4 Quality Names To Keep An Eye On: BP, CF, COP, RIG, TRN

In today's market environment, risk levels have become elevated. Most equity investments today are fairly valued at best and will require a continued upward move in the market to compensate the investor for the risk incurred. While current valuations are not at nosebleed levels, they are not cheap either. This market dependence is not worth the risk incurred.

Develop Ideas
In moments like this, investors should devote their efforts to finding and developing ideas for the future. Stock prices won't go up forever and the longer they remain elevated, the more significant the pullback. When that occurs, the investor who is ready and armed with a quality watch list will be ready to take advantage of any short-term opportunities to buy at an attractive price.

Trinity Industries (NYSE:TRN) is one such name. Trinity is a diversified business that makes rail cars, barges, asphalt, and various other steel products for the infrastructure and transportation industries. Shares aren't cheap, changing hands at nearly 30 times earnings, and the company has around $2.6 billion in net debt. But revenues are growing and backlog continues to strengthen.

Patience Creates Opportunity
As one of the largest producers of ammonia for fertilizer use, CF Industries (NYSE:CF) is another one to watch. Shares are at $155, slightly below the high of $163. Shares are trading hands for 17-times earnings, but the company is expected to significantly grow profits over the next few years as the fundamental demand for fertilizer use looks solid. For what it's worth, shares trade for 10-times forward earnings based on future analyst estimates. If commodities continue to slip in the short term, CF is a name to keep a close eye on.

Shares in oil giant ConocoPhillips (NYSE:COP) already look cheap today. Shares have dipped to $72 from a high of $82 as the price of oil has also declined from its high this year. At current prices, COP trades for under 8.8-times earnings and yields a solid 3.5%. Further price declines could make the valuation look even better.

Shares of Transocean (NYSE:RIG), the largest provider of oil rigs, are still at depressed levels from the Gulf of Mexico oil spill over a year ago. The fundamental picture for RIG remains unchanged, however. Demand for its deepwater drilling rigs remains strong as major oil companies focus all major exploration efforts in deeper waters. Shares are trading at $62, down from $86 this year. Analysts see the company earning $4.01 a share this year and $6.17 next year. Even with the spill issue, if shares continue declining, the risk may be worth the value.

Bottom Line
Risk should always factor into any investment decision. Today's higher stock market valuations increase the level of risk assumed by investors. Keep an eye on today's quality company's for any future opportunity to investment at better prices. Price paid confers value received and risk assumed.

Housing’s Next Leg Down And QE3

That US home prices are once again trending down is no secret. But just how bad things are likely to get is not yet well understood. Consider this from the Atlantic’s Daniel Indiviglio:

Chart of the Day: The Housing Market Is Worse Than You Think
Has the state of the housing market gotten better or worse since the first quarter of 2009? To answer this, you have to define what you mean by the state of the housing market. If you mean sales alone, then the state of the market hasn’t changed much: existing home sales are up a little from that time, while new home sales are down a bit. But assessing the inventory of defaulted, unsold homes in the market probably provides a better measure of health.

The following chart created by Laurie Goodman, a housing market expert at Amherst Securities, shows the ominous rise of shadow foreclosure inventory. It was part of a slide in a presentation she recently gave at an event last week at the American Enterprise Institute on how the Dodd-Frank financial regulation bill is stifling mortgage credit.

This chart answers the question: what’s happening to the homes of all those defaulted borrowers that we hear about? Many of those properties are a part of so-called shadow inventory. This is the sort of limbo between when a home’s loan defaults and when the property is put on the market for purchase.

The increase shown above is staggering. The shaded area shows mortgages more than 12 months delinquent or in foreclosure (darker blue) and those seized by the bank (lighter blue). The sum has risen from just below 2 million in early 2009 to 3.35 million in April 2011. That’s an increase of more than 67.5% over this period of about two years.

Also interesting: despite accumulating more defaulted properties, banks are very careful not to increase the number of loans sold very much. Loans sold has been very steady from 80,000 to 95,000 over this period. So recently prices have begun declining again even though the inventory for homes available for sale is being kept relatively low compared to the number that should actually be available to buyers.

`According to Goodman’s presentation, even though homes sold are only about 90,000 per month, inventory is growing by around 60,000 per month. So the homes sold each month would have to increase by two-thirds just to keep up with the growing inventory — not to begin to cut the 3.35 million homes in the shadows. To conjure up enough demand to meet 150,000 sales instead of just 90,000, home prices would almost certainly have to fall faster.

