-->Profit Pipeline
The Daily Reckoning
Paris, France
Wednesday, 7 May 2003
--------------------
*** Threat of stable prices looms over the Fed...
*** Dollar falls hard...but slump continues...
*** Stocks up...tech funds struggle...real estate
wealth...Eisenhower...and more!
--------------------
"The probability of an unwelcome substantial fall in
inflation, though minor," said the Fed's announcement
yesterday,"exceeds that of a pick up in inflation from its
already low level."
The Fed did not cut rates yesterday. Nor did it signal any
change in policy. Nor has it proven that it can cause
consumer price inflation when it feels the urge.
The Fed is still convinced that stable prices represent the
biggest threat the nation's economy faces. Heck, the things
you and I buy may become even cheaper...and you can imagine
what a tragedy that would be.
At least, here in Paris, that is one problem we don't have
to worry about. Yesterday alone, prices in U.S. dollar
terms went up nearly 2%. Since January, the euro has gained
more than 8% against the dollar. If this keeps up, we'll
all have to return to the Homeboyland before the next pay
period, for we'll soon be unable to pay our rent or our
libations here in Europe.
The dollar is falling against foreign currencies and
against gold...but domestic consumer price inflation is no
problem. The only problem - at least from the Fed's point
of view - is that there isn't enough of it.
And there won't be enough of it, says the Financial Times,
unless a decent recovery begins. If people don't buy,
prices don't go up. And if prices don't go up, people have
little incentive to get rid of their money...and no
illusion of prosperity.
"The inescapable truth appears to be that the labor market
remains very weak and that normal seasonal hiring isn't
occurring in some industries..." writes Joshua Shapiro in
MFR Commentary."Combined with the ongoing efforts by
households to increase savings and reduce non-mortgage
debt, this is hardly the stuff that sustained rebounds in
consumer spending are made of."
This is probably why bonds have been doing so well, too,
even as the dollar falls. Investors are not worried about
inflation. They're betting that the Fed will cut rates
sooner or later...and perhaps buy enough T-bonds to keep
the long rates low, too.
So, the dollar falls...while the slump continues...
And stocks?
We don't know. They could go up and they could go down. But
foreigners are buying fewer of them. The latest figures
show 3 months straight of declines...with net foreign
purchases of only $21.8 billion in February.
"The risk that foreigners are souring on U.S. assets is
becoming a more acute concern," opines Morgan Stanley's
Global Economic Forum."While we do not believe that
February will set the pace for the remainder of the year,
we are dubious that foreigners will step up their
investment to the $50 billion per month needed to finance
this year's yawning deficit. The end of the Iraq war has
only increased the likelihood of a deterioration in safe-
haven-related flows...".
And here's Eric, with more of the latest news:
------------
Eric Fry in New York City...
- Stocks up, dollar down...the combination seems bizarre,
and - like a filet of sole wrapped in cotton candy - more
repulsive than enticing. But the lumpeninvestoriat seems to
like its quirky financial diet.
- The Dow Jones Industrial Average rose 56 points yesterday
to 8,588, while the Nasdaq added 1.3% to 1,522. But once
again, the beleaguered buck fell to fresh four-year lows
against the euro. The dollar tumbled 1.3% to $1.144 per
euro. As Briefing.com put it bluntly,"The dollar is
getting just creamed in here versus just about everything
under the sun." Europe's currency-by-committee has rallied
nearly 25 percent against the dollar over the past year.
- Yesterday, your Paris-based editor noted that deceased
Islamic terrorists may not, in fact, be whiling away
eternity in the passionate embrace of virgins. Rather, if a
controversial new translation of the Koran is correct,
successful suicide bombers may receive little more than a
complimentary fruit basket upon arrival to the afterlife.
- According to the work of a German philologist, standard
expressions in the Koran like"big-eyed virgin" may
actually read"fruit as white as crystal." Admittedly, a
fruit basket is probably better than whatever hell has to
offer. Even so, as eternal rewards go, a pristine apple
hardly compares to a nubile virgin...If this new
translation has any merit, the alleged misinformation
perpetrated by the ancient Koran scribes has class-action
lawsuit written all over it.
