We are believers of buying at distressed prices, but we never try to catch a stock in a free fall.
As such we believe that Gazprom (OGZPY) offers potentially rich rewards. The Russian market which at one point fell 80% from its 2008 peak was in a free fall. For now it appears that this free fall has halted. Many a billionaire oligarch had peldged shares of Russia's largest companies to buy more shares, either in Russia or abroad. Their DB and BNP bankers gave some multi-billion dollar margin calls. So a falling market begot more selling and more margin calls. . . a true death spiral. This seems to be finished.
As Gazprom supplies Europe with more than 25% of its natural gas, we view it as a strategic company, as does the Kremlin. With over $500b in forex reserves, we view the Kremlin as being able to support Gazprom, their crown jewel.
Additionally, we think that $6 is a floor on natural gas given the vicious commodity sell off. We are also expecting a harsh winter. Gazprom has halted its free fal,l and as of today, is in the $19/share level. We view Gazprom as a high return speculation at this price. The risk could be outright nationalization, but the Kremlin already owns 51% of the company, so while possible, we view such scenario as unlikely.
We are opening a small position of Gazprom today.
Traders and investors are reminded to risk small amounts of capital in each position and only add to them as their position shows them a profit. Doubling down on losers has led to more busts in investing and trading than in Vegas.
As always we are not making recommendations for anyone, but outlining our personal investment decisions. We are not registered investments advisors and do not give investment advice.
Thursday, October 30, 2008
Tuesday, October 28, 2008
Our Short Take on Commodities and the Super Cycle (hahaha)
So what has happened to all of the talk of the commodities super cycle? Investors loved Crude at $150, Copper at $8,000 and Nickel at $45,000, but they don't like them at less than half of peak prices.
We are believers that China, India and Asia will continue to grow. We are not believers that investors should pay any price for any asset, nor that they should chase hot markets.
Commodities are cheap, there is a shift in long-term demand. That being said 1) there is a credit crunch 2) emerging market growth is going to be much less, maybe even half of what the Wall Street strategists and fund managers tell us 3) commodity futures are highly levered vehicles 4) commodity prices trend.
Contrary to the EMH and fundamental analysts most commodities are traded by trend- following CTAs and traders that use technical analysis. Commodity prices do trend. And while fundamentals set the trend in motion, due to the high leverage when a position in commodities moves against a trader, he is more likely to sell. This contrasts with many long-only equity fund managers that buy more and double down (how is that working for you?!) on lower prices. Given the leverage, a small % move in the opposite direction of the underlying commodity can have a very large dollar effect on a commodity portfolio.
Therefore commodities do trend and are highly levered. We advise to never buy them without looking at the charts first. We urge investors to head the advice of Dennis Gartman, to buy that which is going up and short or be on the sidelines as things are going down.
Current commodity prices, which are falling make the fundamental outlook for them even better going forward. Mines will be shut down. At under $800 an ounce, the entire platinum industry is on the brink of collapse. So let the hedge funds liquidate, late the CTAs liquidate. Let world trade slow and let mines be shut down. This will only set up a better return potential going forward.
Short-term the outlook for commodities is fundamentally bad. Long-term it looks much better. They have been beaten down on a slowdown in global trade, forced liquidation, and extreme U.S. dollar strength as of late. Additionally, after the current deflationary environment subsides we believe that inflation will re-emerge in the U.S. and developed economies. The current U.S. monetary base is expanding beyond comprehension, but slowing velocity of money makes it feel as if there were a contraction in the money supply. This will not last forever. More money will be printed and velocity will explode, we should be very good for hard assets. When will this occur? We have no idea and we could be incorrect. We know better than to predict market turns, put yearly closing estimates on the Dow . . . the market has humbled us too many times. We let the markets go where they want to go.
All we can do for our readers is find what we believe are the most attractive investments to be in (or out of for that matter), at the best prices.
So when should we buy? When the chart tells us to. Commodities may be oversold, but in an environment of forced liquidation and a credit crunch, they could become even more oversold.
Never try to catch a falling knife, especially in commodities.
We are believers that China, India and Asia will continue to grow. We are not believers that investors should pay any price for any asset, nor that they should chase hot markets.
Commodities are cheap, there is a shift in long-term demand. That being said 1) there is a credit crunch 2) emerging market growth is going to be much less, maybe even half of what the Wall Street strategists and fund managers tell us 3) commodity futures are highly levered vehicles 4) commodity prices trend.
