State of the Illinois Economy
12.04.2013
After a short hiatus, AIW is back in the game this week and we’re talking the State of the Illinois economy for all the local Illinoisans out there. Just yesterday, the IL legislature passed a crucial pension reform bill which isn’t perfect, but is an important first step in the right direction to help fix the worst public pension system in the union. We will discuss this in more detail today.
Once upon a time, Chicago was the envy of the world. It invented the modern skyscraper and held four of the top six tallest building spots in the western hemisphere. We had a booming industrial complex alongside a world renowned financial services hub to boot. Our universities, Northwestern, University of Chicago, and UIUC, and others were (and arguably still are) among the best programs in the world. Our trains were quick, speedy, and expansive. Put simply, Chicago was a boom town all the way through the 1950s. But then, a few things changed. Today, Chicago is home to some of the worst crime in the nation, poorest run schools, and a public pension crisis that dwarfs that of California!
In the last few decades, Chicago and the state of IL have been overrun by rampant corruption oiled by a Democratic machine which has held a stranglehold on the city for decades, the center of power being held in the hands of the Daley family. Money was quickly misappropriated, misspent, and further bond borrowings only made the situation worse when that money too lacked the proper oversight needed for crucial capital projects. Enormous public pensions were also promised that could never be delivered. Then, the world economy sped up. Countries in Asia quickly built buildings that tower over the Sears and began to simply out-compete the high tax and unfriendly business environment IL has come to embrace. Moreover, these series of poor choices has left the IL unemployment rate among the top three highest in the nation at just under 10% even during today’s ‘recovery’. More recently, credit ratings agencies have downgraded the status of our state’s debt, making it even more expensive to borrow in the future. Add to that the fact that multiple medium and large businesses are threatening to leave the state, and all of a sudden the Second City isn't the boom town it used to be anymore. Just look to Archer Daniels Midland or OfficeMax, both of which are likely to leave the state if the IL legislature doesn't come up with a decent incentive package for them to stay (highly unlikely at this point). If Chicago doesn't fix these issues soon, it could quickly go the way of other formerly dominant Midwest cities like Detroit, Cleveland, and St. Louis.
But, there is hope. We can turn the tide and get this city back on track over time- it all starts with getting our fiscal house in order. What we have going for us is our aged, but mature infrastructure of roads, rail, and air/sea ports which continue to allow the city to call itself America’s only inland port. These systems will need massive upgrades to bring our infrastructure in to the 21st century, but the good thing is the foundation is already largely built and in place today. We also have hope in Rahm Emanuel. Rahm is a Democrat, but he is also a centrist when it comes to getting things done for the people. Last year, he took on the CPS union and won, something I thought would never happen. He is akin to the fact that our current fiscal path is simply unsustainable and is working hard to restore our budget. Simultaneously, he is investing in key infrastructure projects (e.g., new red line south) via private-public partnerships. And, he knows that in order to put our city back on the map, we must attract and retain the best businesses and talent around. We also know he has a solid track record and can’t be any more corrupt that what we've seen already. Also, the Illinois House and Senate passed pension reform late yesterday, which is a win for IL and its residents. There is still much work to be done, but it at least recognizes the problem, attempts to address it, and will begin to chip away at the massive whole we’re in- a step in the right direction. The most underfunded public pension in the country will now save an estimated $160B over 30 years if the bill is properly and fully implemented.
I love the city of Chicago and the state of Illinois, it is my home. Even after travelling the world, there is something that still keeps bringing me back to this global powerhouse of a city and pleasant Midwestern charm. Having spent 17 of my now 25 years in this state, including five at The University of Illinois, these issues certainly hit close to home. Many of you are as proud as I at this wonderful city we have, and just want to keep it that way, which is why this issue is so important. For those who grew up in the Windy City, wouldn't it be great to know that one day we can again have the tallest skyscrapers, a business friendly environment, and a responsible local government free from corruption that also keeps its promises to its public workers. These simple pieces are now quietly becoming past times of our city and state, but can be rekindled again when our citizens rise to the occasion and demand it. From one local IL kid to you all, I know we can do better than this, we've just got to make it happen..
12.04.2013
After a short hiatus, AIW is back in the game this week and we’re talking the State of the Illinois economy for all the local Illinoisans out there. Just yesterday, the IL legislature passed a crucial pension reform bill which isn’t perfect, but is an important first step in the right direction to help fix the worst public pension system in the union. We will discuss this in more detail today.
Once upon a time, Chicago was the envy of the world. It invented the modern skyscraper and held four of the top six tallest building spots in the western hemisphere. We had a booming industrial complex alongside a world renowned financial services hub to boot. Our universities, Northwestern, University of Chicago, and UIUC, and others were (and arguably still are) among the best programs in the world. Our trains were quick, speedy, and expansive. Put simply, Chicago was a boom town all the way through the 1950s. But then, a few things changed. Today, Chicago is home to some of the worst crime in the nation, poorest run schools, and a public pension crisis that dwarfs that of California!
In the last few decades, Chicago and the state of IL have been overrun by rampant corruption oiled by a Democratic machine which has held a stranglehold on the city for decades, the center of power being held in the hands of the Daley family. Money was quickly misappropriated, misspent, and further bond borrowings only made the situation worse when that money too lacked the proper oversight needed for crucial capital projects. Enormous public pensions were also promised that could never be delivered. Then, the world economy sped up. Countries in Asia quickly built buildings that tower over the Sears and began to simply out-compete the high tax and unfriendly business environment IL has come to embrace. Moreover, these series of poor choices has left the IL unemployment rate among the top three highest in the nation at just under 10% even during today’s ‘recovery’. More recently, credit ratings agencies have downgraded the status of our state’s debt, making it even more expensive to borrow in the future. Add to that the fact that multiple medium and large businesses are threatening to leave the state, and all of a sudden the Second City isn't the boom town it used to be anymore. Just look to Archer Daniels Midland or OfficeMax, both of which are likely to leave the state if the IL legislature doesn't come up with a decent incentive package for them to stay (highly unlikely at this point). If Chicago doesn't fix these issues soon, it could quickly go the way of other formerly dominant Midwest cities like Detroit, Cleveland, and St. Louis.
