Real Estate Sucker Bet

The major problem facing investment advisors is helping clients with
asset allocation.  Your client is intelligent and engaged.  The problem
is that they are focused on what worked last year, and your job is to
help them with what will work next year.

Our company has an internal ranking of pundits and advisors.  John Rutledge is one of our good sources.

Link:  Real Estate Sucker Bet

I was on CNBC’s Closing Bell with fellow guest and old friend Brian
Westbury to discuss the housing market on Monday, July 5. Brian and I
have known each other since the Reagan White House. He’s a great guy
and first class economist–one of the most …

I’ll expand on the housing theme in future posts, but we believe Dr.
Rutledge has it right on one of the major questions.  People have the
idea that real estate cannot decline in value — a dangerous notion.

Energy Trading – Background

There is so much attention on oil prices that it seems like CNBC has become the Energy Channel.  It is not surprising.  The energy "sector" is up over 20% on the year and also accounts for the largest segment of earnings growth.  The S&P uses the term "sector" as it is defined in Morgan Stanley Capital International’s Global Industry Classification Standard (GICS).

Many — perhaps most — of those in the parade of talking heads on CNBC, and online pundits as well, talk about energy in this same broad fashion.  Everyone wants to act informed, including those who paid little attention to energy stocks before this year.  The result is that nearly everyone says things like "You have to own energy," or "We like the energy names," or "We have been doing well in energy."

Our own sector definitions are much narrower, more like the sub-industries in the GICS system.  For trading purposes these definitions are much sharper.  Here’s why.

The broad energy sector as defined in the GICS system includes a wide range of companies including the following:

  • Companies that own oil reserves
  • Companies that explore for oil
  • Companies that build exploration equipment
  • Natural gas and pipeline companies
  • Refiners – who buy oil from others and sell a finished product
  • Shippers – who transport either crude or refined products
  • Large integrated oil companies who do most or all of these things

The S&P 500 includes 28 companies covering the gamut listed above.

These companies do not all benefit in the same way from changes in oil prices.  Those that have large reserves will benefit from higher long-term prices when they sell the reserves.  More important for stock valuation is the impact on earnings.  A spike in prices may be good for the integrated companies, but have no real implications for the drillers or oil services companies.

More later..

No Inflation???

Pundits on TV and websites express amazement that today’s CPI data show no change overall and only a .1% increase in the core rate.  Writers on Cramer’s site, experts on CNBC, and even Bill Gross all claim that government measures of inflation are silly and inaccurate.  To them, it is obvious that prices are much higher than reported.  Just look at medical care, gas prices, hamburger, or home prices.

That argument sure sounds good.  It is easy to understand, and most people do not think it through any more.  That means that for those willing to get a deeper understanding, there is real opportunity.

Let’s look at some evidence and then try to approach the problem with an open mind.

There are several government indicators of inflation, including the CPI, the PPI, the PCE (focused on wage related costs) and the GDP price deflator.  Greenspan favors the PCE, but the others all get some attention and each is a slightly different measure.  They all show inflation as running about 2 – 2.5%  This is not a bad reading.  It is consistent with a healthy economy.

Another way of looking at this is by turning to the market.  The Treasury now issues inflation-protected bonds.  You can look at the difference between the rate for TIPS and the rate for other government bonds and find the expected inflation.

The result is similar to the inflation readings for the next ten years.  This shows the verdict of one of the largest and most liquid markets — hardly the picture of stagflation that some expect.

So what is wrong with the anecdotal story?  Part II of this series will be the explanation.