Long only, value, growth at reasonable price
Long only, value, growth at reasonable price
Contributor since: 2014
Those who mentioned a $47 price number may well get their wish... and more.
WEC blew through its 50 DMA, and now has blown through its 200 DMA. Not a good sign.
Thanks to MCM and all the commentators for raising and discussing this subject. Very thoughtful and provocative all around.
"For the times they are a-changin'..."
~Bob Dylan
Mr. Hussman, we get it. The market is overvalued. It has been overvalued for a long time. Investors, however, have no place to hide when it comes to financial assets.
The trick is knowing when to get out. The gist of all of your articles is "now." But the stock market continues to rise even in the face of significant overvaluation. The "broken clock" analogy comes to mind for many who follow your writings.
Precisely what are the "market internals, credit spreads, and other risk-sensitive measures" that will give investors a clue that it is really, really, really time to abandon ship?
Can you please be specific? Exactly what "market internals" should investors look at, and what levels scream "get out now"? Exactly what "credit spreads" should be looked at, and what objective measure should ring the alarm bell? What other "risk-sensitive" measures should be looked at in objective, quantitative terms?
With all due respect, simply saying these things in sweeping terms without specificity doesn't help much. Specific indicators that can be ascertained or calculated by ordinary investors would be far more helpful. Again, we get it. The market is overvalued by traditional measures of P/E, P/sales, etc. But the market can stay this way for long periods of time. What additional factor(s) should be the signal to bail out?
Admittedly, TEG has not been growing its dividend for the last few years.
Nonetheless, it pays a dividend of $2.72 per share.
On a dollar for dollar basis, this deal may leave TEG shareholders short some dividend income unless they buy more WEC shares. For example, assume you own 2150 TEG shares. You were receiving $5,848 in dividend income annually. You are going to swap your TEG shares for WEC shares. You will receive 2425 WEC shares in exchange for your TEG shares.
The base WEC dividend you can count on receiving is $4098 (2425 WEC shares x $1.69). This is considerably less than the $5848 you were receiving from TEG. But let's say WEC boosts its dividend by 7%, as stated by the author. This will bring the dividend up to $1.81 per share. This will bring your annual dividend to $4389, still short of the $5848 you were receiving from TEG.
So, let's say that you take the entire amount of the cash payment you get in the deal ($18.58 per TEG share x 2150 shares = $39,947) and use it all to buy WEC shares at say $50 per share. This will buy you another 799 shares of WEC, bringing your total holdings to 3,224 shares.
If you are lucky enough to get the dividend boost to $1.81 right away, your annual dividend income will be $5835.00, or roughly the same dividend income you were receiving from TEG.
But a lot of moving parts have to fall into place to make this happen. And it appears that you will need to buy more WEC shares to "draw even" with your TEG dividend income.
My compliments to Danielle Park for ringing the bell in the fire house. We are so used to a market that seems to go just one way (i.e., up) that we tend to ignore storm warnings associated with a lack of global demand. Her admonition, "Remember, no one gets it all their way forever," is well made and taken.
My compliments also to Michael T. Snyder, who also wrote a good article reminding us that a fall in commodity prices often heralds a falling equity market. See his article, "Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?" (
These admonitions certainly "bear" repeating... no pun intended.
The decline in oil and natural gas prices carries with it some special dangers. Once again, investment banks have created derivatives that hinge on the loans made to thinly capitalized drillers and producers. The risk of over supply causing a continued drop in pricing creates a risk of loan defaults. This in turn could cause a melt down in derivative financial products tied to oil and gas. It is estimated that the amount of derivative exposure faced by big investment banks is almost 16 times the total U.S. National Debt. See The 2008 financial crisis will look like a day at the beach compared to this potential disaster.
Keep a watchful eye on commodity prices. They could be telling us what lurks around the corner.
@Robert Duval
I've been looking for the same thing/answer for months.
If the QE money flowing from the Fed to the banks simply ends up as a credit to excess reserves, which the banks cannot loan out, how, mechanically, does this QE money find its way to the stock market so as to boost equity prices? I don't know.
I get the theoretical part about Fed purchases driving down treasury yields, thus compelling yield hungry investors to invest in stocks in search of yield, thus driving up the price of stocks, but I can't find a direct link that shows or proves Fed money going directly into the stock market (which is prohibited, as I understand it).
