Wednesday, August 31, 2011
Solar Bankruptcies Just Getting Started In U.S.
First Evergreen Solar decided to close up shop. Now Solyndra has announced that it can't compete in solar panels and is declaring bankruptcy. What gives? Wasn't this supposed to be the era of renewable energy? Weren't we headed for a green energy renaissance that would end America's dependence on foreign oil? The U.S. has a long road ahead if it wants optimistic answers to those questions.
Making solar PV panels isn't as expensive as it used to be, and the entry of Chinese producers into the market on a large scale is making it even more cost-competitive. The American solar industry is now experiencing the kind of global cost pressures that drove automobile manufacturing offshore in the 1970s and '80s. Rock-bottom labor costs and an eagerness to copy effective production methods have driven China to lead the world in solar panel production in just five years.
Ballyhooing a resurgence in U.S. solar exports is probably a short-lived phenomenon, driven by the weakening U.S. dollar. Instead of providing loan guarantees, which both bankrupt companies above were offered in spades, the U.S. government might be better off pursuing anti-dumping complaints against China through the WTO. Ending the oil depletion allowances that give hydrocarbon producers big cost advantages is also worth a look, although it won't do much to improve solar makers' cost disadvantages compared to China.
Nota bene: No positions at all in any solar manufacturers at this time. I had no positions in either Evergreen Solar or Solyndra prior to their troubles.
Making solar PV panels isn't as expensive as it used to be, and the entry of Chinese producers into the market on a large scale is making it even more cost-competitive. The American solar industry is now experiencing the kind of global cost pressures that drove automobile manufacturing offshore in the 1970s and '80s. Rock-bottom labor costs and an eagerness to copy effective production methods have driven China to lead the world in solar panel production in just five years.
Ballyhooing a resurgence in U.S. solar exports is probably a short-lived phenomenon, driven by the weakening U.S. dollar. Instead of providing loan guarantees, which both bankrupt companies above were offered in spades, the U.S. government might be better off pursuing anti-dumping complaints against China through the WTO. Ending the oil depletion allowances that give hydrocarbon producers big cost advantages is also worth a look, although it won't do much to improve solar makers' cost disadvantages compared to China.
Nota bene: No positions at all in any solar manufacturers at this time. I had no positions in either Evergreen Solar or Solyndra prior to their troubles.
Tuesday, August 30, 2011
New Boeing 737 Engine Benefits Weigh Against Fleet Age And Route Profitability
Kudos to Boeing (BA) for trying to do right by its customers and the environment. Airlines are sensitive to fuel costs and Boeing wants to stay in their good graces by putting new engines into their 737s that are 12% more fuel efficient. A quick anecdotal study of one of the industry's biggest customers gives us a glimpse into how far this benefit carries.
United Continental Holdings' (UAL) 2010 annual report named fuel costs as 31% of its total operating expenses. Theoretically, if UAL replaced every single plane in its fleet with a new Boeing 737, they'd shave exactly 3.72% off their operating expenses by applying that 12% fuel cost savings. Reality is more complicated. Not all of UAL's planes are 737s (obviously) and other planes in the fleet may be even more fuel efficient. Maybe that's why United retired its last 737 in 2009 when fuel costs made them less attractive; any 737s in its existing fleet are probably inherited from last year's merger with Continental (like one unfortunate plane with Continental markings stuck in a sinkhole this past June). Airlines factor in the age of existing airframes and the need to maintain seat capacity on their most profitable routes when they make replacement decisions. Fuel efficiency is therefore one of several considerations.
Perhaps airlines like United are better off with whole engine replacements targeted at their oldest aircraft as a partial solution to their fuel cost headaches. Hedging with forward contracts can smooth out those fuel costs that can't be minimized cost-effectively with new airframe buys. Decisions like this are the provenance of CFOs. Those CFOs who ignore them contribute to the old financial folk tale that the airline industry has not generated one dollar of net income in its history, adjusting for bankruptcies.
Full disclosure: No positions in UAL or BA.
United Continental Holdings' (UAL) 2010 annual report named fuel costs as 31% of its total operating expenses. Theoretically, if UAL replaced every single plane in its fleet with a new Boeing 737, they'd shave exactly 3.72% off their operating expenses by applying that 12% fuel cost savings. Reality is more complicated. Not all of UAL's planes are 737s (obviously) and other planes in the fleet may be even more fuel efficient. Maybe that's why United retired its last 737 in 2009 when fuel costs made them less attractive; any 737s in its existing fleet are probably inherited from last year's merger with Continental (like one unfortunate plane with Continental markings stuck in a sinkhole this past June). Airlines factor in the age of existing airframes and the need to maintain seat capacity on their most profitable routes when they make replacement decisions. Fuel efficiency is therefore one of several considerations.