Wow. Housing is heading back into a depression even though banks are keeping millions of foreclosed houses off the market. Bank auditors won’t let them hold these depreciating assets indefinitely, so in the coming year the trend will reverse, as banks are forced to clear out their real estate. That’s a ton of new listings at a time when even current listings aren’t selling. So unless something radical happens (a government subsidy aimed directly at housing, for instance), the next leg down in prices should be epic.

This will cause consumers to spend less as their main investment turns out to be an even bigger loser than they currently fear. So a housing crash becomes a broader recession.

To my knowledge no one has tried to calculate what kinds of losses banks are sitting on. So let’s speculate that the average foreclosed house is worth $20,000 less than its mortgage (a conservative guess since most California houses are underwater by way more than that). 3.5 million times $20,000 blows a $70 billion hole in bank balance sheets that will have to come to light sometime soon.

Since the government’s reason for existing these days is to feed the banks, losses of this magnitude will pretty much guarantee a response. If QE3 hasn’t already happened, this will bring it on.

Average U.S. House Price = One 100 Ounce Gold Bar - Nearing Low?

LONDON (BULLIONVAULT.COM) -

So is the U.S. housing market nearing its low? Priced against gold it just might be.

Falling hard as the gold price doubled and more since 2006, the average US home is now priced at 103 ounces of gold - little more than one gold bar for settlement of a 100-ounce Comex gold futures contract.

Housing has only been cheaper in 26 of the last 121 years, and is currently priced around half the long-run average of 201 ounces. But might there be further to go?

Unlike the fine content of a gold bar, necklace or tooth filling, no two residential properties are ever quite the same. Buying or selling the average home can only ever be notional, most especially in a nation of 313 million people, spread out between the shining seas.

But you get the idea, no doubt, as well as the point made on our chart above. Since the housing bust began, the average US home has lost over 70% of its value in gold. It's dropped nearly 80% since the gold-market found its own floor back in 2001.

All told, swapping gold bars for bricks - whether as investment or a place to live - hasn't looked this attractive since the inflationary depression of 1981. US housing's previous low came during the deflation of the Great Depression. Never mind that the average US home doubled in size inbetween, or swelled another 40% since. Because whichever flavor of depression we've got today, the immutable object of unchanging, unencumbered gold has once more whipped back to its pre-20th century value against the ever-changing, credit-reliant market of residential housing.

It's almost as if the "long boom" of easy credit never happened. At bottom, the average US home cost the equivalent of 71.5 ounces of gold in 1934. Forty-six years later, it fell just below 77 ounces of gold. Today's price tag of one Comex gold bar isn't thus rock-bottom yet. But compared to the top of a decade ago, it's getting there

Destructive Force of Bubbles Created By Fed And Greenspan - Dr. Marc Faber

US Debt Default Will Punish Pensions

As America debates its debt, its debt ceiling, and the indebtedness of future generations, let’s make sure we all understand what we are talking about. Also, let’s look at an example of how the debt permeates through our society.

Why does the US have debt?

Because the stewards of the country’s Treasury, Congress, spends more than it takes in in tax receipts.

What is the debt?

The US issues bonds, notes, and bills that promise to pay principal and interest at maturity of the issue. The principal is meaningless. A printing machine produces principal to infinity. The interest, on the other hand, is a problem. Almost all of the current debt will have to be rolled over (re-financed) before 2020 at interest rates that prevail at the time of re-issue.

How much is the debt?

Let’s refer to the following website: www.treasurydirect.gov/govt/reports/pd/mspd/2011/opds062011.pdf. As of June, 2011, the official amount of Treasury debt issued is $14,343,088,000,000. In case we have trouble with all those commas, that figure represents ‘trillions’ of dollars in debt.

How much interest expense does the country pay each year on the debt?

In 2011, the US will pay $385.8 billion in interest coupons. That’s down from $413.9 billion paid in 2010 because interest rates have been falling while debt has been rising. In the end, it is not the debt that crushes a nation but rather the interest coupon required to facilitate a growing debt. We now live in a completely artificial environment whereby the Federal Reserve works to orchestrate a contracting interest coupon so the debt can be perpetuated. Banks make money by lending. The Fed made $90 billion in 2010. That’s more than Exxon and Walmart combined! We can all see who really benefits from massive debt. One can read my article ‘Why US Treasuries Will Eventually Yield Nothing’ to learn more as to why interest coupons will continue to fall.

Who owns the debt?

Here’s where it gets interesting. From the same website as previously referenced, the public owns $9,742,223,000,000 and roughly two-thirds of that is in the form of notes or intermediate term maturities. Another $4,600,864,000,000 in Treasury debt is listed as ‘Intragovernmental Holdings’. Nearly all of that $4.6 trillion is Treasury debt known as ‘Government Account Series’ (GAS) issue.

