Isaac's Catastrophe Corner

20th Jun '09 by Isaac

59 comments 8298 reads

Feel free to post your catastrophes in this thread.

I suspect there will be quite a few later this year or early next year as the Secular Bear Market continues...S+P is on a PE of 30. The markets are not cheap...The best one can hope for is the markets go sideways, earnings rise with inflation and in a few years stocks then appear cheap.

The stimulus can't last forever. There are no green shoots, more like weeds. Deleveraging will last years, the secular bear market will last years.

The banks are only able to pay back TARP because they manipulated MTM rules therefore distressed assets don't have to be priced at distressed prices etc

Do you think the Housing Crash is finished? In history has there ever been a reconvering economy whilst house prices decline?

Interest rates will rise on the back of higher inflation.

Factors which will drive the next significant stock market Correction :

- Swine Flu
- Banking Crisis
- War with Iran
- War with North Korea
- The oncoming Energy Crunch
- Rise in interest rates
- Collapse of the dollar

There are other factors as well as the above. The SECULAR BEAR MARKET IS NOT OVER.

Protect yourself from the oncoming collapse :

Invest in Commodities

Invest in the East

Don't over leverage

Keep a very small exposure to small caps, stay very liquid, Invest in large caps

Don't use instruments that have time elements

I am still expecting the markets to go higher in the short term after the current correction and then expecting a significant correction later this year or early next year. This is not the time to be investing in speculative high risk stocks, more like getting defensive, sticking to financially very sound companies with healthy balance sheets that are cheap and will continue to grow regardless of the broader economy.

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How to be a day trader

Barclays Stockbrokers said day traders had returned in significant numbers since the spring. Over the past few months "execution-only" investors – those who make their own decisions without taking advice – have been logging on every day to buy and sell exchange-traded funds, contracts for difference (CFDs) and equities, it said, as well as using spread betting to play the markets.

Since the end of the technology bubble, when novice investors thought they could make an instant profit by trading shares frequently, day trading has been associated with reckless investors making decisions on a whim. But Barclays said the new breed of active trader was savvy and educated, using all the research thrown at them. Unlike counterparts from the days of the tech boom, they are not relying on tips from taxi drivers.

Isaac

12th Jul '09

July 7 (Bloomberg) -- T. Boone Pickens, founder and chairman of Dallas-based BP Capital LLC, said oil prices will match last year’s record $147 a barrel in three years as producers fail to increase output.

“We’ll be flat at 85 million barrels a year,” Pickens said in an interview. “By 2013 we’re going to see a decline in production. In 10 years we’ll be at $300 a barrel.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQZBAT64L.zk

AnonymousUser858

I genuinely do not understand what this whole thread is supposed to be about.

Market Sentiment? Discuss your catastrophes? What is the connection between these two disparate subjects?

How is T Boone Pickens predictions for POO a personal catastrophe?

Seems to me that there is no connecting thread running through the comments posted here.

13th Jul '09

Does anyone have any idea about what is likely to be a sound currency to hold in the next 5-10 years? It is my belief a currency crisis is looming, some currencies will have an absolute catastrophe, hence why i believe Gold is going alot higher.

Those that can succesfully trade currencies will do very well as i am expecting sharp moves in number of currencies. Although foreigners such as China have very large reserves of dollars, It would be in their interest to get rid as much as they can even if the value of the dollar falls. Once they have done this they will no longer need to prop up the US and therefore the focus will shift to stimulating their own Economy.

Does anyone have any thoughts about holding Asian currencies like Singapore Dollar, YUAN etc ? Swiss Francs?

It is my belief most of the money will be made from Commodities and trading currencies in the coming years. I expect the stock markets to be sluggish and in a big trading range. IMO it would make sense to trade in and out of stocks every 6-12 months. I don't believe we are in a simple buy and hold for 5-10 year scenario. I prefer to stay in large liquid stocks & if possible ones that pay dividends and diversified globally, preferably Asia.