Perhaps airlines like United are better off with whole engine replacements targeted at their oldest aircraft as a partial solution to their fuel cost headaches. Hedging with forward contracts can smooth out those fuel costs that can't be minimized cost-effectively with new airframe buys. Decisions like this are the provenance of CFOs. Those CFOs who ignore them contribute to the old financial folk tale that the airline industry has not generated one dollar of net income in its history, adjusting for bankruptcies.
Full disclosure: No positions in UAL or BA.
Monday, August 29, 2011
Big Global Banks Go Nuts Over New Basel Capital Rules
Big banks are turning into big babies right before our eyes. They're whining about the new Basel capital surcharges that they fear will hurt their competitiveness. Spare me the crocodile tears. Big banks have all the competitive advantages in the world. They can borrow at the Fed's discount window at next to nothing. Their lobbying gets them first in line for taxpayer money to bail them out of self-inflicted balance sheet disasters. Their name recognition gets them right in the faces of customers who are too busy to shop around.
The real deal is that too-big-to-fail banks have too many competitive advantages from their brand name recognition, political influence, and economies of scale. Forcing them to hold more capital is a prudent move. Even the Fed's academic research shows that capital requirements stabilize an otherwise unstable system. Big banks' size used to be a mental shorthand for quality and reliability. That heuristic is gone. Basel III is an attempt at a revival of sanity.
The real deal is that too-big-to-fail banks have too many competitive advantages from their brand name recognition, political influence, and economies of scale. Forcing them to hold more capital is a prudent move. Even the Fed's academic research shows that capital requirements stabilize an otherwise unstable system. Big banks' size used to be a mental shorthand for quality and reliability. That heuristic is gone. Basel III is an attempt at a revival of sanity.
Brief Alpha-D Update for 8/29/11
I'm really starting to think that options with weekly expirations will become a regular part of my portfolio. The covered calls I wrote last week on GDX expired unexercised last Friday. I sold calls again on GDX to expire this Friday. I made no other changes.
The advantage of using shorter expirations is that the option's premium decays more rapidly, i.e., the shorter the option, the more likely it will expire. This should reduce my portfolio turnover in the long run if I keep refreshing the options with weekly expirations. Only time will tell.
The advantage of using shorter expirations is that the option's premium decays more rapidly, i.e., the shorter the option, the more likely it will expire. This should reduce my portfolio turnover in the long run if I keep refreshing the options with weekly expirations. Only time will tell.
Sunday, August 28, 2011
The Limerick of Finance for 08/28/11
Central bankers push leaders to spend
Saying stimulus helps economies mend
But with debt up to "here"
Renewed growth's nowhere near
Sovereign defaults just 'round the bend
Saying stimulus helps economies mend
But with debt up to "here"
Renewed growth's nowhere near
Sovereign defaults just 'round the bend
Saturday, August 27, 2011
Schwab's LIBOR Lawsuit Aims At TBTF Banks
I like Charles Schwab (SCHW), both the man and his brokerage. He persevered against all odds and built a major brokerage from nothing. The established Wall Street firms opposed his ambitions at every turn. Now his brokerage is once again taking on the big players. SCHW is suing U.S. banks for their manipulation of the LIBOR lending benchmark. Banks that are too big to fail think they are too big to be sued for antitrust violations because regulators have ignored their transgressions. Think again, big shots.
Charles Schwab hasn't forgotten what it's like to be a small investor. That's probably why SCHW hardly faced any regulatory trouble or lawsuits in the aftermath of the credit crunch. The MBA preppies in TBTF land never knew what it means to be accountable for one's actions. This lawsuit is a rare example of a moral good in the financial services wilderness. Go Chuck!
Full disclosure: No positions in SCHW or any other financial stock at this time. I do use SCHW as my brokerage.
Charles Schwab hasn't forgotten what it's like to be a small investor. That's probably why SCHW hardly faced any regulatory trouble or lawsuits in the aftermath of the credit crunch. The MBA preppies in TBTF land never knew what it means to be accountable for one's actions. This lawsuit is a rare example of a moral good in the financial services wilderness. Go Chuck!
Full disclosure: No positions in SCHW or any other financial stock at this time. I do use SCHW as my brokerage.
