Wednesday, June 30, 2010

A Quick Word On Comments

For those who visit here often ... or those who are here for the first time, by all means please feel free to leave comments. I definitely would like to know what you think about the pieces, and I'd also love to know what topics interest you. About 95% of my writing is based on whatever strikes my fancy at the time, but I'd like to know what *you* find interesting and would like to read about on this site.

By the same token, if public comments aren't your thing, feel free to send me an email.


Q2 2010

Well, this quarter was a pretty good definition of a Pyrrhic victory.

My portfolio "A" : -6.5%
My portfolio "B" : -7.7%
My combined portfolios: -7.0%

S&P 500: -12.5%
Nasdaq: -12.2%
Russell 2000: -12.4%

You know it's a lousy quarter when you would have been better off with the almost-zero yields available in money market funds. And you know, it just figures. About two and a half months ago, I moved a chunk of dry powder (that is, cash) into the market. What this proves, yet again, is that my short-term market-timing skills are horrible!!!

Oh well, here's hoping the next quarter is a better one!

AgBank Of China IPO Not As Easy As ABC

Reading about all of the angst and concern about the IPO of the Agricultural Bank of China, I am reminded that waiting for the hammer to fall can be worse than the blow itself. A lot of market-watchers have made this event into an be-all/end-all referendum on the state of China's market. The truth, though, is that the long-term impacts are all but certain to be far less earth-shaking. 

A Big Deal, But ...There is no doubt that the IPO of AgBank is a major event. This is the last major bank in China to go public, it is a very significant lender in the country (particularly in rural areas), and the performance of the stock is going to tell us all something about the appetite for Chinese shares. It is also true that you do not see a $23 billion IPO very often. (For more, see IPO Basics Tutorial.)

For the full piece, please continue to:

This piece originally had China Mobile named as China Telecom. We'll be getting that fixed soon...

Micron Enjoying A Break In The Clouds

How do you evaluate a nice property in a very tough neighborhood? That is the ever-present challenge for investors considering American memory chip maker Micron (NYSE:MU). 

As investors have seen over and over again, no company can overpower the strong cyclical currents in the commodity chip market for very long. The key, then, lies in anticipating the changing tides and abandoning a classical "buy and hold" strategy in favor of "buy, sell, and maybe buy again later". 

For the complete column:

General Mills Treads Water

These are not great days to be a packaged food company. The lousy economy seriously limits what you can do in terms of price increases (at least without resorting to sneaky tricks like shrinking the contents), but production prices keep creeping up. Retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are increasingly looking to reduce the number of brands in each category, so they can make the producers jump through all sorts of hoops. On top of all that, public health officials routinely harangue them about the nutritional value of their products and their role in worsening the health of consumers. 

With all that in mind, then, a "just muddling through" result from General Mills (NYSE:GIS) should not be all that bad really. The catch, though, is that some of the food stocks have been moving up lately and it does not seem like an okay result is going to satisfy investors.
To read the full piece, please click on:

Monsanto Still In The Weeds

I had very modest expectations for Monsanto (NYSE: MON) this quarter, and that is basically what they delivered. Revenue was soft (by about $200M), as seed performance was exceptionally mediocre (up about 5%) and chemical sales fell off a cliff (down 34% in total). The further you go down the earnings statement, the worse it gets - lower revenue led to lower margins, and slightly higher operating expenses combined with those lower margins to really smack earnings.

Looking through the details, cotton was really strong, soy was just slightly positive, and corn didn't do very well. Perhaps playing into that performance, I saw the USDA report today that showed lower planted corn acreage than originally expected.

Monsanto is smack in the middle of a painful adjustment process. Round-up has pretty much had its run and the company is going to have to cycle through tough comparisons as that goes away. On top of that, there are concerns that the company's seeds haven't delivered the yields originally promised, while competitors like DuPont (NYSE: DD) and Syngenta (NYSE: SYT) seem to be getting a second wind.

The good news, and the reason I'm hanging on, is that Monsanto still has the best pipeline in the business. As time goes on, it's a simple fact that there will be increasing crop demand but decreasing factors of production (land, water, nutrients, etc.). Ultimately, then, I'm betting that better science ultimately leads to better growth.

In the meantime, I can't really encourage anybody to take the leap with me. I bought the stock way too soon and paid heavily for the mistake. Still, if you don't mind having to wait for a few quarters, it is definitely a prime example of a beaten-down former winner with a very good chance of rising once again. I put a fair value of about $70 - $75 on these shares right now.

Disclosure: I own MON shares.

What Ails Amgen?

Biotech giant Amgen (Nasdaq:AMGN) may not be considered a pharmaceutical company yet, but the market is certainly treating it like one. Whether you consider the P/E ratio, the price-book, price-cash flow, or EV/EBITDA ratios, Amgen trades more or less in line with the likes of Pfizer (NYSE:PFE), Lilly (NYSE:LLY) and GlaxoSmithKline (NYSE:GSK) than Celgene (Nasdaq:CELG) or Genzyme (Nasdaq:GENZ).  

This would be all well and good if Amgen was just another typical big-cap pharmaceutical company. Though Amgen does have some issues in common, I think the differences are more significant than the similarities. Most significantly, it looks as though the market is assuming that Amgen is going to grow at a pace similar to most of these large companies (which is to say, "not much"), and this is where the stock could ultimately outperform.  

The full article can be read at:

The Next McDonald's

No matter how much nutritionists may hate it, fast food joints - called quick-service restaurants (QSR) in the industry lingo - are here to stay. With Americans still in mass-migration away from their kitchens and into the clutches of the "do it for me" food industry, dozens of chains are trying to lock in their own recipe for becoming the next McDonald's (NYSE: MCD). Should investors order up any of these aspirants?   

Chipotle Mexican Grill - Spicy Growth, Hot Valuation 

Chipotle Mexican Grill (NYSE: CMG) is less than 20 years old, but it has already made a splash in the QSR segment by capturing over one-third of the Mexican-themed segment. Chipotle boasts of fresh ingredients and the ability to customize any order to the diner's tastes (so long as it includes the ingredients they have on hand), and customers have responded in force.

For the complete column, please go to:

Monday, June 28, 2010

I'm Such An Idiot

Sometimes I feel like I have to look in the mirror, take a deep breath, and confess to myself that I'm an idiot.

For all the time I've spent talking about BP (NYSE: BP) and Transocean (NYSE: RIG) and all that, I don't know how I could have missed one of the slam-dunk plays on this mess.

Clean Harbors (NYSE: CLH).

One of their main business units is spill clean-up. Hell, it's basically in their name!. Now, I don't know how much (if any) business they're getting from the mess in the Gulf ... and I'm too ticked at myself to go look it up right away. What I do know is that the stock has done quite well ever since it was clear that this would be a serious spill.

What is interesting, as a side note, is that Veolia (NYSE: VE), a French services company which also does industrial/environmental clean-up has gone the opposite direction since the spill. Go figure.

Anyways ... maybe there's still money to be made in Clean Harbors. But I know this missed opportunity is going to bug me for a few days...

A Good Omen From Oracle

The bigger a business gets, the more complicated it becomes. The more complicated a business becomes, the larger its IT needs get. That is my five-second summary on Oracle's (Nasdaq: ORCL) basic raison d'etre and why I continue to be optimistic about the company's future. 

The Quarter That Was 
Oracle generally has a reputation for delivering the goods, and this quarter was no exception. Although revenue was in line with the average analyst guess, 39% growth to about $9.5 billion was a solid result. Even stripping out the non-organic boost from the acquisition of Sun, 12% growth was a solid result. Oracle also delivered very solid operating performance and beat the bottom-line estimate (adjusted for items) by more than 10%. (For related reading, take a look at The Wonderful World Of Mergers.) 

For the full piece:

Friday, June 25, 2010

Banking Reform - Much Ado About Quite Little

So, now we see the compromise bill on banking reform/overhaul, and it's really not that big of a deal after all. For all of the blustering of the likes of Barney Frank, very little changes. Banks will be allowed to stay in the swap business, more or less, as only non-investment grade credit, equity, and commodity swaps are going to be pushed into non-bank subsidiaries. Moreover, the parent banks can still guarantee those subsidiaries.