But, there is hope. We can turn the tide and get this city back on track over time- it all starts with getting our fiscal house in order. What we have going for us is our aged, but mature infrastructure of roads, rail, and air/sea ports which continue to allow the city to call itself America’s only inland port. These systems will need massive upgrades to bring our infrastructure in to the 21st century, but the good thing is the foundation is already largely built and in place today. We also have hope in Rahm Emanuel. Rahm is a Democrat, but he is also a centrist when it comes to getting things done for the people. Last year, he took on the CPS union and won, something I thought would never happen. He is akin to the fact that our current fiscal path is simply unsustainable and is working hard to restore our budget. Simultaneously, he is investing in key infrastructure projects (e.g., new red line south) via private-public partnerships. And, he knows that in order to put our city back on the map, we must attract and retain the best businesses and talent around. We also know he has a solid track record and can’t be any more corrupt that what we've seen already. Also, the Illinois House and Senate passed pension reform late yesterday, which is a win for IL and its residents. There is still much work to be done, but it at least recognizes the problem, attempts to address it, and will begin to chip away at the massive whole we’re in- a step in the right direction. The most underfunded public pension in the country will now save an estimated $160B over 30 years if the bill is properly and fully implemented.
I love the city of Chicago and the state of Illinois, it is my home. Even after travelling the world, there is something that still keeps bringing me back to this global powerhouse of a city and pleasant Midwestern charm. Having spent 17 of my now 25 years in this state, including five at The University of Illinois, these issues certainly hit close to home. Many of you are as proud as I at this wonderful city we have, and just want to keep it that way, which is why this issue is so important. For those who grew up in the Windy City, wouldn't it be great to know that one day we can again have the tallest skyscrapers, a business friendly environment, and a responsible local government free from corruption that also keeps its promises to its public workers. These simple pieces are now quietly becoming past times of our city and state, but can be rekindled again when our citizens rise to the occasion and demand it. From one local IL kid to you all, I know we can do better than this, we've just got to make it happen..
Christie saves the GOP, Obamacare on life support and Tesla engulfed in flames
11/11/2013
Several important, relevant events occurred last week that we'll cover in this final post until after my (hopefully) last CPA exam. Until AIW returns on 11/25, let's close out with these items: Chris Christie’s trouncing re-election in NJ, Obamacare’s endless PR nightmare, and Tesla’s earnings beat that sent the stock plummeting.
Last Tuesday, Chris Christie won re-election as New Jersey governor by a whopping 60% - 39% margin in a heavy blue state. Dissecting the results further, we saw him win nearly every demographic category including men, women, and Hispanics. These figures are simply unheard of for any Republican in recent memory as the GOP has been shrinking its base to a virtual handful of older white men who wish we were living in an era circa 1900. But, last week Christie gave the ailing Republican Party a much needed shot in the arm. His natural political talent coupled with sincere personality and charisma propelled him to victory in this traditionally Democratic stronghold. Christie is a very shrewd politician, building consensus among his supporters and working across the aisle with his adversaries. He has the unique ability few among Republicans to actually expand his base of support rather than shrink it, and should be considered a true contender in 2016. Though his future in the party looks bright, his biggest struggle will be gaining support from middle American GOP voters in places like Iowa where many don’t like the in your face type of attitude Christie brings with his passion for politics. And, in an effort to keep down the volume of election talk nearly three years away, we’ll leave it there and pick up later.
Next up, given the disaster that has been the Obamacare rollout, we must tackle this issue too, briefly. For the record, while I personally disagree with Obamacare, I do accept it as the law of the land and the Republicans haven’t made things easy on anyone in their relentless slash and burn tactics towards it. Nonetheless, it is fair to say the President’s signature piece of legislation is spiraling out of control in free fall at this point. Recent figures from the Congressional Budget Office estimate that up to 78 million Americans won’t be able to keep their current plans as originally promised. No matter what lens you look from, Obama’s credibility is clearly hanging by a thread as plans are being cancelled and premiums skyrocketing across the country. At this point Obama is quickly turning into a lame duck and needs to right the ship by allowing for major overhauls to the program with constructive input from Republicans (if they even have anything to seriously offer), else the Democrats risk losing the Senate in 2014. I am willing to give the President a chance, let the “kinks” get worked out etc.. but if things don’t get better and soon, there will be a lot of angry voters who were promised affordable and quality healthcare coverage subsidized and brought to you by good ole Uncle Sam! The jury is still out…
Lastly, many of you have been messaging me and asking about Tesla Motors, which actually reported solid earnings last week that beat expectations by a penny. But, the brutal force that is Wall Street slammed the stock afterwards for not providing higher guidance going into the end of the year and beyond. The stock is currently trading below $140, and as mentioned previously could see continued downward pressure until more positive news arrives. Due to this fact, and the now three unrelated Model S fires, investors are pumping the brakes on this stock at the moment. However, there is a silver lining to this story and evidence the long term trajectory remains on track, which could provide a buying opportunity for those who dare.
One of the most important metrics in the auto industry is gross margin (Sales – Cost of Goods Sold). On this front, Tesla is sneakily blowing out the competition, and will soon pass the industry leader Porsche without having nearly the scale of the large dominant players (see my last post on TSLA for how they are able to achieve these results). On the earnings call last week, CEO Elon Musk had this to say:
“We expect to track to 25% gross margin in the fourth quarter, excluding Zev credits, so it's excluding the zero emission vehicle credits. Yes. I feel pretty confident about that outcome unless there is some forced reserve of that. Also, almost we were roughly halfway through the fourth quarter, so I think that's almost affected, so I think that's a pretty secure.”
While margins are certainly not the end all be all that will determine the success of this company, it is a key indicator to factor whether the company will be able to generate enough future profits to stay afloat. As for the stock price and where it’s headed, this name truly has had an amazing run and probably went up a little too far a bit too fast. The recent pullback should prove a healthy correction for the long run vitality of this stock, which I continue to believe could easily reach $500+ in the next 3-4 years assuming Musk continues to deliver as promised. During this pause, I think it’s most prudent to wait and see where consolidation and support occur (around $140 or $120 are big areas to watch) as it could prove to be a nice time to buy these guys at a discount to the ~$180 it was trading at just a few weeks ago. Even the highest flying and best performing names come back to reality eventually, and this is what is happening with Tesla. Personally, I had sold some shares before the stock tanked and prior to earnings, recently picking up just a few back at $143 and will consider further purchases to cost down if we track back down to $120 or so. Regardless, investors should keep an eye on this name and when you feel the value is right, pile in for some potentially huge long term gains. We will know in the next couple of years if this company is going to flounder to zero or leave its competitors in the dust.
11/11/2013
Several important, relevant events occurred last week that we'll cover in this final post until after my (hopefully) last CPA exam. Until AIW returns on 11/25, let's close out with these items: Chris Christie’s trouncing re-election in NJ, Obamacare’s endless PR nightmare, and Tesla’s earnings beat that sent the stock plummeting.
