Debt Worries

This post will be brief

If the politicians can't come to a decision on the debt ceiling the United States will default and the stock market will fall at levels on par with 2008. I personally am going 100% cash in my United States portfolio but maintaining my Asia and European positions. This situation is very scary in that it is 100% preventable, all congress has to do is raise the ceiling. Until an agreement has reached I would stay out of US stocks.

WMT: Taking Over

Wal-Mart is an engine that shows no sign in slowing up. Now that it has swallowed up all the Mom and Pop stores it is looking for its next target to take down. It has zeroed in on dollar stores like Dollar General (DG) and Dollar Tree (DLTR). Wal-Mart has now opened up 3 Wal-Mart Express stores near its headquarter in Bentonville, Arkansas that look to compete directly with the dollar stores. These stores are basically a smaller version on the mega-mart that can fit into spaces where a traditional store would be too large. The Wal-Mart Express stores have been dominating the market and look to put other stores out of business. Wal-Mart already controls the affordable retail market and is now looking to take the cheap goods market currently controlled by dollar stores. From what I have heard the Wal-Mart Express stores are extremely popular and, being Wal-Mart, their margins are better than that of Dollar Tree and Dollar General. I would recommend stock in Wal-Mart on this news and believe for the foreseeable future Wal-Mart's stock will perform very well. I would also sell my positions in Dollar General and Dollar Tree but also I would look to Wal-Mart Express to take on Drug stores like CVS and Walgreen's.

OPEC: Cartel Breakup?

Last week, talks between member nations of the Organization of Petroleum Exporting Countries (OPEC) were described as the worst ever as the Saudi representative commented. The group could not come together and set a target production for the future. Could a breakup of OPEC be in the future?

OPEC is a cartel no matter how much they hate being called one. They limit the production of crude oil to keep the prices high. It is well known that member countries could produce more than the allotted monthly quota OPEC gives to each member. Recently Saudi Arabia increased its production when Libya ceased production due to the ongoing conflict. The recent talks broke up because some members wanted to increase production to bring prices down while other, mostly countries without excess capacity that do not want to see prices and profits fall.

Many have argued that oil above $100 is not sustainable. I believe Saudi Arabia and other member who want to increase production understand this. Western Europe, China, the United States, and other oil importers will seek other sources of energy with prices this high. For example,  ethanol, a gas substitute costs about $3.50/gallon without government subsidies. When oil prices are higher than $80 is when ethanol becomes economically sustainable. OPEC needs to maintain prices so that the importing countries do not seek new technologies that make oil obsolete. While they may bring in record profits now in the future there may be much less demand for oil.

Take this game theory for example
Assuming what they product now is 28,985/month (April 2011 total production in 1000's of barrels) and a barrel of oil's price remains constant.
 

	Increase Production	Keep Production
Present	35,000 barrels/month @ $70	28,985 barrels/month @ $100
Future	35,000 barrels/month @ $60	28,985 barrels/month @ $40

Their profits will look like this

Profits
Present	$2.45 billion/month	$2.8985 billion/month
Future	$2.1 billion/month	$1.1594 billion/month
Total	$4.55 billion/month	$4.0589 billion/month

This is a very rough explanation of oil markets, there are many other factors but basically you can see it is in OPEC's best interest to keep prices where the importers don't search for alternatives.

So I believe OPEC will begin to either raise production to bring down prices or the countries that understand the game I just explained will leave the oil's allocation and begin to produce on their own. There is another game to explain cheating cartels which I will not get into but ultimately a cartel is only good until someone cheats, that is, produces more than what is agreed upon. For the cheater, record profits will be made as the price remains high due to low supple but soon others will realize the cheat has happened and also begin producing more and the cartel is no more. In this example I look to Saudi Arabia as the cheater, they have the most excess capacity and the best relations with the West. I stand by my $80 barrel by the end of summer, it might even go lower.

June 13th Preview

A look back at last week: Last week the market as a whole was sold off and lost about 1.7%. For my picks I was bullish on DE and POT while bearish on LCC. DE beat the street and stayed flat due to a rise in the price of corn. US supply of corn came out this week and my prediction for a tight supply was right, corn prices shot up on flooding concerns. POT faired similarly and was flat on the week. I strongly suggest getting in on these two stocks. LCC was down 8.9% on the week, considerably more than the market due to low traffic and high fuel costs. I'd say I went 3 for 3 last week on my picks.

