Oil Drillers Hit a Rough Patch

The underwater blowup that recently sank the BP Deepwater Horizon is now sinking drilling stocks:

Investors sold shares of companies with ties to oil drilling in the Gulf of Mexico as the industry came under greater scrutiny as oil from a massive spill reached the marshlands of Louisiana.

Shares in Apache (APA) sold off, which is probably unfair as they drill in shallower water and are exposed to less risk of a similar incident.  Even very diversified supermajors weren't immune to the selloff today.  Chevron (CVX) was down even though it doubled its Q1 profit:

Chevron Corp. said Friday its first-quarter profit more than doubled as oil prices soared over the past year.

That first sentence is the only excerpt we need from that article as it highlights a salient point about resource exploration.  The single most important determinant of a natural resource company's market value is the current market price of the commodity it produces.  Subtracting a company's cost of extraction from the value of its economically recoverable proven reserves yields a rough estimate of the company's intrinsic value. 

The price of oil is currently over $86 from expectations of stronger economic growth.  Anything that disappoints those expectations, like continued weakness in GDP growth or consumer sentiment, will hurt the price of oil and the value of companies pumping it. 

Full disclosure:  No current position in BP, APA, or CVX.

Wounded Warriors Polo Benefit 2010

I don't normally plug charitable causes on my business blog, but I'll make an exception for this one.  I strongly encourage my readers in Northern California to attend the Wounded Warriors Polo Benefit 2010 in Santa Rosa on June 20.

This event will raise money for the rehabilitation of American servicemembers who have been wounded in the nation's recent wars.  In addition to a live polo match, there will be a silent auction, a champagne divot stomp, some Argentinian BBQ, and loads of fun for rich and poor alike.  I will be there to support the cause and provide personal demonstrations of my amazing wit and enormous intellect.  I have also discovered from past experience that numerous attractive women from the Junior League and other social sets attend polo matches at this particular club.  Ladies, prepare yourselves for the mind-bending awesomeness that is Alfidi Capital's CEO.

Buffett's Realistic Position on Goldman Sachs

Warren Buffett prepares to weigh in on the controversy surrounding Goldman Sachs: 

Warren Buffett, who called Goldman Sachs Group Inc. an “exceptional institution” when he invested $5 billion in the firm, will have his biggest platform to discuss the bank after it was sued for fraud by regulators and pilloried in Congress.

I like Warren Buffett partly for his realism.  His visit to GS as a ten-year old was probably the first of many impressions he got of Wall Street's amorality, avarice, and ruthlessness.  That's why he's always shied away from working there himself, and why he could only stomach a short stint as Salomon's interim chairman.  The finance sector is just another industry to him, to be analyzed for opportunities on its own terms.  Investment bankers and traders serve a useful social function but attract personalities who range from unpleasant to uncontrollable.  The end state of analysis is to determine whether this natural state of affairs leads to profitable outcomes.

This is why we must put Warren Buffett's $5B GS investment in context.  His life's work is to find good investments that maximize value for his shareholders.  Here's what I'd say if I were in his place at Berkshire's annual meeting.

"Fellow shareholders, I'm sticking with my bet on GS.  I realize they're a vampire squid sucking the life out of our economy and all that, but that's what the financial sector has become.  Of course they've bought off Washington and forestalled any meaningful regulatory reform.  That's just a smart business move to protect one's franchise.  They've successfully penetrated government offices at all levels with former employees who still have deferred compensation arrangements through GS.  This gives them the ability to defend their competitive advantage as the world's leading investment firm."

Go for it Warren.  I won't hold it against you.  It's just business. 

Full disclosure:  No position in GS or Berkshire Hathaway at this time.

The Haiku of Finance for 04/28/10

Greek bailout cost soars
So where will they get the cash?
From the Fed, of course

Bond Investors Flee to Places Unknown

Bond buyers are freaking out over spiking Greek debt yields:

The decision by the leading credit rating agency Standard & Poor’s to cut Greek debt to junk and reduce the sovereign rating for Portugal sent investors scurrying to the safer havens of UK gilts, German bunds and US Treasury bills.

