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  • Why Is The Price Of Gold Falling? [View article]
    I find that most people, Cullen included, do not seem to understand the broader macro construct for assessing gold that I've laid out in the foregoing comment. Rather, they fall back on simplistic half-explanations like US inflation or "investor fear".

    The foregoing explanation isn't just my personal opinion--PIMCO and David Tepper have said the same thing.
    Sep 20 01:24 AM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    I think you have the tone of that article wrong. I would say that he's actually issuing a warning that the markets are frothy and overvalued, that people are dumb for overpaying for garbage like CCC-rated bonds, and that he's a proponent of taking the air out sooner than consensus, and that "taking the air out" of the asset bubbles is actually one of the reasons (beyond inflation fears) that the Fed needs to tighten sooner. Basically, he's congratulating Jack Ma for selling to idiot suckers at a high price--sort of sarcastically sticking it right in the craw of the breathless bullish cheerleaders.

    He's also said in the recent past that he's voting to continue hiking whether the markets go down or not.

    Fisher actually has a lot of private sector business experience, I believe, and is one of the most hawkish Board members.

    But, yes, your broader point is spot-on. They're juicing asset prices trying to create inflation and fight a disorderly debt unwind that will otherwise ensue.
    Sep 20 01:08 AM | Likes Like |Link to Comment
  • Why Is The Price Of Gold Falling? [View article]
    Gold prices are ultimately a function of real interest rates (nominal rates minus inflation). Over the past month or two, we've had a jump in rates plus a brief dip in inflation due to sharp currency movements. In other words, real rates have temporarily popped. That's why gold has recently dropped $80 or so.

    Real interest rates are a function of endogenous economic strength (i.e. demand for capital in the real economy bidding up the price of money). If you're bullish on the US economy, you should be bearish on gold. If you believe we're in a structural depression and unable to afford higher real rates, you should be bullish on gold.

    Gold soared from 2003-07 first because of negative real rates and later because the Fed was behind the curve in tightening.

    If inflation never comes back, but strong real growth also never comes back, we're likely to have a sovereign debt crisis at some point. Basically, the US will follow the trajectory of Japan, and they will need to use extremely radical measures (helicopter money, debt jubilees, re-valuation of the currency downward against gold, etc.) to create inflation.
    Sep 19 11:50 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]

    Your assertion is similar to the recent suggestion of Jeremy Grantham that we might have another year or two of euphoric M&A-driven upward movement before the giant bust--"chances are better than 50%". Then again, we might not (note that Grantham states that he has already quit "playing with overvalued assets" and that "if you get caught, your excuses will be quite thin".

    I also have some issue with the notion that heavy retail enthusiasm and/or economic exuberance is required for a market to top. Japan has had numerous bear markets without either. Ditto with the US in 1937 and the 1980-81 bear market. (Incidentally, 1937 and post-1990 Japan were structural low-growth depression / liquidity trap situations similar to where we are today.) That was really only a late 1990s, late 1960s, late 1920s phenomenon.

    There are numerous toppy indicators even aside from valuations (based on predictive measures, not just forward single-year PE) which have already surpassed nearly every other top in US history including 2007. These include junk bond yields/spreads, IPO activity, buy-back activity, investor sentiment surveys, reach-for-yield behavior, deteriorating market breadth (e.g. small-caps), profit margins rolling over, people suddenly rationalizing/criticizing valuation metrics (e.g. Shiller PE), the bulls becoming scornful of the bears (see CNBC/Bill Fleckenstein the other day; recent attacks on Hussman, etc.), etc.

    Also, note that Stan Druckenmiller has expressly predicted that when the Fed raises rates, we'll have a bear market (he even alludes to the possibility that the end of QE could start the bear market). In either case, not a lot of runway left.

    This brings up the obvious question--how to play it? Going straight long is arguably far too dangerous if your thesis does not play out--basically, it's a greater fool theory rather than true "investing". I would say that the options boil down to some combination either (i) long-short (note what Joel Greenblatt has just started doing); (ii) mostly cash with some equity call LEAPs; or (iii) buying the (rare at this point) stocks that you feel offer good value on a long-term buy-and-hold basis.

    I fret that your prediction of a final leg up in this bubble (I consider it to already be a bubble given that predictive valuation metrics already exceed other periods that have consistently ended in lousy long-term returns and 50%+ drawdowns) might be proven correct but that most should refrain from playing it without a risk-managed strategy (and "I'll be smart enough to get out before everyone else" is not a sound strategy).
    Sep 19 10:41 PM | Likes Like |Link to Comment
  • Bubble Stage Of This Bull Market May Be Nigh [View article]
    How about a "reach for yield" bubble in US financial assets?
    Sep 19 09:45 PM | 1 Like Like |Link to Comment
  • Assessing The Growth Scare At Kinder Morgan [View article]
    Yeah, that was a surprise. As always though, exact timing and catalysts are always uncertain. What matters is assessing value. Note that the shares/units were rallying even before the deal though.

