YRCW's CFO Departs For Smoother Roads

YRC Worldwide is about to say goodbye to its CFO.  Losing a key executive in the midst of a turnaround effort is never a good sign.  The CFO's role in restructuring YRCW's balance sheet and estimating the impact of issuing new equity had to be critical.  One can only guess at her reason for seeking greener pastures elsewhere.  Maybe she got sick and tired of hearing the Teamsters demand reinstatement of their pension plan contributions.  You would too if your workforce's main motivation was to seek more pay for less work.  YRCW will be hearing a lot more of that nonsense with Teamsters serving on its board.  No executive would look forward to that given the rampant greed and corruption among unions nationwide. 

Full disclosure:  No position in YRCW. 

The Haiku of Finance for 03/11/11

Pentagon accounts
Impervious to audits
Spending in stealth mode

The Haiku of Finance for 03/10/11

Saudi oil price stress
Threat to global GDP
"Day of Rage" at pumps

Malkiel Likes To Random Walk With ETFs

Burton Malkiel, legendary investment theorist and author of "A Random Walk Down Wall Street," likes what ETFs do for the retail investor.  He has long endorsed the use of low-cost index investing so it's good to see him climb on the ETF bandwagon.  It would be great if he could mention their value in a covered call writing strategy.  Malkiel's further endorsement of high-frequency trading makes less sense.  It doesn't take a million trades per nanosecond to arbitrage an ETF's value into line with its holdings. 

He's not the only voice in finance pushing for more attention to ETFs.  Charles Schwab's study noting the favor independent advisors show towards ETFs is only slightly disingenuous.  Schwab is one of the most popular platforms for independent RIAs, so throwing them a bone is good marketing.  It also helps that this release is timed with the rollout of Schwab's ETF-selection tool.  Gotta hand it to Uncle Charlie. 

Full disclosure:  No position in SCHW at this time. 

Boeing Bonanza From China

Boeing got some big news.  Hong Kong Airlines is buying $10B worth of 777s and 787s.  That figure is a list value before discounts, so the real gross is closer to about $6B (including another order from Air China for some 747s).  The deals add up to almost 10% of Boeing's gross revenue given the company's performance for the last three years. 

China's air travel sector is banking on continued growth.  One of the biggest problems facing any airline is the cost of fuel.  China's additional hurdle is the mere availability of fuel; it must seek oil exploration deals abroad.  Middle East unrest is getting worse and will make oil prices very unpredictable for months.  Libya's production is increasingly at risk of destruction and its eventual resumption is very much in jeopardy. 

Blanket bets on ever-expanding air travel are no sure thing in this kind of environment.  Boeing should hope that rising fuel costs don't price its airline customers out of future sales. 

Full disclosure:  No position in BA at this time.

Raw Energy And Market Action

There is no advanced civilization without energy.  How the world meets its energy needs determines whether nations can life impoverished masses out of despair with growth. 

OPEC claims it can boost output to lower the rising price of crude oil.  Good luck.  Many of OPEC's larger producers are at or near the peaks of their reserves.  Better drilling technology can flatten a peak by reaching previously unrecoverable reserves, but that takes time to deploy.  OPEC's smaller producers - yes, Libya - will have a tough time producing anything if their workers are revolting. 

Constricted supply means other producers are free to pump and reap windfalls.  Russia likes the windfall profits and support for the ruble that have come with high oil prices.  Net oil importing countries have every incentive to start pricing oil imports in a currency other than the U.S. dollar. 

Option traders aren't sleeping through this bonanza action.  The betting game is on, wagering any attempt by Saudi Arabia to meet world oil demand will be nixed by protests on a "Day of Rage" and afterwards. 

All of this oil action makes it easy for other energy sources to escape notice.  Resource-rich nations don't want to miss the next phase of the global commodity boom.  Mongolia needs help from big Western coal companies to develop its coal deposits.  It's a dirty job, but someone has to do it. 

Greece Credit Lower Than Egypt's

It really says something about your country's credit when you're considered less likely to meet debt payments than a country that just had a coup d'etat:

Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry.

This goes to show that debt overload can be more painful than a revolution.  Egypt recently went through a debt downgrade of its own.  The good news for Egypt is that they don't need an IMF bailout just yet.  The bad news for Greece is that they can't use regime change as an excuse for inaction. 

The Limerick of Finance for 03/06/11

China says that reform is a must
Or else its growth trend will go bust
But party hacks with great deals
Will dig in their heels
Their preference for change is to rust

Misuse Of The Strategic Petroleum Reserve Should Not Be An Option

Unforseen crises tempt political leaders to "do something" to appear responsive to the will of the people.  The current turmoil in the Middle East is one such episode.  Washington thinks the answer to short-term turmoil is to tap the long-term oil stocks in the Strategic Petroleum Reserve.  Let's think about this some more before we act. 

