I look here once in a while. As far as KTCC, my view is similar to the recent past. I'm a buyer under $10 and a buyer of more under $9.50.
Spain, as an example of the issue between, "liquidity vs solvency". Today, Spain bonds are getting a bid because:
1)Money flowing out of EM markets back into Euro-zone and the US
2)Euro-zone inflation is trending lower
3)There has been some good news on the macro-econ in recent weeks
So, Spain's bonds are getting a bid-lots of liquidity
However, the underlying fundamentals are getting worse. Budget deficit, as a % of GDP, 2012=10.6%, 2013(est)=6.5%, 2014(est)5.5%. Debt outstanding in increasing.
What about the ability to pay? 2013 CPI up .3%, GDP for 2013 down 1.2%. So nominal GDP is -.9%. Interest costs, across the whole maturity spectrum is 3-4%. For a country to be able to afford its debt, nominal GDP has to be greater than interest costs-sustained. Spain is not even close. So, when the market decided to care-perhaps after it "feels" the effects of the next taper-should start by mid to late Feb-the issue of "liquidity vs solvency" will arise again for many Euro-zone countries.
Money that has been finding its way into the Euro-zone, in recent weeks, will come back to the US. US $ gets a bid, as do treasuries and stocks will sell off as earnings come into question.
Until central banks decide to re-accelerate QE or like programs, then general direction of stocks and GDP growth are down.
Personal income the last three months: Oct, Nov, Dec were -.1, .2 and flat. Where has the consumer gotten the money to spend? From reductions in saving, Dec was the 2nd lowest savings rate since 2007.
Bottom line, "robust" consumer spending of the 4th Q is not sustainable. In addition, top 1%'s will not feel as flush with the market going down, 20 and 30 somethings will be paying health insurance premiums for the first time and just about everybody will be paying higher utility bills.
The 1stH of 2014 is going to slow down from the 2ndH of 2013-S&P 500 earnings estimates will not be reached. In addition, there will be $110 billion less QE money in the financial markets as the FED tapered $10 billion in Jan. and is expected to taper, at least $100 billion for the 5 months Feb-June.
Money is coming out of the EM markets and coming back to the US and the Euro-zone. Once we see the reversal of the recent "good" news within the Euro-zone, that money will be exiting the Euro-zone and back to the US-forcing investors to question the "liquidity vs solvency" issue of many Euro-zone countries and banks. That will be the 2nd leg lower of US stock markets.
CL operating income down 5% y/y, yet the stock sells for 20X earnings. Just another example of a stock that is way over-valued. Should sell for 10-12X PE.
Forgot to mention.
Mike Jackson, CEO of AN, said today inventories of F, GM, and CHY on dealer lots are over 100 days-60 days is considered ideal
So, I would expect auto production will be lower in the 1st Q vs the 4th Q-to draw down those inventories. As mentioned before, housing is rolling over. Both industries, at the margin were responsible for job and GDP growth in 2013. I expect that to reverse in the 1st half of 2014.
Why is this "stuff" so important? Because the "consensus" opinion is to buy stocks because the economy is getting stronger. My observations are the exact opposite-1stH GDP is going to be weaker than expected. Today's buyers of stocks, along with the most optimistic of buyers in the recent past, will be sellers when their expectations are dashed.
Beware the "happy talk" about today's macro-econ #'s.
1)Headline GDP up 3.2%. However, when you look at the internals: inventories were way up $127.2 billion even more than the 3rd Q's up $115.7 billion
2)Reduced trade deficit was greatly helped by less import of oil and export of refined products-good for refiners but not a big net job creator. There is a measure of GDP called "final sales" and Final sales to domestic buyers. For the 3rd Q they were 2.5% and 2.3%. For the 4th Q they were 2.8% and 1.4%. So final sales to domestic buyers weakened in the 4th Q
3)GDP growth was boosted by a lower inflation assumption-PCE was .7 for the 4th Q much lower than the 3rd Q's 1.9%
4)Consumer spending was strong at 3.3% vs the 3rd Q's 2.0%, but at 3.3% is greater than income growth so not sustainable
5)Pending home sales down for the 7 month in a row and at a 2 year low. MBA buyer index (Wednesday stats) was down 12% y/y
6)UnClaims up 19,000 to 348,000 vs expectations of 330,000
MY conclusion is consistent with my prediction-there is a developing "inventory overhang" that will hurt 1st and 2nd Q GDP. In addition, job growth #'s will be lower than expected for the next few months, so Dec's #'s was not an fluke.
Stocks still way over-valued based on inflated earnings estimates that won't come to pass. Back in Oct, the expectation for 4thQ S&P 500 earnings was up 11.1%. Reports to date, 1/2 half that growth.
No, because central banks will be forced to ease sometime later this year. My guess is in the 2nd Q or early the 3rd Q. That will restore "order" but inflation will become a problem 12-18 months after that. It will be after that, when central banks will be forced to stop QE programs because of rising inflation, that the world will start to implode.
