The Limerick of Finance for 07/31/11

A debt ceiling deal is at hand
The charade can now go on as planned
We hold out our tin cup
So more debt can pile up
Self-deception on this scale is grand

The Haiku of Finance for 07/30/11

Markets await dealCould stocks crash on downgrade news?
You betcha they can

Analyst Community Divided on YRCW? Amazing!

Wall Street's permanent bullishness even extends to companies that consistently lose money.  YRCW's problems are so bad that analysts have to grasp at ephemeral straws to have something to write about.  Note that the analyst community acknowledges the horrendous dilution and cash problems but some folks still want to reach for things like revenue that beats estimates.  My readers can be forgiven for not knowing analyst tricks like lowering one's revenue estimate so that even disappointing news can beat it. 

Equity analysts still looking for a bull case on YRCW all know the following.  S&P has just downgraded the company's credit rating to "selective default."  Credit analysts know that the recap is forced.  The company is planning another reverse stock split, obviously an effort to avoid de-listing immediately after the recap dilutes its share price to under a nickel.  Any speculator hanging on for dear life right now is going to end up with a tiny sliver of nothing in a few weeks.  The entire LTL sector knows the cost of culling unprofitable customers and routes.  YRCW's forced sales of distribution centers will drive their network disruption costs even higher at a time when it needs to keep operating costs low. 

Analysts write for a living.  In the face of overwhelmingly negative facts, some i-banks must think they can finagle future business out of troubled companies by playing up whatever small turnaround chance exists.  I-bankers should note that YRCW has likely executed its final restructuring.  The only business they can squeeze out of this company would be more asset sales (like a spinoff of its China unit, a totally unnecessary acquisition if there ever was one).

Full disclosure:  No position in YRCW at this time or any other time. 

Taking Apart This Week's Emailed "Emerging Markets" Picks

I like International Living and The Sovereign Investor for their take on world markets. It's nice to hear what aspiring expatriates think of prospects for leaving the good old U.S.  Advice on cheap living aside, they should work on their fundamental analysis of stocks. 

Cases in point came in this week's emailed financial teasers.  Sovereign Investor swung for the fences with a broad endorsement of emerging market small cap stocks as insurance against a U.S. debt default.  International Living recommends investments in Intel (INTC),  Philip Morris (PM), Coca-Cola (KO) and Microsoft (MSFT) for their "above-average emerging markets exposure," whatever that means.

I usually stay away from broad-brush approaches that are "plays" on anything other than fundamental analysis.  I can address these with some broad-brush critiques of my own.  Small cap stocks in emerging markets are no better than penny stocks here in the U.S.  They may be scams and the lack of robust securities regulation in emerging markets means you'll have a tough time doing due diligence or filing a complaint.  The four stocks named above may indeed derive significant revenues from emerging markets, but a bad year here in the U.S. can negate such results.  It's better to look at their whole pictures.  A second act to the Great Recession is imminent, and tech stocks like INTC and MSFT will be hurt badly if businesses curtail IT spending to survive. 

S.I. and I.L. are outside the box in thinking about solutions to the sovereignty crunch,  Good for them.  That's why I read their stuff. 

Full disclosure:  No positions in companies mentioned. 

Profits, Profits Everywhere While Recession Returns

My title is deliberately confusing.  Lots of companies are reporting profits these days while high unemployment and commodity price inflation hobble the larger U.S. economy.  Oil supermajors are riding high in the saddle thanks to the mad props placed under oil prices by MENA madness.  Kirby (KEX), a well-run barge operator I admire, continues to do extremely well. 

These will likely prove to be isolated bright spots in an economy on the precipice of a further decline.  Housing recoveries traditionally lead broader recoveries.  Homebuilders are not recovering, reflecting the inability of the housing sector to lead the economy out of recession.  D.R. Horton and Pulte are not doing nearly as well as they were a year ago.  Their optimism for future growth is delusional. 

The recession never ended.  More confirmation is coming soon.

Full disclosure:  No positions in any companies referenced. 

Market Waking Up To Debt Dealmakers' Lack Of Insight

Financial markets have exhibited a ho-hum attitude towards the lack of movement in Washington's budget negotiations . . . until now.  Wall Street is getting nervous about the possibility that lack of a firm deal will send interest rates soaring and equities tumbling.  Europe is also getting nervous about Washington's games, with the IMF scolding the lone hyperpower as if it were a collapsed emerging market in need of intervention.

Our leaders are playing with fire and the increasingly likely consequences of their games will be a stock market crash.  If a ratings downgrade forces the U.S. to raise its effective bond yields, countries that normally have to borrow on AA or worse credit will quickly find themselves crowded out of the global bond market.  That is a recipe for an immediate credit crunch in some of the markets that have been very good to U.S. multinational firms' earnings this year. 

This sad episode will not end well for the U.S. even with an agreement to raise the federal borrowing limit.  The only community that is completely oblivious to the coming debacle is - no surprise - the mass of financial advisors whose unguarded optimism about the U.S. economy will probably put many of their clients in the poorhouse. 

Full disclosure:  Long FXI and GDX with covered calls.  No positions in individual U.S. equities at this time. 

