Puplava on the commodities bull market

Jim Puplava's Financial Sense Newshour, July 7: having discussed what he sees as a long bull market in energy, Puplava turns to other commodities such as gold and silver: "the best protection in inflation has always been gold and silver, which represents real money". He sees a new "leg up" in the market within 3 to 6 months, because of the continuing inflationary expansion of money and credit. Another factor will be A&M - "junior producers" being acquired or merged to achieve economies of scale.

So as a hedge against inflation for the small investor, he recommends regular savings into a mutual fund in energy and precious metals, or even commodity ETFs (exchange traded funds) in energy and food.

Puplava on value investing

Jim Puplava's Financial Sense Newshour, July 7: to get rich slowly but surely, invest in companies that pay high dividends.

Puplava quotes research showing that over 100 years, the stockmarket has grown by 5.4% per annum, but reinvesting the dividends raises the return to 10.1% p.a. Over a long period, this margin compounds up impressively.

Features he suggests you look for:

• a low P/E ratio (i.e. a high dividend proportionate to share price)
• essential industries - companies that make things people need constantly or frequently (e.g. energy, consumer staples)
• companies that have a record of increasing dividends over the years
• larger, more mature companies - ones that have gotten past the stage of having to plough back most of their profits into R&D
• strong cash flow and earnings growth
• good management and solid corporate governance

In response to a listener's question, Puplava opines that the utility sector is currently "grossly overvalued", but says there may be reasonably-priced shares available in oil and consumer product companies.

Puplava on the energy market

Financial Sense Newshour, July 7: Jim Puplava sees a long bull market in energy.

This is because there is a long-term upward trend in demand. In the West, we use more devices in the home - and in the US, new homes are actually getting bigger, requiring more energy for space heating; and in the developing world, people are keen to join the consumer lifestyle - "Next year, emerging market energy demand will surpass industrialized countries' energy demand for the first time in history". Meanwhile, extraction costs are rising.

Puplava sees 3 themes in relation to the energy market:

• efficiency
• new types of transportation (e.g. hybrids), or more use of old types (e.g. railways, barges)
• substitute fuels (e.g. ethanol) / alternative energy resources (especially nuclear, solar and wind)

Puplava on subprime lending

For the time-challenged, I propose to highlight sections of Jim Puplava's Newshour. "Financial Sense" is what it says on the tin and I plan to make this a regular read/listen. Working off the transcript for July 7 (and that's another very laudable feature of his service), here is my interpretation of some points he makes about the subprime crisis:

The real sting of subprime defaults is in how they may affect the credit ratings of CDOs (Collateralised Debt Obligations, i.e. mortgages grouped together and sold on as interest-yielding investments). Some major institutional investors, including pension funds, have bought CDOs, but are required NOT to hold any bonds below "investment grade". So if these CDOs drop below a "BBB" rating, the fund managers will be forced to sell, and if there is a wholesale selloff there will be a sharp drop in the price.

Also, the hedge funds that invest in CDOs may have borrowed 10-20 times the value of their capital, to multiply their investments. The margin of safety is thin and a relatively small loss could trigger a cash call. So although Federal Reserve officials are correct in saying that subprime debt is only a small proportion of the lending market, this borrowing-to-invest vastly magnifies the problems.

Another complication is that credit ratings don't mean the same thing for all types of bond. Over the last decade or two, "BBB" rated corporate bonds have had a default rate of 2.2%, but BBB-rated CDOs have a 24% default rate. Do all investment managers fully realise this?

There is over $200 billion in subprime bonds that need to be re-rated, but rating firms are putting off the evil day. One reason for the delay is that the ratings people have a conflict of interest. It seems that many were involved in designing the CDOs in the first place, so if a re-rating happens soon, awkward questions will be asked and reputations shredded. There might even be litigation for damages. Meanwhile, Puplava speculates, the government itself might wish to encourage a more gradual unfolding of the bad news, to prevent the avalanche.

More on real inflation figures via iTulip

Further to my post of 9 July re "real" inflation, I have received the following comment from the originator of the charts - thanks.

I am the author of the charts referenced above. For the latest, see here:

http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
http://homepage.mac.com/ttsmyf/recDJIAtoRD.html
http://homepage.mac.com/ttsmyf/newestHousData.gif

FYI, thru today 7/12 for the Real Dow, and thru 2007 Q1 (= mid-Feb 2007) for Real Homes: Real Dow is 2.24x the +1.64 %/yr curve, which is a 55% drop thereto, and Real Homes national (green points) is 1.78x the ca. 54 level, which is a 44% drop thereto.

Listen to Financial Sense!

Click here for the transcript of July 7's edition of Jim Puplava's Financial Sense Newshour. This is a wide-ranging overview, from subprime loans to commodity investing and listeners' queries.

Soothing noises from the US Treasury re subprime losses

Treasury officials are quoted in Bloomberg, saying that subprime losses don't represent a systemic threat. Another official, Frederic Mishkin, said something similar at the Levy Economics Institute symposium this month (see my blog of 5 July).