What’ the difference?

$4,580,584,000,000 of the $4,600,864,000,000 GAS debt is non-marketable. That means there is no market in which to sell this debt. In other words, if Treasuries should begin a bearish trend and sell off, investors that hold marketable Treasuries could sell their holdings to limit their losses. Holders of non-marketable Treasuries cannot.

Who holds non-marketable Treasury debt?

Interestingly enough, US citizens do. The Social Security Trust Fund holds 57% of the non-marketable Treasuries. Federal government employees are tied to the non-marketable debt through their retirement plan with a 17% ownership. Take a look at the following chart.

Source:www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_ann2010.pdf, pg. 15

Explain how federal employees are affected?

Civilian federal employees hired before 1984 were covered by the Civil Service Retirement System (CSRS) and those hired after 1984 were covered by the Federal Employees Retirement System (FERS). Both plans had investible assets directed to the Civil Service Retirement and Disability Fund (CSRDF). This is a defined benefits retirement fund for retired Federal employees. This retirement benefit extended by the taxpayer is structured as an annuity. Like everything for our government employees, a defined benefit plan is the ‘Cadillac’ of retirement plans. According to the Office of Personnel Management (OPM), they estimate the cost of the FERS annuity to be 12.5% of employee pay. The federal employee pays .8% and you and I pay the other 11.7% of that contribution. The federal government makes supplemental payments into the CSRDF on behalf of employees covered by the CSRS because employee and agency contributions and interest earnings do not meet the full cost of the benefits earned by employees covered by that system. But, it is an annuity and it is totally controlled by the government. The government controls the payout. The government controls the allocation of the invested funds. And, the government controls the ownership of the funds. That means the employees have no rights to the money listed in the plan under their name.

What is in the CSRDF?

As the retirement fund of civilian Federal employees, the funds are 100% invested in special-issue Treasury securities that count against the national debt. Contributions to the fund can be, and are suspended when a debt ceiling prohibits further expansion of the national debt. Current investments in the fund are redeemed by the Treasury while contributions are suspended. If and when further governmental borrowing is allowed, by law, the fund is then made whole again.

How much money is in the CSRDF?

According to an article authored by Katelin Isaacs at www2.pennyhill.com/?p=14318, the CSRDF reported a balance of $734 billion at the beginning of 2009. Here’a the part that I like. As with everything in our world today, the CSRDF is unfunded to the tune of $674 billion. It turns out that the CSRS was never funded while the newer and less generous FERS was and is funded. What we have is a dollar figure based on ‘imaginary value’ derived from Treasury note par value.

How is the CSRDF funded?

According to the OMB, the fund will have an income of $98 billion (estimate) in 2010. A full $3 billion will come from employee contributions. The other $95 billion will come from interest ($40 billion) and well, essentially tax payers. Expenses, or payouts, are expected to be around $70 billion for the same year. Again, all investments are required to be in US Treasuries. Still, the fund has a lot of ground to make up.

What if the US Treasury debt is capped or sells off?

We can see that civilian Federal employees and retirees could be hurt severely. If the debt can’t be expanded. the CSRDF will not get funding and retirement obligations will not be met. Should the Treasury notes and bills experience a loss in value due to selling pressure, the CSRDF will likely lose value and find itself more unfunded than originally thought. Even at best, the current Treasury Secretary has borrowed from the existing holdings of the fund to apply to the national debt to make it seem less threatening. Outright default on held Treasuries would surely diminish the value of the fund.

How does the US government get away with this type of accounting?

I really like this part. What you are about to read explains our world and our fiscal predicament perfectly. Please read this next sentence very carefully. Quoting from the source listed below, ‘According to the U.S. Office of Management and Budget (OMB), balances in the trust fund are... available for future benefit payments and other trust fund expenditures, but only in a bookkeeping sense.’ That statement ought to engender confidence in the government.

(Source: http:www.narfepad6.org/media//DIR_11701/c425b8c8d4041659ffff8b7effffe41e.pdf)

But what about the part that is unfunded?

From the same source listed above, the fund is in no danger of insolvency because the unfunded gap will eventually close. Want to know how? This article that I am quoting from is from the Congressional Research Service written by Patrick Purcell in June of 2009. It says, ‘The decline in the ratio of CSRDF outlays to salary expense after 2020 will occur mainly because future retirees will receive smaller pension benefits under FERS than they would have received under CSRS.’ Does that sound like austerity? I suppose too, that actuaries could estimate rising taxes, rising interest rates, rising numbers of contributors (more government hires), and declining benefit recipients due to death. Or maybe, they are just dreaming!

What about Social Security?

