John McCain’s support of the moratorium on offshore drilling during his first presidential campaign was certainly laudable, but his decision to completely change his position and tell a group of Houston oil executives exactly what they wanted to hear today was the same Washington politics that has prevented us from achieving energy independence for decades. Much like his gas tax gimmick that would leave consumers with pennies in savings, opening our coastlines to offshore drilling would take at least a decade to produce any oil at all, and the effect on gasoline prices would be negligible at best since America only has 3% of the world’s oil. It’s another example of short-term political posturing from Washington, not the long-term leadership we need to solve our dependence on oil. Instead of giving oil executives another way to boost their record profits, I believe we should put in place a windfall profits tax that will help to ease the burden of higher energy costs on working families, and we should invest in the affordable, renewable sources of energy that Senator McCain has opposed in the past,” said Barack Obama.
After reading this from the Obama campaign, I’ve got to say that I think Obama may be the most clueless politician around when it comes to economics; particularly the economics of oil. Where to start? While there are many issues I have with his statement, two in particular are especially horrible.
First, he complains that, “opening our coastlines to offshore drilling would take at least a decade to produce any oil at all.” This is the same argument Bill Clinton made in 1996 about drilling in the Arctic National Wildlife Refuge (ANWR) when he vetoed legislation allowing the drilling. It would have been very nice if oil from ANWR had started pumping in 2006. 500,000 barrels per day may not have solved all of our problems, but would certainly have impacted our economy in several ways. First assuming that drilling in ANWR didn’t impact oil prices, this would have reduced our trade deficit by almost $20 billion per year. The reality is that it would have also impacted oil prices, so the price of imported oil would have dropped which would have reduced the trade deficit even more. The irony of Obama’s statement is that he then calls McCain’s position “short-term political posturing.” It is amazing to me that Obama complains off-shore drilling will take too long so it is short-term posturing on McCain’s part in the very next sentence.
His position on off-shore drilling is bad, but not as bad as his support for the windfall profits tax, “I believe we should put in place a windfall profits tax that will help to ease the burden of higher energy costs on working families.” This is one of the dumbest statements imaginable and proves Obama has no clue on how the economy works. The windfall profit tax will not ease the burden on working families, but will put a tax directly on them. Here is how a windfall profit tax will work in practice:
You have a company like BP that pumps oil out of the ground in Russia with TNK. This oil is then refined overseas. Once they have products like gasoline and diesel, they then decide where to ship these products since there is a surplus of gas and diesel in Russia. Option 1 is to ship it to the U.S. Option 2 is to ship it elsewhere. If you ship it to the U.S., your profits will be taxed with a windfall profit tax. If it is shipped elsewhere, it will not. BP will ship the product elsewhere until U.S. prices increase enough for the NET profit of shipping it to the U.S. to equal the NET profit of shipping it elsewhere. In other words, pump prices will have to increase the amount of the windfall profits tax to make it worthwhile to ship to the U.S. I’m not exactly sure how this eases the burden on working class families.
mPhase Technologies, a developmental stage hi-tech company has some exciting products they claim to be working on. One of the featured technologies they proudly mention on their website is the magnetometer. The magnetometer is similar to something you would see in an unrealistic film sci-fi movie.Of course this technology is “real”. The magnetometer can detect different metals that management says will help future security threats in and other high security locations. What is baffling is the example they use to explain why the magnetometer is so great is that it was able to detect a crowbar from 10 meters away.This should lead to high skepticism.
One will not find this information in their 10-Q’s but in YouTube videos, which are also displayed on the front page of their website.Surly this is a way for management to pump the stock to show would be investors how great their technology is.
Senior management have a long history together.They used to run a company called PacketPort.com, which was a pump and dump from 2005.A simple search of the SEC Litigation page will return several hits.
