Archive for February, 2008
Wednesday, February 27th, 2008
Feb. 28, 2008 – In a February 21, 2008 article, the Globe’s Rob Carrick, provides an inside view of the workings of Canadian asset manager, Eric Sprott and his team at Sprott Asset Management. Carrick writes:
There’s a mix of suits and office casual attire, and a collegial flow of banter as Eric Sprott guides the session with questions and comments. But there’s also a feeling of tension, of wanting to say something that piques the interest of a boss who is good-natured and sociable, and yet intimidates with his obvious grip on market developments. The milk-as-gold idea is the sort of thing that might conceivably appeal to Sprott, manager of the amazingly successful Sprott Canadian Equity Fund and a keen prospector for investing themes with a future. Sprott was buying gold back in 2000, when it traded below $300 (U.S.) per ounce and few people envisioned the $800 prices we’ve seen recently. He took a shine to uranium in 2003, on the cusp of a gradual 10-fold price increase, with the expectation that nuclear power will have a big future in an era of high oil prices. Lately, his search for the next big score has led him to stocks in commodities like molybdenum, phosphates and silicon. “When looking at a stock, we ask, ‘What could happen that would make this thing triple or quadruple or quintuple?’ ” Sprott says, later, after the meeting. “We’re a sucker for big things. If someone says, ‘I have something big,’ that appeals to us.”
In the February 2008, Sprott Asset Management newsletter, Markets At A Glance, Eric Sprott shares his point of view that the market’s darkest days are not upon us yet, that there is in his estimation, more Unidentified Flying Objects from Mars to come. Sprott writes:
It’s been yet another awful month for the financial markets, even though the stock markets continue to be blissfully impervious to the carnage that is taking place in the rest of the financial world. This is not to say that the stock markets are by any definition bullish. But they certainly aren’t in the panic state that the credit markets are in at the moment. If they were then we’d be talking a full scale stock market crash, for that’s what invariably happens when bidders cease to show up. This is the state of the bond and credit markets right now. For all intents and purposes, save for government bonds, there is no functioning bond market. The stock market seems to be playing to a different tune. So, for now, the prognosis is for a long and drawn out bear market that could last for years to come, for the authorities are loath to allow a quick resolution to the bursting of the credit bubble. In our minds it is difficult to rationally reconcile current equity valuations with the washout that is occurring in the credit and bond markets and the US recession that we believe is now in full swing. But as bad as things are in the financial world, they seem to keep getting worse because problems heretofore unanticipated are coming at us from unforeseen quarters, like Unidentified Flying Objects from Mars. Things we already knew, about the credit bubble and the risks that were being taken, tell us that the problems in the financial system are bad. Things we don’t know, but that are only now coming to the fore, tell us that the situation could be unfathomably worse.
Which brings us to the point of the article:
Which brings us to the main topic of this article: UFO’s… the unanticipated surprises that are ravaging the financial system. With or without rate cuts, we already know that the banking system is in deep trouble. On top of the hundreds of billions lost in subprime, MBS’s, CDS’s, CDO’s, SIV’s and other toxic waste (the losses from which keep mounting by the day), what remains on bank balance sheets is also falling in value.
And Finally…
Have you ever heard of auction-rate securities? Neither have we. Before this month they were on no one’s radar screen. Out of the blue they’re suddenly a $360 billion problem.3 These are bonds that have been issued by municipalities, student-loan organizations, and others that seek long term financing with short term flexibility.
…What other incidents such as these have yet to be reported in the banking/insurance industries? We do not, and cannot, know. What we already know is worrisome enough… but what we don’t yet know can be downright frightening!
Make sure you read the whole newsletter. After all, it is coming from one of the brightest guys in asset management.
Tags: Asset Manager, bank balance sheets, Banking System, Bear Market, Canadian Market, CDS, Commodities, Credit, Credit Bubble, Credit Market, Credit Markets, Gold, Government Bonds, Investment, Markets, oil, Oil Prices, Php, pst, Recession, risk, Rob Carrick, Stock Markets, usd, Valuations, Value
Posted in Bonds, Canadian Market, Commodities, Credit Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook | Comments Off
Wednesday, February 27th, 2008
Are the days of easy-to-reach oil at an end? (Gulf News) provides comment on the must read subject of ‘peak oil.’
Excerpt: Jim Buckee, retired president and chief executive of major independent Talisman Energy, echoes van der Veer. “We’re there [at peak oil] or close to it,” he told Canada’s Globe & Mail. “Mexico, the North Sea and possibly Ghawar [in Saudi Arabia, the world's largest conventional oil field] are all in decline. The truth is the world is producing 30 billion-plus barrels of oil a year and is finding less than 10 billion. This is the worry.”
