Greek Bailout Tension, Second Try

This one's coming down to the wire.  European leaders are scrambling like mad to put together a second bailout for Greece that will enable that country to avoid living within its means.  It's too bad every country can't get such a sweet deal.  They sure are lining up to try, with Portugal, Italy, and Spain all in varying amounts of fiscal trouble.

This blog remains agnostic on the subject of whether the euro should continue as a currency.  European nations have the option of amending the EU's governance to enact continent-wide taxation and fiscal unity.  Short of that, insolvent member states (or their unwilling creditors) will drop out of the union one by one should the EU ever try to enforce the terms of bailouts and debt restructuring deals.

Okay, who wants gyros for dinner?  You're buying. 

The Haiku of Finance for 05/29/11

Buy some low-yield bonds
Inflation will eat it all
Waste of some good cash

The Non-Resurgent U.S. Auto Industry

Claims that the U.S. automobile industry is somehow "resurgent" need to be reexamined.  Chrysler and GM have not moved away from product lines that emphasize oversized, fuel-inefficient SUVs.  They may be experiencing a temporary competitive reprieve since the Japanese tsunami wiped out several months' worth of production for Toyota et al.  Once Japanese automakers reestablish their supply chains, U.S. automakers can forget about recovering their market leadership. 

Gas prices are still high.  SUVs can't win as long as pump prices stay high.  BTW, Detroit is still headed for urban contraction thanks to irreversible population loss. 

Full disclosure:  No positions in any automakers at this time. 

Bakken Oil Production Challenges Peak Oil

The history of the petroleum industry is full of predictions of imminent scarcity.  Peaks in production have come and gone thanks to new discoveries and technological advances.  Upward revisions to estimates of recoverable hydrocarbons in the Bakken formation are good signs.  This will hopefully be followed by a more generous federal government approach to granting exploration leases.  Producers' desire to explore is driven by the same market forces that are currently pinching drivers' wallets.  High oil prices bring out production from previously expensive sources; this goes for renewables too. 

Don't turn out the lights just yet, Peak Oilers.  New discoveries and refreshed wells right here in North America are turning that peak into a long, gradually sloping plateau. 

China Growth Story Stronger Than India's (For Now Anyway)

If you're tired of hearing about how the BRICs are a great place to invest for the next generation or so then you're going to be a lot more tired in the years to come.  Some Bloomberg index that no one has ever heard of assesses China as a much more likely growth story than other Asian economies. 

Traffic-grabbing headlines can gloss over deeper forces at work.  China's growth has been impressive but forced; something had to be done to put restive young single men to work to avoid social unrest.  Now China is at serious risk of price inflation and a real estate implosion.  The country also has too much overbuilt infrastructure serving no immediately useful purpose and potential energy supply constraints it must overcome. 

China's political leadership knows that it must keep generating international media attention for its growth narrative if it is to attract value-added manufacturing that complements its leadership in rare earth metal production.  Look for India to generate further headlines as it pushes for development of its water delivery infrastructure.  Let the headline wars begin, to be followed by resource wars in other emerging markets. 

Full disclosure:  Long FXI with covered calls. 

The Haiku of Finance for 05/25/11

Trade like a hedge fund
Churn a million times a day
Lose money, go bust

Traders' Troubles Tied To Frontline

Frontline Ltd. (FRO), one of the world's leading independent petroleum shippers, should be experiencing smooth sailing with world oil prices reaching dizzying highs.  Unfortunately, news of late has been anything but smooth for the company.  The entire shipping industry is facing higher operating costs due to rising fuel prices.  FRO cut its dividend in February.  Commodity trading firms tied to Frontline's owner are in potential trouble with the CFTC over allegations of price manipulation.  It's hard to see how FRO could have benefited from oil price manipulation given its reported losses earlier this year, so this story bears watching as it heads to court. 

The stock price is suffering, down over 6% today and down by almost half of where it was on June 15, 2010 when it traded at its 52-week high of $36.85.  The company's dominant market position is a hard barrier for competitors to overcome, so perhaps this price drop is a boon for FRO watchers looking for a chance to buy.

Full disclosure:  No position in FRO.

Updating The Alpha-D for May 2011

Here comes a super-fast summary of my portfolio.  All options from last month expired unexercised except my equity-covered short calls and cash-covered short puts around my long position in ATHR.  The acquisition will close soon and all of those positions will go away, leaving nothing but some arbitrage profits behind.

I renewed my covered calls in GDX, TDW, and FXI with no changes in my underlying long positions in those equities. 

