Newsreel For Tuesday, 11/30/2010

I can't find a snappy common theme in any of today's financial headlines so I'll pick a bunch of random items.

Ocean shippers have swung wildly from loss to profit.  This tells me that some major carriers are not skilled at either securing long-term contracts (which would stabilize revenue), hedging fuel costs, managing idle fleets, or all of the above.  Spot rates seem to merit only a passing mention as a contributing cause. 

Striking truckers are teaching India how hard it is to deal with unions.  Competing with the BRICs is more than just a race to the bottom in wages.  It also entails exporting innovations to emerging markets eager to compete on quality.  Sometimes you get the good (technology, Six Sigma) with the bad (unions) that the Anglo-West has to offer.

Consumer confidence (read delusion and denial) is levitating thanks to short attention spans.  This helps explain the great retail sales figures for Thanksgiving weekend.  People are emptying their wallets like there's no tomorrow.  If the U.S. heads over the debt cliff like our European friends, there may not be much of a tomorrow for America's middle class anyway.

Pay freezes are headed for Uncle Sam's workers.  A small ray of sanity shines its way through the clouds of insolvency's gathering storm.  It won't be enough to stop a bond market dislocation but it's the thought that counts.  Justice demands the inclusion of military pay and benefits in any freeze.  No one should be exempt from austerity.  Neither should pensions be spared.

Cities shouldn't be spared austerity measures, and they can read the handwriting on the wall.  Lack of a revenue backstop mean muni bond yields will get a lot more volatile in 2011.  Picking winners in muni issues will attract some serious bottom-feeders.  I'd like to see what my favorite Bay Area governments will offer.  San Francisco's financial position will become even more precarious than it is now. 

Consumers Lose Their Minds Over Thanksgiving

I'm the first to admit it when I'm wrong about something.  I had thought retailers were getting desperate by opening their doors days earlier and starting holiday promotions weeks in advance.  Now it seems they were more greedy than fearful:

U.S. consumers spent an estimated $45 billion over the Thanksgiving weekend, up 9.2 percent from last year, the National Retail Federation estimated in a report that brightened prospects for freight transportation.

Wow.  American consumers are unable to resist the siren call of the shopping mall even when European insolvency screams at them from the headlines.  You'll have to pry credit cards from people's cold, dead fingers before they give up the spending habits that have pushed the U.S. debt/GDP ratio to all-time highs. Retailers stocking up for the holidays probably pushed up trucking tonnage in October.  That's nice for national carriers.  It's too bad that a repeat of this stunning news isn't likely next year, with mounting mortgage losses threatening to push banks back into dire straits.  I'll hazard a guess that the money people aren't sending to their mortgage servicers is what fueled this Thanksgiving rush.

The Limerick of Finance for 11/28/10

The EU has new bailout rules
With plenty of leverage-based tools
Taxpayers pay first
When the losses are worst
Rich bankers have played them for fools

Synopsis Of The SF Hard Assets Investment Conference

I made my annual pilgrimage to the downtown SF Marquis Marriott for the 2010 San Francisco Hard Assets Investment Conference.  I've been a pennant-waving fan of this tremendous roadshow since my first visit in 2005, which was the very last year it was known as the Gold Conference.  The name change reflects the broadening base for paid sponsoring companies, who now include explorers and producers of all kinds of minerals. 

The free lectures are always very rewarding.  The two most valuable presenters this year were Tim Wood and Mickey Fulp, who spoke separately on the details of mineral geology and how they determine whether a mining company's ore is economically recoverable.  Here's the most important take-away for investors and analysts:  A mining company's value is ultimately determined by its proven and probable mineral reserves, not the gross amount of "resources" they claim to have discovered.  Furthermore, the economic recoverability of those reserves depend on multiple socio-economic and regulatory factors unique to each property. 

Jim Letourneau warned his attendees about mining executives who manage multiple companies, which reveals that they're more interested in collecting "lottery tickets" on a lucky property than focusing on effectively managing a single project. 

I was disappointed that Jack Lifton was a no-show for his scheduled lecture on Sunday morning.  I was looking forward to his take on the massive surge in attention for the rare earth metals sector.  Jack is The Man on rare earths. 