Last Tuesday, Chris Christie won re-election as New Jersey governor by a whopping 60% - 39% margin in a heavy blue state. Dissecting the results further, we saw him win nearly every demographic category including men, women, and Hispanics. These figures are simply unheard of for any Republican in recent memory as the GOP has been shrinking its base to a virtual handful of older white men who wish we were living in an era circa 1900. But, last week Christie gave the ailing Republican Party a much needed shot in the arm. His natural political talent coupled with sincere personality and charisma propelled him to victory in this traditionally Democratic stronghold. Christie is a very shrewd politician, building consensus among his supporters and working across the aisle with his adversaries. He has the unique ability few among Republicans to actually expand his base of support rather than shrink it, and should be considered a true contender in 2016. Though his future in the party looks bright, his biggest struggle will be gaining support from middle American GOP voters in places like Iowa where many don’t like the in your face type of attitude Christie brings with his passion for politics. And, in an effort to keep down the volume of election talk nearly three years away, we’ll leave it there and pick up later.
Next up, given the disaster that has been the Obamacare rollout, we must tackle this issue too, briefly. For the record, while I personally disagree with Obamacare, I do accept it as the law of the land and the Republicans haven’t made things easy on anyone in their relentless slash and burn tactics towards it. Nonetheless, it is fair to say the President’s signature piece of legislation is spiraling out of control in free fall at this point. Recent figures from the Congressional Budget Office estimate that up to 78 million Americans won’t be able to keep their current plans as originally promised. No matter what lens you look from, Obama’s credibility is clearly hanging by a thread as plans are being cancelled and premiums skyrocketing across the country. At this point Obama is quickly turning into a lame duck and needs to right the ship by allowing for major overhauls to the program with constructive input from Republicans (if they even have anything to seriously offer), else the Democrats risk losing the Senate in 2014. I am willing to give the President a chance, let the “kinks” get worked out etc.. but if things don’t get better and soon, there will be a lot of angry voters who were promised affordable and quality healthcare coverage subsidized and brought to you by good ole Uncle Sam! The jury is still out…
Lastly, many of you have been messaging me and asking about Tesla Motors, which actually reported solid earnings last week that beat expectations by a penny. But, the brutal force that is Wall Street slammed the stock afterwards for not providing higher guidance going into the end of the year and beyond. The stock is currently trading below $140, and as mentioned previously could see continued downward pressure until more positive news arrives. Due to this fact, and the now three unrelated Model S fires, investors are pumping the brakes on this stock at the moment. However, there is a silver lining to this story and evidence the long term trajectory remains on track, which could provide a buying opportunity for those who dare.
One of the most important metrics in the auto industry is gross margin (Sales – Cost of Goods Sold). On this front, Tesla is sneakily blowing out the competition, and will soon pass the industry leader Porsche without having nearly the scale of the large dominant players (see my last post on TSLA for how they are able to achieve these results). On the earnings call last week, CEO Elon Musk had this to say:
“We expect to track to 25% gross margin in the fourth quarter, excluding Zev credits, so it's excluding the zero emission vehicle credits. Yes. I feel pretty confident about that outcome unless there is some forced reserve of that. Also, almost we were roughly halfway through the fourth quarter, so I think that's almost affected, so I think that's a pretty secure.”
While margins are certainly not the end all be all that will determine the success of this company, it is a key indicator to factor whether the company will be able to generate enough future profits to stay afloat. As for the stock price and where it’s headed, this name truly has had an amazing run and probably went up a little too far a bit too fast. The recent pullback should prove a healthy correction for the long run vitality of this stock, which I continue to believe could easily reach $500+ in the next 3-4 years assuming Musk continues to deliver as promised. During this pause, I think it’s most prudent to wait and see where consolidation and support occur (around $140 or $120 are big areas to watch) as it could prove to be a nice time to buy these guys at a discount to the ~$180 it was trading at just a few weeks ago. Even the highest flying and best performing names come back to reality eventually, and this is what is happening with Tesla. Personally, I had sold some shares before the stock tanked and prior to earnings, recently picking up just a few back at $143 and will consider further purchases to cost down if we track back down to $120 or so. Regardless, investors should keep an eye on this name and when you feel the value is right, pile in for some potentially huge long term gains. We will know in the next couple of years if this company is going to flounder to zero or leave its competitors in the dust.
"The Path Ahead"
11.4.13
With the Syrian and budget crises behind us for now, this week we look ahead and see how a few things may pan out- where do we go from here? I do believe both of aforementioned issues will resurface in a few short months as they are yet to be fully resolved. January and February will look like same circus we saw last month when the debt ceiling is hit yet again, and neither side is willing to compromise on taxes or entitlements. Likewise, the Assad regime in Syria is still fighting a brutal civil war within his borders, and his days are probably numbered. As these issues relate to the well being of US citizens, what we do know for sure is that the economy has stabilized but it is still fragile. Economic growth remains anemic and the real unemployment rate is somewhere at or above 13.5% once accounting for folks dropping out of the labor force since they couldn’t find employment. Our rapidly aging baby boomer population remains as a headwind for these figures as well. In looking back at the recovery since the financial crisis of 2007-2008, we are reminded, a full five years after the crash and trillions of fed stimulus later, domestic GDP is still barely struggling to achieve 2% growth.
Growth really is the X factor in any society seeking prosperity. For instance, just a 1% increase in GDP growth would theoretically bring in an additional $2.1 trillion in new tax revenue, while also cutting the deficit by nearly $3 trillion in about a decade’s time. This is the tragedy of our ‘recovery’, and should be the laser focus for Republicans if they wish to have a fighting chance in the 2014/2016 election cycles. As they say, the best welfare program is a job, and the GOP should be relentless in their efforts to stand up for free economic principles that will help us create more of them, instead of just being the opposition party of No. This will prove challenging as the party is facing somewhat of an identity crisis between the establishment conservatives vs. the Tea Party faction. They must start offering constructive policies that empower the individual to foster their prosperity, or risk future fragmentation. Where appropriate, they can also call out the joke of our federal government that is all too often forcing its citizens into a reliance on a system of false hopes and promises. Looking ahead to 2016, though it is early, Chris Christie and Paul Ryan should prove to be strong contenders; both are smart politicians capable of negotiating deals with their opponents.
Turning back to growth, we can compare the US’s 2% rate with several emerging economies: China is expanding at around 8%, India at 5%, and Russia at 4%+. Now, we are no China and can’t expect to be in terms of growth as we are already the most advanced economy in the world and they are starting from a much lower base. But, if we unleash the power of the American entrepreneur and innovative/competitive spirit, we can absolutely achieve 3-5% growth that is our historical full potential. After all, we can sit here and debate policy all we want, but unless and until we start growing again, all that will remain is a shrinking economy, fewer jobs, and a much smaller voice in the international community. THIS is what all of us should be focused on.