I added some short-term Treasuries to my fixed income holdings, which for the past few months have consisted of California state muni bonds.  I'm highly confident that the state government takes its obligations to bondholders seriously. 

And for the last time, I have no position in YRCW.  Never have.  Never will.  It just makes a really easy target for criticism with a unionized work force dragging it down. 

A big chunk of my net worth is still in cash.  I await the next leg down in U.S. equities, whenever it may come. 

Monday News Reel for 05/23/11

Here's news that is real, on the news reel.

China inexorably draws its neighboring trade partners into its orbit.  Two generations after the first Greater East Asia Co-Prosperity Sphere, a new hegemon arises to forge a bloc.  The next step is the displacement of value-added manufacturing from Japan to China.  In return, Japan's flooded out workers get to be migrant labor in China that will keep down the cost of native Chinese labor.  Farfetched, you say?  Stranger things have happened in that neighborhood.

A South Korean company is going to earn billions by building power plants in Iraq.  There's another big contract award shutting out American companies.  I hope Fluor (FLR) and Halliburton (HAL) weren't counting on post-war development contracts as a fall back plan after the occupations end. 

Remember how the Swensen model took institutional investing by storm a few years ago?  Its emphasis on illiquid assets was cute until it blew up the endowments at Yale University and other schools.  Like many innovations, it peaked too early.  Illiquid assets will have their day again and forests are as good as any place to start.  Prices for forest products are way up.  Yale and its Ivy League sisters just had to hang on for a few more years to see their commitments to forest investing pay off. 

The hits just keep on coming - to Greece's sovereign credit rating.  I hope Athens has a few dozen warehouses full of freshly printed drachmas ready to hit the streets, because they'll need them if Germany puts the breaks on further lending.  The IMF would rather focus on bailing out Portugal than on bailing out its disgraced leader.  The venerable fund has its priorities straight. 

Full disclosure:  No positions in FLR or HAL.  Long FXI with covered calls. 

The Limerick of Finance for 05/22/11

The Euro debt crisis gets worse
It's bound to bust some country's purse
This debt overhang
Will crash with a bang
And that's when stock bubbles will burst

Americans Can't Afford Gas At $4

Gas prices are typically high during the summer driving season, when Americans exercise their birthright to go where they please regardless of actual need.  The fun fact for 2011 is that gas prices are already high prior to the traditional start of summer fun on Memorial Day.  Apparently all that money people are saving by not paying their delinquent mortgages on negative-equity homes is going right into their gas tanks.  Paying over $4 per gallon of gas is the new normal, just like permanent structural unemployment around 9%.  Note that the Joe Six Packs quoted for color commentary are cutting back on necessities like medicine and clothing before they cut back on gas. 

It's time to seriously think outside the box about drastically reconfiguring America's urban landscape away from dependence upon the automobile.  The suburban configuration of America demands that Americans impoverish themselves to drive to and from unlivable homes.  The American way of life needs a reset to something more sustainable.  European towns and Asian cities provide models of the future. 

Full disclosure:  No positions in oil producers at this time, although that may change later this year. 

The Haiku of Finance for 05/20/11

Japan sinks again
Recession from tsunami
Big cleanup ahead

Two Odd Finance Moves In Books And Cars

Its not every day that we get to witness two questionable transactions in firms that lead their respective sectors.

First up is Liberty Media's proposed all-cash buyout of Barnes and Noble (BKS).  Brick-and-mortar booksellers are are a declining business model; just ask Borders (BGP) about its prospects.  Liberty Media must see other advantages here as the WSJ has duly noted.  One desirable asset Barnes and Noble possesses in spades is choice retail space that can be repurposed for uses beyond books.  If John Malone needs Liberty Media to go into debt to close this deal, there's no time like the present before rates inevitably rise. 

Speaking of debt and interest rates, we also have Chrysler LLC's proposed payback of government loans.  The problem here is that they're paying it back with money obtained from other debt issues.  Exchanging debt makes sense if the debtor gets a better term structure of interest rates.  Uncle Sam's ZIRP policy makes him the cheapest lender in the country, so going to the capital markets to raise money at higher interest rates makes little sense unless this somehow improves the firm's enterprise value.

Puzzling moves like this make me glad I don't work in corporate treasury offices that have to justify these kinds of decisions on behalf of top management. 

Full disclosure:  No position in BKS, BGP, or Chrysler LLC. 

Soros And His Gold Changes

George Soros's investment strategy has not changed very much in its treatment of gold as an asset class.  He only changed the vehicle.  He drastically reduced his holdings of GLD and exchanged his stakes in some gold mining companies for other miners.  The logic is inescapable.  The lack of certainty around the actual bullion holdings in GLD is well-documented (at least in the blogosphere).  It makes more sense to own gold where it is most secure - in the ground as ore.  Gold stocks' movements are less correlated with the underlying price of gold, so this move aligns the volatility of Soros' precious metals holdings more closely with that of the rest of his portfolio. 