Brent Cook's lecture gave some credence to the Peak Gold hypothesis.  He noted that world gold production has declined since 2000 and that major gold producers are unable find enough new deposits to make up for lost production. 

A large number of exhibiting companies this year have capitalized on the rare earth metals theme.  Some of the uranium and cobalt developers have apparently realized that their trace findings of rare earths have value after all, although with some producers that value is limited to a marketing hook.  You could swing a dead cat in the exhibit hall and hit half a dozen gold or uranium producers claiming to also hold deposits of rare earths.  Time will tell whether those deposits are recoverable. 

I miss the sporadic appearance of renewable energy producers I've seen in years past. Come on, where was U.S. Geothermal and Nevada Geothermal? I recall at seeing least one of them in years past. They were absent this year. 

Quite a few exhibiting companies had stories worth telling.  Here are some highlights of companies that deserve further analysis.

Inter-Citic Minerals (ICI.TO).  This is a Chinese gold producer with financial backing from leading producer Zijin Mining Group.  I don't recall seeing a Chinese gold company at previous conferences.  China's new strength as the world's top gold producer will bring increasing attention to exploration plays there.  Inter-Citic must be doing something right, because their share price has been hovering around the value assessed by Zijin's private placement in April.  Maybe their claim of a 1:1 resource to reserve conversion ratio is the reason.  This one bears watching. 

Nautilus Minerals (NUS.TO).  Nautilus is a unique company mining one of the last resource frontiers on Earth - the deep ocean floor.  They've exhibited at several conferences in the past and they're still around.  Their share price saw better days in 2006 and 2007 but their technology is too compelling to ignore.  The mining industry can't afford to write off players like Nautilus. 

Dacha Strategic Metals (DAC.V).  Dacha's portfolio approach to rare earth metals sets it apart from exploration and development plays.  Trading these commodities on the open market may negate a miner's operating risks, but stockpiling them carries storage costs.  An investment in Dacha is a bet that large buyers (like U.S. defense contractors) will soon look for ways to fill gaps in their supply chains. 

Dacha isn't the only rare earth story at this conference.  Commerce Resources (CCE.V), Avalon Rare Metals (AVL.TO), Rodinia Lithium (RM.V), and Rare Earth Metals Inc. (RA.V) all wanted a piece of the action.  It's also worth noting that resource companies aren't the only players clamoring for attention at the conference.  One investment bank in particular, Forbes & Manhattan, played a key role in sponsoring several companies' booths.  There's money to be made in natural resource development, and mining isn't the only way to make it. 

A run-down of the show wouldn't be complete without a mention of the Dines Letter spokes-models.  I don't know if James Dines gets his models from the same local agency year after year, but other exhibitors should take note that his booth consistently had heavy traffic.  Those gals give new meaning to technical market terms like "double top" and "bottom bouncing."  See you next year, ladies! 

Full disclosure:  No positions in any companies mentioned at this time, although that may change in the future.  I did not receive any compensation whatsoever from International Investment Conferences, the organizers of the SF Hard Assets Investment Conference and its affiliated shows. 

China Sends Foreclosure Demands To U.S.

China has sent its latest foreclosure notice to the U.S. by way of a People's Bank of China adviser:

The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said.

These are are more than merely helpful suggestions.  Nothing in superpower affairs is ever so innocent.  Each of those three polite hints will serve to strengthen China's strategic position.  China is putting the U.S. on notice that a gradual transfer of its hegemony is an acceptable alternative to China's sudden exit from the U.S. Treasury market.  China wants to avoid a sudden drop in the value of its Treasuries and is seeking a typically face-saving alternative to the "nuclear option" of a bond market selloff or boycott. 

The U.S. is not likely to take the hint.  The bond market will thus have to force Uncle Sam to pay attention. 

The Haiku of Finance for 11/26/10

Euro-zone seeks calm
Bailout fund runs on empty
World heads into fire

Warren Buffett Truly Earns Medal Of Freedom

The single greatest living investor of our lifetime is going to receive the single greatest honor of his life:

President Barack Obama will name billionaire Warren Buffett one of fifteen winners of the 2010 Medal of Freedom, a White House official said on Wednesday.

