Portfolio Update

Independent Stock Analysis continues to be in a state of peaceful happiness with it’s portfolio: 100% invested in PHYS; gold as cash. For the first quarter of 2020:

  • PHYS rose from 12.18 to 13.12, a gain of 7.7%.
  • Compare this to the S&P 500, as represented by SPY (and my be in your investment accounts), which had a loss of 22.4%.

Most men ought to be pleased to mimic the performance of the stock market in their investment accounts. It’s the enterprising fellow who picks his own securities to own, for in doing so he is increasing his risk substantially is multiple ways. The decade of the 2010’s saw individual stock pickers get clobbered by the indexing craze: Me and likely you too. Yet the rewards of selecting one’s own stocks can be spectacular.

Your dear editor did not begin the ISA Portfolio expecting to outperform the stock market by 30% in the first quarter. That’s random noise. But he does believe one must expect significant stock market outperformance over time for the endeavor of constructing one’s own portfolio to be worth the risk.

At this time the ISA Portfolio will continue to be invested 100% in gold. The ISA Portfolio is and will always be representative of my investments. All changes to the ISA Portfolio will always be made real time; readers will know as changes occur.

As readers know the first security of interest to be added to the ISA Portfolio is FNV. We love FNV as a permanent portfolio holding. The share price is, however, rich, though deservedly so. It seems likely the COVID-19 crisis will lead to the temporary closure of many mining operations around the world, particularly in the gold complex. I am waiting for these temporary closures to significantly depress the shares of the mining and royalty company’s. Perhaps an excellent opportunity to acquire shares will be presented. Said another way, a favorable PHYS:FNV ratio may be in the offing for us to take advantage. We are watching.

Sidenote: “Hey JJ, with your uber bullishness on gold, why not examine and invest in the gold stocks?” Excellent question. The gold stocks are where most investors who are persuaded to enter the precious metal complex turn. The problem is gold stocks are terrible investments most of the time: They are exposed to ever increasing costs, governmental confiscation, and operating risk (mine walls collapse). Further, the largest problem with economic gold mining is that the deposits are not large enough to be long lived, as opposed to a large copper mine. The gold stocks certainly can move explosively and create fortunes, but ISA‘s value and competitive advantage approach to investing largely excludes them. If an investor feels the need to leverage to the gold price, consider in-the-money call options on GLD.

Next as readers know the second security in which we are interested remains COG. The current economic collapse may slightly delay the bottom for the industry, yet make the recovery ever more significant. The delay, the decline in demand for economic reasons, may surprise the many bulls also aware of our thesis and wash them out. Yet the natural gas production industry still ought to be among the first to recover because of high decline rates to alleviate overproduction. Perhaps in the second or third quarter we will purchase shares of COG.

ISA is also watching the oil industry closely. The collapse in the share prices of the securities was not enough in light of the economic decline we are seeing, for most of the industry is bankrupt. The oil industry will take much longer to recover. But the recovery will be a career maker. Our old favorite is CNQ. But it’s too early for oil.

ISA likes the producers of industrial producers when purchased at distressed valuations. Unless mankind is going to live as paupers, then copper, zinc, steel and the like are needed. We like it that the investment cycle for these metals is measured in decades. Our favorite is TECK. The valuation and low cost long lived production is especially appealing to ISA. The warts depress the price but don’t bother me. TECK is an old favorite. The gloomy ISA macro outlook is the reason TECK is not already in the portfolio.

CF is a nitrogen fertilizer manufacture and distributor with a long term competitive advantage and how ISA plans to invest in the agricultural sector. The recent share price decline made the valuation interesting, however, agriculture prices have been weak.

The shares of these companies – FNV & COG, CF, TECK and CNQ are company’s which are all at the top of my watchlist. Note they are commodity plays. We’ll, yes, commodities relative to paper assets are priced inexpensively. Many other outstanding company’s exist. And in time those ticker symbols will move toward the top of our watch list. But not yet. Stock market valuation remains outrageously high despite of the the recent fall. Never mind the even more gloomy ISA economic outlook brought out by Covid-19.

Covid-19 Recession Will Be Deeper Than the Great Financial Crisis says Mish.

“While consensus bulls might think it’s “different this time” (they’re right, USA had the most Corporate Leverage in human history, pre-virus), I’m thinking those of us who have been accurately bearish should re-consider if we’re Bearish Enough.Keith McCullough. A corporate debt reckoning is coming. 13D Research.

“You may or may not feel there’s still time to increase defensiveness ahead of potentially negative developments. But the most important thing is to be ready to respond to and take advantage of declines.” Oak Tree Capital

“The risks on both sides is not moving quickly enough and overdoing it. If there is too little money made available, the prices of assets used as collateral backing loans will spiral downward. If there is too much, inflation will spiral out of control.” Guggenheim

Why the World Has a Dollar Shortage, Despite Massive Fed Action in a think tank piece Daniel Lacalle.

A primer for gold newbies. Read the whole thing.  Alasdair Macleod

Rick Rule: “So gold and gold stocks will move first.” Got Gold? asks Jesse Felder.

When The Atlantic writes We Need to Start Tossing Money Out of Helicopters: It’s the best option in such extreme circumstances” one must ask how is gold not a cornerstone.

Silver is interesting. Poor mans gold. Why mess with the gold stocks or silver? Just stick with gold? Silver’s industrial component is why it does not hold up like gold in downdrafts, as the demand decline drives the response. Unlike gold, silver is consumed. And it moves late, though dramatically. Remember those mine closures? “The shutdown of silver mines throughout the world is taking place when investors are buying a record amount of physical silver bullion.  This has now become a PERFECT STORM for the silver price going forward.” SRSrocco Report. Add silver to the top of the ISA Portfolio watchlist for purchase.

