Monday, December 31, 2007

2007 US & World Market Recap

Fitz's 2007 US & World Market Recap

The main 2007 story lines for US investors was strength in oil, gold, and Asian markets (with the exception of Japan) and the continued weakness of the US currency. The US dollar index was down a whopping 8%, which means if you were invested in the S&P or the DJIA you did worse than kiss your sister - you lost money, and that's before taking into account inflation and taxes. Europe was anemic in general, with the exception of Germany which is still seeing strong demand for exporting quality products to Asia. Speaking of inflation, I won't even post the inflation numbers issued by the current administration because I simply don't believe them. So, let's forget the official inflation numbers and simply look at oil and commodity prices - which the gold bugs obviously are watching closely. US investors are feeling a double-whammy as the huge deficit spending of the last 7 years combined with the Federal Reserve dropping interest rates to bail out the Wall Street sub-prime profiteers has the US dollar dropping like a rock. It is down some 40% since Bush took office. Will these trends continue in 2008? See down below after the market wrap up summary.

NOTE: The % changes listed below are simply the change in the local index or commodity. That is, currency fluctuations are not taken into account.

Jan 1, 2007 Jan 1, 2008 % Change

OIL $61 $95 +57 % per barrel
GOLD $636.90 $832.10 +31 % per oz
US DOLLAR 83.5 76.65 -8 % US $INDEX-NYBOT:DX
S&P 500 1418 1468 +4 %
DJIA 12463 13264 +6 %
NASDAQ 2415 2652 +10 %
FTSE-100 6220 6456 +3.8 % England
DAX 6596 8076 +22 % Germany
CAC-40 5541 5614 + 1 % France
TSE 12908 13858 + 7 % Canada
BVSP 44474 63644 +43 % Brazil
AORD 5632 6421 +14 % Australia
SEC 2550 5261 +106 % Shanghai
HSI 20008 27812 +39 % Hong Kong Hang Seng
N225 17199 15307 -11 % Japan Nikkei
STI 2990 3482 +16 % Singapore Straits
KS11 1430 1897 +33 % Seoul Composite
TWII 7760 8506 +10 % Taiwan

Fitz's Fearless Predictions for 2008

2008 will continue to be a market for hard assets as the dollar will continue its fall with the Federal Reserve cranking up the printing presses to pay for the huge budget deficits and the sub-prime bailout. Inflation will therefore accelerate. As in 2007, this is not an environment with which to invest in the S&P 500 or US bonds, which will be dead money. Oil and gold will continue on their upward trends, with dizzying shake outs to scare the weak of heart. With fiat currrencies around the world (yes, I include the US dollar in this group) continuing to get pounded, countries rich in natural resources with sound fiscal policies will continue to do well: Canada, Russia, and Brazil for instance. The BRIC countries should continue to outperform. The big wild-card in every economic prediction for 2008 continues to be geo-political events outside of the investor's control (i.e. Bush). If Bush goes into Iran, all bets are off and oil will sky-rocket. Watch out for Pakistan as yet another one of the US's propped up dictators is turning ruthless so he can stay in control (read this as he wants to continue collecting the billions of US dollars we are sending there, like we did with Sadam Hussein, Noriega, etc. etc). This is yet another reason to own gold, which like oil, is priced the world over in US dollars. Watch out if the middle eastern countries decide to begin trading oil in non-US dollar currencies. This would signal the final death bell for the US dollar. I suppose it is possible for the US dollar to turn around and strengthen...however, when the British pound lost its reign as the world reserve currency of choice, it declined some 80% before it recovered. So, one could make a case that the dollar is only half-way down the waterfall. Either way, one cannot afford to hold only US dollar denominated assets.

Friday, December 28, 2007

The Nintendo Wii

has anyone else played with the wii yet? my friend mel bought a set for her kids and, after shish-kabobs last night (friggin yummy!), we hooked it up and checked it out. the tennis is amazing! after mel abused me in the first few games, i got revenge with a cross-court backhand to win the set! is it my imagination, or does that sensor software actually take into account a top-spin forehand? it sure looked like it to me. was it the wine, or did a slice backhand actually cause the ball to spin correctly? what a panic.

the game even reminds you every once in awhile to go outside and take a look around.