Gradders73

Nobody would put a 5 - 10 yr view on currencies. I read that US Dollar has risen to 65% of central bank holdings, which is back to 2007 levels. It is easy to say that the Dollar is due for a sharp correction, but it seems to me the other central banks do not want their currency to appreciate vs the US Dollar, so they will be aggressive buyers in the near term.

Medium term, the countries with busted balance sheets like UK and US have to decide between cutting spending, taxes and monetization and may a decision on how much inflation is sensible. On the one hand a weaker currency deflates debt, and makes exports more competitive, but if energy needs to be imported, the costs of this will counteract any export benefit, as you get imported inflation which the traditional levers of monetary policy struggle to address.

The traditional safe haven currencies of Dollar, Yen and Swiss all have risks. The fortress currencies like SGD, HKD and NOK (i.e. net creditor nations with either currency boards or almost as much foreign reserves as issued cash) will not collapse.

So, given the heightened risk around the 35 yr fiat money experiment, since Nixon took the Dollar off the gold standard, for a longer term time horizon, you should look at real assets not cash.

But, if you were about to go to Gaol for a 10 yr sentence with parole after 5 and wanted to know where to put it, I would tell you to buy a bit of gold and NOK sovereign bonds. These may not be the best performers, but there would still be something left when you got out.

lfc

Hi Gradders

Having done a bit more research I'm getting seriously (as in might commit actual money) interested in the case for investing in Norway - bonds/stocks mix possibly. How about starting a new 'Norway' thread to try and pull in some more opinions as this thread is now all over the place? Hope I don't seem lazy suggesting you start it - it's because it's your baby and you are likely to be in a more informed position regarding the investment case than I am and therefore far more likely to put forward a decent opening post regarding economic metrics and investment options.

rgds

Yes, happy to. I'll see what I can pull together...

emptyend

In reply to demully (post #35)

Hello DEM :-)

.....let's assume I'm totally wrong and energy, in finite supply, really is running out. Not just oil. In such a world, why should the oil companies generate above-economic rates of return any more than AMT/Pret can generate excess returns given the monopolistic nature of their outlets in train stations? Simple - the coffee vendors do not earn the "economic rent"; Network Rail does. Neither will the E&Ps... if they make surprisingly good returns, then the governments will just take these. Call it theft if you like, but there's no reason the next $100/bbl on the oil price ever ends up as a hgiher dividend. Remember that those assets most susceptible to taxation are precisely those that are most immoblle - ie real estate and commodity mines/wells... Tell me why Exxon and not the government earns the marginal economic rent, and then I might start to care in case I'm wrong? Else oilcos including E&Ps are risky utilities, and -worse- utilities trading on expectations of something more that ultimately may be doomed to disappointment when governments simply decide not to allow them "too much" profit, when this can be used to shore up otherwise dire fiscal positions globally.

If I may comment on your points above:

a) on that rationale, no-one would ever own retailers ....or any other businesses that need to have a place of business! All the upside would accrue to the landowners.

b) You are certainly right to say that NOT ALL of any price increase feeds through into higher profits. If oil regains $150+ and looks like staying there, greed will ensure that governments (and other stakeholders) will seek increasing stakes in the pie - but it doesn't necessarily mean that they will simply take over the assets. Why? Because the E&Ps provide external sources of expertise and knowledge that help governments to increase the TOTAL size of the pie, via successful exploration efforts and other technical inputs. Accordingly, price rises will in general largely (but not entirely) feed through to the bottom line in most cases - and in only a small minority of cases (Russia and South America, for example) may governments be tempted into excessive taxation and/or nationalisation.

c) Accordingly, the economic rent will (in aggregate across the E&P space) be shared. We are already seeing that effectively being acknowledged via the international acquisitions made by energy-short countries such as South Korea, China and India. They are prepared to pay up to get asset positions - and will be a great deal more "robust" than private industry in their ability to defend their interests, if other governments should be tempted to over-tax or nationalise! The result of this is going to be a shrinking pool of investable E&P companies for the rest of the world to invest in. If indeed there is another oil price spike, we may well find that the pool of equity exposed to upstream oil and gas (which will generally receive the economic rents) will become very small indeed. We are already seeing current M&A activity involving Venture, Addax, Heritage, Dragon and Rift amongst the UK E&Ps, with Emerald and SOCO having acknowledged they have also been approached and rumours swirling around Dana. Some also think that BP is getting prepared to pounce on a BG, Tullow, Cairn or some even larger target......