Global: Once we are out of this mess, the USD could be hammered by Andreas Steno Larsen

“…the pandemic was not the fundamental cause of the recent turmoil. Rather, it laid bare the fragility of today’s financial markets.” Darn straight; this must be understood to invest properly. Jim Grant


The second stock in which we hope to add to the Independent Stock Analysis Portfolio is Cabot Oil & Gas. Cabot (COG) has 100% of it’s production as natural gas and is the lowest cost producer in the lowest cost basin. The combination of management’s prudence and being a low cost producer has Cabot sporting the rare strong balance sheet in the industry; that is, Cabot is not drowning in debt payments, dependent on capital markets to roll over coming due maturity’s while managing the business for such external factors, nor considering selling crown jewel royalty’s to survive as are competitors.

Obviously a potential investor needs a view on the fourteen year bear market in natural gas to consider investing in the industry. Our perspective at ISA is that the United States and the rest of the world became addicted to natural gas over that last decade, that natural gas in an outstanding product, cleaner than oil and coal, abundant, safe and affordable.

At present natural gas is priced below a price where the industry can hold production. For natural gas investors an endearing feature of the market is the high natural decline rate of production: An oversupplied market can be alleviated quickly by underinvestment.

The stretched industry balance sheets and final end to the seemingly never ending increase in associated gas production appear to have reached a resolution while production is finally rolling over. But wait! The depressed industry still needs to reconcile this warm winter, ISA’s bearish macro outlook and now the coronavirus trigger.

The rise in U.S. natural gas production was remarkable enough to crush the global LNG market. Significant slowing non U.S. economy’s have in some foreign nations have ground to a halt with the coronavirus. LNG loads have been rejected. The tankers have begun to be used as floating storage.

ISA expects one more significant down leg in the industry this spring shoulder season into the summer perhaps creating a generational buying opportunity. Purchasing outstanding business’s at excellent value and then holding tight creates massive wealth. That’s the plan, we’ll see if it works. After much time examining the industry and other industry players, Cabot is our horse. Do your own due diligence.

Meanwhile, we are content with the ISA Portfolio being 100% invested in PHYS; Gold as cash.


Franco-Nevada (FNV) is the premium precious metal equity investment. Conservatively financed, low risk royalty operations, upside optionality, with an institutionalized management attitude to be patiently opportunistic. In extraction industries the low cost producer ends up with all the assets.

Some history: In 2007 founder Seymour Schulich wrote the book Get Smarter: Life and Business Lessons. On Amazon using the LOOK INSIDE! feature one can scroll to Appendix II on page 257 to read a history of the first incarnation of the company.

In 2002 the old Franco-Nevada merged with Newmont in a three way merger: “They are selling Franco at a rich 35 times estimated earnings this year before taxes, depreciation and capital expenditures on new mines. They are buying Newmont at only seven and a half times.” Forbes in 2002.

Newmont spun FNV out in 2007.

FNV’s latest Investor Presentation, latest quarterly results and Asset Handbook.

Question 1: If today I had the opportunity to purchase FNV, but was never allowed to buy or sell any shares for the rest of my life, would I make the transaction? Answer: Yes, I’d make FNV a core position.

While Independent Stock Analysis expects to take a long term position in FNV for the ISA Portfolio as a core holding at some point, we will be slightly patient in waiting for an entry point. If we already owned FNV we would hold on tight. FNV is ‘not cheap’ to quote Rick Rule; frankly, the shares are expensive. Our ISA portfolio owns gold via PHYS. Perhaps after a mild price underperformance to gold we’ll take a position. Maybe the CRA review or the Panama mining judicial ruling will provide the uncertainty for a sell off. We are waiting.

Shares in FNV are not to make one rich. Shares in FNV are to help the rich stay rich and get richer.

Finally, below is a 2013 Seeking Alpha article I wrote on FNV:

<<<Franco-Nevada: A Cornerstone Precious Metal Investment

Paper money being debased in a low-interest-rate world has conservative investors searching for yield and preservation of purchasing power. Shares of Franco-Nevada (NYSE:FNV) are a long-term investment with a high degree of safety, robust growth, and the opportunity to benefit from government money printing.

Gold mining shares (NYSEARCA:GDX) are fraught with risk. Mine walls collapse and managements overpromise. Mine development and operating costs continue to escalate ever higher, while governments often seek to nationalize resources or dramatically increase mining taxes. Gold ETFs (NYSEARCA:GLD) have negative carrying costs to store the metal.

Pierre Lassonde and Seymour Schulich co-founded Franco-Nevada Mining Corporation in 1982. They began by participating in a series of exploration play dry holes. In 1985 Franco-Nevada began the royalty business and bought a small gold royalty in Nevada. Soon Barrick Gold purchased the property, increased production and made the Goldstrike gold discovery. Franco-Nevada parlayed this royalty success into an aggressive program to buy more gold royalties. In 2002, Franco-Nevada merged with Newmont Mining (NYSE:NEM) and in December 2007 Newmont spun out Franco-Nevada into an IPO.

Over a 20-year period, the original Franco-Nevada provided shareholders with a stunning 36% annualized rate of return. A $1,000 investment in the 1983 IPO grew into $1.25 million in Newmont shares to begin 2004. At investment conferences, Franco-Nevada management jests about falling only slightly short of that stellar mark over the over the last five years. Repeating the success of the old Franco-Nevada may not be possible. The Goldstrike find was a company maker and had a disproportionately large effect on the very small old Franco-Nevada. However, the old Franco-Nevada operated in an environment of a secular gold bear market while the new Franco-Nevada has the tailwind of the current gold bull market. Today’s Franco-Nevada begins with the head start of a deep portfolio of exploration assets acting as perpetual call options. Today’s tight equity and credit markets are competitive advantages and volatility creates opportunities.

