June 01, 2008
Commentary by Joseph Warren
As the summer driving season comes upon us, there is one overwhelming predicament the world faces — the price of oil. As I write this article, the $140 per barrel price of oil represents a 128 percent increase since last June. No matter the deceit delivered in the Consumer Price Index reports, the high price of oil is being felt everywhere. For proof, compare the cost of an old plane ticket or grocery receipt to one more recent. Of course, oil is primarily used as a form of gasoline to power vehicles. And if viewed in that sense then oil is a form of energy production that must be offset by other resources lest we yield to the mystic price of the final barrel. Because energy touches every aspect of our lives and, along with climate change, it will emerge as the defining issue of my generation. The irony is that the higher the levels of financial and environmental suffering from oil dependence become, the quicker the transformation to alternative sources takes place.
The world produces 85 million barrels of oil per day but it uses 87 million. In the United States, we’ve cut our daily consumption by 400,000 barrels over the last few years. But that reduction has easily been offset by demand in China, where the Chinese government subsidizes the price of gasoline. Moreover, this oil shortfall is not being met by new supply coming online. In short, we are at full capacity and the price per barrel confirms it. This predicament, however, is accelerating the charge into renewable energy — solar, wind and water power — that can be transferred across power grids. If this movement continues and is complimented by the growth of hybrid and electric vehicles then oil dependence will diminish.
An easy way to determine the economic viability of renewable forms of energy is to measure the cost of each watt of power produced. In December 2007, a Silicon Valley start-up shipped its first solar panels priced to produce 1 watt of energy for $1, which is the price at which solar energy becomes cheaper than both oil and coal production. This $1 per watt threshold has just been met by the wind industry: Dallas-based Broadstar Wind System’s turbine now meets that benchmark. Hydropower is much cheaper than oil and coal right now, but until recent times its use has been limited to areas with dams that have the falling water that creates the flow essential for power production. Despite this limitation, hydropower is the most widely used form of renewable energy as it provides 19 percent of the world’s electricity. Furthermore, more recent technologies are emerging that generate power from the up-and-down motion of buoys riding the tides of the ocean. The principle catalyst of all this innovation is, of course, the high price of oil. And if you want confirmation, just look at the recent action of the most storied oil investor of all time.
In April, Texas oil magnate T. Boone Pickens commenced with plans to build the world’s largest wind farm. It will generate 4,000 megawatts of electricity — the equivalent of building two commercial scale nuclear power plants — enough power for about 1 million homes. The importance of this is that Pickens spent his entire career making billions of dollars in the oil business. His shift is profound and demonstrates to me that opportunities abound: Fortunes will be made from this electric change.
We all face obstacles in this world and there are moments when life can seem overwhelming. When I look back in time I note that my most creative thinking and maneuvers came when I faced my biggest dilemmas. It is just simply human nature find ways to survive in dire circumstances. This ability is more innate in some and those with talent will find a way to prosper in desperate times. That said, the energy predicament is a worldwide phenomenon, and it will take the entire planet to find solutions. Those solutions will be extremely difficult to achieve and the world will likely face higher levels of protectionism and outbreaks of violence. But the solutions will also be highly profitable, and if we can gain exposure to such, all the better for our clients.
No doubt I’ve faced moments of doubt, bouts of frustration and untold fits of human spirit. Nevertheless, I remain optimistic. One thing I do know: No matter the severity of the circumstance, tomorrow the sun will rise, the wind will blow, and who knows what the tide will bring.
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.
July 01, 2007
Commentary by Joseph Warren
It took a quick glance at the menu of a local Mexican restaurant for me to come up with the idea for this month's commentary. Because summer has arrived, I sat on the outside patio and thought it appropriate to try one of the various margarita concoctions available and I began perusing the menu backpage first. It was after I settled on the classic "Cadillac" margarita when Inoticed the price. Although I'm not aregular, I estimate the cost had increased 40% since my last visit. It was at that point when a Cadillac on the street sped by me at the same time the waitress served my "Cadillac" margarita that I realized the irony of inflation.
Last year President Bush set substantial targets for the use of corn-based fuels, such as ethanol, as a gasoline alternative here in the United States. Whether the cost to produce ethanol makes it a worthy alternative is debatable. Nevertheless, the wheel is in motion and corn prices averaged $3.48 a bushel during the month of May, up from$1.31 in May 2006. Demand pushes this type of increase and domestic, as well as international farmers, have taken notice as it is estimated that 15% more corn will be planted this year. Of course, available farming acreage has not increased and other less profitable crops are literally being left in the dust.
