Sunday, October 31, 2010

The Limerick of Finance for 10/31/10

Hedge funds raising big bets on oil
Sentiment will bring prices to boil
What goes up must come down
Bringing pain all around
Volatility makes markets roil

Saturday, October 30, 2010

Pentagon Minimizes Rare-Earth Risks (Hopefully)

The U.S. Defense Department recognizes the implications of China's stranglehold on the rare-earth mineral market.  Officially, DOD believes the risks of Chinese dominance are minimal.  That's not reassuring.  Consider one very expensive example.  The Pratt and Whitney engines in Lockheed-Martin's F-35 fighter require a rhenium alloy.  Does United Technologies (Pratt and Whitney's parent) have long-term contracts lined up to supply the rhenium it needs?  The answer will prove crucial. 

The Pentagon study mentioned in the Bloomberg article admits that DOD's primary contractors don't track their use of rare-earths and consider them just another commodity to be obtained on the world market.  Planners in industry and government alike are just beginning to plan for politically-driven supply interruptions.  Sometimes security cannot be had at any price, as if it were available to any bidder in a free market. 

The F-35 STOVL variant just completed a high-temperature test.  Rhenium makes it possible for engines to perform at high temperatures without disintegrating.  DOD had better be sure that rare earth supplies won't be a problem.  Hope is not a method. 

Full disclosure:  Long put against LMT.  No position in UTX. 

Friday, October 29, 2010

Friday Roundup, Oct. 29, 2010

Unionized longshore workers in NY/NJ get paid an extra three hours for zero work.  Unions can't help but rip off their employers and customers.  This madness must end. 

If cheap debt is driving private equity action, then any disturbance in the bond market (China *cough* China) will shut down all leveraged buyout action and possibly destroy Blackstone and Carlyle.  Neither firm would hire me.  I hope bond vigilantes wipe them out.

The PIIGS await slaughter.  The G-20's agreement not to engage in mutual currency destruction is already null and void.  Debt defaults will demand devaluation.  Disband, G-20.  Further agreements would be a joke and the ECB acknowledges as much

Even Islamic bonds are in the yield basement, but they pay more than comparable Treasuries.  Allah willing, Malaysia might finally be the great growth story I thought it would be when I visited there in 2001. 

The Economist signals to American elites that Anglo opinion is souring on the U.S. as a growth story.  Brits can still take austerity with a stiff upper lip.  Americans will cry and riot. 

Thursday, October 28, 2010

U.S. Yawns At Chinese Supercomputer

China takes another step toward reclaiming the technological lead it lost centuries ago by unveiling the world's fastest supercomputer:

A newly built supercomputer in China appears poised to take the world performance lead, another sign of the country's growing technological prowess that is likely to set off alarms about U.S. competitiveness and national security.

America's dwindling scientific elite, represented by the Oak Ridge Lab expert quoted in the article, is reacting with appropriate concern.  The response from America's political class will tell the world whether our country is fit to remain a world power.  There wasn't any money for supercomputer development in the federal stimulus because the tech industry isn't unionized and doesn't contribute heavily to political campaigns. 

The rest of America simply couldn't care less.  The relative decline in American students' scientific aptitude is well-documented and even accelerating.  This will continue if reactionaries on school boards succeed in replacing evolution with "intelligent design" in textbooks.  The good news is that Uncle Sam put up this cute website to tell anyone in America who's still literate that someone in the government might know something about science and education. 

Americans can't be bothered to study for degrees in computer engineering when there's another reality TV show to watch.  Our leaders can't be bothered to help the industry because they reflect our changed national character.  The Soviet launch of Sputnik 1 shocked the U.S. into massively increasing funding for scientific education and research, which assured that the first human on the Moon would be an American.  We're just not the same country anymore.  At the rate things are going, the first human on Mars will probably not be an American

Nota bene:  Long FXI with covered calls.

Tuesday, October 26, 2010

Hidden Loss On AIG For Treasury

Following the AIG debacle outside the mainstream financial media leaves one prepared for the unpleasant truth.  AIG is losing more money than ever and Uncle Sam thinks we don't need to know:

The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program.

This report will be quickly forgotten by a sleepwalking American public too concerned with the World Series to read any SIGTARP reports.  The Treasury Department has apparently hired its financial analysts from Enron.  The only other explanation for this deliberate mis-valuation is that they're from the government and they're here to help - help themselves to more bailout money.  Those analysts can look on the bright side if they lose their jobs, as there will be plenty of demand for their services in Greece to mis-value that country's bad debt

Monday, October 25, 2010

Rye Patch In A Gold Patch That's Hot For Energy

Rye Patch Gold (RPMGF.PK) is one junior mining company with a unique approach to developing its property. Not content with developing ore, it recently leased rights for geothermal development on its Wilco prospecting site.  This has more than one implication.  It can mean Rye Patch's management is sophisticated enough to take a portfolio approach to developing property.  Alternatively, it can mean that Rye Patch has insufficient resources to explore the geology of a parcel it owns and needs a subsidy in the form of geothermal royalties for further exploration.  Either way, licensing out some exploration in exchange for geological information is an innovation worth noting. 

