World Of Wallstreet

Off Topic: Best Piece On Global Warming That I've Seen

http://pubs.acs.org/cen/coverstory/87/8751cover.html, cover story from Chemical & Engineering News which is a weekly magazine published by the American Chemical Society. It tries to deal with the science (and related evidence) rather than just relying on the usual authority arguments (there is a scientific "consensus").

I find, after reading this 17 page paper, that:

• Global warming is really complicated and even in 17 pages the evidence can't stand on its own. The article has way to much he says, she says and not enough look at this graph, look at that graph. 
• My main take away is that CO2 concentration is definitely rising significantly (see graph below). This is the best hard evidence I've seen for man-made global warming. 
• The impact of this CO2 increase remains not well understood. Estimates for the sensitivity of the climate to a doubling in CO2 vary from .6%C (for the warming skeptics) to 2.0%C to 4.5%C for the global warming adherents. This value seems to be the key value in the climate models (and the estimates for the impact of continued CO2 increase).
• As far being "On-Topic", that is, how does this affect investing, I conclude that there seems to be enough real science behind global warming that I don't expect global warming skeptics to make any significant progress against the entrenched "CO2 is pollution" establishment and investments in CO2 producers (e.g. Canadian Oil Sands, Coal Miners) have significant political risk. Should be somewhat bullish for nuclear power (Uranium miners).

MontyHigh, www.worldofwallstreet.us

P.S., The case for Peak Oil is much, much, much clearer than for Man-Made Global Warming. Seems like a definitely tradable situation. Just wish I had gotten back in with oil in the 60$ last month.

Unadjusted Year Over Year: Labor Department Initial Jobless Fall 22.3%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "Jobless claims fall unexpectedly as layoffs ease... The number of newly laid-off workers filing claims for unemployment benefits dropped unexpectedly last week, a sign the job market is healing as the economy slowly recovers."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 557,155 in the week ending Dec. 26, a decrease of 8,088 from the previous week. There were 717,000 initial claims in the comparable week in 2008."
• My Spreadsheet (click Download 20091231yoy).

Here's my uneducated interpretation - No change from last week. I'm still expecting unemployment to peak around June 2010 with unemployment staying in the high nines and tens for 2010. From this one data series, it appears that the economy is recovering.

MontyHigh, www.worldofwallstreet.us

Best Of The Blogs, But Off Topic: Stiglitz On 6 Hard Lessons And A Blog Comment Response

I thought this was pretty rich, although off-topic (its about what "we should do to change things", not what "we should do to trade what we cannot change"). Here (click here from Ritholtz.Com) is Nobel Prize winning economist Joe Stiglitiz's 6 hard lessons:
"

1. Markets are not self-correcting, and without adequate regulation, they are prone to excess.

2. There are many reasons for market failures. Too-big-to-fail financial institutions had perverse incentives: Privatized gains, socialized losses. .

3. When information is imperfect, markets often do not work well – and information imperfections are central in finance.

4. Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster

5. There is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked.

6. Not all innovation leads to a more efficient and productive economy – let alone a better society. Private incentives matter, and if they are not properly aligned, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation."

Sound pretty reasonable, right? Here's a commenter's response:

"Hume Says:
December 31st, 2009 at 9:42 am

Let’s try something different and equally plausible:

1. Governments are not self-correcting, and without adequate limitations, they are prone to giant mistakes.

2. There are many reasons for government failures. Too-fat politicians had perverse incentives: Privatized gains, socialized losses, no accountability.

3. When information is imperfect or too demanding to follow, governments do not work well – and information imperfections are central in politics.

4. Countries, like Australia, that have commodities depended economies emerged from the crisis faster.

5. There is more to monetary policy than just fighting unemployment and external shocks. Excessive focus on unemployment and external shocks meant that some central banks ignored what was happening to their financial markets due to excessive monetary easing. Short term gains from such policy are miniscule compared to the costs imposed on economies when central banks cause asset bubbles to grow.

6. Not all regulation leads to a more efficient and productive economy – let alone a better society. Private incentives matter, and if they are distorted by badly written and implemented regulation, the result can be muted growth, structural imbalance in the economy, and distorted innovation."

Pretty on-target in my view, but "off-topic" because the US political situation is pretty desparately corrupted with no signs of reform anywhere.