Yep, the Social Security Trust Fund is required to own US Treasuries and as previously pointed out, the fund owns 57% of the non-marketable Treasury inventory. As with the CSRDF, if US Treasuries fail (default), so too will the Social Security Trust Fund. Also, as with civilian Federal employees and their retirement funds held by the CSRDF, a 1960 Supreme Court ruling established that contributors to Social Security do not have a right or an entitlement to receive benefits from the Social Security Trust Fund. The government can cut either off whenever it wants. The debt debate should be bringing the phony pension accounting to light in both Social Security and the CSRDF. Sadly, both now depend on ever expanding debt.

Conclusion

Hopefully this little article will help with the understanding of the US debt and some of the ramifications of current, and probably ongoing debt debate. As we can see, our modern world is tentacled with pervasive debt. Putting a limit on that debt is not as easy as it might sound. Letting the debt continuously expand is clearly an exercise of surrender at the vault of the elite banks. Yes, Treasuries held in trust funds and pensions are valued at par. But if the Treasury is not allowed to borrow more money to pay the interest on currently issued Treasuries, default will occur rendering the paper worthless. On the other hand, if the Treasury is allowed to expand the debt unimpeded, the increased supply will erode the value of currently issued debt either through inflation or supply/demand dynamics. The government is now exposed as an irresponsible fiduciary as it requires certain retirement programs to hold only one security - the one that it issues. The US Treasury note might turn out to be one of the most risky securities on the market. To make matters even worse, the reported balances in some retirement programs like the CSRDF are only balances in a ‘bookkeeping sense’. Maybe we are playing musical chairs only all the chairs are make believe. Maybe what we should really take from the debt debate is the illusion of fiscal soundness. In other words, we are in an ocean of debt that threatens to drown us but fortunately we have a boat. However, the boat only exists in our minds through the power of imagination. The boat is not real. We just can’t afford to open our eyes and see that the boat is not real because the ocean will consume us.

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.

Jay Taylor: Turning Hard Times Into Good Times

The Greater Depression. Can a Gold Standard Put America Back on Track?

click for audio HOUR #1 HOUR #2

NYSE Margin Debt and the S&P 500

The New York Stock Exchange publishes end-of-month data for margin debt on the NYXdata website, where we can also find historical data back to 1959. Let's examine the numbers and study the relationship between margin debt and the market, using the S&P 500 as the surrogate for the latter.

The first chart shows the two series in real terms — adjusted for inflation to the current dollar using the Consumer Price Index as the deflator. I picked 1995 as an arbitrary start date. We were well into the Boomer Bull Market that began in 1982 and approaching the start of the Tech Bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit its real all-time high. A similar surge began in 2006, peaking in July, 2007, three months before the market peak.

Click for a larger image

The next chart shows the percentage growth of the two data series from the same 1995 starting date, again based on real (inflation-adjusted) data. Margin debt grew at a rate comparable to the market from 1995 to late summer of 2000 before soaring into the stratosphere. The two synchronized in their rate of contraction in early 2001. But with recovery after the Tech Crash, margin debt gradually returned to a growth rate closer to its former self in the second half of the 1990s rather than the more restrained real growth of the S&P 500. But by September of 2006, margin again went ballistic. It finally peaked in the summer of 2007, about three months before the market.

Click for a larger image

After the market low of 2009, margin debt again went on a tear until the contraction in late spring of 2010. The summer doldrums promptly ended when Chairman Bernanke hinted of more quantitative easing in his August 27th Jackson Hole speech. The appetite for margin instantly returned.

Unfortunately, the NYSE margin debt data is a few weeks old when it is published. In nominal terms, margin debt at the end of June, the latest available data, has declined for the second consecutive month — down 1.7% in May and 3.0% in June.

NYSE Investor Credit

Lance Roberts, General Partner & CEO of Streettalk Advisors, analyzes margin debt in the larger context that includes free cash accounts and credit balances in margin accounts. Essentially, he calculates the Credit Balance as the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt. The chart below illustrates the mathematics of Credit Balance with an overlay of the S&P 500.

Click for a larger image

As I pointed out earlier, the NYSE margin debt data is a several weeks old when it is published. Thus, even though it may in theory be a leading indicator, a major shift in margin debt isn't be immediately evident. Nevertheless, we see that the troughs in the monthly net credit balance preceded peaks in the monthly S&P 500 closes by six months in 2000 and four months in 2007. The latest trough occurred in March, four months ago.

There are too few peak/trough episodes in in this overlay series to take the March credit-balance trough as an urgent warning for U.S. equities. But I'll certainly revisit this topic on a regular basis, at least for the next several months.