Fortunately, the Wilco property is situated in a part of Nevada that is ideally suited for geothermal exploration.  There may be something to the portfolio approach after all.  Miners would be well advised to consider their undeveloped properties' potential as energy producers.  One caveat to geothermal activity is its propensity to trigger small earthquakes.  It would be facetious to suggest that a little earth-shaking would make ore easier to extract. 

Full disclosure:  No position in RPMGF.PK. 

Asia Turns To Intra-Trade

Here's a quick observation on the future for Asian exports.  Big shippers like Maersk are starting to cut the shipping capacity they dedicate to Asia-Europe routes, a sign of slackening demand for Asian exports.  Carriers raising rates in this environment may be committing economic suicide.  Asian producers will find replacement markets closer to home, and companies like Evergreen have a lot at stake in servicing those markets.  Asian exporters have little choice in the face of trade war provocations like new U.S. anti-dumping duties

This Asian focus on Asian trade makes sense in the context of internal development.  China wants the same kind of consumerist middle class that Taiwan and South Korea have grown for themselves.  Expect the Middle Kingdom to continue its pursuit of a hegemonic strategy in Asia.  China's next strategic gambit will be to create domestic value-added manufacturing in a direct challenge to Singapore and other regional competitors for capital.  Further U.S. stupidity in the form of trade pressure on China will drive Asian nations closer together.  The U.S. will rue the day it plays midwife to the birth of an Asian trading bloc with high walls. 

Sunday, October 24, 2010

Investing In Unbuildable Land

We've all heard horror stories of naive investors being suckered into buying unbuildable lots somewhere out in the boondocks.  Some land just isn't suitable for residential development, but that doesn't mean it's unsuitable for any economic use.  I can think of a few economically productive uses for unbuildable land, especially in developed areas with code restrictions. 

Rights of way.  That parcel you think is worthless at first glance may be valuable because it's on the way to something valuable somewhere else.  I'd be very interested to see where the California high-speed rail project plans to locate its lines.  The tracks will likely be laid parallel to existing transit lines to minimize disruption to the dense urbanization of the Golden State.  Any deviation from those lines means some property owner is going to get lucky (or unlucky, if forced to sell due to eminent domain).

Tower sites.  Wind turbines, wi-fi towers, and billboards are perfect for vacant land.  Restrictions apply.  Urban wind turbines are subject to height and noise rules, and of course they have to be located along a viable wind stream.  Wi-fi is the hot new infrastructure thing for some cities.  Billboards strike me as an all-purpose winner in either urban or rural (along highways) locations.

Natural resources.  Here's where things get interesting.  Drilling for oil or minerals in an urban area is probably a non-starter in most places, although it's been done in California.  I'll never forget my drives through Paso Robles and Kern County where oilfields co-exist with ranches and farms.  Bakersfield is a classic, where oil derricks are intermingled with development. 

Location is everything in real estate, even with sites unsuited for habitation.  Unbuildable land can still be subject to zoning and environmental restrictions.  Title search and visual inspection are always absolutely necessary parts of due diligence.  One advantage to finding a productive use for unbuildable land is that it avoids the many liabilities facing landlords of inhabited property.

The Limerick of Finance for 10/24/10

Visteon readies its IPO
To investors, the proceeds will go
It went in the hole
Now it has been made whole
Ford's reaction is what I'd like to know

Friday, October 22, 2010

Friday's News In Brief

Prepare yourself.  Here it comes. 

Shippers won't be held hostage to trucking costs and are looking for intermodal shortcuts.  This is bad news for truckers who raised rates thinking they had pricing power (yes, YRC Worldwide, I'm thinking of you but you're not alone in that folly).  It's good news for rail and barge carriers.

Speaking of YRCW, it's preparing to triage New Penn if greedy union drivers won't vote for its survival.  I wish I had shorted this stock last year.  Now I just get to watch it spiral down the drain.  I wonder if the asset-backed securitization facility they just renewed will have seniority over other debt holders in the event of liquidation. 

Market observers think trade with the Middle East and Africa will drive Chinese growth.  No argument there, but consider what Chinese strategy demands of this trade.  Their plan is to send value-added finished goods from China to their new resource colonies, primarily in exchange for oil. 

It's a bumper crop for grain exports through the Great Lakes to points across the Atlantic.  Name me some publicly-traded barge operators on the St. Lawrence Seaway so I can have new companies to blog about.