Franco-Nevada management’s attitude considers safety first. In financial conservatism they do not believe in debt; they believe in the need to have cash on hand for when the opportunities to make investments occur. The patience to negotiate new deals from a position of strength allows for strong returns.

Another factor of safety is to be the low cost producer. Franco-Nevada is a royalty and streaming company. Royalties are taken off the top of production from mine operators. Streams are the right to purchase mine production at a low preset price. Franco-Nevada has little exposure to always increasing mine operating costs. In commodity businesses, the low-cost producers dominate the economic returns. Royalty companies are the low-cost industry participant.

Franco-Nevada has limited political exposure with strong title on its asset base. Contracts are written with tenure and the rule of law of Western courts. When the royalties are on private lands, Franco-Nevada writes the royalty into the land title. These royalties rank ahead of debt holders and survive operator bankruptcy. Franco-Nevada never has had a legal dispute because of clean arrangements.

Franco-Nevada has full exposure to the gold bull market. Revenue from Franco-Nevada’s royalties rise and fall with the gold price and the production of the underlining assets. Some royalties increase to higher rates as the price of gold increases. Royalty streams provide operating leverage by allowing the operator to deduct a fixed amount, typically $400 per ounce with small inflationary adjustments, to the revenue due Franco-Nevada. Franco-Nevada exposure to operating costs is very small, with few of their interests being profit-based.

Today’s tight credit and debt markets give Franco-Nevada a strong position in negotiating new royalties. Junior exploration and production companies are in need of regular financing. When one of these many companies would like to explore their property further or expand their production facilities, capital is needed and difficult to obtain. Banks and bond investors demand onerous terms in today’s marketplace. Depressed stock prices for these same companies make equity financing unacceptably dilutive. This dynamic creates opportunity for Franco-Nevada.

Franco-Nevada writes these royalties with an exceptionally long view. Consider a royalty Franco-Nevada wrote in February 2012 with Lake Shore Gold Corp (NYSEMKT:LSG) on its Timmins West Complex. Based on current production, Franco-Nevada could expect this royalty to provide annual revenue approaching 10% of the purchase price, a meager risk-adjusted return. However, Timmins West is undergoing a production expansion which will increase the return. Centrally important to Franco-Nevada’s long-term orientation is the large land position this new royalty covers with promising resource growth potential. Future gold discoveries and associated production accrue to Franco-Nevada’s benefit at no additional cost. This perpetual exploration free call option is the incentive for Franco-Nevada enter the deal.

The perpetual explorations free call options embedded into Franco-Nevada’s portfolio makes the company different and superior to competitors. Silver Wheaton (SLW) simply takes on too much financial risk. Royal Gold (NASDAQ:RGLD) is a mundane financing company. Sandstorm Gold (NYSEMKT:SAND) is a young company venturing into risky Mongolia.

Franco-Nevada has interests in 136 exploration assets and looks forward over multiple decades and resource cycles. When making investments, management is comfortable to get its money back and to make a low initial rate of return in order to have significant exploration upside. This exploration upside is how the company came to have Tasiast and Detour in the pipeline. Franco-Nevada is not a cold investment company merely calculating discount rates. Franco-Nevada pays today for growth years and decades into the future.

Tasiast and Detour as two examples:

  • The Tasiast gold mine royalty is a 2% revenue based royalty and on Franco-Nevada’s books as a $3 million asset. While Franco-Nevada has owned this royalty, the asset has changed owners several times. One previous owner did large amounts of exploration and deep drilling, proving up a world class resource. Current owner Kinross (NYSE:KGC) has aggressively advanced exploration and feasibility work for multibillion-dollar expansion. Tasiat production shall dramatically increase in the years ahead, potentially provided Franco-Nevada with tens of millions of dollars in free cash flow annually. Most exciting is the potential for Tasiast to be a gold district far larger than what Kinross has on its books.
  • Another property to highlight is the 2% royalty on the Detour Gold project. Detour is building Canada’s largest gold mine and expects production with production having begun in 2013. Future plans are to increase production to 650 thousand ounces a year. Detour is similar to Tasiast in size, and the royalty also covers additional ground.

Franco-Nevada management has demonstrated over the last three decades the large share of wealth creation from the resource sector comes from new discoveries. Grassroots exploration, building mines, and operating mines are difficult businesses. Franco-Nevada has all the benefits of new discoveries without the myriad of associated costs. They are explorationists at heart.

Interest in 28 advanced stage assets have the potential to generate revenue within five years. Highlighted already were the two most promising in Tasiast and Detour. The rest as a group have the potential to generate more profit than Tasiast and Detour combined and are detailed in the asset handbook. Mining is a difficult business and some projects will not get permitted, financed or perform as well as projected. The diverse asset base provides Franco-Nevada insulation from being exposed heavily to the inevitable challenges of the operating business. These advanced stage assets provide approximately 50% growth to Franco-Nevada over the next five years. Most importantly, the growth is already purchased and does not require any financing from Franco-Nevada.

Often in the resource industry, operating companies boast of future growth, growth built upon heavy capex spending. A powerful aspect of Franco-Nevada’s business model is the first dollar invested is the last dollar invested. After the investment payback, all the revenue comes in as free cash flow. Continued significant Franco-Nevada growth over the long term requires no further capital spending.

Anticipate Franco-Nevada’s investment universe to broaden. CEO David Harquail at a investment conference last year:

We’ve actually become dominantly 90% plus precious metals and so we’re agnostic. We’re now actually bidding, as you saw with Lumina, on copper royalties and we’re looking at iron ore and other larger copper royalties, potash and coal royalties because we believe the royalty model works in all commodities. The key thing is having that optionality for upside on those properties, and so we now have what we believe is one of the largest investment universes open to us.

