Thursday, December 18, 2014

"Fun on the Permanently High Plateau"

A correspondent writes,

“Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.”
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

We hear a lot of investors and pundits referring to the “New Normal” which is a Twenty First Century code phrase for a “permanently high plateau” in which stock prices are elevated and will remain so indefinitely because of zero percent short term interest rates. When I read in the main stream press and the blogs that we are in the “New Normal” or a permanently high plateau I cannot escape the feeling that the pundits really mean that common stock prices will continue rising but just at a somewhat slower rate. A permanently high plateau with a mild upward slope, if you will.

Nobody seems to talk about what happens when we are on this permanently high plateau. Sounds to me like a trading range with no further upside progress. How would you like to be stuck in a permanently high plateau for the next five years? Dead money? What happens when there are no further upside gains to be made in the broad indexes on that permanently high plateau?

How many bullish investors are willing to remain parked in highly priced stocks after they have waited for a year or more with no gains? Being pushed out on the risk spectrum by zero interest rates might seem like fun, but then why would one expose himself to the risk of equities at prices elevated by PE multiple expansion when there has been no reward for several months? You might as well move to cash and eliminate the risk.

We have actual historical experience with a permanently high plateau from 1966 through 1982, in which the Dow touched 1000 five times during that period only to retreat from that high water mark each time. On an inflation adjusted basis at that permanently high nominal plateau, the Dow was cut in half [1,2].

Shifting to more modern times and the S&P 500, we see that the Wiley Coyote hang time at the more recent “permanently high plateaus” measures about nine months at the year 2000 high before we collapsed into the lows in 2003 and also about six months at the 2007 peak. In hindsight technicians would call these chart formations “double tops.”

Thus it would appear that investors in the Twenty First Century have shorter time horizons and are much more impatient than they were back when I began investing in 1969 and got my first good shellacking in 1974!!

The bottom line is that a “permanently high plateau” is a very unrewarding place to be.

Wednesday, December 17, 2014

Credit Bubble Stocks Book Reviews

5/5 - These Are "Must Read"


Chart of New Highs Minus New Lows

Check out this chart from for $USHL5

Visit to see more great charts.
Fewer and fewer net new highs even with market rallying this year. Bearish indicator.

Tuesday, December 16, 2014

The "Commodity Supercycle", Once A "Well Known Fact", Is Over

Important essay, "Where Did The New Middle Class Citizens Go?":

"The 'well known fact' with regards to oil over the last decade read like this: because of huge GDP growth in emerging markets like China, there were going to be 400 million new middle class citizens born of uninterrupted prosperity; they were going to want all the autos, consumer goods, $10,000 watches and food that Americans have. The demand for commodities was going to be endless because capitalism practiced under authoritarian control was going to be better than the 'invisible hand' of the free market. No recessions or depressions required. [...]

Part of the job of the long-term contrarian investor is to identify a body of economic information which is not only known to all market participants, but has been acted upon by anyone in the marketplace who wishes to participate. We call this the 'well known fact.' [...]

Nearly every major institutional and high-net-worth individual investor had to adjust their portfolio to this particular 'fact' about China and the emerging markets over the last decade. The most successful money managers of the prior decade, who had successfully participated early in the 'well known fact,' were validated and received adulation for promoting it (think BRIC-trade). As Warren Buffett likes to say, 'What the wise man does at the beginning, fools do at the end.'."
Think Jim Rogers. Think Grantham and his commodity scarcity essays. Here's what I was saying a year ago about commodities:
"[The China] construction bubble would explain why commodities prices have been bid up so much. That would mean that Grantham and the inflationists are wrong; that we are at the end of a commodity upcycle not the beginning of one. It would mean that you wouldn't be able to give copper or iron ore away. You'd see true commodity price collapses as in the Great Depression. The effects would spread around the world: Chile and Australia with their mineral exports."
Young Money came up with a theory to explain the commodity supercycle:
"[T]he mining industry is heading for a perfect storm in which: 1) Chinese demand will fall as they stop building empty cities, 2) there will be a supply glut as the industry finishes bringing enormous amounts of new capacity online, and 3) financial demand will disappear and metals stocks that have been hoarded will flood the market as prices fall. There will be a huge sell-off that pushes prices below the marginal cost of production and keeps them there for years, and that will put the commodity supercycle theory to rest."
Just as so many of the leveraged solar panel and renewable energy companies went under in 2012 and 2013, I think we will see many, many resource extraction companies go bankrupt over the next two years: coal, iron ore, oil, and some of the big diversified mining companies.

