Last week Warren Buffet announced that his company, Berkshire Hathaway (BRK) would buy the remaining 77 percent of Burlington Northern Santa Fe Corp. (BNI) that he didn’t already own for $100 per share.
Based on the stock prices of two of BNI’s competitors, Union Pacific (UNP) and CSX Railroad, BNI’s stock should be selling for $82 per share. Furthermore, based on Buffet’s bid, UNP should be selling for $76, well up from today’s closing price of $62. So either the analysts following BNI, and UNP are wrong, or Buffet has made a huge mistake. It has been advanced that Buffet is betting on the relative efficiency of railroad to trucking and/or on a U.S. economic expansion. But these explanations do not add up since, in order to consummate the purchase of BNI, Buffet agreed to sell his Union Pacific stock whose earnings are expected to grow at triple the rate of BNI over the next five years.
Given that last year, almost half of BNI’s tonnage was coal and BRK owns coal fired electricity producing Mid-American Energy, Buffet is essentially doubling down his bet that the current anti-coal, growth hostile cap & trade bill before the U.S. Senate will die a deserved death. Ernie Goss.
Monday, November 09, 2009
Sunday, November 01, 2009
Cap & Trade: Europe’s Experience Should Be a Warning
Europe’s recent economic performance shows how “cap and trade” will likely affect the U.S. economy if Congress passes this legislation currently before the body. In 1997, Europe adopted emission reduction goals outlined in the Kyoto carbon targets, termed the Kyoto Protocol. That year, Republican congressional leaders declared the Kyoto Protocol “dead on arrival” in the US Senate. In response, the Clinton administration chose not to defend the Protocol. Instead, the White House announced that, until other key developing countries signed on, the Protocol would not be sent to the Senate. Subsequently, the Bush Administration remained steadfastly opposed to Kyoto for both presidential terms. Now the Obama Administration, in attempt to reduce carbon emissions paralleling that of Kyoto, is backing a cap & trade bill. However, Europe’s economic experience since 1999 provides US Congressional Representatives, Senators and President Obama with real evidence to reject this anti-growth measure.
0
From 1999 to 2008, a period marked by Europe’s carbon limitation program, Europe’s inflation adjusted economy grew by 19.0 percent while the US’s GDP expanded by 23.5 percent. In fact if the US grew at the same pace as Europe during this period, US GDP would have been $500 billion less in 2008. In terms of unemployment rates, the comparisons are even more startling. From 1999 to 2008, the average unemployment rates were 8.3 percent in Europe and 5.0 percent in the US. In 2008 if the US jobless rate matched that of Europe, another 4.2 million Americans would be jobless searching for work.
While the gap in US and Europe economic performance since 1999 cannot be pinned solely on carbon emissions programs, Europe’s relative economic lethargy should be a warning to lawmakers considering cap and trade legislation---vote no on this measure. European vacations and wine are just fine, but their carbon emissions sensibilities should not be imported into the US if US economic growth is to be supported.
Ernie Goss.
0
From 1999 to 2008, a period marked by Europe’s carbon limitation program, Europe’s inflation adjusted economy grew by 19.0 percent while the US’s GDP expanded by 23.5 percent. In fact if the US grew at the same pace as Europe during this period, US GDP would have been $500 billion less in 2008. In terms of unemployment rates, the comparisons are even more startling. From 1999 to 2008, the average unemployment rates were 8.3 percent in Europe and 5.0 percent in the US. In 2008 if the US jobless rate matched that of Europe, another 4.2 million Americans would be jobless searching for work.
While the gap in US and Europe economic performance since 1999 cannot be pinned solely on carbon emissions programs, Europe’s relative economic lethargy should be a warning to lawmakers considering cap and trade legislation---vote no on this measure. European vacations and wine are just fine, but their carbon emissions sensibilities should not be imported into the US if US economic growth is to be supported.
Ernie Goss.
Thursday, October 15, 2009
No Economic Recovery For Rural Mainstreet: Bankers Expect Drop In Holiday Sales
October Survey Results at a Glance:
· The Rural Mainstreet Index advanced for a second straight month.
· Bank CEOs expect holiday retail sales to shrink by 1.5 percent from last year.