“The Securities and Exchange Commission filed an enforcement action on November 15, 2005, charging six individuals and four companies with securities fraud and other violations in connection with a scheme to pump and dump the stock of PacketPort.com, a company based in Norwalk, Connecticut. The SEC alleges that three PacketPort.com officials and two stock touters, aided and abetted by a registered representative, executed the pump and dump, which obtained more than $9 million in illicit proceeds.”
Top management, Ronald Durando and Gustave Dotoli are certainly a management team shareholders may want to think twice about.
“The Complaint alleges that Ronald Durando, a 48-year-old resident of Nutley, New Jersey, privately acquired a majority stake in an insolvent public company, then called Linkon. His stake in Linkon consisted of restricted shares. With the help of his colleagues, Gustave Dotoli, a 70-year-old resident of Nutley, New Jersey, and attorney Robert H. Jaffe, a 69-year-old resident of Mountainside, New Jersey, Durando took control of Linkon and changed its name to PacketPort.com. Durando became president and CEO, and Jaffe and Dotoli became directors. Durando, Jaffe, and Dotoli laundered restrictive legends from Durando’s share certificates so that the restricted shares could be passed off to the public as “free trading.” Durando then paid IP Equity, Inc., a private California corporation that operated an Internet-based stock newsletter, and its principals, M. Christopher Agarwal and Theodore Kunzog, to publish false publicity and bogus recommendations about PacketPort.com in order to pump up the stock price. The share price more than quadrupled following the false publicity, rising from about $4.75 to a high of about $19.50.”
Durando and Dotoli also happen to be running mPhase Technologies. These crooks aren’t just unethical but from a very bird’s eye view downright stupid.Perhaps they should realize that committing similar crimes for something they have already been accused for in the past would hurt them in court; mPhase is PacketPort.com déjà vu. Unfortunately past litigation and investigations into management’s former affairs should lead one to believe they will never have the opportunity to use a magnetometer as it makes sense to conclude that this product is only an mPhase shareholder’s delusion created by a YouTube video.
Societe Generale SA is a prime example of how a corporate culture can lead people to make extremely poor financial transactions.Jerome Kerviel was the name of the futures trader who helped cover up some very large trading positions that led to a $7 billion loss.Kerviel’s trading results for the year had a direct correlation to his bonus.As any rational investor would know, a one-year performance by itself is not highly correlated on average to one’s long-term performance.In addition, the way one makes returns is just as important as the returns themselves.This is the reason many funds who make triple digit returns on high leverage tend to do poorly or blow up in the years to come. The average fund by definition must perform by the mean performance of all funds.One could also assume with high certainty that the mean return going forward will be in single to low double digits and certainly much lower than triple digits.Therefore, you could be 99% confident that if you take all the funds that use excessive leverage to make abnormal returns a reversion to the mean will take place.This is why a corporate culture that rewards for excessive short-term returns are only asking for disaster ahead.In Kerviel’s case, he succumbed to human emotion and not some sort of money laundering, which many thought to be the case originally.
The associated press came out with a staggering report out of Iran this morning. Iranian President Mahmoud Ahmadinejad declared $115 barrel oil “too low”. He said, “The oil price of $115 a barrel in today’s global markets is a deceiving figure. Oil is a strategic commodity that needs to discover its real value.”
He also claimed that $115 barrel oil was still below the inflation adjusted highs set in 1980. Ahmadinejad called the United States arrogant and selfish and said us Americans believe oil is a free commodity. He then went on to comment on the U.S. currency and called the dollar “a handful of paper” lacking global support. A website quoted Ahmadinejad as saying, “The dollar is not money and longer but a handful of paper distributed in the world without commodity support.”
Ahmadinejad’s points he was trying to make are right on the mark but the evidence he uses is certainly flawed making his credibility all but lacking. I must downright dismiss his remarks that the price of oil is still too low. While I believe oil is bound to go higher the current price of oil is the current price of oil with no questions asked. There’s no conspiracy to keep the price of oil low. Now a much more appropriate argument would to say that per cup oil is cheaper than bottled water and to go more in depth on the facts of oil depletion. Making the argument that global production is higher now than it most likely will ever be again it would be all but conclusive that oil is bound to shoot up higher than it is right now.
