Monday, May 31, 2010

Coinstar: A valuation too far.

When markets fall I love to scan for counter-trenders and skeptically judge the reasons for their strength.  Today's lucky winner is Coinstar (CSTR).  On Friday I tweeted, "if you run a brick and mortar visual entertainment biz, and strippers aren't involved, i am bearish the business model -".  Actually, movies, or more specifically Redbox, are only a part of what Coinstar does, they also operate change counting machines on a percentage fee deduction basis, and a money transfer service.  See below table of segmented income, click to enlarge.

Let's have a look at the numbers since we just got revised guidance after the sale of their E-Pay Business last week.  Link to PR with revised guidance here, applicable segments quoted below:
For the second quarter of 2010, management now expects revenue in the range of $363 million to $383 million, adjusted EBITDA from continuing operations in the range of $57 million to $62 million and EPS from continuing operations in the range of $0.28 to $0.32 on a fully diluted basis after affecting for the sale of the E-Pay Business.
For the full year 2010, management now expects revenue in the range of $1.505 billion to $1.595 billion, adjusted EBITDA from continuing operations in the range of $270 million to $285 million and EPS from continuing operations in the range of $1.74 to $1.86 on a fully diluted basis after affecting for the sale of the E-Pay Business.
 And quickly, let me get the 1q2010 EPS ($0.21) from their filing located here.  Click to enlarge, as always.

So before we go too much further let's do the math just based on the above information, using numbers that would be the most favorable for the company.  Full year EPS ($1.74) = 1q2010 EPS ($0.21) + 2q2010 EPS ($0.32) + 3q & 4q EPS ($1.21 total or 0.605 each quarter).  Hmmmm, that can't be right.  Maybe those people aren't communicating clearly enough what it is they're guiding.  $1.74 = (E-Pay Sale/share) $1.21 + 1q (0.21) + 2q (0.32) + 3q & 4q EPS ($0 ?!).  If the situation is the former, could the company be hoping that their video game business, which appears to be gradually rolling out right now, be enough to double 2q's earnings going forward?  Let's get with IR and try for some clarification on Tuesday before carrying on, shall we?

Moving on.  Just like credit card interest rates, Redbox and Coinstar exploit their customers' laziness.  For every $1 in coins that gets converted in a change counter CSTR keeps 9.8 cents.  For every 24 hours that a DVD is kept CSTR charges the customer $1 up to a max of $25 at which point the customer just keeps the disc.  With the advent of debit cards, and the rapid move toward streaming media, two of Coinstar's primary businesses are at risk of serious deterioration going forward.  Should the company be awarded a 29x 2010 multiple (using the conservative 1.86 guided to benefit the company) given the structural situation they face?  Some believe that the liquidation of Movie Gallery will drive business to Redbox.  Simply, if people weren't shopping at Movie Gallery before, where were they getting their movies?

In other competition news, and proving their management's gold medal inadequacy, Blockbuster is presently rolling out their own kiosk version of the Redbox model with plans to have up to 10,000 installed by the end of the year.  Though the bottom of the 9th and with huge carried debts BBI will be attempting to snipe a segment of Redbox's customer base.

Debt situation:  $225MM on the revolver due November 2012 and $169MM in convertible debt due September 2014, payable in cash (principal) and cash or shares (accrued interest) semi-annually starting March 2010.  To compound the debt situation CSTR is gambling with their balance sheet by entering into long term agreements with Universal Studios, Warner, and 20th Century Fox committing to big cash expenses, yet still not getting discs to customers until 28 days after the Retail Street Date.
Universal Studios agreement
On April 22, 2010, our Redbox subsidiary entered into a rental revenue sharing agreement (the “Universal Studios Agreement”) with Universal Studios Home Entertainment LLC (“Universal Studios”). Redbox estimates that it would pay Universal Studios approximately $82.8 million, during the term of the Universal Studios Agreement, which is expected to last from April 22, 2010 through April 21, 2012. Annual commitments under this agreement are expected to be $23.2 million in 2010, $42.7 million in 2011, and $16.9 million in 2012.
Under the Universal Studios Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental at each location that has a DVD-rental kiosk owned and/or operated by Redbox in the United States. Under the Universal Studios Agreement, Redbox will make the DVDs available for rental 28 days after the “street date,” the earliest date established by Universal Studios on which the DVDs are initially made available to the general public, whether on a rental or sell-through basis. In addition, and pursuant to the terms of the Universal Studios Agreement, Redbox agreed to dismiss with prejudice its lawsuit against Universal Studios relating to Redbox’s access to Universal Studios titles.
20th Century Fox agreement
On April 22, 2010, our Redbox subsidiary entered into a disc output lease and rental agreement (the “Fox Agreement”) with 20th Century Fox Home Entertainment LLC (“Fox”). Redbox estimates that it would pay Fox approximately $394.5 million, during the term of the Fox Agreement, which is expected to last from April 22, 2010 through April 21, 2015. However, at Fox’s discretion, the Fox Agreement may expire earlier on April 21, 2013. Annual commitments under this agreement are expected to be $36.1 million in 2010, $69.6 million in 2011, $80.2 million in 2012, $84.8 million in 2013, $91.0 million in 2014, and 32.8 million in 2015.
Under the Fox Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental at each location that has a DVD-rental kiosk owned and/or operated by Redbox in the United States. Under the Fox Agreement, Redbox will make the DVDs available for rental 28 days after the “retail street date,” the earliest date established by Fox on which the DVDs are initially made available to the general public, whether on a rental or sell-through basis. In addition, and pursuant to the terms of the Fox Agreement, Redbox agreed to dismiss with prejudice its lawsuit against Fox relating to Redbox’s access to Fox titles.
Warner agreement
On February 12, 2010, our Redbox subsidiary entered into a rental revenue sharing agreement (the “Warner Agreement”) with Warner Home Video (“Warner”), a division of Warner Bros. Home Entertainment Inc. Redbox estimates that it would pay Warner approximately $124.0 million during the term of the Warner Agreement, which is expected to last from February 1, 2010 through January 31, 2012. Annual commitments under this agreement are expected to be $54.0 million in 2010 and $70.0 million in 2011.
Under the Warner Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental at each location that has a DVD-rental kiosk owned and/or operated by Redbox in the United States. Under the Warner Agreement, Redbox will make the DVDs available for rental 28 days after the “street date,” the earliest date established by Warner on which the DVDs are initially made available on physical home video formats to consumers, whether on a rental or sell-through basis. In addition, and pursuant to the terms of the Warner Agreement, Redbox voluntarily dismissed its lawsuit against Warner relating to Redbox’s access to Warner titles.
Just using quick adding machine numbers here, I'm looking at between $700 and $750MM of combined debt service and distribution agreement payments between now and the end of 2012 with the annual breakdown resembling a balloon rather than even distribution.

