A. R. Rotsevni

A. R. Rotsevni
Contributor since: 2009
Financial Times is out with a global view of horiz drilling efforts:
Great interview! I agree with TW that the US will not create excess global oil by itself, but this technology is being exported and Europe is exploring for nat. gas as well as all other countries. UK just restarted a horiz. fracking ops for 3x predicted increase in nat gas reserves and new discoveries even w/o fracking are occurring each month in out of the way countries.
While dev. nation demand is ramping higher, the change in energy discoveries seems higher still in my estimation. It is impossible at this time to predict if excess energy resources will overtake demand, but one needs to be aware of that this could occur in 5yrs. Horiz. drilling is a very powerful technique when combined with fracking, technology is advancing each day and the spread of technology globally is rapid.
Shareholder returns come from increases in BV/Shr and Dividends-both come from Net Income. In MSFT's case there has been almost 0% BV/Shr growth the past 10yrs despite very strong rises in Net Income/Shr, ROE primarily because Retained Earnings have been used to buy back stock at 4-5xBV and the corporation as far as shareholders are concerned is not growing.
Too many focus on Net Income and Cash Flow when the bottom line is the total return in Dividends and growth of BV/Shr for shareholders.
Same goes for CSCO, INTC and AZO. AZO has -$27BV/Shr due to buybacks. i.e. negative net worth-watch out.
MSFT is buying stock at such a pace as to use up ALL the Retained Earnings. The actual growth of the company, i.e. BV/Shr has been stagnant for 11yrs because of the buyback program. This is my primary example with finance students of a company with great EPS growth but no corporate growth. Net Income is only a measure of corp growth if one sees BV/Shr growth. Not so with MSFT and if one wants to see how far insiders can go to create negative equity look at AZO with a now -$25 BV/Shr.
You can get the report for free at: www.aar.org/newsandevents/~/media/aar/railtimei...
Rail loadings represent fundamental measures of economic activity. The trends follow spurts in the spring and fall, i.e. seasonal business patterns. I disagree with the insight this author provides which is based on a month-over-month analysis when he should be looking at how the data has actually played out over the business cycle.
Many have called for an imminent 2nd Dip on the apparent slow down in several economic data series from May thru July, but the history indicates that volatility occurs in statistical series which are estimates that average out over time. It looks like May was a spike likely do to housing stimulus which was above the trends from April 2009. All economic trends appear on track for recovery when one examines them from April 2009.
The AAR Rail Times Indicators provides substantial insight to the economic recovery. Look at lumber railcar loadings which only began to rise Jan2010, but it is definately rising reflecting building construction improvement.
All should look at Rail Time Indicators July 13, 2010 from the Assoc of Am Railroads www.aar.org/newsandevents/~/media/aar/railtimei...
The correlation between railcar loadings and US GDP is 88% and predicting a strong increase for 2Q10 top of pg 17.
I am so surprised that so many do not access this readily available fundamental information.
The issue with using long term averages in this analysis is that a major factor of market pricing has been completely ignored and something with which Mr. Hussman may not even be aware. Market valuation is set via the Nominal GDP growth trend. When inflation was high in 1950, 1974&1982 GDP grew at the 14% pace-comprised of ~3.2% Real GDP and ~11% inflation. The marketplace being competitive required 14% Earnings Yield from SP500 and this related to a ~7 P/E ratio.
The proper analysis includes the Nominal GDP growth trend which is less than 5% today and I argue for ~4.1%. This justifies market P/E's in the 20-25 range. One must be very careful that when using broad time studies one has carefully included all the factors which impact the results.
There is no support for Hussman's concerns unless inflation which is less than 1% currently suddenly soars to 11%+.
The question that comes to mind: "Did the increase in velocity during the '90's arise due to the expansion of the activity of hedge funds?" Hedge funds in effect liquified many a private equity situation and even when they took over a public company the cash turnover went up. Is there an answer to this? Then the next question is: "Is there a new normal velocity?"
You are right and wrong on this point. Yes, we outsource mfg, but US creativity/efficiency/... market process is reflected in our continued energy efficiency and the lower energy use per $1,000 GDP is a fair measure of our society's productivity. The macro view is correct and the proper view.
