ValueX Vail - A most excellent adventure

How I felt at times during the conference:
"Dude did he just tell us value guys to buy that expensive subscription based technology stock?
Yeah.  It kinda made sense."

This last June I had the pleasure of reconnecting with a most excellent group of people at the ValueX  Vail  conference hosted by Vitaliy Katsenelson

The conference does not consist of large rooms with speakers presenting their case to attendees who then shuffle off to another seminar. Instead the members present and later discuss their ideas amongst a much smaller audience and it is this interaction, defense, and intimacy (only 40 people) that initially drew me to attend last June and in 2012.

Presenting and defending your idea to a small crowd provides an opportunity for feedback and insight as to how others view the markets.   While the ideas are always interesting and varied I find it as valuable to try to discern how people think about the markets; short term flippers, deep value buyers, GARP, growth, distressed investors (and more) all have their own perspective and even within a value stock themed conference there are varied techniques and perspectives.

The profession of security analysis and selection can be something of a lonely, boring one. Staring at a computer screen for the majority of the day becomes tiresome -- getting the opportunity to actually chat with others who share the same passion is a rare pleasant opportunity for me.   I made it a point to spend time with newer attendees as well as some returning friends.  Trying to balance the goal of being a social butterfly with a desire to really converse in depth with folks was a challenge.

Skynet is becoming self aware, buy the right stocks!

While not all the presentations were released for public consumption you can find quite a few of them here:
http://www.scribd.com/VitaliyKatsenelson/documents
In both instances it was an excellent crowd with everyone having something to offer.  The 2012 conference gave me a new respect for Southerners.  As they are quiet, speak slowly and and with a funny accent (just kidding guys) they tend to be underestimated by us Northerners.   If a Southern investor comes up and says he just wants to leeaarrrn from you, Run, run fast. (thanks Alex Rubalcava

In 2014 I learned what to buy before Skynet becomes self aware and what to buy after China's infrastructure binge goes pop.  2014's session also included a very cordial opposing pair of presentations on why you should be long and short the same stock.   Showing both the bullish and bearish case for the same stock was a nice addition that I hope continues at Vail and is an excellent idea for other conferences.

Get Real

While this post praises the ValueX Vail conference it also is a suggestion to you - find others who share a passion to invest and actually talk, present, kibbitz, challenge each other.  Not everyone can or would want to attend next years' conference (actually, please don't, you may bump me out!)  but if you have an opportunity to join or create a group / conference nearby I would suggest you do so.

While today's technology allows for various methods of communication they don't yet completely replace the advantages of real human interaction. At ValueX Vail I learned just as much during casual conversation as during the organized presentations.   Until Sheldon dramatically improves his Virtual Presence Device, getting together in the same room is a lot more fun and productive.






Fortunately there are some opportunities.

A ValueX in Lennox, MA hosted by Vail attendee Ethan Berg is coming this fall.  More information can be found here:
http://www.winthropestate.com/#!valuex-berkshires/c1r9z
The window for applications is closing soon so please apply if interested.  Unfortunately my to-do list overextended enough already (it took 2+ months to finally post this entry!) otherwise I'd go.

@AlexRubalcava in Los Angeles hosts a monthly 10K 'book club' where people get together and dig into the financial documents of various companies.  I'm also gently prodding Alex to start up a ValueX LA, so if you are interested in attending one in LA please gently prod him to get that rolling. Thanks.

Finally, I myself am starting up a '10K book club' /  value investing discussion group for the Seattle / Tacoma area. If you are interested please leave a comment below or email me at:
merrillovermatter@gmail.com

While today's hyper connected world allows us the opportunity to virtually connect in a manner not even conceived of a generation ago, very low tech human conversations should still be a part of your continual discovery of the financial markets. I suggest you give it a try.

Natural gas has a very big hole to fill this summer

The Polar Vortex winter dramatically drew down natural gas stocks as the numerous cold fronts worked their way through America.  While a decline is natural gas inventories is expected each year, this year America ended the winter with dramatically less natural gas in inventory.

US Natural Gas inventories - via the US EIA http://ir.eia.gov/ngs/ngs.html

As of the most recent report, inventories are 40.1% below their 5 year average. To graphically show what this means going forward, here's an estimation of how much needs to be injected into storage every day until the maximum fill date date of November 11th.

The 2014 line is the one much higher than the rest.  Note how the 2012 line was the lowest, when we experienced extremely low prices.

While it's always a guess as to when we'll hit the maximum in storage each year, (going back 19 years the average date was November 11th with a standard deviation of 9.5 days)  it is quite apparent this year is unlike many others in recent history.  Injecting ~40% more each day looks like a challenge which will not be overcome.  Injection rates depend upon the increased production, weather, industrial activity, hurricanes, and I'm sure a few other factors I have forgotten.

 IF we get a nasty hurricane barreling through the gulf, a hot summer, or an early cold winter we could have some serious inventory problems in early 2015.

I am not attempting to estimate how much natural gas will be in the ground for this coming winter but it is something to watch this summer. 

Peak Hurricane?

