 | | The Daily Reckoning | Monday, August 29, 2011 |
- Perverse privileges and adversities worth relishing,
- Your slice of the $4 trillion aerospace pie,
- Plus, Bill Bonner on markets, lovers and the big tests ahead...
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|  | | | | The Sting of Good Fortune | | Adding Perspective to the Recent Dip in the Gold Price | | |  | | Eric Fry | Reporting from Cannes, France...
“Attention! Il y a une medeuse, la!” a young boy shouted yesterday as your editor dipped his toes into the deep, blue waters of the Mediterranean in Cannes.
“Ah oui,” your editor replied. “Je la vois.”
“What is it?” your editor’s son, Ethan, wanted to know.
“A jellyfish.”
“That’s lame.”
“Yeah,” his father agreed, “but it’s little and it’s probably dead.”
“Even so,” Ethan said, “I really don’t want to go in the water again now.”
“I wouldn’t worry about it,” his father replied.
“Why don’t we just fish it out?” Ethan asked.
“Fine with me. Go find a net or something.”
A few minutes later, armed with a borrowed net, the American tourists went about the task of making this sliver of the French coastline a little more swimmer-friendly.
“There it is!” Ethan exclaimed, as his father speared the net into the water and scooped up the jellyfish.
Your editor strolled over to the nearest trashcan to empty his catch. But just as he was doing so, Ethan yelled again, “Hey, there’s two more!”
Your editor returned to the water’s edge and repeated the exercise. He dipped the net into the water, just like before, and nabbed a jellyfish, just like before. But as he was lifting the net from the water, he felt a sharp, stinging sensation wash across the top of his foot.
It was jellyfish #3.
The jellyfish struck a blow for jellyfish-kind, but did not escape the net.
As your editor gazed down at his blistered, stinging foot, he thought to himself, “Hey, that’s the price of good fortune.”
It isn’t easy to get stung by a jellyfish in Cannes, especially if you are an American who lives 6,000 miles away. You have to set aside enough time and money to buy a plane ticket, pay for lodging, languish on a beach chair until you’re hot enough to dive into the sea and THEN run into a jellyfish. It just isn’t very easy to suffer that kind of adversity.
A jellyfish sting in Cannes belongs to the same genre of perverse privilege as bogeying the 18th hole at Pebble Beach, spilling Dom Perignon on your tie, backing your Mercedes Gull Wing into a shopping cart...or owning gold during a correction.
In the span of just a few trading days last week, the gold price plummeted from a high of $1,910 an ounce last Monday to a low of $1,712 three days later. The folks who never owned gold in the first place, and who have always held the precious metal in contempt, rushed to declare the “end of the gold bubble.” Many of the folks who did own gold wondered if the naysayers might be right this time.
But a few of the folks who own gold, especially those who have owned it for a while, recognized the selloff as the price of their success. In other words, the selloff was only painful if you were one of those investors who actually owned gold. And if you actually owned gold, you probably purchased it for less than $1,712 an ounce, maybe much, much less.
A $200 selloff in three days is not nothing; but it may not be that much worse than a jellyfish sting in Cannes. For perspective, $1,712 would have been an all-time record high for gold as recently as August 5! And even after the recent selloff, the gold price is up 10% over the last 30 days and 45% over the last 12 months. The S&P 500 Index, by comparison is DOWN 6% during the last 30 days and up only 15% during the last 12 months.
No one likes a jellyfish sting, or a sudden, 10% drop in the value of an investment. And most folks don’t like bogeying their last golf hole of the day, getting a stain on their tie or scratching on the bumper of their car.
But context is everything. Some adversities are worth relishing.
| | | | | |
| | The Daily Reckoning Presents | | 33,500 Reasons to Like Aircraft Suppliers | | |  | | Chris Mayer | “The center of aviation has now moved officially from Europe and North America to the Asian markets. It’s the biggest market today and it’s going to grow at the fastest rate, and unless something very unusual happens, it will continue to be the largest market.” — Vice President of Marketing for Boeing, Randy Tinseth
You know how high oil prices tend to create boomlets in certain businesses?
Alternative energy, small car manufacturers and the like get a boost. Aircraft suppliers may also see a boost.
Fuel is the largest expense for the airline industry — at 30% of operating costs. And the airline industry faces pressures to cut costs. Recently, the Air Transport Association forecast that the airline industry would make $4 billion this year, down 78% from last year. So there is pressure (again) to cut costs.
Airlines have already cut staffing costs. You can see this in labor costs as a percentage of operating costs. They now stand at about a quarter of costs compared to 35% in 2001. Airlines have also been smarter about pricing and routes, as airfare rates have stayed up.
The big opportunity for the airline industry, though, is to cut into that fuel cost number. The way to do that is with more fuel- efficient aircraft. A new A320, for instance, saves more than 25% on fuel costs compared with the older MD-80.