All in all, then, all the talk about forcing banks out of the derivatives business was basically just noise. Then again, the whole idea was largely noise - of the banking industry, Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan (NYSE: JPM), Goldman Sachs (NYSE: GS), and Wells Fargo (NYSE: WFC) comprised something like 97% of derivative holdings (according to the OCC), so it was never a "bank issue" anyway. It was an issue for those quasi-bank/brokers, and only the biggest ones at that.

Another area of concern was the "Volcker Rule" that was going to severely limit banks proprietary trading (that is, trading for their own account) and ability to invest in hedge funds and private equity. According to this bill, banks can invest in these up to a total of 3% of their Tier 1 capital. At that level, it's not going to have a major effect on anybody so far as I can tell (that's nearly a $4B limit for JPM and nearly $2B for Goldman). Then again, that's a 3% limit on investing in funds *AND* prop trading, so maybe Goldman will find that limitation a bit constraining, as prop trading is such a large part of their business historically.

In a strange way, this might actually be good news for some of these banks. See, there's a LOT of money in marketing and running these funds, but investors often want to see the manager keep some skin in the game. Now, though, these banks have a built-in excuse for making only very modest investments in their own funds. "Gee, sorry ... we'd like to, but there's that 3% limit we have to obey". Now, instead, the banks may be able to just collect the "2 and 20" (that is, a 2% management fee and 20% of profits) and not worry about having a lot of their own money tied up. Pretty sweet, huh?

Other details seem pretty positive too. There was a fear that the banking sector was going to be made to pay for the wind-down of Freddie Mac and Fannie Mae (maybe $400B - $500B), but that seems to be off the table. Congress also dropped the idea of creating a $150B bailout/wind-down fund (again, paid for by banks, but all of us ultimately through higher fees and interest rates) to be used in seizing and winding down failed banks.

Still, there will be a new tax of about $19B and a change to the regulatory framework will allow the Fed to impose greater capital requirements on individual banks if the regulators decide the underlying risk warrants such a move. Regulators will also now have more authority and discretion to step in, seize, and restructure or wind down banks - ideally before they get themselves into truly dangerous messes. In addition, there will be limits on certain financial transaction fees (like the ones charged by Visa or MasterCard to merchants). 

All in all, this is about as good of a deal as the industry could have hoped. There will be a few constraints on their activities and some higher costs, but nothing that will dramatically impair their ability to get back to doing very profitable business for years to come. Now, it's not a done deal yet, but I would be pretty surprised if the bill doesn't pass. It does end up looking like a normal compromise - nobody is going to be all that happy with it, but both parties will probably acknowledge that it's the best they can come up with for now.

The biggest banks, especially those with proprietary trading desks and large derivative businesses, come out of this great. Banks that are more like "normal banks", BB&T (NYSE: BBT), US Bancorp (NYSE: USB), PNC (NYSE: PNC), and so on will arguably see some higher costs and regulatory burdens, but aren't really getting any perks from the deal either.

There are plenty of reasons to be cautious on banks, lending activity is weak and credit quality is still iffy, but at least regulatory/legislative risk is now largely resolved.

Disclosure: I own shares of JPMorgan and BBT.

Is Cheap Chinese Labor Over?

Bookshelves groan under the weight of materials written about how China has changed the global economy. Skeptics blame China for a "hollowing out" of American industry that has seen companies choose to relocate manufacturing China to take advantage of cheaper labor. Others point to the fact that lower labor costs in China have allowed Americans to prosper from cheaper Chinese imports and essentially live better by getting more for their money. 

Regardless of your view of China's role in our economy, the reality is that the situation is always changing. With wages and standards on the rise in China, can American companies still exploit the leverage present in lower wage costs? (For more, see 

You can read the full column here:

Wait For A Sale On Nike

When is high-quality merchandise not so attractive? When you have to pay up to get it. 

I am a fierce bargain hound, so much so that if I am routinely shopping at your store, you may just have a problem. But that innate cheapness serves me well in the stock market and I think investors who do not already own Nike (NYSE:NKE) should put this one on their "buy when it gets cheaper" watch list.

The Quarter That WasNike had a lukewarm quarter. Revenue was a little light relative to analyst hopes, but still grew about 8% to just over $5 billion. Within that number, footwear sales climbed more than 6% (to about $2.7 billion), while apparel jumped up 13% to $1.3 billion. 

For the full column:

Thursday, June 24, 2010

Profits In For-Profit Education

Whether it is a late-night ad for a graphic design school, an ad in the middle of Good Eats for cooking school, or yet another ad about some IT training program that "changed a person's life", for profit-education is a fixture in the United States. The question remains, though, as to whether there is still money to be made in a sector that has had quite a long stretch of exceptional growth. 

Apollo Group (Nasdaq:APOL)
Apollo generates nearly all of its revenue through the well-known University of Phoenix program; arguably the for-profit program that comes closest to a traditional university in terms of the breadth and depth of programs it offers. The largest player by enrollment, the company has had some difficulties, as the SEC is informally investigating certain revenue recognition policies and the company has come under criticism for the quality of it academic programs.

Nevertheless, the valuation here is very appealing and even if the Department of Education tightens standards for this industry, Apollo stock should have room to move higher. 

To read the complete column:

Wednesday, June 23, 2010

Good-Bye Rudd

So, Australia's PM Kevin Rudd, he who presided over the idea to launch a new mining tax, has stepped aside and Julia Gillard is now the PM of Australia (the first woman to hold that job, I believe).

Rudd learned something that I would have thought to be completely obvious to an Australian - if you take on the mining industry, you're going to get run over and run out of town. Mining is a huge chunk of the Aussie economy, and a major part of the reason that Australia has come through this global recession in much better shape than most other countries.

Now, before holders of BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP), Xstrata and so on get too excited, keep in mind that Gillard is also Labor and arguably "more left wing" than Rudd. So, the idea that she is going to be a softy on mining is probably way too much to hope for right now. But, since it wasn't her idea in the first place, there may be more room for compromise without losing face or looking like she backed down from the fight.

One way or another, the mining tax is coming. That's bad news for the aforementioned companies, others like Barrick Gold (NYSE: ABX), Newmont (NYSE: NEM), Fortescue, Lynas, and so on. It's also still, arguably, good news for companies like Freeport McMoran (NYSE: FCX), Teck Resources (NYSE: TCK), Anglo American, Vedanta, and Vale (Nasdaq: VALE) who don't have big exposure to Australian assets.

Is it going to hurt Australia? Probably, but only to a point. While companies like Xstrata have certainly threatened to halt and curtail investments in Australian assets, these companies are going to face a pretty hard reality. Australia is a country with high-quality mining assets, very familiar rule-of-law, excellent stability and infrastructure, an educated homogenous workforce, and physical proximity to major markets like China and India. Compare that to a country like Congo or Mynamar and suddenly the extra tax doesn't seem so bad. After all, nobody in Australia worries about a government just seizing assets or an outbreak of bloody civil war.

Oh, and these companies that were so worried about the tax? Turns out that their stock prices are pretty much all more or less back (or better) than they were when news of this mining tax came out. So, lots of sound, lots of fury, but probably not a whole lot of long-term significance.

Book Review - The Economics of Happiness

I originally came up with the idea of including book reviews here because I read a lot anyway, and I thought some visitors might find it interesting to pick up a few ideas here and there for other things to read. So far, the books I've written about have been books that I've liked and thought just about anybody could appreciate. Well, now that changes.

The Economics of Happiness by Mark Anielski is one of the least-enjoyable books I've read in quite some time and it was, honestly, a struggle to get through to the end of it.

The book starts out with a solid enough premise - namely, that traditional economic measures like GNP/GDP don't measure everything that matters to us that and it is possible for a nation to get richer and simultaneously less happy. Fine, no argument there.

The author also makes the point that traditional economic metrics fail to properly value (and/or assign costs) things like environmental quality, natural resource depletion, work satisfaction and so forth. Again, no problem there with me - the idea of externalities is hardly new, and it has been a problem that economists have wrestled with for years.

