Energy Shock?

The markets have been quite sanguine since Hurricane Katrina came rolling through the Gulf Coast. All of the Major Market indices are up.

Wait a minute. Gas is at $3.00 a gallon, Gulf production and refining capacity are offline due to the storm, some perhaps for months.

The SPR might help with feedstocks in the short run, but Natural Gas, that might be another issue altogether.

The drop in supply and production of finished petrochemical products has the possibility of acting as a supply side shock. A shock which, could tip us over into a consumer recession, or at least joe sixpack.

It is a tale of two worlds, one Tiffany TIF, the other Wal-Mart WMT. If you own XOM shares, you are smiling, and perhaps shopping at Tiffany. Wal-Mart on the other hand, $3.00 a gallon gas is going to bite somewhere and WMT is a good place to start.

MMS Press Release - Hurricane Katrina Evacuation and Production Shut-in Statistics Report as of Tuesday, August 31, 2005

NG Prices on the rise...

We focused so much on the oil platforms, NG is very, very important.

Hope we don't get a cold snap early in the heating season, or it could be ugly!

HC Katrina to hit the entire USA....

Katrina is going to hit everyone in the USA....in the wallet. As the storm makes a slow westerly progression, more and more oil and gas platforms are shut down. If memory serves, HC Ivan was good for $5 higher on a barrel of WTI due to lost production.

Pushing $73 a barrel and nearly $3.00 a gallon for gasoline at the same time Dr. Greenspan is jawboning Real Estate down, it doesn't sound like a good environment for risky investments.

The Bulls of Baghdad: Weekend - Yahoo! Finance

We are watching something very important. Market driven capitalism is one of the most important forces for change.

I'd blindly buy shares in the banks and brewers if I could. Iraq is an undervalued petrodollar economy.

Troops coming home are bringing Dinar with them, thinking that it will rise in value over time once fully convertible.

That my friends is believing in the mission!

Finally some scripture!

After all the references to fool in my last post, I felt compelled to share something from someone with a little more knowledge of wisdom and fools than myself.

The Proverbs of King Solomon, Proverbs 13:11

Dishonest money dwindles away, but he who gathers money little by little makes it grow.

A Practical Guide for Dealing with A Housing Bubble.

The pundits are spinning as they always do. The Federal Reserve speaks, “frothy, extended.” In the blogosphere, “it might be a bubble.” or “it is an extended asset class”

Whatever.

Maybe it is, and maybe it isn’t. But if it walks like a duck, and talks like a duck, it is a duck.

Last fall (2004) I had someone tell me at a dinner party, “I don’t do stocks any more. I am not even funding my IRA. Real Estate, that is the only place where there is any real return.” How true, the S&P 500 is still negative on an annual basis for the last five years, and Real Estate, Real Estate has been up. up, Up, UP.

The conversation is an eerie reminder of 1999 cocktail party. Investment managers were pariahs at the time. Person: “Why, anyone with an internet connection can do what you do.” Me thinking: “Why yes, and nothing between a fool and a bad trade but a keyboard, CRT and some twisted pair copper cable.” Person: “There is no need for people like you anymore; people can invest for themselves. You own old economy stocks, it is a new era, people are getting rich and I am going to get mine.” Me thinking: “The actual buying and selling is not the hard part, it is knowing when to buy and when to sell.” I went home from that function thinking that I wanted to get as much distance between myself and technology stocks as I possibly could. Fast.

Fast forward to 2005 and everyone, and I do mean everyone, has a real estate deal running, in the works, or has a “dream”.

Aside from the fact that most historic bubbles are not recognized as such until well after the fact, in this situation, you would do well to cover your assets.

Seriously, if it is not a bubble, how will you be harmed? If it is, well the bankruptcy courts are not going to be as friendly as they once where. You are going to have to work off that leverage you could not afford. Owning a speculative home you cannot return, rent or sell that is 30% underwater, that is a large albatross around ones neck.

First, are you a speculator, an investor, or an owner of real estate?

If you are a speculator, realize that real estate prices do move up and down in local markets and leverage and financing are as important to your ultimate return as the property. Most people don’t believe themselves to be speculators. How can you tell if you are a speculator?

