Arlo Gilbert’s Blog

Lately I’ve been looking at the markets and the investment landscape and I’ll admit, I’m a cynic. Of course I was born a cynic and will probably die a cynic. That very cynicism though has kept me out of trouble with investing.

The sub-prime meltdown inspired confidence in the greed of banks and their willingness to hedge their shareholder’s money with high risk investments. Tech companies for the most part have been real losers (except iCall of course )… we see companies like Ford dropping sales by 25%+ in a single month, the dollar is week to the point that just by being an american and keeping your money in cash you are essentially losing money every month. 

All I can do is really just sigh about it, take care of my family, keep my own businesses in order and wonder what the long term outcome of this entire mess will be.. or is that all I can do?

Never one to find a lack of opportunity in the chaos I have plugged money into United States Oil Fund and Fidelity Select Energy Service. I’m not claiming to be a prophet here, but my returns in the past 2 years on money that I have directly invested have been upwards of 40%… and I always make it by investing in (what seem to me) to be obvious winners. At 60 AAPL was a steal.. at 80 people talked about it being overvalued.. they all *knew* there was an iPhone coming, they *knew* what it would do, but they failed to see the forest through the trees and now AAPL is trading at what, 180? 190? I don’t know, I sold at 140.

Before I explain my reason for investing in oil directly through USO, let me explain why I am in FSESX. FSESX is a simple mutual fund, it holds about 50 companies in the energy sector, but it’s real key is that it holds drilling companies, refining companies and the like. These companies are pretty much agnostic when it comes to the price of oil, they still refine, they still drill, they still distribute, they still make money. If oil prices increase demand doesn’t go down in the same economic vacuum that many items do… they stay busy regardless, if oil goes down the demand increases and they see more business… and if new drilling opportunities present themselves (which they must… there are known huge reserves that are not legally drillable right now), the FSESX portfolio overall should see some nice returns. Call it hedging my bets. Currently about 25% of my energy investing is in fidelity fsesx.

So Oil… USO.. why will it continue to climb? Why is this current $143 per barrel “cheap”?

1. Relative to the adjusted dollar, the price of oil and a gallon of unleaded gasoline is about the same now as it was in the 70’s gas crisis. This means that it is one of the few non discretionary purchases that has actually stayed even with inflation.

    

2. It’s non-discretionary… what are you going to do? Quit your job? Sell your S.U.V. and start driving an electric car? Build wind turbines on top of your house? Buy carbon credits? No. You’re going to take your medicine whether you like it or not, fill up your car and pay your electric bill. If you’re rich, the gas pump doesn’t affect your wallet, if you’re not rich you can’t afford to quit your job and you likely can’t afford to just buy another car unless you sell your existing one… guess what, dealer’s dont want S.U.V.’s now… you’ll get half of what you paid for it a year ago on something like a Hummer or a Suburban.
3. Worldwide demand is growing. China among others wants their fair share of the western lifestyle which includes lots of gadgets, lots of meat and lots of cars.. this all requires petroleum, china’s economy is strong, and the Yuan is outpacing the dollar by huge margins.
4. This is a LIMITED resource, in philosophy they say that in order to prove a hypothesis as valid, the philosophy has to be taken to it’s end… so if oil is limited, we know that *eventually* all oil will run out.

This pretty much sums up all of my thoughts about the current valuation system….

I promise I’ll write something soon.. this video was just so fantastic I had to post it.

I’ll admit it, I took macro economics and micro economics in college. I pulled by with an A+ and a C- respectively, but nowhere in these courses did my professors mention the falacy of money… that is, that money isn’t real, it doesn’t really exist. It only exists because we place faith in it and because it keeps moving out of and into our hands.

Yes I know this sounds like the beginning of a governmental conspiracy rap, but the fact is that massive escalating borrowing is essential to our economy, without it, nobody has any money. If you don’t believe me, take a look at “The Money Masters” a very educational PBS movie that was produced by a group of respected economists. I digress however, a history of our economy is not the purpose of this post.

The purpose of this post is in fact relating to this new bubble we are seeing, it is ripe for a massive explosion. Period. End of sentence.

Consumers are unable to pay their mortgages, credit card debt is at an all time high, bank after bank after bank is taking massive multi billion dollar write-downs to account for their failed sub-prime lending… and in the midst of all of this we see companies like FaceBookgetting valuations of $15 Billion dollars.

I have no personal vendetta with FaceBook, but it is imho the equivalent of a flash in the pan night club. It has lots of users who use it because it’s free and currently “cool”, it has lots of advertisers who can’t figure out how to monetize those users because the fact is that those users are not there to shop or gain knowledge about a subject or product, they are there to hang out with their friends. They have revenues of somewhere in the mid 8 figures range (with no mention of their costs)… 

So where has the investing community’s mind gone that it places such value on this company that produces nothing, creates nothing, adds value to nothing and generally is unproductive?

In my humble opinion again, this is what happens when there are no sound investments and everybody is desperately seeking the next “big thing”. Facebook has value no doubt, probably in the neighborhood of 5 years net revenues (whatever that net is if it’s even positive), but I have as of yet heard a compelling argument as to why Skype was worth 4.5 Billion and Facebook is worth 15 Billion.

These valuations are simply made up, poof out of thin air an MBA earning his keep one evening says “xyz.com is worth this much. why? why not?”… and as long as our economy can support it and people believe that easy money comes from nothing, the the bubble will continue to grow and people will continue to be dazzled by flashing lights while ignoring important business fundamentals like “cash flow”, “liquidity”, and “profitability”.

The emperor has no clothes. The economy is fragile. Speculative nonsensical investing caused the sub-prime meltdown and speculative nonsensical investing and hype will cause the web 2.0 bubble to pop.

I just want to know one thing… can I please get in on the FaceBook IPO ?