tag:blogger.com,1999:blog-32824247524852266882024-03-05T11:15:13.522-08:00Good Stock InvestingThis website discusses stock investment analysis, market trends, stock market strategies, and the oil and energy markets. Fundamental and technical analysis is presented along with links to other good research sites. The mutual fund industry and mutual fund strategies are also discussed.Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.comBlogger199125tag:blogger.com,1999:blog-3282424752485226688.post-12385536619781965952018-10-29T20:02:00.000-07:002018-10-29T20:02:42.404-07:00Are We Near The End Of A Correction Or Near The Start Of A Bear?Everybody in the market is asking themselves this question. I don't know the answer, but I know what the overwhelming weight of the technical evidence says at this point. The major averages have broken down below their 200 day moving averages and seem to have taken up residence there. That's bad. Trump is bullheaded about tariffs. That's bad. Powell is bullheaded about the cost of money. That's bad.<br />
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But when you look much beyond these facts, you see a much brighter picture. For instance, the selloff is based on the economy staging a major slowdown. If you look at the price of Dr, Copper (he has a Phd in economics) you see nothing but a pathetic breakdown suggesting a recession soon. But this is based largely on the flap with Trump and China. We have the worst case scenario that both Trump and Powell can possibly present to the market. Trump is slapping tariffs on everything with China refusing to even talk, and Powell is continuing on his present course of over aggressive tightening.<br />
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The only change that can be reasonably expected is China and Trump getting together, and Powell lightening up. Either one or both of these developments would end the selloff with a bang. I think it's silly that market is perplexed by a 3% cost of money (10 yr) in a good economy when historically we have 6%-8% in a boom. 1995 saw near 8%, and that certainly wasn't an economy killer or a market killer. The market may loose its fright over interest rates. It seems to me it's just sticker shock from too many years of no interest rates at all.<br />
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Another thing that strongly indicates the economy isn't going to get killed is the Baltic Dry Index. This tracks the cost of shipping dry bulk commodities. What is that? Think ore and all manner of components that are not wet, like oil, and are in the most raw form and take awhile to be made into product for sale. It must look ahead farther, and discounts economic facts and reacts sooner than the stock markets better than just about anything, If you look at its chart, you see that it has a strong habit of making major moves about 2 to 6 months in advance of the other market's big moves. (click on images to view)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvqN5ZpoYszCUdl07RaNaEsI4mMEiPsrzSglYSxEj61E7B7v5SG8XvdbYq9YysWA7QtsSOMkYl9Md1DwCHBHSZZam4Y7tKlAMISPBIinj7mDeKVxd66P-yNEDT1dGsSgbbRncHKzWSfFQ/s1600/sc.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="673" data-original-width="900" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvqN5ZpoYszCUdl07RaNaEsI4mMEiPsrzSglYSxEj61E7B7v5SG8XvdbYq9YysWA7QtsSOMkYl9Md1DwCHBHSZZam4Y7tKlAMISPBIinj7mDeKVxd66P-yNEDT1dGsSgbbRncHKzWSfFQ/s1600/sc.png" /></a>For example, look at 2014, when oil and the CRB commodity index tanked like crazy mid-year. The CRB is heavily weighted in oil, which has nothing to do with the dry index, but it also includes a multitude of economically sensitive materials. If you look at the chart, you see that it tanked fully six months ahead of the CRB, at the very beginning of the year. Also, the big dip in mid-2012 in the CRB and the stock market was foreshadowed six months earlier in the dry index. The stock market's swoon into the January 2016 disaster was preceded by the dry index swoon starting in early August, 2015. <br />
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Which brings us to the present, where we see the February-April, 2018 stock swoon happening in the dry index starting in December last year. But look at what it's doing now. It foreshadowed our October swoon beginning in August, and now is resuming a fairly sharp uptrend out of the February drop! This suggests the same will happen soon with stocks.<br />
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I have used the 600/500 day moving averages on this high beta item to define big trends, and this pair clearly shows a downtrend until late 2016, then a big change and moving average crossover in mid-2017. Here the moving average pair changed from resistance to support level, which we are clearly obeying. The effects of a stagnant economy until 2017 seem to be morphing into a much better economy.<br />
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Another key leader index has been the QQQ, and we are holding past support there, too.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_5nYgB-enotQn5tmT9b5nM40sv1M0BVqciD0It9RH9UqBcCvSlXTJiOuUaczcbG5fLdWl-rCQoI_t7rMpV1BPeyhBzLN4xZHppUGSZ3Zlk1k9lT09UFaaFG1P1aSUSUeO7clv9a7ynk0/s1600/sc-3.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em; text-align: center;"><img border="0" data-original-height="673" data-original-width="900" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_5nYgB-enotQn5tmT9b5nM40sv1M0BVqciD0It9RH9UqBcCvSlXTJiOuUaczcbG5fLdWl-rCQoI_t7rMpV1BPeyhBzLN4xZHppUGSZ3Zlk1k9lT09UFaaFG1P1aSUSUeO7clv9a7ynk0/s1600/sc-3.png" /></a>Taking this bigger view of the 600/500 moving average pair to the stock market:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_ZUVnBku2tCYrq0UkD_rwz1mbnFChA3Z2y3ptPSJPN-LfGiEX5r85zWqnwNgynerzKKyKTMVMEOCVXnC_xcdl_Sei50RwZMdC2JD3zTypcvJnAHMuYsJtptE-qqsaEuHCuTYQYCU1BfE/s1600/sc-4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="673" data-original-width="900" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_ZUVnBku2tCYrq0UkD_rwz1mbnFChA3Z2y3ptPSJPN-LfGiEX5r85zWqnwNgynerzKKyKTMVMEOCVXnC_xcdl_Sei50RwZMdC2JD3zTypcvJnAHMuYsJtptE-qqsaEuHCuTYQYCU1BfE/s1600/sc-4.png" /></a></div>
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We see that the stock market is holding this support as it has several times in this bull. And another key leader index is the retail sector.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhS3w8BC3bIAK4RMNi8ZapVIPOw2uHiPSeYjOdAonP3scflY6ROPoa6wdZwNwVLsBF_v4W4GscrxA7lkW4K_kaBoJXs8tbKjiZOTqjkPWSllErjlLxYOYv7aChWFakiT-fRIja0GTh9rs/s1600/sc-2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="673" data-original-width="900" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhS3w8BC3bIAK4RMNi8ZapVIPOw2uHiPSeYjOdAonP3scflY6ROPoa6wdZwNwVLsBF_v4W4GscrxA7lkW4K_kaBoJXs8tbKjiZOTqjkPWSllErjlLxYOYv7aChWFakiT-fRIja0GTh9rs/s1600/sc-2.png" /></a></div>
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This is what is supposed to be in a bear from the tariffs. It doesn't look too bearish. It looks like it could stand some more abuse, and still be in a raging bull market.<br />
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Who knows what the markets will do, but the preponderance of the evidence, not from CNBC and market sentiment, but from the technicals of the bull leaders is suggesting that we are nearer the end than the beginning of a bull market correction, with much more bull to come. Some more compelling chart evidence for this is presented by Chris Ciovacco in his latest <a href="https://seekingalpha.com/article/4213182-facts-1987-vs-2018">look</a>.<br />
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<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-45237557305755963892018-10-12T09:02:00.000-07:002018-10-12T09:02:57.549-07:00SMAs - A Better Way For Long-Term InvestorsI am part of what may be a frontier in investment products - SMAs or Separately Managed Accounts. These have been around for decades, but are now finding favor as a smart alternative. SMAs, have grown by 84% since 2010, according to a <a href="https://www.morganstanley.com/ideas/separately-managed-accounts">report</a> by Morgan Stanley titled "What's Behind the Surge in Separately Managed Accounts?"<br />
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Per Investopedia: <br />
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<blockquote class="tr_bq">
The <a href="https://www.investopedia.com/terms/i/investment-management.asp">investment management</a> world is divided into <a href="https://www.investopedia.com/terms/r/retailinvestor.asp">retail</a> and <a href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional investors</a>. Products designed for middle-income individual investors, such as the retail classes of <a href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual funds</a>, have modest initial investment requirements. Managed strategies for institutions have imposing minimum investment requirements of $25 million or more. Between these ends of the spectrum, however, is the growing universe of <a href="https://www.investopedia.com/terms/s/separateaccount.asp">separately managed accounts</a> (SMAs) targeted toward wealthy (but not necessarily ultra-wealthy) individual investors. Whether you refer to them as "individually managed accounts" or "separately managed accounts," <a href="https://www.investopedia.com/terms/m/managedaccount.asp">managed accounts</a> have gone mainstream.</blockquote>
It is basically a personal brokerage account, yours to do with as you wish, run by one or more fund managers of your choice. And you can customize this "fund" in various ways to be your <em>personal </em>mutual fund. They can be a Roth or any tax advantaged type you want. SMAs are a smart alternative to mutual funds, where you must pay taxes on your gain every year. But with an SMA, you can make your account tax free where you can let all the gain compound year after year and not have to fuss with it at tax time. They must be run per SEC safety rules for diversification and investment type, long stocks only. <br />
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Another tax advantage with an SMA is the fact that when you buy shares of a mutual fund, you are penalized for the tax accrued by any gain on the fund going clear back to the first of the year, even though you didn't own those shares then. The fund gives just one tax statement for all holders each year. You can only fix that problem by purchasing fund shares on January 1st. However, with an SMA that is taxable, you are liable only for gain on the new purchases in your account, like any brokerage account.<br />
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SMAs have grown US Assets from 396 Billion in 2000 to over a $trillion now. That's about 6% of the mutual fund/SMA pie and growing fast. Where did SMAs come from? Per the Wikipedia <a href="https://en.wikipedia.org/wiki/Separately_managed_account">account</a>::<br />
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SMAs were developed in the 1970s to accommodate accounts and clients who needed to meet specific objectives that did not fit within the constrictions of a mutual fund investment. It is the freedom of choice of professional managers, portfolio customization, objective investment advice for a set fee, diversification (or concentration should the client choose), <a href="https://en.wikipedia.org/wiki/Tax_efficiency">tax efficiency</a> and general flexibility that have made SMAs popular among informed investors. </blockquote>
SMAs are basically different as reflected by the kind of statement you receive from them. Per Investopedia:<br />
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the statements will look different. For the mutual fund client, the position will show up as a single-line entry bearing the mutual fund <a href="https://www.investopedia.com/terms/t/tickersymbol.asp">ticker</a> – most likely a five-letter acronym ending in "X." The value will be the <a href="https://www.investopedia.com/terms/n/nav.asp">net asset value</a> at the close of business on the statement's <a href="https://www.investopedia.com/terms/e/effectivedate.asp">effective date</a>. The SMA investor's statement, however, will list each of the equity positions and values separately, and the total value of the account will be the aggregate value of each of the positions.</blockquote>
SMAs are a not only an alternative to the safety of mutual funds, but to higher risk hedge funds as well. Investopedia has a piece (Hedge Funds' Higher Returns Come At A Price) describing some of the problems with hedge fund products:<br />
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"Although hedge funds are subject to anti-fraud standards and require audits, you should not assume that managers are more forthcoming than they need to be. This lack of transparency can make it hard for investors to distinguish risky funds from tame ones."</blockquote>
This is another big advantage of SMAs. You are not writing a monster check to be entrusted to a hedge fund manager with lockups, possible theft, and other uncomfortable conditions. Your money is entirely <i>separate </i>and yours to do with as you please, like in any brokerage account.<br />
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"The hedge fund manager must have a pre-existing relationship with a potential investor. It is also acceptable to be introduced by a qualified intermediary, which may be the hedge fund's prime broker. Potential investors must also meet income or net-worth requirements. Those that meet these requirements are called "accredited investors" </blockquote>
You have to be very rich, in other words, and know somebody.<br />
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"all of the advantages of hedge funds can become a nightmare if the fund is highly leveraged and the market moves in a direction opposite of the manager's opinion. The higher opportunity is why hedge funds have proliferated over the last 15 years, and the higher risk is why we sometimes hear about the more spectacular hedge fund blow-ups."</blockquote>
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Besides all the "blow ups" there are many hedge funds with big annualized returns over long periods that aren't so sensational with just the safer stock part of their work - away from the high risk leverage and derivative toys and commodities. Even high roller hedge fund king George Soros, who is recognized as having the best investment fund performance in the world with his hedge fund since inception in 1969 has had a relatively flat period with stocks in the time frame since 2000. You can see this at "George Soros' s Profile and Performance" at gurufocus.com. If somehow you could have placed money with him in just the lower risk stock part of his holdings, the <a href="https://www.gurufocus.com/profile/George+Soros">total equities</a> only portion would have grown by 220% since 2000. This is way out-performing the Dow, but way under-performing Warren Buffett. <br />
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Another big problem with hedge funds is that they come and go by the hundreds each year. For nearly every new hedge fund that opens, another is forced to liquidate after poor performance. This frantic rotation has <a href="https://www.bloomberg.com/news/articles/2018-03-23/more-hedge-funds-closed-than-opened-in-2017-as-returns-lagged">averaged</a> nearly 1000 funds opened and 1000 funds liquidated each year for the last 8 years. Given that there has been around 8000 hedge funds existing the last 8 years, that makes a 12% casualty rate every year. That's an average life span of 8 years. You never know if your fund is going to disappear after maybe 3 years of dazzle but 8 to 12 years of struggle. <br />
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Yet another problem with hedge funds is that they are very difficult to get a long-term performance handle on. Have you ever tried to pin down a hedge fund's since-inception performance. They are not required to publish this, so you are greeted with a maze of "it did this in 2007" and "it did that in 2014", and "it is thought" their annualized return is this, all of which is gibberish noise and means nothing to the careful shopper. <br />
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A disadvantage of SMAs is the typically high account minimums, usually $100,000 or higher, although some firms, such as Morgan Stanley, have minimums as low as $25000. For mutual funds. it is far lower, but, as Investopedia puts it: "Separately-managed accounts are ultimately designed to provide individual investors with the kind of personalized money management that was formerly reserved for institutions and corporate clients" and they want to make it worth their while.<br />
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Another disadvantage of SMAs is that, because they are so individually customized, they do not issue a prospectus. So some additional due diligence on the fund manager and his style is warranted. A helpful tip from Investopedia in this regard:<br />
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A good question to ask here is whether the composite complies with the <a href="https://www.investopedia.com/articles/07/gips.asp">Global Investment Performance Standards</a> set by the <a href="https://www.investopedia.com/terms/c/cfainstitute.asp">CFA Institute</a> and whether a competent third-party auditor has provided a letter affirming compliance with the standards.</blockquote>
The flexibility, tax advantage, and risk problem solving for the mid-tier wealth level of investors is why I think SMAs could be the wave of the future. Hedge funds are going out of favor as an alternative to mutual funds because they don't significantly out-perform them. Check out "The Buffett Challenge: Year Nine Update" at Investopia. As investors become more disenchanted with the usual mutual fund and hedge fund choices, SMAs may step into the void.<br />
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With the kind of SMA I'm involved in, your account is synced to one or more models you want with over 30 models to choose from, chosen from over 30,000 competing fund managers at Marketocracy. They have partnered with FOLIOfn Institutional to set up SMAs. Marketocracy has been around since 2000 and most of the funds chosen for SMA modeling have 15+ year track records.<br />
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<a href="https://www.marketwatch.com/story/why-way-fewer-actively-managed-funds-beat-the-sp-than-we-thought-2017-04-24">Studies</a> have found that about two thirds of all stock funds don't survive over 15 years due mainly to poor performance. Of those that do, <a href="http://www.aei.org/publication/more-evidence-that-its-very-hard-to-beat-the-market-over-time-95-of-financial-professionals-cant-do-it/">only 5%</a> beat the Dow. The <a href="https://www.creditdonkey.com/average-mutual-fund-return.html">average fund</a> has under-performed the market by 3.5% annually the last 20 years. That's a massive amount of compounded money lost in any financial plan if you don't hunt down the good managers.The FOLIOfn SMAs can do the hard work of finding the good long-term managers. I run one of these SMA models, BPMF (Bruce Pile's Mutual Fund):<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI5puzDvEJ1Dn1SXDpByJxPq0knX-CBseNWk77t2epLc42q95aMd3puL9_c66a0DGsnklqKpzsvoRsZ7wfZGv39bCb8ozdY3513aJeRQTFWlPfsNkUtzWvd1hdauBR6e4utFCjmhmjQuw/s1600/table+revision+small+correction.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="184" data-original-width="313" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI5puzDvEJ1Dn1SXDpByJxPq0knX-CBseNWk77t2epLc42q95aMd3puL9_c66a0DGsnklqKpzsvoRsZ7wfZGv39bCb8ozdY3513aJeRQTFWlPfsNkUtzWvd1hdauBR6e4utFCjmhmjQuw/s1600/table+revision+small+correction.jpg" /></a></div>
Warren Buffett is thought of as the world's greatest long-term stock investor. Most of the SMA model funds' since-inception performance, including mine, closely match or greatly exceed Buffett's performance over the same time period - all top 1% stuff for all mutual and hedge funds for 15+ year performance.<br />
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With the FOLIOfn SMAs, you just need to go to mytrackrecord.com to survey all the since-inception charts of every manager you might want to choose, complete with all the slumps and warts. And you can choose more than one manager or style to model your account after to further reduce your risk. All of them have the GIPS (Global Investment Performance Standards) seal of approval.<br />
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Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-42907148274021607202018-08-15T15:09:00.000-07:002018-08-15T15:09:29.666-07:00Amazon: Overbought Or Just Changing Gears?<div class="separator" style="clear: both; text-align: center;">
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A lot of angst is being felt amongst FANG investors over valuation and buying too high right now. I don't want to get into that debate here, but the market has a way of digesting and seeing changes in the business of the high flyers that may be hard to see through any individual's eyes, especially if he is staring at a stock chart that seemingly has climbed all out of control. I just want to note something strictly from a technical perspective from the combined wisdom of all market participants. This, by the way, is smarter than you or me.<br />
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Let's look at Amazon's chart and see how overbought it really is:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ-b7BH6MY-ehS8d3xHmi0IXO557KDuf36QoM-19t49y8hgOmPvmXy2cbqH7JboEQ6BfEVl1moNdUB3YM4w0wfKC4yKkXSRvRntnd3tJvTpRCIRVVB2lozOhVB31QfS1_2W66FL7G6S40/s1600/amzn.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="673" data-original-width="900" height="478" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ-b7BH6MY-ehS8d3xHmi0IXO557KDuf36QoM-19t49y8hgOmPvmXy2cbqH7JboEQ6BfEVl1moNdUB3YM4w0wfKC4yKkXSRvRntnd3tJvTpRCIRVVB2lozOhVB31QfS1_2W66FL7G6S40/s640/amzn.png" width="640" /></a></div>
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At first glance, it would seem to be all out of control to the upside. If you're going to buy it, you have to wait for a big pull back, right? But if you assume there is a change in climb steepness, related to some fundamental changes in their business, and you construct the trading channel change in slope associated with that, you see that it doesn't look so overbought. It is, in fact, resting on the bottom of the new channel preparing for the next run to the top. <br />
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I've also included the Accumulation/Distribution cycling for this channel along with the CMF money flow cycling. These weigh the considered opinion of what I call the "heavy" money - large funds and other very large pools of cash, which tend to do the best research. I find that these have very good predictive power in moving the needle when the cycling correlates well with runs in the stock. As the chart shows, there is very good correlation for Amazon now. Virtually every trip the A/D support trend line corresponds to the beginning of a good run to the upside for the stock, and we are smack on one right now. All this suggests AMZN is actually at a good buy point, even after the run it has had this year - it may just be changing gears.<br />
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This isn't the first time this kind of thing has happened. If you look at the following chart, you see a very similar situation:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8XH6oPs7WySkbQ_Cv5H-TWv8C6NbKGeWwwpFgEwa15vSSsXNHlZ5_k764TS3e0uRbUCytj88YjrQ80AXIjNhvQHhdmpO9LcWT_A74UN2PgJxYrvcIX9X3x5T48wxcwafqq98r2ItCNNo/s1600/nvda.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="673" data-original-width="900" height="476" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8XH6oPs7WySkbQ_Cv5H-TWv8C6NbKGeWwwpFgEwa15vSSsXNHlZ5_k764TS3e0uRbUCytj88YjrQ80AXIjNhvQHhdmpO9LcWT_A74UN2PgJxYrvcIX9X3x5T48wxcwafqq98r2ItCNNo/s640/nvda.png" width="640" /></a></div>
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Here we have the same A/D cycling setting in with the same change in channel. And what happened? Well, we all know what happened. This turned out to be the massive breakout NVDA did in 2015, and it made a bee line to $250 from the way "overbought" $35 price you see at the right end of this chart. Just staring at the above chart in April of 2016, your thought was that you'd have to be crazy reckless to buy it there. But the combined wisdom of the market was telling us that Nvidia's business was changing from gaming to artificial intelligence and a bunch of new, lucrative stuff. I suspect something similar may be going on now with Amazon.Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-38786874679135317432018-07-15T12:42:00.000-07:002018-07-19T17:17:16.874-07:00The Problem With The Modern Gold MinerIf you are a gold bug, you have marveled lately at how historically cheap gold stocks have gotten relative to about everything: (click on images to enlarge)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDqy1rjUwVDyLceISbbz8wBHyEW0L86xGKXzFH2AohDJi3R-k2LpukxNU5pMagc6ww96fZhY2fCrEecZEvz0mWpPjmMQDAMPUkxLRDHCIdGlPZOybgZKjTAP17DRc9JmOMScDgFftXp-U/s1600/gold+miners+vs+gold.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="305" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDqy1rjUwVDyLceISbbz8wBHyEW0L86xGKXzFH2AohDJi3R-k2LpukxNU5pMagc6ww96fZhY2fCrEecZEvz0mWpPjmMQDAMPUkxLRDHCIdGlPZOybgZKjTAP17DRc9JmOMScDgFftXp-U/s1600/gold+miners+vs+gold.png" /></a></div>
Here we see that, despite gold climbing from $35 in 1968 to about $1250 today, the gold miners have dived the opposite direction from the metal price in each of the two big gold bull markets, from 1970 to 1980 and our present one starting in 2000. The mining stocks climbed, but badly under-performed the metal in both bull markets. Note that the two big dives in the above chart were during the bull markets and that our modern bull under-performed at a much lower lever that the previous bull of the 1970s. And they have certainly under-performed stocks in general, having turned back down to the relative level they were at at the <i>beginning</i> of the gold bull market:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZJsAHywBQnUrKSl6PgzzYS_EYP_AWHSqQuzShbnZhfFy17CjbVY8P1H_ZhzY9au4MbE__H33Sm-t7oANE2b7mFRDA455Oi7c5Kkpv1HR9N9bgPnG3majcPs3vh60KWuz4cSAdnUMHqok/s1600/gold+stocks+vs+spx.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="500" data-original-width="800" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZJsAHywBQnUrKSl6PgzzYS_EYP_AWHSqQuzShbnZhfFy17CjbVY8P1H_ZhzY9au4MbE__H33Sm-t7oANE2b7mFRDA455Oi7c5Kkpv1HR9N9bgPnG3majcPs3vh60KWuz4cSAdnUMHqok/s1600/gold+stocks+vs+spx.png" /></a></div>
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Here we see that in the 1970s bull market, the gold miners solidly out-performed your average stock. But in our modern bull market, the miners started to out-perform, then something went horribly wrong and sent the miners spiraling back to where they were <i>before</i> the gold bull began in 2000, despite the price of gold hanging on to its advance from $300 to the mid $1000s today.<br />
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In our modern world, the big driver of gold stocks is supposed to be the proliferation of fiat money. But the miners haven't even performed relative to fiat money:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOR-fMnIXrHOMTHZjBzoGwfF3w0MJydf5cOaI3nhCb82Bd95QSIseBdMlk3QArHaUm8C0iRS9mvqb0VFbq6rXfiSN3S09WYYLclKt26X9AGG1MWe0kswUEKZE5E5nNQF6gEIqhDJLBS4k/s1600/gold+vs+fiat+money.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="578" data-original-width="1200" height="308" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOR-fMnIXrHOMTHZjBzoGwfF3w0MJydf5cOaI3nhCb82Bd95QSIseBdMlk3QArHaUm8C0iRS9mvqb0VFbq6rXfiSN3S09WYYLclKt26X9AGG1MWe0kswUEKZE5E5nNQF6gEIqhDJLBS4k/s640/gold+vs+fiat+money.png" width="640" /></a></div>
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Here we have the gold price plotted vs FMQ (Fiat Money Quantity) and we see that the 1970s gold bull, which wasn't about fiat, solidly out-performed fiat money. Then the proliferation of fiat really began in the year 2000, when our present gold bull began:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig4-g6G0aHSrLK8qPIVgdUUx1XoZ8943ox0DEJi9hFbwe9GdSR7YdTkdTBlzh_P0waGNk-a-rrBSkTqpIba4XmPau0RiEEwj4gPQT6mLy44DaoOdc7XnrkYGEuq5P58fyIynHh-SEccXc/s1600/Chart4+Fiat+Money+Quantity.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="441" data-original-width="674" height="418" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig4-g6G0aHSrLK8qPIVgdUUx1XoZ8943ox0DEJi9hFbwe9GdSR7YdTkdTBlzh_P0waGNk-a-rrBSkTqpIba4XmPau0RiEEwj4gPQT6mLy44DaoOdc7XnrkYGEuq5P58fyIynHh-SEccXc/s640/Chart4+Fiat+Money+Quantity.png" width="640" /></a></div>
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Gold really didn't respond much to fiat, however, now being at the level in 2000 as if there were no modern fiat problem. FMQ took a sharp turn upward shortly after 2005, the same time the gold stocks began their turn south. The chart is for the <i>metal</i> price, so the miners, as seen in the above charts, have been way under-performing gold and thus very severely under-performing the proliferation of fiat money.<br />
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In these charts, one has to wonder just what is going horribly wrong with the modern gold miners, especially since about the year 2005. This seems to be the juncture where a disconnect began between a gold miner and everything it is supposed to be responding to. If you look again at the charts, you see that is about the time when the wheels started falling off.<br />
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Gold mining, as with any mining, is a very difficult and complicated business and a lot of things go into determining their stock price performance. I don't want to over simplify all that, but in this article, I want to look at just two things that I think go a very long way in explaining what we see in the charts above. These two things are very related and are governed by something that no government, economist, or council can fix. So we are pretty much stuck with both of them as they both will only get worse in the future.<br />
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The first thing is the price of oil. The primary job of a miner is to burn massive mounts of energy to extract massive amounts of ore and pulverize it into a few grams of precious metal. If you look at the history of oil, you see what the year 2005 means:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5-F73hFYXmv2tUYwNIpzmQoALlwF7LPspAd6tSoaRr_HxKSgMUhkglYJEQydzs0CUoWrSK-j8cCnpoMrbe6Vo5mbdXkSoVvzy1HhzkZqi2IVdqQNzVCbHoIbWzbrEEQmqH4Li4w1GIqE/s1600/oil+%252705+break.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="409" data-original-width="600" height="436" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5-F73hFYXmv2tUYwNIpzmQoALlwF7LPspAd6tSoaRr_HxKSgMUhkglYJEQydzs0CUoWrSK-j8cCnpoMrbe6Vo5mbdXkSoVvzy1HhzkZqi2IVdqQNzVCbHoIbWzbrEEQmqH4Li4w1GIqE/s640/oil+%252705+break.jpg" width="640" /></a></div>
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That was the year oil made the permanent break above the $30/bbl ceiling on decades of cheap energy. This has put the miners' cost structure into a world of hurt and at least partly explains why miners badly under-performed the gold price in the above charts in both gold bull markets. In the first bull, to the left of the above oil chart, oil had climbed from the standard $3/bbl price in the 1960s to $40/bbl in 1980 because of all the Middle East troubles.<br />
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Then starting in 2000, along with our present gold bull, oil takes off again. Both humongous climbs in oil put a severe damper on the gold miners' fortunes in both of the gold bull markets, helping them to under-perform the metal in the BGMI index above.<br />
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The oil problem becomes compounded with its evil twin, the other big problem with the modern gold miner - declining ore grades:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEYybkpNywTjaF3Uhtzb3Xl5szXGSEwC4-9nOtXKaSeg7LATzJ9rYi-iN_k5SD9jUcy14eDU1CwfgAbWCIRneWwrRtLvl_lumnacvw2Ud7MV5KjKeBPCFuslLjBUDOa7LE7DYK6mEMtcY/s1600/declining+grade.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="527" data-original-width="739" height="456" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEYybkpNywTjaF3Uhtzb3Xl5szXGSEwC4-9nOtXKaSeg7LATzJ9rYi-iN_k5SD9jUcy14eDU1CwfgAbWCIRneWwrRtLvl_lumnacvw2Ud7MV5KjKeBPCFuslLjBUDOa7LE7DYK6mEMtcY/s640/declining+grade.png" width="640" /></a></div>
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Gold content has fallen to about 1/10th of what it was in the 1970s - 1.18 g/t (grams per ton) per this <a href="http://www.visualcapitalist.com/global-gold-mine-and-deposit-rankings-2013/">report</a> and quickly heading below 1.0 to the reserve figure. This may also be a big reason why miner stocks have not kept up with the metal price in this bull market:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6JBbTKlmydemOuJLub4WFc4QB8Cln4aVojlMOot-XV0jX08TR0tcjhwy3kwSkrfwM-LAGDGlPcDw4VtdTV9WYpLBwt0bbZoWmjdNvGapgiShILCsIE26JekQcXQhVHDQ7G5qKr484YGE/s1600/declining+gold+grade+since+%252701.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="309" data-original-width="447" height="442" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6JBbTKlmydemOuJLub4WFc4QB8Cln4aVojlMOot-XV0jX08TR0tcjhwy3kwSkrfwM-LAGDGlPcDw4VtdTV9WYpLBwt0bbZoWmjdNvGapgiShILCsIE26JekQcXQhVHDQ7G5qKr484YGE/s640/declining+gold+grade+since+%252701.jpg" width="640" /></a></div>
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If you take just the basic miner function of buying energy to extract grams of gold and look at how that cost has risen since the year 2000, you must consider that oil has gone from averaging about $22/bbl the 20 years pre-2005 to about $73 the last 10 years, a 3.3 fold rise, and compound that with ore grade declining from 2 to 1. The cost of the actual act of making gold then has increased by 3.3x2 or a 6.6 multiplier. Gold would have to be at $2000/oz. now just to have kept up with that cost rise from when gold really started its climb from $300 to now.<br />
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This is not the total cost for mining, of course, with energy accounting for around 20% of typical reported miners' costs. But it presents a bulging cost wad that miners have constantly got to be compensating for with cuts elsewhere. And that's hard to do. They must constantly be replacing their pipeline of new gold and that's costly and tough because all the good stuff has already been found:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUA7It9Zp97qDD99FaXVdrPtkFi8Q0aKCktgk0CCQHy_JOtBi8kK9XMqmqNb3mrt3HVwIX-995gZcJlpUNMje0Mz-NErlLgKYAKAslfRN7UiGYArCU5WvqidEzaF-xUPz2wqWUnJQKSyY/s1600/gold+exploration+spending.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="299" data-original-width="506" height="378" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUA7It9Zp97qDD99FaXVdrPtkFi8Q0aKCktgk0CCQHy_JOtBi8kK9XMqmqNb3mrt3HVwIX-995gZcJlpUNMje0Mz-NErlLgKYAKAslfRN7UiGYArCU5WvqidEzaF-xUPz2wqWUnJQKSyY/s640/gold+exploration+spending.jpg" width="640" /></a></div>
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The subject of "real" miners' cost is complicated and prompted the World Gold Council and miners, in 2013, to come up with AISC (All In Sustaining Cost) which accounts for some indirect costs. Direst costs are more easily measured, such as diesel usage. This <a href="https://srsroccoreport.com/gold-mining-industry-fuel-costs-explode-in-a-decade/">study</a> found a total diesel cost per once of gold produced going from $18 in 2003 to $101 in 2013. It was for the top five gold miners, who have more means to adjust other costs than the more typical miner, bringing the above mentioned 6.6x factor down to around 6X for their actual net cost increase for the act of making gold from ore, via the diesel usage.<br />
