One of my previous employers, Barclays, had to learn the hard way that there are limits to financial innovations. The firm had to redeem an iPath ETN based on index futures because its market price fell below a predetermined share redemption barrier. The thing about constructing a passive note around futures contracts is that they have to be constantly refreshed to keep the note's holdings consistent with its prospectus. Equity and bond ETFs need refreshing too, but futures notes require leverage, and that's what kills them.
The note's symbol VZZ is appropriate for the fizzing sound this product made as its price declined. It also represents the sound escaping the lips of an investor who gets increasingly angry watching this product's performance. The good news is that ticker VZZ will soon be available for use. Perhaps another enterprising asset management firm with know-it-all quants will come up with a snazzy new product that will lose money.
Thursday, July 07, 2011
Wednesday, July 06, 2011
LTL Rate Hikes Become Self-Fulfilling Prophecy
The mainstream analyst community gets it almost right on the upward trend in LTL trucking freight rates. Sure, it's easy to forecast freight rate hikes when an industry leader like UPS raises its rates by 6.9%. It's intriguing to note that competitor ABF Freight Systems just raised its rates by the exact same amount. I disagree with the analyst community consensus that rate increases are due to tightening capacity. They're missing a few things.
In ABFS's case, the UPS rate increase gives them the cover they need to try to return to profitability. ABFS has had negative net income since 2009 and this rate increase may be their best shot at a positive quarter for a while. The U.S. trucking industry as a whole will soon feel the effects of a slowdown in goods orders; read my last blog post on shipping for a prelude of what's coming. LTL truckers who raise rates are trying to squeeze whatever extra dollars they can out of this economy before GDP growth slows markedly in Q3 2011. I can't say I blame them.
Full disclosure: No position in UPS or ABFS.
In ABFS's case, the UPS rate increase gives them the cover they need to try to return to profitability. ABFS has had negative net income since 2009 and this rate increase may be their best shot at a positive quarter for a while. The U.S. trucking industry as a whole will soon feel the effects of a slowdown in goods orders; read my last blog post on shipping for a prelude of what's coming. LTL truckers who raise rates are trying to squeeze whatever extra dollars they can out of this economy before GDP growth slows markedly in Q3 2011. I can't say I blame them.
Full disclosure: No position in UPS or ABFS.
Tuesday, July 05, 2011
Ocean Rates Falling, Falling, And Falling
The hard ride up in commodity prices is very probably going to turn into a hard ride back down (until long-term scarcity forces them back up, of course). Thank the Fed's quantitative easing for pushing hedge funds to chase yield in hard assets. Anyway, slackening industry demand for commodities is already prompting forecasters to lower their outlook for the economy. The jumps in shipping rates earlier this year are likely to be as short-lived as the non-recovery that spawned them. Shippers added capacity too quickly and will soon pay a huge price for their misallocation as rates drop. We don't have to wait for these pessimistic forecasts to pan out. Shipping lines on the Asia-Mediterranean route are already cutting back service as lower rates make them less profitable.
I can't wait for the next downturn to hit the shipping industry. It will give me the chance to buy some shipping stocks I've wanted for years. I'm willing to wait a very long time for the right entry point.
I can't wait for the next downturn to hit the shipping industry. It will give me the chance to buy some shipping stocks I've wanted for years. I'm willing to wait a very long time for the right entry point.
Monday, July 04, 2011
Deep Sea Rare Earth Extraction From Mud - Improbable, But Possible
China's monopoly on the production of most rare earth metals leaves the rest of the world wondering about alternatives. Any news of big finds or revolutionary extraction methods are bound to bring early investor attention. The latest such news is a Japanese academic study of rare earth metal extraction from the deep seabed.