His inflation adjusted numbers do nothing to support his claim. If you adjust the 1980 high of $38/bbl you will get a number between $96 and $103 barrel oil. Even if the price is lower than it was in 1980 it certainly should be higher anyway as global production was still increasing even though the United States peaked nationally in the early 1970s. Whether the numbers are higher are lower by some a few percentage points is trivial and a moot point as it totally disregards the reason why oil prices are where they are today. It’s about the rate of oil depletion a topic Ahmadinejad didn’t mention once.
His bearish view on the dollar has no merit. He calls it a handful of paper with no global or commodity support. He is right the commodity support is not there but fiat currency is not backed by an underlying commodity but a faith in the nation which the currency is printed that their monetary and economic policy is sound. Global support is still certainly there. While it may not always be there the facts Ahmadinejad are stating are downright incorrect. The Chinese are still buying our debt and as long as this happens our dollar will remain somewhat propped up. Of course if this support ever went away our dollar would crash and would only be compounded by runs on the dollar and the U.S. banking system. Neither our gold reserves at Fort Knox nor our currency reserves would be enough to help keep our currency stable in that situation as our gold would last two days and our currency reserves roughly eight seconds.
Ahmadinejad seems to want it both ways as these assertions seem nothing more than Iranian PR. It is no surprise that high oil prices and a weak dollar would benefit Iran’s economy. Of course if the reason for high oil prices is an increase in the rate of global oil depletion than that would mean Iran and Iraq may certainly be in decline and would also assume their reserves may be less than what has been stated. This would give not only Iran but all OPEC nations less leverage in the world.
On a more rhetorical note, a crashing dollar crashed would not be a handful of paper but of cotton
On October 27, 2007, Seth Klarman who manages the Baupost Group gave a speech as well as answered questions at the MIT Sloan Investment Management Conference. Klarman stressed tuning out daily market blips. He noted most investors can’t tune out the so called noise.I would tend to agree with this assessment.Even so called “Buffett Followers” who preach his mantra of never looking at stock quotes – many of them do, it’s just not in vogue.His conservative and somewhat boring approach to investing has given him impressive returns by any measure.Not only has he significantly outperformed the market but he has made money for his limited partners 24 out of 25 years.The key to this high yield investing approach is to first focus on downside risk before even considering the upside.He has also made his money without ever using leverage.Klarman makes the point that the market should not dictate you and using margin allows it to do just that. “It’s a slippery slope”, he said while referring to using leverage.“If you are on a small amount of leverage, why not use more?”Leverage is addicting.
“We are in an era of leverage,” he said to the crowd.Klarman noted that the last two generations of American have been using their homes as ATM machines and have been buying more goods on credit.He pointed out the problem wasn’t just amongst Main Street.Investment Banks have been pushing structured investment vehicles and exotic finances and the rating agencies have been labeling “toxic waste” as investment grade.
This situation has certainly become worse since October of 2007 and Klarman seems to have been very right on the severity of this theme which many pundits were calling trivial.Klarman noted last year that “Leverage is at record high levels…probably the beginning of a credit de-leveraging period.”He pointed out that the debt crisis is probably not near the end since people who owe money are taking out more debt to cure the problem.“This very ‘cure’ is what caused the problem in the first place”, he said.
In today’s environment credit receivables are ballooning. Perhaps the next round of defaults will take place in this arena. If you can’t take money out of your house anymore why not just swipe plastic? This type of mindset I believe is very prevalent in American society and while pundits such as Larry Kudlow will easily dismiss this rationale, I would be skeptical of this assessment.
Once again as prices at the pump skyrocket big oil executives had to defend themselves against critics in Congress. These hearings aren’t a surprise though. Every time gasoline prices make a big move to the upside Congress howls in anger pointing the finger at an “Oil Company Conspiracy”.Of course any rationally minded human being would know gasoline and oil were all publicly traded commodities as is heating oil and natural gas.