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A new giant <a href="https://www.goldmoney.com/research/goldmoney-insights/gold-price-framework-vol-2-the-energy-side-of-the-equation-part-ii">study</a> just out (July 10) by <i>Goldmoney</i> looks at the real energy cost of gold production, both reported and unreported in a very comprehensive tabulation of real cost, and the difference between direct and the rest. Their result may surprise you - it did me.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_MZUDVhw0hphdpW-vWLzf09dgagqK5NDfWmSRcb0CaYf6m55tmRzv2Yj5sPK-n4vAJ68rrgg0RkkoMdk43XGMAwE_XvSh0-tUfVaE-zvrX2NwI1Xex-HD5WnqLvSAdTRexvaf1IgYOJI/s1600/energy+costs+of+top+25+gold+miners.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="959" data-original-width="1046" height="586" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_MZUDVhw0hphdpW-vWLzf09dgagqK5NDfWmSRcb0CaYf6m55tmRzv2Yj5sPK-n4vAJ68rrgg0RkkoMdk43XGMAwE_XvSh0-tUfVaE-zvrX2NwI1Xex-HD5WnqLvSAdTRexvaf1IgYOJI/s640/energy+costs+of+top+25+gold+miners.png" width="640" /></a></div>
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Here we see a big range in direct costs from mid-teens to 49%. But this is for 2016, where we had low oil and the average price was only $43/bbl - very low for these days. And the report echos the view that your average miner cost is probably much higher than those of the top 25:<br />
<blockquote class="tr_bq">
"Importantly, these are the largest gold producers in the world. They are not the fringe producers that operate at the margin ... It is reasonable to assume that many of these companies have higher energy exposure than the largest traded gold producers we analyzed in this report."</blockquote>
So the average direct cost of these 25 miners, which is 20%, must be bumped up by at least a 71/43 ratio to get what these costs have been really averaging the last 6 years at a $71/bbl <a href="https://www.statista.com/statistics/262860/uk-brent-crude-oil-price-changes-since-1976/">average Brent price</a>. That comes to 33% for direct costs instead of 20%.<br />
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To add on the indirect costs, they do a thorough look at all the oil related costs, such as the giant tires those big-as-a-house transport trucks use. Each of those tires takes 50 barrels of oil to make. A big miner, like Barrick, for example, goes through 6000 of those tires a year. At $67 oil, that's $20 million a year they are spending just on the oil in those tires. After accounting for a vast array of such factors, they conclude the study with this:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWmiJjvQfBkWzz9CM_VZaffjClZ08OmMHgRqLzJovpeN3MKVy81TbTS8zm9rWiyxoXtvguEIymWHpMFA3JHN2lFnbxhQAv2RnUWc0w6L5v_coYxUt1pfXv3e-lbMf2LaloOnKzvNjnYI8/s1600/total+energy+cost+of+gold+miners.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="822" data-original-width="1078" height="488" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWmiJjvQfBkWzz9CM_VZaffjClZ08OmMHgRqLzJovpeN3MKVy81TbTS8zm9rWiyxoXtvguEIymWHpMFA3JHN2lFnbxhQAv2RnUWc0w6L5v_coYxUt1pfXv3e-lbMf2LaloOnKzvNjnYI8/s640/total+energy+cost+of+gold+miners.png" width="640" /></a></div>
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Considering that the average miner energy costs are higher than for the top 25 of this study, and that their data seems centered around the year 2016, a year of lower than average oil price, you'd have to say the miners' energy costs are actually averaging well over 50% of their total costs per this study. This helps to explain the sharp turn in the miners' fortunes shortly after 2005, the pivotal year in energy.<br />
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These two big problems, higher oil and lower grades, are both facts of geology that are not going to go away. US shale will go into the downside of its Hubbert curve at some point and will not keep a lid on oil prices forever. So why would anybody in their right mind buy a gold miner today if you're not betting on a $5000 gold price anytime soon?<br />
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It has to be done very carefully with all the above in mind. For instance, acquiring the remaining high grade properties, which is the name of the game in modern times, is best done by clever acquisition, not spending a fortune on an exploration budget. You can't do much about higher oil, but you can make sure your miner has ultra high grade ore presently and will seek nothing but high grade in the future. Grade is the key to gold mining today.<br />
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There is a mid-tier gold miner that is behaving like the best of the growth stocks with about the highest grade properties on earth and AISC the cheapest to be had. Since 2014, they have increased revenue by 4.9 fold, cash flow from operations by 12.8 fold, and EBITDA by 17.1 fold and sell at a 24 PE. Their stock chart is a copy of that of Netflix over the last three years, a smooth ascent to a 3 fold rise, despite the stagnant gold price. Their properties, both producing and soon to be produced, have ore grades more reminiscent of the 1920s than today. They are debt free and executing aggressive growth with robust cash flow. I just wrote an article at <i>Forbes</i> on this miner and you can read it <a href="https://www.forbes.com/sites/kenkam/2018/07/09/kirkland-lake-gold-adds-growth-and-partially-hedges-tech-heavy-portfolios/#5d7b45ae28db">here</a> as well as see some information on our SMA (Separately Managed Accounts) offered by Marketocracy and FOLIOfn Institutional. I run a model fund for this, where I own this gold miner. It is the only gold miner I own, except for a very small handful that are mainly copper. Some performance stats on my model (as of 7/13/18):<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMlaukhzIhMBpMiCf_DFjyfJ0apGm1UeQwijvK63IQ6ksWBJK-9bRC-FYxR7rKF_PSUyknYD1ra_vPYZ5-v2yqVBhB6tQ0rCbRCk08r37ZXpD8IXs_EJqDvIclz9qvWF2Ag_60P-pQ4nI/s1600/SMA+stats.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="223" data-original-width="355" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMlaukhzIhMBpMiCf_DFjyfJ0apGm1UeQwijvK63IQ6ksWBJK-9bRC-FYxR7rKF_PSUyknYD1ra_vPYZ5-v2yqVBhB6tQ0rCbRCk08r37ZXpD8IXs_EJqDvIclz9qvWF2Ag_60P-pQ4nI/s1600/SMA+stats.jpg" /></a></div>
If you've never checked out SMAs, you should. They offer some advantages of hedge funds (manager's own money invested) but with far more safety (models are per SEC mutual funds) and your account is entirely separate and your own (synced to the models you want) with over a dozen models to choose from, all with hard-to-find, exceptional, long-term track records, carefully chosen from over 30,000 competing fund managers.<br />
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Studies have found that about two thirds of all stock funds don't survive over 15 years due mainly to poor performance. Of those that do, less than 5% even match the Dow, let alone beat it. Those survivors that handily beat the Dow beyond 15 years are among the top 1%. These SMAs can do the hard work of finding the good long-term managers for you.<br />
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Your separate account can be a Roth or any tax advantaged type you want. Customization and control on what's in your account are driving an explosive growth in SMAs, having grown by 84% since 2010, according to this <a href="https://www.morganstanley.com/ideas/separately-managed-accounts">report</a> by Morgan Stanley. </div>
Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-66032345794776181932018-02-04T19:27:00.000-08:002018-05-13T00:10:53.662-07:00Atomera and Moore's Law<div>
Tiny, unheard of Atomera (ATOM) could be Act II of a really big high tech show. What was Act I? It was erbium doping, which revolutionized fiber optic high tech in the '90s. The growth of the network was hampered by lack of a clean way to amplify optical signals. You had to convert light speed down to a crawl at electron speed to amplify, then convert back to light. Then the erbium doped fiber amplifier or EDFA was born where glass fiber was doped with erbium allowing pure optical amplification. The rest is history.</div>
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Now high tech is up against another constraint where a similar invention is needed. When Intel put forth Moore's Law, it seemed it would go on forever with transistors on a chip doubling every 18 months bringing down cost while improving performance. It's debated, but 50 years later, it may be coming up against physical boundaries that will change the industry.<br />
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As was <a href="https://www.barrons.com/articles/atomera-hopes-to-make-money-solving-the-breakdown-of-moores-law-1502985481">noted</a> recently in <i>Barron's</i>, Moore’s Law is “no longer a law in terms of the time frame” of improvement of chips, according to Scott Bibaud. “In 2012, the cost per transistor for the first time did not go down,” he observes, an ominous sign for the industry. Bibaud has served as Senior Vice President and General Manager of Altera’s Communications and Broadcast Division (later bought by Intel) and was chief of Mobile Platforms Group at Broadcom. In 2015, he took over as CEO at Atomera.<br />
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With Moore's Law in control, chip makers eagerly retooled the next generation smaller node, currently going from 20 nanometer to 14 nanometer. But with the Internet of Things (IOT) the wave of the future, they are not so eager. According to Bibaud:<br />
<blockquote class="tr_bq">
“People are saying 28-nanometer will be useful for many years ... And 40-nanometer chips are big in the world of automotive chips and for the Internet of Things. We’ve even heard that the 130-nanometer node has the most new design starts of any node today for things like analog and sensor and power applications.”</blockquote>
So the new IOT chips place less demand on Moore's Law continuance as does Nvidia's approach of parallel processing in their GPU. When video and gaming took over a lot of our computer viewing, Nvidia invented, in 1999, a totally different processor (Graphics Processing Unit) that didn't need high transistor density because it dumped its workload into many hundreds of parallel paths that together put all the color blobs and motion on our screens. Since then, however, they have discovered that these processors are very good at concurrent number crunching, and they are teaching them to do a lot of what the old school, Moore's Law dependent chips were doing. For more on this, see my recent Forbes <a href="https://www.forbes.com/sites/kenkam/2018/04/23/how-moores-law-now-favors-nvidia-over-intel/#32bd461d5e42">article</a> "Why Moore's Law Now Favors Nvidia Over Intel."<br />
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But GPUs and IOT will never replace the ever advancing need for higher semi efficiency. The chip industry desperately needs some kind of big efficiency invention right now, like the fiber networks received in the '90s with the EDFA, giving ramped up performance on existing node designs, calming the costly panic into the next node. Atomera is poised to hand them just that. And they're doing it with some more doping of silica - oxygen this time instead of erbium. And they're doing it with the very same PhD that invented the erbium doping - Dr. Robert Mears, the founder of Atomera. In 2001, it was private and known as Mears Technologies.<br />
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In the 2016 annual report (when they went public) they open with:<br />
<blockquote class="tr_bq">
"There is no manufacturing process as complicated as making a semiconductor chip ... In January we changed the name of our company to more accurately represent the advanced material science we are providing to the industry in an era when semiconductor advances are increasingly happening at the atomic level."</blockquote>
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Mears is now the Chief Technical Officer of Atomera. He has an array of patents on his invention called MST (Mears Silicon Technology) that dopes a transistor with oxygen atoms in a way that dramatically improves electron flow. This allows several benefits like smartphones with 50% better battery use, but more importantly it provides "more than Moore" tooling and cost benefits to chip makers, per their website.</div>
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The strong link between Robert Mears' Act I and II is evident in <i>Wikipedia's</i> box summary for him. It simply reads "<i>Born</i>: England <i>Occupation</i>: Physicist and engineer <i>Known for</i>: Invented EDFA, founded Atomera <i>Notable work</i>: EDFA, Mears Silicon Technology." If the oxygen doping does what the erbium doping did, ATOM is in for some big things.<br />
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I called Atomera "unheard of" but that's not entirely true. There is no analyst coverage yet, but there was the <a href="https://www.barrons.com/articles/atomera-hopes-to-make-money-solving-the-breakdown-of-moores-law-1502985481">article</a> in <i>Barron's</i> August 17, 2017 "Atomera Hopes To Make Money Solving The Breakdown Of Moore's Law" and a nice <a href="https://seekingalpha.com/instablog/94532-super-trades/5108288-atomera-incorporated-iot-technology-improve-350-billion-semiconductor-market">article</a> at <i>Seeking Alpha</i> February 1, 2018 focusing on the Internet Of Things, the web connected device revolution now engulfing us.<br />
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Then there is the January 30, 2018 press <a href="https://globenewswire.com/news-release/2018/01/30/1314322/0/en/Atomera-Continues-to-Grow-Customer-Pipeline.html">release</a> "Atomera Continues To Grow Customer Pipeline" that seems to have brought some attention and activated the stagnant stock, sending it up about 50% the following week in the face of a sharp market selloff. I have been long the stock since December at $4 and feel it is a growth item you hang onto until the thesis is altered.<br />
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This is a risky, pre-revenue, one trick pony with heavily patented oxygen doping being the only product offered. But the market may now be grappling with the possibility of a $67 million market cap company engaging some $3.5 billion of addressable market.<br />
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In the <i>Barron's</i> article of late 2017, Bibaud said Atomera is “very well capitalized,” with “almost three years of burn left” in terms of cash on hand. If you look at cash and equivalents at end of the first public year, 2016, it was $26.7 million. By end of 2017, it was $17.4 million - a burn rate of $9.3 million per annum. So that suggests something more like two years of burn left before a dilution may be called on. But they seem poised to either start signing lucrative licence agreements (or start getting rejected) well before two years have elapsed. And they are not in any kind of debt trouble <a href="https://www.gurufocus.com/term/Long-Term+Debt/NAS:ATOM/Long-Term-Debt-&-Capital-Lease-Obligation/Atomera%20Inc">reporting</a> debt and lease level at zero. In the latest quarter reported 5/3/18 they report:<br />
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<li>Grew the number of customers in Phase III Integration by 50% to nine</li>
<li>Initiated first customer multi-process evaluations</li>
<li>17 engagements underway with 14 customers</li>
<li>Completed Atomera's first installation of MST technology at a customer fab</li>
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From the <i>Barron's</i> article, quoting Scott Bibaud, Atomera CEO:</div>
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“I don’t know if I can quantify the degree of confidence I have in their signing,” he says, “but they are spending a lot of money in evaluation, it’s quite expensive,” suggesting that they wouldn’t be doing so only to end up walking away.<br />
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Atomera, with just under 20 employees at the moment, is currently staffing up because “we’re bringing in a lot of new customers” in the evaluation stage.</blockquote>
In August, when this piece was done, Atomera had four customers in the evaluation stage. Now they have 14 per the January 30 news release, representing about 50% of the biggest semiconductor companies in the world.<br />
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My bullish thesis would change, of course, if the first customer decision was a "no" as they seem likely to accept or reject the technology as a group.</div>
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Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-71100053411144439302017-12-27T08:16:00.001-08:002017-12-27T08:16:45.468-08:00My Two Cents On BitcoinEverybody and their dog is buzzing about Bitcoin, whether they're investing analysts or not. So I'll toss in my two pennies. Like most everybody, I thought it was a bizarre scheme when I first became aware of it. I hadn't heard of blockchain though, and the two are different animals. Blockchain is the enabling technology for cryto-currenies, but likely will be the enabling technology for all the business world of the future. It's just making its debut into our consciousness with a screwball thing like Bitcoin.<br />
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There is a school of thought that goes like this, "Blockchain is to value now as the internet was to information in 1995". By "value" is meant any business transaction where green visor humans push pencils to update everyone's ledger in a brick and mortar unit. They may push some of these results onto the internet, but the "unit" is now becoming the block in blockchains on the 'net.<br />
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As an <a href="https://ripple.com/insights/the-internet-of-value-what-it-means-and-how-it-benefits-everyone/">article</a> from back in June in ripple.com explains:<br />
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Venture capitalist William Mougayar calls blockchain “the second significant overlay on the internet, just as the web was the first layer back in 1990”. When most people think of blockchain, Bitcoin instantly comes to mind. But the potential that excites Mougayar and many others goes far beyond financial transactions made using such digital currencies. It touches on what we at Ripple have for many years called “the Internet of Value.” ...</blockquote>
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In the US, a typical international payment takes 3-5 days to settle, has an error rate of at least 5% and an average cost of $42. Worldwide, there are $180 trillion worth of cross-border payments made every year, with a combined cost of more than $1.7 trillion a year.</blockquote>
This is archaic when we have something like the internet. Of course the first thing that comes to mind with this is security of all that value online. But the internet nerds claim blockchain itself has never been hacked is not hackable. The "on ramps" have all the normal problems such as lost or hacked passwords, thumbdrives and so on. But the blockchain itself is said to be an advancement in security.<br />
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But anyway, back to the Bitcoin craze. It is less predictable whether crpto-currency will be a standard in the future as blockchain will probably be. I am getting the impression that Bitcoin is now dragging the budding blockchain stocks around with it and thus making them a danger. I had three blockchain tech stocks in the fund, but they had run so much, two more than doubling, that I've parked them on the sidelines for now. I'm a believer in blockchain, but I just don't know about crypto.<br />
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Bitcoin itself appears to me to be at a precarious technical juncture. I say "technical" because there appears to be no way to value Bitcoin fundamentally. About the closest thing to such a valuation I've seen is given by an <a href="https://economictimes.indiatimes.com/markets/stocks/news/this-one-factor-could-tell-how-far-bitcoin-will-plunge/articleshow/62248797.cms">article</a> from <i>The Economic Times </i>titled "Bitcoin: This One Factor Could Tell How Far Bitcoin Will Plunge". The idea is to value the Bitcoin price by the value of bitcoin transactions - by how much it is actually used as a medium of exchange. As the following graph from the article shows, this value gauge has grown in close proximity to the price, up until about a month ago.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAS3HxYpqP_qUnpnWf9o9w9kE3QRhmK4OX6kCPby3rQC70U3stWAx279f5Q7Dl_D9DVU9Sd-VfMo3_hbg2oY5MwT6vRG8LxgQOlsa0Qxjn5UgzRSgEM-FJ6EFDU0TgQX6CBo-xIFoBrn8/s1600/bitcoin.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="682" data-original-width="1200" height="362" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAS3HxYpqP_qUnpnWf9o9w9kE3QRhmK4OX6kCPby3rQC70U3stWAx279f5Q7Dl_D9DVU9Sd-VfMo3_hbg2oY5MwT6vRG8LxgQOlsa0Qxjn5UgzRSgEM-FJ6EFDU0TgQX6CBo-xIFoBrn8/s640/bitcoin.jpg" width="640" /></a></div>
I have added an estimate of what this transaction value has been since 12/20/17, where the graph stops, from the total number of transactions from the running total at blockchain.info, which assumes the value per transaction has stayed about the same and the processing flow has been operating OK.<br />
The graph suggests the price of Bitcoin has overheated and is due for a cool down. This agrees with convention technical behavior in that the price action seems bent on forming a classic head and shoulders top way up there above its "value":<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFfjzv3SlV0r1L8Wy8wAlToPchIlj9CQ0cauMS1yr6FaKwTeaUcCwoICjJZ38cGbjC4penVmZkIzxEtKAHwqrR4qk9ugnGSMmBcmci3imaTNIm9hZ1ja9sUbeplRH2GpwuMHfwrSMG5MM/s1600/coindesk-bpi-chart.jpeg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="416" data-original-width="886" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFfjzv3SlV0r1L8Wy8wAlToPchIlj9CQ0cauMS1yr6FaKwTeaUcCwoICjJZ38cGbjC4penVmZkIzxEtKAHwqrR4qk9ugnGSMmBcmci3imaTNIm9hZ1ja9sUbeplRH2GpwuMHfwrSMG5MM/s640/coindesk-bpi-chart.jpeg" width="640" /></a></div>
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The price action seems like it's stalling around the shoulder area of $15000 to $17000, which would complete the right shoulder of a major top. I like the blockchain enablers, the real ones, not just the jokers with no credible history of running a business who are slapping on a "blockchain" hat to jump their stock. But I am going to wait until Bitcoin works its way out of this sticky wicket one way or the other before dabbling with blockchain anymore. The good stocks here may be a lot like the good networking stocks of 1995.Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-60219641456945405522017-11-12T11:03:00.001-08:002017-11-12T11:43:12.082-08:00The New Xoma - A Modified Risk Way Of Investing In The Genetic Era<div>
You may have heard that this year's Nobel Prize in Physiology or Medicine went to Jeffery Hall, Michael Rosbash, and Michael Young for their work in unraveling the workings of our body's daily clock - the circadian rhythm. You may not think too much about partying all night or getting up at 2 am for work, but your body thinks about it plenty. We know that the 24 hour light/dark cycle effects our chemistry and health, but they have found that plant leaves, for example, can open up and close even when put in complete dark - controlled not by light, but by genes.<br />
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As explained in the <i>Biotechin.Asia</i> <a href="https://biotechin.asia/2017/10/08/three-american-scientists-win-nobel-prize-physiology-medicine-2017-work-biological-clock/">report</a> on the Nobel Prize, it's the genes that the prize winners solved to advance our understanding of the clock. This years Nobel Prize reflects the genetic revolution I wrote an <a href="https://seekingalpha.com/article/3226886-insider-wisdom-and-the-new-medicine">article</a> about. I called it "Insider Wisdom And The New Medicine". There is a revolution going on in medicine and it could usher in a whole new array of effective, more palatable therapy. But how do you invest safely in something this new? The genetic developers are typically tiny upstart companies going into a sea of red to put drugs through clinical trials for FDA approval. But only about one of 10 ever gets approved and the casualty rate of these stocks is high. You can own stock in the large biopharmas that are now more than ever tending to collaborate with the more promising candidates of the small caps, and often buy them out. This is lower risk, but you would likely be better off with a biotech ETF.<br />
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If you want to venture into the topsy turvy arena of the genetic revolution with the smaller companies, there is another choice now developing that offers much higher return. The Ligand "model" is what it's often called and Ligand Pharmaceuticals is the first to decisively go down this road. A <i>Forbes</i> 2015 <a href="https://www.forbes.com/sites/danielfisher/2015/07/01/life-after-loeb-ligand-pharmaceuticals-prospers-in-stripped-down-mode/2/#1b5ee0ca2704">article</a> details this nicely. Up until 2008, Ligand had been swinging the trials bat with no earnings home runs to show for it. As the <i>Forbes</i> piece relates:</div>
<blockquote class="tr_bq">
On his first day as chief executive of Ligand Pharmaceuticals in January 2007, John Higgins was shown into a conference room in the biotech firm's 135,000-square-foot San Diego headquarters. Inside was a table so mammoth, Higgins recalls, "you could practically land a corporate jet on it." </blockquote>
<blockquote class="tr_bq">
The new CEO immediately instructed the head of facilities to find a carpenter and cut it up into smaller tables. Higgins wasn't some scientist-turned-empire builder trying to make Ligand into the next Amgen or Genentech. He was a hit man, brought in amid a raid by activist Daniel Loeb of Third Point LLC to stem the losses at the once-promising biotech firm and turn whatever was left into quick cash. </blockquote>
What was left was an array of promising medicine needing big money for trials. Higgins started his hit by slashing Ligand's workforce from 365 down to around 20, where it is today. You could say he turned Ligand into the Wal-Mart of biotech. He proceeded to "farm out" Ligand's better prospects to the big companies with what you hear so much of today - royalty agreements, milestone payments on successful trials, and other high volume, less-than-home-run reward. The Higgins philosophy: <br />
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<blockquote>
... no matter how many Nobel Prize-winning scientists you put on your advisory staff, there's no certainty your decision making about a drug will be right ... He's rebuilt the company along lines that would make a Texas wildcatter proud: spreading bets and relying on other people's money to find winners</blockquote>
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I won't recount the results of this "hit man" other than to say they were extremely successful. After turning EBITDA positive, cash flow climbed like a clock from $2 million in 2012 to 60 million current TTM. The stock had swooned from a speculative $140 in 2004 to around $8 in 2010, when the Higgins plan took hold. It's now a cash flow rich $143 . As the article summed it up:<br />
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No question Higgins has wrung the romance of biotech right out of Ligand. But there's also no question he's made it Loeb-proof. There's nothing left for a takeover artist to cut. "No other biotech has this story," Higgins says. "No other biotech with success could show a flat expense line."</blockquote>
OK, so you've missed the train on Ligand. But there is another train boarding - Xoma Corp (XOMA). About three years after Higgins first took his seat at the much smaller tables at Ligand, Xoma began adopting this same business model. From a 2010 <a href="http://www.wikinvest.com/stock/XOMA_(XOMA)">write-up</a> in <i>Wikenvest</i>:<br />
<blockquote class="tr_bq">
XOMA has evolved into a sort of research and development outsourcing company." </blockquote>
But they didn't decisively ditch the old model until 2015, when disaster struck. A failed Phase III endpoint smashed the stock down from around $100 to the mid-teens in a day. The stock has been in this doghouse ever since, until now. Ironically, it was the same Gevokizumab that ran the stock up recently when it was announced it was being farmed out to Novartis for development against other things. It's a versatile monoclonal antibody, what the "mab" stands for at the end of the drug name.<br />
This model switch is drawing some attention as seen by the <a href="http://www.barrons.com/articles/novartis-deal-could-send-xoma-stock-to-19-1504696834">massive upgrade</a> in <i>Barron's</i> in September:<br />
<blockquote class="tr_bq">
We are upgrading our rating on Xoma to Outperform from Neutral and increasing our 12-month price target to $19 from $9. </blockquote>
<blockquote class="tr_bq">
We drew a line in the sand requiring a deal to validate the new business model of lean operating expenses and licensing revenues and Xoma (ticker: XOMA) delivered. So we are upgrading and increasing our price target to include potential royalties on gevokizumab and canakinumab for cardiovascular-disease sales.</blockquote>
In my insiders and genetic medicine article linked above, I detail why the Baker Brothers are perhaps the savviest insiders in medicine to pay attention to. The Bakers had XOMA as one of their small, select handful of mega-weighted stocks until the 2015 disaster, when they abandoned ship. But this was heavy validation of their basic concept and pipeline, as is the major corroboration now with Novartis. Genetically programmed antibodies are a major Baker interest.<br />
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The similarity between XOMA and LGND is being noticed by biotech pundits, but Xoma has a long hill to climb to be as successful with this as Ligand. However, if they continue to progress, they will inevitably command the kind of "royalty premium" that Ligand now enjoys - a five year average multiple on its revenue of 22! Adjusting Xoma's current 4 multiple to Ligand's current 27 implies another six fold increase in the stock, not even counting future revenue growth.<br />
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They reported their quarter Nov. 6 and it was a crazy, <a href="https://seekingalpha.com/news/3308793-xoma-beats-2_79-beats-revenue">massive beat</a>. As for their press releases, I find the <a href="http://investors.xoma.com/releasedetail.cfm?ReleaseID=1042777">latest one</a> listed at their website from October 4 interesting. It's titled "XOMA Announces Multiple New License Agreements For Proprietary Phage Display Libraries." Phage displays are cataloged antibody configurations that apparently can be "looked up" to match the profile of specific disorders being worked on. The US National Library of Medicine, has a section called "Phage Display - A Powerful Technique For Immunotherapy" and Xoma is a major trafficker in phage display, claiming in the press release, "XOMA's premier antibody discovery platform includes three phage display libraries, which are among the largest in the world."<br />
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<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-46403336871211310732017-08-17T16:36:00.000-07:002017-08-20T19:55:10.416-07:00The Cheapest FANG Stock You Never Heard Of<div class="separator" style="clear: both; text-align: center;">
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Tired of overthinking and overpaying for the modern growth phenomena that is FANG? Afraid the next tech wreck will wreck your portfolio? Don't want to be at the mercy of a FANG member hiccup in results at these high multiples? There are FANG support stocks that are levered to this growth beast, but about all of them are well known and suffer the same over-buzzed and over-owned problems as the Fab Four. Well if you want a new, hot performing, very under-the-radar, pick-and-shovel play for FANG that's been around for over 20 years with no debt and no dilution, keep reading. It has been growing results faster than any of the FANG members the last three years, and is currently at a 1.6 multiple on sales, a 3.9 multiple on cash flow, and a TTM PE of 4.<br />
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I speak of Network-1 Technologies, Inc. (NTIP) and they chase no subscriber base, have no cost of advertising (which is one reason you've never heard of them) and have been turning roughly half their sales into EBITDA. You see, the big players (Samsung, Google, Facebook, Apple, et al) come to them for permission to play. They are a tiny $100 million market cap David that owns a wide assortment critical patents at the heart of every Goliath Amazon and Amazon want-to-be.<br />
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The Long History Of This Company</h3>
They didn't start out doing patents. They were formed in 1990 selling "prepackaged software" as their SEC business classification stated, mainly security firewalls under the name "Network-1 Security Solutions" with the ticker NSSI, going public in 1998. They are still listed by the SEC as "prepackaged software" but they are into a whole new thing business-wise.<br />
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In April, 2004 reporting 2003 results, they stated the change in focus of the company:<br />
<blockquote class="tr_bq">
Network-1 discontinued its software product offering in December 2002. In November 2003 Network-1 commenced a new business consisting of the acquisition, development, licensing and protection of its intellectual property which currently consists of a portfolio of telecommunications and data networking patents. In February 2004, the Company initiated its licensing efforts relating to its patent (U.S. Patent No. 6,218,930) covering the remote delivery of power over Ethernet cables (the "Remote Power Patent"). </blockquote>
Al Gore's claim about inventing the internet comes to mind, only these guys can actually claim a facsimile of that honor. So what about this pipe dream of a tiny band of highwaymen erecting a toll booth to collect patent usage bounty from FANG? How has this worked out in real life?<br />
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There was a 2000% rise in the stock after the business model switch. But to be fair, it was from 2003, when the dot bomb had flattened the stock to near zero. As security software peddlers, their results were consistently pathetic, typically loosing over five times their sales in loss from continuing operations.<br />
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So the math had to be impressive if they just survived, and they did. What strikes me about this chart is that, after the gleam in speculators' eyes went away in 2000, the stock went into a 15 year base, and even with results now that are what the internet speculators were dreaming of in 2000 without a dime of cash flow, the stock is just barely poking its nose out of the base with a PE of 4 with no fan far. But the base breakage is accompanied by a massive increase in volume, and the ownership appears to be extremely stronghanded as evidenced by the near zero reaction by the stock to the sharp, broad selloff of early 2016. All this suggests there is much more to come.<br />
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It's also interesting in this chart that the company seemed to know that much better things would be happening soon in 2011, when they initiated their stock buyback program, and again 2014, when they uplisted their stock from OTCBB to the NYSE.<br />
<h3>
