Over the last couple of weeks we have witnessed a series of conflicting reports from all over the media complex as to why equity markets are under pressure. Predictably, as soon as the markets recover a bit these same pundits come up with all sorts of reasons to cheer.  Needless to say these hysterical reports, bullish or bearish, are entirely worthless.  CNBC, with its ridiculous “fat finger” report, has proved its irrelevance as a financial news source. In fact, this embarrassing story (released with less than an 1/2 hour to go in the trading session) stinks of manipulation and seems to implicate CNBC as a pawn in a propaganda ring.

But I digress, my purpose today is to offer a little clarity to the situation. So without any further ado, let’s map the market developments and see what, if any, conclusions may be reached.

Support:

Government support is the primary reason equity markets have traded higher over the last year. That support has taken the form of, to name a few, ‘cash for clunkers’, foreclosure prevention, home buyer credits and a myriad of Fed liquidity programs.

The result of this support has been the release of government supplied economic numbers that appear promising and suggest GDP expansion (Did you pick up the sarcasm in that sentence? Sorry!).

To sum up, large quantities of Fed-provided quantitative easing and rosy economic numbers are the fuel driving markets higher.

Now Europe and the European Central Bank (ECB) have joined the fray. Supposedly close to $1trillion of liquidity will be thrown into the gaping mouth of the debt monster.

Pressure:

Abysmal – as in the size of an abyss – amounts of world debt are swallowing up prodigious amounts of liquidity.

China - China’s equity markets have for some time been a leading indicator for US markets and risk assets in general.  Recently, the Shanghai Index reached into bear market territory with a 20% decline from the highs of the year.  This is not a good omen.  Moreover, China’s economic expansion could be labeled the lynchpin of world economic growth and the recent measures by China’s central bank to tighten liquidity is, to say the least, problematic for a world drowning in debt. The recent increase in consumer prices of 2.8% in China only exacerbate the problem as it would appear inflation is accelerating.

GS – Common knowledge suggests the markets swooned because of violence in Greece. This is absolutely not the case.  We can draw a direct line to the beginning of this most recent market drop and the day Goldman Sachs faced the Senate tribunal.  Government crucifying of the financial space is heating up and will only get worse as senators fight for re election this November.  GS is the undisputed heavyweight champ of the financial space and if they fall the financials as a whole will experience painful P.E. multiple contraction.  In the last few weeks GS’s credit curve has inverted. Credit protection on GS cost more for 1 year than 5 years. If this trend persists a debt downgrade for GS could be in the offing which would in turn send financial shares tumbling.

This Just In: As I write this the “Senate Finance Committee votes on amendment to create a new ratings agency; yay’s have it 64-35, amendment agreed to…” Can you hear that? That’s the sound of a GS debt downgrade being written. The congressionally approved ratings body will likely remove the conflict of interest inherent in the current private rating agencies business model. Hence, we would not be surprised to see Moody/Fitch/S&P make a preemptive downgrade.

Financial Group (FINs) – FINs have always been a leading indicator for overall market direction. If GS drags the FINs down the rest of the market will suffer. Make no mistake, as the volume of negative news and behavior towards the FINs grows louder the equity markets will suffer.

Andrew Cuomo Investigating Whether Banks Duped Rating Agencies – Huffington Post

Senators Seek Proprietary Trading Ban for Big Banks – WSJ

Greece – I would be remiss if I didn’t include this component as part of the pressure on the markets. The proposed Trillion $ bailout seems dubious at best.  Lest we forget weeks were required to raise just $30 billion and now somehow the finance ministers got together over the weekend and $700 billion was pledged?! Now these ministers must go back to their respective countries and try to get funding. This funding request should be a tough sell. After all, the German people recently voted the ruling party out of one house after the first 40 bil Euro bailout.  In fact, rumor has it a reintroduction of the German Mark may be in the offing. How about England? They have yet to participate in any bailout and now elections have created a coalition (read: do nothing) government.

The simple fact remains that all this talk of bailouts is actually missing the real point: Greece has a solvency issue not a liquidity issue.

Conclusions/Questions:

Q: Will liquidity expansion trump debt implosion?

Q: Will excess liquidity continue to find its way into the equity markets?

Q: Will Chinese tightening and supposed European austerity plans actually drain marginal liquidity?

C: As my mom would say, “we must live the questions and the answers will reveal themselves.” So, remain vigilant, defend principal and let the markets be your guide. Don’t force your will on the market and avoid complacency at all costs.

C: No matter which is the victor, the Tidal Wave of Liquidity or the Trench of Debt, one asset class will not only survive but flourish.  The precious metals, Gold and Silver, are now advancing to new highs against all fiat currencies. I have written repeatedly over the last few years that the true inflection point for Gold and Silver will arrive when their values increase even in the face of a rising US$.  The time is now.  Please hold on to the Bar!