.....the name of the game at present is for countries to regain control of their own energy security - and their ability to do so is certainly a highly-constrained by the fact that many of the largest OPEC countries won't allow foreign ownership of their oil resources (or, like Libya, only do so under an extremely high tax regime)

Fangorn

In reply to Isaac (post #42)

I'd go for Swiss Francs, Japanese Yen myself.

But predicting 5-10 years hence is going to be a mighty ask!

I'd go for Swiss Francs, Japanese Yen myself.

Any reason why, please expand? Would you not buy Gold, Gold too is a currency.

demully

Hey EE

Good crowd, but the technology sucks a bit in relative terms, if you catch my drift ;-)

Re your valid points,

a) Ok, the AMT/Pret example was potentially a bad one re economic rents (ie easy to have a pop at), and hence your pop at the retailers. Let's just say that the supply of energy gets scarcer and the supply of oil companies and of governments is held constant, the relative bargaining power of the latter rises relative to the former and so potentially better for commodity currencies than commodity companies? But I'm not dogmatic on this point... just a little tired of being lectured by some less esteemed than yourself about how "didn't I know how scarce oil was" and therefore "how the future was in oil companies". I was just suggesting that oil governments might have something to say on the matter!

2) A very fair point re technical expertise. What I'm unsure about is suppose a situation where oil prices doubled from $60 to $120 over the next say 5 years and oilco cost inflation (which is heavily energy-dependent inflation) took the marginal cost of production up from $35 to say $50. A $15/bbl edge rises to $70/bbl. What will be very interesting to see (and I'm unsure and agnostic how this plays out) is how the governments set the terms of PSAs to reflect this expertise as a fixed-vs-a-variable cost. IE how much do the oilcos benfit from having that $50 vs $35 as was locked in as fixed compensation for doing a job, ie a 50% revenue increase for little risk (but have little exposure to the oil price). Or how much of any upside (for a lower fixed revenue) can the oilcos retain? I think this is probably the more nuanced point I should have when I talked about the difficulties of sustained super-normal above-economic profits (by which I meant and still do mean RoE above other industries forever - which cannot be).

3) Don't disagree at all with you on the energy security story. Given the original thrust of this thread, I am concerned that somebody would pile into Asia BECAUSE of energy shortages, but this is nowt to do with your point, which I agree with. And no complaints even with M&A, as the resource-rich and the cash-rich do an "Anna Nichol" :-)

very best,

DEM

Let's be absolutely clear. I believe in Buying into the Asian story because it is where i see most of the growith coming from in the coming years, not because of energy shortages. Investing in Asia for me means Investing at the right price, any price won't do. After such a decent rise the last few months, I would wait for a healthy correction.

As for commodities i believe it is one of the best routes to play the growth in Asia. What i mean is Commodities will go up on the back of Asian demand, I expect demand in the West to contract but the East will more then compensate.

Perhaps you can come back in a few years and review the performance of the Asian Stock Markerts to other asset classes?

14th Jul '09

In reply to demully (post #49)

Hi DEM,

Think you are being a bit hard on the technology. Its a lot better than it was a few months back - and I'm certain that ideas for further improvement will be well-received (and acted upon, in sharp contrast to elsewhere).