Where things start to go off the rails for me is when the author becomes infatuated with his own notions of what really matters to people and their inclusion in his metrics for national well-being. For instance, I may have missed it, but I didn't see a single point at which he assigned value to the technology advances related to the internet. I, for one, find it enormously life-improving that I can communicate with so many people so quickly and so easily, and that I can find a wealth of information (and entertainment) at my fingertips.

Moreover, the author also seems to suggest that we all will value non-tangible concepts at the same rate. To me, that's just patently false. For instance, I like being outdoors quite a lot - but the value to me of cycling trails is nil, as I don't bike (conversely, those who don't row may see no value in facilities/set-asides that cater to kayakers).

To be fair, I don't disagree with the author's goal/dream of harmonious development, nor do I personally disagree with his outlook that Americans often value "more" simply because it's, well, more. I've quit high-paying jobs in the past because I hated what I did (or who I did it with), and I'm sure others have as well. But I've also known plenty of smart, upstanding people who have decided to stay put and deal with it because they valued the freedoms that the high-paying job would give them down the road. Personally, I don't see a right/wrong there, I see a "do what makes YOU happy" choice instead.

Anyways, die-hard capitalists and free-marketers will probably break out in hives about 50 pages into this book. On the flip side, those who consider themselves progressive and are interested in concepts like sustainable development and the inclusion of less-empirical factors in economic policy may find some intriguing concepts here.

All in all, though, I'd give it a pass.

A Little More On Santander And M&T Bank

Just a quick little follow-up on the rumor of a get-together between Spain's Santander (NYSE: SAN) and super-regional M&T Bank (NYSE: MTB).

There was news a couple of days ago that Santander was looking to restart talks with M&T management about the possibility of a deal. If the news reports are accurate, the problem is pretty fundamental - M&T does not want to sell and/or give up control to Santander. Given the history of the M&T, the long tenure of senior management, the significant employee ownership, and the whole culture of the bank (as best an outsider like myself can sense), this is not really a surprise.

In other words, Santander is probably welcome to buy Allied Irish Bank's (NYSE: AIB) stake in M&T, but Santander will be expected to operate under similar strictures as AIB - namely, can you offer some suggestions and we won't dilute your interests, but we're not interested in being your subsidiary.

If Santander pushes the matter, they likely will fail. About 20% of M&T is owned by employees, another 5% by Berkshire Hathaway (NYSE: BRK-A), and the 22% or so held by AIB. Assuming AIB has the option to side with M&T management, it is pretty much a non-starter for Santander, and I have to imagine that AIB has other options to monetize their stake if they really wish to pursue them (in other words, I don't think AIB turns over on M&T to make a buck).

I still think Santander is a decent suitor at the right price; I don't think they will ruin M&T and I think there's a fair chance that they would put M&T at the head of their US operations (maybe to the detriment of US-based, Santander-owned Sovereign Bancorp). All in all, Santander is a very good bank and while it may not have quite the same culture as M&T, Santander's relative conservatism has helped them muddle through this credit crisis better than most.

What if the deal doesn't happen? M&T will pretty much continue on as before, growing at a modest organic pace and perhaps considering strategic deals here and there. Santander, though, is not likely to quit. Whether they would look to go large (say, Suntrust (NYSE: STI) or PNC (NYSE: PNC)) or more moderate (deals the size of Fifth Third (Nasdaq: FITB) or Comerica (NYSE: CMA), for instance), I don't think Santander is done building its U.S. business just yet.

Adobe Not Stuck In The Mud

Software companies inevitably sow the seeds of their own destruction. If a company develops a good product and "proves" that a market is lucrative, competition is sure to come running. Worse still, big companies are by their very nature not as nimble or risk-tolerant as start-ups, so there is always a host of wannabes nipping at the heels of successful companies. 

Despite all of that, Adobe (Nasdaq:ADBE) has managed to become the acknowledged top dog in a market segment that is still poised for strong growth. Better still, the company seems to be navigating the latest prophecies of doom pretty skillfully. 

For the rest of the story:


Wish I would have had more space to deal a bit with the bond insurers who also stand to be on the hook if/when these munis start melting down... Who knows, maybe that's another article all on its own!

The ticking clock is a great device for creating dramatic tension on screen. You might get up to go get a snack when the lead actors are emoting, but nobody leaves when there is three seconds left on the device that is going to explode. Maybe that is why there is so much fuss in the financial media about the impending detonation of the municipal bond market. 

Safe and Sleepy... UsuallyIn normal days, municipal bonds are arguably one of the sleepiest and most boring segments of the financial marketplace. Munis are bonds issued by communities or enterprises to pay for things like roads, hospitals and schools. So dull are they that there is typically no active quotation system for them - they trade seldom enough that you have to call your broker, who will then call around to get bid/ask quotes on the bond. (For a quick refresher, check out The Basics Of Municipal Bonds.)
Now, though, that may be changing. 

For the complete column:

Tuesday, June 22, 2010

Another Partnership For Alnylam

One of my favorite biotechs (and one that I own), Alnylam Pharmaceuticals (Nasdaq: ALNY), announced yet another partnership tied to its microRNA/RNAi technology.

Tuesday morning, Alnylam announced that Sanofi-Aventis (NYSE: SNY) had formed a research and development partnership with Regulus Therapeutics. Regulus is a 50/50 joint venture between Alnylam and antisense pioneer Isis Pharmaceuticals (Nasdaq: ISIS). As part of the three-year deal, Sanofi is sending a $25 million initial payment to Regulus, and Sanofi will pay for all of the R&D during the deal. Sanofi also has the option to extend the deal for an additional two years, and could send as much as $750 million to the partnership if various development milestones are met (that's a BIG if, and predicated on multiple clinical successes for multiple compounds). The deal may also include a $10M equity investment in Regulus if the parties can agree to a price.

The deal will initially cover the potential use of microRNA for the treatment of fibroids (four different targets), but could expand even further.

Now, partnerships are nothing new for Alnylam (nor Regulus, as there's also a deal in place with Glaxo). The company already had lucrative deals with the likes of Roche, Novartis, and Takeda. That Big Pharma validation is certainly part of why Alnylam is considered the leader in RNAi, and the company has an impressive amount of  IP to back up its promise (over 300 patents to date).

This isn't the time or the post where I'm going to go into detail on why I like Alnylam. But I will say this is one of the most interesting biotechs I've seen in a long, long time and while there is nothing like a "sure thing" in biotech, I'm actually allowing myself to get a little excited about the potential of this one. Then again, I once thought the same thing about Isis and although I profited from my ownership in those shares, that never worked out as I had hoped.

Disclosure: I own shares of Alnylam

A Little Good News From Lexicon

One of my least-successful investments, Lexicon Pharmaceuticals (Nasdaq: LXRX), re-reported some interesting news early today on one of its clinical programs.

Data from a Phase 2a study of LX4211 (a dual SGLT2 and SGLT1 inhibitor) in Type 2 diabetes showed a 1.15 reduction in HbA1c after just 28 days of use in the 150mg group, while the 300mg group showed 1.25 reduction. In this study, the placebo group showed a 0.49 improvement. Keep in mind, though, that this wasn't really "news" - the top line results from this study came out in January of this year.

Nevertheless, those numbers compare to a 1.5 improvement seen in a recently-announced 26-week study of Amylin's (Nasdaq: AMLN) Byetta, and the 1.2 reduction seen in Merck's (NYSE: MRK) Januvia in that same study.

In the big picture, then, these results would be competitive with most of the state-of-the-art diabetes medications. Better still, LX4211 is administered as a once-daily oral medication and so far SGLT1/2 inhibition has not shown any serious side-effects.

As I am an owner of these shares, I have a certain amount of built-in optimism, but I'm under no illusions that the path to approval will be quick or easy. Lexicon is looking at a minimum of five years before this drug could be approvable and will need even more money to make that happen (dilutive financings have already raised the sharecount here to over 330 million shares). And that, of course, assumes that the drug continues to show a competitive degree of efficacy and no serious side-effects.

All in all, it's a good reminder of why I'm holding out hope on this one, but it's definitely not a widows-and-orphans situation.

Disclosure: I own shares in Lexicon and Amylin.

Judge Tosses Drilling Moratorium

A Federal District Judge in Louisiana has just ruled against the administration, overturning the government's 6-month ban on drilling in U.S. waters. Assuming it holds up on appeal (and the government has already said that it will appeal), it will once again be legal to drill in U.S. deepwater areas, and those 33 exploratory projects in the Gulf that were suspended by the ban can now restart.