- Meanwhile, over in the temporal, soulless financial
markets, no such debate rages. Neither heaven or hell - nor
celestial maidens or melons - exert any influence over the
goings on at Wall and Broad. In the financial markets,
Darwinism holds sway - the strong survive and the feeble
perish.
-"The bear market has sent one in five technology mutual
funds into oblivion in the past 12 months," USA Today
reports,"a casualty rate [nearly] four times higher than
other stock funds...An astonishing 21% of all tech funds
have either merged or liquidated in the past 12 months, vs.
6% of diversified stock funds."
- Were it not for the virtues of evolution, many more tech
funds might have met with an untimely demise."Among
survivors," USA Today continues,"another 23.3% changed
investment style so much that they are no longer considered
tech funds."
- Some funds - may they rest in peace - entered the world
so utterly ill suited to adverse conditions that they
perished in their infancy. Zero Gravity Internet fund - a
three-headed, albino wallaby of mutual funds - breathed its
final breath before celebrating its first birthday in March
2001. The fund fell 40% during its brief life and never
attracted more than $6 million in assets.
- Like the Zero Gravity Internet fund, Van Wagoner
Technology fund was genetically ill-suited to bear market
conditions. The fund, which has lost 90% of its value over
the past three years, is not long for this world. The
fund's managers announced that they will be pulling the
plug next month, thereby sparing shareholders any
additional pain and suffering.
-"It's a death spiral for some funds," said Russel Kinnel,
research director at Morningstar, to USA Today.
-"Aha!" say the bulls,"A sure-fire contrarian indicator
that the woebegone technology is due for a recovery...Time
to buy!" Perhaps. Or perhaps many more tech funds will yet
succumb to the life-threatening wounds they suffered over
the last three years."The carnage may not be over," USA
Today winds up."Of the 358 tech funds tracked by Lipper,
only a third have more than $25 million in assets."
- Incredibly, the tech sector is booming once again,
buoying the hopes of the longsuffering lumpeninvestoriat
who have been hanging on to their tech stock funds through
thick and thin...and thinner. The Bloomberg Silicon Valley
High Tech Index has rocketed 20% in less than 2 months,
breathing fresh - albeit temporary - life into many tech
stock mutual funds. We suspect that pain is not over yet.
- The tech sector may be surging on Wall Street, but it
continues to struggle out in the real world. Hiring
projections for IT workers during the next year are the
lowest since 2000, according to the Information Technology
Association of America, and more than a tenth of IT
companies are planning to move jobs to countries with
cheaper labor.
- Maybe tech stock investors have become a tad too
optimistic...it wouldn't be the first time.
------------
Bill Bonner, back in Paris...
*** The illusion of growing wealth is now confined to the
real estate market, where price inflation is welcomed like
the dessert trolley at a weight-watchers convention. People
know they shouldn't really add to their mortgage debt, but
they can't seem to help themselves.
"Real estate prices continue their trip into the realm of
the irrational," says a letter to Barron's from a reader
who had just visited houses for sale in the Philadelphia
area."Even well-off homebuyers have been priced out of the
market, and thoughtful deliberation seems to have given way
to uncontrollable optimism. Participants in the real estate
boom are lightheaded...As with the Nasdaq of the late
1990s, many real estate investors are convinced that
markets only go up. To those apostles of the Church of
Ever-Increasing Values, I say: Speak with a realtor in
Tokyo, Hong Kong or Buenos Aires; or, better yet, reread
your March 2000 brokerage statements."
One of the common delusions suffered by investors is that
they think they can spot"contrarian" opportunities as
though they were watching for good surf. After 3 years of
falling stock prices, for example, they think they are onto
something. Stocks are down 40%...investors are
"gloomy"...now's the time to go against the crowd, they
say, and buy! Thus, are more than 60% of fund managers
interviewed by Barron's either"bullish" or"very bullish."