Tags: China, Credit, ECB, euro, Fed, financial, gold, Goldman Sachs, Greece, GS, Inflation, precious metals, silver, US$

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The equity markets move higher responding to the results of the healthcare vote Sunday? If you can’t see through that illogical logic then no amount of reading this blog will help you. Please stop reading this post, don’t pass go and choose a card from the community chest as that seems to be the order of the day.

For the rest of you, I will say that we are still sifting through the data trying to determine the true fallout from said vote. So far, we are fairly certain the biggest beneficiary will be the Central Bank of North Dakota. I will get back to you with more detail when the situation warrants. Until then enjoy this piece from Jim Cramer. Kindly hold your collective groan, we don’t like Jim either but a broken clock…. 

“Passage Of The Healthcare Bill Means The Double-Dip Is Coming” – Market Insight From Permabull Jim Cramer Who Just Turned Bearish

Obamacare Will Topple the Rickety Market By Jim Cramer RealMoney

Either the market doesn’t care that the health care bill will pass –  and it will — or it doesn’t think that the proposal will cost that much — something I think is nuts. Which brings us to a very tenuous crossroad: We have to wonder if this is one of those occasions, like in 2008, where the market doesn’t see the coming catastrophe. Or perhaps the market sees any resolution as positive….

READ MORE…

Meanwhile, I suspect the real story from this weekend that will affect markets going forward centers on U.S.- Sino relations. The U.S. equity markets correlated closely with their Chinese counterparts from March ‘09 to Dec. ‘09. However, 2010  ushered in a rather disturbing divergence that has only accelerated in the last four weeks. The question remains whether or not the weakness of the Chinese markets will weigh on our equity markets, but I suspect the following stories will not be a help….

China’s commerce minister: U.S. has the most to lose in a trade war – Washington Post

Washington Post reports that China’s commerce minister warned the United States on Sunday that if it launches a “trade war” against China by levying punitive tariffs on Chinese imports, the United States will suffer the most. Chen Deming also said the U.S. government’s “obsession” with China’s exchange rate could not be seriously addressed until it stopped blocking the export of high-tech products, such as supercomputers and satellites, to China. “If some congressmen insist on labeling China as a currency manipulator and slap punitive tariffs on Chinese products, then the [Chinese] government will find it impossible not to react,” Chen said in an interview with The Washington Post. “If the United States uses the exchange rate to start a new trade war, China will be hurt. But the American people and U.S. companies will be hurt even more.”

Stunner: China Set To Announce Record Trade DEFICIT In March

Say goodbye to China’s “export economy” paradigm. In a stunning development for trade hawks, and pretty much anyone who follows the biggest liquidity bubble in history, China Daily has announced China is about to announce a record trade deficit (yes, not surplus, deficit) for March. This makes the whole CNY undervaluation debate pretty much moot, as even China now moves into the ranks of net importers….

READ MORE…

Tags: China, equity markets, health-care, obama

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The following story represents perhaps the largest obstacle facing equity market integrity today.  The previous statement is not hyperbole. The collapse of equity prices in 2008 was presaged by a python-like constriction of credit. If the private sector cannot access credit then business grinds to a halt and as we saw in 2008 economic cataclysm ensues… 

Credit markets flash hottest warning signal since crisis

European credit markets are flashing the most serious warnings signs in a year as the yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months.

The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. “This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit’s credit analyst.

The rating agency Moody’s said market ructions have led to a “material” rise in borrowing costs over the last month, prompting the cancellation of debt issues by the Dutch energy group New World Resources, Italy’s Snai betting group, and the UK’s Travelport. Sixteen companies wordwide have pulled debt issues worth a $7.3bn (£4.66bn) since mid-January, including Canada’s Bombardier.

Read More…

…Will the Sovereign debt issues of Europe migrate across the pond?  The following story suggests the answer may be yes. The lack of foreign demand for US debt will have the effect of increasing rates. However, since an increase in rates would be the death knell of our supposed economic recovery we would expect the Fed to attempt to fill any gap foreigners create. These actions would be, of course, US$ bearish. So while the talk of an end to Q.E. intensifies reality of the situation suggests otherwise….  

Foreign demand falls for Treasuries – Financial Times 

Financial Times reports foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday. China sold $34.2 bln in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8 bln. China overtook Japan as the largest holder in September 2008. The shift in demand comes as countries retreat from the “flight to safety” strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest. For China, the shedding of US debt marks a reversal that it signalled last year when it said it would begin to reduce some of its holdings.

