I wont make a call that the economy or the stock market is ready to surge tomorrow, but the current atmosphere looks like a bottom. The bottom is not a flat line however. Look for stocks to trade wildly from one end of a range to another, as well as commodities, with stocks making higher highs and lower lows while commodities do the reverse.
What's different now from last month? Earnings are coming in stronger than expected. Oil use is dropping in the world's biggest market. The president lifted the executive order banning offshore drilling, the public is overwhelmingly in favor of more drilling in addition to alternatives, T. Boone Pickens even put forward his own energy plan.
The fed reacted quickly and decisively to the current downturn. While you may debate the actions taken, the problem was quickly acknowledged and dealt with. Stimulus checks were approved early on. Again, even if you don't agree with the method, the fact that the government was able to react so quickly to a downturn is a notable achievement. The government managed to largely stay out of the housing market. They did put systems in place for borrowers and lenders to communicate and negotiate more directly and efficiently, but did not take control.
Good news broke out. In Iraq, we may be ready to bring home as many as 100,000 troops by Spring (although 30,000 may wind up in Afghanistan, still a good net draw-down). Iran has been rattling its sabre, but behind the scenes, seems ready to deal. Oil inventories are up, consumption is down, new fields have been discovered and new technology is bringing new options online. We may not all agree on what specific action we take from here, but one thing is clear: Americans are tired of being sick, and sick of being tired. We will not sit still and simply let the world "happen" to us.
The US is poised to recover much more quickly than other parts of the world. It seems that Europe and Asia are only now beginning to feel the pain. Transparency makes all the difference. The US took its medicine at the first sign of symptoms. Interest rates came down, despite a weak dollar, banks wrote off bad debt and tightened credit requirements. In other countries, mistakes and short-comings are often covered up. Bad debt may remain on the books for years. If you don't acknowledge a problem, you can't adapt for it.
The pain may not be over, but I think the hemorraging has been contained. A lot of people lost a lot of wealth and assets, but this is America. We dust ourselves off and do it again. Hopefully a bit better prepared for the next, inevitable bumpy patch.
Wednesday, July 16, 2008
Tuesday, July 8, 2008
Remaking the Housing Market
The housing market is in the tank. But it's not due to lack of demand. In fact, the number of homes sold on an annual basis has fallen below the growth in the number of households. Something's gotta give.
Lenders, in general, are not in a position to loosen up just yet and most home buyers aren't walking around with $200K in their pocket. So how do you get the deal done?
First, look at what it is the home buyer is really shopping for. Why do people buy as opposed to rent? The number one reason is predictability. It's not "ownership", since, as many have discovered, if you have a mortgage, you don't own it. However, buying can give you a fixed monthly payment for a long time and as long as you make your payments, nobody can tell you to leave.
What if you worked those features into a rental or lease deal? Forget about what's standard and think about giving the shopper what they're looking for while generating good cash flow for yourself. Don't wait for the banks to get healthy. Get on with business.
Here's an example. I have a house that would normally result in a 30 year fixed rate payment or monthly rental rate of about $1000. For many would-be home buyers, making the payment is not the issue at the moment. Getting the loan is. They don't want to rent, because they don't like the prospect of renewing a lease every 3-5 years. What if they had an open-ended lease option at a fixed rate? You offer to rent them the property at $1100/month for as long as they'd like. The lease could only be terminated on your end for lack of payment or some kind of criminal behavior. In any case, as long as the customer continued to make payments in full and on time, the rate remains the same and they can't be asked to leave.
A minimum term would be in order. Say 12 months, with 60 day notification of intent to move. Details could vary (non-transferrable, no sub-letting, etc), but the general idea is giving the renter predictability and security, while still having the ability to move if/when it suits them as opposed to when their lease is up. This may seem like a big risk on the part of the owner, but in reality, people tend to move every 5-7 years anyway, so you wont necessarily be locked into a below market deal for an extended period of time. Having several rental properties dilutes that risk even more.
It's similar to "rent controlled" properties except that because it's not a government program, you could tailor it to make sense from your perspective as well as the renters, and tweak it from deal to deal. One thing you've gotta notice about rent controlled properties: they're never empty.
