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Jake Huneycutt

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  • Taking A Look At Historical Natural Gas Prices [View article]

    I haven't looked at UPL much, but I agree it seems like one of the more interesting companies in the space.
    Jan 21, 2015. 11:12 AM | Likes Like |Link to Comment
  • Taking A Look At Historical Natural Gas Prices [View article]

    Thanks for (albeit misguided) comment.

    If you think it's a safe statement, maybe you should read up on the history of boom and bust cycles. There are periods where commodity sector companies have made poor investments for 8 - 15 years. I'm willing to wager that many of the oil service companies that look "cheap" now will continue to be poor investments for half a decade or more.

    My point in the comment is to say that I don't think the next boom cycle is right around the corner. But that natural gas has been subdued a long enough time, that it's worthwhile to keep an eye on it for the next several years.

    Being a value investor requires patience.
    Jan 20, 2015. 12:07 PM | 1 Like Like |Link to Comment
  • Taking A Look At Historical Natural Gas Prices [View article]

    Thanks for the correction.
    Jan 20, 2015. 12:02 PM | Likes Like |Link to Comment
  • Taking A Look At Historical Natural Gas Prices [View article]

    Thanks for the comment.

    "Commodity cycles" might seem like voodoo, but there's an underlying logic to it. When prices are high and the industry is booming, that's when companies start making large capital expenditures to expand exploration and production. The result is a massive amount of excess capacity that eventually drives prices down to level where much of the new capacity is unprofitable.

    When prices are low and the industry is in bust stage, there's less incentive for new capital expenditures. If demand increases over time, it's not uncommon then for producers to be in catch-up mode while supply is too low and prices are going up.

    The shale boom is one thing that throws a wrench into this for natural gas, because high oil prices have also opened up more gas supply. This is one reason why I don't think the natural gas bust cycle will end in the next couple of years, as I believe oil might have to go into bust for awhile, before the conditions would become ripe for a boom in gas.

    It's true that gas can be produced economically at $3 - $4, but oil was produced economically for well under $80 per barrel and that didn't stop prices from going up over $100 for several years.
    Jan 20, 2015. 11:57 AM | 2 Likes Like |Link to Comment
  • Share Buybacks And Value Destruction [View article]

    Great comment. I did consider writing a section on how buybacks can be used to enrich executives, but ultimately forgot to include it. But it's certainly a very valid point.
    Jan 15, 2015. 09:56 AM | Likes Like |Link to Comment
  • Share Buybacks And Value Destruction [View article]

    Thanks for the comment.

    Look at the companies in PKW.

    Home Depot (HD) and Lowe's (LOW) are two of the largest holdings (comprising nearly 10% of the fund). Many other cyclical holdings such as industrials, restaurants, financial, autos, airlines, retail, etc. In other words, it's probably tracking strong companies in cyclical sectors more effectively than the "value creation" or "value destroying" attributes of share buybacks.

    Also worth noting that many of these companies were undervalued during the 2009 - 2011 period, so buybacks would've likely been beneficial. How it will fare in the future --- I don't know. Too complex to model out given that there may be 100+ companies in there.
    Jan 14, 2015. 12:12 PM | 3 Likes Like |Link to Comment
  • The Coming Euro Crash [View article]
    Excellent article, as always, SU.

    The Euro strikes me as akin to trying to fix a pothole by building 3 new highways and a $100 million streetcar system jointly managed by 18 different jurisdictions. The problems that the Euro set out to fix were relatively minor (price transparency, multiple exchange rates, etc) and probably could've been significantly improved with a much less dramatic reform.
    Jan 8, 2015. 06:29 AM | 3 Likes Like |Link to Comment
  • Denbury Resources Presents A Margin Of Safety, 50% Upside [View article]
    Good article, but I think your case is significantly undermined if it requires oil to go back above $80. I have no problem with the thesis that oil prices are too low right now; but I'm also skeptical of the idea that they are shooting back up to $80 - $100 in the next two years.

    I think a more likely scenario is that rebounds back to the $60 - $70 range and hovers there for awhile. I wouldn't even be totally shocked if it stayed around $50 for the next year (until supply starts to correct).
    Jan 6, 2015. 01:49 AM | Likes Like |Link to Comment
  • American Capital: Acquire Emerging Alternative Asset Manager At Large Discount [View article]

    Great article and interesting thesis. However, when I check the insider fillings for ACAS, I see that insiders have been selling off their shares as if the world were going to end next year. This makes me suspect that something big is being missed.

