Saturday, August 30, 2008

WSJ: Steelmakers Develop New Iron Recipes

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Necessity is the mother of innovation - however it strikes me as strange with the "end of the commodity boom" imminent why people would bother? Ah, these people actually are *in* the industry and not a hedge fund computer. As we bring online another 2 billion humans to the plant, along with hundreds of millions more into cities and into 2nd and eventually 1st class living standards we are going to need many of these type of innovations in our "World of Shortages" scenario.
  • Faced with environmental demands and rising costs, some steel companies are reformulating the centuries-old recipe for making the iron used to fabricate steel.
  • Companies in Europe, Australia and North America have developed processes that skip a high-polluting step in iron's creation, and they are finding steelmakers in Asia and Africa that are willing to gamble on the innovation.
  • But South Korea's Posco, the world's third-largest steelmaker, has moved even further from the traditional iron-making blast furnace.
  • Steel is usually made by refining iron in three steps. First, iron ore and coal are heated into materials -- sinter and coke, respectively -- that can bind easily. Then, they're thrown together in a hot furnace where they combine to become pig iron. Finally, the pig iron is melted further and mixed with other materials into a liquid form of steel, which is then cast in forms or rolls.
  • Posco, though, has built a furnace that can prepare cheaper types of coal and iron ore to be converted into pig iron without putting them through the highly polluting ovens used in traditional fabrication. Pursuing the new approach was "the second biggest risk Posco has taken," says Posco's president, Chung Joon-yang, adding that the biggest was the decision to start the company in the late 1960s, when South Korea was still an agrarian backwater.
  • Steelmakers have experimented with new processes at the iron-making stage for years, chiefly tinkering with the ratio of ingredients in hopes of reducing the use of coke. Most alternatives never made it to market because they consumed too much energy.
  • Over the past year, cost pressures have grown for steelmakers as they have been forced to accept huge price increases for coking coal and iron ore. The gap in per-ton prices between coking coal and the cheaper fine coal used in Posco's new furnace has surged from $15 to $50 this year. Recently, Posco also agreed to pay a key supplier 96% more for lump iron ore, the kind used in traditional blast furnaces. By contrast, the price for the iron ore used in its new furnace has risen only 79% from a lower base. (I guess it's all relative)
  • Even as the economic case for new iron-making techniques is growing, Christian Boehm, a marketing manager at Siemens-VAI, says he is spending more time talking about reduced pollution and other environmental effects with prospective customers. "Every producer is asked about pollution by the people in their community," he says. "New laws are always coming. China is getting even tougher than Europe on emissions." (I think people will be very surprised at the China in 2018 vs the China in 2008 in terms of environmental friendliness - hence another huge opportunity we are very early on)
No position

Friday, August 29, 2008

Bookkeeping: 'Rising Tide' Performance Year 2, Week 4

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Year 2, Week 4 performance of the mutual fund

Comments: Yawn. We continue to churn. [Churn] Despite all the hectic moves this week the indexes were not wildly different than where they they were at the end of last week. Or the week before. Or the week before. Four weeks ago the S&P 500 was 1296; today 1283 - or a -1% move in return for wild daily gyrations. The fund is almost exactly the same spot it was 4 weeks ago - one PENNY higher. Whoop there it is. Again - the brokers executing the trades are the only one amassing any real wealth the past few months. Fact of the day - the S&P 500 first hit 1300 nine and a half years ago. So here we are again (well, technically we are below it). And that is not adjusted for inflation which would make this measure a whole lot worse. Does a country's stock market reflect said country's fundamentals? You can decide.

It is really impossible to generate any meaningful appreciation even in most individual names as things stand. The time frames necessary to make gains are far too short for our purpose. 3 days in; then out of position - let position retrace and then jump back in - repeat. That's the nature of the market right now and certainly does not fit the landscape of any mutual fund. We were (yesterday) at the top of our recent range which I mentioned constituted an opportunity to begin to short either today or Tuesday... and now if patterns hold, we will fall for a few days, then rebound for a few days... until we hit resistance... and then we'll fall. I don't know what gets us out of this funk but it's surprisingly repetitive. On the economic front an export loaded, rebate loaded backwards looking GDP figure was celebrated event though when bad news is reported, we are told to ignore it because it's backwards looking. But don't ignore "good" news. Next week we have the monthly nail biter - the unemployment report.

Old favorites (sectors/stocks) that held up best the past year (pre July 1) continue to drip drop away slowly but surely in stock price - they will occasionally make oversold bounces, raising hope - but that is quickly sold off. Out of favor stocks (up until July 1) continues to do the opposite - slowly making gains, before occasional sharp drops which wipe out 2/3rds of the gains - before making a new run up. And so the dance continues. If you can jump in and out of these names every 48-72 hours you can make a living here. Otherwise it's water torture. We have a much needed staycation ahead of us.

For the fund we took some hits in both A-Power Energy Generation (APWR) on earnings (even though they were fine and this is one exciting story), and Amylin Pharma (AMLN) as last week's drop was followed by more perceived bad news. We were protected Monday from the downturns in the market by our financial and real estate hedges, but all those gains were evaporated (plus some) during the rest of the week as those stocks, after being out of favor for 3 days, went back into favor for... 3 days. So we actually lost money on hedges this week even with the slightly down market. That's what bear markets will do to you. We are sort of inverse to the market right now - we did well Monday/Friday and trailed the rest of the week. The problem right now is we need some direction, any direction to generate some gains and we're getting nothing that lasts - big drops are quickly reversed and big gains are quickly reversed. So unless you are in and out of positions/ETFs in 48-72 hour increments you cannot hold onto gains. The alternative is playing the most beaten down stocks and then you can make some money with riverboat gambling... err investing. But again these are trades, not investments. Investing is simply difficult right now. I've continued to liquidate some long held positions this week, along with Amylin, to narrow the scope of names we hold. With what we hold, we're getting "effectively" stopped out of position after position - i.e. once the stock breaks support on a chart we're cutting back to 0.1-0.2% type of positions. So cash continues to build. This is the most cautious positioning we've held in a while. It is a morass out there.