 If you own 2 or more pre-construction homes in a hot market to “flip them” and get your 15-30%, you are a speculator. Beware!

 If you “own” (I use the term as loosely as I possibility can) a $1.5 million dollar beach front condo, with high LTV (loan to value) financing or an I/O with the EXPECTATION of 15% annual price appreciation you are a speculator. (And perhaps a fool.)

 If you own raw land that could be purchased five years ago for $1100 a acre, you paid $35,000 an acre and expect appreciation to continue for the next five years as in the past five years.

 If flipping condos is now your full time job, you are a speculator.

Beware! Beware! Beware!

Investors, well many today fancy themselves real estate investors. And why not? It is a sign of above average intelligence in this day and age. To me, investors own property based on the income stream a property can generate, they aren’t looking for capital gains per se, and just smile when they get capital gains. An income stream and a workable capitalization ratio for the income is a fundamental anchor to value. Investors are careful about what they pay, never get into a bidding war, and purchase cash flow streams. Think Warren Buffet, not Donald Trump.

Owners, owners live in or on their real estate, perhaps part time (split time between NYC and West Palm, or the Keys and Montana, sweet!) While it may be financed aggressively, owners get real value from their homestead from its use and the opportunity cost of alternate housing. They don’t need cash flow, and capital gains are nice, as long as they keep up with the local market.

Now that we have blasted hot air at you for the last five minutes, what should you do? Realize that if real estate is a bubble, and you are a speculator, no one is going to ring a bell to tell you that the fight is over; you are just going to be face down on the mat.

Practical tips:

Lock in low long term rates. Lock them in fixed. You can always refi if they go lower. Higher, and you are stuck.

Avoid I/O’s or ARMS in which a handful of rate adjustments will put you under water on your payment. (if you don't know what I/O or negative AM is, you are in good shape. Ignorance is bliss!)

Avoid high LTV (loan to value) to make a property work. 20% down should do it in most cases.

If you are lucky enough to have purchased a West Hollywood (Las Vegas, Ono Island, etc) home for $300,000 five years ago and it is now “worth” $x million, don’t leverage up underneath to support consumption or to buy more damn real estate because you think the price is going to go up.

Beware! Beware! Beware! The tipping point is near!

Three way race to replace Dr. Greenspan

This topical item is a huge, huge hump for the markets to get over.

Dr. Greenspan's credibility with Wall St., his street smarts in a crisis and his ability to tease knowledge from raw economic data are unparalleled.

Whoever the next FOMC chair is, they have some pretty big shoes to fill.

Think Ron Zook at the University of Florida following Steve Spurrier, nowhere to go but down.

Investors beware!

Economics Lesson: Comparative advantage

All right, an economics lesson without a blackboard (or white board for that matter). No supply/demand curves.

Comparative advantage is sooooo simple it is almost painful.

Trade benefits all. Period.

More trade is better than less.

Now don't go John Kerry on me and try and nuance it, because you will miss the point. Yes, the real world is messy and there are exceptions but here are the best & clearest example(s) I can think of:

Butter
Soap
Bread

Once upon a time common folk made this kind of stuff for themselves. The duty usually fell upon the housewife to make a sufficient supply for the home. Self-Sufficient, independent, good honest American values.

Lets take a deeper look at bread, (ugh, carbs, just reading about it is going to make you FAT!). Early in the 20th century most if not all America homes made their own supply of bread. Maybe some where fortunate enough to have the help do it, but it was a task that ordinary folk had to do to supply a demand.

Today it would be silly, no matter how modest your means, to produce your own bread. Now you might crank out some specialty bread for a dinner party, or because you enjoy baking, but there is absolutely no economic advantage to baking your own bread.

Bread costs $2.00 a loaf for standard sandwich bread where I live. We use two loaves a week. Now, according to my standard Betty Crocker's cookbook, if you total up all the time required to knead, let rise, bake, etc. you would have to invest about 2 1/2 hours per batch. If you made two loaves per batch your opportunity cost would have to be less than $1.50 a hour. A fraction of even the minimum wage.