The current annual dividend yield is 1.50% and is paid monthly at a rate of $0.06 per share. The new Franco-Nevada initiated the dividend six months after becoming public in May 2008, and has raised the dividend at the annual shareholders meeting every year since. The dividend increases have been by 16.67% in 2009, 7.1% in 2010, 60% in 2011, and twice in 2012 by 25% and 20% in 2012. The board of director’s intent is to annually increase the dividend, keep the dividend at about 20% of free cash flow, and maintain the dividend during cyclical downturns.

Current Chairman Pierre Lassonde led the old Franco-Nevada and current CEO David Harquail was on that management team too. The company operates with 20 employees and has annual G&A overhead of $16 million. The Toronto-based company reports results in U.S. dollars while 60% of the shareholder base resides in the U.S. Currently, Franco-Nevada receives 15% of its revenue from the platinum group metals.

Two potential catalysts to move the stock are possible. First, the precious metals complex has suffered and may rebound. Second, Franco-Nevada last year obtained a large stream on the Cobre Panama project from Inmet Mining, and Inmet is busy fighting off a hostile bid by First Quantum. A resolution should provide clarity. The business and shares of Franco-Nevada have an incredibly bright long-term future. Safety remains a company core value, the exploration upside is substantial while meaningful growth is real without any capital spending requirements. Expect Franco-Nevada to continue to make additional transactions on a regular basis. The possibility of currency debasement and a rising gold price multiplies the upside.>>>

Insightful Commentary

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system.” – Andrew Mellon

Fast forward 90 years: “…with this much debt in the system, global central banks are painfully aware that, from a balance sheet perspective, the only two possibilities to recalibrate debt levels back towards productive underlying output are default or debasement — and central bankers will always do everything in their power to avoid debt deflation. Gold’s unique portfolio utility is that it is possibly the only investment asset that can provide protection in both scenarios.” Peter Grosskopf

Was yesterday’s ISM an unmitigated disaster? Calculated Risk

Valuation and perspective by Jill Mislinski. A deeper dive by John Hussman.

Chairman Powell’s mid cycle adjustment explained by Danielle DiMartino Booth.

Gold’s Outlook for 2020 by Alasdair Macleod.

“Aspects discussed in this report include gold’s monetary history over the past 150 years, the world’s current monetary system, the supply and demand factors of the gold market as well as the structure of the gold market itself, financial market manipulation and market efficiency, cycles analysis as well as the geopolitics around gold. The report examines all of these subjects individually after which these aspects are used to form a reliable and thorough market analysis.” Sam Laakso

Gold is Money

“Money is gold, nothing else.” J.P. Morgan

The Independent Stock Analysis portfolio begins with the dawn of the new decade, 1-1-2020.

The entirety of the portfolio is be invested in gold, using the Sprott Physical Gold Trust, ticker PHYS. ISA will use the closing price of PHYS on December 31, 2019 as the beginning point of our portfolio.

With the outrageous currency debasement occurring, we lack trust in cash in the form of money market or bank deposits. J.P. Morgan: “Gold is money, everything else is credit.”

The popular SPDR Gold Shares, ticker GLD, is a fine trading instrument for now. But when push comes to shove, GLD is meant to track the price of gold rather than be a claim on actual gold. For the speculator, options are GLD are liquid as we will learn in a new column called Trader Nathan.

As time advances like an ever rolling stream, we intend to slowly peal off portions of our PHYS in exchange of shares of our favorite companies. When the price is right. Independent Stock Analysis. We enjoy analyzing stocks. Today’s monetary madness has pushed prices beyond our willingness to purchase shares. That, and we think of our selves as somewhat conservative in our vain attempt to adhere to Warren Buffett’s Rule number 1: Never loose money.

Gold as the Cornerstone

“We are living through the greatest improvement in human living standards in history” at The Spectator. Yet a speed bump is coming…

David Stockman walks us through the outrageous U.S. Federal finances.

“With most US portfolios heavily skewed towards paper assets (i.e. stocks and bonds) and nearly devoid of hard assets (i.e. energy producers/transporters, gold miners, copper producers, and agriculture nutrient companies) the stage is set for a significant paradigm shift over the next decade.” Gavekal.

“The highly probable and downright inevitable unwind of today’s trifecta of financial asset bubbles: stocks, corporate credit, and Treasury bonds may soon morph into a brutal bear market. The end game is unstoppable in our view and approaching fast. The Fed is between a rock and a hard place. It has been printing money like it’s the depth of the Global Financial Crisis while stocks and corporate credit are flying high reflecting a dangerous combination. The panic stimulus at this point in the business cycle is completely understandable, but it is only hastening the unwind of the imbalances the central bank has created and been impossibly trying to maintain.” Crescat Capital. Um, got gold?

“Over my 40 years I’ve done pretty well despite painfully sitting out the most recent decade-long equity ‘roid rage hunkered down with gold (about 25%), laddered 2-year treasuries, and a TIAA fixed-income account paying out guaranteed 3.6% per annum…For me, investing is all about valuations and process…Thousands saw the bubble and ensuing crisis in ‘08–’09, but nobody saw the interventions. The central banks clipped 5–10 years off a standard secular bear market and pulled markets off valuations that never dropped significantly below historical “fair value”. (Read that again: it is true.)…Last year I spilled my guts providing 20 metrics showing equities were >2x over historical fair value.2 It’s only gotten worse, so go read it ‘cause I am not gonna repeat it…How’d I do in 2019? My clinical paranoia has largely kept me very light on equities…My large gold and much smaller silver positions went up 19% and 16%, respectively. Gold equities don’t interest me as levered proxies for the price of gold. I remain unconvinced they know how to generate cash flow. Fixed income returns were nominally positive but surely did not beat the real (uncooked) inflation. I am well aware that bond traders might try to scalp a trade, but low-net-worth investors should buy investments whose stated return is acceptable rather than fixed-income timeshares. That, for example, excludes 10- and 30-year treasuries in my world.” David B Collum

Gold to house, stock and copper ratios by Lyn Alden.

