AT&T and T-Mobile

The US Justice Dept. has sued to stop the proposed merger of AT&T and T-Mobile. Frankly this was expected as the current administration has made it clear they do not like mergers, especially mergers they do not consider politically advantageous. The last part of that is the most perplexing to me, but more about that later.

The merger would have created the largest cell network in the country and helped AT&T improve it's 4G network. The merger still might happen, but the chances are slim now. The winners here are few.  Sprint is considered the winner, but Sprint is in trouble no matter the merger or not. As the wireless carrier with the most troubled financial situation Sprint might get a longer lease on life, but frankly they need a merger and somewhere along the way that has almost surely got to happen. T-Mobile, owned by the German telephone company, wanted out of the US market as they see this market as saturated and no growth. They are correct in that assessment. T-Mobile being the 4th largest carrier had only one way to go and that is down. The German company that owns T-Mobile has no intention on spending more capital on the carrier so they will be considered a long term loser here, despite what the US Justice Dept. wants to think. Verizon, despite acting concerned about the merger, was considered a winner if the merger went through because the competition would be less and they could begin making some actual profits on their huge wireless investment here. So consider them a loser too. AT&T also is a loser since they saw T-Mobile as a quick fix to their network and the lessened competition as well.

So in all no one really won here long term. The largest legacy carrier Centurylink was never mentioned in this scenario publicly, but most people considered that if T-Mobile was merged, then Sprint would be forced to merge with someone and that someone would be Centurylink.  That was a plus for Centurylink, so they might be considered a loser here too. All these carrier have spent billions on the last decade to upgrade and improve their networks and are ready for a big payoff for the investment and for now that will not happen. There is also the fact that with the no growth market that the US market has become both AT&T and Verizon will now become more of a utility than growth companies and you can expect the market PE to soon reflect that fact. Verizon might have the most to lose there with the higher PE currently. A utility type company will be one that is heavy with regulation and lots of debt, a decent and slow growing dividend. A growth company would see captial gains in stock prices too, so check that off as likely to no go now for both companies.

US Justice has said they see this merger as non-competitive and that very well might be so, but they have done consumers and as well as Sprint and T-Mobile no favors here. With no merger technology improvements, like those in Europe and Asia, will be slow coming to the US market and Sprint and T-Mobile will continue to lose customers with a very uncertain future.  I am also perplexed by the decision since the unions wanted this merger as they saw significant increases in jobs and union dues from this merger. The 5000 jobs AT&T mentioned go away too, most of that coming from Europe. With unions a huge supplier of cash and manpower for the coming election Obama has told them he believes they are in his pocket already.  (Note there could be a similar union screwing decision coming soon on the Keystone Pipeline.) 

As an investor this decision means if you are looking at AT&T or Verizon as a utility shareholder you will be fine. If as a growth stock with capital gains you better look elsewhere. If you own Sprint you better take your losses and go elsewhere. I still consider Centurylink to be the most promising long term buy here.       

I currently own either long or options on CTL. T is on my watch list for inclusion.      

STI Hedge Fund August Performance

The greatest danger to hedge fund performance is forced liquidation. Most funds liquidate securities from time to time that the operator decides no longer fits the criteria for the fund. But forced liquidation is death to profit performance since the fund is generally taking losses selling securities prior to when the operator believes is prudent.

 

Forced liquidation is caused by two events, one is when holders of shares in the fund demand cash for their shares or the fund over levers the capital margins of the fund. Of course giving cash to shareholders means selling securities since most hedge funds are just that HEDGE funds where they hold little cash. When funds over lever, or hold securities in the downward trending market, they can reach margin requirements quickly and can be forced to liquidate to satisfy account or SEC rules.

 

In the past month with the downward trajectory of the markets many hedge funds have had to liquidate for both of the reasons noted above. It has been brutal in some cases. STI Hedge Fund has not liquidated a single position during the past month and does not see any forced liquidation situations going forward. One, because we are privately owned by one person and two because of the structure of the fund.  Due to the onerous regulatory environment and fiscal uncertainty brought on by the current administration  I do not see in the near future any reason to go public and take on investors, even though I would highly consider doing so if those regulations and uncertainty were rescinded.  Also the structure of the fund is such that we invest in securities or use derivatives with certain criteria that are positioned for a cash flow approach to avoid forced liquidation due to loss of value. We do not see any scenario currently where we would ever be forced to liquidate until we consider a security not fitting our criteria.  One last point here is that with our scenario we produce steady market beating returns of 15% to 18% annually instead of the wild swings of  single digit returns to 20% plus. During August the average hedge fund lost 4.1% or 48% annualized loss.

 

The STI Hedge Fund reports a positive cash flow for August. We had a 11.86% annualized return for the month. This is below our goal, but frankly we could not be happier to actually go forward in cash for the month after the horrible market month.  A large gain from tobacco trading was the highlight of the month.  We are carrying a significant carry forward loss into September, but as noted above our structure allows us to wait on recovery of capital declines until a later date. In addition the majority of our holdings are down less than a day's trading value so we are poised for a recovery in fund value if market conditions improve. The action during August has confirmed that our security selection process and cash flow approach.

 

Looking forward to September the fund has good trading opportunities open for profit as we only had to use a few far forward options last month despite the lower pricing of the market. The fund will also benefit from the lower trading expenses we negotiated last month. I am also pleased that the structure of the fund will actually produce cash flow from margin that will be positive next month.  Unless the market collapses STI Hedge Fund should continue to produce positive cash flow and market beating returns going forward.  We will avoid being smug about our performance when other hedge funds stunk it up during August.

                

In Praise of Boiled Okra

Two things in life separates people into two distinct groups. No subgroups, no fence sitters, no victim groups, just plain ole I hate it or love it. Those are the eating of any type of liver and boiled okra. For the record I can not stand liver. On the other hand I can not get enough boiled okra.

 

Maybe it has something to do with my upbringing since as a Southerner  I first introduced to okra it was not about what the texture was, but the taste.  When I was growing up we had plenty of this vegetable from our garden and my mother fixed it fried and boiled. I like it both ways for the record, but I LOVE it boiled or lightly steamed. Yeah, it is slimy and makes funny feeling in your mouth, but the taste make up for any of that. Besides I honestly have never noticed or been bothered by the texture issues. The way I look at it when okra is boiled and on the table I have to fight no one over who is going to get their share. My wife likes it too, but not in the quantities I do. I suppose the fact okra is low in calories, has no cholesterol, no fat, has tons of vitamin C and K, and dietary fiber make no difference to most people, they just hate it. So here's in praise of boiled okra.

 

Hey, if it is so slimy to you, remember that means it slides right in and it slides right out too. Good for bowels so to speak.  Keeps small town investors living longer too!

              

Personal Housing Story

We put our home up for sale several months ago. Just before that we had found a newer home about 6 miles down the road near a lake that fit our lifestyle better and would allow us room to have more out of town guests.  The people who owned that home had been trying to sell their home for almost two years and were happy someone who could get a loan was willing to purchase their home. We understood from conversations with them that they had previously had home buyers look at their home and not have the ability to get credit like they could have just a few years ago. They also had come down on the asking price significantly already. So we made a deal, signed a contract, with the contingency we could sell our existing home.