The technical feasibility of deep sea mining is not in question. Offshore industry has been able to extend drills, scoops, and other processing equipment to the sea floor since the 1970s. Even the former Glomar Explorer is still in use. Technical capability to drill an ocean floor deposit is not an indication of whether such an effort is economically feasible. One big difference between deep sea oil drilling and metal drilling is the ability of colocated natural gas deposits to force oil through a bore hole to the surface in a confined pipe. Any offshore driller looking to turn those rare earth drill sites into profitable mines will have to consider the energy costs of sucking tons of silt from the ocean floor through at least 11,000 feet of water. Scooping it up is certainly an alternative, but compare lifting a scoop through miles of water versus traversing a much smaller distance on land. Miners can build conveyor systems to carry ore out of land-based mines; building a conveyor system to go vertical from the sea bed would be a huge undertaking with a host of unknowns (like stabilizing it against ocean currents). Engineers may be up to the challenge right up until a driller's finance department figures out how much it will all cost.
Consider the environmental implications of the Japanese research project's findings. If the silt is processed on a surface ship, where will the processor dispose of the slag? Simply dumping it overboard is not a viable option, especially if it's been acid-leached (as the Japanese researchers claim to be the ideal technique). Whichever country ends up granting drilling permits will undoubtedly want to enforce its environmental laws on the seabed. The EPA will probably require slag to be brought down to the seabed with controlled action. Operators should thus plan on doubling their estimates for an energy budget.
Add it all up and filtering through deep sea silt looks like a lot more trouble and expense than prospecting for rare earths on land. It's not impossible, but it needs to be profitable.
The technical feasibility of deep sea mining is not in question. Offshore industry has been able to extend drills, scoops, and other processing equipment to the sea floor since the 1970s. Even the former Glomar Explorer is still in use. Technical capability to drill an ocean floor deposit is not an indication of whether such an effort is economically feasible. One big difference between deep sea oil drilling and metal drilling is the ability of colocated natural gas deposits to force oil through a bore hole to the surface in a confined pipe. Any offshore driller looking to turn those rare earth drill sites into profitable mines will have to consider the energy costs of sucking tons of silt from the ocean floor through at least 11,000 feet of water. Scooping it up is certainly an alternative, but compare lifting a scoop through miles of water versus traversing a much smaller distance on land. Miners can build conveyor systems to carry ore out of land-based mines; building a conveyor system to go vertical from the sea bed would be a huge undertaking with a host of unknowns (like stabilizing it against ocean currents). Engineers may be up to the challenge right up until a driller's finance department figures out how much it will all cost.
Consider the environmental implications of the Japanese research project's findings. If the silt is processed on a surface ship, where will the processor dispose of the slag? Simply dumping it overboard is not a viable option, especially if it's been acid-leached (as the Japanese researchers claim to be the ideal technique). Whichever country ends up granting drilling permits will undoubtedly want to enforce its environmental laws on the seabed. The EPA will probably require slag to be brought down to the seabed with controlled action. Operators should thus plan on doubling their estimates for an energy budget.
Add it all up and filtering through deep sea silt looks like a lot more trouble and expense than prospecting for rare earths on land. It's not impossible, but it needs to be profitable.
Sunday, July 03, 2011
The Limerick of Finance for 07/03/11
Stock buybacks sure look really hot
But really, they don't do a lot
They do pump the price
In the short term, that's nice
A long term plan? That's what they're not
But really, they don't do a lot
They do pump the price
In the short term, that's nice
A long term plan? That's what they're not
Saturday, July 02, 2011
Friday, July 01, 2011
YRCW Coverage Dropping Like . . . Flies On A Unionized Truck
Publicly traded companies like the attention they get from research analysts who give them formal coverage. The thing is, you have to be a solidly profitable company with a bright future to warrant coverage. Sadly, YRC Worldwide no longer meets that description, which is why research coverage of the firm is drying up. Don't worry, YRCW, I'm still tracking your every move.
Maybe the Teamster monthly newsletter can initiate coverage of the stock. The union is already giving it a shot with media puff pieces, but they need to try harder for Wall Street to take them seriously. The union would first have to find members eager to put down the donut box long enough to pick up a YRCW annual report. They'd also have to start reading the business section of the daily paper instead of the comics page so they can understand why lame stocks like YRCW can experience a massive one-day run based on nothing at all.
