Friday, December 18, 2009

BAGAKOAA DEC 18, 2009 Cap’n Trade Maty.


DEC 18, 2009 Cap’n Trade Maty

Ok we can all take deep breath because we now have climate agreement. That’s right we have an unverifiable volunteer agreement whose details are not yet quite certain with China, India, and South Africa. Last I heard, China has a problem measuring their carbon emissions. You all might check that out in US World & News, The Economist, and Foreign Policy. Anyway, we got an agreement so the press is happy and we can maybe go for the second leg of the Hat Trick and get a Nobel Prize in Science.

Anyway, someone (not a current reader but I will invite.) asked me this week about the Carbon Cap and Trade Concept. I was not quite equipped to explain it, so you know me, no life Cronin, I wanted to better understand. It might make good fodder for this blog as conservative estimates of this potential derivative market is 600 billion to 3 trillion by 2020. Don’t worry that won’t be a lot of money by then. That will be our daily interest on our US debt by that time.

Anyway homework was done and here is a primer on Cap’n Trade.

The goal with a Global Cap and Trade program is to reduce global emissions of carbon dioxide and other nasty gases gasses called greenhouse gases. Natural greenhouse gasses are not in and of themselves a bad thing. In fact if there were NO greenhouse gases, our average temperature would be about 80 degrees F colder than we know it today. Great sleeping weather if you ask me, but it would make scuba diving a tad more of a challenge. But I digress.

Due to the women of the world domesticating their men in the 17-1800s, the industrial revolution has caused a shift in the components of greenhouse gases. Into the life sustaining balance of water vapor, carbon dioxide, methane, ozone, and nitrox oxide, man has added too much carbon dioxide. So now the current recipe of greenhouse gases causes radiation from our little terrarium called earth to stay trapped and it causes our average temperature to creep up or jump up or shoot up, depending upon your political persuasion. Regardless it is headed up.

Enter the Clean Air Act in the US about 1990. It established emission limits for sulfuric acid emissions for companies or utilities or government facilities. And believe it or not it worked. Companies were given permits based upon reduced but acceptable levels of sulfur emissions and if they exceeded those levels they had to pay a fine. It reduced acid rain damage and did not cripple industry in the US and Canada.

The same idea will be true with a global cap and trade program. Companies and governments will be given carbon credits, think of them a non interest bearing bonds with the right to dump X tons of carbon into the atmosphere. How they determine how many credits each company and country will get should make for some interesting negotiations, but it will give Fox and CNN something to takes sides on for years to come.

There will be a market, like a stock market where these carbon credits can be traded. How it will actually work is still not nailed down, but if Obama can brag about a yet to be determined detailed voluntary climate control agreement with a couple of countries who by their own omission cannot accurately measure their carbon emissions, I can pretend to explain how carbon Capn Trades will work.

I am GE and in North America the Global Czar of Carbon Credits determines that I am spewing 100 million tones of carbon into the air of America, (Don’t worry the Czar will be talking to my cousin Vinny who runs GE in Mexcio and my other brother Darrel in Canada.) I will be given credits allowing me to spew say 80 million tonnes (for my global audience to play at home). In order for me to spew 81 million tons, I will need to buy 1 carbon credit whose value is yet to be determined. Now when I, Mr. GE bought Bob’s Little Manufacturing Company in Some City, USA, this summer, on his books were assets listed as 5 carbon credits. (My inner voice was just singing “5 golden rings”, for you Dr. Karen) I now can use one of those credits for my carbon credits to pollute above the 80 million ton target. Now if I, Mr. GE has a bad year and production is way down and I want to make a dividend payment to keep my disillusioned shareholder happy, I can go on the Capn Trade Exchange and sell 20 carbon credits for the going rate of YTB (Yet to Be Determined) and raise some cash to pay my dividend. Now if Mr China wants to displace another 300 million Chinese people with another damn project, (did I spell that wrong?), and it is going to cost me 1,000 carbon credits that I don’t have, I go on the Capn Trade Exchange and try and buy these carbon credits. Now imagine what would happen to the value of Bob’s Little Manufacturing Company if China announces that a month before GE goes to buy the company. Those credits could inflate the value of Bob’s Little Company to a point where GE does not want to buy them, unless they need the credits.