 

Our realtor came to our home, got photos, discussed price and put our home on the market. We had a repair man come over and do some small items we believed needed doing to make the home more appealing.  Our home is in an established neighborhood very close to both the local high school and middle school. You can get to Lowes, Belks, Walmart, two strip centers, numerous restaurants, and car service within less than one mile. It is an ideal setting for a young couple, older retired couple, or a new graduate wanting to start life. We even got the comment from people saying " why would you want to move you got such a good location". Yes, it is a good location, but we needed some additional items that were more important to us now. In the end we set a price that the realtor deemed would make the home attractive. We also made it clear we were most negotiable. So anyway we were set for selling our home and it went on the market.   We were ready to move.

 

Well were ready to move so we thought. Over three months passed and our full level of activity has been exactly two onsite visits. One about one week after the home went on the market and another when we had an open house about four weeks ago. There has been several drive by looks and people picking up our printed material at the street. No offers, no would you considers, no nothing. We considered what to do and better yet what we did wrong. Frankly nothing after talking with our realtor and other people trying to sell their homes.

 

We have now taken our home off the market.  I suppose we now understand better the plight of others who are trying to sell homes in this market and the market we live in is relatively good. I have been told since taking the home off the market how to sell our home and I expect the person is right.  The how to sell goes like this, find the home you want to buy, tell the person you will buy their home at a significantly reduced price and that you are going to sell your home at a significantly reduced price, therefore the relative sell and buy price are about the same. What the person was saying that even in this low interest rate loan environment that home prices are still too high. Frankly that is the truth.  We build too many homes and sold them to people who should not have been buying bought them due to too easy loans dictated by the federal government. So unless you are really lucky consider the fact you are going to live in your current home for awhile and be happy you own one. Look like we went back to the future and returned to what our fathers and mothers knew in the 1960:s homes are for living and not trading or moving up. They knew how blessed they were, we should too.

               

Weak Dollar Investing

The current administration in Washington has signaled that a weak dollar is ok with them. As this scenario plays out take caution to what works well in a weak dollar environment.  A strong dollar environment as championed by Reagan and Clinton helps stock markets and particularly growth stocks.  Bush began a new era of the weak dollar and Obama has doubled down on this approach. A weak dollar makes hard assets such as gold, metals, buildings, and commodities more valuable.  In this posting I will concentrate on weak dollar investing since that is what we currently have and look to have going forward.

 

A weak dollar means the federal reserve is printing money and the federal government is spending like mad. That is indeed happening right now. Therefore with more dollars chasing goods and most importantly chasing limited supply hard assets they grow in value.  Goods related to hard assets such as food have already seen large increases in cost.  Goods where supply is not limited like electronics and clothing have not seen large or sometimes any price movement.  This could change is business conditions improved and people had more money to spend. But even then that would be doubtful since many households are still de leveraging from debt overload of the past decade. The federal reserve wants people to spend their money or invest it and is keeping interest rates near zero so that in itself tells you that economy activity will be suppressed for some time to come.

 

The best investments going forward currently are metals such as gold, silver, copper, platinum, and such. I am not a gold or silver person preferring copper. Gold and silver are generally good holds of value but can be wicked in their downward move if you own it when traders consider conditions are going to change. I also favor dividend paying metals and SCCO fits my criteria there. SCCO's dividend fluctuates since this company's profit is tied directly to the price of copper. Point is this makes for serious upside potential when copper value is moving upward.

 

Oil, which is in limited supply due to restrictions on drilling in this country remain and good value as well.  I know I have suggested ERF as the choice here for some time and the price has been trending lower lately. This is due to some weakness in oil prices and the resulting concern with ERF's value. I am not concerned the management here is top notch and the dividend should be safe unless the bottom falls out of the price of oil.

 

POT which is direct play on food commodities is your best bet for a stock related to farmland and farming. Frankly the ownership of farmland is a better choice, but if you do not have access to such,  being the arms dealer to farmers is a good bet too.  If you are looking for a dividend play here TNH is your choice, high dividend and direct linkage to farming via fertilizer.

 

There is a reason stocks such as NNN and O have held up well in the recent downturn in the market. They own premium valued commercial buildings with triple net leases which tend to hold up very well in weak dollar environments. Both these stocks raise their dividends annually and provide good protection for your money going forward.

 

Once more may I suggest you consider agency reits such as NLY, HTS, and AGNC. These stocks pay double digits dividends and are safe going forward for two years since the fed has said no rate increases for three years. Not having the opportunity to buy into the soon to be disposal of the huge federal housing auction the agency retis give one a chance to make money on the mortgages for these soon to be bought homes.

 

I hold either as an option or long in, NNN, O, ERF, HTS, AGNC, and SCCO.   

 

                

Market comments and reconsidering a position.

The past couple of days continue to show an unhealthy market, but that is to be expected with an unhealthy economy.  The up ticks the past two days are nothing more than bargain hunting and the lack of high volume trading. Today futures note a down market, but again not much and that actually is good as those who bought in the last two days are likely taking some profits.  I am concerned about the Friday expectations of the Bernanke speech. Expectations are too high for a QE3 to begin and I can not see the chairman doing anything right now shortly after saying rates will remain near zero for the next two years. Investor and traders are hoping for more money candy and I believe that would not be a positive in my opinion.  The good news is that the market has settled down some in the past few trading days.

 

If you are looking for market stability going forward you are going to be disappointed. There are too many uncertainties out there to make that a reality.  The political situation with the upcoming 2012 budget, renewing of the CR, the super committees, the Obama Sept. speech, the 2012 election, and etc. make for a volitle market for at least another 15 months. Again selective picking of stocks is the way to go. If you are a long term investor stay put in your positions and continue to add when opportunity presents itself.  Until we hopefully settle the long term political landscape next year you will not get clarity on investing.

 

BP has been on my radar for some time now and I have alternately liked the opportunity and disliked the opportunity. BP is still a large oil and gas company with wide ranging assets and a nice dividend. At the same time they face significant issues with lawsuits and the ongoing lack of activity in the Gulf of Mexico due to Obama's moratorium on drilling. However there is serious upside in the fact the $20 billion dollar fund they set aside for Gulf pay outs will see about $10 billion or more returned to the company after August 2013 since only $6 billion has been paid out to date. A PE of only 6 and the price down around $10 from the 52 week high make for enticing profit possibilities. Again, I am considering taking an option position in this security sometime soon.

New normal...new job skills.

Our mothers, fathers, and grandparents went through something similar to what we are currently economically, then it was called the Great Depression.  Frankly the misery they endured would make today's so called problems look silly in comparison.  We as a country will likely never know anything approaching the concerns of not knowing where your next meal is coming from and if you will have enough money to pay not some of the bills, but any bill coming due soon. Oh, we think we do , but if you have read history and had the chance to listen to those who lived through the 1930's then you know better. When I hear people on TV or in the media try to say we really really need to be concerned about the "poor", I think they are not serious because we do not have poor compared to the 1930's. The people of that era endured the Great Depression , fought and won a World War sacrificing some of their prime years, and went on to build the greatest economic society known to mankind . I know and have known many of them, never a complaint, never a request for charity, just give them an opportunity and they would take it from there. A hand up instead of a hand out. Today we lose our job and live on unemployment, have lifetimes on welfare and food stamps.  Many of us enjoy free medical care through Medicaid. Trust me that is not depression like living conditions.  According to government statistics almost everyone "poor" today has an air conditioner in their home, lots of home appliances, a cellphone, even a car. So poor today is not poor like yesteryear, or most places in this world.