Friday, August 26, 2011
The Haiku of Finance for 08/26/11
The Alfidi Fund
My one fund to rule them all
Just like Frodo's ring
My one fund to rule them all
Just like Frodo's ring
European Market Detonation Countdown
It's hard to count down to economic annihilation when the world's central bankers keep pushing back the minute hand on the clock. Greece has received several bailouts and yet still needs to tap its emergency lifeline because the collateral it pledged to the ECB for loans is worthless. Bankers see the rapid rise in premiums for credit default swaps on European banks as a warning of banks' imminent insolvency.
The collapse of European banks and then equities will of course be felt here in America. Wall Street insiders know what's about to hit. So does Warren Buffett, which is why he invested in Bank of America's preferred stock (senior to common shareholders in claims on a firm's residual assets) and not its common stock. The warrants he obtained can be exercised in the future, presumably after a recapitalization wipes out that bank's common equity. Not that BAC would ever need a recap, of course, as long as the Fed and Treasury stand by ready to funnel it with some TARP 2.0.
Full disclosure: No positions in any banks at this time, certainly not BAC.
The collapse of European banks and then equities will of course be felt here in America. Wall Street insiders know what's about to hit. So does Warren Buffett, which is why he invested in Bank of America's preferred stock (senior to common shareholders in claims on a firm's residual assets) and not its common stock. The warrants he obtained can be exercised in the future, presumably after a recapitalization wipes out that bank's common equity. Not that BAC would ever need a recap, of course, as long as the Fed and Treasury stand by ready to funnel it with some TARP 2.0.
Full disclosure: No positions in any banks at this time, certainly not BAC.
Thursday, August 25, 2011
China Winning Over Manufacturers With Rare Earths
China's strategic gamble on its rare earth metal resources is starting to pay off big time. Foreign manufacturers are beginning to build capacity in China because they don't want to lose access to its rare earth metal stockpile. The article's last sentence says it all; of course this is what China's government has always wanted, from as far back as Chairman Mao's days.
China possesses about a third of the world's store of rare earth elements but ramped up its production to 95% of the world's output. The intent behind this move was to flood the market with supply that would drive smaller producers outside China out of business or make new exploration prohibitively expensive. China would then be free to impose export controls on its metals that would force dependent manufacturers into a bind. They could do without the metals and let their supply chains atrophy while they sought production elsewhere, or invest directly in China to manufacture stuff there.
The faster China attracts high-value manufacturers, the sooner it will have the technological capacity to become a military peer competitor to the U.S. Asian nations need to take note and plan accordingly for tighter links with India and the U.S. American investors need to plan accordingly for undeveloped rare earth deposits in the Anglo-West.
Full disclosure: Long FXI with covered calls.
China possesses about a third of the world's store of rare earth elements but ramped up its production to 95% of the world's output. The intent behind this move was to flood the market with supply that would drive smaller producers outside China out of business or make new exploration prohibitively expensive. China would then be free to impose export controls on its metals that would force dependent manufacturers into a bind. They could do without the metals and let their supply chains atrophy while they sought production elsewhere, or invest directly in China to manufacture stuff there.
The faster China attracts high-value manufacturers, the sooner it will have the technological capacity to become a military peer competitor to the U.S. Asian nations need to take note and plan accordingly for tighter links with India and the U.S. American investors need to plan accordingly for undeveloped rare earth deposits in the Anglo-West.
Full disclosure: Long FXI with covered calls.
Buffett Expects Bank Of America Bailout
In an age of crony capitalism, it's important to identify the cronies. Their investment decisions provide lessons in minimizing the impact of financial repression. Warren Buffett has purchased preferred shares in Bank of America along with warrants for more common shares. This fits his method of investing in companies with durable competitive advantages, although this bank's advantage comes from its ability to obtain your taxes as a capital cushion. He fully expects BAC to exercise its option to buy back the preferred shares once the government funds anohter bailout round, so this is likely a way for him to earn an above-market rate on some spare cash.
It's worth noting that Buffett made this decision after taking a phone call from the President of the United States. We can only wonder at the details discussed, but Buffett excels at reading a macroeconomic climate. He's risking capital on a bank that has been first in line for government bailouts for several years. Too big to fail means no investment can fail as long as the government is there to backstop a bad bank. Mr. Buffett's political fundraising is his way of saying thank you.
Average investors who mimic the moves of the plutocracy may do very well indeed, provided a jealous neighbor doesn't prompt law enforcement to levy an asset forfeiture action against them. Don't ever say America has ceased to be the land of opportunity.
It's worth noting that Buffett made this decision after taking a phone call from the President of the United States. We can only wonder at the details discussed, but Buffett excels at reading a macroeconomic climate. He's risking capital on a bank that has been first in line for government bailouts for several years. Too big to fail means no investment can fail as long as the government is there to backstop a bad bank. Mr. Buffett's political fundraising is his way of saying thank you.
