Eurozone Phone Calls Give Peek At U.S. Future

Yesterday's U.S. debt rating downgrade opens the door to the kind of chaos we've seen for the past couple of years in Europe.  The latest round of European crisis talks over debt relief give us a preview of what the future holds for us on this side of the Atlantic.  There is of course no relief possible from a 100% or greater debt-to-GDP ratio aside from that provided by an immediate default.  European central bankers are about to find that out the hard way when this round of conference calls breaks up. 

"Hello, operator?  I'd like to dial 9 for a bailout." 

Sorry, but we cannot complete your call.  Please check the number and dial again, but this time make sure you're calling the Fed for another $16 trillion. 

S&P's US Debt Downgrade Relaunches Sovereignty Crunch

Standard and Poor's regained a little of the ratings agencies' massively degraded credibility by making a sound decision today.  It downgraded the United States' sovereign credit rating by one notch.  The full report is over on the S+P's site.  Moody's and Fitch were probably too timid to go first.  Imagine the phone calls flying among their managing directors right about now arguing various shades of "I told you so" and "we should have gone first" with full-throated invective.  Now the other agencies have to play catch up.  Look for future downgrade reports, one notch at a time, for the next year and a half until the federal government has a junk rating. 

S&P waited until after the close of market hours so corporate insiders could finish selling whatever is left of their blue-chip stock holdings.  That's how our world really works.  Stop kidding yourselves if you think otherwise. 

The short term effects are obvious.  Banks will raise rates on loan products tied to ten-year Treasury yields, cratering home equity values and eventually forcing more homeowners into foreclosure.  Bank of America and Wells Fargo hold plenty of mortgages for deadbeats already, so more inbound jingle mail from impoverished mortgage stuckees will be a nightmare for their servicing desks. 

A further stock market selloff on Monday is pretty much assured.  The eventual end of the dollar as the world's reserve currency is now assured.  The U.S. government is incapable of putting its own house in order.  Foreign creditors will now determine the Republic's fate and the ultimate disposition of its citizens' wealth. 

Full disclosure:  No positions in BAC or WFC at this time. 

Shipping Troubles In August 2011

The news gets worse everywhere you look, and now global economic weakness is hitting the shipping industry.  Tankers have been hurting for a while and watching oil prices come down from their recent highs can't be fun.  Now shippers need to worry about additional "green taxes" on those ships that don't meet environmentally benign fuel standards.  Targeted taxes are of course a hidden boon to shipbuilders who can fulfill new orders for those fuel efficient hulls.  The declining health of the industry means those new orders will be a long time coming.  Container lines that brought older models out of mothballs up until last month will probably face enormous operating losses this quarter as lower freight rates catch up to them. 

The only good news is that suffering carriers like SFL and FRO may finally have affordable entry points with their single-digit P/E ratios.  I'll give the market a few more weeks to take them down a bit more.  The ocean-going shipping industry won't disappear, but size has a lot to do with staying power for those carriers that will survive. 

Full disclosure:  No positions in shipping stocks at this time.  I may open long positions in SFL and/or FRO in the near future. 

COO Gone At YRCW

Another exec bails out at troubled YRCW.  The COO's job in a nutshell is to make the trucks run on time.  Maybe he got sick of listening to Teamsters whine about having to actually do some work for a change. 

Hey, YRCW, I'm available to act as interim COO.  My first order of business when hired will be to shut down the union-heavy divisions and transfer as much traffic as possible to the USF Reddaway units (or to whichever low-cost, non-union parts of the company still exist).  If that's a non-starter, I'd start farming out "last mile" deliveries to local owner-operators and start furloughing Teamsters.  Most recent hires get the first pink slips.  Bring on the DOL complaints.  That's my Hail Mary plan to salvage as much shareholder value as possible before the recap leaves them almost penniless. 

I drove past a former YRC Worldwide terminal here in San Francisco a few weeks ago.  It looked pretty run down and I don't feel like guessing how long it's been unoccupied.  The whole darn company will look that way pretty soon if it can't get rid of the union culture that's eating it alive.

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

Full Speed Ahead For Containers On Barges

There's nothing surprising about inland waterways operators' surging interest in transporting containers on barges.  What's really remarkable is that it has taken so may people so long to realize this is worthwhile.  The Port of Pittsburgh completed a study in 2003 endorsing the concept.  The Connecticut DOT tentatively agrees, with caveats for increased capital outlays.  Inland port operators can handle the traffic but they will need to consider whether investing in large container cranes is justified by the projected additional revenue from container-on-barge traffic. 