“Credit is a system whereby a person
who cannot pay gets another person
who cannot pay to guarantee that he can pay …”
Charles Dickens (1812-1870)

Tags: China, Credit, credit markets, equity markets, Q.E., sovereign debt, US Treasury, US$

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That’s it! I’ve had it! Enough!

Let’s dispense with the absurd, ludicrous, vacuous debate about “imminent” Fed tightening.  The financial airwaves and print are full of this idiotic expectation that the Fed will reduce liquidity soon.  Allow me to be clear: THE FED WILL NOT REDUCE LIQUIDITY AT THIS TIME.

The Fed cannot reduce liquidity because the economic environment is tenuous at best and tragic at worst.  If you don’t want to take my word for this assessment, reading the FOMC minutes from December would be a good start to your education.  You will note that the private session comments from the Fed do not correlate with the public Fed statements made during the same period.  Perhaps this misdirection by the Fed is the cause of all the financial media drivel about possible Fed tightening. Whatever the case, I’ve listed four stories below that should, along with the FOMC’s own emissions,  put to rest the useless notion of Fed tightening.

Stock Market Investing: Expect Q4 earnings, released over the next few weeks, to be lackluster (Alcoa’s announcement today is the first example of disappointment). Subdued EPS results along with continued employment, consumer credit and real estate woes will succeed in limiting the Fed’s ability to change policy. This sad realization will send the US$ lower, commodity prices higher and perhaps extend the equity market rally for a bit longer.

Maintain a close watch on the Treasury market. The recent selloff in bonds/increase in rates has been problematic as mortgage rates have climbed. It would be in the best interest of government for a little volatility and weakness to hit the equity markets and drive the fear trade into treasuries effectively bringing down rates.

Miller Tabak on Payroll Figures:

Beyond Friday’s lackluster headline payroll figures, the “real” unemployment rate (or U6) rose to 17.3% and the average hourly work week remained near record lows at 33.2. In addition, the average duration of unemployment rose to 29.1 weeks as the ranks of the long-term (or “permanently”) unemployed continue to swell. Furthermore, the household survey showed a decline of 589,000 employed persons to the lowest level since 2003, according to Miller Tabak.

In sum, fewer people are working, more Americans are dropping out of the labor pool and those who are working are working fewer hours: Average hourly earnings up just 2.2% vs. a year ago in December, lowest rate since 2004 and vs. an average gain of 3.3% over the prior decade, according to Miller Tabak.

“Net-net, we are not in your typical WWII recovery and major headwinds still remain,” writes Miller Tabak equity strategist Peter Boockvar.

Consumer Credit in U.S. Drops Record $17.5 Billion

By Vincent Del Giudice

Jan. 8 (Bloomberg) — Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.

A labor market that’s shed 7.2 million jobs since the recession started in December 2007 is restraining consumer spending that accounts for about 70 percent of the economy. Fed policy makers have said tighter bank lending standards and reductions in credit lines are hampering the recovery.

“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.” READ MORE…

America slides deeper into depression as Wall Street revels: December was the worst month for US unemployment since the Great Recession began. By Ambrose Evans-Pritchard

…The Fed’s own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc….

… This has not stopped an army of commentators is trying to bounce the Fed into early rate rises. They accuse Ben Bernanke of repeating the error of 2004 when the Fed waited too long. Sometimes you just want to scream. In 2004 there was no housing collapse, unemployment was 5.5pc, banks were in rude good health, and the Fed Multiplier was 1.73. READ MORE…

Delinquency rate rises for mortgages – WSJ

WSJ reports more than 6% of commercial-mortgage borrowers in the U.S. have fallen behind in their payments, a sign of potential troubles ahead as nearly $40 billion of commercial-mortgage-backed bonds come due this year. The percentage of loans 30 days or more delinquent rose to 6.07% in December from 5.65% a month earlier, according to data provider Trepp. That is the highest delinquency rate since the advent of commercial-mortgage-backed securities.

By year end, delinquency rates on loans for hotels, shopping malls and other commercial properties could rise to between 9% and 14%, according to Jefferies analysts, as high unemployment levels and a depressed housing market inhibit consumer spending. As retailers, hoteliers, restaurateurs and other businesses find it difficult to keep up with their rent payments or to meet rent increases written into their leases, their landlords will find it just as hard to keep up with their mortgages. “As cash flow declines materialize … loans that are current will face pressure,” said Aaron Bryson, an analyst with Barclays Capital.

Follow up on our China post…

China overtakes US as world’s largest auto market – AFP

AFP reports China’s auto sales surged past those in the United States in 2009 to make the Asian nation the world’s biggest car market, industry data showed, but analysts warned sales would slow this year. The China Association of Automobile Manufacturers said more than 13.64 million units were sold last year, marking an increase of 46.15% from the 9.4 million units sold in 2008, Xinhua news agency reported. Auto output for 2009 increased 48.3% to 13.79 million units, Xinhua said. Calls to CAAM to confirm the figures went unanswered… Analysts welcomed the news, but warned that China car sales could hit the brakes this year. “We are still optimistic about the outlook for this year but it will be quite difficult to achieve the growth rates of 2009,” John Zeng, a Shanghai-based analyst at IHS Global Insight, told AFP. “This year will see a high single-digits growth rate of nine to 10 percent.”