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Census Department Durable Goods Manufacturers New Orders Down 6%

Here's the summary for today's Census Department monthly Durable Goods Orders and Shipments report:

• Associated Press Headline And Lead: "Jobless claims, goods orders signal modest rebound... A fitful economic recovery is drawing strength from a stabilizing job market and signs that manufacturing will contribute to the rebound."
• Labor Department News Release: click here. 
• Key Numbers: Census Dept Durable Goods Manufacturers New Orders Not Seasonally Adjusted: $158,670,000,000, Year Ago: $168,735,000, -5.96%. Census Dept Durable Goods Manufacturers Shipments Not Seasonally Adjusted: $170,632,000,000, Year Ago: $181,533,000,000, -6%
• My Spreadsheet (click Download 20091224yoy)

Here's my uneducated interpretation - Less bad, but still bad with the orders lower than shipment with no improvement. This is bearish report for the economy, although durable goods are a lagging indicator.

MontyHigh, www.worldofwallstreet.us

 

Unadjusted Year Over Year: Labor Department Initial Jobless Fall 21.9%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "Jobless claims, goods orders signal modest rebound... A fitful economic recovery is drawing strength from a stabilizing job market and signs that manufacturing will contribute to the rebound."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 561,902 in the week ending Dec. 19, an increase of 6,492 from the previous week. There were 719,615 initial claims in the comparable week in 2008."
• My Spreadsheet (click Download 20091224yoy).

Here's my uneducated interpretation - Year-over-year, unadjusted initial jobless claims had a great week (-21.9%), but one that does not change my forecast for unemployment peaking. Based on the recession over recession graph (below) and the previous recession's unemployment graphs (see further below) I'm still expecting unemployment to peak around June 2010 with unemployment staying in the high nines and tens for 2010. From this one data series, it appears that the economy is recovering.

 

MontyHigh, www.worldofwallstreet.us

Relative Importance Of Stock Picking Vs Being Right About Resource Prices

This chart shows the performance of gold itself (GLD) and my top holdings since the recent top in gold on 12/2/2009. I'm showing all my top holdings so as not to self-aggrandize any supposed great stock picking.

As you can see, only one of the above stocks has been positive, Gold Resource Corp (GORO.OB), even though it suffered a dilution during the period and is failing to get its mine going in 2009 as it "targeted". I believe that this is because Hochschild (mid-tier silver producer and investor in GORO.OB) is anxious to up its investment (because it deems it to be quite a good investment) and is thus supporting the price. 

What I see in the other stocks is that, even with my best stock picking, they have fallen roughly 50% more than gold itself (15% vs 10%). I take this to mean that even with my best stock picking, stocks fall significantly harder than gold and basically no amount of stock picking expertise can be expected to produce profits while the price of gold is falling.

In contrast, the same stocks during the dramatic bull run (from 9/1/2009 to 12/2/2009) are up around 50% compared to roughly 25% for gold itself. I take this to mean that my own stock picking (the best I can do) gives better leverage to gold during upswings (and smaller losses on downswings) and the overall leverage is some where around 2 to 1 on upswings.

I guess it means that being right on the price of gold (or any resource) is of foremost importance, while picking among stocks for a given resource adds leverage and value. Stock picking is good, but is not worth as much as being right about the basic resource. Is that how you see it?

Your mileage may vary. Hope this is useful and not self-aggrandizing. It is not meant to be.

MontyHigh, www.worldofwallstreet.us

Unadjusted Year Over Year: Labor Department Initial Jobless Fall 11.83%

Here's the scoop on the Labor Department's weekly initial jobs claims report:

• Associated Press Headline And Lead: "Jobless-aid claims rise, but 4-week average falls... The number of newly laid-off workers filing claims for unemployment benefits unexpectedly rose last week as the recovery of the nation's battered labor market proceeds in fits and starts."
• Labor Department News Release: click here. 
• Key Numbers: "The advance number of actual initial claims under state programs, unadjusted, totaled 555,344 in the week ending Dec. 12, a decrease of 107,393 from the previous week. There were 629,867 initial claims in the comparable week in 2008."
• My Spreadsheet (click Download 20091217yoy).

Here's my uneducated interpretation - Initial jobless claims have been better, year-over-year, for 6 consecutive weeks. No real change from the last couple of weeks. Based on the recession over recession graph (below) and the previous recession's unemployment graphs (see further below) I'm still expecting unemployment to peak around June 2010 with unemployment staying in the high nines and tens for 2010.

MontyHigh, www.worldofwallstreet.us

Best Of The Web: Dorsch On Interest Rates

Here's (click here) a nice piece about what's coming up for USA interest rates.