The old workhorses of the fleet, such as the 737s an 757s, also are lacking in fuel-efficiency.
What’s also interesting here is that the airline industry also has scrimped on investing in new planes. In fact, the world’s 50 largest airlines spent only 8% of sales on new aircrafts. That is the lowest total in a decade. I’d bet that number climbs in the next few years.
But there is an even more compelling reason to like aircraft suppliers. Actually, there are 33,500 reasons...
Boeing recently put out its long-term forecast for aircraft for the next two decades. This is a much-watched and commented-on forecast, as Boeing has as good an insight into the backlog of the industry as anyone.
They project that passenger traffic will triple by 2030 and the number of commercial aircraft will double. They estimate this will create a market need for 33,500 new planes.
The tab: $4 trillion.
Where is the growth coming from? I’m sure you could guess, and it fits well into our World Right Side Up thesis.
The idea behind the World Right Side Up is that the very large gap between emerging markets and developed markets is closing and will continue to close.
Twenty years ago, 72% of all air traffic was on carriers from North America or Europe. Today, only 55% is. Boeing forecasts that figure will fall to 40% by 2030. It’s a different world than the one we knew in the 20th century. It will also create new and different opportunity sets for investors.
Boeing’s forecast is still a forecast and it could be wrong, as all such forecasts can be. But if it is wrong in the particulars, I think it will prove directionally accurate. Meaning, we’re going to need a lot more planes, and that creates a nice tailwind for a certain flock of businesses.
I tend to favor the suppliers over the manufacturers, as some of suppliers have better growth prospects and upside potential.
I continue to follow a group of aerospace-related stocks. I think it’s an attractive lot...and if the projections pan out, investors that take action could see large profits in the future.
Regards,
Chris Mayer,
for The Daily Reckoning
P.S. My next Capital & Crisis alert is due out this Friday. If you’re not already receiving my research, you can get yourself on the list here. We’ll be following a few sectors over the next few months, including aerospace, to see if there aren’t some bargains to be had out there. I’ll check in with my Capital & Crisis readers Friday. Again, please fee free to join them here.
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| | | | | | Bill Bonner | | How to Pass the Gold Bull Market Test | | |  | | Bill Bonner | Reckoning from Poitou, France...
Markets...like lovers...always put their admirers to a test...
The summer is winding down fast. We’re already closing shutters and putting away tools. In a couple days it will be time to back up and head back to the USA.
Maryland needs us. The poor Old Line State has sweltered under 100- degree heat...been rocked by an earthquake...and drenched in a hurricane.
All the while, we’ve been sitting pretty here in France...cool as a cucumber; no, cooler than a cucumber. It’s been so cool we’ve had to wear sweaters much of the time. This past weekend we drove down to the Tarn...more below...
Meanwhile, last week in the financial markets was unsatisfactory. No clear trend announced itself. The Dow should have gone down. Gold should have gone down too. But they diddled around...and on Friday, both seemed to be back in counter-trends, moving against the direction we think they OUGHT to go.
As for stocks, everything we’ve found out about the economy since 2007 suggests that our Great Correction view is right. This market aims to correct something; we just don’t know what.
Whatever it is doing, it is NOT responding in a typical post-war recovery manner. The feds have pumped trillions into the economy. They’ve gotten nothing for it except more debt.
Which was just what they DIDN’T need. The real problem — or at least the most obvious problem — is too much debt. Adding more, the feds aren’t doing anyone any favors, except the banks themselves.
It’s just a matter of time before investors realize that stocks are not worth prices in the top of the range. In a correction, they’re worth prices in the bottom of the range. And eventually they should fall to the very bottom of the range...where you can buy the entire Dow group for only one ounce of gold.
But that is still a long way away. And in the meantime, what about gold?
Well, bull markets — like lovers — always test their admirers. Remember the stock market crash of ’87? Stocks had been rising for five years. Then came Black Monday. The Dow lost 508 points in a single day. By the end of October, the Dow had lost nearly a quarter of its value.
Naturally, a group of 30 prominent economists got together and made fools of themselves. They announced that “the next few years could be the most troubling since the ’30s.”
And naturally, faint-hearted investors failed the test. They left the stock market — fearful that another Great Depression...or maybe a repeat of a ’70s-style slump...was coming.
When the crash was over, the Dow stood at only 1,738. Investors who had bought stocks 5 years previously were still up 70%. And the bull market had scarcely even begun. Instead of going down, stocks rallied...and never looked back. The Dow rose to over 11,000 in January 2000 — the most spectacular stock market success story in history. The economy, too, roared ahead.
Stock market investors may anticipate a replay of that post-crash world. They’ll be disappointed. Our world today has nothing in common with 1987. To make a long story short, then we were coming out of a long bear market. Now, we are coming out of a long bull market. Then, we were at the beginning of a long bull market in bonds. Now, we must be near the end of it. And then, households and the government could still borrow in order to keep spending. Now, the private sector is played out; government continues to borrow at record levels....but that’s a different story.