The rare article on silver with meaningful numbers and facts for analysis from Mining.

10 Charts to Watch in 2019 from Callum Thomas as well as some of his best charts of 2019.

Gold will be the cornerstone of the Independent Stock Analysis portfolio at inception.

Favoring the Precious Metal Complex

The bearish Evergreen Gavegal suggests that in 2020 bonds could sell off while stimulus could boost equities in a “re-rating could be surprisingly strong.” Legendary Stanley Druckenmiller gives a pragmatic, insightful and thoughtful interview to Bloomberg in which he explains the reflation case.

Inflation – We Gonna Let ‘Er Run Hot: “Position your portfolios accordingly.” Macro Tourist

Meanwhile, David Rosenberg has many of the same concerns but is not in the reflation camp.

If the reflation trade is on, It’s time to get greedy in the energy sector says Jesse Felder.

The farce of the Trump-China agricultural deal: Chris Martenson.

The latest from Dylan Grice. Commentary on the value-growth divergence from Star Capital.

“…every policy is, on the contrary, designed to force the gold price into an ever upward spiral.” The Bear’s Lair. Gold vs the stock market at the Speculative Investor.

Independent Stock Analysis favors the precious metal complex.

The Order: Sector Rotation

“I think the road-map ahead is a market crash, followed by obscene fiscal stimulus. As always, I’m trying to think a few steps ahead here. I’m making a list of beat-down sectors who benefit from this change in government policy. I want to be ready to buy as soon as they get serious about unleashing the stimulus. You need a crisis that’s severe enough that both political parties can agree on stimulus. We’re not there yet, but we will be. If you thought QE was nutty, wait until you see what drunken sailor mode looks like. Inflation is coming. Be VERY careful if you own assets with duration risk.” Kruppy

Hussman: “…adopted a constructive, unhedged, or leveraged market outlook after every bear market decline in over three decades. I have every expectation that such opportunities will emerge over the completion of this market cycle. The mistake would be to believe in a permanently high plateau.”

This Jeffrey Gundlach is ought to be watched in it’s entirety.

You Should Be Buying Gold Stocks Now says gold stock analyst Jordan Roy-Byrne who has not made his career being perpetually bullish. Miners Are Leading The Way Higher at Sprott. We at Independent Stock Analysis think the precious metals complex is the most appealing sector at the moment. Even the mainstream Financial Times says Gold is looking more and more attractive. The Next Wave of Debt Monetization Will Be a Disaster in which gold is the winner. ISA does not have the extreme view of a goldbug like Alasdair Macleod, but we read his excellent insight anyway: “For these nations, which use dollars, euros, pounds and yen, there is no apparent escape from an eventual fiat money collapse.”

The second sector interesting to ISA is natural gas. The appeal, of course, is the high natural decline rates which alleviate cyclical oversupply. Today’s secular oversupply is long in tooth. Meanwhile, the customer became addicted per RBN: “Lower-48 gas production last week hit a new high of 96.4 Bcf/d, after surpassing 95 Bcf/d not too long ago (in late October). That’s remarkable considering that production was only 52 Bcf/d just 12 years ago.”

“…investors would be wise to watch three areas on the supply side which are already responding to a relatively short period of unsustainably low gas prices. We believe these basins will define the outlook for natural gas over the coming years:

  1. Non-Permian associated gas volumes, particularly from the SCOOP/STACK
  2. Utica rig count and well completions
  3. Haynesville rig count and well completions

As these trends unfold, we will report back. Stay tuned.” Sailing Stone

Looking at oil: Tight Oil and the Willing Suspension of Disbelief:

  • Oil will continue to dominate the world energy stop looking for improbable solutions that allow us to live like energy
  • Unconventional oil has bought the world a fewdecades of high density energy but does not offer ameaningful long-range alternative.
  • Humans have never gone from higher- to a lower-density energy source.
  • While increased use of renewable energy isinevitable and desirable, it is not a satisfactorysubstitute for oil.
  • A transition away from an oil-weighted energysupply will be complex, costly and lengthy despitesustaining current levels of energy use.
  • The best path forward is to stop looking forimprobable solutions that allow us to live like energy is still cheap, and find ways to live better with less

We’re about to move from the Age of Abundance to a Return to Scarcity” according to this veteran energy investor.” This informative discussion will bring nostalgia to the old peak oil crowd. Oil may boom as a ginormous inflationary driver coming out of the next recession. Hedgeye

Leading up to the Independent Stock Analysis portfolio, beginning January 1 2020, has been a time of reflection. Here are 24 contrarian ideas for the 2020s from DB. The overvalued asset market, driven by indexing gone wild, central bank steroids, and outrageous budget deficits may be near an inflection point. Such would be fortuitous beginning to the ISA portfolio.

Opportunity in Overvaluation

The world changes fast. Fifteen years ago the energy future of U.S. was bleak as it appeared the world was going to be short of energy: Stateside conventional natural gas production was in trouble along with peak oil. But markets work: Horizontal drilling combined with hydraulic fracking, while creating a glut devastating to the producers, has been remarkably outstanding for the rest of society. “The United States is about to begin a new era as a net energy exporter…The change will occur in 2020, according to the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2019 (AEO2019), released in January 2019. The country will maintain that status through 2050, AEO2019 says.” SME

At some point we’ll want to revisit the energy sector as investors, and owning the lowest cost producer(s) in the lowest cost basin(s) would provide the best risk adjusted returns. AAPG. However, be aware “Analysts believe that 2018 will go down as the best year for internal combustion vehicle sales ever, predicting a downturn in demand for the mode of propulsion starting in 2019.” The Drive

Meanwhile, it’s the credit bubble which will tell the tale. Everything you could possible want to know and more about the U.S. federal deficit in chart form from The Manhattan Institute.  Alasdair Macleod asks if you got gold?