I appear to be the only one worried about the economic outlook ahead - everyone is jumping on the "everything is fine in 6 months" bandwagon - the same one they jumped on a few times over the past year. Frankly, while I had a blueprint that this is how the economy would devolve, to see it happening slowly but surely is making me more worried. Whereas the equity market has the opposite reaction. I find that strange. We enter the historically worse time of the year - while crashes infamously happen in October, September is the worst month of the year in actuality. However, I remember typing that last August verbatim and seeing the market race to all time highs on the S&P. Why? Well it was predicting good things ahead of course - that's what the market is right? A predictor of the great times 6-9 months ahead. That predictive ability proved to be "wrong". We'll see how things go but I continue to shake my head at both the apathy and rationalization of the data, and spin doctoring of it all. Maybe they can keep it up and just want to get through the election. I'm still trying to figure out whose pockets the next $500 billion in write offs in financials is going to come from?

A very volatile week intraday but again we went nowhere as a market - the S&P 500 lost 0.7% and the Russell 1000 lost 0.6%. Rising Tide Growth gave back a bit more than half of last week's gains and is right back to where it was a month ago, losing 1.0% on the week. "Year 2" is currently quicksand.

As always if interested in pledging an investment when fund is ready to launch (shooting for late 2008) please attach a comment here, or send me an email (need your state please). We are now at roughly $4 million pledged - thank you.

*** Year 1 Results here: +10.1% vs -14.0% S&P (+24.1%)

Year 2 Metrics


Price of Rising Tide Growth: $10.656
Year 2 Performance to date (vs Aug 1, 2008): -3.22%

Comparable S&P 500: 1282.2 (+1.79%)
Comparable Russell 1000: 702.2 (+1.72%)

Fund return vs S&P 500: -5.0%
Fund return vs Russell 1000: -4.9%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of July 2008.

Basis for indexes for year 2 is closing price August 1st, 2008.
SP500 : 1,260.3
Russell 1000 : 690.3

Please click here: fund performance for previous updates

Zillow.com: Majority of US Homeowners Think their Home is Insulated from Housing Crisis

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Oh Americans.... at least we are an optimistic lot. Denial is not only a river in Africa...
  • "Not My House!" Sentiment Showcases Wide Homeowner Perception-Reality Gap Nearly two out of three (62%) homeowners think their home value has increased or remained the same in the past year. (editor note: WHAT???) Unfortunately, the reality of the market is not quite as bright; in fact, it's getting worse. Seventy-seven percent of U.S. homes lost value in the past 12 months, according to preliminary analysis of Zillow's Q2 Real Estate Market Reports, due to be released August 12, while only 19 percent increased and 5 percent remained the same.
  • Whether it's apathy, confusion or just plain denial, homeowners seem to believe the housing crisis affects every other home but "not my house," underscoring a wide gap between homeowners' inflated perception of their home values and the gloomy market reality.
  • Homeowner short-term outlook is even more optimistic than current perception as three out of four (75%) homeowners expect their home value will increase or stay the same over the next six months, with 25 percent expecting a decline.
  • The same level of optimism doesn't extend to neighboring homes, however, as 42 percent expect values in their local market to drop and 58 percent think values will increase or remain the same. (see how it works? we think the house in our neighborhood will fall but it won't affect our house) :)
  • Nearly half of all homeowners (48%) say homeowners who are currently facing foreclosure because they took out an adjustable rate mortgage or other loan that they can no longer afford should not receive government assistance to stay in their homes. Only 28 percent support government intervention and 24 percent "don't know."
"Our survey reveals a wide gap between the perception homeowners have about their own home's value and the realities of a market in which three-quarters of homes declined in value in the past year. We attribute this gap to a combination of inattention and a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others, but not them,"
I see the same precepts that work in stock markets work in home prices ;) Who knew Kool Aid was also prevalent in Main Street USA :)

India's Q2 Economic Growth Slows to 7.9%

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It's a global world, so we need to keep our eyes open to the world stage. India "slows" to 7.9% GDP growth which while lower than the 5 year average is a rate Western countries would dream to have. The question is when and at what pace do they bottom? Their central bank has been extremely aggressive at raising rates to try to stem inflation.
  • India's economic growth slowed to 7.9 percent in the April-June quarter from 9.2 percent in the same period last year amid a slump in manufacturing, the government said Friday. Growth, which has averaged 8.8 percent over the past five years, is at its slowest pace since 2004, government data showed.
  • The decline in the growth rate was widely anticipated and comes after months of monetary tightening, as authorities have tried to reign in surging inflation.
  • "When you have monetary tightening, you do get lower growth. That was expected," he said. "But it's not terribly low; 7.9 percent is still high by historical standards.
  • In 2005, 456 million Indians -- 42 percent of the population -- were living on less than $1.25 a day, according to the World Bank.
  • Subir Gokarn, Standard & Poor's chief economist for the Asia-Pacific, said such bounding growth (10%) is not likely to return to India until the government embraces tough reforms to encourage private investment in infrastructure and to liberalize the labor market.
  • Gokarn said volatility in the manufacturing sector began last September and has been driven by declines in interest-rate sensitive sectors like transport equipment, construction, and consumer durables.
  • Inflation in India has been raging at 13-year highs, prompting the central bank to hike the nation's key interest rate by 125 basis points and the cash reserve ratio -- the amount of money banks must keep on hand -- by 150 basis points since April.
  • Meanwhile, below-average rainfall could imperil agricultural growth, which declined to 3.0 percent in the most recent quarter from 4.4 percent a year ago. About two-thirds of Indians depend on agriculture for their livelihoods

