Year: 2010

The Business Insider: the National Enquirer of Financial Sources?

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Anchorage, AK, May 4 2005 (some rights reserved), click on photo for Flicker source

I’ve grown to really dislike the Business Insider.  I consult it regularly because for every two bad articles they provide a good one.  They provide excellent access to people like Peter Schiff, John Mauldin, Marc Faber and Gonzalo Lira.  But the tendency is for them to be liberal in orientation; so the editors themselves, while begrudgingly recognizing certain fundamental laws of economics, nevertheless are quite often shills for the Obama administration, the Democrat party, and Keynesian style economics.

But today a flicker picture appeared in their article on poverty in America and the increasing gap between rich and poor.  Gus Lubin writes:  ”

While politicians gloat about our “recovery,” our poor are getting poorer, our average wages are still falling behind inflation, and social mobility is at an all-time low.

Read more: http://www.businessinsider.com/facts-about-inequality-in-america-2011-11##ixzz16WCVJ23N

Now I wasn’t very interested in the charts and statistics that Gus Lubin wished to present.  I was interested in the photo of the desperate man with the sign saying “Homeless Please Help!”  and the background behind the man.  The scene was familiar.  If I’d seen it once, I’d seen it a million times:  Mt. Wolverine and the Chugach Mountain range which forms the backdrop of my home town Anchorage, Alaska.  I lived twenty years on the foothills of those peaks.  I went to Flicker which was linked to by Business Insider as the source of the photo.  The photo is from 2005 and is presumably of a native Alaskan.

Now this is just bad and unethical journalism.  The story of this photograph is not remotely related to the widening gap between rich and poor in America in 2010. Sorry.  Other narratives are more suitable:  Perhaps the man was a stranded Inupiat, Yupik or Athabaskan man, far from his village home–maybe he had a problem with alcoholism.  Who knows the story behind this photo?  It looks really sad.  But what does it have to do with the Business Insider article?  This man was standing at this Anchorage street corner five and half years ago, over two years before the recession even started.

American Thanksgiving

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The reason why socialism doesn’t work is that it provides no personal incentive for work and productivity.  Human nature chaffs against it and hates it.  Each person wishes to work above all to provide the needs of his or her own self and family, not for the common good.  This is an immutable (at least humanly speaking) characteristic of all humanity.  Today, I wish to thank God for instituting private property rights via the Eighth Commandment:  “Thou shalt not steal.”

Reason TV has made the following video explaining the true meaning of American Thanksgiving:

Hat tip:  Monty Pelerin

P. S.: Craig Carter mentioned yesterday on his blog meeting the people of Acton Institute at SBL.  Their core principles include these two regarding government and wealth creation:

Rule of Law and the Subsidiary Role of Government – The government’s primary responsibility is to promote the common good, that is, to maintain the rule of law, and to preserve basic duties and rights. The government’s role is not to usurp free actions, but to minimize those conflicts that may arise when the free actions of persons and social institutions result in competing interests. The state should exercise this responsibility according to the principle of subsidiarity. This principle has two components. First, jurisdictionally broader institutions must refrain from usurping the proper functions that should be performed by the person and institutions more immediate to him. Second, jurisdictionally broader institutions should assist individual persons and institutions more immediate to the person only when the latter cannot fulfill their proper functions.

Creation of Wealth – Material impoverishment undermines the conditions that allow humans to flourish. The best means of reducing poverty is to protect private property rights through the rule of law. This allows people to enter into voluntary exchange circles in which to express their creative nature. Wealth is created when human beings creatively transform matter into resources. Because human beings can create wealth, economic exchange need not be a zero-sum game.

The socialist, utopian dream is not possible.  It will result in the poverty of everyone except the ruling classes.  Respect of private property and the limited role of government is necessary for a society to flourish.  I like especially that the Acton Institute stresses the core principle that government must promote the “common good”.  The redistribution of wealth, i.e. socialism, is not the promotion of the common good, but the good of some to the detriment of others.  Most of what liberal democracies do today is socialistic: education, health care, welfare.  We need to see government limited to the roles of common protection from enemies both foreign and domestic (i.e., military and police) and providing a justice system to punish crimes and to arbitrate between competing interests.  Beyond that, government has few legitimate roles.

Gold at $56,000 per ounce?

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There is a story going around that the London Bullion Market Association has sold as much as 45-100 times the amount of gold futures as there is physical gold underlying the notes.  I first heard about this story from Monty Pelerin’s blog which featured a Max Keiser interview with Jim Willie (see videos below).  Then, on the Peter Schiff Radio Show, Adrian Douglas claims that gold should be selling at $56,000 per ounce. Even Peter Schiff was incredulous about it (see http://www.schiffradio.com/pg/jsp/charts/audioMaster.jsp?dispid=301&pid=51169 ).