Rosenthal Capital Management runs the Fortune’s Favorite Family of Funds, including Fortune’s Favor I, Fortune’s Favor Precious Metals and Fortune’s Favor Offshore. For more information visit www.rosenthalcapital.com

Tags: ben bernanke, China, consumer credit, earnings, employment, Fed, stock market investing, unemployment, US$

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Investment strategy: Many factors will affect our investment strategy in 2010 not the least of which will be the continued development of the Chinese dragon. The transformation of China into an economic powerhouse will lead to many dynamic investment opportunities for those who can separate the proverbial wheat from the shaft.

I can think of no better international combine driver than our own research guru, Gary Rosenthal. When he simply touches a shaft of wheat a loaf of bread materializes. Am I bias because he is my father as well as a partner at RCM? Maybe, but proof of his personal success can be found under the ‘Charts & Graphs’ page of our website www.rosenthalcapital.com. Review ‘Gary’s Rosenthal’s rollover IRA’ section and judge for yourself whether my sentiments are justified or exaggerated.

Welcome to Our Research Room:

Bret: Gary, China has offered fertile soil from which to reap investment returns for some years now. Why do you feel 2010 may offer continued opportunity?

Gary: On Friday Jan. 1st 2010 a China and Asean free trade deal began. This is a major event on par with China being allowed into the World Trade Organization in Dec. 2001. I believe this Asean free trade deal among nearly 1.9bn people will further accelerate the growth in Asia. Furthermore, China has established initial agreements to settle trade in local Asian currencies, not the US$. The stage is set for Asia to roar away from the U.S. and to establish the Yuan (Rinmembi) as a hard currency.

Bret: Forgive this question for being the softball it is and riddle me this: What do you believe is in store for the US$ this year and how would you structure a portfolio to benefit.

Gary: Softball? More like a pumpkin or watermelon! Take my previous comments, add Quantitative Easing (unlimited Dollar printing) to declining Dollar demand in Asia and you have the blueprint for a dramatically lower Dollar over time. An appropriate long term investment strategy: Precious metals, industrial metals, energy, agriculture and well researched high growth Chinese equity ideas.

Stories reported since Jan. 1 2010 supporting the Chinese theme:

Asian consumers most upbeat, American sentiment dips – Reuters.com

Reuters.com reports consumer confidence is strongest in emerging Asia, Brazil and Australia, but weakened slightly in the United States in the fourth quarter as Americans worried about job security, a survey showed. Consumer sentiment was highest in Indonesia, followed by India and Brazil, and was weakest in Japan and South Korea, according to the survey conducted by Nielsen Company a month ago. Globally, the Nielsen Global Consumer Confidence Index averaged a reading of 87 points in the fourth quarter, little changed from the third quarter but 5 points higher than the second quarter. The U.S. reading dipped to 82 in the fourth quarter from 84 three months earlier, reflecting concern about rising unemployment and ranking U.S. confidence at 18th among the 29 markets surveyed worldwide. 

China raises key interbank rate – WSJ

The Wall Street Journal reports China’s central bank unexpectedly raised a key interbank market interest rate Thursday for the first time in nearly five months, signaling a change in its policy focus toward pre-empting inflation risks in the new year. The tightening move, in the form of a higher yield in its weekly bill sale, came less than a day after the People’s Bank of China hinted its priorities had shifted toward managing inflation expectations and away from single-mindedly supporting economic growth. It also shows the PBOC still prefers using liquidity management tools, rather than policy interest rates, to guide market funding costs gradually higher before inflation becomes a real threat, analysts said. In its weekly open-market operation, the central bank sold 60 bln yuan ($8.8 bln) worth of three-month bills at 1.3684% Thursday, after keeping the yield unchanged at 1.3280% since Aug. 13. The PBOC drained a net 137 bln yuan from the money market this week, its biggest weekly fund withdrawal in nearly three months. The central bank has been draining liquidity for 13 consecutive weeks.

 Jan. 6 (Bloomberg) — China overtook Germany as the world’s top exporter last year, data compiled by Global Trade Information Services Inc. show. 

China shipped products worth $957.7 billion in the first 10 months of 2009, while Germany sold goods worth $917.7 billion to customers abroad, according to an Internet database operated by Columbia, South Carolina-based GTI. Exports from China exceeded German shipments every month since April last year, data show.

