Huntington Ingalls Scores Nuke Revenue

Here's a story about a government contractor that caught my eye.  Huntington Ingalls Industries (HII), which spun off from Northrop Grumman (NOC) this past March, just landed a decent-sized contract to maintain prototype nuclear reactors for a U.S. Navy research program.  The minimum they'll earn is about $40mm per year with the base contract and another $80mm per year with the option.  Based on gross revenue of about $3B per year (an estimate based on six months' of data from their 10-Qs), that will amount to a topline increase of 1.33% to 4% depending on whether they fully earn that option.  That's not bad, but any contribution to earnings will depend on the cost of servicing this contract.  HII's ROE is clocking in at a respectable 12.73% but ROA lags at 2.75%, indicating that HII is not efficient at using its existing assets to generate earnings. 

Here's another tiny feather in HII's cap.  Its Continental Maritime of San Diego subsidiary was awarded OSHA's star status.  Nice work, folks.  Now translate that into lower costs for the contracts you service and you'll really impress me. 

Full disclosure:  No position in HII or NOC at this time. 

Even Man Group Can't Get It Right

I entertained myself recently by attending an investment conference here in San Francisco.  Some dude from a feeder fund for hedge funds introduced himself to me by asking, "So, you're saying you'd pay a premium for a manager who can outperform?"  I smirked and told him "yes" then specified that my premium would be precisely zero.  It is a waste of effort to seek out managers who may outperform in the short term because their returns invariably revert to a mean over the long term, so paying them any premium at all is a waste of money.  That premium is the reason hedge funds actually underperform a passive indexed investment. 

More hedge fund investors are now finding this out the hard way.  Man Group, one of the world's largest agglomerator of hedge funds, has lost 25% of its value as its investors have begun redeeming their investments.  Even leading hedge funds can't get it right.  Gee, that's just too bad.  All of those whiz-bang models couldn't beat market benchmarks after all.  Portfolio management skill is so genetically rare that those few people who do possess it - Warren Buffett of course comes to mind - happen to also be innovators whose wisdom is widely available for free. 

No hedge fund will ever get my money. 

The Haiku of Finance for 09/28/11

Europe union end?
Debt crunch will leave a remnant
Franco-German rump

Time To End All Energy Subsidies And Feed-In Tariffs

The collapse of Solyndra will hopefully put a nail in the coffin for government loan guarantees targeted at specific industries.  Unfortunately, hope is not a method.  Solar technology is actually becoming extremely cost-effective completely on its own and probably won't need any subsidies.  We should take the same approach with funding other energy developments.

The oil depletion allowance is the mack daddy of energy subsidies.  Read that IRS publication carefully and you'll note that it also covers minerals and timber.  The depletion allowance is not merely a freebie handed to deep-pocketed industries that fund political campaigns.  It is easy to see how this tax break encourages accelerated reductions in our nation's vital economic resources that would otherwise be uneconomical without a tax break.  It makes no sense to help oil producers pump more crude than their sales forecasts and long-term contracts will justify. 

Nuclear power gets plenty of free help.  That should end along with the design preference for lightwater reactors.  Thorium-salt reactors are the future and allow for safer, smaller designs. 

I suppose we'd have to phase out feed-in tariffs just to be fair.  Such a mechanism distorts a free market in electricity by mandating different cost structures for renewable sources than for non-renewables.  The government's proper role, as guarantor of "the commons," is to invest in infrastructure like long-distance transmission lines that bring renewable sources within everyone's reach.  Good transmission lines that bring Montana's wind and the Southwest's sunlight to every grid operator are a much more appropriate public policy objective than cost-diluting tariffs. 

Full disclosure:  No investments in any energy companies at this time, with the exception of a sweat equity investment in a wind energy startup that never paid me for my services, has had no contact with me for about three years, and looks like it has had no real activity after I left.  Oh well. 

Alpha-D Update for 09/26/11

My GDX covered calls expired last Friday, which did not surprise me.  What did surprise me was the collapse in the value of GDX thanks to huge selling pressure in gold bullion.  The blogosphere is pointing to raised margin requirements on the CME as the likely culprit, which makes some sense if  traders with big gold positions had to liquidate some gold to cover margin calls.