· Farm equipment sales decline again.
· Over three-fourths of bankers support an extension and/or expansion of the tax credit for first-time homebuyers.
· Six of ten bankers report their FDIC premiums are up more than 250 percent from last year.
For a second straight month, the overall index for the Rural Mainstreet economy expanded but continued to indicate significant economic weakness, according to the October survey of bank CEOs in an 11-state region.
The Rural Mainstreet Index (RMI), which ranges between 0 and 100, advanced to 37.5 from 36.5 in September. A reading of 50.0 is considered growth neutral.
“The RMI has remained below growth neutral for 20 consecutive months. The decline in farm income continues to weigh on the rural, agriculturally dependent economy with few signals that the economic downturn is coming to an end,” said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of City National Bank in Greeley, Neb., created the monthly economic survey in 2005.The downturn in farm income has negatively affected both farmland prices and sales of farm equipment. The October farmland price index rose to a weak 43.0 from September’s 41.1. This was the 12th straight month that the index moved below growth neutral. The farm equipment-sales index slipped to 36.7 from September’s 38.6.
However, there are pockets of very strong farmland sales. As reported by Larry Rogers, CEO of the First Bank of Utica in Utica, Neb., farmland in his area recently sold for $6,650 per acre, indicating a very strong market for farmland.
Recent positive national economic news and record low interest rates propelled the confidence index, which tracks bankers’ economic outlook six months from now, to 58.7 from 43.5 in September.
Hiring in rural areas remains frail. The new-hiring index rose to 35.6 from September’s 27.0. This is the 22nd consecutive month that the index has been below growth neutral, due in part to the national and global recessions and weakening farm income from much lower agricultural commodity prices. “Over the past 12 months, rural areas of the region have lost more than 5 percent of their jobs. This compares to a loss of 3.6 percent for urban areas of the region,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.
Like much of the nation, retail sales were less than healthy for the month, with an October retail-sales index of 36.7 from 32.8 in September. This month bankers shared their expectations for holiday sales. On average, bankers forecast holiday sales to decline by 1.5 percent from last year’s weak sales. Brian Nicklason, president of Woodland Bank in Remer, Minn., said, “I have talked to several local retailers and hospitality businesses, and they are very concerned about business prospects over the upcoming winter months.”
Despite an improving national housing market, the Rural Mainstreet home-sales index stood at a frail 46.7, which was up from 42.7 in September. Bank CEOs were asked about their support for the federal home tax subsidy with 68 percent endorsing a continuation of the $8,000 tax credit for first-time homebuyers and 9 percent backing an increase in the tax credit. Only 23 percent supported an end to the program.
This month bank CEOs were also asked how much their Federal Deposit Insurance Commission (FDIC) fees had increased from last year. Fifty-two percent of bankers reported that FDIC premiums had grown by more than 250 percent. On average, bankers reported an increase of 320 percent from last year. “This increase is undermining the profitability of community banks; the FDIC’s recent proposal for banks to pre-pay their 2010-2012 premiums is especially troubling,” said Goss.
Rural Mainstreet bankers reported mixed banking numbers for the month. The loan-volume index declined to 42.4, its lowest level since November 2006, down from September’s 49.3. According to Frank Sullentrop, president of Legacy Bank in Colwich, Kan., there is a good explanation for this. “Regulatory oversight has had a significant impact on reducing lending activity.
For October, checking-deposit growth dipped to 61.0 from 61.9 in September. The index for certificates of deposit and other savings instruments inched higher to 51.7 from September’s 50.1.
Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of an 11-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.
This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 11 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.
· The Rural Mainstreet Index advanced for a second straight month.
· Bank CEOs expect holiday retail sales to shrink by 1.5 percent from last year.
· Farm equipment sales decline again.
· Over three-fourths of bankers support an extension and/or expansion of the tax credit for first-time homebuyers.
· Six of ten bankers report their FDIC premiums are up more than 250 percent from last year.
For a second straight month, the overall index for the Rural Mainstreet economy expanded but continued to indicate significant economic weakness, according to the October survey of bank CEOs in an 11-state region.