China has already slipped past Germany to become the world’s third-largest economy and is forecast to overtake Japan this year, assuming the No. 2 spot behind the U.S. Exports have driven a 15-fold increase in China’s economy to more than $3.8 trillion since the nation opened its doors to foreign trade and investment in 1978. READ MORE…

China approves stock futures, margin trading – AP  

AP reports Chinese regulators have approved the launch of stock futures and a trial run of margin trading, a state news agency said, in a move that could help boost stock prices and increase the role of China’s securities markets in financing economic development. It will take about three months to complete preparations for stock futures, the China News Service said Friday. It said the trial of margin trading – buying stocks with cash borrowed from a broker – might be followed by full-scale use but gave no indication when that might happen. The decision was long-awaited by investors. Rumors that the innovations might be introduced this week helped to push up stock prices. They fell back when the changes failed to materialize.

Tags: China, investment strategy, precious metals, Quantitative Easing, US$, yuan

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Berkshire Hathaway’s recent acquisition of rail operator Burlington Northern Santa Fe Corp has generated a tremendous amount of dialogue within the investment community.  For one, the deal involves Warren Buffet, Berkshire’s iconic CEO and legendary value investor.  The 79 year-old sage, whose succession plan remains one of the most tightly bound secrets in the industry, invited the rail operator to join the ranks of such names as GEICO, Dairy Queen, Fruit of the Loom, and Brown Shoe Company which currently shine atop Berkshire Hathaway’s Omaha, Nebraska-based mantle.

In addition to Buffett’s obvious name recognition, the deal stands out due to its sheer enormity.  Berkshire Hathaway agreed to fork over all of $26 billion to acquire the 77% stake in BNSF it doesn’t already own.
That would value Berkshire’s total ownership stake at $34 billlion (not to mention the $10 billion in
BNSF debt payments the conglomerate now assumes).

In return, Berkshire gains control of the nation’s second largest freight railroad network.  In fact, BNSF is also the country’s most prolific mover of intermodal freight traffic, a practice characterized by moving freight between ship, truck, and rail within the same container.  Not only does this insure that a container’s contents remain considerably secure, but it also presents a much more cost-effective means of moving freight across multiple modes of transportation.

In the end, the deal’s cost was by no means cheap.  Buffett & Co. agreed to pay $100 per share for the operator, more than a 30% premium over the firm’s share price on Monday, November 3, when the deal was first announced.  With shares trading at 18.2X estimated 2010 earnings, the deal does not constitute the typical Buffet- esque value play.  In fact, the mere notion of ponying up a premium for any company is considered a rarity at Berkshire Hathaway, a firm who owes much of its previous success to purchasing companies at bargain-basement prices.  Buffett has even willingly admitted as much, commenting on the deal, “You don’t get bargains on things like that. It’s not cheap.”

Although the investment appears puzzling from a valuation standpoint, a number of issues stand out as potential motivations for the deal.  First, there is the concern over the future of the US dollar.  As many are now concluding, the dollar’s recent descent presents a legitimate, growing concern to investors and businesses,
alike.  In part, the Federal Reserve’s insistence upon keeping interest rates low is forcing investors to flee low-yielding bank deposits and short term investments, dumping dollars and chasing investment returns which are more likely to keep pace with inflation.  One way to hedge against the dollar’s demise is to invest in real assets, whether that be precious metals, commodities, real estate, or other businesses.  With that said, what better a place to make a long-term investment than in  one of America’s largest rail operators?  BNSF holds billions of dollars’ worth of real estate, offering the potential for long term value stability.  Meanwhile, by paying out roughly a billion dollars per year in dividends, it also provides Berkshire with a steady cash flow, joining the ranks of other cash flow-rich businesses such as insurers, newspapers, and utilities which have funded Berkshire Hathaway’s prolific growth throughout the years.

Despite the relatively quick execution of the deal, Berkshire Hathaway’s decision did not arise without precedent.  In recent years, Buffett’s firm had shown a propensity for rail operators, accumulating positions in Union Pacific and Norfolk Southern.  When BNSF CEO Matt Rose recently expressed a willingness to negotiate with Buffett, Berkshire pounced at the opportunity and made an offer.  However, even after completing the combined cash/stock purchase, Berkshire still holds roughly $20 billion in cash.  Buffett had plenty of motivation to put his cash to work. Hence, when the opportunity arose, he tossed his chips into the ring.

Stretching beyond concerns about the dollar,  the dealmaker for this transaction is, without a doubt, coal.  Coal, that dirty, filthy fossil fuel has increasingly become the target of global warming advocates and legislators.  However, by accounting for nearly one half of all of the electric generation in the US today, its presence is solidly entrenched in this country’s energy future.  Fortunate for Berkshire Hathaway, one half of all the tonnage BNSF’s trains have transported thus far this year is-you guessed it-coal.  In all, the total yearly tonnage of coal BNSF moves is enough to power one in every ten US homes.

