull us into a sense of "drone-ness". Where we become lulled into a sense of false reality based on their often insight-less insight. Everything you've read in the newspapers as to why stocks rally or fall on a specific day are more likely to be wrong than right. Not just this week but for eternity. Correlation is not causation. Just because news was reported on a particular day doesn't mean it had any more impact on the markets than weather in Siberia. The media has their own biases and agendas. And, they are easily manipulated by politicians, Wall Street or whomever. So, what other data reported by the press is also suspect? Something to think about..........

"The man who reads nothing at all is better educated than the man who reads nothing but newspapers."
--Thomas Jefferson

Let me update that quote to the twenty first century. Replace newspapers with magazines, the internet, television, newspapers, radio and any other form of generally available media.
posted by TimingLogic at 9:51 AM links to this post

Saturday, December 01, 2007

Why The Rally This Week?


This bull market has been driven significantly by quantitative traders. That means investing has favored those who understand technical trading. Even if it is very simple concepts like trend lines. So, the market blew higher this week with a massive rally. Mostly in financials. There are many who are going to believe the economic circumstances unfolding are specific to the housing concerns be it debt instruments or the real estate market itself. They are completely wrong. But, that doesn't mean some investors don't see perceived value in some financial investments with very large dividends. So, is the rally tied to sovereign fund investments in Citigroup? The mortgage bailout proposed by government officials? A seance performed by central bankers? Other topics discussed by the financial media? Well, how about the fact that market players ran the S&P down to its bull market trend line where every short to intermediate term market participant was going to go long? Nah. That would mean all of the reporting in the financial press as to why we had this rally would be completely erroneous and everyone believing it would be completely wrong.
posted by TimingLogic at 12:32 PM links to this post