Dow down hard – 231 points. Gold flat.
What’s behind the big drop in equities? Our colleague Chris Hunter reckons it’s the two “C”s – China and Crimea. These two hotspots are giving investors the jitters.
Meanwhile, our friends over at Agora Financial gave us a fright. They pointed to an article in the Wall Street Journal: “Nation’s Power Grid Vulnerable to Sabotage.”
A few low-tech saboteurs could put the nation in the dark for 18 months, says the WSJ. The folks at Agora Financial reckon there could be an even bigger danger: cyber-attacks. “World War D” (for digital) they call it.
In our mind, this created a whole demolition derby of disturbing ideas. We had a taste of power-outage this winter, when we were staying at a hotel here in Aiken. The first day was a happy adventure. The second day… with plenty of food, water and (importantly) alcohol still available… was long. We didn’t have to suffer a third day; the power came back on.
Without power, you can’t pump water. And you can’t get gasoline. Without gasoline you can’t go anywhere. And you can’t even run a generator. Your beer is warm and your bath is cold. You’re out of luck.
How do you get food? Is there any food to get? Without refrigeration how much of the nation’s food simply rots and spoils?
Was Al Gore Wrong?
This is not a problem for us down in Argentina (where we have a ranch and where we are headed after we leave Aiken). We don’t have any power down there anyway. Water comes down from the snow-covered Andes. The evening meal wanders around the prairies, on four legs, until dinner time.
Of course, we’re not worried for ourselves; we’re worried for our dear readers!
Even if the federales were smart enough to protect the power grid from saboteurs – which we doubt – could they protect it from the sun?
Yes, one of our dearest readers, has turned up the heat… upped the ante… and made us worry even more.
She sent us a report from author Mr. G. Edward Griffin (best known for his critique of the modern central banking system, The Creature from Jekyll Island).
Griffin reckons solar activity is the real cause of global temperature changes… and that the sun’s hissy fits will blow out so many fuses all over the power system… we could be without power, well, for a long time.
As to the first provocative point, he cites a book by Lawrence Joseph, Solar Cataclysm: How the Sun Shaped the Past and What We Can Do to Save Our Future. The gist of the argument is that solar activity causes big swings in the Earth’s temperature. Al Gore and the global warming crew are wrong, he says. According to an article in the MIT Technology Review their computer program is defective:
In the world of statistical analysis, there is a standard routine called the Monte Carlo Test that uses random data with no trends whatsoever to confirm that a computer model has no built-in errors or biases. If all is well, the Monte Carlo Test will produce zero trends.
When the global warming computer model was tested, he says:
[O]ut popped a hockey-stick graph just like the one for global temperatures. Conclusion: The computer model was rigged.
Maybe he is right. Maybe he isn’t. But it was what Griffin says next that caused us angst:
The electronic infrastructure of the modern world is a new phenomenon in history. It hasn’t yet been tested by large-scale solar storms, which have occurred as recently as a hundred years ago.
The grid didn’t exist at that time but, if it had, engineers say it would not have survived. When the next one will arrive is unknown, but one thing is certain: we are not ready for it. Unless steps are taken to protect transformers and control systems, the grid WILL be knocked out by the next large-scale storm.
What will we do if the juice goes out? Don’t know. But we’re stocking the wine cellar.
Does It Pass the Headwind Test?
From the desk of Braden Copeland, Senior Analyst, Bonner & Partners
“Your call has proven correct.”
That was the subject line of an email I received Wednesday night.
It was from an analyst I had dinner with after speaking at a conference in Florida last fall. He was reminding me of our discussion about coal stocks.
At the time, he was excited by how the stocks had bottomed and begun to rally. TheMarket Vectors Coal ETF (NYSE:KOL), which tracks an index of coal stocks, was coming off a four-year low.
Peabody Energy Corporation (NYSE:BTU), the coal mining giant, was trading for a price-to-book ratio (P/B) barely above 1 (just above liquidation value, in other words). Its 10-year average P/B was close to 4.
Based on this incredible discount to its 10-year average P/B, it seemed Peabody was setting up for an easy double. And if its P/B traded back in line with its historic average, investors would see a fourfold increase in their investment.
I told him I understood the math. In certain situations, looking at a company’s P/B is a useful way to measure the possible upside for an undervalued investment.
I hadn’t seen the chart for BTU or KOL recently. But I had an idea what it looked like: After a big rally off 2009 lows, shares had trended down for the last few years. Now they were starting to recover.
I could understand why the coal sector was tempting, based on the chart and the Peabody Energy valuation. He thought it was time to buy. I thought there was a problem.
I asked him, “Does it pass the headwind test?”
He rolled his eyes.
“Have the forces that pushed coal stocks into the valley of death given way to forces strong enough to pull it out again?”
He didn’t really know. I explained I didn’t believe they had and gave him a few reasons:
1) Nearly 10% of the fleet of US coal power plants was slated to be decommissioned by 2015.
2) Except for the coal miners, no one was arguing that the US should generate more power from coal. (In fact, coal is becoming the last resort.)
3) Technology had helped natural-gas fueled power plants become as efficient and cost-effective for power generation as all but the newest coal plants.
Then we talked about the boost coal shares might get thanks to demand in Asia.
I told him I hadn’t seen a compelling economic case that covered the cost of shipping coal across the Pacific to Asia. But I hadn’t looked too hard either. After all, long term, no one in Asia really wants to burn dirty coal to generate electricity anyway.
Coal had run its course and good luck to anyone investing otherwise.
That was my call. And that’s why he sent me the email Wednesday night.
This is what the chart for KOL looks like today.
I’ve circled the rally that was underway when we had dinner last year. KOL has since fallen 25%.
So…the next time you’re looking to pick up some shares you believe are “cheap” ask yourself: “Does it pass the headwind test?”
Editor’s note: Did anyone ask if the US stock market had passed the headwind test before investing their life’s savings in it? The Dow has been soaring non-stop since March 2009. But it’s phony growth built on phony Fed money. Yesterday’s 231-point drop could be the start of an almighty storm. Learn the surprising secret of how to protect yourself here.