Tuesday, October 27, 2009


One of my main concerns towards the future is how low income individuals will live in comfort with long term increasing energy prices and rising temperatures. As individual income in countries like China and India grow , hence their energy requirements (hence the temperature and global demand for oil). Nowadays a middle class European lives far better than Louis XVI and basically is due to energetic and medicine improvement. So far part of the problem was solved by Hydrocarbons, but currently the extraction rate is greater than the natural generation rate, thus creating an unsustainable imbalance for the long term.

All the green movement started mainly in the 50s with Germans but the real boom in terms of capital investment started in 1990s reaching new heights during the last four years. Humanity in one way or another will succeed and the succeeding mechanism will be pricing. As long as crude prices continue to soar and less people could afford some kinds of services the more incentive the human has to develop more alternative sources for energy.

I don’t see the crude prices in 70s per barrel in the long run, way up. Wind and Solar energy are currently the main sources for clean energy (because nuclear is quite efficient but not that clean). Today Wind and Solar energy are not the most efficient sources of energy. Improving technology in these fields will create a massive shift from one energy source to another, thus creating an increase in real income for the whole population.

Green efficient energy will reduce the gap in current comfort that exists between different income classes, and will open the opportunity in markets that before was not efficient to supply. In the next ten years you will see stock prices of green efficient companies to grow faster than the overall market, you will see a lot of new billionaires (pi-hippie billionaires), mainly in the energy sector or in the savings energy sector (products that save energy like insulation and building materials, air conditioning systems, etc) .

There is a lot of optimism about the energy stocks but the real baggers are going to be the ones that nobody gives a dime for until they are no longer cheap, everybody as energy consumers has an edge in this industry but I wonder how many people will use it to increase their wealth.

*this article or any of the previous or following ones does not constitutes any investment advice or suggestion.

Friday, September 18, 2009

Created Knowledge and Adopted Knowledge

I think that the financial turmoil of the previous year and the cyclical slump of the current is one of the best things it ever happened to Marco, Diego and I. We are fortunate not because we are wealthy (we aren’t), it is because we almost don’t have liabilities in our Balance Sheet and that gives us a huge power, the ability to use cash on hand in the most creative ways (or at least not in the most preposterous ones).

After some time of remorse I started to think in all the people that saw their homes in foreclosure, credit card debt, revolving credit lines closed, broken covenants, triggers deployed and any other financial disgrace that you could imagine that an individual, institution or government can suffer (they can’t? Ask Iceland).

Definitively I am not trying to attempt to conclude the whys and tell the hows, because I’m not that smart. Instead I try to wonder if all this financial turmoil and excessive leverage is a matter of Created Knowledge or Discovered Knowledge.

Capitalism and Communism are a created knowledge, the humanity did not rose and …….. and voilá! There is capitalism or communism to their status quo. This system was based in certain rules that by themselves were based in some knowledge, theory or some sort of hypothesis….. at the end knowledge.

Is the lack of knowing the human being the problem? Or it is that just that we need more delimited boundaries? And here we go again, is more regulation needed? Doing money is not that hard, just a little bit of common sense and work. During the past 35 years the world of finance and financial markets, products or anything that carries the word have been revolutionized amazingly.

Options, Forwards , ETFs, Derivatives and other kinds of financial products created for something are used in reality for another. Options , forwards and other products were created to hedge, in other terms to avoid “risk” (measured as the volatility in the price of something) and in reality are used in a leveraged basis which increases the risk versus having the underlying real asset.

Adopted Knowledge is something that it is as it is, described in other words is something discovered. What it seems to me is that there is a basic misunderstanding of the basic nature of human, thus adopted knowledge.

We clearly don’t know lots of things about humans, we won't know how we will react to different knew products, financial schemes and economic incentives with great precision. What we really know is that we cannot afford the social cost of this crisis that only benefit people that have some cash on hand. I don’t know if we need more rules, but for sure we need more watchdogs in the kid’s playground.

Saturday, August 29, 2009

Irrational Exhuberance?

