Monday, August 25, 2008

Buy Lunch for a Soldier and You'll Feed Yourself in More Ways Than One

With all the negative news about the markets and the economy, I thought I would share with you a personal feel good story just to lighten the mood. Recently I was flying from San Francisco to Portland Oregon and I had a three hour layover in Portland airport. It was close to lunch time and having time to kill, I decided to go to one of those slow food restaurants in the airport.

I sat down and the friendly waitress came over and ask for my drink order. She brought me my usual large Diet Coke and then I ordered a salad for lunch. As I was sitting there three soldiers came in and sat down to have lunch. They were, I found out later, traveling from one post to another and Portland was a stop over point. As I sat there I looked at the soldiers and said to my self, " I wonder if I could buy them lunch?" Of course I could buy them lunch, but the real questions was "Should I." I didn't want to pry into the discussion they were having, so I called over the waitress and asked how much their bill was.

She told me the amount of their bill was and I asked her to please put it, plus tip, on my bill. I asked her not to identify me, just say that someone, who was thank full for their service, wanted in a small way, to say thank you to them. The waitress brought over my bill for all of our lunches and I signed the bill. This is the point were my plan went afoul. The waitress went over to the soldiers, pointed to me and I heard her say. "That nice man over there paid for your lunch." So much for my idea of keeping what I had done to myself, she let the cat out of the bag.

When I left the restaurant I stopped by the soldiers table and said thank you for all that they do. These soldiers seemed somewhat shocked, but were very appreciative, airport food is not inexpensive. I went on my way and I felt good about what I had done. The three soldiers, my self, and the rest of the wait staff in the restaurant knew what I had done and that was enough.

As I got home and thought more and more about what I had done I didn't tell my wife or my children about what happened in Portland. I didn't tell them because I didn't want them to know, it was something I wanted for myself. I decided that I felt so good at what I had done that I promised myself that every time I had a meal in an airport I would look for some soldiers to feed. As I thought about the surprise on their faces I wondered if I was the only person in the airport who thought about buying them lunch? More importantly, I wondered how many other Americans across this country think about buying lunch for soldiers?

I know that, many of you who read this blog travel a great deal and are in airports all the time. So, I ask you to consider this request; the next time you are in an airport and about to eat, look around and see if there are any soldiers in the restaurant, if there are, call the waitress over and tell her that you want buy them their lunch. You'll feel better for doing it, and the soldiers will know that Americans like you and me really do care about them and the sacrifices they make for us.

I know all of us don't like the volatility of the stock market, but when you compare the stock market volatility to the life and death nature of those serving in the military, spend a little money and take a solder to lunch. The soldier will really appreciate it, and so will you. Pass this one on!!!

Dan Perkins

Friday, August 15, 2008

Stair Steps to Heaven?

Look at the chart above and you will see a chart of the movement of the S&P 500 stock index over the last 30 days. The untrained eye may not see what I see. Look at the bottoms of each bar, that is a bottom of the trading day. Also look at the tops of the bars and you will see the high in the trading day. Now draw a line connecting all of the tops and another line connecting all the bottoms.
Now look at what has happened over this period of time. Every time the market goes up it falls back, but it doesn't fall back below the previous low. When the market goes up from a sell off it goes higher than the previous high. What this means is that the market has built a floor and it is trying to beak out to the upside.

I believe we are in a strong rally in a bear market. Over the years it has been my experience that many bear market rallies can be stronger that rallies in a bull market. In my most recent posting I suggested that the dollar was in recovery and that traders were have trouble covering their short positions and getting long the dollar. I think the same thing is happening in the American equity markets.

As of Friday August 15 the value of gold was about $780 an ounce much lower than I predicted it would fall. The strength of the dollar which I also predicted has been swift and painful for many traders. In the span of 1 week the British Pound fell to a level it hasn't seen against the dollar in 2 years. Things have moved quicker than I thought they would, but the direction I was predicting was correct.

The American equity markets are making higher high and higher lows, money is stampeding out of gold, energy and all commodities and looking for an opportunity, the alternative is stocks.. The Fed is on hold and the rest of the world will be forced to bring down interest rates in line with interest rates in America. People all of a sudden want to own American stocks and bonds. As long as the chart patten of higher highs and higher lows continue the market will continue to climb. We can have some strong both up and down days, but money is in motion and looking for an opportunity.

Nothing goes up forever so watch out when the trend reverses. When one or the other trend line, lower highs or lower lows is broken this market could fall big time perhaps over 1,000 points in one day. It is possible that we may go back to test the previous highs in the market before the election. The outcome of the election may have significant impact on the direction in the market.

Dan Perkins

Sunday, August 10, 2008

Do you want to go to London?

In early June I predicted that by mid summer we would see crude oil at about $100 a barrel and Gold around $850. As of Sunday, August 10, we are almost half way through the summer and both oil and gold are within $15 dollar of my target price. I still have 11 days to go and I might just hit the target.

In another posting I suggested that I thought that the dollar would recover. As the price of oil and gold has come down the dollar has risen. I think there are a great many hedge funds and dealers that are short the dollar big time. I also believe the traders and short sellers are finding it hard to cover their short position and in turn go long the dollar because they are wed to the short dollar position; they just don't believe what they are seeing on the tape.

We could see a spike up even greater than the one that occurred over the last few weeks as traders scramble to cover their short position and go long. Many of you may be asking yourself why the strong recovery in the dollar? The markets were expecting the Fed to increase interest rates and with the payroll decline there was no way the Fed can increase rates. On the surface it would appear that this lack of movement by the Fed would have caused the dollar to decline. The reverse happened and the dollar strengthened. Why?

