IMF Attack Implies National Fingerprints

A major computer security breach at the IMF begs the question of the instigator's identity.  Why, who could have done such a thing?  (I've always wanted to say that line.)  Let's run through a lineup of the most likely suspects.

China.  The Chinese have the most to gain from penetrating the IMF's databases.  They've been shopping for European debt for some time, both to seek discounted value (Greece, et alia) and to diversify away from investments in a shaky U.S. dollar.  They certainly have the computing horsepower and brainpower to pull off this kind of stunt.  Motive + Means + Opportunity = fun speculation.

Russia.  Other BRIC nations have money to spend and agendas to advance.  Some in the post-Soviet Russian establishment have never gotten over the humiliation of losing the cold War.  The IMF is a leading institution identified with the American power. 

Non-state entities.  Here's where wild cards can come into play.  Big hedge funds have plenty of computing power at their disposal.  Some hedge fund executives may just be amoral enough to authorize a little extracurricular adventure for their whiz-kid traders.  A small, tight team of computer PhDs could probably whip up a spear phishing algorithm in their spare time between arbitraging yield differentials.  The motivation is obvious.  Getting a special look at sovereign debt valuation metrics confers the ultimate inside trading advantage.  The fact that such action is illegal on so many different levels won't deter a determined hedge fund team staring redemptions in the face. 

This is all guesswork on my part.  I have no idea who did this and I condemn any such action.  Hacker shenanigans make it harder for honest investors like yours truly to operate. 

Disastrous News for Inland Shippers On The Mighty Miss.

I'm glad I sold off Tidewater (TDW) once I saw its deteriorating fundamentals.  Now here's another reason to shy away from inland shippers and offshore servicers for a while.   Recent flooding has poured so much silt into the Mississippi River channel that business Brahmins around N'awlins are asking for $95mm worth of dredging.  That kind of money is more than double the Army Corps of Engineers' entire dredging budget, but don't think of this as a potential stimulus.  Emergency dredging has "broken window fallacy" effects.  That money will have to be diverted from something else that's just as urgent while Congress is trying to keep federal spending from triggering defaults (on federal contracts, not debt service payments). 

Things are thus worse than I thought on several fronts and I'm notorious for pessimism. It's bad news for barge operators, both captive oil company fleets and independent operators like Kirby (KEX).  Barge operators can do the math on how much less cargo they can carry if drafts are maxed at 43 feet.  Shippers of bulk grain and petrochemicals will have to calculate how much extra storage space they need dockside while they wait for underutilized barges to make return trips.  Excess inventory has a carrying cost.  Maybe this is good news for certain railroads whose trestles haven't been washed away by floods. 

Full disclosure:  No positions in either stock mentioned at this time.

The Limerick of Finance for 06/12/11

Oil fracking has led to a boom
It shows old fields still have some room
It's been used for years
With no base for health fears
Just ignore all these prophets of doom

Trust In Banks Is Misplaced, Just Count The Ways

What's wrong with U.S. banks lately?  Plenty.  They can't stop hackers from breaking into their systems and stealing your private data.  Maybe they'd have better security if they paid their IT staff as much as their junior rainmakers.  The Fed wants to increase the number of banks who provide it with details about their capitalization.  Look for more banks to raise their campaign contributions to fight that one, especially with an election year coming.

European banks aren't any better off.  For the sake of my readers who aren't aware of European banks' exposure to Greek debt, Germany's leaders are very aware of the disastrous consequences a Greek default would have on their banks' viability.  Find a European bank whose solvency isn't threatened by sovereign debt defaults and you'll be the luckiest investor in the world, until three seconds later when some hedge fund arbitrages the alpha out of that share price. 

There are many more reasons not to trust large banks.  I've mentioned enough to give me a reason not to invest in them for now. 

Full disclosure:  No positions in bank stocks at this time. 