I don't think it surprises anybody that there has been opposition to the ban, including industry representatives like Transocean (NYSE: RIG) and Chevron (NYSE: CVX).

Frankly, I'm with the drillers on this one. Locking things down after a rare disaster is an overreaction that plays well on TV and with the environmental groups, but doesn't score high on common sense. The reality is that drilling was going to recommence whether people liked it or not; the economic demands for ongoing offshore drilling are just too powerful to ignore.

What's more, it seems more and more certain that the rig disaster and oil spill were a product of a thankfully rare combination of reckless operation, very challenging geology, and ill-maintained equipment. Assuming that other drillers are going to be checking their blowout preventers VERY carefully and insisting upon conservative practices for cementing, the risk of another accident is very low.

After all, name the last major oil rig accident that resulted in an oil spill before the BP (NYSE: BP) Macando/Deepwater Horizon accident. Go ahead ... take your time ... I'll wait.

Clearly this could be good news for a whole host of Gulf and deepwater operators. Drillers like Rowan (NYSE: RDC), Ensco (NYSE: ESV), Noble (NYSE: NE), Nabors (NYSE: NBR), and Diamond Offshore (NYSE: DO) should benefit, as well as a whole host of service providers like Cal-Dive (NYSE: DVR), Oceaneering (NYSE: OII), Tidewater (NYSE: TDW), and equipment companies like Cameron  (NYSE: CAM) and National Oilwell Varco (NYSE: NOV).

The initial reaction hasn't been all that strong, though, as the Oil Equipment ETF (NYSE: IEZ) is down more than 1.5% as of this writing. If nothing else, this ruling could add even more pressure and uncertainty to situation as the administration may go to greater lengths to enforce its wishes on the industry. After all, you certainly don't make someone more friendly to your cause by suing them.

All in all, this ruling is a minor bit of positive news for a beaten-up sector, but it's only one round in a long battle. There are plenty of long-term reasons to stay positive on drilling and the energy sector, but also a lot of near-term noise and volatility. That's a great recipe for folks with the nerves and stamina to buy at a low price and just ride out any turbulence, but investors who find themselves shaken up when they see a holding down 10% or more from where they bought it should probably stay on the sideline for now.

Can Investors Fatten Up On Weight Loss?

I would like to make one addition (or rather, an extended explanation) to part of this article. In it, I discuss Arena's lorcaserin and mention its somewhat dicey legacy. What I did not have time to adequately mention in the original is that there is a significant biochemical difference between lorcaserin and its predecessor fenfluramine. Fenfluramine caused serious cardiac side-effects because of its effects on type 2b and 2c receptors. Lorcaserin is active only with the 2c receptors and does not cause the same side-effects. 

That said, investors would be mistaken to believe that many (or even "most") physicians will do the perfunctory research necessary to understand that distinction. Consequently, there is a real risk of "guilt by mis-association". If Arena can get a strong marketing partner, one that can spend the time educating docs, it won't be a problem. But if Arena has to go it alone, they may be hampered in their efforts to really get docs to understand the difference and use the drug.  

You cannot read a major U.S. newspaper for more than a week before you will read something about the "obesity epidemic" in the country. To be fair, it is a serious problem with major ramifications on the health, productivity and economy of this country for years to come. But rather than fret about a problem with no clear solution, investors can do what they do best - figure out a way to make a buck off the situation. 

Diet, Exercise and SupportIn terms of non-medical intervention, there are two clear leaders in the U.S. obesity market - Weight Watchers (NYSE:WTW) and NutriSystem (Nasdaq:NTRI). Here is a classic good news / bad news dilemma for investors. Both of these companies have exceptional returns on capital, strong brand value, asset-light business models and huge addressable markets. Unfortunately, that is hardly a secret on the Street, and both stocks carry valuations that do not suggest ample appreciation potential. 

For the full column:

There Is Life After Death, At Least In Biotech

Crushing disappointment is not an uncommon occurrence in the stock market, but it is practically commonplace in the biotech sector. For every Gilead Sciences (Nasdaq: GILD) or Celgene (Nasdaq: CELG), there are many companies whose compounds fail and whose stocks wither away to mere penny prices.

That said, biotech may also be one of the resilient sectors you can find. So long as you still have a few compounds (or a few ideas) and enough cash, you will get a second chance. And if that second chance works out, you will find the market is more than willing to let bygones be bygones.

For the full column, please go to:

Monday, June 21, 2010

50 Years Old And Broke: Now What?

For many people, it is an idea too scary to contemplate. For others, it's reality. Being in your 50s and having no meaningful savings is certainly a frightening and serious situation, but by no means is it hopeless. People are living longer and in better health than ever before and it is never really too late to start making positive moves. (These retirement income distribution methods are all viable; the one you choose will depend on your personal circumstances. Learn more, in 3 Ways To Make Your Retirement Funds Last.)

Fix 'er Up
 First, figure out how you got to be 50 and broke and how you can prevent that from continuing. In some cases, it could have been crippling medical or legal costs that were all but impossible to prevent. In other cases, it may have been major investment losses incurred in the stock market or a result of tying a large amount of money into corporate options and stock that are now worth much less.

Excessive generosity (like paying for college and weddings) may also have depleted the coffers, or low savings may be a product of excessive spending. Some people never think to pay themselves first (in the form of savings) and instead focus on having a new car every few years, top-of-the-line electronics, season tickets to professional sports and so on.

If the cause was out of your control, simply shift your focus to rebuilding your savings and do not dwell on it. But if the cause was controllable or avoidable, make sure to keep the lessons in mind. Sharp stock market losses may indicate you take on too much risk or do not diversify enough, while excessive spending suggests the need for stronger prioritization and discipline. (They may not be sexy, but bonds offer undeniable benefits to investors. Learn more, in Savings Bonds For Income And Safety.)

For the full column, please continue on to:

Saturday, June 19, 2010

Book Review - The End Of Overeating

I don't think it is hyperbole to say that a book's significance has a lot to do with whatever impact it has on changing your outlook on its main topic. By that standard, Dr. David Kessler's book The End Of Overeating is quite significant to me. While the book is by no means without its flaws, I think there is a decent chance that reading it may lead you to change your views on the root causes of obesity in our country and its implications on public health, public policy, and the food/restaurant industry.

The first parts of the book deal with what you might call the neurochemistry of food and eating and the notion of what Kessler calls "hyperpalatable" foods. Hyperpalatable foods have particular combinations of fat, sugar, and salt that essentially make the pleasure centers of our brains light up and, for many people trigger an appetite well in excess of biological needs.

What is interesting here too is the detail that roughly 15-20% of our population is basically immune to this effect. For them, then, overeating is not the fault of the food but the absence of willpower in the eaters. Though I do not completely reject the idea that willpower has a significant role in overeating, it is not a productive or helpful attitude when it concerns forming public policies to deal with the growing obesity problem. Imagine trying to deal with smoking, drinking, or drug abuse with nothing more than just a "okay, just stop it" approach.

The second part of the book addresses how the food and restaurant industries exploit our own biology in their food design. As an amateur chef, it was interesting to me to see just how far "Food Inc" will deviate from traditional notions in order to create recipes that they know will trigger those biochemical reactions in our brain and have has coming back for more. Not only does this involve simple combinations of sugar, salt, and fat, but also a lot of other manipulations of food to make it softer, more moist, and in other ways easier to eat in unhealthy quantities.

This too is where the book had arguable the most influence on my thinking. I have largely been against government attempts to bully Food Inc. into making healthier food and/or using taxes to discourage consumption. After considering just how far Food Inc goes towards manipulating our own biology against us to eat more, I am no longer so opposed to the notion. Much like the tobacco companies were hammered for deliberately altering the ingredients of cigarettes to make them even more stimulating and addictive, I think Food Inc. does deserve criticism for manipulating food. If you are going to, in effect, exploit human biology to make bigger profits, you should expect some of those exploited humans to strike back.

The last section of the book mostly addresses how to use information about our weaknesses to hyperpalatable food to more effectively limit our intake of it and eat a little more healthily. Here too he discusses the need to find rewards apart from eating and to change our view of restaurant meals and processed food.