Late Entry to the 2015 Prediction Contest

A correspondent with a late arriving prediction for the 2015 contest:

German chancellor Angela Merkel tried to speak to a German crowd. But the crowd punished her for her support of American sanctions against Russia. The crowd booed her so loudly that she could not be heard, even with a public address system. The crowd booed her until she gave up and left the stage after more than 13 minutes of booing.

Anti-foreigner protesters march in Dresden and in other cities all over Germany, every week, in what they call "evening strolls." The number of marchers in Dresden has doubled six times in about nine weeks.

The speed of this development is driven by hardship caused to ordinary German people by American sanctions against Russia. This speed approaches the speed of events that led to the fall of the Berlin Wall and the collapse of the Soviet Union.

  • There is an 80-percent chance the German people will force Merkel from office in 2015.
  • There is an 80-percent chance Germany will leave NATO in 2015.
  • There is an 80-percent chance China will sell the bulk of its U.S. treasuries in 2015.
  • There is an 80-percent chance that Turkey will leave NATO in 2015.
  • There is an 80-percent chance that the National Front Party in France will become part of a ruling government coalition in 2015
The next German federal election is in 2017, so while there are ways for a parliamentary government to lose control before an election, it doesn't seem like an 80 percent likelihood. I would certainly pay $0.20 for a $1 bond that paid if Merkel was still Chancellor at the end of next year.

Saturday, December 13, 2014

Some Great Posts From Stagflationary Mark and Young Money

Stagflationary Mark is the only one of the 2015 predictions participants to exhaustively document his rationale for his predictions.

  • "Full year exports of goods to China will not increase from 2014 to 2015. I am now 80% confident and no longer feel that this prediction is my weakest link. Can exports go higher? Sure. As a conservative guess, I'd say there's a 20% chance."
  • "I predict that the 30-year treasury yield will be below 3% for all of 2015. In order for my prediction to come true the yield needs to say below the blue line for just a very small moment in time (that last little interval on this long-term chart that spans from 2015 to 2016). I was tempted to go with an average for the year, but this should keep the game more interesting."
  • Last three: "For the past 5 years, predictions about the Fed's ability to raise rates have continuously been way too optimistic. Now that oil has fallen, I'm going to stick with what works."
  • "As for department store sales, they've been in a downtrend since 2000. I just need a dollar! One dollar less. That's all I'm asking. Jeff Bezos, you got my back?"
  • "And lastly, ShadowStats is my ringer. If they raise their subscription price from $175.00 to $175.01 then all hope is lost for me. These predictions could all go very, very wrong!"
Making fun of ShadowStats for not raising its subscription price during a period of 90% probability hyperinflation is delicious.

Amazingly, Stagflationary Mark links to a report that "91% [of institutional investors] are bearish on Treasury bonds, and 95% see 10-year yields over 2.5% by the end of 2015 compared to 2.1% today." That means we are going to have to hold onto our treasuries for longer, even after the massive rally this year.