Stock Picks of the Week:
Look for continued momentum in Petrobras #PBR, which has done well since my recommendation last month. Likewise, Freeport-Mcmoran #FCX should keep doing well so long as gold prices don’t take another leg down. If you bought the play on natural gas #XCO before earnings, I feel your pain, it was a rough quarter. I have personally doubled down on this company @ around 5.70 and think it can still do ok heading into the winter season. If you are scared of this name but still want to play the natty gas, take the pure plan via #UNG.
Also, look for #TSLA to see continued choppy trading into and after earnings. There is a lot of support at around $160 which appears to be holding up. But, depending on how the street digests their accounting this name could easily sink down to 140 or surge higher to as much as 200 in very short order. Unless your risk appetite is high, avoid this name before earnings. If it does take another lap downward you can scoop it up for a bargain after the call on Tuesday.
11.4.13
With the Syrian and budget crises behind us for now, this week we look ahead and see how a few things may pan out- where do we go from here? I do believe both of aforementioned issues will resurface in a few short months as they are yet to be fully resolved. January and February will look like same circus we saw last month when the debt ceiling is hit yet again, and neither side is willing to compromise on taxes or entitlements. Likewise, the Assad regime in Syria is still fighting a brutal civil war within his borders, and his days are probably numbered. As these issues relate to the well being of US citizens, what we do know for sure is that the economy has stabilized but it is still fragile. Economic growth remains anemic and the real unemployment rate is somewhere at or above 13.5% once accounting for folks dropping out of the labor force since they couldn’t find employment. Our rapidly aging baby boomer population remains as a headwind for these figures as well. In looking back at the recovery since the financial crisis of 2007-2008, we are reminded, a full five years after the crash and trillions of fed stimulus later, domestic GDP is still barely struggling to achieve 2% growth.
Growth really is the X factor in any society seeking prosperity. For instance, just a 1% increase in GDP growth would theoretically bring in an additional $2.1 trillion in new tax revenue, while also cutting the deficit by nearly $3 trillion in about a decade’s time. This is the tragedy of our ‘recovery’, and should be the laser focus for Republicans if they wish to have a fighting chance in the 2014/2016 election cycles. As they say, the best welfare program is a job, and the GOP should be relentless in their efforts to stand up for free economic principles that will help us create more of them, instead of just being the opposition party of No. This will prove challenging as the party is facing somewhat of an identity crisis between the establishment conservatives vs. the Tea Party faction. They must start offering constructive policies that empower the individual to foster their prosperity, or risk future fragmentation. Where appropriate, they can also call out the joke of our federal government that is all too often forcing its citizens into a reliance on a system of false hopes and promises. Looking ahead to 2016, though it is early, Chris Christie and Paul Ryan should prove to be strong contenders; both are smart politicians capable of negotiating deals with their opponents.
Turning back to growth, we can compare the US’s 2% rate with several emerging economies: China is expanding at around 8%, India at 5%, and Russia at 4%+. Now, we are no China and can’t expect to be in terms of growth as we are already the most advanced economy in the world and they are starting from a much lower base. But, if we unleash the power of the American entrepreneur and innovative/competitive spirit, we can absolutely achieve 3-5% growth that is our historical full potential. After all, we can sit here and debate policy all we want, but unless and until we start growing again, all that will remain is a shrinking economy, fewer jobs, and a much smaller voice in the international community. THIS is what all of us should be focused on.
Stock Picks of the Week:
Look for continued momentum in Petrobras #PBR, which has done well since my recommendation last month. Likewise, Freeport-Mcmoran #FCX should keep doing well so long as gold prices don’t take another leg down. If you bought the play on natural gas #XCO before earnings, I feel your pain, it was a rough quarter. I have personally doubled down on this company @ around 5.70 and think it can still do ok heading into the winter season. If you are scared of this name but still want to play the natty gas, take the pure plan via #UNG.
Also, look for #TSLA to see continued choppy trading into and after earnings. There is a lot of support at around $160 which appears to be holding up. But, depending on how the street digests their accounting this name could easily sink down to 140 or surge higher to as much as 200 in very short order. Unless your risk appetite is high, avoid this name before earnings. If it does take another lap downward you can scoop it up for a bargain after the call on Tuesday.
"Wait, What Debt Ceiling?"
10.14.13
It wouldn't be proper to post a topic this week if it weren't related to the all important debt ceiling crisis- and this one could actually do some serious harm to the global economy, not to mention continuing the degradation of the United States reputation around the world. We are certainly in a rather large mess, the Chinese are taking it to the bank, and it’s high time our elected officials wake up and smell the coffee before further damage is done.
In discussing this horrible situation we’re in, it’s important to step back and ask ourselves what put us in this crisis to begin with. The problem stems from decades of federal budget deficits. We have $17 Trillion in national debt- that is the issue. For 55 of the last 60 years the richest nation on earth has squandered its children and grandchildren’s future by spending more than it takes in. A country like ours should theoretically have a surplus, not a deficiency, and certainly not a multi-trillion dollar one at that. You can look to history and notice that growing nations create budget surpluses while declining nations amass large deficits. We can go back and blame Bush (perhaps rightfully so) and other Presidents, but we are where we are today and need to look for a way to dig ourselves out of this hole.
Whether we like it or not we do have divided government and elected officials are deeply at odds. President Obama should be in the forefront, leading the effort trying to get the two sides to agree on something. He is the President and should be doing everything in his might to bring our nation together in a time we’re so deeply divided. He should demand these children stay locked in a room until they play nice, instead of blaming Republicans for the entirety of the situation and refusing to budge. I’m afraid on this issue, he is demonstrating near zero leadership.
So where do we begin to stop the bleeding in a real and meaningful way? First, we’ve got to stop kicking the can down the road and fundamentally fix the tax structure as well as implement entitlement reform- both of which are simply unsustainable at current levels, especially given the aging population trend in this country. It’s not fair nor is it right to promise benefits to seniors, veterans, and the poor that we simply can’t keep over the long run. On top of that, what is the point of even a having a debt “ceiling” if it’s really just an artificial line that keeps getting raised once you hit it- that’s not a real ceiling. If we’re going to set these things in place, we should learn to stick to them or just not have them to begin with. So, I offer several high-level solutions:
On Tax Reform- we all know the rich get some pretty juicy tax deductions and have great professionals that help find all of the ‘loopholes’. I certainly love my home mortgage deduction, but this type of thing only benefits those who own a home, and I think it’s safe to assume most lower income households rent more than they buy. By eliminating this deduction, we can increase our tax revenues substantially without really increasing tax rates or placing any further burden on the poor. Additionally, if we actually lower our overall rates, including our corporate tax rate- the highest among developed nations, we could actually start to become more competitive and grow our economy again. A growing economy is the best cure for deficits.