No one has done more to exemplify a virtuous lifestyle for an investment professional than Warren Buffett.  He has articulated a comprehensive, common-sense investment philosophy that anyone can decipher and follow and has stuck to it throughout his career.  He has little in common with most Wall Street professionals and that is precisely why he is far more successful than them.

Warren Buffett isn't perfect.  His personal relationships haven't exactly been conventional but he has never tried to hide them.  Some of his investment calls have been less than admirable - like his Goldman Sachs rescue - but he has made them to further the interests of the Berkshire Hathaway shareholders who've entrusted their money to him. 

Congratulations, Uncle Warren.  You've earned it. 

Euro Meltdown Can Split Belgium

Here's a follow-up to yesterday's observations on European debt.  Contagion doesn't just spread internationally.  It can also hit parts of Europe's internal systems that were previously considered healthy, like Belgium: 

In the bars of Antwerp and the cafes of Bruges, the talk is less of Christmas markets and hot chocolate than of the rising cost of financing a national debt which stands at 100% of annual national income. 

Like Ireland, struggling to fend off criticism of its austerity package, there are signs that international bond investors are starting to view Belgium as living on borrowed money and borrowed time.

Belgium faces the additional challenge of internal ethnic tension between its Flemish and Walloon constituencies.  Belgium's problems are a microcosm of Europe's.  National identities reassert themselves because ethnically distinct groups never fully accepted allegiance to supranational governance.  The dividing lines between opposing solutions to Europe's debt crisis are now solidifying along nationalist and tribal lines.  Flemish advocates for austerity oppose their national government's profligacy.  Germany's resistance to further bailouts opposes the EU's desire for unity.

The great European experiment in forging a transnational identity for the Continent is in its sunset years. 

European Debts Eating Away At Global Stability

It would take a lot to sink the MSCI EAFE Index.  Markets in Europe, the Far East, and Australasia would have to decline in tandem.  That's the great thing about investing with an index covering multiple parts of the world that are too far removed from a U.S. investor's locale.

One of that stool's three legs is being eaten by termites.  Europe's PIIGS are once again making news:

Anger and fear about Europe's seemingly unstoppable debt crisis coursed through the continent Wednesday. Striking workers shut down much of Portugal, Ireland proposed its deepest budget cuts in history and seething Italian and British students clashed with police over education cuts.

I guess "Old Europe" is getting some more grey hair with all of this stress. Speaking of stress, didn't Europe apply stress tests to its own banks recently?  Yeah, those worked out just fine.  They were designed to hide problems instead of reveal them, just as their counterpart tests in America did. 
Full disclosure:  My short puts under EFA might get triggered next month after all, if European contagion spreads to Asia.

Ceres' Hidden Agendas

Everything in high finance happens for a reason.  Ceres, an alliance of institutional investors and environmental interest groups, recently released a ringing endorsement of investments in low-carbon technologies:

Citing potential climate-related GDP losses of up to 20 percent by 2050 and the economic benefits of shifting to low-carbon and resource-efficient economies, investors released a major statement today calling for national and international policies that will spur private investment into low-carbon technologies.

The statement was signed by 259 investors from North America, Europe, Asia, Australia, Latin America and Africa with collective assets totaling more than $15 trillion—more than one-quarter of global capitalization. Signatories included Allianz, HSBC, APG and a dozen U.S. public pension funds and state treasurers. It is the largest-ever group of investors to call for government action on climate change.

Institutional investors don't line up behind public policy changes unless there's money to be made.  There are probably several hidden agendas at work here.  Carbon credit trading is a potentially a huge new market in derivatives for global investment banks.  Any expansion of the physical market for carbon capture and carbon control technologies will mean more market participants in the bid-ask spread on carbon credits. 

Don't forget the importance of infrastructure investing to market makers.  The more national governments spend on infrastructure to lower national carbon production, the more creative financing they'll need.  Pushing $100mm blocks of Build America Bonds would make any underwriters' day.  Ceres should be careful what it wishes for, as some low-carbon investments can easily become boondoggles.  Take this U.S. Department of Energy loan to an unproven company that purports to develop a natural gas powered van for wheelchair users.  Only Uncle Sam would be dumb enough to give a loan to a startup and not ask for a convertible feature that turns it into equity. 

Go green.  Collect the green (money).  Nice business model.