edit - @smallcapanalyst discovered this gem highlighting the difference between the 2008 and 2009 annual reports.  Take note of the studio agreement wording.

And finally, we have insiders converting and monetizing options.  Who doesn't love a rash of insider selling at stretched valuations (10 separate form 4's over the past 3 weeks)?  All SEC filings, uncategorized, here.

I will grant to the casual observer that this company is a high order cash cow, but cannot take a pass on the trade because its momentum, and a nifty squeeze carried it to these bloated levels.  This stock must return to valuations more inline with the questionable forward outlook for the company.

Please check back on Tuesday for clarification on the guidance numbers provided.

Thursday, May 27, 2010

Two Week Outlook

Since there's nothing else going on in the market today went ahead and fired up the scanner early.  If the next week brings us selling back into the 9800-9850 level on the DJIA I will be awash in a sea of favorable chart setups.

As such, I used the news that NEP insiders are stepping down to book a 10% loss in LPIH as well as thin the herd elsewhere.

The preliminary angle on this play will be to participate with call option ladders as the move should be sustained, but probably not breaking to new 52 week highs.

If you've read this blog before you know that I am steadfastly and unapologetically bullish Uranium and the nuclear renaissance.  The supply/demand fundamentals for uranium are so favorable for price appreciation that it's almost scary.  We have seen the results of secondary dumping before, though, with gold during the early 2000's.  I feel that the USU news of capital injection through B&W and Toshiba should finally give the sector some much needed skeptical analysis.  My favorite pure play uranium miner is DNN.

Finally, I put a counter at the bottom of the blog 2 days ago.  Total unique visitors subsequent:  5.  Now that I know no one reads it anyway there is something I have to admit because the inherent gayness has been bothering me.  When I'm having a shitty day, like rad shitty, where the blood pressure meds fail to knock down the visible pulsing of my carotid, there is a playlist I have made on Grooveshark consisting of the following:  Major Tom (cover) by Shiny Toy Guns, Your Latest Trick by Dire Straits, seven songs by the Celtic Women(!), and concluding with Undisclosed Desires by Muse.  It's like fucking Unicorn Planet in my office, but know what?  After the play list is finished, I feel better.

I'm thinking about taking a shot at RCL on the short side later.

Tuesday, May 25, 2010

Cruise Lines - No Midnight Taco Bar for You

Good morning.  Only last week I wrote an article with a few high level reasons why I believe the movie theaters could be starting an industry-wide secular move, article here.

Today I remembered Royal Caribbean (RCL) which I had been watching back in April (and missed the entire move, so far).  Cruises as recreational entertainment probably won't go out of business altogether, but they are in for a stretch of pain if my thesis is correct that the middle class consumer is entering a second iteration of fiscal hardship brought about by declining credit and inflationary trends in the costs of basic goods.

Therefore, take a look at RCL whose near term debt maturity and debt ratios are unfavorable.

Reasons why cruising will suffer:
  • Peripheral costs (flight to port city, car rental/parking, day trips, booze);
  • What do I get with the room?  Nothing, and don't call that shoebox a "room";
  • Cruising demographic (retirees, spring breakers, trailer park Shamu and her patsy husband);
  • What is there to do when I get there?  Midnight taco bar, look at fat chicks at the undersized pool;
The crux of the point being that the middle class now enters a sustained period of restraint, there's not enough value proposition to justify the cost of a cruise.  Retirees have been dinged for big losses in each of the last 3 decades.  For all the money spent to cram yourself onto a floating borefest, it's easy to ignore the "fun" of going altogether.  All of that being the case, Royal Caribbean should get pinched between consumer debt, price competition, and balance sheet debt.

Red sky morning, sailors warning.

Sunday, May 23, 2010

Quick and Dirty Market TA for 5.24.2010

Below find a marked up weekly chart for the DJIA over the past 8 years.  I am still trading based on a thesis of market consolidation over a period of at least 4 to 6 quarters though if the pattern shown repeats, it could be much, much longer.  Now would be the time to allocate money into the "real world" and I feel that is exactly what the investment banks are/will be doing with their money now that more retail investors are having their tax-deferred accounts stuffed with bloated stocks.

Blue line support drawn in a range of 9800-9850, though I do not feel like that will come into play for at least a couple more months.  (How's that for a hex?)  Presently there's a bearish engulfing candle on but after such hard moves, it would be reasonable to expect some upward movement if for no other reason than that liquidity providers need to unload their holdings from the last couple of weeks.

I have boxed analogous inverted head and shoulders patterns and the right-angled descending consolidation that followed in the period from 1-26-2004 to 10-18-2004.  The pattern of the MACD does give me pause, but not as much so as if the same pattern were seen on the daily chart.

I continue to be bearish the consumer and financial names, but steadfastly, and unapologetically bullish Uranium. Uranium is the only widely used industrial metal, apart from silver, that is maddeningly undervalued given intermediate to long term supply-demand fundamentals.  While secondary suppliers (governments) around the world dump their supplies, I am reminded of the early 2000's when governments were dumping gold at 25 year lows.