 

All this is not to say we do not have problems because we do. The current economic environment could be greatly improved with just a change in direction of policy and a new commitment to equal opportunity, not equal outcome. Our new normal is not a good normal in my opinion. We either have to decide to get out of this mind set or endure a reduced standard of living going forward. Maybe you are personally satisfied with that, but if you are get out of the way and let those who want to do better do so and improve your life as well. This misery and malaise we find ourselves in is embodied by Obama who does not seem to have a uplifting bone in his body. Many others in our society seem to have adjusted to the new down spirit.  If you want to adjust your life to a better future do what our fathers, mothers, and grandparents did and pick yourselves up and learn some new skills that can be sold to an employer or you can sell on your own.

 

Our community colleges offer a huge selection of new skills to learn. Medical services, accounting, all kinds of technicians, business education, paralegal, office technology, criminal justice,  and the list goes on for seems like forever. All of these skills are in demand right now, all lead to good income opportunities, and frankly all are cheap to learn via the community college system. My personal opinion is that earning a major college degree currently, unless it is a medical licence, law licence, or something that leads to direct employment are worthless.  Oh, the media or Big Education establishment will not tell you that as they have a vested interest. But do you know of a medical trained person now who either does not have a job or can not find a job immediately? I bet you do know of someone with a major college degree who is unemployed and looking.

 

So use your time off during unemployment to stop looking for a job like the one your had, chances are that career is either gone or soon to be gone. You can either sit home with your smartphone, Facebook page, DVD's. and video games or you can get out and make it happen. Go learn new skills, get some "family jewels" as I suggested in an earlier posting. The opportunities are out there, but it is up to you to find them and train for them. I noted in a story this morning many people are junking their corporate careers to start their own business and are happier doing so. The choice is yours a new normal and reduced lifestyle or a bright future.

 

High Electricity Rates for Electricities NC Towns.

Representative Leo Daughtry at the start of the recent North Carolina legislative session placed a bill for consideration in the NC Legislature that would limit members of Electricities group to using electricity payments for just that electricity purposes. With the reaction from these towns you would have thought he entered a bill to eliminate the towns entirely. Frankly it might have felt that way if you were a town commissioner or elected representative in one of those towns. How did we come to this, and why is this a topic for small town investor?

 

Let's first say how the Electricities group got started. About three decades ago Carolina Power and Light, the predecessor to Progress Energy, and Duke Energy were having trouble financing new power plants as the costs of building those plants got higher and higher due to the increasingly regulatory atmosphere, as well as the very high interest rates during this period. The state government in North Carolina was also concerned by the prospect of not having enough electricity for the smaller towns in the state . So legislation was passed that allowed these towns to buy into the new power plants and become power plant owners. Enter public power agencies, one in the eastern part of NC and one in the western part of NC. These power agencies thought buying into the new power plants being built by Carolina Power and Duke Energy would give them a leg up on cheaper power costs for their respective towns. Not only could they help the privately owned power companies with financing, but they could do it cheaply by offering municipal bonds at a lower interest rate. So Electricities was created with the issuance of Eastern Municipal Power Agency bonds and North Carolina Municipal Power Agency bonds for the western part of NC.  Most of these bonds were 30 year bonds that would be essentially start being paid off about right now in 2011. 

 

Now as interest rates decreased during the mid 1980's from a double digit percentage to mid single digit percentages these power agencies took the opportunity to call these higher interest rate bonds and issue bonds with a lower rate. Refunding if you will, but with a twist the sinking fund that normally accompanies bonds and offers a timely payoff was not included. The new bonds and any called from that point on were reissued as 30 year bonds extending the maturity date. The towns in the compact used the sinking funds for other expenses, anything that could be tied in any way to power expenses. They also transferred funds from the power fund to keep tax rates down in some towns. If this does not seem kosher to you it isn't.  As in any case when you place a pot of money in front of a politician they find other uses for it.  If you were thinking your local politician was less prone to such temptation than say your Congressperson to the Social Security money pot then you are thinking silly.  Another quirk in this scenario is that with lower interest rates on the new bonds going forward versus the initial cost structure and prevailing rates now offered excess funds from already set electric rates flowing into the pot, money that should be put towards debt became available for other uses. Of course other uses won out.

 

 

At this point in the original bonded debt cycle the bonds should have been begun being paid off and electricity rates begin dropping due to less revenue needed for bond debt service. Instead we got lots of new bonds that if I read correctly will not get paid off until the late 2020's.  I should say, if then, since who knows what the politicians might do next. One other note just like any government bureau the Electricities organization wants to perpetuate their existence, so they are in no hurry for the bonds to be paid off either and those agencies are another cost added into the mix of electrical rates for the agency's towns.

 

Now frankly I welcome Representative Daughtry's bill as needed long ago. Unfortunately  there are too many , read city council, municipal power workers, and the other agencies involved,  who have access to political power who would get hurt if the bill actually became law.  Unfortunately Representatives Daughtry's bill got watered down considerably and ended up only applying to towns in his district. So the taxpayers and ratepayers in all these towns will continue to bear the brunt of higher power costs and the towns in Rep. Daughtry's district have already found a way around the watered down version of the new law.

 

 My opinion is that the state should step in and require as part of the proposed merger of Duke and Progress Energy the ending of the current municipal systems and power agencies. That would involve the new Duke Energy to assume the bonds and assume the assets of the town power systems. Yes, it would be an added expense to the utility, but the added expense could be spread over a much larger group of power consumers and make the monopoly power system fair. The NC Utility commission could grant some additional rate adjustments to compensate Duke for the added cost structure. Of course this idea is too common sense and again hurts the people and agencies with vested interest so it would never be considered.

 

Full Disclosure I own Eastern Municipal and Municipal Power Agency bonds.

 

 

Your "million dollar moment" is here and you are not included.

I picked up on a news story this morning that the federal government was preparing to sell off their huge inventory of homes that have been foreclosed on by Fannie Mae, Freddie Mac, and HUD.  Now everyone we are talking about BILLIONS and BILLIONS of dollars of housing that are soon to be on the auction block. We are also talking about BILLIONS and BILLIONS of dollars of discount from the real value. This value will transfer to someone who buys the foreclosures from the federal government. Many people overnight will become quite wealthy from the purchases of these homes. This is lot winning the lottery.

Now your federal government is concerned you might not like seeing all this wealth transfer so easily and so therefore sent out a Request for Information yesterday to judge how the public might respond to the sale. Note this RFI was not posted anywhere most people look and I do not know of any news media that covered it. That is how it is meant to be. The legal stuff is to be done like most legal stuff just done and move on to the real show. The real show is selling those homes.