According to the Energy Information Administration, a statistics office within the US Government, the US’s current recoverable coal reserves should meet a growing US demand for another 150 years.  Given coal’s cheapness, abundance, and relative efficiency, it presents an extremely cost effective and convenient form of energy.  Furthermore, with the largest recoverable reserves of any country buried in our own back yard, it presents a viable energy option, provided the US begins to ween itself off of its foreign oil dependency.

From a strategic standpoint, BNSF is well-positioned to benefit from our continued use of coal.  Its tracks spread across 28 states and 2 provinces, mainly west of the Mississippi River, at a combined length of 32,000 miles.  Its  network of rail lines is heavily concentrated in the upper Great Plains, particularly in the region of the Powder River Basin, an area of southeast Montana and northeast Wyoming which supplies roughly 40% of the nation’s coal. Of note, the region is rich in sub-butiminous coal, a cleaner-burning alternative to Appalachian coal.  This coal is known for being low in sulfur dioxide, a common contributor to acid rain.  Lastly, BNSF’s extensive lines throughout the Great Plains, Midwest, and Pacific Northwest will allow it to serve MidAmerican Energy, an energy producer also owned by Berkshire Hathaway which happens to operate several coal-fired power plants of its own.

Currently, BNSF transports the majority of its coal to population centers of the Great Plains, including Denver, Kansas City, Chicago, St. Louis, and Dallas.  However, with its wide reach, it could also feasibly provide significant amounts of coal to population centers in the Upper Northwest, Southern California, and South Texas as well.  The nation’s hunger for electricity is expected to increase 25% by 2030.  Factoring in our continued reluctance to build more nuclear power plants, the cost barriers to implementing green energy initiatives, and the highly variable cost of oil, our reliance on coal is likely to intensify for the foreseeable future.

In addition to this, coal exporters are also poised to benefit from the developing world’s mounting appetite for electricity, especially China and India.  China, which burns more coal than the US, Europe, and Japan combined, is scheduled to build 500 additional coal-fired powerplants over the next decade.  After first becoming a net importer of coal in 2007, the country’s appetite for coal will undoubtedly force it to increase its reliance on imports.  Given BNSF’s plentiful access to Pacific ports, it sits in a prime position to benefit should coal producers look to direct their coal shipments across the Pacific.

Mr. Buffett has never shied away from admitting his bullishness with regards to the US’s long term prospects.  In fact, following the deal’s announcement, Buffett told CNBC, “America’s best years lie ahead, there’s no question about that.”  If one assumes that Mr. Buffett’s remarks are correct, this deal should put Berkshire Hathaway in an enviable position to ride that wave of prosperity over the next 50-100 years.  BNSF gives Berkshire a brawny, strapping infrastructural presence, transporting carload-after carload of goods and resources cross-country.  The relative cost-effectiveness of rail transport (it takes only one gallon of diesel fuel to move one ton of goods 470 miles) gives it an obvious edge over the automobile.   In fact, should gas prices rise considerably, demand for rail freight will undoubtedly increase.

Berkshire Hathaway prefers to identify companies which hold a competitive advantage within their industries.  BNSF’s competitive advantage lies in its strong infrastructure base, some 32,000 miles of tracks.  Furthermore, its geographic footprint-primarily located between the population centers of the Great Plains and the West Coast-ensures that it holds a distinct advantage for moving not only processed goods and products, but more importantly, coal.  As US, and for that matter, global demand for goods and resources accelerates over the coming decades, Berkshire Hathaway and its shareholders could be rewarded handsomely.

Tags: Berkshire Hathaway, bnsf, brown shoe company, Burlington Northern, Burlington Northern Santa Fe, CEO, China, coal, dairy queen, debt payments, Federal Reserve, foreign oil dependency, fruit of the loom, geico, great plains, india, intermodal freight traffic, midamerican energy, U.S. Dollar, union pacific, Warren Buffett

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Outmaneuvering America

Rodgers has no doubt that China understands peak oil and expects future supply disruptions, which is why it’s accumulating foreign assets and diversifying its import options.

Peter Dea, the president of oil and gas exploration and production company Cirque Resources LP, made the same point a bit more obliquely, rhetorically asking if China had no doubts about the future of oil, why would they have recently outbid Exxon Mobil for new drilling in Ghana?

Putting a finer point the difference between the strategies of the U.S. and China, Dea wryly observed that the U.S. has potential for offshore drilling for natural gas, but “it won’t be developed until the U.S. takes energy resource planning as seriously as China does.”

