Margin Compression Soon To Hit All Producers

Commodity price explosions aren't just igniting Middle Eastern protests against the rising cost of food staples.  They're now impacting the margins of producers in the earliest links of the global supply chain.  Witness the margin compression at PPG Industries over copper prices.  Its market dominance in specialty coatings means it can afford to pass price increases to its customers.  That's good for PPG's bottom line and bad for every single industrial user of its coatings. 

Companies in competitive industries are in for a rough ride.  The big U.S. automakers will face a very difficult climb back to health in the face of rising material costs.  Indian car and bike makers are feeling the pinch from input prices.  Companies at the very end of most value chains (that is, retailers and their servicers) will be in the worst possible position in 2011. Expect more stories of companies facing hard choices between raising prices for end customers or reporting lower earnings. 

Middle Eastern Kleptocrats Demand Gold

Retail investors aren't alone in their flight from unstable currencies to precious metals.  Dictators in the notoriously unstable Middle East know the value of gold all too well.  They place such esteem in gold as a store of value that they're willing to rely upon it as a ticket out of a crumbling regime. 

Zine el-Abidine Ben Ali and his wife Leila Trabelsi looted the Tunisian central bank of one and a half tons of gold bullion.  Such an audacious move did not escape the notice of either the international press or European financial regulators.  Yet the Ben Alis have not been remanded to the custody of law enforcement.  They got away with the heist! 

Hosni Mubarak apparently had a similar plan all worked out long ago.  He didn't have to wait until the last minute like his Tunisian friends.  He spent years sequestering his gold and other investments all around the world, far away from prying Egyptian eyes.  How does a President become a billionaire?  Inquiring minds at Interpol would like to know.  They can start by asking any oil companies or defense contractors who've done business with his regime just how much they had to pay all those years for "access" in Cairo. 

Libya's Muammar Gaddafi (just how does that guy spell his name?) has been taking notes.  His private jet is rumored to be loaded with gold and other precious goodies, ready to spirit him away to a comfy retirement far from the hassles of cracking down on protesters.  A planeload of bullion can buy lots of African savannah. 

Perhaps this uncovers a hidden force behind the strong performance of gold in recent years.  Dictators in the Middle East and North Africa (that's the MENA neighborhood for you investors looking for a new BRIC bloc) have been quietly taking lots of supply off the market.  Sarcasm aside, the World Gold Council will have to update its gold reserve figures with appropriate subtractions for looting by deposed autocrats. 

Full disclosure:  Long GDX with covered calls.

The Limerick of Finance for 02/27/11

Shale oil and gas are now in play
Large producers will show us the way
Drilling set to begin
May the lowest costs win
Hydrocarbons will light a new day

Plenty Of Oil Left In U.S.

Forget what you've heard about Saudi Arabia's oil fields approaching their production peaks, if they haven't already passed them.  New techniques involving proppant injections, hydraulic fracturing, and horizontal drilling are unleashing the untapped potential of oil fields right here in the U.S.:

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

Shale oil and gas are going to be big domestic winners thanks to petroleum engineering.  Don't thank policymakers for this bonanza.  Thank high world oil prices that have incentivized new exploration and production.  The free market works just fine when we leave it alone.

Companies are scrambling to line up shale oil and gas properties for production.  Chesapeake Energy just sold a large shale gas property to BHP Billiton for $4.75B.  EOG Resources wants to double its rig count this year in the Eagle Ford shale oil formation.  Occidental Petroleum has long been confident that its shale properties in California will drive its future growth.  Shale producers are not pure-play situations; companies like BHP (with ROE over 34% and a very healthy balance sheet) are in a much better position to deploy capital and expertise into virgin territory. 

Full disclosure:  No positions in CHK, BHP, EOG, or OXY at this time. 

Wisconsin Approaches Sanity On Union Smackdown

The Wisconsin legislature is one step closer to fiscal solvency for the state after its lower house passed a measure to curtail state employee unions' bargaining power.  The state Senate can now consider the bill once enough absentee lawmakers are corralled into performing their sworn duties.  Putting a muzzle on unions is absolutely necessary if state governments are going to balance their budgets. 