What is really going to happen here is the RFI is structured in such a way to only allow the big guys to get in on this action. In case you are wondering who the big guys are let me mention a few, the DEMOCRAT hedge funds, the DEMOCRAT led Goldman Sachs, and the DEMOCRAT private equity funds. Yep, Mr. Obama is making sure those who pay for his reelection are getting to feast at the federal housing goodie table. Oh, I will admit there will be some Republican big wigs here too, but they will be very very few just to cover for the real money being handed out. Think about it this way if YOU were one of those select Republicans getting ready to win the lottery would you squeal about your good luck or just keep quiet take the money and go home and rejoice?

Anyway if everything was on the up and up here regular people like you and me would have the chance to bid on these homes, buy them and fix up, rent out, or just sit on them for the big payday down the road. I have looked and looked this morning for a way to get in on this pork and can not find one and I have access to more opportunities than most people. So as I posted in my "Million Dollar Moments" posting back a couple of months ago that really bad times such as this offer chances to be really rich for those who seize opportunity your chance for one of those moments is with this sale.  But Mr. Obama is going to make sure YOU are left out. Now if you are a reader of this blog and are getting a shot at this federal largesse please e-mail me on how to join you and get in please. Trust me I will keep quiet too.

                 

Picking the right stocks for a market like this one.

The market tanked again today and investors who own stocks felt more pain. If you own technology stocks or growth stocks you felt it worse than people who own dividend stocks. But some dividend stocks went down significantly too, so which ones to pick in markets like this is important.  For many years I have done lots of due diligence just to pick stocks that do not go down as much, or even at all, in markets like this one.  I spend hours weekly keeping up with the news on my picks and delete those from time to time that no longer meet my criteria. When running a hedge fund the need for stability in positions is important.  Below I will point out some of the stocks in the fund which have held up well and where we stand with them after a day this bad.

BCE... this stock is down $1.49 per share from the purchase price. Not much at all considering the market and has actually rebounded some the last week from a lower low. BCE is just solid company and is safe money long term.

DO...down 49 cents per share from purchase price. DO is a good company doing business with long term contracts so a safe dividend long term.  I also used some experience in purchasing it at the right price.

DUK..down 63 cents from the purchase price. DUK is just a solid utility that will produce a product needed no matter how bad an economy.

HTS.. agency REIT down 50 cents per share. In a low growth or no growth economy this stock is safe money too.

LO...I am still up over $2 per share in this stock. LO is just a great company, paying a healthy dividend and just announce a big stock buyback. Despite the uncertainly regarding menthol regulation this company is shareholder friendly and the stock price proves it. My largest holding and I am happy about that in this market.

MO..down $1.30 per share from my purchase price. As solid a company you can buy. As I have said before nothing beats owning a government monopoly.

NNN. down 70 cents per share from purchase price. NNN has convinced me they know how to purchase and lease real estate maybe better than anyone in the country.

RAI...down $1.51 from purchase price. The third of my tobacco stocks that have proven to be solid holdings for investors.

SO..up almost $3 from purchase price. This company is the best safe company on the planet for my money and I still love it. Owning it will let you sleep like a baby.

Now yes I have other holdings that have taken bigger hits, but by holding stocks like the ones above the pain is less. In moments like this smart investors take a look at their holdings and which held up and remember them when you are culling picks

Another day, more problems in Europe and more jobless claims.

If you were expecting the few recovery days last week were the trick to get the stock market going again, think again. Better yet read some of my posts last week when I opined about nothing having changed and the bears would be back. This morning it could be with a vengeance and expect the market to start out down 200 points or more.European  banks are a mess and France and most importantly Germany yesterday said they were not going to bail the rest of Europe out of this mess. Maybe Germany has finally had enough?  Jobless claims moved up smartly this morning from last week to be above 400k again. Stupid is when people do the same thing over and over expecting different results.  Maybe this continued drip, drip, drip of bad economic news for the next 15 months will focus the mind to the perils and opportunities in the 2012 election or maybe it will not. But this will not end until we resolve long standing debt problems.

 

Once again I will note that the safe investments are NOT in US government bonds where everyone seems to be heading with yields keeping pushed down due to investor buying. US bonds not only do not protect you from inflation, they yield so little than when prices do start up your principal will be ravaged. The late great Louis Rukeyser called the bond buyers the "bond guolls" since buyers there are always pessimistic and always wondering why when they buy at low yield they never get their entire principal back unless they wait until maturity. Of course then you have always got damaged by inflation. Smart bond buyers buy when yields are high and wait for yields to decline and sell taking in the capital gains.

 

With corporate balance sheets of the large cap companies well endowed these companies are raising dividends, starting or adding to share buyback's and are the smart money now.  You can almost pick any solid blue chip and win here. The agency REITS continue to be a great buy here and yesterday there was a new ETF issued for this class of stocks.  Symbol MORT, it projects a payout of 16%, and has a basket of stocks in this sector that lowers the already low risk there. Once derivatives are launched on this security I will buy it and make it a top holding. If Obama is reelected president I will load up even more.

Thoughts on two national banks, two local banks, and the Smithfield town council.

Bank of America, symbol BA, is a national franchise bank. It has the largest footprint of retail banking in the country. It has an enviable position in terms of access to customers. The deposit base is solid and the upside from it's business is bright. With that said the bank recently has been selling the parts of the business with the best outlook, notably some of the credit card business and the Chinese portion. Add in the continued missteps of the management and we get some serious downtrend in the stock price and no recovery in the last week either. In my opinion this all comes back to the CEO Brian Moynihan, who I have never thought was up to the position there. He began his duties as CEO saying he was going to do his work out of Boston and New York, not the headquarters in Charlotte, which said to employees that his comfort came first.  Add to that his early desire to run BA like old Fleet Boston, which was bought by BA due to some weakness in operation, and you get the trouble you have today. I no longer think this bank has a positive upside. I did not say it was going to die or anything, just that it was going to perform like a regulated utility in the future. Just with a non existent or very low dividend. Dead money going forward. I have no position in BA.

 

Goldman Sachs which I have posted on a good bit about the price being beaten down too much and the upside for investors looked good is starting to change in my mind. The change is my mistake, as I did not think about another source of trouble for the investment bank going forward. GS is making all the right moves, in changing it's approach to suit the new Dodd Frank regulations, to enhance their profit opportunities. The moves of people and assets to Singapore is smart too to avoid many of the new US regulations. Ditto on being smart about contributing millions to Obama for reelection to get him to call off the government dogs. The thing I overlooked was the trial lawyer wing of the Democrat party. The trial lawyers and big education unions basically own the Democrat party and whenever they say jump the party obliges. Recently the problems for GS have not come from Obama, but from companies and people piling on law suits against GS for alleged mortgage issues.  Trial lawyers see lots of profits here and Obama will not buck them so if this continues at the recent pace GS could have more trouble than even millions of donations can keep at bay. I own GS long, but now have concerns about that position.