The Rural Mainstreet Index (RMI), which ranges between 0 and 100, advanced to 37.5 from 36.5 in September. A reading of 50.0 is considered growth neutral.
“The RMI has remained below growth neutral for 20 consecutive months. The decline in farm income continues to weigh on the rural, agriculturally dependent economy with few signals that the economic downturn is coming to an end,” said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of City National Bank in Greeley, Neb., created the monthly economic survey in 2005.The downturn in farm income has negatively affected both farmland prices and sales of farm equipment. The October farmland price index rose to a weak 43.0 from September’s 41.1. This was the 12th straight month that the index moved below growth neutral. The farm equipment-sales index slipped to 36.7 from September’s 38.6.
However, there are pockets of very strong farmland sales. As reported by Larry Rogers, CEO of the First Bank of Utica in Utica, Neb., farmland in his area recently sold for $6,650 per acre, indicating a very strong market for farmland.
Recent positive national economic news and record low interest rates propelled the confidence index, which tracks bankers’ economic outlook six months from now, to 58.7 from 43.5 in September.
Hiring in rural areas remains frail. The new-hiring index rose to 35.6 from September’s 27.0. This is the 22nd consecutive month that the index has been below growth neutral, due in part to the national and global recessions and weakening farm income from much lower agricultural commodity prices. “Over the past 12 months, rural areas of the region have lost more than 5 percent of their jobs. This compares to a loss of 3.6 percent for urban areas of the region,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.
Like much of the nation, retail sales were less than healthy for the month, with an October retail-sales index of 36.7 from 32.8 in September. This month bankers shared their expectations for holiday sales. On average, bankers forecast holiday sales to decline by 1.5 percent from last year’s weak sales. Brian Nicklason, president of Woodland Bank in Remer, Minn., said, “I have talked to several local retailers and hospitality businesses, and they are very concerned about business prospects over the upcoming winter months.”
Despite an improving national housing market, the Rural Mainstreet home-sales index stood at a frail 46.7, which was up from 42.7 in September. Bank CEOs were asked about their support for the federal home tax subsidy with 68 percent endorsing a continuation of the $8,000 tax credit for first-time homebuyers and 9 percent backing an increase in the tax credit. Only 23 percent supported an end to the program.
This month bank CEOs were also asked how much their Federal Deposit Insurance Commission (FDIC) fees had increased from last year. Fifty-two percent of bankers reported that FDIC premiums had grown by more than 250 percent. On average, bankers reported an increase of 320 percent from last year. “This increase is undermining the profitability of community banks; the FDIC’s recent proposal for banks to pre-pay their 2010-2012 premiums is especially troubling,” said Goss.
Rural Mainstreet bankers reported mixed banking numbers for the month. The loan-volume index declined to 42.4, its lowest level since November 2006, down from September’s 49.3. According to Frank Sullentrop, president of Legacy Bank in Colwich, Kan., there is a good explanation for this. “Regulatory oversight has had a significant impact on reducing lending activity.
For October, checking-deposit growth dipped to 61.0 from 61.9 in September. The index for certificates of deposit and other savings instruments inched higher to 51.7 from September’s 50.1.
Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of an 11-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.
This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 11 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.
Wednesday, October 14, 2009
Mortgage Rates Will Top 6 Percent When Job Losses Cease
For the first week of October, the average rate on a 30-year fixed mortgage was 4.87 percent, down from 4.94 percent last week. Despite this low level, some home buyers are waiting for even lower rates. Forget about it! Even though rates may move a bit lower in the short run, I expect rates to rise very quickly once the economy, as measured by job prospects, improves. That’s right, if you want to see where mortgage rates are going, just watch the job market. At the beginning of the recession in December 2007, annualized job growth was 1.4 percent and the 30-year fixed rate mortgage was 6.1 percent. At the depths of the recession in April of 2009, annualized job growth had plummeted to -5.6 percent and the 30 year mortgage rate had sunk to 4.81 percent. Today job growth is still negative at -2.3 percent and mortgage rates have rebounded slightly to 5.06 percent.