This so-called flight to quality will have a limited shelf life.  Let's leave aside for a moment the risk that German bond yields may eventually spike the more Germany entangles itself in an EU bailout of Greece.  That might be mitigated if near-term German elections bring new leaders to power who can scuttle such a bailout. 

The U.S. and U.K. have massive debt problems of their own, but the relative unattractiveness of other sovereign bonds artificially keeps up demand for gilts and Treasuries.  That relative advantage is temporary.  The sovereign credit problems facing the Anglo-West are not lost on the Chinese, who have discovered that they must raise interest rates to clear their bond inventory. 

I would not want to be in the Fed Chairman's seat when he comes to the inevitable point of raising rates.

Full disclosure:  No positions in U.S., U.K., German, or Chinese bonds at this time.

American Mortgage Acceptance Company REIT Bites The Dust

Here's more bad news for property owners.  A mortgage REIT is going bankrupt:

Real estate investment trust American Mortgage Acceptance Co filed for Chapter 11 bankruptcy protection on Monday, blaming a sharp drop in property values.

A quick look at their financials brings no surprises.  Their last three balance sheets showed increasingly negative retained earnings and free cash flow.  Their net income went sharply negative in 2007 and then their financial statements seem to disappear, with the exception of a few SEC filings in 2008 that indicate the likelihood that the company's operations will cease.  Numbers that bad never lie.   

REIT investors can look forward to more disappointing stories like this one.  Investors enticed by the cash flow of REITs should proceed with extreme caution.

Full disclosure:  No position in AMOA.PK.  Long puts against IYR. 

Newspaper Biz Continues to Spiral Down

In good news for bloggers like yours truly, the reading public continues to abandon newspapers:

Circulation continues to drop severely at U.S. newspapers, though the rate of decline slowed from the previous six-month reporting period.

Figures released Monday by the Audit Bureau of Circulations show average weekday circulation fell 8.7 percent in the six months that ended March 31, compared with the same period a year earlier. Sunday circulation fell 6.5 percent.

Keep up the good work, print media.  Oddly enough, that old stalwart the Washington Post Co. (WPO) has an ROE of 3% but is trading within 97% of its 52wk high.  Some folks are getting irrationally exuberant here.  Hey, WPO, don't forget to turn the lights off on your way out.  I'll be sure to let your last advertisers know that there's some space for rent here on my blog. 
 
Full disclosure:  No position in WPO.

The Haiku of Finance for 04/26/10

Hertz buys Dollar cars
But rental cars face Peak Oil
Guess they won't run far

Germany Throws Monkey Wrench at Greece

Germany continues to be reluctant to throw its hard-earned money into Greece's money pit:

German Chancellor Angela Merkel said she won’t release Greek rescue funds until the country shows it’s got a “sustainable, credible” plan to cut its budget deficit. A decision may be in a “few days,” she said.

Merkel's determination not to be steamrolled into bankrolling Greek profligacy is the reason the IMF will be leading the Greek debt rescue and not the EU.  Kudos to German leaders who continue to look out for their taxpayers' best interests. 

Elites on both sides of the Atlantic are desperate to keep the PIIGS' debt bomb from exploding, which is why the U.S. recently agreed to support a massive expansion of the IMF's standing credit facility.  The Anglo-West is going to try every trick in the book - along with some new ones they're still testing - to prevent Great Depression 2.0 from breaking out.  I do not think they can ultimately succeed.  We will all be poorer in some way whether we know it or not. 

New Flowchart on Financial Services Career Progression

In my never-ending quest to provide the financial community with much-needed assistance, I've published a new flowchart on career progression for financial services professionals at Alfidi Capital.  This flowchart should serve as a handy reference tool for aspiring bankers, traders, client relationship managers, analysts, and other types who wish to climb Wall Street's corporate ladder.  Alternatively, it can also serve as a warning of what to expect for employees who do not possess appropriate credentials, i.e., aristocratic pedigrees, lack of conscience, etc. 