Tags: Canadian Market, conventional oil field, energy, Gulf News, Jim Buckee, Markets, Mexico, North Sea, oil, Peak Oil, president and chief executive, Saudi Arabia, Talisman Energy
Posted in Canadian Market, Energy & Natural Resources, Markets, Oil and Gas | Comments Off
Friday, February 22nd, 2008
February 22, 2008 – George Soros, the infamous hedge fund manager who broke the British Pound, penned an article for FT.com, in which he posits that this crisis, unlike many of its peers, which occur every 4-10 years, is actually the end of a 60 year period of credit expansion led by the once dominant greenback. Here are a few excerpts from The Worst Market Crisis in 60 Years, by George Soros:
…the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.
…Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.
Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
And finally,
Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.
Soros concludes that there is a danger that US protectionism could disrupt the global economy and plunge the world into a recession or worse.
Source: The Worst Market Crisis in 60 Years, George Soros, FT.com
Tags: Banks, BRICs, Central Banks, China, Commodities, Counterparties, Credit, Credit Default Swap, Credit Market, Currency, Dollar, Economy, Emerging Markets, Excerpts, Fed, Federal Reserve, food, FT.com, George Soros, Hedge Fund, Hedge Funds, India, infamous hedge fund manager, inflation, International, Investment, Investment Banks, Investment Wisdom, Markets, Mortgage, Mortgage Insurance, oil, Oil Producing Countries, Recession, risk, Term Bond, Trillion, United States, Us Federal Reserve, usd
Posted in Bonds, Commodities, Credit Markets, Energy & Natural Resources, Markets, Oil and Gas | 1 Comment »
Friday, February 22nd, 2008
February 20, 2008 – James B. Stewart, Wall Street Journal, writes that Agricultural Stocks Belong In Long Term Portfolios.
Here are a few excerpts:
What’s remarkable about soaring agriculture prices is that corn, oats, barley and wheat aren’t finite resources, like oil or copper. Fortunately for the world’s ever-growing population, food is a renewable resource. Yet it isn’t inexhaustible. U.S. stockpiles of many grains are at record lows, according to some reports. A more affluent world population is clamoring for better-quality foods, starting with wheat, a natural high-protein grain and the essential raw material in bread. The ethanol boom may have peaked, but the biofuel movement has further super-charged demand.
You thought $3-a-gallon gas was bad? On a recent visit to my neighborhood market, I saw loaves of bread fetching upward of $4, a small box of granola was $5, and a pound of beef filet was $27.99. Get ready for refrigerator shock.
There isn’t much consumers can do about it, short of going on a crash diet. But you can ease the pain by sharing in some of the profits that are flowing into the agricultural sector.
Here are some agriculture related stocks and ETFs:
| Stocks |
Ticker |
12-Month return |
| |
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| AG Growth Income Fund |
AFN.UN-T |
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| Agrium |
AGU-T |
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| CNH Global |
CNH-N |
|
| Deere & Co. |
DE-N |
|
| Monsanto |
MON-N |
|
| Mosaic |
MOS-N |
|
| Potash Corp. |
POT-T |
|
| Saskatchewan Wheat Pool |
VT-T |
|
| Terra Nitrogen |
TNH-N |
|
| |
|
|
| ETFs |
Ticker |
|
| |
|
|
| Claymore Global Agriculture ETF |
COW-T |
|
| PowerShares DB Agriculture Fund |
DBA-A |
|
| Market Vectors Agribusiness ETF |
MOO-A |
|
Tags: Agriculture, Chart, CNH, Deere & Co., ETF, Excerpts, Grain, Markets, oil, Potash Corp, risk, United Nations, upw, usd, Wall Street, Wall Street Journal
Posted in Energy & Natural Resources, ETFs, Markets, Oil and Gas | Comments Off
Wednesday, February 20th, 2008
Feb. 20, 2008 – Stagflation is a threat that is best defended against with commodities and Treasury Inflation Protected Securities or TIPS as they are commonly referred to.
A recent article by John Wasik, Bloomberg describes a few ways that investors protect against stagflation:
Several investments come to mind: commodities and Treasury inflation-protected securities, or TIPS.
…One refuge in inflationary times has been gold. Held in huge quantities by large banks and the favorite commodity of inflation speculators, it has been in demand over the past year.
You are better off buffering the ravages of inflation on your portfolio.
