Joseph L. Shaefer's  Instablog

[Signal-to-noise ratio is a term familiar to anyone in communications or the Intelligence Community, as well as to those in science and engineering.  It is a measure of how much a “signal” has been corrupted or hidden by the “noise” that inevitably is there at the same time the signal is being transmitted or analyzed.]

 

One of Rachel Granby’s selections for “Wall Street Breakfast: Must-Know News” today was: “Positive signs from Beige Book, just not on jobs, housing.”

 

Her synopsis then continued, “There were some glimmers of light in the Fed's Beige Book, including an assessment that economic activity ‘continued to rise, albeit at a modest pace’ through early October. Manufacturing continued to expand, retail spending was flat to moderately positive, and there were reports of increasing demand for loans. However, there was little positive to be said about the nation's two weak spots: housing and jobs. Housing ‘remained weak,’ commercial real estate conditions were ‘subdued,’ and inventories were ‘elevated or rising.’ In the job market, hiring ‘remained limited’ and firms are ‘reluctant’ to add to permanent payrolls.

 

While Rachel’s tongue seems firmly planted in her cheek, she may have been too kind, even with intended irony, in using the exact words the staffers putting out the Beige Book used themselves.  May I suggest the following minor changes to the Beige Book’s padded and delicate verbiage:

 

Economic activity < barely kept from drowning> through early October. Manufacturing continued to expand <at a snail’s pace>, retail spending was flat <except for gasoline which was> positive, and there were reports of increasing demand for loans. <Really, there were!  My uncle Morty applied for one.  Of course, Uncle Morty hasn’t been in his right mind for years, but, hey!, it’s a report.>  However, there was <absolutely nothing> positive to be said about the nation's two weak spots: housing and jobs. Housing <was in the toilet>, commercial real estate conditions were  <clubbed into submission> and inventories were <already in the stratosphere and still rising.>  In the job market, hiring <was nonexistent except for new federal bureaucrats> and firms are <unable and unwilling> to add to permanent payrolls.

 

Just once, wouldn’t you like to see your elected leaders and their appointed minions use words that were truthful?

 

At any rate, the important thing to remember is what I wrote in a previous article.  There are three determinants of US economic health going forward:

 

Housing,

 

Jobs, and

 

Taxes.

 

These three are signal indicators of recovery.  Not how much money has been lifted from citizens’ purses and wallets and given to banks and Wall Street.  Not how much money Warren Buffett and Bill Gates are spending in jet fuel.  Not because last month, 13 out of 100 builders thought their business was going to get better and this month 16 do.  (Maybe they were just drinking, either the Kool-Aid or something stronger.)  Not “retail sales” that include the cost of gasoline as a key component.  (We’re {celebrating} increased “retail sales because we pay more for gasoline now????!!!)  All this is just noise.  Just the straws the crew of the New Titanic are tossing into the water to us, rather than lowering the lifeboats or repairing the vessel. 

 

The noise is blared from the Chronically Noisy Bull Channel and hundreds of federal apologists every day.  Concentrate on the signals too often obscured by the noise:

 

Housing – when people are secure in knowing they aren’t going to be tossed out of their homes; when prices tempt new buyers because they are fair prices; and when banks no longer have a greater incentive to borrow from the feds and invest in bonds than they do to loan to qualified buyers, housing will begin an honest recovery.  That will mean more lumber is sold, more aluminum, more, steel, etc.  It will mean furniture makers and carpet companies and landscapers will be hired.  It will not necessarily mean more new houses in the first month, but it will mean people are confident enough to remodel and repair, since they know it is “theirs” and not soon to be “the bank’s.”

 

Jobs – When some subset of those currently unemployed realize “their” old job is never coming back, they’ll look in new areas, seek different training and education, and start small businesses of their own.  Maybe at first they can only scrimp by with the help of their spouse and kids.  But since entrepreneurs are the heart, soul, and impetus of new hiring in this country, sooner or later, they’ll hire others to help in their new business.  There are a thousand un-met needs out there.  “The government” is unlikely to address a single one.  But people who see a need and work to fill it will.

 

Taxes – I’ve just returned from a month in Europe, primarily in Eastern Europe.  The contrast between those people unleashed from decades of “the government will take care of it” and The West, which seems intent upon heading down the path of “the government will take care of it” is startling.  Many of these nations have flat taxes or taxes that are under regular revision to ensure that the individual is not prevented from contributing their full potential.  At the same time, the US is looking to increase taxes on the remaining 53 out of every 100 citizens who actually pay them!  The lie that taxes will increase for only “the rich” has been thoroughly debunked.  Now let’s see if our leadership has the moral fiber to admit the lie and create incentives for hard work and success.

 

Forget the noise, from whatever source, or at least give it only the attention it deserves. 

 

Focus on the signals.  When what will happen with taxes is known and equitable; when housing becomes stable somewhere in the neighborhood of the bottom in prices; and when new entrepreneurs and existing small businesses begin to hire others -- then real retail sales will improve, big companies beyond those selling to emerging markets will recover, and we’ll begin the upward journey, considerably leaner and stronger than we were during the fat years.   But if these signals don’t improve – look out below.