Football - The Big 10 versus The SEC

I was born a "damn yankee" in upstate NY and was raised in Louisiana. Although I believe in general I have a "yankee head", I appreciate many things in the south. One of which is sports and the never ending debate about which conference has the best football. Since my mom went to Ohio State and my grandfather (her dad) went to Michigan, I grew up with Big 10 rivalry football in my house. At the same time, the LSU tigers were followed closely and even more so after my two nieces attended LSU and Alabama with my sister driving around with a "house divided" license plate to show spirit for both teams.
All that said, I believe any truly non-biased football fan would have to agree the SEC has the strongest football conference top-to-bottom (sorry mom). Being a Georgia Tech fan, I wish I could say the ACC is among the tops, but with Miami and Florida State being down this year, they are not. Hell, Georgia Tech hasn't beaten Georgia in 6 damn years. But I digress.
Big 10 fans, in the days of Woody Hayes and Bo Schembechler, used to be "4 yards in a cloud of dust" and sometimes I think things haven't changed much. In fact, while reading Shelby Foote's great 3 volume series on the Civil War (which I would highly recommend to anyone), I realized an interesting parallel between the coaches of the Big 10 and the SEC to the generals of the North and South, respectively. The coaches in the north seem to be more conservative and play safely, trying not to lose and letting the defense determine the course of the game (similar to Generals McClellan, Hooker, etc.) while the southern coaches like to be on the offensive, take risks, and know that to win sometimes one has to rely on strategic thinking as opposed to talent or materials (Robert E. Lee, Stonewall Jackson). One of my favorite stories that Foote speaks of was how some in the defense department complained to Lincoln that US Grant was a no-good alcoholic that drank whiskey all time. Lincoln thought about this for a second, and said "But General Grant is not afraid to fight. Find out what whiskey he drinks and send a case of it to all my generals!"
This is the year the Big 10 must put up or shut up. Last year, of course, OSU got thrashed by Florida. This year, Florida plays Michigan, Illinois plays USC in the Rose Bowl, and the big one is LSU vs. OSU for the national championship. I'm pulling for OSU with my heart (for dear ole Mom), but my brain says LSU wins. But wait, who won that war anyhow?

A Fish Story

My buddy over in Arkansas calls me up two days before Thanksgiving and says "Fitzman, where the hell are you!!?" I said I'm back home moving in on a turkey, why, did you hang a big one? He goes on to explain that he just landed 3 trout, 2 rainbows and 1 brown, all of which were over 20 inches. The brown was 24 inches and weighed 7 1/2 lbs (!). Almost sheepishly he admits he is going to keep it and mount it. We had had a conversation this past summer on the banks of the river about how neither one of us had ever kept and mounted a trout before, and that in general we were against the idea. That said, we both agreed that if we happened to catch a really large, old, male trout (no females with eggs!) we might cave in. Well, he caught such a trout, and the brown was in its full fall spawning colors. He also deserved it after releasing, just minutes before, a big female rainbow chock full of eggs (who says rainbows only spawn in the spring?).
So, I head over to Arkansas the week after Thanksgiving, just in time for a strong cold front that passed through. I fished the evening of my arrival, then set up the tent with big plans for the next morning. The next morning was very foggy next to the river and about 26 degrees. As I was making coffee, I noticed my wading boots were completely frozen and sat them down in the river to thaw so I could get them on. By the I got my waders, boots, and fly-rod all together and got into the river, I was one cold SOAB. After catching a few trout, I hooked the one in this picture. I worked the fish to perfection and soon had it near me and I was excited because for once I had brought my net with me. I've owned the net for years but for various reasons never used it. However, landing this fish would be difficult because I could not get my fingers to process the "SQUEEZE" command from my brain and therefore could not squeeze the release clasp on my net to disconnect it from my fly-fishing vest. I started laughing realizing there was a good chance I could lose this fish. Undaunted, I held the fly-rod in one hand (with the fish on) and dangled the other hand in the 50 degree water (which felt nice and warm!) to thaw out. Eventually I got some feeling back, got the net clasp to release, and landed the fish, the first using my net.
Btw, I had tried to sell the 5 wt bamboo fly-rod which I made (with Preacher Jim's help) on Ebay a couple weeks earlier but no one would bid on it. I caught this rainbow on that fly-rod and discovered that it can throw weighted wooly buggers very nicely (though for some reason I can't float a smal dry fly with it to save my life). Anyhow, I am glad nobody on Ebay wanted my bamboo fly rod.

Can we recover from Bush?

Doesn't matter what you look at: domestic policy, foreign policy, fiscal policy, or environmental policy: George Bush has been a presidential disaster that the US may well not recover from.

On the domestic side, there has been no real investment in the things that America needs to be great: education, infrastructure, health care. Meanwhile, our Constitution has been thrown out the window, and US citizens are losing their rights at an alarming rate.

On foreign policy: we have gone from a much admired nation to the most hated nation on the planet. Invading Iraq to steal the oil is simply a disastrous policy. Supporting torture has probably done more to harm the reputation of the US than anything I can think of. Our blatent disregard for our friends ("old Europe" as Chaney characterized them) was just plain stupid.

On fiscal policy: the deficits the Republicans have run-up are just incredible. Their refusal to tax hedge fund managers making hundreds of millions of dollar is inexcusable. So, the Federal reserve has to crank up the printing press and flood the world with millons of paper dollars, the dollar subsequently drops like a rock, and oil (priced in US dollars) soars. And these guys call themselves "conservative Republicans"? Come on. When I was growing up, that meant small government and balanced budgets. Now it means large government and grotesque spending. Meanwhile, the raping of the national treasury continues unabated and dollars are flooding the world market. What happens when the Chinese stop buying our bonds?

On the environment: Bush continues to let the coal burning utilities release their CO2 and mercury into the atmosphere. Mercury is now, in my opinion, the biggest threat to human health as it has now invaded not only our seafood but our water tables as well. Any person with a background in physics knows what the half-life of mercury is. The Bush administration, however, has admitted (after 6 years) that global warming is accelerating due to man but this only after every country on the planet pointed fingers at them.