Full disclosure:  No position in GLD.  Long GDX with covered calls. 

America's Third-World Transportation Infrastructure

The U.S. is going to have serious problems generating wealth for its citizens for the remainder of this century if it can't effectively deliver goods to markets.  The public infrastructure of America's transportation system is degrading without remediation.  The BRIC bloc will soon have so many shiny new airports and railways between them that exporters just won't be able to stay away.  Multinational firms will have no difficulty avoiding the U.S. if we make the choice easy for them by not investing in transportation here at home.

This bad news cries out for a remedy.  The administration wasted a golden opportunity to fund a new golden age of mass transit funding.  Instead of promoting compact urban cores that favor trains over cars, we blew stimulus dough on median strips and traffic controls. 

The rest of the world might laugh at us for our national shortsightedness, but they're too busy building infrastructure to notice our foibles.  We can do better than this as a nation.  All we have to do is spend the $2T on infrastructure instead of on middle class entitlements, Wall Street bailouts, and open-ended occupations. 

Freight Rate Derivatives: An Investment Idea Whose Time Has Come

Derivatives are best used to hedge risk, not to make bets on underlying macroeconomic moves.  Futures and forward contracts have been around for ages to allow dealers in raw materials to lock in prices.  The time has arrived for shippers to avail themselves of similar instruments to manage risk in freight prices.  Freight rate derivatives are ready for prime time.

It takes more than just demand from shippers to make these derivatives viable.  You need indexes against which bourses can measure a derivative's value; the World Container Index from Drewry and Cleartrade now exists.  You need counterparties ready to underwrite derivatives; some shippers are starting to take the other side of contracts. 

The market for freight rate derivatives won't be fully mature until major investment firms take on large roles in underwriting and the derivatives are regulated and traded on exchanges.  Like all derivatives, they are subject to abuse by traders who misuse them or misrepresent their risks to investors. 

Derivatives offer shippers a tool that can complement traditional long-term delivery contracts.  This is a welcome development. 

The Limerick of Finance for 05/15/11

Treasury warns of a double-dip
If Uncle Sam doesn't let slip
A new ceiling on debt
That hasn't sunk yet
QE3 buys bonds at a fast clip

YRCW Still Losing Money Prior To Recapitalization

Teamsters and other YRCW employees may be scratching their heads by now, wondering why things haven't turned around at their LTL trucking company.  They lost "only" $102mm in Q1 2011, as opposed to losing $270mm in the same quarter a year ago.  That's not a turnaround.  It's a deeper hole. 

Let's do some simple math on how successful YRCW would have to be after the equity recapitalization to truly regain Wall Street's favor.  This company hasn't been financially healthy since 2006, when it made $276.6mm for an EPS of 4.82.  YRCW's EPS has been negative every year since then.  Read the Form 10-Ks yourself, just as I have done. YRCW currently has 47.6mm shares outstanding. Assuming that the dilution of current shareholders does not get any worse than 2.5%, the recap will create 1.9B shares outstanding.  If YRCW were to have as healthy a performance as its last positive year in 2006 when EPS was only a modest 4.82 . . . after the pending equity recap makes the denominator in its EPS explode . . . its net earnings would have to be almost $9.2 billion!  In other words, a company that's been losing money for the past four years would have to generate bottom-line profits that are more than twice as large as its 2010 top-line gross revenue of $4.3B.  That's what dilution does, folks; it makes the earnings mountain even harder to climb for a company that needs to make itself attractive to investors.   

YRCW's results this quarter included an increase of revenue per shipment of 3.3% yoy while shipment volume rose 6.3%.  In other words, volume delivered has to grow twice as fast as revenue to get YRCW's gross revenue up to whatever stratospheric level will generate a $9.2B profit.  I honestly don't think there's enough shipment volume or gross revenue in the entire trucking industry to allow that kind of a result for one company.  Ask the CEO if a quarterly improvement in yield of 1.8% will enable YRCW to singlehandedly earn every last dollar in the U.S. trucking industry. 

YRCW trades today at just over a buck, which is barely a tenth of of a percent of its adjusted closing price at the end of December 2006.  Look it up on Yahoo Finance yourself if you don't believe me.  The market is thus correctly pricing the probability of a YRCW turnaround. 

