The Limerick of Finance for 02/13/11

Mubarak ran off with the gold
He's worth billions, or so we are told
Grabbing all of that cash
Piled up in a stash
Down the Nile's where his country was sold

China Prepares Tough Hurdles For Mergers

China wants to have its cake and eat it too.  In a throwback to imperial China's historical insistence that foreigners kowtow and pay tribute, the Middle Kingdom is preparing to exact a new form of tribute from foreign investors:

Foreign investments in military, agriculture, energy and resources, key infrastructure, transport systems, key technology sectors and "important equipment manufacturers" may be subject to reviews, according to a statement published on the central government Internet portal, http://www.gov.cn/.

This isn't merely a response to other countries' barriers to China's strategy of resource acquisitions.  Replace the words "national security" with "rare earth metals" and you'll see the hidden agenda.  China wants to ensure that foreign investment adds to its high-end manufacturing capability without surrendering control of its rare earth metals.  Note the article's comparison to Australia's own review board.  The common theme is that resource-rich countries seek to husband their deposits for the strategic advantage they confer.  Those investments that are permitted will be exclusively to China's advantage. Western corporations will pay a huge premium if they wish to secure their supply chains from China. 

The main driver of strategic conflict in the rest of the 21st Century will be a contest for resources in high-value manufacturing.  The main contestants will be China, India, and the Anglo-West's transnational corporations.  You heard it here first. 

Trucking Success Implies High Yield

Let's talk a little about yield, or the trucking measurement for revenue per hundredweight.  How does a company maximize it?

Hiring a senior exec who focuses on yield management is one way, as Con-way Freight is doing right now.  It works if the exec has a plan to cut across the firm and gets buy-in from every business unit.  This hire had better have an excess of charisma and networking ability. 

Product focus helps.  Limiting your freight to stuff that commands a premium - like perishables - means you've staked out a niche in a channel where customers absolutely must pay to have something delivered on time.  It also means you deliberately prune away low-cost business lines using your hand-dandy BCG growth-share matrix. 

Tiered pricing helps.  Charge more for rush deliveries.  Don't eat costs like bridge tolls if you can compete on non-price service metrics like timeliness.  If you have to pass on fuel surcharges to your customer, don't count them towards yield.  Fuel costs are mostly out of a company's control although they can be partially hedged with energy futures. 

Reader, your thoughts are always welcome.  There must be plenty of people out there with relevant wisdom.

SF American Legion Does Justice 02/10/2011

Local veterans upheld honor today by rendering a verdict on corruption. I'm glad I was able to offer testimony. 

The Haiku of Finance for 02/09/11

Inflation threat looms
Ben says, "Raise the debt limit"
That won't solve a thing

Tuesday Newsreel for 02/08/11

Headlines are not crystal balls. 

Berkshire Hathway is buying Wesco Financial.  Warren Buffett is taking his partner Charlie Munger's firm completely private.  It seems to be a departure from typical Berkshire acquisitions, as Wesco has no durable competitive advantage and currently clocks an ROE that's less than the 10-year Treasury yield.  Maybe Mr. Buffett likes the float from the reinsurance lines so much he's willing to pay a premium (38 P/E!!) for a lackluster, no-growth business.

AOL buys Huffington Post for $315mm, but founder and namesake Arianna Huffington only gets something like $18mm.  Founding principals typically get way more than 5.7% of the takedown at liquidity.  I think her early backers took her to the cleaners.  She should have asked former gubernatorial rival Arnold Schwarzenegger for advice. 

It finally dawns on The Economist that TIPS are not reliable as a way to discount against inflation.  Individual bonds probably aren't as they don't reset their principal often enough to account for daily price changes in a high-inflation environment.  A TIPS bond fund or ETF on the other hand would be subject to routine daily price discovery.  Hmmm, looks like TIPS turn the traditional bond roles - stabilizing a diverse portfolio and providing cash flow - upside down. 

Chinese manufacturing has a long way to go to catch up with the U.S., says an editorialist.  Here's my editorial response.  The gap will close rapidly as manufacturers realize they'll have to relocate to China to keep rare earth metals in their supply chains.  Our only hope is to develop technologies in the U.S. that aren't rare earth dependent.  Hope is not a method. 

