Thursday, September 17, 2009
McAlvany Weekly Commentary, Sept 16, 2009
An Interview With Bill King: Current Market Perspective
September 16th, 2009
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Oil Risks Pullback to $59 If Support Fails: Technical Analysis
Crude oil, struggling to sustain gains above $70 a barrel this month, faces a decline to $59 if support on technical charts fails in the coming days, National Australia Bank Ltd. said. Oil is likely to continue drifting in a sideways pattern as traders seek to gauge the market’s short-term depth, according to Gordon Manning, a Sydney-based technical analyst. Futures, which touched a 10-month high of $75 a barrel Aug. 25, haven’t traded at $59 since mid-July.
“It’s trying to find a bit of a base,” Manning said in a telephone interview. “A close below $66 would easily take it lower.” (more)
Real Estate Rebound Will Reap ‘04 Prices, Simon Says
Prices of U.S. shopping malls may return to 2003 or 2004 levels as consumer spending and the commercial real estate market recover, Simon Property Group Inc. Chief Executive Officer David E. Simon said. That would represent a decline of as much as 23 percent. Simon, the biggest U.S. shopping mall owner, has $3.8 billion on its balance sheet and is looking at possible acquisitions, Simon said in an interview in New York.
“There is still a decent bid and ask difference between the buyer and the seller,” Simon said. “I think the sellers’ expectations certainly have gone down from where we were at the end of ‘07, early part of ‘08.” Prices may go “back to the ‘03, ‘04 period of time, somewhere in that range.” (more)
The Real Lesson of Lehman's Fall Lehman Died So TARP and AIG Might Live
Stephen Foley is on to something. Lehman Bros. didn't die of natural causes; it was drawn-and-quartered by high-ranking officials at the US Treasury and the Federal Reserve. Most of the rubbish presently appearing in the media, ignores this glaring fact. Lehman was a planned demolition (most likely) concocted by ex-Goldman Sachs CEO Henry Paulson, who wanted to create a financial 9-11 to scare Congress into complying with his demands for $700 billion in emergency funding (TARP) for underwater US banking behemoths. The whole incident reeks of conflict of interest, corruption, and blackmail.
The media have played a critical role in peddling the official "Who could have known what would happen" version of events. Bernanke and Paulson were fully aware that they playing with fire, but they chose to proceed anyway, using the mushrooming crisis to achieve their own objectives. Then things began to spin out of control; credit markets froze, interbank lending slowed to a crawl, and stock markets plunged. Even so, the Fed and Treasury persisted with their plan, demanding their $700 billion pound of flesh before they'd do what was needed to stop the bleeding. It was all avoidable. (more)
Mortgage problems are walloping Americans' credit scores
A scoring company created by the three national credit bureaus -- Equifax, Experian and TransUnion -- has some eye-opening numbers. VantageScore Solutions, whose risk-prediction scores are now being used by some of the largest mortgage companies and banks, has found that the way consumers handle their mortgage problems can have profound effects on their credit scores.
For example, loan modifications that roll late payments and penalties into the principal debt owed on the house can actually increase borrowers' scores modestly. Refinancings of underwater, negative-equity mortgages -- which the Obama administration's Making Home Affordable program offers through government-controlled Fannie Mae and Freddie Mac -- may have little or no negative effect on scores, even though the homeowners might have been tottering on the edge of serious delinquency before refinancing. (more)
MONEY MARKET FUNDS NO LONGER GUARANTEED - SEPTEMBER 18
I noted with interest that Tim Geithner, the Goldman Sachs Secretary of the Treasury, has gone on record as saying that the government will withdraw its $3 trillion backstop guarantee from the money market fund industry, on schedule, this September 18. While I am for any reduction in the government’s role in the economy, this decision is pretty interesting. Why would they do it now, when even a cursory examination of the real economy shows that things are shaky and rocking the boat on investor confidence seems a bit of a gamble?
In my usual, convoluted manner, I will try to answer that question, but only after stepping back to 2008 when I was told by a friend of mine in the most rarified air of high finance that he and all his peers had pulled all their cash out of money market mutual funds in March of 2008. They had done so because of the large quantities of suspect paper littering the portfolios of the funds, much of it anchored to commercial real estate and syndicated portfolios of consumer loans. As of mid-year 2008, 40% of outstanding corporate paper was held by money market mutual funds. The funds had taken on this paper as a way of trying to boost their yields and therefore gain a competitive advantage. (more)
Buffett: Economy Has Not Turned Up
The U.S. economy has not begun to climb out of the worst recession since the Great Depression, but the "terror" that followed last year's near-collapse of the financial system is gone, due in part to government intervention, Warren Buffett told Reuters on Tuesday.
Buffett maintained a positive outlook on the government's much criticized Troubled Asset Relief Program (TARP) for banks, saying it may ultimately turn a profit for the government.
