The US Economy: Rise of the Grim Reaper Crowd

Buy canned goods, ammunition, bottled water and batteries. Capitalism is over and the United States of America will soon become a socialist state, with scattered regions of anarchy and bloodshed. At least, that’s what you’d think by reading the newspapers. And what’s causing all this? In a word: uncertainty.

Wall Street hates uncertainty (read “change”) and loves to worry about it. And the current administration is, well, changing things. There is talk of financial regulation, limiting CEO pay, changing healthcare, changing education, and more. And it isn’t just in the United States, either. Formerly democratic countries like England are talking about raising educational standards, improving infrastructure, and combating climate change. Aargghh!! So much change!

Hard-core industrialists cannot fathom why anyone would purposely reduce corporate profits merely to achieve such vague goals as “clean air.” In the Jan. 2010 edition of Resource World, a Canadian mining investment magazine, Leonard Melman writes: “It would appear that the public will not tolerate the abandonment of their favourite social, environmental, medical or educational goals, just to create industrial efficiency or financial balance.” I’m not making this up.

Reality is slightly more benign. Home prices in the U.S. have finally dropped back to prices affordable for the average family. Personal savings rates (and the repayment of debt) have improved to levels not seen in decades. Interest rates are low. Stock prices are reasonable. Bank spreads are glorious. And to top it all off, huge amounts of frightened personal cash is still sitting in savings accounts, GICs, and money market funds. The United States has taken its necessary dose of suffering, and is fully poised for a comeback.

Nevertheless, it’s fun to be scared. Recent blog posts on CNBC use talk like, “America is not coming back,” “The political class exists to create and extend ‘war’ between groups of Americans,” and “I am worried about the plotocray we have become.” I’m not sure what a plutocray is, but it must be bad.

All this talk of regulation and rules… If Henry Clay Frick were here, he’d know what to do: he’d send Pinkerton’s into Congress and be done with it.

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""Tell him I'll see him in hell, where we are both going." Henry Clay Frick, to Andrew Carnegie on his deathbed.

Chinese-Style Bao Ba

A quick and dirty definition of a bubble is when, a) everyone thinks that an asset is overpriced, but b) they want to buy it anyway.

This is precisely the situation in China, where, according to state news agency Xinhua, 86% of investors believe that a housing bubble has begun; yet 92% expect prices to remain steady or rise. On average, investors expect a gain of 4.4% per quarter, or 17.6% per year! Recent adjectives used to describe the Chinese housing market include “rocketing,” “sizzling,” “surging” and “searing.” In capital city Beijing, a 950 sq ft apartment costs the equivalent of $2.8 million dollars to an American (roughly 0.65 month’s salary per square foot). And if all that were not enough, the General Office of the State Council (Jan 16th) issued a report noting that “excessively rising house prices have recently emerged in some cities,” and recommended “restraining purchases for speculators and investors.” Ouch!

When something is this obvious, it’s painful to watch.

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“One clear indication of a bubble is the rapidity of the price rise. Although there are occasions when sharp increases in the price of individual stocks are justified, this has never been true of market sectors.” Jeremy Siegel

Two Stocks I Like - Oil and Gas Industry

When it comes to stocks, I’m of the Peter Lynch School, which says that you shouldn’t purchase a stock unless you can, a) rationalize your purchase in few sentences, and b) draw what the company does with a crayon. These companies fit the bill.

I have no idea whether these stocks will go up or down in the next 6 hours, days, or weeks, and don’t know anyone who does. My intention is to hold them (I own both) until at least the peak of the next market cycle, or until the company proves to be something other than what I thought (for example, the dreaded words, “accounting irregularities.”)

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Tidewater (TDW) – Tidewater is an offshore oil and gas drilling support-company that owns a fleet including 126 new vessels, making it one of the youngest fleets in the industry. Its ships have low downtime and an excellent safety record. The company has almost no debt, great return on equity, and the stock price is cheap – single digit P/E and close to book value. The company has been buying back shares.

Because Tidewater’s worldwide fleet is mobile, they can sail to wherever the work is. This company is also a manly man stock, with photos of oceangoing vessels all over the annual reports. While this latter point isn’t actually a reason to buy, I enjoy it nonetheless.

Barack Obama recently expressed an interest to expand offshore drilling in the United States: this is not a sufficient reason to buy Tidewater. Buy a stock because the company is great -- not because of a politician, the weather, interest rates, or any other transitory reason.

TDW Statistics (as of writing):
Price $46.81
P/E 6.67
Return on Equity 16.75%
Dividend Yield 2.12%

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Chevron (CVX) – one of the world’s largest and most recognizable energy companies. Chevron owns assets worldwide including Australian natural gas, Canadian oil sands, offshore sites in Brazil, and sites in Nigeria, Kazakhstan, and Tahiti, amongst others.

Recently, Chevron announced that its earnings had declined due to losses from weak refining prices in 2009: something I believe is unlikely to be repeated in the foreseeable future. Chevron’s debt level is low (lower than most energy companies), it has actively been buying back shares, the stock is reasonably priced, and its return on equity is excellent. In addition, its international operations help prevent currency shock.

CVX Statistics (as of writing):
Price $72.80
P/E 11.83
Return on Equity 13.86%
Dividend Yield 3.69%

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Disclosure
Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.