The Genius Behind The Big Change - Corey M. Horowitz</h3>
Horowitz was Chairman of the Board starting in 1996 before becoming CEO with the new vision. The November, 2003 launch of the patent business coincides with the December, 2003 start of the role of a this legal genius as CEO. He is the guiding inspiration for spotting the key patents, working deals with the inventors to monetize their work on the big stage with royalties to the inventors and licensing revenue from the big fish. It's like Shark Tank in reverse with the sharks being in the hot seat. I say "legal genius" not because he has a law degree, but because his gang, consisting of a handful employees, has been drawing the likes of Apple, Cisco, and Google, with their armies of lawyers, into court to get patent rights squared away - and winning. Legal fees are a big expense for the company. In Bloomberg's <a href="http://www.bloomberg.com/research/stocks/people/person.asp?personId=393885&privcapId=393883">profile</a> of Horowitz, they allude to his talent:<br />
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Mr. Horowitz was an early stage investor in Network 1 and helped transform that company into an award-winning distributed firewall vendor prior to its being taken public in 1998 ... In 2003, as Chairman, Mr. Horowitz supervised the winding down of operations, sale of the product suite and the development of alternative business opportunities. Since 2004, he served as the Chief Executive Officer and transformed the company into a business specializing in the licensing and enforcement of intellectual property, resulting in a 25 fold appreciation in its stock price</blockquote>
Horowitz puts his money where his genius is, owning roughly a third of the shares. I like it when founding individuals own this kind of interest.<br />
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You can find almost nothing written or said about this company. Jeff Marston did a nice <a href="https://seekingalpha.com/article/4046282-networkminus-1-technologies-catalysts-horizon">article</a> at Seeking Alpha back in March, "Network-1 Technologies: Catalysts On The Horizon" where he explains the patent portfolio status. And an earlier <a href="https://seekingalpha.com/article/2964456-networkminus-1-technologies-an-undiscovered-cash-rich-company-with-a-solid-revenue-stream-could-see-substantial-upside-on-proven-ip-assets">PRO article</a> by Tom Shaughnessy from March, 2015 "Network-1 Techologies: An Undiscovered Cash Rich Company ..." discusses the patents. In lieu of the debt or dilution you'd fear with a 'net nanocap, this outfit had, as of March, 2015, laid claim to about $12 M in share buybacks on a market cap of $56M. That's 21% of the company grabbed by the company. They now have roughly $50 M in cash and a current ratio of 22. As Shaughnessy stated:<br />
<blockquote class="tr_bq">
NTIP is a <i>uniquely</i> financially strong microcap company which positively differentiates it from other microcaps in the space.</blockquote>
Is this the same company that was losing over five times their sales and needing over $40 M in paid in capital to survive in the tech boom? I think they've made a wise change in direction. It's not that this patent brokering thing is NTIP's invention. As Marston points out, there are others doing a similar thing: RPC Corp. (RPXC) Acacia Research Corp. (ACTG) Wi-Lan Inc. (WILN) and Marathon Patent Group Inc. (MARA). But they all have had negative or spotty results with it. They just don't seem to have the flare for this sort of thing that NTIP's Horowitz has.<br />
<h3>
The Challenging World Of Patent Litigation</h3>
How these court cases turn out is very topsy turvy and are a constant battle against the expiration of the patents. The Remote Power Patent that currently has a yearly revenue stream coming to NTIP from Cisco and others expires in 2020. But expirations don't necessarily mean no revenue. For example, there is the case of the Mirror Worlds patents. In 2013, NTIP bought some patents from this company that Apple was infringing on. This was after Mirror Worlds took Apple to court and lost. Steve Jobs realized the value of these patents, saying in a Supreme Court <a href="http://sblog.s3.amazonaws.com/wp-content/uploads/2013/06/2013-03-21-Petition-Mirror-Worlds-LLC-v.-Apple-Inc.-No.-12-1158.pdf">document</a>:<br />
<blockquote class="tr_bq">
"It may be something for our future, and we may want to secure a license ASAP". Steve Jobs stated this after seeing a New York Times article that praised Mirror Worlds' new Scopeware product. Scopeware is Dr. Gelernter's (founder of Mirror Worlds) invention for a "document stream operating system and method".</blockquote>
Horowitz bought the patents and got a $25 M <a href="https://thepatentinvestor.com/2016/07/network-1-technologies-wins-25-million-in-settlement-of-patent-infringement-dispute-with-apple/">settlement</a> from Apple last year even though the patent had just expired. It was more of a penalty awarded by the court for Apple's infringement in the past.<br />
These retroactive awards can apply to patents in general. From Shaughnessy's article:<br />
<blockquote class="tr_bq">
The Remote Power Patent's royalties are providing a viable stream of revenue, but they can grow. For example, there are 11 infringers who have the potential to owe back damages and future royalty payments. </blockquote>
NTIP can't rest on their laurels of impressive court wins (batting 1.000 so far) because patents expire and many court wins are one time settlements. They must keep a stream of license revenue and court awards coming, and they seem to be about that with actions beginning with Google and Facebook. But the future of NTIP's revenue is far from an open and shut case. The major risk with this company is the changing legal landscape for IP (Intellectual property) litigation. No one is more aware of that than Horowitz himself.<br />
<br />
In a 2015 <a href="https://thepatentinvestor.com/2015/12/network-1-ceo-horowitz-says-investors-miss-the-value-in-its-active-litigations-against-apple-and-others/">interview</a> with "The Patent Investor" Horowitz predicted the massive surge in NTIP's results the following two years, but revealed some angst over the future of this patent business model:<br />
<blockquote class="tr_bq">
“In the next two years, we’re going to wind up with a lot of cash on our balance sheet and then we’ll have to decide what to do next.”</blockquote>
<blockquote class="tr_bq">
For his part, Horowitz said whether he makes additional patent portfolio purchases will depend on whether the patent market gets better.</blockquote>
<blockquote class="tr_bq">
Over the past 10 years, patent holder rights have been steadily eroded by a series of court rulings that have taken away injunctive relief, reduced damages and done away with software as a patentable subject matter. In addition, the America Invents Act also established the IPR and CBM review process to give infringers an inexpensive and time-saving tool to invalidate weak patents.</blockquote>
<blockquote class="tr_bq">
“Patent holder rights have been eviscerated over the past few years and innovation in this country’s been harmed. Ambulance chasers ruined it. I’m negative on the patent business because the game keeps changing, the rules keep changing. That’s not a business for a public company.”</blockquote>
<h3>
What Is The Attitude Of Horowitz Now, Two Years Later?</h3>
Since that discouraging word from Horowitz, the court wins have continued for Network-1, and there seems to be debate around the pendulum swinging back to patent holder rights as <a href="http://www.iam-media.com/blog/detail.aspx?g=d89c70c8-11a5-458e-bd04-9ef418e57532">conveyed</a> in this coverage of the 2016 NPE conference, attended by Horowitz:<br />
<blockquote class="tr_bq">
The prevailing mood among the CEOs set a particularly sombre tone for the rest of the event. It was by no means shared by all panelists and delegates (which this blog will follow up on tomorrow), but it did contradict the claims that the pendulum is starting to swing back to stronger patent rights in the US.<br />
<br />
As one delegate put it: “The talk at last year’s event was about turning a corner, well it’s proving to be a pretty long corner.” The reality is that while the licensing climate might be improving for some patent owners, for many NPEs it remains very challenging. If the pendulum is moving back towards the centre, it’s not taking everyone with it.</blockquote>
If frivolous lawsuit squashing vs patent rights is indeed a pendulum in history, we seem to be coming off a swing to the squashing, anti-patent end, a swing in which Network-1 has managed to make big hay anyway. The America Invents Act that went into effect in 2013 is generally seen as making life harder for the small inventor. The main reason for this is that it changes patent rights from first-to-invent to first-to-file. Before 2013, if you filed for a patent, someone could come along later claiming they came up with the idea first, thoroughly prove it with documentation, and steal your patent. After 2013, a patent is yours if you filed it first. This puts a lot of pressure on inventors to file before they're ready or before they pay for attorneys, giving a big advantage to bigger companies over lone wolf inventors.<br />
<br />
To further aggravate patent rights, the US Supreme Court ruled just this May that patent court cases must be held in the district where the alleged infringement took place. This basically scatters cases away from the knowledgeable patent "specialists" of the Eastern Texas District, where some 39% of all patent cases are held and strong patent rights can be expected.<br />
<br />
This would all seem to hurt NTIP until you think about it a little. The 2013 Act actually makes the Network-1 portfolio safer since they deal mainly with <i>filed patents</i> which they have paid for. The new laws prevent any of these patents from being stolen from them. It just makes it harder for those filing. Though they have been filing some patents lately with Professor Ingemar Cox as a consultant to Network-1, they are not in the business of trying to get things filed. And when they do file, they enjoy the advantages a cash rich company has over the others. As for the case location issue, Marston discusses this in his <a href="https://seekingalpha.com/article/4076977-recent-supreme-court-decision-means-networkminus-1-technologies">article</a>, "What The Recent Supreme Court Decision Means For Network-1 Technologies". He points out that Network-1 has been filing in other districts, besides Eastern Texas, and they don't file a lot of frivolous lawsuits like a "patent troll" outfit does with a shotgun approach. Network-1 takes more of a smart bomb approach, doesn't go to court with weak patents and wins in any proper court.<br />
<br />
Despite his moaning about eroding patent holder rights cited above from 2015, Horowitz is now very bullish on his stock. He still owns 33% of the shares and had this to say in a December, 2015 <a href="http://www.ipwatchdog.com/2015/12/07/have-investors-lost-the-appetite-for-the-public-ip-companies/id=63705/">interview</a> at The IP Dealmakers Forum:<br />
<blockquote class="tr_bq">
“We are buying back our stock because we think it is attractive,” Horowitz said. “I have at least one trial, maybe two trials… I’m very optimistic about the next two to three years.”</blockquote>
He has since launched into some new litigation. And the company's rabid confidence as expressed by its stock repurchase program, initiated with $2 M worth in late 2011, continues unabated. In June, 2015, they announced another $2 M worth of approved buybacks with Horowtiz <a href="https://www.streetinsider.com/Stock+Buybacks/Network-1+(NTIP)+Approves+Additional+%242M+Buyback/10664156.html">saying</a>:<br />
<blockquote class="tr_bq">
"We are pleased to announce another increase to our repurchase program to benefit shareholders at a time when we believe our stock is undervalued," said Corey M. Horowitz, Chairman and CEO of Network-1. "This, our fourth increase of our share repurchase program, reflects our confidence in the long-term potential for Network-1 and our commitment to increasing shareholder value," he added.</blockquote>
But he has gotten much bolder with the buybacks since then. In June, 2017, they <a href="https://www.streetinsider.com/Corporate+News/Network-1+Technologies+%28NTIP%29+Approves+%245M+Buyback+Plan/13018554.html">announced</a> another $5 M worth approved:<br />
<blockquote class="tr_bq">
"We are pleased to announce another increase to our Share Repurchase Program to benefit shareholders at a time when we believe our stock is undervalued," said Corey M. Horowitz, Chairman and CEO of Network-1. "This, our fifth increase of our Share Repurchase Program, reflects our confidence in the long-term potential for Network-1 and our commitment to increasing shareholder value," he added.</blockquote>
This grab is aggressive:<br />
<blockquote class="tr_bq">
permitting the Company to repurchase up to $5,000,000 of shares of its common stock over the next two years (for a total authorization since inception of the program of approximately $17,000,000). To date, the Company has repurchased an aggregate of 7,104,711 shares of its common stock under the <a href="https://www.streetinsider.com/entities/Stock+Buyback">Share Repurchase</a> Program since inception of the program in August 2011 at an average price of $1.72 per share or an aggregate cost of approximately $12,214,110 (exclusive of commissions).</blockquote>
All this is on a market cap of just $98 M. They have bought 7.1 M shares compared to a present mutual fund ownership of 5.7 M shares (Morningstar figures). These are all huge numbers compared to a public float of only about 14 M shares. That's ultra piggish. It's almost like you're allowed to buy a private equity company while it's being made over for public consumption. If funds become very interested, it will move the stock needle. The company has been very right with their buyback buying since 2011 when their patent results began springing to life. Now they are more aggressive then ever in these buybacks. As Shaughnessy said in his article from 2015, <i>before</i> the massive $5 M increase this year:<br />
<blockquote class="tr_bq">
We would be hard pressed to find a microcap company of this size with a comparable repurchase program.</blockquote>
<h3>
The Patents</h3>
I don't want to go into a detailed discussion of all the patents here. Marston and Shaughnessy cover this in their articles linked above, and there is a very nice rundown of the patents on Network-1's <a href="http://www.network-1.com/portfolios">website</a> with up-to-date timelines on them. They presently own 28 altogether. I will however summarize the collection. These can be grouped into four batches - Power over Ethernet, Mirror Worlds, Content Monetization, and QoS.<br />
<br />
<b>Power over Ethernet </b>More commonly known as the Remote Power Patent, this is a technique where internet flows can be safely put over standard LAN lines in a local network without harming devices not able to take signal. It has been subject to three litigations and has contributed $100 M in revenue from over 20 licencees. It expires in 2020. This <a href="http://www.valuewalk.com/2017/03/undervalued-micro-cap-network-1-technologies-inc-fcfev-yield-134/">summary</a> suggests more revenue may be due once the rest of the defendents are found guilty:<br />
<blockquote class="tr_bq">
So that means Network-1 has now reached settlement and license agreements with twelve of the original sixteen defendants for the licensing of its Remote Power Patent. The remaining four defendants are Avaya Inc., AXIS Communications Inc., Hewlett-Packard Company, and Juniper Networks, Inc. The litigation is currently scheduled for trial in 2017.</blockquote>
The patent was invented by Boris Katzenberg, who was active in the IEEE Task Force that developed the second generation Power Over Ethernet standard.<br />
<br />
<b>Mirror Worlds </b> This small company patented "technologies that enable unified search and indexing, displaying, and archiving of documents in a computer system" resulting from work in the mid 1990s (before the internet) and were later widely used in web based systems. Mirror Worlds took Apple to court and won a $208 M verdict that was not awarded due to a procedural technicality. Per Network-1's website, "Working with Dr. Gelernter, Network-1 acquired the Mirror Worlds portfolio in May 2013. Network-1 believed that under the facts of the previous case, Apple still was obligated to pursue a fair licensing agreement. Network-1 filed a patent infringement action against Apple and Microsoft on May 23, 2013." Last year, they won a $25 M settlement from Apple and $5 from Microsoft. On May 10, 2017, Mirror Worlds, now a wholly owned subsidiary of Network-1, <a href="http://www.marketwired.com/press-release/network-1-commences-patent-litigation-against-facebook-nyse-mkt-ntip-2215323.htm">announced</a> commencement of litigation against Facebook.<br />
<br />
The patent was invented by Professor David Gelernter. He wrote a popular book titled <i>Mirror Worlds: or t</i><i>he Day Software Puts the Universe in a Shoebox </i>in 1991. It was a look into the coming of the internet. The above Facebook announcement from marketwired.com noted just how prescient Gelernter was with his amazing book:<br />
<div>
<blockquote class="tr_bq">
As reported in The Economist, "Dr. Gelernter foresaw how computers would be woven into the fabric of everyday life. In his book 'Mirror Worlds,' published in 1991, he accurately described websites, blogging, virtual reality, streaming video, tablet computers, e-books, search engines and internet telephony. More importantly, he anticipated the consequences all this would have on the nature of social interaction, describing distributed online communities that work just as Facebook and Twitter do today."</blockquote>
<b>Content Monetization </b>Otherwise know as the Cox patents, they were "12 issued patents that relate to identifying or tagging uploaded media content and taking business actions based on the identification" as the website puts it. In 2013 Network-1 bought the patents and is filing for more based on the original patents. In 2014, they began proceedings against Google, specifically against their subsidiary, YouTube, alleging they use this technology without a license. One has to wonder how many more are using it. In June, 2016, the Patent Trial and Appeals Board upheld the patentability of 119 of the 129 claims. Another objection raised by YouTube, Covered Business Method, was reviewed and ruled in favor of Network-1 in October, 2016.<br />
<br />
These patents were invented by Professor Ingemar Cox from the University of Copenhagen. He was at Bell Labs and NEC Research Institute, holding over 40 US patents.</div>
<div>
<br /></div>
<b>QoS </b>Then there are some "QoS" (Quality of Service) patents they've stashed away and are holding close to the vest for now.<br />
<div>
<h3>
Conclusion</h3>
There were several IP companies present at the IP Dealmakers Forum mentioned above, and they agreed that they shouldn't be judged like most companies by quarterly results as patent cases are not a smooth ride. It is difficult, in fact pointless, to project court awards into revenue. But judging from the "near miss" $208 M judgment scuttled by a technicality in one of the cases above, there appears to be even bigger money to be made with these internet defining patents than what Network-1 has done so far. The stock is not pricing any of this in. It is a fascinating speculation with a PE of 4. Network-1 keeps making precision forays into court and bringing home the bacon to inventors and shareholders.</div>
Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-12795179265962693622017-06-25T18:07:00.001-07:002017-06-26T18:10:07.487-07:00What Does The Swooning Commodity Index Of 2017 Mean For Gold Miners ?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibjLtRSOxVRjfrB79UeNEtGvlV2zQxWDT7DA4X4oCD5dUhYvr-BYl8AxtQ7va7i6z3u0rinaum1s3SspWvlwavhC1-kAoqZHDO-_1fsoVkKZDqlOaBBkSQ9aV-KS5pVDHOrYR6ySDupPg/s1600/scared+bull.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="375" data-original-width="400" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibjLtRSOxVRjfrB79UeNEtGvlV2zQxWDT7DA4X4oCD5dUhYvr-BYl8AxtQ7va7i6z3u0rinaum1s3SspWvlwavhC1-kAoqZHDO-_1fsoVkKZDqlOaBBkSQ9aV-KS5pVDHOrYR6ySDupPg/s320/scared+bull.jpg" width="320" /></a></div>
If you haven't noticed, commodities are diving badly this year:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhveJzOXvLr-xqITwFHqWLRXIFeUb5Y3Qg5KzCeNuyDHoaHZVNIwhZ47atGZHnIm_fFENksEcdy2OgtTXUBSujrBYoS9SxOncXnLHOlXdlCqkCw5TtH0B1w2q21cd1TtTWK7_gA5xFR9I/s1600/CRB+YDT.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="423" data-original-width="903" height="298" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhveJzOXvLr-xqITwFHqWLRXIFeUb5Y3Qg5KzCeNuyDHoaHZVNIwhZ47atGZHnIm_fFENksEcdy2OgtTXUBSujrBYoS9SxOncXnLHOlXdlCqkCw5TtH0B1w2q21cd1TtTWK7_gA5xFR9I/s640/CRB+YDT.png" width="640" /></a></div>
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Commodities are consumed by a healthy economy, and dives like this can come before overall downturns. Gold is a commodity that historically is thought to be correlated with the CRB Index. Commodities soared along with gold in the 1970s as capital flowed into hard assets, away from a bad economy. This is all very confusing. So does the bad CRB behavior of late bode ill for gold and the miners now?<br />
<br />
Well, if you compare gold and the CRB index over various time frames, you see a somewhat loose correlation. Sometimes they move together, sometimes they don't. But there is one thing the CRB is correlated with much more than gold, and that's oil.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXKyk5oTssGcDAND5Yw76MzTyrpzut-MU9lcIxOAZ3tt-WuXY0E-ef0vUa7kl5ortv3Em_q5NjIX9ieCUaLnFrJrRp6zFCcXQoQ8V2hRgbjANnyajhRTyadvMj2Zjf5EItYhoKlVhYRE8/s1600/CRB.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="857" data-original-width="918" height="596" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXKyk5oTssGcDAND5Yw76MzTyrpzut-MU9lcIxOAZ3tt-WuXY0E-ef0vUa7kl5ortv3Em_q5NjIX9ieCUaLnFrJrRp6zFCcXQoQ8V2hRgbjANnyajhRTyadvMj2Zjf5EItYhoKlVhYRE8/s640/CRB.png" width="640" /></a></div>
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Here we see a broader two year view of the CRB and oil and they look like the very same chart. Since the 2005 massive revision to the CRB index, it mainly does whatever oil does. This oil correlation of the CRB is much tighter than with gold or anything else. The energy complex is about 40% of raw index weighting, but because of the new arithmetic averaging, and oil being much more volatile than most other index components, the CRB winds up being pretty much just the oil chart.<br />
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So the real question is "What does swooning oil mean for gold miners? If we look at the year 2001, we have a comparable period where the CRB, much less slaved to oil back then, was also diving like it is this year, and the price of gold wasn't doing much:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFbHtgCJ7O7qug6mSEBU6_9GGg9GDSTdK3eG1S8mUSey53LSLmUAFeQZ4FeIIynENEyFid8NP2TFTI2wIP5hNcCUsMr9iOT5CttgfriyOiDigga6i4Je0ZLFEScv0qoUc_VB7N7gcUJO0/s1600/CRB+%252701.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="849" data-original-width="912" height="594" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFbHtgCJ7O7qug6mSEBU6_9GGg9GDSTdK3eG1S8mUSey53LSLmUAFeQZ4FeIIynENEyFid8NP2TFTI2wIP5hNcCUsMr9iOT5CttgfriyOiDigga6i4Je0ZLFEScv0qoUc_VB7N7gcUJO0/s640/CRB+%252701.png" width="640" /></a></div>
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Even back then, they were essentially the same chart. Did the gold miners, lacking any clear guidance from the gold price, follow the horrible CRB chart back then?:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgm1becWoAjd3vKx-n4rWtmtB0Xg-i9M3LgaKh16SO8vHS-QBYLrX7vKB0cZfxzYIqKmlyIFfWwaIA4h75xcyz_xqSyolQtJnQDpTH_fGvFvl4Jz0zZH0HMVFOXFKBiCP1W2NBW-7wP1TI/s1600/HUI+%252701.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="427" data-original-width="903" height="302" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgm1becWoAjd3vKx-n4rWtmtB0Xg-i9M3LgaKh16SO8vHS-QBYLrX7vKB0cZfxzYIqKmlyIFfWwaIA4h75xcyz_xqSyolQtJnQDpTH_fGvFvl4Jz0zZH0HMVFOXFKBiCP1W2NBW-7wP1TI/s640/HUI+%252701.png" width="640" /></a></div>
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Not really. Here, the miners as represented by the HUI index, did not have a bad year with the commodity dive. The gold price ended the year about right where it started, yet the gold miners did a stunning 60% return. And <i>oil, not gold</i>, was probably a big reason why. Gold mines are some of the biggest energy hogs on earth and when oil goes down, gold mining profits go up. You can't be quite that simplistic as gold stocks have a way of anticipating what the prices of both their product and their inputs are going to be. The gold price was beginning its long ascent the next year in 2002 and the stocks were perhaps getting wind of that. And they seemed to be a few months ahead of oil as well. But by and large, other things being equal, gold mining has a strong inverse relation with oil.<br />
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When thinking about the energy costs of gold mining, you first consider the monster trucks, bigger than your house, that carry the ore at 0.3 mpg. This is a big part of it as this <a href="https://srsroccoreport.com/gold-mining-industry-fuel-costs-explode-in-a-decade/">article</a> shows, giving us this chart of the climbing diesel use for the top five gold miners:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYn1oJD1atWu5H1JF7yYKP1paWl8inK2k2WTtwZVJXVONXaT_Ji3tHX4mFTz24ry4fEgXCHN1UgSJvhiTTrOJdiC5A-b0odz49ZOhSrFRbrE7gR0UT7uaqhG_2mZ49yyoOHB-LDYyQ08Q/s1600/Top-5-Gold-Miners-Gold-Production-Diesel-Consumption.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="477" data-original-width="674" height="452" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYn1oJD1atWu5H1JF7yYKP1paWl8inK2k2WTtwZVJXVONXaT_Ji3tHX4mFTz24ry4fEgXCHN1UgSJvhiTTrOJdiC5A-b0odz49ZOhSrFRbrE7gR0UT7uaqhG_2mZ49yyoOHB-LDYyQ08Q/s640/Top-5-Gold-Miners-Gold-Production-Diesel-Consumption.png" width="640" /></a></div>
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Because the higher ore grades are mined first, the declining grades mean much more rock processed to produce the same amount of gold. This has run diesel usage to a 100% increase the last 10 years producing about the same amount of gold. But the trucking is just a part of overall energy usage. Overall, gold mining is the second most energy intensive product in the world as this British engineering <a href="http://www-materials.eng.cam.ac.uk/mpsite/interactive_charts/energy-cost/basic.html">report</a> shows:<br />
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Gold is literally off the charts as the arrow points to on this log scale (9000 pound sterling/kg and 6000 Megajoules/kg) and that makes sense when you consider that, as they explain:<br />
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Gold is a precious metal which can be sold for a very high price; this means that more energy can be spent in extracting it by mining rocks containing only a small fraction of gold</blockquote>
So they can tolerate a whole bunch of digging and energy use. This is why gold miners typically have total energy cost run roughly a third of their total cost of operation, their biggest single expense. If gold is the second most energy intensive, what is #1? It's diamond mining with many times the energy usage of gold.<br />
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Also in the expensive quarter of the above graph is all the metals that makeup the miner's massive equipment. A big chunk of what they don't spend on energy goes to buy and maintain their monster machines. Deflation is good for gold miners. Either inflation or deflation can accompany gold miner climbs as long as currency-in-the-bank is being threatened, as I discussed <a href="http://www.talkmarkets.com/content/us-markets/fractal-and-fundamental-gurus-agreeing-on-a-gold-mega-bull?post=136387">here</a>. This was the case in the 1920s and '30s when the price of everything went way down, banks failed at record rates, and the gold miners were in massive climbs, both before and after the stock market crash.<br />
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As I've written before several times, I think oil will stay moderately priced ($40-$60) for a couple years at least as the shale overcapacity is gradually worked off. Gold miners did exceedingly well in gold's run to $1900 in 2011 on $100 plus oil. If we get a next bull phase for the gold price, they could do vastly better on oil at half that price. That's exactly what happened in last year's mini run up in gold. In 2009-2011, gold climbed 110% with the HUI doing 100%. In 2016, gold climbed just 28%, but the HUI blitzed for 155%. Gold CEOs will be cheering for the "horrible" CRB charts shown above and shale will be the gold miners' new best friend.Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-11464650123838986572017-06-17T11:35:00.001-07:002017-06-17T11:35:15.341-07:00Fed Rate Hikes - The Best Algorithm For Predicting Gold UpsideAs nearly the whole world knows, higher interest rates are gold investing's worst enemy. As Warren Buffett has explained, gold is something where we pay to dig it up, we pay to put it away, we pay people to stand around and guard it, and all the while it produces no goods, pays us no dividend or gives us any interest. Well, Warren, if you take the trouble to closely examine the history of Federal Reserve raises in interest rates and gold, you got some more 'splainin to do!<br />
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If you look at what happened in the 1970's gold bull market, you see that the more gold had to compete with interest bearing investment, the better it did. In fact, there was a very close, <i>positive</i> correlation between the two:<br />
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<img height="412" src="https://blogger.googleusercontent.com/img/proxy/AVvXsEilHp3Xn8IN60sKvesuw2b6wufqI0hmIViqbFxbt9UhBFgPbg1NTwR2k_g6xlQwnAQUiTOyc_LdJ2cENhojOnpAMVAI_iqd288-Mgb0t1MIO2fzfDFALdhqLChJZOLqg64_WUNDIjrpYwEoPoI91ybRJaBc-a0Ef-FdUvNcunUnuNdWFWRfBLrZj9uwRTJEsnpcPvA9X3s=" width="640" /><br />
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These were the most extreme US interest rates of all time running to well over 10% and dwarfing our current numbers. Yet they did not kill the gold bull back then. Indeed, they seemingly waved a red cape in its face.<br />
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The 70s rate cycle was not an isolated case in its correlation with gold. Adam Hamilton presents a detailed history of this in his <a href="http://www.talkmarkets.com/content/us-markets/gold-bullish-on-fed-hike?post=138997">article</a> this week. He notes:<br />
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Before today’s rate-hike cycle was born in mid-December 2015, the Fed had executed fully 11 rate-hike cycles since 1971. Those are defined as 3 or more consecutive FFR increases by the FOMC with no interrupting decreases. Our current rate-hike cycle to which the Fed added a fourth hike this week is the 12th of the modern era, certainly nothing new. So there’s a substantial rate-hike dataset to evaluate gold’s action.</blockquote>
He notes that the average reaction of gold during all 11 previous rate ramp-ups is a climb of 27% including the most recent cycle (2004 - 2006) where rates were aggressively quintupled and gold reacted with a 50% climb over that time. If you are an investor with the mindset that rising rates is a reason to sell or avoid gold, you need to read Adam's article. He points out that our present rate hike cycle is playing out as in the past:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB0E7vL8Fy2WzKbJAo_97PMLkK3NaziygL8YQ6ZOTyEGAI4rbk7ra8p7A0S1DN5T_RdE_b0icUjssZxP96liE0cxlhiPWzz68Q-5QSPt3fhBKWDlbTvLDYo1ThHqxGBLZ8aKWLEht9fW4/s1600/rate+hikes+and+gold.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="444" data-original-width="914" height="310" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB0E7vL8Fy2WzKbJAo_97PMLkK3NaziygL8YQ6ZOTyEGAI4rbk7ra8p7A0S1DN5T_RdE_b0icUjssZxP96liE0cxlhiPWzz68Q-5QSPt3fhBKWDlbTvLDYo1ThHqxGBLZ8aKWLEht9fW4/s640/rate+hikes+and+gold.png" width="640" /></a></div>
If you look at the four rate raises so far in our current cycle, we see that you are hard pressed to find a guru or algo that predicts gold climbs any better. If you were a newsletter with this track record, you could sell a zillion subscriptions. Note that the arrows all fall on an ascending trend since the first one in late 2015. As the above chart shows, there is typically a decline in gold leading into a much talked about FOMC meeting where everyone has come to expect a rate increase. This weakness also lasts a couple weeks or so after the fact, then a vigorous climb ensues.<br />
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Because we have just had a rate increase June 14, that would schedule our current gold weakness into July, which also agrees with many wave counters and technical analysts who are saying July/August is going to be a major bottom. It also agrees with the simple up-trending channel in the above chart that would put a visit to the bottom at about $1220-$1240, probably in July/August. It also agrees quite nicely with my fractal argument presented <a href="http://www.talkmarkets.com/content/us-markets/will-gold-ride-again-?post=130087">here</a>. But these rate hikes can also send gold straight into a tizzy as it did the last time in March. So waiting for a bottom could leave you chasing any new exposure you want.<br />
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But why would gold, with no interest return and even a cost of storage for physical ownership, behave in such a counter-intuitive way? Is this just to punish investors who try to think logically, Mr. Market's specialty? Hamilton makes the point that these rate changes are well telegraphed. The Fed doesn't like to roil markets, so they don't like to move unless at least 70% in the polling expect them to. So you could have a longer term fundamental working in the background pressuring gold higher while the buy-the-rumor-sell-the-news effect works in the short-term around the Fed meetings.<br />
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What could that longer term fundamental be? Well, I don't really know with any certainty. But I suspect it is the age old thing about gold being an alternative currency. Fed rate raising cycles always come after they have done some kind of financial rigging, and that always somehow lessens the soundness of the dollar. It also undermines the natural viability of the economy.<br />
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As I discussed in <a href="http://www.talkmarkets.com/content/us-markets/fractal-and-fundamental-gurus-agreeing-on-a-gold-mega-bull?post=136387">"Fractal And Fundamental Gurus Agreeing On A Gold Mega-Bull"</a> gold has a long history of going into bull phases, along with the stock market, years ahead of some calamity involving dollars in the bank. This was true in the 1920s when the banks were the problem, it was true in the 1960s when a gold decoupling with the dollar and double digit inflation approaching made the dollars the problem. And it is probably true now with some kind of dollars-in-the-bank problem approaching.<br />
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You can only speculate on what the gold market may be seeing. But with the European banks on shaky ground and linked to all banks no matter how healthy, you could say it's the banks. And with the dollar's soundness continuing its decay as the world's reserve currency, you could say it's the dollars. There are plenty of problems to choose from. Let's hope the problems are fixed before they get here. But a gold hedge would be in order in the mean time.