That doesn’t appear to be in the offing any time soon. Washington doesn’t seem to understand the commodity markets at all, Matthews said, nor the shrewd moves that China is making. While Japan already has a strategic mineral stockpile, and China is quickly amassing one, the U.S. is selling off its key minerals: “The lack of knowledge and concern over it in Washington is horrifying, and I can’t explain it,” he moaned.

Well, I have explained it: America has no energy plan, and we won’t have one until we give up our fantasies about energy independence or drilling our way out, admit that oil is peaking, and get serious about planning accordingly.

While America was busy with its hallucinated wealth meltdown and trying to raise some cash by selling assets at garage sale prices, just one of China’s three major oil companies, CNPC, secured 75 resource projects in 29 countries.

Another of the three, energy giant China National Offshore Oil Corporation (CNOOC), just bought oil assets in the US for the first time. The size of the deal for four deepwater exploration licenses in the Gulf of Mexico was undisclosed, but Norway’s Statoil, the seller, characterized it as “small.”

Still, the purchase is bound to make it more difficult for China to maintain a low profile as it snaps up resources.

Perhaps that’s why it has begun trying to cover its tracks: China OGP, an oil industry newsletter issued by Xinhua news agency, recently announced that it would no longer publish data on China’s stockpiles of crude oil, gasoline, and diesel. (As if that data weren’t hard enough to get already! Killin’ me.)

The lesson on China for retail investors should be clear: Buy domestic reserves while they’re cheap, and hold ‘em, hold ‘em, hold ‘em.

Until next time,

http://www.getreallist.com/

Tags: China, demand, PEAK OIL, supply

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Stock Market Investing: The equity averages continue to languish, however, as anticipated, the relative strength of precious metals investments soars. The Dow, S&P500 and the NASD all sit at or near their respective lows of the last two weeks while Gold hits a new high for the year at $1,085.65 and Silver crosses $17.

I would like to spend some time today augmenting our precious metals investment thesis. To begin, please review the story below…

IMF Sells Gold to India, First Sale in Nine Years

Nov. 3 (Bloomberg) — The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first such sale in nine years.

The transaction, equivalent to 8 percent of global annual mine production, involved daily sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said in a statement yesterday. The average price to India, the biggest consumer, was about $1,045 an ounce, an IMF official said on a conference call.

“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.” Read More

…The key to this story: 200 metric tons were sold over 10 business days at an average price of $1,045. This sale price was only 2.7% below the recent high!

The key is to identify a basket of attractive takeover candidates now, place them into the portfolio and wait for the explosive takeover phase to begin. If our research capability is intelligent and we are patient, we are very likely to hit several 5-10 baggers.

Tags: China, gold, hyperinflation, india, investment strategy, precious metals, silver, stock market investing, US$

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More economic numbers out this morning that suggest a continuation of the status quo.

The Fed can point to the PPI numbers and pretend there is no inflation…

September Core PPI Y/Y +1.8% vs +2.0% consensus, prior +2.3%

September PPI Y/Y -4.8% vs -4.3% consensus

…So rates can remain low to help the listless housing market…

September Housing Starts 590K vs 610K consensus, prior revised to 587K from 598K

September Building Permits 573K vs 595K consensus, prior revised to 580K from 579K

Somehow, all this data results in a U.S.$ rally, T-bond advance (rate decline) and an equity market sell off. I would expect this counter trend move to be short lived. In fact, there have been some developments regarding the U.S.$ that should concern any U.S. $ optimist.

BEIJING, October 14 (RIA Novosti) – Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday.The premier, currently on a visit to Beijing, said a final decision on the issue can only be made after a thorough expert analysis.”Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans,” Putin said. MORE…

A possible accelerant about to be poured onto the pile of burning U.S.$s may have a UK label. The real estate market in the UK appears to be heating up. Prices for both residential and commercial properties in London are hitting records. If this recovery turns into a trend that moves across the channel to the rest of Western Europe then Ben and Pinocchio could have a real problem.

The U.S. $ carry trade will gain steam if a European economic recovery/inflation outpaces the U.S. and leads to rate increases much like in Austraila (see Oct. 7th post). A lagging real estate market here in the U.S. will make it difficult for Ben to raise rates. Meanwhile, Pinocchio (Geithner) will continue to express the desire for a strong $ as his nose grows…

London Agents ‘Sold Out’ as Home Asking Prices Jump to Record Oct. 19 (Bloomberg) — London home sellers raised asking prices to a record high this month and led gains across the U.K. as the shortage of properties for sale intensified, Rightmove Plc said. MORE…