Updating The Alpha-D Portfolio For Nov. 2010

Here's what I didn't change this month.  I maintain my long puts against LMT (hedging the defense bubble) and IYR (hedging the housing sector). 

I also maintain my long holdings of GDX (gold sector bull), FXI (China bull), TDW (energy services bull and compelling fundamental value).  My covered calls on each expired unexercised and I refreshed them.  I also sold short puts under those three securities.  If they remain range-bound, I keep the cash.  If they drop in a flash crash, I pick up more of what I like at a discount. 

Here's one significant change. For the first time in over two years, I wrote a small number of short puts under EFA.  I do not have a long position yet in EFA but I'm willing to risk acquiring some.  I don't mind a Euro currency crisis or Asian capital controls as the trigger.  I consider EFA to be a way to own non-U.S. markets I can't track myself.  I'm not quite ready to take the same approach with SPY because I'm waiting to see whether a bond market dislocation puts the S&P 500 on sale. 

I didn't add much to my fixed income holdings other than buy a one-month Treasury with my cash proceeds from selling options.  The sickeningly low yields on Treasuries reduce the effectiveness of this yield-enhancement approach.  I just need to stay in the habit of rolling cash into F.I.  It will pay off when interest rates rise after the U.S. is forced to live within its means. 

The Limerick of Finance for 11/21/10

The Irish have asked for a loan
The EU may throw them a bone
That sounds really nice
No one's thinking twice
With more debt Europe sinks like a stone

The Greatest Generation Goes Greatly Into Debt

The Greatest Generation saved the world from fascism but didn't save enough for retirement.  That's why they have to go into debt to maintain their lifestyles:

Retired Americans are racking up credit-card debt like never before, be it for vacations or medical expenses, and a surprising number have no intention of paying it off before they die.

Several generations of middle class entitlement programs have taught Americans the value of a free lunch.  The trouble is that Social Security and Medicare aren't enough for people who've been conditioned to think that their living standards should keep rising into their golden years.  I can't even begin to understand the mentality of people who feel entitled to buy luxuries but refuse to save enough to afford them. 

It's too bad the Baby Boomers saved even less for retirement than their parents did.  They'll be left with nothing when Grandma's estate is liquidated at auction to pay the credit card bills she ran up on her last trip to Paris.  C'est la vie!  Indeed. 

Our political leadership will never be able to force austerity measures on an audience like this.  That's why they're willing to let the Fed be the bad guy by inflating away the government's unfunded liabilities.

Here Come The Irish, For A Bailout

Students at my worthless alma mater, the University of Notre Dame, had a lot of favorite chants that livened up football games and distracted the home crowd from the poor performance of the Fighting Irish on the field.  One such chant was "Here come the Irish!"  The thinking behind this one was to scare the visiting team into running away in fear at the sight of the Blue and Gold.  It never worked.

This chant may actually be an appropriate way to announce the queuing up of the real Irish for a European bailout.  Irish debt will still be a bad bet for investors but now all Europe's taxpayers will share the pain of a default.  Stalling on needed tax increases won't help Ireland reassure European investors that they can put their house in order.  The EU has learned nothing from dealing with Greece.  Then again, Greece is making fitful progress towards forcing austerity on its people, so there's some slim hope for sanity after all. 

All of this makes me wonder if the iShares MSCI EAFE ETF will be headed down.  Its P/E of 12 makes it almost a good deal but it will take more than Continental-sized defaults to make the price reasonable for entry. 

Nota bene:  No position in EFA at this time. 

GM Undead

GM has returned from its near death experience.  Without buying into all the Wall Street hoopla aimed at retail investors, I'll apply some common sense before I call it a night tonight.

I wouldn't buy the stock of a formerly bankrupt company that sells a high-cost product in a mature industry.  I wouldn't buy stock in a company whose every operational decision will be subject to veto by the federal government and labor unions. 

Enough said.  That's a wrap for tonight.

Nota bene:  No position in the "new" GM.

The Haiku of Finance for 11/17/10

Big drop in home starts
Good luck buying foreclosed ones
No deal?  Sue a bank

ABFS Stands Up To Teamsters

ABF Freight Systems gets my vote for company of the year by standing up to corrupt unions!  They are taking the Teamsters to court.  Their challenge to the National Master Freight Agreement may also have the hidden benefit of pushing YRCW over the edge into bankruptcy.  Let that be a lesson to any carrier that doesn't put its unions out of action - they'll be out of business themselves!