The whopper of the day is the astronomically high expected tab for Phoney and Fraudie - at least $154B.  This presumably excludes the costs of servicing or foreclosing all of these fraudulently securitized mortgages we're just now discovering.  Another TARP is politically impossible, as even folks in Ireland are catching on to bailout scams.  This leads to inevitable big-bank collapses and forced resolutions.  Equity owners and bond investors will eat a big fat mud pie.  Investors who've been sitting this spectacle out - like me - will buy up tracts upon tracts for a song.  Bring it on. 

Remember how the stimulus was supposed to fix America's dilapidated infrastructure?  Surprise!  It never happened and now we have to live with reduced future prosperity thanks to that lack of foresight.  This is the one thing that will cement America's descent into the world's economic basement.  I take issue with the Economist's statement that there is "no urgent need" for high-speed passenger rail.  Excuse me, but Peak Oil will price air travel out of reach of the shrinking middle class.  That's why people will be screaming for an alternative to cars and planes in about a decade.  Nothing could be more urgent, and there is plenty of rail capacity available for both freight and passengers when rail carriers are double-stacking containers. 

I hope you enjoyed reading all of this wonderful news about your immediate future.  Have a great weekend everybody! 

Full disclosure:  No position in YRCW, FNM, or FRE. 

Thursday, October 21, 2010

Suckers Rush Into Emerging Markets

I'm convinced that most people never learn anything at all.  Retail investors are desperate to pick up nickels in front of steamrollers in their insane chase after yield.  Look at the money jumping into emerging market stocks that pay sky-high dividends.

It's too bad the party won't last.  China's growth has finally slowed to single digits. Now all Chinese companies have to do is pay huge dividends to keep FDI flowing in.   

Thanks for the never-ending macro "put," Helicopter Ben.  Your ZIRP is forcing know-nothing investors to price the rest of us out of emerging markets.

Full disclosure:  Long FXI with covered calls.  No position in IWM. 

Goldman Sachs Ready To Part Ways With Buffett

Maybe Goldman Sachs really is the home of the smartest people on Wall Street.  They're preparing to pay back one of their toughest creditors:

Goldman Sachs Group Inc. is considering paying back a $5 billion investment from Warren Buffett's Berkshire Hathaway Inc. that bolstered the securities firm during the worst of the financial crisis, according to people familiar with the situation.

Mr. Buffett got one awesome deal when he bought Goldman's preferred.  Goldman's new math is that the present value of all those perpetual future dividend payments exceeds what it would cost right now to pay him to go away.  Maybe Goldman's execs don't like the restrictions on selling shares that came with the Oracle of Omaha's deal and they want to sell their stakes before the next downturn hits.  Always look at business deals through the prism of human greed and you'll understand everything about Wall Street. 

Uncle Sam's TARP managers can learn something here if they're paying attention.  This is how deals are done, and undone. 

Full disclosure:  No position in GS or BRK-A. 

Wednesday, October 20, 2010

The Haiku of Finance for 10/20/10

Fed regional growth
Uneven and too sluggish
Stagnant joblessness

Megabanks Back In The Hole (Or Headed There)

I shake my head whenever I hear the latest cutesy reason to invest in bank stocks.  Have you heard them too?

"They're too big to fail."
"Warren Buffett likes bank stocks."
"I'm an i-banker; buy my stock."

If you have heard such baloney and believe it, here's some real news.  Morgan Stanley had a net loss of seven cents per share in Q3.  Is that convincing enough?  How about BofA's net loss of $7.3B in Q3?  Not every bank is a disaster (yet), as Wells Fargo is chugging right along with a $0.60/share profit this quarter.  Uncle Warren thinks that's just fine, but I'm not inclined to follow him over the cliff when that rumored $1T or so in off-balance sheet liabilities shows up. 

If you bought bank stocks anticipating a broad economic rebound, you'll need lots of luck. 

Full disclosure:  No positions in BAC, MS, or WFC.

Tuesday, October 19, 2010

Desktop Manufacturing: The Long Poles In The Tent

There's revolution going on and it's headed straight for your desktop.  It's the desktop manufacturing revolution and it promises to bring just as much upheaval as the Industrial Revolution and Information Age have wrought. 

I'm very interested in this development.  There's a lot of excitement in the blogosphere about the 3D printers that will enable every wanna-be backyard tinkerer and reality hacker to make their own machine tools.  I'm much more interested in what military planners might call the "long poles in the tent," those resources and building blocks without which this maker revolution would be impossible.  I'll use my imagination.

The 3D printers themselves.  It's impossible to get this party started without these all-purpose design and fabrication devices.  Where do you get them?  Who's going to make them?  Will established industries try to outlaw them or pay their captive lawmakers to tax and regulate them out of reach of your local hackerspace or resilient community?  If they break, is someone in your neo-tribe qualified to repair them?  The RepRap Project seems to have the inside track on solving this problem. 

The raw materials.  Where do we find the toner for these printers?  Right now even the most advanced 3D printers can only handle plastic polymers and some metal.  Making your own complex, precision-controlled devices will require feedstock that's a lot more diverse. 