That means finding investments that combine income and price appreciation, and rise with inflation expectations.
Two investments come to mind: commodities and Treasury inflation-protected securities, or TIPS. A deft combination of TIPS and commodities can be found in the PIMCO Commodity Real Return Strategy Fund. It returned 23 percent last year. This is my portfolio’s key inflation buffer.
Whatever stagflation strategy you adopt, remember that overconcentrating in any of the inflation-fighting vehicles will add unnecessary risk to your portfolio.
Inflation is an often-unpredictable ogre that creeps up slowly. You will need a number of weapons to do the job.
Canadian investors seeking to invest in inflation protected securities and commodities may look at any of a number of Real Return Bond and diversified commodity products. Some of these include:
ETFs
iShares Real Return Bond ETF (XRB)
Claymore Global Agriculture (COW)
Canadian Mutual Funds
TD Real Return Bond Fund A (TDB755)
Investors Real Return Bond Fund (IGI491)
Don Coxe’s January 2008 recommendations include this particular paragraph:
Bond investors face two risks: inflation and credit. Nominal Treasury bond yields are far too low, and quality corporates are too rare – with 71% of corporate debt junk-rated. Buy inflation-hedged sovereign bonds – preferably in major foreign currencies. Simplicity is good: avoid complex products that are subject to drastic rating writedowns.
George Soros discusses the circumstances under which the Fed might be rendered impotent at macroeconomic control:
Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
Caution: One thing to remember is that TIPS or Real Return Bonds in a mutual fund do not provide investors with the same degree of risk management where date-driven spending plans are concerned. The maturity date of any bond is a guarantee the face value will be paid at an exact time in the future. Bond mutual funds, unlike the underlying security, do not provide any fixed maturity date or guranteed sum. Ideally, if you can get your hands on the bonds, then do so.
…leaves you wondering just how far the Fed may or will have to go with rate cutting in order to get the economy going again, and in the process, provide enormous [inflationary] stimulus to the rest of the world. This is truly a mixed blessing.
Tags: Agriculture, Banks, Blog, Bloomberg, Canadian Market, Canadian Mutual Funds, Commodities, Commodity, Commodity Products, Credit, Credit Market, Desc, Dollar, Don Coxe, Economy, ETF, Fed, Federal Reserve, food, FT.com, Gold, inflation, Investment, Investment Strategy, Markets, Mutual Funds, oil, PIMCO, Real Return Bond Fund, Recession, stagflation, Term Bond, Us Federal Reserve, Value
Posted in Bonds, Commodities, Energy & Natural Resources, ETFs, Gold, Markets, Oil and Gas | Comments Off
Saturday, February 16th, 2008
Feb. 15, 2008 – Joe Friesen and Marcus Gee of the Globe and Mail published an excellent article Eastern Promises on how demand for all things agricultural commodities are being driven by growth from Emerging Markets. The piece features commentary by Don Coxe, Chief Investment Strategist, BMO Capital Markets, on food and the agricultural boom. This piece features lots of anecdotal and empirical information.
Here are some excerpts:
India’s consumption of pulses — yellow peas, lentils, chick peas, green peas — has doubled in a year. In a country where millions are strict vegetarians, pulses are an essential protein source that go into the preparation of dal, which is cooked every day in millions of homes. India’s struggling, still backward farm industry can’t keep up with the demand.
“It’s not our part of the world that changed things, it’s the millions of people over there that are no longer content to get along with a bowl of rice and a few loaves of bread. They’re adding meat and dairy to their diet and we aren’t producing enough feed grains, enough vegetable proteins, to supply their need,” said Donald Coxe, global portfolio strategist for Bank of Montreal.
“Milk is the new oil. Milk demand worldwide is rising faster than oil demand. That’s because of the new Asian middle class.”
“Western Canadian farmers, unless they have an all-out crop failure, are going to have the biggest year in their history,” Mr. Coxe said.
Mr. Coxe said the rise in living standards in India, China and other parts of the developing world, as well as the sudden explosion in demand for corn to make ethanol for gasoline in the U.S., have put a squeeze on markets that’s making all cereal crops and vegetable proteins more expensive.
“So the way I sum it up,” Mr. Coxe said, “is the world is roughly in the position of a family that gave their son who was going to Las Vegas all the money they had and told him to put it on the dice table. He has rolled four consecutive sevens. He has left all the money on the table and now he’s rolling the dice again.”
“We are facing the real possibility of the worst global food crisis for which we have records.