 

Disclosure: No securities mentioned. However, this has me thinking about what sectors will benefit as we wring out the last of the excesses and a number come to mind for future articles!

 

Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

 

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

 

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

 

 

You may as well ask who put the bomp in the bomp she bomp she bomp.  We all know where that money went: Wall Street, banks, and bigger government.

I've just returned, about an hour ago, from a month overseas so I'll let this little gem, courtesy of the Heritage Foundation, using data from the US Dept. of Labor, speak for itself.  

What has this to do with investing?  Everything!  When private industry (what we call "revenue") loses 7 million taxpaying jobs and government (what we call "overhead") adds jobs, there is less money to support evermore government employees and therefore a less attractive environment in which to invest.



Fortunately we are nearing the first Tuesday in November...

Disclosure:  No securities mentioned.  Only security, or lack thereof.

Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

When on vacation, except for spending 3 or 4 hours daily on our clients’ portfolios and keeping tabs on world markets, I don’t do much other business-related stuff  – like writing articles for SA.  But I received an important question from a reader who purchased Penn Virginia Resources (PVR) based upon one of my articles and asked if I agreed with Zacks’ analysis of short-term problems to come at PVR.  Since many other readers may have also agreed with my examination of PVR and purchased it, I think the only responsible response is to share my reply.

 

Here is Zacks’ take:

 

Penn Va. Downgraded to Underperform

 

By Zacks Investment Research|Oct 6, 2010, 2:03 PM|Author's Website

 

We recently moved to an Underperform rating for Penn Virginia Resource Partners L.P. (PVR), on expectations of a significant dilution of cash distribution stemming from the partnership’s announcement to merge with its general partner, Penn Virginia GP Holdings L.P. (PVG).

 

Despite this near-term fear of dilution, we like Penn Virginia Resources for its diverse coal reserves and leases, located in four different producing basins: Central Appalachia (73%), Illinois (20%), Northern Appalachia (3%) and the San Juan Basin of New Mexico (4%).

 

Penn Virginia Resource’s coal-royalty business generates revenues by leasing its coal reserves for a royalty payment. Additionally, we favor earnings from the partnership’s Midstream business, which helps diversify its low-risk coal royalty business, benefiting from its hedging strategy.

 

We believe the partnership’s royalty structure allows for asset and producer diversification, while it eliminates the direct exposure risks that coal mining companies typically face, namely mine operating costs and risks, environmental liabilities and labor relations challenges.

 

Penn Virginia GP Holdings holds a 37.6% stake in Penn Virginia Resources. The merger between the two partnerships involves completion of 100% equity consideration. The merger transaction would result in PVR owning its general partner and the cancellation of PVG’s incentive distribution rights (IDRs) and L.P. units owned. Furthermore, the merger involves the issue of roughly 38.3 million new PVR limited partnership units and the cancellation of about 19.6 million PVR limited partnership units owned by PVG.

 

In the long term, the merger is expected to place the partnership in a better position to compete for acquisitions, increasing returns on future transactions.

 

Though the merger would reap profits for PVR in the long term and benefit from significant reduction in the cost of capital, we expect the transaction to be dilutive to the partnership’s distributions in the near term, affecting investor sentiments. As a result, we expect the share price to lose much of its sheen in the near-term, keeping investors away from the stock for the time being.

 

 

 I responded to the gentleman who wrote me:

 

I am constrained -- and rightly so -- from commenting on whether a particular investment is "right" for a non-client.  (The "Know Your Customer" rule under which, as an SEC-registered advisor, we operate.)

 

However -- I am able to comment on both the news item and Zacks' take on it.  For me, as a long-term investor, the news is great.  Magellan recently did the same thing and fears of it reducing its distribution in the short term were overblown.  Long term, what PVR is doing makes eminent sense to me!

 

Short term, Zacks may be right.  Because many investors look only at the current month's yield, without doing any further research, many will be tempted to sell as they see what they mistakenly believe is a "trend" of lower distributions.. I personally, and for our clients, will use this opportunity if it presents itself to add to our PVR holdings.  For those who want to try to time the possible short-term decline and what I believe will be the considerably better long-term outlook, they may want to sell half their holdings -- at a nice profit! -- and re-enter IF the pullback takes place.  If not, you'll still have half your position as a long-term holding.

 

The bottom line for me is that we have already taken profits on 50% of our position as the market has roared into what I believe is yet another bubble.  PVR will not escape a market decline, but this particular news item I see as a plus, not a minus.  That’s why we have a strong cash position right now.  It is exactly the companies like PVR – with solid management, great cash flow, and superb long-term prospects – that we want to buy if both a market contraction and some alleged (short-term) “bad news” strikes at the same time.  If either happen, we’ll buy more.  If both occur at the same time, we’ll buy lots more!

 

Disclosure:  We and those clients for whom it is appropriate are long PVR -- and lots of cash!

Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.