The last bull market in gold tested its admirers too. The price had risen from $41 an ounce — when Richard Nixon cut the last link to the dollar in August ’71 — to nearly $200 in 1975. Thereupon began a sell-off, in which gold lost 40% of its value...coming to rest around $100.
Weak sisters, johnnies-come-lately, and camp followers got shaken out. They gave up on gold at $100 an ounce...before it began its real push to the top, which eventually put the price over $800.
Our guess is that this bull market in gold will test its admirers too. So far, it has closed every year higher than the last. Making money was easy. Our faith was never seriously challenged. Even now, the price of gold is close to $1,800. It’s still ahead for the year. It’s still in its upward channel, well above its 160-day moving average.
Gold is still a winner. Gold investors are still winners. There is no reason to doubt that they will be winners this year...just like they have been every year this century.
But that’s not how it works. Not usually. The gold market needs to make its admirers feel like losers. It needs to cause them to wonder...and question their own faith and judgment.
How so? By letting the price fall to...$1,200...or even $1,000. Then, we will be ready for the third and final stage of this great bull market.
And more thoughts...
We drove from Poitou down the A20 through Limoges, Brive and Cahors...to the Tarn. It’s an area near Toulouse. Drier than the north. More open. Hillier. It reminded us of Tuscany, with large, old houses in vaguely Romanesque style on the hilltops...and brownish fields and orchards.
“There’s a lot of history in this area,” said Elizabeth, reading a guide book.
“Tell us some...” we asked.
“Well, there are ruins of Roman forts, cities and baths in various places. But then, the area was overrun by the Germanic tribes after the Romans pulled out. Things generally fell apart. There was little central order.
“The Moors came through here...this little place on the right, for example, is called ‘Roquemaure’...or the ‘rock of the moors.’
“After the 10th century, the cities were gradually founded, intentionally. They were laid out on land granted by the church. The streets were straight; houses were packed tightly against one another, and they were protected by high stone walls. According to this, the stone walls served to keep out marauders and enemy armies, but they also served to keep the serfs under control. Everything was set up to support the feudal order.
“Not long after the cities were built, the Black Death came along and wiped out a third of the population.
“This was also near the center of the Albigensian heresy...and the bloody crusade against them. Simon de Montfort led the crusade. He is said to have killed all the residents of the town of Albi, after he took possession of it. When someone protested that not all the people of the town were heretics he replied that he would kill them all, ‘and let God choose his own.’
“This area was also part of the region that came with Eleanor of Aquitaine. It was fought over during the 100 years wars. Many bloody battles between the English and the French. Apparently, towns were demolished and rebuilt, often more than once. In this short history, there are so many awful things going on, it is amazing that anything was left standing or anyone left alive.”
The occasion was the 50th birthday party of a neighbor. The woman lost her son to leukemia earlier this year; friends and relatives gathered ’round to celebrate her birthday — in what must have been the worst year of her life.
On hand were several local farmers.
“People say you can’t make money in farming,” said one of them. “They say you can’t make money in France.
“But it’s not true. I didn’t have anything. But I got a job on a farm. Then, I offered to manage the farm. And then, I realized that there were a lot of people with farms who didn’t really know anything about running farms. You know, they inherited them. Or the family had moved to Paris a long time ago. So, the farms were run very badly.
“So I made a business of running farms. I set up a corporation. I get contracts from people who own land. I run their farms. Before, they were often losing money. Now, they’re making money, so they’re happy.
“And then, the lady whose land I was managing died. So I offered to buy the farm. Now, it gets interesting. Because I can get enough income from running a farm to pay for it. And because I’m operating several different farms I can afford the kind of big equipment you need nowadays. You can’t make it on a small farm. But if you have a big farm, you can benefit from the big farm equipment...and you don’t need so much labor.
“Nobody wants to hire anyone in France. Too expensive. And too many labor rules. You spend all your time negotiating with your own employees. That’s part of the reason landowners don’t want to farm their own places. They don’t want to hire anyone. So I get a contract to do it. And then, because I’m working so much land, I can afford the kind of big machinery that you need. I just hope that not all the fields need to be harvested on the same day!
“As long as farm prices continue to rise, I’ll be able to pay for the land and buy more.”
“Aren’t you afraid that farm prices might go down?” we asked.
“No, I don’t think there’s any chance of that. Farm prices are bound to continue to rise. Because there are so many people in the world who are getting the means to buy food. The demand is there. No question about it.
“My real problem is financing. I know that I can have bad years as well as good years. So, I need deep pockets to survive bad years. And I need financing to buy equipment...and to keep buying land, of course.
“The bankers around here don’t want to lend me money. They say it’s too risky. But the real problem is that the banks don’t have any money.”
Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
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