Bookkeeping: Starting New Position in Alliance Data Systems (ADS)

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Since it is hard to really hold on to any sector trend in this market for a sustained period of time, I'm trying to find some "special situations" to help create some longer term return. One such name might be Alliance Data Systems (ADS) a position I'm starting today near $64 for 1.5% stake. This is a relatively "boring" company but with high cash flow and some potential catalysts coming its way. Company website here.

Alliance Data Systems Corporation, together with its subsidiaries, provides data-driven and transaction-based marketing and customer loyalty solutions. It offers marketing services, including coalition and stand alone loyalty; and analytical, strategic consulting and creative, proprietary data, interactive communications, and database marketing services. The company also provides credit services comprising underwriting and risk management, and receivables funding; and transaction services, which consist of new account processing, billing and payment processing, and remittance processing services.

The company was a target of Blackstone (BX), a private equity firm; in 2006/2007 private equity buyouts were all the rage. But that was then, when credit was cheap, plentiful and Wall Street was acting like drunken boors. Well they still act that way but with a lot less money in their pockets. Anyhow, long story short, the deal was announced in summer 2007, and ADS jumped from mid $60s to $80. A credit crunch later, the deal fell apart as Blackstone walked away - a lot of drama ensued, and ADS went from the low $80s (proposed purchase price) to (for a few days) lower $40s, before settling in the upper $40s and making a run to the $60s.

Long story short, the stock is now where it was before the buyout bid.


Now, aside from the base business, which is solid if not spectacular we have some interesting catalysts.

The company is undertaking a massive stock repurchase plan. Now, "approved" does not mean "we will do it" but they seem intent on it from past experience.
  • Alliance Data Systems Corporation (NYSE: ADS - News), a leading provider of loyalty and marketing solutions derived from transaction-rich data, today announced that its board of directors has approved a new stock repurchase program to acquire up to $1.3 billion of the Company's common stock through the end of 2009. The program is in addition to the previously announced $500 million repurchase program, bringing the Company's combined repurchase authorization to $1.8 billion.
  • The Company has already repurchased approximately $725 million worth of its outstanding shares, representing 12 million shares, or approximately 15 percent of outstanding shares as of the beginning of the year, and still has more than $1 billion remaining under the combined programs.
  • "While the macro-economic environment has been challenging for the overall stock market, our strong track record of 29 consecutive quarters of meeting or beating expectations, combined with our solid outlook for 2008 and 2009, gives us strong confidence in our future," commented Ed Heffernan, chief financial officer, Alliance Data. "As such, we believe we have a unique opportunity to use both the low existing leverage of the Company as well as its high free cash flow generation to potentially repurchase as much as 35-40 percent of our existing share base at attractive prices. We believe this repurchase program is the best use of excess capital and underscores our confidence in the Company's long-term financial outlook as well as our commitment to optimizing our capital structure to enhance shareholder value."
The company only has a market capitalization of $4.3 Billion so you can see this is an enormous amount of potential repurchase. So as shares are repurchases, earnings PER share naturally go up - even without organic growth.

Second, an activist hedge fund, ValueAct Capital Management, has taken a sizeable stake. Here are all their holdings as of June 30th, but they've recently filed an even larger stake, in fact a near doubling since June 30th - as of a July 21st filing ValueAct is now up to 3.87M shares or 4.9% of outstanding shares. From what I can find on ValueAct they seem to be a friendly type of activist hedge fund, not the belligerent type. Without knowing their intent I would not be surprised to see them work to find a new bidder for ADS. Just my gut take.

ValueAct Capital, LLC is a San Francisco based hedge fund. The firm offers its services to high net worth individuals and institutions while investing in the public equity and hedging markets of the United States. VAC primarily invests in share re-purchase programs, public market recapitalizations, de-leveraging equity infusions, off-balance sheet financings, and going-private transactions.

At $64 the stock is trading at a forward P/E on 2008 of under 15x, for 15-20% type of growth. But that P/E ratio should actually be lower because by the time we get to the end of 08 and into 09 the amount of shares outstanding should be substantially lower and earnings per share higher. So it is cheaper than it looks. Last earnings report can be found here.

This is a non correlated, non financial, non commodity type of stock that also should provide the portfolio some stability in a sickly sea.

Long Alliance Data Systems in fund; no personal position

Bookkeeping: Getting Back some Energy Conversion Devices (ENER) and ReneSola (SOL)

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I am replacing some solar exposure I sold off earlier this week. I continue to find this space very undervalued but valuation has meant little in this market for a long time - so we've relied on charts. I'm also wary of the type of reversals this group is infamous for. But we have 2 industry conventions coming up, Obama, McCain, blah blah and perhaps we can get sentiment to stick. The solar story is very global and has very little to do with America thus far, but investors in solar stocks are mostly American so it's an interesting juxtaposition.