On Social Security- the retirement age was set in 1935 when average life expectancy was roughly 55 years. In 2013 our average life expectancy is over 75 years. If we just raised the retirement age slightly for young people only and NOT for those 55 and older, we could put a serious dent in bending the cost curve of this program (which is set to run dry in less than 20 years). Additionally, we should eliminate the social security wage cap at $106,800, which would force rich folks to pay this tax on all of their income, not on their first 100k, which is a highly regressive tax (Yes, even I am calling for certain tax increases where appropriate).
However, more broadly speaking we need a complete overhaul on our entitlement system. In the last five years, the number of families on food stamps has more than doubled. I don’t think anyone would disagree this is not a positive statistic for any nation. As a country, we should be focused on how to lift these people out of poverty, not accepting them staying in it. For all of the billions we spend on wealth transfer payments, if just a portion of that went towards actually trying to find the unemployed a decent wage, or an uneducated twenty something an actual degree by putting them through a vocational training program / community college, we would be doing so much more good. Now, I understand these programs will always exist as they should and also realize that every situation is different and that a country such as ours should always have the proper safety nets in place to catch those who fall poor on their luck. But, the focus is really ass-backwards. Let us put our resources and efforts into teaching people how to fish, instead of just doling out crappy cans of tuna!
Regardless of which side you come down on regarding this whole fiasco, there is one thing that I believe the American people can all agree on right now- Our government is not finding solutions our nation’s toughest problems. In fact, our government is the problem. Perhaps we all should take a look in the mirror for WE elected these clowns in the first place. Maybe we all should start to pay more attention to who we are electing so as to one day put a few more moderate and dare I say more competent bureaucrats in place to do the job they’ve been sent to do. But, for now this is what we have to deal with, and hopefully these two sides will figure something out soon for the well being of us all.
*Quick note on the related government shutdown: Did you know that during the shutdown Congress’s swanky taxpayer subsidized gym is still open for business, while national parks and domestic violence shelters are shutting their doors… An utter outrage!
10.14.13
It wouldn't be proper to post a topic this week if it weren't related to the all important debt ceiling crisis- and this one could actually do some serious harm to the global economy, not to mention continuing the degradation of the United States reputation around the world. We are certainly in a rather large mess, the Chinese are taking it to the bank, and it’s high time our elected officials wake up and smell the coffee before further damage is done.
In discussing this horrible situation we’re in, it’s important to step back and ask ourselves what put us in this crisis to begin with. The problem stems from decades of federal budget deficits. We have $17 Trillion in national debt- that is the issue. For 55 of the last 60 years the richest nation on earth has squandered its children and grandchildren’s future by spending more than it takes in. A country like ours should theoretically have a surplus, not a deficiency, and certainly not a multi-trillion dollar one at that. You can look to history and notice that growing nations create budget surpluses while declining nations amass large deficits. We can go back and blame Bush (perhaps rightfully so) and other Presidents, but we are where we are today and need to look for a way to dig ourselves out of this hole.
Whether we like it or not we do have divided government and elected officials are deeply at odds. President Obama should be in the forefront, leading the effort trying to get the two sides to agree on something. He is the President and should be doing everything in his might to bring our nation together in a time we’re so deeply divided. He should demand these children stay locked in a room until they play nice, instead of blaming Republicans for the entirety of the situation and refusing to budge. I’m afraid on this issue, he is demonstrating near zero leadership.
So where do we begin to stop the bleeding in a real and meaningful way? First, we’ve got to stop kicking the can down the road and fundamentally fix the tax structure as well as implement entitlement reform- both of which are simply unsustainable at current levels, especially given the aging population trend in this country. It’s not fair nor is it right to promise benefits to seniors, veterans, and the poor that we simply can’t keep over the long run. On top of that, what is the point of even a having a debt “ceiling” if it’s really just an artificial line that keeps getting raised once you hit it- that’s not a real ceiling. If we’re going to set these things in place, we should learn to stick to them or just not have them to begin with. So, I offer several high-level solutions:
On Tax Reform- we all know the rich get some pretty juicy tax deductions and have great professionals that help find all of the ‘loopholes’. I certainly love my home mortgage deduction, but this type of thing only benefits those who own a home, and I think it’s safe to assume most lower income households rent more than they buy. By eliminating this deduction, we can increase our tax revenues substantially without really increasing tax rates or placing any further burden on the poor. Additionally, if we actually lower our overall rates, including our corporate tax rate- the highest among developed nations, we could actually start to become more competitive and grow our economy again. A growing economy is the best cure for deficits.
On Social Security- the retirement age was set in 1935 when average life expectancy was roughly 55 years. In 2013 our average life expectancy is over 75 years. If we just raised the retirement age slightly for young people only and NOT for those 55 and older, we could put a serious dent in bending the cost curve of this program (which is set to run dry in less than 20 years). Additionally, we should eliminate the social security wage cap at $106,800, which would force rich folks to pay this tax on all of their income, not on their first 100k, which is a highly regressive tax (Yes, even I am calling for certain tax increases where appropriate).
However, more broadly speaking we need a complete overhaul on our entitlement system. In the last five years, the number of families on food stamps has more than doubled. I don’t think anyone would disagree this is not a positive statistic for any nation. As a country, we should be focused on how to lift these people out of poverty, not accepting them staying in it. For all of the billions we spend on wealth transfer payments, if just a portion of that went towards actually trying to find the unemployed a decent wage, or an uneducated twenty something an actual degree by putting them through a vocational training program / community college, we would be doing so much more good. Now, I understand these programs will always exist as they should and also realize that every situation is different and that a country such as ours should always have the proper safety nets in place to catch those who fall poor on their luck. But, the focus is really ass-backwards. Let us put our resources and efforts into teaching people how to fish, instead of just doling out crappy cans of tuna!
Regardless of which side you come down on regarding this whole fiasco, there is one thing that I believe the American people can all agree on right now- Our government is not finding solutions our nation’s toughest problems. In fact, our government is the problem. Perhaps we all should take a look in the mirror for WE elected these clowns in the first place. Maybe we all should start to pay more attention to who we are electing so as to one day put a few more moderate and dare I say more competent bureaucrats in place to do the job they’ve been sent to do. But, for now this is what we have to deal with, and hopefully these two sides will figure something out soon for the well being of us all.
*Quick note on the related government shutdown: Did you know that during the shutdown Congress’s swanky taxpayer subsidized gym is still open for business, while national parks and domestic violence shelters are shutting their doors… An utter outrage!