One very serious potential obstacle is the potential for height limitations on barges stacked with containers.  Lock and dam upgrades will benefit all riverborne traffic, but double-stacking containers on barges will eventually require considerations of how bridges and rail overpasses spanning rivers will limit barge movements.  In the short term, MARAD and state transportation regulators can help operators plan routes that avoid low bridges.  Longer-term viability of this mode will require more infrastructure upgrades. 

Washington should pay attention.  MARAD needs to start attending meetings of the Transportation Research Board, where they can hear about the benefits of containers on waterways firsthand.  Stimulus money spent on riverborne infrastructure will pay dividends for decades.  Spending it to accommodate container cranes at inland ports will make some local politicians very happy. 

FAA Shutdown Leaves Hidden Blessings For Energy-Constrained U.S.

One early casualty of the federal budget battles is continued funding for air transit programs.  The FAA has partially shut down until Congress can re-authorize its budget.  I've had the displeasure of listening to coverage of this episode on NPR, where it's portrayed as some kind of disaster.  I prefer to look on the bright side.

The Essential Air Service bears the hallmarks of a useless government handout.  Rural air routes that were discontinued for being uneconomical should not be kept alive with government subsidies.  Ending the program will lead to no more than an inconvenience as rural travelers either switch to trains and buses or stay where they are. 

Loss of tax revenue will hurt in the short term but restoring this particular function is the easiest fix of all.  Loss of airport construction is the biggest hidden blessing possible in this situation.  We should put aside our envy of gleaming new airports in China long enough to realize that air travel is the single most expensive (and least fuel efficient) way to move people and cargo.  Letting go of nonviable airports that don't serve major metropolitan hubs opens growth opportunities for rail service.  Peak Oil will demand this transition anyway. 

The coming months will bring us plenty of sob stories about government programs that were once affordable at the height of our civilization's power.  Rural air transit and construction at low-traffic airports are inappropriate uses of capital for an empire in decline. 

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

A Day Late, More Than A Dollar Short

It paid to be a short seller today (I was not, boo hoo).  Declines across the board in the DJIA, Nasdaq, and S+P 500 indicate to this humble observer that equity markets are finally beginning to price in America's inability to put its fiscal house in order.  U.S. economic data is going from not-so-bad to increasingly worrisome.  Consumer spending is weakening thanks to the wage stagnation American workers have lived with since about 1974.  It's not news (if you've been reading my blog) that the U.S. is in the same fiscal boat as Europe, with continental futures markets rendering their verdict on Italy's new crisis.  It also shouldn't be news that the U.S. has become as economically sclerotic and plutocratic as Europe.  That's a story for another day. 

It is worth noting that, just like the 2008 financial crisis, ratings agencies' official pronouncements continue to lag market reality.  For all of the bluster about putting Uncle Sam's bonds on negative watch, major rating agencies continue to uphold the government's triple-A rating.  The obvious conclusion is that ratings agencies cannot be trusted. 

If you still want to make a case for a bull market, you need to go somewhere else. Maybe the inmates at your local insane asylum would make a good test audience. 

Full disclosure:  Long FXI and GDX with covered calls, no other equity positions.  Long California state municipal bonds.  Lots of cash on hand too, ready to buy when people really panic.

Debt Ceiling Raised To The Roof

This weekend, another brick was laid in America's long, winding road to financial implosion. Our leaders reached some kind of deal on raising the debt ceiling, which has been raised umpteen times already after World War II. We can now look forward to being the butt of jokes among those countries whom our financial strongmen at the IMF have bailed out and restructured.  Russia took the lead today in calling us out for our profligacy.  That criticism is likely intended for a domestic audience; no doubt Russia likes the rise in oil prices driven by our Federal Reserve's monetary expansion. 

Speaking of the IMF, it's coming off its leash.  Mme. Lagarde is gently admonishing us that maybe our Treasuries aren't such a hot product after all.  Good for her.  She knows the U.S.'s time as hegemon is drawing nigh.  Maybe Russia can be the IMF's new backer if it throws some oil money over the fence.  They can start planning new bailout packages for investors who are about to get burned by the new bubble in emerging market bonds. 

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