...fair point re technical expertise. What I'm unsure about is suppose a situation where oil prices doubled from $60 to $120 over the next say 5 years and oilco cost inflation (which is heavily energy-dependent inflation) took the marginal cost of production up from $35 to say $50. A $15/bbl edge rises to $70/bbl. What will be very interesting to see (and I'm unsure and agnostic how this plays out) is how the governments set the terms of PSAs to reflect this expertise as a fixed-vs-a-variable cost. IE how much do the oilcos benfit from having that $50 vs $35 as was locked in as fixed compensation for doing a job, ie a 50% revenue increase for little risk (but have little exposure to the oil price). Or how much of any upside (for a lower fixed revenue) can the oilcos retain? I think this is probably the more nuanced point I should have when I talked about the difficulties of sustained super-normal above-economic profits (by which I meant and still do mean RoE above other industries forever - which cannot be).

Governments set PSAs to generally take more of the profits as the oil price rises. This is one of the major reasons why the largest oil companies have problems replacing their reserves in a rising price environment, because their entitlements to oil produced (and thus oil in the ground) are reduced as the government take rises. In other words, the increasing government take is already provided for in the contracts and (unless the country is in South America or Russia) Governments seem to generally accept that.

In the old days of the asset grabs by Libya and others, I don't think they had PSAs of this nature - hence Governments faced greater natiuonalisation pressure.

Anyway - that's probably about enough for me on this thread, as I'm sure we must be heading off-topic.... ;-)

cheers

In reply to Isaac (post #48)

Swiss franc has always been seen as a traditional safe haven(and there's certainly going to be need for that I reckon). I think most major currencies are going to struggle, whether it be the dollar or sterling, or Euro. Always been a fan of Japan, they know how to get things done, and despite being export orientated Japan will come through this crisis in fairly good shape I believe compared to other major developed economies. Whilst the economic power is shifting to the East I wouldn't place much faith in buying the Yuan or the Rupee as a currency trade,nor would I want to hold much in the way of assets in those currencies either. As for gold,I don't see it going much above $1000 - it's had an incredible run already imv. I'd rather go for Agricultural commodities(Agriculture ETF) as the Demand/Supply equation going forward is clearly in favour of higher prices and pile into energy companies, utilities,whether it be electricity or water, and Oil Companies.

The problem with Swiss Franc is that the banking industry totally dominates the economy. The central bank has stated it's intention to keep the currency low, so prevent inflation but more importantly, the save the necks of the banks that made CHF loans to Eastern Europeans to buy houses. The additional pressure of the US on secrecy and tax avoidance (wait until Germany gets in on the act) could cause serious problems. Basically, the Swiss economy works on the basis it is a good place to hide your money, which is under severe stress right now.

As for Japan, the demographics are terrifying, with the majority of the population approaching retirement fast. On the export side, I expect them to be squeezed by the rising economies and even if they don't, the BoJ will continue its policy of selling Yen to weaken the currency. The other thing worse remembering in my view, is China would like to see Japan reduced to a vassal state. It will be long, subtle and bloody, but it is an unspoken element in the situation.

What is interesting is the Euro. One of the things you can see with the current crisis is the fact that the currency is not a sovereign currency and therefore not explicitly tied to the debt issuing government. Therefore, monetization is off the table and other quick and easy solutions to excessive debt. Anyway, all I know is everyone loves to talk down the Euro, especially the Germans and Americans, with imminent collapse and on the way to parity, but I can tell you one thing I can see from here in Germany. No matter what the exchange rate may be telling you (via central bank action), they are running out of bank notes as demand from outside the EU zone is sky-rocketing for switching from Dollar to Euro. When the criminal gangs of Eastern Euro no longer accept Dollars, you know something is going on.

China's stimulus package seems to be working...