Contrary to the EMH and fundamental analysts most commodities are traded by trend- following CTAs and traders that use technical analysis. Commodity prices do trend. And while fundamentals set the trend in motion, due to the high leverage when a position in commodities moves against a trader, he is more likely to sell. This contrasts with many long-only equity fund managers that buy more and double down (how is that working for you?!) on lower prices. Given the leverage, a small % move in the opposite direction of the underlying commodity can have a very large dollar effect on a commodity portfolio.
Therefore commodities do trend and are highly levered. We advise to never buy them without looking at the charts first. We urge investors to head the advice of Dennis Gartman, to buy that which is going up and short or be on the sidelines as things are going down.
Current commodity prices, which are falling make the fundamental outlook for them even better going forward. Mines will be shut down. At under $800 an ounce, the entire platinum industry is on the brink of collapse. So let the hedge funds liquidate, late the CTAs liquidate. Let world trade slow and let mines be shut down. This will only set up a better return potential going forward.
Short-term the outlook for commodities is fundamentally bad. Long-term it looks much better. They have been beaten down on a slowdown in global trade, forced liquidation, and extreme U.S. dollar strength as of late. Additionally, after the current deflationary environment subsides we believe that inflation will re-emerge in the U.S. and developed economies. The current U.S. monetary base is expanding beyond comprehension, but slowing velocity of money makes it feel as if there were a contraction in the money supply. This will not last forever. More money will be printed and velocity will explode, we should be very good for hard assets. When will this occur? We have no idea and we could be incorrect. We know better than to predict market turns, put yearly closing estimates on the Dow . . . the market has humbled us too many times. We let the markets go where they want to go.
All we can do for our readers is find what we believe are the most attractive investments to be in (or out of for that matter), at the best prices.
So when should we buy? When the chart tells us to. Commodities may be oversold, but in an environment of forced liquidation and a credit crunch, they could become even more oversold.
Never try to catch a falling knife, especially in commodities.
So What do We Like in Energy?
We like Tenaris SA (TS). It is the Luxembourg based maker of steel tubes and pipes for the oil and natural gas industry. One of the world's largest. It has been sold of on falling stocks, falling commodity prices, and falling Argentine stocks. Yes, Tenaris is listed in the MSCI Argentina index (part of the MSCI Latin America index for those that care about indexes and such nonsense). Soon it will be moved to the MSCI Italy index, relegating Argentina to index obscurity.
Forced selling of emerging market funds have seen massive redemptions has hurt the stock. As usual the public was very late to the emerging markets game and must now pay the price. Not having bought in 2003-2006, the "crowd" climbed aboard in 2007 and 2008. Why would they buy as prices had gone up 35% a year from 2003 through 2006? Because contrary to the Efficient Market Theory (EMH), man is not rational. He has never been and never will be. He is governed by fear and greed and shall be forever.
We are buyers of Tenaris after forced emerging market and commodity liquidations with the belief that the energy industry will require massive infrastructure in Africa, the Caspian, and Brazil. TS trades at 4x 2009 estimated profits and yields 4.5% as of today. Even if EPS estimates are twice too high we would still be paying single digits P/Es and receiving a handsome dividend yield.
We can't guess what the market will do tomorrow or next year, but we do attempt to highlight special situations and distressed assets that are fundamentally sound for our readers.
http://finance.yahoo.com/q/ae?s=TS
As always we are not making recommendations for anyone, but outlining our personal investment decisions. We are not registered investments advisors and do not give investment advice.
Forced selling of emerging market funds have seen massive redemptions has hurt the stock. As usual the public was very late to the emerging markets game and must now pay the price. Not having bought in 2003-2006, the "crowd" climbed aboard in 2007 and 2008. Why would they buy as prices had gone up 35% a year from 2003 through 2006? Because contrary to the Efficient Market Theory (EMH), man is not rational. He has never been and never will be. He is governed by fear and greed and shall be forever.
We are buyers of Tenaris after forced emerging market and commodity liquidations with the belief that the energy industry will require massive infrastructure in Africa, the Caspian, and Brazil. TS trades at 4x 2009 estimated profits and yields 4.5% as of today. Even if EPS estimates are twice too high we would still be paying single digits P/Es and receiving a handsome dividend yield.
