We had a wonderful time at our meeting today! I want to thank everyone for coming and making for an excellent conversation the delight of the afternoon. I really feel that we are all developing as traders and investors and each meeting makes us better at our art. We had a total of 7 attendees: (from left to right) Kevin Day, Jeff Harrington, Hien Nguyen, Tommy Schultz, VJ Arjan, Earl Landry, and Larry Rosenfield (who came later on in the meeting).
The Rise of the Bad Apples
Kevin Day commented on the amazing rise of the following stocks, AIG, Bank of America, Citicorp, Fannie Mae, and Freddie Mac (AIG, BAC, C, FRE, FNM). These 5 stocks have accounted for 40% of the entire trading volume for the NYSE exchange. Perhaps this is the greatest short squeeze in history? There is no fundamental evidence for this rise. In fact, it is no secret that AIG, FRE, FNM have billions of dollars of bad assets on their books. Kevin was commenting that it often happens that there is no fundamental reason for a stock to rise or fall in the market. It, therefore, will benefit one to follow the trend. As an old market adage goes, the trend is your friend. Earl Landry bought into Fannie Mae and is up several hundred percent since his buy.
Three Bullish Reason
Kevin also went ahead to comment on the market conditions for the next 9 months:
Gold Plays
Hien is a gold and currency trader and has predicted very specific price levels for gold in the near term. She feels that the price will go to 1032, and then retrace to 964. She has determined these price levels with trend and Fibonacci lines. She told us that it is unlikely that gold will pass much past $1,000. Below is a graph:
Jeff Harrington’s Oil Plays
Jeff Harrington, whose sheer brilliance I continue to admire time and time again, has a few oil plays that ought to be considered by any serious oil investor. Schlumberger Limited (SLB), National-Oilwell Varco (NOV), McDermott International (MDR). He also explained the favourable discovery for British Petroleum of the "Giant" oil find in the Gulf of Mexico and how this find fairs well for the above mentioned companies.
MDR and RIG build the offshore oil platforms. Deep water drilling is the final frontier of oil exploration.
Below is an email personally written by Jeff Harrington explaining in great detail his opinion on this matter:
Depths in the Gulf are now in deeper than 1 mile of water and some are in 2 miles of water. Drilling in the Gulf is going into what is called the Lower Tertiary geological formation, which formed between 23 and 65 million years ago. Note that the massive Cantarell field off the Yucatan (partially in the gulf) was formed from the asteroid impact that wiped out the dinosaurs some 65 million years ago. This is an extremely deep rock formation, more than 5 miles below the sea floor! In fact, the BP find this week is considered the worlds deepest oil well at just over 35,000 feet. This rock structure is considered to be 'over stressed' and is incredibly hot. Heat, of course, is a necessary ingredient in the formation of oil and is the reason why oil sands in Canada and oil shale in the Rockies are literally locked in the rock and not pumpable, but must be 'mined'. The tolerances of deep water drilling are approaching that of the aerospace industry and is incredibly expensive. One oil well costs $100 million (domestic on-shore wells can be as cheap as $10-100k by contrast), and usually requires multiple wells to be drilled before oil is found. With construction of a rig and all the other costs, a well can run $1 billion+. But, with $70 oil and 3 billion barrels, the BP find is worth $21 billion. Oil of $70+ a barrel is required to make these ventures profitable.
Anyways, the same can be said of the San Juan basin off the coast of Brazil. It is in waters of 2 miles deep plus another 5 miles of rock. The San Juan and Gulf of Mexico are the last frontiers of oil exploration that is open to the oil majors. I fathom that we will eventually drill in the deep oceans, but am unaware of what the oil prospects are in 2-3 miles of water. But it makes sense, when organisms in the water die, they sink to the bottom of the ocean. With so much bio-mass contained in the oceans, it seems certain that there are pools of oil locked in the oceanic crusts. In fact, the massive Middle East oil fields originated from an ancient sea called the Tethy's sea (Ocean), which closed when Africa slid into Europe and Asia. (http://en.wikipedia.org/wiki/Tethys_Ocean).