Anyhow, I sold Energy Conversion Devices (ENER) off post earnings around $82 - the stock has now fallen 10% in 24 hours so I'm getting back part of my position in the low $74s. This is a very fast moving market - and this is one case of many. This continues to be an excellent chart. I'd like to add more in the upper $60s if I can but 10% in a 1 day is too much to pass on. So we'll take this back to a 1.4% stake.

ReneSola (SOL) remains one of my favorites fundamentally at this point, but I was worried about a broken chart developing; I cut back earlier this week but was basically head faked out of this position as the stock has reversed nicely. No problem with that - it happens a lot. You can see a high volume drop Wednesday which generally indicates bad things ahead - but not this time. I'd like to see it north of $20 (over recent highs) to confirm this is a real move, but until then we're taking this back to a 1.3% stake.

Trina Solar (TSL) is trying to make a reversal as well, but from past history we'll give this one a lot more leeway before trusting any moves. But in general these stocks all move together, it is just a matter of degree. LDK Solar (LDK) remains a powerhouse with yet another contract signed today.
  • LDK Solar (NYSE: LDK), a leading manufacturer of solar wafers, today announced that it has signed a seven-year contract to supply multicrystalline solar wafers to Republic of Korea-based Hyundai Heavy Industries Co., Ltd (HHI).
  • Under the terms of the agreement, LDK Solar will deliver approximately 440 MW of multicrystalline silicon solar wafers to Hyundai Heavy Industries Co., Ltd over a seven-year period, commencing in 2009 and extending through 2015. Hyundai Heavy Industries Co., Ltd will make a down payment representing a portion of the contract value to LDK Solar.
Again this in a quiltwork of a very conservative portfolio sitting in very high levels of cash. I'm struggling to find long positions that can be trusted for more than 72 hours.

Long all names mentioned in fund and personal account

Bookkeeping: Cutting Back Research in Motion (RIMM)

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I pointed out the non confirmation yesterday in the tech leadership stocks - it was very strange on a big up day. Today, I'm cutting back Research in Motion (RIMM) - simply sticking to our laid out plan to cut anything that breaks support - RIMM just fell below its 50 day moving average so it's going down from 1.0% allocation to 0.1% stake. This is yet another ominous "double top" formation. Frankly this is a chart I'd be shorting with a stop loss over $126... $115 seems almost destined.

Right or wrong, this pattern of respecting charts when they break down, and cutting back, is taking us more and more out of the market as chart after chart we watch breaks down. On "up days" these stocks rebound but most of the time only to resistance before falling back. I continue to scratch my head at the general indexes holding up when I see so much weakness in individual charts.

As an aside as we wrote yesterday this market is now at the top of its range so as I wrote

Now we're back at the top of our recent range - the pattern would dictate to go short tomorrow or Tuesday. Then cover 3 days later, and go long. Rinse. Repeat. Continue until this market actually does something.

We continue to churn. I went through and charted about 90% of the stocks yesterday that drove the S&P 500 higher. [20% of the S&P 500 Gained 3%+ Today] All but 10 or so are simply terrible charts that were doing oversold bounces. Nothing to be excited about - looks like short squeezes to me. But shows again you buy weakness and sell into strength in this market. Riding strength is simply not working in the vast majority of cases.

Today we have economic reports that show despite rebate checks consumer spending is falling off a cliff, and inflation persists. But not to worry, bad news is backwards looking. Good news means a "turn is coming". That's called rationalization. I guess we are still in denial. Kool Aid. The US consumer continues to get poorer by the month. Less people working. More people working less hours. Access to credit lines of all sorts being ripped away. Someone please call China - we need more money to send to consumers to create an illusion of strength so we can get this market going up.
  • Personal incomes plunged in July while consumer spending slowed significantly as the impact of billions of dollars in government rebate checks began to wane.
  • The Commerce Department reported Friday that personal incomes fell by 0.7 percent in July, the biggest drop in nearly three years and a far larger decline than the 0.1 percent decrease analysts expected.
  • Consumer spending edged up a modest 0.2 percent, in line with expectations, but far below June's 0.6 percent rise. When the impact of rising prices was factored in, spending actually dropped by 0.4 percent in July, the weakest showing for inflation-adjusted spending in more than four years. (keep in mind this is happening with rebate checks sent out mostly in May - June; what environment will await us without "free money"?)
  • A gauge of inflation closely watched by the Federal Reserve remained elevated in July, rising by 0.6 percent. (strange considering when crude falls 20% I am told all inflation will disappear and the consumer will be "back") Over the past 12 months, this inflation gauge tied to consumer spending was up 4.5 percent, the biggest year-over-year increase in more than 17 years
Long Research in Motion in fund; no personal position

Three Infrastructure News Stories

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These infrastructure stocks continue to be out of favor on an "institutional money rotation away from global growth stories", but in the big picture I continue to believe the story is very interesting. Below is a series of stories entailing some of the opportunities and challenges we've discussed many times in the blog.