“…MMT’s central tenets will become increasingly influential among the coming generation of voters and investors.” Popular Delusions

Grant’s: “Mattel creditors are lending to a company already loaded with leverage, as net debt of $3.2 billion stands at 7.7 times consensus 2019 adjusted Ebitda. Operating income of $125 million in the 12 months ended Sept. 30 failed to cover the $190 million in interest expense incurred over that period.” How does this end well?

Generally speaking, asset prices are outrageous: The Corporate Share Count, Valuations, and Trend by Steve Blumenthal.

Today’s narrow market favors growth over value to an extreme, yet, “By steadily rebalancing against the market’s most extravagant bets, RAFI strategies are positioned to recoup accumulated shortfall at the cycle’s turn, delivering meaningful long-term value-add.” Research Affiliates

‘Stock pickers are now feeling like an endangered species. Just one-tenth of the US equity market’s trading volumes now comes from fundamental stock investors, with most of the rest coming from index derivatives and passive funds.’ FT

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Institutional Investor: “Passive investors may unwittingly be taking a huge active bet on the most overvalued sector of the market, according to new research.” At this time Active Managers Just Can’t Win the Loser’s Game by John Authors. Meanwhile, “(F)unds are dumping stock so they can qualify as ESG compliant for 2020. It’s a bloodbath out there.” Kruppy nails the opportunity.

“When I first entered the securities industry in 1979 (yikes!), paper assets were very cheap, and about to get cheaper, while hard assets were quite pricy and poised to get even pricier. It was a great time to be gradually shifting out of oil, gold, silver, copper, farmland, et al, and be moving into stocks and bonds. Of course, almost no one wanted to do so. Today, the exact opposite is true—buying and holding a passive balanced portfolio of US stocks and bonds—heavily tilted toward stocks these days—is assumed to be all an investor needs to do to generate superior returns. Based on the way the economy and politics are trending in the US these days, that’s likely to be just as return-crushing as bailing on stocks and bonds was forty years ago.” Evergreen Gavekal

Evergreen Gavekal has commentary on the MLP’s for investors searching for yield.

“An important ratio of commodity versus equity valuations just reached a fresh 50-year low resembling two prior significant cyclical US stock market peaks in 1972 and 2000.” Crescat Capital

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In spite of the poor stock market returns expected over the next decade, many are the opportunities.

Is it really December? The Independent Stock Analysis portfolio begins 1-1-2020.

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.


“The average person living in the U.S. has never had it so good, by any number of measures” say Scott Grannis.

How the Stealth Deregulation Boom is Driving this Economy. Cabot Wealth

The problem remains the foundation of sand: Fiscal recklessness including pensions and student loans et all.

“The May Flash Markit PMI reading was terrible as it is consistent with just 1.2% GDP growth…The Markit PMI flash reading implies rising risks of a recession occurring as early as this year.” UPFINA

“The investment implications of a protracted trade war are still playing out” and they aren’t good. Scott Minerd

Many are the reasons Why a 60-65% Market Loss Would Be Run-Of-The-Mill.

“”Instead, they decided to spend a fortune buying back stock at much higher prices than where it’s currently trading,” the “Mad Money” host said. “In retrospect, they might as well have set that money on fire.” Bed Bath & Beyond embarked on an aggressive buyback program in recent years, but the stock is down nearly 80% from February 2015.” Indeed, Bed Bath & Beyond spent twice it’s current market cap on buybacks. Look for many more of those stories in the years ahead.

“Bond performance since 1981 is anything but normal. Bonds provided zero inflation-adjusted returns from 1926 to 1981. The performance streak since 1981 has created two unrealistic expectations…” Bonds are no place to hide, via Movement Capital. Further, U.S. Recession Would Spur ‘Massive’ Corporate Bond Losses at Bloomberg.

“Hedging is typically expensive and shouldn’t be treated as a free lunch to capture stock market upside with less downside.” Movement Capital

Policy response outcomes from Ray Dalio.

“In my view, global risk is now at an extreme which clearly means that wealth protection should also be extreme.” says Egon von Greyerz. “The 2007-9 crisis was only a rehearsal for what we are to see next” from MOVES IN GOLD & SILVER WILL BE 1970s ON STILTS

Copper Well Positioned to Lead the Next Resource Cycle

The offshore drilling company’s are in depression, and most of the industry looks to go bankrupt. Bassoe Offshore. I’ve become interested in the industry. I think I’ve chosen my horse. But it’s still too early. Stay tuned.

“In just 20 years, the number of people going through their “S-Curve” period of intense commodity demand growth has jumped from 700 million to over four billion. Never in history have so many people all gone through their “S-Curve Tipping Point” simultaneously. The result is that global demand for raw materials such as oil, natural gas, copper, and proteins will continue to surprise to the upside”. Goehring & Rozencwajg

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This holiday weekend I read, among other things, The Greatest Trade Ever by the WSJ’s Gregory Zuckerman chronicalling John Paulson’s coup.

How does 1/3rd PM exposure, 1/3 the favorite stocks, 1/3 cash sound? Our next post will be around the July 4 holiday. The ISA portfolio begins 1-1-2020.

Roadmap to recession, or You Own Too Much Common Stock

A 460 point decline in the DJIA still gives me sticker shock, for back in the day that was a big move. Yesterday the S&P 500 fell 1.9%. Such ought not be a big deal. When you checked your portfolio…did you get a sick in your stomach feeling? If so, you own way too much common stock.

At Independent Stock Analysis we operate under theory that the financial system was going to implode during the financial crisis and Great Recession from a decade ago. The imbalances were monstrous and a cleansing needed to occur. The crises would have been a painful depression had the government and FED not acted decisively. Had the depression been allowed to run it’s course, the event would now be long in the rear view mirror and with only scars preventing it from being a forgotten depression.