Union leaders expecting sympathy from the country at large are in for an unpleasant surprise.  America isn't Greece, where half the population works in cushy government jobs.  Union representation has been on the decline in the private sector for decades.  Those unions that still operate in the for-profit sector do nothing but drag their employers down. 

The clock is winding down on the union era in America.  Hallelujah. 

GDP Growth Not Where We Thought It Was In Q4 2010

Anybody still crooning about a recovery needs to check this out.  The economy's purported growth rate is weaker than recent reports indicated:

U.S. economic growth slowed to an annual rate of 2.8 percent in last year’s fourth quarter, largely because of reduced spending by state and local governments, the Commerce Department said.

These consistent downward revisions should be big news but they don't seem to make a dent in rising consumer confidence.  Joe Six Pack is either a slow learner or so deeply in hock to his mortgage holder and credit card sponsor that he just doesn't care anymore. 

Italy Depends On Libyan Oil

This one's fast and easy to digest.  Libya's turmoil has cut its oil production.  Italy gets 22% of its crude from Libya.  Direct substitutes for light sweet crude are not easy to obtain on a moment's notice.

Short ideas involve obvious candidates like ENI SpA (E) and the iShares MSCI Italy Index Fund (EWI).  Similar short ideas are probably available for Spain, Ireland, Austria, and any other country drinking from Libya's tap. 

Full disclosure:  No positions in E, EWI, or anything else mentioned above.

U.S. Infrastructure Deals In Brazil

America's commercial infrastructure is in a sorry state.  This nation's bridges, railway overpasses, dams, locks, ports, and various other skeletal appendages are in dire need of repair and retrofit.  This is a legitimate place for governments at all levels to spend stimulus money because it supports aggregate use of a public commons that benefits everyone.  Just when we have a great reason to spend money here at home, we find a way to spend it abroad:

U.S. President Barack Obama plans to offer new financing for joint infrastructure projects between U.S. and Brazilian companies when he visits Brazil next month, sources with knowledge of the situation told Reuters.

The Administration has a stated goal of doubling U.S. exports in five years (really closer to four now as this idea was launched last year).  Washington can do the right thing if it follows through on a plan to spend half a trillion dollars on infrastructure here at home.  Promoting trade is ususally worthwhile, but goods will never get from here to there if we spend money on foreign infrastructure before rebuilding our own first.

Updating The Alpha-D For Feb. 2011

Options expiration last week left me with choices to make.  I allowed a small portion of my TDW holdings to be sold away and renewed my short covered calls on the remainder.  That stock has been on a tear recently so pocketing some gains is okay by me.

Similarly, I allowed some of my GDX to be called away and I renewed my covered calls on what was left.  The shares called away were sold at the exact price I was forced to pay a month ago when they were put to me.  That doesn't happen often, so I'm grateful to be lucky enough to have collected the cash from those covered call options. 

My covered calls on FXI expired unexercised.  I renewed them this month with no change in the size of my underlying equity position. 

I also still have my long ATHR position with covered calls and cash-covered short puts.  This special situation play still looks like it will pay off. 

I am not shorting any other puts this month against anything.  Markets worldwide are far too overvalued right now given the debt loads most companies and countries are carrying.  I'd rather not have any overvalued equities put to me at this time. 

I don't ignore fixed income, as I did when I was younger.  I added to my holdings of short-dated California state muni bonds.  I even grabbed some short-dated Treasuries.  It's hard to turn down a little extra yield.  The stagflationary U.S. economy could break either way towards depression/deflation (ruinous for equities) or higher inflation (bad for bonds).  No one knows in advance which will prevail, or even if stagflation will persist (my current opinion).  I'm just staying flexible, with cash on the sidelines ready to buy anything that breaks the right way. 

Full disclosure:  All positions described reflect my true portfolio. 

The Haiku of Finance for 02/21/11

Euro inflation
Heating up with some warning
Caused by debt bailouts

Monday Newsreel for 02/21/11

The U.S. stock market is closed, so I need something to do.  Reading headlines is just the thing.