One would think the chairman of the House Select Committee on Energy Independence and Global Warming would have some insightful remarks to dispute the “evil oil company” claims unless of course the one making the most foolish remarks was the chairman himself. Rep. Ed Markey of Massachusetts demanded, “The American people deserve answers and it is time for Big Oil to go on the record about these record prices.”
“Given that the largest contributor to the cost of gasoline is crude oil, this has translated into record-high gasoline prices,” Peter Robertson, vice chairman of Chevron said.
He also wanted to know why big oil hadn’t put more money into alternative energies. Perhaps it didn’t cross his mind that he was questioning “Big Oil” hence the word “oil”. Maybe he should ask executives at Pfizer why they aren’t putting more money into Vitamins or why Exxon Pays more taxes to the US Government then they have US revenue. Why not ask why we push fuels with negative energy yields such as Ethanol and Hydrogen which do even more damage to the environment than the usage of gasoline? As someone who should have vast knowledge on the subject of the oil industry as well as alternative fuels and their contributions to pollution or lack thereof, these questions are nothing but disturbing as they show the lack of competence in Congress to one of the largest issues to not only the United States but the world.
On September 10, 2007 I wrote an article about Dominion Homes, the struggling homebuilder based out of Ohio. The company was highly leveraged, had close to no cash on the balance sheet, and owned roughly 400 million dollars in land on the books. With tight liquidity in the housing market the company was having trouble selling off its inventory. With roughly 200 million dollars of long term debt on the balance sheet, the company was flirting with bankruptcy.
I suggested the company would make a fantastic buyout candidate as the company was trading for a mere fraction of the 200 million dollar book value. The reasoning behind a buyout was that a larger company with a stronger balance sheet could pay down its debt which would take bankruptcy out of the question as well as increase Dominion’s credit rating. The transaction would also allow for Dominion Homes to wait until the housing market rebounded to sell off its land instead of forcefully liquidate. While the company may get below book either way, there is no question Dominion Homes would get more for their inventory if they had the luxury of not having their lenders demanding payment. Of course the only way they could achieve that luxury would be paying down their debt and the best way to do that would be to have someone else do it for them.
On January 18, 2008 Angelo Gordon & Co., L.P. a well respected firm along with Silver Point Capital, L.P. decided to take the company over for the bargain price of 65 cents a share which would equate to about a 5.5. million dollar market cap. While Angelo Gordon and Silver Point are practically getting this company for nothing, shareholders of Dominion Homes faced two awful choices to make: Sellout at fire sale prices or go bankrupt and be left with possibly no equity. Bankruptcy was just an option they couldn’t afford so they had to do the next worst thing which happened to be the only other option.
Management made a press release that very day saying, “The homebuilding industry continues to be in a very difficult period,” said Mr. Borror. “This transaction will allow Dominion Homes to continue our 55-year tradition of building quality homes that exceed our customers’ expectations.”
The press release also hinted to one of the obvious reasons of the buyout saying , “The Company also announced today that it has entered into certain amendments to its existing credit facility with its lenders in anticipation of the merger transaction. The lenders have agreed to increase the Company’s borrowing capacity under the credit facility by approximately $3,500,000 and to forbear until the earlier of June 30, 2008 or termination of the merger agreement from exercising their rights and remedies under the credit facility.”
This deal could be no further from what was perfectly inevitable. While I did predict this several months prior, my feat was none other then logic and far from predicting the future. This is also a good example of why never to buy a company in hopes for a buyout. As the company looked cheap at 3 dollars which was where the stock price hovered at the day I wrote my original article. There is an arbitrage opportunity where one has to see whether the probability of the deal will go through. As I write this the spread is roughly 6.5% and levered up 2:1 that is a pretty nice rate of return within the amount of time the deal should go though, assuming it doesn’t fall through.
