Are you planning to buy any stocks during the downturn?

Update 10/5/2015: Two large moves up, the one today a “gap” up, ends the “barely-a-bear-market” correction, largely based on postponement of Fed rate increase into next year.  That means the advice below is out of date – unless prices again retreat near to the levels where they were the middle of last week.  Eventually the Fed will increase rates, so unless there is some huge gain in corporate profits, the headwinds are still present.  Based on the chart below you can see the S&P 500 is about half way back to “where it was” and at a level where it has been hanging out whenever the mood was not too horrible.  It’s premature to say a new uptrend is established.  However, it does look like a confirmed double bottom, the 2nd slightly higher than the first.

SPY2015-10-05

Are planning to acquire any assets during the downturn?  It appears to be a typical inventory cycle, a temporary reaction to Chinese growth slowing as planned from 7% to 4% (still pretty good), moderation in a long run up in U.S. growth, year 3 of the election cycle, and the temporary oil glut which cannot last (only Denmark of all exporters can balance its budget at current prices).

Income producing securities have taken hard hits also.  Some of them are oil related.  Others leveraged on interest rates and expecting the Fed rate hike.  Quite likely the reaction on both counts is over done.  We are also in the typical September-October lull in mood among investors.

Here is a review of oil stocks that pay dividends.  Big stable companies.  On the 2nd page it discusses BP, which pays 7.7%.  This might be reduced, but nevertheless BP looks like the biggest gainer over the next two years.  It is much better managed than it was 5 years ago.  If you want to not put all your eggs in one basket, buy some of the Conoco Phillips COP yielding over 6%.  Beats a bank account.  Oil is not going to crash dramatically from here.  Might be slow going up but with dividends who cares.  Shell has pulled out of the arctic.

MORL might be volatile, but with over a 21% dividend, you only have to invest a little bit to generate cash.  Consider two things about this ETN.  It doesn’t have volatility losses like an equivalently leveraged ETF.  It’s reasonably safe to hold barring a great depression.  And the equivalent volatility is 1/3rd of what it looks like on paper compared to a 7% dividend, and 1/6th as great compared to a 3.5% dividend payer.  For example, you’d have to invest 5 times as much money in 4% payer Exxon (XOM) to get the same cash flow.  If XOM declines 10%, that is the same dollar decline as a 50% decline in MORL. In 5 years you will have your capital returned, and in 6 years you have a 20% profit in dividends, even if the value goes to zero after that.  It takes about the same amount of time to make 20% with a 3.5% dividend payer.

Another stock I have held for a long time is HTGC, currently yielding over 11%.  That is higher than their historical average.  It is diversified, but not as much as MORL.  But it is in venture capital and MORL is real estate, so you could nibble a little of each if you need some income.

Here is another article on dividend stocks.  AT&T is paying 5.8% and stands to have some cap gains over the next year.  The have acquired Direct TV and generally their business is not phones anymore, except cell phones of course.  I don’t own any of this and don’t like the company, just mentioning it in case you don’t like oil.  I live in Houston, after all, oil capital of the Western Hemisphere.

Ford is paying 4.6%.  The company is still controlled by the founder’s family, and is defacto the most successful car company in the Western Hemisphere, with Chrysler owned by Fiat, and GM being a new reorganized company after bankruptcy in which all prior shareholders were liquidated.  Looks like a 50% gain might be available.

Why not just by a dividend ETF?  There are some listed in my book.  You can check them out and see what they are paying currently.

Anything you buy between now and the end of November is likely to go up.  Trump is going to be president.

I can’t really do much.  I bought oil a little early at the first bottom.  (I’m always early, a lifelong investment problem.)  But it looks like my Russia stocks might pick up.  Putin really looked good in the Charlie Rose interview, and I’ve told Natasha that since he is again using the word “partner” in regard to the U.S., however much he might criticize us, it’s OK again to travel there.

Disconnected! Corporate profits and GDP growth…

The view of the Fed based on Gross Domestic Product (GDP) growth is that we are edging up toward 3.9%, and that is good enough for a rate hike: article.

The view of investors based on corporate profits is that they are likely to be down 3.9% (yes the number is exactly the same but in the opposite direction) for the 3rd quarter, and down 2% a year from now: article.

