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Burn Dollars to Fight Gravity?

While I respect and use the “bullish sentiment” indicators and, in fact, just commented on it last week I’ve also started thinking about the “herd mentality” as it applies to rational decision making.

Please do not take this as a BUYBUYBUY opus, but let’s think about where we are in the universe (see Tuesday’s post).

Starting with our spaceflight motif. I see the market as skimming along the upper atmosphere, the bottom of the ship buring red hot as we pick up speed but with the pull of gravity and the resistance of atmostphere slipping away. As any rocket scientist will tell you (and I know some), physics are a real bitch if you ignore them. So cutting the boosters, or running out of fuel, when you still have .001% of the Earth’s gravity to fight off may feel good for a while and you will float – but you will also EVENTUALLY, INEVITABLY experience ORBITAL DECAY!

So here we are in our shuttle craft and the thrusters are easing off a bit and we’re starting to feel a little weightless and some people want to get up and mess around but some people are still clinging to their seats, still thinking we could come back down at any minute.

Now the physicysts (analysts) are debating whether we can coast into orbit or do we need more fuel and, as you can tell from the padded walls, it’s a well known fact that gravity can catch you by surprise if you miscalculate but, at some point, probably after a few people (bears) throw up – everyone may have to admit we have finally left Earth orbit.

That’s where I see us now, right at the outer end of Earth’s gravity well, ready to head off into space on a quest to go where no market has gone before (Dow 15,000). It just so happens we are launching a shuttle mission this week and, while it is now fairly routine, those of us who still watch such things still get the same feeling that any bear might have watching the markets take off.

They pick a launch time, they delay it. They pick another launch time, the weather is no good. They pick another launch time, there’s a stock option scandal. They pick another launch time, Microsoft delays Vista…

Finally, the rocket is on the launch pad, the countdown is ready to go, the engines fire and it takes off. Those of us who have seen a few rocket disasters (and market disasters) know that queazy feeling that lasts all the way until those rockets finally go off and the small ship that was sitting on top of those big rockets finally separates and heads off into space. At any given point, something could still go wrong…

[youtube=http://www.youtube.com/watch?v=Y92gmdS6Vt8]

I asked on Wednesday “Are we there yet?” and it turns out we weren’t but we sure don’t look like we’re crashing yet either. Ever since man first learned to fly (and, I’m sure, invest) there have always been bears standing on the ground with 1,000 reasons why it will never take off!

Now here’s where it starts to get interesting:

This isn’t an article about market gravity, we’ve done those, this is about the herding instinct. The biggest bear case at the moment is “if so many people are positive on the markets – they must be wrong.” You should be insulted by this attitude!

What the analysts are actually saying is “if you don’t listen to me – you must be wrong.

Analysts, fund managers, brokers etc. want you to be good little sheep and let them tell you when its a top, when to start and stop buying, what to buy, what to sell… If you don’t listen to them then IT’S CHAOS!

Chaos for them anyway, chaos for GS who make Billions and Billions of dollars telling you what to think. Goldman said buy oil, buy more oil and, when in doubt, buy more oil – HOW DARE YOU STOP BUYING OIL!

YOU are not supposed to stop buying oil until after THEY stop buying oil, get out, get THEIR friends out, put out a private letter to THEIRclients and THEN go on CNBC to tell YOU to get out. If you jump the gun you’ll ruin everything!

But this isn’t an article about oil (actually it’s starting to sound a little like Alice’s Restaurant but bear with me, I’m on a roll), this is an article about the the dollar that I promised for the weekend.

So there’s no inflation right? The government tells us there’s no inflation and they’ve never lied to us before so there must be no inflation. It is true that a lot of suff costs less, IPods, TV’s, Computers, Telemarketers (as long as you don’t mind the accent), your salary, SS benefits (adjusted for the inflation that doesn’t exist) and therefore anything you may be paying more for is just a function of your questionable negotiating skills.

In fact the same Goldman analysts who tell you inflation isn’t a problem are also telling you that the price of oil isn’t a problem if you adjust it for inflation. I try to stay on top of all this BS but they just keep piling it on!!

Oh yes – the dollar! So Hank Paulson, my nominee for the Mr. Potter look alike contest AND former head of Goldman Sachs, is off to China next week to prop up the dollar and, after much discussion, I’ve decided to let him use my Roach Motel Theoryas a Weapon of Mass Dollar Destruction (WMDD) against the Chinese.

