|Moneytalk Show Review
September 25, 2011
MONEYTALK GUEST – CHARLES (Charlie) MAXWELL
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written by David Korn and Kirk Lindstrom
DAVID KORN'S WEEKLY STOCK MARKET COMMENTARY: Excerpts below
Brinker Comment: The International Monetary Fund said this weekend that it is ready to support the European nations that have sovereign debt issues such as Greece, as well as Portugal, Ireland and other countries. Bob said it is a movable feast each week in terms of what country has problems. Greece has reached an absurd point with some interest rates on government debt at sky high rates. Two-year sovereign bonds for Greece are yielding 70% PER YEAR. Nobody expects to get that kind of money on sovereign debt. When you look at the credit default prices on Greece sovereign debt, the chances of default are 90%. Obviously, not many people expect Greece to pay off its debt. The problems in Greece have now been going on for 18 months.
How much could people lose on their investment in sovereign debt of Greece? The answer is easy — 100%. Bob said he doesn’t know how Greece will get its act together because patience has been stretched to the limit throughout the European union with regard to bailing out Greece. Moreover, Greece has another aid payment due in October. If they don’t get that payment made, then there is a risk that the Greece sovereign debt will enter default which could occur as soon as December because Greece has 5.2 billion euros of sovereign bonds maturing this December. What could happen is that the European union kicks Greece out of its membership. If that occurs, the only alternative left for Greece would be to go back to the printing press and start printing out its own currency. Under that scenario, they would be transacting in the drachma or whatever currency they print.
DEPOSITS AT GREEK BANKS
Caller: How concerned would you be if you had some deposits at a Greek bank? Bob said it is reasonable to assume that all of the major Greek banks in their bank portfolios own some Greek sovereign debt. So if that goes into default, they either have a huge write-down of that asset which thereby disappears from their capital base. If they suffer an enormous decline in their capital base and can’t meet their deposit obligations, that would be of serious concern to any depositor. You also need to look at the insurance that covers your deposits. Bob said he has made no recommendation to deposit money in a Greek bank. Having money in a Greek bank is like juggling three balls of fire and hoping it turns out well.
EC(David Korn): I was reading the following article this week that reported on how Lloyd’s of London is pulling deposits from certain banks in the peripheral economies due to the sovereign debt crisis. More at this url: http://tinyurl.com/3c35jop
UBS POTENTIAL HERE?
Caller: Is there a possibility that something happened at UBS could happen at Vanguard or Fidelity? Bob said UBS has a trading account which is a risky situation. It is not unusual as most banks have that, but that is not what you are looking at when you have a mutual fund company. They hold funds that investors choose from — they are not trading or speculating for their own accounts to it is an apples to oranges comparison. Now if you wanted to compare it to American banks that would be a different question.
EC: Personally, I think the answer is yes. Look what Bernie Madoff got away with. Here is a link to an article entitled, “5 Biggest Rogue Traders — and Could it Happen Here?”: http://tinyurl.com/3bzjhpa
REINVESTING BOND DIVIDENDS NOW
Caller: This caller has some money invested in the Vanguard Total Bond Index and GNMA. Given that rates are at historic lows, should he reinvest the dividends into a money market fund to keep it for a rainy day fund? Bob said that is solid thinking given where rates are right now.
Kirk Here: Interesting. If Brinker says it is "solid thinking" to not reinvest dividends into his favorite GNMA fund at Vanguard, (VFIIX) with rates so low, then why keep any money in the fund?EC: The ten-year Treasury set historic lows this week when the yield touched 1.672% this week — the lowest level since the 1940s. Hard to believe.
LUMP SUM OR ANNUITY
Caller: This caller has the choice of taking a $444,000 lump sum or $2,589 a month ($31,000 a year) annuity. Bob said annuity would represent about a 7% payout. Bob asked whether it was indexed to inflation, and the caller said it was not. The caller said she had a net worth of about $800,000. Bob asked whether she had anyone she wanted to leave money to and she said she had two sons. Bob said if she doesn’t take the lump sum her net worth stays where it is, but if she takes it then it goes up to $1.2 million which would be a a difference of $400,000 each versus $620,000 each, taxes aside. The other factor is what you will live on if you don’t have that annuity. The caller said she thought about investing that money and generating income on it. Bob said he thinks it would be ok to take the $444,000 and investing it in a balanced portfolio of stock market holdings and quality fixed income holdings and a withdrawal rate of 4% which means you would get close to $18,000 in income based on the current value of the account which is $13,000 less than the annuity monthly payments.