That means investors will invest less (due to lower expected returns), and ultimately less “GDP” will be produced.

It means corporations and investors will be able to borrow less to finance production because of the Fed policy (assuming the rate increase happens), and for a second reason less GDP will be produced.

No one in their right mind (other than a CEO) would suggest the Fed act in such a way as to maximize corporate profits.  However, they could act in such a way as to maximize employment, and this would have the effect of postponing the rate increase until such a time that the investment in future GDP (and thus future employment) were not declining.  Which would be something an economist in their right mind might do.  But of course economists can never decide.

WWI-II Alliance Re-Forms Against ISIS/ISIL Religious Fascism

World War III has already begun, but it is not what anyone imagined just a few years ago.  WWIII only means that most of the nations of the world are involved, not yet that fighting is everywhere, though it is widespread and it may yet come to that.  To understand my thesis, we must understand some terms.

Definitions:

  • Fascism originated in Italy.  It is against both conservatism and liberalism, arguing instead for a strong state (nationalism) with a hybrid or mixed economy, somewhat directed by the state.  This allows faster preparation for war.  Fascism holds that violence is not a wholly negative strategy and may have positive outcomes.  Mussolini held that (1) Racism had no place in Fascism, only national unity was important, and (2) he wanted to create a New Roman Empire.  See Wikipedia discussion.  Initially Mussolini disliked Hitler and thought he was crazy.  One of the strong motivations for Fascism is a sense of community decline.  It is part of the cycle of war, money and trade, and in the update to Money, Wealth & War I point out it arises when defeat of a group or country is slow or incomplete.  By the way, September 12, 2015, Saturday, will be a one day free promo for the eBook on Amazon.
  • Racial Fascism, aka Nazism, added the factor of blame on some racial group.  External blame allows humans to avoid seeing themselves as at fault and therefore powerless.  In other words, it is a sort of shortcut to raising self esteem.  Communism under the Soviets also used this technique, blaming the rulers and the bourgeois (materialist middle class, a lot like Americans).
  • Religious Fascism – Therefore, if you believe your religious faction has been picked on and is in decline, and you blame other cultures or religions, and if you believe violence is a sanctioned and effective method of reversing your group’s fortunes, then by our definitions that makes you a Religious Fascist, very closely akin to a Nazi.  In fact there was a religious Christian vs. Jew element to Hitler’s Nazism.
  • Islamic Fascism – While any Radical Islamist could be seen as a Religious Fascist, since the fall of the Taliban the only organized political force controlling a large amount of territory which fits this definition is the Islamic State in Syria, Iraq and the Levant (ISIS or ISIL).
  • The Problem with Islam – There is a serious problem that many of the world’s political leaders are trying to “cover up,” which is that the founder of Islam, Mohammad, appears to have been a Religious Fascist, advocating violence and oppression against virtually every other religion (some more than others).  Since he wrote the Koran, this is encoded in a highly revered scripture, with many on-going (not just historical, as in the case of Judaism) injunctions to kill or oppress non-Muslims.  As long as this scripture is intact and revered, Islamic Fascism will recur.  There are passages in Jewish texts about the “promised land” that have a weaker effect (and it was in connection with these that the historical injunctions were issued), and in Christianity in Revelation, which while it doesn’t specifically say that God orders Christians to commit such atrocities, suggests that God is going to commit them and leads to cults such as the Branch Davidians who get the idea that they are required to “help.”  I would be in favor of purging all three scriptures of such tempting references.
  • The Allies – WWII and to a lesser extent WWI were wars against Fascism, and brought together a large number of “allies” who both before and after the war were not otherwise allied at all.  Both alliances included Russia and western nations, and elements of if not nations in the Middle East, and at least one Asian nation (e.g. China, Philippines).

Evidence:

Now I present the evidence as to why I think such a broad alliance of ordinary enemies is again forming against a fascist threat, involving most of the nations of the planet.