I suspect that there will be a segment of the reader base who just will not see much of value here. Given that roughly 15-20% of the population does not seem to develop these cravings to hyperpalatable foods, overeating to them will always simply be a matter of discipline and willpower. For them, then, this book is just a long apologist screed against an industry serving the public's demands. Also, I do have to admit that the author repeats himself many times over throughout the book. That makes it seem as though you are being bludgeoned into submission at some points rather than persuaded to the author's viewpoint with novel arguments.

I doubt that the book will ultimately change any policy or change the national dialogue about the obesity problem, but I think that has more to do with the fact that the circumstances supporting Food Inc are just that powerful as opposed to any real deficiency in the book. In any case, if you are interested in reading about the intersections of human behavior, industry, and public health policy, this is an excellent book to read.

Friday, June 18, 2010

FinancialEdge - What Caused the Flash Crash?

I'd like to thank my editor Erin Joyce for suggesting this piece. It was a lot of fun to do the research and write it up ... and I daresay I haven't seen too many other people out there trying to summarize what may have gone wrong on that fateful day in May.

Experienced investors, particularly those who have worked for a while on Wall Street, like to believe that they have seen it all and try to project an air of slightly dismissive boredom with the day-to-day gyrations in the markets. On May 6, though, hundreds of would-be masters of the universe were in utter panic as the markets melted down in spectacular fashion.

In what is now being called the "flash crash", the Dow lost over 700 points in a matter of minutes, at one point being down nearly 1,000 points for the day, before storming back. In the wake of that craziness, exchanges and investors had to sift through broken trades and regulators are still trying to figure out what happened.

For the full column, please continue on to:

FedEx Is Delivering The Recovery

There must be money in gloom and doom. That is the best explanation I can come up with for why there is not more optimism and satisfaction with the global recovery. Despite numerous positive signals on economic growth in the U.S., Latin America and Asia, investors remain fixated on what could happen in Europe and the S&P 500 is basically flat for the year.  

The fiscal fourth-quarter earnings reported by FedEx (NYSE:FDX) on Wednesday reflect a lot of the reasons that I am optimistic about global growth. Volumes were strong and the company is ramping up more assets to deal with even more anticipated growth. That is basically what any investor should want to hear - if companies in the transportation sector are seeing business improve, that should presage better growth.

For the full piece, please go to:

Lumber Does Not Bode Well For Housing

I would like to mention that this column was written *before* the housing data came out the other day...

Over the last year or so, home building stocks as measured by the S&P Homebuilders SPDR (NYSE:XHB) have had a pretty respectable run, topping the S&P 500 by about 20% or so. Of course, it must also be mentioned that this is a strong recovery off of a deep bottom, as a four-year comparison shows a painful drop of over 60% for holders of this ETF.

Among this year-long rebound has been a muddle of mixed messages, as sentiment feels worse than the numbers look. Low interest rates and tax credits have encouraged some buyers to get back in the market, and banks seem to be reporting some stabilization. Going a step further, prices seem to be creeping up again, housing inventories have leveled off, and sales appear to be growing.

That has not really been good news of late, though, for the shareholders of stocks like Pulte (NYSE:PHM), D.R. Horton (NYSE:DHI), Lennar, or Toll Brothers (NYSE:TOL) as these stocks have all come off their highs lately. If these stocks can move unpredictably in the face of economic data, is there another data source for investors to watch?

The answer appears to be "yes".

To read about the linkage between lumber futures and housing stocks, continue on to:

Amylin Finally Gets a Break

Sometimes I wonder if Amylin (Nasdaq: AMLN) management if hugged a black cat while standing on a broken mirror underneath a ladder. In other words, if it were not for bad luck, they would have no luck at all (I am waiting for Amylin Pharmaceuticals - The Country Western Album). But in a rare change of pace, they got a little bit of good news due to bad luck at another company.

Roche (RHHBY.PK) announced today that they are going to be delaying the filing of its diabetes drug taspoglutide (licensed from Ipsen) for at least 12 - 18 months to reevaluate its safety. This comes in the wake of news that a Phase 3 study of this GLP-1 analog showed that some patients developed a hypersensitive response with skin and GI problems, but sometimes cardio and respiratory problems as well. Once the drug was stopped, the symptoms went away.

I give a lot of credit to Roche for dealing with this quickly and relatively decisively. The reactions are not too common (apparently less than 1% of patients), but the company is wise to realize that the FDA itself is hypersensitive these days and it is crucial to come to the agency with clean safety data. Moreover, this is generally part of how Roche does business - they are not a group of cowboys that tries to push through questionable data.

For Amylin, this is certainly a break. Amylin just realized clinical data on its once-weekly Bydureon (taspoglutide is always once-weekly) that demonstrates it likely will not be a first-line therapy. That news hit the stock pretty hard, although I do not understand why people thought it would be a first-line option when metformin is still effective, easy to take, and very cheap. Now, though, one of the major potential competitors is on the shelf a bit longer and may carry concerns or even a warning label into the market assuming it gets approval. Better still, for Amylin that is, Roche's drug may require antibody testing and that little extra inconvenience could be enough to alter market share.

Of course, this is also good news for Novo Nordisk (NYSE: NVO) as this company actually has its Victoza long-acting GLP-1 drug on the market.

I still happen to think that Bydureon has a good chance of becoming the top extended-release GLP-1 drug on the market, even though Victoza is benefiting from being the only game in town right now. I think Bydureon gets approved, and I think its edge in clinical performance will drive strong adoption once it is released. But then, I own Amylin stock so that should be expected (if I did not think they were going to "win", I would sell the stock and buy something else).

All in all, this is no reason to sell Roche (and I am certainly thinking about buying on the dip), but maybe a reason to consider buying Amylin if you do not already own it. The third major player, Novo Nordisk, is a great pharmaceutical company in its own right, but perpetually expensive.

June 18 - Beware of Witches!!!

June 18 ... One of the four "triple witching" days of the year.

Given the big spike in volatility we have had lately, today could be exceptionally "interesting". There was a pretty sustained downward trend throughout April and May, but a rebound in most of June. That should really mix things up, particularly for those instruments just near their respective strike prices.

So, for all of you short-term, momentum, or day traders ... good luck!

Thursday, June 17, 2010

M&T and Santander ... This Could Actually Make Sense

Rumor going around is that Spanish banking giant Santander (NYSE: STD) may consider a bid for the exceptionally well-run M&T Bank (NYSE: MTB). If this happens to be true, it is a deal I would probably like ... at the right price, of course.

For those not familiar with it, MTB is a Buffalo-based bank with operations across the Mid-Atlantic. While the return on equity and return on assets do not immediately jump out as top-tier, it is widely considered one of the best-run banks in the country. I happen to share that opinion, and would group it along with the likes of US Bancorp (NYSE: USB) and BB&T (NYSE: BBT) as some of the best-run banks in the country. As such, they have not been hurt quite so badly by the housing/credit boom and bust.

What makes this an intriguing deal is that Santander is also an exceptionally well-run bank, even if it carries the "Scarlet S" of being a Spanish bank. Santander gets about 25% of its profits from Spain, with 21% coming from Brazil, 14% from "other" Latin American countries, 12% from the UK, but only a tiny bit (about 2%) from its US business (from its acquisition of Sovereign a few years back). Although the U.S. is not an under-banked market by any means, it is a profitable one and it is reasonable to think STD would have interest.

The opening for Santander is coming, ironically enough, from problems at another large European bank. MTB is 25%-owned by Allied Irish Banks (NYSE: AIB), a good-enough bank when times were good in Ireland. Times are not nearly so good now, though, and AIB is under pressure to raise capital. With MTB shares near a 52-week high, selling that stake could be a very appealing means of generating that needed capital.

Ahhh, but now for the "but". In this case, the "but" is valuation. Even if I stretch some of my assumptions about future growth, I have a tough time going above $100 per share in fair value. Given the restrictions on moving deposits across borders (collecting deposits in Buffalo to fund loans in Buenos Aires is frowned upon), there would not be a lot of synergies for Santander. So, the question for me is whether Santander can basically position AIB over the barrel and strike a bargain price on the stake (as large blocks of stock often move at discounts, similar to public share offerings), and use some of that to offset the takeover premium it will have to pay to buy a controlling stake.