The Haiku of Finance for 07/26/11

No Peak Oil just yetBig Saudi petro complex
Betting there's oil left

The Limerick of Finance for 07/24/11

Now deficit talks just broke down

Debt default is the talk of the town
Treasuries aren't risk free
Just how much, we shall see

Dollar will lose reserve status crown

Deficit Talks Crash, May Crash Markets Too

I'm not prone to apocalyptic thinking.  Life goes on for most of us no matter what unpleasant surprises come along.  Here's a surprise that won't make life better for Americans.  Bipartisan deficit cutting talks have broken down, and the financial markets are starting to price in the possibility of a U.S. debt default. 

It didn't have to be this way. Politicians could have bit the bullet the bullet in countless ways but grandstanding for next year's elections was more important.  World War I started with a similar series of strategic miscalculations.  Now the global bond market will find out just how risk-free Treasuries really are.  Mutual funds and state pension funds that have to sell off Treasuries in anticipation of a ratings agency downgrade will be the first dominoes in a worldwide cascade. 

The long-dreaded run on the U.S. dollar is almost here. Brace yourselves.

The Haiku of Finance for 07/21/11

"Don't you dare default"

Say U.S. Chamber big shots

Business hates chaos

Updating The Alpha-D For July 2011

Wow, how about that gold action.  Gold's price strength propelled my GDX holdings past the strike price of the call options I had on them.  I bought back some of that pile in a wash sale (and sold more covered calls)but I let the rest go as a capital gain.  It is very difficult to tell right now whether we're headed for hyperinflation (good for gold, at least initially) or a renewed depression (probably bad for gold).  My GDX holdings have done their job so far, protecting me from the mild price inflation the U.S. has experienced in 2011.

I also renewed my covered calls on FXI; none of that pile of equities was sold off at options expiration this month.  China's economy is slowing down and inflation over there is heating up, but the country's central bank is in a much stronger position compared to the Fed.  They're able to keep the ship afloat. 

I used my growing cash pile to buy more State of California general obligation bonds and an out-of-state bank CD (short-term).  This is just to get a little bit more yield.  I believe my state government in Sacramento will take all necessary measures to cut its budget deficit and protect bondholder payments. 

Individual equities still look too pricey given the broad market's overvaluation.  No way am I re-entering TDW.  Their financial statements are a huge disappointment. 

That's it for this month.  This is too easy. 

Fake Signatures, Fake Mortgages, Fake Economy

The Fed's QE2 combined with regulators' lack of interest in pursuing justice has reflated the worst part of the housing bubble:  its lack of integrity.  Mortgage robo-signing continues unabated.

Readers can be forgiven if they must wonder if anything about the world economy is real anymore.  Shadow Government Statistics notes that most of the U.S. government's economic figures are untrustworthy but financial pundits cite them anyway to lend authority to their guesswork.  Fake European bank stress tests are starting to rattle equity markets, long after I first wondered why investors weren't paying attention.  A fake debate over cutting the U.S. budget deficit hasn't stopped foreign bond buyers from throwing their money away just yet.  No cuts are coming without a bond market implosion. 

Hey folks, I'm just keepin' it real here.  That's a hard job. 

The Haiku of Finance for 07/16/11

Buying up farmland
Not the same as buying stocks
Hard work required

YRCW Fantasizes About H2 Operating Profit

YRCW likes to send out very optimistic forecasts just before it announces that it's still losing money.  The company stays in that groove with its estimate that it will soon turn a profit of $4.2mm on revenue of $4.9B.  Mind you, that's merely a figure for the second half of 2011 because they still plan to lose money on an annual basis.  This is a bet on continually rising tonnage and rates.  Don't tell management how unrealistic that is with the price of fuel on the upswing again after a brief period of relief. 

Here are some even more unrealistic assumptions YRCW can figure into its turnaround plan. 

- They can buy unicorns to haul freight.  I hear they're cheaper than trucks and less trouble to maintain  provided Teamsters clean up after them. 

- They can relocate their trucking centers to the Moon.  Lower gravity means trucks can carry more mass and even get away with more height with no restrictions. 

- They can fire their Teamster workforce and hire brand new high school graduates in their place.  Their labor costs will be lower and the I.Q. of the workforce will skyrocket. 

None of the above ideas are on the table in the YRCW boardroom but that's okay.  The stock is going to massively dilute this month anyway and nothing can stop it. 

Full disclosure:  No position in YRCW.  No unicorns were harmed in the creation of this blog post. 

Barclays Learned Nothing From VZZ

Never underestimate the stupidity of a large financial firm.  The crash and forced redemption of VZZ should have taught Barclays not to build structured products around futures.  They've learned nothing. they're about to roll out a brand new version of the exact same product.  I guess the "B" added to the ticker is for baloney.

This reminds me of automakers who rebrand a poorly selling domestic model for relaunch in an international market.  The key there is that they can introduce the lemon to a whole new batch of suckers who've never encountered it.  Doing that with financial products is almost impossible because of the globalization of financial markets.  Word will get out instantly, like on this blog (thank you very much).

Ah, Barclays.  You don't want someone as smart as me working there.  I'd ruin some managing director's day by ridiculing stuff like this.