 

Two local banks in my area continue to face problems differently. KS Bank, which is privately stock owned, continues to weather the recent real estate troubles quite well frankly. They continue to make some profits going forward and their write offs are manageable. KS is not hitting home runs or maybe even singles but they have not struck out either.  Four Oaks Bank, on the other hand, can not stay out of the news. Bad news that is, they regularly get wrote up for some new adventure in federal oversight. FOB  each time refutes the news with news of their own, but eventually you begin to think where there is smoke there might be fire. FOB is not currently profitable and has been writing off bad real estate loans for some time now.  I have opined in my postings that with the new Dodd Frank regulations small community banks are in trouble. Just buying some of the new required software costs millions. That is millions most all of these community banks do not make in profits now.  I expect what is happening to the small banks might not have been what was expected when the law was passed, but with any law not thought out well you get unintended consequences. These UC however costs jobs. Does anyone in the Obama administration care?

 

I attended a Smithfield Town Council meeting last night where the current town council set a meeting to ask the public to come comment on what they thought would make a good new town manager. With the recent trouble in town government centered on this post this was a good idea.  The public at the meeting last night counted to 3 people, including me.  All 3 of us spoke and gave opinions and the council said they appreciated the input. My mind wonders where everyone else was at this meeting. If people are really outraged as they say they are about the recent troubles you would think more would take time to be a watchdog on the council.  Maybe the people believe a change in leadership in November will do the trick I do not know. But you got to wonder if we are back to business as usual.  Maybe the recent property tax rate increase is not enough to be worth the trouble to come? 

Identity Theft

If you have not been a victim of identity theft, then you have no idea what problems it will cause you, nor do you know how much a hassle it it to restore your good name.  Likely you listen to all the commercials on TV and radio and wonder why such a fuss over the idea of losing some numbers and such. I have personal experience with it so I know.

 

Let me give you some free advice, that you should make use of or just ignore and regret. There are two numbers in your life that you must never give out without serious consideration.  Your Social Security number and your bank account number.

 

Your SSN must be given to those who need to report to the IRS, such as banks, investment houses, and your employer. Virtually no one else needs that number. Do not be swayed into giving it to your cable operator, city or county governments, or anyone or any business just wanting it for use in identifying you.  They do not need it and you are not required by law to give it to them no matter how much they insist. Tell them NO and stand by it.

 

As for your bank account number no one other than your bank needs that.  Your bank account number in someone else's possession is a ticket to them emptying your account without your consent.  If you use online transfer of funds be extremely careful about making all transactions a one time authorization. Do not allow companies to have ongoing access to your bank account. Also, do not use your debit card for paying bills.  I know it is simple and easy, but it is dangerous. If someone gets that number they can take out of your account any amount for the most part and the bank is not liable for one penny to you. Yes, many banks do refund your stolen money, but they do not have to do so by law. Use your credit card for regular purchases and have the discipline to pay your bill monthly. You can also get a cash back card and make some money here as well.  You DO have protection from theft with credit cards. Final note, NEVER carry your checkbook with you and avoid writing checks unless no other way to pay. Ask those who you pay who do not offer payment by credit card to change their policies. Tell them if they do not you will seek to do business with those who do. I have done that and got response from even governmental agencies.

 

Now I know most of what I suggested above is extra work or a hassle currently, but it is nothing compared to the hassle of identity theft. Let me give you some idea of what happens with identity theft. The person who steals any of your above numbers can open credit cards and accounts in your name and buy thousands of dollars of merchandise in your name. Most of it you are generally are not required to pay back, but trust me some of it you very well might be required to pay back. When my identity was stolen I was able to avoid paying back a couple of credit cards, but one company had me in small claims court where the company got a judgement against me and I ended up paying several thousand dollars for something I never purchased. Yes, trust me it can happen. Add to that I could not get a cell phone for about one year since the person purchased two cell phones in my name and never paid the bill resulting in no cell phone company allowing me to have a phone. Try not having a cell phone for a year.  The theft caused me significant hardship in trying to purchase a car. But the real problem was dealing with banks who would no longer trust you and credit agencies who had my credit scores in the sub 500 range. Dealing with credit agencies and proving to them you are who you are is a major problem and took me over 18 months to clear that up enough so I could again purchase things and get credit cards again. Yes, your credit cards and debit cards are revoked many times when you have identity theft.

 

So ignore this advice to your own peril, but trust me you will remember this posting when your identity is stolen and it is done everyday. Identify theft is the fastest growing crime, because people are not careful.

 

 

                  

Five Stocks in AAA rated Canada for your consideration

If you are looking to get out of the mess that is the US market and political situation in the US then Canada is a great place to invest.  Triple AAA rating on their government debt too. The government there is business positive, so your money here will not be held political hostage like the current situation in the USA. Below are four picks I believe make good choices.

ERF...With recent market action this stock is yielding right at 9%. Note you get a monthly dividend payout, but it is taxed in Canada at 15%, but you get declare that against what you owe the IRS in the USA. ERF continues to improve it's market position with acquisitions in the North Dakota oil boom and some of the gas properties in the Appalachian area, but it's main business is in Canada where there is lots of oil. Nothing like oil in the ground to have a great hedge against inflation and nothing like an oil company in Canada that just keeps right on paying you.

 

BCE..largest telecom in Canada, think AT&T of the north. They have wireless, land line, and video delivery as well.  Almost 6% yield too. No business in the USA. This is one solid company that raises their dividend regularly and adds some capital gains for you as well.

 

POT..The world need fertilizer now. Fertilizer companies must have Potash to make the stuff. There are less than a dozen places in the world where you can find potash and Canada is the leading place. Potash Corp. mines about 80% of all the potash in Canada. Their stock continues to hold up well even in this environment. They tripled their small dividend this year and reported huge earnings. POT is a safe place to place investments and provides solid continuing capital gains.

 

CVE...I have opined on this stock for the start of my blog. Cevonus Energy sits on a huge deposit of oil in Canada is only now getting to it and making profit. An investor here can expect nice gains on it's 2.5% yield and also nice capital gains from increased profits and dividend pay outs. I would not be surprised to see this stock north of $100 in less than a decade while holding the same yield as today. Safe, growing Canadian oil with growth.

 

TRP..Operates pipelines in Canada and pays just above 4% dividend. This dividend is about as safe as they come. Pipelines are like electric utlities since to get oil and gas to markets for sale they are essential. TransCanada Corp. has lots of them in oil rich Canada and with the Chinese and the US needing the oil there will be lots of demand for years to come. Add in if Obama actually decides during the election season to ignore the crazy environmentalists and agrees to allow the Keystone X pipeline project to commence TRP will own the pipeline and all the juicy profits from the use of it.

         

What a ride. It is still a dangerous world out there.

Remember last week and how fear griped everyone and the market tanked big time. Well forget about it!  Well maybe not forget about it since even though we have recovered much of what was sold away last week we still are not near the high set back earlier in the summer. Rallies such as these mean little since a good bit of what happened last week was driven by computer trading a good bit of the last few days rally is computer driven as well. If you bought last week maybe time to take your profits and be happy. If you bought dividend stocks for the dividend just be happy and stay put, you got a good buy in a long term holding. It is a dangerous world and the European problems have not gone away and the economic problems in the US have not gone away either. I would expect a downturn any day now as professional traders lighten up on their holdings.  Today is likely an oversold bounce. Just few sellers in the market.

I still like good large cap dividend stocks here. Many corporate balance sheets are solid and durable going forward no matter what happens in this struggling economy and trust me it IS struggling. This rally is a market event not a economic event.