Nota bene:  No position in YRCW or ABFS. 

Monday Newsreel, 11/15/10

Let's check the headlines, shall we?

U.S.-South Korea free trade talks aren't necessarily dead yet.  I'm pessimistic.  No way do Koreans want Uncle Sam's QE to have inflationary spillover into their economy. 

A tax-cut extension is in the works.  Fiscal madness continues as our mandarins prove unable to convince spoiled Americans to take their medicine.  This is the perfect fiscal twin to the Fed's monetary irresponsibility. 

Greece raises first itsy-bitsy warning flag that it won't be able to repay the EU and IMF on time.  No kidding.  Maybe all those protestors scared Athens.  What's scarier is that no one in the Western nations seems able to tolerate austerity.  The proverbial man on horseback in each country watches this folly and awaits his chance to put things "back the way they used to be" in exchange for power.  This never ends well.

China is going bargain hunting.  It's spending more on FDI and not just to lock in access to resources.  They probably want to get ahead of any capital controls that emerging nations will erect to prevent the U.S. from exporting inflation. 

The Limerick of Finance for 11/14/10

APEC wants a big free trade zone
No nation can go it alone
In a currency war
With inflation in store
The U.S. can't throw them a bone

Inflation Didn't Wait For Fed's QE

Here's an above-the-fold kind of report on a below-the-radar topic.  Even the Drudge Report picked up on this one.  Inflation in non-core stuff like groceries is already at Wal-Mart:

A new pricing survey of products sold at the world’s largest retailer showed a 0.6 percent price increase in just the last two months, according to MKM Partners. At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate.

 

The practice of reporting "core inflation" is worth noting for its fraudulent origins.  It grew out of political pressures during the Nixon-Ford era to underreport the high inflation bedeviling America in the 1970s.  Inflation ended but this fictional statistic took on a life of its own.  It's a shame that members of our mandarin class, like the Fed's governors, don't shop among those most hurt by their monetary policies.  They could then see first-hand the destruction caused by faulty policies like quantitative easing. 

Ask a poor person if they consider their monthly spending on groceries and utilities as something "non-core" to their existence and watch the reaction.  I'll bet it's a combination of shock and awe.

Signs Of Black Friday Retail Desperation

Retailers are starting to panic over the possibility of very disappointing holiday sales.  Toys R Us has decided to open its doors on Thanksgiving with big discounts for fools who think their spoiled brats don't have enough plastic junk.  Sears and Wal-Mart are doing the same.  Nothing is sacred to retail, and some year national retailers will be open all Christmas Day so Joe Six-Pack can impoverish himself some more.  The latest in credit card technology will help low-end Americans spend even more without making the effort to become financially literate. 

Black Friday comes but once a year.  Americans will pay for it all year long. 

Deficit Commission Hints At Pain To Come

The blue-ribbon panel charged with giving Uncle Sam a way out of his indebtedness hasn't quite finished its report but its leaders are launching their biggest trial balloon yet:

A proposal released Wednesday by the bipartisan leaders of the commission suggested cuts to Social Security benefits, deep reductions in federal spending and higher taxes for millions of Americans to stem the flood of red ink that they say threatens the nation's very future. The popular child tax credit and mortgage interest deduction would be eliminated.

Such clear thinking is rare in Versailles-on-the-Potomac, which is precisely why these proposals won't be adopted until the bond market forces America into action.  Cut the child tax credit?  Joe Six-Pack will be mad that he's no longer being subsidized to bring more squealing mouths into the trailer park.  Eliminate the mortgage interest deduction?  No way will the homebuilders lobby tolerate that.  Cancel Grandpa's Social Security and Medicare?  Run that by the AARP and watch the TV ads scare the bejeezus out of everyone at the old folks' home. 

Americans will react to this with a snore but that's okay because our rulers know us all too well.  They'll print money until one day when annual inflation is at 25% and Grandma's Medicare Part D isn't enough to pay for her meds.  When that day comes, we'll need a new enemy to distract us from our problems and provide a ready rationale for sacrifice.