EC: There is actually a web site whose domain name addresses this very issue: http://lumpsumorannuity.com/
Article: How to Get the Best CD Rates
Caller: This caller is currently in a balanced portfolio split between the stock market and the bond market. He just sold a company and came into $200,000 of cash. What should he do with the money? Bob said first you pay off any debts, then you make sure you have an emergency fund. Once that is taken care of, Bob said he would be comfortable investing it proportionately in the caller’s current asset allocation.
EC: Bob didn’t address whether he would dollar cost average or lump sum into the equity side of the portfolio with that new cash, but given his bulletin this week, I assume the advice would be to go all in immediately.
Kirk Here #1: Read Marketimer Special BulletinMONEY MARKET ACCOUNTS
Caller: Could money market accounts in the US could go down if they have investments in foreign banks? Bob said typically, a money market fund will maintain a $1 a share, but if they make an investment in a bad credit than it could negatively impact the net asset value. There are two possible scenarios if that happens. The most common solution is that the fund will make sure the dollar value holds by putting up the money if the portfolio manager makes a bad investment — usually the money will come out of their fees. That is the reason to go with a big fund family. The $1 NAV — is a sacred cow. To go below that is called “breaking the buck” and is avoided at almost all cost. If the shareholder has to pay for it, then the NAV could go below $1, whether it is one penny or more.
Kirk: See ==> CURRENT Survey of Best Savings Account Rates <==EC: According to Peter Crane who tracks money funds, U.S. money funds have been reducing their holdings of European bank paper since June, but still have about 20% to 30% of their assets in European bank paper. Found that information at this url: http://tinyurl.com/43eyy3d
Caller: This caller said he feels like we are going through another 1987 scenario in our country. Bob disagreed and said that in 1987 we had a big haircut in the stock market over a quick timeline but we quickly recovered in terms of the economy without even a recession. It took some time for stocks to recover but they did. In the present case, we have already had a recession.
EC: This was as close a caller got to asking Bob about the stock market. Note in 1987 we had a bear market if you go by the definition of a stock market decline of 20% or more, but Bob missed that bear and actually sold out after much of the carnage only to get back in at higher levels. He claims to have modified his timing model after that point in time.
Caller: This caller saw that one-year CDs are yielding about 1% and read that GNMAs are yielding 6% -- is that right? Bob said that GNMA return is total return, not coupon only. Total return is a combination of the interest earned plus any change in capital value and in this case the net asset value. You could collect 3% in interest payment and the value of the shares rise 3% and that would be 6%.
Caller: Do GNMA funds offered by the various financial institutions produce similar returns? Bob said over the long term one of the primary drivers in return is the expense ratio. Vanguard has one of the lowest expense ratios of any GNMA fund which means more of the money stays in the pockets of shareholders.
EC: Vanguard charges 0.23% for its GNMA Fund Investor Shares (VFIIX). It currently has a yield of 3.24% and its net asset value closed Friday at $11.20.
GUEST – CHARLES MAXWELL
Introduction: Bob had on one of his favorite guests, Charlie Maxwell, Senior Energy Analyst for Weedon & Co. Charlie was educated at Princeton and then Oxford. He has been working in the oil industry since the 1950s. In the 1960s he became an analyst on Wall Street and has been rated the #1 energy and oil analyst on many occasions. Bob heaped heavy praise on Charlie as the best of the best in terms of energy analysts and mandatory listening for Moneytalk trekkies. Bob also congratulated Charlie on receiving the M. King Hubbert E3 Ward for Excellence in Energy Education at the 2007 ASPO World Oil Conference. I summarized the interview below.