Solar panels and windmills are not enough to supply the energy demands of American consumers given their well entrenched habits of leaving every light and TV on in the house, even when no one is home.  If we are to return to a more basic production/farming/exporting economy, space will ever be at a premium.

Chart below, click to enlarge, as always.

Mission to China: Exporting Financial Fuckery*

Good Sunday morning my dear compats, the new look for Bloomberg's website is a pox upon my eyes, but I digress.  No, today we revisit "policy advisors" and their "recommendations" that other countries do what America would like them to do.  Namely, China and their currency peg.

Having run through the rest of the First World countries there now exists growing evidence that government supported middle class consumerism is wrecking the financial conditions of those same governments and middle class workers in Australia and Canada.  The latter being one of the last outposts of financial conservatism in the stylings of post-Depression era earn/save/spend balance.  Let's recall one more time my sentiments on this kind of policy from an old post, here.
I am on record saying that the developed governments of this world are going the wrong way in driving esoteric and consumerist business at the cost of production/export centric economies, which are more useful, sustainable, and have less beta (if you know what I mean).
So in order to serve our own best interests, and without fixing source issues about why the US is not competitive, our policy advisors go to China this week with the idea of pressing China to forgo that which put it in its present position, exporting, in favor of the slow-motion train wreck that is Western Financialism.  Full source article by Reuters here.
The Treasury official, who spoke on condition of anonymity, repeated it was China's choice to decide what to do about its currency peg but expressed hope Beijing would keep boosting domestic consumption and rely less on exports.
Real stewards to the welfare of our fellow man are we.  Please do not be hornswoggled by the headline grab that these political pontificators seek.  The most direct route between increasing exports for the today-minded bureaucrat is to go the route sought, provided the yuan strengthens which of course cannot be guaranteed.  Rather than hurt feelings at home by self-implementing public fiscal responsibility and freeing corporations to seek economic balance by destroying the antiquated, extortionist, politically corrupt, and morally bankrupt Union Institution while weak, our brave leaders head into untapped territory, like parasites, to encourage what we have seen will become a financial plague.

The items sought by this Administration are tantamount to changing the rules of the game in order to aid them toward victory rather than benching the dead weight.  Once again we see that the government feels entitled to act in ways individuals should not, for if they were held to the same standard, the United States would help itself before reaching out to others.

*  All credit for the word "fuckery" goes to @The_Real_Fly, a word that may have existed before, but without which the title of this piece would seem incomplete.

Thursday, May 20, 2010

Quick and Dirty Market TA for 5.20.2010

What a wild ride, indeed.  I remain bearish on the consumer and financials, but am frustrated and getting frustrated'er by the lack of segmentation between pigs (COF, ZION, LTD) and value (DNN, LPIH, TSL).  When the trend is on, already good values will get more valuable, so we must stay patient in adding.  There will be a post in the near future about how electronic Emini trading has effectively turned the whole American equity market into an ETF that gets rebalanced nightly.  I remain steadfastly bullish on uranium producers (not explorers), and biotechs as both sectors are long overdue for M&A among other more specific reasons.
Operant Conditioning (noun) - A process of behavior modification in which the likelihood of a specific behavior is increased or decreased through positive or negative reinforcement each time the behavior is exhibited, so that the subject comes to associate the pleasure or displeasure of the reinforcement with the behavior.
During the past 3 years traders have been party to rare levels of volatility coupled with self-reinforcing trends up and down.  I do not accept that we are going to double-dip, yet.  I maintain belief that the DJIA will trade a roughly horizontal range, even if that range is wider than the normal few hundred points.  I believe this partly because it is the only trade that hasn't taken place for several years, and also because it'll take at least 4 to 6 quarters for a sort of post-apocalyptic stasis to manifest itself.  Previously alluded value segmentation will be the primary validation of this thesis.

Dow chart below (click to enlarge) is one ugly mofo.  Long term trend now clearly broken.  First support 10250-10290.  This one has been very important over the last 7 months and the 200 dma just so happens to join in a confluence there.  If this one looks like it's not going to hold, I am prepared to book gains on some long term holdings.  Second support 10050-10100, reasonable to expect capitulation-type overshoot into 4 digits if this comes into play.  This support level also has a corresponding Fibonacci retrenchment area.  Below these ... let's not get below these.

Wednesday, May 19, 2010

From the "Is this really happening?" files.

Next week Timothy Geithner shall engage the Chinese in "high level talks" about ... stuff.  In an online WSJ report posted here Senator Chuck Schumer apparently sent a letter to Mr. Geithner requesting him to press the issue of "currency manipulation" by the Chinese.

Forgetting for a moment that the Chinese fund America like a weak-willed parent supports its petulant bastard child, is America logistically able to handle the outcome that is sought?  Simply, no.  Here again we face politicians electing to go the Band-aid route without understanding or planning for the potential ramifications.

A peg is a consistency.  It is a way of life.  To unhinge a consistency without thought for how American multi-nationals would be affected, and for the length of time is, well, stupid.  Huge American companies drive this nation's economy, not small business, despite what the government tells you.  Think of it like this:  if an instability arises, stock prices are lowered until clarity is seen.  Just like the Financial Reform measures soon to come to vote have taken large investment banks behind the woodshed, what would happen if our major importers (virtually every American consumer-driven company model) got dropped?

Rather than look at tough issues at home like, union extortion of parent companies, unfavorable tax structures due to government waste, and mountains of bureaucratic red tape we see a man going the route of Cowboy Diplomacy once more.  Let's hope against hope that this issue is allowed to die on the vine lest our self-righteous nature be questioned by the parent who is yet bigger, and increasingly without scruple when it comes time to smash our faces into the soft compost of financial warfare if for no other reason than to establish without question whose economy runs whose.

This spring's Carbon Emissions summit in Europe highlighted the Chinese sensitivity to diplomacy, as well as continuing frustration at being strong-armed into activities that they may (or may not) care to undertake.  So, can the supposition of the United States' preeminence withstand hard questioning brought about by Chinese doubt?  Confidence (link to prior blog post) is a fickle bitch, indeed.