Here's my theory as to how this trading anomaly may have occurred. Perhaps some hedge fund algorithm mined the market for low-priced stocks with an extremely high short interest (over 20% of float for YRCW right now). Then maybe the fund took outsized positions in YRCW options (which surged over 1200%) in the hope of driving a short squeeze that would force up the share price for some quick gains. Come on, I'm just guessing here. I don't have time to look for confirmation of large institutional long positions placed into YRCW or its options chains this week, but it's just fun to wonder which hedge fund on Wall Street is dumb enough to play this game. If Teamsters really want to be taken seriously on Wall Street, they should start their own hedge fund and try to come up with even dumber trading strategies. It's not hard at all to be dumber than the Street.
Full disclosure: No position in YRCW.
Maybe the Teamster monthly newsletter can initiate coverage of the stock. The union is already giving it a shot with media puff pieces, but they need to try harder for Wall Street to take them seriously. The union would first have to find members eager to put down the donut box long enough to pick up a YRCW annual report. They'd also have to start reading the business section of the daily paper instead of the comics page so they can understand why lame stocks like YRCW can experience a massive one-day run based on nothing at all.
Here's my theory as to how this trading anomaly may have occurred. Perhaps some hedge fund algorithm mined the market for low-priced stocks with an extremely high short interest (over 20% of float for YRCW right now). Then maybe the fund took outsized positions in YRCW options (which surged over 1200%) in the hope of driving a short squeeze that would force up the share price for some quick gains. Come on, I'm just guessing here. I don't have time to look for confirmation of large institutional long positions placed into YRCW or its options chains this week, but it's just fun to wonder which hedge fund on Wall Street is dumb enough to play this game. If Teamsters really want to be taken seriously on Wall Street, they should start their own hedge fund and try to come up with even dumber trading strategies. It's not hard at all to be dumber than the Street.
Full disclosure: No position in YRCW.
Thursday, June 30, 2011
Too Hard To Short A Levitating Bond Market
I respect Jim Rogers for his contrarian bent and his focus on finding value in Asia and commodities. I do differ with his penchant for trying to make market timing calls. He wants to short U.S. Treasuries. Oooooookaaaaay. The difficulty in working a big short bet into an investment strategy is that no matter how sound the thesis may be, it can take forever to play out given unpredictable events.
The U.S. bond market is strong thanks to ZIRP and QE, nothing else. Those things are the result of political decisions that can be reversed in an afternoon. Taking a short position in an artificially manipulated environment is an easy way to lose one's shorts in the short term even if the reasons for the trade are proven sound in the long term.
This week's European action is telling. I had thought Greek politics were too intractable to pass austerity programs, but lo and behold they did pass some and they'll probably get their bailout after all. I would have been on the losing side if I had bet against a resolution to this crisis. Some hedge funds undoubtedly did bid up the CDS spreads on Greek debt. We'll see which ones made that call by the end of the summer if some funds have to close shop.
Shorting an entire market is hard. Shorting an individual stock, with far fewer unknowns, is a bit easier but no less nerve-wracking if you're unprepared to lose big.
The U.S. bond market is strong thanks to ZIRP and QE, nothing else. Those things are the result of political decisions that can be reversed in an afternoon. Taking a short position in an artificially manipulated environment is an easy way to lose one's shorts in the short term even if the reasons for the trade are proven sound in the long term.
This week's European action is telling. I had thought Greek politics were too intractable to pass austerity programs, but lo and behold they did pass some and they'll probably get their bailout after all. I would have been on the losing side if I had bet against a resolution to this crisis. Some hedge funds undoubtedly did bid up the CDS spreads on Greek debt. We'll see which ones made that call by the end of the summer if some funds have to close shop.
Shorting an entire market is hard. Shorting an individual stock, with far fewer unknowns, is a bit easier but no less nerve-wracking if you're unprepared to lose big.
Memo To Lagarde: Lay The Smackdown On Greece
From: Anthony Alfidi, CEO, Alfidi Capital
To: Mme. Christine Lagarde, Managing Director, IMF
Subject: Greece Talking Points
Congratulations upon your selection as Managing Director of the International Monetary Fund. Please do your best to stay out of trouble. We don't want any surprises like the one we all recently got from your predecessor.