Why? Counties, companies and the consumer majority will be use to excess liquidity and artificially lower interest rates. As a consequence, they all took out debt. For all the #$%$ you hear about corporations having record amounts of cash, well net debt is up 15% since 2009. Countries have still been running large budget deficits and individuals are re-leveraging.
As central banks are forced to cut QE because of inflation, interest rates will rise, GDP will slow, defaults will increase-leading to a self-reinforcing negative loop. Eventually the US and other western countries will default on their debt, print money or cut spending by 10-20% per year over several years Unemployment will get above 20% in the US and the S&P 500 will go to 1/3 its high of this cycle.
Lower liquidity (FED and other QE programs) leads to higher interest rates, leads to slower econ growth, leads to previously good credits-under a high liquidity low interest rate environment-to turn bad and become non-performing loans. That will lead to a self reinforcing loop of lower GDP and more loan defaults.
These higher rates will be in countries that were the last in getting the excess liquidity that was provided by the FED. Four countries in the last week have had to raise rates:Brazil, India, South Africa and Turkey. We will soon see the weakest of the Euro-zone countries interest rates rise:Italy, Spain, Greece, Portugal, France, perhaps others-with the "lesson" that liquidity is not solvency.
The US will be the beneficiary of money flowing back to the US-the 10 year could get down to 2.40-2.50%. So, expect more of the same, once the emerging market "mess" hits Euro-zone countries, then the ECB and the FED will be forced to act by easing. Massive easing-more QE or the like- will restore order but it will:
1)Gold shoot up
2)Inflation will become a problem in 12-18 months
3)stocks should sell off until just before the massive easing
4)I expect the pain will go on until the 2ndQ or early the 3rd Q before central banks are forced to act
Asia, for the most part and US futures are rallying on Turkey's interest rate hikes. Fear of contagion over?
I don't think a sustained rally is the correct response. Western banks, mostly Euro-zone, have approx $350 billion loans in Turkey. Just how well are those credits going to perform with interest costs up 200-400 BPS overnight, coupled with slowing econ growth as a result of the higher interest rates.
Euro-zone banks are already in need of $100 billion Euro in capital. They aren't in financial positions to take huge losses. So, there maybe a relief rally, but the financial pain will come later in the year as non performing loans jump in Turkey. Ironically, of the Euro-zone banks, Greek banks have the biggest % exposure.
Turkey will be the "model" for the western world, in the next few years, as lower liquidity leads to higher rates, slower econ growth and increased non-performing loans. Credits that were once good, under low interest rate assumptions and decent GDP growth, will become bad-starting a negative feedback look into world depression.
W/R to ECA, going back to late Nov, the stock was $19.50+ and at that time very few industry analysts were expecting NG to get to $4.00. Now with NG around $5.00 and been above $4, just about every day since the 1st week of Dec, yet ECA trades about $2.00 or 10% lower. Same company, yet cash flow and EPS should be much stronger than expectations since late Nov.
Conclusion, ECA is getting stronger as they take advantage of spot sales and can sell forward at much higher prices than was thought of just two months ago. All the assets they owned two months ago, they own now. However, at today's NG prices those assets are worth more and cash flows are stronger. It is a sleeper.
Catalyst? Perhaps, if they get the correct price, ECA sells its Deep Panuke property for $1-2 billion. 1/2 the proceeds retires debt, 1/2 added to capX-accelerating production and EPS.
As I was taking profits on UPL last week, I was buying 1/2 the $ amount of ECA just above $18. Prior purchases,earlier this month were under $17.50. Upside is in another post.
W/R to gold, I have only bought mining companies. For me, I want to own the assets the company says it has and is mining. Perhaps I'm old fashioned, but GLD is suppose to own and have stored the gold it is equivalent to its market cap or whatever. What happens when one day, and it may not happen, GLD doesn't own as much as it should have. What is its value then? I tend to avoid "financial engineering" type securities. Perhaps I have become too cynical in my mid 50s-actually been this cynical since my 30s. Whether it is cynical or skeptical, I prefer being able to pick the mgt teams and the asset locations of the gold companies that I want to own. In addition, unlike GLD, GG, AUY, AEM and others pay dividends.
The other thing about ECA, is they tend to beat analysts estimates. For the June Q last year, X-items, they earned $.34/share vs estimates of $.17, the Sept Q earned $.20/share vs estimates of $.15.
For the 4th Q, they will have a charge as they have slimmed down their operations because of concentrating on 5 plays vs being spread to thin on being active on a dozen plays. This move requires less employees. For 2014, I think the market is way underestimating earnings as NG prices will be much higher and OpX lower than the consensus view.
I don't know ECT and I have tended to avoid MLPs and other specialized tax income oriented vehicles. ECA I've followed for years, with the observation, that it is asset rich, but current earnings poor. It is my estimation the assets are worth $35-$40/share-new mgt will realize that value over time. The have 25 or so plays in their portfolio, but have not had enough cash flow, in the low NG environment to develop them all. Mgt has chosen to concentrate on 5 and the let the rest be to be developed at a later date. As a consequence, they will keep their balance sheet strong and CapX within cashflow. Now should they get a strong offer on a "play", I'm sure they will take it and in doing so, the "market" will start doing the math and realize that the current price is much too low for all the assets they have.
