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March 07, 2011
Chaos in the mid-east is contributing to an ongoing spike in oil prices. How might this weigh on the stock market? Since 1973, there have been at least eight occasions when oil prices rose sharply. The stock market appreciated at an 8 percent rate since 1973. Other than in 1990, when Iraq invaded Kuwait, during oil spikes, the market just moderately underperformed.
February 02, 2011
Embargo or Diversion. Steven M Anderson, retired Army brigadier general, who served as the military’s senior logistician in Iraq in 2006 and 2007, says keeping our bases supplied with fuel drains $24 billion a year from the Pentagon budget. (NY Times 1/13/11). At $88/barrel that comes to 272 million barrels or 74% of the amount of oil “imported” or more properly called, “diverted” from Saudi Arabia. The war is burning more oil than we import from Iraq, Brazil, Russia or the UK. If the war were a country, it would be among the world’s top twenty five oil consumers.
Diversions are disruptive. A year after its birth, OPEC’s (the Organization of Petroleum Exporting Countries) embargo highly disrupted our economy. As in 1973, today Saudi oil comprises almost 9% of our supply. Diverting most of that oil impacts prices at the pump and affects the cost of production throughout the economy. It is oil that would otherwise be used to fuel our cars and power plants, fabricate or deliver the latest product.
Winding down the wars might be like striking oil.
August 15, 2008
From early 2005 to last month, gold went from $400/oz to $1000/oz and oil from $46/barrel to $142/barrel. What happened to investors who finally got the message that gold and oil had no place to go but up?
Unfortunately beginnings are not announced with bells and whistles. When a trend has been underway for some time and finally makes it to the headlines, it is often old news. Though most enticing, investing late is often most dangerous. Since July gold is down 17% and oil 22%. Chasing yesterday’s headlines can be dangerous.
January 01, 2007
The turn of the calendar marks the season of economic predictions from Wall Street.While last year was my first foray into the world of predictions, I find myself, and more importantly, Warren Capital clients,very pleased with the results for 2006. I've attached last years forecast at the end of this commentary for review. In as such, I'd liketo list the following points of data for comparison:
• Fed Funds currently stands at 5.25%, upfrom 4.25 % in late 2005.
• The price of gold per troy ounce rose from $517.10 in 2005 to $635.20 in 2006, representing a 22.84% increase.
• The technology select spider (XLK) returned over 12% last year.
• Oil prices and energy were consistent headlines in 2006. However, the price of oil per barrel ended the year unchanged.
• Overseas markets were far superior toU.S. markets with the DJ World Indexex-U.S. returning 23.10%. Japanese markets did not participate in this rally,however, as the Nikkei returned a paltry 6.91% in 2006.
• While the yield on the 30-year treasury bond reached 5.35% in April, the bond market ended with an inverted yield curve as the short term rates stand 20 basis points higher than long rates.
• The S&P 500 returned 13.6% for theyear, very close to its 30-year average of12.7%
• Small caps outperformed the large caps with the Russell 2000 returning 17% versus 16.29% for the Dow. Companies like Wisdom Tree, which use fundamentals like dividends rather than market capitalization to create an index, saw tremendous inflows into their products.
• With the exception of biotechnology,portfolios holding railroad, hotel,insurance and iron ore were handsomelyrewarded in 2006.
Given the data, the outlook for 2006 proved fruitful. However, I find myself seeking better means to produce return from macroeconomic thinking. As mentioned in theJanuary 2006 commentary, one certain way to produce profits is to find consensus ideas and then construct portfolios that benefit if and when those ideas dont evolve. Being correct on non-consensus ideas can yield tremendous profit. In as such, I give a few thoughts for 2007:
• Risk has all but been forgotten in many markets. This is most notable in the miniscule spread between high yield and investment grade bonds and also in the frothy emerging markets. Watch for high yield bonds to be one of the worst performing markets and look for serious corrections in India and Russia.
• U.S. markets are hitting all time highs, insinuating a perfect economic landing. Simultaneously, the bond market is inverted, which is an almost certain precursor to a recession. I look for both measures to come together with the S&P500 producing below average returns and long term yields rising to produce a flat yield curve.
• Economists are forecasting a gradual decrease in profitability coupled with the slowing economy. I expect profitability to remain strong given falling commodity prices in the slowing global economy and labor pressures that ease as more companies outsource to foreign labor markets.
• While the political might in Washington continues to stress the need for currency re-evaluation in China, protectionist measures actually come from the developed world. Companies in surplus countries go on buying sprees around the world and the United States, as well as other developed economies, use national security concerns to block international takeovers.
• Once common correlation conceptions dissipate over the year, whether they are negative or positive. The use of gold to protect against a U.S. stock market decline proves futile. As proven in the second quarter of 2006, emerging markets continue to move in tandem with U.S. markets as oversea investing provides limited diversification.Industrial materials and developed markets provide hedges for U.S. equity investors.
• Real estate markets continue to correcton a local basis. However, the year ends with new home inventory falling. Several home builders return to profitability and when combined with industry consolidation, the sector turns in a solid performance.