Your first order of business is to address this whole unpleasant Greek situation. Maintaining order in the international financial markets is a precondition for the United States' continued debt financing of its unsustainable lifestyle. A Greek default would set a dangerous precedent for larger, nuclear-armed nations to start living within their internally financed means. Here are some suggested talking points you should emphasize when scolding those unruly folks in Athens (written in your voice).
- No one is allowed to leave the eurozone. It is an inviolable, nonnegotiable compact of infinite duration, just like Jehovah's covenant with the Israelites but with more money.
- Banks in my home country of France hold much of your debt. I cannot allow you to rob their CEOs of their annual bonuses by threatening to default.
- German government officials have informed me that they are willing to fund your bailout if I arrange for France to give back Alsace-Lorraine. I told them they can just walk right in and make themselves at home. Done deal! Plus cha change!
- I need you to play ball because I really like my new job at the IMF. The views from my office are great and I don't want to go back to my old job at Baker & McKenzie. Those guys were always cracking jokes about my French accent and whether I was related to Pepe Le Pew and Inspector Clouseau.
- You really must stop all of these ugly protests and riots. You did not seek proper approval for this street theatre at the last Bilderberg conference and you did not recruit the agitators from our pre-approved lists of agent provocateurs / retired intelligence operatives.
- I expect your Parliament to pass its austerity measures forthwith, like sometime this week. Do not stop at the gyro stand on the way in to work. Do not pass GO. Do not collect $200.
- In the unlikely event that you are unable to pass your austerity package, I expect you to surrender unencumbered ownership of the Acropolis to the People's Bank of China. Please ensure the title deed is legible in both Greek and Chinese, and that it is delivered to the Chinese embassy in Washington, D.C. If you can't find the embassy right away, rest assured that it will relocate to 1600 Pennsylvania Ave. soon after the effects of your default are felt across the Atlantic.
- Whatever you do, don't you dare call me a cheese-eating surrender monkey. I do not eat nearly as much cheese as the typical Francophone.
Nota bene: The above "memo" is a satire of all the key players in the Greek debt drama. It has about as much chance of being taken seriously as any Fed pronouncement that economic recovery is underway in the U.S.
To: Mme. Christine Lagarde, Managing Director, IMF
Subject: Greece Talking Points
Congratulations upon your selection as Managing Director of the International Monetary Fund. Please do your best to stay out of trouble. We don't want any surprises like the one we all recently got from your predecessor.
Your first order of business is to address this whole unpleasant Greek situation. Maintaining order in the international financial markets is a precondition for the United States' continued debt financing of its unsustainable lifestyle. A Greek default would set a dangerous precedent for larger, nuclear-armed nations to start living within their internally financed means. Here are some suggested talking points you should emphasize when scolding those unruly folks in Athens (written in your voice).
- No one is allowed to leave the eurozone. It is an inviolable, nonnegotiable compact of infinite duration, just like Jehovah's covenant with the Israelites but with more money.
- Banks in my home country of France hold much of your debt. I cannot allow you to rob their CEOs of their annual bonuses by threatening to default.
- German government officials have informed me that they are willing to fund your bailout if I arrange for France to give back Alsace-Lorraine. I told them they can just walk right in and make themselves at home. Done deal! Plus cha change!
- I need you to play ball because I really like my new job at the IMF. The views from my office are great and I don't want to go back to my old job at Baker & McKenzie. Those guys were always cracking jokes about my French accent and whether I was related to Pepe Le Pew and Inspector Clouseau.
- You really must stop all of these ugly protests and riots. You did not seek proper approval for this street theatre at the last Bilderberg conference and you did not recruit the agitators from our pre-approved lists of agent provocateurs / retired intelligence operatives.
- I expect your Parliament to pass its austerity measures forthwith, like sometime this week. Do not stop at the gyro stand on the way in to work. Do not pass GO. Do not collect $200.