Atlantic hurricane frequency - source: NOAA

So far this year we have been blessed by a lack of hurricanes on the East Coast.  As the accompanying graphic shows, we are past peak hurricane season this year without any major storms.  Of course statistics only work with a large sample size. Hurricane Sandy from last year is an unfortunate contrary example.  She struck in the last few days of October and as you can see from the accompanying graph this is supposed to be rather uncommon.   This doesn't matter to someone whose home that was demolished by Sandy.


As of right now the coast does look rather clear except for one storm named Humberto near Africa.  The current forecast is for it to rise to hurricane force winds and then fall back to a tropical storm.  One can keep an eye on any storms forming at http://www.nhc.noaa.gov/  During hurricane season I open this window every day to see if anything is forming on the horizon.

Beyond the horrible damage, death and destruction a hurricane inflicts upon society they also play havoc with a portfolio.  Reinsurance firms, oil service companies, oil and natural gas exploration firms, and even utility companies are but a few of the sectors which can be adversely affected by one slamming into America.    Keep an eye out for upcoming storms and also consider stress testing your portfolio. If a major hurricane hit the East Coast how would it affect your portfolio?  Do all your energy stocks have Gulf of Mexico fields? What's the risk with your insurance firms, reinsurance firms?  

Disclosure: Own stock in pipeline companies, reinsurance, oil service, and major oil & nat gas companies

Edit: Reuters also notices the lack of meteorological violence this year 

http://www.reuters.com/article/2013/09/07/us-weather-hurricanes-idUSBRE9860AY20130907

The rising oil choke collar

Oil prices are on the upper end of the post 2008 financial crisis range. So far each time prices rose to the 110+ region they have backed down again.

Gasoline and Oil prices - source: Federal Reserve

While Syria has been getting all the news, Libya's declining oil production may be another reason for firm oil prices. A recent WSJ article (September 10, 2013) highlights the situation.   Considering the vast majority of Libya's GDP is derived from the energy sector (CIA Factbook) this does not bode well for the new post Gaddafi Libya.

I suggest keeping an eye on the price of oil. If it gets much higher it may temper the recent positive economic news.

Additional reading:
http://en.wikipedia.org/wiki/Economy_of_Libya
http://en.wikipedia.org/wiki/Libyan_civil_war

Disclosure: Own oil service, energy, and pipeline stocks

Divergence in employment growth numbers

A few months ago I highlighted how looking at the employment data on a year over year basis provides a different perspective on the numbers.  Today I'd like to bring up a divergence between the private and public data.

yoy employment data and divergence them

source: Federal Reserve

The green and blue lines are the ADP and government year over year employment growth data, left scale and the red jagged line is the difference between their growth rates, right scale.  What's noticeable is the divergence between them.  While it would be better to show just the absolute difference between them regardless of sign, I'm not enough of a FRED graph Meister to figure that out right now.   Right now the >0.35% difference between them is the largest on record for this data series.

Is this divergence truly exceptional? It may have been greater in the past and only later revisions tightened up the spread.

I'm not making a prediction as to which is wrong, merely it's likely the spread will narrow in the future.

Hugh Hendry watch - Turning Japanese

I'm a bit late in this, but here's the most recent report from Hugh Hendry's Eclectica fund.

It's a quick read so I won't excerpt from it except for one trading tidbit:  In 2008 he purchased a 10 year one touch call on the Nikkei with a 40,000 strike price !!!

Q1 Review 2013 Hendry by ValueWalk.com

ht: Mark H @fundmyfund

Addition by subtraction -- Not all dividends are created equal

The current low bond yield, low growth environment has fostered a growing interest in high dividend yield paying stock. I myself have a separate account offering focused on this very area of the equity markets.  A number of ETF's have popped up as well over the last few years to accommodate this demand.

Some of these ETF's may not be the best designed and can show the downside of simplistic indexing. An excellent example of this is Pitney Bowes' recent dividend slashing.

For those of you unfamiliar with the company, they derive a vast majority of their revenue from helping companies snail mail packages and letters.  (Pitney Bowes presentation dated 02/12/13, page 6)  Since you are reading this post online I don't think much discussion is needed to expound upon the disruptive capabilities of the internet. The revenue chart below shows how they have fared.  I do imply anything nefarious with the company mind you, just they are stuck in a market segment that will most likely continue to experience challenges in the future.

They recently cut their dividend after several years of consistent dividend increases. The stock has not done well in the past few years.

When this company popped up on my screens for possible purchase it didn't take long for me to reject it.

As you can see from this chart from ycharts.com, revenue growth has been declining for years, even though dividends have been rising.

Pitney Bowes data - source: ycharts.com

Unfortunately there were a few dividend focused etf's which were sucked into buying the very high yield provided by the stock. Thanks to the site xtf.com we can see which etf's hold the stock

Etf's holding PBI - source xtf.com

Note: 20% of the free float of PBI is held in ETF's and the vast majority of the top ten etf holders were dividend focused.

Pitney Bowes shows just because a company has a high yield and a growing dividend you shouldn't just blindly purchase it.  Always do you homework and look at their long term history and prospects. A very high yield can be a sign of distress instead of opportunity.

Disclosure: Do not and never have held Pitney Bowes stock in my dividend focused separate accounts  or anywhere else.