June 13th-17th
Last week was the 6th consecutive week the major indexes lost on the week and I believe  market is oversold. However I believe because of the news coming this week the market will go depending on how the news is. There is a lot of big news this week. Retail sales and PPI (inflation) numbers come out on Tuesday that, if better than expected could cause the market to rally through the week. Wednesday more inflation (CPI) and industrial productions numbers come out. I expect industrial production to be worse than expected because of a strong dollar, causing US goods to be more expensive and imports to be cheaper. I expect inflation to higher than expectations, oil has remained steady but agricultural products will be more expensive than before as I explained last week. Thursday the last big news comes out for housing starts, I expect 0 houses to be started as the housing market is still in very bad shape. This news will not move the market unless it is better than expected. Look for Monday, Wednesday and Friday to be winning days for the US market.

Last week I talked about corn and how its getting to be too late to plant it, this week let's quickly talk beans. Farmers window to put their cash crop, corn in the ground is closing fast. Farmers are not going to leave the fields bare so less profitable soybeans will be planted across the United States. Bean supply will exceed demand this year look for falling prices of soybeans.

Pandora Internet Radio releases its IPO on Monday. Getting in on an IPO requires you to know somebody but you can get in on the hype of it. Most people who get in sell on the open and make a few dollars doings so. Look for Pandora (P) to sharply rise on the open, start to come back down, and go back up again but I wouldn't ride this stock for more than a day or two.

 Railroads are a great stock to get if you are not in one yet. Warren Buffet likes them so much he bought my favorite railroad, Burlington Northern and bundled it into Berkshire. My pick in the railroads is CSX (CSX 73.48). It has been relatively unaffected by natural disasters this year because it is located mostly on the Atlantic coast. I would stay away from Canadian National Railways (CNI 75.13) because it has been crippled by Mother nature and bad luck. They are diverting much of their traffic around their main lines, particularly in the Dakotas due to flooding and next the had a derailment in Northern Minnesota on an already congested line. I still think railroads are strong but CSX is the leader.

This week will be exciting on Wall Street and could go either way. Be sure to pay attention to those economic reports coming out and make your decisions off them. Also this week I will talk about OPEC and the talks or lack of them between members and what that means for the price of oil. Expect that post on Thursday.

One last pick: Buy blink-182 tickets because they are the greatest band ever and tour with My Chemical Romance. These tickets will be a hot commodity

Week of June 6th

Recap of last week. My picks were WY up SI up and PKN down and I am excited to report I was three for three. Also I was especially excited when MSNBC's Jim Craemer endorsed WY on his show Mad Money, good to see Jim is taking tips from my blog.

For the week of June 6th to the 10th.

Employment data came out last week for the month of May and it wasn't great. Unemployment ticked up to 9.1% and the economy added 54,000 jobs. I think the cause for the rise in unemployment has to be more people entering the search for jobs again. This is good news if you look at it like more people expect the economy to be improving and more jobs to become available. This week the big news everyone is looking for is the International Trade report. Expectations is that trade will be worst than last month but I think the actual numbers will beat expectations thanks to a weak dollar.

It's summer time and that means summer vacations, well usually. Consumer confidence is near all time low levels and discretionary income is hard to find. In the United States the vacation industry and those closely associate with it will be hurting. Las Vegas, Cancun, Disney, are all going to be hurting. More specifically airlines are getting hard especially with oil where it is. I would sell airlines associated with the US market with limited international exposure. The airline I think is worst off is US Airways (LCC $8.89). They are the least efficient of the sector and are over exposed to the United States market. Airlines that may fare better would be European based airlines where "holiday" is a bigger tradition and vacations may be taken more than in the United States.

One thing I observed this week is corn. Pretty exciting right? This year is shaping up to be a very bad year for all agricultural stocks. With the floods, tornadoes, and cold springs the crops haven't gotten in the ground yet across the United States. Corn needs to be in the ground very early in the season or else it doesn't have enough time to grow. Corn prices should be higher this year which makes farmers who got their crops in the ground very happy because they will be getting a very good price. Look for farmers to be buying the new John Deere tractors towards the end of summer/early fall. Buy Deere now before this is reflected (DE $81.95). Other agricultural supporters should also do very well with these high prices such as fertilizer suppliers like Potash (POT $55.17). Buyers of corn will be the losers these high prices. Corn is used in almost all foods as high fructose corn syrup so any major buyer of corn should be seeing high prices if they haven't locked in prices already.

Well this is what I will be watching this week. Let me know what you think. Shout out to Jim Craemer, next time you take my stock tips I want credit and $100.

Debt Ceiling: To Raise or Not to Raise

Recently all the talk has been about the United States reaching their $14.3 trillion debt ceiling. Moody's rating agency just announced today that the Aaa rating of the US's short term credit would be under review if no significant improvement had been made in reducing spending or raising the debt ceiling by this July. The government of the US is gridlocked with the conservatives stressing more spending cuts and no raise in the debt ceiling while the liberals want the debt ceiling raised. Both sides are stressing the need to run a surplus to reduce the deficit but lets just look at the debt ceiling.