CTL continues to be oversold and a real nice long term buy. NNN is a solid company and it's price has held up extremely well during the past week.

Warren Buffett, billions of reasons for a tax rate hike, and the news media too.

Seems Mr. Buffett can not help himself and once again made news by saying that those evil rich people should pay more taxes. I have lost count of the number of times he has said this in some form or another. For the record let's examine what is going on here with his continuing push for higher taxes.

First off let's understand even if the tax rates were pushed up Mr. Buffett would not be paying additional taxes not matter how high the rates go up. Mr. Buffett has made an agreement to give much of his billions of net worth to the Gates Foundation so anything he withdraws from his Berkshire Hathaway fortune as capital gains to spend will be more than offset by his charitable gift rendering the distribution tax free. So do not have empathy for Mr. Buffett wanting pay more taxes. I doubt he will pay a dime of income tax the rest of his life. Unlike his secretary, who he constantly says pays a higher tax rate then he does. Of course he does not point out that his secretary is paying social security which is not a tax but a payment into an annuity to be collected later. If was more caring he could pay his secretary more and push her up into a higher tax bracket, but do not expect him to since he is notoriously cheap. Just ask the staff at the Buffalo NY newspaper about that point. Now if Mr. Buffet was truly wanting to pay more taxes he could just donate some of his money to the US Treasury, come on Warren and set an example for all of us. While you are doing that why not take some of those billions you are giving to the Gates Foundation and give them to the US Treasury if you truly believe they need the resources. Hmm..I expect with no tax deductibility there you do not like that option.

Let's also point out that Mr. Buffett never points out that President Obama thinks rich begins at $250K of income. Not quite billions there. How about this idea Mr. Buffett suggest a higher tax rate on mega income owners of say $5 million dollar plus annually. Let's also include in the new tax deal that the highly paid movie stars and sports stars who avoid lots of taxes now by using Foundations by saying if you make over $1 million dollars annually you can use no tax dodges like Foundations and you just got to pay. Wonder how fast Hollywood and the professional players unions would tell him to go to hell there?  Add in that movie stars and sports stars, unlike corporate executives high pay, get to deduct their income from the company's tax liability. Let's end that little tax dodge too, courtesy of the Clinton administration back in the 1990's.

Lastly, once again the agenda press has fallen in line here too. You will notice no one in the press questions Mr. Buffett's generosity of proposing higher taxes here. They do not because higher taxes are part of their agenda. No questions, no pursuit of why Mr. Buffett is so desirous of higher taxes. Not one single story asking why?   Mr. Buffett personally prospers from higher taxes because the smaller businesses he is so fond of buying for his Berkshire empire get hit with these big taxes when the original owner dies and must look for a buyer to pay the tax load and guess who is sitting there with a pot of cash just to do that? Yes, he not only gets to buy from people in their our of extreme distress he gets to buy these businesses cheaper too. What a swell guy.

So my friends appreciate the fact that Warren Buffett has lived the American Dream life and prospered from his smarts, but do not give him credit for his supreme generosity beyond it's due.

               

Positive points and a rumor.

A couple of positive developments this morning.

 

One is the news that many cash rich corporations are using the downturn in stock prices to increase stock buyback's or initiate new ones. This will help considerably in putting a floor under stocks and help form a market bottom. It of course might not help in hiring new employees, but right now the market action is top of the mind. It also is positive that these corporations believe their stocks at current prices merit buying. Add in yesterday's news that company insiders were picking up their buying of their own company stocks as well. Since insiders must hold generally at least six months before selling they will not be flipping shares.

 

Two is the tepid response the US Treasury 30 year bond auction got this morning. The buy ratio was about 2 to 1, which is considerably down from previous 30 year auctions. This means that people are moving some money and assets to better yielding assets. The 30 year bonds had to move up yield a bit to get the bonds sold too. Any movement of money from US bonds to stocks and other assets will help buoy prices also and help with some improvement in economic activity.

 

One final note of info. There are reports this morning that some of the news coming out of Europe about France and it's alleged banking failures are nothing more than well placed traders who are trying to protect and enhance short positions in stocks or options. This thinly veiled reference could very well mean George Soros, who has already said he has shorted this downturn and making serious money doing it. There has also been rumors the last week that people in the US administration more concerned with making money for political friends and less concerned with policy are feeding these reports. Who knows who it could be and if it is true, but with options expiration just over one week away it certainly makes sense that people are trying to prolong bad news to protect already profitable positions to final payment.  If stock prices are being manipulated to some extent by large player interests this also could help stock prices going forward as eventually these interests will either make their profits and move on or give up.

 

Now do not interpret these posts to mean anything but what they are, nowhere did I post here that this downturn is over. However today's market action is positive and helps build a bottom as we must ebb and flow to do so.

Fear, rumors, and no bottom to be found.

The market closed down another 500 points yesterday, making it down just over 2200 points since this sell off began. I wish I could say that we have hit bottom, but frankly I think we got some to go on the down side . The reason is simple, this is not a market event, this is a response to the lack of economic activity in the country and also the world. Investors and markets have finally decided things are not getting better and the Federal Reserve Tuesday reinforced that knowledge with their unusual action of stating interest are staying put for TWO years going forward. Market pros are still in the market and that means we have not seen the final selling know as capitulation.  I would not even dare to call the bottom here, but it would not surprise me to see another 1000 points or more. I know that is not what people want to hear, but this is what you get from capital being completely on strike. The congressional legislation that gave us Dodd-Frank financial regulation and the health care bill passed two years ago is just two of several legislative actions that have caused the small business person to lay low, quit investing and hiring in their business. Add in the constant demonizing of business and most of these entrepreneurs do not want to take risks with their capital, they certainly do not want to be pointed out as making money.  Much of these problems we face are choice not fate and can be changed at the ballot box if their is will to do so.

 

A couple other economic trends worth noting here is what is known as the peak spending year rule. People spend more on consumer items at the age of 49 that any other year in their life on average. The baby boom generation and their large cohort there are now fully past that age and demand has subsided from their spending binge. Add in that most of them has also hit credit card limits as well and you get a general easing of consumer demand. Another generational fact is starting to move into the peak consumer spending ages of 30 to 49 years and that is Generation X which trend to be quite complacent and ill trained as a group. Males in this generation more so than females. With this trend you get lower spending due to lower salaries and the lack of engagement in society makes for less involvement in civic activities. This final trend makes way for the generation behind it to take over as leaders and decision makers sooner than normal. Unfortunately the next generation, known as The Millennials are not old enough to take up the slack in consumer spending yet.

 

Add to that the death throes of socialism in Europe where the money to finance the large social safety net has run out. People who no longer work and no longer worry about their access to anything since governments supply everything finally know their party if over and do not like it. I had mentioned to you the chain of countries to go down. Greece, Ireland, Spain, Portugal, and Italy. All those have either defaulted or had austerity measures forced upon them. England, which is experiencing huge riots over austerity measures there also made changes. France, as I had said was soon up, looks to be just that as rumors are rampant today that they French banks are in trouble. Makes you wonder why sane people in the US would want to follow this path, but follow it we have.

