Greek Bailout Tension, Second Try

This one's coming down to the wire.  European leaders are scrambling like mad to put together a second bailout for Greece that will enable that country to avoid living within its means.  It's too bad every country can't get such a sweet deal.  They sure are lining up to try, with Portugal, Italy, and Spain all in varying amounts of fiscal trouble.

This blog remains agnostic on the subject of whether the euro should continue as a currency.  European nations have the option of amending the EU's governance to enact continent-wide taxation and fiscal unity.  Short of that, insolvent member states (or their unwilling creditors) will drop out of the union one by one should the EU ever try to enforce the terms of bailouts and debt restructuring deals.

Okay, who wants gyros for dinner?  You're buying. 

The Haiku of Finance for 05/29/11

Buy some low-yield bonds
Inflation will eat it all
Waste of some good cash

The Non-Resurgent U.S. Auto Industry

Claims that the U.S. automobile industry is somehow "resurgent" need to be reexamined.  Chrysler and GM have not moved away from product lines that emphasize oversized, fuel-inefficient SUVs.  They may be experiencing a temporary competitive reprieve since the Japanese tsunami wiped out several months' worth of production for Toyota et al.  Once Japanese automakers reestablish their supply chains, U.S. automakers can forget about recovering their market leadership. 

Gas prices are still high.  SUVs can't win as long as pump prices stay high.  BTW, Detroit is still headed for urban contraction thanks to irreversible population loss. 

Full disclosure:  No positions in any automakers at this time. 

Bakken Oil Production Challenges Peak Oil

The history of the petroleum industry is full of predictions of imminent scarcity.  Peaks in production have come and gone thanks to new discoveries and technological advances.  Upward revisions to estimates of recoverable hydrocarbons in the Bakken formation are good signs.  This will hopefully be followed by a more generous federal government approach to granting exploration leases.  Producers' desire to explore is driven by the same market forces that are currently pinching drivers' wallets.  High oil prices bring out production from previously expensive sources; this goes for renewables too. 

Don't turn out the lights just yet, Peak Oilers.  New discoveries and refreshed wells right here in North America are turning that peak into a long, gradually sloping plateau. 

China Growth Story Stronger Than India's (For Now Anyway)

If you're tired of hearing about how the BRICs are a great place to invest for the next generation or so then you're going to be a lot more tired in the years to come.  Some Bloomberg index that no one has ever heard of assesses China as a much more likely growth story than other Asian economies. 

Traffic-grabbing headlines can gloss over deeper forces at work.  China's growth has been impressive but forced; something had to be done to put restive young single men to work to avoid social unrest.  Now China is at serious risk of price inflation and a real estate implosion.  The country also has too much overbuilt infrastructure serving no immediately useful purpose and potential energy supply constraints it must overcome. 

China's political leadership knows that it must keep generating international media attention for its growth narrative if it is to attract value-added manufacturing that complements its leadership in rare earth metal production.  Look for India to generate further headlines as it pushes for development of its water delivery infrastructure.  Let the headline wars begin, to be followed by resource wars in other emerging markets. 

Full disclosure:  Long FXI with covered calls. 

The Haiku of Finance for 05/25/11

Trade like a hedge fund
Churn a million times a day
Lose money, go bust

Traders' Troubles Tied To Frontline

Frontline Ltd. (FRO), one of the world's leading independent petroleum shippers, should be experiencing smooth sailing with world oil prices reaching dizzying highs.  Unfortunately, news of late has been anything but smooth for the company.  The entire shipping industry is facing higher operating costs due to rising fuel prices.  FRO cut its dividend in February.  Commodity trading firms tied to Frontline's owner are in potential trouble with the CFTC over allegations of price manipulation.  It's hard to see how FRO could have benefited from oil price manipulation given its reported losses earlier this year, so this story bears watching as it heads to court. 

The stock price is suffering, down over 6% today and down by almost half of where it was on June 15, 2010 when it traded at its 52-week high of $36.85.  The company's dominant market position is a hard barrier for competitors to overcome, so perhaps this price drop is a boon for FRO watchers looking for a chance to buy.

Full disclosure:  No position in FRO.

Updating The Alpha-D for May 2011

Here comes a super-fast summary of my portfolio.  All options from last month expired unexercised except my equity-covered short calls and cash-covered short puts around my long position in ATHR.  The acquisition will close soon and all of those positions will go away, leaving nothing but some arbitrage profits behind.

I renewed my covered calls in GDX, TDW, and FXI with no changes in my underlying long positions in those equities. 

I added some short-term Treasuries to my fixed income holdings, which for the past few months have consisted of California state muni bonds.  I'm highly confident that the state government takes its obligations to bondholders seriously. 

And for the last time, I have no position in YRCW.  Never have.  Never will.  It just makes a really easy target for criticism with a unionized work force dragging it down. 

A big chunk of my net worth is still in cash.  I await the next leg down in U.S. equities, whenever it may come. 

Monday News Reel for 05/23/11

Here's news that is real, on the news reel.

China inexorably draws its neighboring trade partners into its orbit.  Two generations after the first Greater East Asia Co-Prosperity Sphere, a new hegemon arises to forge a bloc.  The next step is the displacement of value-added manufacturing from Japan to China.  In return, Japan's flooded out workers get to be migrant labor in China that will keep down the cost of native Chinese labor.  Farfetched, you say?  Stranger things have happened in that neighborhood.