There is housing available. There is demand for housing. When the institutionalized, generally accepted practices aren't doing the job of putting the two together, think of another way.
Lenders, in general, are not in a position to loosen up just yet and most home buyers aren't walking around with $200K in their pocket. So how do you get the deal done?
First, look at what it is the home buyer is really shopping for. Why do people buy as opposed to rent? The number one reason is predictability. It's not "ownership", since, as many have discovered, if you have a mortgage, you don't own it. However, buying can give you a fixed monthly payment for a long time and as long as you make your payments, nobody can tell you to leave.
What if you worked those features into a rental or lease deal? Forget about what's standard and think about giving the shopper what they're looking for while generating good cash flow for yourself. Don't wait for the banks to get healthy. Get on with business.
Here's an example. I have a house that would normally result in a 30 year fixed rate payment or monthly rental rate of about $1000. For many would-be home buyers, making the payment is not the issue at the moment. Getting the loan is. They don't want to rent, because they don't like the prospect of renewing a lease every 3-5 years. What if they had an open-ended lease option at a fixed rate? You offer to rent them the property at $1100/month for as long as they'd like. The lease could only be terminated on your end for lack of payment or some kind of criminal behavior. In any case, as long as the customer continued to make payments in full and on time, the rate remains the same and they can't be asked to leave.
A minimum term would be in order. Say 12 months, with 60 day notification of intent to move. Details could vary (non-transferrable, no sub-letting, etc), but the general idea is giving the renter predictability and security, while still having the ability to move if/when it suits them as opposed to when their lease is up. This may seem like a big risk on the part of the owner, but in reality, people tend to move every 5-7 years anyway, so you wont necessarily be locked into a below market deal for an extended period of time. Having several rental properties dilutes that risk even more.
It's similar to "rent controlled" properties except that because it's not a government program, you could tailor it to make sense from your perspective as well as the renters, and tweak it from deal to deal. One thing you've gotta notice about rent controlled properties: they're never empty.
There is housing available. There is demand for housing. When the institutionalized, generally accepted practices aren't doing the job of putting the two together, think of another way.
Friday, July 4, 2008
Happy Birthday America
Tis the season to reflect on what it means to be an American. What is it we’re so proud of? What makes this country unique in the world?
Is it our “shared values”? That hardly seems possible since we so often and so vehemently disagree on so many of them. Is it capitalism, democracy? No, those are great things, but not unique to America.
So what can we point to and say “That’s what being an American is all about.” I would submit that America’s greatest asset is not its capacity to induce conformity to a common way of thinking, but its capacity to enable hundreds of millions of individuals with a wide variety of opinions, viewpoints, perspectives and values to live, work and play together in relative peace. Our uniquely American common value is the recognition that so long as we agree to a few fundamentals rules of engagement among individuals, we don’t need to all have the same values.
When I see political opponents going at it tooth and nail one minute and making fun of themselves and each other the next, that’s America. When I look around the grocery store and see whites, blacks, hispanics, asians, and arabs browsing and greeting each other and nobody’s throwing rocks or blowing anything up, that’s America. When I’m at a social gathering and an openly gay person is debating a fundamentalist Christian about gay rights and they agree to disagree just before moving on to discussion of the Bronco’s prospects for next year, that’s America.
In other countries around the world discontent and dissent are expressed with violence and a seeming urgency that if one group’s view doesn’t win out over the other group’s view, life as we know it will come to an end. The emphasis is on the group, whether it be a political party, a religion an ethnicity or some other entitity that has been raised above the individual.
What has made the American experiment a success is the recognition that the core of independence, the foundation of freedom, is the individual. That doesn’t mean we all agree with each other. It doesn’t mean we all accept the validity of other’s choices. In fact the word “tolerance” has become widely misused and misunderstood. If you agree with or accept something, you’re not tolerating it. When you disagree with something or someone, but allow them to be as wrong as they want to be so long as they do you no harm, that’s tolerance.
It’s an odd dynamic. We are a diverse group held together by the will to preserve our individuality. That’s what makes us strong. That’s America. That’s what our men and women in uniform put themselves in harm’s way to protect and preserve every day.
I hope we never lose sight of that. Happy Independence Day!