The amount of excess reserves is starting to come down ( Is this money, that was being held as reserves, being released back to the banks? And can the banks put it to work?
It is sad indeed that many people have been duped by the "global warming" hoax. It is distressing that this indoctrination is being spread continuously on our college campuses and in our public school systems by teachers and academics that have been snowed by the "feel good" green movement.
The belief that we in America can affect the earth's climate if we will only reduce our so-called "carbon footprint" and reduce our use of fossil fuels is sheer lunacy.
If one wants to assume that human activity relative to carbon can make a truly beneficial difference in our climate, it is unlikely that developing economies throughout the world will reduce their carbon footprint. Meanwhile, the political elite is determined to cripple our society and our economy with wild eyed rules and regulations. This is foolhardy, in my opinion.
Think in terms of "putting the squeeze" on Russia. Is it possible that the USA and OPEC are in cahoots to punish Russia?
Yes, U.S. producers stand to suffer, but consumers get a "gasoline dividend" while Russia really takes it on the chin. And if the "important" U.S. producers get into real trouble, there is always a government bailout lurking around the corner. The name General Motors rings a bell for starters.
This article reports that China is stockpiling crude oil in record quantities:
"The number of supertankers sailing to China jumped to a record in ship-tracking data amid signs that the oil-price crash is spurring the Asian nation to stockpile. There were 83 very large crude carriers bound for Chinese ports, according to shipping signals from IHS Maritime compiled by Bloomberg at about 8:30 a.m. today in London. The ships would transport 166 million barrels, assuming standard cargoes, the largest number in data starting in October 2011. The cost of hiring the vessels surged to the highest in almost five years, according to Baltic Exchange data. ...China has to buy at least another 50 million barrels of crude in 2015 for its strategic petroleum reserve, according to Amrita Sen, chief oil market analyst at Energy Aspects Ltd., a London-based consultant. Plans to expand commercial crude inventories could raise that total above 100 million barrels, depending how quickly the country can build new storage units, she said.
“China filling up big parts of its SPR essentially helps to absorb the oversupply” on international oil markets, Sen said by telephone today. “You’re not going to get China slowing down on filling before 2016.”
Here is the link:
It looks like China may get a bargain price on the next 100 million barrels!
Nice article, Eric.
I disagree that UPL should be grouped with companies that may be in danger of a credit default as the price of oil drops.
UPL is primarily a natural gas producer, and the price of natural gas is thus critical to its revenues and profit. While the price of natural gas has been falling, and stands at $3.77 at this moment, one should not overlook that UPL is the low cost producer in the group of companies in the natural gas business.
During a recent conference call, UPL’s president alluded to an “all in” cost for natural gas of around $2.00. Reference to UPL’s most recent 10Q shows that the “all in” cost for both oil and natural gas in the quarter ending 9-30-2014 was $1.49/Mcfe excluding depletion, depreciation and amortization. Adding this non-cash item to this number brings the “all in” cost to $2.71 for both oil and gas. This number will probably fall a bit, as UPL elects the shut in its small crude oil production due to falling crude prices. But the point is that natural gas prices can fall a long way, and UPL will still make money gathering and selling natural gas.
Will UPL be able to meet its debt obligations over the next 4 years? A review of the company’s most recent 10-Q contains extensive information about UPL’s debt situation. The following points are notable: (1) The first indebtedness falling due occurs in March 2015 in the amount of $100 million; (2) Then comes $62 million in “high yield” notes due in March 2016; (3) Then comes $116 million due in 2017, followed by a total of $650 million in 2018. In October 2016, the company’s credit facility with $516 million outstanding will be due. As of September, $434 million in borrowing capacity remained available under this credit facility. The credit facility can be expected to be renewed, I would think.
Where will natural gas prices be 4 years from now? I don’t know. Will prices have recovered? I don’t know. But logic tells me that the answer is “yes.” Natural gas is not going away. And while revenues can be expected to be lower for the foreseeable future due to falling prices, UPL will still make money due to their low cost producer status. Thus, I believe that this puts them outside of the group of those producers who “might” default on their indebtedness.
Thanks again for a nice article, as always.
Investors in KMI might do well to review KMI's discussion of "Risk Factors" in their 10-K.
Excellent article.
"Warning lights are flashing down at Quality Control
Somebody threw a spanner and they threw him in the hole..."
~Industrial Disease
Dire Straits
Excellent article.
