Sunday, January 25, 2009

Incompetent to the Last

The last second, the very last nano-second of the Bush administration (the swearing in of Barack Obama as the new President) again displayed the incompetence we have come to know and expect from a Bush appointee. Chief Justice of the Supreme Court John Roberts blew the Presidential Oath of Office. It's no surprise, however, as the Presidential Oath of Office is contained in Article II, Section I of the US Constitution and of course it is well known the contempt at which the Bush administration has held the US Constitution over the past 8 years. You can watch and listen to the screw-up here:

Was it planned by the neo-Cons as a parting shot? Who knows. I doubt it... more likely it is just another reminder of Bush administration incompetence that has landed the country where it is today. Luckily, unlike so many Bush administration mistakes, this screw-up was later redone correctly.

Good news: our 8 year nightmare is over.
Bad news: it will take the country years, perhaps a decade or longer to recover from the damage done. Of course, that assumes we begin tackling the problems facing us directly, logically, and pragmatically. Time will tell if Obama has the chops....

Sunday, January 18, 2009

Alan Abelson's Bush Summation: A Classic Quote

Speaking on the subject of Cheney coming out from underneath his rock, and Bush himself hitting the talk show circuit to spin his legacy, Alan Abelson wrote in this week's edition of Barron's magazine, and I quote:

"His message was straightforward, consistent and clear: Thanks to his vigilance, this nation was spared a terrorist attack after 9/11. And so it was, for which we are all profoundly grateful. And only the most vehement Bush-basher would sniff that the real reason for the absence of an attack was that Mr. Bush did such a thorough number on the country all by himself that the terrorists figured, why bother?"

This is one of the most profound (and funny) words I've ever read in Barron's. I wish I had written them myself!

Along with congratulating himself on preventing another terrorist attack, Bush feared (and scarily almost implied) another attack is coming...real soon. Leaving office as he began ("fear" being the key word here) those of us who believe Bush and his buddies had something to do with 9/11 wish the earlier investigations on the attack had been allowed to conclude unimpeeded. We'll never know the true story of the flight the Bush White House authorized and organized for the Saudi Arabians to leave the country during the air-space lockdown after 9/11. We'll never know exactly who was on that plane, nor what their connections were to the Saudi hijackers (that's right fans, the hijackers were Saudi, not Iraqi). We'll never know the true story about the big money that sold short on the S&P500 and S&P Transportation indexes in the 4 days prior to 9/11 (and thus made billions when the markets reopened sharply to the downside), the volume of which was exponentially higher than normal. That is, someone new about the attacks and profited handsomly. Bush initially refused to investigate. When the widows of 9/11 protested, he appointed some buddies and began an investigation on the matter. In spite of his buddies, when the investigation started to lead toward the Carlyle Group (among whom the largest shareholders were Bush senior and his buddy the King of Saudi Arabia), the investigation was halted and covered up. We'll never know who made those short sales and how much money they made (no wonder Bush was in such a hurry to get the NYSE open after the attacks, the shorts had to unwind in order to reap their profits). One thing for sure, had we hired a special prosecutor for those cases, and had the American press and Congress pushed the issue as they should have, Bush would have been impeached and all the misery that followed perhaps avoided.
So, goodbye George W. Bush. And good riddance.
Funny how adding a middle initial to a name is supposed to be make the person more impressive. Never worked on me with Bush. I hear "W" and I just cringe. I was much more impressed with plain ole Bill Clinton (no initial).
So, if the perpetrators (including bin Laden, supposedly...) got away with the first attack, it wouldn't be hard to strike another blow. In spite of all the red ink that the American government bled under Bush, we have nothing to show for it (that is, no secured borders and ports). My question now is, given the state of the US economy and our financial turmoil, what would the impact be of another terrorist attack on the equity markets now? By playing straight into the bin Laden's hand after 9/11 and declaring war on Iraq (kind of like the US attacking Australia after the Japanese bombed Pearl Harbor for all the logic involved), not only is the US much less safe now than we were before 9/11, our economy and financial markets are now in a much weaker state to recover from a terrorist attack of substantial magnitude. Besides, if the Carlyle Group and other "inside" people really were responsible for the 9/11 attack - how can that be stopped if they decide to do it again? Since they weren't investigated after the first attack, it appears that Congress has given "them" the go-ahead for a repeat performance.
And if that isn't enough to worry you, peak oil is looming in the background. The problem there, of course, is that current low oil and gasoline prices encourage more oil addiction.
But enough of Bush all my worries. Let's give Obama his day in the sun and feel sorry for the man as he steps in to clean up yet another Bush family's disastrous policy and economic legacy (as Clinton had to do for Bush #1). Lest anyone believe I won't criticize Obama, let me just say that I am totally disgusted with his pick of Ms. Shapiro to lead the SEC. Also, if Obama doesn't put a major emphasis on US natural gas powered transporation in his infrastructure and stimulus plan I'll be all over him. For now though, welcome Barack Obama, Mr. President. Good luck!