My humble opinion is the idea is a good one. Thinking that the major polluters of the world (Think BRIC and parts of Europe), will agree on carbon credit values and a fluid market for trading the credits? But what the hey, I still think I am going to get taller and have more hair some day.

OK how did we do this week. Tuesday I told you I got whacked on my March Best Buy 41 dollar Call. Ouch, its down 22%. I said they were going to beat 46 and they did. I still like it, but own enough to where I am not buying more. Sit and wait if you own it. This does go around my 8% down rule, but I am cognizantly making that choice for good reasons. Needless to say I did not catch the bottom of Adobe. I had a limit buy at 33 thinking that if the earnings came in weak, (less that .31) I could catch it bottom feeding. Well they had a great 4th quarter and earned .39, I think, and the stock took off. At 37 and change, its rich but well positioned for the future. Its PE is now 30 and price to book over 4. Its 23% above it 200 day average so its trading rich, but I wouldn’t blame for buying or keeping it. I do not own it.

PAYX reported and they hit revenue but way missed earnings. They are down 10%. As I mentioned last week I don’t own and still don’t, but should recover as more people get back to work. The stock is down because it disappointed, but its fundies still look good.

Last week I called PALM worst of breed. Nailed that one. It disappointed and it was ugly. The iPhone is King of the Aps. If you were really brave and read this blog last weekend you would have shorted PALM and be doin the happy dance.

The blog last week noted I would be watching FDX from the sidelines. Good call. They disappointed at all levels. They have managed to cut expense which will bode well for the future, but at an 18 PE ration and the inevitable recovery, I’m am starting to like FDX. After the Holiday I am going to revisit that April 75 dollar call. This could be a good in to the stock. If it threw a better dividend, I would buy into the equity, but its yield is less than .52.

OK getting long here so I’ll start to wrap up. The week was confused but flat and techs pulled us out of the muck today. The Salve Lucrum portfolio lost about 3.2% in unrealized gains this week. There were very few trades this week because I am tired of being called a “day trader” and my real job interfered with me hanging around the halls of Chuckie Schwab. Bought some more Flowserve FLS, more Games Stop GME, bought those calls for BBY, took a nice profit on the Jan HAS calls, took a little profit off the table with IBM as I was up 30% +, took the profits and bought more April Calls on VZ at a strike price of 28.00, bought more of the May HD 26 call but it does have a heavy time value premium, but I like it anyway, brilliantly sold and closed my Jan 45 Boeing calls. Just in time as they got whacked when Ryan Air cancelled 200 planes, took a little profit on BMY since there are indications that h1n1 flu season might be winding down. Look for me to trim my positions in PFE and RHHBY for the same reasons. I want to go back and listen to the last earnings call to hear what other drugs are in the pipeline. Will let you know more next week.

In closing, I had a chance to kick the tires on friend’s portfolio, well one of them. They had a fund fund. Never seen one of these before, but I guess they are out there. It was a Goldman Sachs World stock fund. Its call is GAXCX. I did some homework and found out this is a dog, poor performer and very expensive fee wise. In researching, I ran across an decent ETF you might take a look at if you want global large cap exposure with a nice kick form emerging markets. It is a Vanguard ETF with a ticker of VT. Do your homework. If I were a fund guy, I’d play it. It actually holds a lot opf the stocks I hold in my and various other custodial accounts. MSFT, XOM, GE (Not one of my favs), P&G, AAPL, T IBM, CVX, STD (still one of the banks I track), K, GOOG to name a few. If someone were to hold a gun to my head and say pick a fund any fund, well VT.

Salve Lucrum


Post a Comment

<< Home