Newsreel For Tuesday, 11/30/2010

I can't find a snappy common theme in any of today's financial headlines so I'll pick a bunch of random items.

Ocean shippers have swung wildly from loss to profit.  This tells me that some major carriers are not skilled at either securing long-term contracts (which would stabilize revenue), hedging fuel costs, managing idle fleets, or all of the above.  Spot rates seem to merit only a passing mention as a contributing cause. 

Striking truckers are teaching India how hard it is to deal with unions.  Competing with the BRICs is more than just a race to the bottom in wages.  It also entails exporting innovations to emerging markets eager to compete on quality.  Sometimes you get the good (technology, Six Sigma) with the bad (unions) that the Anglo-West has to offer.

Consumer confidence (read delusion and denial) is levitating thanks to short attention spans.  This helps explain the great retail sales figures for Thanksgiving weekend.  People are emptying their wallets like there's no tomorrow.  If the U.S. heads over the debt cliff like our European friends, there may not be much of a tomorrow for America's middle class anyway.

Pay freezes are headed for Uncle Sam's workers.  A small ray of sanity shines its way through the clouds of insolvency's gathering storm.  It won't be enough to stop a bond market dislocation but it's the thought that counts.  Justice demands the inclusion of military pay and benefits in any freeze.  No one should be exempt from austerity.  Neither should pensions be spared.

Cities shouldn't be spared austerity measures, and they can read the handwriting on the wall.  Lack of a revenue backstop mean muni bond yields will get a lot more volatile in 2011.  Picking winners in muni issues will attract some serious bottom-feeders.  I'd like to see what my favorite Bay Area governments will offer.  San Francisco's financial position will become even more precarious than it is now. 

Consumers Lose Their Minds Over Thanksgiving

I'm the first to admit it when I'm wrong about something.  I had thought retailers were getting desperate by opening their doors days earlier and starting holiday promotions weeks in advance.  Now it seems they were more greedy than fearful:

U.S. consumers spent an estimated $45 billion over the Thanksgiving weekend, up 9.2 percent from last year, the National Retail Federation estimated in a report that brightened prospects for freight transportation.

Wow.  American consumers are unable to resist the siren call of the shopping mall even when European insolvency screams at them from the headlines.  You'll have to pry credit cards from people's cold, dead fingers before they give up the spending habits that have pushed the U.S. debt/GDP ratio to all-time highs. Retailers stocking up for the holidays probably pushed up trucking tonnage in October.  That's nice for national carriers.  It's too bad that a repeat of this stunning news isn't likely next year, with mounting mortgage losses threatening to push banks back into dire straits.  I'll hazard a guess that the money people aren't sending to their mortgage servicers is what fueled this Thanksgiving rush.

The Limerick of Finance for 11/28/10

The EU has new bailout rules
With plenty of leverage-based tools
Taxpayers pay first
When the losses are worst
Rich bankers have played them for fools

Synopsis Of The SF Hard Assets Investment Conference

I made my annual pilgrimage to the downtown SF Marquis Marriott for the 2010 San Francisco Hard Assets Investment Conference.  I've been a pennant-waving fan of this tremendous roadshow since my first visit in 2005, which was the very last year it was known as the Gold Conference.  The name change reflects the broadening base for paid sponsoring companies, who now include explorers and producers of all kinds of minerals. 

The free lectures are always very rewarding.  The two most valuable presenters this year were Tim Wood and Mickey Fulp, who spoke separately on the details of mineral geology and how they determine whether a mining company's ore is economically recoverable.  Here's the most important take-away for investors and analysts:  A mining company's value is ultimately determined by its proven and probable mineral reserves, not the gross amount of "resources" they claim to have discovered.  Furthermore, the economic recoverability of those reserves depend on multiple socio-economic and regulatory factors unique to each property. 

Jim Letourneau warned his attendees about mining executives who manage multiple companies, which reveals that they're more interested in collecting "lottery tickets" on a lucky property than focusing on effectively managing a single project. 

I was disappointed that Jack Lifton was a no-show for his scheduled lecture on Sunday morning.  I was looking forward to his take on the massive surge in attention for the rare earth metals sector.  Jack is The Man on rare earths. 

