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You keep using that word … III. Investment

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Previous posts:  I. Consensus; II. Recovery.

The lamestream media loves Obama.  When it comes to this man, they lose all semblance of objectivity and their critical faculties, if they ever had any, get flushed down the toilet.  Consider Henry Blodget, stock analyst par excellent–though you have to catch him off the record if you want his real opinion–did a cynical piece yesterday saying that well both President Obama and Trig Palin should be disclosing their birth certificates publicly.  I like you Henry, I real do, but that’s really, really stupid.  Business Insider is a bit like the National Enquirer and Forbes magazine all combined in a single publication.

So when the media classifies Obama as a conservative and smart investor, it is really malpractice.  So MSN reported about candidate Obama during the presidential election had dumped some stocks of companies who had made contributions to his campaign:

The 50th-richest senator, with a net worth at the end of 2005 of between $1 million and $2.5 million, has most of his assets in bank and retirement accounts, owning only three publicly traded securities.

All three, two Vanguard mutual funds and a Nuveen closed-end fund, are partly or entirely invested in fixed income securities. Despite providing little opportunity for capital appreciation, they delivered combined returns of around 15% in 2006, only slightly less than theS&P 500 Index ($INX).

“The man is conservative and smart,” says Linda Gadkowski, a financial adviser with CFP Beacon Financial Planning in Centerville, Mass.

Sycophantic worship is what that’s called.  Obama has a lot of capital but a completely unimaginative portfolio that requires no research, no knowledge and no gumption.  And the media portrays that as conservative and smart.  Gimme a break.  But the man has shown that he knows little about investing when he said that “profits and earning” ratios looking enticing, recommending that Americans  invest in the stock market.  So there is no reason to believe that Obama has any knowledge of investing.

While his use of “investment” in the place of “spending” is a huge lie, don’t expect the sycophantic adoring media to ever call him on it.  You see government spending is lost, never to be recovered.  Investment on the other hand, looks to preservation of capital and a return on investment (“profits and earning ratio”, in Obamatalk).  When governments borrow money, they only rarely put the money into anything that will have a ROR.  Even its so-called “investments”, which are just subsidies, like ethanol and wind energy, are money losing ventures.

Is it time to buy US? II: February deficit $223 billion

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I lamented in May 2010 that the US federal budget deficit was $83 billion, or about $8.90 per person per day.  Now the Washington Times (hat tip: the American Thinker) reports that the US government has posted its largest monthly deficit in history, $223 billion in February.  Now that means that the US government borrowed nearly $26 per person per day.  Clearly, the fundamentals that have caused the US dollar to depreciate against commodities is getting much worse not better:  the US government is borrowing three times as much money as what it was only 10 months ago.  This is proof that the debt death spiral is a reality in our times.

Now here is what has been happening:  (1) the US government borrows money but doesn’t find sufficient lenders whether domestic or foreign, so the Federal Reserve bank lends to them the remaining shortfall.  This is called quantitative easing because the money is created out of nothing.  But that is not the end of QE: for Bernanke is also buying old debt as it turns over and finds no new borrowers (see “Hyperinflation when?“).  QE greatly increases the amount of greenbacks that are in the money base:  view (chart below) and be afraid and weep.  (2) Next, commodities go up in price because too many dollars are chasing too few goods–food riots start happening in poorer countries.  (3) Then, consumer prices go up.  (4) Lastly, workers will get cost of living adjustments if indeed their employer can pay them at all.  In any case, the last thing to adjust to this whole mess is people’s take home pay.  But unfortunately, the adjustments will be too little too late because the next round of QE has already taken place and the spiral of hyperinflation has reached the next stage even before they receive their next pay cheque.

The newly elected Republican Congress?  They swept into power with Tea Party momentum.  But they can’t or rather they won’t fix anything.  Their puny little efforts to reduce the deficit are a joke.

My investment approach remains steady (current portfolio is up 88% above book) :

Short:  US dollar

Long:  Canadian oil & gas; Canadian gold mining; physical gold and silver (via Sprott Physical Gold Trust, Sprott Physical Silver Trust)

Finally, in my opinion, those who are telling people it is a great time to exchange your loonies for greenbacks and to go long on US stocks are really not doing their readers a favor; they seem ignorant of the fundamentals.  Yet even Warren Buffet’s famous and flippant advice about gold is little better.  What, pray-tell, Mr. Buffet, do you suggest to the American people regarding how they might protect themselves from this robbery?  Remember these words of Alan Greenspan (hat tip: Monty Pelerin):

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. Deficit spending is simply a scheme for the confiscation of wealth.

… the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.

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.