You see all these non-inflationary dollars that have been flooding the markets for the past 10 years have to be going somewhere. We created(and this is estimated now because they stopped reporting it) $1,200,000,000,000 brand new dollars last year and not many of them ended up in your wallet (unless you are in the top 10% of the country in which case you got 85% of it).

So we didn’t get the money as salary which means that retailers didn’t get it either. The auto companies didn’t get it. The airlines didn’t get it (see a pattern) – none of the things we (The People) like to do got it. So who got it?

Why the rich did silly! The bankers, the brokers, the doctors, the lawyers, the traders, the CEOs… The top 1% of the income earners (oh sure the “other” 9% got some too) got pretty much all of it. It’s not just here in this country, this is a global fad.

All that money has caused inflation of all the things you don’t want to spend money on: Drugs, Health Care, Housing, Commodities, Legal Bills and, yes, stocks! You like it when your stocks go up, but HOW are they going up?

Has anyone built something new and cool that makes your life better? Are there any great scientific and medical advances that have actually cured anything (rather than put you on a pill popping treadmill for the rest of your life)?

Did American companies hire millions of high salaried workers or did they cut back on the blue collar jobs and cut out the white collar jobs entirely while executive salaries tripled in the past 10 years?

Nothing has been built, no major projects have been undertaken, no one is looking for oil or creating better means of transport or really doing any damn thing to improve the quality of life for the bottom 90%. And, no, I’m not going all communist on you but the number one investment made by corporations last year was in buying back their own stock!

Is this really what we pay them to do? This is not a good thing for anyone but the current shareholders who, coincidentally, happen to be, in large part, the Management! That’s right in 1995 you paid your CEOs just 1/3 of what they make today and they said “pay me a bonus based on performance” and that sounded fair so we said “sure.”

Well they got us good! We thought Exxon was going to open up vast new reserves, explore deep sea drilling, find alternative energy, give America a wonderful, energy independent future… So what did they do instead? They bought out the competition, cut back production and bought their own stock, driving the price into the stratosphere!

This is not because they are a better company, not even because they will make more money next year (they project 0 sales growth and a modest decline in profits), the shares are up because, much like oil, they have created an artificial scarcity of them.

On the average one out of 10 shares of XOM you are bidding for is being bought by — XOM!

So“, you may say, “companies plowing record profits into buying their own stock accounts for $400Bn of the $1.2T we flooded the global markets with last year – where did the other $800Bn go and may I have some please?

No.

Perhaps you weren’t paying attention. They’re not giving it to you. In fact, if you work there they are likely to tell you how tough things are and how you’d better chip in more for health care. Don’t worry, it’s very fair – the CEO has to chip in the same $500 a month that you do to pay his medical bills – so we’re all in this together!

They’re not going to give it to you and they’re not going to spend it on any other part of the economy either: ordering new computers, upgrading infrastructure, research and development… Nope, not going to do it. Exxon made $40Bn in the past 4 quarters and about the only thing they could think to do with it, other than compensate the executives who came up with this plan, was to buy back $24Bn of their own stock.

That other $800Bn is being spent, in recycled dollars, on more stocks and bonds and the $1T our government has to borrow this year to keep the lights on in this country. That situation is getting so nasty that Mr. Paulson has to go to China to make sure foreign investors keep giving us $100Bn a month or they may have to eat that White House turkey after all!

That’s why Paulson is the perfect man to mount this attack against China, he’s a CEO Banker/Broker Billionaire – he’s like an economic superman!

He flys off to China (under his own power – of course!) and reads them the riot act.

Why will they listen? Ah, that’s where the old Roach Motel Theory kicks in – not as it applies to oil, but as it applies to dollars. The Chinese have a Trillion US dollars! While they may threaten to diversify them into something more stable Mr. Paulson is going to point out to them that they are not the only roach in the motel.

Japan also has a Trillion of our dollars, we send them more every time we buy a Toyota but the biggest joke of them all is that we’ve been shipping these ever devaluing dollars to OPEC and every other oil producing country at the rate of $165Bn a month (what, did you think Jihads just fund themselves?). Oil is traded in dollars, people who want to sell oil must accept dollars, people who want to buy oil need dollars to buy it…

Ha ha! So the devaluing US dollar will hurt China, Europe (the least), OPEC AND every one of that top 10% of the world’s richest people who have 85% of the dollars that are floating around. I challenge you to find a government, no matter how communist, that can afford to ignore them!