“When people ask me what’s the biggest threat facing China — it’s food price inflation. The consumer price index in China (6.5 per cent) is now the highest rate in many, many years. If you take the food inflation out of it, their inflation rate is closer to 1 per cent.”
Tags: Agricultural commodities, Agriculture, Asia, Bank Of Montreal, BMO, Canadian Market, Chief Investment Strategist, China, Commodities, Consumption, Don Coxe, Donald Coxe, Emerging Market, Emerging Markets, Excerpts, food, food inflation, food price inflation, Food prices, global portfolio strategist, Globe And Mail, Grain, India, inflation, Information, Investment, Investment Wisdom, Joe Friesen, Las Vegas, Marcus Gee, Markets, Middle Class, oil, Oil Demand, risk, the Globe and Mail, United States, worst global food crisis
Posted in Commodities, Emerging Markets, Markets, Oil and Gas | Comments Off
Friday, February 15th, 2008
Feb. 15, 2008 – Courtesy: Bespoke Investment Group
Once again the folks at Bespoke have published something very unique. They are the best at producing clear eloquent tables and charts. Below is the one of the most interesting statistics that we have seen in a long time.
Many investors look at a stock’s PEG ratio as a valuation metric that takes growth expectations into account. The PEG ratio is a stock’s P/E ratio divided by its estimated growth rate. Generally, a PEG of less than 1 is considered positive because growth estimates are higher than the stock’s P/E.
With that in mind, we created a PEG ratio for major countries using the P/E ratio of each country’s major equity index and its estimated GDP growth in 2008. While some countries have a low P/E ratio, they also have low growth prospects (Spain and France), so their valuations are not as attractive. Countries that are the most attractive are ones with low P/E ratios and high GDP growth, giving them a low PEG ratio. Countries that are the least attractive have high P/E ratios and low growth prospects.
Below we highlight the country PEG ratios for 22 countries that have trackable ETFs. As shown, Russia tops the list with a P/E of 11.17 and estimated GDP growth of 6.8%. This gives Russia a country PEG of 1.64. Other countries with strong PEG ratios include Singapore, Malaysia, Hong Kong, India and South Africa. Unfortunately, the US is second to last on the list with a PEG of 10.26. The S&P 500′s P/E ratio is 18.46 while its estimated GDP growth this year is 1.8%. The US is barely ahead of Japan, which is last on the list with a PEG of 10.31.
Tags: Bespoke Investment Group, Chart, ETF, France, GDP, GDP Growth, Hong Kong, India, Investment, Japan, Malaysia, Markets, P/E, Rally, Russia, Singapore, South Africa, Spain, Valuations
Posted in ETFs, Markets, US Stocks | Comments Off
Thursday, February 14th, 2008
Hat tip to Chris Perruna – chrisperruna.com – for this collection of quotes on the subject of predictions.
- “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” – Lao Tzu
- “He who knows, does not speak. He who speaks, does not know.” – Lao Tzu
- “Never make predictions, especially about the future.” – Casey Stengel
- “Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” – Peter Drucker
- “If one could foresee the next three days, one could become rich for several thousand years.” – Anonymous
- “If you learn one thing from having lived through decades of changing views, it is that all predictions are necessarily false.” – M. H. Abrams
- “I figure lots of predictions is best. People will forget the ones I get wrong and marvel over the rest.” – Alan Cox (the MEDIA!)
- “History can predict nothing except that great changes in human relationships will never come about in the form in which they have been anticipated.” – Johan Huizinga
- “You can only predict things after they have happened.” – Eugene Ionesco
- “In the future, instead of striving to be right at a high cost, it will be more appropriate to be flexible and plural at a lower cost. If you cannot accurately predict the future then you must flexibly be prepared to deal with various possible futures.” – Edward de Bono
- “You never know what the next day is going to bring. That goes for football, goes for off the field, and I gave up a long time ago trying to predict the future and trying to deal with things I couldn’t deal with.” – Brett Favre
- “Predictions of the future are never anything but projections of present automatic processes and procedures, that is, of occurrences that are likely to come to pass if men do not act and if nothing unexpected happens; every action, for better or worse, and every accident necessarily destroys the whole pattern in whose frame the prediction moves and where it finds its evidence.” – Hannah Arendt
- “To predict the behavior of ordinary people in advance, you only have to assume that they will always try to escape a disagreeable situation with the smallest possible expenditure of intelligence.” – Friedrich Nietzsche
- “The unpredictability inherent in human affairs is due largely to the fact that the by-products of a human process are more fateful than the product.” – Eric Hoffer
- “My predictions are notably inaccurate.” – Robert Caro
And Finally…
- “The best way to predict the future is to invent it.” – Alan Kay
Tags: Alan Cox, Alan Kay, Brett Favre, by-products, Casey Stengel, Chris Perruna, Edward de Bono, Eric Hoffer, Eugene Ionesco, Friedrich Nietzsche, Hannah Arendt, Johan Huizinga, Markets, Peter Drucker, risk, Robert Caro, wisdom
Posted in Markets | Comments Off
Wednesday, February 13th, 2008
Feb. 13, 2008 – Warren Buffett, live on CNBC, proposed to buy the muni-bond portfolio from the monoline insurers, an offer, which if accepted would be very good for muni-bond holders (as it would protect the bond’s AAA ratings and their pricing) and Berkshire Hathaway, and would effectively leave the CDO portfolios right where they are. This could in no way be misconstrued as a bailout. This is Warren Buffett doing what he does best. Ahhhh…Capitalism at its finest.