<!-- Blogger automated replacement: "https://images-blogger-opensocial.googleusercontent.com/gadgets/proxy?url=http%3A%2F%2Fstatic.seekingalpha.com%2Fuploads%2F2010%2F1%2F24%2F152129-126437351686245-Bruce-Pile.png&container=blogger&gadget=a&rewriteMime=image%2F*" with "https://blogger.googleusercontent.com/img/proxy/AVvXsEilHp3Xn8IN60sKvesuw2b6wufqI0hmIViqbFxbt9UhBFgPbg1NTwR2k_g6xlQwnAQUiTOyc_LdJ2cENhojOnpAMVAI_iqd288-Mgb0t1MIO2fzfDFALdhqLChJZOLqg64_WUNDIjrpYwEoPoI91ybRJaBc-a0Ef-FdUvNcunUnuNdWFWRfBLrZj9uwRTJEsnpcPvA9X3s=" -->Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-66023971811653929702017-06-13T14:16:00.000-07:002017-06-13T14:16:33.055-07:00The FANG Gang Is Challenging The Ascending WedgeAs we all wonder what to do with the mini "tech wreck" that is upon us, it is helpful to step back and check the big technical picture of this group. The group could be defined as big cap growth, not necessarily tech, that has produced a handful of big growth superstars. These stock climbs will sometimes produce a technical condition known as the ascending wedge, which is bearish, and typically result in a trend change, either to a stagnation period or a protracted decline.<br />
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To illustrate, let's look at a good growth stock of the recent past that can seemingly do no wrong - Tractor Supply (TSCO), the specialty "recreational farming" supply retailer. If you have ever worked on a small farm like I have, you wonder why they call this "recreational". They have somehow escaped the Amazon squash with their results, but the stock went into a wedge and was squashed anyway:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbiS01zk8lgwmH6Ro_fKxv3e_JKJi5CvW5Nt9iYg0qD1ebaH8qcGJfpGUr2nj1QH6jYgjA-Rj8MwwbanIXX7bfy6UYPEUsXTVJgBsEE5Gn8l5BRY9DPa2GWMxDinCcEfGrqScyBq1wxII/s1600/TSCO.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="558" data-original-width="906" height="394" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbiS01zk8lgwmH6Ro_fKxv3e_JKJi5CvW5Nt9iYg0qD1ebaH8qcGJfpGUr2nj1QH6jYgjA-Rj8MwwbanIXX7bfy6UYPEUsXTVJgBsEE5Gn8l5BRY9DPa2GWMxDinCcEfGrqScyBq1wxII/s640/TSCO.png" width="640" /></a></div>
What is especially bearish is when the A/D trend (upper graph) is broken in conjunction with a wedge. In TSCO's case the trend was blasted with the monster gap down move, and you had no chance to get out ahead of the damage. When this is more gradual, the warning should be heeded.<br />
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So where is the FANG gang in relation to the ascending wedge? Not in a good place:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjA8LuCx2GPG1XiuwTOnBAtfLn6qlsFzoebD0JpRPxCtFoW1oCoOu8cZFZZ5LZFNaIixeukOfGS-ZvEDqXJIJiJ3PdCbEUjjzm3JXgBs77LofwEjIK9xI59u3XGKrxAPZ5BNNThwBRAq4w/s1600/NFLX.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="554" data-original-width="905" height="390" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjA8LuCx2GPG1XiuwTOnBAtfLn6qlsFzoebD0JpRPxCtFoW1oCoOu8cZFZZ5LZFNaIixeukOfGS-ZvEDqXJIJiJ3PdCbEUjjzm3JXgBs77LofwEjIK9xI59u3XGKrxAPZ5BNNThwBRAq4w/s640/NFLX.png" width="640" /></a></div>
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Here we see Netflix earnestly tracing out a wedge, but the A/D trend is intact.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjte42kbN8Pt73IEBPzRLjI78aUx0NGQwUtFr9briYZa0Y8Xqocf-0pxFUCiQ1Zf5rxEUoaV5o0aD76-YrjlyfC0GB93vkrzRup2TO__yMqWEYEULHNHxyDi7WRV2xVTQsJH5RpbPOOsSQ/s1600/GOOG.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="550" data-original-width="915" height="384" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjte42kbN8Pt73IEBPzRLjI78aUx0NGQwUtFr9briYZa0Y8Xqocf-0pxFUCiQ1Zf5rxEUoaV5o0aD76-YrjlyfC0GB93vkrzRup2TO__yMqWEYEULHNHxyDi7WRV2xVTQsJH5RpbPOOsSQ/s640/GOOG.png" width="640" /></a></div>
Google is also wedging but with no A/D problem. But stocks often break the wedge before they break the A/D trend, as TSCO did above.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZH252ZUMsa9LS7gOytRRsyjbMFuE9denczPW-jAjlYMLW777iYMVBeP3iHpxWF-cIVlZov9vpM1YcKIiHZyP_3NBf4nXhja3Fh4LOiha_yUEQds3wg7O__kiKjftQ06LkrzW3NdW73kQ/s1600/ULTA.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="560" data-original-width="918" height="390" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZH252ZUMsa9LS7gOytRRsyjbMFuE9denczPW-jAjlYMLW777iYMVBeP3iHpxWF-cIVlZov9vpM1YcKIiHZyP_3NBf4nXhja3Fh4LOiha_yUEQds3wg7O__kiKjftQ06LkrzW3NdW73kQ/s640/ULTA.png" width="640" /></a></div>
An honorary FANG stock outside of tech is ULTA, the make-up and beauty supply growth beast. It is forming a wedge and also threatening an A/D breakdown as well.<br />
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Apple isn't forming a wedge, but it hasn't had much of a chance having broken out of a big downtrend just this year. But Facebook is:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlgG1_Ghfu1yZjM1v5P65r29DvMJBXRWSqcWytGos7_E0HbBkgxcv6QrAm749OHZ9pbPfZ9LFZLBSuHXHvP5zV0-rfMVn18J7nOxqajbiFr6D2IHBEwDXIqMsop_Hno7o3SmezegmwvhA/s1600/fb.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="556" data-original-width="901" height="394" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlgG1_Ghfu1yZjM1v5P65r29DvMJBXRWSqcWytGos7_E0HbBkgxcv6QrAm749OHZ9pbPfZ9LFZLBSuHXHvP5zV0-rfMVn18J7nOxqajbiFr6D2IHBEwDXIqMsop_Hno7o3SmezegmwvhA/s640/fb.png" width="640" /></a></div>
And the leader of the gang:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-jx0rrx5QLXymDjQSLa1OY9aAqts3DrFEdjETfjnK9tc0ZvbasqNGMZKQsMetot4J5wV-4CGBIMZysaJ5uIsmQSX9CV9dNBq7MkpQ3ZX0_qNaVZzPXPIwh4q8T4CKm9607khzB_uc5Ic/s1600/AMZN.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="560" data-original-width="914" height="392" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-jx0rrx5QLXymDjQSLa1OY9aAqts3DrFEdjETfjnK9tc0ZvbasqNGMZKQsMetot4J5wV-4CGBIMZysaJ5uIsmQSX9CV9dNBq7MkpQ3ZX0_qNaVZzPXPIwh4q8T4CKm9607khzB_uc5Ic/s640/AMZN.png" width="640" /></a></div>
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Amazon's wedge is the most pressuring with a break imminent. Does all this mean the FANG move is near an end? No, because ascending wedges do break to the <i>upside</i> as well. A case in point is Nvidia :<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTowUY3nXWES67D8FV0ar_SpAGErbkOusbEsAyZ2Vzs8b4ft8BXZZbVk5OZCEZ6nOoy-zHFUJI1bHccId-g739bzScCHfjiyN8-wbn6p9EWylOrGeZycT08tR7gXAaZFttghFQC-OQehw/s1600/nvda.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="555" data-original-width="903" height="392" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTowUY3nXWES67D8FV0ar_SpAGErbkOusbEsAyZ2Vzs8b4ft8BXZZbVk5OZCEZ6nOoy-zHFUJI1bHccId-g739bzScCHfjiyN8-wbn6p9EWylOrGeZycT08tR7gXAaZFttghFQC-OQehw/s640/nvda.png" width="640" /></a></div>
And another is Dave and Buster's:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPZSwFiFOjr_o86WnUjJQeUL4ekOIycfVjSjK6UpVCZta7s1Ic0J625BqcYzR6RFW8TkJe3B-kY-5WGXoZR8uzJL7u8wM-7lu2EL7BsMKcpIcvVfIBoAhO0q17jvkFSbPRl6w99CkD6IQ/s1600/play.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="559" data-original-width="904" height="394" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPZSwFiFOjr_o86WnUjJQeUL4ekOIycfVjSjK6UpVCZta7s1Ic0J625BqcYzR6RFW8TkJe3B-kY-5WGXoZR8uzJL7u8wM-7lu2EL7BsMKcpIcvVfIBoAhO0q17jvkFSbPRl6w99CkD6IQ/s640/play.png" width="640" /></a></div>
But these are the exceptions, and it takes a lot of growth horsepower to break these to the upside, especially when they are proceeding at a valuation speed limit on a basic fundamental like their cash flow:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWXwaX516qVHLdmYS2RphoBTXCE0ZasQBO9IFfOmGpNyNYdWakQT1WTLiNRSzwM8QnCc_71pQlkfD1if5dwikDvY0b4LGCtP2FUS15E2ZBKK0r6M3N1Q-55u4tm2OOnKkHuNTBEXg18EE/s1600/AMZN.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="265" data-original-width="692" height="152" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWXwaX516qVHLdmYS2RphoBTXCE0ZasQBO9IFfOmGpNyNYdWakQT1WTLiNRSzwM8QnCc_71pQlkfD1if5dwikDvY0b4LGCtP2FUS15E2ZBKK0r6M3N1Q-55u4tm2OOnKkHuNTBEXg18EE/s400/AMZN.png" width="400" /></a></div>
You can see from the above numbers (from Morningstar) that it took a jump to a 60 multiple on cash flow, not to mention the 13 on sales, for Nvidia to break its wedge to the upside, a rather extreme valuation for an established growth operation. Will all of FANG make this kind of jump? It's possible, but that would be a little crazy.<br />
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The large cap growth stocks are up against something of a valuation speed limit, and also up against a trend expiration limit as well. Big trends with wedge formations typically break up before they go over five years or so, and the FANG types are in wedges pushing about four years now.<br />
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If this sector does breakup into sideways or moderate declines, it will likely be in conjunction with market leadership rotation into the other good performing but neglected areas, like the financials, especially the quality growth regional banks, materials, and the other bull market sectors.Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-88957560247033555472017-05-24T18:55:00.000-07:002017-06-10T09:21:07.820-07:00Fractal And Fundamental Gurus Agreeing On A Gold Mega-BullBack in early February, 2016, I floated the <a href="https://www.blogger.com/blogger.g?blogID=3282424752485226688#editor/target=post;postID=3254600733865618695;onPublishedMenu=template;onClosedMenu=template;postNum=62;src=postname">screwball theory</a> about gold following a fractal replication of the prior gold bull market of 1971-1980. Fractal factors are best corroborated by sensible fundamentals, regular technicals, and respected opinion. But the fractal things have an uncanny way of happening with or without the more proper analysis. The markets do tend to "misbehave" as Mandelbrot, the founding father of fractal analysis, claimed in his classic book "<i>The (Mis) Behavior of Markets</i>".<br />
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My article of February 14, 2016 "Gold's Bull/Bear Status" explains this fractal view, and suggested a big move up in gold was beginning. This did indeed happen as gold went from $1100 to $1370 in just four months, a 25% rise. We've been consolidating that move, but as I showed <a href="http://www.talkmarkets.com/content/commodities/gold-miners-are-at-a-critical-juncture?post=135646">here</a>, the technicals now suggest a resumption of 2016's move.<br />
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I thought I was the only one noticing the two parabola progression going on in gold's behavior, with only a fractal pattern to explain it. But I've found somebody saying the same exact thing, but from a purely fundamental perspective. Luke Burgess gives a fundamental explanation <a href="https://www.wealthdaily.com/articles/gold-prices-may-hit-6500-by-2019/8272">here</a> . I doubt he has ever heard of the fractal explanation, but to summarize this, from my article:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhb2ppcSWyBccnzCOWpVlbYRR_oHkFAHqxqOVbB01SuVdACqp8IKCzBmbH4FkcjWObKV3cZNyNJw0Q21YCeEMQhN1eAitDRSVTb7Sr7249sQofldvy83xh0Mhv484Aql01Q7XprxAPmuvo/s1600/gold+2016.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="356" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhb2ppcSWyBccnzCOWpVlbYRR_oHkFAHqxqOVbB01SuVdACqp8IKCzBmbH4FkcjWObKV3cZNyNJw0Q21YCeEMQhN1eAitDRSVTb7Sr7249sQofldvy83xh0Mhv484Aql01Q7XprxAPmuvo/s640/gold+2016.png" width="640" /></a></div>
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As I showed in the article, many mega bull markets around the world have exhibited this basic pattern of two parabolas separated by a big downtrend. It shows up a lot in big bull markets, especially involving currency and/or gold. It is this same pattern that Luke Burgess discerns from the fundamental factors alone. He derives this chart, which he claims we are repeating in our current gold market:<br />
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Before we look at his reasoning, just who is this Luke Burgess? According to <a href="https://www.streetwisereports.com/pub/htdocs/expert.html?id=3252">Streetwise Reports</a>, he serves as investment director to two high-end investment advisory services, Underground Profits and Hard Money Millionaire. He is a weekly contributor to <i>Wealth Daily</i> and has written for <i>StockHouse</i> and <i>Goldseek</i>. He is a frequent guest on "Trader's Nation", "The Bill Meyer Show", and other radio programs. He co-edits <i>Gold World</i> with Greg McCoach. He was long gold until the summer of 2011, when he sold all gold stocks. Then in October, 2015, very near the bottom of the four year decline, he went long again. He has been playing this gold bull like a violin, so his opinion should be considered. And his opinion is this. The gold bull did not end in 2011 and is "going exactly as expected. Investors simply can't see the forest for the trees" with the biggest part of the bull market still ahead.<br />
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The above chart is from his July, 2016 <i>Wealth Daily</i> <a href="https://www.wealthdaily.com/articles/gold-prices-may-hit-6500-by-2019/8272">article</a>. His fundamental explanation for the 1970s gold bull market involves not wars, politics, catastrophe, recessions, or stock market declines, but gold as an alternative currency. Stage One was when Nixon closed the convertibility of the USD into gold in 1971. The dollar index declined by 25% from 1971 to 1973. This was accompanied by the Great Recession One, the first global recession since WWII. Few today realize that this was about as bad as 2008. The Dow was smashed by half, and the Fed went beserk (for that day) and chopped rates.<br />
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Stage Two was where the Fed's action worked for a time, and the recession eased. Gold declined for two years. But the Fed's policies "eventually caught up with them" (Stage Three) and the dollar sank and we descended into the inflation pit sending gold into the late '70s blitz.<br />
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Burgess sees the same story driving the gold market today saying that "Nearly the same exact scenario started in 2001 and continues to unfold before our very eyes today" with 1976 being analogous to 2017. Starting in 2001, the dollar began a plunge, then the Great Recession in 2008. Burgess shows a side by side dollar comparison for '71-'73 vs '01-'08 with the dollar falling 120 to 92 and 120 to 72. This was Stage One. The Fed went beserk again, only more so with QE this time. And for a long time, it worked and the Great Recession has eased, which is where we are today, near the end of Stage Two. The whole process today involves way more currency debasement against a way bigger mountain of debt than in the '70s. This may explain why the whole fractal winds up being a 2X scale up (time-wise) of what happened before. That's what fractals are all about - same thing, different scale.<br />
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So will wreckless monetary policy catch up with the dollar and cause a gold bull, or will we get away with it this time and go peacefully into calm seas? Burgess thinks not: <br />
<blockquote class="tr_bq">
"make no mistake about it...The Federal Reserve and corrupt politicians can’t save the value of the U.S. dollar or your hard-earned assets, even if they wanted to. Take control of your own money and do what the smart money did in 1976 ... buy gold."</blockquote>
Burgess points out the big bankers' market for gold where they lease it out amongst themselves effecting the gold lease rate. He says the banks control the gold price more than anyone, and when they do a shuffle with it, running up the lease rates, it often signals a major move. Such a lease rate run up is occurring right now:<br />
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There was a run up of rates going into late 2015, in front of the big move up in the gold price in 2016. Currently, the 12 month rate (black line) has run up to its highest level since early 2009, which was just in front of the gold price running up to the 2011 peak of $1900. So the lease rates are signaling a major move.<br />
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Does all this mean we must suffer another Great Recession and bear market soon? For some reason we have been conditioned to think of gold as a reverse day-to-day barometer on the economy and thus the stock market. Short term moves can reflect this, and the financial media dote on every bit of economic data released as an explanation for gold and stock market going opposite ways.<br />
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But there is another guru, a fractal practitioner, who is saying both the US stock market and gold are soon going much higher, hand in hand. He is David Nichols, publisher of <i>The Fractal Market Report </i>and, like Burgess, he has been playing the gold market like a violin for many years. Last August, he wrote a <a href="http://www.321gold.com/editorials/nichols/nichols080916.html">piece</a> where he looked at some currency challenged third world countries and points out that when a government gets too powerful and self-serving, "capital gets scared and scrambles to find any kind of home that isn't a manipulated currency, or a bank that could confiscate, or debt that will inevitably default". Capital finds a home like stocks, even if the real economy is mediocre or even bad. This he says, is why Argentina's overpriced stock market is soaring in defiance of real economic justification. Sound familiar? Nichols titled his article "The US Is Becoming Argentina" and thinks our stocks will fly for similar reasons. A quick <a href="http://www.tradingeconomics.com/">check</a> of where Argentina stands among the nations, as well as the Venezuela market he mentions, shows these two at the very bottom of GDP growth with inflation rates of 40% and 741%. This is, of course, the extreme end game. But Nichols sees the US starting to play.<br />
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Gold, Nichols says, will be the destination of much of the capital flight. In August, 2016, with gold at the top of its sprint last year, he said this (from the above mentioned article):<br />
<blockquote class="tr_bq">
Gold is responding to the switch to tangible assets. It's got some work left to do to put the multi-year correction in the rear-view mirror, but once that happens, the "hot money" will pour right back into gold.</blockquote>
Since that top last August, gold has indeed done just what he predicted it would do. It has done many months of consolidation "work" that appears close to an end. He says the next phase should be the hot money pouring right back into gold.<br />
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Do I agree with him about joyful days ahead for both the stock market and gold, contrary to conventional wisdom? Well, one thing that strikes me as I look at the history of gold is that you don't have to have a lousy stock market to have a gold bull market. You just have to have a crisis of confidence in currency. This was true in 2001-2007. Here you had a booming stock market and no recession - just a bad drop in the dollar and resultant climb in gold.<br />
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Investor confidence with dollars in the bank seems to be the overriding factor for what gold does. As another example of this, consider the roaring 1920s. Here we had a booming stock market and economy. We also had a booming gold market as measured by the few major gold miners' stocks. The gold price was set by the government then, so the handful of big miners was the gold market. The stock market and gold miners were climbing hand in hand, but there was a <i>growing threat to dollars in the bank</i>:<br />
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Gold miner climb "A" saw Homestead Mining appreciate by nearly 100% from 1924 to 1929, others had similar gains - and it had nothing to do with a Great Recession or a bad stock market. It had everything to do with waning confidence in dollars in the banks.<br />
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Note the complete void of banking problems in the above chart in the 36 year cycle after Bretton Woods. That's because this global event put us on the gold standard. But as the monetary safe haven it created began to come under duress in the 1960s from government dollar killing practices, a gold mining bull market ensued, even though there were <i>no Great Recessions </i>and the stock market was good<i>.</i> The only miner index for that period was BGMI, Barron's Gold Mining Index. Take a close look at what it did in this nonrecessionary period:<br />
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All we needed was dollar-dumb policy. The gold market saw the handwriting on the wall far before the president had to officially close the gold "window" in August of 1971. It was pretty much the same with the housing tom foolery of 2002-2008.<br />
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So do we absolutely have to have another Great Recession and stock bear market to go along with a booming gold bull market? Absolutely not if history is any guide. The bad stuff seems to happen <i>after</i> the gold bulls have seen it coming for years.Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-6253740607159840692017-05-17T14:54:00.000-07:002017-05-17T14:54:31.811-07:00Gold Miners Are At A Technical Juncture To WatchThe gold miners have been in a limbo for months now, but that is approaching an interesting condition. To better appreciate just how interesting, it would be good to go back a couple of posts to <a href="http://www.talkmarkets.com/content/us-markets/will-gold-ride-again-?post=130087">"Will Gold Ride Again?"</a> and read that first.<br />
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So what is gold doing now that's so interesting? The miners are replicating a breakout condition they did in early 2016. Back then, it was a breakout that ended the four year decline, now it appears to want to end a continuation pattern. This is the common consolidation pattern after a big move where the bigger trend is continued after a mostly sideways period:<br />
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Here we have the two pennant formations compared. The first was the end of the long four years of decline, then we had the sharp climb in 2016, then we have had the limbo going into 2017. If this breaks to the upside, it will have been the classic continuation pattern with a new bull leg ensuing, continuing the 2016 move. The A/D (Accumulation/Distribution) and CMF (Chaikin Money Flow) cycling is very similar. In both formations, there was a positive switch trend in place in money flow, and we are at the takeoff point in that cycling.<br />
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I've also shown what I call the MAPS divider (Moving Average Pair Separator) which is the best divider of bull and bear market I've found. This is the 140 day exponential moving average plotted with the 200 day alongside, the blue and red lines in the chart. All during the four year decline, the miner index kept below MAPS very consistently. Once the break occurred in early 2016, we had a brisk positive moving average crossover which has morphed into essentially no separation in 2017's consolidation. If the formation breaks to the downside, it will produce a negative cross and puts gold back into bear mode. If it breaks to the upside, it will keep the bull cross in place.<br />
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The forces that will move gold from here are many and complicated. If interest rates go up, the dollar is defended, the economy is OK, and gold goes down. But gold has historically gone up when rates start going up, as in the late '70s. We've had political turmoil in Britain, France, the US, and elsewhere, which should move gold up. But we had gold in bull mode before any of that came along - in the politically uneventful times.<br />
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I think the main fundamental controlling gold is probably its role as an alternative currency. That was the main concern in gold's bull market in the early 2000s as the debt/dollar situation grew worse. It was the concern after the financial crisis into the bull leg to 2011. And it is still probably the main concern.Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-20095758929258007782017-05-17T12:02:00.001-07:002017-05-17T12:02:26.921-07:00Rick And Dave And Buster Are On The Same Beam.If you've read my Forbes <a href="https://www.forbes.com/sites/kenkam/2017/04/26/bruce-pile-says-dave-and-busters-is-a-best-idea/#28666ea21a29">article</a> on the new paradigm in restaurants and retail, as exemplified by Dave and Buster's, you will find what's happening at Rick's Hospitality of interest. I wrote an <a href="https://seekingalpha.com/article/1710262-where-is-ricks-cabaret-on-the-growth-stock-map">article</a> on RICK back in 2013 at Seeking Alpha, and what they were about back then was certainly ahead of the curve in today's ongoing train wreck in retail. Just last week alone, Kohl's was down 9%, JC Penney was down 17%, Sears was down 12%, Macy's down 18%. The Rick's article was an exclusive and is available now with a Seeking Alpha Pro subscription. So I can't reproduce it here, but I'll comment on it.<br />
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The point of my Dave and Buster's article, as explained by Patrick Doyle of Domino's Pizza, is that if you are a restaurant or retailer looking to just serve good food or merchandise and prosper, you will probably be suffering in today's evolving environment, despite adequate offline consumer spending. "People still get out" as Doyle said. You have to also be serving up "experiential retail" as it is coming to be called. Rick's Hospitality, or Rick's Caberet as it was called before their name change, is all about just that.<br />
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Rick's is a growing restaurant/entertainment chain where the entertainment is "the most beautiful women in the world featured daily". It's a little like Hooter's but there's more fun with the girls. The dancers pay a "facilities use" fee to entertain and collect tips. They can make as much as $1000 in tips for a night's shaking of the booty. But before you dismiss them as a sleazy massage parlor that has somehow wound up a public company, be aware that no less than Forbes has not only put them on their America's 200 Best Small Companies List (they installed them at # 94) but they've also been written up at The Wall Street Journal, Fortune, Smart Money, and other places that don't normally cover massage parlors. They are simply some of the early settlers in the experiential retail frontier along with Domino's Pizza, Dave and Buster's and other's with the same idea - only their experience is a little more naughty.<br />
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And they combine naughtiness with alcohol, to make money, not trouble. In the tight margin world of competitive eateries, alcohol is everything. These beverages are market up more than anything on the menu. The study <a href="http://www.thefreelibrary.com/Adding+value%3A+beverage+alcohol's+contribution+to+restaurant+sales+is...-a0170456551" style="background-color: white; font-family: georgia, times, "times new roman", serif; font-size: small; line-height: 1.48em;">"Adding Value: Beverage Alcohol's contribution to Restaurant Sales Is Significant And Growing In Importance"</a><span style="background-color: white; color: #333333; font-family: "georgia" , "times" , "times new roman" , serif; font-size: x-small; line-height: 1.48em;"> </span>gives the numbers. Of the top 500 chains, only half deal with all the hassles of alcohol at all, and <i>only eight</i> are able to derive 30% or more of sales from it. Rick's is an elite player here with 40%. Alcohol at over 30% is sought after by everyone in the business.<br /><br />
This includes even the restaurant chain giant Darden. As I covered in my article, they are trying the new ideas too. I pointed out three comparables to Rick's:<br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #333333;">The second sort-of comparable is Yard House Restaurants. This is a private seafood/pub combo with 44% of sales from alcohol and a focus on growth. They were snapped up by Darden (DRI) last year, who paid 1.8 times sales (compared to 0.8 for Darden itself) for Yard's 15-20% annual growth rate to add some punch to the Darden lineup.</span></blockquote>
Darden recruited them into their Specialty Restaurant Group, their SWAT team for future growth.<br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #333333;">So the second of the quasi-RICK comps, Yard House, is also a case of blistering growth, but now available as an investment only in diluted form with DRI stock.</span></blockquote>
DRI has been performing well despite old style restaurant ("casual" dining) blues and the horrors of old style retail in general:<br />
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And so has RICK:<br />
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These charts don't look at all like most restaurant chains do nowadays.<br />
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But hasn't this been tried before - entertainment with meals? What about Buffalo Wild Wings and such? Well yes it <i>has</i> been tried here and there, and with great success. In my RICK article, I point out three comparables, BWLD, Yard House, and VCG. Eric Langan, CEO of Rick's has compared themselves to Buffalo in past presentations, with BWLD at 30% of sales from alcohol, Yard House is now in Darden, and VCG was merging with Rick's in mid 2010 after posting blistering growth numbers in the five years they were public! But the merger fell through, and the VCG chief bought up all the shares he didn't already own and it went private.<br />
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This new paradigm is not untested, and now several players are getting in on this new beam. And those that are able to execute geographical growth will likely be good growth stocks of the future. There is something of a store count barrier here at around the 30-50 store area where growth skills of management are severely tested, and parabolic growth ensues if they prove their skills there. I show this on a chart in the Rick's article for the history of Walgreens, Walmart, Lowe's, and Rick's. Dave and Busters is just beyond this barrier with about 80 locations, Rick's is at about 40. There will be many of the big chains trying to adapt their behemoths to the new concepts, but Rick, Dave, and Buster are growing with the right idea to begin with.<br />
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<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-70356262487214844862017-04-03T17:55:00.000-07:002017-04-07T16:44:05.581-07:00Will Gold Ride Again ?<div class="separator" style="clear: both; text-align: center;">
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What happened to gold the last six months could best be called being shot out of the saddle. But is it dead? If you look closely, it could be crawling back into the saddle to continue the crazy ride of 2016. Gold has been a bit schizophrenic lately, not knowing if it's a bear or a bull. Although thought of as a dog since Trump's election, it actually has outperformed all the Trump commodities YTD and has trounced the Dow by almost double so far this year - seeming determined to disguise its true identity.<br />
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Back on Feb. 14, 2016 as gold was threatening to go on a tear from its long 4 year slide, I published an <a href="https://www.blogger.com/blogger.g?blogID=3282424752485226688#editor/target=post;postID=3254600733865618695;onPublishedMenu=template;onClosedMenu=template;postNum=60;src=postname">article</a> here, at <em>TalkMarkets</em>, and at <em>Seeking Alpha</em> called "Gold's Bull/Bear Status". To understand this update, you need to go back and read this. The article correctly suggested a rampage upward in gold, which is what it did throughout most of 2016. But are we still in the large scale twin parabola fractal pattern that was the premise of the article? Gold has a very strong tendency to follow fractal patterns, as do a lot of big bull markets, as I illustrated in the article.<br />
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I drew a broad sweep diagram of this twin parabola fractal over a year ago that predicted last year's gold fireworks. Where are we on that map now?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9nIRtKSKyMxca8wPcYMBgF9cVVSMEucS4oww99S1CSYR-3KHSDmi5HOJ1yoSf0Pvppt7OlWX1wweWmnQLf67ZEJzhc6I9huZk3PI2ewLKFlaUIkutWMSj0hoNF445TW12hiPTcv9wyzM/s1600/gold+april+2017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="356" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9nIRtKSKyMxca8wPcYMBgF9cVVSMEucS4oww99S1CSYR-3KHSDmi5HOJ1yoSf0Pvppt7OlWX1wweWmnQLf67ZEJzhc6I9huZk3PI2ewLKFlaUIkutWMSj0hoNF445TW12hiPTcv9wyzM/s640/gold+april+2017.png" width="640" /></a></div>
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I have added the black dot to update this as of April, 2017. Despite all the short-term schizophrenia of the last few months, in the bigger picture, gold seems to still be on track to do a roughly 2x scale up of the 1970s gold bull market. If we are to replicate the previous gold bull with its downtrend in the midst of the parabolic rises, we need to replicate this:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrH-kF1PmLxJgn2QCPfzQpJrtQWFT1nhP93HJu3vAFj_8QiwbzGZMVuYJZ8jUfEIcOVXwWezcz_iKeb-Ls4lEHNsBNl82gG1ElG47KxWWITkd7rjHz-EcLKP1-O-XWgwQ0MTArEiInkug/s1600/75-77+gold+separator.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="434" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrH-kF1PmLxJgn2QCPfzQpJrtQWFT1nhP93HJu3vAFj_8QiwbzGZMVuYJZ8jUfEIcOVXwWezcz_iKeb-Ls4lEHNsBNl82gG1ElG47KxWWITkd7rjHz-EcLKP1-O-XWgwQ0MTArEiInkug/s640/75-77+gold+separator.gif" width="640" /></a></div>
And so far we are doing this:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYfuZi4gRn1Q09Z26UgCRm0gQ-MsPhME279f742bsqmtT_Sju5n4xYa2spvdw_T7CAMMYU8pQ6ICUyAqQjVmRlFQahNF6beJ3skYmXUQkSx2gqHCFIKrLJ53Hmou_TjMisW5083VnEOiU/s1600/xxx.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="316" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYfuZi4gRn1Q09Z26UgCRm0gQ-MsPhME279f742bsqmtT_Sju5n4xYa2spvdw_T7CAMMYU8pQ6ICUyAqQjVmRlFQahNF6beJ3skYmXUQkSx2gqHCFIKrLJ53Hmou_TjMisW5083VnEOiU/s640/xxx.png" width="640" /></a></div>
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The two downtrends look similar in that there is churning against the resistance early on, then a sharp resignation to the downward move well below the resistance, then a return to churning on the resistance again, which is where we're at now. MAPS is what I call Moving Average Pairs for the 140 day and 200 day EMA that I find is a good separator of bull and bear moves. If GLD does a convincing break to 125-130 soon with high volume, a second parabolic rise starts to come into play.<br />
<br />
But it is so hard to imagine gold going into a big bull market when its natural enemy, higher interest rates, are surely on the way. We seem to be going in the direction of all of gold's natural enemies - a good stock market, a defense of the dollar, an improving global economy, and a political sea change in Washington similar to the Reagan Revolution of 1981 that accompanied the death of the previous gold bull.<br />
<br />
But gold can be very contrary to what it's supposed to be doing. For example, you can have bull markets in both stocks and gold at the same time, as in 2002 to 2007. In 1979, the year gold went ballistic in the last bull, the Dow was actually up 4.2%. And as for interest rates, if the last gold bull market is any indication, we should anticipate ramping gold alongside ramping rates:<br />
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The price of gold is very complicated and contrary, and maybe something like the science of fractals<br />
is the best guide to what it will do.<br />
<br />
The lead practitioner of fractal analysis of gold that I discussed in my aforementioned article back in February, 2016, is David Nichols, who publishes the <em>Gold Fractal Report</em>. His short-term calls on gold are somewhat hit or miss, but for long-term moves (say over two years) his accuracy is uncanny. He correctly was saying for months in 2010, when silver and gold seemed unstoppable, that precious metals would turn into a major bear move, and he gauged the time to be February/March, 2011. Silver hit its blow-off top in April and gold closely followed with its top in August, and the great four year slide began. <br />
<br />
