Monday, January 14, 2013

Exploring the Virtual Economy

While it has been a while since my last post, the holidays have come and gone. President and the U.S. Congress acted to avoid the fiscal cliff with new tax increases for most Americans.  Granted the payroll tax cut would continue to hurt Social Security funding if left at the old rate for individuals.

The main issue for investors is an age old question. What asset classes or investments give me the best chance to earn a real rate of return and avoid risk?  As I have mentioned, I believe we are in a "virtual economy" with no answers to the problems that exist in the real economy.  Major structural imbalances will take many years to correct, as the economic conditions have taken many years to develop.  As investors explore the uncharted waters, I think we need to step back and look at some long-term investments to consider.  Problems can create opportunities and I believe longer-term trends to be more appealing then to play the hourly changes in stock prices. Many institutions are now involved with high frequency trading strategies. I am sorry, but my computer is not fast enough.

What long-term areas do I find appealing?

Natural Gas and the potential for exporting the fuel.
Natural Gas engines
Facilities to export Natural Gas
Heath Care and Pharma
Long-term Senior living facilities REITS

I am interested in other long-term areas they find appealing. Feel free to send me a note.   

Sunday, November 11, 2012

In Uncharted Waters

As I have mentioned before, the United States is in an economic environment we have never witnessed before in the history of our country.  While I have discussed the major economic imbalances in my blog that have developed over a long period of time (such as trade, budget, and currency issues), the necessary economic adjustments remain elusive and obscure.

In my opinion, the world's central banks have printed trillions of dollars of currency and tripled their balance sheets to support the debt currently outstanding around the world.  As the assets that back the record amount of debt continue to deteriorate or are written off in some cases, the debt imbalances will need to be worked out with more consumer, government, and corporate defaults.  With the removal of debt stimulus polices, the potential toxic combination of defaults and budget cuts that have been offsetting the deflationary drain of debt servicing on economic growth now look to be a long-term issue.  The health of the world financial system is at risk.

The developing issue is now governments cannot continue to borrow from bond investors and now subject to the same debt servicing problems as citizens and are subject to further austerity.  Leaders in the United States want to deal with the “fiscal cliff” by announcing budget cuts and tax increases. The combination will detract from any chance of economic growth for the United States near-term. Corporations around the world continue to hoard cash in advance of the potential falloff in economy activity and as a result unemployment remains at crisis levels.  

 The major question of how the excessive imbalances will work out remains. What should we do to protect our own financial future?  One possible answer is I think we need to treat this economic environment as an explorer did many years ago.

As we learned from history books, explorers set out to prove the majority view wrong that the world was round and not flat.  They had vision and wanted to find new lands with potential riches for the Kings and Queens that supplied the necessary financing for voyages.  The explorers “sailed off into uncharted waters” and were very brave and did not want to tell the leaders they failed.  They relied on ships that were supplied with a significant amount of men, food, and the best materials to try to account for any problem along the way.  Still, many died on the voyage to find new lands and riches. While they tried to be prepared for any event, many still lost their lives on the journey.  Those who survived came back heroes and brought back new riches.

Yes, I believe we are in uncharted waters and plan accordingly.      


Thursday, October 25, 2012

The Developing Problem with ETF's

Exchange traded funds have exploded to the investment scene over the last few years with many different sectors, types, and even volatility based ways to benefit from market trend changes.  The main issue is that many of the funds are becoming less liquid and in some cases are closing.

My concern is with a market crash, that the liquidity in these funds may dry up and become more difficult to sell in an extreme market event. Keep an eye on your ETF's and check the trading volume. Make sure it is active enough to provide liquidity for entry and exit points.

The market appears to be starting a major leg down, and liquidity will be important as this trend develops.

Saturday, September 29, 2012

Are Corporate Cash balances too high?

A look at the over $2 trillion in cash at U.S. corporations has been an economic concern and debated about by politician's. Should the money be put to better productive use to spur domestic economic growth? 

First, a number of large multi-national corporations hold significant cash balances outside the United States. While the rules for a two year period were changed that offered corporation's tax advantages to bring the funds back to the United States, the plan did not work. The main reason is that major multi-national production facilities are now offshore and used in the normal cash flow cycle in the country of production.

The second issue is that the collective debt level of companies have surged to over $6 trillion from $2 trillion  few years ago.  In effect, management teams have decided to borrow funds instead of using cash to invest in productive assets. The cash on hand will now be needed to payoff creditors in case of a reduction in  demand.

While borrowing rates continue to be at record lows, many management teams are too concerned about end demand to enter new markets or acquire other companies to secure their competitive position.  Management teams appear to be building up a significant cash war chest to prevent any liquidity issues as leveraged companies find it more difficult to access the credit markets.