Brent Cook's lecture gave some credence to the Peak Gold hypothesis.  He noted that world gold production has declined since 2000 and that major gold producers are unable find enough new deposits to make up for lost production. 

A large number of exhibiting companies this year have capitalized on the rare earth metals theme.  Some of the uranium and cobalt developers have apparently realized that their trace findings of rare earths have value after all, although with some producers that value is limited to a marketing hook.  You could swing a dead cat in the exhibit hall and hit half a dozen gold or uranium producers claiming to also hold deposits of rare earths.  Time will tell whether those deposits are recoverable. 

I miss the sporadic appearance of renewable energy producers I've seen in years past. Come on, where was U.S. Geothermal and Nevada Geothermal? I recall at seeing least one of them in years past. They were absent this year. 

Quite a few exhibiting companies had stories worth telling.  Here are some highlights of companies that deserve further analysis.

Inter-Citic Minerals (ICI.TO).  This is a Chinese gold producer with financial backing from leading producer Zijin Mining Group.  I don't recall seeing a Chinese gold company at previous conferences.  China's new strength as the world's top gold producer will bring increasing attention to exploration plays there.  Inter-Citic must be doing something right, because their share price has been hovering around the value assessed by Zijin's private placement in April.  Maybe their claim of a 1:1 resource to reserve conversion ratio is the reason.  This one bears watching. 

Nautilus Minerals (NUS.TO).  Nautilus is a unique company mining one of the last resource frontiers on Earth - the deep ocean floor.  They've exhibited at several conferences in the past and they're still around.  Their share price saw better days in 2006 and 2007 but their technology is too compelling to ignore.  The mining industry can't afford to write off players like Nautilus. 

Dacha Strategic Metals (DAC.V).  Dacha's portfolio approach to rare earth metals sets it apart from exploration and development plays.  Trading these commodities on the open market may negate a miner's operating risks, but stockpiling them carries storage costs.  An investment in Dacha is a bet that large buyers (like U.S. defense contractors) will soon look for ways to fill gaps in their supply chains. 

Dacha isn't the only rare earth story at this conference.  Commerce Resources (CCE.V), Avalon Rare Metals (AVL.TO), Rodinia Lithium (RM.V), and Rare Earth Metals Inc. (RA.V) all wanted a piece of the action.  It's also worth noting that resource companies aren't the only players clamoring for attention at the conference.  One investment bank in particular, Forbes & Manhattan, played a key role in sponsoring several companies' booths.  There's money to be made in natural resource development, and mining isn't the only way to make it. 

A run-down of the show wouldn't be complete without a mention of the Dines Letter spokes-models.  I don't know if James Dines gets his models from the same local agency year after year, but other exhibitors should take note that his booth consistently had heavy traffic.  Those gals give new meaning to technical market terms like "double top" and "bottom bouncing."  See you next year, ladies! 

Full disclosure:  No positions in any companies mentioned at this time, although that may change in the future.  I did not receive any compensation whatsoever from International Investment Conferences, the organizers of the SF Hard Assets Investment Conference and its affiliated shows. 

China Sends Foreclosure Demands To U.S.

China has sent its latest foreclosure notice to the U.S. by way of a People's Bank of China adviser:

The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said.

These are are more than merely helpful suggestions.  Nothing in superpower affairs is ever so innocent.  Each of those three polite hints will serve to strengthen China's strategic position.  China is putting the U.S. on notice that a gradual transfer of its hegemony is an acceptable alternative to China's sudden exit from the U.S. Treasury market.  China wants to avoid a sudden drop in the value of its Treasuries and is seeking a typically face-saving alternative to the "nuclear option" of a bond market selloff or boycott. 

The U.S. is not likely to take the hint.  The bond market will thus have to force Uncle Sam to pay attention. 

The Haiku of Finance for 11/26/10

Euro-zone seeks calm
Bailout fund runs on empty
World heads into fire

Warren Buffett Truly Earns Medal Of Freedom

The single greatest living investor of our lifetime is going to receive the single greatest honor of his life:

President Barack Obama will name billionaire Warren Buffett one of fifteen winners of the 2010 Medal of Freedom, a White House official said on Wednesday.