  • Iran, a long enemy of the U.S. and Saudi Arabia, has already joined the fight against ISIS/ISIL.  No doubt this alliance has made easing of sanctions and a nuclear treaty with Iran more palatable.
  • Russia has declared itself committed to the fight, and is building a military base in Syria for this purpose.  See article.  The U.S., despite being against Russia’s ally the Assad regime, has declared it will not support attacks directly against Damascus, and is not protesting nearly as much as you might expect against the Russian move.
  • Peace seems to have “broken out” in the last week in Ukraine.  Russia is moving to damp things out there, seeing the greater opportunity in Syria.  As a result, France is proposing to end sanctions against Russia sooner rather than later.  See article.  In my opinion, this is going to now happen, because it is clearly in everyone’s interest, even Russia’s, by their own statements.  They haven’t annexed eastern Ukraine and they aren’t going to.  It is too expensive, a basket case.  And they have redeployed those “little green men” to Syria.
  • The Economic Factor – OIL! – I have made the argument wars occur because it becomes a cheaper way for nations or people to get what they want from others than trade.  If you think ISIS is fighting only over religion, think again.  That was Al Queda that was doing that, and they were pointlessly taking the fight to the U.S. and other cultural enemies, and though stirring up a lot of trouble, getting nowhere.  ISIS is fighting a practical economic war for control of oil fields in northern Syria and Iraq.  The combined northern Iraq and Kurdish oil production is about 1 million barrels per day – about equal to the total production capacity of Iran!  To control that would make ISIS economically as strong as Iran, who is about to become a nuclear power sanctioned by treaty with the U.S. (anti-nuke provisions expire in 10 years).  Oil was also a factor in WWII.  Japan attacked the U.S. because the U.S. had imposed an oil embargo, and Germany, also lacking domestic oil, desperately sought to control oil resources in northern Africa, and a warm water port to access it via seizing France.
  • Other Symptoms – Ahead of this impending conflict, people are fleeing en masse.  The media are already reporting European migrations as “the largest since WWII.”  Oddly enough, where people were fleeing from Germany before and during WWII, now they are fleeing to Germany.  Merkel says the “breathtaking flow of migrants will occupy and change Germany forever.”  I guess when Hitler tried to get rid of the Jews, he didn’t consider the long term blowback that would eventually reverse all his efforts to purify Germany.
  • Asia – the missing link – The factor that prevents the anti-ISIS campaign from immediately involving the entire world and thus being technically qualified as WWIII, is the lack of Asian participation.  China has a non-interventionist policy.  However, Chinese security is threatened by ISIS, see white paper.  China stated as of February that it is willing to strengthen cooperation in fighting ISIS.  And China has a lot of strategic partners and interests in Africa and the Middle East which will come under threat if ISIS continues to grow – and indeed ISIS is spreading to Libya and other places even while it is under attack in its base region.  A week ago we were not talking about Russia joining against ISIS and were still mostly worried about Russia in the Ukraine.  But Russia’s interests there, and ally Assad, now has them involved.  The same kind of rapid turnaround could happen with China.
  • And what of Russia’s interests in the Middle East? – Russia is not a member of OPEC, but has recently passed Saudi Arabia on oil production (actually, they are about neck and neck).  Both countries are tapped out and cannot easily produce more.  Further, Russia is hurting from low oil prices and seeks leverage to get them back up.  Putin and the president of Venezula were discussing “ideas” on how they might do this while in China this past week.  Using their planned base in Syria, Russia could attack ISIS in both Syria and Iraq, using deniable little green men, and other surrogates (Assad’s forces), and disrupt the one million bbd production there, spiking oil prices in the short term.  In the long term, Russia might be able to acquire some of this production capacity for Russian companies, even if they do not directly acquire the territory.

Disclosure of conflict of interest:  I am long OIL via ETF, BP, and Russia via ETF.  I would love to see a spike in oil prices.  This may affect the objectivity of my analysis.

P.S. Is Putin a Fascist?  Putin uses some of the rhetoric.  He claims Russia has been picked on by western countries and builds up his military.  But he does not openly advocate war.  He declares it would be ridiculous for Russia to invade Europe, and accomplished limited territorial expansion by use of “little green men.”  I think Putin is a criminal capitalist, behaving like a totalitarian communist, and smart enough to keep his militaristic views toned down and avoid full scale war with the west as the Russians have for the last century and a half.  In the last open war they had with the west, they lost Crimea, and they’d like to keep it this time.