This is why I've renewed my covered calls to expire next month rather than at the end of this week.  I believe gold will retrace its climb upward as long as Fed policy is holding interest rates near zero, so I need to allow more time for the climb back up to reach the calls' strike price.  Trouble in the eurozone is definitely making the U.S. dollar look more attractive than gold as a temporary store of value, so gold's retreat from its record highs may not be finished yet. 

I made no other changes to my Alpha-D portfolio. 

The Limerick of Finance for 09/25/11

If Europe's rescue fund does expand
It will give Greece a big helping hand
But it may be too late
Italy just can't wait
Its default would break up Euroland

The Haiku of Finance for 09/24/11

Russia says, "Save Greece"
Do Russian banks own Greek debt?
Lost decade ahead

Tidewater's Worsening Prospects In Fall 2011

I was reluctant to exit my position in Tidewater (TDW) a few months ago when I realized their balance sheet no longer had the strength I preferred (i.e., long-term debt should be less than twice net income).  I am even more grateful now that I made that call.  Tidewater has released pessimistic expectations for this quarter's revenue.  I guess their strong market position doesn't translate into pricing power.  Recent weakness in the price of oil probably doesn't help make offshore drilling projects desirable, and that's Tidewater's bread and butter. 

Full disclosure:  No position in TDW at the present time. 

Tough Times For Rail Starting Fall 2011

Warren Buffett's favorite sector (besides insurance and banking) is rail.  American railroads had a good run for the past couple of years but now the rolling slowdowns in other sectors are hitting the rails (ha ha, a pun).  Big coal producers are cutting their production outlooks and won't need to order so many train shipments.  It's too bad that rail industry managers can't retrench as quickly as their share prices have declined.  Class I rail carriers are still hiring at a fast clip, and carriers of all sizes are still pulling idle cars out of yards for scheduling.  Neither of those trends will be sustainable for much longer if big customers keep reducing demand. 

The rail equipment sector also has its head in the sand with unrealistic expectations of rising demand for new railcars.  Those planned orders will be canceled soon once railroads put cars back into storage as quickly as they pulled them out.  Greenbrier (GBX), Trinity (TRN), and American Railcar Industries (ARII) are probably going to see a hard winter into 2012.  I wouldn't ramp up hiring if I were them; they'll just have to lay those folks off all over again once this bow wave of slacking demand works its way through the railroads to their servicers. 

Is there any good news?  There is for me, since I've got cash I'm waiting to commit to buying railroad stocks that can stay healthy through the next phase of Great Depression 2.0. 

Full disclosure:  No positions in any railroad stocks or other companies named above at this time. 

Operation Twist's Perverse Effects Confirmed

We did not need to wait long at all to see the Fed's desired end state become reality.  The stock market sank again today, while bonds rallied.  The crashing stock market makes bonds look desirable.  That will feed the federal government's insatiable desire to spend money it doesn't have and borrow money it can't pay back.  The falling 10-year Treasury rate will prop the housing market for another fake recovery.  Underwater homeowners can pretend they have regained lost home equity for a little while longer.  Those are all part of the Fed's master plan to keep America running on fumes. 

The reset of the American way of life to a much lower level of sustainable prosperity comes in fits but it comes nonetheless.  Stocks one week, perhaps bonds another week, then unfunded entitlement spending another week, until finally consumer spending collapses and pulls down seven decades of post-WWII middle class affluence with it.  The Fed can't keep the mirage up forever.  The age of Levittown was fun while it lasted. 

If it makes my readers feel better, I too am feeling the effects of this bear market.  The value of my GDX and FXI holdings are down with the rest of the equity market.  My reasons for holding them are still valid.  They are both long-term hedges of sorts against the U.S. economy.  China is carrying more internal debt than its foreign accounts surplus would indicate.  Gold's run up won't last forever.  I'm just glad I took time to reduce my holdings of each while they were highly valued.  My cash pile awaits the coming bargains. 