We can't guess what the market will do tomorrow or next year, but we do attempt to highlight special situations and distressed assets that are fundamentally sound for our readers.
http://finance.yahoo.com/q/ae?s=TS
As always we are not making recommendations for anyone, but outlining our personal investment decisions. We are not registered investments advisors and do not give investment advice.
Land of the Rising Sun
We note that today's 10% rally in U.S. markets started in Asia with Hong Kong's Hang Seng up more than 14% and Japan up around 6%. Recent articles in Bloomberg have noted that the price-to-book ratio on the Topix in Japan is 0.83. We want to buy this market. If one is a believer in value we should own Japanese stocks at these depressed valuations.
We are unconcerned if the market goes up or down another 10% before we get in. Normally the knock on Japanese stocks is that the P/E ratios are too high and dividends too low. This is no longer the case. We view the market as a value investor's paradise. We recommend EWJ (i Shares japan etf) for large caps and JSC (a small cap etf). Additionally, Sumitomo Corp has been crushed as commodities and Japan have gone down. The ticker is SSUMY. The stock trades at 3x 2009 and 2010 P/E and yields 6% using information from Reuters as of October 28, 2008. It sells fo under book value.
Rather than try and call a bottom on emerging markets, Nasdaq, gold and small caps, current Japanese valuations make us drool. We will buy at less than book value and high single to very low double digit P/Es. Investor's may own them for a trade or long-term, but we like the market.
http://www.reuters.com/finance/stocks/overview?symbol=8053.T
We are unconcerned if the market goes up or down another 10% before we get in. Normally the knock on Japanese stocks is that the P/E ratios are too high and dividends too low. This is no longer the case. We view the market as a value investor's paradise. We recommend EWJ (i Shares japan etf) for large caps and JSC (a small cap etf). Additionally, Sumitomo Corp has been crushed as commodities and Japan have gone down. The ticker is SSUMY. The stock trades at 3x 2009 and 2010 P/E and yields 6% using information from Reuters as of October 28, 2008. It sells fo under book value.
Rather than try and call a bottom on emerging markets, Nasdaq, gold and small caps, current Japanese valuations make us drool. We will buy at less than book value and high single to very low double digit P/Es. Investor's may own them for a trade or long-term, but we like the market.
http://www.reuters.com/finance/stocks/overview?symbol=8053.T
Tuesday, October 21, 2008
Short Modern Art, Go Long Old Masters
We leave it to Souren Malikian to tell the story of the down turn in Modern and Contemporary Art. As for us, we will exclaim it to anyone who will listen short Warhol, short Modern Art, and go long cash or the Old Masters.
http://www.iht.com/articles/2008/10/21/arts/melik21.php
But why would we sell our Modern Art? Are we at Creative Destruction such snobs that we can't appreciate a "Green Car Crash," Blue Square # 69, Pink Blob #53 or any other such inanely named works? Well... no, we can enjoy Warhol, Ramos, Murakami, Hirst, Lichtenstein as much as anyone. Though anyone with sense good taste can admit El Greco and Titian they are not.
For those that haven't followed this market, exponents have been made in the mid and late 2000s. Why? Global liquidity, nouveau riche fund managers looking for a way to spend their ill gotten monies. We will borrow a phrase as best we can from Bill Bonner of the Daily Reckoning, hedge fund managers were the only ones with enough money and bad enough taste to buy this junk. So we say sell. SELL it all. The hedgies are going down. Cute as it maybe, the old money doesn't want this junk. It will collapse much as when the Japanese stopped buying Monet's and Van Gogh's over a decade.
And while prices are still strong, dump your Damien Hirst works too. SAC Capital Guru Stevie Cohen whom we have nothing but respect for as a trader, is the owner of Hirst's famed shark in formaldehyde. While we like his trading, obviously his tastes don't match his pay check. Then again Steve can afford it and would likely turn a good profit on the abomination.
http://www.iht.com/articles/2008/10/21/arts/melik21.php
But why would we sell our Modern Art? Are we at Creative Destruction such snobs that we can't appreciate a "Green Car Crash," Blue Square # 69, Pink Blob #53 or any other such inanely named works? Well... no, we can enjoy Warhol, Ramos, Murakami, Hirst, Lichtenstein as much as anyone. Though anyone with sense good taste can admit El Greco and Titian they are not.