Success And Ethics Only Mix One Way

The NYSE Group's chairman wants us to think that career success in a large organization is compatible with high ethical standards of conduct.  I beg to differ.  The massive bonuses paid out to bank executives under TARP are proof of this incompatibility.  Those executives knew their financial sausage factories were selling mortgage backed securities whose valuations could never be supported by underlying property values.  Anyone raising a red ethical flag during that process would have been canned.  Go along to get along, and you'll get rewarded with big bucks.  Sell that garbage quick with big lies and collect that bonus.  Don't worry about the client getting hurt afterwards when "I'll be gone and you'll be gone."

My post's title hints that success and ethics only mix in one way.  That way is self-employment.  When your only boss is your own conscience, no one can order you to falsify documentation or misrepresent an investment product.  Say "thanks, but no thanks" to Wall Street's hucksters when they try to tell you otherwise. 

The Haiku of Finance for 11/10/10

Perfect trading days
Doesn't pass baloney test
No bank has such luck!

Bad News For U.S. Truckers in November

Here's the ugliness in brief.

The Cass Freight Index fell 2.7% from September to October.  Truckers who raised their rates in October made dumb moves.

Wholesale inventories keep moving up.  Truckers, this trend is not your friend, because every parcel in inventory that goes unsold is something that doesn't need to be replenished.  No replenishment, no transport. 

The Ceridian-UCLA Pulse of Commerce Index (a mouthful) is down just a hair.  It measures truckers' purchases of diesel fuel, which is an odd way to estimate logistics activity since it doesn't account for tonnage.  Correct me if I'm wrong.  I wouldn't use this index as anything more than anecdotal evidence for a slowdown as I don't trust econometric extrapolations of GDP growth from just one data input. 

The price of diesel fuel is still climbing, which makes little sense in light of the Ceridian-UCLA index's findings until you consider regional bias.  Refinery outages on the East Coast have a funny way of making prices jump. 

This is all mostly bad news, and yet some truckers like Old Dominion are determined to keep hiking base rates.  I wouldn't do that if I were running a trucking company in this environment.  I'd use the above data in the next collective bargaining round to force the Teamsters to cough up some givebacks.  I guess I care more about shareholder value than being nice.  I'm funny that way. 

Full disclosure:  No position in ODFL.

California's Election Implications

My friends on the Right have lately sent me many republished opinion pieces lamenting the return of a former Governor to his old office in Sacramento.  They are aghast at the prospect of higher taxes.  I am more sanguine. 

Whoever was elected would have to close the Golden State's budget gap somehow.  Folks, it's gonna be either higher taxes or much less spending.  A lot of people will howl either way.  I say cut spending, especially the big white elephant known as unionized babysitting education.  The techers' lobby will fight that and they'll probably win, so everything else will be cut.  Welfare recipients will lose all of their present benefits and then some because they don't have a well-funded union to lobby in Sac-town, so they'll have to shape up or ship out. 

Repealing extra car taxes was a dumb move.  Californians need to be weaned from their addiction to suburbs and long driving commutes so Peak Oil doesn't destroy us, and the car tax was one way to do it.  Those taxes will return. 

The state will cut its pension plan contributions.  The math is unavoidable. 

One conservative columnist mentions California's oil reserves and lack of full-length three lane highways in the same paragraph and doesn't see the irony.  He's never heard of Peak Oil.  My modest riposte is to sequester whatever oil is left in the ground until high-speed rail is built.  Recoverable reserves are civilization's insurance policy. 

The return of a political dynasty is not a cataclysm.  California will still exist long after any of its leaders alive today are gone.

G-20 Tires Of U.S. Hegemony

The Group of 20, responsible for producing 85% of the world's GDP, are learning the hard way about the folly of putting all of their eggs into the U.S. dollar's basket.  Key leaders are staking out positions prior to the summit:

Officials from Germany, Brazil, China and South Africa were among those expressing concern that the Fed's money printing could weaken the dollar, drive up commodity prices and send uncontrollable waves of investor cash into emerging markets.

We can thank the Federal Reserve's loose money policies for making the rest of the world's rich countries go sour on American leadership.  Frustration with the U.S.'s irresponsibility has grown to the point where the head of the World Bank - an institution founded and controlled by the U.S. - is floating the possibility of a new gold standard for global currency exchange. 