For more information on the formation of oil in both the Tethy's Sea and the Gulf of Mexico, Google search 'anoxic events'. It is now widely believed that most of today's fossil oil reserves formed in several distinct anoxic events in earth's geologic history. The Gulf of Mexico house the worlds second largest anoxic areas that forms when rainwater run off from farms flows down the Mississippi and feeds massive algae blooms in the Gulf that basically kills all marine life because it saps oxygen out of the water (hypoxia). This algea eventually dies and sinks to the bottom of the Gulf and forms a dense soup that will become oil.
MDR and RIG will be beneficiaries of the offshore oil boom as they are the only companies that I am aware of that have the technological expertise to put these rigs together.
SLB and NOV are the guys who help service the drillers by providing the mud and pipes. Their stocks are more volatile b/c the servicers are the first to be impacted by pull backs in oil prices. My outlook on oil long term is incredibly bullish and is the reason why I have maintained my positions in COP and RIG. COP is a more risky company and thus has a lower stock price, but has a higher yield. Plus, their 10% stake in LUKOIL is helping them out b/c it allows them to play in Russia, which is currently a lockout country.
Another company that I will get back into soon is CHK, natural gas prices have remained in the toilet due to over supply from the Barnett, Marcellus, Haynesworth, and other domestic shale plays. But, NG will be a part of this nations, and the worlds, energy plans We are in a period of 'cheap natural gas' due to so much supply but it too will end.
VJ Arjan’s Trading System
VJ Arjan was discussing his trading system to Hian and Jeff who were inquiring about what strategies to use. He sets Sundays up for the days he lays down his strategy in the currency markets. He finds key entry levels based on support levels, trendlines, Fibonacci levels, and momentum indicators. He will then set up entry orders among the major currency, most of which are likely not to be executed. The first portion of his trade is very small and he pyramids the positions which are consecutively larger and larger until the price level reaches half of the profit target. Subsequently, his goal is to start exiting positions for the last half of the trade. While in the trade, he wakes at 4AM (CST) which is when the London markets trade and simply moves his stops.
Santa Fe Gold Corporation (SFEG)
The name says it all. This play is probably going to yield fruits very soon. According to the figures published by the company the average grams of gold per ton, there is very little question that the riches are there. Jeff Harrington was stating that traditionally large companies like Freeport-McMoran (FCX) or Newmont Mining (NEM) have an average of 1-2 grams of gold per ton. In the mine owned by SFEG, there is estimated to be 20-60 grams of gold in each ton! It is a matter of time before the needed permits are procured and the mining will begin (as well as the riches).
The Coming China Wars
VJ Arjan and Tommy Schultz were discussing the upcoming problem of China. Here is a list of things that need to be addressed for starts:
1. Low wage, high quality work by highly disciplined, uneducated, and non-union work force – when 5% of the population wax rich on the effort, the sweat-equity effort, of 95% of the population which remains impoverished, tensions are sure to brew
2. Minimal worker health and safety regulation – It is customary for at least 10 persons to be admitted to a hospital for poisoning in major cities and towns on a DAILY basis. The pollution in their rivers are so grave that it may soon become necessary for China to import water from other countries. Tommy Schultz stated that even importing water may not be necessary; China has the reputation for piracy and counterfeiting. They may just steal filter technology to filter polluted water.
3. Government-sanctioned system of counterfeiting and piracy – Currently the world black market accounts for 7% of the world’s GDP. Of this percentage, 5% comes from China. Currently 12% of the world’s GDP comes from China. The government knows that cracking down on piracy would lead to massive unemployment among Chinese workers. So to appease the world, they crack down on some counterfeiting operations from time to time, but know that they must sustain these “industries” if they are to keep appreciating at 10% per annum.
