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  • Sleeping With The Jaguars 4 comments
    Oct 5, 2009 4:12 PM | about stocks: SLB, RIG
    The end of last week brought two important announcements, both of which are relevant to our investments, though not terribly cheerful.
     
    The first of these is the latest report on employment from the Bureau of Labor Statistics. It could not have been worse. The horrific details included a larger than expected decline in employment, both in terms of payroll data and household surveys. Unemployment is nearly 10%, if you don't include people who are underemployed or who have stopped looking for work. (If you do include them, the rate could be closer to 17%.)
     
    You may recall that, back towards the middle of this year, everyone was talking about positive second derivatives. This is a nifty bit of calculus/desperation that claimed that, while things were getting worse, they weren't getting worse as quickly.
     
    Unfortunately, Friday's employment report was clearly a negative second derivative. Not only were the numbers worse than expected, they were worse than the previous month's. Whatever forward momentum the economy has, if any, seems to be much less than previously thought.
     
    Oddly, the market did not sell off very much in response to this news. It seems the driving force behind stock prices today is not fundamentals so much as liquidity. So long as that remains true, overvaluations notwithstanding, we cannot accurately call a top.
     
    Our long standing view remains the same, however. The downside risk today dwarfs any upside potential. Sure, prices could rise a little more, but we feel it's only prudent to take a cautious approach over the near term.
     
    As for the other piece of news, you'd think the IOC must have read last week's update...
     
    IN THE SHADOW OF BRAZIL
     
    On Friday we had the announcement that the 2016 Olympics would take place in Rio de Janeiro, Brazil, rather than Chicago. This decision came despite President Obama's last minute plea to the International Olympic Committee.
     
    The Olympics have evolved into serious business since their revival in the 19th century. A host nation must spend enormous amounts of money to create suitable facilities for the games, in return for which it receives a tremendous economic boost to its economy that persists for many years after the actual event. Certainly, the U.S. economy could have used the help. But then, the Brazilians probably feel they've been poor for too long themselves.
     
    We should note that Brazil's victory comes at the expense of not only the U.S. but also Spain and Japan, two other developed nations. It perfectly symbolizes the passing of the baton from the developed world to the developing world that we discussed in last week's update.
     
    Of course, there's a lot to celebrate in the land of the Jaguar these days. This year, Brazil's economy will likely post positive growth, followed by a 5% gain in GDP in 2010. These are much better results than the U.S. economy can hope to see for some time, a further sign that the developing world may soon surpass the West. When that happens, will Latin America still be “the U.S.'s sphere of influence,” or will we find ourselves sleeping next to a newly invigorated Jaguar? But that's still a way down the road.
     
    As for how to make money during this transition...
     
    COLD WINTERS FOR THE DOLLAR SPELL GOOD TIMES FOR ENERGY
     
    One other recent event worth noting is the G20/G7 meeting. In their public statements, this group has shown a certain reluctance to say that the decline in the U.S. dollar has been overdone. In other words, don't count on them supporting the dollar going forward.
     
    Loss of dollar support is certainly positive news for gold.
     
    A declining dollar will also be positive for oil. But there is something else in the wings that could dramatically accelerate an already sure uptrend in energy prices. We are talking about global warming or the lack thereof. Global warming has become a well entrenched ideology among scientists. Increasingly, however, the consensus view states that the next 10 to 20 years could actually be a cooler period within a long-term warming trend. We could see colder winters and lower average worldwide temperatures during this time. But according to the scientific community, a generation of colder temperatures is not reason to turn up the thermostats.
     
    We have always had trouble with zealots whether they be Scientologists or ivory tower ideologues. And global warming is no exception. A few experiences and recent articles make me especially skeptical.
     
    In the summer of 2008 I attended a conference hosted by Accenture in Rio. Sitting next to me for a good part of this event was the head of the National Oceanic and Atmospheric Administration. This man was a Naval Admiral and a Harvard Ph.D. in applied math. He struck me as a soft-spoken, level-headed, plain-speaking man – certainly not someone inclined towards hyperbole. In addition, as his assistant informed me, he was very thick-skinned.
     
    Turns out he had testified before a Congressional committee on the subject of global warming. His frank answer to the Chairman was that there was not enough evidence to conclude global warming is taking place. The Admiral took a lot of verbal disrespect for expressing such an unpopular view, but his expertise in weather patterns cannot be denied. Nor could the lack of expertise by the Senator who lambasted him.
     
    In light of the data suggesting we may experience a cooler period, I find myself more respectful of the Admiral's view.
     