Instead, the world doubled down on the wrong prescription and is moving toward Modern Monetary Madness. In fact, when the next recession occurs, the world may well go down that rabbit hole, which would be more painful than the proverbial depression passed over a decade ago. Mainstream Business Week gives an explanation.

Ten years into an economic expansion ought to see government revenue surplus. Instead the U.S. Posts Largest Ever Monthly Budget (Bloomberg): “The budget deficit as a share of gross domestic product is expected to widen to 5.1 percent this year, up from 3.8 percent a year ago, according to projections from the White House Office of Management and Budget. The shortfall is expected to be 4.9 percent of GDP in 2020, and further narrow every year through 2024, according to the estimates.” There will be no tiny narrowing to the outrageousness, but instead an explosion.

Hearken back to the last crisis: Do you remember wishing you were positioned differently as the disaster unfolded? That the available opportunities were spectacular…

…the idea is the same, though the playbook this time is different. A decade ago the question was ‘shall economic deflation or inflation occur?’ Today’s playbook is to be in a combination of cash and gold, and in the years ahead the first the cash converting into shares of your favorite company’s at distressed prices, then the gold. A kind of dollar cost averaging. Over the medium term, this time we know it’ll be inflation as money is printed 10 trillion at a time.

The timing has everything to do with recession: “Recession fears have increased but first quarter growth weakness could be short-lived, as has often been the case with first quarters. We don’t see a recession in the near term, but believe trade policy remains a key factor in the span between now and the next recession.” Schwab

The Roadmap to recession makes a remarkably clear case. Nordea

In the chatter yesterday: An Old Recession Boogeyman—the Inverted Yield Curve—Returns, and It’s Spooking Some Investors. Fortune

Meanwhile, The Retirement Crisis Is Worse Than You Think.

“Global equity markets peaked in January 2018 while US markets peaked in September 2018…We are confident that was only the beginning of a downturn in asset prices from record global leverage and central-bank-driven asset bubbles for this cycle. US asset bubbles only just began to burst at the end of last year as one can see in the chart below.” Crescat CapitalA

A Different Way to Look At Market Cycles by Lance Roberts.

Valuation Determines Return says John Mauldin and here is part 2.

To desperately seek income, as Jeff Saut suggests, will end badly. This recommended strategy is the equivalent to writing naked puts. At the wrong time. Nevermind that in a bull market the covered call strategy sees the investors best stocks called away.

In Ground Rules of Existence John Hussman shares his compelling playbook.

“Fortunately, we believe there are things worth owning. First, we are excited about T-bills at this stage of the cycle. In addition to protecting capital, T-bills are very liquid, provide a competitive yield relative to equities, and allow investors to act decisively when future opportunities return. Second, as it relates to potential equity purchases, we are very attracted to businesses with strong balance sheets” Palm Valley. So, cash and a very small investment universe; we will be talking about this later in the year.

How to position? Cash. And Gold – Preparing for the next move by Alasdair Macleod.

Buy Gold, Sell Stocks Is the ‘Trade of Century’

There is a lot here to ponder. As I have only begun to get back in the saddle, a question to consider: How would you like to be positioned when outstanding opportunity arrives? I am bursting with things to say in the months ahead You know where I stand: You own way too much common stock. It will likely be late April before I post again. Subscribe by email to Independent Stock Analysis to avoid missing the next post.

Triumphant Return

No one has been more out of step with asset markets this decade than me.

As Warren Buffett recently said, “Prices are sky-high for businesses possessing decent long-term prospects.” (The Felder Report). Unfortunately that’s not a good environment for this fellow.

Been wrong for long, yet I’m still in the “There is no bull market without central bank intervention or jawboning” camp. (Northman Trader).

Absent recession, oil looks good. (Goehring & Rozencwajg) This decade U.S. oil & gas production boomed yet the sector has underperformed to near generational lows relative to the whole stock market. And the sector may still offer precious little value. We’ll discuss this in the future.

Copper looks better. (Goehring & Rozencwajg). We’ll discuss this in the future.

The move to 5G in wireless is a big deal. (Gavekal).

The next decade, the 2020’s, I expect to be filled with harrowing opportunity born in upheaval. (Lance Roberts). I’m watching carefully. (Northman Trader).

When the economy rolls over, the stock market is in huge trouble. The credit imbalances today compared to a decade ago are different, and worse than the Great Recession of a decade ago. Thus the positioning of oneself ought to be different.

Already profit margins are under pressure (Blackrock). Long time bear John Hussman eloquently writes like the market peak is definitely in the rear view mirror (Hussman Funds). Watch out below when the margin debt unwinds (Advisor Perspectives) simultaneous to the calm premium ending (Blackrock). The next recession will have to wring out monster excesses (Gundlach).

Getting this right is the opportunity. In today’s world I’m not sure the difference between protecting yourself and seizing the opportunity are a whole lot different. We’ll discuss this much in the future.

It’s been 3 and a half years since my last blog post. I’m back. Posting will be sporadic through April; by May I hope to be rolling on a regular basis.

Cash is King

I have been out of step with the market for several years.  The valuations and underlying fundamentals are pretty much outrageous.  Perhaps the proverbial bell rang this week.

Market internals have been horrible for quite some time, that’s why most market participates have been left behind despite the rising stock market of the last few years. The strength in the large momentum names is gone, there is no where left to hide.  The narrow market has reached exhaustion.  Already 74% of NYSE stocks are below their 200 DMA, a downtrend started early 2013.  Yesterday (8-21-2015) the NYSE had zero new highs and 627 new lows. The VIX has had the largest one week spike in history, from 12.83 to fear 28.03 in 5 days.  Yet YTD the S&P 500 index is down just 4.3% and the Nasdaq Comp is down only 0.63%.  The Biotech’s are still 10% higher in 2015 and 28.3% year over year; manias end badly for investors.  Initial public offerings as a froth indicator peaked last fall.  The Nasdaq 2000 and 2015 are a double top if I’ve ever seen one; perhaps she’ll punch through permanently in a decade.