On Apr 13 06:36 PM Tas1974 wrote:
> Doesn't this underscore the fact that we have outsourced a large
> percentage of our manufacturing operations to emerging market economies?
> The quote "we don't make anything anymore" doesn't mean we don't
> use stuff anymore. We're still using the oil, its just in the form
> of finished products.
Shiller reports Real housing prices, but we use Nominal prices when we buy a house and the Nominal price is against what banks lend. Mixing the Affordability Index with Shiller's price data is mising oil and water. The media has so mixed Shiller's with the venacular discussion of "Price" that we fail to see just how great the difference can be. Shiller over over does the decline.
I urge all to take Shiller's raw data and perform semi-log plots. The net result is that two clearly definable economies with ~1.7% pre-1933 SP500 ann growth and ~6% post-1933 SP500 ann. growth rates. The establishment of the Fed's control in the Banking Act of 1933, the creation of FDIC and the Glass-Stegall Act of 1933 dramatically reduced the rate of capital destruction.
Shiller averages all periods to make his forecasts. He is incorrect to do this. He is so incorrect that one wonders how he ever got tenure.
Could the current sell off be the result of foreign investors delevering? The headlines are rampant with stories of EmgMkt moguls in trouble because they built empires with the dramatic use of debt. It is typical that this occurs as many have had little experience with business cycles and are drawn in with the strong themes of "...oil and metals in short supply for decades". Now these folks are liquidating. Typical of the "Japanese Bubble" of the '80's was the fact that corporate Treasurers of Japanese cos were trading their markets thus boosting reported eps. The losses on the down-side were multiplied when the markets turned.
Are we seeing selling from these sources today of which we have no visibility? Valuations appear so cheap today that much of this does not make financial sense unless the selling can be ascribed to sheer panic from overseas investors of which we have little transparency.
I note that the chart above shows what we have all known that Japan has had lowest rates for the past decade (2 decades in fact). The Yen has long been a source of low cost funding for HF's and even the Japanese were shorting Yen to buy higher yielding assets elsewhere. Dennis Gartman called for a US market rally(haven't seen this yet) in part because the Yen began to get weaker vs. US$ indicating "increasing appetite for risk" and a rebuild of the carry trade. Falling rates world wide will crimp this arbitrage. The question I would like answered is how important has the Yen been as a source of low cost financing to HF's, has this driven the insane speculation of the past 8yrs and with rates world wide falling in line, will this speculation be subdued? HF returns track available cost of borrowing rates and with all rates down will the number of HF's be reduced dramatically?
Rates are set in my view by 2 factors. There is a market return rate that is dependent on the long term trend of US Real GDP + core inflation. I call this rate the Wicksell Rate based on Knut Wicksell's observations in 1898 that secure fixed income and investments in production assets arbitrage till investor needs are satisfied.
However, during times of stress as in WWII and high inflation, capital flows out of stocks into bonds seeking safety. Then market earnings yields reflect the Wicksell Rate(in 1974 the earnings yield of SP500 went over 14% with a P/E ~7). 10yr Treasuries on the other hand fell to 5% with the crowding of capital seeking safety. Importantly, All Treasuries out-performed stocks, especially 5yr-7yr maturities, because they held their value, paid interest every 6mos and returned principal intact whereas stocks acted like zero coupon bonds and had awful performance. Of course all this changed after August 1982 when the SP500 P/E tripled from 7 to 21 by 1995 thus convincing many that stocks were always the best investment all the time. The Wicksell Rate today is 5.4% and 10yr Treasuries are over valued at less than 3%. Buffett calls Treasuries the biggest "Bubble" since the Internet Bubble of 1996-2000.
The market has 100% upside in a couple of years w/P/E close to 10 today and low inflation expectations if Bernanke withdraws the liquidity as monetary velocity returns to normal.
I hope for the best.
Although Republicans screwed up by confusing self-monitoring "Free Markets" as being some extention of "Fair Markets" and stripped the controls to let greedy & short sighted self-interested activity to reign, Obama has wrought confusion. We need clarity, we need a baseline from which to reestablish a sense of trust. Obama firmly promised something "concrete" and failed to launch. Geithner actually delivered a clear message yesterday. I hope this is the beginning of clarity.