For those that haven't followed this market, exponents have been made in the mid and late 2000s. Why? Global liquidity, nouveau riche fund managers looking for a way to spend their ill gotten monies. We will borrow a phrase as best we can from Bill Bonner of the Daily Reckoning, hedge fund managers were the only ones with enough money and bad enough taste to buy this junk. So we say sell. SELL it all. The hedgies are going down. Cute as it maybe, the old money doesn't want this junk. It will collapse much as when the Japanese stopped buying Monet's and Van Gogh's over a decade.
And while prices are still strong, dump your Damien Hirst works too. SAC Capital Guru Stevie Cohen whom we have nothing but respect for as a trader, is the owner of Hirst's famed shark in formaldehyde. While we like his trading, obviously his tastes don't match his pay check. Then again Steve can afford it and would likely turn a good profit on the abomination.
Whither the Oil Sands?
As many investors know Canadian Oil Sands plays, the best known being Suncor and Encana, have received a beating as of late. Long-term we believe that China and India will need more oil. They want motorcycles and cars like the West. Easily accessible supply in stable and friendly countries is increasingly difficult. Yes, crude has lost 50% from its speculative peak, but the Oil Sands stocks are factoring in worse than that. Why?
1) Oil Sands are not the preferred light sweet crude. It is more expensive and harder to refine. Really it is the "junk" of oil.
2) The Globe and Mail estimates that the $170 billion of planned investments in the Oil Sands looks to a WTI price of about $85 a barrel to break even. Well there it is, Suncor can print money at $150 a barrel, but at $85, new projects look less and less sustainable. The forward EPS contracts as estimates are proven too high.
Read the entire article here:
http://www.reportonbusiness.com/servlet/story/RTGAM.20081017.wagendafournier1020/BNStory/robAgenda/home
1) Oil Sands are not the preferred light sweet crude. It is more expensive and harder to refine. Really it is the "junk" of oil.
2) The Globe and Mail estimates that the $170 billion of planned investments in the Oil Sands looks to a WTI price of about $85 a barrel to break even. Well there it is, Suncor can print money at $150 a barrel, but at $85, new projects look less and less sustainable. The forward EPS contracts as estimates are proven too high.
Read the entire article here:
http://www.reportonbusiness.com/servlet/story/RTGAM.20081017.wagendafournier1020/BNStory/robAgenda/home
Friday, October 10, 2008
Support the Bund!
As an advocate of free market forces Creative Destruction views the 2008 Election, to paraphrase Richard Maybury as a choice between "more War and more Socialism or more Socialism and more War." Hope we got it right Richard.
Anyway the campaign is starting to get nasty. Which historical figure or figures does Fraulein Palin remind you of? You be the judge, we are only posting the photo!
Thursday, October 9, 2008
Buy Defense
We recommend the opening of 1/3 to half sized positions in ITA and Fidelity Select Defense and Aerospace (FSDAX).
Both funds have fallen more than the market. Valuations are very reasonable and essentially recession proof. They are dependent on government printing presses, the ability to tax, and the ability to whip a nation's citizens into a frenzy over real or fictious enemies.
We see only increased global tensions and the purchase of many more weapons.
Both funds have fallen more than the market. Valuations are very reasonable and essentially recession proof. They are dependent on government printing presses, the ability to tax, and the ability to whip a nation's citizens into a frenzy over real or fictious enemies.
We see only increased global tensions and the purchase of many more weapons.
Cash Will Not Always Be King
While cash and 2 year and under gov bills have been the place to be as of late,
they won't always be.
Real returns on cash are strongly negative. The Fed Funds rate at 1.5%
means you lose money every year by putting you cash in savings. In fact,
while global credit has contracted and nearly every asset has plummeted
in value, one thing has not gone down, that is the governments creation
of US dollars.
Inflation is a cheat and the gov has a printing press. The current bail-out
bill solves nothing. The gov has a war in Iraq, Afghanistan, and a likely
one brewing in Pakistan. The Russians have $600 billion in currency reserves
and are asserting themselves once again. The "New" Cold War will ratchet
defense spending up on big ticket bombs, missiles, planes and the like.
The Democrats will not dream of cutting or vetoing defense spending bills.