Politics aside I think the debt ceiling need to be raised and the United States' Aaa credit rating needs to be maintained at all costs. The debt ceiling has been raised 8 times since 2000 and I agree that this trend needs to be stopped however it should be stopped buy reducing the deficit through raising income and cutting spending and not by setting a limit and risking default on our debt. While keeping the debt ceiling where its at does not mean a default is imminent is does mean a review of a credit and I do believe the will lower our rating. If the rating falls from its current Aaa rating it would make paying off our debt even harder. As we saw in corporate examples, companies ran in the red because of cheap credit as a result of their good credit rating. AIG was operating by paying off old debt with new debt until its rating was lower and new debt suddenly cost a lot more than the old debt they were trying to pay off. I realize this is only one factor in AIG's collapse but it is a good example of what could happen to the US.

Last year, 2010, the United States payed $413,954,825,362.17 in interest expense. The total debt from 2010 was $13,561,623,030,891.79 this gives an average interest rate of 3.05% for the year 2010. A downgrading of US debt would cause interest rates they pay on their debt to raise. a 1% raise of rates on 2010's debt would equal $135,290,907,400 more in interest rate expenses or an extra 1% of the US GDP for 2010. This is something the United States cannot maintain for much longer. This year the US debt is $14.7 trillion and I expect for the first time will hit 100% of GDP. The debt ceiling needs to be raised to avoid a downgrading with the stipulation that this will be the last raise and that major reduction measures will be enacted.

All is not doom and gloom when you take it in perspective. The United States is still far from becoming a Japan. Japan has  225% of debt to GDP while the US is flirting with 100%. Even on the list of the worst of countries debt-wise the United States is still behind the world average and ranks 36 out of 128 on the ranks behind the United Kingdom and Germany. Obviously this scaled is skewed towards the debt heavy countries but it shows the United States is not alone in sovereign debt crisis. The entire world needs to look and its spending and revenues and realize what is a maintainable level of debt/surplus is.

Week of May 30 in the Stock Market

So I think I am going to try something new. I will be covering major events coming up in the week and making my predictions on what the economy will do in the next 5 days (4 this week because of the Memorial Day holiday in the US).

This week of May 30 to June 3.

The first thing I would like to talk about is Germany's goal to abandon nuclear power by 2022. This is a very significant announcement that will hurt an already troubled nuclear industry. The Fukushima disaster that is currently ongoing and has already hurt the nuclear industry. Germany's Chancellor Angela Merkel plans to offset the 25% of power currently supplied by nuclear power with renewable resources. My play on this is buy Siemens (SI $128.19) and sell Powershares Global Nuclear ETF (PKN $19.75). Siemens is one of Germany's largest corporations and is heavily involved in renewables. Not only are they involved in renewable energy but everything from high speed trains to healthcare. Powershares Global Nuclear ETF is a global play on the nuclear sector. While its exposure to Germany may be limited I believe that these events will negatively effect the whole industry world wide.

The best piece of investing advise I have been told is look around at what is going on in your world and see investing opportunities. Today as I was stopped by a passing train and thought that this would be a great opportunity to observe where the economy was going. Around 40% of all freight in the United States is shipped by rail so it is a good barometer of the economy Where I am from, in a small town in Northern Minnesota we have a lot of agriculture so grain cars coming back from the fall harvest are expected at all times to be going to and fro. I was intrigued by the number of cars carrying lumber products going by, it had to be about half. Tied with the Mississippi flooding events, the Japanese tsunami, and the Joplin tornado I think wood prices are going to shoot up. Price took a huge hit during the housing collapse and have yet to recover. New building permits have been steadily increasing and with the summer building season starting for us northern states I see an increasing demand for building materials especially lumber. My play on this news is Weyerhaeuser (WY $20.75), Weyerhaeuser is a leading supplier of forestry products and of the lumber cars I saw go by, half were full of Weyerhaeuser wood. I hear your criticism that I live in only a snap shot of the global economy but I feel strongly that what you see around you is a good indication of the economy, but not the only.

A few more comments for the long term, after listening to Fareed Zakaria talk to the Prince Al-Waleen bin Talal about oil prices I agree with the Prince that oil prices will begin to go back down. The Saudi's, the worlds largest producers of oil acknowledged that with $100 a barrel prices the US and others will begin to seek alternatives and 10 years down the road will not need to import oil anymore. I also think that the uprisings in the Middle East have begun to cool down just look at Gadhafi, he is ready for a ceasefire. Speculation that drove up the prices will calm down and I believe $80/barrel will come by September.

Please leave your comments below on what you like and what you would like to see. Also leave your ideas for or against my predictions.

Cheers