Thursday, July 29, 2010

July 29, 2010 Where Are The Tectonic Plates Of The Market


July 29, 2010 Where Are The Tectonic Plates Of The Market

I was fortunate enough to be provided a great article from UBS’s Mike Ryan, (Thanks Tim). It is titled Aftershocks and subtitled, Strategies For Rebuilding Wealth In An Uncertain World.

The article describes how each and every ripple piece of news since the depths of the global financial crisis has reverberated like aftershocks in the market. Ironically, Wednesday’s Mad Money had Cramer saying basically the same thing in his unique colorful style. He called it the panic strategy.

Ryan along with a stable of co-writers and analysts such as The following contributed to this report: Anne Briglia, CFA; Andrea Fisher; Stephen Freedman, PhD, CFA; Kurt Reiman, Anthony Roth; Kevin Ruth; Joseph-Anthony Sawe; Mike Tagliaferro, CFA; and Jeremy Zirin, CFA and they spent ten pages describing strategies to repair an investor's balance sheet including increasing current cash flows, more aggressively deploying cash balances, diversify outside of traditional assets, enhancing debt management, and hedging against extreme events. If you know some one at UBS, get a hold of this great piece. If not, let me know as I know one of the best.

Time to step on the gas

One of President Obama’s many priorities and campaign promises was to deploy an energy program that would reduce the country’s dependence on imported oil and institute the first functional cap and trade program for carbon dioxide emissions. If you were reading the headlines last year, amidst all the other programs being introduced in the congress and the senate, one bill introduced known as the Waxman-Markey bill, addressed clean energy, energy efficiency, pollution reduction, transition assistance for a move to a clean energy economy, and offsets for forest and agriculture programs that could reduce emissions. (The last half of that sentence was taken from an AP story about the bill).

Well even this administration and this Senate admitted they bit off more than they can chew and a kinder and gentler bill is under consideration and just might pass before the fall session. This will be good news for us who have been hedging our bets on nat gas. The main components of the news bill will be an elimination of the 75 million dollar cap on damages from oil spills. (I wonder what brought that about?), Homeowners will get financial assistance to make their homes energy efficient, (Don’t worry, wealthy people won’t be given any incentives because we all know only middle and lower income people have the 20-60 thousand to put in solar.), and most importantly it offers huge subsidies for the production and purchase of electrical and nat gas vehicles. This portion of the bill will be in the 5 billion range and will impact many of the stocks mentioned here over the last several month that are nat gas plays. (CNG, UNG, WPRT, CLNE)

What is really cool is the bill will pay for itself with taxes on oil. It would be an eight cent to fifty cent tax on a barrel of oil. That is nothing since oil is floating around 72 a barrel and we didn’t stop using the stuff when it was 140 a barrel. This could work. It is estimated we have 200 years worth of nat gas buried all over the states.

Legislation versus regulation.

We have discussed here the 2,307 page Finance Regulation Bill that got passed. As we mentioned, I have gleaned it but really don’t know how it will impact the likes of JPM, WFC, BAC etc. Well today, running home to check on the cats, I heard an exec from a huge bank say he did not know how it will impact business yet. He did say it will cost him more to run his business and that bank that have a capitalization below 2 billion will find it hard to stay sustainable. (As a primer for those who need it. Market capitalization is just the current value of the stock times the number of outstanding shares. Example, AAPL Apple has a market cap of about 238 billion=920 million shares outstanding at about 250 dollars a share.)

Now what the exec went on to describe is the process for converting the 2,307 page legislation into a functional set of banking and finance regulations. The process is painful, tedious and slow. The resulting document, could be volumes upon volumes. This is where they would take a single paragraph out of the legislation and write 300 pages of rules to fulfill the meaning of the paragraph. An example might be that consumers must have adequate acknowledgment as to the documentation they need to take out a loan. The regulation would define the documents, the copies needed, distribution of the copies, grace period details, retention of documents, recourse initiatives, audit requirements and so on. The exec indicated and I am sure that other Banking and Finance leadership is feeling the same way, that he is in no hurry to add staff, address former strategic initiatives, issue dividends, dilute the balance sheet in any way until he sees the working documents of regulation. I can’t say I would blame him.

Now we often talk about linkage in this blog. That would be hearing a piece of news and using our intuitive skills to draw hopefully adequate conclusion that other have failed to deduce. If this exec in this industry is feeling this way, and we just had a massive health care initiative passed with yet completed regulation, and a pending but probably energy bill (Thankfully gutted of the cap and trade BS), and an education bill that was introduced early on but is now causing the President some angst because teach unions are now just finding out that it is performance based and not tenure based, (Oooops, looks like he forgot a lot of AFL-CIO people –like teacher unions- got him in office.), I would bet there are a lot of execs in a lot of industries waiting to see how all these regulations are going look once complete and what political fall out will occur at the mid term elections.

My long winded point is that we may feel the earthquakes on a weekly and daily basis, (Greece is going to collapse, Germany will have bond defaulty issues, the Euro is going to evaporate, a volcano is going to close Europe for decades, the medical-insurance reform bill is going bankrupt the country, flash crashes will happen at any given moment, finance reform will chase all bankers to Hong Kong, Chinas GDP is collapsing, the Yuan float will lead to wild inflation, and the list goes on and on.) is the result of the panic strategy introduced at the beginning of this global crisis, but what we really need to look at is the underlying facts and values of what is going on with companies, their free cash flow, and what significant underlying geopolitical issues are diving the craziness of the market.

One real good example is UK Prime Minister Cameron is over in India doing kissy face with India to try and shed their imperialist 300 year history in the region. While there he made some very “in your face" remarks about Pakistan supporting and encouraging global terrorism. The is about as stupid as smoking and talking on a cell phone while you fill your car next to tanker pumping gas into the stations underground tanks. Both countries are on the verge of nuclear capabilities and his comments and positioning could blow up in all our faces. That would not be an earthquake, but a major shift in the tectonic plates of the world market as we know it.

Because of our holiday this week I did not get a chance to prognosticate about any earnings this week. Two I would have missed on and you should take to heart was PG and CL. Both missed top line sales and bottom line earnings. This is not a good sign as both are defensive type staple goods companies. I have owned both and still have some in a couple of the accounts we manage. We will be reading the filings and see how bad the damage is and determine that these might be buying ops or the tell of something more serious.

Be nimble and be careful.  We have a GDP number coming out tommorow and I don't think we are going to like it.

Salve Lucrum


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