The Haiku of Finance for 06/10/11

Saudi surprises
Says it will boost production
Hit thirty-year high

The Haiku of Finance for 06/09/11

Tapping oil reserve
A really bad idea
Save it for war use

OPEC In Transition To Somewhere

OPEC is going through some kind of maturation process, or perhaps a winter of discontent, or some other metaphor for a phase of life that will probably take it to a new level of (dis)organization.  OPEC can't agree on whether to change production quotas.  History has shown that such disagreements tempt one member country to go it alone and raise production while prices remain high, in a mad dash for a revenue spike.  That won't sit well with countries whose supergiant fields are maturing (Saudi Arabia, Mexico) and not amenable to production boosts without years of new investment. 

Meanwhile, there's life left in supposedly mature North American petroleum production.  ExxonMobil has found plenty of oil in the Gulf of Mexico.  Heads up, BOEMRE, you'll have to speed up those GOM permits if the Administration is to make good on its promise to keep the U.S. out of recession.  Maybe the U.S. could join OPEC as the new swing producer if it keeps up the pace of offshore discoveries. 

The death of OPEC has been predicted for decades.  Those wily producers always manage to surprise the world with their longevity.  The only thing that can hurt the bloc is a permanent decline in oil production.  That isn't on the scene just yet. 

U.S. Offers To Subsidize Greek Default

It isn't enough for the U.S. government to throw money at underwater homeowners to prevent them from walking away from crushing debt burdens.  Now it feels compelled to offer a subsidy to Greece to stave off a sovereign default.  Can't we just let people and countries go bankrupt so they can start over?  Uncle Sam sure is getting nervous about something. 

It's easy to draw an inference that the European banks exposed to Greek debt are also counterparties in interest rate swaps and other deals with U.S. banks.  A Greek bond restructuring will pull down banks on both sides of the Atlantic in a cataclysmic daisy chain.  Alternatively, if Greece and other bankrupt countries leave the euro to hyperinflate their debts away, the euro's collapse would drive currency investors into the U.S. dollar.  A resurging dollar would make U.S. exports more expensive and make a double-dip recession unavoidable for the U.S. economy.

This Greek melodrama really poses a Scylla-and-Charybdis dilemma for monetary policymakers.  The Scylla of debt default can compete with the Charybdis of currency destruction to see which will do greater damage to the U.S. economy in the near future.  European bankers may be ready to throw in the towel and let Scylla devour some of Greece's bond holders in exchange for stability.  Scylla has fans on this side of the Atlantic too; U.S. leaders are openly flirting with a temporary default on U.S. financial obligations. 

Dear readers, we may be weeks or even days away from a replay of the credit crunch of September 2008. 

Stock Promoters Getting Sloppy And Getting Punished

Pump-and-dump schemes are even older than the financial markets in which they now operate.  When Schmedlap in 2000 B.C. was touting his camels in the Egyptian desert to unsuspecting tribesman, he probably embellished their stamina just a little bit.

Things haven't changed.  Pumpers touting stocks with poor prospects do the same thing.  Some firm called Wall Street PR just coughed up $382,000 to the SEC for promoting MitoPharm.  I've never heard of MitoPharm and after this news I don't want to hear about them.  Another promoter was playing games with unregistered shares of Universal Food and Beverage and as a result won't be doing anything with penny stock shares anymore.  I want nothing to do with penny stocks anyway, but those of you who do should take note of the sharks plying the waters ready to eat you alive. 

Full disclosure:  Alfidi Capital is not a "pumper" or stock promoter.  This firm does not accept any compensation from companies mentioned in its blog posts or research reports. 

Total Divestiture Of TDW

When I went long TDW over a year ao, I thought the stock was winner.  It seemed to have everything going for it, at least according to the Buffett-derived value investing criteria I use to select equities.  It had good ROE and cash flow, and management seemed to know how to add value.  All of that has changed as of this June.

TDW's earnings have fallen 79% in the most recent quarter.  Its EPS growth is now negative, along with its operating cash flow (with little hope of a turnaround).  This is very disappointing in an environment when petroleum prices are at a premium.  Long term debt has exploded from $275mm in 2010 to $700mm now.  That is a huge disappointment and a major burden to carry.  Imagine one of Tidewater's ships dragging several giant anchors through the Gulf of Mexico while underway.  That's the kind of drag on the company this new debt represents. 