I do not know of any publicly-traded company in the world that has ever gone from near bankruptcy to complete possession of its industry.  Well, okay, maybe Apple Inc. (AAPL) pulled off something similar after Steve Jobs returned, but he's not running YRCW and AAPL thankfully isn't unionized.  Such a miraculous result is usually impossible in the real world.  I would never accuse any YRCW bulls of living in the real world.  I've done this math for those pumpers, touters, Teamsters, day traders, hedge fund quants, and other people who still hold out hope that YRCW will turn around.  Hope is not a method. 

Full disclosure:  No position in YRCW.  Ever.  Oh, yeah, no position in AAPL either. 

Fuel And Weather Teaming Up To Hobble Transportation Sector

Wouldn't ya know it, just as I was preparing to turn bullish on the transportation sector, a bunch of Black Swans take flight.  Just look at how fuel costs are driving up consumer prices.  Transporters are passing on their fuel costs because they can't afford to eat them with margin compression anymore. 

Kirby Corp. (KEX) has been doing very well this year but now thinks that Midwest flooding will have a greater than expected impact on its bottom line.  I further suspect that the flooding will disrupt rail movements in affected areas.  Willingness to buy into railroads right now is a bet that the imminent opening of spillways won't deluge any Class I tracks.  Railroad bulk traffic has begun falling anyway, so buying rail stocks now might be premature until all of this news shakes out. 

Silver lining?  You betcha.  These accidents of history will make the stocks I'm watching cheaper in the short term.

Full disclosure:  No positions in KEX or railroad stocks at this time. 

The Haiku of Finance for 05/11/11

Deficit bust-out
One trillion dollars and up
The world knows we're broke

Greek Downgrade Means Gyros Will Outperform Greek Bonds

Another shoe has dropped in the euro's long, slow disintegration.  Greece's S&P credit rating is headed down the proverbial tubes.  The country that gave the world gyros and other fun foods can now knuckle under to Germany's demands for austerity or tell its sovereign debtholders to go jump in the Aegean.  They'll probably choose the latter and say goodbye to the eurozone.  That means buying a gyro will probably provide more practical utility than putting money into Greek bonds. 

Like a house of cards, currency unions look stable until some tiny structural flaw gives way.  The eurozone's Achilles heel was always the lack of a unified treasury that could levy taxes and issue debt without regard for any national parliaments.  Did you get that Greek reference?  Achilles heel, eh?  If you didn't, you owe me a gyro.  You'll be paying for those in Greek drachmas again soon enough. 

Full disclosure:  No positions in European currencies or bonds at this time. 

Housing Bottom Coming In Our Lifetimes

The housing market has one again pulled its welcome mat out from under speculators, flippers, and those who thought they could play at landlording.  Home prices are still heading down.  Falling at 1% per month and 3% per quarter makes for a nice linear projection, but this blog isn't about intellectual laziness.  The failure of government intervention has ended housing's artificial bottom.  The pending end of the Fed's QE2 will soon drive up mortgage rates and push prices further down, at least until the Fed panics and launches QE3. 

No one can accurately call a bottom in U.S. home prices.  The only certainty is that prices will bottom someday.  Sellers would do well to lower their expectations immediately so this market can find its equilibrium.  Buyers would do well to wait.  Patience should bring remarkable bargains in foreclosure sales later in 2011. 

Full disclosure:  No position in IYR but awaiting an entry point around 10x dividends.  Seriously. 

The Limerick of Finance for 05/08/11

Big kudos for nukes in Japan
We need to build more while we can
The energy's cheap
With profits to reap
It's foolish to talk of a ban

Bailouts In Greece And U.S. About To Break The Bank

Bailing out insolvent governments and their entities leads to the same result every time.  Greece is about to pull the trigger on restructuring its sovereign debt.  The EU is scrambling for a contingency plan that will probably not satisfy all of Greece's creditors - particularly Germany - in time to prevent a restructuring. 

Meanwhile, the U.S. is headed over the same cliff.  Fannie Mae needs another $8.5mm of your tax money because its home loans to Joe Six Pack just aren't working out.  That's what happens when too many average Americans elect strategic defaults over giving up their addiction to living beyond their means. 

Bailouts didn't work in Greece and they won't work here in the U.S.  Citizens of both countries will be living within their means very soon, whether they like it or not. 

LLEN Has Potential In Chinese Coal

China's modernization miracle still has a full head of team.  A significant part of that steam is powered by coal, one of China's greatest natural resources.  Smaller companies like L&L Energy (LLEN) may have a chance to break out if their resources are recoverable at an attractive cost.