"The Curious Case of Tesla Motors"
10.7.13
This week’s topic of discussion is not about government shutdowns, the debt ceiling, or events in the Middle East. Rather, we’re going to take a look at recent market phenomenon- Tesla Motors. Surely, many readers have noticed my never ending tweets about this company, so it’s time to put some of those to bed and provide a summary here on why this company is just so damn cool.
Tesla Motors, for those unaware is the world’s premier provider of fully electric vehicles. That’s right- no gas, no more oil changes, or costly maintenance. With the first mass production launch of the Model S, Tesla has stunned the world through its near flawless execution, becoming one of the best performing and most talked about stocks of the year. So, what’s behind all the hype Elon Musk has produced over in Silicon Valley?
The answer is complex, but can be summed up in two simple words: Disruptive Innovation. That is exactly what Tesla is and has to be in order to survive the brutally high barriers to entry in the automotive market, which hasn’t allowed a domestic entrant in over a hundred years. The power fueling Tesla’s excitement largely surrounds their superior battery technology. They are the only company to offer a fully electric vehicle with a current range of over 300 miles. Not to mention their positive cost structure which eliminates the extra layer of dealer networks that cause enormous margin pressure on other car manufacturers. Tesla sells their product just like anything else you buy, direct to consumers: You can custom configure your car to order and add in your options to arrive at a set price, no haggling or dealership negotiating drama. This model, along with other manufacturing capabilities that surpass even Toyota and the like, will allow the company to achieve gross margins in excess of the industry leader Porsche, currently around 25%. From start to finish, Tesla is re-defining the way cars are sold, and in a much smarter and more efficient way at that.
In analyzing this company, let us compare the Model S to the first generation iPod (remember those non-contrast screens?). Naysayers will point out that the car is currently a luxury niche item and the technology isn’t ready for full mass market adoption. While this may be true today, these folks fail to realize how rapidly tech products evolve. In just a few short years, the company plans to unveil a better, longer lasting battery at a much reduced cost. It’s not inconceivable that we could see a fully electric, 500+ mile range, $35k vehicle in the not too distant future. Without going too deep into the economics, these same naysayers also often forget the all important factor of gas prices. As an example, my gas hog Jeep Grand Cherokee costs roughly 5k a year to refuel ($5 a gallon x 12k miles @ average 12 mpg). This may be a more extreme case, but $6-7 gasoline is a very realistic scenario, with higher demand along with potential supply shocks from OPEC posing increased price risks- in Europe, consumers already pay well over this to pump their vehicles. Over the life of the car, which runs on electricity at less than 1/10th the cost of gasoline, these cost savings along with essentially zero maintenance are very significant. Add all of this in with the fact that these cars simply perform better and are much safer than their gas powered counterparts. Couple that with the environmental and national security factor with EVs since they don’t require us all to take out more debt to pay for foreign oil that eventually gets exhausted into the air we breathe and you have yourself a recipe for a pretty successful venture, if executed properly.
For those who believe, as I do that electric cars are the future, then #TSLA is poised to remain the leader in this category for years to come- they are 3-5 years ahead of their competition today. The stock has had an incredible run, but could fly even higher as this cult stock is still heavily shorted and has much room to grow. Tesla could easily see a market cap of $100B at around the time of their Gen III release in 2016-17. Personally, I’ve been in and out of this stock since 30 and have regretted every time I’ve sold. Still, many analysts argue the valuation on this stock is absurd (and I would tend to agree). But, if the Tesla story continues to bear its full fruit, this could be just the beginning for Tesla as traditional valuation metrics just simply don’t matter. The company is on the cusp of revolutionizing the entire automotive industry. Just think- if you could have bought Apple way back at $180 a share, you would have looked like a genius. Now, this company has had an extraordinary run. While it would be foolish to short a stock with this much momentum, you must also be prudent not to pay too much for this high flier. For those still interested in getting in this name, I highly recommend using long call options. But, if you want to pick up a few shares, wait for a small pullback- if it comes in at all, even to around a $160 where there is technical support, you can probably pull the trigger.
The technology is now proven, the big players are finally waking up to it, and Tesla is leaving them in the dust. Maybe this company won’t make it, maybe this whole EV thing is just a fad… But if these things are here to stay, I want you all over this company to take advantage of this newly created industry. After all, we charge our phones, laptops, and every other device out there, why can’t we charge up our cars too? Having a fully charged vehicle with 300+ miles of range every morning when you wake up, at virtually zero cost with no more hassle of pit stops in the Chicago cold filling up your gas every week sure sounds pretty good to me. #GoElectric
(Full Disclosure: I am currently long Tesla in both common shares and call options)
10.7.13
This week’s topic of discussion is not about government shutdowns, the debt ceiling, or events in the Middle East. Rather, we’re going to take a look at recent market phenomenon- Tesla Motors. Surely, many readers have noticed my never ending tweets about this company, so it’s time to put some of those to bed and provide a summary here on why this company is just so damn cool.
Tesla Motors, for those unaware is the world’s premier provider of fully electric vehicles. That’s right- no gas, no more oil changes, or costly maintenance. With the first mass production launch of the Model S, Tesla has stunned the world through its near flawless execution, becoming one of the best performing and most talked about stocks of the year. So, what’s behind all the hype Elon Musk has produced over in Silicon Valley?
The answer is complex, but can be summed up in two simple words: Disruptive Innovation. That is exactly what Tesla is and has to be in order to survive the brutally high barriers to entry in the automotive market, which hasn’t allowed a domestic entrant in over a hundred years. The power fueling Tesla’s excitement largely surrounds their superior battery technology. They are the only company to offer a fully electric vehicle with a current range of over 300 miles. Not to mention their positive cost structure which eliminates the extra layer of dealer networks that cause enormous margin pressure on other car manufacturers. Tesla sells their product just like anything else you buy, direct to consumers: You can custom configure your car to order and add in your options to arrive at a set price, no haggling or dealership negotiating drama. This model, along with other manufacturing capabilities that surpass even Toyota and the like, will allow the company to achieve gross margins in excess of the industry leader Porsche, currently around 25%. From start to finish, Tesla is re-defining the way cars are sold, and in a much smarter and more efficient way at that.
In analyzing this company, let us compare the Model S to the first generation iPod (remember those non-contrast screens?). Naysayers will point out that the car is currently a luxury niche item and the technology isn’t ready for full mass market adoption. While this may be true today, these folks fail to realize how rapidly tech products evolve. In just a few short years, the company plans to unveil a better, longer lasting battery at a much reduced cost. It’s not inconceivable that we could see a fully electric, 500+ mile range, $35k vehicle in the not too distant future. Without going too deep into the economics, these same naysayers also often forget the all important factor of gas prices. As an example, my gas hog Jeep Grand Cherokee costs roughly 5k a year to refuel ($5 a gallon x 12k miles @ average 12 mpg). This may be a more extreme case, but $6-7 gasoline is a very realistic scenario, with higher demand along with potential supply shocks from OPEC posing increased price risks- in Europe, consumers already pay well over this to pump their vehicles. Over the life of the car, which runs on electricity at less than 1/10th the cost of gasoline, these cost savings along with essentially zero maintenance are very significant. Add all of this in with the fact that these cars simply perform better and are much safer than their gas powered counterparts. Couple that with the environmental and national security factor with EVs since they don’t require us all to take out more debt to pay for foreign oil that eventually gets exhausted into the air we breathe and you have yourself a recipe for a pretty successful venture, if executed properly.