The minor components.  This flows from the raw materials problem.  If your printer relies on a high-temperature laser to solder elements together, can those minor components be manufactured in the same way as a bulkier item that requires only simple polymers?  This is relevant for those tiny components that have very special structures or require rare earth elements.

Alloys and metallurgy.  How will a 3D printer combine two or more materials in a way that's more efficient than modern smelting?  This is relevant for manufacturing products that must perform in extreme conditions of temperature and atmospheric pressure to exacting tolerances (like aircraft engine parts).

We're just at the beginning of this adventure and I don't have the answers.  Looking for those answers is what makes this so much fun.

The Haiku of Finance for 10/19/10

Rare earth embargo
China holds back its metals
Ready for trade war

Hire Veterans In Logistics

Here's another of my rare career-focused blog posts, but this one's aimed at employers.  Logistics providers who want experienced professionals need look no further than military veterans.  They understand supply chains and quality control.  They come to work drama-free and will put in long hours with realistic salary expectations (i.e., they work cheaper than MBA prima donnas because they're accustomed to being underpaid by Uncle Sam).  They know how to motivate an unskilled workforce using both carrots and sticks when appropriate.  They can handle a great deal of stress without complaint even if that stress is caused just for fun by the person who signs their paycheck.  Most importantly, they know their private sector career options are very limited and will gladly stay with an employer who offers them a halfway-decent career path.  Veterans have families to raise and bills to pay too, and they are willing to go the extra mile even for an unappreciative employer. 

Hire a veteran for a logistics job.  You won't regret it. 

Full disclosure:  I am a veteran. 

Monday, October 18, 2010

YRC Worldwide Pins Hopes On Higher Volume In Q3 2010

I can't resist another peek at my favorite "sick man" in trucking, YRC Worldwide.  It's claiming once again to be narrowing its losses.  It made this claim last quarter and turned out to be correct in the narrowest possible sense.  Good luck making that claim if the union leadership can't sell the latest round of concessions to its rank and file members.  Good luck keeping revenue up if the sluggish economy and the costs of complying with the Comprehensive Safety Analysis 2010 prove to be as tough as many truckers suspect

Oh, by the way, assertions that rising fuel costs help LTL carriers are dismissed in news that YRCW is counting on falling fuel costs to help its earnings.  Maybe that only works with LTL carriers that have pricing power, which YRCW should have given the size of its gross revenue.  Maybe this just shows that YRCW doesn't know what it's doing, or tries to spin changes in fuel costs any way it can if analysts aren't paying attention. 

I am not short this stock.  I have never had any position in YRCW (now briefly YRCWD since the reverse split), although I've been tempted to go short.  I'll resist that temptation as much as I can.  Maybe the company can pull off a miracle for the sake of their shareholders and employees. 

A True But Disappointing Tale From Dubai

I may have told this story before.  It's worth retelling.

Earlier this year I received an unsolicited email from a financial media company in Dubai.  They claimed to have noticed my blog and wanted to pay me $300/week to write a column for their website.  I was intrigued and asked to see the contract.  The contract looked attractive at first glance but it lacked some details that raised my eyebrows. 

First, there was nowhere on the contract for me to sign.  Everything I've ever signed in my life that required some kind of legal commitment had a clearly marked line for my signature.  I emailed the Dubai guys to ask where they wanted me to sign, and they basically said "sign anywhere."  Oooooo-kaaaaaay.  I did not sign.  Furthermore, the contract asked me to send them the my checking account number so they could directly deposit my weekly pay.  NO WAY was I sending my checking account details to people in the Middle East whom I've never met.  These guys had probably never heard of PayPal, which was created to enable secure transactions between parties who were heretofore strangers. 

I sent the Dubai guys a polite email message informing them that I was no longer interested.  This all transpired months ago but I still remember it today as I consider ways to expand my presence in cyberspace.  There are plenty of other ways to do business. 

Updating The Alpha-D For Oct. 2010

Whew!  Options expiration in October turned out to have some fairly bullish consequences.  Such is life on the cusp of Helicopter Ben's much-telegraphed QE2, when every actor anticipates every asset class to be bid up.  My holdings of FXI and TDW went through their strike prices and were called away last Friday; today I bought them back as a wash sale. 

I maintain long puts against LMT and IYR.

I wrote covered calls on GDX, FXI, and TDW.

I wrote cash-covered puts under GDX and TDW because I wouldn't mind adding more to my stake if forced.  I did not do so with FXI because China's economy is getting pretty bubblicious.  I can't call the top so I'll have to live with riding China down; I can wait a decade or two for it to recover.  A billion consumers will eventually emerge from a cocoon there.  Many of them will end up as warriors. 