 

In any case stocks are still on the way down. US treasuries and bank CD's are paying nothing. These items are not safe as your money does even keep up with inflation with them. The safe places in my opinion are very blue chip dividend stocks where you can be relatively sure of your payout and even if the stock price goes down more you can live off the dividend. One bright spot here is that insiders at these large cap stocks are now buying. They are saying our business is not going anywhere and they believe there is value here. For about the tenth time you can find good pay outs and safety in agency Reits, backed by the real estate and guarantee of the US government. Why would anybody own US treasuries, when they get the same protection and much higher payout in agency Reits? Lastly, I will also reiterate my belief that many US states are safe to lend too, safer than the US government, and payout more yield and tax free too.

 

Fear is rampant and until that subsides the market is biased to the down side.

STI Hedge Fund and the big selloff.

Several times in the past week I have been asked how are my investments doing?  I am down approximately 11.7% overall on the valuation of the stocks either long or in options held in the hedge fund as of Tuesday close. . Cash flow for the year is around 10% net, so I am down less than 2% overall. Most stocks are holding up well so that in itself validates my selection process, which requires almost all selections to meet certain criteria.  I can not say I am happy at this past week's action since it could limit my options going forward and most importantly could cut down on opportunities to produce cash flow.  My hedge fund is cash flow based. For the record I have one stock green on my screen, SO, good ole SO, which on my very first posting I said was the safest stock on the planet. Got one right.

 

I am pleased and proud that the structure of the hedge fund has held up just as I planned for so many years of trial and error building an approach to be prepared for a moment like this one, when a big sell off happens. I have taken some time to model scenarios going forward and find that the scenarios I envisioned for large market corrections such as this one work out with a continued positive cash flow, however currently a smaller cash flow. This is not to say that they WILL work out right. The pride here comes from the fact I only know of one hedge fund not down big for the year, and that one bet big on a downturn and won.  If the downturn had not occurred then they would be down as well.  I believe I include one element that so far saved my fund from drastic losses and makes my model scenarios going forward work right. A hedge fund is a highly leveraged approach that allows one to make outsized gains in most markets, it also can produce outsized losses if the market is down big. And no I am not about to come right out and say what that element is or any other of the unique approaches I take to derivative investing. If you had worked for over three decades to get something you know works and make you money would you give it away. I expect not. 

 

Anyway only time will tell here. You will notice in my monthly reporting if it works by noticing if I continue to report positive results each month. Positive results that are above what you can get in any other investment currently. Since I am doing 16% plus going into August that is way above anything you can find elsewhere.  You can also note the December report and see if I have had to take losses in carry forward items too. The final point here is that the model requires that the US economy comes back to normal sometime down the road. Under the current leadership that frankly is in doubt, so there still could be a fly in the ointment. Running my own personal hedge fun is still exciting to me even when it is scary like the current environment.  I can assure you of that if you ask my wife about being around the house with me this week. On the other hand she did not seem to mind too much when we went to the new car dealership last week.

                /

 

 

Federal Reserve Stunner

Right when you think the Federal Reserve can not say something new, they pull one out of their hat. This afternoon they said they do not plan on considering raising interest rates until Mid 2013.  Take that in for a moment, that is two years from now. Never has the fed ever said something like that.   Add to that the fact the US Treasury auction today was heavily subscribed, or had a 3 to 1 cover ratio. People being afraid bought treasury bonds thinking their money is safe there. The three month bills are trading at 0.043%, basically nothing. Lending your money to the government for that period of time, considering inflation, or for free. !0 year bonds are selling at 2.37% which is saying I am willing to take on huge inflation risk for 10 years out and lend my money to the government for basically little or nothing.

 

The Federal Reserve by this action is also saying they expect the country to be in a very slow recovery, if you can call this a recovery, for some time to come. Finally as I have noted before they are also saying you need to find somewhere else to put your assets because we will pay you nothing lending it to us. This again is an effort to force assets elsewhere in an effort to get the economy moving forward. Buy a house, buy some stocks, invest in a business, anything but lend it to the US government. Of course people who are fearful will ignore this and continue to give the government their money.

 

This could put a floor under the market for the time being. It could also make investors and traders think things are REALLY bad if the Federal Reserve is ok with interest rates basically zero for two years. But macro economic conditions of no economic growth could continue to limit capital investments. Add in the negative political atmosphere you will likely continue to see nothing happen until the next election either changes things or embeds current no growth conditions.  

 

This does make investments in blue chip dividend stocks more attractive. It also continue to make buying a home for your own living a solid investment too. Finally as I have noted numerous times this makes agency REITS a great buy. Take our pick, NLY, HTS, CYS, AGNC, or any of serveral more. I have a postion in HTS and will likely take a position in AGNC sometime in the next week or so.

 

One final note, this for all intents and purposes takes the Federal Reserve out of the 2012 election. Nothing you do will change our direction.

                

A Suckers Rally.

Today is what as known in the business as a "suckers rally", and the best advice is do not bite. Nothing fundamental has changed, except maybe some of the Democratic grownups have told Obama to sit down and shut up. The administration canceled all appearances today. What you are seeing is a bounce caused by those who are either trading for the day making some quick profits or some bargain basement buyers looking cheaper stock values. I would fully expect the market to sell off towards the end of day since the day traders will take profit and go home.

 

The reason I see this is first experience, but also some evidence. Note that two stocks that have held up very well during the huge sell off of recent days, SO and LO, are trading down today. Traders who hung out there because of the relative safety are leaving those stocks for short term trades. Now that might offer some the opportunity to take a look at SO and LO, but be careful here. I do find LO a very compelling value at the current price myself.

 

Otherwise wait out some time here and see what happens. The Federal Reserve is meeting today and I frankly can not see much they can do. Of course the market will wait and listen to every word said by Bernanke. Bottoms are only reached when it is tested again to see if the sellers are out of the market and values so compelling at the price buyers step in. No sin not catching your buys at the absolute bottom, like not allowing greed to make you feel sad because you did not get the top price when selling.  If this turns out to be a bottom you will lose little by waiting.

 

Gun to my head, I personally think there is some ways down to go. Even though a lot of the last two days action was computer driven trading.

                

Jobs Mr. President, you want jobs..here are thousands that can be had now.

If you would like to see what a real growing economy looks like check out North Dakota. The answer is energy jobs and drilling for oil.  If you are scratching your head and asking how can anyone drill in this political environment did I mention the Senior senator from North Dakota is Kent Conrad, who just happens to be a powerful Democrat.  Just yesterday Obama said he was going to "redouble: his efforts at creating jobs. First off, no politician ever has "created" one single job and he will not be either. Businesses and entrepreneurs create jobs. Without business there would be no government jobs either as someone has to pay for them. The reason there is no growth in jobs is the poison filled political environment and most importantly the jobs that can be "created" now are jobs Obama does not want.  Below are about half a million jobs plus that could be "created" overnight if Obama would just say OK.

This week is exactly one year to the day since the oil well in the Gulf was capped.  Heard anything from the media lately about the "disaster in the Gulf"? You will not, because there is not one. For the most part the environment, seafood fishing, and tourism in the area has returned to normal. What has not returned to normal is the 230000 people who were employed by the offshore oil drilling business. One signature, one overnight change of policy would immediately put these people back to work, drilling for oil, processing oil, supplying the derricks, and providing food and such for the people who work on them. Cuba is drilling in the Gulf, Mexico is drilling in the Gulf, but as yet the USA is not. The reason is that Obama is allowing environmental extremists to dictate his policy there.