Barely 10% described themselves as"bearish." Everybody
seems to want to be a contrarian, so long as they can all
do so together.
But true contrarian opportunities don't come along very
often...and never attract a crowd.
*** Almost everyone thinks that real estate always goes up
in value over the long haul. But it ain't necessarily so.
Marc Faber points out that land prices in Chicago were
lower in 1933 than they had been 40 years earlier - despite
huge population increases.
"Unfortunately," Faber concludes,"the history of land
values in Chicago between 1830 and 1933 does not tell us
whether real estate prices in the U.S. are about to
decline, or whether they will continue to appreciate. It
only shows vividly that real estate prices have always
fluctuated widely (and will continue to do so) and that
land values can decline even when the population is
expanding rapidly."
[Editor's note: Dr. Faber is a regular contributor to
Strategic Investment. For investment advice consistent with
the ideas expressed in the Daily Reckoning, click here:
Strategic Investment
http://www.agora-inc.com/reports/DRI/RestEasy/ ]
*** Every decent American must be ashamed of his leaders.
They are almost all humbugs or connivers. The last American
president for whom we had any real respect was Eisenhower.
It must have been 50 years ago, but we still remember when
we saw the former president as he was being wheeled down
the hall of the Bethesda Naval Hospital. Your editor's
father, a former master-sergeant and WWII veteran, was
startled to see the old general come around the corner. It
had been years since either of them had worn a uniform.
Still, he snapped to attention, stood as erect as a locust
post, and gripped his son's hand to avoid saluting.
Eisenhower seemed like a decent man. He played golf and
left the world alone.
But our affection for George Bush is growing. We loved the
photo of the Commander in Chief, on the front page of
Monday's International Herald Tribune, in that fighter-
pilot get-up. It was so bold...so proud...so shameless. And
so unusual. Never before have we seen an American president
in a military uniform, not even those - such as Washington,
Grant and Eisenhower - who earned the right to wear them.
America is a country in which the military is supposed to
be subordinate to civilians. Only tin-pot dictators like
Saddam Hussein or Idi Amin wear uniforms.
But this is a New Era, we remind readers, a half-a-century
post-Eisenhower. And we might as well enjoy it. If Rumsfeld
wants to pretend he liberated Paris...and George Bush wants
to bask in the light of military glory...why not?
What's the harm?
We suggest, however, that the president get a special
uniform made for himself...one worthy of his position as
the top gun in the world's top military force. Perhaps he
should get Karl Lagerfeld to design it...something in
purple, yes, that's the right color...with epaulets the
size of, say, Domino's pizzas...and, oh yes, perhaps huge
ostrich feathers shooting out of a burnished brass helmet.
He would look absurd and ridiculous, of course...but so
much the better. No one would mistake him for Eisenhower.
PROFIT PIPELINE
By John Myers
T. Boone Pickens, the renowned oil man and former
"corporate raider," stood in front of a crowd of
institutional investors in New York City last week and
declared,"I don't believe I'll ever see natural gas below
$4.50 again." We emphatically agree. Investing in natural
gas is one of the most exciting opportunities in the entire
resource sector today.
But first, a little background: As all resource investors
are well aware, the earth's"inventory" of energy products
- coal, oil and natural gas - is not a renewable resource.
Once burned, fossil fuel is gone forever. This simple truth
is the main ally of investors looking for a bull market in
natural gas.
I recently received an email from a veteran investor who
wanted to correct me on what he thought was a mistake I had
made in an email to subscribers of Outstanding Investments.
"John," he admonished,"you must be more careful with your
facts! You say that the United States has only 20-odd
billion barrels of oil in reserve. This can't be right."
Unfortunately, I was right. According to the American
Petroleum Association, the U.S. had just 22.4 billion
barrels of crude oil reserves as of December 31, 2001.