For those who believe, as I do that electric cars are the future, then #TSLA is poised to remain the leader in this category for years to come- they are 3-5 years ahead of their competition today. The stock has had an incredible run, but could fly even higher as this cult stock is still heavily shorted and has much room to grow. Tesla could easily see a market cap of $100B at around the time of their Gen III release in 2016-17. Personally, I’ve been in and out of this stock since 30 and have regretted every time I’ve sold. Still, many analysts argue the valuation on this stock is absurd (and I would tend to agree). But, if the Tesla story continues to bear its full fruit, this could be just the beginning for Tesla as traditional valuation metrics just simply don’t matter. The company is on the cusp of revolutionizing the entire automotive industry. Just think- if you could have bought Apple way back at $180 a share, you would have looked like a genius. Now, this company has had an extraordinary run. While it would be foolish to short a stock with this much momentum, you must also be prudent not to pay too much for this high flier. For those still interested in getting in this name, I highly recommend using long call options. But, if you want to pick up a few shares, wait for a small pullback- if it comes in at all, even to around a $160 where there is technical support, you can probably pull the trigger.
The technology is now proven, the big players are finally waking up to it, and Tesla is leaving them in the dust. Maybe this company won’t make it, maybe this whole EV thing is just a fad… But if these things are here to stay, I want you all over this company to take advantage of this newly created industry. After all, we charge our phones, laptops, and every other device out there, why can’t we charge up our cars too? Having a fully charged vehicle with 300+ miles of range every morning when you wake up, at virtually zero cost with no more hassle of pit stops in the Chicago cold filling up your gas every week sure sounds pretty good to me. #GoElectric
(Full Disclosure: I am currently long Tesla in both common shares and call options)
"Helicopter Ben"
9.30.13
If the last few weeks were any indication, this week should be another roller coaster for the markets given all of the uncertainty plaguing Washington, D.C. at the moment. Aside from the debt ceiling debacle, the Federal Reserve and Ben Bernanke have provided some degree of certainty on the monetary side of the house in recent weeks. Most notably was its decision to silence any speculation of imminent tapering of its bond purchasing program. Over the short and medium term, this will continue to artificially buoy the broader markets as sustained low interest rates for the foreseeable future will keep financing rates low and money cheap. Both home builders DR Horton #DHI and Lennar #LEN will continue rally in this low rate environment and are pure plays on the domestic US housing recovery (If you're even considering buying a home- there is no better time, not to mention the tax savings.. for another post). But, the bear case for stocks here is evident in the Fed's decision itself- the economic data just isn't strong enough yet to justify an easing of monetary stimulus, so say Bernanke and Co. After all, at five years since the economic crisis we're still only building homes at less than half the pace of pre-recession levels and the real unemployment rate remains stubbornly high.
Now, we shouldn't be too quick to pass judgment immediately on this decision. For all those calling for Bernanke's head, keep in mind he has helped cradle the world economy back to stability from the abyss, despite the lack of fiscal responsibility coming from Congress and the White House. We were in a very tough situation for sure- though when you pump trillions of dollars into the economy by expanding the money supply, it's a tough sell to say that all this never ending stimulus is really making us better off in the long run. The question of any Fed tapering is a matter of when, not if, since virtual 0% interest rates are simply not sustainable forever. Inflation, to a certain extent will absolutely start to occur at some point under this policy, and when it does the Fed may be forced to tighten its belts- potentially before the economy has begun to show significant signs of real recovery. This could lead to a possible new conundrum in an environment of stagflation. Let us all hope that the economy is in full recovery mode before any such action is taken by the Fed.
Assuming these policies will lead to moderate or severe inflation, you can expect Gold and gold miner stocks to rally. While it is recommended to always have a bit of gold in your portfolio to protect yourself from these types of events, I believe the ETF #GLD and miner Freeport-McMoran #FCX will perform strongly in the coming quarters. The GLD will give you a pure play on gold prices and FCX gives you a nice 3.5% dividend while you wait for these events to unfold.
Quick Picks of the Week
Last week several opportunities to play the ever volatile oil markets were brought up. The possibility of a sharp rise in oil prices due to supply shocks (Much of the Middle East is a seemingly unending novel of uncertainty) and/or steadily increasing demand by emerging economies is real. To purely speculate on this guess, the #USO (US Oil Fund) ETF should provide great upside to any short term positive price action. If you want to play the emerging markets as well, go with Brazilian oil giant Petrobras #PBR which could easily see a double within the next 18 months. Last, if you want a nice dividend and a solid performer, while also catching some of the upside in oil prices, Conoco #COP should fare well too.
9.30.13
If the last few weeks were any indication, this week should be another roller coaster for the markets given all of the uncertainty plaguing Washington, D.C. at the moment. Aside from the debt ceiling debacle, the Federal Reserve and Ben Bernanke have provided some degree of certainty on the monetary side of the house in recent weeks. Most notably was its decision to silence any speculation of imminent tapering of its bond purchasing program. Over the short and medium term, this will continue to artificially buoy the broader markets as sustained low interest rates for the foreseeable future will keep financing rates low and money cheap. Both home builders DR Horton #DHI and Lennar #LEN will continue rally in this low rate environment and are pure plays on the domestic US housing recovery (If you're even considering buying a home- there is no better time, not to mention the tax savings.. for another post). But, the bear case for stocks here is evident in the Fed's decision itself- the economic data just isn't strong enough yet to justify an easing of monetary stimulus, so say Bernanke and Co. After all, at five years since the economic crisis we're still only building homes at less than half the pace of pre-recession levels and the real unemployment rate remains stubbornly high.
Now, we shouldn't be too quick to pass judgment immediately on this decision. For all those calling for Bernanke's head, keep in mind he has helped cradle the world economy back to stability from the abyss, despite the lack of fiscal responsibility coming from Congress and the White House. We were in a very tough situation for sure- though when you pump trillions of dollars into the economy by expanding the money supply, it's a tough sell to say that all this never ending stimulus is really making us better off in the long run. The question of any Fed tapering is a matter of when, not if, since virtual 0% interest rates are simply not sustainable forever. Inflation, to a certain extent will absolutely start to occur at some point under this policy, and when it does the Fed may be forced to tighten its belts- potentially before the economy has begun to show significant signs of real recovery. This could lead to a possible new conundrum in an environment of stagflation. Let us all hope that the economy is in full recovery mode before any such action is taken by the Fed.