Full disclosure;  Long GDX and FXI with covered calls. 

Fed Twist Quickly Sinks Stock Market As Monetary Tools Lose Punch

Today's a good day to be smart-alecky and say "I told you so," because I've long suspected that the Fed is running out of effective monetary games to play.  The Federal Reserve announced the launch of its "Operation Twist" bond-gaming program designed to keep Uncle Sam's borrowing costs as low as possible.  Note that the Bernanke Fed's approach to telegraphing its moves in advance is a far cry from the Greenspan Fed's opaque approach that kept market watchers guessing.  Anyway, as soon as the Fed disclosed the macroeconomic worries that prompted its decision, the DJIA lost two and a half percent of its value. 

The shortening duration of the U.S. government's debt is putting the Fed into a box.  The inability of further monetary measure to keep asset prices afloat is going to force internal Fed dissension out into the open soon enough.  The traditional six-month lag for monetary policy to take effect won't be long enough for the Fed's anti-inflation dissenters to wait. 

The Haiku of Finance for 09/20/11

Italy downgrade
Sowing fear of contagion
No more bailouts? Ciao!

Alpha-D Update 9/19/11

I'll be brief.  All of the covered calls on my GDX and FXI holdings expires unexercised.  I renewed the GDX calls with a weekly expiration and the FXI calls with a monthly expiration. 

I made no other changes.  I like how my cash pile is growing from all of the expired call options I've executed this year.  My war chest is ready for whatever valuation disasters Europe's insolvency will throw at the markets. 

The Limerick of Finance for 09/18/11

The Greeks will not cut what they spend
Their deficit spending won't end
With more bailouts in doubt
And all options played out
Euro's breakup is just 'round the bend

Day Of Rage Ignites In America

The Arab Spring's Day of Rage phenomenon has arrived in the United States.  A few hundred professional activists and unemployed do-gooders tried to occupy Wall Street on a day when no one's in business.  That shows how unserious they are at this stage.  Future protests will be more aggressive as economic conditions worsen. 

The ruling elite has begun to acknowledge that things are getting worse.  NYC's Mayor Bloomberg warns that unemployed college graduates are a paycheck away from becoming anarchists.  The country club set needs to get nervous after hearing this from one of their own.  Youth unemployment, income stagnation, and lack of upward mobility were necessary conditions for the Arab Spring but were not sufficient conditions.  The black swan of the Federal Reserve's dollar debasement drove investor capital into metals and commodity foodstuffs.  That was sufficient to spark the kindling for revolution. 

The Day of Rage phenomenon is a form of class warfare, pitting economically marginalized workers against members of favored sectors.  Wall Street is the most visible target but it will not be the last.  Union-controlled automakers backed by government favoritism hand out juicy bonuses while making uncompetitive products.  GM was not alone in getting a deal from Uncle Sam.  Solyndra's bankruptcy reveals that a politically-connected investor moved ahead of other creditors.  The Administration's investments in favored renewable energy companies are looking more and more like slush fund payoffs for campaign donors.  This kind of cronyism was the rallying cry of protesters in Tunisia, Egypt, and Bahrain. 

If the protesters are true to their public statements against cronyism, they'd enlarge their target set to include companies backed by government favoritism.  Omitting blue-collar beneficiaries would be an indicator that the protesters are instigated by the professional Left against the visible symbols of the American ruling elite.

It is interesting to note that the original "Days of Rage" were a Weatherman/SDS revolutionary action in 1960s America.  I don't think it is a coincidence that Arab Spring insurgent leaders branded their uprisings with this moniker after American left-wing organizers visited MENA countries.  Some memes retain their power to motivate action even after a generation.  Activist presence in MENA and on Wall Street begs the question of ultimate funding and strategic direction.  Ask yourself who would benefit most from the downfall of U.S.-friendly monarchies and the U.S. financial system.  Then ask yourself why well-meaning American activists - and their ideological sympathizers in government who are unskilled at performing link analysis - allow themselves to be used in this manner.