All their properties are in NA and it is my expectation that NA NG prices will move higher to world prices, $12 or so, over time as LNG export plants come on stream. ECA is already a much higher stock if NG prices stay around $5. Should NG double or more as I expect, it is a $50+ stock. Under that scenario, it wouldn't matter what NG stock, MLP or trust you own-they will all go up. For me, ECA offers alot of downside protection because of all the assets they have with upside perhaps 2-3X current prices.
Why S&P 500 closer to 1600, maybe 1500? Stocks are way over-valued. Take PG, for the Q end Dec., operating income was flat y/y. Yet, the market is paying 19X earnings for flat earnings. That is a bunch of #$%$, PG should sell for 10-12X earnings. Go up and down the S&P500 and there are 100s of companies that are way over-valued. Depending on the financial event I expect to happen, and how long central banks take to respond-the S&P500 needs to get to hammered before the reward to risk gets worth buying in size.
Of course the "perma" bulls will be telling everybody the recent sell off is a buying opportunity. That begs the question, is "something" different this time around? My answer is yes.
In essence, the market is "stress testing" world wide markets after the FED's taper and the expectation of more tapers. Last summer the markets didn't even like the thought of a taper, now they have to live with its implementations.
Implications, the "credit engine" in China is broken as it is in the Euro-zone. EM markets are financially and socially imploding as liquidity recedes. My theme of 2013-liquidity is not solvency-is finally taking root as a concern. If there should be a "deflationary" financial event, the central banks of the would will not allow it to morph into financial contagion. They will respond with massive easing.
So, when will stocks become a buy? As of today, I am in the camp that a "deflationary" financial event has to occur first to force the hand of central banks-because they rally don't want to have to reramp up QE and other programs.
1)Cramer gets bearish and says there is nothing to buy
2)The VIX get near 30
3)S&P 500 gets closer to 1600.
Can't help you there. Obviously, I'm bullish on NG, have been for a couple years, but have no idea how high it could go in the short run. Should NG stay above $5.00 for a sustained period, then CapX will come back into the industry-increasing production with a 6 month time lag. Prices will peak before that increased supply comes on-line. But to "guess", sell the rest when NG hits $6.00.
I harvested some more "trading share" gains on UPL today at $24.10. Have not sold any ECA-it is still cheap.
China financial market issues now in mainstream business press
NG almost hit $5.00 today-intra-day high was $4.95
What is not mainstream news?
AN CEO says car dealer lots have too much inventory. A check of the last 3 weeks of carloads shipped by rail show y/y: down 27%, down 22.5% and up .2%.
That suggests, for the 1st 3 weeks of Jan, dealers are ordering fewer cars from the mfgers. That doesn't sound like an accelerating econ to me. Of course, more data will come out each week and perhaps weather has played a factor YTD. Still, for those that are paying attention, there is consistent evidence that the macro-econ is not accelerating but stagnating from an "inventory overhang".
In the meantime, Turkey, Argentina, Venezuela, Thailand, Ukraine, Syria, Iraq, Brazil to a small extent and some African countries are imploding socially. These sort of things happen more often when GDP growth is under pressure. Implications: the FED will most likely taper next week-that will be the last one. Increased social and financial stresses from the with drawl of the FED's financial "crack" will have the FED and/or other central banks increasing their easing sometime in the 2nd Q. The world is "hooked" on artificially low interest rates and gobs of excess liquidity. That excess liquidity is drying up. The leaders of the central banks don't want the markets to "test" solvency issues fearing contagion-they will err on the side of further easing. Ultimately bullish for gold as paper money will grow, 2X-5X, faster than the real growth of goods and services.
Without a doubt, FED's QE3 program:
1) Lifted asset prices around the world-stocks and bonds and with that some "wealth effect" induced increased consumption
2)With interest rates lower than they would have been, residential real estate did better than it would have otherwise, commercial less so
3)With lower interest rates, savers earned much less income so it forced many retires back into the labor force to make up for that lost income. In the age bracket 65 and older, the participation rate in 2013 was 23.4% vs 2008 it was 21.6%.
Net, net, QE was a plus on world GDP, as lower interest rates subsidized all borrowers-especially governments-which could keep spending higher than it would otherwise have been. However, the consequences have yet to be felt since, at some point in time, QE from all central banks will have to stop and borrowers will have to pay the real rates of interest vs the artificailly lower rates of the last 5+ years. It is my view central bans will have to stop once inflation becomes a problem. Hence my bullish view on gold.
Euro-zone debt, as a % of GDP, was up y/y for the 3rd Q from 90% to 92.7% as reported by Eurostat. More data that sustains my view that Euro-zone ability to service its debt is getting worse vs better. For now and in recent months, liquidity has trumped the notion of solvency. When it turns, the "confidence" game will be over in a hurry. I continue to raise cash-expecting a "deflationary" event to #$%$ stock and bond markets.