Is it our “shared values”? That hardly seems possible since we so often and so vehemently disagree on so many of them. Is it capitalism, democracy? No, those are great things, but not unique to America.
So what can we point to and say “That’s what being an American is all about.” I would submit that America’s greatest asset is not its capacity to induce conformity to a common way of thinking, but its capacity to enable hundreds of millions of individuals with a wide variety of opinions, viewpoints, perspectives and values to live, work and play together in relative peace. Our uniquely American common value is the recognition that so long as we agree to a few fundamentals rules of engagement among individuals, we don’t need to all have the same values.
When I see political opponents going at it tooth and nail one minute and making fun of themselves and each other the next, that’s America. When I look around the grocery store and see whites, blacks, hispanics, asians, and arabs browsing and greeting each other and nobody’s throwing rocks or blowing anything up, that’s America. When I’m at a social gathering and an openly gay person is debating a fundamentalist Christian about gay rights and they agree to disagree just before moving on to discussion of the Bronco’s prospects for next year, that’s America.
In other countries around the world discontent and dissent are expressed with violence and a seeming urgency that if one group’s view doesn’t win out over the other group’s view, life as we know it will come to an end. The emphasis is on the group, whether it be a political party, a religion an ethnicity or some other entitity that has been raised above the individual.
What has made the American experiment a success is the recognition that the core of independence, the foundation of freedom, is the individual. That doesn’t mean we all agree with each other. It doesn’t mean we all accept the validity of other’s choices. In fact the word “tolerance” has become widely misused and misunderstood. If you agree with or accept something, you’re not tolerating it. When you disagree with something or someone, but allow them to be as wrong as they want to be so long as they do you no harm, that’s tolerance.
It’s an odd dynamic. We are a diverse group held together by the will to preserve our individuality. That’s what makes us strong. That’s America. That’s what our men and women in uniform put themselves in harm’s way to protect and preserve every day.
I hope we never lose sight of that. Happy Independence Day!
Monday, June 23, 2008
Has the U.S. Become Less Relevant on the World Stage?
As I was channel flipping today, I caught CNBC's Jim Cramer making a good point. He was asked whether or not coal was a good investment given the uncertainty about the development of "clean coal" technology in the U.S. His response was that coal is a great investment and what the U.S. does or doesn't do is irrelevant. He pointed out that China is no longer exporting coal and will fuel demand with or without the U.S. market.
It was later pointed out that India is currently constructing the world's largest gas refinery, which will come online before the end of the year. The U.S. may be unwilling to build more, so India is taking full advantage of the void. While we enter our third decade of discouraging domestic oil production, Brazil and Canada are developing huge new finds and using technology to exploit known reserves.
The U.S. once set the pace of progress around the globe. Now we are so paralyzed by the smorgasborg of fears fed to us by politicians and the media that we are like a very large corporation. We're able to institutionalize and tweak existing ideas at the margins, but we're losing our ability to make dramatic leaps forward. We are so afraid of making a mistake that we wont take anything but baby-steps in any direction, right or wrong. There are lots of great automobile designs being pursued by individuals and small companies across this country, but by the time they pass muster for mass production, they will likely be obsolete. Someone in some other country will have leap-frogged the U.S. market.
The only industry that the U.S. has not regulated into stagnation is information technology. At least when we officially pass the mantel of entrepreneurship to another country, we'll be among the first to know.
This is not a doomsday scenerio, just an observation. Large, non-agile entities have an important role in any economy. They preserve and extend the life of existing ideas until they are no longer viable. They ensure that we exploit things to their fullest before we dispose of them. They must be complimented however, by smaller, more agile risk takers for a robust economy of ideas to thrive. How many bad songs are produced for every great one? On the other hand, how many great songs would be produced if every piece of music had to be pre-approved by a panel of experts?
Conservatism creates demand for innovation. Innovation leads to ideas that warrant conservation. For both to exist, each must recognize the value of the other and not set out to dispense with one or the other. If the U.S. is going to be Yahoo, somebody has to be Google. If the U.S. is going to be Microsoft, somebody has to be Apple.