Corn thrives on arid land; the type of ground that is also ideal for the blue agave plant. It turns out that tequila, a principle ingredient in any proper margarita, is distilled from the sap of a blue agave. Given the bushel price and the climate south of the border, it's the agave fields of Mexico that are now being sacrificed.
Whether it is from the stock market turmoil or just plain good marketing, alcohol consumption increased dramatically in the early part of this decade. In turn, the production of agave soared as demand outpaced supply. But the cactus-like agave takes about seven years to reach maturity and now there is an abundant crop. Ever the capitalists, Mexican farmers have started to abandon the crop in hopes of bundling corn profits. The planting of the agave is estimated to drop 35% in the coming years as the switch to corn intensifies.Think this matters little because you are not a fan of refried beans and guacamole? Well, take a moment to scan the prices at your local supermarket and you'll gain insight into inflation.
Corn also is a primary feed source for cattle and other livestock. So, the neteffect on things like milk doubles as both feed cost and the expense of moving dairy from the farm to the supermarket are reconfigured. Anticipate a 15% increase in your milkand cheese bills next time you shop.While numerous examples of how inflation affects our daily lives can be cited, the irony lies in the fact that we are often the culprits of the cause.
Americans' dependence on oil and gasoline is unprecedented. The UnitedStates has less than 5% of the world's population, yet it consumes nearly 30% of global production. It is taken as almost a birth right in this country that we can drive anywhere, at anytime. Think that's far fetched? Consider the legal driving age in most states versus voting age. It makes me wonder if Exxon has lobbyists taking employees of local DMV branches to lunch. Whatever the case, more legislation,which often translates to taxation, will not fix the problem. We already have substantial tax levies on gasoline and we are in this predicament. But there is one process that works every time - market economics. So, next time you take a quick spin to the supermarket or car pool to Margaritaville, realize the consequences of your transport. Because no matter how or what you swallow, we are not going to escape the irony of inflation.
Warren Capital News
In what I consider to be one of the crowning achievements in the young history of Warren Capital, I am pleased to announce the establishment of theWarren Capital Foundation. The foundation is a charitable organization designed to oversee the distribution of donated funds to exempt organizations to support their charitable work. Early in my career, I began to recognize the power of the asset management business and the sheer magnitude of the wealth capable of being created for both clients and advisors. Benjamin Graham, the person I consider to be the father of securities analysis and mentor to legendary investor Warren Buffet, once said that every day he strived to do something foolish, something creative, and something generous. While I can easily find myself placing the milk in the cabinet or crafting the type of title that heads this commentary, it's the latter that matters most and I intend the foundation to be the vehicle for such accomplishment. Because at Warren Capital wealth is measured in more ways than one.
As such, I have decided that a percentage of Warren Capital annual profits will be donated to the foundation. The foundation will in turnmake donations to charities that serve worthy causes and consistently meet certain standards of efficiency with their allocation of capital. We also are frequently queried by clients as to appropriate places to make charitable contributions. The foundation is available for such and we intend to actively manage the assets in the foundation free of charge. I am confident that we can achieve returns inexcess of the foundation's net donations to other charities and, over time, the foundation assets and annual donations will grow dramatically.
As always, I appreciate your continued trust and confidence.
Warren Capital Group is a fee-based registered investment advisor specializing in wealth protection and growth. 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 the firm’s clients -- high net worth individuals, institutions, foundations, and corporations -- and advise them on mortgages, insurance and other aspects of their net worth. Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.
January 01, 2007
Commentary by Joseph Warren
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.
September 01, 2005
Commentary by Joseph Warren
After eclipsing $50 when fueling the car this past month, I decided it was time to make an immediate inquiry into the current oil and gas dilemma. If measuring in real or inflation-adjusted terms, crude oil prices are now at levels only seen in late 1982 during the last oil shock. From a more recent perspective, the 40% rise in oil prices over the last six months marks a 300% increase from the trough experienced in 2000, the last recession. Numbers like these warrant further exploration into the fundamental supply and demand equation.
While the common conception is that supply is diminishing, basic analysis of the five majors suggests that this is not a supply related shock as both production and reserves are modestly higher than in 2000. Rather, as is my contention, worldwide demand is more likely the culprit. And while a quick count of the SUVs parked at your local Whole Foods Market might make you assume the United States is to blame, it is foreign consumption that is rising.
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