Wednesday, January 7, 2009

2008 Economic & Political Summary & Review

2008 Year End Metrics:

DJIA -33.8 %
S&P500 -38.5 %
Oil -54.0 %
Gold + 6.0 %
US$ + 8.0 %

(returns from the year-end edition of the WSJ)

What a year. The numbers above tell the story in black and white. There was no place to hide but US Treasuries. As far as my advice from the beginning of the year, I was spot-on about oil for the first 6 months, but had no idea a financial crisis was in the works which would cut the legs out from under oil demand such that oil would fall as far and as fast as it has. As such, energy and energy services investments, my favorite pick at the beginning of the year, enjoyed a wonderful first 6 months and then just got hammered as a result of the financial crisis and subsequent drop in oil demand. Hopefully, anyone listening to me didn't have to raise cash and sell these investments (except for perhaps tax reasons), as I still believe the long-term prospects for energy related investments are bright. Despite $145/barrel oil, supply never got much above 86 million BPD. Production at the top 3 oil majors (XOM, CVX, COP) was down year over year. The precipitous drop in oil prices have already led to a big decline in oil investments going forward. This will lead to an even large price spike the next time (assuming the world economy survives the current crisis). See my Seeking Alpha articles for more on this sector. I have shown a 2008 oil price chart below.

2008 Oil Prices

The other big story of the year was the financial turmoil caused by (imho) years of unregulated financial markets combined with low interest rates and fraudulent lending practices. As a result we saw a plethora of US finanical and insurance related businesses bite the dust: Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, AIG, Washington Mutual, the list goes on and on. Tax payer bailouts were used to fund government takeovers of the financial and insurance industries. The US government now controls or has major stakes in companies controlling 80% of the US credit card market. All this happened under the so-called "conservative republican" president Bush. The country moves closer to fascism at a rapid pace. Now that our civil liberties are gone (wire tapping, "patriot act", detaining without the right to a lawyer, torture, etc. etc.), the government is now hard at work on two fronts: stealing tax payer money, and contolling citizens' finances. Look for more abuse and fraud at this level. At the same time $700 billion was handed over to Paulsen with little to no restrictions on where the money would go (you guessed right - it went to the salaries and bonuses of the Wall Streeters and bankers that caused the crisis to begin with), the comparatively small amount to bailout the US "little three" automotive companies caused a firestorm. I suppose in addition to sending $700 billion dollars a year out of the country for foreign oil we'd be better off having to buy our electric and hybrid vehicles from asia as well. Sure, Toyotas and other foreign auto manf. have plants in the US, but we'll still be trading in our addiction to foreign oil for an addiction on foreign batteries...and those will be made in asia if the US doesn't wake up.

My suggestion to remain out of the S&P500 was a good one, as that index is still under water for the last 10 years, badly so after inflation and the fall in the US dollar are taken into consideration. The future for the broadest measure of US economic performance, the S&P500, continue to look terrible in my opinion. If not for the inclusion of energy companies like XOM, CVX, and COP the S&P500 index over the past decade would look simply abysmal. Stay out of it.

I was right wrt gold. It was one of the few investments to remain in the black for the year. I continue to favor gold for US investors. That said, my advice to put some money in Vanguard Precious Metals, which looked like a genius call until mid-year, turned out to be a disaster as the deleveraging we saw in the 2nd half of the year just crucified this fund. Wish I had had kept my VGPMX money in gold coins instead. Gold hit $1000 during the year, but backed off as it was sold to delever and position for the deflationary period people expect as the economy contracts big-time. Same with another gold pick I made: Fidelity Select Gold, which got clobbered, but has been coming back as of late. That said, continuing financial instability, and the opinions of many that the US dollar is a fiat currency (which I subscribe to), has kept the price of gold falling significantly. A 2008 chart of gold is shown below:

2008 Gold Prices

The US dollar made a fool out of me as did US Treasuries. I still cannot understand their strength. The financial mismanagement of the country has all but guaranteed long-term bankruptcy for the country. Current low yields on US Treasuries tell me to stay away as they have no where to go but up. You want safety? Buy gold coins and take possession of them. If you have to buy US debt securities for safety and diversification, buy I-bonds. The ones I bought back in 2002 are yielding 5-6%, tax free (until i sell em). In today's market, those safe returns are a blessing. Even today, I-bonds should be considered. Yes, the fixed yield portion of the I-Bond is down to 0.70% for the current period. But, when oil comes back, and it will, inflation will rear it's ugly head, the economy and the markets will take another tumble, and these bonds will start yielding. So, why buy a standard US Treasury that yields close to 0% when you can buy an I-bond? US dollar index is shown below.