Are you feeling lucky, punk?

Tuesday, May 18, 2010

On Libertarian Principles.

Libertarian (noun) - a person who advocates liberty, especially with regard to thought or conduct.

Does America know what it wants anymore?  At this time in our history the United States citizenry get more information, more readily, and with an immediacy never before seen in the world.  We know about scandal only hours after police make arrests, we know about foreign government interventions live as they are announced, we see politicians on CSPAN not as sage statesmen, but as poker players telegraphing their [lack of] knowledge and their special interests.  Our society has grown denser, until entire coast lines become masses of sprawl, yet our identities, as always, are defined by the web of personal relationships we share.  We share similarities but enjoy one another for our individualities.  At such a point are we, now that New World outposts, became colonies, became a Nation, became a World power, that our individualities outnumber our common bonds.   What should one want from a government unifying our land and people?  A thousand times asked, a thousand times answered in a thousand different ways.  But isn't there an answer given in the founding documents of this nation?  Life.  Liberty.  The pursuit of happiness.

Am I getting what I paid for?  While tax season still lingers fresh on everyone's mind now is the perfect time to consider the Government and the results it produces.  The unedited version of my sentiment the very hour of check cutting and mailing can be found here.  Crass, maybe, but couldn't it be said that everyone has some form of contempt for the choices being made in DC?  I will not waste time discussing temporary solutions like term limits, salary limitations, and campaign contribution caps.  These limited-view answers presume that a country as large as ours can be legislated by a few hundred people completely disconnected from their contingencies.  No, the real solution is to handicap the willingness of few to govern the many by simultaneously cutting federal and raising local taxes, rolling back numerous (onerous) daily-life federal statutes, and empowering States' electorates to choose for themselves how, where, and why their money gets spent.  With this power comes the answer to all problems, culpability.

Solution through dilution and committee.  Consider that I feel like the United States Federal Reserve should be audited.  I cast my vote for local House and Senate representation.  A person who has some semblance of my ideals wins and heads East.  Once there they might sit on a committee where the "politics" of selling out some ideals, in favor of what's really wanted takes place.  If enough money was spent in Iowa that term, it doesn't really matter what happens next because there's no chance that my wants are recognized, even if next term the opposite is true.  Shouldn't the government that I pay for give me what I want all the time?  If they don't, what's my alternative?  Who is the one person that can be held accountable for failing to deliver?

Through diffusion of responsibility, the easy answers (excuses) are both plentiful and frankly, honest.  Underpinning everyones' frustrations an institution exists that tries to satisfy everyone, all the time.  No tough choices get made.  And if they do, and I don't agree with them, there's nothing that can be done for at least 2 more years.  These are the struggles anyone who genuinely cares about the direction of this country face.

Life.  Liberty.  The pursuit of happiness.  The transformation of our country from telegraphs to emails highlights the speed of change, yet our government moves slower than ever.  Though it may seem counterintuitive, I would like the federal government to fall back on its founding principles, and cease with futile efforts to legislate minutiae.  It should collect the minimum amount of taxes required to defend our freedoms and let states collect taxes to spend how local voters see fit.  Unfair, and not right is it to collect taxes only to bail out fiscally irresponsible idiots at banks, or in California, much less Greece.  So long as no willful harm is done to my neighbor, I should be free to live as I choose to.  No government should incentivize, or disincentivize, things like gay marriage, or marriage at all.  It makes no matter what another's relationship status is so long as the individuals therein feel free to enjoy their lives.  Everyone should be taxed as individuals.  Our identities should extend no further than our social security numbers in the eyes of the Nation.

A Tea Party Republican by any other name is a Libertarian.  The Tea Party Movement is a blessing and a curse for the revitalization of sensibility in America.  Tumult in the ranks rewards loud mouths first, but their psychotic rants distract from the message as showmanship prevails.  Once attention has been garnered, explaining the frustrations that people have in a way that organizes their feelings must be the second step.  Tea Party Republicans have capitalized on the fact that a growing percentage of the population feels disenfranchised by present government machinations.  To crib a name doesn't lend credence to the cause, the ideology takes care of itself provided it is explained in a way that everyone identifies with.

In sum, as a Libertarian I advocate:
  • A decrease in the size and breadth of Federal government;
  • A greater focus on State and Local representation;
  • A greater level of culpability across all government programs;
  • A reversion to living under founding principles, without effort to legislate minute details;
  • A migration away from the notion that to fail is to be a failure.
The Bill of Rights, a paragon of practicality and a credit to the brilliance of our forefathers can still serve our needs today, if only we allow it.  For all other matters, let the Peoples' vote and money count.  Let locals make local decisions.  Let their representatives shop in the same grocery store with the guy who pulled up in a new Chrysler 300, only to pay for his Cheetos with food stamps, and his beer in cash.

The Beginning of the End for Movie Theaters?

Look, it does no one a service to be talking in superlatives all the time, but what's the point of going to the theater anymore?

There are:
  • Logistical irritations getting there;
  • An uncertainty about the quality of the crowd (texters, talkers, foot bouncers, etc.)
  • Ridiculous pricing structure for the luxury of sitting in a filthy seat for 2 hours;
  • Continually improving televisions and projectors;
  • Streaming video rentals through dish, cable, and Netflix;
  • Competition for entertainment (video games, Ipads, fast internet, etc.).
It first struck me as odd that the leadership of Cinmark (CNK) were dumping shares in early April while the "consumer" was supposed to be improving.  Then last night, under the influence of mind-expanding martini rocks (in a tumbler ... times 3), it occurred to me that I could be placed in the "former movie-goer" category.  In fact, the thought of the going to the movies for any other reason than posterity, or perhaps just to get out of the house, crushes my will to live.

How many ways can you trick up the movie experience to keep people coming back for more?

I'm calling for a secular move in movie theaters, and like BBI and BKS, the result of the move is no bueno for steadfast longs.