The IMF (i.e., the U.S.) is unable to help the EU solve its debt crisis.  The Fed is too preoccupied with buying U.S. sovereign debt to make any QE available for Europe.

Speaking of U.S. debt, there's more of it now than there has ever been since World War II.  Remember what FDR's Treasury Secretary said prior to WWII about how the New Deal did nothing but put the U.S. deeper in debt?  That was when the U.S. was still the world's largest creditor nation.  Now that we are the world's largest debtor, we have no spare room to launch any great projects. Growth won't save us this time.  Inflation is not a substitute for real growth. 

Speaking of inflation, China continues to fight it by raising fuel prices.  The rising price of oil due to Middle East turmoil will magnify the impact of this policy.  China's economy will hit the brakes faster than its Mandarins expect. 

Egypt wants the bond market to buy almost a billion dollars worth of debt.  They should send the bill to former President Mubarak.  He can easily cover it.  The new government is taking its first steps to locate the assets he grabbed.  Recovering all of the national wealth he stole will take some time, and of course even a corrupt former head of state is innocent until proven guilty.

Finally, U.S. investor behavior continues to defy common sense.  The stock market's dizzying rise does not deter new investors despite indications it is overvalued.  The U.S. economy's fundamentals have not improved at all since 2008.  The Fed's QE provides liquidity to the i-bank dealers of U.S. debt, who are emboldened in turn to extend credit to hedge funds that churn and pump the stock market to no end.  This cannot end well for investors when QE ends. 

Wind Energy Costs Decline Despite Transmission Obstacles

Wind energy may be catching its second wind lately.  How's that for a pun?  The cost of generating electricity from wind is now close to the cost of coal-fired generation.  That's good to know for utilities planning capital outlays.  That study only pertains to onshore developments, which can sometimes be sidelined by NIMBY objections (noise, ruined views, and other baloney excuses) and relevant reasons (like the fact that tall wind towers can interfere with FAA and DOD radars).  Offshore wind developments are becoming increasingly attractive and may not fall prey to the same obstacles as onshore developments.  They may of course pose a whole new set of problems, like locations that fall in the middle of shipping channels or prime fishing areas. 

Cost competitiveness isn't the only feasibility factor relevant to planning wind farms.  Energy providers need to consider the capacity of the transmission grid that serves a proposed wind project.  Lack of convenient transmission lines was the Achilles heel in T. Boone Pickens' plan for a giant wind farm in Texas.  Wind power enthusiasts in China have yet to figure this out.  China's vaunted leadership in building wind installations may prove meaningless if grid upgrades lag behind new generation.  Wind power is a waste without the grid lines to bring it to market. 

Utilities planning wind projects should tread carefully.  All of the relevant ducks need to be in a row - including enablers like transmission infrastructure and environmental considerations - before a green energy project gets a green light. 

The Limerick of Finance for 02/20/11

Nasdaq closes in on its high
Tech earnings give some reason why
But as we all learned
Last decade when burned
Tech results can still mask a big lie

YRCW Way Behind In Mobile Apps

Here's a clue as to how badly YRC Worldwide is hurting.  The company is just now rolling out a mobile phone application that allows customers to track shipments.  Its main competitors have had similar apps out for a long time.  Check out some old news.

UPS launch its app in December 2008.

FedEx launched its app in early 2009.

Con-way Freight launched its app in August 2010. 

It's really sad when you're just starting to explore a service that others have spent more then two years bringing to maturity.  It's all too easy to fall behind when you're distracted by your unionized workforce's insane demands and work rules.  High-performing companies always have an external focus.  Unions demand an inward-looking focus that ignores the competitive landscape.  I certainly hope YRC Worldwide isn't entrusting the application's data entry or interface design to union labor. 

Full disclosure:  No positions in YRCW, UPS, FDX, or CNW at this time.

The Haiku of Finance for 02/18/11

Brent crude price is up
Triggered by Bahrain unrest
Time to drill for shale