First, as we always say - America; the land of not addressing a problem until it's an emergency. And we have an emergency brewing in our infrastructure. The positive is, addressing this emergency can create many good, solid jobs for Americans. (these will be tough to offshore) The negative is we're plain broke and we'll have to call the Chinese or Middle Easterners to help us pay for the coming tsunami of upgrades. Or back to the printing press (strong dollar everyone - strong dollar) Even worse - many of these solutions will relay not on states (who actually seem to get some things done in America) but on that pathetic body called Congress, due to the need to cross state lines. Here we have a story from the NYTimes about the challenges of wind power vis a vie our national grid. A few ideas to address this angle are (conservative) [Aug 10: Quanta Services (PWR) - Looking to Break Out] or General Cable (BGC) [series of articles here] or (speculative) American Superconductor (AMSC) [Jun 12: Starting a Beachhead in American Superconductor (AMSC)]
  • When the builders of the Maple Ridge Wind farm spent $320 million to put nearly 200 wind turbines in upstate New York, the idea was to get paid for producing electricity. But at times, regional electric lines have been so congested that Maple Ridge has been forced to shut down even with a brisk wind blowing.
  • That is a symptom of a broad national problem. Expansive dreams about renewable energy, like Al Gore’s hope of replacing all fossil fuels in a decade, are bumping up against the reality of a power grid that cannot handle the new demands.
  • The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not. The grid today, according to experts, is a system conceived 100 years ago to let utilities prop each other up, reducing blackouts and sharing power in small regions. It resembles a network of streets, avenues and country roads. “We need an interstate transmission superhighway system,” said Suedeen G. Kelly, a member of the Federal Energy Regulatory Commission.
  • While the United States today gets barely 1 percent of its electricity from wind turbines, many experts are starting to think that figure could hit 20 percent. Achieving that would require moving large amounts of power over long distances, from the windy, lightly populated plains in the middle of the country to the coasts where many people live. Builders are also contemplating immense solar-power stations in the nation’s deserts that would pose the same transmission problems.
  • Wind advocates say that just two of the windiest states, North Dakota and South Dakota, could in principle generate half the nation’s electricity from turbines. But the way the national grid is configured, half the country would have to move to the Dakotas in order to use the power.
  • The grid’s limitations are putting a damper on such projects already. Gabriel Alonso, chief development officer of Horizon Wind Energy, the company that operates Maple Ridge, said that in parts of Wyoming, a turbine could make 50 percent more electricity than the identical model built in New York or Texas. The basic problem is that many transmission lines, and the connections between them, are simply too small for the amount of power companies would like to squeeze through them. The difficulty is most acute for long-distance transmission, but shows up at times even over distances of a few hundred miles.
  • The power grid is balkanized, with about 200,000 miles of power lines divided among 500 owners. Big transmission upgrades often involve multiple companies, many state governments and numerous permits. Every addition to the grid provokes fights with property owners. (that's a problem)
  • In a 2005 energy law, Congress gave the Energy Department the authority to step in to approve transmission if states refused to act. The department designated two areas, one in the Middle Atlantic States and one in the Southwest, as national priorities where it might do so; 14 United States senators then signed a letter saying the department was being too aggressive. ("they" are an even bigger problem)
  • Without a clear way of recovering the costs and earning a profit, and with little leadership on the issue from the federal government, no company or organization has offered to fight the political battles necessary to get such a transmission backbone built. (welcome to America - if you don't have a lobbyist to fight your fight, nothing gets done)
  • We still have a third-world grid,” Mr. Richardson said, repeating a comment he has made several times. “With the federal government not investing, not setting good regulatory mechanisms, and basically taking a back seat on everything except drilling and fossil fuels, the grid has not been modernized, especially for wind energy.” (beat and puff out chest: "But we're America - we're the best at everything! Take that as a solution to your "facts"")
Onward - we've talked about the weakness in state budgets, that will only get worse next year. [Jul 25: States Slammed by Budget Shortfalls] [Apr 25: Shoes Beginning to Fall in the States] [Dec 16: California in a State of Emergency - Coming to a Theater Near You]

