Friday, August 29, 2008

Not yet


Real estate hasn't yet turned the corner. The top five states for mortgage fraud for the first three months of 2008 according to the Mortgage Asset Research Institute:

1. Florida
2. California
3. Illinois
4. Maryland
5. Michigan

The last three are actually in a three-way tie. The report went on to say.

The first quarter data reveals that loan application misrepresentation continues to plague the industry. According to the FBI’s 2007 Mortgage Fraud Report, “the downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market.” 4 Simply stated, mortgage fraud will not disappear — in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry.

Do you really want to dip your toes in financials still? For more information about mortgage fraud, check out attorney and mortgage banker Rachel Dollar's Mortgage Fraud Blog.

Tuesday, August 19, 2008

Jim Rogers


This is a condensed version of a speech he recently gave in Vancouver. He can be a bit repetitive if you've heard him speak previously or read his books. Still, he makes a valid point.



The commodity bull market has a long way to go. This bull market is not magic. It’s not some crazy “cycle theory” I have. It does not fall out of the sky. It’s supply and demand. It’s simple stuff.

In the 80s and 90s, when people were calling you to buy mutual fund and stocks, no one called to say. “Let’s invest in a sugar plantation.” No one called and said, “Let’s invest in a lead mine.” Commodities were in a bear market and in a bear markets people do not invest in productive capacity. They never have. Perhaps they should have, but they’ve never done it throughout history and probably never will. There has been only one lead mine opened in the world the last 25 years. There’s been no major elephant oil fields [of more than a billion barrels] discovered in over 40 years.

Many of you were not even born the last time the world discovered a huge elephant oil field. Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of OPEC. OPEC stands for the Organization of Petroleum Exporting Countries. Indonesia is going to get thrown out because they no longer export oil, they are now net importers of oil. Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the 2nd largest importer of oil in the world. Oil fields deplete, mines depletes. This is the way the world’s been working for a few thousand years and it will always work this way. So supply has been going down for 25 years.

Meanwhile, you know what’s happening to demand. Asia’s been booming. There are three billion people in Asia. America’s growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That’s called a bull market.

One of the things you’ll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn’t matter about my theory. The fact is that it always works this way and it’s working this way now.

So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. [Editor’s note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.] This is an index fund. I do not manage it. It’s a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since Aug 1st 1998, when the fund started, it is up 471%.

I [mention this index] to show you that the commodity bull market is not something that will happen someday. It’s in process right now, and it’s going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof. There will be setbacks along the way. I don’t know when or why, but I know they are coming, cause markets always work that way. Commodities have done 15 times better than stocks in this decade and they’re going to continue that [trend].

You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She’s very happy owning commodities. She doesn’t care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.

Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you’re not ever going to get rich diversifying. I assure you. But if you DO diversify, commodities are the best anchor because they are not going to do what the rest of your assets are going to do.

I will give you one brief case study about oil, because it’s one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called ARAMCO. It was nationalized in the 70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit [of Saudi oil reserves] and came to the conclusion that Saudi Arabia had 245 billion barrels of oil. Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – 20 years in a row - Saudi Arabia has announced, “We have 260 billion barrels of oil.”

It is the damndest thing. 20 years; it never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me go to Saudi, we ask, “How can this be? How can it be that they always have 260 billion barrel of oil?” (By the way, last year they said they have 261 billion barrel of oil). And the Saudis say, “You either believe us or you don’t,” and that’s the end of the conversation.

I have never been to the Saudi oil fields, and even if I had, I wouldn’t know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually. That is the supply side. Let’s look at the demand side.

The Indians use 1/20th as much oil as their neighbors in Japan and Korea use. The Chinese use 1/10th as much per capita. There’s 2.3 billion people in India and China alone. Well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy, so are the Chinese. But if the Indians just doubled the amount of oil used per capita, they would still use only 1/10th of what the Koreans use. If the Chinese doubled their oil use, they would still be using only 1/5th what the Japanese and the Koreans are using. So you can see what kind of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side. These are simple things.

So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US dollar. My little girls own a lot of commodities. I would urge you to do the same
.

Tuesday, August 12, 2008

Who to trust?