This market cycle was dependent upon QE:Maybe it's spurious, but the market has shown an inability to push meaningfully higher in the absence of QE. $SPX

Don Coxe: Bond Bull Coming to an End and Bonds Now a Center of Risk is an excellent listen for those who haven’t run across Coxe’s commentary in a while.  The junk bond market has cracked with credit spreads at multi-year highs, something which began, ironically, with the energy issues.

When a stock market break occurs, the record margin debt will be a downside catalyst.  The familiar margin debt charts show margin debt 40% above previous peaks.  Further, margin debt as a percent of market value is high, with free cash being particularly frightening.  Just two days ago the DJIA and Nasdaq entered corrections (first since 2011!), and these newfound speculators will become forced sellers.

Commodity Weakness Persists.

In light of this decades financial advisor meme to charge 2% of assets for putting investors in index funds, this chart is particularly scary:Chart of the Day

The DJIA:Gold chart looks to finally reassert itself southward: Chart of the Day

Cash ought be the largest position of any investor.  Period.

Gold will be the asset of choice for the next recession (which is not imminent).  Central bank bond buying and ginormous fiscal stimulus (budget deficits) will drive the mania.  In the meantime, gold bulls will have to be content with a currency war.

Gold ought to be the second largest position of any investor.  Another bell was rung:  The 491 million ounces traded in two weeks is highest volume in history.

A little schedenfruede:  In mocking gold bugs he called the bottom!  Joe is right about the inguinity of humans, it’s the folly of the political class he missed:
That was fast!  Precious metals have already reached short term rebound targetsAdam Hamiliton provides a starting point for speculators in junior gold equities.  Student loans will be the next big political fight.
Little else is investable. Many speculative situations, however, do exist:
Silver is extremely interesting long term as a play on the remarkable booming solar build out worldwide.  Maybe the next silver bull market has already started.
Twice in this young century investors have made (and lost) fortunes in the energy complex.  Consider conservative Baytex Energy (BTE).  This heavy oil producer with low production costs has collapsed again.  Two days ago the income security cut the dividend to zero. In a stable $100 oil price environment Baytex provided shareholders with an annual C$2.88 dividend.  Yes, Virginia, that implies a return to robust oil prices means patient buyers of the stock could realistically see a 50% dividend yield on today’s shares.  It’s just not a bet I can recommend at this time.  Shares may be more likely to get cut in half before any sustained move higher and are a function of an unlikely oil price rebound.
House prices should remain stable (and homebuilding will be a tailwind for economic growth in the years ahead).  Higher interest rates are a financial pricing negative.  However, fundamental household formation supply-demand is strong.


The world outside of the United States is experiencing anemic economic growth.  But stateside conditions are better and job growth is not a bad as thought.  The difficult environment for asset prices can exist with decent economic growth.  The dynamic seems strange at first, but is the norm  in a rising interest rate environment.

“Overall, the U.S. “startup rate”—new firms as a portion of all firms—fell by nearly half between 1978 and 2011…” (WSJ).  Might be the right direction to head…


“Warren Buffett’s favorite valuation model is screaming that stocks are overvalued.”  (Ed Yardeni ) “The most important observation an investor can make is that foreign equities (EU and EM) have not made any progress since October 2009, while majority of the gains in the All Country World Index (NYSE: ACWI) has come from the US equities outperformance.”  Short Side of Long

In the extremely low interest rate environment many investors chased yield, and have begun to learn “investing for high income can sometimes be extremely risky…”  Richard Bernstein.

In short, Asset prices are very rich.  Stocks and bonds.  This isn’t the year 2000 either, when Russell 2000 stocks were in the bargain bin.  Precious little is investable.

The economy continues to plod along:  Employment, Housing & Autos Point To Continually Improving Economy at Value Plays.  Jobless claims are at a 40 year low (WSJ) though inflation adjusted incomes stinks (Doug Short).  Pent-up demand for housing is real and underappreciated (WSJ).

The commody complex disaster has continued, and even accelerated this summer.  “The Bloomberg Commodity index fell 3.3 per cent on the week, to the lowest level since 2009.”  Financial Times

Fortunately in the real world, “The long run economic benefits of structurally lower energy prices and energy security are slowly feeding through to the wider economy.”  In the Long Run

Salman Partners economist calls bottom in copper (Mining).  Many a commodity bull has said the same the last four years and been wrong all the way down.  Base metals are a tough business, and interetingly:  “But since 2005, the world’s copper industry has consistently produced 7% less copper than planned.”  TCK sports a $7 handle.

In commodities meltdown, natural gas is a bright spot at the Finacial Post.  The delinking arguement is at least interesting.

The entilement program picture with color:  Social Security, Medicare Outlook: Better but Still Bleak at the WSJ.

Commentary regarding the credit fiasco leading to the financial crisis often led to ‘gold to the moon’ as the investment conclution.  Perhaps the goldbugs were just an economic cycle early.  Household balance sheets have not improved.  The governement’s balance sheet worsened significantly.  Business balance sheets were strong going into the financial crisis, but the siren song of cheap money has turned out to be too much temptation for corperations as Companies May Be Running Out of Time to Borrow From Bond Investors to Pay Shareholders (Bloomberg).  With a Kansas City Fed research paper finding changes in the economy and financial markets are blunting the effects of Fed policy, the money printing to arrive with the next recession will be larger than can be imagined (WSJ).  We just don’t think it’ll be anytime soon.

“It could take many months — or even years — for the precious metals to form a bottom” says Peter Brandt.

Chart of the Day

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.