TRYING TO UNDERSTAND THE MATH

Our new President is trying to understand the new math today with his new financial advisers.
As yet more companies seek bail outs....like the auto industry today.....still no debt has been paid down, retired, or forgiven.....only written down, replenished with more debt to buy time. This madness will not end until the debt starts to be retired. This is simple math.

If you lose 50% of your money in a stock decline it takes a 100% increase in the stock just to get back whole. If you lose 40% it takes a 67% increase to be whole. But you have real equity in the investment over time. People chasing debt here as an investment are missing this key point. You have no equity just the hope that the bond matures at par and you can get your money back. Interest rates have bottomed. Rates are going higher....and debt becomes even more problematic. This is in part why equity is so hard to value right now....but it is easier if the company has little or no debt.

"Commodity markets face an impending hecatomb of sharply lower demand" said a major research house this week. "Hecatomb is defined as a large-scale slaughter." These comments are the opposite of what was said just six months ago...as they made the top....now comments like this will make the bottom.

The accumulator is a contract that obliges investors to purchase a security at fixed prices at regular intervals. These contracts last a year. There are many Asians who in these contracts have lost fortunes trying to average into their collapsing markets. Yet more junk sold to people by investment banks. These are also a form of derivatives. They bankrupted a company this week in the USA. New regulations will wipe out all this nonsense.

Exxon's production fell 8% in the most recent quarter, Chevron's 5.7%. Depletion of existing wells is finally being realized...the IEA now admits to a pending crisis in supply. Oil is going higher this is a current bottom being formed.

Endowments and pension funds saying they will no longer fund their Private Equity commitments and now want out of their illiquid private company investments will increase their demise....putting more pressure on commercial banks and bond holders...investors in debt are going to lose a very material amount of money in bankruptcies.

It is easier today to find comfort in investing in the right equities than trying to get involved in any form of work outs to make money....but it is human nature to do so...

"Pressure makes diamonds"

Danny Boy seen here through the late autumn sun set.