Remember these are are so very reliant on (a) income from home tax assessments as home prices fall (mostly) nationwide and (b) increased sales tax revenue while the national consumer is retrenching. So we know what the "fight the fire today, and kick the can down the road" mindset will be, correct? It's already happening (local example - debate in Detroit to sell off local zoo to raise funds for budget shortfalls) - now the question is just how far it will go. States and local municipalities will sell off assets for that 1x payment (get the "fix") and give up the annual annuity (income stream). I don't know if this is necessarily "good" or "bad" - one could make the argument that private enterprise would run things more efficiently... but I do believe the cost to consumers will be higher as private equity, hedge funds, and large financial institutions and hedge funds own our roads, bridges, and the like. Implications here are more and power moves from the masses (government) to the few elite. More concentration of wealth in fewer hands. You can debate amongst yourselves the merits - I'm just pointing out the long term trends coming your way. But it points again to a lack of planning, fiscal responsibility, and outright idioticy from government agencies with "our" money. Once again, the "sheep" do not realize what is going on, nor do they get involved, or kick these folks out - their decisions are costing us all, over and over. From the NYTimes: Cities Debate Privatizing Public Infrastructure.
  • Cleaning up road kill and maintaining runways may not sound like cutting-edge investments. But banks and funds with big money seem to think so. Reeling from more exotic investments that imploded during the credit crisis, Kohlberg Kravis Roberts, the Carlyle Group, Goldman Sachs, Morgan Stanley and Credit Suisse are among the investors who have amassed an estimated $250 billion war chest — much of it raised in the last two years — to finance a tidal wave of infrastructure projects in the United States and overseas.
  • Their strategy is gaining steam in the United States as federal, state and local governments previously wary of private funds struggle under mounting deficits that have curbed their ability to improve crumbling roads, bridges and even airports with taxpayer money.
  • This fall, Midway Airport of Chicago could become the first to pass into the hands of private investors. Just outside the nation’s capital, a $1.9 billion public-private partnership will finance new high-occupancy toll lanes around Washington. This week, Florida gave the green light to six groups that included JPMorgan, Lehman Brothers and the Carlyle Group to bid for a 50- to 75 -year lease on Alligator Alley, a toll road known for sightings of sleeping alligators that stretches 78 miles down I-75 in South Florida.
  • And then there is the odd romance between Americans and their roads: they do not want anyone other than the government owning them. The specter of investors reaping huge fees by financing assets like the Pennsylvania Turnpike also touches a raw nerve among taxpayers, who already feel they are paying top dollar for the government to maintain roads and bridges. And with good reason: Private investors recoup their money by maximizing revenue — either making the infrastructure better to allow for more cars, for example, or by raising tolls.
  • Mitch Daniels, the governor of Indiana, faced a severe backlash when he collected $3.8 billion for a 75- year lease of the Indiana Toll Road. A popular bumper sticker in Indiana reads “Keep the toll road, lease Mitch.”
  • Traditionally, the federal government played a major role in developing the nation’s transportation backbone. (but now the federal government is a paralyzed useless piece of... joy and wonderment) But since the early 1990s, the United States has had no comprehensive transportation development, and responsibilities were pushed off to states, municipalities and metropolitan planning organizations.
  • Look at the physical neglect — crumbling bridges, the issue of energy security, environmental concerns,” said Robert Puentes of the Brookings Institution. “It’s more relevant than ever and we have no vision.” (do you notice a theme that permeates through story after story of our national government? they sure do run $50M conventions well though!)
Some facts that should startle you as we sell off infrastructure stocks because (a) the world is ending and (b) its time to buy retail stocks and financials
  • The American Society of Civil Engineers estimates that the United States needs to invest at least $1.6 trillion over the next five years to maintain and expand its infrastructure. (cross the 4, carry the 1... umm... errr... $320 Billion a year? So you mean TWICE the stimulus check we just sent out EVERY year? Just to MAINTAIN what we have. Mr Paulson - it's time to get on the phone with our Chinese friends again. Oops nevermind - Goldman Sachs and friends just raised $250B - well that takes care of most of 1 year)
  • Last year, the Federal Highway Administration deemed 72,000 bridges, or more than 12 percent of the country’s total, “structurally deficient.” (so you are playing russian roulette as you drive, over 1 in 10 chance you are driving under a structurally deficient bridge)
  • But the funds to fix them are shrinking: by the end of this year, the Highway Trust Fund will have a several billion dollar deficit. (is there anything we don't have a deficit in, other than hot air and empty promises of all the things Obama/McCain are going to give to us once they arrive on their mighty horses into town January 09?)
  • We are facing an infrastructure crisis in this country that threatens our status as an economic superpower, and threatens the health and safety of the people we serve,” New York Mayor Michael R. Bloomberg told Congress this year. (one man with sense) Gov. Arnold Schwarzenegger of California warning of a national infrastructure crisis (two men with sense)
Back to the investing side
  • People are creating a new asset class,” said Anne Valentine Andrews, head of portfolio strategy at Morgan Stanley Infrastructure. “You can see and understand the businesses involved — for example, ships come into the port, unload containers, reload containers and leave,” she said. “There’s no black box.”
  • Some foreign pension funds that jumped into the game early have already reaped rewards: The $52 billion Ontario Municipal Employee Retirement System saw a 12.4 percent return last year on a $5 billion infrastructure investment pool, above the benchmark 9.9 percent though down from 14 percent in 2006.
  • Ten to 20 years from now infrastructure could be larger than real estate,” said Mark Weisdorf, head of infrastructure investments at JPMorgan. (hopefully they don't create the same type of debt instruments for infrastructure as they do in real estate - but don't worry they will create some Frankenstein object to fleece the masses - that's what they do and damn if they are not great at it)
Last story for all the "woe is me, China is going to crumble from 12% growth to (gasp) 7% - the world is ending" - well at least Rio Tinto seems to disagree. Granted their biased but for those who have a 40,000 point of view rather then the next 6 trading days, we continue to be huge bulls on commodities. An example here from the Guardian UK - Chinese Skyscraper Builders to put up Equivalent of 10 New Yorks.
  • Rio Tinto yesterday shrugged off talk of an impending collapse in the commodities market, pointing to recent research that suggested China will build up to 50,000 skyscrapers in the next 20 years, the equivalent of 10 New Yorks, creating sustained long-term demand for steel and other raw materials. The company cited research from McKinsey, the management consultancy, which said the scale and pace of urbanisation would continue at an unprecedented rate.
  • The company said that North America and Europe were becoming decreasingly relevant to the setting of metals prices, as demand is driven by China, India and other emerging markets (however American quant hedge fund computers are as ethno centric as their programmers and as you know, when the US sneezes China cries out in anguish and drops from 12% growth to -12% growth, or so stock prices reflect)
  • Chinese imports of iron ore are running 20% ahead of the same point last year. (yes but that is backwards looking; looking forward we should expect a drop off of at least 50% - or so the stock prices reflect) The average copper price charged by Rio in the first half was 20% higher than last year, gold was 38% higher and aluminium prices were up 2%. (strange, considering the globe is imploding ex- USA of course)
Sit back and think about this
  • By 2025, the report predicts that China will have 221 cities with more than a million inhabitants, compared with 35 in Europe today. (demographics is destiny)
  • McKinsey projects that China will build between 20,000 and 50,000 skyscrapers, many of them in less developed interior provinces far from Beijing and Shanghai.
So let's assume they and their management consultancy firm are engaging in hyperbole and are off by a factor of 50%. So it's only 5 New Yorks. Think about that while you hear the pundits on CNBC cry about the end of commodity boom and how its time to buy wonderful asset classes in the US such as financials and retailers with their growth rates of... wait, did I say growth rates? HAL 9000, the hedge fund quant computer, does not read the Guardian nor did his programmer - so the fact we are facing an army of HAL 9000s does not allow us to trade on such data. Hence we sit in stocks with unprecedented 20 year opportunities, losing money by the week, and have to wait until their algrorithims return back to the 'long term reality' trade. Yes the entire globe is slowing - we've exported our infamy and debauchery worldwide and our virus will infect the world - we're sneezing, and sneezing and sneezing. But it is all relative - but just keep this on your radar as we sit here feeling idiotic for believing a country "hobbling" along at 8% growth might actually be a better investment than one with a (rebate induced) 3% otherwise known as -1 to 1%.

