Oil Price Significance, Dollar v. Gold, Cash Flow v. Earnings, Poverty in America

Mar 07 2011

Oil Price Significance, Dollar v. Gold, Cash Flow v. Earnings, Poverty in America

Published by Ian R. Campbell at 8:26 am under Gold,Oil see Legal Disclaimer.

Oil Price Significance

President Obama appeared on U.S. Television yesterday and, among other things, talked about the retail price of gasoline and the possibility of tapping into the U.S. Strategic Oil Reserves as a way to help consumers deal with escalating gasoline prices. From what I have read and heard, I believe the U.S. Strategic Oil Reserves represent about 3 months oil supply at current consumption levels. As best I know, supplementing the U.S. retail gasoline price is not one of the intended purposes of those Oil Reserves. The topic of rising U.S. retail gasoline prices was also the lead story this past Friday on ABC’s evening news.

So as you think about it what is the significance, if any, of this emphasis on recent U.S. retail gasoline price escalation. To me it very simply means that the U.S. economy is fragile in the extreme, and that Main Street U.S. consumers are tapped out – or more than tapped out – from the point of view of having enough U.S.$ to maintain their lifestyles. I don’t suggest you leap to agree with me, but I do suggest you think hard about this in the context of current reports suggesting U.S. economic recovery is ongoing.

Dollar v. Gold

If you participate in the equity markets I strongly recommend you read a Seeking Alpha article published Saturday titled ‘Dollar vs. Gold in a Dual Inflation-Deflation Economy‘ – reading time 5 minutes. In this article Doug Eberhaardt, author of the recent (September, 2010) book ‘Buy Gold and Silver Safely‘, canvasses the inflation/deflation issue, the current oil price, the dramatic (my word) fall in the Baltic Dry Index in recent months, U.S. unemployment, Bernanke and the equity markets, and summarizes gold five principal currencies ‘priced in gold’ over the past 10 years in a very easy to read table. His article concludes – not surprisingly given his views – that investors ought not to let the inflation/deflation debate preclude them from holding some physical gold as he sees gold’s purchasing power increasing from here.

Cash Flow v. Earnings

An article Saturday titled ‘Cash Matters More Than Earnings‘ – reading time 3 minutes – in my view goes some, but not all, of the way in emphasizing the importance of the cash flow of company as contrasted with the accounting earnings reported by a company. Being a Chartered Accountant by training (in America, a CPA equivalent), and having spent 40 years of my life advising business owners on the value of their businesses, I pay virtually no attention to reported earnings. Rather I spend my time focused entirely on balance sheet stability, financing ratios, and (importantly) the discretionary after-tax cash flows a given business is forecast to generate. The reasons for this approach are:

· reported earnings are accounting constructs based on a theoretical accounting view of the world. Importantly, application of generally accepted accounting principles is subject to a great many subjective decisions (including ‘mark-to-market’ issues, appropriate amortization periods, inventory valuation, etc., etc. Accordingly, put three public accountants in three separate rooms with the same articulate and forceful company executives who purposefully tell three distinctly different stories, and the chances are the result will be three different earnings statements; and,

· no group of executives can change, short of fraud, the cash flow their business generates. Ask the same three public accountants in three separate rooms to develop the total after-tax cash flow the business has generated in its latest fiscal year, and they should each produce exactly the same cash flow amount. There is, of course, subjectivity with respect to how much of that total after-tax cash flow is required to be used to sustain (or maintain) the capital assets of the company in the context of wear, tear and functional obsolescence.

In my view, these are important concepts for equity investors to understand and apply in their investment thinking. How many public companies report period/period changes in discretionary after-tax cash flow. I don’t know of any. Yet to me that is a primary value driver. If you want to read more about this topic you can do that at http://goo.gl/OrQSo.

Poverty in America

A brief article this morning talks about Americans who appear “totally delusional” due to rising stock prices and the regularly reported “economic recovery”. The article, titled ‘The America You Didn’t Know Existed …’ – reading time 15 seconds – links to a ’60 Minutes’ television segment aired last evening (13.5 minute video) that discusses what it alleges to be a 25% poverty rate for children in America. If you have not watched this 60 Minutes segment I suggest you take the time to watch this video.

Additions to Stock Research Portal’s Company Universe

Today we added the following Companies to our Company Universe:

Eagle Energy Trust (TSX:EGL.UN). We currently categorize Eagle Energy Trust as a company focused on oil exploration and production operating principally in the United States (Texas). Eagle Energy Trust’s current market capitalization is approximately Cdn$210 million. Review research data on Eagle Energy Trust.

Manitou Gold Inc. (TSXV:MTU). We currently categorize Manitou Gold Inc. as a gold explorer operating principally in Canada (Ontario). Manitou Gold Inc.’s current market capitalization is approximately Cdn$20 million. Review research data on Manitou Gold Inc.

SilverBirch Energy Corporation (TSXV:SBE). We currently categorize SilverBirch Energy Corporation as an oil sands company operating principally in Canada (Alberta). SilverBirch Energy Corporation’s current market capitalization is approximately Cdn$460 million. Review research data on SilverBirch Energy Corporation.

Press Release Highlights

The following table summarizes the companies in Stock Research Portal’s Company Universe who last Friday issued Press Releases and whose shares increased in price from the previous day’s close by more than Cdn$0.05, more than 10%, and whose share volumes last Friday exceeded their trailing 3 month average trading volume. You can research each of these companies by clicking on the company name in the table.

Company	Symbol	Sub-Industry	Closing Price*	Price Change*	% Price Change*	% Vol / 3 Mths Avg*
East Asia Minerals Corporation	TSXV:EAS, DB:WG3	Gold	6.34	0.84	15.3	516.8
Erdene Resource Development Corporation	DB:E8K, TSX:ERD	Coal – Met	1.39	0.21	17.8	160.1
Metalline Mining Co.	AMEX:MMG, DB:LZ6, TSX:MMZ	Base Metals	1.32	0.19	16.8	464.8

* Yesterday’s data, or latest trading day’s data, as applicable

Insider Trade Highlights

The following table summarizes the companies in Stock Research Portal’s Company Universe for who our system yesterday reported insiders who filed reports indicating they had acquired shares through ‘purchase’ transactions. You can research each of these companies by clicking on the company name in the table.

Company Name	Symbol	Sub-Industry
Bolero Resources Corp.	DB:U7N1, TSXV:BRU	Molybdenum
BonTerra Resources Inc.	TSXV:BTR, DB:9BR	Gold
Channel Resources Ltd.	TSXV:CHU, DB:DHA	Gold
Corex Gold Corp.	TSXV:CGE, DB:G4D	Gold
Jet Gold Corp.	TSXV:JAU, DB:JGCN	Molybdenum
Legend Gold Corp.	TSXV:LGN, DB:NA8	Gold
San Gold Corporation	TSX:SGR, DB:S3G	Gold
Sienna Gold Inc.	TSXV:SGP, DB:39S	Gold
West Kirkland Mining Inc.	TSXV:WKM	Gold
Zedi, Inc.	TSXV:ZED, DB:Y2I	Oil & Gas Services