Brinker/Maxwell: Bob asked Charlie his thoughts on the collapse of the solar-electric company Solyndra. Charlie says it is important that government step in and help at the early stage in new technologies. China is doing that allowing them to do preliminary research that doesn’t produce revenue and get them over the hurdles of the early days of the industry when there are little profits to have. Our government has been remiss in not helping much. They don’t have to give money, they can lend them money and check on them. President Obama with a good thought in his mind and trying to help America went ahead to push solar power. The problem is he doesn’t select companies or gives them the money and his underlings let him down by picking a loser who had a new and controversial type of solar power that they thought would be cheaper but turned out to be much more expensive and they couldn’t sell what they have made. They should have pulled back from their help but they didn’t because they were told by the company that everything was all right and just needed time. They weren’t analyzed carefully by the government and now a bad name has been given to the industry and to President Obama for helping. It shows you can’t just throw money at problems, you have to monitor and evaluate and follow up.
EC: Solyndra was a manufacturer of solar cells and last year was promoted as a model for government investing in green technology. A $535 million loan guarantee was applied for under the Bush administration but was denied, but later granted under the Obama administration and private investors also invested more than $1 billion in the company. Early last month, the company ceased all business activity filed for Chapter 11 bankruptcy and laid off all employees suspended all of its operations last month leaving behind the United States government as its largest creditor.
Brinker/Maxwell: There is a lot of volatility in oil prices. What do you see ahead? Charlie says there is almost nothing that can stop a longer-term rise in oil prices because oil is the most attractive energy supply. It is easy to transport. It is powerful as a fuel. And we have been using it like crazy for 150 years. We have now reached a point where we are producing 88 million barrels a day and the earth is saying how can I continue to grow this much. Getting the production going has been a real problem. In 5 years we will probably reach a plateau and at some point we won’t have additional barrels and the price will go up and we will have to ration oil for those who don’t have the money to pay for the higher rates.
EC: Charlie is on record stating that agrees with the viewpoint of the renown Shell geologist, Dr. Marion King Hubbert, who predicted that the world oil production would reach a peak and then rapidly decline. Hubbert said the amount of oil given to our planet when it was formed is finite. When an individual field has produced 50% of its oil, you cannot force it to produce more oil on a daily basis. Charlie thinks the we are not far away from when more countries have declining production versus those that have rising production.
Brinker/Maxwell: Bob said we are sitting on incredible reserves of natural gas and many have implored the President to start a program that would require all federal vehicles to use natural gas which would jump start this program. Charlie agreed that he has not picked up the ball on this issue. We have problems with coal because of greenhouse gases (and he thinks we will have to reduce it); we are running short of oil, and we have the problems with nuclear energy now other countries saying no to nuclear following what happened in Japan. (Charlie thinks we will come back to nuclear in 20-30 years but it has been terribly delayed by the issues in Japan). And here we have natural gas which produces less waste than coal or oil. In the US, we have a surplus in gas and the price has dropped in half over the last five years so it makes sense to increase our reliance on it. We should have growth of 4-5% a year, but instead it is 2% a year and the government is not sponsoring it. Why not? The environmentalists are a big factor. They want to get rid of the fossil fuels (Charlie says we all do), but they fuel 80% of our energy and so we can’t get rid of it immediately. Solar and wind just won’t cut it right now because they account for a very small percent of our energy and are expensive sources and take a long time to develop the capital equipment. What we have available is fossil fuels. So if we are going to be forced to use less oil and we want to use less coal, let’s go with natural gas. Let’s use it for more transportation purposes where oil dominates.
EC: Last time Charlie was on the show, Bob had asked him to comment on whether hydrogen would ever play an important role in our energy supply. Charlie said he thinks it will in 40- 50 years because hydrogen is the most plentiful element on the planet. Charlie also pointed out that he problem is that Hydrogen bonds so easily and powerfully on a molecular level with other elements that it requires a lot of energy to unbind it and, therefore, getting pure hydrogen is therefore expensive, and it costs money to transport and store.
Brinker/Maxwell: Bob noted that Wind and solar energy only amounts to less than 2% of our energy yet there seems to be a huge lack of federal sponsorship for natural gas. Charlie says it is a political issue. There is a battle between maintaining our standard of living and the ideology of the environmental movement. Charlie said we are finding out new ways of opening source rocks that we have known about for a long time but could never open. Using new cracking techniques with sand, we are getting lots more gas than we ever suspected we would. We are going to have a lot more natural gas which can be converted to liquid form so many big trucks and buses can use it as well as for marine applications. It can be compressed or put in a liquid by cooling. All of that will allow us to move to a natural gas economy over time.