And please, give your Congress(wo)men and a hug and a pat on the back - "Heck of a job Brownie!"

Long American Superconductor in fund; no personal position

Thursday, August 28, 2008

Dell (DELL): "Dear Mr. Institutional Investor: We're Not so Safe Either"

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I've been confounded by this Dell (DELL) chart - obviously institutions piled in as the "safe haven play" - I mean it's technology after all and that's immune to problems (sort of like the US economy). Not so safe after all - down 10% after hours due to "facts". (I hate facts; I much prefer sentiment driven opinion to drive stocks up that have no right being driven up). The chart won't be looking quite so pretty tomorrow. Hopefully we can brush it off and take this market up another 300 points since facts are just obstacles in the road to a rally based on hope/dreams/unicorns/Kool Aid we deserve.


  • But the company noted that the continued "conservatism" in U.S. technology spending has spread to Western Europe and several countries in Asia.
  • Dell's gross margin was 17.2% in the fiscal second quarter, vs. 20% at this time last year (boost sales by sacrificing margin = lower profits)
Why do we care about Dell? We really don't - I just want to give you a preview of the coming plight of the US multinationals who rely on overseas sales. Dell doesn't even have that much overseas exposure. So what should you do? Of course buy American-centric stocks where the economy is set to rebound "in 6 months" and again, is immune to the rest of the world's plight. Remember the current Wall Street thesis - the rest of the world will devolve just as the American economy bursts into the bright white light. Not that it was ever really weak in the first place - I mean 3.3% GDP growth baby - that's rockin'.

As I keep saying to these "strong(er)" dollar cheerleaders - be careful what you wish for - this (overseas strength) was the last leg the economy was standing on. (note this miss had nothing to do with the strong dollar, I'm just foreshadowing) So all these guys cheerleading how excellent the US is as a place to invest now that we've exported our crummy financial instruments worldwide - causing pain globally - I really wonder if they realize the implications of their "hopes". It should bear out the next 2-3 quarters. Or (again) just about the time the US economy rides a wave of Kool Aid back to world dominance.

No position

20% of the S&P 500 Gained 3%+ Today

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Since my watch lists are so empty of big gainers I was curious to see what exactly is driving the indexes up today. Since the S&P 500 is the broader index (over Dow Jones 30) that I focus on, here is a list of all the stocks with a >3% return from highest to lowest (104 names). I like to use this data mining to see what exactly I am missing. Today is just 1 day but if over time, we continue to underperform, I like to see what sectors/stocks are doing well that I am not watching so I run screens such as this. Housing and financials dominate the 5%+ range. Retailers and financials with some industrial in the 3-4% range.