- In the unlikely event that you are unable to pass your austerity package, I expect you to surrender unencumbered ownership of the Acropolis to the People's Bank of China. Please ensure the title deed is legible in both Greek and Chinese, and that it is delivered to the Chinese embassy in Washington, D.C. If you can't find the embassy right away, rest assured that it will relocate to 1600 Pennsylvania Ave. soon after the effects of your default are felt across the Atlantic.
- Whatever you do, don't you dare call me a cheese-eating surrender monkey. I do not eat nearly as much cheese as the typical Francophone.
Nota bene: The above "memo" is a satire of all the key players in the Greek debt drama. It has about as much chance of being taken seriously as any Fed pronouncement that economic recovery is underway in the U.S.
Tuesday, June 28, 2011
Monday, June 27, 2011
China Buying Into Europe May Be Attempt To Push Dollar Down
The big news this week is China's continuing big move into European debt, giving the EU a little bit more wiggle room as it makes contingency plans for Greece's probable departure. China doesn't take actions this big without attempting to hit several targets at once.
Target one is diversification. China has been making noise for at least a year about diversifying its foreign exchange holdings away from Treasuries. Telegraphing such an intent for so long without following through would have harmed China's credibility in capital markets.
Target two is the U.S. dollar's reserve status. Buying euros must precede buying European debt. This props the value of the euro against the U.S. dollar; indirectly, a weaker dollar makes the renminbi stronger with no need for a forced revaluation.
Target three is U.S. foreign influence. Forcing Europe to become beholden to Chinese capital will make Brussels think twice before committing to U.S. pet projects like expanding NATO, increasing European defense spending, or funding economic development projects in emerging markets that would otherwise compete with China's drive for resources.
China is playing its weakening hand well. Domestic inflation is forcing it to chase yield abroad, and euro-denominated debt is the new risky trade. Buying European debt will give it some cushion against insolvent banks and real estate projects at home, for at least as long as the European experiment in unity lasts.
Target one is diversification. China has been making noise for at least a year about diversifying its foreign exchange holdings away from Treasuries. Telegraphing such an intent for so long without following through would have harmed China's credibility in capital markets.
Target two is the U.S. dollar's reserve status. Buying euros must precede buying European debt. This props the value of the euro against the U.S. dollar; indirectly, a weaker dollar makes the renminbi stronger with no need for a forced revaluation.
Target three is U.S. foreign influence. Forcing Europe to become beholden to Chinese capital will make Brussels think twice before committing to U.S. pet projects like expanding NATO, increasing European defense spending, or funding economic development projects in emerging markets that would otherwise compete with China's drive for resources.
China is playing its weakening hand well. Domestic inflation is forcing it to chase yield abroad, and euro-denominated debt is the new risky trade. Buying European debt will give it some cushion against insolvent banks and real estate projects at home, for at least as long as the European experiment in unity lasts.
Williams Fights Energy Transfer Equity For Southern Union
Energy Transfer Equity's (ETE) bid for Southern Union (SUG) should have been a done deal when it was announced. Some acquisition targets are just too juicy to ignore. Now Williams (WMB) is jumping into the fray with an all-cash $39/share bid for SUG. Merger fights make life interesting. The benefit to SUG investors is the enhanced price discovery from competing bids. The problem is that the boards of both ETE and SUG have already approved their merger, so now a costly proxy fight among SUG shareholders is likely.
This action might make for a good merger arbitrage play as long as Williams doesn't withdraw its bid. I might have more to say in a few days once I have a chance to compare all three companies' financial statements.
This action might make for a good merger arbitrage play as long as Williams doesn't withdraw its bid. I might have more to say in a few days once I have a chance to compare all three companies' financial statements.
Sunday, June 26, 2011
The Limerick of Finance for 06/26/11
Situation in Europe is grave
Now China comes in for the save
They'll buy bailout debt
On recovery they've bet
Europe will become China's debt slave
Now China comes in for the save
They'll buy bailout debt
On recovery they've bet
Europe will become China's debt slave
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