Navigating the Inflation-Deflation Paradigm Is Exasperating

“Markets breaking out to new highs. But is the breakout a fake out?” Northman Trader

Internally the market lacks uptrends with a sector participation problem. Sentiment Trader

A valuation update and perspective from Jill Mislinski. Meanwhile, “The link between starting valuations and subsequent returns is powerful” though “Valuations levels are not useful for timing market tops and bottoms.” Research Affiliates

“The S&P has become totally detached from profits…” Marketwatch

“The US gross national debt – the sum of all Treasury securities outstanding – passed another illustrious milestone, $23.01 trillion…when recession hits…The federal debt will jump by $2.5 trillion or more in a 12-month period.” Wolf Street

Washington Post: Unemployment is climbing in key swing states, including Michigan and Wisconsin. “If the American consumer is Atlas — holding up “the greatest economy ever” — his legs are weakening under the strain.” 13D Research

“The New York Fed Staff Nowcast stand at…0.9% for 2019:Q4.” Woo nellie. New York Fed

“All bets are off if and when the unemployment rate begins to increase.” Evergreen Gavekal

We are repeatedly asked, what is the weak link that will bring the U.S. economy down? “Although there are many possibilities, our vote right now is corporate debt.” 13D Research

“America’s largest public companies (EPS) will decline year-over-year during the three-month period…they’re managing to cut costs without cutting employment.” Marketwatch

The short Gold Chartbook is still 70 pages.

“An awful lot of money is in stocks that probably doesn’t really want to be there, that was manipulated into that risk position because the Federal Reserve’s adherence to ultra-low rate policies has forced interest rates down to levels on which even people with substantial savings can’t live.” Horizon Kinetics

Chris Martenson: “Through history, the balance has swung recklessly — almost chaotically — between inflation and deflation. Another such phase transition approaches.  These moments are billed as periods of wealth destruction, but they actually aren’t.  Instead, they are periods of wealth transfers. Independent Stock Analysis will attempt to be ready.

Navigating the coming inflation-deflation paradigm has been and will be the difficult part. A crack up boom may well occur in equities. The New Bull Market by Callum Thomas

“It may be time to replace bonds with gold.” Goldhub

Larry Benedict: “(S)tep one towards having trading discipline is finding someone successful to emulate, step two is finding the specific thing you’re good at, and becoming an expert at it…When people tell you they have a portfolio of 40-odd stocks, that’s dangerous to me… How could someone look at 40 stocks every day or week and have a broad range of exceptional knowledge of each and every one? Impossible…I’d say it’s wise to become an expert on just a handful of stocks…around 5-10.”

When picking stocks, run, don’t walk, away from stock based compensation. Ben Hunt

The Independent Stock Analysis portfolio will be a focus portfolio of 10 stocks. We begin January 1, 2020.

The Environment and the ISA Portfolio

Your dear editor would prefer to spend his time evaluating the common stock of wonderful businesses which contain moats (Vaneck). Instead, the outrageous imbalances and the inevitable implosion seem to see most of our attention. The timing part is hard.

Stateside the Main Street economy continues to plow forward as evidenced by the strong and tight labor market. Garbage men until recently had a $3500 signing bonus in my area, and these are jobs which support a family. Recent headlines indicate the U.S. consumer is the last man propping up the world economy..

But globally: “Global manufacturing and construction sectors have already entered a downturn; the service sector is all that now stands between the economy and a full-blown recession.” Reuters

Closer to home, it’s the Worst Weakness Since Last Recession. Also, What Just Happened Also Occurred Before The Last 7 U.S. Recessions. Reason To Worry? Is recession coming: “Yes, but not just yet.” say John Mauldin.

The New York Fed “model puts the odds of a recession in the next 12 months at 34.8%, which, as Colas notes, is close to where the same model sat in September 2007, when it was at 34.6%. Still, it’s an improvement from August, when the model read 37.9%, he noted.” Barons

“Given the incremental debt accumulation that has occurred as compared to the accumulation before those five prior episodes, financial conditions have more than likely already tightened enough to induce a recession.” Michael Lebowitz

“The riskiest of junk bonds are seeing some selling pressure.” Jason Goepfert. More junk bond commentary by Mike “Mish” Shedlock. A junk bond market warning from Sentiment Trader. Jim Grant walks us thought the farce of a 100 year bond yielding 0.72% as only he can.

The demographic bulge, wealth inequality and information access will shape the world going forward. Morgan Housel

At this point in time, the precious metal complex is the favorite of Independent Stock Analysis. Gold in the Age of Eroding Trust is 340 pages of research. Take a day and read it. The PM’s are coming out of a bear market, yet remarkably “the average annual performance of spot gold measured in the world’s nine leading fiat currencies has been positive in 17 of the past 19 years (Figure 1).” Sprott

BANG: Why The Gold Miners Have Only Just Begun To Shine says Jesse Felder

What does the debt end game look like: “I believe we find a way to monetize the debt. We are headed for a “debt jubilee” of some form.” says Steve Blumenthal.