Symbol Company Name % Price
MBI MBIA Inc 34.7
TIF Tiffany & Co 10.9
MER Merrill Lynch & Co Inc 9.8
DDS Dillard's Inc 9.2
PCL Plum Creek Timber Co Inc 8.9
WB Wachovia Corp 8.7
PHM Pulte Homes Inc 7.7
LEN Lennar Corp 7.5
KBH KB Home 7.1
TIE Titanium Metals Corp 7.1
AIG AIG-AMERIC.INT.GRP 6.9
LEH Lehman Brothers Holdings Inc 6.8
CTX Centex Corp 6.6
MI Marshall & Ilsley Corp 6.5
LUK Leucadia National Corp 6.3
HIG Hartford Financial Services Group Inc 6.2
WY Weyerhaeuser Co 6.2
FHN First Horizon National Corp 6.1
LM Legg Mason Inc 6.1
SLM SLM Corp 6.1
GGP General Growth Properties Inc 6.0
KEY KeyCorp 5.4
STI SunTrust Banks Inc 5.4
GCI Gannett Co Inc 5.4
CMA Comerica Inc 5.3
DHI D.R. Horton Inc 5.2
KIM Kimco Realty Corp 5.2
JNS Janus Capital Group Inc 5.2
DDR Developers Diversified Realty Corp 5.1
C Citigroup Inc 5.0
TXT Textron Inc 4.9
MWV MeadWestvaco Corp 4.7
MAS Masco Corp 4.7
MDP Meredith Corp 4.6
M Macy's Inc 4.6
WFC Wells Fargo & Co 4.5
PCP Precision Castparts Corp 4.5
DE Deere & Co 4.4
LNC Lincoln National Corp 4.4
VIA.B Viacom Inc 4.3
MS Morgan Stanley 4.2
CMI Cummins Inc 4.2
BK Bank of New York Mellon Corp 4.2
XL XL Capital Ltd 4.2
DOV Dover Corp 4.2
DFS Discover Financial Services 4.1
CCL Carnival Corp 4.1
AXP American Express Co 4.1
RSH RadioShack Corp 4.1
PCAR Paccar Inc 4.1
TEX Terex Corp 4.1
BBT BB&T Corp 4.1
PFG Principal Financial Group Inc 4.0
MHP McGraw-Hill Companies Inc 4.0
IP International Paper Co 4.0
GNW Genworth Financial Inc 3.9
MTB M&T Bank Corp 3.9
JWN Nordstrom Inc 3.9
GT Goodyear Tire & Rubber Co 3.8
WYN Wyndham Worldwide Corp 3.8
BEN Franklin Resources Inc 3.7
PRU Prudential Financial Inc 3.7
WAG Walgreen Co 3.7
GS Goldman Sachs Group Inc 3.7
HOG Harley-Davidson Inc 3.7
YUM YUM! BRANDS INC 3.7
TROW T Rowe Price Group Inc 3.7
EXPE Expedia Inc 3.6
EMR Emerson Electric Co 3.6
COF Capital One Financial Corp 3.5
RL Polo Ralph Lauren Corp 3.5
LMT Lockheed Martin Corp 3.5
NWS.A News Corp 3.4
UNM Unum Group 3.4
GR Goodrich Corp 3.4
EXPD Expeditors International of Washington Inc 3.4
NWL Newell Rubbermaid Inc 3.3
ACAS American Capital Ltd 3.3
AMP Ameriprise Financial Inc 3.3
PH Parker Hannifin Corp 3.3
PLL Pall Corp 3.3
ETN Eaton Corp 3.3
MET MetLife Inc 3.3
SEE Sealed Air Corp 3.2
PTV Pactiv Corp 3.2
R Ryder System Inc 3.2
JNPR Juniper Networks Inc 3.2
HOT Starwood Hotels & Resorts Worldwide Inc 3.2
JCP JC Penney Co Inc 3.2
USB US Bancorp (Del) 3.2
FDX Fedex Corp 3.2
ASH Ashland Inc 3.2
NTRS Northern Trust Corp 3.1
HCBK Hudson City Bancorp Inc 3.1
SHLD Sears Holdings Corp 3.1
JNY Jones Apparel Group Inc 3.1
KSS Kohl's Corp 3.1
CHRW CH Robinson Worldwide Inc 3.1
NYX NYSE Euronext 3.1
CME CME Group Inc 3.1
DOW DOW CHEMICAL 3.0
PDCO Patterson Cos Inc 3.0
STT State Street Corp 3.0
BA Boeing Co 3.0

Back to the Top of Our Range - and Cutting another Swath of Lennar (LEN)

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The S&P 500, and market, is quite frankly trying to drive as many people batty as possible. With light volume it is relatively easy for large money to move things around and with month end the "theory" (who knows what is really happening) is people can "mark up" stocks temporarily so they can show a better than it should be monthly performance. I don't know how much truth there is to that - I just continue to watch the action in quiet amazement :) I will call this the Rally of the Zombies... best performers - Freddie, Fannie, Ambak, MBIA - boo yah.


Now we're back at the top of our recent range - the pattern would dictate to go short tomorrow or Tuesday. Then cover 3 days later, and go long. Rinse. Repeat. Continue until this market actually does something.

I've cut out most of my remaining Lennar (LEN) into this move today, as we wrote yesterday we were looking for high to mid $12s, and we more than got it - so it is down to 0.2% stake. What gets me about this rally is not only do I have very little in the portfolio running with the crowd, I have a 500-600 stock watch list and only about 20% of it is really up more than say 1%. I don't have many zombies on my watch lists apparently. I appear to be completely out of touch with the "hot stocks" at the moment. But those airlines are up 10-14% across the board ;)

A few points about the stocks rallying right now, one thought from myself and one from Robert Marcin over at Realmoney.com. From myself - GDP estimates for Q2 originally were 2.7%. They came in at 1.9%. Today it was revised up to 3.3%. Our rebate check mostly hit this past quarter so that was a large part of the strength. Yet almost no one is mentioning that. (crickets chirping) The second point is, isn't that data backwards looking? Or is it only when bad news is reported do we call it backwards looking? And when its good news from the past we call it a "turn in the action". But not backwards looking. Funny how that works.

Last, a comment from Robert Marcin which I am also shaking my head at in agreement but complete and utter amazement at this market action. Most of the "strength" (ex rebate check) is from our exports yet as he writes....

The market's rallying on stronger than expected economic news over the past couple of days. Much of the strength is in the export related markets. Yet, it's the domestic consumer and financial stocks that are rallying the most. Go figure. Regional banks, apparel retailers, and home builders are hardly out leading export driven companies.

The market remains a riddle wrapped in an enigma wrapped in hedge fund redemptions and quant traders making moves that boggle me. I said the only thing that could hurt us as currently positioned is a big rally, and the last 2 days have hurt us. But every time we "give in" and cut back short exposure as the pain gets extreme over the past few months (when the market rallies) it reverses within 48 hours, and we have to scramble to put the short exposure back on. And then the market reverses back up within 24-48 hours, and we have to cut back short exposure. And... well you get the idea.

Hence ... well hence, I don't know :) And I'll readily admit the toughest market I've ever encountered. So I'll scratch my head, keep watching, and realize sometime in the next 10-30 years markets won't be like this. I hope :) I continue to watch a bevy of stocks growing 40-60% at PE ratios of 10-14 completely abandoned. And "leaders" Apple (AAPL), and Research in Motion (RIMM) left on the side of the road in a ditch (down on a day like this)? As unprofitable and shrinking businesses scream upward. Oh to be a fly on the wall of a microprocessor of HAL9000 to understand how "it" thinks.

May I introduce to you the new hottest stock in America....


Long Lennar, Research in Motion, Apple in fund, no personal position

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