Starts out with a great Buffet quote, which I'll repeat here because its so juicy: "As the old saying goes, what the wise man does at the beginning, fools do in the end... It’s like Cinderella at the ball. You know that at midnight everything’s going to turn back to pumpkins and mice. But you look around and say, one more dance, and so does everyone else. Everyone thinks they’ll get out at midnight. The party does get more fun, dance partners get prettier, - one more glass of champagne. And besides, there are no clocks on the wall. And then suddenly, the clock strikes 12, - and everything turns back to pumpkins and mice". Its that whiff of fear (which I pick up from that quote) that is one of the things that makes the investing game so fascinating.

The basic idea in the piece is that interest rates may go up sooner than most expect, perhaps at the end of Q2 2010. Dorsch expects that interest rates won't rise til then because: "Since 1954, the Fed has raised rates only after unemployment has peaked." That little nugget was worth the time spent reading the piece.

Here's a little bit about how fair and open the USA's "free markets" are. The plan for keeping inflation in check is to rig the markets for commodities (thereby cheating the commodity producing nations of the world [mostly much poorer than the USA] out of a fair price): "Instead, the Fed is calling upon Congress and the CFTC to rein in energy and commodity prices, especially crude oil, by limiting how many futures contracts hedge funds, investment banks and other speculators can control in 2010."

He ends up by saying that Volcker is calling for interest hikes sooner: "If you wait, it’s too late" and inflation is upon you. But, since when has anybody actually done what Volcker has called for (especially in an election year where the ruling party is in real danger of losing control of the house of representatives)?

So, Dorsch seems to suggest they will wait too late and raise rates too slowly: "If history is a guide to the future, the gold market has been able to climb sharply higher, alongside a rising fed funds rate. The Fed’s last rate hiking cycle, - starting in June 2004, - and beginning with the fed funds rate at 1%, wasn’t able to cap gold’s powerful advance thru May 2006, until the fed funds rate was lifted to 5.25-percent. Thus, for two-years, gold rose 40%, alongside a 425-basis point increase in the fed funds rate, since the Fed was lingering far behind the inflation curve."

The piece is nicely decorated with Dorsch's dual-Y-axis graphs that allow the correlation between seemingly unrelated time series to be visually assessed. Here's an example:

Pretty cool, huh? I'm going to have to learn how to make those graphs myself.

MontyHigh, www.worldofwallstreet.us

What If Copper Buyers Aren't Insane?

Inca Kola New's Otto Rock keeps ranting about LME copper inventory levels (click here): "The LME copper inventory level is not an elephant in the room. It's 470,800 elephants in the rooms."

This has been going on for months. Its long past time for saying that the market is wrong and that copper should not be priced above 3$/lb (and rising) and its time figure out what the market is saying.

Seems to me that there are two possibilities here:

• Copper buyers are insane given that copper, at current prices, is obviously in over supply and they are going to get murdered as soon as reality sets in.
• Something else is going on besides just the supply and demand of copper. Something having to do with what copper is priced in, U.S. dollars.

Here's what I think is going on:

• The ballooning copper inventories means supply exceeds demand. But the copper price (in US dollars) keeps rising. 
• To my mind this means that the supply of dollars is exceeding demand faster than the supply of copper is exceeding demand.
• Now, 400,000 tonnes of copper at 6,000$/tonne is 2.4 B$. This means folks with real money think its better to have at least part of their money in copper, even though it is obviously in oversupply, than in dollars. Its a big vote of no-confidence in the dollar. That's how I see it and am placing my bets accordingly (in the anti-dollar, that is gold, leveraged by owning Jr producing gold miners). 

Now, I could be wrong and the guys buying copper at current prices are flat out wrong and this is a case of gross stupidity. That could certainly be the case, given the same kind of stupidity that we've seen with real-estate recently (and worthless Internet bubble stocks a year ago). If that's the case at some point the price of copper will collapse. If I see that I'll go short on copper big time, but until then I'm thinking that something very bad is happening with the US dollar that will come out of hiding sometime not too far in the future.

MontyHigh, www.worldofwallstreet.us

A New Thought On Inflation Vs Deflation Debate And Gold

Here (click here) is the best piece I've read lately about the fundamentals of gold investing. Its buy some guys (and an organization) I've never heard of before: QBamco, Lee Quaintance and Paul Broadsky.

Here's a quote that says a lot about the inflation vs deflation debate and the price of gold:

"gold anticipates contracting total bank credit (continued debt deflation), which requires further monetary inflation to be administered by central banks."

Pretty profound. I recommend reading the whole thing.

MontyHigh, www.worldofwallstreet.us