Goodbye, TDW.  I've sold off my entire long holding in this stock (at a decent profit, I must admit) and unwound my covered call position.  I only wish I had sold off this stock when it was over $60.  I had considered initiating formal research coverage of TDW until I realized that its recent financial results leave too much to be desired.  I don't think I'll come back to this stock, as there are undoubtedly healthier plays in the energy and offshore services sector.

Full disclosure:  No more positions in TDW; all long equities and short calls unwound today prior to publishing this post. 

The Limerick of Finance for 06/05/11

U.S. firms are shut out of Iraq
Oil and gas deals are things that we lack
We are losing this race
So let's pick up the pace
Lest China's deals crowd out the greenback

Jobs And Stocks On The Down Trend

Stocks have been headed down for a month.  Culprits abound.  Blame the coming end of QE, which quant traders program into their algorithms as a sell event.  Blame a very weak jobs report, which should smash any statements that the economy can generate jobs from more fiscal stimulus.  Blame European difficulties in cobbling together a Greek rescue that will keep stress-tested banks from turning over. 

I was premature when I called the peak of the markets at the end of summer 2010.  I didn't miss much by keeping a big chunk of my net worth in cash since then, with some exposure to China, gold, energy services, and one merger arb play.  Calling a peak now is tempting but I've learned my lesson.  Waiting patiently for a market decline and new bottom will prove more satisfying. 

YRCW Teamsters Scrape Out Pension Contributions After All

So this is what the fuss was all about.  YRCW is still losing money and yet resumes contributions to the Teamsters' pension plan instead of focusing its cash on operations.  Contributing $21mm per quarter is a meaningful chunk of the company's current burn rate and is precisely 21% of the new capital they are supposed to arrange from restructuring their debt.  The Teamsters never took their eyes off the prize; by agreeing to a debt restructuring, they ensured they would be able to further pillage the company of cash while it continues to spiral down the tubes.  Greed wins again. 

If the company had chosen to file for bankruptcy months ago, it could have torn up that horrendous agreement with the Teamsters and start fresh with a new agreement giving them exactly zero pension contributions.  That is now a missed opportunity and YRCW's other creditors will be poorer for it. Trucking companies with their eyes open can now see exactly what happens when union members get board seats.  The unionized workforce will always put its own needs ahead of the company's, even at the risk of their employer's survival.  Heads up, Arkansas Best (ABFS) . . . you could be next.

Full disclosure:  No position in YRCW or ABFS.  I have better places to put my capital to work than in unionized companies. 

Find The Wisdom At Wisdom Tree

The financial services sector needs innovation as much as any other part of the economy.  That's the only way to achieve growth and deliver value over the long-term.  The bad news about innovations is that many of them don't work out as intended. 

Wisdom Tree rolled out ETFs based on value-adjusted weights rather than market cap weights.  A fine idea, until the underlying fundamentals of the ETFs' constituents demand broader portfolios.  The firm recently announced major changes to the composition of several of its ETFs.  The problem with value weights is that changing economic conditions will demand more rapid changes in portfolio composition as the ETFs' holdings become even broader.  This will raise transaction costs and make these ETFs less competitive than index-based products from Vanguard, BlackRock, and other players who compete primarily on cost. 

Wisdom Tree's experiment in ETF construction is necessary.  It will run its course.

Full disclosure:  No position in any Wisdom Tree products. 

Too Late To Bet On Freight

I've long suspected that transportation data generates good leading indicators for the direction of the overall economy.  If the housing market's double-dip is insufficient proof that the U.S. economy is slowing, the reversal of freight volume growth should be convincing.  The slowdown is hitting several transportation modes and mirrors new data from the Institute for Supply Management confirming a May slowdown in manufacturing growth.  There's less to transport if less stuff is being made. 

If freight traffic is peaking, then similar peaks in carrier earnings and transportation sector stock prices should follow shortly.  Watch out below.  Those of us with large enough nets can catch falling bargains.