What is Nichols saying for our present timeframe? In August he published an <a href="http://www.321gold.com/editorials/nichols/nichols080916.html">article</a> with his call for two things - the US stockmarket and gold. In August, if you will recall, we had just suffered a brutal pair of sell-offs, one in late 2015 and the plastering of early 2016. This was before the election and few were thinking run away bull, no matter who won. Nichols bad-mouthed the bears and predicted a nice bull market in stocks: <br />
<blockquote class="tr_bq">
They are expecting a repeat of 2008, with a deflationary spiral that sends assets crashing down. Many seem downright gleeful at the prospect of the market doling out a brutal punishment to those holding long positions. But that was last decade's battle. The world has moved on ...</blockquote>
And he had this to say about gold: <br />
<blockquote class="tr_bq">
Gold is responding to the switch to tangible assets. It's got some work left to do to put the multi-year correction in the rear view mirror, but once that happens the "hot money" will pour right back into gold.</blockquote>
Since August, gold has indeed done some "work" just as he said, being shot out of the saddle and perhaps now clawing back to put the four year slide "in the rear view mirror" and setting the stage for gold's next run. Giddyup.<br />
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<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-13728975557099998122017-03-24T18:17:00.000-07:002017-03-26T13:34:19.679-07:00The New Paradigm In Restaurants And Retail<div class="article-summary article-width">
It's well known that the brick and mortar retailers are suffering in today's ebullient markets. The internet is changing the way we shop. And, it's changing the way we dine as well, giving a twin abysmal <a href="https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1490299200000&chddm=256&chls=IntervalBasedLine&cmpto=INDEXCBOE:SPX&cmptdms=1&q=INDEXDJX:DJUSRU&ntsp=0&ei=YP3TWKndIoq-mAG2mbKoBA">effect</a> in the restaurant world. The restaurant stocks are generally flat and the big box retail stocks are falling off a cliff. People today are seeking a generous serving of digital experience with their meals as well as their merchandise.<br />
<br />
A man with some thoughts on this digital-tom-foolery/food thing is the guiding light behind what has to be considered the most successful restaurant chain of our time. This outfit has seen its stock do over a ten fold gain the last seven years since Jim Cramer first recommended him as "bankable". I am referring to Patrick Doyle of Domino's Pizza, what Cramer has called a technology company that also happens to sell good pizzas.<br />
<br />
From the Mad Money of 3/6/17, Jim Cramer <a href="http://www.cnbc.com/2017/03/06/dominos-ceo-reveals-how-it-smoked-the-pizza-competition-last-quarter.html">interviewed</a> Patrick Doyle, CEO of Domino's Pizza after they reported yet another stunning quarter from the badly suffering restaurant group. Cramer asked him about what he has dubbed the new stay-at-home economy, despite growing disposable income, and how Domino's is beating this new attitude. Doyle then relates how Domino's has used the new digital age and everyone's fascination with it to deal with what he sees as the "new" consumer, telling us that fully <em>half</em> of the staff at the home office of Domino's are technicians that oversee the new order options where hungry customers simply order food while on Facebook, Google, Netflix, or whatever. Cramer just shakes his head at this. As for "getting out" foot traffic, the traditional life blood of restaurants, Doyle sees a great new divide now developing in consumer-land. In his words from the interview:</div>
<blockquote class="tr_bq">
I think what's happening, Jim, is there is a great convenience now ... what you're seeing is people still clearly go out, but it's got to be special. There's got to be something in a restaurant or retailer that's drawing people in, that's giving them this experience that's different than simply going in and buying ... In restaurants, if you're giving someone a really special experience, then I think you're going to continue to drive traffic into your restaurant ... I think if you've got a restaurant that's a sit-down restaurant that's <em>not</em> doing something really special, then I think you're going to hurt." </blockquote>
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Doyle noted that his company is one of the few that has gone from a majority over-the-phone to a majority digital operation. "That's not a long list" he said. Cramer responded, "It's not a long list, and you are at the top of it."</div>
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Investors tend to think of Domino's as the great leader in this march of eateries into the new digital entertainment world. But there is a much more obscure name that perhaps is even more of an example of this powerful revolution, and seems to be exactly what Patrick Doyle was talking about in the above quote. That name is Dave and Buster's. You've probably heard of them because they've been around since 1982, went public in 1995 and were taken private in 2005. </div>
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In October, 2014, they have resurfaced as a public company again with a new mission and the name Dave and Buster's Entertainment, Inc. with the Nasdaq symbol PLAY. And play is what now sets them apart - digital play. About half their typical store floor space is the latest and best digital arcade games. They renew about 10% of their games each year at a cost of about 2% of their sales. These videotronical games seem like so much foolishness to me, and I've never wasted a moment of my time with one. But I've learned to never underestimate how popular they are with everyone else and I take their investment implications quite seriously. </div>
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Dave and Buster's does the big screen TV sports thing as well, even being a corporate sponsor of the UFC. But from Buffalo Wild Wings to my neighborhood Applebee's, you see the bar/TV thing everywhere these days. It's the games that now are making Dave and Buster's "special" to those cocooned in the house, and as Doyle said above, this is drawing them out. How does all this show up in their results? Well, it has propelled them to an industry leading Average Unit Volume - and the games are why:</div>
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<a href="https://staticseekingalpha.a.ssl.fastly.net/uploads/2015/11/4039111_14484265562059_rId5.png" itemprop="image" itemscope="true" itemtype="https://schema.org/ImageObject" rel="lightbox"><img src="https://staticseekingalpha.a.ssl.fastly.net/uploads/2015/11/4039111_14484265562059_rId5_thumb.jpg" /></a></div>
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<em>(Source of all results images: </em><a href="http://files.shareholder.com/downloads/AMDA-16L7N9/1066946060x0x834122/603D32FD-C4AA-4564-A328-0D7D4B8D8254/PLAY_June_Conferences_FINAL.PDF" rel="nofollow"><span style="color: #024999;"><em>Investor presentation</em></span></a><em>)</em></div>
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The 2% of sales going to buy the games each year is well worth it as it sends the unit volume soaring past virtually all of their competition. Soldier of Fortune at <em>Seeking Alpha </em>has an excellent <a href="https://seekingalpha.com/article/3712676-press-play-dave-and-busters-investment">article</a> titled "Press PLAY On A Dave And Buster's Investment" from back in November, 2015 showing these investor presentations by the company - just about a year after PLAY began trading. The stock has gone from $37 to $60 since then. Mind you this was precisely during the big swoon in both retailer and restaurant stocks since late 2015. And this has everything in the world to do with Cramer's stay-at-home economy, a corollary to his FANG acronym (Facebook, Amazon, Netflix, Google) he invented some four years ago. Jayson Lusk, a food and agri economist has a <a href="http://jaysonlusk.com/">blog</a> where he <a href="http://jaysonlusk.com/blog/2016/5/11/restaurant-performance-index">describes</a> the Restaurant Performance Index comparing it to food spending away from home:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiN15nv3tIOUlCcNrNSc1DlmZYqDoJeyTHNIIXC20GB7L-MqRoL7XZ1ExDiplJ7000WeZnuKmTBsnhrOtgVplUMri_asxG-OYUdbznGK9E6i_YCgVvB5XnpVN26DDV6ntF8HY-Mt9ns9gY/s1600/PLAY.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="410" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiN15nv3tIOUlCcNrNSc1DlmZYqDoJeyTHNIIXC20GB7L-MqRoL7XZ1ExDiplJ7000WeZnuKmTBsnhrOtgVplUMri_asxG-OYUdbznGK9E6i_YCgVvB5XnpVN26DDV6ntF8HY-Mt9ns9gY/s640/PLAY.jpg" width="640" /></a></div>
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Here we see the tale of woe for the eateries starting in mid 2015 - about the same time when PLAY's results went ballistic:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5MmPUSjFj49V9lYdjScN17FF6J3b5ZxLyUQRAa_gnLLJ6ps-k623DTsk9h02NMjDHx_RMTA6FoHOe9H4wa_mISIP5OvlC2esKxP7aBjqSoJnhQpTEBhC-3xiEEyEFj3whdy1qJondKnE/s1600/EROI+vs+10%2525+profit+oil+price.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="616" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5MmPUSjFj49V9lYdjScN17FF6J3b5ZxLyUQRAa_gnLLJ6ps-k623DTsk9h02NMjDHx_RMTA6FoHOe9H4wa_mISIP5OvlC2esKxP7aBjqSoJnhQpTEBhC-3xiEEyEFj3whdy1qJondKnE/s640/EROI+vs+10%2525+profit+oil+price.jpg" width="640" /></a></div>
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The "spending away from home" in the previous chart appears to be stampeding away from restaurants in general and into Dave and Buster's - a clear case of highway robbery in market share. And the same could be said of Domino's, which has a TV ad out now imploring customers to not deal with them by phone anymore, even smashing, with a crane, a big box with a phone image shown on it. Deal with us by the internet, they demand in the ad.<br />
<br />
The growth shown above remains pretty cheap with just a 2.7 multiple on the revenue and just 10.8 on the cash flow from operations, whose growth looks similar to the EBITDA cash flow. Forward PE is 24.8 per Morningstar numbers.<br />
<br />
The results at Dave and Buster's really began peeling away from the restaurant group in 2013 while they were still a private company:<br />
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<a href="https://staticseekingalpha.a.ssl.fastly.net/uploads/2015/11/4039111_14484265562059_rId9.png" itemprop="image" itemscope="true" itemtype="https://schema.org/ImageObject" rel="lightbox"><img src="https://staticseekingalpha.a.ssl.fastly.net/uploads/2015/11/4039111_14484265562059_rId9_thumb.jpg" /></a><br />
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I suspect this was a prime reason for the public offering of PLAY in October, 2014. It was almost like offering a new public equity launched into a new growth story - just what IPO lovers like. And they are in the fast growth part of the curve geographically, having a fraction of the store count of most major chains, just 1.7 stores per state.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdpb37MqAP8OjuuNVy5DXd6EYdfEIRfGMxdeL7C65fcIKArfZr9IZgDQfx4gYSX0JA2S2fnqkQ8j8MPxRrEs8IvcEzXcUh5bMulE6DyK_42faJp2HEN32eqnnVaEjCerkpg_a1Qr_gjwY/s1600/play+picture+2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="215" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdpb37MqAP8OjuuNVy5DXd6EYdfEIRfGMxdeL7C65fcIKArfZr9IZgDQfx4gYSX0JA2S2fnqkQ8j8MPxRrEs8IvcEzXcUh5bMulE6DyK_42faJp2HEN32eqnnVaEjCerkpg_a1Qr_gjwY/s400/play+picture+2.jpg" width="400" /></a></div>
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If the digital traffic draw is such a good idea, why won't everybody be immediately doing it? Well, the gradual use of about 2% of sales to refresh 10% of their games each year has produced something of a competitive moat for Dave and Buster's. Each of their stores has about <em>150 games</em>. And Soldier of Fortune gives this estimate: <br />
<blockquote class="tr_bq">
Any competitor wishing to enter the space at any sort of scale would be facing a massive capital outlay (I estimate $165-175 M) in order to match Dave and Buster's gaming arsenal.</blockquote>
And as if to play dealer's advocate to the gaming junkies, they dispense:<br />
<blockquote class="tr_bq">
... a pre-loaded card that one swipes to play a given game, removing the headache associated with keeping track of the coins to play with and the paper tickets won. Importantly, this is an experience that is not easily replicated at home (or at a competitor, for that matter) - most people/restaurants don't have even one full-size arcade game, much less 150+ to choose from.</blockquote>
For their part, Domino's has, the last seven years or so, made the massive investment to make half their main office workforce internet technicians. It would be a stretch for any competitor to suddenly make that change.<br />
<br />
The games habit is high margin. It produces a gross margin of 86% vs 73.4% for their food and a combined average total store gross margin for their nine chief competitors of 71.3% (2015 figures). Clearing away some bookkeeping issues and just looking at EBITDA margins:<br />
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<a href="https://staticseekingalpha.a.ssl.fastly.net/uploads/2015/11/4039111_14484265562059_rId7.png" itemprop="image" itemscope="true" itemtype="https://schema.org/ImageObject" rel="lightbox"><img src="https://staticseekingalpha.a.ssl.fastly.net/uploads/2015/11/4039111_14484265562059_rId7_thumb.jpg" /></a><br />
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Floor space is an item that makes the business model hard for competitors to copy. A Dave and Buster's store is something around 44,000 square foot, about what the first Walmart stores were. Even if a competitor wanted to dish out the near $200 million for the state-of-the-art games, where would they put 150 of them? <br />
<br />
As the big box mall spaces currently being occupied by J.C. Penney, Sears, Macy's, and the like become available via hundreds of closings, something like a Dave and Buster's may snap up some of this space as they would divide it up. There isn't much competitive bidding at their store size as everything this big is looking to get <em>out</em> of their spaces.<br />
<br />
In the '60s, big box was good, a mega draw. Now the big boxes are making dotcom their draw and dragging the big box as dead weight. Taking the average mall annual lease<a href="https://www.reference.com/business-finance/much-cost-average-lease-store-space-mall-7347b92e46e4abd8"> rate</a> of $41 per square foot and applying it to a typical bigger Macy's <a href="http://www.newsnet5.com/money/business-news/macys-of-the-future-smaller-box-bigger-wow-factor-for-department-store">being closed</a> at something like 260,000 sq. ft. you have about $10.7 million a year being chopped out of a big store's profit before you even pay anyone to work there. That's bad when the per store TTM <a href="http://financials.morningstar.com/income-statement/is.html?t=M">profit</a> for Macy's is currently less than $1 million. And J.C. Penney and Sears are in much worse shape.<br />
<br />
Moving into mall space vacated by a big box retailer isn't a new idea to Dave and Buster's. Last month, the <em>Baltimore Business Journal </em><a href="http://www.bizjournals.com/baltimore/news/2017/02/14/dave-busters-targets-white-marsh-mall-for-new.html">reported</a> them swooping into the space at White Marsh Mall left by a Sports Authority as that company collapses into bankruptcy. If a recent CNBC <a href="http://www.cnbc.com/2017/01/06/losing-your-sears-or-macys-its-not-just-the-weakest-stores-that-get-chopped.html">story</a> is any indication, big floor space ventures are going to have their pick of vacancies as a historic wave of big box mall closings are on the way:<br />
<blockquote class="tr_bq">
"I expect the closures to be worse, and I expect the malls to be hit more than any other shopping center type," Cushman and Wakefield's Brown said. His firm keeps a list of the major store closures announced each year. Until 2016, the highest number it had tracked was in 2010, when about 3,000 closings were announced. That number grew to 4,000 last year, and Brown predicts it will balloon to 5,000 this year. "There's no way around [it]," Brown said, referring to what he considers an inevitable drop in the occupancy rate this year. While many argue that turnover and other changes have always been a part of the retail industry, "the pace at which it's changing is more rapid than has ever been the case," Green Street's Sullivan said.</blockquote>
Mall owners like the big floor space "anchor" tenants, and welcome big replacements when one closes. The many smaller tenants often have contingency clauses linked to the anchors, many times governing whether they stay or leave, and at what price. This gives an operation like Dave and Buster's some bargaining power. This mall opportunity is a two edged sword for Dave and Buster's. It affords them a fast and likely cheaper path to expansion, but it also gives their competition the same physical path to copy their business model and expand. <br />
<br />
However, as mentioned above, Dave and Buster's has just a fraction of the store count as their main competitors, and they can more easily make a higher portion of their stores mall takeovers. And all their existing stores are already that big! Their competitors have a great mass of stores too small to populate with games, and a big learning curve with them in new places. Dave and Buster's has 35 years of experience with the games. <br />
<br />
They are already establishing a presence in the revolution as was noted in the 3/23/17 <em>Investor's Business Daily </em><a href="http://www.investors.com/news/real-estate/kiddie-activity-hubs-seen-as-way-to-make-malls-amazon-proof/">article </a>about how to "Amazon proof" your mall. Sandeep Mathrani saw a vision of the future on a trip to Dubai, where he saw malls with KidZania in them - entire kid size towns with currency and role playing. Mathrani is head of the U.S. mall giant General Growth Properties (GGP) and is bringing these new concepts here. The article echoes Patrick Doyle's "special experience" theme:<br />
<blockquote class="tr_bq">
For Mathrani, KidZania is part of a shift toward "experiential retail" - away from department stores ... Other concepts have taken their place, including supermarkets like Wegmans Food Markets, entertainment hub Dave and Buster's Entertainment ..."</blockquote>
GGP owns 126 malls in 40 states and has gone on the offensive: <br />
<blockquote class="tr_bq">
"Instead of just waiting for stores to go vacant, it has bought out leases and physical property from chains like Macy's (M), Sears Holdings (SHLD) and J.C. Penney (JCP). The company has now reclaimed more than 100 stores over the past five years, Mathrani said."</blockquote>
Could this mall revolution be a growth engine for PLAY? I would say yes. You could say that all this videotronical stuff is just a two year fad with the kids. But be careful. You're calling Cramer's FANG and Doyle's "new convenience" a fad, and will probably wind up looking like those that called the horseless carriage and telephone fads. I think "paradigm shift" is not too strong a description.</div>
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Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-54621904352224868182017-03-05T18:41:00.002-08:002017-03-10T18:19:51.197-08:00Is A Major Copper Bull Being Unleashed? <div class="separator" style="clear: both; text-align: center;">
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When the earthquake hit in Washington last November, sliding everything to a more business friendly world, copper went on a Trump tear along with several other things. Does this have any staying power? Is there something in the world's wiring to back it up?<br />
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Jesse Moore has an excellent series of reports on copper at <em>Seeking Alpha</em>. He began predicting a bear-to-bull turn in copper back in March, 2016, when copper was in everyone's doghouse, including mine. He was saying that within 12-24 months the bear would be a bull. We are now 12 months from his call, and copper is stirring from its bear slumber. His first in the series was a country-by-country <a href="http://seekingalpha.com/article/3952556-find-hole-stop-digging-part-1-copper-supply">look</a> at copper mining projects, and he compares his result with that of Chili's government. Why should we care about Chili's copper work? Because they are the biggest copper supply in the world, giving us about one third of the metal. The whole Chilean economy centers on copper. Then there is the International Copper Study Group (ICSG) that does a projection as well. Moore's summary: <br />
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I believe both groups have not taken proper account for delays in a startup or ramp of new mines, grade reductions in Chile, water shortages leading to unplanned shutdowns, reduced capital expenditure, and the replacement of risk taking CEOs with risk averse CEO's who have slashed budgets across the world. Copper is not iron ore, and it is not nearly as easy to find and produce. The current copper price does not support growing supplies, and it appears that some producers have begun to put their collective shovels down ... In reality, the world needs another mega-project before 2020, and we just don't have one coming. The major deposits are, for the most part, found. $3.00 will easily bring on plenty of supply, but again, my belief is it will be too late. My guess is that we start to see the shortage become obvious near the end of the first half of 2017, prices will overshoot and what we saw during the China boom won't be out of the question</blockquote>
"The China boom" he is talking about is what happened back in 2004, when China went ballistic building the future China - and over did it. China has been notorious for commodity hoarding to insure supply for their plans. And they did this with copper in 2004, when their Shanghai inventories did a rare thing. They rose above the LME (London Metal Exchange) inventories, the world's standard for metal storage, just in front of the crazy copper bull market that ensued back then. Moore shows on a <a href="https://staticseekingalpha.a.ssl.fastly.net/uploads/2016/3/34605935_14572956781689_rId11.png">chart</a> that this rare occurrence has just now happened again, the first time since 2004.<br />
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<strong> <span style="font-size: large;">Don't Ignore China</span></strong><br />
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We need to pay attention to China and Asian copper usage in general because it accounts for about 62% of total copper usage, the Americas just 14% according to the ICSG pie chart shown in Moore's <a href="http://seekingalpha.com/article/3956485-find-hole-stop-digging-part-2-copper-demand">article</a> treating copper demand. So forget Trump's building ambitions, copper began its breakout before the election. We need to know what's up in China.<br />
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China's construction contracts have continued a high rate of growth despite their economic slump, as have car sales. A lot of China's recent copper interest may lie in the aluminum vs copper wiring battle. They have been using a lot of the aluminum wire, because it is a very abundant metal with stable pricing running a fraction of that for copper. But aluminum wire has its problems. It must be alloyed to make it strong enough for wiring and this makes it less conductive. Copper can be used in a more pure form, especially pure, newly mined copper as opposed to the 50% of annual copper usage that is recycled. Only about 8% of scrap is made into wiring. So copper wire places nearly all its demand on the newly mined half of supply. Aluminum is also is subject to corrosion from moisture and other things and must be replaced much more often than copper. China is considering going to all copper for its wires, and this Moore says, will make a big, abrupt difference in copper demand: <br />
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Nearly half of all China's copper consumption goes towards grid infrastructure, and China has recently been discussing abandoning aluminum wiring in favor of more expensive, but reliable, copper wire. The outcome of which could drastically effect the demand for copper over the short term</blockquote>
Altogether, 75% of global copper demand is for electrical wires. But a big problem with copper wire is price instability. This may explain a good bit of the stockpiling going on now in China.<br />
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<strong><span style="font-size: large;">Copper's Supply</span></strong><br />
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On the supply side, copper mining has been suffering a pronounced decline in ore grades. In "Copper: A Bullish Decade Is Coming" Moore shows a <a href="http://seekingalpha.com/article/3991196-copper-bullish-decade-coming">graph</a> for global mining revealing that copper content of ore coming out of the ground is half of what it was in 2008. The best fruit has been picked, and, unlike oil, there is no big shale bump to come to the rescue. Shale, as I have written about in other articles, is keeping oil prices moderate for at least a couple of years.<br />
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If nothing suddenly shows up like a copper shale, the projected departure of demand curve from supply curve is slated to transpire around 2019 according to mining.com and their infographic <a href="http://www.visualcapitalist.com/the-looming-copper-supply-crunch/">tour</a> of copper. For 50 years, they've known about shale and the other "dreg oil" (bottom of the barrel) that would be flooded onto the market by a quantum leap to higher prices. There is no such thing for copper - just a continuous slide to more and more expensive grades of normal ore. The current labor problems of Escondida, the world's biggest copper mine and <a href="http://seekingalpha.com/article/4045105-copper-weekly-supply-disruptions-hit-copper-heads-new-highs">other disruptions</a> may be bringing a looming copper deficit closer at hand. Mining.com isn't the only one projecting this timeframe. Moore includes an RBC Capital Markets <a href="https://staticseekingalpha.a.ssl.fastly.net/uploads/2016/7/25/34605935-14694333624150121_origin.png">chart</a> saying the same thing.<br />
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<span style="color: black;">These could be some of the reasons for "Doctor Copper Hiding in Shanghai Warehouse" as a <em>Wall Street Journal</em> online </span><a href="http://blogs.wsj.com/moneybeat/2016/03/23/doctor-copper-hiding-in-shanghai-warehouse/"><span style="color: black;">piece</span></a><span style="color: black;"> from about a year ago proclaimed, saying that, "the pickup in the price of copper isn't driven by a stronger Chinese economy." You could argue that all the price surge is from Chinese stockpiling and thus it will simply reverse when they figure they have enough. But as Jesse Moore points out, they did this same stockpiling thing in 2004, to the same level relative to the LME, after which copper did a huge climb. China probably knows the copper market better than about anyone, being much more dependent on it than any country. They seem to know that they will have to buy higher later.</span><br />
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So<strong> a</strong>re we running out of copper?<strong> </strong>No we are not. In fact we have mined way less than half of what's in the ground and almost all of that is still in circulation! <span style="color: black;">Roughly half of copper usage is recycled metal. Even for silver, the recycled portion of demand is just about one fourth. Copper is by far the most reused resource on the earth. We don't burn it up like oil. It's relatively rare and doesn't rust into oblivion like iron. It only takes 15% of the energy to recycle copper as it does to mine it</span>. How much gets recycled and refined is a function of the copper price. How much of the low grade, expensive ore that gets dug out is also a function of the copper price. We should perhaps draw a distinction here between peak oil and peak copper. We are enjoying a reprieve from peak normal oil with shale, tar sands, and so on. This could be for years, but there isn't that much of it to be exploited compared to the normal copper that's left to be recycled and still in the ground. <span style="color: red;"><span style="color: black;">We are not running out of copper</span>.</span><br />
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<strong><span style="color: black; font-size: large;">We Are Running Out Of <u>Cheap</u> Copper</span></strong><br />
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The looming supply deficit being projected is all a matter of copper pricing. It will be about market pricing and what that will be bringing to the plate. And it will be about any sudden changes to copper demand, like a China switch away from the aluminum electrical wiring. Added mine capacity doesn't come quick or cheap. And 92% of new copper wire must be pure, newly mined copper.<br />
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<span style="color: black;">This aluminum/copper wire problem in China is being further aggravated by the massive internet speed bottle neck <span style="color: black;">going on now</span> in our last mile networking. I discuss this in detail in my </span><a href="https://www.blogger.com/blogger.g?blogID=3282424752485226688#editor/target=post;postID=7108825354643582162;onPublishedMenu=template;onClosedMenu=template;postNum=1;src=postname"><span style="color: black;">article</span></a><span style="color: black;"> "The Impending Super-Cycle In The All Glass Internet" noting that as China struggles to become a superpower, their internet speed ranks #82 in the world. As all new buildings everywhere are becoming very populated with our new web connected devices, wiring material is being pushed beyond its limits now. </span><br />
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<span style="color: black;">The disruptive switch-over from copper hybrids to an all fiber last-mile in urban areas means a very expensive mess. So ever increasing speeds have dictated a next generation of DSL on the very old copper that's already there. This new standard known as G.fast is being deployed. It is a nice speed improvement, and often compared to broadband fiber based on lab results, but will suffer the usual shortcomings of anything imposed on copper. The fade with distance is very bad relative to fiber. Also, there is a vast difference in the normal existing copper and what they are using in the lab for these tests. I refer you to Jim Wegat for this. He was an optics engineer for Terabeam, and when I asked him about this supposed equality of G.fast copper to fiber, he said it:</span><br />
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<span style="color: black;">... is confusing the wiring in homes and neighborhoods with the high quality wire used in the study by Alcatel-Lucent. It is a bit like saying that a specially designed car broke the land speed record and since most Americans have cars they should be able to break the land speed record with their cars too.</span></blockquote>
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<span style="color: black;">If we are needing this super pure, pristine copper to handle our new last mile, the cruddy, slow aluminum is out of the question. No wonder they are wanting to tear out the aluminum.</span><br />
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<span style="color: red;"><span style="color: black; font-size: large;"><strong>Fiber vs Copper</strong></span></span><br />
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If I were vice president in charge of China's building programs, I would just cut to the chase and future proof my structures with all fiber and not even mess with copper. But I suppose when you must deal with a complicated budgetary mess and calendar of progress that dictate less than ideal science, it's not as simple as that.<br />
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<span style="color: red;"><span style="color: black;">There is a lot of debate on the pros and cons of fiber vs copper for LAN and building cables. Copper cabling suffers from electromagnetic interference between cables, fiber is immune to electric or magnetic interference. Copper is subject to disruption from lightening and water. Fiber is immune to that. <span style="color: black;">I am not an expert on all this</span>. I will just offer what Commscope has to say per a </span><a href="http://www.commscope.com/Blog/Will-Fiber-Ever-Replace-Copper-Cable/"><span style="color: black;">write-up</span></a><span style="color: black;"> titled "Will Fiber Ever Replace Copper Cable" on their website <span style="color: black;">concerning</span> what's happening in China. </span></span><br />
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<span style="color: black;">Data centers <span style="color: black;">in China</span> are averaging 40% fiber and 60% copper while the very large data centers are about 70% fiber. But with "intelligent buildings" copper still dominates in-building networks:</span><br />
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<span style="color: black;">"This is mainly due to the high cost of fiber-to-the-desk (FTTD) system as well as fiber’s high requirements for application environment and routine maintenance. Therefore, in the market of intelligent buildings, the percentage of fiber usage is only around 30 percent, while copper cabling occupies the remaining 70 percent market share. "</span></blockquote>
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The Chinese seem to be very cost sensitive, having put in a lot of the aluminum wire, and now are averse to the high cost of FTTD. And that 70% copper <span style="color: black;">market share</span> may be looking better because of a new technology they are developing called Power over Ethernet (PoE):<br />
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"...when it comes to the intelligent buildings market, copper cable is facing new opportunities brought on by the fast landing of the Power over Ethernet (PoE) application"</blockquote>
The extraordinary copper stockpiling pointed out by Moore that took place in 2005 and just recently in 2015 was done with little fan fare or publicity, as important as it is to investors. But in a Reuters<a href="http://www.reuters.com/article/china-power-transmission-idUSL4N1171UP20150901"> report</a> from 2015, cited in Moore's part two article on copper (demand) China's government gives us a glimpse of their plans for copper. China does things by five year plans, and this report covers the 2015-2020 plan with the title "UPDATE 1 - China Targets $300 bln Power Grid Spend Over 2015-2020 - Report" and cites government sources in China. That's a third of a $trillion spent on wires, a big number, but to put the numbers in perspective, the plan calls for installing transmission line length over 2015-2020 equal to more than twice the 2014 level. That's over twice the cable strung in five years than was strung in the previous one hundred. The report, in what would seem to be an understatement, said all this is “likely to provide a boost for sectors like copper.” And it also makes pretty clear the choice in the aluminum vs copper battle:<br />
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“The plan was aimed at increasing the reliability of power transmission, which would favour copper-based cables over cheaper alternative aluminium-based cables, said Yang Changhua, senior analyst at state-backed research firm Antaike.”</blockquote>
If you look at a historical chart of China's copper imports, as in this<a href="http://www.metalchina.com/uploads/file/03%20%E6%AE%B5%E7%BB%8D%E7%94%AB%20%20EN.pdf"> report</a>, you see an interesting connection to these five year plans. Over the 5 year plan 2000-2005, copper importing was flattish going from 70 to 50 (10 thousand tons). Then after the unusual stockpiling blitz by China in 2005, when the Shanghai inventories exceeded the LME the first time, the 2005-2010 five year plan saw copper imports do a massive climb from 50 to 300. This was accompanied by a strong climb in copper from $1.43 to $4.27. In the five years since, the imports have again been flat, going from 300 to 300, with the price of copper drifting back down. In fact, if you overlay this China copper import chart with the copper price chart, you get a remarkable correlation except briefly for the 2008 financial crisis. Now, the Shanghai inventories have exceeded LME once again, and you have to wonder what's up with China's plans. Keep in mind that they probably know the copper market better than anyone.<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<span style="color: red;"><span style="color: black;">So a big new wave of demand could be coming for <span style="color: black;">newly mined wire grade</span> copper. The supply projections above may have a tough time keeping up with it.</span></span></div>