The G-20 will have plenty on its plate besides managing America's relative decline.  Preventing a rare earth trade war is now on the agenda, but this will likely be handled as ineffectively as the group's recent non-accord on managing trade imbalances.  Note how China's actions drive the agenda; their rare earth embargo is a thrust that the U.S. and others must parry. 

The Limerick of Finance for 11/07/10

Small banks are all going down hard
While big ones turn cash into lard
Chopper Ben is in flight
Giving foreign banks fright
A bank run is not some canard

Pentagon's Plan For Rare Earth Shortages

The U.S. Department of Defense is preparing to release a study of rare earth metals and their importance to national security. This study comes in the wake of findings from the GAO and other sources highlighting the critical role that rare earths and other “technology metals” play in U.S. national security. Media reports indicate that the DOD report will downplay the impact of rare earth shortages on US military applications. 

On Oct. 8, 2010, the DLA Strategic Materials section released its implementation plan for the transformation of the National Defense Stockpile (NDS) into the Strategic Material Security Program (SMSP).  It discusses process, milestones, and program criteria but does not mention rare earth metals as an acquisition objective. The DLA Strategic and Critical Materials Report for FY 2009 lists the materials stockpiled in DLA’s inventory on page 57. The inventory does not contain any rare earth metals. 

The coming DOD study apparently contradicts the GAO study from April 2010, which clearly indicated that major defense contractors were canvassing their supply chains for assurances of rare earth metal supplies, and that the Hellfire missile in particular is dependent on a special chemical available only from China at present. The National Defense Stockpile has been shrinking since the mid-1990s as policymakers have authorized the sale of resources no longer deemed critical to national security. Washington allowed this to happen without considering how strategic competitors could affect the availability of resources. America's potential peer competitors are not so short-sighted.  China is considering the creation of its own strategic metals reserve. 

The private sector is not waiting to seize the opportunity posed by latent demand for rare earth metals. Goldman Sachs helped finance the reactivation of the Mountain Pass mine in California, formerly a leading producer of rare earth metals. It now forms part of Molycorp (MCP). Another company, Rare Earth Elements (REE) has seen a massive increase in its share price this year due to investor excitement (panic?). Most other rare earth miners and refiners, like Great Western Minerals Group (GWG.V), tend to be small and unpublicized. That may change very quickly if the U.S. government is serious about addressing its potential rare earth supply problems.

Full disclosure:  No positions in any stocks mentioned.

YRCW Loses Big Bucks In Q3 2010

Nail by nail, the coffin for YRC Worldwide is closing.  Their Q3 loss this year is a great big $62mm, which will come as a big surprise to those penny-stock true believers whose wishful thinking kept them long this turkey.  Way to go.  Tonnage improvements don't matter if they make your company less profitable.

Shedding unused terminals won't help either.  Do the math.  Selling another $40mm or so worth of excess property by the end of the year won't be enough to close the Q3 net loss, let alone mitigate whatever losses are looming for Q4.  I've been 100% right about this company and the Teamsters will never admit it. 

Full disclosure:  No position in YRCW / YRCWD. 

U.S. Slips In Corruption Rankings

One inevitable consequence of the financial elite's capture of America's political machinery is an increase in corruption.  It is easier for observers outside the American political system to notice this trend.  Transparency International has released its Corruption Perceptions Index for 2010.  The U.S. has slipped from 19th least corrupt in 2009 to 22nd this year. 

Implications for U.S. investors are worrisome.  Securities investors who seek to redress fraud through regulatory relief can expect little responsiveness from regulators preoccupied with placating their future employers on Wall Street.  Litigation is still a viable option, provided plaintiffs can fight lawfare from deep-pocketed big banks.  The best option for investors with an axe to grind is to have extensive contacts within a captured system.  Knowing which favors to call in and which levers to push is very valuable in a hollow state. 

The Haiku of Finance for 11/05/10

Berkshire income drops
Derivatives take a bite
Warren, where art thou?