A South Korean company is going to earn billions by building power plants in Iraq.  There's another big contract award shutting out American companies.  I hope Fluor (FLR) and Halliburton (HAL) weren't counting on post-war development contracts as a fall back plan after the occupations end. 

Remember how the Swensen model took institutional investing by storm a few years ago?  Its emphasis on illiquid assets was cute until it blew up the endowments at Yale University and other schools.  Like many innovations, it peaked too early.  Illiquid assets will have their day again and forests are as good as any place to start.  Prices for forest products are way up.  Yale and its Ivy League sisters just had to hang on for a few more years to see their commitments to forest investing pay off. 

The hits just keep on coming - to Greece's sovereign credit rating.  I hope Athens has a few dozen warehouses full of freshly printed drachmas ready to hit the streets, because they'll need them if Germany puts the breaks on further lending.  The IMF would rather focus on bailing out Portugal than on bailing out its disgraced leader.  The venerable fund has its priorities straight. 

Full disclosure:  No positions in FLR or HAL.  Long FXI with covered calls. 

The Limerick of Finance for 05/22/11

The Euro debt crisis gets worse
It's bound to bust some country's purse
This debt overhang
Will crash with a bang
And that's when stock bubbles will burst

Americans Can't Afford Gas At $4

Gas prices are typically high during the summer driving season, when Americans exercise their birthright to go where they please regardless of actual need.  The fun fact for 2011 is that gas prices are already high prior to the traditional start of summer fun on Memorial Day.  Apparently all that money people are saving by not paying their delinquent mortgages on negative-equity homes is going right into their gas tanks.  Paying over $4 per gallon of gas is the new normal, just like permanent structural unemployment around 9%.  Note that the Joe Six Packs quoted for color commentary are cutting back on necessities like medicine and clothing before they cut back on gas. 

It's time to seriously think outside the box about drastically reconfiguring America's urban landscape away from dependence upon the automobile.  The suburban configuration of America demands that Americans impoverish themselves to drive to and from unlivable homes.  The American way of life needs a reset to something more sustainable.  European towns and Asian cities provide models of the future. 

Full disclosure:  No positions in oil producers at this time, although that may change later this year. 

The Haiku of Finance for 05/20/11

Japan sinks again
Recession from tsunami
Big cleanup ahead

Two Odd Finance Moves In Books And Cars

Its not every day that we get to witness two questionable transactions in firms that lead their respective sectors.

First up is Liberty Media's proposed all-cash buyout of Barnes and Noble (BKS).  Brick-and-mortar booksellers are are a declining business model; just ask Borders (BGP) about its prospects.  Liberty Media must see other advantages here as the WSJ has duly noted.  One desirable asset Barnes and Noble possesses in spades is choice retail space that can be repurposed for uses beyond books.  If John Malone needs Liberty Media to go into debt to close this deal, there's no time like the present before rates inevitably rise. 

Speaking of debt and interest rates, we also have Chrysler LLC's proposed payback of government loans.  The problem here is that they're paying it back with money obtained from other debt issues.  Exchanging debt makes sense if the debtor gets a better term structure of interest rates.  Uncle Sam's ZIRP policy makes him the cheapest lender in the country, so going to the capital markets to raise money at higher interest rates makes little sense unless this somehow improves the firm's enterprise value.

Puzzling moves like this make me glad I don't work in corporate treasury offices that have to justify these kinds of decisions on behalf of top management. 

Full disclosure:  No position in BKS, BGP, or Chrysler LLC. 

Soros And His Gold Changes

George Soros's investment strategy has not changed very much in its treatment of gold as an asset class.  He only changed the vehicle.  He drastically reduced his holdings of GLD and exchanged his stakes in some gold mining companies for other miners.  The logic is inescapable.  The lack of certainty around the actual bullion holdings in GLD is well-documented (at least in the blogosphere).  It makes more sense to own gold where it is most secure - in the ground as ore.  Gold stocks' movements are less correlated with the underlying price of gold, so this move aligns the volatility of Soros' precious metals holdings more closely with that of the rest of his portfolio. 

Full disclosure:  No position in GLD.  Long GDX with covered calls. 

America's Third-World Transportation Infrastructure

The U.S. is going to have serious problems generating wealth for its citizens for the remainder of this century if it can't effectively deliver goods to markets.  The public infrastructure of America's transportation system is degrading without remediation.  The BRIC bloc will soon have so many shiny new airports and railways between them that exporters just won't be able to stay away.  Multinational firms will have no difficulty avoiding the U.S. if we make the choice easy for them by not investing in transportation here at home.

This bad news cries out for a remedy.  The administration wasted a golden opportunity to fund a new golden age of mass transit funding.  Instead of promoting compact urban cores that favor trains over cars, we blew stimulus dough on median strips and traffic controls. 

The rest of the world might laugh at us for our national shortsightedness, but they're too busy building infrastructure to notice our foibles.  We can do better than this as a nation.  All we have to do is spend the $2T on infrastructure instead of on middle class entitlements, Wall Street bailouts, and open-ended occupations.