John Ginn

John Ginn
Contributor since: 2013
In my view SE's current interest rates on their bonds reflect the exact opposite. Based on current yields bond investors believe the company to be in a good cash position and not in risk of default.
First, SE's bonds which mature this year yield less than 1%.
Next, mentioning that their issuance which yields over 6% matures 20 years from now would help to put things in perspective. The 6% yield is reflecting future expectations of a general rise in interest rates over the next 20 years, not a weak financial position.
John
MCD has been around forever and is well established in both developed and emerging markets and therefore is not a good comparison to SBUX.
The market is pricing in future growth for Starbucks, which unlike MCD is in the infant stage of expanding into emerging markets.
Drewheyl,
Thank you for your comment. I am about to write another article, the main contents of which is below -
The prediction was definitely premature, and it was not fun watching the stock climb to $17 but I'm definitely glad I sold now that it is back under $13. It seems that in our current market it takes unusually long for the fundamental picture to trump speculation (and on a side note I this is a precursor to what is about to happen to the larger market in general).
As to your comments, I was initially attracted to RPC because unlike drillers it is not necessarily directly tied to the price of natural gas, and is in a far superior cash position.
In RPC's case lower natural gas prices only affects earnings growth, while in the case of a driller (i.e. CHK or XCO) lower natgas can quickly make the driller bankrupt.
RPC's relationship to the commodity is indirect because while their business might decline due to lower drilling resulting from lower natural gas prices, RPC can offset that through pre-arranged contractual agreements and therefore remain profitable even amidst low natural gas prices. Furthermore RPC can reduce its workforce and activity in this area accordingly as to save costs until prices rise.
That being said, the majority of RPC's servicing contracts just expired at the end of 2012 and were not renewed, which is what caused the stock to drop almost 12% in one day. Accordingly, RPC is now more tied to the price of natural gas because they do not have work until the drillers decide the spot price is high enough to resume drilling, and then RPC has to beat out the competition on pricing.
However I think the price of natural gas will steadily rise. We are now at a 14yr low in rig count, and by most accounts everyone who is looking to take rigs offline has done so. Furthermore, there remains a large demand for natural gas (i.e. DOW chem., fertilizers).
Going forward, I expect basic economics to take over soon where stable demand and lower drilling pushes the price of natgas back into the driller's profitable range. When that happens the situation will reverse and there will be a rush to bring rigs back online and RPC will be able to get good pricing on future contracts and plenty of work in the spot market.
Accordingly, I am holding off on buying now but I plan to start buying should RPC fall into the low 12's and then really increase purchases as natgas nears or passes $4.50+ (the level at which most producers can drill profitably).
The bottom line is that if your a long-term investor this weakness should be temporary (I would say less than a year), you will get paid a good dividend to wait, and you don't have to worry about the company going bankrupt (at least is much less of a risk as compared to drillers). But if your looking to buy for the short term now is not a good time becasue the price will most likely fall in the short term and at the very least be very volitile.
A perfect scenario would be natgas climbing towards $5 and RES remaining below $13 - at which time I'll be "backing the truck up" so to speak.
John
Bob,
Thank you for your comment.
I respectfully disagree.
Based on your argument, you have the "big players" and then smaller "technology firms" that use their tech to even the playing field. Not included in those two is the retail investor.
Both the big firms and small HFT firms can take advantage of the retail investor in different ways, and getting rid of the HFT might be a win for "the big players" but its also a win for the retail investor.
John
Vermontistan,
Thank you for your comment,
I haven't seen the article you posted yet, it was very interesting.
A move into other assets would probably be a good move for HFT's because retail investor involvement is much lower in bonds and currencies, and those retail investors in bonds usually hold them to maturity.
Jason,
Thank you for your comment, I am glad you enjoyed the article.
I also think HFT affects market prices more than expected due to our current low volume environment.
In reference to the liquidity, I don't think the SEC will find it increases liquidity either - Unless "increasing liquidity" for half a second during the trade counts. . .
Corporate tax revenue to GDP is also back at all time highs. . . http://bit.ly/1504Fn3
Muoio,
The chart you posted shows that both marginal tax rates and corporate tax rates have dropped over the past 90 years.
The chart I posted is of overall federal corporate tax revenue, which is exponentially higher.
Therefore the data we both presented demonstrates that lower tax rates have significantly increased federal tax revenue.
Furthermore throughout the same time period U.S. net worth per household also exponentially increased (http://bit.ly/XeyH2Y).
Thank you for your comment.
There will always be certain individual stocks that are a good buy in any economic backdrop for reasons of valuation or expected future trends.

For me one example is natural gas and accordingly I am long OKE, SEP, PWR and others and don't plan on selling for 5yrs or more.
However, individual stocks are much different than the general stock market as a whole. This article states that the market in general is overvalued, which is why I shorted the SPY.
Cranky,
I believe buying individual stocks such as Heinz or other value investments is much different than exposure to an index in general (i.e. through a ETF such as SPY or QQQ)
There will always be undervalued stocks in any enviroment, and Buffett is a master at finding them. Buffett is a value investor with a time horizon 10yrs+. The fact that he bought Heinz recently cannot be analogized with whether the market in general is a good buy now.
