Friday, September 23, 2005

Don't Believe the Hype

Rich Kuslan once passed down some wisdom about commodities to me. He summarized the message of Stanford professor, Thomas Sowell:

1. There is in actual fact almost inexhaustible supply of commodity X.
2. Increased demand causes temporary dearth of supply.
3. Then people, especially pundits paid to sell papers, holler that the supply of X is running out.
4. Greater demand stimulates investment, advancing technology in procuring X
5. Ever greater quantities of X are thus procured.
6. Price of X falls as supply outstrips demand, and then stabilizes.

Professor Sowell has recently written how politics and media can fool us about “crisis.” The two part article can be obtained from the following links:

Part 1
Part 2

Tuesday, September 20, 2005

Wake Up Call

Many individuals seeking some debt relief through bankruptcy filings will have a difficult time after October 17th. The credit card industry will finally get their way once the new bankruptcy law reform is enacted. This reform will prohibit many debtors from filing Chapter 7 (which allowed individuals to keep certain exempt property – i.e. real estate mortgages) as a means of protection from creditors.

Those whose incomes are above a certain median range will be most likely affected. Such individuals will be denied the Chapter 7 (liquidation) option and will be forced to file a Chapter 13 (reorganization) or some repayment plan. So what does this all mean?

This is not good news to some of the home buyers who have financed through some exotic methods such as interest-only and ARM financing. As the interest rate environment changes, such borrowers will find it difficult to make monthly payments. Some people will feel the harsh reality of real estate speculation and irrational credit abuse.

After October 17th, people that have considered filing for bankruptcy will find it extremely difficult to find protection from creditor collection efforts. I’d hate to speculate how everything will play out, but it appears that there will be a wake up call. People should have taken some serious considerations before buying the American dream. As they say, “Easy come… easy go.”

Friday, September 09, 2005

Can Mirant Survive?

Several years ago, many energy players faced difficulties after the Enron scandal. Enron disrupted the whole energy industry, and many industry participants scrambled to refinance their debt loads. While some banks provided refinancing to some companies, creditors made a disciplinary example out of Mirant. The once well-respected company was refused the refinancing and forced into Chapter 11 (reorganization) bankruptcy.

The company has been undergoing a lengthy court procedure to come to an agreement. Mirant has announced the positive momentum towards its exit from bankruptcy. The company has much milestone to accomplish, but the game is not over. I will continue to gauge Mirant’s progress during this critical and delicate phase. This type of play is not for the faint of heart and not recommended for those who do not conduct their own thorough due diligence.

Sam Park owns OTC pinksheet common shares of Mirant.

Wednesday, September 07, 2005

Reducing the Noise in Forecasting the S&P

My recent newsletter for RW Wentworth is up on RWW's website. The report on the website is an abbreviated version that discusses some forecasting techniques. The full version can be obtained by contacting RWW.

Tuesday, September 06, 2005

Got the "O"?

The Motley Fool’s Jeff Hwang wrote an interesting take on and its profitability. He points out that if Overstock ceases to spend on advertisements, then the company will be profitable. He assumes that by cutting on advertisements, OSTK will continue to grow at a zero percent rate.

There are some things to consider. He also assumes that the past customers will continue to return to and spend the same amount. There are a lot of “ifs” to Hwang’s version of “worst-case scenario”. The real worst-case scenario would be OSTK ceases to advertise, customers do not return, and OSTK’s revenue falls.

I personally do not wish the worst for OSTK. I’m simply pointing out the immense hurdles that the company must overcome to survive. I don’t think it’s wise or realistic to completely stop spending on advertisements. Perhaps a change of its marketing to that of something more effective would be in OSTK’s best interests.

Sunday, September 04, 2005

We Need Some Magic

Several people have questioned about the possibility of an inverted yield curve in the near future. Before I explain anything, I would like to note that Mr. Greenspan expressed his belief that the yield curve (this time around) does not necessarily signal a dismal economic outlook. As I have previously pointed out in my RW Wentworth newsletters, foreign entities purchasing longer term Treasuries may explain Greenspan’s conundrum.

Many, including myself, explained that Asian institutions have spent their excess dollar holding by buying U.S. Treasuries. Excess demand for existing Treasuries (i.e. 10 year) will raise prices, thus driving their yields down. So is there someone else that may be buying these Treasuries to further drive the rates down and invert the yield curve?

In light of these rising crude oil prices and speaking with other analysts, I believe that there may be new Treasury buyers. My previous post with the diagram of the gas price breakdown indicates that over 40% of the price we pay gas stations goes to crude oil producers. Since Katrina, we have seen gas prices jump all throughout the U.S. This would mean that more money goes to the crude oil producers for the same amount of oil.

If these “petrodollars” get funneled back into the U.S. in the form of Treasury purchases, then we could see the longer term Treasury yields remain in their already low levels. If oil prices continue to rise, and if these petrodollars make their way into our system, we may even see long term yield fall below the shorter term yields (i.e. 2 year).

The shorter term yields will most likely be impacted by the Fed’s decisions on the fed fund rates. As I have mentioned in my previous posts, the fed fund futures now indicate that the Federal Reserve is less likely to make many more hikes by the year's end. We are in no doubt dealing with a delicate situation.

To answer whether the yield curve could invert by the year end… I think it’s a definite possibility, but a flat or humped curve is more likely. However, I wouldn’t be surprised to see a slight inversion before the year comes to an end. Keep in mind that a yield curve doesn’t necessarily indicate a recession up ahead. We saw a flat yield curve before Katrina made her devastating path through our country. However, it appears that she came with her hammer and nails, not to help rebuild, but to shut the coffin. Let’s just hope it won’t be too bad… perhaps David Blaine, the street magician, could explain how he survived for a week buried alive in his temporary coffin.

Thursday, September 01, 2005

Oil Breakdown

Source: U.S. Department of Energy

Is Recession Inevitable

Some have compared the impact of rising gas prices on disposable income. Some say that gas prices will not hit the $4 mark on average. The theory behind that is gas consumption will be reduced at those levels. If it plays out as so, then that's all you need to set the recessionary path on its way. Consumers will stop traveling and cut back on spending. No spending, our economy slows, GDP falls, and you know how that story goes.

When Will Gas Prices Stop?

Gas prices for regular unleaded in San Diego has surpassed the $3 mark. Even though California does not get its oil from the Gulf area, Californians will share the pain. I suppose the Big Oil companies will spread its costs all throughout the US. Transporting goods continue to remain costly, and those costs will likely pass through to the consumer. Inflation is knocking on the door. I'm not sure how much impact Katrina will have on our economy, but it will definitely slow our economy. Here's a doomsday prediction that I wouldn't like to see. If our economy halts its growth and prices continue to rise, we may enter stagflationary conditions. Greenspan has some tough decisions ahead. September fed fund rate prices jumped to 96.43 suggesting now that a September hike is less than 80%. Whether or not the Fed decides to raise rates in September, making moves (in either direction) beyond that may harm the economy.