We will become what we become. While we do so, we should let India be India, China be China, Singapore be Singapore, Saudi be Saudi and not try to impose some kind of international economic order on the controlled chaos. That's not to say we shouldn't champion individual rights and freedoms. Free association of individuals in the absence of force is another critical component to a thriving world economy. But if we are going to progress, we have to allow risk takers to be risk takers.
Restricting the development of ideas is like restricting the gene pool. Nothing good will come from it.
It was later pointed out that India is currently constructing the world's largest gas refinery, which will come online before the end of the year. The U.S. may be unwilling to build more, so India is taking full advantage of the void. While we enter our third decade of discouraging domestic oil production, Brazil and Canada are developing huge new finds and using technology to exploit known reserves.
The U.S. once set the pace of progress around the globe. Now we are so paralyzed by the smorgasborg of fears fed to us by politicians and the media that we are like a very large corporation. We're able to institutionalize and tweak existing ideas at the margins, but we're losing our ability to make dramatic leaps forward. We are so afraid of making a mistake that we wont take anything but baby-steps in any direction, right or wrong. There are lots of great automobile designs being pursued by individuals and small companies across this country, but by the time they pass muster for mass production, they will likely be obsolete. Someone in some other country will have leap-frogged the U.S. market.
The only industry that the U.S. has not regulated into stagnation is information technology. At least when we officially pass the mantel of entrepreneurship to another country, we'll be among the first to know.
This is not a doomsday scenerio, just an observation. Large, non-agile entities have an important role in any economy. They preserve and extend the life of existing ideas until they are no longer viable. They ensure that we exploit things to their fullest before we dispose of them. They must be complimented however, by smaller, more agile risk takers for a robust economy of ideas to thrive. How many bad songs are produced for every great one? On the other hand, how many great songs would be produced if every piece of music had to be pre-approved by a panel of experts?
Conservatism creates demand for innovation. Innovation leads to ideas that warrant conservation. For both to exist, each must recognize the value of the other and not set out to dispense with one or the other. If the U.S. is going to be Yahoo, somebody has to be Google. If the U.S. is going to be Microsoft, somebody has to be Apple.
We will become what we become. While we do so, we should let India be India, China be China, Singapore be Singapore, Saudi be Saudi and not try to impose some kind of international economic order on the controlled chaos. That's not to say we shouldn't champion individual rights and freedoms. Free association of individuals in the absence of force is another critical component to a thriving world economy. But if we are going to progress, we have to allow risk takers to be risk takers.
Restricting the development of ideas is like restricting the gene pool. Nothing good will come from it.
Saturday, June 14, 2008
Windfall Profits Tax
In what seems like the latest episode of "Back to the Future" or "That Seventies Show" Barak Obama and friends are proposing a new "windfall profits" tax on oil companies. Never mind that nobody can actually define what a "windfall profit" is. The idea is to imply that there is a certain level of profit that is simply unacceptable and must be stopped.
The idea has come about due to record oil prices and record profits being posted by the likes of Exxon. They never mention the fact that Exxon's return on investment is almost half of what the government takes, with zero investment being made on their part. Yet a 9% return on investment is touted as obscene, while the government's 15% take still isn't enough.
What would be the impact of a windfall profits tax? We don't have to wonder. It's been done before. Essentially you're telling the oil companies that while there downside risk is unlimited, their upside potential will be capped at a level deemed appropriate by the government. Why in the world would one put big money at risk for exploration and development under those conditions? Of course, once you reach the level of “windfall profit” there is zero reason to do anything to become more efficient or increase productivity. Once you’ve made your quota, you might as well send everyone home, shut everything down and take the rest of the year off. At a time when we are ever increasingly dependent on foreign oil from countries who don't like us very much, we're going to bend over backward to make sure we don't produce any more at home.
Believe it or not, oil company execs and shareholders are not genetically compelled to produce oil. If there's easier money to be made elsewhere, they'll take their talents and resources elsewhere. That's exactly what happened the last time we tried windfall profits taxes and price controls, and it's exactly what will happen this time.
Politicians don't want you to be energy independent. They want you to be government dependent. They are once again taking an opportunity to demonize the producers in a bid to gain more control over resources. They want to be the gatekeepers, the power-brokers. Now, I'm sure some are well intentioned, just ignorant, but the result will be the same.