• With a slowing global economy, the key theme for 2007 is to find growth. This is more easily done on a regional level than a company level. Recognizing opportunities in both areas prove beneficial, however.
Warren Capital News
I want to thank the clients of Warren Capital for all of their business. The last year proved very beneficial to our clients and I look forward to a successful 2007.
As always, I appreciate your continued trust and confidence.
While there is no particular monetary reason, the years end marks a natural time for economic reflection and prediction. Although some of the more recent themes ofpast newsletters have not had much time toplay out, an objective analysis of previous comments is in order.
The inaugural July edition featured topics on the housing market and trade deficit. While I might have been a little early calling the housing bubble, inventories have risen dramatically with interest rates, mortgage applications have fallen, and many major markets have seen no price appreciation inthe last half of the year. And while the finalnumbers for the trade deficit will not beknown for a few weeks, my suggestion of a 26% increase in the total deficit is right inline with the year-to-date numbers.
In September, I noted my belief that energy supply concerns were here to stay and that maintaining exposure to oil exploration and refining companies would be necessary to increase investment return. That the meserved our clients well with many exploration and refining stocks posting total returns beyond 50% for 2005 in comparison with a -0.61% change in the Dow.
October offers mixed reviews. The chorus of those expressing concern about United States refining capability has taken hold and announcements have been made about new refining facilities coming online. However,the other warning heeded about a dramatic increase in natural gas prices with the onset of winter has not played out with the mild temperatures so far experienced. Natural gas prices have actually fallen $3 per British Thermal Units since October.
Although my November prediction of a 5% fed funds rate in 2006 will not be known for some time - with fed funds currently at 4.25% and core inflation expected to run at2 ½% in the next 12 months - I consider 5% easily achievable and probably on the low end for 2006.
Finally, my most recent December suggestion about paying mind to the yield curve and watching for inversion is beginning to take hold. Ten-year treasury yields were trading at one-tenth of a percent below 2-year treasuries as of December 29. With the fed funds prediction yet to be determined, my biased calculation of past economic prediction yields five for six (83.33%). A quick lesson learned; never bet on the weather.
In as much satisfaction felt by offering successful themes, my objective going forward is to implement more actionable ideas around such themes. What I havecome to realize, as I now approach my first decade in investment advising, is that one of the most assured ways to make money for clients is to find long-tailed out of consensus ideas that come to be correct. Under that assumption, I offer the following 2006predictions for the record:
• While most economists expect two more rate hikes with fed funds rising to 4.75%, pent-up demand for hiring and capital expenditure will lead toabove trend line GDP growth near4% while inflation edges near 2 ½%, substantially above the Fed comfort zone. I predict fed funds reach 5.25%; however, the year ends with serious consideration given to ratecuts.
• The dollar gradually falls and gold continues to rise as foreign governments move a considerableamount of their reserves away from dollar denominated assets and into gold.
• Companies sitting on hoards of cashwill finally release those funds and invest in their core businesses and upgrade technology. While most Wall Street firms maintain an underweight in technology, 2006 marks a new cycle in tech and it concludes as one of the best performing sectors.
• Energy continues to dominate the political and economic landscape. While the earnings growth rate ofenergy companies declines dramatically, the shear size of dollar profit elevates energy to 13% of theS&P 500 by year end.
• Overseas markets continue to offer compelling returns but proper country selection becomes critical. Japanese reforms continue to takehold and the Nikkei produces strong total return in dollar terms
• After several months of a flat to inverted yield curve, long rates finally rise dramatically with a major move away from long-term treasuries by foreign governments.
• Consistent, solid earnings for S&P500 companies combat continued price to earnings multiple contraction, which is catalyzed by numerous rate hikes. Under such forces the S&P 500 achieves an average total return.
• Despite many predictions by Wall Street that the coming year will produce a boon for large capitalization companies, mid caps outperform again and new products that compete with S&P 500 as acomparison index emerge.
• With inflation running above Fedtargets, companies with pricing power produce the best total return. Portfolios with emphasis on railroads, hotels, biotech, insurance and iron ore are rewarded.
While I am comfortable making thesepredictions, it must be reiterated that profitwill come from proper investment positions.With that in mind, please stay tuned.
The Numbers
For your review, heres where the markets ended:
Warren Capital News
As the year concludes, I want to thank our clients for all the business they conduct at Warren Capital. I am proud to state that after year-end reviews with clients I honestly feel that 2005 was not only asuccess for Warren Capital but also truly rewarding for clients.
As always, I appreciate your continued trust and confidence.
Warren Capital Group is a registered investment advisor specializing in private wealth management and protection and growth for high net worth individuals, institutions, foundations, and corporations. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth. As a fee-based personal wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.
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This commentary has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy. Information in this report does not pertain to any Warren Capital Group product and is not a solicitation for any product. Investing in securities involves risk, including the potential loss of principal. Foreign investment involves specific risks including greater economic, political, and currency fluctuation risks, which may be even greater in emerging markets. Indexes can not be invested in directly, are unmanaged, and do not incur management fees, costs or expenses.