Monday, September 17, 2012

The Grand Illusion Continues

A number of announcements were made by Central Banks and others and confirmed that government leaders and Central Banks "Will Do Whatever It Takes" to avoid an economic collapse.  Wait just a minute; Prevent?  Today marks the four year anniversary of the Lehman Brothers/Bear Stearns collapse and "The Great Recession of 2008".  For most people, it has been a long and painful experience.  As a number of my business associates already know, the economic collapse was not avoided and has continued.

What we have now is a "Virtual Economy" not a "Real Economy".  Video game players should know that a number of computer programmers can create a "virtual world" in which you explore, fight, and conquer enemy's. The Fed and the governments around the world have created a similar game called the "Virtual Economy" and left the "Real Economy" in shambles. Let me explain: 

What has always been the reality depends on which side you are on. You are either in The Have Camp or Have Not Camp.  In the Have camp (or virtual reality economy), the outlook is bright as bond prices, mortgage backed securities, and the stock indexes have rebounded on trillions of dollars of capital market purchases by Central banks/Governments that have propped up asset prices. The Virtual Economy has rebounded and wealth has returned to the Have Camp.
In the Have Not Camp (or the real economy), the majority of citizens have been left to fend off the collapsing housing prices, lack of jobs/high unemployment, and soaring food/gasoline prices as the "Real Economy" remains in a depression.

Just what is the end game here?  Will the "Virtual Economy" players come out of their world and back to the "Real Economy", or will citizens around the world be drawn into the new "Virtual Economy Bubble Game"?  After all, virtual games are fun for the winners! However, in the Virtual Economy will need more players, or the Central Banks will need to print more money since the "Real Economy" has none. In the Virtual Economy game, the rules are that Government's and Central Banks issue bonds or the Central Banks print money to replace "Real Money". 

The disconnect between the economy and the capital markets is as wide as I have ever seen it. The difference between the "Virtual Economy" and the "Real Economy" is frightening to me as the game continues. 

When will the Have Camp come out of the "Virtual Reality Economy" and realize that it is just a crazy game that cannot be won? The virtual economy game cannot be won by the Have Camp, unless new players are drawn into the bubble.

The real game here is called a Ponzi scheme. Please don't fall for the new bubbles being created in the "Virtual Economy" or we may end up like Lehman Brothers or Bear Stearns who ended up being in the Have Not Camp. Sorry, the game is over. Time to come back to reality!         

Tuesday, September 11, 2012

9/11 Tribute

While we await some major economic events, I think we should take time today to pause and reflect on our lives.  I had a few friends who survived the 9/11 attack and know how grateful they are to still be living today.

As we all know our family, friends, citizens and first responders were victims of multiple acts of terror on that day. We all know other Americans gave their lives and perished trying to prevent further attacks on this country on 9/11. 

As my friends who survived the terrorist attacks told the stories of first responders who went up many flights of stairs going to save others while many where exiting a building, or discussed some other event that occurred that day that saved their lives we must remember to all be grateful we live with other Americans willing to help us.
My own story is small compared to the other stories that day.  I had a flight scheduled to leave in the afternoon on September 11th. While watching the events unfold before my eyes on the television, I knew I was fortunate that my flight was not earlier in the morning or in the airport of the planes that were a target of the heartless killers.

I had also borrowed a book from the Market Technicians Association library, which was destroyed in the World Trade Center that day.  I waited long enough for the association to relocate and rebuild. Then I sent the book back that I borrowed with a special note.  Somehow that book had a very special meaning to me as it survived the attack and the library was rebuilt.

I will take a walk tonight around a local lake with my family to pray and honor the victims of this event. I will also pray that world leaders avoid conflicts in the future and strive toward peace.  I have learned in my life it is far easier to destroy than to build.


Tuesday, September 4, 2012

Actions Speak Louder than Words

Around the world investors, consumers, and citizens are waiting on the "magic announcement" from either political leaders or Central Bank heads to solve the problem of weak economic growth, high unemployment, and the risk of capital flight.

Recent articles suggest that savings/money is leaving Spain at a rapid percentage of GDP.  When money leaves the economic system, economic activity will contract and not expand.  The money contraction is being replaced by Central Bank or government purchases of bonds to continue to support a failing economic system or a depression.  As most citizens know, the United States is in a depression. Most economic statistics keep coming in weak or weaker.  Investors, consumers, and citizens are starting to ask the most important question; Will economic activity or the economy ever get better?

While Europe is suffering, the U.S. announced the ISM factory activity index is now below 50. Most economists consider the economy is contracting when the index falls below 50.  The European Central Bank heads will meet again September 6th trying to float the idea of unlimited bond purchases in the E.U. to prevent the wide credit spreads between higher rates of Spain and Italy compared to Germany.  While the major issue remaining is the pending court ruling in Germany due at the middle of September to allow the ECB to purchase any bonds at all.

As most citizens now know by now, the magic announcement is just an illusion.