I don't know that the big shift to the left can be avoided in the short term. I do believe it will be reversed in the long term, because it can't and wont work. It never has. It never will. The folks who run the post office, Amtrak and the DMV cannot outperform the free market. I guess we just have to learn by demonstration once again. The good news is that ten years from now, some upstart will push through a package of massive tax cuts, privatization and deregulation.
The more things change, the more they stay the same.
The idea has come about due to record oil prices and record profits being posted by the likes of Exxon. They never mention the fact that Exxon's return on investment is almost half of what the government takes, with zero investment being made on their part. Yet a 9% return on investment is touted as obscene, while the government's 15% take still isn't enough.
What would be the impact of a windfall profits tax? We don't have to wonder. It's been done before. Essentially you're telling the oil companies that while there downside risk is unlimited, their upside potential will be capped at a level deemed appropriate by the government. Why in the world would one put big money at risk for exploration and development under those conditions? Of course, once you reach the level of “windfall profit” there is zero reason to do anything to become more efficient or increase productivity. Once you’ve made your quota, you might as well send everyone home, shut everything down and take the rest of the year off. At a time when we are ever increasingly dependent on foreign oil from countries who don't like us very much, we're going to bend over backward to make sure we don't produce any more at home.
Believe it or not, oil company execs and shareholders are not genetically compelled to produce oil. If there's easier money to be made elsewhere, they'll take their talents and resources elsewhere. That's exactly what happened the last time we tried windfall profits taxes and price controls, and it's exactly what will happen this time.
Politicians don't want you to be energy independent. They want you to be government dependent. They are once again taking an opportunity to demonize the producers in a bid to gain more control over resources. They want to be the gatekeepers, the power-brokers. Now, I'm sure some are well intentioned, just ignorant, but the result will be the same.
I don't know that the big shift to the left can be avoided in the short term. I do believe it will be reversed in the long term, because it can't and wont work. It never has. It never will. The folks who run the post office, Amtrak and the DMV cannot outperform the free market. I guess we just have to learn by demonstration once again. The good news is that ten years from now, some upstart will push through a package of massive tax cuts, privatization and deregulation.
The more things change, the more they stay the same.
Monday, June 9, 2008
The Chevy Volt - Where Will it Take the Market?
Chevy is going full tilt into the electric car market with mass production of the Chevy Volt scheduled for 2010.
Actually, it's a hybrid, but it can be recharged by plugging in to a regular wall socket. It's a good start, and it can kick-start the rest of the market into high gear if demand is strong.
It could also impact the energy market in a big way. Consider that the federal government taxes gas to the tune of about 18 cents per gallon. State governments tack on even more. California's gas tax is a whopping 69 cents/gallon. In total about 15% of the price of gas goes to the government (by comparison the greedy oil companies net is about 4%). The big conflict between the government and the advent of electric vehicles is: How do you keep that revenue flowing?
What if electric vehicle technology goes fully electric? You can already buy home wind generators at Sam's Club and other retail outlets. What if you could power your car without even going on the grid?
The folks who stand the most to lose by a change in the status quo are not the oil executives, it's government; here and abroad. Producers will find something else to produce. Government produces nothing. It must find a new way to take.
There are a few ways things could go. First, we could see a resurgence in privately owned and operated roads. Toll roads could become much more common as revenues from pumping gas decline. This option makes too much sense, so is the least likely. Too much of the money flow would come out of the hands of Congress. Since controlling cash flow is where all of their power and influence comes from, they'll never go for it.
The government could dramatically hike taxes on electricity, but that would only encourage more private generation. They could tax generators, but I don't think the public would go for it, and it's too easy to get around.
The most likely scenerio is a dramatic drop in the price of crude well before the mass production roll out. Once politicians realize the threat, they'll suddenly come around to drilling in Anwar, off the coast and elsewhere to deal with our "energy emergency", yes, even the left will find some pragmatic justification for their 180 degree swing. This will just be cover. There really is no short-term supply crunch. We just let too much of the supply fall under the control of OPEC and friends. There is still plenty of untapped oil in the ground. Just as the falling dollar and demand in China and India have been used to explain the run up (as if the dollar fell 80% and/or demand in China quintupled in 18 months) the perception of increased supply will be used to explain the precipitous fall in the price of crude.