Things are hard all over the place. The market rallies, then declines, then rallies, then declines. It's positively Sisyphean. The banks keep on saying the worst is over. The homebuilders keep saying the worst is over. Pundits and permabears live in fear of the dreaded "r" word(recession). So who can you trust, when no one will tell the truth?

The debt collectors. These guys are on the front lines. They've heard every excuse in the book and they know what's going on with the American consumer. Read this quote Asset Acceptance Capital Corp.'s CEO:

Looking ahead to the remainder of 2008, we are encouraged by the opportunities presented in the current economic climate particularly with regard to both the supply and pricing of charge-offs.

He is encouraged. Remember, this guy's business is to buy debt on the cheap and then collect on it. He sees a lot more bad debt in the future.

Asta Funding, another publicly-traded debt collector had a terrible Q2. They all did actually. Anyway, it said they were going to be careful about purchases and focus on retiring debt. These guys are vultures and if the carrion doesn't look all that great to them,that should give all of us pause.

This tells me a lot about the consumer. While lower gas prices are helping, people still aren't paying their debts. They're using that money to eat.

Friday, August 8, 2008

Not all the financials suck


If you've own BAC, C, AIG, LEH, or heaven forbid,BSC, you've taken quite a bath. The money center banks, the regional banks, the savings and loans, insurance, investment banks, brokerages, pretty much have all gotten hammered( notable exception, Hudson City Bancorp-HCBK. However, on group within financials have actually done well over the last year: asset managers. The worst haven't suffered as much and the best have far outpaced the sector and the general market.

I've put together a small watchlist of names that I plan to buy on a pullback:

EPHC
BLK
TROW
GROW*
JNS
IAAC
EV
WHC
VALU
BEN
IVZ


* This mutual fund company is wedded to commodities and emerging markets. YOu might want to wait for the current correction in these markets to end before buying.

Tuesday, August 5, 2008

Correction in Commodities?


Yes. It's hear. It's not the first and it wont' be the last. The secular bull market isn't over though. How will we know when it's over? When everyone believes that commodities are the place to put your money. Try to remember back to 1999, 2000, and even 2001. Everyone still thought names like JDSU, CSCO,and MSFT would go up forever. We aren't close to that yet when it comes to commodities. I'm going to take this opportunity to pick up some great stocks at great prices. This is what my watchlist looks like right now.

RIG: P/E of 7
XOM: P/E of 10
EXM: P/E of 5
FCX: P/E of 10
COP: P/E of 7

Two names that are non-commodity related that I'm buying are MO and its spinoff PM. The former has a P/E of 4 while the over is trading at a P/E of 1. Yes, 1!. Philip Morris has been on the greatest American stocks of all time and I can't get it for next to nothing.

Friday, August 1, 2008

Ignore talk of a bottom


... in financials, in housing, in the market as a whole. Does this statement mean that I am Nostradamous of the Amazing Kreskin and know where the bottom is? No. In addition to not being either of those guys, I'm also NOT a technician.

I am basing my pessimism on the lack of pessimism on Wall Street. Take Yahoo! for example. Chairman Roy Bostock has the stones to defend his actions in the proposed merger with Microsoft. He claims that $30 a share wasn't a "compelling offer." Yahoo! just doesn't get it. Tney are are puzzle at a yard sale with a couple of pieces missing. This is not the Yahoo! of 1997 that ruled the search roost.

GM lost $15 billion in the second quarter, nearly twice as much as Ford... and still they won't throw in the towel and declare bankruptcy. Bankruptcy could give them the breathing room they need to take the drastic measures that they need to take in order to survive.

The peso is gaining strength against the dollar. Oil is at $125.10/bbl and people are relieved.

My point is that the market is delusional. Wave after wave of bad news hits the wires and the markets shrugs it off. Supposedly, it's all been priced into stocks. If the four horsemen of the Apocalypse descended, the talking heads would claim that this was priced in. Note: I would myself call such an event the bottom.

There will be no bottom until the optimism has been killed. When Cramer turns bearish, that might be a good indicator of the bottom. Or maybe not. The famous BusinessWeek cover, "The Death of Equities" came in 1979, three years before the '82 bull market began.