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<span style="color: red;"><span style="color: black;">The supply would have to be accomplished with higher prices</span></span>. <span style="color: black;">A lot of what's going on in China probably applies to other emerging Asian countries, and that block is 62% of copper's demand. China apparently sees this as a big enough problem to justify a whole new round of stockpiling.</span><br />
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Another consideration with copper supply is its relation to gold. Copper is usually found wherever gold has formed, and you can't read much geology on miners without seeing "gold-copper, copper-gold" and similar terminology. The basic fact is that much copper is mined as a co-product or by-product with the vastly more lucrative gold content. If the price of gold is cutting production, a copper shortage has to run a ways before operations are being ramped up just for the copper. Thus you have to be mindful of the relative status of gold and copper bulls and bears. Right now we have gold looking bearish since late last year while a copper bull may be on its way. Almost always in history, gold and copper bulls have run in tandem. If now they are to run in opposite directions, it would be an oddity. Technically, gold is in limbo now between long-term bull and possible new bear in the $1250 area. So this bears watching. We will probably have a copper shortage if gold continues its long-term bull market, but if gold continues its retreat from last year, the copper shortage could become severe.<br />
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<strong><span style="font-size: large;"></span></strong><br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-64707869698375801082017-03-03T19:10:00.000-08:002017-03-04T09:44:09.547-08:00Insiders And The New Medicine <div class="separator" style="clear: both; text-align: center;">
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Biotech was the big outperformer for years up until mid 2015. After a big cool down, it looks to be reigniting. <br />
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There is a new medicine slowly taking hold over the years. To see it, you should be aware of the little project that, in 1990, the Department of Energy, The National Institutes of Health, and some international organizations began - The Human Genome Project. It was to be a 15 year globally coordinated effort that would map and sequence the human genome completely so that we could begin practicing this medicine.<br />
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And they did it. It was pretty much completed around 2003, two years ahead of the 15 year schedule and under budget. It was worth every penny of the roughly $3 billion the US government spent on it (in 1991 money). By the <a href="http://fastercures.tumblr.com/post/53532403798/paying-it-forward-how-investing-in-the-human">tabulations of FasterCures</a> every $1 spent on the Project has triggered $178 in US economic activity. "An investment in knowledge always pays the best interest" they quote from Ben Franklin. They conclude that "As the largest, single undertaking in the history of life sciences, the Human Genome Project has paid back extraordinary dividends on the U.S. government’s investment." That total investment of $3 billion has produced, in 2012 alone, genomic endeavors resulting in $31 billion in US GDP, $19 billion in personal income, at a cost of about $2 a year for each US resident. Now that's a stimulus package.<br />
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The Project was pronounced done in 2003, and genomic medicine was eagerly anticipated. But practical, disease killing applications have not exactly been sprinkled on us like magical fairy dust. There is a kind of Moore's Law at work in getting genomic medicine into our every day life. In the early 2000s it cost about $50 million to get your genome mapped. That has steadily declined to less than $1000 now - something akin to getting a tooth pulled, but less painful. Getting your genome mapped is rapidly becoming a common part of good healthcare.<br />
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<strong><span style="font-size: large;">Investing In Modern Medicine</span></strong><br />
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The approach in "modern" medicine has been to introduce chemicals concocted for a mass audience into your particular body to stop some bad thing it is doing. Because we're all different, that typically is done at the expense of upsetting the body's intricate chemical balances, producing a new set of problems. The era of side effects has resulted. The old school drug industry profits, and it's a whole new wing of the legal profession. Have you noticed that about every third commercial on TV now is a disclaimer that drones on ad nauseam about every bad thing some drug has ever done to anyone? From bleeding, pain with or without vomiting, to other unseemly discussions, it's getting so you can't even enjoy a meal while watching your TV. You don't take two aspirin and call in the morning anymore, you call 1-800-BAD DRUG. A hundred years from now, all this will seem like applying leeches.<br />
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Genomic medicine has a basically new approach in that it seeks to fix problems by having our body just do what it was designed to do - genetically. And this can now be tailored to each of our individual genomes. It uses the body's own processes to fix problems. "Immunotherapy" is all the rage now in biotech and it uses the body's own immune system to search and destroy disease. A genetically correct body would never get most of our debilitating disorders. It is only when genes are damaged or not working right that we are programmed to problems. As they say in this science, we will stop endlessly treating symptoms, and simply fix the programs.<br />
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Unless you're a doctor, probably the best way is to analyze, not these stocks, but the insiders buying the stocks. There are, of course, the officers of the company; and a sudden rash of buying or selling by them is often a good tell. But I like to focus on another type of buyer - the cross company career buyer. These are the very few who are often highly educated in the medical field and also are 10% owners and/or sit on the boards of several of these companies, and do massive, informed buying. <br />
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They also like to run biotech hedge funds and, because they know not only medicine, but the business of medicine, they tend to have dazzling track records of performance. There funds are not for everyone as the downdrafts are huge and the sector risk is extreme. But the buying by these very smart people should command your attention. Kevin Tang is one of those people. He founded Tang Capital Management in 2002. My personal favorite for medical insiders to watch is the Fabulous Baker Brothers (no relation to the 1989 musical). Felix Baker owns a Phd in Immunology and is the most massive inside buyer I know of. Julian Baker holds an A.B. Magna Cum Laude from Harvard (social studies) and this blend of intelligence founded Baker Brothers Investments in 2000, which offers their hedge fund, Baker Brothers Advisors, among a family of funds for institutional investing. Together, they are on the boards of several medical companies. <br />
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The Bakers' fund tends to run just a handful of heavy-weighted positions although they spread the money out over nearly a hundred names. What strikes me about the names they buy heavily is the high buyout rate. For example, as tabulated by J3 Information Services, the <a href="http://www.j3sg.com/Reports/Stock-Insider/Generate-Institution-Portfolio.php?institutionid=4698&DV=yes">fund's holdings</a>, in heavy positions at the end of 2013 were : ACAD, SLXP, XOMA, GHDX, SGEN, PCYC, INCY, and GEVA. Of those eight, four have been bought out at fat premiums. That's a .500 batting average for takeout homeruns in just three years. <br />
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<strong><span style="font-size: large;">The Bakers' Personal Shopping</span></strong><br />
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These funds do well, but I find it more helpful to look at the yearly progression of the personal buying by the Bakers as they seem to not only know what to buy but when to buy it. When total yearly buying goes over around $20 million, the Bakers tend to do massive personal buying of select stocks, and very big climbs tend to start within three years or so. This only happens with about a half dozen stocks, but when it does, you should pay attention. As an example, let's look at Incyte Corp.<br />
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After declining to flat stock action for many years, the Bakers began $30 M plus yearly buying in '07, '08, and '11, accumulating something like a $10 cost basis before the run to over $100. They apparently think the run is far from over with Julian buying an astonishing $260 million worth in '16, not to mention 10.6 million shares in non open market buys in February, 2017 per <em>Morningstar, </em>worth roughly $1.4 billion.<br />
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The Bakers seem to gravitate to the new genetic medicine. Incyte was a groundbreaking leader in the genomic revolution as Incyte Genomics, Inc. and was going about selling its library of mapping until the Moore's Law effect mentioned above made this an impractical business model. So they morphed into one of the best disease fighters after 2004, currently ranked #4 on <em>Forbes</em> The World's Most Innovative Companies list. <br />
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Synageva BioPharma Corp. (GEVA) does recombinant genetics, and it also caught the attention of the Bakers. The company was formed when a Genzyme executive "was approached in early 2008 by Baker Bros. Investments to be the CEO of privately held Avigenics, Inc." according to the Wikipedia <a href="https://en.wikipedia.org/wiki/Synageva">account</a>, and this later went public as GEVA. If you construct a chart as above for the Bakers' buying, you find that after a decade of declining to flat stock performance, they bought $75 M of GEVA in '12, $200M in '13, and $267 M in '14 at an average stock price ranging from roughly $110 to $150. I bought GEVA based on this Baker activity and was rewarded with a $230 buyout of GEVA in May, 2015 by Alexion Pharmaceuticals. It "was the one of the largest premiums paid to any company over $5 billion in market cap since 1995" (Wikipedia).<br />
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Another rare case of Baker yearly buying going over the $20 M mark was Pharmacyclics (PCYC) where, after a decade of slumber, they bought a little over $15 M in '11 followed by about $24 M in '12 at prices ranging roughly between $10 and $60. PCYC was bought out in early 2015 at $261. And in mid 2013, Felix forked over $58 M at about $14 to buy some ACAD; it's now worth over twice that. Of course the Bakers are human, and they can buy losers as well, especially in the funds they operate. But when they go much over $20 M in personal yearly purchases, the success rate is extraordinary. <br />
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<strong><span style="font-size: large;">The Current Favorite Of The Bakers</span></strong><br />
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There is one stock that has received the most intense Baker insider buying I have ever seen, and they operate squarely in the new medicine area. Genomic medicine is crossing an important threshold as noted in an <a href="http://www.thelifesciencesreport.com/pub/na/casey-analyst-forecasts-explosive-biotech-growth">article</a> "Casey Analyst Forecasts Explosive Biotech Growth", from late 2012. In this interview with <em>Casey's Research</em>, they were asked about breakthroughs in the concept of using the body's immune system to deliver engineered cancer killers. Two were discussed:<br />
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The first is the recently approved use of antibody-drug conjugates (ADCs). Seattle Genetics (SGEN:NASDAQ) is the leader in this space, and its ADCs are created by bonding traditional chemo with antibodies selected from our own bodies that target very specific cancer cells. Chemotherapy, which is known as the "poison" in the oncological lingua franca "slash, burn, and poison," does precisely that to the entire body, causing horrific side effects in many patients. By piggybacking on the body's own mechanism for targeted immune response, chemotherapy can be rendered basically inert except when it comes in contact with cancer cells. This means more chemo can be delivered safely, working wonders on metastatic cancers and other difficult-to-target, small, multiple-growth cancers.</blockquote>
From the <a href="http://www.seattlegenetics.com/adc_collaborations">SGEN site</a>, we see that genomic science is facilitating all this as they:<br />
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:... have also formed a strategic collaboration with Oxford BioTherapeutics to jointly discover novel ADCs for cancer. Under the collaboration, OBT will generate panels of monoclonal antibodies against novel tumor-specific antigens identified using its proprietary Oxford Genome Anatomy Project database</blockquote>
Seattle Genetics is a small speculation enamored with science, not profits. But a development in 2010 could change that. From an <em>Xconomy</em> article in 2011 "<a href="http://www.xconomy.com/seattle/2011/07/05/seattle-genetics-on-the-verge-of-going-commercial-seeks-to-keep-its-scientific-soul/">Seattle Genetics, On The Verge Of Going Commercial, Seeks To Keep Its Scientific Soul</a>":<br />
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A little science background is required to see why this matters. Other biotech companies have had a lot of success with targeted therapies over the past decade, making genetically engineered antibodies that specifically zero in on markers on tumor cells, while mostly sparing healthy cells - unlike typical chemotherapy. Seattle Genetics has gone a step further, by turning genetically engineered antibodies into what amounts to a “smart bomb” against cancer. The company’s technology links the targeting antibody to a potent toxin, which gets unleashed on the tumor.</blockquote>
This idea of putting a cancer poison warhead on a genetically crafted antibody missile isn't new. As the article explains:<br />
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Most of these efforts to soup-up antibodies have failed over the years, but Seattle Genetics proved it had solved the puzzle last year in a pair of clinical trials. </blockquote>
So this 2011 piece claimed that Seattle Genetics "proved it had solved the puzzle last year" inducing the company to "start putting together a commercial plan." This was 2010, which interestingly enough was the year the Bakers began their massive buying of the stock in earnest:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfcEKB1rSIIFkhxRtUlzQ_1Z7cAL4Ccrk6r5mhIp2lEOHUE8v8Zl8iMOsYTATdtbs94o6lsW3x_nWj-8d9Asnktl79ce3s1Suy_o536uf7P-YF6rTGN2IwYuTdrK8hou0WgJZ1ulej8RQ/s1600/Baker+SGEN.gif"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfcEKB1rSIIFkhxRtUlzQ_1Z7cAL4Ccrk6r5mhIp2lEOHUE8v8Zl8iMOsYTATdtbs94o6lsW3x_nWj-8d9Asnktl79ce3s1Suy_o536uf7P-YF6rTGN2IwYuTdrK8hou0WgJZ1ulej8RQ/s640/Baker+SGEN.gif" /></a><br />
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You have to wonder what's up with that. This is the most intensive buying I have seen from the Bakers, or anyone. That's about $1 billion of one person's personal bank account invested in one dangerous stock.<br />
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Since the Bakers began buying up shares of INCY and SGEN hand over fist, INCY has not only been placed in the top five World's Most Innovative Companies list by Forbes, they have been added to the Standard and Poor's 500 index as <a href="https://www.fool.com/investing/2017/02/24/heres-why-incyte-rose-as-much-as-8-today.aspx">announced</a> on Feb 24, 2017. This will dictate some index fund buying. The Motley Fool announcement went on to say:<br />
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Incyte will be a fine addition to the S&P 500. It has a fast-growing drug franchise in Jakafi, a decent pipeline, and after a string of high-profile pipeline failures from competitors, faces close to zero competition for the drug's market opportunity. The company has staying power -- and so does today's move.</blockquote>
And the "going commercial" plans of SGEN have been proceeding with a Feb 10, 2017 announcement of a major <a href="https://www.thestreet.com/story/13997694/1/seattle-genetics-announces-global-license-agreement-with-immunomedics-for-sacituzumab-govitecan-immu-132-a-promising-late-stage-adc-for-solid-tumors.html">deal</a> with Immunomedics to license one of the cancer "smart bombs" that has received Breakthrough Therapy Designation from the FDA. According to Cynthia Sullivan, CEO of Immumomedics:<br />
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"After a long and robust process, we concluded that licensing our lead asset, sacituzumab govitecan, to Seattle Genetics, the leading ADC company, would give us the best opportunity to advance this product on behalf of advanced stage cancer patients."</blockquote>
Looking at the massive buying figures like those above may prompt one to sell the kids and bet the farm on whatever people like Tang and Baker are buying heavily. But as in the '90s with the revolutionary internet, genetic medicine is here to stay, but most of the stocks will go away. The key insiders will likely be our best guess for the stocks that will be the mega winners.<br />
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<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-71088253546435821622017-02-26T11:32:00.001-08:002017-03-20T06:56:33.862-07:00The Impending Super-Cycle In The All-Glass Optical Internet <div class="p p1">
Technology lagged the Trump rally at first, but now appears to be coming to life. There is one area of tech that may be contributing to that.<br />
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There is a Gigabahn in our information superhighway that has been compared to Germany's famous Autobahn, where there is no speed limit except for urbanized or congested stretches, and they typically fly at around 100 mph. Their trips are badly bottlenecked by the last few miles to their home or office. (click on images for full view)<br />
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The biggest problem facing the age of the web, other than perhaps security, has always been the immense difference in data speed as light waves vs electricity waves. They built the main trunks of our network with plenty of fiber optic overcapacity, and they have been doing the local switching into our computers by converting the lightwaves into electrical waves and pretending they are to be dealt with as in the party line era. With a lot of cleverness, that has worked OK, but with net traffic doubling every year, we have now come to the limits of that optical denial. <br />
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Local area networking with optics is an inevitable revolution of the future. Fortunately, smart minds have been developing light wave switching to do what the very old school electricity switching has always done. If the experts are right, we are about to enter a quantum leap closer to the lighted "cathedrals of glass" in George Gilder's all glass view of the future. There are several public companies involved in "last mile" fiber optics that are the can openers that let the 100 gigabit light speed shining across the globe into our neighborhoods. A lot of this is done with the simple prism effect. There is a super cycle in this can opener function coming as explained in the <em>Investor's Business Daily </em><a href="http://www.investors.com/research/industry-snapshot/fiber-optic-components-snapper/">article</a> "Fiber Optic Super Cycle: Raising The Speed Limit On The Gigabahn's Last Mile." <br />
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Clearfield, Inc. (CLFD) Oclaro Inc. (OCLR) EXFO Inc. (EXFO) Ciena Corp. (CIEN) and Acacia Communications (ACIA) are some of the small pure play investments in this anticipated super cycle. The experts think this super cycle is just beginning.<br />
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I have traded Clearfield over the years twice for 44% and 130% profits, but I would have done many times better had I just held it after my first buy. The growth, despite all the cycles, has been that massive. <br />
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What's all the crazy explosion about? You could say it's a leftover (or maybe "hangover" would be a better term) from the internet bust of over 10 years ago. If you will recall, everything went nuts over the future growth of traffic on the 'net. The telcos frantically laid a fiber-optic backbone to replace the hopelessly slow copper, and mindful of the high cost of continual upgrades, laid in a pretty vast oversupply of capacity. This is commonly referred to as "dark fiber" until end-user demand eventually lights it up.</div>
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There is still dark fiber and excess capacity left in the backbones. But the internet traffic growth has been catching up to the last mile distribution systems. This part of the network was sped up with many different half measures using on-demand switching strategies that worked well on the old copper or copper/fiber combos. The basic problem with all the combos is that information on light travels at the speed of light, which is umpteen thousand times the speed of electricity in copper, or silver or any conductor. It has always been cheaper and a little more convenient to speed up the combo switching than tearing up the neighborhood and installing pure optic to the premises.<br />
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Is there really a "super-cycle" coming in optical last mile?<strong> </strong> Metro traffic jams and upgrades do tend to run in erratic cycles. But they say a super-cycle happens about every 10-15 years, and a big new one is emerging being fueled greatly by the "Web 2.0" phenomenon - Netflix, Facebook, and the whole FANG revolution. They have started buying their own net equipment to squeeze product to their customers. This isn't your teenage daughter's web anymore. Now we have presidential campaigns being waged on Twitter, and our new president has a full blown audience before his first old fashioned press conference. The <em>IBD</em> piece above states:<br />
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During "every prior optical cycle, there has been one major driver and a couple of minor drivers," said Needham analyst Alex Henderson, who as argued that the uptrend could be a telecom industry "super cycle." "This cycle looks quite different than that in the sense that there are at least three major drivers and a couple of smaller drivers as well." As a result, the fiber-optics group ranked No. 3 on Thursday among the 197 industries tracked by <em>IBD</em>, up from a No. 95 ranking six months ago</blockquote>
The huge new FANG imposed driver is being complemented by another major driver - a pressing upgrade cycle in China. As they try to emerge as a superpower, their net speed is ranked #82 in the world, and they are seriously attacking that. <br />
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Local systems, foreign and domestic are being strained to keep up with traffic on the internet. <a href="http://en.wikipedia.org/wiki/Dark_fibre" rel="nofollow" target="_blank"><span style="color: #024999;">According to Wikipedia</span></a>, the traffic pouring out of the fiber backbones is <i>doubling every 9 months</i>. According to the above IBD article:<br />
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The problem is, we've now got these fibers that have 90 channels of 100-gig traffic on them, and they're dumping into a metro core that's 10, 15, 20 years old that can accommodate 10 to 40 gigs of traffic, Henderson said. "That's like trying to drink out of a fire hydrant with a sippy straw.</blockquote>
FTTH stands for Fiber To The Home, which is about the same as FTTP (Fiber To The Premises) and other FTTs that are sometimes collectively called FTTx - or simply last mile fiber. There is now a sharpening need for all-fiber last mile installations.</div>
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The disruptive switch-over from copper hybrids to an all fiber last-mile in urban areas means an expensive mess. So ever increasing speeds have dictated a next generation of DSL on the very old copper that's already there. This new standard known as G.fast is being deployed. It is a nice speed improvement, and often compared to broadband fiber based on lab results, but will suffer the usual shortcomings of anything imposed on copper. The fade with distance is very bad relative to fiber. Also, there is a vast difference in the normal existing copper and what they are using in the lab for these tests. I refer you to Jim Wegat for this. He was an optics engineer for Terabeam, and when I asked him about this supposed equality of G.fast to fiber, he said it:<br />
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:... is confusing the wiring in homes and neighborhoods with the high quality wire used in the study by Alcatel-Lucent. It is a bit like saying that a specially designed car broke the land speed record and since most Americans have cars they should be able to break the land speed record with their cars too.</blockquote>
Still, it's just been too much mess to upgrade all the copper we've built into our advanced countries. Thus, if you look at a global fiber penetration chart, it's the emerging markets where they are enjoying higher FTTP rates. The United Arab Emirates already has all fiber to 75% of premises with South Korea at 68% and Hong Kong at 57%. At the other end of the scale, there is France with 3%, and both the US and China with a mere 9%. In the copper infested nations, the switchover is a complicated mess. What we need is simplification! </div>
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This is Clearfield's heart and soul. In a <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYy4gZgd6vrc" rel="nofollow" target="_blank"><span style="color: #024999;">story</span></a>, on this company, Bloomberg starts off with the statement "Clearfield Simplifies Fiber Distribution." Putting all the moving parts together in a last mile light-wave distribution system is an incredibly complicated, disruptive, and costly thing. In the Bloomberg article, they give us the general description of Clearfield's offerings. I am no tech geek, but the thing that stands out to me is the phrase "delivering the industry's only fiber management platform that is built upon a single architecture. Scaling from 12 to 1728 ports". This ease of assembly and a gradual scaling of a customer's build out (so as not to bankrupt the premises) all on one platform (no big interfaces and what have you) is exactly what you see stressed at Clearfield's website. If you go there, the first thing plastered on your screen in big letters is "Scalable Fiber Management". They say:</div>
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Based on the patented Clearview™ Cassette, our unique single-architected, modular fiber management platform is designed to lower the cost of broadband deployment and maintenance while enabling our customers to scale their operations as their subscriber revenues increase...No matter which product line you are using….or whether you're networking in the Inside Plant, Outside Plant or In-Building, everything we do is based on the architecture of the Clearview Cassette. While it's designed to fulfill all the "musts" of fiber management, the cool thing is that your technicians learn it once and then the cassette becomes like using legos….simply rearranging the pieces, depending on your fiber network solution!</blockquote>
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Clearfield's selling point is that they are the least painful way to get the limitless bandwidth and "future proof" nature of light waves sent to your screen. Clearfield has the kind of insider ownership I like. With CLFD, you actually have more insider ownership (18%) than mutual fund ownership (11%) and almost as much as institutional ownership (23%). It is somewhat undiscovered, except by the insiders. Despite all the cycling fiber has done, this company has produced steady, strong growth over the years:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNhgwyEJS7bwTAtmMmH2C-aG8AS2ZsKPZ9HCKz9JEQOpEmcp1rjtJA0dx7hJqUZQPiAZtoiMT4V3kh9epdF1p7EqWwaGw5tXNKbHKNNLSdkbpQzbg9OAbRHF6POxKFNh0sdw0JrzSas8E/s1600/BSF.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNhgwyEJS7bwTAtmMmH2C-aG8AS2ZsKPZ9HCKz9JEQOpEmcp1rjtJA0dx7hJqUZQPiAZtoiMT4V3kh9epdF1p7EqWwaGw5tXNKbHKNNLSdkbpQzbg9OAbRHF6POxKFNh0sdw0JrzSas8E/s400/BSF.png" width="343" /></a></div>
If these are the results just <em>before </em>a super cycle, there's a chance they may get even better! This, of course applies to, EXFO, CIEN, CSCO, LPTH, and the whole local optical group.<br />
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<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-78488687690853900302016-12-29T14:03:00.000-08:002016-12-29T14:04:40.104-08:00The Mega Fractal Turns In The Markets I Wrote About In June Have Made Themselves Known<span style="color: red;">Back in June I posted "Fractal Condition of Several Key Markets At Mega Turn Points" where I submitted that there was about to be a big turn into either bull or bear mode (I was thinking bear at the time) and since then, these markets have indeed made a decisive turn. I have reposted the original article in black, and I have added in red what each of these has done since June.</span><br />
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Recently I wrote an <a href="http://www.talkmarkets.com/content/commodities/gold-has-a-full-fractal-tank-of-gas?post=97669">article</a> on gold's fractal dimension showing that it had built to a high level not seen for at least 10 years. Well you may be scratching your head asking "fractal what?" I briefly explained that it is a "high math" way of quantifying any moving object's reversion-to-mean force after it has been in a trendless state for awhile.<br />
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For something that can be charted, like a market, there are two dimensions. The fractal dimension at any point is a mathematical summation of something's behavior as either something that can be described with one dimension (a strong, straight-line trend) or by two dimensions (a meandering, chaotic range). Thus the dimension is calculated as being between 1.0 and 2.0 (between one and two dimensions). We typically just take the decimal portion and refer to it like basis points. So a fractal dimension of 1.35 is just called "35". This "line vs chaos" thing in theory happens at all different time scales, minutes, years, what have you, and you have to divide all this rightly for it to mean anything in the scale that's significant to you. The guiding mantra of all fractals is always "same thing, different scale". <br />
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This also applies to the geometrical rescaling and repeating that markets tend to do. Back in early February, I wrote an <a href="http://www.talkmarkets.com/content/us-markets/golds-bullbear-status?post=85898">article</a>, "Gold's Bull/Bear Status" on gold's apparent "new" bull market, which is likely just a repetition of a rescaled, typical, and oft repeated bull market fractal that is really all one bull market<br />
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Anyway, enough math. After looking at gold, and seeing that it currently has a very unusual fractal condition, I looked at several other key markets and found that there is a similar fractal abnormality in them as well. First, let's look again at gold: (click on image to view)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjFP9eBD5gMtdGzaESOUoyB6PIk_UrdXTzWeb0xdJ3_BnOpWiURB88SXBsECy4QcSt5n5mZ7FCbQ92bcFvQoreuIGoDGfBqoty-fckjKSKT7-IT_wqoUkTWhSJoeqEHf5Hmee-y_0-cNI/s1600/gold+01+maps.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjFP9eBD5gMtdGzaESOUoyB6PIk_UrdXTzWeb0xdJ3_BnOpWiURB88SXBsECy4QcSt5n5mZ7FCbQ92bcFvQoreuIGoDGfBqoty-fckjKSKT7-IT_wqoUkTWhSJoeqEHf5Hmee-y_0-cNI/s1600/gold+01+maps.png" /></a></div>
As the graph shows, gold is currently at 55, highest in 10 plus years, presaging a very strong trend coming, either up or down.<br />
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<span style="color: red;">Since June, gold has moved down from the top of the range shown, but the fractal dimension is still at 55. So gold is still moving in a range, undecided how to dissipate the 55.</span><br />
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Gold is linked to many other markets, so let's take a look at the US dollar with this measure:<br />
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"Historically unstable" would be a good description of the dollar's fractal behavior since the 2014 power move up and subsequent chaotic range. The peg-to-peg gyration from 30 to 60 is very unusual for a major index, especially a supposedly stable currency, even on the weekly scale as this fractal dimensioning is calculated.<br />
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<span style="color: red;">Since June, the dollar quickly reversed this formation break back to the upside, reflated the fractal dimension back to 60, and the dollar has been on a tear since, dissipating its fractal dimension down to 45. </span><br />
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Of course gold is also supposed to be an inverse play to the stock market, although I beg to differ with that take as there have been extended periods with both rising gold and stocks, with 2002 to 2007 being a prime example. But historically, and especially lately, gold is inversely related. So let's look at stocks via the Russell 2000, because it is a broad stock market and it is a leading group. Let's calculate some fractal dimensions:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCxrMMAAkL39OKxeVQ4lC-evfY2VNGcaPWp363SlFqTQ5Mpq-oHXm9AZBniW6_ih4tdHEWsyniK3-eIsH1sCyxjB5U97fPb7sPfIOE4j1QK52Nfgs2ZSx8TbIw2A5bVSj92SUZgFkBOV4/s1600/Russell+fractal.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCxrMMAAkL39OKxeVQ4lC-evfY2VNGcaPWp363SlFqTQ5Mpq-oHXm9AZBniW6_ih4tdHEWsyniK3-eIsH1sCyxjB5U97fPb7sPfIOE4j1QK52Nfgs2ZSx8TbIw2A5bVSj92SUZgFkBOV4/s1600/Russell+fractal.png" /></a></div>
Amazingly, we find that the stock market is also jam packed with the highest fractal energy level in over 10 years. But just from this, we don't really know which way it wants to go, up or down, from looking at these graphs as they just show its fractal condition. <br />
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<span style="color: red;">Since June, the Russell has blitzed to the upside, deflating its dimension down to 52. This is still very high for a major index and suggests a lot more upside to come.</span><br />
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Is there something that we could check that could be more suggestive of the direction ? <br />
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Consider copper. "Every bull market has a copper top" is ancient wisdom, noting that copper puts in a top somewhere in the late stages of a bull. And it is referred to as Dr. Copper because it has a PhD in economics. It did indeed peak clear back in 2011 before the transports, European banks or any other leader. Copper has put in attempts at bottoming ranges amidst a pronounced decline, and recently it has attracted attention to the $2.00 level as a major line in the sand. <br />
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There is the technical read where $2.00 is a Fibonacci level. But then there is the basic fact that the world's biggest trafficker in dangerous derivatives, Deutsche Bank, is highly levered to Glencore, and Glencore is very highly levered to copper staying above $2.00 a pound. An <a href="http://www.businessinsider.com/barclays-glencore-trouble-copper-below-2-dollars-2015-10?r=UK&IR=T">article</a>, from<em><strong> Business Insider</strong></em> recently explained "Barclays: Glencore Is In Big Trouble If Copper Gets $0.30 Cheaper". Copper was $2.34 at the time. The article states at the top:<br />