No one has done more to exemplify a virtuous lifestyle for an investment professional than Warren Buffett.  He has articulated a comprehensive, common-sense investment philosophy that anyone can decipher and follow and has stuck to it throughout his career.  He has little in common with most Wall Street professionals and that is precisely why he is far more successful than them.

Warren Buffett isn't perfect.  His personal relationships haven't exactly been conventional but he has never tried to hide them.  Some of his investment calls have been less than admirable - like his Goldman Sachs rescue - but he has made them to further the interests of the Berkshire Hathaway shareholders who've entrusted their money to him. 

Congratulations, Uncle Warren.  You've earned it. 

Euro Meltdown Can Split Belgium

Here's a follow-up to yesterday's observations on European debt.  Contagion doesn't just spread internationally.  It can also hit parts of Europe's internal systems that were previously considered healthy, like Belgium: 

In the bars of Antwerp and the cafes of Bruges, the talk is less of Christmas markets and hot chocolate than of the rising cost of financing a national debt which stands at 100% of annual national income. 

Like Ireland, struggling to fend off criticism of its austerity package, there are signs that international bond investors are starting to view Belgium as living on borrowed money and borrowed time.

Belgium faces the additional challenge of internal ethnic tension between its Flemish and Walloon constituencies.  Belgium's problems are a microcosm of Europe's.  National identities reassert themselves because ethnically distinct groups never fully accepted allegiance to supranational governance.  The dividing lines between opposing solutions to Europe's debt crisis are now solidifying along nationalist and tribal lines.  Flemish advocates for austerity oppose their national government's profligacy.  Germany's resistance to further bailouts opposes the EU's desire for unity.

The great European experiment in forging a transnational identity for the Continent is in its sunset years. 

European Debts Eating Away At Global Stability

It would take a lot to sink the MSCI EAFE Index.  Markets in Europe, the Far East, and Australasia would have to decline in tandem.  That's the great thing about investing with an index covering multiple parts of the world that are too far removed from a U.S. investor's locale.

One of that stool's three legs is being eaten by termites.  Europe's PIIGS are once again making news:

Anger and fear about Europe's seemingly unstoppable debt crisis coursed through the continent Wednesday. Striking workers shut down much of Portugal, Ireland proposed its deepest budget cuts in history and seething Italian and British students clashed with police over education cuts.

I guess "Old Europe" is getting some more grey hair with all of this stress. Speaking of stress, didn't Europe apply stress tests to its own banks recently?  Yeah, those worked out just fine.  They were designed to hide problems instead of reveal them, just as their counterpart tests in America did. 
Full disclosure:  My short puts under EFA might get triggered next month after all, if European contagion spreads to Asia.

Ceres' Hidden Agendas

Everything in high finance happens for a reason.  Ceres, an alliance of institutional investors and environmental interest groups, recently released a ringing endorsement of investments in low-carbon technologies:

Citing potential climate-related GDP losses of up to 20 percent by 2050 and the economic benefits of shifting to low-carbon and resource-efficient economies, investors released a major statement today calling for national and international policies that will spur private investment into low-carbon technologies.

The statement was signed by 259 investors from North America, Europe, Asia, Australia, Latin America and Africa with collective assets totaling more than $15 trillion—more than one-quarter of global capitalization. Signatories included Allianz, HSBC, APG and a dozen U.S. public pension funds and state treasurers. It is the largest-ever group of investors to call for government action on climate change.

Institutional investors don't line up behind public policy changes unless there's money to be made.  There are probably several hidden agendas at work here.  Carbon credit trading is a potentially a huge new market in derivatives for global investment banks.  Any expansion of the physical market for carbon capture and carbon control technologies will mean more market participants in the bid-ask spread on carbon credits. 

Don't forget the importance of infrastructure investing to market makers.  The more national governments spend on infrastructure to lower national carbon production, the more creative financing they'll need.  Pushing $100mm blocks of Build America Bonds would make any underwriters' day.  Ceres should be careful what it wishes for, as some low-carbon investments can easily become boondoggles.  Take this U.S. Department of Energy loan to an unproven company that purports to develop a natural gas powered van for wheelchair users.  Only Uncle Sam would be dumb enough to give a loan to a startup and not ask for a convertible feature that turns it into equity. 