Then again, that assumes that Santander wants, or feels it needs, full control. They could, conceivably be content with just holding that sizable stake and cashing dividend checks.

Personally, I don't think this deal happens I'm coming around to the idea that this deal eventually gets done. It makes sense, but I'm not sure Santander is in a position to do anything quite so bold, and I'm not sure AIB wants to let go of its MTB stake if it has other options to avoid it. Still, should the deal happen, it has the advantage of being a combination of two very well-run banks. As it stands now, Santander is a stock that is definitely on my watch list whether the deal happens or not. 

I wrote that prior paragraph last night, and after sleeping on it, I'm changing my mind. I think the odds of a deal are at least 50-50. Santander has a lot of pressures at home and the capital stress tests going on in Europe now might limit just how bold Santander can be. Nevertheless, AIB will have almost no choice but to sell its stake and Santander is clearly interested in expanding its U.S. footprint. If the deal happens, it's a marriage of two very well-run banks. But even if the deal does not go off, I would be happy owning either bank. As it stands now, Santander looks cheap and it is definitely on my watch list. 

Full disclosure - I own share of BBT

In the original posting I forgot to mention that M&T and Santander have talked before about a merger. I apologize for not mentioning that as it certainly ups the odds of a transaction. 

Covidien's Still Hungry

Nobody is going to accuse the management at Covidien (NYSE:COV), a diversified medical technology company, of being slow to make any changes. It was only two weeks ago that the company announced that it was entering the peripheral and neurovascular intervention markets by buying ev3 and largely exiting parts of the respiratory care market with a divestiture. 

Now the company is at it again, announcing Wednesday morning that it was acquiring small medical device maker Somanetics (Nasdaq:SMTS) for almost $300 million in cash. That deal represents a 32% premium to the closing price prior to the deal, and a valuation of nearly six times on a trailing price-to-sales basis. Given that growing small-cap medical technology companies generally trade for between four and six times trailing sales and get bought out at between five and eight times, this seems to be a fair deal for both parties. (For more on this topic, check out The Wacky World Of Mergers And Acquisitions.)

You can read the full piece here:

Bringing Biotech To The Barnyard

Human genomics and genetic analysis gets a great deal of attention from investors and journalists. That attention is well-deserved, as a single cancer drug can be worth as much as $100,000 per year per patient. Clearly, that provides ample incentive for major drug companies to invest heavily in genomic equipment in the hopes of developing more effective drugs.

By no means is it just a pharmaceutical opportunity, either. Myriad Genetics (Nasdaq:MYGN) has built an attractive niche in gene-based cancer diagnostics, and larger players like Abbott Labs are also delving deep into molecular and genome-based diagnostics.

But why should people have all the fun? The cattle industry alone is worth about $80 billion a year in the United States, and there is clearly substantial money to be made in getting the best out of every Bessie and Wilbur in the feed lots.

You can read the full piece at:

Wednesday, June 16, 2010

Can Investors Capture Gains In Carbon Capture?

Carbon capture and storage (CCS) seems to be an inevitable emerging technology over the next few decades. CCS holds the promise of cutting CO2 emissions from power plants by up to 80-90%, while not imposing a crippling cost burden on energy producers and customers. As increased legislation aimed at controlling green house gas emissions seems like a done deal in the years to come, investors should look to see how they might position themselves to profit. 

Look to the Oil FieldsOne of the early adopters of CO2 capture and storage has been the oil and gas industry. Companies including Statoil (NYSE:STO), Kinder Morgan (NYSE:KMP), and Denbury Resources (NYSE:DNR) have been early movers in this field, which involves injecting CO2 far beneath the ground to stimulate better oil and gas production. Kinder Morgan operates CO2 pipelines and reported a few years ago that in the Permian Basin and Mississippi nearly 11 trillion cubic feet of CO2 had been used to generate and incremental 1.2 billion barrels of oil that might otherwise have remained in place.

For the complete column, please go to:

Book Review - The Science of Liberty

Every once in a while you find a book written by a clearly qualified writer addressing a pertinent and interesting topic. Unfortunately, some of the authors fall into what I call "Ayn Rand syndrome"; they think their ideas are so good, their topics so interesting and vital, that they must beat you over the head with them page after page after page.

That is perhaps the biggest failing in Timothy Ferris' work The Science of Liberty.

Even with that flaw, however, this is a book that is worth reading. The gist of the author's theme is that science has a long record of improving the quality of life for people around the world in a wide variety of ways. That's not exactly a revolutionary idea, but Ferris goes into detail attempting to show how progress in science has led to progress in government (towards democracy and freedom), progress in civics and ethics, and progress in commerce.

Ferris also draws many lines connecting science and liberalism. Here is one of the more valuable parts of the book in my view; the author goes to great lengths to try to recapture the original and true meaning of liberalism. What is commonly called "liberal" or "liberalism" in America is really more like progressivism and populism; you have to look more to modern Libertarian to come close to the original meaning of "liberalism".

Ferris does go a little too far in some cases, for instance he overestimates how accessible science is to everywhere. While I absolutely agree that anybody *can* learn science and become scientifically literate, once you abandon that path (usually early in life), it becomes exceptionally difficult to find it again later in life.

I imagine this book will not please the very religious, nor those highly skeptical of science and the scientific process. The author argues in several places that religion has been an impediment to progress, liberty, and ethics. Moreover, he is withering in his criticisms of those who would approach science as "just another point of view" or another way of experiencing the world. I can't say that I disagree with the author, but then I went into this work with a pro-science slant.

While I did enjoy this book, I can only give it a recommendation with some reserves. If you are already in the "pro-science" camp, this book will not do much more than make you feel even more justified and correct in your world view. Now, plenty of people like reading books that confirm their point of view, so this is certainly a good one for the pro-science crowd.

If you are more of a skeptic about science, though, or feel that religion and philosophy have a bigger role to play in improving people's quality of life, this will not be a pleasant book to read. Unfortunately, the author is also so heavy-handed and opinionated at times (the aforementioned Ayn Rand Syndrome) that you will feel more like you are being bullied and bludgeoned than presented with clear evidence and interpretations to change your mind.

(Apologies for the relatively low quality of the front cover scan)

Tuesday, June 15, 2010

FinancialEdge - Biggest Corporate Comebacks

With Apple (Nasdaq:AAPL) recently supplanting Microsoft (Nasdaq:MSFT) as the most valuable tech company in the world, there is no doubt that it is one of the most remarkable turnarounds in U.S. corporate history. From a foundering company teetering on the edge of irrelevance, Apple has become one of the most innovative consumer-focused technology companies.

Apple is not alone, though. Many other corporations have danced on the brink of collapse and found their way back. Here we take a look at some other well-known major companies that had their flirtations with trouble and came back stronger than ever.

To read the full piece, please click on the link below:

The Future Of Stem Cells

There has been no shortage of hype regarding the possible therapeutic uses of stem cells. To date, though, there has been a lot more hope than clinical results, no doubt in part to research restrictions imposed by the prior U.S. presidential administration. While companies ranging from the huge Pfizer (NYSE:PFE) to the much, much smaller Osiris Therapeutics (Nasdaq:OSIR) and StemCells (Nasdaq:STEM) are gamely trying, it may be a decade (if ever) before we have any late-stage clinical success stories to talk about with stem cell therapies. 

That does not mean, however, that stem cells may not have a major role in medicine and drug development long before then. One of the more interesting concepts in development right now concerns the use of stem cells in the drug design, validation and testing process. If successful, stem cells could significantly alter the preclinical drug development process and lead companies to more successful clinical trials and more productive drug development. 

The full article can be read at:

SEA Ship-Shape Again

In one of the stranger stories in the ETF world, Claymore has re-launched its global shipping ETF. Trading as the Claymore / Delta Global Shipping ETF (NYSE:SEA), this ETF is one of the only options available to retail investors looking for a one-stop shop for shipping stocks. 