4. Racism – The “Hanification” of the Urumqi – The Chinese government has been systematically flooding the western region of China that is home to ethnic Muslim Urumqi. This area also happens to be incredibly rich in resources. The Urumqi have been retaliating and this is being reported in the press as a terrorist activity.
Obamacare
Larry Rosenfield, who is himself a physician from Tyler, TX, commented on the national health-care debate. The government, not just the American government but most governments, do things without thinking of the full ramifications of its actions. In the current bill, there is definitely a lot of pork and many political motives involved. However, the health-care system is inherently corrupt.
He thinks that the fair option would be for everyone to buy into Medicare and Medicaid. Most Medicare/Medcaid patients, however, are very eager to take advantage of this system. They take free government checks by qualifying (they do not work) and they do not pay taxes to fund the system. In Larry’s words, these patients “game the system.” This must be stopped, however, if Medicare/Medicaid wants to avoid bankruptcy in the very near future.
The next meeting will be on Sunday, October 4th, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com
We had a great time at our meeting! I must say that I, for one, feel truly privileged to know these individuals and learn from their experiences tremendously every time we meet. We had 3 attendees this time: (from left to right) VJ Arjan, Jeff Harrington, and Kevin Day.
Harold Geneen
Kevin Day gave a glimpse into the mind of the CEO of one of the largest conglomerates in U.S. History, Harold Geneen. One thing that mattered most to him was the number for earnings. He had a photographic memory and could remember the exact figures of profit targets of all 33 arms of IT&T’s business in a heartbeat. Kevin was explaining the board room atmosphere, where all 33 arms of the company would gather to present their MOR (monthly operating report). If there was ever a pet peev of Mr. Geneen, it was lying about earnings. If anyone were caught lying about their figures, they would be dismissed at once. Kevin recalled once when a senior vice-president among them was asked about the figure for the profit target for a business, and the executive, who was not sure of it, was humiliated in front of all the other executives by being asked to personally leave the room and find out what the exact figures were. In this way, Mr. Geneen set an example to his other vice-presidents, of which Kevin was one of them.
Market Plays
It seems that this market rally still has legs, despite the fact that most of the money is still waiting on the sidelines. Jeff Harrington is closely watching when people start buying on margin as it will signal the exhaustion of the upward bull move.
Kevin Day is still looking at Eastman Kodak (EK). He is convinced that there is some major move going on within the company although he cannot name what it may be. Eastman Kodak, we may add, crept up to $3.25 and is back down to $2.97.
Kevin also added that he may be looking at a several point move in Sante Fe Gold Corporation (SFEG) as rumour has it that the permit, which has been long awaited, may be coming through.
Oil has been acting bullish as well; it is certainly at the level where the crude oil producers can recoup the cost of production at $60-70 a barrel. Friday, crude oil moved up close to $3 in a single day’s trading to $67 a barrel.
We can expect natural gas futures to remain depressed for the remainder of the year. Jeff Harrington explained that he has a source of information suggesting that the supply for natural gas for the entire winter will have been attained in September. Obviously, over supply does not bode well for natural gas.
Jeff Harrington was also explaining that, according to CFA, basic materials do well when coming out of a recession. Proof of this, if theory did not suffice, is that Jeff is up 80% year-to-date on his portfolio, which includes a good deal of basic materials plays. On another note, VJ Arjan is also up about 60% year-to-date with nearly 80% of his portfolio in basic material equities.
The restructuring of the automobile totem-pole
The automobile industry will be shaping up to be very different than it has been. Ford will survive due to its ability to raise cash by mortgaging everything it owns (tangible or intangible). GM will come through leaner and meaner by shedding off its other losing businesses. Honda will ride on the cuff of Toyota’s position. The Korean car companies like Hyundai and Kia are quickly gaining ground. Toyota has been making its cars bigger and is becoming like the new GM. Tata motors is creating for India what would be the equivalent of Henry Ford’s Model T in America, the Tata Nano. It was released a couple of weeks ago and will be purchased in massive quantities throughout India. The great loser of this reshuffle will be Chrysler. Like Jeff Harrington said, the only thing he likes about Chrysler is the Dodge Viper, and that’s about it!
