The way I look for stocks is somewhat of a three step process as I outlined below:
1. Get a Macro view of the economy in general
2. Find a sector which will logically or reasonably do well in the future economic picture
3. Follow and research several stocks buy or watch to see if they rally or if anyone else begins to talk about these stocks
So lets talk about where we are.
The markets have been in rally mode, the effect of massive government spending and the impact of the general realization that we are not courting financial collapse. The question is will the recovery take hold or will the spending run out and the problems that caused this recession re-emerge and send the world economy back into recession.
With cheap money and massive liquidity injections, not surprisingly, some sectors are doing well. Banking, atleast the depository portion is reaping large profits with fed rates so low. The spread between what they pay for money versus what they pay in interest to depositors is several hundred basis points. I have heard a few commenters mention this as a reason to buy
Bank of America or Citi.
OK, lets go back in time to see what happened. The last time this occurred was 2001, however it was a different world, at that time mortgages and housing boomed, not so this time. So scratch buying those stocks.
The last time the world was flooded with cheap money, apparently unaware to central bankers such as Greenspan, there was the build up of the shadow banking community, the securitization of debts, SIVs and the rest.
I don't really see any good reasons to buy financials, I know that some like Goldman Sacks is making money, I am not sure how. I know that financials are likely at generational lows, but it is hard to pick winners in this environment.
A thought, the last time interest rates where lowered in the 2000/2001 timeframe things became distorted, like housing.
What is being distorted this time by the presence of easy money?
The last time money was cheap, it was cheap and available to the consumer - not so in this cycle. Back then cheap money supported consumer durables such as autos or even airplane purchases. While that is not occurring in this market at this time, auto makers or manufactures in general may find themselves a stronger competitor due to reduced input costs and more market share due to the bankruptcy of competitors.
I believe that is a important theme to remember and to look for that in a variety of industries.
The last time we saw a bottom of the cycle we saw energy drop, spare capacity in electric demand, wipe out IPPs and some subsequent recovery in that market. The last cycle saw a slow build in energy prices due to emergence BRIC demand. Its hard to remember but that kinda of came out of the blue. Even when it was apparent other commodities didn’t rally till a year or two after oil prices began to rise.
Oil prices have risen, but the world is now on the hunt for renewables and energy effiency.
Input costs are now less for users of iron ore, costs are less for miners and manufacturers however so are the prices of their goods. However gold mining is in the sweet spot, mining costs are down, gold prices are up. Maybe we have found something that deserves more investigation. Over the last decade many have watched the rise of gold prices and in the past we would have seen the same rise in the rise of the stock price of gold miners, but we didn't. People who anticipated the rise in gold prices and bought the big gold miners didn't catch the wave. I believe this was due to the the gold ETFs now available.
But now gold miners may get the respect they deserve.
Tech never saw the recovery of the last cycle tech giants, but the emergence of something entirely new - Google.
Healthcare such as one of my favorites PFE has been a perennial wallflower, will the collapse of the Obamacare, bring on a rally in healthcare? Well see.
Saturday, August 29, 2009
First Deflation Then Inflation
I guess I thought I would add my thoughts in the inflation/deflation debate. While I see the looming problem of printing to much money will lead to inflation, I believe that currently what is a driving force currently is a massive output gap.
There is overcapacity in auto manufacturing, steel mills, retail space, the list goes on and on. This is clearly a deflationary force. Nothing governments have done which is mostly financial manuvering (except Cash for Clunkers) has increased industrial production to reduce the overcapacity. So I see deflation now and likely inflation later.
There is overcapacity in auto manufacturing, steel mills, retail space, the list goes on and on. This is clearly a deflationary force. Nothing governments have done which is mostly financial manuvering (except Cash for Clunkers) has increased industrial production to reduce the overcapacity. So I see deflation now and likely inflation later.
Whats Wrong With Natural Gas
From my trolling the internet, it appears these are the likely suspects driving down the price of natural gas:
1. oversupply
2. distortion of the futures market from the effects of the UNG ETF "negative roll" in the spot price due to the contango market
3. No hurricannes
4. Storage is now approaching full on a nationwide basis
5. Industrial production is down 12%
6. Going into a "shoulder" period of the year
7. Natural gas is locally produced and locally consumed, oil is a global commodity, so while China maybe rebounding and spurring industrial production, that is not true in the U.S., nor it will be in the future
I have read reports where there have been cases that producers give natural gas away free to avoid shutting in
Whatelse could be impacting the natural gas market and what is the major driver, more importantly how long will this last?
Could wind and alternative energy be impacting the energy industry? I have read a report put out recently where in Texas wind is now impacting the pricing of the electricity market as a whole. Wind in Texas is actually displacing natural gas as a fuel, it does not displace the baseload generation producers such as nuclear or coal, could this be a sign of things to come?
I have looking at this market and have a few thoughts, if you look back at the last decade we have seen a great energy boom. The boom consisted of a huge investment, based on the response by industry to the rising prices. This occurred in both the oil and natural gas sectors, as we would expect we would see, the fruits of free market capitalism working and therefore bringing more product to market.
If you look at graphs of reserves, you see a huge increase in supply in natural gas, but not in the oil market, one reason why I believe in peak oil. Looking at these curves over 10 years does not lie.
The natural gas industry needs to find more customers other than power plants. The natural gas industry has done nothing to encourage the use of CNG vehicles. To me this would be a natural investment to encourage natural gas usage.
Value Stock Thoughts
1. oversupply
2. distortion of the futures market from the effects of the UNG ETF "negative roll" in the spot price due to the contango market
3. No hurricannes
4. Storage is now approaching full on a nationwide basis
5. Industrial production is down 12%
6. Going into a "shoulder" period of the year
7. Natural gas is locally produced and locally consumed, oil is a global commodity, so while China maybe rebounding and spurring industrial production, that is not true in the U.S., nor it will be in the future
I have read reports where there have been cases that producers give natural gas away free to avoid shutting in
Whatelse could be impacting the natural gas market and what is the major driver, more importantly how long will this last?
Could wind and alternative energy be impacting the energy industry? I have read a report put out recently where in Texas wind is now impacting the pricing of the electricity market as a whole. Wind in Texas is actually displacing natural gas as a fuel, it does not displace the baseload generation producers such as nuclear or coal, could this be a sign of things to come?
I have looking at this market and have a few thoughts, if you look back at the last decade we have seen a great energy boom. The boom consisted of a huge investment, based on the response by industry to the rising prices. This occurred in both the oil and natural gas sectors, as we would expect we would see, the fruits of free market capitalism working and therefore bringing more product to market.
If you look at graphs of reserves, you see a huge increase in supply in natural gas, but not in the oil market, one reason why I believe in peak oil. Looking at these curves over 10 years does not lie.
The natural gas industry needs to find more customers other than power plants. The natural gas industry has done nothing to encourage the use of CNG vehicles. To me this would be a natural investment to encourage natural gas usage.
Value Stock Thoughts
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