Average investors who mimic the moves of the plutocracy may do very well indeed, provided a jealous neighbor doesn't prompt law enforcement to levy an asset forfeiture action against them. Don't ever say America has ceased to be the land of opportunity.
Wednesday, August 24, 2011
Solar Developers Making Huge Mistake Near Blythe
The rush into clean energy will generate mistakes on the way to generating power. Solar Trust of America is about to make a big mistake near Bythe, California. It has decided to redesign its planned solar installation around photovoltaic technology rather than solar thermal technology. This is a bad move on two counts.
First, solar thermal technology is a more resilient approach. It is simpler to manufacture than photovoltaics; no billion-dollar clean rooms are needed to keep impurities out of panels. Polished mirrors and steel girders are easier to source and maintain than PV cells. Mirrors also last a lot longer (sometimes decades) than PV panels.
The project team is also forgoing a $2B loan guarantee simply because it claims its investors find PV more attractive. That is simply stunning. These genius investors have not done their homework on the technology at all. It's worth noting that the project retained Citigroup and Deutsche Bank to seek investors. Those two financial institutions were not exactly known for their adroit management of their own balance sheets during the 2008 credit crunch. Can you see the sales pitch now? "No, you don't want those boring mirrors. PV is what you really want because it's more exciting." Bankers are skilled at putting words in the mouths of the gullible rich with whom they have profitable relationships.
I am grateful not to be an investor in a complicated energy installation that will require a complete redesign of its enabling technology and supply chain. I'd rather hold out for a decent solar thermal project that investors are smart enough to see through to completion.
Full disclosure: No positions in the two banks mentioned, or in this energy project.
First, solar thermal technology is a more resilient approach. It is simpler to manufacture than photovoltaics; no billion-dollar clean rooms are needed to keep impurities out of panels. Polished mirrors and steel girders are easier to source and maintain than PV cells. Mirrors also last a lot longer (sometimes decades) than PV panels.
The project team is also forgoing a $2B loan guarantee simply because it claims its investors find PV more attractive. That is simply stunning. These genius investors have not done their homework on the technology at all. It's worth noting that the project retained Citigroup and Deutsche Bank to seek investors. Those two financial institutions were not exactly known for their adroit management of their own balance sheets during the 2008 credit crunch. Can you see the sales pitch now? "No, you don't want those boring mirrors. PV is what you really want because it's more exciting." Bankers are skilled at putting words in the mouths of the gullible rich with whom they have profitable relationships.
I am grateful not to be an investor in a complicated energy installation that will require a complete redesign of its enabling technology and supply chain. I'd rather hold out for a decent solar thermal project that investors are smart enough to see through to completion.
Full disclosure: No positions in the two banks mentioned, or in this energy project.
Tuesday, August 23, 2011
China's Auditors Flat On Their Backs
My regular readers know that I've been long FXI for quite some time as a long-term bet on China's growth. That country is still going through the growing pains of an emerging market. Chinese regulators have good reason to reassure American regulators that they can police their equity markets. You see, fraud is rampant in China's stock market and knowledgeable non-Chinese investors are getting spooked.
Some hedge funds have picked up the dropped regulatory ball by warning investors away from questionable Chinese companies. I hate to admit it, but some hedge funds perform a valuable public service once in a while. Chinese regulators have extra incentive do their jobs if only to fight the increasing D&O liability resulting from public disclosures of Chinese reverse merger abuse.
I'm all in favor of more discipline in Chinese capital markets. More scandals will scare away the liquidity China needs to make its domestic manufacturers attractive to foreign partners. Remember that China's rare earth metal strategy is designed to attract value-added manufacturing to China's shores. That goal will be increasingly difficult to reach if Chinese regulators don't work hard to reassure foreign investors.
Full disclosure: Long FXI with covered calls.
Some hedge funds have picked up the dropped regulatory ball by warning investors away from questionable Chinese companies. I hate to admit it, but some hedge funds perform a valuable public service once in a while. Chinese regulators have extra incentive do their jobs if only to fight the increasing D&O liability resulting from public disclosures of Chinese reverse merger abuse.
I'm all in favor of more discipline in Chinese capital markets. More scandals will scare away the liquidity China needs to make its domestic manufacturers attractive to foreign partners. Remember that China's rare earth metal strategy is designed to attract value-added manufacturing to China's shores. That goal will be increasingly difficult to reach if Chinese regulators don't work hard to reassure foreign investors.
Full disclosure: Long FXI with covered calls.
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