AMD’s failed strategy
“Hector Ruiz, basically, sucks!” – Jeff Harrington
You may be wondering who Hector Ruiz is; well he was until very recently the CEO of AMD. AMD has been hiding out in the forest and camping out in tents next to bonfires like outlaws, trying to hide from Intel and its deputies. Hector Ruiz decided to challenge Intel on its cost front, trying to limit costs of AMD chips, but Intel having the bigger infrastructure, basically kept cutting prices on its chips until AMD was forced to report losses for the last 7 quarters straight. Now AMD is in desperate straits and Intel is just waiting to gobble them up when they declare bankruptcy. However, recently with Ruiz’s firing they have changed strategies that promises for a potential rebirth of the company. They have changed their business strategy to core architecture, shooting to make the best chips and not the cheapest ones.
The Crowd
“In the case of everything that belongs to the reality of sentiment – religion, politics, morality, the affections and antipathies, etc. – the most eminent men seldom surpass the standard of the most ordinary individuals. From the intellectual point of view, an abyss may exist between a great mathematician and his bootmaker, but from the point of view of character the difference is most often slight or nonexistent.” – Gustave Le Bon
VJ Arjan recently read a book by French historian, Gustave Le Bon, entitled The Crowd: A Study of the Popular Mind. One of its main arguments is that a crowd is, in fact, less intelligent than its individuals separately as it is prone to elevate sentimental affectations to override reason. He furthermore went to say that the market mechanism and its players also are prone to act in this fashion. It is therefore imprudent to forecast with a crystal ball prices levels, as the crowd may relish on things that have no substance whatever and for undue time periods as well. One may well remember the Tulip craze in Europe where peasants and farmers would squander their entire life savings in the desire to acquire tulips. This is no different for the crowd of investors and it may pay well for most to do the exact opposite.
Recommendations on how to pick great stocks and make money in the market
Kevin’ Million Dollar Car
Kevin was explaining to us his days back in San Francisco (in the 1960s) as a stockbroker with Sutro and Company when he was one of the first people in the city to own a Rolls Royce. He has often referred to it as his Million Dollar Car due to the effect it would have on his clients who could not wait to brag to others about their stockbroker and being driven in his Rolls Royce. He explained that although he wouldn’t buy a Rolls Royce right now even were it given to him now as his net worth has gone up 20 times what it was back in the 60s, these things were important to him at that certain point in life. The car made him lots of money while he was working as a stockbroker – hence his Million Dollar Car.
Jamaica, lost after being colonized
Jamaica, unfortunately, is following the same path as many countries in Africa after colonization – it is falling apart and paving the way for civil unrest or even civil war. Kevin recently took a cruise to the Caribbean stopping on his way in Jamaica. Speaking with a local he came to find out that the official unemployment rate in Jamaica is 60% (the real figures were closer to 80%), an excessively high crime rate, and a total infrastructure collapse after the British left in 1971. With the slew of high crimes in its capital city of Kingston, tourists who used to be a major economic driver of the country are drying up and are no longer frequenting the island.
The next meeting will be on Sunday, September 6th, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com
It is not unusual now, I think, to expect to feel like a sponge that has soaked in lots of water after these meetings. I want to send a heartfelt thanks to all who attended and contributed to the liveliness and depth of the discussion; as always, we end up more knowledgeable by feeding off of one another. In addition, I want to welcome Shelley Gomez and Phil Garcia to the Scarlet Kings and thank them for sharing their stories and insights with us all. We had 6 attendees: (from left to right) Shelley Gomez, VJ Arjan, Phil Garcia, Jeff Harrington, Tommy Schultz, and Kevin Day.