Following articles on the US dollar throughout the past several months, I’ve encountered a wide range of very mixed opinions. Reading primarily the New York Times business section, some columnists make the case for why the US Dollar is going to go lower and some say a weak Dollar is good for the United States. Anyone working for the New York Times is going to have to sound convincing as they are surely very good at their jobs. After reading nonstop on the subject I’ve come to some very controversial opinions of my own.
The main problem I see is the Federal Reserve. Bernanke is so fixated on patching up short term fixes and never has any insight on how we got here in the first place. It is logical to first understand why we have a certain problem then to just patch it up to delay the problem. Over the last few months the stock market has been rocky and the bond market has been even worse. Bernanke has said he is willing to cut interest rates to devalue our currency if it will help stop a recession. He’s also said that a low dollar wouldn’t affect Americans as long as they bought domestic goods. He also claims it would rid us of our deficit as the textbook approach says a low currency will correct a deficit. There are several logical fallacies with these statements and it’s more than terrifying that the head of our central bank is coming out and making comments like these.
First of all, Bernanke should not be so fixated on preventing a recession. It is a fact that if America never had a recession, we would be a lot worse off than we are today. Recessions are part of the business cycle as well as bankrupt the weaker companies and strengthen the stronger ones. If a company makes really terrible decisions, in a capitalist society that equates to bankruptcy or at the very least a massive loss of equity during a recession. A strong company may be temporarily weakened but when the recession is over they come out stronger because they’ll have fewer competitors as much of the competition went bankrupt as well as have the opportunity to buy their competitors in distress. It is also impossible to prevent a recession as the business cycle is a byproduct of capitalism. If you really don’t like business cycles, move to a country where free markets don’t exist. As the Federal Reserve’s shareholders are made up of men tied to private banks it makes sense that they would try to benefit themselves before the American people by attempting to bail out banks that took on way too much risk. By helping those out you make things worse. You set a precedent to take excessive risk because why not if you have the notion you will get bailed out by your friends if the investment turns against you. This is why Bernanke trying to prevent a recession at the expense of our currency is illogical.
The second statement Bernanke has made about the low dollar is that Americans wouldn’t be affected much as long as they buy domestic goods. Again, it is hard to believe that he sincerely believes this. A scenario which would disprove this is that of the average retired man or woman. You have a portfolio of CDs yielding 6% a year which you are living off of, you drive a car, and you eat food. When the dollar declines 50% against major foreign currencies, that man or woman has just had his or her standard of living cut in half. The 6% yield on those CDs are now yielding 6% but this time with a currency only worth half of what it used to be worth. If the oil supply and demand equilibrium stays the same, oil prices would still go up as we buy our oil in dollars. As gasoline is petroleum based, the price of gas in the United States would therefore increase. But it wouldn’t just be oil that increases most commodities from wheat to butter to sugar would increase as well. The average food company would face higher costs and would be more than happy to pass those costs onto the American consumer which would in return raise prices. It wouldn’t matter if the company was domestic or international. Unless Bernanke thinks the average retiree is living off gold krugerrands and 50 dollar palladium maple leafs, has no use for gasoline, and is willing to not eat then he has a case, otherwise I don’t buy it.