I expect mortgage rates to again top 6.0 percent when the nation begins adding jobs. Thus expect two potentially harsh outcomes when the labor market turns around. First, the monthly payment on a $100,000 home will rise by more than $50. Second, this will signal the end to the high prices and low yields on long term U.S. Treasury bonds that determine mortgage rates. So if you have a large share of your savings in these bonds, either directly or via mutual funds, put your money somewhere else to avoid heavy losses when the labor market improves. Ernie Goss.
I expect mortgage rates to again top 6.0 percent when the nation begins adding jobs. Thus expect two potentially harsh outcomes when the labor market turns around. First, the monthly payment on a $100,000 home will rise by more than $50. Second, this will signal the end to the high prices and low yields on long term U.S. Treasury bonds that determine mortgage rates. So if you have a large share of your savings in these bonds, either directly or via mutual funds, put your money somewhere else to avoid heavy losses when the labor market improves. Ernie Goss.
Friday, October 09, 2009
Is the market over-valued?
Many Yo-Yo financial reporters are yelling and screaming about the stock market being over-valued. This may be the case, but many of them are using trailing P/E ratios to justify their hypothesis. This is ridiculous logic, so before you accept their conclusions, let me explain.
For a trailing P/E, they may take the S&P 500’s current price of 1068 and divide by the index’s 2008 as-reported earnings of $14.88. This simple calculation yields a P/E ratio of 72x. The index’s trailing P/E has averaged 16x since 1936, so at 72x, the market is grossly OVERVALUED, right? Don't agree just yet, because this certainly isn't the case if you analyze the P/E from different perspectives.
It may be fine to calculate a P/E ratio in normal times by looking at previous year’s earnings, but last year was in no way normal. Last year’s earnings are a poor proxy for earnings going forward, so for now, please throw your trailing P/E ratio out the window. It is useless.
It is also illogical to use as-reported earnings at this time. In 2008, and continuing on for the next few years, you will see a lot of charges in between the operating and net lines of most companies’ income statements. Financial companies have taken massive losses due to asset write-downs, and other firms have incurred huge restructuring charges to align themselves for a more profitable future. As-reported earnings captures all of these charges, but since they are transitory and astronomically high for now, they shouldn't be included when hypothesizing the over/under valued-ness of the stock market.
Instead I would advise looking at a forward P/E ratio based on operating earnings, which doesn't include those transitory costs. Using 2010 operating earnings expectations should give us a more normalized picture of profitability going forward. Either way, it is certainly a more accurate proxy than 2008 figures.
The forward operating P/E for the S&P 500 has averaged around 19x for the past 20 years. S&P estimates 2010 operating earnings to be $73.47, implying a P/E ratio of 14.5x. From my calculation, the stock market appears CHEAP.
Writers want to sell stories. In deciding that the market is expensive, and since many people follow P/E ratios, they fandoongle the ratio to outrageous numbers to grab your attention and support their conclusion.
When times return to normal, go ahead and bring back your trailing P/E ratio, but for now, don’t be fooled by their calculations.
Aaron Konen
For a trailing P/E, they may take the S&P 500’s current price of 1068 and divide by the index’s 2008 as-reported earnings of $14.88. This simple calculation yields a P/E ratio of 72x. The index’s trailing P/E has averaged 16x since 1936, so at 72x, the market is grossly OVERVALUED, right? Don't agree just yet, because this certainly isn't the case if you analyze the P/E from different perspectives.
It may be fine to calculate a P/E ratio in normal times by looking at previous year’s earnings, but last year was in no way normal. Last year’s earnings are a poor proxy for earnings going forward, so for now, please throw your trailing P/E ratio out the window. It is useless.
It is also illogical to use as-reported earnings at this time. In 2008, and continuing on for the next few years, you will see a lot of charges in between the operating and net lines of most companies’ income statements. Financial companies have taken massive losses due to asset write-downs, and other firms have incurred huge restructuring charges to align themselves for a more profitable future. As-reported earnings captures all of these charges, but since they are transitory and astronomically high for now, they shouldn't be included when hypothesizing the over/under valued-ness of the stock market.
Instead I would advise looking at a forward P/E ratio based on operating earnings, which doesn't include those transitory costs. Using 2010 operating earnings expectations should give us a more normalized picture of profitability going forward. Either way, it is certainly a more accurate proxy than 2008 figures.