Chart Study: Institutional Panic

Capital One financial sucks, just released a bunch of reserves, and now is going to be subject to interest and fee regulation courtesy of Uncle Sam.  The "consumer" has been running up credit card debt having witnessed the market ramp, but there have been no structural remedies.  There are plenty of reasons to hate this shitty company, not the least of which is their stupid Viking raider commercials, and the thought of the type of consumers to whom the company markets.

Capital One, what's on your balance sheet?

Anyhow, below is a picture I want to remember (click to enlarge).  It's what a chart looks like while institutional investors clamber over one another for the escape hatch:

Wednesday, May 12, 2010

Finally! Mish tackles Canadian consumer debt. Australia right there, too.

Oh man!  How geeked am I right now?  No matter how good the idea, it takes time, or perhaps, notoriety to get a momentum break.  I have tried with mixed results to short Canada through one of its largest banks, the Bank of Nova Scotia.  Always looking for opportunity, I keep BNS on my screen, but have pretty much abandoned shorting the country via the bank based principally on its momentum and institutional investor base.

The tide may be turning.  Being a dude, first, and philosopher-investor second, and trader third, I appreciate that it takes realization before my resources can be committed to a macro move without limiting performance advantageous to smaller, nimble participants.  Now that Mike Shedlock (Mish to those who know his work) has blogged on Canada, it's time to pay closer attention than ever to the consumers in Canada, and Australia.

Read Mish's blog post, "Canada's Household Debt Reaches Record $42,000 a Person; Fast and Furious Real Estate Decline Coming" here.  The title says it all, most of it anyway.

Canada had been a fiscally conservative bastion over the last decade or two.  That has changed.  In short, Canadians have switched to middle class consumerism in the form of an American lifestyle, a lifestyle whose fallout we now read books about.  Though their mortgage lending practices have been different than ours, the signals coming from the North are not to be overlooked.  As recently as February, rumors started to come out of Canada that the government ran a deficit, contrary to their balanced budget history, as a backdoor bailout to Canada Mortgage and Housing Corporation of approximately $50 billion was enacted.

Not surprisingly, CMHC was originally structured to sell insurance to lenders, but along the way became a loan backer in the glorious stylings of FNM/FRE.

There are plenty of tidbits out there suggesting Canada is due for a big decline based on the above and more.  I like BNS because what was once a strength, its focus on Canada, would now be a weakness.  Additionally to that, Scotia Bank expanded into Central America and the Caribbean, neither of which could be considered strong enough to bridge a major downturn.

Heads on swivels my dear Compats, and Long Live Libertarianism.

Updates on Inflation and the Feudal Divide

On April 23 I posited the cost of basics would lead the wave of inflation simply because basics are a daily need that cannot be excepted, like Ed Hardy tshirts.  See earlier post, in full, here.  Applicable excerpts below:
The middle class's margins are to be squeezed until raises are effected, which may not happen for a while due to the unemployment levels.  Recognizing the implied demand for basics the price of basics will continue to increase.
Drunk with profits, shareholders are quick to forgive the banks and forsake the humble in a hell where retirement probably seems like a dream.  Without hope this group will be driven to government entitlement programs, where easy government money again jams the costs of basics.
Today zerohedge posted an update on the swelling ranks relying on the government's largesse in the form of food stamps SNAP (Supplemental Nutrition Assistance Program, because "food stamps" stigmatizes the bearer).  Zerohedge article located here.

Now that the government, not the worker, accounts for 12.5% of all food purchasing there is an opportunity for prices to be pushed, eventually resulting in increasing the food stamp payments.

Look, it is important to me, as a human, to care about my fellow man.  I want them to have opportunities to do what I have done.  I also want them to stop relying on the government for their necessities one day.  The sad fact is that there exists a structure that rapidly disincentivizes the effort to leave these programs as diffusion of responsibility and sentiments of "I was put here because of the bankers" start to run amok.

Yesterday an article was tweeted (which I foolishly did not copy) indicating that Detroit landscapers were having trouble filling needs because applicants preferred to remain on Unemployment Benefits.  The Unions would have you believe that the landscapers were not paying enough.  Unfortunately, the real cause is that the government has made it too easy to collect money for doing nothing.

America's structure gets tested every day.  I am losing hope for positive outcomes as dramatic austerity measures are soon to come to bear in this country.  A growing feudal divide will make the protests in after-thought Greece, look like a sit-in.

Libertarian principles must be returned to America.  It is the only way.  Long Live Libertarianism.

Notes to El Presidente (1)

Every now and then a dude gets grumpy to the point of writing letters.  Thankfully, the new Administration has made this process easier than ever by providing a handy comment section at the White House website.

Your humble correspondent has made use of such comment section periodically over the past year, but did not have the blog running until today's note.
Mr. President -
You are about to be made a fool of in the economy once more by permitting the obvious ruse of "flash trading" to distract from the real issue, margin and leverage.
Liquidity doesn't matter for long term investors, just as price action doesn't matter except to provide opportunity to buy at deep discounts.
However, if price action gets to certain extreme levels margins are called and the resulting procyclical demolition of wealth ensues.  By agreeing to impose curbs, in lieu of limiting leverage you are in fact abetting large entities in their cornering of the markets vis a vis minimizing their risk of being margined out.
Flash trading may have been the engine for the collapse, but leverage was the underlying cause.
Your economic and market policy advisors are so reinforced in old world thinking that they can't see that the sky is blue.  Think out side of the box, sir.  You campaigned on Change.  Putting training wheels on a big boy stock exchange isn't the answer.

Tuesday, May 11, 2010

Who doesn't love crash talk?

To be realistic, though, unless the Administration succeeds in shaking leverage down and/or, implementing a rigorous trader tax the thought of imploding the equity markets seems implausible at best right now.

