We pause today to remember Henry Allingham, who died on Saturday at the age of 113.
He was Britain's oldest man. But we mark his passing because he was one of only three surviving British veterans of World War I. Allingham survived Jutland – the greatest naval engagement of the war. (The Royal Navy lost 14 ships and 6,000 seamen.) He also survived the Somme, where the British Army lost more than 50,000 soldiers on the first day of the battle – July 1, 1916. Between July and November 1916, more than 420,000 British casualties would accrue in an effort that gained about two miles of territory. In total, there were more than a million casualties over the 12-mile front. Of the war, Allingham said little. "I saw too many things I would like to forget, but I will never forget them, I can never forget them."
We wish the dead got a vote. We think if they did, the world would have far less government, far lower taxes, and far fewer wars.
As you might recall, I've been an energy bear for a long time. Since 2006, I've been writing that the price of oil, and particularly natural gas, would fall.
I was bearish on energy because its price was well above the inflation-adjusted average range, because speculative demand was controlling the futures markets, and because of the popularity and widespread acceptance of a nonsensical Malthusian myth, "peak oil." I knew that, sooner or later, the speculative traders would blow themselves up. (They did. See Brian Hunter's track record at Amaranth.) I knew that, sooner or later, more oil and gas would be found, destroying the peak oil myth. (It was. See the huge finds off the coast of Brazil and the record-breaking increases to natural gas supply around the world.)
In my mind, avoiding oil and gas for the last few years was an easy bet. The hard part is figuring out when to start buying. I think we're getting close.
The time to buy oil (just like any other commodity) is when no one wants it. When you see oil and gas storage filling up, when you see drilling rigs shutting down, and – best of all – when you see magazine covers reporting that the world is "drowning" in oil, it's time to buy. You can see for yourself that storage is way above the normal range for this time of year. And the domestic drill-rig count is now down 57% from its peak last August.
I sponsored an in-depth statistical study on the influence of the rig count on oil prices two years ago. We found the rig count is not a leading indicator of oil prices – most of the time. (The number of working rigs lags the price of oil by about four months, on average.)
However, when the number of rigs declines by an extreme amount (more than 30% year over year), it's usually a very good time to buy oil. The last time rig counts declined by more than 50% year over year (1986), oil nearly doubled in price over the next 12 months. See the chart below…
The chart above doesn't show it, but the rig count in the U.S. is currently 920, down 52.3% since last year. It's a huge decline, signaling a great entry price for oil. However, I'm still bearish on natural gas, because the glut of supply is too large to overcome.
More bad news for commercial real estate… U.S. banks have been charging off commercial real estate loans at the fastest pace in 20 years, according to a study by the Wall Street Journal. At that rate, losses could hit $30 billion by the end of this year. Small, regional banks will get hit the worst because commercial real estate loans make up a larger percentage of their assets.
Our own Dan Ferris has been way ahead of the market on this problem. Dan recommends shorting a major insurance company (which is one of the world's largest owners of commercial real estate) and a small regional bank that has 48% of its portfolio in commercial real estate. To learn more about Dan's latest shorts in Extreme Value, click here…
Bond King Bill Gross is dumping mortgage debt in favor of cash. Gross cut investment in mortgage bonds in his $161 billion Total Return Fund to 54% of assets – the lowest in nearly two years – from 61% in May. He also trimmed holdings of government-related bonds to 24% of assets, the least since February, from 25%.
New highs: Hatteras (HTS), Vanguard Short-Term Tax Exempt (VWSTX).
In the mailbag… the tax battle rages. Putting aside the venom and the outrage, we pose a simple question. Assuming you have enough money saved to get by for a while, what level of taxation would cause you to simply quit working? It seems likely that income taxes alone will consume more than 55% of my wages next year. So, I'm seriously considering simply taking the year off. Why work for less than half? How about you? At what point would you rather do nothing than pay taxes? Let us know: feedback@stansberryresearch.com.
"I grew so tired of those who claimed to be proud to pay their taxes and those who think that taxes should be higher that I now tell them to put their money where their mouth is and send in more taxes than are due. This smokes them out because they end up admitting they want OTHERS to pay higher taxes and to be proud of paying already high taxes." – Paid-up subscriber Joe
"Two points contradict Sloca's assertion that higher taxes don't cause taxpayer flight: 1. A study last year found that 5,000 of California's top 25,000 taxpayers had left the state. Their combined tax payments were $8 bil, half of the state's $16 bil deficit at that time. 2. Sloca also ignores the many additional taxes that raise the burden over 50% for many already: self-employment or SS (15.3%), sales tax, property tax, luxury tax, vehicle tax, gasoline tax, liquor tax, utilities taxes, intangibles taxes, transfer taxes, 'user fees.' When looking at this partial list, it is amazing there is anything left for food and shelter." – Paid-up subscriber Bill Matz
"You favor ever lower taxes. If the tax rate were 3% and went to 6% you'd scream it had 'doubled and will now bankrupt the country.' Our taxes h
ave been higher than they are now most of the time since taxes were created, yet somehow we did not fold as a country nor did everyone move out. The government is not 'confiscating' your money. You are paying to live here, and are free to go… Why stay here? Or maybe it's not so bad and you are just trying to sell subscriptions by pandering to your extremist base... I am sorry for the people who can't see what you and your kind are doing. You are a different form of financial entertainment like CNBC is… You probably are aware of pretty much everything I am saying, but of course could never admit it as it would ruin your business model. I have always wondered whether Glenn Beck (for example) believes what he says or is just acting to become an entertainer, (like Don Rickles act of being nasty when in his real life he was kind to everyone). Can you really believe the ridiculous examples and analogies you use… Remarkable for an intelligent man! Can you be serious? I will never know I suppose..." – Paid-up subscriber David G.
Porter comment: I often ask myself where did America go? I don't mean the real estate, of course. I mean the idea. America was an idea long before it was a country. The idea, at the core, was very simple: Take care of yourself and demand that your neighbors leave you alone, as long as whatever you're doing doesn't infringe on their right to be left alone, too.
It seems like such a simple idea to me. But actually, it was revolutionary (then and now). It was powerful enough to sustain the American Revolution, where a group of farmers threw off the most powerful army in the world, putting their lives, their property, and their honor in harm's way. It was an idea powerful enough to inspire the largest creation of wealth and power in human history. And yet... here I sit, reading letters like the one above, from people who probably consider themselves Americans. What happened to our country?
Regards,
Porter Stansberry
Baltimore, Maryland
July 20, 2009