    I was also struck by a recent article in the August 2009 issue of Science in which scientists found it nearly impossible to incorporate the effect of the sun into climate models. Variability and system feedbacks seem to have a bigger influence on temperatures than the sun's radiation, even though we clearly get most of our heat from the sun.
     
    Well, being unable to determine the sun's role in a climate model is a bit like excluding the role of rainfall from agriculture.
     
    Our point is that we cannot assume the global warming theory is complete and proven. All we know is that we are likely to experience some colder winters in the years ahead, and they will in turn affect the demand for energy.
     
    Colder weather will certainly up the demand for natural gas, oil, and coal, which will in turn drive up the prices of these commodities.
     
    Energy prices are correcting at the moment, as they usually do between the driving season and the heating season. However, if we have a cold winter, we can expect gas and oil prices will be bid up substantially within the next 2-3 months. If people start to realize that cooler winters are a long-term scenario, energy prices may receive a long-term bid as well.
     
    Once again, this bodes well for Brazil, a country which is a net energy exporter. It will impact other developing countries which will be consuming commodities hand over fist. And it will affect the U.S., where year-over-year energy prices show a positive gain despite the recent correction. By the start of next year, energy prices could easily be up 100% y-o-y. In the past, such a high rate of change has always signaled trouble for the stock market and the economy. If it happens this time, in the context of high unemployment, the impact could be worse.
     
    Clearly, you should own energy stocks such as Schlumberger (SLB), the leading oil service company, Transocean (RIG), the leading deepwater driller, and others in our portfolio. The entire energy patch could see extraordinary gains in the years ahead – the result of a long-term trend that could force Al Gore to return his Nobel Prize.

    Themes: employment, labor, ioc, olympics, brazil, obama Stocks: SLB, RIG
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  •  
    One need only hear climate change believers say that "It is no longer debateable" to know that the time to question has come.

    I could list facts here, but the zealots would not hear them.

    Global warming is a religion, where humanity is omniscient and all-powerful, and the followers Arthur Dimmsdale lashing their backs and those of others for breathing, consuming, and creating "CO2".

    Unemployment - consider that our employment has increasingly become two wage earners, or three, or four per household. If the housing market and employment are in bad shape, collectively, we are in REALLY bad shape compared to past generations.
    5 Oct 2009, 07:26 PM Reply Like
  •  
    All people have ideologies--and those that express them with confidence are sometimes called zealots.

    We may indeed be in for a cooling period.

    But there is signal and there is noise. The market may rally from here in spite of some peoples belief that fundamentals don't support it, and that the much more likely outcome over the longer term is down.

    Similarly, the climate (as is true with the market) is a complex system which the author correctly points out we have incomplete models (as as is true with the markets)--the long term signal may be for much warmer temperatures, within a counter cyclical sunspot induced cooling period.

    I find the people that jump on the markets as they head higher similar in in erroneous thinking to those who say that global warming must be false because , "look, see, temps are getting cooler."

    Its possible to have counter cyclical patterns in well established trends, and in fact, in complex systems, it would be very odd if we didn't see counter cyclical patterns in well established trends.

    Bear market--yet look at the unpredictable rally.
    Global warming--yet counter cooling trend.
    Same thing.
    The science is intact.
    6 Oct 2009, 12:53 AM Reply Like
  •  
    Your reference to “zealots” advocating global climate change is most interesting in evaluating this group’s intellect and academic achievements vs. that of the Kool-Aid guzzling disbelievers!

    “Science as a Candle in the Dark,” Carl Sagan PhD. Paraphrasing, “C’mon man!”


    On Oct 05 07:26 PM ebworthen wrote:

    > One need only hear climate change believers say that "It is no longer
    > debateable" to know that the time to question has come.
    >
    > I could list facts here, but the zealots would not hear them.
    >
    > Global warming is a religion, where humanity is omniscient and all-powerful,
    > and the followers Arthur Dimmsdale lashing their backs and those
    > of others for breathing, consuming, and creating "CO2".
    >
    > Unemployment - consider that our employment has increasingly become
    > two wage earners, or three, or four per household. If the housing
    > market and employment are in bad shape, collectively, we are in REALLY
    > bad shape compared to past generations.
    6 Oct 2009, 11:37 AM Reply Like
  •  
    Some interesting discussion on this article's climate commentary, and the misinterpretation contained therein (maybe stick to finance?):
    climateprogress.org/20...
    6 Oct 2009, 04:43 PM Reply Like
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