I believe that the major markets have entered a long consolidation period during which companies must perform to their expectations for several quarters, at least until individual investors have their retirement portfolios stuffed full of stocks bought with cheap dollars at prices far below here.  When the positions have been rolled into Joe Sixpack's port, the money will be redeployed toward funding the economy in a way that will lead to growth.  (IPO capital, secondaries, and debt)  The resulting growth will be the fuel that takes the broad markets higher.  Until then, I continue to avoid momo pigs, particularly retail and super regional banks, and actively quest for hardly researched value propositions.

The China macro environment has made some of the prospective China growth stocks even more valuable and the profitability of a trade rests on meeting self-guided expectations.  Some companies may be held back because these expectations seem too high to be credible and performing presents big opportunity.

For now, I am focusing on trading ranges with a list of catalysts regularly updated, and holding fast to my prospective stocks, as the desire for alpha invariably leads to rarely mentioned, quality issues.

Friday, May 7, 2010

Leverage as Liquidity isn't liquidity at all.

Over time there are ideas, as those ideas gain acceptance they become policy, and eventually policies become truths due to self-reinforcement.  That is, until their validity gets tested.  It is not until the final stage, where the truth in the policy is tested, that the "real" truth is uncovered.

Recent examples include:
  • Housing prices, on average, will always appreciate;
  • An EU sovereign can never default;
  • An AAA rating is as safe as it gets;
  • The US Dollar as a reserve currency will always be a safe-haven ...
You get the idea.  What is the true value of a stock, especially one that pays no dividend?

What occurred yesterday was a loss of leverage.  It was an Event, not a sign of what "loss of liquidity" will do to the markets.  Leverage as liquidity isn't liquidity at all because leverage can be called/pulled all at once, and the distributed loss of liquidity resulting therefrom results in a snowball of defensive posturing by institutions who have too much skin in the game if they can't cover the calls without having to punch market orders as fast as their fat fingers can move.

If liquidity loss due to leverage loss, even if caused by high frequency trading, is to blame for yesterday, then there exists in the market another leverage bubble whose hollow core equity valuations temporarily fell into.  If there exists a leverage bubble then, indeed, we are in an equity valuation bubble.

This rube doesn't expect the bubble to pop.  I expect the next phase of the market to be generally horizontal, but with specific (under/)performance as the stretched valuations of some of these pigs are tested with a few quarters of results.  Alternatively, some of the tougher to DD names locally and abroad will be examined more closely in the search for appropriate valuation and the alpha resulting therefrom.  I also expect institutional equity deleveraging as retirement account suckers load up on the "counseling" of their advisors at Douchenozzle Capital, plying them with group sessions and charts, and begging them not to "miss the rest of the rally."

If yesterday was an attempt to Shock and Awe elected officials against cracking down on I-Banking practices it will probably work.  Most elected officials are culturally sophisticated dopes without the ability to free think, rather relying on inciting their contingencies with headlines and obscure stats.  If yesterday was an experiment, the outcome was rigged not because of the action, but because of the unexpected jarring to the system.  Again, yesterday was an Event.  It would be like instituting the uptick rule without telling anyone instead of giving the market 9 months to institute the policy after 18 months of consideration and panel meetings.  If yesterday was a carry trade collapse as is widely suspected then we see highlighted once more the disproportionate weight individuals have over what is supposedly the world's preeminent economic model.

From last March the idea has been that America would not fail, that the global economy would recover in time.  Over the last 13 months this notion has been reinforced by strengthening equity prices, moderating new unemployment, and increased consumer spending.  The policy has been to buy all dips as present earnings ratios are still undervalued relative to historical means.  The validity test will be whether broad market pricing can support the past averages.  There are good deals and there are pigs.  As Zachary Karabel said, "I am a buyer and a seller here."

Thursday, May 6, 2010

Why the Fullback Offense needs to stage a return in the NFL.

Over the last decade the NFL offense at large has witnessed a widespread departure from the Fullback Offense.  Passing, wide receivers, shifty running backs, and dual tight ends have replaced a solid offensive tool and the returns on this investment have been streaky, unreliable, and ultimately disappointing, unless you field a Top 3 passer in the League.

As you know from prior posts, I feel that a philosophy of favorable advantages exploited repeatedly is better than relying on breaking off large quantities of performance less percentage of the time.  The same argument was made earlier referencing the importance of scoring in the paint in basketball, especially during the playoffs. (see post Points in the Paint:  Why the Mavericks will never close the deal.)

Mostly, I blame the idiocy of "group think" on the part of team owners and coaches having taken beatings at the arm of Peyton Manning for the better part of 12 years.  By looking deeper, you see that the Colts have not finished in the top half of the league in rushing offense since 2005 and were ranked dead last last year.  Sure, when you have a lights out, perform-under-pressure, guaranteed Hall of Fame quarterback going away from a solid running game can pay dividends, but how often do these gunners come up?  For more on group think, see the Wildcat Formation.  Nothing says strategy like telegraphing your freaking intentions ...  Alas, that is a fight for another blog post.

Draft trends are not solving the problem.  A trend toward drafting linemen earlier and stud quarterbacks more toward the middle (and then "developing" them for 3 years) still doesn't solve the problem as a blocking lineman can only do so much.  Should a highly drafted lineman be expected to pick up a roving linebacker in addition to his man any more than a free-agent blocker?  It's no mystery what hand the quarterback is going to throw with, so stacking a line isn't going to provide any favors, neither is putting your highly paid tailback up the backside to chop one of these ass-hauling 250 bound beasts.  The running back would be better suited as a last resort dump in the flats anyway, but more on that later.

Color me biased.  Let's put it out there right now that I feel like Daryl "Moose" Johnston is one of the most under-appreciated players from the 90's vintage Dallas Cowboys.  There are numerous reasons, but first among them is the fact that he literally put his neck on the line for the team for 10 seasons.

What do I think an NFL fullback should do?  Simply, an NFL fullback is everything you want a middle linebacker to be.  Toughness, brains, hands, and an appreciation for all things football.  Carefully examine that last quality.  Your fullback needs to love football because you will be asking him to do anything an offensive player can do, and he must do it full throttle, hammer down, and savor every minute.