<blockquote class="tr_bq">
Glencore is a strange hybrid company, both a commodities trader and a mining company, and it has a complicated balance sheet loaded up with different kinds of debt. There are a lot of different ways to analyze the company but perhaps the best way to think of it is like a bank that's hitting a crisis, like Lehman Brothers ... if the price of copper falls below $2/lb, you begin to get some seriously sweaty palms in Glencore's finance department </blockquote>
If this level gives way, it will be a serious debt problem with the banking system. And because $2.00 is also a psychological level, breached only in the March, 2009 and January, 2016 market debacles, it would also involve a confidence shock to all the other markets. In fractal terms, this is how copper looks now:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiD5i2H5m8VfqSvW39b2H5qmCQTJHjdqt5Z0_o6-S3I1mJaPpRdhDIN2ToPjfTOoxQg6jEf_qK82yg69PeyLWUtCoZd1oLT8OZ6WOPlAph_tz615CdcDCEiTNCL9Xr1WnlicvAis1BVECs/s1600/copper+fractal.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiD5i2H5m8VfqSvW39b2H5qmCQTJHjdqt5Z0_o6-S3I1mJaPpRdhDIN2ToPjfTOoxQg6jEf_qK82yg69PeyLWUtCoZd1oLT8OZ6WOPlAph_tz615CdcDCEiTNCL9Xr1WnlicvAis1BVECs/s1600/copper+fractal.jpg" /></a></div>
Each of the ranges in the decline where the fractal dimension went to over 50 resulted in a sharp collapse downward. The $2.00 per pound line in the sand is right at the red arrow I've drawn illustrating the current range. And currently we have copper at a fractal dimension of 55, the highest of the entire decline, strongly suggesting another sharp drop, this time through the $2.00 barrier. Of course, the direction could be up from here, but there is a very strong primary trend at work with copper, so the more likely outcome of the fractal situation is a continuation of this primary trend. It's showing no signs of reversal.<br />
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<span style="color: red;">Since June, copper's dimension continued to build and slammed hard on 60 (the upper peg) and has since gone into a power climb with current dimension at 45 - still a lot of room to power climb.</span><br />
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Oil is in a similar but much less profound state of weakness. It went to an extreme fractal dimension of 60 (monthly) in mid 2014 with oil seemingly stable at around $105. The massive move to $45 in just 6 months that followed sent the fractal dimension to below 40 in a flash. On the weekly scale, the fractal dimension went to 52 in mid 2015 with oil steady at $60, went back down to 30 as oil plummeted to $28, and is swiftly going back up as oil struggles in the $40s. It is a similar plateau and plummet progression as copper, but not nearly as fractally strong, and with the primary down trend in question as oil is trading well above its 200 day moving average.<br />
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But there is yet another market index with a once-in-10 year fractal event going on where the direction is probably more clear. Let's take a look at the VIX:<br />
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The fractal dimension reacted strongly to the 2008 event with a big build to 53, then a big dissipation clear down to 34. It didn't seem to react as strongly to the 2011 Greece scare, as if it knew it was just a passing cry of "wolf". But it has again gone to an extreme level, being violently pegged at 60 for some time now. So there would seem to be an extremely large move coming. But if it were <em>down</em>, it would be to an absurd VIX level of around 10 or less. <br />
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Not that this hasn't happened before. We were cruising into 2007 up until March with the VIX at 10-12 before hardly anyone was worried about housing, or anything. But in our day, this would imply that stock markets will sudden go to a PE of 30, or an unprecedented burst of earnings will suddenly materialize from a weak economy seemingly beyond the resuscitation of monetary policy, the rising debt defaults will suddenly stop from the mountain of shaky loans, interest rates will "normalize", the lion shall lie down with the lamb, and pigs will fly. <br />
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<span style="color: red;">Since June, the VIX has stayed pegged about as low as it can go and its dimension is still pegged at 60.</span><br />
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It may not be just your imagination that the global economy, markets, and interest rates are going into some kind of twilight zone. The cold science of fractal analysis backs you up on that.<br />
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The collective fractal wisdom is saying buckle your seat belts, and the VIX is saying a big move will either be another big decline in stocks or a sudden trip to nirvana. I guess we could be going to nirvana, but until the evidence is convincing, it may be wise to make some preparation the other way.<br />
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<span style="color: red;">Since June, we have gone to nirvana. How long will that last? I don't know, but there is a lot of fractal energy that says enjoy the ride!</span><br />
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If you would like more information on the fractal dimension in markets, you can read the works of Benoit Mandelbrot, who discovered and wrote about this phenomena in all areas of science. He coined the label "fractal" and founded the Chaos Theory approach to analyzing markets. His book <em><strong>The (Mis)Behavior of Markets</strong></em> has been called "the deepest and most realistic finance book ever published". There are a few product offerings that give you an FDI (fractal dimension index or indicator) along with the RSI and other technical indicators. One is from <a href="http://www.quantshare.com/item-826-fractal-dimension-indicator">QUANTSHARE Trading</a><br />
<a href="http://www.quantshare.com/item-826-fractal-dimension-indicator">Software</a>. If you are a programmer, there is <a href="http://traders.com/Documentation/FEEDbk_docs/2003/05/TradersTips/TradersTips.html#amibroker2">code written</a> for this calculation by AmiBroker and others. You can also use someone's code at MetaStock with their Indicator Builder feature.<br />
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<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-76496094377553662772016-12-16T17:57:00.000-08:002016-12-30T15:01:12.646-08:00From The Makers Of Wal-Mart And Bank Of The Ozarks Comes Bear State Bank What's up with these regional US banks? So many of them are growth stories nowadays with crazy stock climbs in a weak economy. And that was <em>before</em> the election. Since then, the small banks have been amazing - the best performing group .<br />
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Banks are certainly Trump stocks, but there was something cooking with them even before this year. As Thomas Michaud, CEO of the investment banking firm KBW said on CNBC's 12/21/15 interview, "there is a rise of regional champions" going on with merger activity among the well run regional banks looking to grow. Some of these growth stories have been stunning with stocks tripling or more despite junk debt and lack of economic growth.<br />
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There is your basic economic cycle. As rates rise, banks will benefit from a return to the classic business model of making profit from the yield curve between deposits and loans. But a big difference in this rate cycle could be our escape from the aberrant zero interest era. As explained in this <a href="https://beta.finance.yahoo.com/news/federal-reserve-will-pay-banks--12-billion-in-2016-165253054.html" rel="nofollow"><span style="color: #024999;">article</span></a>, the Fed is now paying interest to banks over the prevailing rate to keep the massive QE flood on banks' balance sheets and out of lending into the economy to prevent inflation from going out of control. The Fed is "bribing" banks to keep a lid on inflation.<br />
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This will be $24 billion yearly per 1/4 point rate increase. This was described as a problem back in 2013 as the commercial banks' reserves held at the Fed ballooned to over $2 trillion as noted in the <em>Wikipedia</em> <a href="https://en.wikipedia.org/wiki/Excess_reserves#In_the_United_States_.282008-.29" rel="nofollow"><span style="color: #024999;">account</span></a> on this feature of the Fed:</div>
<blockquote class="quote p p2" itemprop="citation">
As the economy began to show signs of recovery in 2013, the Fed began to worry about the public relations problem that paying dozens of billions of dollars in interest on excess reserves (IOER) would cause when interest rates rise. St. Louis Fed president James B. Bullard said, "paying them something of the order of $50 billion [is] more than the entire profits of the largest banks."</blockquote>
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This fallout from the Fed's tom foolery with creating an artificial market in everything looks like a windfall "subsidy" for the banks. There is another megatrend that makes this development more significant - the drastic shrinkage in the number of banks as featured in a <em>Wall Street Journal</em> <a href="http://www.wsj.com/articles/SB10001424052702304579404579232343313671258" rel="nofollow"><span style="color: #024999;">piece</span></a>. Since 1985, the number of U.S. banks has shrunk from 18000 to around 6500 while squeezing deposit assets up from $3 trillion to about $10 trillion.</div>
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The weak banks being gobbled up by the strong is making the players left fewer and stronger. On top of that, not all commercial banks get this interest from the Fed, just the ones who are Fed member banks. You have to meet certain qualifications for that, and only about one out of three are member banks. This federally guaranteed largess, being funneled into select banks, is perhaps one reason why the fast growing "regional champions" are doing so great the last couple years. The Trump effect is looking to amplify all this. So we're seeing the post election jumps in these stocks.</div>
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I have been very negative on banks in some of my other writings. Have I changed my mind? Well, banks are like Italian families. Some are involved in the mafia and are neck deep in nefarious global doings. And some families just like toughening up their kids as they raise them, like Frank Barone of <em>Everybody Loves Raymond</em>. They're all tough Italian families - but there is a huge difference in the mortality rate. It's the big global banks I am avoiding. There is a vast difference in the growing U.S. regionals run by tough, smart people, and the big banks drowning in derivatives and bad debt. <br />
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But do we want to buy banks into what appears to be a down debt cycle? The gloomy side of banking is centered around the commodity/junk debt problem that I wrote about in my 2015 <a href="http://seekingalpha.com/article/3600546-the-debt-cycle-and-rhymes-of-lehman-brothers"><span style="color: #024999;">article</span></a> "The Debt Cycle And Rhymes of Lehman Brothers". In that article last year, I said of this gloom,"Personally I suspect this lopsided view of next year's stock market will be wrong" and I pointed out that "history has seen stock and debt markets act independently before, and next year [2016] may well be a case of that (hopefully) as was the year 1980." And I made this obsevation: <br />
<blockquote class="tr_bq">
There we saw a nice climb for stocks even though we were entering the weak economy of '80-'82. The debt cycle was down as with any recession, and in fact snowballed into the Savings and Loan Crisis of the '80s that eventually saw one third of these banks go under! ... 1980 was an election year as is next year. To the extent you believe market forces are politically controlled, you have to put those forces all to the upside for 2016.</blockquote>
After the earthquake in Washington November 9, you must suspect, as in the early '80s, that we could see a down debt cycle with an up stock market, including the best run regional banks not being destroyed by debt. </div>
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Enter Bear State.<strong> </strong>It's a trick to find them before they have done big climbs and attracted attention. I offer Bear State Financial as such a find. It is a Fed member bank. Although it is obscure to say the least, it has started on a growth track being orchestrated by some most able growth people on the planet. It was formulated as a dramatic reorganization of a struggling bank, First Federal of Harrison, in 2011. A corporate raider restructure was done by one Rick Massey. As the Bear State Financial <a href="http://www.bearstatefinancial.com/CorporateProfile.aspx?iid=102666" rel="nofollow"><span style="color: #024999;">website</span></a> describes it:</div>
<blockquote class="quote p p4" itemprop="citation">
On May 3, 2011, Bear State Financial Holdings made a $46.3 million investment in the Company to recapitalize First Federal Bank. Company Chairman Richard N. Massey led the Bear State group, which brought a new management team to the Bank. In June 2014, First Federal Bancshares of Arkansas, Inc. changed its name to Bear State Financial, Inc. (NASDAQ:<a class="ticker-link" data_retrieved="0" followers_count="146" href="http://seekingalpha.com/symbol/BSF" symbol="BSF"><span style="color: #024999;">BSF</span></a>). Bear State Financial is the parent company for Bear State Bank.</blockquote>
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In the Form SC13D (Statement of beneficial ownership) <a href="http://www.barchart.com/plmodules/?module=secFilings&filingid=7925033&type=CONVPDF&popup=1&override=1&symbol=FFBH" rel="nofollow"><span style="color: #024999;">filed</span></a> May 11, 2011 in conjunction with this $46 million "investment" in First Federal, it's clear it was a one man takeover by Massey. The name officially changed from First Federal with ticker FFBH to Bear State Financial with ticker BSF in June, 2014. The name Bear State is for all the black bears in Arkansas.</div>
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So how has this heavy handed takeover worked out so far?<br />
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Not too bad. Overall, there seems to be a turn into fast growth taking hold. <br />
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These results, as nice as they are, may not be the star attraction here. It's the Board. The Board of Directors for Bear State is an intriguing mix of success and power with Little Rock's movers and shakers. The Stephens Group, a diversified investment banker, officed in Little Rock, is the largest brokerage outside of Wall Street, New York. It has had a strange, bipartisan habit of rubbing shoulders with presidential power ever since Jackson Stephens attended the US Naval Academy and became friends with Jimmy Carter. He later became financially involved with his administration. Then the "king maker" was a big backer of Reagan in the early '80s and has been given varying degrees of credit for installing Arkansas Governor Bill Clinton in the White House.</div>
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Jack Stephens epitomizes winning friends and influencing people. The football field at the US Naval Academy is named Jack Stephens Field to honor him. He underwrote the initial public offering for Wal-Mart Stores. Wal-Mart is now the largest company in the world by revenue. The Stephens Group also had a hand in building Tyson Foods and Alltel into giants. Alltel started in 1943 putting up telephone poles in Arkansas. By the mid 2000s, Alltel operated the largest network in the United States by area. Then Verizon gobbled them up.</div>
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Stephens and friends know growth. As the <em>Wikipedia</em> write up on him states it:</div>
<blockquote class="quote p p6" itemprop="citation">
Jack began to grow Stephens by providing private equity to many young growing companies, much in the way of the British Merchant Bank investing model, predating by decades the private equity endeavors of Wall Street firms. Jack's acumen as an investor was combined in remarkable fashion with his ability to form enduring personal relationships with his partners. Several generations of companies and business leaders came to know Jack as not only a smart investment banker, but as a loyal and reliable friend as well. Jack's influence grew well beyond Arkansas to the boardrooms of corporate America and to the halls of Washington D.C.</blockquote>
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What does this Arkansas power connection have to do with Bear State? Wal-Mart and Alltel are old news with this bunch, What they seem to be into now are regional banks. Many of the growth stories in the regional banks are launching from here including Home Bancshares, Inc. (NASDAQ:<a class="ticker-link" data_retrieved="0" followers_count="989" href="http://seekingalpha.com/symbol/HOMB" symbol="HOMB"><span style="color: #024999;">HOMB</span></a>) of Conway and Bank of the Ozarks (NASDAQ:<a class="ticker-link" data_retrieved="0" followers_count="3637" href="http://seekingalpha.com/symbol/OZRK" symbol="OZRK"><span style="color: #024999;">OZRK</span></a>) of Little Rock. If you peek at what these two stocks have done the last 5 years, you see HOMB growing four fold and OZRK five fold.<br />
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<em>Bank Director, </em>the premier bankers' industry magazine, does a yearly <a href="http://www.bankozarks.com/assets/docs/bank_of_the_ozarks_named_top_performing_bank_2015_%282%29.pdf" rel="nofollow"><span style="color: #024999;">ranking</span></a> of banks by small, mid, and large size categories, and OZRK has held the number one ranking in the nation for the last four years running in its small, then mid size categories including its <a href="http://www.bankdirector.com/index.php/magazine/archives/3rd-quarter-2016/2016-bank-performance-scorecard/">current</a> number one rank in mid size. They rank the 300 best run banks out of about 6500 banks in the country. That's the top 1/2 of one % - it's an honor to even be in their ranking list.</div>
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In the SEC Prospectus <a href="http://www.nasdaq.com/markets/ipos/filing.ashx?filingid=459601" rel="nofollow"><span style="color: #024999;">filing</span></a> for the 1997 IPO for Bank of the Ozarks, Stephens, Inc. is the chief underwriter. In this filing, it is amazing to read that the two main banks that came together to form Bank of the Ozarks were headquartered in Jasper, population 498, just a few miles south of Harrison, and Ozark, population 3525, just a few more miles south of Harrison. Wal-Mart's ground zero was actually this same Harrison.</div>
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After setting up shop in Rogers, AR, where I live, Wal-Mart's first store in 1962 labored as a local loner for almost 3 years. We didn't even think of it as a chain. Sam Walton himself described it in his book as an "experiment", trying his lower cost mass merchandising in a modest, unappealing building just to see if the concept itself would work. There's an antique mall in there today. I shop there. <br />
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They put gigantic "W A L - M A R T" letters on top - the first appearance of this name on a building on the planet. In 1965, when this store proved very popular and profitable, the Waltons began the real building and expansion blitz we know of today, opening over 20 stores between 1965 and 1967 - starting with store #2 in Harrison, population 13,000. The Rogers "store" was still in the flea market as the building spree blasted into the '70s. Stephens took the company public in 1970.</div>
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What is it with Harrison anyway? I go over there a lot, and it's beautiful, but it's a real cultural throwback. There's a joke that says if the world were to end, you'd want to be there, because it would end 30 years later. Why does the business elite of Little Rock like launching some of Wall Street's biggest growth behemoths from these backward hills? Is Harrison an alter ego of New York - the phantom Wall Street of the Ozarks?</div>
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Will The Phantom Strike Again with Bear State? Little Bear State is also from Harrison. Bear State could now almost be considered a branch of the Stephen's Group. For years before 2011, First Federal was thought of as a "Stephens controlled bank". And this <a href="http://www.stephensgroup.com/news/news-detail/22/103/P4" rel="nofollow"><span style="color: #024999;">piece</span></a> from the Bear State website back in 2011 suggests a Stephens orchestrated rescue of First Federal in describing Bear's new board. Both Massey and Scott Ford had been key chiefs at Alltel, and Massey was Managing Director at Stephens for six years.<br />
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With Home Bancshares Inc. and Bank of the Ozarks, the role of Stephens was the public launch of those companies. With Bear State in 2011, there was no public launch, First Federal was already public. But Stephens supplied the board leadership that has essentially launched a new company. As promising as Bear State is, you see almost nothing being written about them. Bear State is already on a buying spree as detailed in <a href="http://talkbusiness.net/2015/06/bear-state-acquires-missouri-bank-in-70-million-deal/" rel="nofollow"><span style="color: #024999;">this story</span></a> published at <em>Talk Business and Politics</em> when they acquired Metropolitan National Bank last year. This was a quantum leap for Bear State as the MNB banks headquartered in Springfield, Mo. pushed total assets up by about a third, and breached the Missouri state line. </div>
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Already, a scant four years from reorganizing a failing bank, they are into the elite <em>Banking Director </em>list at #127 in the small category - a remarkable feat in and of itself. So could this tiny backwoods regional bank be another embryonic Stephens growth beast springing from the Arkansas Outback? Watching the green Bear State signs popping up in front of banks around here is starting to remind me of the very early days of the Wal-Marts, taking first steps in and around Harrison and here in Rogers, then creeping over the state lines of Missouri and Oklahoma with zero national attention.</div>
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Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-3941828729201588982016-11-01T08:58:00.001-07:002016-11-01T08:58:32.486-07:00Swoon Factor At High Danger Level<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiubO29CRfKwHxzRSaMsxnheiVTuVJ0AXmuopQSO9iFZ7eVbNx6luyfhyphenhyphenOfJlKiSLuXNg9qBHVQfcJQO2xk2Bfpxn9499ivl8-awSjTxX1JzBaC0s5u_AyZU7Li2ciKPJDNQBTplQqCM0E/s1600/crash1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="252" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiubO29CRfKwHxzRSaMsxnheiVTuVJ0AXmuopQSO9iFZ7eVbNx6luyfhyphenhyphenOfJlKiSLuXNg9qBHVQfcJQO2xk2Bfpxn9499ivl8-awSjTxX1JzBaC0s5u_AyZU7Li2ciKPJDNQBTplQqCM0E/s400/crash1.jpg" width="400" /></a></div>
<br />
In trying to anticipate any dangerous stock market collapses, I keep an eye on leading economic indicators, as I've written about before. But the truth is, no matter how much you study these things, the market has studied it more and will beat you to the punch about every time. I am a great believer in the efficient market theory, so I pay more attention to market behavior than anything else. <br />
<br />
One such market behavior is breadth, what all the small stocks are doing that are not seen in the major averages we all look at. Smaller stocks seem to be more efficient in seeing things coming for whatever reasons. Maybe it's because there are more of them and they are less moved by en masse trading, ETFs and so on. So they discount information better as a group. Low breadth, when the smaller stocks are not doing as well as larger index stocks, happens often, but not always, in conjunction with major market declines:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmSiA4uroXV86M7ZqiqBWBpEfRScr1Ou2AcCyAyXfTkcB9Mpd9aAEtg3D56VmjfDr-CoYkdYWCHwxM7Lp7RgN8vpdBDaFEGB2brnkA5EqjV_-UpgSXJ7vSurX4NG8CMywwkLMHjalvRMw/s1600/breadth.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmSiA4uroXV86M7ZqiqBWBpEfRScr1Ou2AcCyAyXfTkcB9Mpd9aAEtg3D56VmjfDr-CoYkdYWCHwxM7Lp7RgN8vpdBDaFEGB2brnkA5EqjV_-UpgSXJ7vSurX4NG8CMywwkLMHjalvRMw/s640/breadth.png" width="640" /></a></div>
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<br />
This Business Insider chart from the article "The Stock Market's Breadth Is Unusually Shallow" shows the red zone breadth levels occurring with the 2000 market top, the choppy, weak 2004 market, the 2007/2008 market top, the 2011 top, and it's showing up now. We are far in excess of the one standard deviation away from the 30 year average. But this condition also showed up several other times with nothing especially bad happening.<br />
<br />
All the breadth calculations put moving averages, etc. into a formula and crank out a number. But another way to approach this is with the "eyeball" method. You can survey a set period of a stock's behavior, say 5 months, and classify it as normal or an abnormal swoon. This is somewhat subjective. But I did some surveying of the smaller stocks and used some rules for identifying an unusual swoon:<br />
<br />
<ul>
<li>A steady change of slope of the 140 day ema from up to down</li>
<li>A persistent negative slope the whole period with widening divergence with the 200 ema</li>
<li>A change in trading behavior to high volume, sharp down moves below the 140 ema</li>
<li>A sudden large gap move down with no recovery breaking a normal pattern</li>
<li>A trading volume average of at least 2000 shares a day - a market participant</li>
</ul>
All this simply shows a profound weakening in a stock's condition. At any given time in the market, you will have a large population of stocks doing swoons, of course. But this population grows to a certain level just in front of rapid market declines, while the major indexes look fine.<br />
<br />
I used this "swoon" consideration to look at small stocks in a steady, good market, mid 2005, and got a normal/swoon ratio of 5.6 showing the weakness level of my rules is a pretty small minority of stocks in a good market. Looking at a bad, but not catastrophic market, mid 2004, I get a normal/swoon ratio of 2.0 suggesting a non-precrash average of something like 4 normal to every swoon case. <br />
<br />
To look at how this ratio foreshadows historic crashes, I look at the months just before the crash becomes evident, before there is anything looking scary. For the 2002 sharp crash, I viewed January to mid May when the market indexes looked fine. But the population of these breakdown cases amongst the small stocks was very elevated. You could tell something ugly was brewing by noting how frequently they were showing up. I got a 1.2 ratio there. This was <em>after</em> the recession was over. It was primarily a massive margin debt unwind, not a reaction to a recession.<br />
<br />
Looking at 2008, I looked at mid year, while the major indexes looked very normal and get a 1.1 ratio. Looking at our present market, the Dow and Russell look nice. The economic indicators keep dancing between sluggish and pre-recession and have been for years. Since we are in an unprecedented period of weak but not recessionary numbers, I looked at 2014 to see if this was inducing any more swoon phenomena than normal. No, I get a 4.1 ratio there, perfectly normal. But looking at the previous 5 months this year, I am getting a 1.2 ratio - same as it was in front of the 2002 decline and about the same as it was in front of the 2008 decline. We now have the worst of both of these past two worlds - a market margin debt at record high levels and a brewing recession.<br />
<br />
Does this mean the market must decline? No, these things can clear up and no one gets hurt. But until it does clear up. I, for one, am being very careful. It could be that we are morphing into a new no growth age for the global economy and this will dictate a vastly diminished population of the small stocks. There is a big difference in how levered small stocks are to economic growth vs the big stocks. If central banks are attempting to do away with economic cycles, and are accidentally shooting economic growth in the head in the process, then the huge population of small stocks will be whittled down over the years from here on. Maybe this is the beginning of that. The state of technical decay in nearly half the small stock world is an unstable condition and can't go on forever.<br />
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<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-86492511666471082952016-10-09T06:41:00.000-07:002016-10-09T06:41:06.611-07:00What Hubbert Practitioners, Art Berman, and The EIA Agree On With Shale Oil<h3>
Oil Is Oil</h3>
A big problem with energy thinking today is the notion that "oil is oil" and it doesn't matter where it came from. Wrong! A major criticism you see of Hubbert is when they point to all the "oil" we've found (shale oil, tar sand, kindling wood) and throw it in the URR pot (Ultimate Recoverable Resource) and generate a production curve. This is not Hubbert's method at all, and when you see them doing this, you can ignore the whole analysis. It totally misses the vastly different set of recovery physics between conventional crude and shale, or anything else. Each set of physics demands its <em>own Hubbert tabulation</em>. His method can be done, for <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.302.5441&rep=rep1&type=pdf">example</a>, with the coal production of Australia, or any resource that has and will have fairly consistent recovery geophysics.<br />
<br />
The shale oil of the US is ultra critical to oil prices and the world economy. A little considered fact with oil is that world conventional production has been declining since 2005 except for just two players:<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5D_-XIDcWegwvc0a6C72n0yFrPKHcgnLbLhEmw0Mp1BqSSeNSJZDzY663sDG0xMxGhnS-v8LLImlrSTOudnWrR926kfzfLcKXYcT4gkqHKl7MSqdEwqaJ04WbWAZvKNARDxpwvFJZtHA/s1600/world+oil+production+less+US+and+Russia.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="434" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5D_-XIDcWegwvc0a6C72n0yFrPKHcgnLbLhEmw0Mp1BqSSeNSJZDzY663sDG0xMxGhnS-v8LLImlrSTOudnWrR926kfzfLcKXYcT4gkqHKl7MSqdEwqaJ04WbWAZvKNARDxpwvFJZtHA/s640/world+oil+production+less+US+and+Russia.jpg" width="640" /></a><br />
<br />
Ken Deffeyes, using Hubbert knowledge he learned from him personally, wrote his book <em>Beyond Oil: The View From Hubbert's Peak </em>in 2005 where he said the peak is:<br />
<blockquote class="tr_bq">
postulated as 24 November 2005 (`Thanksgiving' Day), after this date world oil will go into decline, slowly at first then more rapidly</blockquote>
This was for world <em>conventional</em> oil. Considering that the two players left out of the graph above are climbing almost entirely with shale (US) and bypassed oil (Russia) what you have shown is the world's conventional oil production. Deffeyes missed the peak by maybe a few days.<br />
<br />
Isn't it ironic that these two big players, whose oil peaked over 30 years ago at the height of the cold war, are now both displaying a production resurgence that is changing perception of peak oil today. I discuss what's up with Russia <a href="http://www.talkmarkets.com/content/us-markets/over-production-of-the-past-and-a-100-oil-norm-for-the-future?post=107373">here</a> , which may have a lot to do with the cold war. But what about the amazing shale revolution of the US? It is very critical to the global picture, so it would behoove us to use the best projection tool there is to see about the future of shale. This method requires a few years of actual production data to make its projection. Now that we've had a few years of shale oil production, has anyone bothered to tabulate a true Hubbert curve for our shale oil ?<br />
<br />
Yes. Tad Patzek has done a Hubbert curve on the two big shale oil plays of the US and <a href="http://patzek-lifeitself.blogspot.com/2016/03/is-us-shale-oil-gas-production-peaking_16.html">published</a> them earlier this year - "Is US Shale Oil Production Peaking?" <br />
<h3>
Who Is Tad Patzek?</h3>
Tad Patzek is Professor of Petroleum and Chemical Engineering at the Earth Sciences Division and Director of the Upstream Petroleum Engineering Center in KAUST, Saudi Arabia. You can read his blog <a href="http://patzek-lifeitself.blogspot.com/">here</a>.<br />
<br />
He and Art Berman, a "good friend", collaborate to make Hubbert curves for both gas and oil in the shale fields. Berman supplies the data and Patzek does the rest. According to Wikipedia, <br />
<blockquote class="tr_bq">
"The focus of his research is mathematical modeling of earth systems with an emphasis on multiphase fluid flow physics and rock mechanics [spending] years as a researcher at Shell Development under M. King Hubbert"</blockquote>
A fellow grasshopper of Hubbert, like Deffeyes, he generates curves per the methods used in his highly cited <a href="http://gaia.pge.utexas.edu/papers/EnergyCoalPaperPublished.pdf">study</a> "A Global Coal Production Forecast With Multi-cycle Hubbert Analysis". If anyone on earth is qualified to make a Hubbert curve for Shale, it would be Patzek. Here is the Bakken:<br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwF1Xk-u3WbpVFYJTxCczZMlCt3HzC5mSWu2iJAYg7BdkCQUi6XmhaKQLlOX1Tq_-dl8aNl_cybMYXkcafWqX6UXIsEsGpyOPL4gQSNuAXI_0-5f35X__2Vl4xGJIP9n5VGeIPdKrt24c/s1600/Bakken+hubbert.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwF1Xk-u3WbpVFYJTxCczZMlCt3HzC5mSWu2iJAYg7BdkCQUi6XmhaKQLlOX1Tq_-dl8aNl_cybMYXkcafWqX6UXIsEsGpyOPL4gQSNuAXI_0-5f35X__2Vl4xGJIP9n5VGeIPdKrt24c/s640/Bakken+hubbert.jpg" width="640" /></a></div>
And here is the Eagle Ford:<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNR8EoJKlV7lV4hVgWGAhZKYCsgyJ3YRUTsUDEZlApMJD5hHZRS-ts3QVrbLKAbzrsMtSM3_kca0k7oxaDTCZ571gCtmaMMiY0z3uLpTgXhdbrXELzi1xC-0o8cVUDJZWiJTib28q8NqY/s1600/Eagleford+Hubbert.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNR8EoJKlV7lV4hVgWGAhZKYCsgyJ3YRUTsUDEZlApMJD5hHZRS-ts3QVrbLKAbzrsMtSM3_kca0k7oxaDTCZ571gCtmaMMiY0z3uLpTgXhdbrXELzi1xC-0o8cVUDJZWiJTib28q8NqY/s640/Eagleford+Hubbert.jpg" width="640" /></a></div>
<br />
This is all very unsettling when you consider that the only thing propping us up from a return to Hubbert's curve for conventional, where we were driven to over $100 a barrel in 2012, is the current US shale oil boom we are enjoying. That's over 4 mb/d, and the two plays pictured above account for over 3 mb/d of that. Are we soon to lose our only prop saving us from peak net energy? This would have severe consequences on the price of oil out 5 years and beyond.. <br />
<br />
Patzek isn't the only one using Hubbert's method on US shale. David Archibald has done some curves that closely agree with the above in "The Imminent Peak In US Oil Production" <a href="http://has%20done%20some%20curves%20that%20closely%20agree%20with%20the%20above./">posted</a> over two years ago at Peak Oil Barrel, where the site's subtitle reads "The Reported Death Of Peak Oil Has Been Greatly Exaggerated".<br />
<br />
The over-production problem I've discussed in other articles for the large conventional fields of Russia and Saudi Arabia may apply also to our shale oil when you consider that the shale drilling boom was fueled by free money and a massive debt frenzy. Instead of price wars or cold wars running the oil fields, we've had the bankers running our fields. The mechanics of shale over-production are different, but whatever they are, there has probably been a lot of it. A Bloomberg <a href="http://www.bloomberg.com/news/articles/2015-07-06/refracking-fever-sweeps-across-shale-industry-after-oil-collapse">article</a> "Refracing Is The New Fracking" points to one possible over-production mechanism, new fracking blasts before a well's first fracking production is over:<br />
<blockquote class="tr_bq">