Thanks for the analysis. The quest for yield has been the prime mover of the equity market IMHO. Once rates go up, the house of cards will tumble. I agree with the author's statement that most of us will not be nimble enough to get out of the way before damage is done to one's portfolio.
It's not a question of "whether" there will be a downturn, it is a question of "when."
Bounces and Santa Claus rallies may be good opportunities to exit stage right, but they will not forestall the inevitable downturn that is coming.
Eric has done a marvelous job of acquainting us with what has been happening with some very reliable indicators of rough water ahead. There is a consistency of "decline" across multiple indicators, as Eric has so vividly illustrated for all to see (XLI, HYG, $RUT, $MID, $NYA200R, EFA, EZU and others). Ignoring these indicators of trouble ahead is like ignoring an iceberg in the path of the Titanic.
Eric, your articles and comments are well received by investors like myself. I cannot thank you enough for them!
Please continue to keep us posted and apprised of what's on your mind.
Excellent article all around!
Many thanks for sorting out some trees from the forest.
Don't forget the tax impact of "qualified dividends." My understanding is that REIT dividends are generally not eligible for "qualified dividend" treatment, but I could be wrong.
"Not so fast, Rodriguez"... goes the punch line to a joke.
Current data is showing that "vaping" using VTM (vaping tanks/mods) devices is taking share from the eCig categories. Here is a quote from a recent CSP Dailey News article :
"A new survey of convenience store retailers shows almost 92% of respondents believe vaping products and tanks are overwhelmingly taking share from electronic cigarettes. The Wells Fargo Securities LLC survey of tobacco retailers and wholesalers representing more than 30,000 convenience stores in the United States concludes that convenience retailers are excited about VTMs (vapor/tanks/mods)."
Convenience store retailers are reporting that vaping devices are "hot" sellers, and are becoming more popular than eCigs.
Reynolds is rolling out its Vuse product nationally next week. Here's a video all about this and the Vuse product
If you really want to get a sense of what is coming, and also "storm test" what your stocks may face, go to and create a chart that shows the price action for each stock for the period July 1, 2007, through January 1, 2009. Be sure to click the "price" indicator. Clear the other overlays and indicators.
This will give you an idea how a given stock held up starting in 2007 when the you-know-what hit the fan.
I think Mark Twain is credited with saying that history doesn't always repeat itself, but does tend to rhyme.
Eric, excellent comments. Particularly your statement that "And this outcome has come to pass at the expense of those that acted responsibly by favoring savings over debt, focused on disciplined investment over rife speculation, and prioritized prudence over recklessness."
Fed policy drove down interest rates to levels that forced many people into the equity markets. Chasing yield became a necessity for many who had previously relied upon interest on their savings and CD's for income. There was no place else to go.
Authors, like yourself, are doing a public service to highlight the downside risk. The downturn will catch many off guard, and it will culminate with a sudden and deep savagery that will produce outrageous losses for many. To quote John Hussman, "it strikes me that the repeated belief that a crowd can exit through a mouse hole is really one of the wonders of human psychology."
Thank you for your thoughtful insight.
"The beatings will continue until morale improves."
I don't know who said that originally, but in my view the sluggishness in our economy will continue until Øbama, Pelosi, Reid, and their ilk are long gone. Businesses are gasping for breath, yet they continue to smother them with more and more regulations.
The impact on capitalism and the economy are obvious. There is little demand for loans when no one wants to start a new business. Why? Because the government regulatory "moat" is too wide, the tax burden is too high, and having to deal with labor is too problematic. All of this combines to discourage investment.
The negative psychology of having to cope with the "leviathan" that the political elite have created for us insures our continued decline. Expect the sluggishness to continue, and rates to remain at historic lows... unless and until we have a fundamental change in the political class.
E-cig sales have been declining over the past few months. LO's 10Q notes the decline. But in convenience stores, where most sales are occurring, Lo's blu e-cig still leads in dollar sales and unit volume over other brands in the category. Query whether this will remain the case with RAI rolling out its Vuse product.
In addition, across the nacent industry sales have declined. In the 4 week timeframe ending May 10, 2014, dollar sales volume declined 10.4%. Net pricing declined 13.9%. In response, unit sales grew 4.1%, but were not enough to offset the losses in dollar sales.
There seems to be an increasing sales volume trend in the vapors-tanks-mods category sold mostly in tobacco stores and vape shops. This could put a dent in e-cig sales.
