Where to Invest as the US Wallows in "Recovery"

[This article originally appeared in Tomorrow in Review on October 22, 2013]

The other day I broke with my oil and mining lifestyle to meet a group of high-tech entrepreneurs.

Basically, I was looking for investment perspective and wanted to get out of my “geology” box for a day. That, and it was a good excuse to have lunch at Pittsburgh’s superb Duquesne Club.

Here’s some of what I learned…

I was in a modest-sized room with people from our local high-tech mills, CMU and the University of Pittsburgh. Plus, the group included tech geeks from locales like Silicon Valley, Boston, Washington (both state and D.C.), North Carolina and Texas. Overall, it was a solid group of really smart people.

Pretty much everyone I met is involved with an early stage tech effort. They run small shops with big ambitions. They discussed how much money they raised from the seed-people, angels, mezzanine guys other venture investors. They described how they were pouring bucks into their latest and greatest ideas. Change the world as we know it, right?

Still… despite all the MBA-talk, where’s the money? Who is making any money?

The discussion touched on all manner of “cloud storage,” business-to-business software (B2B), as well as direct sale concepts that will better enable people to use hand-held social media to spend themselves broke. You want it? Buy it now! That and more.

Everyone was bragging about their inspired business models. I don’t doubt for a minute that everyone is pouring heart and soul into their efforts. Then at one point — almost as an offhand comment — I posed a question. “Who here is making any money?”

Oh, wow. Every party needs a pooper. That was me. The room went silent. Literally everyone looked at each other kind of sheepishly. One set of eyeballs after another fell as the tech whiz kids closely examined their shoelaces.

Of course, people didn’t stay defensive for long. The next round of discussion was along the lines of how fast “enabling tech” is changing. How much money is flowing in. How the customer base is growing. How many eyeballs. All the click-throughs. How one guy’s idea is better at “scraping content” off of sites than some other guy’s idea. How we’re getting “this close” to critical “movement events.”

Still… despite all the MBA-talk, where’s the money? Who is making any money? I lived through one dot.com boom-bust back in the 1990s and early 2000s. Are we watching the next one form up?

Frankly, I had a sense of deja vu with the tech geeks. I detected the same sense of “hard work, no money” in these early-stage, junior-style techs as I presently see across much of the resource and resource development space. It leads me to think harder about fundamental business models. What works? What doesn’t?

In my Outstanding Investments newsletter, I don’t normally focus on small plays (aside from an occasional one-off idea). Instead, we focus on large-cap energy, mining and related industrial technology plays. I write about big oil companies, service companies, drillers and such. I follow big mining plays.

That is, the average idea is a big company with big assets and big cash flow. There’s typically billions of dollars in market cap, for a company that spends more billions to operate, with billions in sales and raking in profits in the high hundreds of millions if not billions.

Well, that’s the idea, anyhow. Assets. Cash flow. We’re not waiting for “movement events.” I want companies that have already moved.

Still, not all is wine and roses. For the past 18 months or so, the resource space in general has been tight on the best of days. Overall, resource companies have experienced a continuing upwards cost spiral. Couple this with a price-revenue-share price unwind in the large-cap mining space (and medium- and small-sized plays, too).

Part of the hard time is because of the China economic slowdown, with declining prices for commodities, as well as reduced volumes which makes for higher cost per ton. Other aspects of the unwind have to do with economic issues of Europe — Greece, Italy, Spain, etc. Plus there’s less growth momentum in formerly developing economies like Brazil, South Africa, India and many more.

Of course, the U.S. still wallows along in a precarious so-called “recovery” — until enough people don’t make any money and it gets worse, speaking of tech startups.

Looking at the global picture, where’s the growth? As I noted above, the tech startups with which I met aren’t making much money, despite all the great ideas. Elsewhere in tech-land, the bloom is off the rose even for iconic plays like Apple. After all, how many iPhones can people buy?

Getting back to the thesis here, where’s the rising global demand for basic materials? Where’s the pricing strength? Where’s the corporate profitability? Where’s the efficiency that comes from economies of scale?

Where’s the value, really? Or put another way, can we count on China to do in the next dozen years what it did in the past dozen? I doubt it. Still, though, I’d rather hold a piece of “real” assets like oil and natural gas, and copper, gold and silver in the ground, than the latest vaporware.

Put another way, gold is currently selling at $1,300 per ounce. Yes, the price could fall to $1,000 but it won’t go to zero. You can’t say that about many other things in this world. Now, if only the people who mine the substances can keep their costs down and profitability up.

So here we are in October as well. It’s the traditional month for strange things to happen — market crashes and such. It’s the season when the proverbial black swans migrate, so to speak.

As of Oct. 1, we’re also captive to the political theater of the so-called “government shutdown.” Wow, talk about a passive aggressive government in which the political powers want to make life miserable for the citizens!

As you surely know, the federal budget ran out of juice at midnight on Sept. 30. So the Obama administration immediately closed all manner of federal sites and bureaus. The government of the U.S. is now locked down as tight as politically possible, with the visible emphasis on trivial and petty things like barricading the World War II Memorial at the National Mall.

Indeed, we’re witness to an historic, extreme effort by our federal government to make life as inconvenient as possible for the greatest number. And oh by the way, feel free to sign up for Obamacare, too.

Investment-wise, what should we be thinking about? Well, I don’t have a bad feeling about the market. Things are muddling along, and the Federal Reserve will apparently keep on propping things up – Yellen or no.

Today I kept things general. Soon enough I’ll get very specific in terms of investment ideas and buy-sell calls.

That’s all for now. Have a good weekend. Thanks for reading.

Best wishes…

Byron W. King
for The Daily Reckoning

P.S. I know you’ve seen congress bickering. The government shutdown and debt ceiling debate has reached a fever pitch. The media is eating it up, too. But did you know Congress already passed a “secret” – more important – budget? Not only is this “secret” budget not affected by the current shutdown circus, it’s presenting a more immediate opportunity for in-the-know readers, like you. I gave readers of the free Tomorrow in Review email edition unfettered access to a new report that details the whole story. If you weren’t among them not to worry. I’ll be sending them this opportunity again in a forthcoming issue. Sign up for FREE, right here, to make sure you don’t miss it.