“You see, advocates of MMT insist that because fiat currency is ultimately a creation of the state, governments can and should print as much of it as needed to fund massive public works, guarantee government jobs for the unemployed and much more. And since a government can never run out of money, the theory says, it can never default on its debts. Deficits are meaningless. Anyone who’s studied macroeconomics knows that unfettered money printing on this scale is a recipe for runaway hyperinflation.” Frank Holmes

Meanwhile, the stock market just had The Best Ten Years Ever. Well, yea: “The Crestmont P/E of 32.1 is 124% above its average (arithmetic mean) and at the 99th percentile of this fourteen-plus-decade series. We’ve recently highlighted a couple more level-driven periods in this chart: the current rally, which started in early 2014, and the two months in 1929 with P/E above the 25 level. Note the current period is within the same neighborhood as both the tech bubble and the 1929 periods, all with P/E above 25 and is certainly in the zone of “irrational exuberance”. Jill Mislinski

“…as the debt bubble unwinds and the market cycle flips, gold and other hard assets might be the best protective options for investors.” Well done by Evergreen Gavekal.

“Only when debt and derivatives have imploded…you can swap your gold for real assets like land, income producing property or sound businesses at bargain prices, this would be a serious opportunity. History is full of examples of people who used their gold to pick up absolute bargains in periods of economic distress and hyperinflation.” Egon von Greyerz “When the time is right, investors with bigger gold holdings will be able to buy valuable assets with their gold for a fraction of what they cost before the crisis. Price reductions of 90-95% are not uncommon in these periods…”

“Corporate Profits are Overstated and What It Means for Investors” by another early 20th century pen name, Jesse Livermore.

Our cornerstone precious metal investment did what they do this summer, purchasing mineral title counter cyclically from a distressed seller in a world class mineral deposit at the top of the capital structure.

Navigating the deflation, then inflation will be the key when things fall apart.

The company’s which move good by sea are interesting as Shipping Is All About Upside Leverage says Kruppy. He also likes Altisource is a default mortgage servicer as way to invest in difficult times.

I have a keen eye on the beaten down, low cost Marcellus natural gas producers. The survivors will be home runs. I’ll watch as their quarterly results are reported over next several weeks. Not yet, still preparing. Note this commentary from Sailing Stone. Thoughts on Cabot at Insider Monkey.

The Goehring & Rozencwajg Q2 Natural Resource Market Commentary.

The significant and provoking reading provided must suffice readers until Thanksgiving. What is the maximum precious metal exposure and still be prudent? How much cash can an investor handle? Is it okay to have a significant watch list and own zero of the shares of any of them? Would you tell my mother if I argued for put option exposure? The ISA portfolio begins January 1, 2020.

Upside Down

“The yield on 10-year U.S. Treasury securities averaged 1.8% during 2012, the lowest levels in 60 years. But that episode may now be behind us.” (Econbrowser).  Pimco’s Bill Gross Says the Bond Rally Is Over (Business Week).

The fundamentals of gold are remarkable.  Consider:  “Moody’s Investors Service, dissatisfied with the way states measure what they owe their retirees, released its own numbers on Thursday, showing that the 50 states have, in aggregate, just 48 cents for every dollar in pensions they have promised.” (Dealbook).  Additionally, the world’s third largest currency is in the Mother of All Painted-In Corners (Mauldin).

Meanwhile in the investment world, gold can not be owned.  Consider:  Gold is not yet as oversold as it was during the bottom in ’76 at The Short Side of Long.

“It’s been an incredible run… but gold’s 12-year streak of price gains will end in 2013.”

A Big Correction Means Gold Streak is Over

The Ups and Downs of the Gold Stock Market

U.S. Oil Boom Affecting Global Prices at the WSJ.

Is Oil is the Next Major Commodity to CrashEconmatter

Coal shares tumble as investors see no sign of turnaround at ReutersWhat Happens When You Buy Assets Down 80%? (Mebane Faber), though I’m not so sure asset prices always come back.

“There was no discussion of exports in Bernanke’s assessment of the economy during his press conference last Wednesday. They’ve stopped growing because global economic growth has been depressed by Europe’s recession.”  Ed Yardeni

Here We Go Again in Europe (Economic Policy Journal).  Also, “It’s likely that the days of the super-powered Chinese economy are over” says Michael Pettis.

In the U.S., “four powerful forces coming together over the next year are poised to support stronger growth and job creation.”  Stronger U.S. Growth Ahead at Economix.

On the one hand, “Since May 1, rising mortgage rates have reduced the purchasing power of U.S. home buyers by 18%” (Dollar Collapse), while at the same time the shortage of supply we’ve long discussed is manifesting:

Housing Returned 684% During the 1970s

Chart of the Day

“I would add that it does appear based on the last month of data that rail
traffic seems to be picking up.  This gives further evidence that we might see GDP increase at higher rates as we go through the second half of 2012.”  Value Plays  The Private Economy is Doing Just Fine says Davidson.