"MZ: “Here are the facts. Every single day over 3000 kids nationally light up a cigarette for the first time. Every single day over 700 kids progress to becoming regular smokers. Those numbers are unacceptable. And when you combine that with reports from the CDC that in one year, from 2011 to 2012, ecigarette use among middle schoolers and high schoolers doubled, we have an ongoing problem that we have to address.”"
These comments were made by Mitch Zeller in the context of electronic cigarettes and the regulation thereof by the FDA. See
If menthol plays a role in the initiation of smoking, or its continuation, as suggested by the FDA and other studies, it is difficult to believe that the FDA is not going to act on this subject.
Ban all other flavored tobacco products, but leave menthol standing? That strains credulity, IMHO.
Taxation aimed at e-Cigs is spreading.
A New Jersey Senate Committee has voted 5 to 2 to support a bill imposing a 75% tax on manufacturers of electronic cigarette products. This cost, if it becomes law in N.J., would be passed on to consumers. In addition, the excise tax on other tobacco products would double from 30% to 60%.
Whether this legislation will make it through the N.J. Assembly remains to be seen. But the handwriting on the wall is pretty clear: As with traditional tobacco, States see a "tax cow" in the e-Cigs category.
Expect a tsunami of similar legislation.
Presently, it appears that a hurdle that could stymie the growth of the eCig industry is private prohibition on NDD's (nicotine delivery devices), as well as prohibition by local governments.
An article in the Pittsburgh Post-Gazette brings this to the forefront by pointing out the ban of eCigs by private businesses. State and local governments are getting into the act with laws and regulations of their own. See
If the FDA determines that NDD's confer a health benefit over traditional cigarettes, these bans may fall by the wayside. As Mitch Zeller of the FDA stated: "If we could get all of those people to switch all of their cigarettes to these products, that would be good for public health... ."
Ironically, FDA regulations approving NDD's as a way to assist smokers in quitting may prove to be just the boost the eCig business needs.
Put Øbama to work on it. He's done such a fabulous job since 2009 when he took office.
Let's see... tax increases on people, refusal to re-patriate profits being held by companies abroad, passage and cram down of Obamacare, increased capital gains taxes to discourage capital investment, more governmental regulations to smother businesses, refusal to permit the Keystone pipeline, probable increases in the minimum wage, amnesty for illegals.
Sounds like a sure fire program to encourage job growth.
A study has come forth from the Rutgers School of Public Health that contains some interesting data concerning youth smoking and menthol.
The data comes from the National Young Adult Health Survey undertaken in 2011. 23.8% of respondents in this study were current smokers, and of these, nearly half (40.3%) smoked menthol cigarettes. Menthol use was significantly higher among 18 to 24 year old smokers (51%), and extremely high among Blacks (82%).
Here is one really interesting data point: 65.7% of menthol smokers said they would quit tobacco all together if the sale of menthol cigarettes were banned. Breaking this down further into groups, 79.3% of Black menthol smokers said they would quit smoking.
The authors concluded: "A majority of young adult menthol smokers stated they would quit smoking if menthol cigarettes were no longer sold, which builds on research finding public support for such a policy and on work modeling the public health impact such a ban could have."
The point is that data is being assembled to the effect that menthol affects the initiation and continuation of smoking in youthful smokers, and that banning menthol would have an impact on cessation among youth and racial minorities.
The scientific power of studies like this can be criticized as being weak, because no one really knows what people will do when push comes to shove. Prospective studies could be designed to test what menthol smokers will really do when their menthol is taken away from them, and these may be underway.
It seems apparent, however, that as the data against menthol begins to pile up, the FDA will take action.
This particular study can be seen at
The market seems to be placing great emphasis on e-Cigs as a profit driver for LO, MO, RAI and others.
Unfortuately, the political class has been working furiously to impose severe limitations on where e-Cigs can be used. In addition, they are working on confiscatory taxes to inhibit or destroy the market for this product. Cities, towns, and counties have gotten into the act with prohibitory ordinances. States will soon be waking up to the "tax potential" of e-Cigs.
Minnesota is the only state at present that taxes e-Cigs. It imposes a tax rate of 95% of the wholesale cost. Yes, you read that right. 95% of the wholesale cost is collected by the State of Minnesota and added to the price consumers must pay. This brings the cost of a typical e-Cig product to $16 to $18. I think someone once said, "The power to tax is the power to destroy."