What can your fullback do for you?  (bullets because there is no order)
  • Provide solid back side pass protection, freeing the RB for an option in the flats;
  • Pickup the last block (typically a linebacker on inside running plays, but can also seal OLB's on sweeps and bump outs);
  • Become a second option on quick passes and screens or busted pass plays;
  • Decrease the reliance on pulling linemen;
  • Mix up the offensive set and audibles with pre-play motion;
  • Generally deemphasize the need for positional top talent across the offense.
Given the choice between having a 200 pound RB picking up backside blitzes and mismatches and having a 230 pounder with a taste for contact, is the decision that tough to make?  When you've got a 2 TE set who picks up the linebacker on an inside play?  Why would you run an inside play out of this formation unless you were only looking to pick up 2 yards?  See how it becomes a back door way of telegraphing the play, and of managing yard-gain risk to the opponent's defensive strategists?  The importance of a fullback's utility as a mobile blocker cannot be overstated.  He could go anywhere, and there's no way to defend that except to dedicate an OLB or DE to covering him.  Play action then, pulls a quality defender off of mid-field coverage for hitch and drag routes, or outside protection in the case of a DE.  As an extra offensive weapon to receive on pass plays the FB position gives you another choice in the flats, one of the most error-in-coverage prone areas of the football field.  Uncovered receivers in the flats get first downs on busted plays, not a loss of down caused by throwing the ball away.  While I do favor pulling offensive linemen to get blowout blocks backed by the momentum of a stampeding yak, their movement is slow to develop and adds a knee/ankle joint risk to the equation.  Pulling linemen also telegraph a developing play by drawing d-linemen down the motion of the pull, in addition to backfield penetration caused by the absence of a blocker and rotation into the play by linebackers.  The offensive basket that a FB brings inherently deprives the other team's coordinator from knowing what he's going to do once the play gets going.  When you motion him up to a Wing set will the FB be sealing an end?  Play action release on a 5 yard route?  Releasing into the flats to open up backside option?  Why pay for a double tight end set, when you can get the same thing and more from your FB without having to change personnel?

Finally, and this one gets its own paragraph, a quality fullback deemphasizes the need for positional top talent.  There exists in the game, and in pundit circles, a notion that with so much parity due to free-agency it doesn't really matter how you get it done because everyone's going to have a "superstar advantage" somewhere.  Horse puckey!  What if the superstar advantage is your wide receiver, but your QB is streaky?  Answer, inside pressure and your best DB should take care of that.  What if your advantage is your QB but his receivers can't make tough catches at the sideline?  What if your advantage is a speed-freak, crazy shifty RB with the field vision to move, but the DE's keep outside contain all game?  To have the balance and maximum number of options on the field every play imparts a decisive offensive advantage because if I'm on the ball I have no idea what's coming, even if I know how to defend against it.  Fullbacks expose the opponent D to playing perfect football over a long set list without having the same ability to limit the offensive tendencies based on fielded personnel.

Conclusion.  Whether or not the fullback returns to the league out of necessity or "rediscovery," the early teams to head back to reliance on fielding this under-appreciated position will benefit greatly.  So too will teams who try and force fullbacks like LenDale White and Troy Hambrick into running back positions fail a majority of the time.  The NFL should be played as a game of averages.  Getting that last LB block on a run resulting in an extra yard, or that extra half second for the QB on a pass adds up over a season.  To continue to deny the importance of the fullback only emphasizes that group think trumps will to win, and that coaches and coordinators are overpaid for the results they produce.  If a decade of poor Dallas Cowboy football neatly overlaid with a decade without a fully functional fullback doesn't write the rest of the story, then I don't know what else to say.

Tuesday, May 4, 2010

American Equity Markets' Theme Song - High

Jimmy's Chicken Shack put out a song in the late 90's called "High."  Having rediscovered this song today while riding my cycle around the lake (I really had my handle bar streamers ironed out I was hauling so much ass) your humble correspondent got a hearty laugh.

The lyrics:
What mood is that you wear this time 
Why do you get high
To change the seat you're in
In time you won't come back again
What mood is that you wear this time
Why do you get high
To change the seat you're in
In time you won't come back again 

high (x6) 

Make light of the weight
Time off from hell 
I could be in
these are the words you say
what mood is that you wear this time
why do you get high
to change the seat and complicate things 

high (x6) 

what does it take to get you high
what will it take to get me high
what does it take to get us high
whatever it takes to get you high 

high (x2) 

you don't like me when i'm high
high haha haha

Monday, May 3, 2010

Is Australia about to "Pull a Homer" with its Miner Tax?

There's an episode of the Simpsons titled "Homer Defined" whereby our unlikely, Duff swilling, hero uses eeny, meeny, miney, moe to select the one and only button on his control panel that will avert a core meltdown at the nuclear plant.  To Pull a Homer, the show educated us, means "to succeed despite idiocy."

What follows are philosophical musings, with little to no numbers backup at this time.

What I wonder is if by raising taxes, Australia sends clients and investment overseas to cheaper minerals as a result of cheaper overhead.  During a time when basic materials have risen nicely, and are probably near a short term high (copper, iron, etc.), wouldn't it be convenient for locals to mothball some mines and let the other countries give up their resources on the cheap as prices stabilize?  Population growth, and certainly the raging fires of Chinese societal industrialization will drive demand for basic materials in the long term.  Is Australia potentially maximizing its future by limiting production now?

Upon consideration, three direct negative implications:
  1. Mining as an economic contributor accounts for about 9% of the Australian economy according to Bloomberg.  The profits from the increased taxation of profitable resources are meant to lower other types of corporate and local taxes.  I am on record saying that the developed governments of this world are going the wrong way in driving esoteric and consumerist business at the cost of production/export centric economies, which are more useful, sustainable, and have less beta (if you know what I mean).
  2. As a libertarian I never like to see "these profits are going to that cause" and other like-minded logic.  If the local government isn't seeing enough money from the mines payroll taxes, not a baseline tax-on-profit structure needs to be instituted.  Bottom line:  it's easy to make a company look like shit, but doing so drives the "consulting fees" higher up the employee ladder, not down low where you need it most.
  3. As I understand it, Australia is in somewhat of a tough spot right now with living expenses getting away from Joe Rugby.  This is probably not the best time, or best way, to handle that problem.  Why spook large segments of a regional economy that you have cornered? ... until China can bring more of its own mineral sourcing operations online.
Talk amongst yourselves.