So we will keep printing dollars and China will keep buying them, as will everyone else and, now that we have pushed commodities to the limit, they will start using those dollars to buy other American goods and services – maybe even an IPod!

Hopefully some of those dollars will find their way into some actual infrastructure improvements and will accidentally make some of the poorest 1% of the world’s (3 Billion people) lives just a tiny bit nicer.

Meanwhile for us investors, that ever expanding money supply has to go somewhere and we may be heading into a very, very soft landing on a very big pile of US dollars!

So let’s throw those dollars onto the fire and light up those market engines – we’re taking this baby to the moon!


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  1. D

    Phil – thanks, a very good read.

    Now, can you talk them into buying some Motorola cell phones with all that money?

  2. John, the Other One

    Your best article since the last one. Very nice. Makes especially poignant Exxon’s boohooing the other day about losing their tax breaks.

  3. soccer_F1

    Thanks Phil. Another great post.

    D – MOT is a dog. I sold my calls before the recent slide after a few days of inactivity. May eventually get back in. RIMM is XOM’s tech equivalent in this space. MOT has $42 billion in revenues compared to RIMM’s $2.4 billion, so why wouldn’t RIMM’s market cap close in on MOT’s market cap? LOL. Why do you let logic get in the way of the rocket?

    ———————-

    3.41 million cars were sold in China between January and November 2006, an increase of 40% year-on-year, according to figures from the China Association of Automobile Manufacturers.

    http://english.people.com.cn/200612/09/eng20061209_330504.html

    BUY BUY BUY XOM, lol :)

    ———————-

    From the what took them so long files:

    “The Corn Plus ethanol plant in Winnebago, Minnesota, will install two wind turbines that ultimately will provide about 45% of the electricity the plant requires. The two wind turbines will produce a combined 4.2 MW of power.”

    BUY BUY BUY XOM, lol :)
    ———————--

    Sales of hybrids in the US in November rose to 18,283 units, up 13.8% from the 16,065 sold in November 2005.

    http://www.greencarcongress.com/2006/12/us_sales_of_hyb.html

    BUY BUY BUY XOM, lol :)
    ———————--

    Honda Motor Co. plans to establish a wholly-owned subsidiary, Honda Soltec Co., Ltd., which will produce and sell the next-generation thin film solar cell independently developed by Honda. At the end of September 2006, Honda began construction of a ¥7-billion (US$61 million) plant to mass produce solar cells within the current site of Honda’s Kumamoto factory. The new facility will become operational in fall 2007 with an annual capacity of 27.5 megawatts.

    BUY BUY BUY XOM, lol :)
    ———————--

    Great weekend reading (thanks to BillCara.com):

    UBS’ Global Economic Study

    http://www.billcara.com/UBS%20Dec%206%202006%20Global%20Econ%20risks.pdf

  4. soccer_F1

    How could this happen?

    Dec. 8 (Bloomberg) — Goldman Sachs Group Inc.’s $10 billion flagship hedge fund dropped 11.6 percent this year through the end of November. Global Alpha, which started in 1995 with $10 million, uses computer-driven quantitative models to help make investment decisions.

    Time to pay Tom for his computer-driver model :)

    ————————-

    How about this?

    Dec. 8 (Bloomberg) — Reckson Associates Realty Corp. Chief Executive Officer Scott Rechler won approval for the $3.8 billion sale of his company to SL Green Realty Corp. only after agreeing to give his $25 million severance to shareholders.

  5. soccer_F1

    SwissRe predicts $65-70 oil by year-end 2007

    http://www.billcara.com/SwissRe%20Dec%208%202006%20US%20econ%20outlook.pdf

  6. Cap

    nice try Rechler … dirtball.

  7. Hal

    nice try Rechler … dirtball.

  8. Cap

    wassup w/ my computer ? or WordPress ? 2001 Space Oddity !