Food and as an Insight into the Cultures of People
We started the first three-quarters of an hour on a discussion about food. Phil Garcia, who has been an astute observer of cultures worldwide, explained to us that the was food is flavoured tells much of the culture of a people. For example, sweet and tasty flavours in a type of food can be interpreted to mean that the people have sunny, positive, and open dispositions. Likewise, sour and tangy flavours can be interpreted to mean that the people are dry, negative, and closed-minded inclinations.
Investing Like a Lion
Phil Garcia, who has been himself a very successful trader and investor, related to us that the key to success in investing in the markets is to invest when the lion (the market) is calm and dormant with the potential to explode at any moment. Most people make the mistake of investing when the lion is hot on the chase; most people, however, don’t see the imminent end of the market rally and the cooling of the lion until it is already too late. The current market environment can be equated, therefore, to the position of a calm and dormant lion; let people say what they will about the market, but it will move one day and most people will not catch it.
Obamacare – Pros vs. Cons
We spoke about President Obama’s initiative to nationalize healthcare – a touchy topic for the whole nation at this point. Kevin Day spoke to us about the nationalized healthcare in Austrailia, where he is originally from, in a place called Ballerat. He related to us how 5 or 6 of his childhood friends have died because the hospitals in Ballerat did not have enough doctors or beds to treat patients, especially those with terminal chronic diseases. Perhaps the stories about bureaucratic inefficiencies are true for healthcare in Germany, the United Kingdom, France, and Canada. We discussed how the government cannot take the place for the irresponsible choices of others; instead of having multiple cell phones or cable television, people should sacrifice those to pay for health insurance. Kevin spoke further that is would be a dream for the Obama administration to think that they can provide healthcare at the very high level it is right now to everyone without bankrupting the nation. When our President was campaigning he captured the hearts of millions with his message of hope and change, but change does not always mean an improvement. Civil unrest will ensue as this landslide of debt continues to mound.
However, the government’s efforts may not be hopelessly inefficient as it may seem. Jeff Harrington spoke about the returns on government initiations in healthcare and education are meant to pay off approximately $2-5 for every $1 invested. If the 47 million uninsured in America get access to health insurance, people will take less sick days, will earn more and, therefore, consume more, circulating more money through the economy. Also, the government, along with its string of failures, has had its strings of successes as well as a regulator of public industries. A case in points, continued Jeff, was the government subsidization of thousands of acres of land to the railroad companies in the 1880s, which may seem like a heck of a bargain for the railroad companies. What did the government ask in return? Only free access to use the railroads for free for the next, oh say, ONE HUNDRED years! So the government programs of the past have been successful, and this may be the case for the Obamacare Health Plan as well.
Will China Sell the U.S. Treasuries on its Books?
In one word, No. Selling U.S. Treasuries would wreak asset values for Chinese companies significantly. Also, China cannot afford to put tens of millions of Chinese workers out of jobs, as this action would certainly result accordingly. However, when China can sustain a self-standing economy and its military might can parallel those of industrialized nations, they may seek a greater rate of return with Eurodollars rather than the pitiful rate provided at the moment by U.S. Treasuries.
Problem of a World Currency
Recently, China’s Finance Premier, Wen Jiabao, expressed in a public statement the possible need to create a world currency so as to avoid the recent fluctuations in the yuan, which is pegged to the rapidly depreciating U.S. dollar. There is principally one problem with this thesis. Let’s take the case of the Euro: The United Kingdom is a member of the European Union, but it is not participating like the other European counties in issuing their currencies into Euros. The reason is that when two countries combine currencies, there is a transfer of wealth from the rich to the poor countries. This is, of course, a situation a country like the United States would object to, so it probably would not happen, except as a result of some economic calamity that left the world no other option.
The Fall of the American Empire
Phil Garcia explained that no matter how far in history you go from the Egyptians to the British, empires have risen and fallen, and the American empire is going to be no different. In fact, this country is already giving indications of a fall: mass printing of our currency, $1.2 billion of credit card debt, $13 trillion government deficit, etc. Tommy Schultz also added that most people, in general, are concerned with short-term gains, and do not take in the long-term consequences of their actions. This prevailing attitude is always what wrecked empires of the past and will lead to this nation’s eventual downfall as well.