UK property undergoes dramatic recovery - FT
FT reports the UK commercial property market delivered the highest monthly price growth for more than three years in September, capping a remarkable comeback for a sector that looked to have been wiped out only a matter of months ago. Investors are now chasing commercial property and some are complaining that the market has become too hot again. The switch in sentiment has been tangible as investors look to take advantage of a slump that wiped off about 45% from prices from the peak in 2007 by the beginning of the summer. The recovery has been building since, with IPD, the benchmark index, rising 1.1% for September, the highest since June 2006

Tags: China, commercial real estate, Geithner, Inflation, ppi, renewable energy, residential real estate, Russia, UK

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U.S.$ weakness of late has spurred a cacophony of comments around the world for a new reserve currency. Now the Fed is attempting to fight back. Over the last few days a number of Fed governors have made hawkish statements to bolster the U.S.$ (the fact that these comments were offered before, during and after the G20 summit is not a coincidence)…..

Fed’s Warsh says Fed may need to roll back policies sooner – DJ

Fed’s Warsh says last few months show continued improvement in economic performance – Reuters

Fed’s Bullard says Fed should consider rules governing quantitative easing policies with rates near zero – Reuters

Fed’s Plosser says policy shift may need to be aggressive - Reuters.com
Reuters.com reports the Federal Reserve will have to act quickly, and “perhaps aggressively” when the time comes to pull back its extraordinary support for markets in order to avoid stoking inflation, the president of the Federal Reserve Bank of Philadelphia said.

“The Fed will need courage,” Charles Plosser said in remarks prepared for delivery at Lafayette College in Easton, Pennsylvania. “I believe we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels.”

The Federal Reserve cut interest rates to near zero percent last December and put in place an unprecedented array of emergency support programs as it battled the deepest recession since the Great Depression. That has worried some market participants that inflation will result. “Just as the Fed has taken aggressive steps in flooding the financial markets with liquidity during this crisis to reduce the possibility of a second Great Depression, it will also have to take the necessary steps to prevent a second Great Inflation,” Plosser said. “We recognize the costs that significantly higher inflation and the ensuing loss of credibility will impose on the economy if we fail to act promptly, and perhaps aggressively, when the time comes to do so,” he said.

…However, economic reality still suggests the need for aggressive stimulus…..

September Chicago PMI 46.1 vs 52.0 consensus, August 50.0

ECONX Chicago PMI Halts Expansion - Briefing.com
The expansion in the manufacturing sector hit a major speed bump as the Chicago PMI declined 3.9 points to 46.1 in September, well below the consensus expectation of 52.0. The drop below 50 signals a contraction in manufacturing. A negative feedback loop seems to have reentered the manufacturing sector…

The drop in PMI was mostly due to a severe cutback in both new orders and order backlogs as new orders declined 6.2 points to 46.3 and order backlogs declined 9.1 points to 36.7. It seems that manufacturers had bought into the economic recovery scenario and decided to ramp up production in August. At the same time as production revved up, the contraction in new orders had ended and most firms expected growth to continue into the future. The increased production was used to work off the backlog along with the new orders that arrived. Unfortunately, at the same time as production ramped up, consumer demand in September seems to have stalled and along with it the recovery effort. Wholesalers and retailers did not need any new goods and orders dropped precipitously. Production in September tumbled.

As long as consumer demand continues to stumble, the recovery effort cannot be sustained. Instead of multiple months of expansion, we may see these PMI indices becoming highly volatile as production meets a fluctuating order schedule.

There was one positive sign from the data. While inventories are still contracting, the rate of contraction slowed. Eventually inventory levels will shrink enough to force manufacturers into production just to restock the shelves. Unfortunately, the consumer will dictate when this will happen. Other components of the index showed problems in manufacturing including: The prices firms paid expanded for the second consecutive month as the index rose to 51.3 from 50.0. The contraction in employment held steady as the index increased only 0.1 to 38.8. Supplier deliveries reentered a contraction phase as the index declined to 49.3 from 54.6.

MBA Mortgage Applications -2.8% vs +12.8% Prior
…And the struggle between reality & the desire to support the U.S.$ has the Fed speaking out of both sides of it’s mouth….

Fed’s Lockhart says worst is likely ahead for commercial real estate – DJ
Says return to robust bank lending unlikely in near term
…The take away? We must not let the short-term strength in the U.S.$ alter our investment strategy. This strength was purely cosmetic and created for the G20 summit. The stagflation trade is alive and well (Please see the Sept. 7th post for details). This trade will gain strength as poor economic numbers continue to evolve during a time when prices manufacturers pay for goods continues to increase (see the bold text above).
The asset of choice for this environment is Gold. We don’t know all the answers but we are eminently comfortable owning gold. Gold is the only international monetary asset with globally declining supply and rising demand. How smart do you have to be to join us?

Companies of Interest

Tags: bullard, chicago pmi, China, citigroup, Fed, lockhart, mortgage applications, plosser, Warsh

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