    What was interesting was that amazing ground-swell of negative sentiment in late March. Sure enough, that marked the bottom.
    Aug 17 07:16 PM | 1 Like Like |Link to Comment
  • Assessing The Growth Scare At Kinder Morgan [View article]
    "Expect the units and stock to re-visit and ultimately eclipse their May 2013 highs within the next 12-18 months for low-risk capital gains in the ballpark of at least 30% with current yields of 7.5%, 8.0% and 5.4%, respectively."

    He-he, I nailed it perfectly!
    Aug 17 01:13 AM | 2 Likes Like |Link to Comment
  • This Might Be A Stock Bubble, But Valuation Metrics Won't Help You Understand That [View article]
    On the purported subjectivity / uselessness of valuation measures, it's worth noting that there are several sophisticated value investors, such as Jeremy Grantham, John Hussman, Seth Klarman and Doug Kass, who are on public record in real-time as having been bearish (based on overvaluation) from 2005-07, making "fair value / undervalued" calls in late 2008 and early 2009 and then become cautious / bearish once again (citing overvaluation) at various points between late 2010 and early 2013.

    Therefore, these guys are not perma-bears even though they have been bearish based on over-valuation for most of the past 15 years (and rightly so). The simple reality is that the S&P 500 has been overvalued most of the time for the past 15 years and has generated weak long-term returns (even calculated into the current bubble as the end-point--once this one bursts, those long-term returns will be even worse) unless you bought very selectively (i.e. during the end-phase of one of the two massive bear markets when valuations did indeed become very reasonable).

    The last two over-valued bull phases (late '90s and '05-'07) each ended with historically epic bear markets (declines of 50% and 60%, respectively) and have generated disappointing long-term returns even calculated into the recent buoyant recovery. Valuation is worth paying attention to, unless you're blasé about locking in minimal long-term returns with stomach-churning draw-downs along the way.
    Jul 20 11:08 PM | 3 Likes Like |Link to Comment
  • The Energy Paradox: More Is Less [View article]
    Question: how much of this is energy-specific structural (e.g. the depletion of easy-to-exploit oil fields) and how much of this is a broader impact of US dollar depreciation over the past decade (both currency depreciation and an increase in the relative buying power of emerging market consumers via higher nominal growth rates in those countries)?

    When people make arguments about oil or gold in isolation, I'm sort of struck by the fact that just about all internationally traded commodities went up roughly four-fold over the past 12 years or so--gold, silver, oil, lead, zinc, ag commodities, etc., not to mention emerging markets stocks and real estate.

    Since 2011, all of these things have also consistently been side-ways to soft at the same time. Seems like it's all one big trade to me. Assessing the trajectory of the dollar over the next few years seems like the key to the kingdom. USD strength/weakness will be driven by a combination of monetary policy and economic growth rates in the US (relative to elsewhere). My guess is the long-term trajectory is probably down though the shale revolution does throw a monkey wrench into the equation.

    The increase in the oil price since 2000 has been considerably less dramatic in Euro or Yen terms.
    Jul 9 01:48 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For A Mid-Course Correction? [View article]
    No, I wouldn't call the last bear market a black swan event. Imbalances and fragilities, excessive leverage and unsustainable high buy-back-driven profit margins built up over the years, and ultimately you had a psychological catalyst that unleashed violent negative feed-back loops. Perhaps the Lehman failure could be called a "black swan", but if it wasn't that, it would have been something else. Bad debt is bad debt, and it was bad long before Lehman failed. Note that the bear market and 2007-09 recession also started well before Lehman failed.

    That's like saying that after snow has built up to the point where an avalanche is likely, the eventual avalanche is a "black swan" because one more snowflake fell and set off the avalanche.

    Put it this way--if, in the next year or two, there's some trust product default or scandal in China, and it sets off a real estate price collapse or financial crisis in China, would you consider the whole affair to be a black swan (i.e. attribute the whole thing to that particular unforeseeable catalyst)? Anyone with eyes can see the imbalances and risks building the past few years. Maybe there's a solid possibility that it resolves with a long sideways period or slow bleed over many years, but certainly, gaming the probabilities, there's a significant risk of a large price decline and/or financial crisis. It's certainly not unpredictable nor is it a trivial probability.