Assuming these policies will lead to moderate or severe inflation, you can expect Gold and gold miner stocks to rally. While it is recommended to always have a bit of gold in your portfolio to protect yourself from these types of events, I believe the ETF #GLD and miner Freeport-McMoran #FCX will perform strongly in the coming quarters. The GLD will give you a pure play on gold prices and FCX gives you a nice 3.5% dividend while you wait for these events to unfold.
Quick Picks of the Week
Last week several opportunities to play the ever volatile oil markets were brought up. The possibility of a sharp rise in oil prices due to supply shocks (Much of the Middle East is a seemingly unending novel of uncertainty) and/or steadily increasing demand by emerging economies is real. To purely speculate on this guess, the #USO (US Oil Fund) ETF should provide great upside to any short term positive price action. If you want to play the emerging markets as well, go with Brazilian oil giant Petrobras #PBR which could easily see a double within the next 18 months. Last, if you want a nice dividend and a solid performer, while also catching some of the upside in oil prices, Conoco #COP should fare well too.
“From Russia with Love”
9.23.13
In this the first post, let’s hit the month’s hottest topic- Syria. As of this weekend, it appears that Syria is in the back window... for now. Secretary of State John Kerry and the Russian foreign minister have agreed to a deal by which Syria would disclose and destroy all of its chemical weapons in a timely manner. Great news, right!? I only wish it were so easy.
Those who honestly think the situation in Syria is over are seriously fooling themselves. We have seen Russian President Putin and his ally Bashar al-Assad in Syria play the United States and the West like a fiddle all too many times in history. Putin loves to push the US and has consistently demonstrated his resolve to prick us over and over seeking a slow bleed of the only remaining superpower since the Cold War.
For investors, it’s important to remain cautious since this issue will likely resurface again in the coming months. Assuming military action is the only way to truly bring down Assad- the West’s ultimate goal, the biggest implication of any such action will be a spike in oil prices. This shock will obviously cause equities directly tied to oil prices to move, but especially favor: Oil ETF #USO, Conoco #COP, Brazilian petro giant *Petrobras #PBR and of course, Tesla Motors #TSLA, which benefits from higher gas prices at the pump. Certainly, there are other reasons to like these names- to be outlined in next posting *(FD: I am long Petrobras PBR with entry @ 14.34 and long TSLA at multiple entry points averaging 102.20).
From a political point of view, this whole situation puts President Obama in a very tough position. The gassing of women and children by the Assad regime is a reprehensible act. However, the American people are rightfully and understandably war wary, and obviously no one wants another war. But, the resolve and credibility of both the United States and the international community via the United Nations is at risk here. Assad’s use of chemical weapons not only violates international norms, it violates international law. If the UN is unwilling or too weak to act, President Obama has decided it is in our national interest to do so… I support him on this decision. Assad and his bro Vladimir Putin (who by the way just implemented anti-gay laws in Russia and is seeking a dictatorial 4th term in 2018) are trying to weaken the US in this process, and it’s right for the President to stand up to these tyrants. As a global, civil society we must demand some real action for these atrocities, else what’s the point of the UN? It passes resolution after resolution then sits on its hands and looks the other way. In the end, Assad must go, he will eventually fall, and the world will have the US to thank for it. Unfortunately, this saga has merely been postponed and we will likely face an even worse situation in the next 3-6 months as the civil war continues on despite international talks. If it occurs, expect the above stocks to rally.
The Week Ahead:
Don’t forget about the debt ceiling debate. If it’s anything like we saw last go around, President Obama and the GOP are in for a battle royale over the budget. We’re just a week away from a potential government shutdown, and Republicans are riled up over Obamacare’s unpopularity. Expect more uncertainty, which will negatively impact markets in the short term.
9.23.13
In this the first post, let’s hit the month’s hottest topic- Syria. As of this weekend, it appears that Syria is in the back window... for now. Secretary of State John Kerry and the Russian foreign minister have agreed to a deal by which Syria would disclose and destroy all of its chemical weapons in a timely manner. Great news, right!? I only wish it were so easy.
Those who honestly think the situation in Syria is over are seriously fooling themselves. We have seen Russian President Putin and his ally Bashar al-Assad in Syria play the United States and the West like a fiddle all too many times in history. Putin loves to push the US and has consistently demonstrated his resolve to prick us over and over seeking a slow bleed of the only remaining superpower since the Cold War.
For investors, it’s important to remain cautious since this issue will likely resurface again in the coming months. Assuming military action is the only way to truly bring down Assad- the West’s ultimate goal, the biggest implication of any such action will be a spike in oil prices. This shock will obviously cause equities directly tied to oil prices to move, but especially favor: Oil ETF #USO, Conoco #COP, Brazilian petro giant *Petrobras #PBR and of course, Tesla Motors #TSLA, which benefits from higher gas prices at the pump. Certainly, there are other reasons to like these names- to be outlined in next posting *(FD: I am long Petrobras PBR with entry @ 14.34 and long TSLA at multiple entry points averaging 102.20).
From a political point of view, this whole situation puts President Obama in a very tough position. The gassing of women and children by the Assad regime is a reprehensible act. However, the American people are rightfully and understandably war wary, and obviously no one wants another war. But, the resolve and credibility of both the United States and the international community via the United Nations is at risk here. Assad’s use of chemical weapons not only violates international norms, it violates international law. If the UN is unwilling or too weak to act, President Obama has decided it is in our national interest to do so… I support him on this decision. Assad and his bro Vladimir Putin (who by the way just implemented anti-gay laws in Russia and is seeking a dictatorial 4th term in 2018) are trying to weaken the US in this process, and it’s right for the President to stand up to these tyrants. As a global, civil society we must demand some real action for these atrocities, else what’s the point of the UN? It passes resolution after resolution then sits on its hands and looks the other way. In the end, Assad must go, he will eventually fall, and the world will have the US to thank for it. Unfortunately, this saga has merely been postponed and we will likely face an even worse situation in the next 3-6 months as the civil war continues on despite international talks. If it occurs, expect the above stocks to rally.
The Week Ahead:
Don’t forget about the debt ceiling debate. If it’s anything like we saw last go around, President Obama and the GOP are in for a battle royale over the budget. We’re just a week away from a potential government shutdown, and Republicans are riled up over Obamacare’s unpopularity. Expect more uncertainty, which will negatively impact markets in the short term.