Tag Archives: RTM

Reversion to the Mean and Using History as a Guide

What’s going to happen is, very soon, we are going to run out of petroleum, and everything depends on petroleum. And there go the school buses. there go the fire engines. The food trucks will come to a halt. This is the end of the world. Kurt Vonnegut, Jr. in Rolling Stone (August 2006)goldOil




 It is very difficult to predict energy markets. In thirty-five years in the industry, I have never seen a forecast of the future that has been right. Jim Rogers, CEO of Duke Energy “U.S. Boom Won’t Hurt Australian LNG, Says Duke” (The Australian, 26th February 2013)

Gold is headed to $700. When will gold crash again and natural-gas-natural-gas-natural-gas

ung chart

gold to nat gas

People who purport to foresee, in other words, characteristically “see” the future exclusively through the lens of the present: if today it’s sunny and warm, then they’re upbeat and anticipate that tomorrow’s weather will be even more pleasant; but if it’s presently storming and cold, they are downcast and expect that the gloom will persist and worsen.

On May 6th, 2008, when the price of Brent crude was $125 per barrel and had doubled during the previous 12 months a Goldman Sachs analyst:

“I would suggest that the likelihood of that happening sooner has increased tremendously … sometime in summer,” Jeffrey Currie told an oil and gas conference in the Malaysian capital, referring to oil at $150 a barrel.

Goldman Sachs, the most active investment bank in energy markets and one of the first to point to triple-digit oil more than two years ago — a once unthinkable level — said last month oil could shoot up to $200 within the next two years as part of a “super spike.” Oil to $150 to $200 a barrel, May 2008

Quite the contrary: during 2009 it collapsed below $50–and within a few years it doubled. oil

Don’t take “expert” opinion seriously and the blunt truth is that neither you nor I nor anybody else can know the economic and financial future.  Yet investors must ACT TODAY in light of their expectations–however misplaced–about tomorrow.  So what do we do?  What’s happened historically can OCCASIONALLY (not always) provide credible clues about what might subsequently occur.

To learn more,  a must read: jul15_newsletter RTM. 

The author combines a fundamental understanding of the supply/demand dynamics of oil (inelastic supply/demand) and the past history of oil prices. It is that COMBINATION that helps with expectations.

Take the time to understand his analysis of RTM in the oil market. It is an expectation not a prediction.  A supplement to this might be: Pzena on oil 4th Q 2014 (the marginal cost producer in oil).

My attempt at gold: Estimating Where Gold will go using history as a guide and Historical-Gold-Prices

Gold prices are, in my mind, more difficult to analyze since the production of gold does not influence price because the stock to flow ratio is so high (180,000 tones to 2,500 tons per year). The reservation demand for gold is what drives the price. Does gold mining matter? For an analysis of gold: In Gold we Trust 2015 – Extended Version (e)

Also, see gold-when-will-it-crash-again  The author believes that gold is a commodity that went into a bubble and, like 1980, will decline 65% to below $700.

gold chart

fear chart

Have a great weekend!

Fortune 500 Extinction

Be aware of the fragility of companies no matter how powerful today.

Fortune 500 Firms in 1955 vs. 2011; 87% Are Gone.

What do the companies in these three groups have in common?

Group A. American Motors, Studebaker, Detroit Steel, Maytag and National Sugar Refining.

Group B. Boeing, Campbell Soup, Deere, IBM and Whirlpool.

Group C. Cisco, eBay, McDonald’s, Microsoft and Yahoo.

All the companies in Group A were in the Fortune 500 in 1955, but not in 2011.

All the companies in Group B were in the Fortune 500 in both 1955 and 2011.

All the companies in Group C were in the Fortune 500 in 2011, but not 1955.

Comparing the Fortune 500 companies in 1955 and 2011, there are only 67 companies that appear in both lists. In other words, only 13.4% of the Fortune 500 companies in 1955 were still on the list 56 years later in 2011, and almost 87% of the companies have either gone bankrupt, merged, gone private, or still exist but have fallen from the top Fortune 500 companies (ranked by gross revenue). Most of the companies on the list in 1955 are unrecognizable, forgotten companies today. That’s a lot of churning and creative destruction, and it’s probably safe to say that many of today’s Fortune 500 companies will be replaced by new companies in new industries over the next 56 years.

What Causes Corporate Decline According to Steve Jobs

Update: Here’s a related article from Steve Denning in Forbes, featuring some insights from Steve Jobs about what causes great companies to decline (power gradually shifts from engineers and designers to the sales staff) and how the life expectancy of firms in the Fortune 500 and S&P500 has been declining over time.

Also, the impending death of a big-box retailer, Best Buy: http://www.forbes.com/sites/larrydownes/2012/01/02/why-best-buy-is-going-out-of-business-gradually/

Peggy Noonan On Steve Jobs And Why Big Companies Die

There is an arresting moment in Walter Isaacson’s biography of Steve Jobs in which Jobs speaks at length about his philosophy of business. He’s at the end of his life and is summing things up. His mission, he says, was plain: to “build an enduring company where people were motivated to make great products.” Then he turned to the rise and fall of various businesses. He has a theory about “why decline happens” at great companies: “The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesman, because they’re the ones who can move the needle on revenues.” So salesmen are put in charge, and product engineers and designers feel demoted: Their efforts are no longer at the white-hot center of the company’s daily life. They “turn off.” IBM [IBM] and Xerox [XRX], Jobs said, faltered in precisely this way. The salesmen who led the companies were smart and eloquent, but “they didn’t know anything about the product.” In the end this can doom a great company, because what consumers want is good products.

Don’t forget the money men

This isn’t quite the whole story. It’s not just the salesmen. It’s also the accountants and the money men who search the firm high and low to find new and ingenious ways to cut costs or even eliminate paying taxes. The activities of these people further dispirit the creators, the product engineers and designers, and also crimp the firm’s ability to add value to its customers. But because the accountants appear to be adding to the firm’s short-term profitability, as a class they are also celebrated and well-rewarded, even as their activities systematically kill the firm’s future.

In this mode, the firm is basically playing defense. Because it’s easier to milk the cash cow than to add new value, the firm not only stops playing offense: it even forgets how to play offense. The firm starts to die.

If the firm is in a quasi-monopoly position, this mode of running the company can sometimes keep on making money for extended periods of time. But basically, the firm is dying, as it continues to dispirit those doing the work and to frustrate its customers.

As the managers find it steadily more difficult to make money playing solely defense, they become progressively more desperate and start doing ever more perilous things, like looting the firm’s pension fund or cutting back on worker benefits or outsourcing production to a foreign country in ways that further destroy the firm’s ability to innovate and compete.

There is another way

What’s interesting is that Steve Jobs lived long enough to show us at Apple [AAPL], in the period 1997-2011: what would happen if the firm opted to keep playing offense and focus totally on adding value for customers? The result? The firm makes tons and tons of money. In fact, much more money than the companies that are milking their cash cows and focused on making money. Other companies like Amazon [AMZN], Salesforce [CRM] and Intuit [INTU] have demonstrated the same phenomenon and shown us that it’s something that any firm can learn. It’s not rocket science. It’s called radical management.

Fifty years ago, “milking the cash cow” could go on for many decades. What’s different today is that globalization and the shift in power in the marketplace from buyer to seller is dramatically shortening the life expectancy of firms that are merely milking their cash cows. Half a century ago, the life expectancy of a firm in the Fortune 500 was around 75 years. Now it’s less than 15 years and declining even further.

The above articles are yellow flashing lights on the longevity of competitive advantage for established companies.  Do you agree with the article’s premise?