Yet U.S. stock valuations are uninspiring:

Chart of the Day

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Limited Opportunity

Paul, I’m not sure what the future holds.  The U.S. relative strength against Europe and China continues on the back of oil (Mark Perry) and natural gas production.  “Home construction is booming in the United States, but it remains severely depressed.” (Ritholtz)  Yes, housing has legs:

Chart of the Day

Weakness in China has the commodity trade looking bad and feeling worse:

Commodities Have Been Volatile, But Move Sideways

After all, The Oil and Gold Booms Are Over (Bloomberg).  Grim BRICs news pushes copper to 5-week lows (Mining).  Oversupply pushes thermal coal price to 2009 levels (Mining).

Yet, Commodities poised for revival says Cam HuiA Case for Owning Commodities When No One Else Is by Frank Holmes.

Meanwhile, the S&P 500 at new highs with modest valuation has the stock market uninteresting.  (Vitality katsenelson)

Chart of the Day

Avoiding interest rate risk seems prudent:

Chart of the Day

Additionally, being a gloom and doomer is so passe.  (Albert Edwards)

Perhaps the best opportunity is the shorting the Yen, using the break this week to attempt to initiate a position.  It’s The Mother of All Painted-In Corners (John Mauldin) with horrible demographics.

Stimulate Me!

“Greece continues to receive billions of euros in emergency assistance from a so-called troika of lenders overseeing its bailout…it is flowing directly back into the troika’s pockets.  The European bailout of 130 billion euros ($163.4 billion) that was supposed to buy time for Greece is mainly servicing only the interest on the country’s debt…”  Read about the farce at CNBC.

Will There Be Stimulus?  Jim Puplava

Governments are addicted to stimulus:  Sober Look

The Bank of England prepares to print as a matter of daily business:  Telegraph

Currently printing is measured in the hundreds of billions.  Eventually the problems will be papered over with trillions.  King World News

Eric Sprott May 2012 presentation.  Sprott

Strong Evidence of an Important Low in Gold Stocks, continued, from Daily Gold.  Newmont makes the WSJ.

Jeff Saut on the bottom.  Raymond James

Undulating Plateau

Global oil demand growth accelerating:  IEA

North Dakota has 213 rigs running, tying record, and a few comments on efficiency gains:  Million Dollar Way

Nuclear power by region:  EIA

It’s not that Chesapeake is ‘sticking by growth plans’, but that they must drill their brains out.  CHK has a ginormous long term asset base, matched against large short and intermediate term liabilities, to get the same asset base held by production.  Fuel Fix

Energy and materials under-performance (scroll down).  Bespoke

Time to sell on strength?  Humble Student of the Markets

Reversal

I am not much for forecasts and predictions, but today’s reversal would be powerful if it held.  Energy and material stocks are off less than the market and tck is green.  The S&P 500 looks like a inverse head and shoulders intra-day.  But the gold stocks have had the most remarkable day and look like a low risk entry today.  They opened down 2%, reversed early on huge volume and are currently up 2%.  The MACD divergence and possible engulfing candle (we’ll know by the close) add to the allure of the depressed shares.  Stockcharts

I’ll see what my favorite technician says later today.  ChessNwine

MHR and KOG Results

MHR and KOG released Q1 results and had their conference calls:

Riddle me this:  How does a company with a $700 million market cap raise $600 million?  Answer:  Sell some equity and tap the high yield market to replace all the short term money.  Throw on a large acquisition that needed to be financed, increase the oil drilling budget and now longer run the company overly tight liquidity wise and it all comes together.  Operationally MHR had little detail to offer.

KOG does not give out quarterly guidance due to the difficultly of knowing well hookup timing in a lumpy hyper-growth phase.  Production in Q1 was a little light at 10,578 BOE a day.  March production was 12.500 BOE.  Guidance for the year was changed; the upper end of the range of 21,000 BOE was kept the same, but the lower end was lowered to 17,000 BOE.  Again, well timing is key.  The year end exit rate of 27,000 is expected to be met or exceeded.  Anecdotally, they do have a 4 well pad coming online sometime near the end of Q2.  At this point only half of their natural gas is being gathered and sold (vs CLR at 88%).  Almost free money, even at $2 mcf.  Their learning curve remains steep.  They plan to draw down on their revolver over the course of this year and to go the other way in 2013.  Experience suggests they will find some acreage to buy and drill instead.

Sources:  Magnum Hunter Resources and Kodiak Oil and Gas

Update:  My latest Seeking Alpha essay was published:  Plains Exploration and Continental Resources by the Numbers

Getting Creative…

As we navigate trying to understand the investment world, this blog tries to wade through the sludge to improve our understanding.  I post anonymously.  In the spirit of pioneering financial writers from Larry Livingstone to today’s blogosphere, I changed my pen name.  Hello J.J. Butler.  Eighty years ago (pre-SEC!) a real J.J. Butler wrote the booklet Successful Stock Speculation for his brokerage firm.  Enjoy!

Source:  Gutenberg.org