Like everywhere else in the world, China has been pumping money into its economy in an attempt to fend off recession. Unlike everywhere else, China's stimulus package actually seems to be having an effect. Whether that's a good thing or not is another question – but we'll get to that in a moment. The Shanghai stock market is up by around 60% since the start of the year. Chinese banks have issued 7.3 trillion yuan (£663bn) in loans so far this year, and doubled the amount they handed out between May and June, reports The Telegraph. There are signs of another property bubble building – last month saw the record-breaking sale of a plot of land in Beijing's central business district.

http://www.moneyweek.com/investments/stock-markets/investing-in-emerging-stock-markets-stay-out-of-chinese-stocks-for-now-14954.aspx

Interesting article. It does'nt take much of a stimulus to get the chinese Economy going. Shame that can't be said for the West.

1.3Billion people in China & 1.1 Billion people in India want to live like the West, they will more then compensate for the slowdown in consumption from the 300million Americans. I can't see how Commodities can have a bad time in the next few years.

15th Jul '09

In reply to Isaac #50

Hi Isaac,

Fair enough, and that's exactly the answer (I think) to the original question I've been such a hard-a**e about throughout. Which is to say the automatic assumption of, or at least the implied, correlation between Asia and commodities doesn't make much sense on the surface. Precisely because Asia is commodity-poor and commodity-inefficient. If, however, you take the view that there will be global growth that is Asia-driven and thus commodity-intensive, your position makes a lot more sense (to me, at least). Note though that any supply-constrained, as opposed to demand-driven, scenario for commodities really does the Asians in. Many thanks for the clarification - very helpful (to me).

very best and I hope your analysis is wrong - 100% because of its implications for the world and 0% because of implications about your analytical abilities!

China's stimulus is working:

Retail Sales +15% yoy

Auto Sales +45% yoy

Home Sales +40% yoy

Housing Starts +12% yoy (critical, because it shows the stimulus is working on the supply-side and construction as well as consumption and the demand-side)

Credit growth +30% yoy

New Loans +125% MONTH-on-MONTH

To me, there's no "seems about it". Job done! And the question becomes about exit strategies - ie sterilisation (oops failed bond and bill auctions because the banks would rather lend to their mates who can make 2% buying Shanghai and hoarding copper) and toughening credit regulations (banks now told to report lending DAILY to the PBC!). Fingers crossed, no rate hikes needed to withdraw the stimulus! Because it's the withdrawal, not the effectiveness that's the debate right now...

best,

16th Jul '09

How to be a day trader

Barclays Stockbrokers said day traders had returned in significant numbers since the spring. Over the past few months "execution-only" investors – those who make their own decisions without taking advice – have been logging on every day to buy and sell exchange-traded funds, contracts for difference (CFDs) and equities, it said, as well as using spread betting to play the markets.

Since the end of the technology bubble, when novice investors thought they could make an instant profit by trading shares frequently, day trading has been associated with reckless investors making decisions on a whim. But Barclays said the new breed of active trader was savvy and educated, using all the research thrown at them. Unlike counterparts from the days of the tech boom, they are not relying on tips from taxi drivers.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/5841718/How-to-be-a-day-trader.html

I have always maintained the view that before the market takes another significant topple we will be at an Euphoric stage. It is clear we are having another push up, IMO the stage is being set to suck in a few more bulls because we have bounced of a dreadful correction of the past few weeks - this will boost confidence.

What I find interesting is JP Morgan, Goldman, IBM and Google have all posted excellent results. Maybe the next leg down will be related to an outbreak of Swine flu rather then a bad economy? But then again a few good results does'nt make everything ok.

17th Jul '09

What I find interesting is JP Morgan, Goldman, IBM and Google have all posted excellent results.

With the possible exception of IBM, I'm not surprised in the slightest. If the likes of BAC, AIG, LLOY, RBS, III, TW, MKS etc then go on to do the same then we might start thinking that the corporate world is on the mend.

JPMorgan, Goldman and Google were always well-placed to profit from the misfortunes of others.

I found it rather amusing that the markets took the bumper GS profits as a sign of the health of the economy. As the profits were almost entirely driven by trading revenue, and trading revenue is by it's very nature a nil sum game, all it said to me was the transfer of wealth from the wider investment community into the GS coffers had increased....

Isaac's Catastrophe Corner

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How to be a day trader

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