Given that the U.S. consumes 7 billion barrels of oil a
year, if it had to depend solely on its own reserves, the
nation would consume the last of its oil in just three
years!
Little wonder that the U.S. must import 57 percent of the
oil it uses. Simply stated, the US is"drilled out." Most
of the oil fields still operating onshore in the U.S.
produce meager amounts of oil. For perspective, the average
U.S. oil well produces about 500 barrels of oil per day,
while the average Saudi Arabian well produces about 5,000
barrels per day.
The supply situation with natural gas is quite different.
The U.S. produces about 90 percent of the natural gas it
consumes. Canada supplies most of the balance.
America's natural gas self-sufficiency would be
comforting...if it were sustainable. The problem is, gas is
becoming increasingly difficult to find in the"lower 48."
Compounding the supply problem is the fact that most new
gas wells deplete very quickly.
Ironically, many electric utilities, along with numerous
other commercial users, began increasing their consumption
of natural gas at the very moment that domestic production
peaked. The electric utilities, staring into their rear-
view mirrors at chronically depressed natural gas prices,
blanketed the country with brand-new gas-fired power
plants. All in all, this new demand is likely to drive
prices higher.
Natural gas, otherwise known as methane, is a relatively
recent energy source. In the U.S. petroleum industry's
heyday, natural gas was burned off at the top of wellheads.
Years later, the industry recognized that it could collect
and sell gas.
Natural gas is the cleanest energy harvested from the
Earth's crust. When burned, methane releases far lower
levels of"greenhouse" gases and nitrogen oxides than
either oil or coal. Unlike oil, coal and nuclear energy,
natural gas produces virtually no solid waste. According to
the Environmental Protection Agency, the switch to gas-
fired plants from coal-fired plants could reduce sulfur
dioxide emissions and cut carbon dioxide by as much as two-
thirds, as well as cutting nitrogen oxides by 95 percent.
As a"clean" fuel, natural gas is the fossil fuel of choice
in America. Natural gas supplies 25 percent of all the
energy Americans consume, second only to crude oil. And
consumption is growing rapidly. Already, the majority of
American households - 58 million, or 61 percent - use
natural gas. According to a Washington Policy and Analysis
study, residential gas consumption will grow by 30 percent
over the next 20 years...assuming, that is, that the
natural gas industry can find and deliver the stuff at a
reasonable cost.
That's where one of the most exciting investment
opportunities of the next ten years comes into play:
Canadian natural gas. According to the Oil & Gas Journal,
the influx of Canadian natural gas into U.S. markets will
steadily rise over the next several years.
In 1986, Canada produced 2.7 trillion cubic feet (Tcf). In
2000, production soared to 6.0 Tcf, with most of the growth
arising from the petroleum-rich Western Canada Sedimentary
Basin (WSOB). With over 200 Tcf of gas reserves, the WSOB
is the largest oil and gas basin in North America, and it
is far less explored and offers far greater potential for
future growth than gas production in Louisiana and Texas.
Still relatively immature, the WSOB has a much lower well
density than the over-drilled basins in the lower 48
states.
Canadian producers have another factor on their side: the
extraction cost difference between U.S. and Canadian gas
fields. In the late 1990s, Western Canada's extraction
costs amounted to less than 50 cents per Mcf, compared with
Texas and Louisiana's extraction of 75 cents per Mcf.
Energy insiders tell me that this cost differential will
continue to grow, a factor that will favor Canadian gas
producers.
In 2000, a total of 5,500 gas wells were drilled in the
WSOB. In 2001, 7,700 wells were drilled. Even with all this
activity, geologists estimate that two-thirds of the WSOB's
gas reserves have yet to be unlocked. Given the turmoil in
the Middle East and diminishing known reserves of oil,
natural gas - Canadian natural gas - looks like its going
to be a solid play for years to come.
Regards,
John Myers,
For The Daily Reckoning
|
Thread-Ansicht
Mix-Ansicht
Reihenfolge
Thread gesperrt
