Tag Archives: cyclical

The World is Cyclical; Valuation in a World of Zero Interest Rates

Cyclical Markets











The NASDAQ bubble showed the highest P/E ratios in stock market history due to low or no earnings technology companies.

Kopernik 1Q 2017 – Conference Call – Final  Worth a read–note high and low market cap sectors of the market (see page 9)–a proxy for expensive and cheap.  A search strategy.

Time in a Bottle – Final A good discussion of valuation methods in an era of distorted interest rates.

Join https://microcapclub.com/

http://tsi-blog.com/2017/04/are-rising-nominal-interest-rates-bullish-or-bearish-for-gold/  A discussion of how to understand interest rates and gold.  Note the analysis using data going back 90 years.   Do not use a small smaple size.

Also, see ETF Weapons of mass destruction FPA 1Q2017 Commentary

https://youtu.be/bZfPJCAVQg0   Recent Greenblatt talk at Google.

The Structure of Production


Why Are Gold and Commodities So Darn Volatile?

By Mark Skousen, Editor, Forecasts & Strategies

Why are commodities and commodity stocks so volatile? Commodity speculating is not for the faint of heart, and many investors give up on gold, silver, and mining stocks because they can lose 40-90% of their value in a short period of time. Gold’s recent drop from $1,900 to $1,200 is a case in point. You have to expect a volatile market.

The reason why commodity prices vary so much can be found in an understanding of Austrian economics, the free-market school that is endorsed by Doug Casey, Rick Rule, and many other commodity experts. As developed by Ludwig von Mises and Friedrich Hayek in the 20th century, the Austrian school of economics explains why commodity prices are so volatile.

Austrian economists call it “the structure of production.” As a follower of the Austrian school, I wrote a book titled The Structure of Production (New York University Press, 1990). Rick Rule told me he loves the book and has bought hundreds of copies to give to his clients.

Austrian economists emphasize the structure of the economy—the structure of interest rates, production, employment, and inventories. It is a complex theory, but the basic idea is that price volatility depends on how far away the product or service is from final consumption. Consumer prices are the most stable, producer or wholesale prices less stable, and commodities are the furthest from final use; therefore, those prices are the most volatile. You can see this difference in the graph below, where the Consumer Price Index (CPI) is far more stable than the RBA Commodity Index.

Take oil and gasoline, for example. Oil is far removed from final use (gasoline) and has varied from $30 to $140 a barrel during the past ten years… and yet the gasoline price (final consumption) is far more stable, varying from $3 to $4 a gallon.

But there’s a silver lining in this story. While commodity prices are far more volatile, it also means that commodities and commodity stocks can be much more profitable on the upside… if you buy right. And with commodity prices down 40% or more (with oil being an exception), now may be a great buying opportunity.

Mark Skousen Editor, Forecasts & Strategieswww.markskousen.com

You must understand the structure of production if you invest in any cyclical business (and what business isn’t cyclical?).  Understanding time is critical in investing. After the over-building in 2005, the housing bubble needed time to clear away mal-investments. All the demand pumping, interest rate manipulating, and subsidies could not change that process.  I highly recommend Skousen’s book.

To learn more: Structure_Production_Reconsidered

Valuing a Cyclical Company: Cypress Semiconductor (CY)


Ludwig von Mises:

“Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.” (Mises, Human Action, Chapter XXVII, Part 2)

Murray Rothbard:

“The State is a group of people who have managed to acquire a virtual monopoly of the use of violence throughout a given territorial area. In particular, it has acquired a monopoly of aggressive violence, for States generally recognize the right of individuals to use violence (though not against States, of course) in self-defense. The State then uses this monopoly to wield power over the inhabitants of the area and to enjoy the material fruits of that power. The State, then, is the only organization in society that regularly and openly obtains its monetary revenues by the use of aggressive violence; all other individuals and organizations (except if delegated that right by the State) can obtain wealth only by peaceful production and by voluntary exchange of their respective products. This use of violence to obtain its revenue (called “taxation“) is the keystone of State power. Upon this base the State erects a further structure of power over the individuals in its territory, regulating them, penalizing critics, subsidizing favorites, etc. The State also takes care to arrogate to itself the compulsory monopoly of various critical services needed by society, thus keeping the people in dependence upon the State for key services, keeping control of the vital command posts in society and also fostering among the public the myth that only the State can supply these goods and services. Thus the State is careful to monopolize police and judicial service, the ownership of roads and streets, the supply of money, and the postal service, and effectively to monopolize or control education, public utilities, transportation, and radio and television.” (Rothbard, War, Peace, and the State)

This writer believes government is necessary to protect–through legitimate force–the individual rights and freedoms of its citizens. The rule of law and property rights are essential. The problem occurs when government goes beyond this boundary.

Valuing A Cyclical Company

A few readers have asked about how to value a cyclical company.  Rather than give my view, perhaps listening to how an entrepreneur of a cyclical company views the price and value of his company.

I think you will gain if you read all the materials.

TJ Rodgers Letters to Shareholders about the Stock Price of Cypress: CS on a Cyclical Business or Thinking About Cypress Stock

Also, view the Value-Line to see the company’s history: CY_VL

An industry perspective circa 2002 is presented here: download_t_j__rodgers__cdc_2002_keynote_presentation

Questions and thoughts are encouraged.