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The dollar's doomed, pensions are doomed, but this company's OK

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July 08, 2008 – Comments (7) | RELATED TICKERS: AMN.DL2

I am going to kick things off today with some more on why I expect the U.S. dollar to continue to fall, but as promised I came up something positive to say at the end of this post.  I am not completely convinced that the Euro is the best way to play the weak U.S. dollar, but unless the clashes between countries like Spain and France, which are having serious economic problems, and the more hawkish countries like Germany cause the whole European Union to crumble, I don't see how the gap between the two currencies doesn't continue to widen.  Even after eliminating the United States' massive current account deficit, national debt, and weak economy from the equation...which believe me is difficult to do, the interest rate difference between the ECB and the Fed right now is enough to make anyone want to own the Euro over the dollar.  Check out this chart:

It's difficult to say whether Trichet has the stones to raise interest rates in the EU like he really wants to when everyone and their mother is yelling at him not to, but I personally would be shocked if the U.S. Federal Reserve raised interest rates any time soon.  Despite what many out there believe, they just can't raise rates with unemployment rising like it is.  Doing so would be devastating for the economy.  Bloomberg had an interesting article this morning on how some now believe it is unlikely that the Fed will raise rates in 2008 because doing so at the same time that it closes its window to investment banks would be a nasty one-two punch for Wall Street (see article: Fed's Loans to Wall Street May Prevent Raising Rates This Year).

From a pure currency standpoint, I personally would rather play the Brazilian real or the Chinese yuan than the Euro, but regardless of the vehicle one chooses I just can't imagine any way that the dollar doesn't continue to weaken versus most other currencies.  I don't like it and you shouldn't either, but there's no use in sugarcoating it...the U.S. dollar is screwed and anyone who believes otherwise is just fooling themselves.  This means that absent of a massive global economic meltdown or the invention of nuclear fission, high oil prices in dollar terms are probably here to stay.

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The problem with annuities and pension funds that guarantee the payment of a specific amount of money to beneficiaries at a certain period in time, regardless of what the stock market does.  If the people who manage the fund aren't able to achieve adequate returns, the whole system has the potential to crumble and leave either retirees or the government (aka you and I) in big trouble.  CNNMoney published a scary article on this subject yesterday (see article: Pension plans suffer huge losses). 

The second line of the article's title says it all: "Report says weak markets, credit crunch have drained $280 billion from plans of largest U.S. companies."  Ouch.  Many companies skimmed off of the top when their pension plans were performing fantastically, rather than saving the proceeds from the outperformance for a rainy day (sounds like the U.S. government and Social Security doesn't it).  Now that the chickens have come home to roost and the stock market is not doing well, they may end up having to use money from their operations to make up for the underperformance of their pension funds.   Doing so would obviously hurt their earnings, though they may try to mask it with the good old "one time charge."

According to a recent study, assuming no change in the stock market the average U.S. will likely see its pension expenses to rise by 20% to 30% in 2009 as a result of smaller returns on assets and a higher cost of servicingAdd this to slowing consumer spending and higher input costs for energy and raw materials and we are likely to see a number of earnings "misses" over the next year unless analysts become significantly less optimistic with their estimates.

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Think positive, think positive.  OK, I'm positive we're all doomed.  I kid, I kid.  On a positive note, I came across a very intriguing stock this weekend.  I know that I have read about this company in the past, but with so many stocks and so little time it fell off of my radar screen.  Barron's had a small blurb on it which spurred me to add it to my CAPS portfolio.  The company is...drum roll please...Ameron International (AMN). 

Ameron is not as cheap as it was earlier this year when it was in the 80s, but the recent market weakness has caused it to pull back a little.  Here we have a company that is involved in a number of hot sectors.  It manufacturers fiberglass and concrete pipe for the oil / gas, chemical, and wastewater industries (love it), PVC liner that protects pipelines from corrosion (love it...though plastics are getting more expensive which could hurt margins), wind-turbine towers (really love it), and concrete and steel lampposts (don't love it).  It also owns a minority stake in a steel mini-mill in California (love it) and a construction business in Hawaii (hmmmm, construction yuck. At least Hawaii has huge barriers to entry). 

I like many of its businesses plus it actually pays a dividend of over 1%, which by historical standards isn't great...but by today's standards is actually pretty good.  This is a very interesting company.  I don't know enough about it to buy it in real life yet, but as I mentioned I bought it in CAPS yesterday.

 

I leave you with this strange, yet mesmorizing video of birds. 

 

Deej

7 Comments – Post Your Own

#1) On July 08, 2008 at 9:25 AM, AnomaLee (28.50) wrote:

I bought AMN because when I picked it in CAPs and it dropped like a rock. I think it dropped about 20% in one day which was bad for my CAPs but good for me buying. However, I actually sold off all but one share. I'm very worried about future earnings due to energy costs and lower utility and municipality spending. It takes a lot of energy to produce fiberglass, concrete, pipes, and steel. No one is buying their poles. However, their fiberglass unit and water transmission is experiencing over 30% growth and they're also exposed to the oil and gas industry through their pipe manufacturing. There's been some minor inside selling, but nothing alarming. 

I wouldn't be surprised to see the P/E contract to under 12 or so, but I plan to build a long-term position over this bear market. It's a good company

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#2) On July 08, 2008 at 9:32 AM, colonelnelson (42.11) wrote:

There's always the upside that the weak dollar boosts exports and narrows the trade deficit. 

In fact, if the dollar continues to fall, perhaps we'll all find secure jobs one day making sneakers for Chinese kids.  : )

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#3) On July 08, 2008 at 9:52 AM, hansthered0 (< 20) wrote:

lol

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#4) On July 08, 2008 at 9:57 AM, GS751 (27.24) wrote:

Roger Lowensteins book was great.

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#5) On July 08, 2008 at 5:03 PM, DemonDoug (81.27) wrote:

c'mon deej, you know the best way to play the dollar.  It's called oil.  Oil is the world's true reserve currency nowadays.  But you've sort of got that covered with wind energy plays (energy is a surrogate for oil).  Why mess with fiat currencies when you can get real commodity-backed assets?

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#6) On July 08, 2008 at 5:31 PM, TMFDeej (99.43) wrote:

I agree 100%, Doug.  I'm longer than you would believe on companies in the oil sector in real life.

Deej

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#7) On July 08, 2008 at 7:56 PM, DemonDoug (81.27) wrote:

I'm not long enough, but that's because I kept looking for a downturn in the price of oil around january which didn't materialize.  I think I could believe how long you are. :)

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