Tax bills are pending in several other states. New York is pushing for a 75% tax, Rhode Island 80%, and Vermont 92%. While 39 states do not yet have an e-Cig tax on the books, they no doubt will, and the consumer will pay dearly for that nicotine fix. The Feds have not yet gotten in on this tax target, but give them time.
Back to Econ 101, folks, to figure out whether price to the consumer will affect demand, demand will affect sales, and sales will affect earnings. :>)
I have to agree with mgladden2 concerning the risk that the FDA will eventually ban menthol in tobacco products, especially cigarettes, and probably e-Cigs, as well. I wrote an article about this some time ago,
If you take the time to read the articles and studies on the impact of mentholated tobacco products, you will discern that menthol plays a significant role in smoking initiation and continuation. The tone of the FDA's preliminary scientific report demonstrates a decided bias towards the elimination of menthol in cigarettes.
Here is a statement from the FDA's report that should be a real an eyebrow raiser, in my opinion: "[A]dequate data suggest that menthol use is likely associated with increased smoking initiation by youth and young adults. Further, the data indicate that menthol in cigarettes is likely associated with greater addiction. Menthol smokers show greater signs of nicotine dependence and are less likely to successfully quit smoking. These findings, combined with the evidence indicating that menthol's cooling and anesthetic properties can reduce the harshness of cigarette smoke and the evidence indicating that menthol cigarettes are marketed as a smoother alternative to nonmenthol cigarettes, make it likely that menthol cigarettes pose a public health risk above that seen with nonmenthol cigarettes."
One should also take into account that the Family Smoking Prevention and Tobacco Control Act itself statutorily banned every natural and artificial flavoring from tobacco products, except menthol. Menthol was left hanging for FDA action. No doubt a political decision. The FDA's desire to get their ducks in a row on regulatory action affecting menthol is understandable in view of probable court challenges that will be mounted by Lorillard. The FDA has been down this road before, and knows what will stick and what won't. In my opinion, the courts will not befriend Lorillard if the declared purposes of the Act are to be achieved.
I am an investor, not a politician. I am not an anti-smoking advocate. I believe in personal choice and liberty. But the political winds are seemingly no longer blowing in favor of personal liberty and freedom of choice.
Read the preamble and findings to the Family Smoking Prevention and Tobacco Control Act. If the politicians really meant what they said in drafting this legislation, and if the Surgeon General's report on tobacco and smoking is true, it is hard to conclude that menthol will not be banned from tobacco products and from e-Cigs, as well.
As previously stated in another post, the FDA is not free to do anything that it wants to do.
The Act specifically prohibits the FDA from banning cigarettes and certain other tobacco products: "Because of the importance of a decision of the Secretary to issue a regulation—
(a) banning all cigarettes, all smokeless tobacco products, all little cigars, all cigars other than little cigars, all pipe tobacco, or all roll-your-own tobacco products; or
(b) requiring the reduction of nicotine yields of a tobacco product to zero,
the Secretary is prohibited from taking such actions under this Act."
So, the FDA cannot ban Marlboro cigarettes per se. But it can regulate what additives, if any, are permitted to be put into Marlboro cigarettes by Altria.
Note that all other flavorings, spices, etc., were specifically prohibited by the Act, except menthol, and even as to menthol, the Act makes clear that it could be regulated ("Beginning 3 months after the date of enactment of the Family Smoking Prevention and Tobacco Control Act, a cigarette or any of its component parts (including the tobacco, filter, or paper) shall not contain, as a constituent (including a smoke constituent) or additive, an artificial or natural flavor (other than tobacco or menthol) or an herb or spice, including strawberry, grape, orange, clove, cinnamon, pine- apple, vanilla, coconut, licorice, cocoa, chocolate, cherry, or coffee, that is a characterizing flavor of the tobacco product or tobacco smoke. Nothing in this subparagraph shall be construed to limit the Secretary’s authority to take action under this section or other sections of this Act applicable to menthol or any artificial or natural flavor, herb, or spice not specified in this subparagraph.").
Regarding your comment that "no regulatory body has ever been able to operate with such tyrannical freedom," have you had any dealings with the EPA since 2009?
As for any requirement that the FDA show or prove "disproportionate harm," there is no such legal requirement, to my knowledge. In any event, the FDA in its PSE signaled that the presence of menthol posed the likelihood of "a public health risk above that seen with nonmenthol cigarettes."