Why is all of this important anyhow?

Because billions of people have joined the tradable goods & services market in the last ten years (China and India). It is very important for people to understand the natural law underneath outsourcing and offshoring. If your job gets swept offshore because it can be done cheaper, faster, better there, well that sucks for you. But if we put up a real or legal fence around the good ole USA to "protect" ourselves from this competition, it will stink for ALL OF US.

Now if you need more on comparative advantage, check out this wikipedia post. But be warned! There is some historical revision going on trying to take away from David Ricardo's observations.

Uh Oh...

Gasoline (here on the Gulf Coast) is $2.55 a gallon. I am starting to see lots of big iron by the side of the road with a "for sale" sign on it.

Uh oh. Don't these people realize that the market value of their sport ute or pickup is adversely effected by the price of the black gold.

Seriously, in the last week I have seen more that half a dozen of these big rigs parked and for sale.

A sign that we are near the tipping point?

USATODAY.com - 'Mr. Housing Bubble' tries to wash away the worries

This is the thing that makes the USA, well, great.

We can sum anything up and get it on a humorous T-shirt.

Directors Chartbook, New York Federal Reserve

Get the skinny first hand on wha they are looking at with out making the trip to NYC.

As for what they are thinking, that is another story altogether...

Weekly Market Returns

It was a mixed bag for the major indices this week, with the DJIA and the S&P moving higher while the NASDAQ lagged.

For the week the DJIA was up .4%, the S&P 500 .3% and the NASDAQ down -1.0%

Not if, but when in the USA...

It is not if, but when housing prices in the USA moderate. Many a sage market analyst is looking abroad for evidence of a housing slump.

Well, in Sydney, Australia you have one. Sydney has been called the canary in the coal mine. What makes this even more interesting is that Australia led the USA in the up cycle, their central bank saw what was going on and started raising rates much earlier to let the air out of the bubble.

This has major implications for future US Federal Reserve policy, because remember kids, the Greenspan Fed always keeps at it until something breaks!

Remember Orange County, CA!

It's Not the End Of the Oil Age

I remember in the late 70's, "experts" on TV predicting that all the oil in the world would be gone in ten years or less.

The 80's came and went, and I am still driving a gas powered car.

One number to watch like a hawk...

For all the talk of gas prices, Las Vegas real estate, interest rates, retail sales it is all for naught if you don't focus on the key thing you use to pay for gas, a home, interest etc. Income.

Income, income comes in part from labor. Initial jobless claims have been signaling a stealth rally in the labor markets and labor markets show all kinds of signs of strengthening and tightening up.

If jobless claims dip below 300,000 in the coming months, it will be good for Main St. but Wall St. via the FED will be in a tizzy.

If the Fed pushes too far and the labor markets roll over and die, then my friends, it won't matter what kind of mortgage you have, paying it will be hard.

From the fine folks at BCA...Goldilocks

Maybe it is not to hot and not to cold, but just right. But then again, on Wall St. what everyone knows isn't worth knowing.

The Fedegizer Bunny.....it keeps going and going

Another quarter point, measured pace stays. Thoughtful analysis later...

Wage gains inflationary, Fed concerned...

This is patently ridiculous folks.

The fact that labor markets might tighten up enough so someone can negotiate a pay raise? A private market transaction between the employer and the employee? This causes fear at the Fed and in the financial markets?

We need some wage inflation to rebalance this expansion, corporate balance sheets (in general) are flush with cash, personal balance sheets are not.

Why is it that rising commodity prices are ok, as are rising equity prices, but prices in the labor market rise, that happens and the Fed starts tapping on the labor markets head.

Ridiculous! We have been banking 10 years of outstanding productivity gains, now is the time to spend some of them, if corporate margins fall and the equity market with it, so be it!

Weekly Market Returns

For the week the markets struggled, with the DJIA down -.8%, the S&P 500 -.6% and the Nasdaq down -.3%

Even better than the major averages is to take a peak into investment style returns for the week, to try to tease some understanding of the trend from the data.

Morningstar does an outstanding job of providing this data to the public, which of I have linked to.

