Hyperinflation when?

I first began to fear hyperinflation in my post “Obama and Inflation in Zimbawe“, on February 6, 2009, after learning of the absurd $1.4 trillion budget deficit.  These days, however, there are many economists and investment advisers warning of deflation.  The current pullback in the stock market seems to vindicate their position, though the current price of gold and Wallmart’s decision to increase its prices would not.  Meanwhile, my friend Keith is asking when is the inflation going to happen in earnest.  I don’t know when, but I am going to hazard a guess about when inflation is going to make its presence known.

Today in the American Thinker Anthony Kang points out a video from Opinion Journal, in which Jason Trennert says that the US government could be the next Bear Stearns because over 60% debt of the USA is due within one to three years.  What happens if the creditors decide not to rollover their treasury notes?  The Federal Reserve will have no choice but to monetize and that will likely put more of the debt back into circulation which will require printing more money (with real printing presses this time).  Will creditors continue to rollover their debt?  If so, then inflation may not hit in earnest until these creditors choose stop funding the US deficit.

Petroleum eating microbe emits carbon dioxide and carbon monoxide gas

The AP reports that a hitherto unknown species of bacteria is eating the oil spill in the Gulf of Mexico.  This seems to be a miracle, because the media had propagated the notion, along with Nobel Laureate, Dr. Barack Hussein Obama (who is a Christian not a Muslim!!!), that the Gulf oil spill was the worst environmental disaster of all time (well, at least since the moment he became President).  The Righteous Investor has learned, however, the bad news that these oil-eating bacteria are bad for the environment, and the damage done by them after eating the oil is worse than the oil itself.  These microbes are reported to emit more carbon monoxide and carbon dioxide–both noxious greenhouse gasses–than all the combined emissions of all the cows in Brasil and the over-populated human population of the entire earth (which numbers currently about 600 trillion people in China alone!!).  Who would have thunk that the flatulence of bacteria could be so bad?  Anyway, don’t try to deny it, or we will call you Hitler or a Holocaust supporter, or both.  Leading scientists are now predicting that the emissions from bacteria eating the BP oil spill will cause the planet to heat up at least 400 degrees Celsius (=10,000 degrees Farenheit) over the next decade to two million years.

Do DIY investors need financial advisers?

Jonathan Chevreau of the National Post says that smart DIY investors also need financial advisers, and by this he means paid financial experts.  The crux of article is this:

You may be an expert stock-picker who doesn’t need help with security selection but are you also an expert on bonds and interest rates? How about insurance products? Options and portfolio hedging strategies? I suggest that unless you’re in the investment business yourself, it’s a rare individual investor who can master all these different disciplines.

I commented as follows:

Hi Jonathan: Thank you for this article. I think that as I DIY investor, I could tell you my story and it would perhaps contribute to this discussion. I started as a DIY investor for a couple of basic reasons: (1) My adviser charged me 2% or $80 per stock transaction (now I pay $9.99); (2) I would ask for investment ideas, and sometimes he would not respond; (3) when I suggested my own ideas, he would often take on the role of trying to talk me out of them—this was good at first, but as I gained experience I began to outgrow these limitations; (4) he would suggest putting stop losses or to sell when I felt it better to hold. I started DIY investing in 2005 and took complete control of the portfolio in 2007, when I transferred everything to my discount brokerage. My adviser’s role seems to have been to prevent me from implementing my own vision and strategy and to enforce his own. Well, I’ve had considerable success since taking over, so I am not interested in finding an adviser: there is a plethora of financial information and advice available on the internet and in books: so my advisors are many: Peter Schiff, Jim Rogers, Marc Faber, Jonathan Chevreau, Rob Carrick, Patricia Lovett-Reid, Monty Pelerin, Ivestopedia, The Dailey Reckoning, The Daily Bell, and the Business Insider, to name a few. When I’ve talked to financial people about what I do, they say, “Oh that’s really risky!” So I am not at all convinced that I would be better off seeking advice. So I am not expert in all three areas of stocks, bonds (interest rates) and insurance products. I fear inflation and therefore I am not in the market for fixed income. I don’t need any more insurance yet. I think it less important to have a mastery of these three areas, and more important to have a working strategy that leads to success. But I will admit, however, using a lawyer for estate planning and tax issues—and we also have to have an accountant to calculate our tax and give us advice about how to avoid paying tax.

Calculating book value: Case study, Petrobakken (PBN)

The value investor should pay attention to book value (assets-debt). I aspire to be a value investor, but I depend on stock analysts to do part of the work for me. Here is my dilemma. The discount brokerages make some of the research available to their clients to encourage their clients to invest in stocks. This generates revenue for them, as they depend on commissions. This is one reason to hold in suspicion their recommendations, since they will often be more optimistic than they should. If I always obtained the 52-week target price that they suggest, I would be probably be fabulously wealthy. That being said, their information is nevertheless very useful to me.