I always hold individual stocks that I think represent value or unrecognized growth potential regardless of the economic backdrop (right now GNW, ONFC, SEP, PWR, OKE to name a few)
This article states that the market in general is overvalued, which is why I shorted the SPY. There will always be individual bargains.
I agree with you points as to diversification and choosing high quality stocks (and I think almost anyone would).
I was simply saying that I decrease net long exposure to stock in general as the market nears yearly highs when that occurs in an enviroment of a negative economic outlook.
I also stay diversified and always hold 5 or more core positions in individual stocks (right now GNW, OKE, PWR, SEP & ONFC, etc).
This article relates to the stock market in general - which is what I shorted.
Yeah I think we all at some point have questioned whether this will ever end. But looking at a long-term chart always helps with those worries - http://scharts.co/YiO5dM
Yes they could do it until 2020 but the point is we already have extraordinarily low interest rates so (as we are seeing now) QE would no longer be effective.
I agree on the point on longterm bonds. I wrote about that on my blog back on 1/22 in the article titled "The trade of the decade." http://on.fb.me/YcjBs2
Thank you for your comment. I'll be blunt and get to the point as you did in your post:
1. You portray me as a young investor who has not yet learned that it is impossible to generate better returns than just buying and holding - you are absolutely correct.
I still believe that it is possible to generate higher returns by reducing stock exposure when prices surge admits poor fundamentals and then buying when lower prices come. Most investors give up or don't even try because everyone says its impossible - I am not one of them. If it wasn't hard it wouldn't be worth doing.
2. I am short because the market is back at all-time highs coupled with the fundamentals above. I was invested in stock throughout 2012, which I extensively posted about on my blog. The post from 1/29/13 summarizes 2012 and provides the reference to when I bought the stock. (http://on.fb.me/XCKHss)
3. The fact that people are willing to ignore all of the negative fundamentals and buy stock solely on the basis of Fed QE is exactly why shorting the market now is so attractive. There are so many on the other side of the that trade putting their faith in an entity (the Fed) which they have no control over.
Finally, I wish you luck in your investments as well.
The great thing about the stock market is we'll have a answer one way or the other in the next few months.
Thank you for the encouragement. And yes as soon as I started posting financial related articles I learned pretty quick that you must have thick skin in this game.
JS,
I agree with all of your points. Unemployment is especially interesting considering the labor force participation rate has also been steadily declining, and when people quit looking for work they aren't count as unemployed.
The fundamentals always prevail, it's just a matter of how long it takes.
The total cuts come out to $1.2T, $85B is just what is to take place in March.
And I agree less debt will be good for the economy in the long run. However, keeping an eye on the underlying fundamentals and selling when negative fundamentals occur at the same time as record high stock prices is much more attractive to me - this chart does a pretty good job of explaining the point on its own: (http://scharts.co/YiO5dM)
For example, an investor who chose to ignore the unsustainable P/E ratios of tech stocks throughout the late 90's into 2000 would eventually make their money back, but not until a decade later in 2007. The same is true for the housing bubble which formed in '06 and '07.
The counter argument to that is those that bought the market dips or bought in the early '90's are up huge. My reply to that is that if we were at those levels now (or even under say 1350) I would add stock exposure. But we're not. We're back at all-time high stock prices.
Muolo,
I do not think "low taxes" contribute significantly to corporate earnings.
I study corporate and international tax law, and the effective average tax rate on US corporations is much higher than many think - see the chart of government tax receipts here (http://bit.ly/12FYJg0)
Plus, although foreign earnings are not taxed in some jurisdictions, corporations cannot bring those earnings back to the U.S. without paying a 30% withholding tax.
I'm ok with being a little too early if that means a few weeks or a month early. Longer than a month and it would not be enjoyable to still be short.
I am always interested in alternative ideas and conclusions if you would like to share.
Cranky,
That approach was much more attractive pre 2008.
Thank you for your enthusiasm! The fun thing about investment predictions is at some point we will know whether it is right or wrong. . . Time will tell.
In my opinion the answer to how long QE will last depends on how much weight you give to the Fed's statements and actions.
Up until earlier this year they pegged the fed funds rate at 0-.25% until 2015 - but last November they changed that policy to the current policy of employment below 6.5% or inflation above 2.5%.
That tells me that the Fed is anticipating having to raise rates earlier than expected, and from their previous statements and actions QE would end well before a rate hike.
Accordingly, I'm estimating the Fed will end QE around late '13 to early '14 and then raise rates as early as mid-late 2014
Well before deciding keep in mind that the article is meant to be an analysis of intermediate term direction over the next 6 months to 1yr. As the last paragraph points out, RES has great long term potential (I'm looking out 2-5yrs). Good luck!
j,rogers - Thank you for your comment. The company being sold in the near future would definitely be a catalyst for the stock, but I prefer to invest based mainly on the current earnings outlook.
I would only hold a position in expectation of a buyout if the company was known to be in negotiations and the stock price had yet to reflect what I perceived as a likely sale.
Thank you for your comment. I believe that RES will benefit from a rise in natural gas prices and thus a rise in rig counts, which will occur when natural gas prices near $4.50/btu.
However, I am selling now because I expect RES's stock price to decline for the intermediate term - the catalyst being that rig count has now declined to a level where RPC is seeing a slowing of demand for their services - and current natural gas prices are not high enough to reverse the ongoing trend of declining rig count and drilling.