  9. soccer_F1

    Boeing [NYSE: BA] today announced that Spectrolab, Inc., a wholly-owned subsidiary, has achieved a new world record in terrestrial concentrator solar cell efficiency. Using concentrated sunlight, Spectrolab demonstrated the ability of a photovoltaic cell to convert 40.7 percent of the sun’s energy into electricity. The U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) in Golden, Colo., verified the milestone.

    http://www.boeing.com/defense-space/space/bss/news/2006/q4/061206b_nr.html

  10. Optionstrader1

    Phil, excellent article. Very Barron’s like. I love the cause and effect relationships all the way down the line. “Goodwill Hunting style”
    I’ve recently said the same to many friends. Hey, the lowering speculative hype in housing is going to lead to market boom. Look at the 90′s.
    Started off not to hot with the Gulf War thing, then speculative housing bubble esp. in California created by what? Speculative Japanese buyers and pretty much interest free loads of money from global sources then it pulled back hard (or as others would say busted)then the stock market roared till the bitter end, ended by what else but a pop with a Greenspan pin. See the cycle. See the cycle now. Except without ol’ Greenie the Grinch. See how this GLOBAL economy is now here. RIGHT NOW. Our equities market is undervalued. WHERE in the hell is all that speculative housing money going to go next? Where?
    You know where. Here. But now its a global thing with ever more speedy connectiveness. The world is alot richer and when it decides to move into the US markets it will be amazing.
    Phil is it 13 straight quarters of double digit growth now? What does our ticker say? US companies are now global world companies reaping in global profits with what seems like ever expanding markets. Helped by the WTO.

    ——--
    Holy shit Phil they are opening up the Gulf of Mexico even more.
    Oil drillers are looking awesome long term.
    http://www.al.com/news/birminghamnews/index.ssf?/base/news/1165659915105990.xml&coll=2

    Phil found some really good articles.
    My current analysis is long OIH or specifically ESV, DO, NE, GSF
    http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20061207:MTFH38273_2006-12-07_18-16-05_N06436066&type=comktNews&rpc=44

    http://www.theroyalgazette.com/apps/pbcs.dll/article?AID=/20061201/BUSINESS/112010131

  11. phil

    Speaking of Solar – one of my favorite solar stocks, SPWR is getting ready to break up after having jusr bought PowerLight, who are very tied in to the CA infrastructure (and they will find a way to fund more solar somehow).

    Now they only currently have about a 20% efficiency which was considered pretty good until Soccer dropped that bomb on us!

    Seriously if I lived out there I would go over to SprectroLab on Monday and ask for a sales job! You’re talking about a 4 year pay-back on a roof installation for your home if production costs are in-line with current cells and, very likely, most people in high electric cost areas (+$400 mo) will be cash positive on a 2nd mortgage (assumning $100K install and $50K subsidized by state).

    This will screw up the state rebate models which are mainly based on wattage as it’s always been assumed that the average home can’t convert 100% of their usage to Solar. If any of you guys have some massive amounts of cash, I propose we look into a business:

    Buy homes in a sunny state, with cheap housing (Texas for example) that has a good rebate program on solar AND high utility rates AND forces the electric company to buy excess production. At 40% efficiency you can build a $150K home with a $50K roof that can earn $300 a month selling power, at today’s prices.

    I’ll bet I could draw up a business plan that projects with just 15 years (assuming 3% annual bumps in utility rates) of $1,000 a month payments you will have paid off a $180K mortgage in full and be earning $600 a month in a house with no electric bill!

    http://www.nrel.gov/docs/fy04osti/35297.pdf

    At 40% (note the chart on page 7 assumes a max efficiency of 16%) you could build an energy efficient home with 1,500 sq foot of solar panels at about $4 per foot (wholesale) that would generate 50,000 Watts! MU HA HA! My solar home communities shall power the world!

    Seriously, if you sell power at just .05 per hour (and 50K is a little overboard but fun) you should have $3K+ of annual income and no electric bill.

    Check this calculator out – the numbers are really hard to crunch because of all the variables but you’d be looking at a conservative cost per KW of less than $4,000 and your output adjustment would be 20% (which is off the chart so you have to use 10%). Also, the biggest system they assume is 10Kw as that’s as much as a home should need to power itself.

    http://www.clean-power.com/Kyocerasolar/default.asp

    It’s kind of too good to be true – doubling efficiency in one shot? That’s a 10-year leap forward in projections…

    Anyway CY, with a total market cap of $2.4Bn and $1Bn in sales and $34M in net profit ($50M next year – p/e 26 ish) owns 52M shares of SPWR at $38 a share.