Bernanke’s other case for a low dollar as well as several New York Times columnists believe that the weak dollar would help reduce our trade deficit. They’re argument besides being a textbook example is that it is happening right now as during the course of this semester, The United States had the lowest deficit in two years. Unfortunately, to get to a trade surplus by devaluing our dollar would surly get us into a worse deficit then we are right now. So Bernanke is right in the short term, a weak dollar would temporarily reduce our deficit but in the long run it makes things much worse. As of now the United States stays solvent by borrowing 2 billion dollars a day much of it coming from the Chinese. Unfortunately, our currency is not backed by any asset but by people accepting that our currency is worth something. As of now OPEC is diversifying away from the dollar as they called the dollar, “a worthless piece of paper”. China is also diversifying out of the dollar as well. There’s a good chance they will retire the Hong Kong dollar which is pegged to the US dollar and switch over to the renminbi. Saudi Arabia will most likely get out of their fiat currency which is pegged to the US dollar and most likely move to some asset backed currency such as petrodollars. So if the dollar got so low for us to rid America of its trade deficit, these events, especially a Chinese pull out would certainly crash the dollar overnight and most likely cause a run on the dollar. When “dollar-bashers” make this argument, the US government and the Federal Reserve both say we have gold reserves at Fort Knox and currency reserves at the treasury. Fort Knox has not been audited since the 1960’s so who knows whether that gold is still even there. Assuming that it is, it would keep US currency stable for roughly two days. Our currency reserves are surely there (and if they weren’t the government could print more money as that is common when currencies are backed by nothing) and would last 8 seconds in the currency market. That’s why the reserve argument is also something to be discredited.
The way to prevent all this chaos from occurring is to get rid of our current system. When the founding fathers wrote the constitution, it was deemed unconstitutional to have a currency not backed by gold or silver. The market as a whole is very complicated and the CPI numbers are not taken seriously as an accurate measure of inflation. Many of the great investors such as Seth Klarman and Jim Rogers who worked with George Soros say that the CPI understates inflation and that the manufacturing index is more appropriate. The problem with fiat currency is that it is very easy to overprint money which leads to high inflation and a devaluation of the currency. A gold standard ensures you won’t overprint money as you can only print what is backed or partially backed depending on which gold standard you use. Instead of having a Federal Reserve micro-managing a free market economy you can get rid of the Federal Reserve which gets rid of all political and emotional bias and you leave it up to the market to determine borrowing rates, etc. While a bunch of guys debating what to do with interest rates may be really smart the individual decisions of everyone participating in the global market has been proven to be much smarter. Every major fiat currency has eventually had to reset and many of the time it retired for good. It is not a radical statement to say the US Dollar may very well go to zero and with this currency monetary policy the dollar will most likely not be the major currency anymore.
Berkshire Hathaway shareholders from all online communities are welcome.
If you feel most comfortable wearing a suit, go for it. With that said, it’s Omaha; please feel under no such obligation. This is a casual atmosphere, with light snacks available. It’s a “happy hour” type of gathering - not a formal dinner or anything of that sort.
The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.
As many of you know, the Federal Reserve may very well slash interest rates this week. With a weak dollar and oil nearing $100/bbl, many economic policy critics including Jim Rogers, have said Bernanke should not be slashing the federal funds rate. Personally I have many problems with the Federal Reserve and have many of the same views as Rogers.
According to Rogers, it makes absolutely no sense for the Fed to lower the interest rate. With a rate cut, the dollar would tank even more and oil could easily top $100/bbl and inflation could potentially get out of control. Rogers also has argued that the United States may very well already be in recession. He said the housing and auto industries are already in conditions worse then a typical recession. Even big Dow Components such as Caterpillar (CAT), have said business hasn’t been this bad in fifty years.
Rogers, also claims that while a lower dollar does mean higher exports and probably a cut in the trade deficit short term, it would hurt us in the mid/long term. Historically no country has ever been successful mid/long term devaluing their currency. There is nothing wrong with keeping interest rates steady, even if it means driving the United States into recession (assuming we aren’t already in one). It’s a normal part of the business cycle. If you keep trying to bandage short term fixes, there will be many more negative long term effects. He also referred to Fort Knox, saying there gold would only be able to prop up the currency for maybe two days and our Treasury Reserve of 60 billion dollars would last about five seconds.
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Who knows what will happen in the long term, but if we keep going down this road we will undoubtedly have high oil prices, a weak currency, a potential run on the dollar, and even hyperinflation. If the Fed does not lower interest rates and giving into short term greed, we help reduce the risk of high interest rates further down the road.