The other central banks around the world are just now beginning to deal with the problems of falling real estate prices and loan defaults. The major industrial countries find that their economies are starting to falter. The world is just now beginning to experience what the US has been going through over the last 13 month. Central bankers find themselves between a rock and a hard place. The Fed is saying we are standing pat and the foreign bankers find themselves in the position that they will have to lower their interest rates to try and stave off a recession. With the spread narrowing between the US Dollar and the rest of the currencies people will want to have their money in the dollar.

The other issue for me about the dollar is the decline in some stock prices in the second half of 2008. As the dollar declined those companies who were multinational in nature saw earnings increase because of exchange rates. With the dollar falling against the euro companies that got paid in euros and then converted the earnings back into dollars had inflated earnings. I expect that with the current strength of the dollar we will see third quarter earnings affected by the increase in the value of the dollar.

Being a global economy the impact of the changing dollar will have serious implications for many economies throughout the world. I will share with you two examples of how much the dollar has increased in value. In May of 2007 my wife and I were in London and at that time the value of the pound was $2.12 to one pound. As of Friday the value was $1.9212 to the pound. The second example of change is the Canadian Dollar. Six month ago the value of the US Dollar to the Canadian Dollar was $1.05. As of Friday the value was $.9240 to the Canadian.

This may well be the beginning of a significant reversal in trend that takes the pound to $1.75, the Euro to 125 and the Yen to 125. I did pretty good predicting the price of oil, gold and the dollar.Lets see what happens. Perhaps it is time to begin to make travel plans to England and Europe.

Dan Perkins

Monday, August 4, 2008

Blood in the Streets

The chart to the left is a comparison of the price of Cross Timbers (XTO), one of the largest natural gas developers in the nation, and the price of oil. I'm using the Exchange Traded Fund (ETF) strangely enough called OIL. As you can see the price decline in OIL this year has been about 35% vs. a decline of 75% for XTO. A closer look at the price of XTO has it just about flat for the last 12 months, while oil is up about 75% for the same period.

Clearly, oil got ahead of itself and has backed off in terms of price, but the fall in natural gas stocks is a bit more puzzling to me. All the talk about alternative energy has natural gas at its core. We have huge deposits of natural gas in the United States so we will not have to import any natural gas to meet our needs. Is the greater decline in XTO an example of the markets throwing out the baby with the bath water? It is companies like XTO that will drill for the natural gas that we will need for energy independence.

I asked my self, is it true that we are not drilling in the United States to meet our needs from the resources we have here in America? The answer, based on exporting $750 billion dollars a year, some to foreign government that are not our friend, is yes. Is it also true that the developing countries of the world are demanding more “carbon based fuels”? The answer to that question is yes. Is it possible that the slowdown in the United States will spread to other nations both developed and developing and take some of the pressure of the oil inventory for the short run? The answer is yes.

Then I had to ask myself the final two questions. First, at some point in time when the global economies start growing again some time in the future, will oil and natural gas prices be higher than they are today? Yes. Second, is now a good time to either add to or start a new position in the natural gas stocks like XTO? I believe the answer is an unequivocal yes. Could these stocks go lower? Possibly, but for the long-term investor adding or entering into these stocks at these levels is a great bargain.

Someone once said that the best time to buy stocks was when there was “Blood in the Streets”. The decline in these stocks clearly has been a “Blood Bath” and nobody wants to talk about buying them at this level. I expect these companies to report great earnings and at these levels be trading at 6 to 8 times earnings or less. For the investor that has a long view now is the time to start committing capital. If you have $25,000 dollars, you want to invest in this assets class pick several stocks and commit 25% now, 25% in 30 days and 25% in 90 days and the last 25% of your money by year-end. I fully expect some short-term rallies and then retracement to higher lows. Watch for these higher lows as a possible signal to add to you positions.

Dan Perkins

Friday, August 1, 2008

Is the Financial Press Reporting Responsibly?

As I watched the most recent market, meltdown I was taken back by the contrast of what the Press was saying and what the Sectary of the Treasury, Paulson was saying about FANNIE MAE and FREDDI MAC. The market press was reporting the demise of both of these companies while the Secretary was saying they do not have a problem, they have plenty of reserves and cash.

The financial reporters were just pounding the story about pending bankruptcy adding fuel to the fire. Then you had the naked short sellers (previous post) applying pressure on the stocks. Let me tell you the other side of the story. First, in the entire history of both companies they have never missed a coupon payment. Second, both companies have outstanding lines of credit, which neither has had to use to meet its obligations.

I ask you this question “Did any of you hear any of this information during the melt down?” One additional point, both of these companies are public companies and have to comply under the SEC rules of disclosure. Under the rules company officer’s are not permitted to discuss company financial during the 30 days prior the announcement of earnings, this 30 days is called the "quite period". During all of this turmoil, the companies were in the quite period and they could not say anything to defend themselves.

One last point from my “soap box”. Both of these companies are Government Sponsored Entities (GSE) created by Congress to carry out a specific mission on behalf of the government. These companies have no diversification in their business mix, they only do one thing, they buy mortgages from the banks and other originators. They cannot change their business regardless of the mortgage market. We can debate: are they to large, do the have to much power, are they running their business under the best practices rules? All of these are important questions and need to be answered, but they were charted by the government to carry out housing policy set by the government.

They are not perfect and they do need supervision, but largely they have been doing what we asked them to do. Again, I did not see any of this responsibility discussed in the press. I commend the Secretary for his staunch support of the mission of these two organizations. As I have written many times before, the residential real estate market is key to the prosperity of our nation and our people. We have serious problems in the real estate market, like 5 years of inventory in Florida and declines in the values in California of 28% from the top. We can work through these problems, but it will take longer than most reporters are willing to wait.

Dan Perkins