    CY happens to be a great company (they invented SPWR) but, frankly, for
    $300M net of cash and SPWR stock, I don’t care if they make crepes – I still think they’re a good buy!

    ===================================

    China car boom means more roads, more roads means more busines for CAT and VOLV!

    Meanwhile, there are 200M cars in this country that use about 15 gallons of gas a week at 19 gallons (refined) per barrel that’s 7.8Bn barrels of oil (shameful) a year, about 20M per day – that’s just about right.

    So China, buying 6M cars per year and assuming all of them stay running forever would take 8 years to use 25% of the amount of oil we do.

    Meanwhile US cars have an average fuel economy of 22mpg. If, over those same 8 years we increase the net fuel efficiency to 30mpg – the net of our consumption plus China’s would be NEGATIVE 2M barrels a day!

    Oh, and that’s assuming China is getting 22mpg in their cars, which I doubt. It’s a good thing they stopped Gore – that guy was a madman!

    BUYBUYBUY XOM!!! ;-)

    Also, from a 3.5M vehicle base, even with a 40% increases in sales every year, it would take 6 years to get 50M cars but that would mean by year 6 they’d be selling 25M cars a year vs. just 16.3M total in the US projected in ’07 so the heck with buying oil companies (because who knows what’s going to power them) let’s all open car dealerships in China!

    =================================

    Soccer, thanks for the light reading from UBS!

    Check out that Global GDP on page 12 – 4% even with us dragging down the curve!

    I hate to read these things because they seem so authoritative yet they are so wrong so often!

  12. Jamie

    Phil, Thoughts on CHTR? Have you sent out emails to sign up yet for those who pre-registered?

  13. Jamie

    Thoughts on Charter Comm?

  14. Jamie

    Phil, Thoughts on CHTR, and have u sent out invitations to join to the pre-registered readers?

  15. phil

    CHTR – see previous post

  16. ramana

    Thanks, Phil. Another brilliant post. Insightful as always.

  17. ramana

    Some weekend amusement on Iraq Study Group Report and other such sundry our foreign policy ideas and HAL :-)

    http://www.washingtonpost.com/wp-dyn/content/article/2006/12/06/AR2006120601672.html?nav=rss_opinion/columns

  18. Paul

    Phil,

    Any thoughts on direction for the Q’s for opex?

    Thanks

  19. barry

    soo i go to new site BUT i forget user name

    WHAT TO DO???

    you fix psswd

    BUT what about user name????

  20. phil

    I hope opex isn’t some odd exchange I’m not familiar with but I’m market neutral and waiting to see what’s happening globally but with the Fed meeting, an Opec meeting and Paulson in China we can expect rumor and innuendo to drive the markets this week so I’m taking some insurance (see latest post).

  21. Jon

    Solar concentrators have been around for quite a while, either to produce heat directly from sunlight, invrease PV efficiency, or to create power by driving a Stirling engine for example. The PV cell is not operating more efficiently, instead the suns rays are focused by a lens or a mirror to increase the light density, thus increasing the energy per area for a collector such as a PV cell. Just like frying an ant with a magnifying glass.

    The big problem with a solar concentrator is that it must be aimed at the sun in order to work, so you can’t just mount one the roof, there must also be a tracking system that keeps the collector aimed directly at the sun as it traverses the sky.

    The next problem is what to do with all of the heat generated by the focused sunlight. Check out Spectrolab’s website and you will notice that the PV cells are connected to a cooling system. Yes, to run these PV cells at 40% conversion efficiency, they would probably fail in a short time without external cooling.

    Build your own solar concentrator:
    http://www.ida.net/users/tetonsl/solar/solarhom.htm

    Some links to existing solar concentrator technology and economics:
    http://www.harbornet.com/sunflower/pvdish.html

    For large rooftop installations, I think SPWR and ESLR are on the right track, but there are other material technologies coming along, such as Cadmium Tellurium cells (not as efficient but possibly much cheaper to build) and CIS (already up to nearly 18% efficiency); these materails do not depend on semiconductor grade polycrystalline silicon.

  22. Jon

    Ah, here’s the other one I was looking for, and another solar stock to watch. First Solar (FSLR) just came public, they are making the CdTe cells in Germany.

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