"At the moment we don't see (the economy) getting better or worse, but that's better than you could say six months ago," said the billionaire known as The Sage of Omaha for his long history of successful investments. "The terror of last year is gone and that's thanks in part to the government." (more)
The World’s Most Precious Resource
Yesterday, I met with Ben Simpfendorfer, who is chief China economist for the Royal Bank of Scotland. He works out of Hong Kong, but is in the U.S. on business. We struck up a correspondence a few months ago after I read his book The New Silk Road (which I heartily recommend). We soon learned we are kindred spirits on a lot of what is happening around the world, and I was glad to finally meet him in person.
Simpfendorfer’s book highlights the growth of trade between China and the Arab world, a point I’ve also tried to show in my newsletters. It’s important for several reasons, not least because volumes are starting to become significant. They are also growing exponentially. For instance, a decade ago, Chinese exports to the Middle East totaled $4 billion. Today, they total more than $60 billion.
There are all kinds of investment implications from this shift in trade, which I’ve tried sorting out in these pages and in Capital & Crisis. The non-U.S.-centric trading models will affect the value of the dollar and commodities and more. Simpfendorfer talked about some of this over lunch.
If you’ve read this publication for any length of time, you know one of the critical issues is water. This is still not widely appreciated. But Simpfendorfer, who has traveled extensively throughout the Middle East and China -- and speaks Mandarin and Arabic (“Yes, I have no free time,” he says) -- will tell you it’s a “huge problem.”
In fact, when we talked about the state of the U.S. economy, Simpfendorfer ventured that water might be what keeps the U.S. on top for decades yet:
“The Silk Road has an average of 2,260 cubic meters of internal renewable water per person. The equivalent figure is 9,300 in the United States. In fact, an abundance of water is an important, but often overlooked, reason why the United States might defy its critics and remain the world’s major power through the end of this century.”
Conversely, when you look at the new Silk Road -- an area that covers North Africa, the Middle East and Asia -- water is what could “bring the region to its knees,” as Simpfendorfer says.
We talked about how water was crucial to nearly everything -- and not just for drinking. You need water to run factories and to make textiles and consumer goods of all kinds.
This week, there were many warnings in the headlines that the water crisis is worsening. Simpfendorfer talked about Syria and how a quarter of a million farmers had to abandon their land due to drought. It’s worse in Iraq, where water flows have fallen by two- thirds. Lack of water, Simpfendorfer offered, might do more harm to the rebuilding effort in Iraq than Islamic extremists.
You probably saw the headlines about Mexico. It’s experiencing its worst drought in half a century. Mexico City is close to running out of water and Mexican farmers will likely report crop losses of over $1 billion.
According to the LA Times:
“Hard hit have been corn, beans, barley and sorghum, plus livestock. Farmers and officials say the impact, including lost earnings, unpaid debts and shortages of staple foods, could be felt well into next year.
"‘Although no one wants to recognize it, there is a food crisis,’ said Cruz Lopez Aguilar, president of a national federation representing rural dwellers. He and others say increasing imports to make up for lost crops could raise food costs.”
Mexico is not alone. Kenya, Argentina, Australia, India, and other places have suffered drought this year. The problems are deeper than drought, but drought does magnify the weaknesses in the world’s water systems.
As an investment theme, it means companies that help alleviate water stress, manage water resources more efficiently or even own water resources outright, should grow in value over time.
Over the weekend, Barron’s published a favorable piece on Nalco (NLC:nyse), a stock I recommended several months ago to the subscribers of Mayer’s Special Situations. Nalco is the world’s largest water treatment company. According to Barron’s, “It is about three times the size of GE, its biggest competitor.”
The company has many solutions. One highlighted by Barron’s is 3D Trasar Boiler technology, which saves water and energy and also reduces emissions. Nalco is also just starting to crack the growing markets along the New Silk Road:
“This year, Nalco has added 80 people in China and India, and recently hired a well-known Chinese ex-diplomat to lead Nalco’s thrust there. The company has established a research center in Nanjing to develop products for Asia. With its huge infrastructure, polluted water systems and heavy dependence on coal-fired energy, China is a perfect prospect for Nalco’s anti-pollution services and equipment.”
Nalco has dramatically outperformed the S&P 500 Index since I first recommended the stock. Also interesting to note, Berkshire Hathaway owns 6.5% of the company and is its largest shareholder. Nalco won’t double or triple overnight, but it ought to remain a rewarding investment over the years.
During our lunch, Simpfendorfer talked about Hyflux (HYFXF:pink sheets), a diversified Singaporean water company. He met with the company and believes it is in a great position to prosper from the water troubles along the New Silk Road.
As for China, specifically, you might wonder what Simpfendorfer’s views are given that there is much debate right now about China’s economy. He said the next five years or so “would be very difficult,” but he did not expect China to collapse. This is very important, because if China does collapse, it would devastate commodity markets. Yet even modest growth in China could buoy commodity prices for years.