I don't know if it will work. There are a number of promising technologies that may well be able to compete with $28/barrel oil. Timing is key. If oil falls fast and far enough, a lot of investment dollars could come out of alternatives. If the players wait too long, they wont be able to get the genie back in the bottle.
Actually, it's a hybrid, but it can be recharged by plugging in to a regular wall socket. It's a good start, and it can kick-start the rest of the market into high gear if demand is strong.
It could also impact the energy market in a big way. Consider that the federal government taxes gas to the tune of about 18 cents per gallon. State governments tack on even more. California's gas tax is a whopping 69 cents/gallon. In total about 15% of the price of gas goes to the government (by comparison the greedy oil companies net is about 4%). The big conflict between the government and the advent of electric vehicles is: How do you keep that revenue flowing?
What if electric vehicle technology goes fully electric? You can already buy home wind generators at Sam's Club and other retail outlets. What if you could power your car without even going on the grid?
The folks who stand the most to lose by a change in the status quo are not the oil executives, it's government; here and abroad. Producers will find something else to produce. Government produces nothing. It must find a new way to take.
There are a few ways things could go. First, we could see a resurgence in privately owned and operated roads. Toll roads could become much more common as revenues from pumping gas decline. This option makes too much sense, so is the least likely. Too much of the money flow would come out of the hands of Congress. Since controlling cash flow is where all of their power and influence comes from, they'll never go for it.
The government could dramatically hike taxes on electricity, but that would only encourage more private generation. They could tax generators, but I don't think the public would go for it, and it's too easy to get around.
The most likely scenerio is a dramatic drop in the price of crude well before the mass production roll out. Once politicians realize the threat, they'll suddenly come around to drilling in Anwar, off the coast and elsewhere to deal with our "energy emergency", yes, even the left will find some pragmatic justification for their 180 degree swing. This will just be cover. There really is no short-term supply crunch. We just let too much of the supply fall under the control of OPEC and friends. There is still plenty of untapped oil in the ground. Just as the falling dollar and demand in China and India have been used to explain the run up (as if the dollar fell 80% and/or demand in China quintupled in 18 months) the perception of increased supply will be used to explain the precipitous fall in the price of crude.
I don't know if it will work. There are a number of promising technologies that may well be able to compete with $28/barrel oil. Timing is key. If oil falls fast and far enough, a lot of investment dollars could come out of alternatives. If the players wait too long, they wont be able to get the genie back in the bottle.
Monday, June 2, 2008
The May Surge in Oil Prices
Oil has been on the rise for some time now, but in May it accelerated a bit, up about 15% for the month. What happened? Did demand suddenly spike? Did supply drop? Was there manipulation?
Actually, I believe I put my finger on it this morning as I watched a commercial for $2.99 gas, guaranteed for three years when you buy certain new cars. If I were a CFO for a car company considering making such an offer, what would I do? Well, you may be on the hook for some big losses if gas continues to go sky high. But, you can offset that potential expense by buying oil and gas futures. I suspect that the car makers went to the market before and during this promotion and purchased as many oil and gas contracts as they felt they needed, to hedge against losses due to the offer. Smarter speculators than me would have realized this much earlier on and taken advantage by increasing their own positions, so you get a short term spike in demand and prices.
The good news is that given the behavior of oil prices in recent days, it looks like they're close to meeting their reserve requirements.
Actually, I believe I put my finger on it this morning as I watched a commercial for $2.99 gas, guaranteed for three years when you buy certain new cars. If I were a CFO for a car company considering making such an offer, what would I do? Well, you may be on the hook for some big losses if gas continues to go sky high. But, you can offset that potential expense by buying oil and gas futures. I suspect that the car makers went to the market before and during this promotion and purchased as many oil and gas contracts as they felt they needed, to hedge against losses due to the offer. Smarter speculators than me would have realized this much earlier on and taken advantage by increasing their own positions, so you get a short term spike in demand and prices.
The good news is that given the behavior of oil prices in recent days, it looks like they're close to meeting their reserve requirements.
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