This ETF disappeared only a few short months ago under strange circumstances. When Guggenheim Partners acquired Claymore, it triggered some provisions within the legal framework of the ETF. Although the shareholders approved the necessary reorganization, the nature of the shareholdings of the ETF was such that the company was not able to get a quorum of investors to approve the new structure. Consequently, the ETF had to be shut down.

To read the complete article, please go to:

Monday, June 14, 2010

FinancialEdge - Disbanding The Euro - A Worst-Case Scenario

Although the title of this column mentions the worst-case scenarios for the collapse of the Euro, that is not quite what it is about. Instead, it is more about the probable negative outcomes should the Euro go away. If I was to talk about true "worst case scenarios", I'd have to talk about the risk of virtual economic collapse in Southern Europe, competitive devaluations throughout Europe, the risk of less-democratic governments in some areas of Europe, and, ultimately, the outbreak of war as political demagogues pander to financially desperate populations and rile them up with notions that other people/countries are responsible for their problems and must be punished. 

Only time will tell if we are past the worst of the debt crisis in Europe, or simply enjoying a calm amidst the storm. In either case, the crisis in Greece and the fears of its spread into Spain, Italy and Portugal have led many financial analysts and commentators to seriously consider what had once been mostly the domain of crackpots - the notion that the euro could collapse and vanish altogether.

This is no small matter. Of the 10 largest economies in the world, four use the euro as their currency. Roughly 330 million Europeans use the euro every day, while nearly 200 million people use currencies that are pegged to the euro (many of them in Africa). It is also the second most-used currency as a reserve currency, with roughly one-quarter of the world's reserves held in euros. 

For the full column, please continue on to: 

Review - Oil Panic and Global Crisis

Steven Gorelick's relatively recent book Oil Panic and Global Crisis is a definite must-read if you have an abiding interest in energy investing and the fate of major energy companies like BP (NYSE: BP), ExxonMobil (NYSE: XOM), or Chevron (NYSE: CVX).The author is a Stanford professor and a Guggenheim Fellow, and I suspect those qualifications come in handy as this book may strike quite a few people as controversial.

One of the most interesting take-aways from the book is that the notions of "peak oil" may be irrelevant if not fatuous. While the peak oil crowd holds to the idea that Hubbert successfully predicted the peak of oil production in the U.S., this book demonstrates how that is not really the whole story. Namely, the peak might have been successfully predicted, but the forecast bell curve has been disproven as production in the U.S. has not fallen off nearly so much as previously predicted.

Gorelick also talks a lot about the role of technology in oil and gas extraction. Oil and gas that was considered technologically or economically off-limits only a decade or so ago is now routinely extracted (thing about the shale gas plays, horizontal drilling, and fraccing). As geologists get better tools for finding oil and producers get better tools for extracting it, a lot more oil and gas is going to be available than we currently might expect.

On top of that, Gorelick devotes time to two other interesting concepts. First, we should keep in mind that the energy intensity of growth and economic activity is declining and may continue to do so as newer, less energy-intensive options come into the market. If, for instance, more and more automobiles have enhanced fuel efficiency (whether through more efficient engines or hybrid technologies), that will reduce the burden of ongoing vehicle growth.

Second, Gorelick mentions how relatively unexploited most of the world's oil and gas fields really are. The United States ranks #13 in global proven energy reserves ... but according to the Baker Hughes (NYSE: BHI) Rig Count, roughly 50% of the rigs operating in the world are operating in the U.S. Assuming that other countries will eventually drill as aggressively as we do, that raises the possibility of a much longer decline period for global oil and gas production.

All in all, this was a very interesting book, heavy on facts, details, and footnotes, that may make those worried about long-term energy supplies feel a little better. It is definitely a good read for those interested in global energy, energy investments, and the future of energy supplies over the next couple of decades.

Friday, June 11, 2010

FinancialEdge - Investment Options for Any Income

If you earn income, you should be saving and investing. Yes, it really is that simple. The single most important rule of saving and investing is to start saving and investing. Establish the habit early on and putting aside money for investing becomes just another routine "must do" like paying the rent or the electricity bill.

More Money = More Options
Once you begin, you will see that there is a simple reality in the investment world - the more money you have, the more options you have. If you have millions of dollars to invest, the world is your oyster and you can invest in almost anything you wish. For us regular people, though, our options depend on how much we can put aside each month. (There are a lot of options for investors who hate the hassle of investing. We go over some that will help your financial future in Hate Dealing With Money? Invest Without Stress.)

For the full column, please go to:

Thursday, June 10, 2010

BP, Anadarko, and Transocean - Splitting the Bill

I thought it might be interesting to get a better sense of what the total bill for the oil spill might be and how that stacks up to the liquidity of the companies on the hook. Clearly there are a lot of guesses and assumptions here, but I felt it was worth taking a stab at it.

The Clean-Up
I looked at the Oil Spill Intelligence Report to get a sense of what past spills have cost. There is a wide range of factors that go into the cost, including the type of oil ("lighter" is better), the size of the spill (bigger gives economies of scale), how much coastline is involved, and so on. All in all, the costs seem to range from $5,000/ton to $34,000/ton. 

Obviously it's hard to get a firm estimate of how much oil is in the Gulf, as BP's guesstimates have been woefully inadequate. So far, I'd estimate that anywhere from 100K tons to 135K tons has been spilled, and that we're now at about a 4K ton/month rate. So if this spill is plugged by the end of August, we might be looking at something like 125K tons.

I'm going to assume a cost of $20K/ton and a total 140K tons. That's a total clean-up bill of close to $3B. Extending the math, figure on $80M/month if this stretches past August, but at a reduced rate of flow.

Punitive and Compensatory 
History suggests a 1:1 ratio of punitive to compensatory damages, but that ratio may be optimistic and conservative given the tenor of the Obama administration and the changes in the class action legal environment since the time of Exxon-Valdez (the best and closest analogue).

So, how to estimate compensatory damages? I've seen estimates that range from $3B/yr to $9B/yr in terms of the annual economic activity that is imperiled by the spill (and obviously this goes up as the spill lingers on and affects a larger and larger area), but the tourism cost could be even higher. It's also reasonable to assume that the area of effect will linger for a few years, but at a declining rate each year.

I'm going to go with a total educated guess of $10B - $15B in total compensatory costs, so the total of punitive and compensatory could be $20B - $30B.

Violations of the Clean Water Act, Migratory Bird Act, and so on could easily kick another $500M - $2B into the kitty. 

The Total
That leads me to an estimate of $23B - $32B in total damages, with full admission that punitive costs could be higher (but probably no higher than 3x the compensatory). Maybe the absolute worst-case, then, is something like $65B?

Who Pays?
Clearly, the wrangling has just begun on this topic. BP (NYSE :BP) has already begun paying claims and has consistently acknowledged their responsibilities to pay. One big question is whether Anadarko (NYSE: APC) gets drawn into this, and how deeply. Anadarko has a 25% interest in the well. In a best case scenario, Anadarko escapes by hiding within the Oil Spill Liability Trust Fund that limits liability to $75M. Worst case is that they're drawn in to a proportionate share of the total cost.

Cameron (NYSE: CAM), the maker of the blowout preventer that failed, is not likely to be on the hook here, in my view. The BOP was nine years old and information has come out that Transocean (NYSE: RIG) modified the BOP at BP's direction. That, in my mind, basically gets them off the hook.

Likewise, Halliburton (NYSE: HAL) has the advantage of a contract that limits their liability. As I've said before, I still think there's a chance that HAL gets tagged for a bad cementing job and drawn into this, but that's a big unknown right now.

Last and least, Transocean likewise has a contract that limits its liability, and there has been a fair bit of information coming out that Transocean was just following BP's orders all along the way. Does that hold up? I think so.

The Market's Moves So Far
So what is the market discounting for this mess? Let's look at the amount of market cap lost since before the spill.

BP - $86.5B
APC - $17B
RIG - $16.7B
HAL - $8.3B
CAM - $2.4B
SII - $2B

So, the market has taken out about $133B in market cap ... 2x what I think is a reasonable worst-case scenario.

Can The Companies Afford It?
But can they pay?

BP has $7B in cash and should be able to produce another $6B - $9B in free cash flow per year (and this WILL go on for years...). BP is also relatively underlevered and could probably borrow at least another $10B free and clear. On top of that, BP has over 10B in oil reserves, and those could either be sold or used as collateral if need be. The going rate for oil deals has been around $20 - $25/bbl, so that gives a decent idea of the resources BP can bring to bear.