Let's add the Keystone XL pipeline which would bring Canadian oil to the USA. The Canadian company, TRP,  that wants to build the pipeline has said they would hire up to 250000 people for this project, add in the people who have to service the workers on this pipeline, feed them, cloth them, make the steel pipe, and you likely got 400000 new jobs. Only Obama's signature is holding this pipeline project up. Why is he not doing this, again environmental extremists are telling Obama we do not want oil, any oil, to keep us from pursuing wind energy and such. 

Lastly, the shale gas revolution is being held up by Obama. Shale gas, cheap energy is all over the USA. I count 33 states in the country who have recoverable supplies of this energy.  Youngstown Ohio just OPENED a new steel plant there to do one thing, make pipe for drilling shale gas. Folks that is unheard of in this country. opening a new steel mill.  With enough shale gas underneath us to power this country for about two hundred years we can say goodbye to Middle East oil if we just get drilling and get it out of the ground. Add in the thousand of new jobs that would come up to service this new energy, such as the steel jobs noted above.  Why is Obama not telling his EPA to allow this drilling to commence at full speed, again you find environmental extremists.  They believe that the sand, water, and some chemicals that are injected into the shale rock in the earth to push this gas out COULD pollute the environment. Note that there is not in any case where shale gas is being drilling where there has been any proved pollution. Add in that other countries in the world or doing this too and not adverse problems there either. The water solution that is being forced down is DEEP in the earth, like 20000 plus feet deep, under rock that does not leak upward. Again, the extreme environmentalists do not want anything to stand in the way of forcing us to other higher priced, unproved energy sources. 

Lastly let's note all these jobs are HIGH PAYING, mostly UNION jobs that normally Obama would like. Also think about all the current government benefit payees could be converted to taxpayers here helping the current deficit. Ask yourself, does Obama REALLY want new jobs, or is he actually "redoubling" his efforts to make sure we only have jobs he wants, or environmental extremists want.       

Full disclosure I am either long or hold options on ERF, DO, and have in the past TRP. All these securities prosper from the lack of action by the Obama administration on the above policy matters, therefore I have a vested interest in the continuation of no action.       

Monday Market Action..1929 redux.

Looks like I should have stuck with my original posting on the current market, noting we could be having our generation's 1929 since it now looks to be the case. Like anyone I can get caught up in hopeful thinking and indeed I did with the Eurpean Bank's action and not expecting the S&P downgrade to be significant.  Fact is as I mentioned in last night's posting the downgrade is for real. Today's action continues the selloff from last week and I expect it will not abate tommorrow and maybe not this week. The market has not found a bottom and technical analysis is not positive. Add in that President Obama everytime he gets up is the Grim Reaper, no inspiration, no positive talk and you get a market that sees nothing but going down.  He remains arrogant and condescening to others.

 

Anyone who buys in this market needs to be committed. Yes, I see some good buys, and again I mention the agency REITS.  But even now there is no bottom in their prices either. Today for the first time this year I have gone negative return on my hedge fund.  There just are no buyers in this market and that is reflected in the bid ask spread. Two years ago I bought heavily into a bond panic such as this and made money, you will note I am not buying into this panic.

S&P downgrade..some humor and some effects.

Let's give S&P some credit here and I have given them little recently. They did wait until right after all trading, including after hours, had ended for the weekend to downgrade US government debt. Can you imagine what would have happened Friday if they had throw this little grenade into the market carnage then?  Anyway this was not unexpected, they had been telegraphing it all week and obviously had given a heads up to the Obama administration since the administration had worked the last couple of days to get ahead of the news by putting out comments prior to the official release. Without a doubt the thing that hits me in the gut most is that our national debt is now not considered top notch. I am sad for the moment, but happy most of the World War Two generation is not around to see this, since they spend so many years sacrificing so their children could have this inheritance. Like spoiled kids the generations since have used and spent this inheritance and not been willing to do the same for their children.  We get days on end of it is "not fair" from these supposed grownups who are actually behaving like spoiled brats on the playground.  The downgrade is expected and frankly in my opinion long overdue. If you have been a reader of these posting I have for six months saying a US bond is not the safest savings instrument anymore.

 

The humor here is this downgrade is the direct result of the Dodd-Frank Financial Regulations bill passed by the Democratic Congress  last year and hailed by President Obama as the end of financial problems as we know them. If you remember the rating agencies were taken to the woodshed over the lack of oversight on the federal housing agencies and institutional banks during the 2008 financial crisis. The were accused rightly of having basically embedded ratings on such agencies, banks, or other financial businesses and not taking a due diligence approach to their ratings. Let's also remember none other than the world renowned Warren Buffett, who is loved by the media for his tax raising desires, thought the rating agencies were hunky dory while he had very sizable investments in them. So now the rating agencies, led by the top one S&P, are doing due diligence and downgrading where they believe it is justified. Darn if they do not think that US Government debt is not AAA anymore and downgraded it. Hmm.,somehow I expect Senator Chris Dodd  Congressman Barney Frank and President Obama did not have THIS particular downgrading in mind with the new law. Unintended consequences again.  Also note that the Obama administration went after the messenger here and not the message. They know  the downgrading is on their watch. So slur the messenger in hopes it hurts the integrity of the message. Hillary Clinton would be proud.

 

Now to the effect of this downgrade. I would expect little of no long term effect on the stock market Monday Morning. Maybe an initial sell off then back to business, or whatever business as usual is today. The effect on US Bonds is another matter, They could see some selling early on as institutions and pension funds who are required to hold only AAA bonds have to dump the treasuries and go to something else. That will cause some updraft in rates and loss of some principal. But note if people this week respond to the European crisis like they did by buying one and two year US treasuries, with inflation included,  by paying the government to loan their money TO the government then prices will not be effected too much. However you could see some improvement in corporate AAA bonds since they are now considering safer than US treasuries. Add to that the fact that many state governments now have a better rating than US treasuries and they will benefit as well with cheaper borrowing costs. Strange that individual US state municipal bonds would now be a safer investment than US treasuries. That my readers is why I ONLY hold municipal bonds. States must balance their books and can not print money. I also see some lift in very blue chip stocks that pay good dividends as investors will take another look at them as well.

 

The end result here is that S&P noted that this is the first step towards a likely continued downgrading of US Treasuries. Also note that nowhere in the official 8 page S&P document does it say anything about raising taxes as helping improve the situation. It actually states that "spending" is the problem and must be addressed soon. I would expect the first signs of this on consumers will be increased borrowing rates for credit cards, houses, and cars since the downgrade will force the US to compete with more instruments when asking to borrow money. Most people in the US are right now oblivious to this downgrade action and just going on about their lives. Frankly they better begin paying attention, especially if you are young, since time to change to trajectory of the US financial situation is running out. With a forecasted one trillion dollar INTEREST only payment due in 2020 for the federal government  lifestyles and choices as we know it are about to change in meaningful ways.