On energy policy: well, we don't have one other than to start wars to try to steal oil. The US should begin a MASSIVE iniative to build out wind, solar, and nuclear energy along with the infrastructure to support non-gasoline powered automobiles. The adminstration continues to ignore the most important issue of peak oil (surprised considering the "oil men" in office??) as does the US media and the American public.

Can we survive Bush's 8 years in office? The only way is for a real "statesmen" to emerge who will not be scared to tackle the REAL problems this country faces.

The sub-prime cluster f*ck

Isn't it ironic that the credit rating firms (S&P, Moodys, and Fitch) are now downgrading the same financial firms (Citigroup, Bear Stearns, etc. etc.) that they played such a huge role in wrecking?

The sub-prime disaster was a simple fraud: take sub-prime debt (loans to those people who would never "normally" qualify), repackage these loans into a debt instrument, convince the 3 firms noted above that 1+1+1 repackaged equals 5, slap a AAA rating on this debt, and sell it to foreign and domestic investors who considered US debt ratings as "safe" and "trustworthy".

Well, as we all know, 1+1+1 equals 3, and the difference between 3 and 5 is considerable. So, it imploded after making many Wall Streeters filthy rich (the ratings companies didn't do so bad theirselves). Now, the "free market" proponents are calling for a government bailout and I am sure it will happen. Just like the RTC back in the S&L debacle (under the first Bush, I might add), the same people who profited from the disaster in the first place will profit from the "solution". Meanwhile, the US tax-payer picks up the tab.

If the rating firms did not slap the AAA ratings on the debt instruments, the debt could never have been traded and therefore the faulty loan making would have stopped. What a country.

Meanwhile, foreigners have learned that the US financial markets cannot be trusted, and the dollar continues its drop. In fact, one could make an argument that the dollar has been replaced as the "world reserve currencty of choice". By what you ask? The Euro? The Swiss Franc? No my friends, the new "reserve currency of choice" in the world today is a barrel of crude oil (sweet crude if you can find it).

The bigger threat: global warming or peak oil?

The US government, media, and public in general appear to believe global warming is the main impetus for a transition to alternative sources of energy. However, the politicization of global warming by the Bush administration and the "oil men" who currently "lead" our country has not only hindered the push to alternative energy, but also has obscurred the more imminent threat to the US economy, our way of life, and worldwide civilization: peak oil. Let me explain.

While I certainly agree that global warming is a big problem and needs to be addressed (I would argue that mercury pollution of out water table is a bigger near-term threat to health), it does not have the ability to cripple civilization for at least a few decades. Peak oil, on the other hand, has the potential to bring the world economy to a screaching halt within the next 5-10 years. Therefore, the most pressing problem to address is peak oil, not global warming. That said, addressing peak oil DOES address global warming as well. So, why am I so picky about which is the priority? Well, it is a question of urgency: while the debate and politicization of global warming continues, the more imminent threat of peak oil is not even on the radar screen. To address the issues of peak oil, we need to begin a massive buildout of alternative energy sources (wind, solar, and yes, nuclear) along with the infrastructure needed to build and power non-gasoline powered automobiles. If this doesn't happen in the next 5-10 years, it won't matter what the longterm consequences of global warming will be, as our economy and civilization will have, in the meantime, slipped into a state best described as chaotic.

So, what is "peak oil" and why do I believe it is a bigger threat to civilization than global warming? Here is a decent description:

In a nut shell, "peak oil" is the fact that production from an oil reservoir, once reaching its peak, falls off very rapidly. It was this observation that lead Hubbert to accurately predict (in 1956) that oil production in the continental US would peak in 1970, which it did. The same theory of peak oil also accurately predicted the peaking of oil reservoirs in the north sea and Alaska. In fact, all but a handful of countries left in the world have reached peak oil production and are now in decline - most notably the US and Mexico. Even Saudi Arabia's oil production may have peaked in 2005 despite a massive drilling campaign. That said, Saudi oil reserves and production numbers are particularly hard to determine due to the closely held data. Bottom line: world oil production will not be able to keep up with world oil demand. Remember, we have billions of Chinese and Indians wanting to join the world middle class - complete with gasoline powered automobiles.

Oil prices have zoomed to $100/barrels while the talking heads on CNBC and most of the financial media continue to predict a "correction" to take us back to the days of $40/barrel oil. This is a pipe-dream which they are perpetuating to keep from scaring people out of the stock market since most stocks will decline (some dramatically) were the truth about oil supply/demand become well publicized and understood.

Consider for a moment what life would be like in the US for the vast majority of its citizens if gas were $10/gallon....then $20/gallon...then gas not available at any price. We'd have chaos, right? Well, that is exactly where we are heading if the government, media, and public at large don't get their hands around reality and continue to ignore the biggest threat to America: not terrorism, not off-shore jobs, and not even global warming. The biggest threat to America is peak oil, and being unprepared for its consequences.