I briefly considered writing cash-covered puts under KEX, but I ultimately decided I'd rather wait to pick it up super-cheap when the rest of the U.S. market craters.  See, I'm willing to ride TDW down because it's at a P/E of 9 right now, but KEX is about twice as pricey (and thus has farther to fall to find a really attractive entry point). 

Alas, if only FLIR were cheaper!  It seems to be headed there, compared to where it was months ago. 

I'm continuing to do my homework on "pick and shovel" plays on commodities like pipeline companies and oil services.  I'm not done yet.  Watch this space. 

Sunday, October 17, 2010

The Limerick of Finance for 10/17/10

Luxury spending's back on the rise
But that may not prove to be wise
Nouveau riche should start thinking
While bank stocks are sinking
Bonus pools will dry up, quelle surprise

China Prepares For U.S. Dollar Self-Destruction

Another chapter unfolds in China's "Unrestricted Warfare" strategy against the United States.  China's position as a primary customer of U.S. Treasuires gives it the ability to dictate U.S. policy.  China will not tolerate U.S. pressure to let the yuan float and the U.S. political leadership is powerless to fight back without triggering a flight from the dollar

The dollar's fifth stright week of decline against the currencies of the U.S.'s largest trading partners is the market's recognition that quantitative easing will destroy dollar-based assets.  China's assessment of the U.S.'s fundamental weakness is correct.  Global currency traders are anticipating that further monetary stimulus from the Fed will trash the dollar's value

China, despite its growth-related problems and urban real estate bubble, is in a relatively stronger position than the U.S.  Any eventual appreciation in the yuan will increase the value of Chinese companies and their earnings in dollar terms.  Chinese investors can easily use this leverage to pick up dollar-based assets on the cheap after a run on the greenback. 

Saturday, October 16, 2010

Union Stupidity at Hawker Beechcraft

I've got to hand it to union workers.  No one does stupidity like they do:

Machinists at Hawker Beechcraft voted Saturday against a new seven-year contract that would have included a 10 percent pay cut and other concessions aimed at keeping the company from moving all its operations out of Kansas.

Way to go unions!  You've just driven your employer to Baton Rouge, Louisiana.  If you're not willing to relocate then you're out of a job.  Even though Hawker Beechcraft is privately held, their 10-Q filings and other financial statements provide enough confirmation of the company's challenges.  Quarterly gross sales of $603.7mm at the end of June 2010 are over $170mm less than what they were a year prior.  Year-over-year quarterly revenue for the same period plummeted from $172mm to a loss of almost $57mm. 

Numbers like that are a disaster heading into the next leg of a recession.  Hawker Beechcraft would be well-served to take Louisiana's offer.  Kansas' incentives mean nothing now that unions have rejected a deal. 

Full disclosure:  No positions in Hawker Beechcraft's joint owners, Goldman Sachs (GS) or Onex Corporation (OCX.TO).

Friday, October 15, 2010

SEC Settles For Less With Mozilo

The tanned former king of mortgages avoids his day in court thanks to a settlement with the SEC:

Countrywide Financial Corp. co-founder Angelo Mozilo has agreed to a $67.5 million settlement to avoid trial on civil fraud and insider trading charges that alleged he profited from doling out risky mortgages while misleading investors about the risks.

I thought this would be a slam dunk prosecution, but that was before the mortgage foreclosure mess revealed the sorry state of so much documentation needed for corroboration of wrongdoing.  Hmmm.  Maybe more former mortgage brokers and i-bankers are going to breathe easier at the precedent this sets.

I guess the SEC really does have better things to do with its time than pursue full-bore prosecutions.

Thursday, October 14, 2010

The Haiku of Finance for 10/14/10

Trillion-dollar holes
As far as the eye can see
Stare, you'll get dizzy

Currency Crisis Awaits U.S. Dollar And The Rest Of The World

Pundits can pontificate all they like about leading currencies avoiding a state of war with each other.  The dollar is under attack by Uncle Sam himself thanks to a stealth round of quantitative easing that Helicopter Ben is waiting to launch

Perhaps describing QE as the end of the world as we know it is a bit much.  Apocalyptic apoplexy may not be appropriate.  All this excitement is making gold investors even more excited than they would be without their meds thanks to gold's rising priceInsanely high commodity prices make resource investors happy but prolong the popping of China's property bubbles.  What to do when the Chinese bubble pops?  Why, blow a new bubble in India with foreign direct investment, of course. 

Don't worry if you've decided to sit out these Asian bubbles and currency gyrations.  There will be a few more before China and India go to war against each other some day over their disputed Himalayan border

I hope I've given my readers enough to chew on while I look for some decent stocks that deserve my attention.