2008 Chart of US $ Index

The zero coupon bond fund (BTTRX), my main suggested hedge against deflation, did very well after the leverage unwinding and flight to "quality". It gained nearly 40% toward the end of the year, but I sold it this week after it went down 7% in 2 days as people finally realized long-term treasury yields have no where to go but up (and the price down). The 2008 chart for BTTRX is shown below:

2008 Chart of American Century BTTRX Fund

Some of my picks and their 2008 performance:

XOM: -14.8 %
CVX: -20.7 %
COP: -41.3 %
BP: -36.1 %

Returns above do not include dividends. Not too awful considering the S&P returns.

As expected, XOM faired the best during the financial turmoil. However, at one point in the crisis even XOM traded down to $56/share(!) at the height of fear. XOM continues to benefit from its pristine balance sheet and operational efficiencies. Chevron performed admirably, but BP got hammered over the failed Russian venture, and COP (my #1 big oil pick) got penalized for making more big investments at the top of the oil price peak (middle east ventures and the big australian nat gas purchase). That said, COP is currently trading at valuations where the dividend yield is roughly equal to the trailing PE ration (4). This stock is a steal at current prices.

Looking ahead in 2009, I continue to see very hard times for the US economy. Unemployment will pick up, profitability for the S&P50 will continue to sink, and I just cannot understand why the US dollar has not tanked with Paulsen and Greenspan printing money as fast as they can and giving it to the same old inner circle of thieves.

The big picture is this: as long as the US government continue to attempt fixing what is structural commodity problem (our addiction to foreign oil) with monetary and fiscal policies, the outlook is bleak. After 8 years of military imperialism to gain access to Middle Eastern and Caspian Sea oil (see my latest Seeking Alpha post), we are bankrupt, with nothing to show for the money spent. No trans-Canadian pipeline to bring Alaskan nat gas to the lower-48. No natural gas refueling stations on our interstate highway system. No social security funding. No health care funding. The Bush administration doubled the entire US debt in 8 years and we have nothing to show for it. NADA.

The only structural fix for the US economy is adoption of a strategic long-term comprehensive energy policy (see my policy by clicking on the link in the upper right hand corner of this blog) combined with excellent execution and financial discipline.

Despite current low oil prices, we *still* are importing 70% of the oil we use.
If the US does NOT adopt a comprehensive energy policy, the debt will continue to balloon, the currency will (at some point) sink like a rock, the S&P500 and equity markets will continue to suffer, and US savors and investors will lose their wealth and watch their standard of living erode.

The big oil interest in Washington, DC...while hating Muslims and Arabs in one breath, continue to spout out energy policies which do nothing but transfer American wealth into the pockets of these same people, terrorists, and countries such as Russia, Iran, Iraq, Saudi, and Venezuela. How ironic that the big tough pro-oil guys are simply enriching the people they hate so much. How typically "American". At times, I am ashamed to be one myself.

For the year ahead, I continue to advise US investors to:

1) stay out of the S&P500 and all broad market averages.
2) buy XOM, CVX, COP, and BP
3) buy I-bonds instead of US Treasuries
4) buy (but not all at once) and take possession of gold coins

I sure don't envy Obama. That said, we have a chance for quite possibly the worst president in US history to be followed by one of the best. That said, I am not impressed with Obama's rhetoric wrt windfall profits taxes on US oil companies. I am not impressed with his stimulus policy which appears to be lacking in the natural gas transportation infrastructure that we so badly need to build. I am also extremely dissapointed in his pick to head the SEC. Michael Milken, Madoff, the principals of Long Term Capital Management. For Obama to appoint Ms. Shapiro to lead the SEC, a woman who once hired a Madoff family member, is not a good sign at all, imho. What we needed was someone *outside* the SEC with a background at the FBI or CIA. The SEC hasn't caught one significant fraudulent operation since it began. It's a bit like the fox watching the chicken coup - at US taxpayer expense. Disgusting.

Anyhow, I hate to end on a down note, but at this point I am tired of typing. All the best for you and yours in 2009. I sincerely hope it will be better for all of us than 2008. At least George Bush will be out of the White House. Not that is ending on an up note!!