American Empire Goes To India

The Anglo-West seeks a return to a subcontinent it once abandoned.  The new Rome sends its royal entourage to impress the locals in a variety of ways.  A mighty flotilla will project Smart Power (TM) into India's tourist traps.  A royal tunnel will magically appear to protect sovereigns from the sight of unwashed commoners, and BTW it sounds way cooler than your typical red carpet.  Even coconuts are being harvested early lest they mature into ripened ICDs:  Improvised Coconut Devices.  Everything must go according to plan.  Nothing can be left to chance. 

India may very well scoff at this spectacle after it's over.  New Dehli has its own supersonic cruise missile program and a standing agreement with Russia to develop a fifth generation tactical fighter aircraft.  It's not like they need all of America's know-how, but they would like to cherry-pick what they can afford.  The country is also fairly unique among Asian nations in the readiness of its middle class to absorb domestic production that can't be exported.  That's a handy trait to have as central banks threaten to launch currency wars in response to the Fed's inflationary folly.  The trigger for part two of Great Depression 2.0 won't be a reenactment of Smoot-Hawley tariffs.  It will come from the responses of Asian central banks to the inflationary pressures of capital inflows.  India will be ready. 

Full disclosure:  No investments in Indian securities (yet). 

Fed Destroys Your Money

The Federal Reserve has just thrown down the gauntlet to China and other big buyers of U.S. sovereign debt.  It has announced that quantitative easing, phase 2 will begin the imminent devaluation of the dollar and continue indefinitely.  The first pile of junk food in Helicopter Ben's shopping cart will probably be junk-bond grade MBS backed by nonperforming mortgages originated by Freddie Mac, that ward of the state that continues to lose your money. 

I have a small portion of my net worth in short maturity Treasuries that will soon roll over, and an even tinier portion in California muni bonds that mature in late 2011.  Those portions are going to stay small indefinitely (i.e., for as long as the Fed remains indefinitely insane).  The bulk of my cash is looking for a good home in stocks of commodity producers and transporters.  Inflation is on its merry way to your pantry and gas tank. 

The Haiku of Finance for 11/02/10

UPS raised rates
While freight index has fallen
That's not a smart move

The Million-Dollar Job From The Recovery Act

The boondoggle that is the American Recovery and Reinvestment Act of 2009 continues to amuse the remaining independent thinkers in America, namely yours truly.  I wanted to see for myself how recovery dollars are spent in my neighborhood (hat tip to John Robb at Global Guerrillas for locating this tool).  I typed my home ZIP code - 94132 - into the handy box provided.  The result was a colorful map that looked a little like the SBA HUBZone's GIS tool.  I was mildly amused several years ago to discover that I live in one of San Francisco's HUBZones.  Maybe the same GIS mapping contractor got some extra work thanks to the Recovery.gov site.

Anyway, here's a screen capture of the resulting map.

Those numbers in the black box at the lower left may be difficult to read, so here they are in plain text.  A total of $4,769,713 in stimulus money has created 3.70 jobs in my San Francisco neighborhood.  All of those jobs are amalgamations of contract estimates from San Francisco State University, the recipient of pretty much all of the money.  Clicking on the blue dot at SFSU reveals the details of the contracts and grants, primarily for scientific studies.  What's left unmentioned (until now) is that those studies end when the money runs out.  There will be no permanent job growth from the stimulus in my locale.  Those 3.70 jobs created are the weighted averages of probably several dozen part-time graduate students' credited research hours. 

If my rhetoric leaves you underwhelmed, just do the math.  The stimulus spent $1,289,111 per "job" created.  By contrast, I spend about $150 per year on my website and business cards to maintain my own job as a freelance investment analyst and market commentator.  That makes me about 8500 times more effective as a job creation machine than the federal government.  The flip side is that I could probably create 8500 new jobs with the same amount of money Uncle Sam just spent.  Don't believe me?  Fine, just give me that money and I'll show you how it's done.  :-)

Lee Majors played Col. Steve Austin, the Six-Million Dollar Man, in the heyday of 1970s cheesy television long before "Stone Cold" Steve Austin brought a new kind of cheesiness to mass entertainment.  The fictional Col. Austin was the product of a government program designed to create a human being with enormous potential.  The federal stimulus has attempted something similar but with less spectacular results. 

Nota bene:  SFSU became my landlord several years ago when they bought the apartment complex where I reside.  They're a fine landlord but I don't plan to spend the rest of my life here.  I am neither emploed by nor a student at SFSU.