Wednesday, October 13, 2010

Drilling Through The Seabed Is Fun And Profitable

The Administration has thankfully lifted its self-imposed moratorium on deepwater drilling in the Gulf of Mexico, opening the way for a return to normal for thousands of waterborne roustabouts.  Handwringing over the possibility of more catastrophic spills is overblown.  Memories in the offshore drilling industry are long, and the prospect of lives, time, and money lost to a disaster will make every firm involved more risk-conscious.  Tighter government regulation is inevitable and warranted.  Rig owners should welcome that oversight because meeting higher standards will make liability tougher to prove in future litigation. 

This is definitely bullish for the oil supermajors and their drillers and servicers.  Transocean, McDermott International, and Oceaneering International spring to mind as worth watching.  It probably won't hurt Tidewater either.  Big finds on land are growing scarcer, so prospects in the deep blue sea look more attractive.  The Arctic Circle and Antarctica beckon.  One can only guess at the riches under the ice caps.  More capacity means less upward pressure on diesel prices, until it all runs out and we have to make biodeisel from switchgrass.

Full disclosure:  Long TDW with covered calls and cash-covered short puts.  No positions in RIG, MDR, or OII. 

Tuesday, October 12, 2010

Untapped Resources Set The Stage For Domination

Earth is a finite sphere.  There are only so many ounces of recoverable ore left to mine.  The point of diminishing returns from resource extraction will appear some day.  That day will herald the world's transition from a perpetual growth economy to a steady-state economy. 

Until that day comes, it's game on in a scramble for untapped mother lodes of metals and energy.  The winners in this scramble will be able to dictate the future structure of the world's political arrangements.  There's plenty of potential in the U.S. for wind energy, and the company that lays the grid to collect and distribute wind-derived electricity will hold a perpetual monopoly

Some resource-rich countries still have relatively accessible mineral deposits.  These countries will be able to name their own prices for extraction as long as those deposits last.  Such countries also risk becoming battlefields for Great Powers if the price they name for their mother lodes is too high.  I am willing to bet that the military leaders of China and India are wargaming options that will maintain their countries' access to resources if a rival cuts them off.

Map out the remaining resource deposits in emerging markets and draw lines from there to Chinese and Indian ports.  The flash points for future naval confrontations lie at points where those trade lines cross natural geographic choke points.  I will invest accordingly. 

Monday, October 11, 2010

PG&E (PCG) Pipeline Blowout Won't Destroy Company

Sometimes bad things just happen. Last month PG&E (PCG) got hit with a black swan when one of its natural gas pipelines exploded on the San Francisco peninsula and leveled a halfway decent neighborhood.

This accident will not sink the utility. PG&E has over $1B worth of insurance for catastrophes. The neighborhood damage claims are likely to come in far below that sum. The utility capitalized its initial claims fund with $100mm, but the company held over $800mm in cash and equivalents on June 30. Moody's hasn't downgraded the utility's credit rating, so it can continue to borrow at present rates with no material changes to its capital spending outlook other than replacing the destroyed section of pipeline.  This is the good news. 

The bad news comes from the ongoing financial results.  PG&E's five-year EPS growth rate is an atrocious -18.94%, far below the industry average of 14.15%. Negative EPS, folks.  Ugh.  Its five-year ROE growth is a respectable 12.25% but this falls short of the 14.83% industry average.

How can a local energy monopoly have such a hard time extracting excess economic profits?  On second thought, PCG investors don't need to worry about another pipeline eruption damaging the company. The company's internal fundamentals are doing enough damage to shareholder value.

Preferred shares tell a different story.  Observing one class of its preferred stock, specifically its non-redeemable Series A at 6%, shows us that its annual payout of $1.50 per share should give us a fair value (if we use the preferred's 6% coupon as the required rate of return) of $25 per share.  Today PCG-PA closed at $28.23.  Utility investors may value the security of the preferred's dividend more than any growth they hope to obtain from common shares. 

Full disclosure: No position in PCG or any of its preferred shares.

Sunday, October 10, 2010

Foreclosure Hiatus Revives Credit Crunch

We can mark the restart of the credit crisis with the pocket veto of HR3808, The Interstate Recognition of Notarizations Act of 2010.  Lack of cash flow from mortgages in default finally forced banks to move against homeowners.  Unfortunately, monumental confusion over who holds the right to collect on an underwater mortgage is about to have huge unintended consequences:

Allegations of possible mortgage fraud against financial giants GMAC, JPMorgan Chase and Bank of America read like a corporate thriller: forged documents, faked Social Security numbers, phantom titles, disappearing paper trails, "robo-signers" and mortgages sliced and diced so many times that nobody really knows who owns them.

Resurgent housing prices cannot lead the U.S. out of recession until clearing up the confused title chains of foreclosed properties clears the housing market.  Banks can't lend when the collateral underpinning their home loan portfolios is of doubtful ownership.  We saw this show before in September 2008 but this time the political climate won't tolerate another TARP.  Thus, whatever solution emerges will not be a product of the democratic process.  The foreclosure hiatus will spark the renewed credit crunch.  Invest at your own risk. 