Saturday, May 1, 2010

On Confidence

On a daily cruise through zerohedge, I came across the following quote referenced in a paper titled "Greece, The End of the Beginning" by Oisin Zimmerman:
"Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence - especially in cases in which large short-term debts need to be rolled over continuously - is the key factor that gives rise to the this-time-is-different syndrome.  Highly indebted governments, banks or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits."
- excerpted from This Time is Different by Carmen M. Reinhart and Kenneth Rogoff

Studies on the Price of Uranium, Present and Future

So many mechanisms affect Uranium pricing that deconstruction of the complex should be a task reserved for a string of Saturdays, not just this one.  Please check in for updates as time allows.

For Clarity in Reading

U3O8, also called yellowcake, is the refined but not enriched Uranium that mills produce from mined Uranium ore.  Typically yellowcake is 60 to 70% pure and is radioactive.  For purposes of macro economic study, I will refer to world demand in millions of pounds of U3O8, a common baseline assumption.

U3O8 indicates a chemical compound consisting of three Uranium atoms and eight Oxygen atoms.  Therefore, note that the "O" is in fact not a zero.  Note:  Some may be familiar with the terms Uranium-238 or U-235, these designations are the atomic weight of the Uranium atoms themselves.  U-238 is the most commonly found form of natural Uranium, while the latter is the fissionable isotope used in nuclear weapons.  Wikipedia on Uranium

Major Factors in Uranium Pricing
  • Secondary Supply
    • Government sales of down-blending supplies of highly enriched uranium (also called HEU);
    • Government sales of low enriched uranium (LEU) and natural uranium (NU);
    • Government sales of depleted uranium fluoride (DUF);
  • Irregular Supply/Demand Cycles
    • Commissioning a new reactor requires a one time supply of Uranium that is more than the [typically] consistent annual demand;
    • Considerable backlog of ongoing, planned, and pre-planning stage new construction;
    • Utilities sometimes exhibit tendencies to "school," this results in spikes of forward purchasing;
    • Company shut-ins to wait out price compression;
  • Costs to Produce
    • Bureaucratic inefficiencies due to:
      • Ongoing fear related to Chernobyl, Three Mile Island;
      • A generation-wide gap in procedures;
      • Apprehension about controlling supply to limit proliferation of weaponized material;
      • Concerns about what to do with the waste;
    • Uranium's entire structure is highly regulated, ie:  permitting, mining, milling, enriching, transport;
    • Exploration is time consuming, highly prospective, and expensive;
    • Large deposits are not frequently located in areas with well developed infrastructure;
    • The type of extraction method, this factor depends on many other factors:
      • Deposit concentration (typically communicated as a percentage of U3O8);
      • Size of deposit;
      • Depth of deposit;
      • Regional tendencies;
    • Large deposits are not always in "friendly nations," ie:  Kazakhstan, Mongolia, African nations:
      • Bribes;
      • Civil unrest;
      • Organized crime;
      • Ineffective worker pools;
  • Forex
    • Uranium prices are quoted in US$, a weak and volatile American currency can hurt foreign producers' margins and models;
  • Expanding Demand
    • Growth in reactor construction due to:
      • Ability to transport concentrated electrical potential;
      • Ability to generate power in almost any exogenous climate;
      • Ability to throttle power supply onto the grid;
      • Low ongoing cost per unit of electricity;
      • Low ongoing Carbon emissions;
      • Third World development;
      • Population growth;
  • Success or Failure of other "Green Energy Initiatives"
    • Biofuels;
    • Wind farms;
    • Liquefied coal, natural gas, combined-cycle power plants;
    • Thorium seeding;
    • Others.
    Secondary Supply

    President Obama has continued with great interest an aggressive campaign of nuclear disarmament.  The secondary supplies of HEU, LEU, DUF, and various forms of natural uranium in each government's care can never be known with certainty, but I was able to locate a declassified Department of Energy paper from 2008, Excess Uranium Inventory Management Plan, indicating America's holdings (click to enlarge):

    Various agencies estimate that secondary supply accounts for anywhere between 25 to 35% of annual supply against reactor demand world wide.  See below from Uranium Resources's 2009 Annual Report:
    Based on reports by Ux Consulting Company, LLC, or Ux, the preliminary estimate for worldwide production of uranium in 2009 is 120 million pounds.  [Existing plant] annual consumption [accounts for] about 162 million pounds of uranium.  Ux reported that the gap between production and demand was filled by secondary supplies, such as inventories held by governments, utilities and others in the fuel cycle...
    The referenced DOE paper outlines the government's plan to continue the sales of these types of materials for a period of 10 years, though it estimates total time to work through all excess inventories at up to 25 years.  Details are located on page ES-2.

    Irregular Supply/Demand Cycles

    Once a plant has been commissioned its fuel demand remains approximately constant throughout the life of the reactor.  However, to commission a newly constructed plant requires a factor more than the typical annual demand.  (LOCATE DEFINITIVE VALUES)  The growing strength of the nuclear renaissance means that as plants are brought online, the demand curve could be lumpy.

    Below is another excerpt taken from Uranium Resources's 2009 Annual Report:
    According to the World Nuclear Association (WNA), as of February 2010 there were 436 nuclear power plants operating in the world ... In addition, the WNA lists 53 reactors under construction, 142 being planned, and 327 being proposed.
    Depending on a myriad of factors this pipeline could also inject large, irregular supply gaps if plants are constructed, and therefore commissioned, in groups as a part of governmental or corporate initiatives.