Now, thanks again to Monty Pelerin, I’ve read Vincent Bressler’s “Empire of Fraud“, saying:

The futures markets are fractional reserve systems running at very low reserve ratios, something like 45 to 100 ounces of electronic gold and silver obligations for every unencumbered ounce of physical gold or silver. The day is coming when the physical price of gold and silver disconnect from the electronic price and they can not be brought back together again except through a massive devaluation of the dollar in terms of gold and silver. On this day the future’s markets in gold and silver will be stopped. There will be secret meetings. Those holding electronic gold tickets will be paid in be paid in dollars at the price of gold before the disconnect. And then I believe that there will be an explicit devaluation of the dollar with respect to gold on the order of 20 to 40 times.

Once this happens, the dollar will be further devalued against a large number of other commodities and will probably actually collapse altogether as the world’s reserve currency.  Few believed the warnings about fraud which was going on in the real estate market and yet that bubble collapsed.  Lying, manipulation and greed is the common story in our times.  I’m preparing for this one.  I am long on Barrick ABX, New Gold NGD, Lakeshore Gold LSG, and Detour Lake Gold DGC; and I’ve now also taken a long position on Sprott Physical Gold PHY.U, which claims to keep actual physical gold in the Canadian Royal Mint.  I’ve sold puts on ABX, GG, DGC and NGD.

Here is Max Keisar interview Jim Willie in three parts:

Part One:

Part Two:

Part Three:

Are Canadian junior and intermediate oil stocks in a bubble?

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In 2008, those of us who were invested in the junior and intermediate Canadian oil and gas sector, experienced the collapse of a bubble.  I had bought 500 Enerplus, e.g., at $48, and I watched it collapse to $18.20 by March 2009 for $14,900 (62%) loss.  Losses for 100% natural gas Perpetual (pmt) were similar, only it hasn’t recovered much of its lost ground.  Midway Energy Ltd (then Trafalgar Energy) plummetted to a tenth of my original purchase price, but is now back up to $4.33, which is above the highest price that I ever paid for it.

As a result of an aggressive averaging down, oil and gas holdings in my current portfolio are now 65% above book–and that doesn’t take into account profit taking along the way, as I’ve taken the opportunity of the extreme volatility of the last two years to buy low and to sell high.  But with the buy and hold part of the portfolio, diligence is necessary.  Is there any sense in which there is a bubble–that these stocks are just too high and that it is now time to bail, or at very least to reduce?  This is a particular concern to me since my portfolio is 87% weighted towards Canadian junior and intermediate oil and gas companies.

The first consideration is commodity prices.  Natural gas is at a nadir.  Therefore, it is hard to imagine that natural gas weighted companies can go much lower.  These would include Terra Energy, Prospex, and Perptual (TT, PSX, PMT).  Oil is high at $80 but nowhere near where I believe it can go with a rapidly rising demand from emerging markets (esp. China and India) and the constant inflation being forced upon us by our central banks.

A second consideration is low interest rates.  At the moment, most of the intermediate stocks pay dividends far in excess of currents rates in savings accounts, GICs and short term bonds.  Thus, the sector is still attractive as investors seek yield.

A third consideration is fear.  About once a week I read an article indicating that retail investors, if not institutional funds, are still afraid to get back into the stock market, indicating that billions of dollars are still resting on the sidelines.  There won’t be a stock market bubble until more people are all in.

So let’s look at a few of the companies to determine if they are in a bubble.  Statistics are from the TD Waterhouse Market & Research, which I find is often inaccurate, but lets say for now that the numbers are representative of the larger trends.  Market price is as of close yesterday.

Petrobakken (PBN) $18.96 book 17.18 Price/Cash Flow 6.1x

Crocotta Energy (CTA) 1.77 book 2.52 Price/Cash Flow 9.1x

Midway Energy (MEL) 4.33 book $1.44 Price/Cash flow —-

Crescent Point 40.51 book $19 price/cash flow 11.2x

Prospex (PSX) 1.37 book 2.00 P/cash flow 9.4x

Now part of the story is that almost every company in the sector is ramping up its development costs in order to increase production and reserves.  Midway, for example, is on a fast pace of developing its Cardium holdings.  They have 150 drilling sites with an estimated netback of 4 million each (see their corporate presentation), which would provide a potential profit from these holdings alone of $600 million.  That is double its 294.6 million market capital.

Nothing yet indicates to me that there is anything remotely like a bubble in this sector.  Indeed, I am still bullish and think that there are still buying opportunities despite the recent surge in the sector.  In consideration also that the Obama administration has shut down future competition from new offshore drilling in the Gulf of Mexico–putting production behind by at least six months–the Canadian oil and gas sector begins to look extremely attractive.