Full disclosure:  Long puts against IYR.  No positions in bank stocks. 

The Limerick of Finance for 10/10/10

Foreclosures have been put on hold
Banks lost paperwork, or so we're told
Who pays and who owes?
It seems no one knows
Many homes will just never be sold

Peak Employment Will Constrain U.S. Economy For A Decade

One topic that most mainstream economists are reluctant to touch is whether a nation's economy has a finite carrying capacity for productive jobs, in the same manner as ecosystems.  Here's one indicator that Peak Employment may be a reality in the U.S.:

Employment bottomed in December 2009 at 129.588 million — two years after peaking at 137.951 million. At this year’s pace, the U.S. won’t recoup all those 8.36 million lost jobs* until March 2020 — 147 months after the December 2007 high.

Employment is now about where it was in 2000.  The jobs created since then have been wiped out by the FIRE economy's heart attack.  The economy is unable to generate enough jobs to match population growth.  This will cause a lot more problems than just an inability to pay a Social Security COLA.  The curtailment of that COLA and other middle class entitlements currently funded by our nation's debt addiction are symptomatic of broader structural limits to growth.

Limits to growth imply limits to population size.  The effects of employment stagnation will eventually manifest in immigration policy.  The Arizona immigration law is the first of many similar steps to America's future.  Use your imagination. 

Saturday, October 09, 2010

Unemployment Ready To Surpass 10%

Official unemployment figures are too optimistic by far but hardly anyone notices.  The official number has been hovering south of 10% for some months:

Nonfarm payroll employment edged down a net 95,000 jobs in September, and the unemployment rate was unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported Friday.

Such continuing weakness in the job market bodes ill for consumer spending in the holiday season.  We're starting to see anecdotal evidence for a slowdown in some logistics data.  Need proof?  LAX air freight volume is slipping.  Intermodal traffic on railroads has peaked.  I expect such reports to multiply between now and the end of 2010 as consumers continue to restrain purchaes made on credit

Thursday, October 07, 2010

The Limerick of Finance for 10/07/10

Foreclosures have ground to a halt
The banks all claim it's not their fault
But they should have tracked
What the documents lacked
Title claims are now under assault

Wednesday, October 06, 2010

U.S. Treasury Underestimating TARP Losses

There's some hullabaloo shooting around the financial mediasphere about how TARP isn't going to become a colossal money sinkhole; rather it's only going to lose a paltry $29B or so according to the New York Times.  The NYT's standards must really be slipping, because their writers obviously have difficulty with grade-school addition.  Someone's got to tell them that a $17B loss on the automakers and a $49B loss on housing programs do not add up to a total loss of $26B.  Someone should also tell them to read the second page of the government's own "TARP: Two Year Retrospective" report, which specifies that only 53% of the TARP loans have been paid back as of Sept. 30.  We can thank AIG and the housing programs for holding up the line.  I don't have time to help journalists figure all of this out.

I also don't have time to deliver a wake-up call to Americans who think the banking crisis is over.  That has been done ably enough by Institutional Risk Analytics in their latest report.  The U.S. banking sector is merely in the eye of a storm and further dislocations are yet to come.  A second bailout is a political impossibility given voter anger at incumbents.  The solution to the next stage of this crisis will require some combination of nationalization, stealth inflation, wealth confiscation, and other severe measures. 

Tuesday, October 05, 2010

U.S. Economy Faces No-Growth Stagflation

The U.S. is in no position to lead the global economy away from the brink of a double-dip recession.  The rest of the world is doing just fine without us:

Just three years since America began dragging the world into its deepest recession in seven decades, Goldman Sachs Group Inc., Credit Suisse Holdings USA Inc. and BofA Merrill Lynch Global Research are forecasting that this time will be different. Goldman Sachs predicts worldwide growth will slow 0.2 percentage point to 4.6 percent in 2011, even as expansion in the U.S. falls to 1.8 percent from 2.6 percent.

That's the Wall Street consensus, and we all know how the best and brightest often get forecasts wrong.  There's some wisdom in the general point about U.S. weakness even if you want to quibble with the specific numbers.  Nations that find themselves in weak competitive positions often resort to trade sanctions as a last resort:

Legislators from both sides of the aisle, frustrated by years of conversations with China over the deep imbalance in trade activity between the two countries, and concerned over plant closings in their districts, are beginning to take action.

Here's a point that appears to be lost on our erstwhile legislative saviors.  China buys a whole lot of Treasury bonds to allow us to fund our profligate empire.  If we launch a trade war using a specious provocation like a WTO complaint over currency manipulation, China will probably exercise their nuclear option of ceasing to buy our sovereign debt.  Say goodbye to the bond market bubble when that happens, regardless of any good economic news

The U.S. has no decent path out of its no-growth future as long as we keep piling on debt.  China knows this and plans accordingly.  Joe Six Pack remains sound asleep in front of the TV. 