So, if BP has to go it alone, it'll be a tight squeeze, but BP won't go away. They may have to meaningfully cut the dividend in the meantime, though, particularly if Anadarko does not have to chip in.

As for Anadarko, they have more than $3B in cash on the balance sheet, manageable debt, and can generate about $1B-$2B/yr in free cash flow. So, if Anadarko has to pay up to their economic interest (25%), they could be looking at a bill between $5B and $8B. This would be more of a strain on Anadarko ... enough, perhaps, that an unfavorable ruling that pushes them to pay their 25% might lead them into an M&A transaction with a bigger firm that has the cash to pay up. Of course, Anadarko also has oil reserves that could be monetized.

For HAL and RIG, there is about $3B and $1.5B in cash, respectively. I don't see either getting drawn into this, though, so that should be fine. That said, HAL, RIG, and CAM are all going to suffer from the decline in Gulf of Mexico and deepwater business, so I do not read their declines in market cap as being due to potential liability, but to a decline in business and maybe a dented reputation.

Okay, admittedly this was a long piece, but maybe it will be interesting to a few readers. Looking at this all by the numbers, I end up feeling better about BP, worse about Anadarko, and really no different about Halliburton or Transocean. It would take a total bill of over $60B to bankrupt BP, though admittedly the company will be hurt significantly at lower levels. As for Anadarko, they are going to be hurt by the moratorium and there are definitely some risks to the company with the combination of a high bill bill and 25% participation.

All in all, I still think you can buy BP, RIG, and CAM here. APC is a bit more questionable, and I might be more careful there.

GameStop and Pier 1: A Tale of Two Retailers

Admittedly, leading video game retailer GameStop (NYSE:GME) and once-struggling furniture and "dustables" retailer Pier 1 (NYSE:PIR) would seem to have little in common. After all, apart from men who are transitioning from bachelorhood to married life, you would not think they share many customers. While that all may be true, I mention them together for a different reason - namely, the businesses are heading in opposite directions and have very different futures.

GameStop - Here Today, Where Tomorrow?GameStop has certainly enjoyed a fine trajectory. On the way towards becoming the leading independent seller of games (with upwards of 20% market share), the company has boasted a 10-year revenue growth rate in excess of 30% and produces very solid returns on capital. Moreover, the company has a nifty little sub-business within its operations trading used games; while used games represent about one-quarter of the company's sales, they produce about half of the gross profit.

For the complete column, please click on the link below:

Satellite Phones Head Into Orbit

Considering all the attention given to iPhones, Blackberries, 4G and other mobile phone topics, investors could be forgiven if they have forgotten that satellite phone systems still existed. Judging by the announcement last week that Iridium Communications (Nasdaq:IRDM) had awarded a major contract to build a new satellite network, the business not only still exists, but has money-making potential ahead of it. 

The New Deal 
On June 2, the satellite phone operator announced that it had awarded a contract for its Iridium NEXT project to a consortium led by France's Thales. The deal, which could be worth in excess of $3 billion, calls for the construction and launch of 72 low-orbit satellites starting in 2015. 

For the complete piece, please go on to:

Sequencing Wars - The Third Generation

Forget the white lab coats and the quiet demeanors. In biology labs across the country, and in corporate R&D labs, there is an all-out war going on. Researchers are pushing themselves and their gear in an effort to understand human disease and find new pathways for treatment, while companies are pushing each other on a relentless drive to build better, faster, and cheaper research equipment. (Learn more about the importance of Research and Development, see: Buying Into Corporate Research & Development (R&D).)

We are now on the cusp of a new battle - the sequencing wars to be fought with third-generation sequencing equipment. Third-gen systems promise more accuracy, faster results, better economics, and a new round of sales for major corporations. The combatants will include some of the better-known names in life sciences research, while the victors will almost certainly include all of us, as these technology innovations should ultimately lead directly to better healthcare treatments.   

For the full column, please continue on to:

I also would like add that IBM is working on a next-gen platform as well. IBM's idea is to use microtubules that read the charge of the base-pairs in the DNA. IBM thinks they may be able to produce entire genomes in under an hour with this technology. It's very interesting technology, but it's a long way from "interesting in the lab" to break-out commercial success.

Green China

Whenever you read about environmental topics in China, the news is almost always bad. Whether it is problems with air quality in Beijing or water quality in the provinces, there is no shortage of bleak reports about the degradation of nature within China's borders. 

This may not be the full picture, though. True, China has a lot of polluting industries and generates a considerable amount of electricity from older coal-burning plants. The country also has the challenge of figuring out how to provide power, heat, and transportation to a huge population with increasing needs. But China also has considerable financial resources and a political structure that can more easily mandate and advance specific technologies.

With that in mind, it may not be too long before a green China is possible.

For the complete article, please go to:

Wednesday, June 9, 2010

Is The Government Pushing Its Luck With BP?

Another day, another volley from the federal government lobbed at BP (NYSE: BP). This time, though, the survival of the company may now actually be in question.

Today's news has the Interior Secretary "encouraging" BP to pay the salaries of oil workers laid off because of the government's decision to impose a six-month moratorium on offshore drilling and completion activities. I have no idea how much money this will ultimately be, nor how many people the government will try to shove under BP's umbrella, but it feels safe to assume that it will be quite a bit of money.

Am I the only one here who thinks this smacks of what you hear about in the third world, where governments charge the families of political prisoners for the costs of their incarcerations and/or executions?

In any case, this comes on top of the already $1.3B+ in likely economic damages that BP will have to pay, to say nothing of billions more that the U.S. government is going to attempt to levy in civil and criminal penalties. On top of *that*, figure on even more lawsuits (class action and otherwise) to come from people who incurred real damages from this spill and those who simply see a chance to chase a fat, juicy ambulance.

Right now speculation is starting to swirl about whether or not BP will have to seek bankruptcy protection. As of the end of 2009, BP had about $101B in positive book value, about $37 billion in debt, and about $8 billion in cold hard cash.

I think bankruptcy is probably a stretch at this point. That $8 billion in cash does not include any ongoing positive free cash flow (which could easily be $7 billion or more per year), so unless the government drastically overplays its hand, I just don't see the company coming to such dire financial straits that bankruptcy is financially necessary. Remember, it will take up to a decade for all of this to get resolved and BP won't be writing big checks for some time to come.

What could happen, though, is a strategic bankruptcy for the U.S. subsidiary of BP. I truly have no idea how that would impact the legal wranglings that are going to involve BP for a decade to come. I would suspect that a bankruptcy of the U.S. subsidiary would be a large middle finger extended towards Washington, D.C. and would complicate efforts to get payments from BP above and beyond any assets residing in the U.S. subsidiary. On top of all that, I have to wonder if this is going to become a diplomatic issue at some point; I cannot imagine that the U.S. government would let a foreign government push ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) to the point of bankruptcy, so I have to think that the British government gets involved before too long.

Along similar lines, the ongoing trouble for BP looks increasing bad for Anadarko (NYSE: APC) (BP's partner), Halliburton (NYSE: HAL), and Transocean (NYSE: RIG). The worse this situation gets, the more incentive BP has to spread the economic damage. Though I still think Transocean (and Cameron (NYSE: CAM) walk away from this in good shape, Halliburton and Anadarko could have something to worry about.

On top of that, the knock-on effects to offshore players like Apache (NYSE: APA), Cal-Dive (NYSE: DVR) shouldn't be ignored, as the cost of doing business off the coast of U.S. (and maybe even the opportunity to do so at all) is definitely now in question.

Here's hoping that U.S. government sees reason and doesn't push their luck too far with BP. Like it or not, the U.S. oil industry is a significant part of our energy infrastructure, and the oil industry is a major source of jobs and state tax revenue in places like Texas and Louisiana. Seek justice by all means, but when it teeters over into populist vengeance and confiscatory retribution, the government may just find that it has made us all poorer in the long run.

Bottom line - I'd still be interested in stocks like Apache, Transocean, and Cameron. I still think BP survives this and works long-term as a stock, but you really have to have a strong stomach to step up today.