Go green.  Collect the green (money).  Nice business model.

Updating The Alpha-D Portfolio For Nov. 2010

Here's what I didn't change this month.  I maintain my long puts against LMT (hedging the defense bubble) and IYR (hedging the housing sector). 

I also maintain my long holdings of GDX (gold sector bull), FXI (China bull), TDW (energy services bull and compelling fundamental value).  My covered calls on each expired unexercised and I refreshed them.  I also sold short puts under those three securities.  If they remain range-bound, I keep the cash.  If they drop in a flash crash, I pick up more of what I like at a discount. 

Here's one significant change. For the first time in over two years, I wrote a small number of short puts under EFA.  I do not have a long position yet in EFA but I'm willing to risk acquiring some.  I don't mind a Euro currency crisis or Asian capital controls as the trigger.  I consider EFA to be a way to own non-U.S. markets I can't track myself.  I'm not quite ready to take the same approach with SPY because I'm waiting to see whether a bond market dislocation puts the S&P 500 on sale. 

I didn't add much to my fixed income holdings other than buy a one-month Treasury with my cash proceeds from selling options.  The sickeningly low yields on Treasuries reduce the effectiveness of this yield-enhancement approach.  I just need to stay in the habit of rolling cash into F.I.  It will pay off when interest rates rise after the U.S. is forced to live within its means. 

The Limerick of Finance for 11/21/10

The Irish have asked for a loan
The EU may throw them a bone
That sounds really nice
No one's thinking twice
With more debt Europe sinks like a stone

The Greatest Generation Goes Greatly Into Debt

The Greatest Generation saved the world from fascism but didn't save enough for retirement.  That's why they have to go into debt to maintain their lifestyles:

Retired Americans are racking up credit-card debt like never before, be it for vacations or medical expenses, and a surprising number have no intention of paying it off before they die.

Several generations of middle class entitlement programs have taught Americans the value of a free lunch.  The trouble is that Social Security and Medicare aren't enough for people who've been conditioned to think that their living standards should keep rising into their golden years.  I can't even begin to understand the mentality of people who feel entitled to buy luxuries but refuse to save enough to afford them. 

It's too bad the Baby Boomers saved even less for retirement than their parents did.  They'll be left with nothing when Grandma's estate is liquidated at auction to pay the credit card bills she ran up on her last trip to Paris.  C'est la vie!  Indeed. 

Our political leadership will never be able to force austerity measures on an audience like this.  That's why they're willing to let the Fed be the bad guy by inflating away the government's unfunded liabilities.

Here Come The Irish, For A Bailout

Students at my worthless alma mater, the University of Notre Dame, had a lot of favorite chants that livened up football games and distracted the home crowd from the poor performance of the Fighting Irish on the field.  One such chant was "Here come the Irish!"  The thinking behind this one was to scare the visiting team into running away in fear at the sight of the Blue and Gold.  It never worked.

This chant may actually be an appropriate way to announce the queuing up of the real Irish for a European bailout.  Irish debt will still be a bad bet for investors but now all Europe's taxpayers will share the pain of a default.  Stalling on needed tax increases won't help Ireland reassure European investors that they can put their house in order.  The EU has learned nothing from dealing with Greece.  Then again, Greece is making fitful progress towards forcing austerity on its people, so there's some slim hope for sanity after all. 

All of this makes me wonder if the iShares MSCI EAFE ETF will be headed down.  Its P/E of 12 makes it almost a good deal but it will take more than Continental-sized defaults to make the price reasonable for entry. 

Nota bene:  No position in EFA at this time. 

GM Undead

GM has returned from its near death experience.  Without buying into all the Wall Street hoopla aimed at retail investors, I'll apply some common sense before I call it a night tonight.

I wouldn't buy the stock of a formerly bankrupt company that sells a high-cost product in a mature industry.  I wouldn't buy stock in a company whose every operational decision will be subject to veto by the federal government and labor unions. 

Enough said.  That's a wrap for tonight.

Nota bene:  No position in the "new" GM.