It’s easy for things to go wrong. If poorly executed, the maneuver could take oil from the producing zones of other wells, or worse yet, ruin a reservoir. Then there’s the concern that some industry analysts have that a refrack only accelerates the flow without increasing the actual total output over the life of the well. EOG is among the drillers that remain reluctant to start using the procedure.</blockquote>
Patzek views refracking as a poor substitute for making a good well to begin with:<br />
<blockquote class="tr_bq">
As to the refracking the jury is out. Very poor wells may see some increase of production. Very long wells cannot be reentered towards the toe. Other wells may see the new fractures linking back to the old ones with no incremental benefit. I think that the technology of controlled refracking will improve, but I doubt if it will change the picture dramatically. The key is to make a good well first time around and improve how this well is hydrofractured. There is a lot of work done everywhere on this subject, including yours truly. </blockquote>
Arthur Berman is a consultant to several oil companies and provides guidance to capital formation and investment conferences. He is an energy contributor at Forbes and is interviewed often on CNN, CNBC, and other major media outlets. Does Berman buy this popular notion that we have many decades worth of shale oil to rely on? Well, he recently wrote an <a href="http://www.peakprosperity.com/podcast/91722/arthur-berman-why-todays-shale-era-retirement-party-oil-production">article</a> titled, "Why Today's Shale Era Is The Retirement Party For Oil Production" wherein he states:<br />
<blockquote class="tr_bq">
... looking at the Eagle Ford shale ... even the EIA shows Eagle Ford oil production peaking in 2016... Where do we get this decades of production? ... Eagle Ford isn’t going to stop in 2016; it will go on for many, many years, but at greatly reduced rates of production every year ... They look at the US tight oil plays and they see a couple of years, maybe five years before things start to fall off.</blockquote>
Rex Weyler, a director of Greenpeace <a href="https://www.theburningplatform.com/tag/eroei/">said</a> of shale:<br />
<blockquote class="tr_bq">
In spite of huge shale and tar reserve discoveries, peak discoveries remain well behind us, in the 1960s. My father, a petroleum geologist his entire life (and still, in Houston, Kazakstan…), knew about shale and tar deposits when I was a teenager in the 1960s. He called them “the dregs.” These deposits are not really news within the oil industry. And they are the dregs because of high cost, low EROI and rapid depletion.</blockquote>
It is only prices around $100 that brings dreg oil out. Fracking was invented in 1947. It is less a technology revolution than a price revolution. Berman doesn't think the popular $60 figure for their profit point is right - more like $85-$95. He looks at free cash flow as a big measure of this. If you look at cash flow from operations on these companies, it's typically good if oil stays above $60. With free cash flow including a lot of future building cap-ex, Berman seems to be stretching present costs to cover typical future ambitions. He claims in the above article that, "these plays cannot survive on anything other than sustained $100, $90, $95 oil prices and that is the bottom line."<br />
<br />
The profit points may be debatable, but the awestruck view of shale as new vistas of added oil supply seems like a pipe dream of either bad analysis or head-in-the-shale ignorance. Berman agrees:<br />
<blockquote class="tr_bq">
... once your conventional production peaks, then you are going to be increasingly driven to more expensive, lower quality kinds of sources and that is exactly what we are seeing ... Sure, we will find something more than what we have. Will we find the equal of what we found so far? Highly unlikely ... I mean, these shale basins are not news ... The big companies have had teams of geologists and geophysicists and engineers studying them for decades ... so when the prices got high enough and the technology arrived ... companies knew exactly where to go. </blockquote>
If you look at the EIA total shale oil projection, you can see this "sweet spot first" effect evident in their production profile:<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwmbWAKL-WodsMlHxPQ5T_efBEFToTE2Ad327u4JmLRVjob2i_Aw5xD6VbcO9lcoo9V8t6vO6GGpCgxcMpGS98da_Du7ruLnnMM0zYtDk9V4lVcSm1ryaiYz5kvB56VKKMXJ8VrP1azMs/s1600/EIA+shale+oil+curve.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="420" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwmbWAKL-WodsMlHxPQ5T_efBEFToTE2Ad327u4JmLRVjob2i_Aw5xD6VbcO9lcoo9V8t6vO6GGpCgxcMpGS98da_Du7ruLnnMM0zYtDk9V4lVcSm1ryaiYz5kvB56VKKMXJ8VrP1azMs/s640/EIA+shale+oil+curve.png" width="640" /></a><br />
<br />
Here we see pretty much the same peak time frame for shale (yellow) as the Hubbert curves for the Eagle Ford and Bakken plays, the two sweetest of the sweet spots, with the super-fast ramp-ups in production. The giant, high quality Permian Basin is also contributing to this profile, but with a slower climb and a slower projected decline. The sharp climb pictured closely reflects what Eagle Ford/Bakken has done while the EIA sees the Permian and the sum of all the lesser plays coming on line hereafter plateauing a top and making for a much slower decline than just the two big play Hubbert curves. But they still see about the same overall top that the two big, explosive plays may produce by Hubbert linearization.<br />
<br />
You have all these independent means of analysis in Tad Patzek, Art Berman, and the EIA in close agreement. Patzek is using Hubbert's math method (with Berman's data) while Berman does meticulous well-by-well reserve data accounting. And they both agree on a shale oil production peak in 3 years or less. The EIA also is projecting this with a 2020 peak. If that's all true, in just 3 years, conventional will be declining <em>along with shale oil</em>. With these declines, the only meaningful prop keeping us above Hubbert's curve for conventional oil will then be buckling, and we will once more be in a losing battle with rising demand, as we were briefly before the shale sweet spots ignited in 2012. You will probably want to be long oil once this condition sets in, barring a really bad global economy.<br />
<h3>
Shale Oil outside the US</h3>
The<a href="https://www.eia.gov/analysis/studies/worldshalegas/"> EIA</a> says the US has 78 of world's 419 billion barrels of unproved technically recoverable reserves of shale oil. There is shale outside the US, but as explained in this <a href="http://belfercenter.ksg.harvard.edu/files/draft-2.pdf">study</a>, "The Shale Oil Boom: A US Phenomenon" it is unlikely that the US shale explosion will be replicated elsewhere. The reason - logistics: <br />
<br />
<ul>
<li> The shale boom has depended on an exponential growth of wells drilled. Unlike conventional, shale oil requires punching holes in rock like crazy like a machine gun. No other country has anything like the drilling rigs of the US, where 60% of all the rigs in the world are. They simply don't have the tools or crews to make it happen. The study concluded that this is unlikely to change in this decade because of the time needed to build and man the right rigs and equipment. </li>
<li> Also a problem is that the thousands of new wells a year will be impossible in the more populated areas like Europe due to environmental and other concerns. </li>
<li> And nowhere but the US do you have the small independent oil companies that are needed to take on the fast moving, high risk business profile of shale. And in most other countries with shale, the property is state owned with issues unlike the private and freely sold property rights of the US. </li>
<li> Also in other countries, they don't have the pipeline infrastructure or water supply needed by the water intensive shale business. </li>
</ul>
The study concluded:<br />
<blockquote class="tr_bq">
For all these reasons. it is difficult to believe that a US style shale revolution may occur in any other part of the world in the foreseeable future.</blockquote>
The other shale plays in the world will be played - eventually. As oil stays high enough, these countries will deal with all the above logistic roadblocks, and this oil will find its way onto the market. If the "dreg" US shale card soon goes into a decline, there are other cards to play in global net energy supply. But how <em>quickly</em> can those cards be played? It will likely be in small, erratic doses. <br />
<br />
This is why it is so critical to build the natural gas bridge away from oil, as I and others have been writing about for 10 years now. Fracked natural gas has much different dynamics and will peak much later than oil, (around 2040 by Hubbert and other means) and is a much superior transportation fuel than refined oil. The Pickens Plan is needed more urgently now than ever.<br />
<br />Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-29831424168719010062016-09-26T11:39:00.000-07:002016-09-26T11:39:02.199-07:00Past Over-Production And A $100 Oil Norm For The Future A Hubbert curve has proven to be about the most accurate way of estimating a production peak time frame for any resource extracted by a consistent method over the life of the resource. But there is one thing that rarely gets considered in Hubbert projections. In 1956, geologists ran the oil fields of the world. A conventional reservoir has an oil/water interface where pressurized water forces the oil up through the wells. Once the water migrates past this interface, as happens with faster rates of production, the drive mechanism for the reservoir is reduced. Oil gets stranded and can only be recovered by secondary methods at much lower net energy levels. Some water encroachment happens no matter what the recovery method over the life of the field, but geologists know just the right production rates to keep the drive at the optimal level through the field's life. Hubbert based his neat, symmetrical logistic curves on this in the peaceful 1950s.<br />
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But then we had geopolitical mayhem take over the oil fields. Saudi Arabia was the big swing producer (the Fed of oil) and, most of all, we had a cold war with oil financed expansion of the Soviet bloc, and an oil price war in the '80s and '90s between these two mega-players. It was a political soap opera, but suffice it to say that Russian centric geopoliticians began running the elephant oil fields of the earth. And they were not good geologists. This aspect of our present day energy markets is very rarely discussed or even considered. But its ramifications could be enormous. It is likely there was much over-production of the major fields with permanent reservoir damage. <br />
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No one can say just how much over-production and damage was done, and the secretive governments involved have never volunteered this information. The Wikipedia account for "Oil Reserves in Saudi Arabia" mentions Matt Simmons and his criticism of field management and noted:<br />
<blockquote class="tr_bq">
"Simmons also argued that the Saudis may have irretrievably damaged their large oil fields by over-pumping salt water into the fields in an effort to maintain the fields' pressure and boost short-term oil extraction"</blockquote>
As I mentioned in this <a href="http://www.forbes.com/sites/kenkam/2016/08/29/what-hubbert-and-pickens-got-right-about-oil-and-whats-next/#14f1ec456f52">article</a>, the decisive weapon deployed against Russia in the cold war was the Saudis' big production ramp and price war starting in the mid 1980s. There are those that claim this was in blatant partnership with Reagan, as this <a href="http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11220027/Cheap-oil-will-win-new-Cold-War-with-Putin-just-ask-Reagan.html">piece</a> in the <em>Telegraph</em> details, with the main witness being none other than Michael Reagan, the president's son.<br />
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As for the massive Russian fields, well some say that, in the Soviet era, they were run as a military funding unit. They had no vibrant economy, so their massive oil fields were their prime treasury supply to build their empire, so they badly over-produced with poor technology. Russia is one of the most complicated oil cases on the planet, and opinions and future projections are all over the map.<br />
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But I want to present one scenario that would greatly alter oil price projections and energy investing out five years plus. I also should point out that over-production was not just a Russian thing, but they may be the biggest case of it. I should also point out how critical the Russian elephant fields are to the global production picture. The simple fact is that global crude has peaked and come off the plateau except for two players:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5D_-XIDcWegwvc0a6C72n0yFrPKHcgnLbLhEmw0Mp1BqSSeNSJZDzY663sDG0xMxGhnS-v8LLImlrSTOudnWrR926kfzfLcKXYcT4gkqHKl7MSqdEwqaJ04WbWAZvKNARDxpwvFJZtHA/s1600/world+oil+production+less+US+and+Russia.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="434" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5D_-XIDcWegwvc0a6C72n0yFrPKHcgnLbLhEmw0Mp1BqSSeNSJZDzY663sDG0xMxGhnS-v8LLImlrSTOudnWrR926kfzfLcKXYcT4gkqHKl7MSqdEwqaJ04WbWAZvKNARDxpwvFJZtHA/s640/world+oil+production+less+US+and+Russia.jpg" width="640" /></a></div>
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In the U.S. it is only the frantic shale boom diverging away from this peaking process. That's another story. As for Russia, it could be said that they are the most critical country in the world now for future oil pricing. This is because their production is over twice that of the U.S. shale and its future perhaps even shakier.<br />
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The following graph depicts the general effect of over-production:<br />
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The blue line is the kind of geologically sound curve Hubbert generated for the recovery of a large body of oil with just a little, maybe accidental over-production. The red line shows the effect of severe over-production, and has the effect of steepening the climb on the upside, but also steepening the decline rate an even greater amount after the peak with a greatly damaged field. <br />
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As you can see from the graph, the price paid for all the added oil extracted pre-peak is a lot of oil that gets left in the damaged field. The peak time frame is about the same, thus Hubbert's peak time accuracy, and the total oil extracted is roughly the same. So how does our actual oil production history look so far?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLw2ZJiDYahXnNxMwmgnF3V7VUfMbWWdKOI-_zhvTMTS9f_THB2hzctq6dwmYea8FvdyofQJlwM7t_xbCccau-kOmL-_X8G79ssJ0FtAAaPCY8oFUWAGFZHLohvY9spmASp2YPzysXVPA/s1600/global+oil+consumption+with+logistic+fit.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="436" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLw2ZJiDYahXnNxMwmgnF3V7VUfMbWWdKOI-_zhvTMTS9f_THB2hzctq6dwmYea8FvdyofQJlwM7t_xbCccau-kOmL-_X8G79ssJ0FtAAaPCY8oFUWAGFZHLohvY9spmASp2YPzysXVPA/s640/global+oil+consumption+with+logistic+fit.jpg" width="640" /></a></div>
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This is a logistic fit of crude consumption done by Graham Zabel in 2007 and shows a couple interesting things. First, it's logistic, so it should be in accordance with Hubbert methods for peak projection. It is <em>not</em> Hubbert's method, but does show how well our production history so far is falling into line with typical, sound geology. It includes about 10 mb/d of the usual add-ons to conventional crude, but it does show the 2005 arrival at a bumpy plateau we've been on with conventional oil ever since. <br />
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Second, it shows us just where the over and under production areas are on the natural curve. From the late 1930s to the mid 1960s we had mild under-production, due in part to an economy emerging from the Depression. Then we had a booming economy and a historic surge in the principle use of oil, U.S. driving, amounting to over a doubling of miles driven from 1962 to 1977. This sent oil into mild over-production. Then a dramatic improvement in average gas mileage (and other oil uses) induced by the Arab oil shocks sent mileage up from 13 mpg in 1975 to 22 mpg in 1985. We also had a big slowing in the climb of miles driven. All this dipped the oil production curve back to mild under-production. Overall, as can be seen in the above chart, what was soundly produced and consumed followed market forces pretty closely.<br />
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So how did the dynamic duo of field mismanagement, Russia and Saudi Arabia, respond to all this?<br />
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Per this <a href="http://peakoilbarrel.com/soon-will-world-oil-production-peak-hubbert-linearization-analysis/">study</a> by Political Economist, these two mega producers, making about 1/4th the world's supply, severely over-produced in response to the driving demand ups and downs, but the Soviet cold war financing over-production went on long after the driving demand dropped in the mid '70s. This went on until the Saudi ramp-up drove the Soviet oil industry to ruin in the '90s. Things have since settled back to typical Hubbert dynamics (red curves) as calculated here by Political Economist. But was there field damage?<br />
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I again refer you to the opinion of Matthew Simmons. He was an oil investment banker in the industry since 1973, was an oil advisor to the president and a member of the Council On Foreign Relations. He went through a mountain of SPE papers (Society of Petroleum Engineers) to write <em>Twilight In The Desert</em> in 2005. There was massive damage according to Simmons. He claims significant damage in Saudi Arabia, but also had this to say on Russia:<br />
<blockquote class="tr_bq">
"The oligarchs who own and operate most of Russia's oilfields are aggressively tapping into the myriad pockets of bypassed oil ... This performance demonstrates the steps that can be taken to boost production after a field has been reduced to pockets of bypassed oil that water sweeps leave behind. These practices have accounted for most of Russia's surprising production rebound. But they are temporary, one-time remedies ... all oil fields have their rate sensitivities . Ignoring this concept and over-producing jeopardizes future production for <i>any</i> field, even in such prolific oil provinces as Western Siberia and Saudi Arabia." <em>Twilight In The Desert, </em>Matthew Simmons, p.307</blockquote>
One could look at the Hubbert curves above and say that Russia and Saudi Arabia aren't due to peak until clear out to beyond 2030. But there is serious doubt among Hubbert mathematicians whether the classic single curve is appropriate for these two cases. You could consider the curves shown above as "what should have been". Generating a Hubbert curve is based on the production physics staying about the same. When there are two vastly different ways of producing a large body of oil, like a country, sometimes a double curve is generated to better project the future. The very prolonged and severe over-production of the Soviet era could be considered a whole separate set of physics, and would justify a double math treatment for Russia, and by extension, to Saudi Arabia as well:<br />
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Sam Foucher, an oil analyst, presented the above in 2007 as his best Hubbert fit of what's to happen with Russian oil. I have added the data points through 2015. It has proven to be pretty accurate so far almost 10 years later. Russian production continued the rapid rise to just below the former peak and has been struggling to climb much higher in a similar plateau top as the '80s. If this projection plays out, it means Russian oil will soon turn into the same king of fast decline as the fast upside of the '60s and '70s and the fast decline of the '90s.<br />
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This view of Russia's oil future is from mathematicians viewing public data available on a secretive government from the outside. What do the Russian's themselves foresee? Russia projects their own oil future with a couple of Russian think tanks in "<i>Global And Russian Energy Outlook to 2040</i>". In that work, they conclude :<br />
<blockquote class="tr_bq">
"Conventional oil (excluding NGL) production will drop to 3.1 billion tonnes by 2040 from the current 3.4 billion tonnes, and the long-discussed 'conventional oil peak' will occur in the period from 2015 to 2020. The drop in its extraction will be due to the gradual working-out of reserves of the largest existing fields." (p35) "Exports of petroleum products will peak in 2015 and will then gradually decrease ..."(p111)<br />
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</blockquote>
Note they say here <i>exports</i> will peak in 2015 - that's the end of their contribution to the staving off of global decline for <em>anyone living outside of Russia</em>. This would leave just the U.S. shale prop in the global picture. Here is how the Russians see their crude in the years ahead:<br />
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"From old" means the oil they see coming from their existing aging elephant fields, so named because they can't be missed in exploration, and 99% of this oil globally has been found for over 30 years. This chart is based on two very optimistic items. First, it displays a 4.5% annual decline rate from the old fields, the "standard" rate applied to global post-peak fields. If these fields were greatly damaged as Simmons says, the decline rate will be much greater than that. Second, the blue parts of the bars are presenting the finding and exploitation of many more elephant equivalents. Good luck with that.<br />
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To give you an idea of how differing the explanations are on Russia, consider this fly in the ointment with the Simmons view above. A poster at The Oil Drum claims to have this simple <a href="http://www.theoildrum.com/node/3139">explanation</a> of the '90s rebound in Russian production:<br />
<blockquote class="tr_bq">
About a month ago, I had the pleasure of spending 5 hours with the Chairman Emeritus of the most prestigious petroleum engineering consulting firm in the world as part of the SPE Distinguished Lecturer program. His firm has done reserve/ engineering studies in every major producing area of the world. He spent a lot of time in Russia over the past 12 years. He told me I wouldn't believe the principal reason for the Russian production increase from 1995 to 2005. They didn't have well tubing that had the tensile strength to run below 1,000'!!! As a result, the bottomhole pumps were set to 1,000' or shallower in all their wells. When they started tubing them deeper and pumping them down, here came the oil.</blockquote>
So this expert is saying the poor Soviet materials they had limited the wells to 1000' or less when clear back in the 1950s, average well depths were four times that. They were just scratching the surface in Russia!<br />
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But this explanation flies in the face of most expert opinion on Russia. It could be that they were just exploiting the top layer of oil fields and bungling that with over-production, putting a damaged cap on a lot of stranded oil to be recovered later with secondary recovery at lower production rates and low net energy levels. In my comments on the above cited article, I said this back in 2007:<br />
<blockquote class="tr_bq">
Russia's very big part in the global peak can not be considered apart from the very large impact of the very large Soviet Union. The Russian production chart isn't a case of a single peak per Hubbert's theory, but what is going to be a twin peak ... One interesting article is <a href="http://www.airpower.maxwell.af.mil/airchronicles/aureview/1980/jan-feb/jefferies.html" rel="nofollow">this one</a> written by an Air Force major in Air University Review in 1980. Way back then, he sounded just like Simmons today only talking about Soviet fields and predicting a production collapse by the mid '80s (which, in fact, did happen) ... He points out that Russia ambitiously directed over half of their oil exports to Eastern Europe and other parts of the expanding empire, and other geopolitical factors that led to serious overproduction where "...rewards for exceeding goals are given without regard to productivity over the long term ...The consequences are...overproduction of existing fields using low productivity techniques that reduce the total amount of recoverable oil." The major was thus accurately predicting the <em>first</em> Russian peak (a Twilight on the Tundra).</blockquote>
The Russian over-production was apparently bad enough to be a military cause for concern in 1980, just before the production collapse of the mid '80s, which was about it for the primary recovery of conventional crude according to Simmons. But as I said earlier, we mustn't just blame Russia for a possible field damaging production spree in years past. Any country with the elephants and an urgent need for oil revenue was about equally to blame:<br />
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Venezuela's chart looks even worse. In fact, the study by Political Economist cited in these charts looks at the top 11 mega producers, and all but Canada, US, China, and UAE have been severe over-producers. I'll give Iraq a pass on this since its erratic chart from political instability can't tell us much. Did <em>everybody</em> in the oil business over-produce. The study gives a chart for global production <em>without </em>these top 11:<br />
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Note that it is dropping off sharply from the 2005 peak.Clearly, not everybody over-produced. It was the large field owners that stepped in to the driving demand excess 45 years ago that were also playing all the political fun and games. The geologists weren't in charge as they were elsewhere. The vast majority of the earth's fields were run sensibly. But here's the thing - <em>The big 11 producers account for over 70% of the projected global peak production. </em>They have done their deeds to the earth's elephant fields, the irreplaceable ones that have been mostly exploited. This soon may come back to haunt us.<br />
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Governments running oilfields is still a problem, as this <a href="http://www.economist.com/node/7270301">article</a> "Oil's Dark Secret" details. About 90% of the post-peak half is owned by state-run companies. Because they are not good at exploiting what they've got, "oil production will be even more concentrated in the hands of the national firms of Russia and the Persian Gulf."<br />
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All this is not good news for those of us stuck on the post-peak side of conventional oil's foreign affairs fun and games. Energy planners and forecasters tend toward an existing field post peak average decline rate of about 4%. But consider this. The Cantarell elephant field of Mexico, as recently as 2004, was the biggest producer in the world except for the Saudis' Ghawar field. It was over-produced in its later stages and has declined now to just 12% of its peak production, a 14% annual decline rate as opposed to the widely assumed 4% for existing production.<br />
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All fields behave differently, but if we are underestimating over-production damage to our elephants, we could all be in for a surprising oil production decline rate from damaged fields. Without the policies and infrastructure built needed to get us off the high net energy of conventional oil, with such things as The Pickens Plan, we may be left with a net energy crisis a few short years down the road.<br />
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This all sounds very gloomy. But there is a lot of high cost oil out there yet to be drawn into the market by high prices. We found that out when oil was at $105 and climbing in 2012, which drew a flash of American shale oil out of the rock. I'm writing an article on what's really out there in shale, and it shows that the U.S. shale experience is not easily replicated globally. But it will be replicated! Due to several factors, global shale oil will be slower to ponce on high oil, and may be more expensive. And I think oil will be cheap for a while before global shale supply is activated. But we are going toward a global secondary recovery cost norm (think bypassed oil, shale and other "dreg" oil). It's expensive but there is a lot of it. We think of the break-even cost for shale as about $60. But Art Berman believes that counting the typical total balance sheet tendencies of these aggressive companies, it's more like $100 for the "going concern" oil price. Oil at $200 will mean serious demand destruction and belated switch-over to natural gas. So I see oil modulated at $100 or a little more for a long time, if we can keep net energy from falling over the math cliff, as I discussed in this <a href="http://www.forbes.com/sites/kenkam/2016/09/13/t-boone-pickens-was-right-about-peak-oil-joe-kernen-was-wrong/#23427a3675af">article</a>- a <em>big</em> if.<br />
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We (Marketocracy) are publishing an article at Forbes online this week about an investing strategy for all this and a discussion of one stock in particular. The tentative article title is "Russia, Saudi Oilfield Mismanagement" in interview format with Ken Kam as the contributor. You can google to read it, probably later this week.Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0tag:blogger.com,1999:blog-3282424752485226688.post-43649881706696708252016-09-16T13:15:00.000-07:002016-09-16T13:15:16.809-07:00We Still Despatately Need a Natural Gas Bridge<div>
[This is a republication of part of an article I wrote back in 2011, when oil was marching up to its highest average price ever in 2012. Now a shale oil blitz has taken everyone's mind off the need for anything but oil. But as I will show in a future article, this may not last very long. In the meantime, when we should be using the shale reprieve to help in a scramble to get our transportation switched over to natural gas, we are instead leaving the Natural Gas Act of 2011 dead in the Congress. This will come back to haunt us in the years ahead]<br />
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I have said in many past writings over the years that the US is the global village idiot when it comes to energy policy. I'd like to reiterate that here. But there seems to be a change happening in our Washington D.C. that is warming the heart of me, T. Boone Pickens, Jim Cramer, Harry Reid and a whole new army of nat gas fans.<br />
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I have described the danger of trying to safely get to a post carbon world without a carbon bridge. The problem with solar, hydrogen, ethanol, and wind is that they take about as much fossil fuel to make these forms of energy as the energy it gives us. They do not displace much fossil fuel if any. There are exceptions, like sugar ethanol; but until we have a good scientific handle on what is really worth a big infrastructure build, in net energy terms, we desperately need a good old fashioned high net energy bridge fuel - like natural gas.<br />
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Even before the fracing revolution of the last 5 years, there was a span of about 25 years between the Hubbert calculated peak production of conventional crude oil and the corresponding peak for conventional natural gas. As we pass the oil peak, and I'm referring to oil from conventional pressurized reservoirs which takes relatively little energy to retrieve, the still climbing nat gas curve starts to form a criss-cross where we embark on the "bridge" to a stable energy supply for the next couple decades. If you put all the forms of energy on a time-line, you see this bridge and its relation to the developing fuels of the future: (click to enlarge)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrd9opbxCaWhqFigFpDNiCQUiVGaMPpeDBZ7j-PKLWa57Pqg_txsrQwPkmHcS2qZK8ooY9DWo8Y7EX6DaHNYFK9f9qkV5uiZZki18wwpwE1nt5P69mVksQL1RX2-L6oH95Hh-Q8Kx8q0w/s1600/Gas+vs+Oil+Peak+vs+Renewables.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5691208253245317218" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrd9opbxCaWhqFigFpDNiCQUiVGaMPpeDBZ7j-PKLWa57Pqg_txsrQwPkmHcS2qZK8ooY9DWo8Y7EX6DaHNYFK9f9qkV5uiZZki18wwpwE1nt5P69mVksQL1RX2-L6oH95Hh-Q8Kx8q0w/s400/Gas+vs+Oil+Peak+vs+Renewables.jpg" style="cursor: pointer; height: 242px; width: 400px;" /></a><br />
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You basically have the huge separation by scale between the fossil fuels and the renewables. The fossil fuels are here and now while the renewables are a tiny fraction of our supply and aren't going to replace fossil fuels any time soon. This is why Washington's veto of anything with carbon in it is so dangerous. It prevents maybe a fraction of the CO2 that gets emitted by volcanoes and other natural sources, but surely cripples a massive share of our energy supply and keeps a post peak-oil bridge from being built for the civilized world.<br />
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As the chart shows, a twenty year bridge can be built on either coal or nat gas. Coal has two major problems. It is dirty, and it is of questionable net energy. You can burn it as has been done for hundreds of years with decent net energy, but poison our globe. Or you can go the CTL route (Coal-To-Liquids) and put coal derived fuel into your gas tank without having to burn it. The problem with this is that the EROEI (Energy Return On Energy Invested) calculations I've seen for this process are all over the map with most of them around 3.5 or so. This doesn't do much good in displacing crude - you need around 6 or higher, nat gas and oil are estimated at 8-11 currently. CTL certainly needs to be developed, as Sasol SSL and others are doing. But we <span style="font-style: italic;">know</span> that nat gas is 30% cleaner than the oil we're using and we <span style="font-style: italic;">know</span> that the shale gas net energy, at least for now, is good. The recent tech breakthrough in fracing, by the way, pushes the nat gas peaking curve much further out into the future.<br />
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The combination of peak oil and gas fracing has radically altered the oil and gas markets. Traditionally, one could judge valuations of the oil or gas price by just multiplying gas by 6. But the last 5 years has seen the end of this age:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlXRi-DSbQLAwIH1_Xu7eQOME2-tZ2DariaTSpRN8Q1D738fMRt4KOr6hBHJXy_0QeqTTemANqdpNmei2qXf6kwz8UI0_VYukba0qIMIQj3nwCOdrW9hjI0XC10wHJJwYa2YB7SC7fYjI/s1600/Oil+Price+Relative+to+Nat+Gas.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlXRi-DSbQLAwIH1_Xu7eQOME2-tZ2DariaTSpRN8Q1D738fMRt4KOr6hBHJXy_0QeqTTemANqdpNmei2qXf6kwz8UI0_VYukba0qIMIQj3nwCOdrW9hjI0XC10wHJJwYa2YB7SC7fYjI/s1600/Oil+Price+Relative+to+Nat+Gas.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5691075152177647970" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlXRi-DSbQLAwIH1_Xu7eQOME2-tZ2DariaTSpRN8Q1D738fMRt4KOr6hBHJXy_0QeqTTemANqdpNmei2qXf6kwz8UI0_VYukba0qIMIQj3nwCOdrW9hjI0XC10wHJJwYa2YB7SC7fYjI/s400/Oil+Price+Relative+to+Nat+Gas.jpg" style="cursor: pointer; height: 332px; width: 400px;" /></a></div>
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We are now entering an era of troublesome oil prices and cheap nat gas. I still see arguments that gas must rise because it's so out of sync with oil. But that won't happen until a massive switchover of usage happens from oil to gas.<br />
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Which brings us to The Nat Gas Act of 2011. This bill was introduced into the House mid year and now has been sent to the Senate as of late November. It used to be mostly a Republican idea, but it is gathering strong bi-partisan support with Senate Majority Leader Harry Reid a key ring leader. This bill would give tax breaks to the purchase and usage of trucks designed to run on nat gas, and other gas infrastructure incentives. It's strengthening support is chronicled in <a href="http://www.lawrencegmcdonald.com/2011/04/dc-tripwire-nat-gas-act-is-the-time-finally-right/">DC Tripwire: NAT GAS Act: Is The Time Finally Right ?</a></div>
Bruce Pilehttp://www.blogger.com/profile/15066962052800376422noreply@blogger.com0