    If it were merely one insider and / or the dollar amounts were limited, I wouldn't have much cause for concern, but there have been millions in sales, by multiple officers and directors of the company. Meanwhile, I see not a single insider buy in the past year. I have to think that if this were truly a great value, there wouldn't be such uniform movement towards the exits by insiders.

    You know this company much better than I do and I'm merely looking at one metric, but when I see these sorts of large and consistent insider sells, it never makes me feel very comfortable with an investment.
    Dec 30, 2014. 09:10 PM | 2 Likes Like |Link to Comment
  • Why The Shiller P/E Is Useless [View article]
    Thanks to the author for the perspective, but I have to disagree.

    Personally, I don't use Shiller P/E for anything. It has several limitations and doesn't have much of a function within my investment process. That said, nearly every single article I've read criticizing Shiller P/E seems to try to turn the metric into more than it's supposed to be.

    Shiller P/E is not a "market timing" mechanism. It's not meant to be a flawless measure of market valuation. It's merely one metric and like all other metrics in the universe, it has flaws. If you follow any metric mindlessly, you'll do poorly.

    Some of the criticisms in this article are true, but not necessarily relevant. Yes, if you use Shiller P/E on SBUX, it won't make much sense, but it was never designed to measure valuation of individual stocks. Similarly, if you use a traditional P/E with a cyclical company, it often will yield absurd results. There's nothing wrong with using these metrics when you understand the weaknesses. The basic goal of Shiller P/E is show when there are broad market valuation risks that might be resulting from cyclical macroeconomic expansion.

    Yes, there are reasons why a higher P/E might be justified (such as technological progress), but I don't think Shiller has ever argued otherwise. Is 10 years a perfect timeframe? No. It is reasonable? Yes.

    Like I said, I don't really use Shiller P/E in any meaningful way, and I personally think there are better measures, but I don't see it as "useless." I think it's useful in the context of examining many broad market valuation measures for investment managers that are examining asset allocation from a 10,000 foot view.
    Nov 3, 2014. 11:35 AM | 1 Like Like |Link to Comment
  • America's Disinflationary Future? [View article]
    Thanks for the comments everyone. Lot of good thoughts in there. A few responses to general criticisms I've seen:

    (1) I've noticed a few have critiqued my article because they say "we have a demand problem." If you actually read and digest my article, I'm saying precisely the same thing. We do have a demand problem. QE has increased supply, not demand. If QE were increasing demand, we wouldn't see falling interest rates and disinflation. The fact that we are seeing that suggests its only increasing the former, and not the latter.

    (2) The demand issue goes straight to my hypothesis on bubbles. Bubbles generally form because of distortionary monetary and / or currency policies that jack-up IRRs on investments in the short-term, but do not generate equivalent increases in end-user demand. The result is short-term asset price inflation, but long-term disinflation, as investment returns fall to below-average levels.

    (3) Notice that the demand issue also comes into play with the public pension funds. My argument is that interest rate suppression results in lower returns, which then forces governments to either cut benefits or raise taxes. Tax increases obviously harm demand, but I think you can argue benefit cuts do, as well.

    Most of the criticisms I'm seeing seem to misunderstand the article. The problem with economics is that it's not a hard science and there's no way to conduct "scientific experiments" per se. However, we can take a scientific approach to trying to explain why Japan's experiments with quantitative easing resulted in disinflation, rather than the predicted result of greater growth and / or higher inflation. We're already seeing evidence that this seems to be occurring here in the US, as well.

    My article provides one logical explanation as to why disinflation may be the result. That, in essence, QE is creating a short-term boost in investment, which increases supply, but this basically "steals" future investments and results in long-term disinflation. I do not claim that there are not other possible reasons (such as demographics), but I also think people underestimate how small changes in interest rates by a central bank can have a dramatic impact on the investment environment. These minor changes can alter the economics of an investment radically, which means the Fed is making asset allocation preferences that may not be beneficial. This becomes particularly noteworthy when done on such a dramatic scale as QE has been.
    Oct 27, 2014. 04:05 PM | Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]
    Your narrative says that the Federal Reserve 'took the right action' by taking a radical new approach to monetary policy and dramatically buying up treasury bonds to reduce the risk-free rate. My narrative says that the Federal Reserve has no evidence that this would result in sustainable economic growth. In my book, the people who are dramatically trying to re-engineer the American economy through centralized directives have the burden of proof.

    So we don't have a lot of evidence here, but the one piece of evidence is that these same policies have been used in Japan. And the result has been continual disinflation. Interest rates have continued to fall, growth has remained stagnant, and taxes have continually been increased to make up for government shortfalls. That's the one piece of evidence we have.