Young Money also has a new post up today. Highlights:
  • "Glenn Chan argues that investment managers' ability to identify scams is a good measure of their skill. [...] I don't follow Watsa closely, but his largest stock investments over the past decade are an all-star list of value traps: Abitibi, Canwest, Dell, Exco, Frontier Communications, Research in Motion, Sandridge, and Torstar."
  • "Taking the $77.979 billion that Canadian farmers owed in 2013 and dividing it by $53.890 billion (the total cash receipts which Statistic Canada reported Canadian farmers received that year) we get a ratio of 144.7 per cent... the U.S. ratio of farm debt to total farm receipts is much lower at 69.4 per cent."
  • "In Barron's, Anne Stevenson-Yang claims that 'Chinese corporations have taken on $1.5 trillion in foreign debt in the past year or so, where previously they had none. A lot of it is short term.' I haven't been able to verify the number, but it's ominous if true."
That much foreign ownership of China debt will have serious (like 2008) style consequences when the China ponzi unravels.

"Conrad Industries Announces Special Dividend and Institutes Quarterly Dividend, Reports on New Business" $CNRD

Conrad Industries, Inc. (CNRD) announced today that its Board of Directors has declared a special cash dividend of $1.00 per share of common stock. The special cash dividend is payable on January 5, 2015 to shareholders of record on December 23, 2014.

Additionally, the Board plans to initiate a quarterly dividend of $0.25 per share during the first quarter of 2015. Declaration of the dividend is at the discretion of the Board each quarter, and will depend upon the Company's financial performance, cash requirements, outlook and other factors deemed relevant by the Board.

The Company also announced today the signing of contracts and sale of stock barges, bringing current backlog to approximately $170.0 million, compared $135.0 million at September 30, 2014 and $152.9 million at December 31, 2013.

Barges sold and new contracts include four 297'6"x 54'x 12' 30,000 bbl. tank barges, two 361'x 62'x 24' 55,000 bbl tank barges, two 300'x 62'x 18'5" 35,000 bbl. tank barges, and a 235'x 64'x 18'6" ferry.

The Board approved approximately $27.3 million in capital expenditures for 2015, which includes $16.7 million for continued development of the Conrad Deepwater South yard. The additional improvements at Deepwater South will continue to enhance the Company's ability to build larger vessels.

The Company also announced that its Board has increased the Company's stock repurchase program to $20.0 million. The Company plans to use cash on hand or generated from operations to purchase the stock. Acquisitions may be made from time to time in the open market or in privately negotiated transactions as permitted by securities laws and other legal requirements. The timing, prices and sizes of purchases will depend upon prevailing stock prices, general economic and market conditions and other factors as management deems appropriate. The program does not obligate the Company to acquire any particular amount of common stock, and may be commenced, suspended or discontinued at any time or from time to time in the Company's discretion without prior notice.

Johnny Conrad, Chairman and CEO commented, "Our announcements today reflect our financial strength and our Board's optimism about the long-term prospects of our business. Our actions also reflect management's ongoing planning process aimed at taking advantage of our recent achievements and accumulated substantial cash balances for the benefit of our shareholders.

Throughout the years, we have used our cash and debt to make investments in our business to continue to diversify our product mix, take advantage of business opportunities and improve efficiencies. We believe these investments have allowed us to remain competitive, meet changing customer needs and navigate effectively through business cycles. Additionally, we have returned cash to our shareholders through our stock repurchase program and special dividends in each of the past two years."

Mr. Conrad continued, "We must also take note of near-term risks to our business. We have experienced a decline in demand for inland tank barges primarily used to transport petroleum products produced from shale plays, and a softer repair market. Current declining oil prices may adversely impact our business, particularly in our repair segment. We have been actively pursuing increased opportunities to produce different types of vessels for new markets. Some of these vessels would be larger, take longer to start production, and take longer to complete than vessels we have constructed in the past, and some may require additional capital expenditures. We currently expect these factors to negatively impact our financial performance for the fourth quarter of 2014 and first two quarters of 2015, compared to prior periods. We have met these types of challenges in the past, and our record of success and talented and dedicated employees give us confidence that our business will continue to grow and prosper."
So, the dividend yield going forward will be around 3 percent, assuming that the only dividends going forward are the quarterly dividends.

More importantly, they are giving "guidance" for weak results related to the oil crash (the key cyclical driver of their profits).