Wednesday, August 11, 2010
One particular oil field is central to the problem. It’s called Cantarell. It’s a super-giant, offshore oil field that was discovered in 1976 — based on a natural oil seep under about 150 feet of water, by the way.
After decades of production, Cantarell is getting long in the tooth. Oil output from Cantarell, is declining rapidly. Cantarell is depleting at an astonishing rate. Meanwhile, the yield from new Mexican oil fields is simply not making up the difference. (more)
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The Dow Jones Industrial Average is no longer a bargain, according to one fundamental valuation measure. As of Friday's close, the liability-adjusted cash flow yield (the anticipated rate of return through which all of a company's debts and liabilities are proportionally assumed into the purchase price of the stock) of the SPDR Dow Jones Industrial Average ETF(DIA-N106.66-0.46-0.43%) is 4.03 per cent. Divide this figure by the 2.82 per cent yield of a 10-year U.S. Treasury Note and the resulting margin of safety ratio is a scant 1.43 (a ratio greater than 2 is desirable).
In light of these figures, bond and index fund investors should prepare for total-returns below historical averages. However, "stock pickers" should be able to generate satisfying long-term returns by selecting equities with attractive valuations, strong returns on invested capital and a durable competitive advantage.
Last week we focused on the 10 Dow stocks with the least attractive valuations -- a portfolio of companies that suffer from weak or irregular cash-flows, excessive debt burdens, and possibly, a damaging speculative interest. This week we highlight the 10 Dow stocks with the largest (most-attractive) liability-adjusted cash-flow yields (using 10-year historical data). (more)
In several long-term studies, however, the P/S ratio has proved a better predictor of stock returns. Perhaps that's because earnings are far more volatile than sales, and the P/E ratio can mislead when earnings are temporarily suppressed or inflated. Or, it might be related to research showing that profit margins tend to revert to industry averages over long time periods, as extraordinarily profitable companies attract new competition, and as companies with weak margins come under shareholder pressure to make improvements.
Among the large, American companies that make up the S&P 500 index, the median P/S ratio is 1.5. However, ratios vary sharply by industry, according to whether companies specialize in achieving high sales volume or large mark-ups, and according to investor popularity. For mass merchants, the median P/S ratio is 0.5. For software developers, it's 3.5. (more)
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(CNNMoney.com) -- More than 20% of the nation's mortgage borrowers owe more than their homes are worth.
At 21.5% for the third quarter, it is a small improvement over the previous quarter, when 23.3% of loans were underwater, according to real estate website Zillow.com.
This so-called negative equity is a hotly watched statistic because it is a prime predictor of foreclosure -- second only to loss of income.
"It is the paramount challenge facing housing markets," said Stan Humphries, Zillow's chief economist. "We already have had record levels of foreclosure and, combined with high unemployment, negative equity is very toxic to the market." (more)
"Once again, if there is no growth in broad money, no increase in velocity and no increase in Fed credit (hybrid money), then the only source to finance growth in the real economy will remain the sale of risky assets. When confidence seems to be stuck in a low plateau and talk of reigning in fiscal deficits is growing louder, a policy of undermining the value of risky assets couldn't be more counterproductive to growth."
I find myself in New York this morning (I once again did Yahoo Tech Ticker) leaving for DC later. Then sadly will have to forego Turks and Caicos, but that does allow for me to go to Baton Rouge for a one day course on the affects of the gulf oil spill on the regional economy, helicopter flyovers, etc. I will report back in this week's letter what I learn. (more)
Some of us should count our lucky stars, however. In certain U.S. cities, life is much worse for residents than in other areas of the country. Using a variety of criteria, including unemployment rates, health data, the number of foreclosures, crime statistics, climate and other measures of misery, WalletPop came up with its unofficial list of the 10 worst cities to live in. This list is far from comprehensive, but there are some significant reasons why these cities made the cut. (more)
What passes as normal? Well, today, that is an interesting question.
Just reading the newspapers from the past few days, does “More Workers Face Pay Cuts, Not Furloughs” from The New York Times get you all hot and heavy over a new cyclical bull market? How about “Tech Gadgets Steal Sales From Appliances, Clothing” from the Wall Street Journal – hey, who cares if the spin cycle on the washer-dryer don’t work no more, I got me an iPad! Amazing.
Meanwhile, there is excitement in the air over the view that all we have on our hands is a pause that refreshes. More interesting, however, is how the bond market just isn’t buying it. Why should it when MasterCard processed transactions are flat from where they were a year ago?
Nothing we are seeing in this post-bubble credit collapse is normal. (more)
After falling as much as 147 points earlier in the session, the Dow Jones industrial average (INDU) was off 53 points, or 0.5%, to close at 10,644.86, according to early tallies.
As was widely expected, the central bank said it would leave short-term interest rates unchanged in a range between 0% and 0.25%. But the Fed gave its most bearish outlook in more than a year, saying the economic recovery is weakening. (more)