One of person I admire the most is Alan Greenspan and these days remind me a lot of him. Does the stock market frenzy is sustained by fundamentals? Are there any signs of recuperation? When someone is ill and shows signs of recuperation does not mean that the virus is away. I think the resilience of the American, German and French economies is quite astonishing but remind two things : first the stimulus package is not forever (remember the balance sheet problem described in the previous article) and second stock prices are based mainly by sentiment.

This sentiment has been nourished lately with some “positive news” but I think is too early to smile and to late to cry. In my belief the economy is on the verge of knowing( maybe one or two quarters away) if the stimulus is enough and the economy will get back on track (which I think it would take at least to the 3th quarter of 2010) or if the demand and supply were not able to change structurally and cyclically (increase and readapt).

The Dow has advanced from 6440 Units (this year low) to 9554.20 Units to date. Even a monkey could do a 50% profit just by doing nothing (if the monkey bought at year’s low, is quite difficult for a human but I think that the monkey has a better chance). I love the rapid rush that the stock market showed in the last three months. I picked some stocks that doubled, tripled, quadrupled or more, but still I’m seeing a lot of greed in the market and when I see ungrounded greed I start to be fearful (to see the perfect example of ungrounded greed , look at AIG’s stock price in the last 4 weeks).

I stay long long long (this means to hold them) on stocks, but I do remain concerned of real operative indicators (scrap metal prices ,FF indexes,inventory turnover, consumer confidence, among others). If indicators do not improve we will see a setback in earnings (increase in some earnings could be caused by a decrease in previous quarter inventories),thus in stock prices. Buying the Dow at 9500 is far better than being on fixed income, in the long run it will outperform.

Time will say if we have a Alice in WonderlandMarket , surrounded by irrational exhuberant sentiment or if we have an articulated, resilient, stable and back on track demand for goods and services aiming to 2007-mid 2008 levels.


Wednesday, August 19, 2009

Dumping Dollars?

In my point of view Dollar is not the right place to sit. Maybe its seems like the chair with more cushion but would you sit on a chair with great cushion and two broken legs? I wouldn’t . Would you invest in a company that spends 185% of what it receives from their customers? I wouldn’t. That its debt is growing 1% a month? I wouldn’t. This company is called United States of America and their shares are called Dollars. Pundits qualify the US as the safest country to park your savings, thus denominated in their currency. With all due respect that is only regarding the probability of default, but what about the purchasing power risk ?(dollars vs Euros, GBP, Remibis, Yens, Pesos,etc).

Being sympathetic with accountants I will explain how I see the US situation, looking it in a balance sheet wise , what happens when a company increases its liabilities and the proceeds go to spending (with no added income from this spending)? You reduce stockholders equity wright? And how do I name the shares of the company? Dollars, so basically they worth less as the company increase its leverage and increases spending.

This increase in borrowing from the US will erode the value of the US Dollar . The US is borrowing about 2 trillion dollars additionally each year, 400 billion financed by Chinese and 500 billion from domestic market and the rest from other places of the world. To revert this pattern the country has to deleverage itself, otherwise you will see a declining value of the dollar, inflation and real negative returns from holding dollars (cash and bonds). The only way to deleverage is to increase taxes (which due current conditions is not feasible at least until 2011) , thus having enough money to repay or at least not to incur in additional debt.

Don’t get me wrong I’m not saying do not invest in the US, go for stocks because they have an inflationary component , not a 1 by 1 but they will capture in value from inflationary times (depending on industry and company , but in average they will increase in nominal terms as inflation increases because their revenues will increase). Basically my point is you could do better holding cash or bonds in other currencies than holding just cash or bonds in Dollars.

Wealthy Mexicans base a huge amount of their savings in US Dollars relying on a basic tenet; to preserve their purchasing power. I wonder if this decision is based from a fundamental point of view or it is a mere tradition (maybe I’am not seeing something). Maybe they just like dollars but I encourage them to diversify and do not remain only parked in a currency with huge deficits.

Thanks for reading

P.S. For a country borrowing is not a bad, as long as the cost from doing it is below the benefit for the country as a whole.

Tuesday, August 18, 2009

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Ricardo Montes d....