Brinker/Maxwell: There is a lot in the headlines about a move against the oil companies and the White House is talking about raising their tax bill. What is your view? Charlie said we need to do something if oil is going to reach a peak in the next 5-10 years. We need energy efficiency. However, we could use help to get a little more oil than we might otherwise get if we don’t make a real effort. What we have seen so far is the President comes up with a good idea like increasing car miles per gallon, but then he slams the energy companies by taking away the means to do it. We have a government that wants to punish the oil companies for their success, but on the other hand needs the oil companies since the government can’t do it itself. The result is that we are not making the strides we need relative to our energy policy. We need leadership on this issue otherwise we will have big problems 7-10 years down the road.
Brinker/Maxwell: Should we be drilling for more oil in the United States? Charlie said every barrel we can save or can substitute for oil we should. We need to cut down on the imports and increase the value of the dollar by not spending so many dollars on these imports. We are very vulnerable to being cut off from imports. We need to create greater efficiency and finding more oil where we can. Charlie said we will never find enough oil in the United States to meet our needs. It will never get back to the glory days of the late 1960s. But we can develop some additional supplies and every barrel we do it will cut back our reliance on some of the very countries that are using that money to fuel terrorism. Charlie said they can just give the oil companies a level playing field by removing some of the paperwork and ways that don’t involve tax breaks.
Brinker/Maxwell: Are there any areas that are potential drilling regions in the country that you would be taking a serious look at if you were in charge? Charlie said Alaska has areas that have never been tapped that have substantial amounts. The other is area is the Gulf Coast where there is a lot of oil and and we have found new sources of oil and gas.
Caller: Don’t we have tons of oil in our country that we just haven’t found yet? Charlie said we found oil in 1859 for the first time and we have been producing more and more since them. There has only been 5 or 6 years that production has been down. Then came Hubbard in 1956 and said this will last until the early 1970s then we will go over the peak. Then in November 1970, oil production peaked. He was absolutely right and we have been in a downward course of production from 1970 through today. At that point we were the only country progressing downward in oil production but now there are 13 other countries including Russia that have a downward production and so this is a very well accepted theory around the world. Soon the whole world will peak, probably in the late teens.
EC: David Strahan has written a book called, "The Last Oil Shock." In that book, he writes, "There are currently 98 oil producing countries in the world, of which 64 are thought to have passed their geologically imposed production peak, and of those 60 are in terminal production decline." Learn more about that book at the hubbert peak web site at this url:
Brinker/Maxwell: Bob asked Charlie to comment on China as it relates to energy. Charlie said 70% of their energy is derived from coal and they don’t have the administrative restrictions that we do so it is blasting out into the world and polluting the sky and air. We are all breathing air that has been polluted in China. We are working with the Chinese, but they will probably not cut back on their economic growth and so they will probably keep up their coal use. It is the cheapest source for electricity. That is a long term problem that we can’t solve since it is not an American problem. On the other side, we should be sponsoring a lot more natural gas. The Chinese have natural gas and they can easily import it through pipeline from a number of countries in Europe and Asia. We should be helping them do that. They can also import it in liquefied form.
Caller: This caller has been following the building of wind towers in Illinois. The caller wanted to know what rate of capacity they are putting out because he read a report that they are spending a lot of money without getting much bang for the buck. Charlie said he is afraid that he is right. Although he can’t speak to the wind farms in Illinois, when you hear someone say you get 70-80% capacity when the wind is continuously flowing they are right; however, wind doesn’t continuously flow and during hot spells you have to fire up the coal production as a back up to the wind farm. It means you have to build the equipment even if you don’t use it. This is being sold to the American public as a real answer and it is not a real answer. It is pretty close to break even in terms of making a profit bur we need to look elsewhere. Photovoltaics will take over wind as a better long-term energy solution.
EC: Photovoltaics generates electric power by converting solar radiation into direct current electricity using semiconductors that exhibit the photovoltaic effect. Try saying that five times fast.
EC: I always enjoy it when Charlie Maxwell is on the show. He is a real class act. Charles Maxwell's bio is at this link: http://www.weedenco.com/research/charles-maxwell.php
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