More Wind Out Of China's Sails

Writing "sales" instead of "sails" in this post's title might have been a cute play on words, but I don't feel like being all that cute today on the subject of China's continuing disappointments.  Manufacturing activity in China continues to slow down.  Europe's malaise is hitting China's exporters hard and the eurozone hasn't even fallen apart (yet).  The world copper price hasn't responded to this news, so perhaps Dr. Copper has decided to defy commodity analysts' wisdom and become a lagging indicator.  Steel futures indicate strong future demand, which no longer makes any sense at all.  Dude, like manufacturers use steel and copper, okay?  So, like, the prices should be cratering rather than meandering sideways or setting new highs.  This kind of action proves the old adage that the only people who make serious money in commodities markets are the brokers of transactions, not the investors going long or short.

The price of FXI hasn't factored in this bad news from China.  I'll renew my covered calls but I may be forced to eat a realized long-term loss as the market price went through my calls' strike price.  It all depends on how my brokerage calculates the purchase date for which shares will ultimately be sold off.  I can console myself with the reminder that the cash I've generated from years of covered call writing has built up a war chest I have yet to deploy.  More bad news out of Europe, China, and elsewhere will eventually give me the bargain opportunities I seek.  The waiting game is one I can play endlessly.

Full disclosure:  Long FXI with covered calls.

The Haiku of Finance for 01/20/12

GE comes up short
Slow Europe hurts revenue
Bellwether omen

Keystone XL Pipeline Could've Been A Contender

I may have been too generous a few days ago when I saluted a U.S. proposal to streamline business regulation.  What the government giveth, the government taketh away.  Federal support for the Keystone XL oil pipeline has suddenly ended, for the time being  I guess the reform proposal forgot to take away the State Department's veto power over commerce decisions.  This major infrastructure project would have provided jobs for unemployed Americans and secure energy for businesses.  The lesson for its backers is that it probably wasn't as environmentally friendly or cost-prohibitive as a failed solar panel maker like Solyndra, which of course got plenty of help from the U.S. government.  

Even our natural allies scratch their heads at this kind of decision making.  China now has a golden opportunity to obtain Canadian oil in furtherance of its strategic goals.  Chinese purchases of Canadian oil via pipeline would constitute a strategic breakout by giving an Asian nation its first-ever foothold in North America (well, at least since Russia owned Alaska in the 19th Century).  It sure would be nice if the State Department had taken that into account before it recommended against the Keystone XL pipeline.  TransCanada did the smart thing by trying to re-route the pipeline, so now it must wait until after the 2012 election cycle for the project to be approved when no one's paying attention.  

Imperial Resources (IPRC) Nowhere Close To Building An Oil Empire

I just can't get enough of these penny stock mailers.  Early in 2011, the Carpenter Global Stock Advisory sent me something touting Imperial Resources (IPRC).  It's another Texas oil and gas play.  Man, those things just don't quit, do they?  There's always another country gentleman with a derrick coming out of the sagebrush down there.

Okay, enough with the stupid humor already.  You can guess what I'm going to mention first if you follow my posts on stuff like this.  Three years of negative net income, retained earnings, and free cash flow.  I'm starting to wonder what these kinds of companies do with the money they raise.  I even wonder what they do with their time.  Do they spend this money and time on one purchase and sale agreement after another or do they actually drill for oil?  That comes as no surprise from a management team consisting of lawyer-financial types, with only one petroleum engineer anywhere in sight.

If you bought this stock in March 2011 when it debuted at $0.75, you watched it seesaw for a couple of months until it eventually settled to about a dime per share today.  Nice work.

Full disclosure:  No position in IPRC, ever.

The Haiku of Finance for 01/17/12

World Bank gets a clue
Weak growth popping up worldwide
Well, ya don't say now?

American Power Corporation (AMPW) Remains Powerless To Earn Money

Let's pull yet another old penny stock teaser out of the dead letter file.  Myers Energy & Gold Report sent me something in January 2011 about how American Power Corporation (AMPW) was going to be just about the greatest thing in the coal sector since sliced bread.  One year has passed.  That's enough time to learn something.

The company has three years of increasingly negative net income, retained earnings, and free cash flow.  The corporate website sure looks pretty, with its flash intro and all, but I really need to see some confirmed resource discoveries and not just estimates from preliminary exploration.  The executive team looks to be heavy on investment banking experience and light on experience running actual coal mining projects.  One thing they're doing right is developing a project in an area with good rail and power infrastructure.  Time will tell whether their coal project in Montana actually produces anything, but that doesn't necessarily mean this particular company will be the one producing it.