Bankers Assemble Monster Products for Amusement

SEC actions are always a fun way to pull back the curtain and see how Wall Street really works.  Peering inside the Goldman Sachs sausage factory, we see how bankers put together their wonderfully innovative products:

As the U.S. housing turned downward in January 2007, a Goldman Sachs trader wrote in e-mails to a woman he apparently was courting that investments he had sold were "like Frankenstein turning against his own inventor."

Apparently when sharp MBAs get bored with ripping off their clients and hoodwinking regulators, they create mystery products that serve no useful purpose but somehow command a premium.  They then create proprietary indexes against which they can measure the performance of their mystery products, and these indexes are just as meaningless as the products.

Does any of this matter to investors?  Only if they're dumb enough to buy these Frankenstein securities.  Smarter investors (like yours truly) just wonder what all the fuss is about and move on. 

Full disclosure:  No position in GS at this time. 

Dodd Bill's Limits Take Shot at Fed's Independence

What's this I hear about the "reform" bill limiting the Fed's regulation authority to large banks?

A bill sponsored by Senate Banking Committee Chairman Christopher Dodd of Connecticut would limit the Fed’s authority to 36 of the country’s largest banks, those with assets of at least $50 billion, tying the Fed nameplate to firms such as Goldman Sachs Group Inc. and JPMorgan Chase & Co.

The Fed currently uses data from smaller banks to help assemble reports tracking the health of the economy.  The regional banks' "Beige Books" take into account inputs from many local sources, including contacts in the financial community. 

Arbitrarily limiting the Fed's authority to large banks makes little economic sense.  This is probably a political ploy, but who benefits?  The TBTF institutions would probably like having their own dedicated case manager at the Fed who isn't distracted by demands from smaller banks.  This would make it easier for Goldman Sachs et al. to dump degraded mortgage assets on the Fed when it's time for the next bailout. 

I guess community bankers didn't spend enough on campaign contributions to members of the Senate Banking Committee.  They have every right to worry that regulatory favoritism will be shown to larger competitors if this "reform" bill becomes law. 

The Haiku of Finance for 04/22/10

Greece set to blow up
Take notes and prepare yourself
Contagion will spread

Greece's Day of Reckoning Approaches

Will this Greek drama (pun intended) ever reach its denouement?  The entities that agreed to bail out Greece may now wish they hadn't done so, as concerns mount over rising spreads on Greek government bonds:

The International Monetary Fund has warned that Greece’s debt crisis risks spinning out of control, threatening to spill over across the region unless action is taken soon to restore confidence.

Consider the secondary effects that concerns over debt default are having on that country's equity markets:

Greek stocks declined for a second day today with the benchmark ASE Index falling 3.9 percent to 1,860.76, leaving it down 15 percent on the year. At 10 percent, Greece’s two-year bonds now yield more than the 10-year debt, indicating investors don’t believe the EU bailout plan will be enough to sustain Greece. Credit-default swaps to insure against a default in the coming year leaped 104 basis points to a record 744.7.

The lesson for American investors is that they should expect the same stock market reaction here when investors in our own government bonds eventually figure out that our social Security and Medicare programs are Ponzis that require more funds than the U.S. taxpayer can mathematically provide.

Just get this over with already!

Some Good Earnings Results, But . . .

In normal times, one would expect that reports of rising 1Q profits at eBay, solid 2Q earnings at Qualcomm, and a big government loan repayment from GM would allay fears of a double-dip recession and power the stock market to new highs.  Unfortunately these times aren't normal anymore.  The Dow closed up a very negligible 0.07% today. 

Can you see the future?  I can't, but futures traders certainly are trying.  Futures markets outside the U.S. remain concerned about a potential default on Greece's sovereign debt. 

Nota bene:  Anthony J. Alfidi has no positions in any stocks mentioned in this particular post.