Speaking of China, they just raised interest rates again.  They really are serious about fighting inflation and revaluing the yuan on their own terms.  The after-hours announcement will probably make the SSE and SZSE open lower on Wednesday.  Don't hold your breath; after all, this headline isn't a crystal ball. 

Time Is Precious And Fleeting

Permit me a brief departure from finance into philosophy.  I tend to do this sometimes.

My time is precious. I have wasted far too much of my limited life on people who aren't worthwhile.  I simply cannot afford to do that as I grow older.  I've learned enough through trial and error about whom I must avoid. 

I do not wish to meet jackals, hyenas, troglodytes, psychic vampires, fools, idiots, mental defectives, ding-dongs, ding-a-lings, morons, losers, idiots, numbskulls, arrested development adolescents, and others of their ilk. 

I sure do love living in San Francisco.  It's hard to reconcile that with my desire to avoid insanity but I'm always up for a challenge.  :-)

The Limerick of Finance for 02/06/11

Union labor has become a joke
Workers should free themselves from its yoke
Unions have no real role
But remain on a dole
This can drive a good company broke

YRC Worldwide Reports Profit Solely Due To Tax Gain

Don't look now, but YRCW is pulling out all the stops to dress up its problems as successes.  The company reported a Q4 profit of $23mm.  Look closer, optimists.  That profit is solely attributable to a one-time gain on debt redemption.  Subtract that $52mm gain from the $23mm profit and the real result is a net loss of $29mm.  One telling lesson is that the company continues to experience difficulty earning real money while gross revenues rose by 4%. 

The company claims to possess rising pricing power.  They're going to need sustained increases in yield if tons per day keep declining by 5.2%.  Consider the weakening competitive position of a company that relies on "pricing power" to keep revenues rising while tonnage is falling, and can't even translate that combination into real operating profits.  If that pricing power comes solely from fuel surcharges, it will evaporate when fuel costs eventually come down (and come down they will, because commodity prices move randomly over the long run).  If it comes from LTL market leadership, that will erode with continued tonnage declines and further asset sales. 

Kudos to management for turning a freefall into a slow decline, but YRCW's problems persist.  March 15 is D-Day for a deal to keep its balance sheet above water.  Realistic solutions include debt haircuts and dilution of equity, so investors will feel more pain.  Operating results that continue to be marginal will give management a lever to keep the Teamsters from demanding restored concessions.  Persistent difficulties may be a blessing in disguise for YRCW and other truckers if they use these problems to keep a lid on the Teamsters' greed and force them to actually do some work.  Management has made it clear (at the very end of this article) that Teamsters need to be part of the solution by extending concessions to help the company survive.  That's asking a lot given the problems unions tend to cause. 

Full disclosure:  No position in YRCW. 

Walk Like An Egyptian ETF - With Caution

The world's eyes were until recently glued to Greece, the cradle of civilization.  Now they're mesmerized by that other font of ancient mystery, Egypt.  U.S. retail investors have little access to the Egyptian stock market except through thinly traded instruments like the Market Vectors Egypt Index ETF (EGPT).  This ETF isn't as liquid as others because many of its underlying equities are illiquid, requiring new shares to be handled via in-kind creations.  Van Eck has suspended those creations now that Egypt's turmoil has closed its equity market.  Investor cash intended for EGPT can't be put to work in the fund, so the Egyptian market remains largely inaccessible to new investors despite increased investor attention.  Even ETF experts are unable to estimate a fair value for EGPT thanks to the implied tracking error of all that sidelined cash. 

Daily trading volume in EGPT has exploded in the past two weeks.  Long investors might be betting that the crisis will soon be resolved and stability will return.  Short investors can bet on further chaos.  Value investors need to consider the long-run implications of Egypt's problems.  Credit default swaps on its debt are extremely high, with yields rising due to uncertain bond market interest in new issues.  There is some risk that Egypt's logistics infrastructure can be compromised by political violence.  The Suez Canal seems safe for now but an explosion has taken a very important natural gas pipeline offline.  It is too early to tell whether that explosion was due to sabotage, but any any infrastructure vulnerability puts additional pressure on the military to implement backup measures. 