Read their financial statements to find out whether they have enough capital to operate for much longer.  Go ahead, read the stuff.  I dare you.  I can't be the only one to do any work around here.  Oh, what's that, you don't like to do work?  Fine, I'll do it anyway.  Their 10-K dated Jan. 5, 2012 says this under MD&A:  "We do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months."  Alrighty, then!

When the mailer came out in January 2011, AMPW was just over a buck.  I guess you could say it "soared" to $2.14 on Jan. 27, 2011 when suckers bought in that month.  The stock then promptly collapsed and kept sliding to trade at $0.17 today.  Great job, everybody!  Well, actually, I should say poor job by everybody but I had to be sarcastic first.

Well kids, what did we learn today?  We all should have learned not to buy penny stocks touted by pretty-looking mailed brochures.  Some investors will never learn.  That's why I'm here, getting in Mr. Market's face day after day as my life's work.

Full disclosure:  No position in AMPW, ever.

The Haiku of Finance for 01/16/12

Morgan Stanley pay
Deferred comp in future years
No big cash for you

Smart Reorganization Coming To Federal Business Regulation

Sometimes Uncle Sam gets it right.  The White House has proposed a consolidation of several major business-oriented agencies into one federal department.  These agencies all grew out of multiple efforts over decades to make American businesses more competitive in the world marketplace.  Getting serious about promoting exports means getting regulatory messes out of exporters' paths.

Concerns that this reorganization will curtail federal contracts available to small businesses are legitimate but can be addressed.  Requirements for prime contractors to award portions of their contracts to small businesses will very likely always remain in federal law.  Big contractors have plenty of experience certifying small businesses as partners to fulfill this mandate and know the value of businesses owned by women, ethnic minorities, and veterans.

There is some bad news that reform-minded observers may not be willing to notice.  The inability of the U.S. government to balance its budget will eventually exhaust the bond market's patience, and either an austere balanced budget or a hyperinflationary economy will result.  There will then be less federal spending available for all businesses, large and small.  Agency consolidation won't prevent that outcome but it will make a bitter pill easier for all to swallow once the business community sees the federal government get ahead of the downsizing curve.

One odd thing about the effort is the elevation of the SBA to a Cabinet-level agency.  That cannot outlast the reform if the SBA is to be eventually folded into the Department of Commerce.  It's a no-cost political move in an election year, the equivalent of a shout-out to entrepreneurs.

Reformers have finally found a voice in Washington D.C.  They're from the government and they're here to help.  

The Limerick of Finance for 01/15/12

China launched a trading platform
To make iron trading the norm
A consistent price
Would be really nice
With bid spreads that stay uniform

Inter-Citic Minerals (ICI) Struggles Even With Strong Gold And Yuan

The stream of junk mailers from stock touters never seems to end.  Even among a flood of hopeless penny stocks, one or two might stand out as worth more than just cursory dismissal.  Today's let's consider whether a Chinese gold miner named Inter-Citic Minerals (ICI) deserves study.

I first took notice of this company when I saw their promotional booth at the San Francisco Hard Assets Conference in 2010.  They positioned themselves as an affordably priced gold producer.  They're still a low-priced stock, which is disappointing in the face of two fundamental forces that should have worked in Inter-Citic's favor.

The first force is the price of gold itself.  Gold is now trading at over $1600/oz., an increase of about 20% since the time of that conference in late November 2010.  Now watch the other shoe drop.  ICI.TO was trading at $1.83 on November 29, 2010 and has since dropped to $1.13.  The stock has declined in the face of a rising metal price.  Junior miners typically experience a significant pop when their commodity price rises, and that's precisely why many gold bugs find them attractive.  Inter-Citic Minerals did the opposite.

The second force is the gradual appreciation of the yuan versus the U.S. dollar.  A currency that can buy more in dollar terms would make earnings denominated in that currency worth more to equity investors.  The stock market did bid up the price of ICI.TO but this crested in February 2011 at over $2.00/share.  Inter-Citic's operations don't seem to be motivating the market to bid up its value along with the gradual strengthening of the yuan.

Sometimes even powerful macroeconomic tailwinds can't push up a weak stock.  Their 2010 annual financial statement revealed negative net income in 2009 that grew even more negative in 2010; free cash flow was also negative.  The company is still losing about a penny per share (measured in Canadian dollars) according to their Q3 2011 report.  I'm glad I chose not to commit money to this stock way back in 2010.  I would have been poorer by now.