The only drawback to the Morningstar data is the weekly report is not available until the start of the following week. Oh well, I guess no one in Chicago can stand to stay a extra hour on Friday and pound that one little PDF out.

Employment situation

One ingredient to the "conundrum" of long term interest rates falling (which has reversed in the last 30 days) is the murky situation in the US Labor markets.

Some market analyst's believe that the Fed's interest rate policy has led to robust job creation, only it is in China and India.

To us the labor situation may be better than the markets believe, depending on how well BLS can measure changes in the self employed. Many, many people are now K1 or 1099 employees and not w2 employees, an emerging trend, including yours truly.

If we are under reporting total employment due to this emerging trend and a lack of good measurement tools, the labor markets may in fact be tighter than the bond market thinks.

Capital and materials are not the major input costs in the USA, it is LABOR. For those who think that inflation pressures have peaked this cycle, they may be in for a nasty surprise.

It is frustrating to watch the markets spin off of industrial era numbers, like manufacturing employment when we are soundly a service driven economy.

We lack enough metrics to measure growth, output and inflation in the information age and the new series that we have like the Monster employment index are not robust enough, ie little historic data and not seasonally adjusted.

Have a great weekend, see you next week.

Cornerstone's Chart of the Month

Many haven't paid attention to the fact that earnings have been growing very strongly underneath near static market prices. With inflation under control for the time being, investors should consider a slight increase in the market PE and potentially stronger earnings in the coming months.
However, it might be prudent only to buy during dips in the market because the Fed is tightening monetary conditions. For more of our thoughts on the macro-economy, view our monthly Chartbook.

US Treasury takes dust off the long bond

Finally some fiscal sanity from Washington, DC. We have been living off of short term bonds since Bob Ruben hoodwinked us into it during the Clinton Administration to save money (in the short term) but at risk of having reissue short dated bonds at higher rates.

I say here, here. I'll even go one further. Let's test the loooong term waters like France and Britain and see if there is any interest in a 50 year or 100 year.

Let's refi and lock in these low rates!

Go Treasury Go!

Hot Topic: Savings Debate

Is the savings rate in the USA good or bad?

Depends on who you ask and where you look.

The latest "news" from the usual suspects is that it had fallen to zero and this is a bad sign. Turns out it is more complicated than that.

Yeah, I know, nothing can be simple anymore. You need a spreadsheet and a 3 MPS internet connection to noodle anything. Heaven forbid, you might have to Tivo something from CSPAN or grab a podcast to get up to speed.

Here is the inside skinny. The personal savings rate is our national monthly income less spending. Spend more than you made in any given month, negative. No distinction on how long an item will last, say a car. As an economist would say you are dissaving. Whatever.

In truth when you look around, we are on the front side of the baby boomers retiring when they do they will be consuming savings to live (read: monthly distributions from their IRA) and savings rates may go more negative.

A clue to what is really going on, the last time savings rates improved was when the federal government was running a surplus. Didn't change my savings rate then, did you? Hummm, maybe, just maybe it was the government dissaving that was throwing things off. Naw, we are spendthrift bunch going straight to hell on a credit card. Oh well. See you at Target! Take care.

Weekly Market Returns

Overall the market finished the month on a down note, giving back some of the gains.

For the week the NASDAQ was up .2%, the S&P 500 was flat and the DJIA was down -.1%

Upside surprise from ISM

Maybe, just maybe we are through the "soft patch".

Fad Watching...

At the same time that bread, pasta and donut companies (think: KKD) were blaming Atkins for hammering their bottom line, Atkins had reached its zenith.

Everyone was on Atkins, but it was a diet folks not a new lifestyle the USA was just going to up and adopt.

You have to have incredible timing skills in order to profit from a popular fad, because while some last for years they always wind up like the rubiks cube or the cabbage patch doll, on sale at the local flea market at a deep, deep discount to the last retail price.

Now pay attention kids, because Real Estate is the new national pastime, seeking 15%+ annual returns from now until kingdom come. Is it a investment fad? Has it reached its zenith?

King Fahd Dies