The SPR has a very specific mandate.  It exsists to provide supply in the event of disruptions to physical delivery.  No such disruptions are occurring now in the U.S.  The price of crude is rising worldwide because oil consuming nations everywhere must pay for alternatives to the Libyan production that is now offline.  The price signal sent by curtailed non-U.S. production incentivizes U.S. producers to reactivate wells that do not produce economically at lower prices.  The rig count for U.S. producers has recently risen, along with the share prices of U.S. drillers.

Tapping a reserve intended to provide an emergency supply for national defense just to lower pump prices for American casual motorists is a huge error.  Previous drawdowns during the Persian Gulf War and Hurricane Katrina set unfortunate precedents.  Politicians now consider the SPR to be a political football that can win votes from Americans addicted to spontaneous driving. 

Middle Class Wakes Up To Union Dangers

Union agitators counting on mainstream support for their offensive tactics in Wisconsin had better think again.  Americans are less fond of unions than ever:

Support is no longer a sure thing from the middle class -- not even in a city long considered a union stronghold in a state that gave birth to the nation's largest public employee union. National polls show that the portion of the public that views unions favorably has dropped to near historic lows in recent years, dipping below 50 percent by some accounts.

People who think for themselves don't assume that unions bring bountiful benefits to the working class.  The economic damage done by union demands - the higher costs, the inflexible work rules, the hurdles to layoffs and restructuring - is obvious in the hollowed-out manufacturing heartland of America.  Government employee unions are the worst of the bunch, bringing corruption and inefficiency to essential government services that are already difficult to deliver effectively. 

Bye-bye unions.  Your services are no longer required. 

The Haiku of Finance for 03/04/11

Pension fund shortfall
One point five trillion dollars
That is one big gap

Road To Mexico Opens Wide

The prospect of a new U.S.-Mexico trucking accord is nothing new to loyal followers of Alfidi Capital (all three of them).  The preliminary agreement is ready, sort of.  U.S. negotiators need to iron out a few details that can irk some members of Congress' transportation-related committees.  The final deal will be ready for legislation once the relevant industry players have made appropriate campaign contributions. 

Business groups are celebrating too early.  Union labor can still sabotage the deal by making impossible demands that may find an audience in Washington.  The Teamsters in particular are up in arms at the possibility that Mexican drivers will work longer and harder for a fair wage than their union brethren ever will.  They didn't get the message that trucking firms hurt by the high cost of fuel need any lever they can find to stay competitive.  Teamsters are better off blaming their woes on Middle Eastern unrest than on cross-border competition closer to home. 

Full disclosure:  No position in trucking stocks at this time. 

The Haiku of Finance for 03/03/11

ECB shocker
Proposed rate hike in April
Should strengthen euro

Energy Diversity In The Works (Hopefully)

U.S. energy policy is overly reliant on hydrocarbons, particularly oil.  That's an easy observation to make but changing course is hard.  It takes unsettling news of Middle Eastern violence to smack us all out of our collective stupor.  Libyan oil disruption is now confirmed and other oil producers are due for their own versions of nasty shakeups.  More unrest means more oil price spikes. 

The U.S. has plenty of oil in deepwater and unconventional sources but last year's Macondo blowout in the Gulf of Mexico taught us the difficulties of extracting it.  Restrictive regulations for offshore drilling can be a cloud with a silver lining.  New regulations will increase production costs and discourage new exploration, but they also make renewable alternatives look more attractive. 

All is not lost for the U.S. We can make our existing energy distribution network more flexible with efficiency programs and smart grids.  California shows us the way to energy efficiency, as usual.  China is looking to the West for help with smart grid projects.  American companies should at least try to penetrate the Great Wall of China if they have energy goodies to sell.  Emerging economies are hungry for new infrastructure.  Let's hope America wakes up - but hope is not a method. 

Full disclosure:  Long TDW with covered calls. 

YRCW Restructuring Extended

YRCW stakeholders have granted the trucker an extension on its restructuring plan.  That's the good news.  The plan will lead to both deferral of interest payments to bondholders and significant equity dilution for shareholders.  That's the bad news.  All classes of YRCW's investors will thus get the worst of all possible worlds.

The dilution will force YRCW's share price back down to penny stock levels very soon.  It's headed there already on the news, with a drop of almost 15% today.  The clowns on YRCW's Yahoo Finance message board who've been pumping the stock relentlessly are too stupid to know they've been on the wrong side of this trade for too long. 

Where is this $300mm in new capital going to come from?  Christmas is over so count Santa Claus out.  Maybe the Easter Bunny could cough it up this spring.  The main reason for that injection seems to be to preserve the Teamsters contract, but it would be nice to have more details for confirmation.  Speaking of Teamsters, Fitch is looking to downgrade YRCW's debt even further while the Teamsters line up to claim the lion's share of new equity and convertible debt.  If there was ever a smoking gun that Teamster influence is running YRCW into the ground, there it is.  The Teamsters are firing that smoking gun at the heads of YRCW shareholders.  Pow!  There's another direct hit. 

Investors can avoid debacles like this in the future by shunning unionized companies like the plague.  Companies can spare their customers and shareholders these episodes by driving unions out of their operations.  No one deserves to put up with a union-sponsored nightmare. 

Full disclosure:  No position in YRCW.