Full disclosure:  No position in ICI.TO or ICMTF.PK, ever.

The Haiku of Finance for 01/14/12

Greek debt talks break down
No way to stop implosion
Bring on contagion

Multiple European Sovereign Downgrades Prompt More Yawns

In ordinary times, the pending downgrade of several advanced economies' sovereign credit ratings would prompt some kind of sensible reaction.  Portfolio managers would dump those countries' bonds.  Yields would rise for future issues.  It says something about the collective ability of bond market buy-side players that these things are happening in slow motion and not immediately.

Maybe buyers have no highly liquid safe havens left, with the U.S. and Japan already having fallen off the triple-A perch.  Maybe "anticipated" is too kind a way to describe sovereign credit deterioration, with Bill Gross and others banging the drum for months in public about what to expect.  Maybe investment professionals and their cheerleaders in the media really are so clueless that they can't see the rapids churning into a waterfall up ahead.

I have zero exposure to European equities or debt at the present time.  No one can entice me to go long either of those things until long after the euro has dissolved and regrouped into something much smaller.  

Bankrupt Solyndra Will Pay Bonuses For Failure

Only a government-subsidized enterprise could pull a stunt like this one.  Solyndra wants to pay bonuses to some key employees to "incentivize" them to stick around.  The legal grounds for this are specious.  Granted, employees' unpaid wages have senior claim status in a bankruptcy, but I have a really hard time believing such a claim covers incentive bonuses in addition to base pay.  The key folks look like the kinds of equipment specialists who need to stick around until the end anyway just to catalog all of the unsold inventory and fixed property so Solyndra's assets can be valued for sale.  Why doesn't the bankruptcy court just hire a turnaround and liquidation firm to do that?  They can hire the former Solyndra workers on contract to wrap up the asset sale and be compensated with a portion of the sale proceeds.  Nah, that would make too much sense for a politically connected corporate implosion.

It's really funny that the company's founder and another director have pending claims for huge bonuses they feel they are owed.  A bankruptcy court focused on justice would deny these claims and claw back previously paid bonuses to reimburse creditors.  I've got news for Solyndra's former leadership team:  Life owes you people nothing.  

The Haiku of Finance for 01/11/12

Hostess Brands goes bust
Thanks to high cost cake and bread
Not sweet anymore

Are Corporations Really People?

Dinner tonight with some deep thinkers at a private club in San Francisco brought forth an interesting discussion of Mitt Romney's statement that "corporations are people."  A quick read of his quote reveals it may have been taken out of context.  I think Gov. Romney meant to say that corporations are comprised of people - workers, managers, shareholders, etc. - who make it run by earning incomes and paying taxes.  I don't think he meant to say that a corporation is the equivalent of a living, breathing human being with comparable political rights.

Unfortunately, American law seems to substantiate the "corporate personhood" argument more than ever.  The most significant legal support for corporate personhood in modern times is the 2010 U.S. Supreme Court decision removing any restrictions on corporate spending in political campaigns.  A disembodied corporate "person" thus has the same right to express political opinions as a live person without fear of government interference.  This is a significant departure from what legal scholars in the era of our Founding Fathers considered corporations to represent.

I believe a return to the original spirit of the Framers' time is in order.  Corporations back then were chartered in the public interest to accomplish a specific project, then allowed to disband.  They had a definite life span, which is as close an analogy to a human life as an artificial non-person could possibly get.  Corporations chartered for an indefinite life span are the norm today, so our legal system needs mechanisms to deter them from egregious behavior.  These mechanisms would be analogous to legal sanctions against individual's lives and property.  One such mechanism would be a corporate death penalty.  Any corporation with a sufficiently long and troubled history of conduct could be found to be in violation of its corporate charter and disbanded.  The capital structure of the company would be rendered worthless and its stock and bondholders would lose their entire investment.  The financial assets and physical property of the company would remain intact and could be sold to another corporation.  The employees and managers would remain a viable part of the new enterprise.  Handled wisely, such a transition could even go unnoticed by customers and suppliers in a manner similar to debtor-in-possession bankruptcy proceedings.

Such a legal solution would be impossible to implement today with corporate spending governing political campaigns.  It will have to wait until after the next financial meltdown, when both politicians and corporate executives sufficiently fear citizens in the streets to agree to limits on corporate power.  Society needs corporations and capital markets, but it does not need certain corporations that have habitually violated the public trust.