The risks of investing in emerging markets are obvious.  Egypt is a boiling cauldron right now, and investors can easily get burned. 

Full disclosure:  No position in EGPT. 

The Haiku of Finance for 02/05/11

Nasdaq hack attack
Criminals want the data
Breaking laws for gain

Flash Crash To Splash Crash

Remember the last flash crash, when the Dow Jones Industrial Average dropped something like a thousand points?  I sure do, even though I'd had a drink or two just so I could enjoy the spectacle.  The markets may now be facing the even more horrific phenomenon of a "splash crash" according to a new report:

With memories of last May's "Flash Crash" still fresh in investors' minds, now comes warning of a market meltdown that could extend beyond stocks—a possible "Splash Crash" that also would affect currencies, commodities and bonds.

The splash crash takes valuation resets to a whole new level.  The world's central banks can in theory float enough liquidity to refloat equities, bonds, commodities, and every other asset class that a splash crash can impact.  The only problem that will cause is the spawning of a global liquidity trap that forces up the long end of every yield curve in the world.  Oh, that will in turn force down the value of the world's major trading currencies - dollar, pound, euro, yen, etc.  I guess splashing is an appropriate image for all of that liquidity yet to be spawned. 

The splash crash may look something like the picture below if you need a helpful visual aid.




Splash!  You're all wet and so are your assets.

 What an awesome deal for a bargain-hunting bottom feeder like yours truly.  The splash crash will usher in a new era of cheap, affordable investments across all asset classes priced especially for those of us who've stayed liquid throughout the quantitatively eased phantom recovery.  We'll have to act fast, before the liquidity refloat obliterates that brief buying window. 

Whither The Suez Canal In Early 2011

Unrest in Egypt makes Suez-bound shippers nervous.  Is there really cause for concern? 

The Suez Canal itself remains open to throughput traffic, but some Egyptian ports remain inaccessible due to unrest.  This could pose a short-term problem for Egyptians if any overland routes into the country are disrupted.  Transnational firms exporting from Egypt think their supply chains are secure.  They are probably very fortunate that Internet access was restored so soon.  In-transit visibility can be lost very quickly when all of your query systems are Web-based.

Oil prices continue to rise purely on fear of the unknown.  We know now that the Egyptian military has a big stake in maintaining that nation's stability, is moving to secure ports, and is probably the most powerful institution in the country (and thus most able to broker a way out of the political crisis).  Shippers are balking at changing crews in the canal but the Egyptian army's history of securing it during crises should put them more at ease. 

Concerns about disruptions of Suez Canal traffic are probably overblown. 

Unions Predominate Among Health Plan Exemptions

It's time for me to get angry.  I am slow to anger and rich in kindness, just like the fictional deity of the Western world's solar cult.  This news item warrants a much speedier escalation from my normal laconic state into blood-boiling rage.

Last year's national health care act force-fed a whole new slew of regulations to health care providers and burdened employers with a whole new set of taxes.  Federal courts are taking a harsh look at the law's mandates.  The law's loopholes allowing escapes for favored players deserve similar harsh looks. 

The federal Department of Health and Human Services is one of those agencies Americans could probably live without and not miss.  While it exists, it needs to occupy its time somehow.  It does so by granting exemptions from mandated health coverage to health plan sponsors who have that "something special" going on.  Here's the official list of those very special plan sponsors.  A quick scan reveals a predominance of unions and other non-profit groups, along with a few private corporations and municipal government agencies. 

It would be far too generous of me to suggest that the union exemptions were granted to ensure the widest possible coverage for employees under multi-employer plans.  The federal government is now the largest employer of union labor and thus has much more power to wring costs out of health plans through periodic regnegotiations.  These union exemptions are more likely than not a simple political payoff to a favored constituency.   

High mandates paid by productive taxpayers and their employers will cost much more than these mini-med plans benefiting union workers until 2014.  These union workers receive more pay for less work than the more productive taxpayers who must pay through the nose for comparable coverage.  That's the kind of thing that makes me mad.  It's the patent unfairness of it all. 

Excuse me while I go kick some holes in the nearest wall. 

The Haiku of Finance for 02/01/11

Egypt in crisis
Markets worry about oil
Don't close the Suez