Here is the excerpt of the transcript from CNBC.
Becky Quick: We know Warren that you’ve already put a plan out where you are, in fact, a bond insurer yourself. You have a new company that’s doing that. But beyond that, Ambac, FGIC and MBIA, they all have some significant problems. What do you think needs to be done?
Warren Buffett: Well, last Wednesday, as you know we have formed a new bond insurer. And last Wednesday, Berkshire Hathaway made a firm offer to the three largest bond insurers, who in aggregate I think, insure about 800 billion (dollars) of tax exempt bonds.
And what we said we would do is, and we gave a copy of this, of course, to the Superintendent of Insurance of New York. We said we would form, we would add to our company’s resources five billion dollars. That five billion dollars in the new insurance company, we would pledge that there would be no dividends or any kind of distributions or management fees taken out of that for ten years, so all the earnings of that company would be retained to build up the claims-paying ability.
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And we offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds. They have what they call an ‘unearned premium reserve’ which reflects the original premium less the amount that’s been proportionately earned. And we said, for one-and-a-half times that amount, we would take away all of their liabilities so that the $800 billion in bonds would carry a real triple-A insurance, and would sell in the market as if it had real triple-A insurance. Whereas now the bonds sell at significant discounts.
And we provided additionally that if they felt that this premium was too high or that they could do better that for thirty days, they would have the backstop of our offer which would be totally firm, and if they came up with anything better for themselves and for the holders of their insured bonds, that for a break-up fee of one-and-a-half percent of the premium, that they could go and take the other deal. So that the world would know that, one way or the other, that that the municipal bond insurance problem was behind it. It would be either with our offer or some other offer that they went out and obtained.
So, we put that out there to the three largest insurers and if they should decide to take it, eight-hundred billion of bonds that are now selling as if they were uninsured, or even in some cases a little worse. They’re probably selling on balance maybe 5 percent below where would sell for if the insurance was regarded as good, which is 40 billion on 800 billion. We will see what happens.
Good Luck Mr. Buffett, and good luck muni-bond holders…
Tags: ABK, Bailout, Becky Quick, Berkshire Hathaway, bond insurers, capitalism, CDS, Credit, Credit Market, Dollar, Earnings, Insurance, Mbia, municipal bond insurance problem, New York, risk, Superintendent, usd, Warren Buffet, Warren Buffett
Posted in Bonds, Credit Markets | Comments Off
Saturday, February 9th, 2008
Courtesy: BeSpoke Investment Group
The folks at Bespoke are by far one of the best resources for charts that put the market in relative perspective. Their charts get right to the point, cut through all the media noise and often in one glance. Take a look at this weeks chart digest, depicting the oversold position of the S&P 500 and various component sub-indices:
Below we provide our trading range charts for the S&P 500 and its ten sectors. When the price moves into the green zone, it is one standard deviation below its 50-day moving average. When it moves below the green zone, it is two standard deviations below its 50-day. The green zone indicates that the price is oversold versus its historical trading range.
Last week, most sectors had bounced back from lows reached a couple weeks ago. This week, however, prices have once again moved to the bottom of the green zone (extreme oversold territory). Technology, Telecom and Energy are currently the most oversold, while Financials, Industrials and Materials are the least oversold. Based on these one-year charts, the majority of sectors remain in steep downtrends, and until these downtrends are broken, it’s important to take money off the table once prices move to the top of the downward channel.
Tags: Bespoke Investment Group, Chart, dig, energy, Financials, Investment, Markets, media noise, risk, S&P 500, Trading
Posted in Markets, US Stocks | Comments Off