    When you start to analyze why that happened, it does start to make sense. If a central bank continues to suppress interest rates, then it makes all other investments attractive in comparison. However, this results in asset prices rising, and investment returns falling over time. Lower returns create higher risks and fewer incentives to invest. Less investment results in lower economic growth. Lower economic growth results in lower tax receipts. Lower tax receipts often result in higher taxes, which further stifle private investment, and further knocks down demand, growth, and interest rates.

    How do I know the US Fed isn't shifting the market interest rates to their natural levels? I don't for certain. But I also know that they are taking these actions without a single ounce of evidence to support the idea that these are the "natural levels" for interest rates right now and that their rational is that they can "create growth" through lower interest rates (a flawed rational no matter how you slice it). The fact that they have to purchase an un-Godly amount of treasury bonds to engineer this outcome is pretty good evidence that this isn't being driven by the market.

    Monetary policy can and should be shifted to prevent a liquidity crisis. But after 2009, there was absolutely no evidence that the US was experiencing a "liquidity crisis" any more. The purpose of monetary policy magically shifted to "create growth"; and that's something it can't do.
    Oct 23, 2014. 11:54 AM | 4 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]
    "which then reduces the overall cost of goods and services over time"

    You're getting desperate, Lawrence. I challenge you to prove that QE has driven down the cost of goods and services since 2009. At best, you can say that the rate of growth has fallen.

    Even that's debatable. If you exclude food and energy, CPI is at 1.7% growth right now. Does that differ in any substantial way from the past 20 years? During the boom years of the late 90's, CPI was at 2.3% for 1997, 2.3% for 1998, and 2.1% for 1999. .

    In 2002, CPI excluding energy and food was 2.0%, in 2003 it was 1.1%, and in 2004 it was 2.3%. If you look at the data over the long-term, you might be able to argue that CPI growth is just a smidge below where it was in the late 90's or in the 2000's, but nearly every stat on economic growth and income growth is uglier.
    Oct 23, 2014. 11:27 AM | 4 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]

    Great comment.

    I do think there's a bit of the "chicken and the egg" conundrum here. Are millennials thriftier because they inherently possess those qualities, or are they thriftier because they are becoming adults in an environment that demands it? I'd view it as more the latter than the former. People adapt to the situation in front of them.

    I thought about mentioning population growth, as well. That's certainly a distinction from Japan. However, there does seem to be a significant deal of evidence suggesting that population growth is tied to economic growth. This is to say, Japan's low (or negative) population growth rate may as much be a result of their low economic growth rate. For proof of this, see Italy, which has experienced a wave of outward migration as a result of its horrible economics. Of course, Japan's restrictive immigration policies also keep their population growth rate low, so that's certainly different from the US.

    I'd largely agree with you on the fiscal policy (and EIC vs min wage). That's really a main prong of my argument here. That QE creates fiscal stress, and that governments tend to respond to this with higher taxes, putting further pressure on economic growth. It's a vicious cycle. If anything, we should've been lowering and streamlining the tax code over the past few years. This is where I have to call out so-called "Keynesians", as Keynesian policies would favor tax cuts, but nearly every self-described "Keynesian" I've encountered supports raising taxes coupled with monetary stimulus.
    Oct 23, 2014. 11:08 AM | 2 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]

    I try to take a much more scientific approach than you. You believe that the Federal Reserve has no burden to prove its actions are beneficial. I disagree and view the Fed as having the burden to prove these extraordinary measures work.

    I look at the evidence from this experiment and other similar experiments. Japan provided the most similar experiment. The result has been continual low-growth and disinflation.

    So why did Japan's monetary stimulus result in low growth and disinflation? How is the Fed's attempt different? What are the reasons why Japan's stimulus created the opposite result than the one anticipated?

    This article provides one possible answer to the last question. It makes sense once you start to piece it together. Japan's constant attempts at stimulus resulted in disinflation. This is likely because constantly lowering interest rates merely resulted in weaker investment returns. Weaker investment returns result in lower private investment. Lower private investment results in lower growth and lower demand for loans. Lower growth and lower demand for loans results in lower interest rates. And all of this also results in weaker government revenues, which have typically been countered by tax increases, which further sap growth, private investment, and demand.

    It's a vicious cycle, and we're making very similar mistakes as Japan did. Central banks can not "grow" the economy. They can merely insure that there is enough liquidity for the economy to function normally. By intervening into the market in this haphazard fashion, the Fed has made disinflation and low-growth more likely --- not less.
    Oct 22, 2014. 01:26 PM | 15 Likes Like |Link to Comment