Come and listen to a story about a man named Jed
A poor mountaineer, barely kept his family fed,
Then one day he was shootin at some food,
And up through the ground came a bubblin crude.
Oil that is, black gold, Texas tea.
A poor mountaineer, barely kept his family fed,
Then one day he was shootin at some food,
And up through the ground came a bubblin crude.
Oil that is, black gold, Texas tea.
"The Ballad Of Jed Clampett"
Even after all these years I'm still amazed at how rapidly events can change our perspectives on the markets, and how rapidly the level and volume of noise can rise. At the beginning of the year no one was predicting that before the end of February the dictators in both Tunisia and Egypt would be gone. That Libya would be engulfed in civil war. That civilian protests would escalate in Bahrain, Algeria, Morocco, North Korea, and Wisconsin. That banks would be closing in South Korea. Whew, and that's just the new stuff to add to the continuing problems in Europe, the continuing housing decline, and the continuing debasement of the US dollar accelerating global inflation. Almost makes you want to hit the beach somewhere in the Caribbean.
I've often found that when the noise level increases it is generally useful to step back and look at the big picture. Is the noise impacting our portfolios, and how?
First lets look at the unrest in Northern Africa. Clearly it is too early to determine whether new rulers will be better than old rulers, or if they will we be pro or anti westerners, time will tell. But it is pretty evident that a lot of the worlds oil resides in that part of the globe, and we westerners tend to consume a lot of it (the US has 5% of worlds population but consumes 25% of worlds oil). So any increased uncertainty of the steady supply of oil will cause the prices to rise. In the last 12 months oil has gone from about $75 to $100 per barrel, with most of that increase in the last two weeks.
Why is oil so important? Well, oil supplies about 40% of the worlds total energy needs, and an astounding 95% of the fuel used to transport people and goods. Oil discovery peaked in the mid-1960's and by the early 1980's we were consuming more oil than we found. Today we consume about 4 to 6 barrels of oil for every new barrel discovered. How much oil is left to be discovered? Who knows, experts argue and argue this point. The simple fact is that most easy discoveries have long been made (i.e., Jed Clampett shooting rabbit, only to find some bubblin' crude), US oil production peaked in 1971. But there is still plenty of oil out there, some experts project as much as three to four times what has already been discovered. The problem is that this yet to be discovered oil is going to be very hard to extract. Think deep, deep, water off-shore drilling, or tar-sands, where the energy used to extract the oil almost equals the energy extracted. In other words, most new discoveries will only be made if oil is selling for a lot more than todays price.
In summary; Unrest in the Middle East = Higher Oil Prices, which = slower economic growth, which = is usually not too positive for Equities.
Investment Implication; Maintain exposure to commodities and gold (the yellow kind and the black kind).
The following chart does a great job showing the history and future of oil (click on it and zoom in).
The Dollar Is Impacted By Oil Too:
Over the last several years the US dollar has actually been perceived as a safe haven in times of turmoil. Even though the US clearly has it's issues, it was perceived as the best looking dog in the pound. During the financial crisis it rallied 24% against a basket of major currencies, and appreciated 10% during the latest European sovereign debt crisis. But not this time. An oil crisis strikes right at the heart of what drives (literally & figuratively) the American economy. Again, we have 5% of the worlds population but consume 25% of its oil. Increases in the price of gasoline hit our economy faster than about any other factor, and there is very little the Fed can do about it. Simple math, if you drive an SUV with a 25 gallon tank, and gas is $4 per gallon, it now costs you a crisp $100 bill to fill-er-up!
Investment Implication; diversify your US dollar exposure, the Aussie dollar and Brazilian Real are good alternatives.
US Market Up 100% in 102 Short Weeks:
The last 102 weeks have certainly been pretty special, the S&P 500 has doubled! The only other time the market has appreciated so much in such a short time was coming out of the Great Depression in 1934 and 1937. Below is a great table and chart from the Chart Store that shows just how rare this event is. Unfortunately, the average return on the market after such explosive moves was -10.35% over the next 26 weeks, and -20.78% over the next 52 weeks. Since all of these samples occurred during a three year period in the mid-'30's it is hard to say how relevant they are today, but when you factor in the fact that today's hyper-rally was Fed engineered (read "not natural") they do become a bit ominous.
Again, I'm not reading too much into this other than the fact that we are living in some pretty interesting times.
Investment Implication; Still fully invested in US equities, but sitting here with an itchy trigger finger.
Well the first thing you know ol Jed's a millionaire:
The pension battles flaring up in Wisconsin and other states are just the beginning of the end of the entitlement generation. This will be a very long and drawn out battle, the simple fact is that our governments are broke, they cannot make good on their promises. We have been living on borrowed time and borrowed money and the game is coming to an end. I think New Jersey's Governor Christie put it best in a speech to 7,500 firefighters after he proposed raising their retirement age, eliminating the cost-of-living adjustment, increasing employee pension contributions, and rolling back a 9% pay increase.
He was roundly booed as he took the stage. He crumpled up his prepared remarks and threw them on the floor, and in a rather loud voice gave the following speech. "Here's the deal: I understand you're angry, and I understand you're frustrated, and I understand you feel deceived and betrayed. For 20 years, governors have come into this room and lied to you, promised you benefits that they had no way of paying for, making promises they knew they couldn't keep, and just hoping that they wouldn't be the man or women left holding the bag. I understand why you feel angry and betrayed and deceived by those people. Here's what I don't understand. Why are you booing the first guy who came in here and told you the truth?"
He told them there was no political advantage in being truthful: "The way we used to think about politics and, unfortunately, the way I fear they're thinking about politics still in Washington involves the old playbook which says, lie, deceive, obfuscate and make it to the next election. I've seen a study that said New Jersey's pensions may go bankrupt by 2020. A friend told me not to worry, you won't be governor then. That's the way politics has been practiced in our country for too long. . . You may hate me now, but 15 years from now, when you have a pension to collect because of what I did, you'll be looking for my address on the Internet so you can send me a thank-you note."
The battle in Wisconsin centers on collective bargaining powers for public service employees. The inherent problem with collective bargaining for public employees is that these employees can choose their bosses (via elections), and those bosses tend to be beholden to those who elected them. Can you imagine the power you might have if you got to choose who you wanted as your boss? In Milwaukee the average school teacher makes $56,500, but total compensation with benefits is $100,005. That's right, for every $1 in salary the teacher gets an additional 74.2 cents in benefits. For a private sector worker that ratio is about 24.3 cents in benefits for every $1 in salary.
Investment Implications; Austerity means that we all have to cut back and live within our means, not living within our borrowing power. Unfortunately this leads to slower growth, but real sustainable growth versus artificial growth. In the Muni-bond world this means avoiding the biggest debtors and watching for those babies being thrown out with the bath water.
Well now its time to say goodbye to Jed and all his kin.
And they would like to thank you folks fer kindly droppin in.
You're all invited back again to this locality
To have a heapin helpin of their hospitality
Hillybilly that is. Set a spell, Take your shoes off.
Y'all come back now, y'hear?
And they would like to thank you folks fer kindly droppin in.
You're all invited back again to this locality
To have a heapin helpin of their hospitality
Hillybilly that is. Set a spell, Take your shoes off.
Y'all come back now, y'hear?
Be careful out there, and keep the light's on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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