But what happens when their numbers don’t appear to agree, either with each other or with the reports from the company in question. Consider the case of Petrobakken, which both TD Waterhouse and Scotia Capital give a high rating. A couple of days ago I blogged that I would buy some shares, and I did, though the stock has continued to drop. Not to worry, I calculated that this growing oil-weighted company was selling at less than shareholder’s equity/book value; typically, if a private investor wanted to come in and buy the company, they would have to offer the shareholders premium on the book value in order to convince the majority of shareholders to relinquish the company. That means that Petrobakken is selling at a discount. I calculated the book value based upon  their quarterly report (in billions) as 5.5 (assets)-0.698 (net debt) / .188 (total shares)=$25.54 per share.

Now it is interesting to me that on TD Waterhouse website under markets and research, PBN is listed as having a book value of only $17.18:

Analyst Jason Bouvier for Scotia Capital lists PBN’s “value” at 4.467 billion and its net debt at 0.902 billion. Analyst Roger Serin at TD Newcrest (TDSI Morning Action Notes, August 11, 2010) reports PBN net debt as 1.642 billion. He provides the following explanation:

Balance Sheet – At the end of Q2/10, the company had net debt of $1.48 billion, with $557 million drawn on its recently revised covenant based $1 billion credit facility (previously $900 million reserve based). At year-end 2010, we forecast net debt of 2.5x trailing cash flow and 14% available on its current facility, or 30% with working capital deficit. Net debt includes US$750 million convertible debentures due 2016. We also note PetroBakken pays annual dividends of ~$180 million, providing additional flexibility.

I see. The debentures are added to the debt which is only correct. Using this measure we arrive at the following book value (in billions): 5.507-1.448/.1886=$21.52 per share. This is higher than the book value indicated on TD Waterhouse’s Markets and research page, and it is the price at which I purchased shares earlier this week.

Of course Petrobakken at the end of their report explain how they calculated “net debt”:

Non-GAAP Measures. This press release contains financial terms that are not considered measures under Canadian generally accepted accounting principles (“GAAP”), such as funds flow from operations, net debt and operating netback. These measures are commonly utilized in the oil and gas industry and are considered informative for management and shareholders. Specifically, net debt is used to evaluate financial leverage and includes bank debt plus and accounts payable and accrued liabilities, less current assets. Operating netback is determined by dividing oil and gas revenue less royalties, transportation and production expenses by sales volumes. Management considers operating netback important as it is a measure of profitability per barrel of production. Net debt and operating netbacks may not be comparable to those reported by other companies nor should they be viewed as an alternative to net income or other measures of financial performance calculated in accordance with GAAP.

There is no mention here of debentures. And this could explain the difference. Thus, there seems to be different ways that debt is calculated, and the DIY investor must be aware of this and dig a little deeper to make sure that the data being reported is accurate.

Book value as a determinant for buying a stock: The case of Petrobakken

At the current time, I am investing in the oil and gas industry for a number of reasons:

(1) Oil is a commodity based upon a US dollar price.  As the US dollar inflates, commodities will maintain their value.  As a result, there is likely a coming surge in the commodities in the market as everybody and his brother starts looking for value as they catch on to the severe devaluation of the US currency.  Already the Chinese, who are usually huge investors in US treasury bills, have begun to establish enormous positions in the Canadian oil sector.

(2) Current prices in the Canadian oil sector are mostly well below their 5 year highs.

(3) Canadian oil and gas companies pay really good dividends or distributions.

(4) Canadian oil companies, particularly in the junior oil sector, are often selling below “book value” or what is also called “shareholder’s equity”.

Today, for example, Petrobakken (PBN)  in their quarterly report stated that their total assets were 5.5 billion; their net debt 0.698 billion.  This means shareholder’s equity per share (total shares outstanding, 0.188 billion) = 5.5-0.698/.188=$25.54 per share.  I am not a stock analyst, so my calculations could be incorrect (and I would appreciate anyone correcting me on this).  Despite this report, because of the net loss during Q2, PBN shares fell to as low as $21.28 today, as disappointed shareholders dumped the stock.  Others like me were obviously establishing long positions.  I established long positions at an average of $21.56, which in my view means that I immediately gained equity of nearly $4 per share.  Meanwhile, before yesterday’s financial report both TD Waterhouse and Scotia Captial had given PBN excellent ratings, with a $30 and $31 52-week target price respectively [Update:  I learned that the book value of Petrobakken is probably closer to 21.52, and TD Waterhouse has lowered their 52 week target to $25].

I’ve read that Warren Buffet, the value investor par excellence,  does not like too much the commodities sector.  I comfort myself with the fact that there have been other billionaires who have made fortunes on black gold.