The Up and Coming Indo-Chinese War
The emerging superpowers of China and India do not bode well for either. Their proximity by land and water makes for some potentially dangerous encounters. The Indian navies control the Bay of Bengal while the Chinese navies control the South China Seas; the two bodies meet on the Southeast Asian peninsula. Shelley Gomez, a native of India, noted that India has always worried about China more than Pakistan, as China has more power than Pakistan and is also close allies with it.
China’s Acquisition of Raw Materials
China has been scrambling to acquire raw materials by becoming close allies with resource rich countries like Angola, Sudan, Myanmar (oil), etc. In regards to the recent ethnic riots in China involving the Urumqi the Chinese government flooded the area with Han Chinese to take advantage of oil and coal reserves there.
The Era of Unreasonable Returns
Phil Garcia went through the last century and detailed us on the changes in perception of a reasonably good return on investment.
- After the Great Depression a 7-15% rate of return was fantastic
- A change occurred from 1997- April 2000, greed factor heightened returns and it was not uncommon to expect 100% - 1000% returns per annum
- A second bubble occurred from 2001 to July 2007 with the real estate crisis
All this turmoil has led the investors to become very scared of the market and to sell good, solid companies vastly under true values.
Peter Lynch was and IS still right!
“Buy companies that your friends are using.” – Peter Lynch
Some potential plays include the following:
- Kodak (EK) at $2.84
- American Airlines (AMR)
- Merck (MRK) – Dividend yield of 5.7%
- The Big Three (Banks, not Autos) – JP Morgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC)
- Chinese Healthcare Companies (with consumption of meats, cigarettes, fast food, and pollution people will be getting sick)
- China Construction Bank (CCB) – large insurance companies and Prince Alwaleed Bin Talal have taken large blocs for themselves
- China Mobile (CHL) – Dividend yield of 5%
- Pepsi (PEP) – Dividend yield of 2.2%
Gold and Silver – What Will Happen Next?
Phil Garcia talked about gold forming a bullish pattern and rearing to break through the $1,000 price resistance mark. Kevin added that silver will probably outpace gold in terms of percentages as it is selling at historically low ratios to gold. Below is the chart for gold:
For your hearing, below is a link of the audio recording of the meeting. Enjoy!
http://rapidshare.com/files/255191224/July_12th__2009_Meeting.mp3
Simulated Portfolio
| Date | Security | Entry | Current Price | Profit/Loss |
| July 12, 2009 | FXI (iShares FTSE/Xinhua China 25 Index | $25.16 | $36.87 | $1,171 |
| July 12, 2009 | ILF(iShares S&P Latin America 40 Index) | $26.60 | $32.41 | $581 |
July 12,2009 | EWZ(iShares MSCI Brazil Index) | $37.69 | $49.35 | $1,166 |
| July 12, 2009 | PBJ(PowerShares Dynamic Food & Beverage) | $13.27 | $12.95 | -$32 |
| July 12, 2009 | GUR (SPDR S&P Emerging Europe) | $29.74 | $27.96 | -$178 |
| July 12, 2009 | FCX (Freeport-McMoRan Copper & Gold Inc.) | $29.06 | $46.64 | $1,758 |
| July 12, 2009 | WLT (Walter Industries – metallurgical coal) | $38.75 | $36.04 | -$271 |
| July 12, 2009 | RIO (Companhia Vale do Rio Doce – gold mining) | $13.12 | $16.12 | $300 |
| July 12, 2009 | GVA (Granite Construction Inc.) | $35.67 | $30.59 | -$508 |
| July 12, 2009 | MT (Arcelor-Mittal ADR) | $26.25 | $29.70 | $345 |
The next meeting will be on Sunday, August 2nd, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com