A quick review of the basics provides a starting point for further analysis.  The P/E of 4.42 (today) is unbelievably low for a resource producer in this age of Fed-induced commodity price explosions.  Operating cash flow has been negative for over a year (not good on its face).  Quarterly net income has been steady for about a year, which is especially nice given the company's very small long term debt load.  ROE is huge at almost 49%!  All of the numbers except the cash flow results make LLEN worth a deeper look. 

The salient figure for any resource producer is the place on the global cost curve occupied by its four mines in China (unknown at present for LLEN).  Its interest in the Bowie Mine in Colorado is harder to value; aside from its booked value as a loan, the equity option may have significant value if the mine can sustain its historical production of 4-5mm tons per year.  The TVA's fixed demand for about 3mm tons per year give the project reliable long term cash flow. 

The notable news here for potential suitors is that the company's market value and enterprise value are extremely close right now.  A market value much higher than enterprise value would suggest some hidden value to be unlocked in an acquisition.  This one bears watching to see if it can sustain its numbers and raise its market value. 

Full disclosure:  No position in LLEN. 

The Haiku of Finance for 05/05/11

Jobless spike coming
Not just due to gas prices
Margin compression

RIG And A Deep Dig, Plus New Oil Exploration

Here's a brief note on something that will catch more investors' eyes in the years ahead.  Transocean announced a new deepwater drilling success, possibly even a new world record.  This kind of expertise is going to be very much in demand as the low-hanging fruit of onshore and shallow-water drilling is maxed out.  The industry needs answers now as it prepares for drilling in the Arctic.  How deep will they have to go?  How thick is the ice?  Answer those questions, plus tons of others, and a lucrative career awaits geologists and engineers north of the Arctic Circle. 

Plateau Oil won't be as bad as Peak Oil with drillers like RIG around, assuming they survive BP's massive lawsuit over the Deepwater Horizon fiasco.  New guidelines on the use of blowout preventers will help explorers, provided they get wide dissemination.  Any drillers looking to expand south of the border?  Mexico needs oil services if it wishes to transform its slide down the far slope of Peak Oil into a nice slow drift toward Plateau Oil. 

Nota bene:  No positions in RIG or BP.

Which Way Out Of Recession Is Up To Bond Market

Which way do we go from here?  Read on to find out. 

The good news is that the number of idle container ships is at its lowest level since just before the recession hit.  That's a global figure indicating a healthy world economy with plenty of consumer spending pushing orders for finished goods.  The U.S. shares in the good news with steadily rising factory orders and NAFTA cross-border trade way up in February. 

The bad news is that diesel prices keep climbing.  That's not good for trucking within NAFTA if carriers can't pass on fuel surcharges (yeah, YRCW, I mean you).  More disturbing is that the U.S. wants to play chicken with the international bond market by seeing how long it can delay raising its debt limit.  One of these days, Asian central banks are going to call that bluff.  I won't go long Treasuries again until after that momentous occasion. 

The good news up front is due to ultra-low interest rates and more consumer spending enabled by foreclosure delays.  Neither of those forces are sustainable after the bond market takes a hike from Treasury purchases. 

Full disclosure:  Still no position in YRCW. 

The Limerick of Finance for 05/02/11

Exports go up when dollar is weak
That just shows our trade flows will peak
Competing on price
Isn't always so nice
Through that hole, our advantages leak

YRCW Restructuring Successfully Dilutes Shareholders Into Irrelevancy

The latest news from YRCW is confirmation of the company's ability to eke out an existence that defies reality.  Its creditors have agreed to a restructuring.  The plan is to cancel the company's massive debts by issuing massive amounts of new equity shares to debt holders.  This will leave existing shareholders with no more than 2.5% of the company.  Let's do some quick math on that revaluation.  YRCW closed Friday at $1.98/share.  Reducing that to 2.5% means a single share after dilution will have a market value of $0.0495.  The stock isn't even worth a nickel.  It will be worth even less if management exercises further dilutive rights after the new equity is issued. 

This instant devaluation will immediately subject the firm to another delisting review by NASDAQ.  That delisting will make it very difficult for the company to raise the $100mm in new capital it needs to survive. 

The earnings call on May 6 will reveal just how long the proposed new financing will carry the company. The company's total cash flow in 2010 was about $61.5mm, so $100mm in new financing would theoretically last more than a year at their present burn rate.  If net income turns negative again, the new asset-backed loan covenants may require the surrender of assets.  What are the triggers?  Creditors are not fools and will not provide money for free.  Let's see the agreement's details, please. 

YRCW's Pyrrhic victory in restructuring ultimately leaves nothing of value for individual shareholders.  This can't go on forever. 
 
Full disclosure:  No position in YRCW.