    Overvaluation is relative--arguably, stocks are over-valued right now relative to historical norms even if less over-valued than big-cap growth and tech stocks were in 2000. US stocks in 2000 were less over-valued than Japanese stocks in 1989, but that didn't keep them from collapsing.

    To manage risk in this later-stage bull market the past couple of years while still earning solid returns, I'm personally using a concentrated stock / sector approach overlaid with a seasonal strategy. In other words, for the most part, I only go long from late fall through May/June, and only in things where I'm comfortable with the valuations and biz risk profile. The past couple of years, that's been mostly large-cap midstream MLPs though I also bought a good batch of Russian stock ETFs during the Crimea invasion crisis and will go wherever I see value (not many places these days.

    During the seasonally risky summer-fall period, I go mostly to cash for about six months and then re-enter new positions in the late fall. Yes, it's not as tax-efficient, and yes, there's the possibility of missing out on some extra gains, but that's fine by me. In all likelihood, I'll miss any severe declines as they always happen in summer or fall. I've already locked in a nearly 15% gain YTD and am comfortable sitting mostly in cash (plus my modest RSXJ position which is still dirt-cheap) and looking for new opportunities in late fall.
    Jul 7 09:58 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Time For A Mid-Course Correction? [View article]
    Note that we did see the share-buyback and related profit margin inflation dynamic in 2006-07 as well. What was inflated wasn't the P/E per se but the profit margins. The market was only at PE 16/17 in 2007 as well before collapsing. Markets never "look expensive" to the casual observer (based on current PEs) at market tops just like they never look cheap (based on current PEs) at market bottoms.

    The key difference between now and 2007 is that we have a lot of slack (i.e. not much over-heating) and lower interest rates. How that all plays out in this stock market cycle is anyone's guess.

    Bill Gross is out recently suggesting permanently higher multiples based on permanently lower interest rates (I can see the theoretical argument though am skeptical--it seems like wishful thinking). Others suggest that sooner or later, profits roll over, and we get hit with some type of destabilizing liquidity crisis given the prevalence of self-reinforcing negative feed-back loops in our leveraged economic/financial system (more in line with history and the cyclical nature of capital markets) with a catalyst that's as yet unforeseen.
    Jul 6 06:48 PM | 1 Like Like |Link to Comment
  • Is It A Good Time To Buy MLPs? [View article]
    Oil production will top out by then, but not natural gas or NGLs. Much longer runway for nat gas. Note that refined products have already topped out which is why MMP's growth projects have been mostly in crude oil.
    Jul 5 09:13 PM | 1 Like Like |Link to Comment
  • Is It A Good Time To Buy MLPs? [View article]
    Oh, one more question. Which MLPs are you comfortable holding "for the rest of my life"? That's certainly a sign of confidence in the longevity of the shale revolution. You don't seem that old!
    Jul 5 02:34 AM | 3 Likes Like |Link to Comment
  • Is It A Good Time To Buy MLPs? [View article]
    Timely article, and I agree that many of the high-growth MLPs are looking rich--investors may be making the classic mistake of capitalizing recent growth rates and near-term strong growth prospects indefinitely into the future which means growth MLPs trading at low yield multiples might be overvalued.

    One question though: how do you conclude that MLPs were in a bubble in 2007 given that they have generated outstanding returns since then (much better than the stock market)?

    I now think inflation is coming back, and higher rates with it, and that may well provoke a temporary sell-off much like last year. However, at the end of the day, MLPs are much more attractive than utilities, REITs and staples given the superior growth prospects and should do fine for the next several years. My bias would be toward the quality large-caps as I believe that the smaller ones are rich and will suffer greatly during the next bear market (no more than a couple of years away) as access to capital dries up. Note that the managements of PAA, EPD, etc. are suggesting the same thing on recent conference calls--they're getting their dry powder ready for this eventuality.
    Jul 5 02:24 AM | 7 Likes Like |Link to Comment
  • 2014 Strategies And Stocks: Mid-Year Review, Part 1 [View article]
    What do you think of the offshore drillers here? Cheap and ready for an up-cycle? Do you think oil prices go higher from here? Per the typical business cycle, that's what we should expect.

    These things tend to move explosively when they move (see 2005-07). For a related example, see what WFT and NBR did the past few months.

    I think the offshore drillers are next. They're even paying good dividends now and have insider buying. Higher inflation/oil will be the catalyst, and money will be eager to flow into stuff that hasn't participated in the rally of the past couple years.
    Jul 5 12:10 AM | 1 Like Like |Link to Comment