They don't want to seem "weak" on terror or whichever other new bogeyman
the military-industrial complex invents to line its own pockets. We are
going to see pay outs to regional banks, the auto and airline
industries, extension of unemployment benefits, and more social
programs. In the end we will just print more money.
In the short-term the USD may rise against other paper currencies, but
in the end they will all revert to were they have historically.
That is to say zero. No paper currency has ever stood the test of time.
At some point, we don't know if it is in 3 months, 1 year, or two years,
the gig will be up and the fiat currency era over. All of the bail-outs
and wars will make cash no longer King, but a Joker, as an inflationary
wave crashes upon our current (and temporary) deflationary environment.
We would use this extreme weakness in stocks and physical silver
to slowly add to the highest quality companies. We do not think
this is a market bottom, but many top quality stocks are down 2/3 in value.
Slowly start getting long.
For the speculative portion of our portfolio we like Exeter Resources (XRA), Fronteer Group (FRG), Allied Nevada (ANV), Andina Minerals (ADMNF), and Minera Andes (MNEAF), Silver Wheaton (SLW) and Silver Standard (SSRI) at current prices and on pullbacks.
When the public and mutual fund managers pile into the gold stocks we suspect it will be like the dotcoms all over again. We have no idea as to the timing. An opening of a January 2010, 65 Call on the GDX is recommended at under $2.70.
they won't always be.
Real returns on cash are strongly negative. The Fed Funds rate at 1.5%
means you lose money every year by putting you cash in savings. In fact,
while global credit has contracted and nearly every asset has plummeted
in value, one thing has not gone down, that is the governments creation
of US dollars.
Inflation is a cheat and the gov has a printing press. The current bail-out
bill solves nothing. The gov has a war in Iraq, Afghanistan, and a likely
one brewing in Pakistan. The Russians have $600 billion in currency reserves
and are asserting themselves once again. The "New" Cold War will ratchet
defense spending up on big ticket bombs, missiles, planes and the like.
The Democrats will not dream of cutting or vetoing defense spending bills.
They don't want to seem "weak" on terror or whichever other new bogeyman
the military-industrial complex invents to line its own pockets. We are
going to see pay outs to regional banks, the auto and airline
industries, extension of unemployment benefits, and more social
programs. In the end we will just print more money.
In the short-term the USD may rise against other paper currencies, but
in the end they will all revert to were they have historically.
That is to say zero. No paper currency has ever stood the test of time.
At some point, we don't know if it is in 3 months, 1 year, or two years,
the gig will be up and the fiat currency era over. All of the bail-outs
and wars will make cash no longer King, but a Joker, as an inflationary
wave crashes upon our current (and temporary) deflationary environment.
We would use this extreme weakness in stocks and physical silver
to slowly add to the highest quality companies. We do not think
this is a market bottom, but many top quality stocks are down 2/3 in value.
Slowly start getting long.
For the speculative portion of our portfolio we like Exeter Resources (XRA), Fronteer Group (FRG), Allied Nevada (ANV), Andina Minerals (ADMNF), and Minera Andes (MNEAF), Silver Wheaton (SLW) and Silver Standard (SSRI) at current prices and on pullbacks.
When the public and mutual fund managers pile into the gold stocks we suspect it will be like the dotcoms all over again. We have no idea as to the timing. An opening of a January 2010, 65 Call on the GDX is recommended at under $2.70.
Stocks for the Long Run?
Where did we learn the myth that stocks always go up? From the Greenspan Put Era and from all of the nefarious marketing from mutual fund companies. Why do mutual fund managers not have most, rather hardly any of their net worth in the funds they manage?
They didn't get rich by being stupid, they got rich collecting the fees from selling
the public their funds. If mutual funds were such a great wealth
builder the fund managers would put their own money into them.
An inflation adjust chart will be added shortly. In order to reach the
March 2000 high, the S&P 500 must hit approximately 1998. This is
using the gov's bogus CPI numbers. In real terms were are down 50%.
So much for markets always going up.
They didn't get rich by being stupid, they got rich collecting the fees from selling
the public their funds. If mutual funds were such a great wealth
builder the fund managers would put their own money into them.
An inflation adjust chart will be added shortly. In order to reach the
March 2000 high, the S&P 500 must hit approximately 1998. This is
using the gov's bogus CPI numbers. In real terms were are down 50%.
So much for markets always going up.
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