The forward operating P/E for the S&P 500 has averaged around 19x for the past 20 years. S&P estimates 2010 operating earnings to be $73.47, implying a P/E ratio of 14.5x. From my calculation, the stock market appears CHEAP.
Writers want to sell stories. In deciding that the market is expensive, and since many people follow P/E ratios, they fandoongle the ratio to outrageous numbers to grab your attention and support their conclusion.
When times return to normal, go ahead and bring back your trailing P/E ratio, but for now, don’t be fooled by their calculations.
Aaron Konen
Thursday, September 24, 2009
Should You Invest in Gold Now?
Most investors in the U.S. stock market have seen their “nest eggs” plummet faster than January temperatures in Nebraska. For example, investors who purchased a basket containing one share of each the Dow-Jones Industrial 30 in 1999 lost almost 20% of their investment over the past decade. On the other hand, the investor who invested his/her bundle in gold experienced a gain of 262% during this same time period. What accounts for gold’s superior return? Rising inflation, a cheaper dollar, an expanding economy, and escalating risks account for gold’s fantastic returns. But among these four factors, investor’s risk assessment dwarfs the other three in terms of influence on the price of gold. The best measure of financial risk is the gap between the yield on corporate bonds and U.S. Treasury bonds. As risks rise, investors sell corporate bonds and buy risk free U.S. Treasury bonds. This increases the yield on corporate bonds and decreases the yield on U.S. Treasury bonds widening the gap between the two. If risks rise to levels existing in January of 2009, gold prices are likely to soar by as much as 78% from the current price. However, if risk declines to the level existing in November 2007, one month before the recession began, gold prices will plunge by approximately 11%. Thus, investors’ decision to buy gold should hinge on their assessment of the direction in financial risks. A return to the scary financial environment of early 2009 will reward gold buyers handsomely, while a more soothing economic climate will inflict losses on the gold buyer.
Ernie Goss
Ernie Goss
Thursday, September 03, 2009
Is It Time to Buy Natural Gas?
Natural gas prices tumbled again Thursday, hitting a new seven-year low of $2.52 per million cubic feet after the government reported an increase in supplies. Meanwhile, benchmark crude for October delivery advanced to $68.17 a barrel on the Nymex. The ratio of the price of a barrel of oil to a million cubic feet of natural gas is now 28.2 compared to the historical average of 10.0. One can interpret this one of three ways; 1) either natural gas prices are artificially low, or 2) oil prices are artificially high, or 3) the fundamental relationship has changed due to supply and demand factors.
If natural gas prices are artificially low due to speculative activity, then this would present an opportunity for the long term investor to buy natural gas. The United States Natural Gas fund (UNG), an exchange-traded fund that tracks natural gas prices, has plunged this year hitting a 52-week low of $8.94 a share on September 3, well down from $62.00 per share in July 2008. So should investors jump in and buy shares of UNG. I say be cautious. The price of natural gas and UNG could go lower.
Even though the ratio of the price of oil to natural gas is at a 25 year high of 28.2, the ratio of oil production to natural gas production is at a very low level (not a record but low nonetheless). What this is telling us is that, natural gas prices are very low due to significant increases in supply or production. Thus, I would not expect any momentous natural gas price rebounds unless and until there is a rapid upturn in natural gas demand due to changing federal energy policy.
Ernie Goss
If natural gas prices are artificially low due to speculative activity, then this would present an opportunity for the long term investor to buy natural gas. The United States Natural Gas fund (UNG), an exchange-traded fund that tracks natural gas prices, has plunged this year hitting a 52-week low of $8.94 a share on September 3, well down from $62.00 per share in July 2008. So should investors jump in and buy shares of UNG. I say be cautious. The price of natural gas and UNG could go lower.
Even though the ratio of the price of oil to natural gas is at a 25 year high of 28.2, the ratio of oil production to natural gas production is at a very low level (not a record but low nonetheless). What this is telling us is that, natural gas prices are very low due to significant increases in supply or production. Thus, I would not expect any momentous natural gas price rebounds unless and until there is a rapid upturn in natural gas demand due to changing federal energy policy.
Ernie Goss
Subscribe to:
Posts (Atom)