Full disclosure:  Long FXI with covered calls.

Monday, October 04, 2010

Lots Of Energy Out There

Here's a quick stream-of-consciousness capture of recent energy developments.

Romania is launching a wind park that will become the largest of its kind in the world.  China is also a big market for wind energy and U.S. firms can deliver the infrastructure they need.  They're all prepping for some form of Peak Oil.  The good news is that Peak Oil may be delayed if supermajors like Shell keep increasing production in North America.  Note to Americans:  Get over your NIMBY attitudes towards energy exploration in any form. 

The Gas Exporting Countries Forum is a pale imitation of OPEC.  The funny thing is that the world is swimming in gas right now thanks to giant new discoveries.  Even the U.S. has plenty of natural gas in shale deposits.  Cartels are supposed to limit production; good luck doing that with a glut of supply. 

Full disclosure:  No position in any companies mentioned. 

Sunday, October 03, 2010

The Limerick of Finance for 10/03/10

Terror warnings are now on the rise
So let's not get caught by surprise
Just travel with care
And always beware
"Stay alert" is advice to the wise

Great Real Estate Wisdom From John T. Reed

Here's my show of appreciation for fellow entrepreneur and Internet personality John T. Reed.  He's a real estate guru who also publishes how-to books on athletic coaching.  I like this guy for his honesty, cynicism, and devotion to old-fashioned concepts like thoroughness and integrity.  I have a few of his books and they are immensely informative. 

I'll publicly thank John T. Reed for sharing his wisdom on real estate.  His guru ratings and free articles contain valuable learning points for anyone who wants to invest in real estate. 

Full disclosure:  No one prompted me or paid me to post this endorsement. 

Saturday, October 02, 2010

Rant About Urban Infrastructure And Government Pump-Priming

America has arguably the worst-planned and least cost-effective public infrastructure among the developed nations.  You can look for confirmation of this from places like the Congress for the New Urbanism or you can check out some blight in my very own San Francisco Bay Area. 

I frequently take BART from The City all the way out to Dublin in the East Bay.  The Dublin BART station is a big gray bunker sandwiched between the east and west arteries of I-580 with one huge parking lot that's always full, one small parking lot that's always empty, and one parking garage under construction that already looks like a big white elephant.  It is two long blocks from the nearest shopping mall and a mile from the clusters of office parks where its riders work.  Residents, riders, and shoppers are everywhere except where they need to be most - right on top of each other. 

Contrast this with the smart development I've seen first-hand in Germany and Asia.  Those countries cluster vast amounts of economic activity around multimodal mass transit nodes.  South Korea is a terrific example.  Seoul's Express Bus Terminal is many stories of shops and restaurants stacked on top of a giant bus station serving a dozen bus routes.  The same holds true for Seoul's Yongsan Electronics Market. 

America is losing its competitive edge because sclerotic suburban wastelands are isolating residents from each other by atomizing them into separate living and working arrangements.  The federal government could have given us a push in the right direction with stimulus spending focused on mass transit infrastructure.  Instead we get happy media pieces about how stimulus spending extended unemployment benefits

People need to live, work, and travel together.  That's how magic happens.  We should be willing to pay for it. 

Friday, October 01, 2010

The Haiku of Finance for 10/01/10

Delay foreclosures
BofA can't find papers
Hint:  Look in shredder

YRCW Sinks In One Day As The Truth Sinks In

Hey, someone agrees with me about YRC Worldwide's prospects.  The stock cratered when another analyst assessed its post-split prospects:

Shares of YRC Worldwide plunged more than 20 percent in trading on Wall Street Thursday after an industry analyst urged investors to "get out of the stock today" when the troubled trucking giant said it would execute a reverse stock split.

Here's big kudos to Stifel Nicolaus hiring a sharp analyst like David G. Ross.  It's too bad more firms wouldn't look at my own resume, or they could have had the benefit of my opinions on YRC Worldwide and kept their clients well-informed. 

Let's get back to the trucking firm itself.  I had speculated about what the big announcement from YRC Worldwide would be in my last post about the company.  It turned out to be two steps forward with one step back.  The reverse split and forgone pension contributions are absolute musts for the company to have any hope of lasting through 2011.  The step backward comes from granting the Teamsters a huge say in running the company, including another board seat.  Huh?  What do a bunch of truck drivers know about accounting, sales, and Six Sigma?  Nothing, of course, but that won't stop unions from running the firm into the ground.

Look, something changed already!  They put a "D" on the end of their ticker after launching the reverse split as an acknowledgement of a corporate reorganization (reversion to YRCW happens Oct. 28).  If only their operating results could move that fast.  The new shares closed at $5.39 today.  Watch it sink back to pennies faster than a run flat brings a big rig to a halt.

Full disclosure:  No position in YRCW.