Vulcan Appears Vulnerable Again

Vulcan, and other similiar companies, has nearly doubled in the past several months as infrastructure rebuilding and stimulus mania has taken hold. The thesis holds that stimulus funding will fill the hole that developed in residential, commercial, and state road budgets. It won't. At best, it will halt the decline in volume, but it won't get the company on a fast growth track. The price surge reflects the beginning of good times being here again.

In 2007/2008/2009 I rode puts and shorts on both VMC and MLM. It's time to start nibbling at negative bets again as these companies are priced too richly.

AIRLINE SURVIVAL EQUALS DILUTION

Earlier posts have detailed my adventure in owning airline stock. I knew airlines were probably the worst industry to invest in, but Southwest, the best of the worst, was offered at a very attractive price. Rather than thinking, I bought and immediately started losing money. It took about six months of regret before the price returned to my basis. About 90 days after my exit, airline shares started moving upward. Have they ever. The airline ETF, FAA, is up over 100 percent in the last six months!

Does a 100% move mean the industry must be attractive? No, it means that the industry won't go bankrupt in the near term. New equity offerings and sale/leasebacks have raised cash for struggling carriers. Cheesey fees for bags, seat selection, and pets have juiced occupied seat revenue. But it is still a lousy industry. It requires too much capital, has unionized workforces, is subject to large fuel swings, and, mostly, faces pricing pressure from both leisure and business travelers. As usual, the optimists have gotten ahead of themselves and run prices up too fast.

I hope that I've got it right this time. Recently I borrowed some AMR shares and sold them short. American has enough money to continue to bleed for the next year and won't go toes up anytime soon. But it still must service a huge amount of debt, about 10Billion, with terrible operating margins. A difficult task. AMR recently sold equity and diluted the common shareholder, and issued debt at 10.5% for 3 years! They are staying alive, but at an expensive cost.

I think airline shares will go down; I know they won't go up another 100 percent. AMR is about as weak as they get. This time I picked the lousiest company in the lousiest industry and time is on my side.

THE 80/20 RULE MUST NO LONGER APPLY

Awhile back I wrote, in Crusty's How It Ought To Be blog, about two disruptive products that I was using to my advantage. One was a 4.01% checking account from a local credit union. Yes the rate is correct, 4.01% up to $25,000 and still 1% for excess balances. Virtually no difficult requirements attached. only one ACH and 12 debits monthly. My wife is easily up to that task.

My gameplan was to look for other credit unions to replicate the account and put more money to work at 4+%, government insured. I knew of a credit union in eastern Iowa using the same gambit, but paying 5%. But, I haven't gotten around to it yet. Now I won't have to as banking has changed in Omaha.

For the last twenty years most community commercial banks have followed the 80/20 Rule which shows that 2o% of the customers provide 80% of the profit, so raise prices on the 80% to increase their profitability. If they leave, so what as they were not as valuable as the important 20 percent. Bankers catered to the better off and sent the smaller balance accounts off to the savings & loans and credit unions.

The result was increased profitability and chest pounding. But now, twenty yeaars later, lobbies and drive thru lanes are empty and bankers have found customer numbers hard to increase. Not so at the financial institutions that enjoyed the customer traffic. Account balances were small and activity high, but they pay fees and take out loans. Bankers have started to take notice.

Proof of a changed approach is a new account from my local bank. IT'S THE SAME PACKAGE AS THE CREDIT UNION! Except that they are paying 4.05%. Other banks won't be far behind and I won't have to open an account in eastern Iowa. Since my wife is up to making sure we use our debit card enough times to keep the banks happy, we'll be opening accounts whenever the banks change their attitude. When we head to Florida for the winter I'm hopeful of finding a similiar banking climate.

4 percent, FDIC insured, is an attractive yield as it certainly beats by a large margin normal bank rates on money market savings and certificates of deposit. It also yields more than a 10 year Treasury and other bonds, plus you don't risk loss of face value due to rising rates. You can earn a 3% dividend on some solid common stocks, but not without the risk that the stock price will go lower with the next correction.

Moderation and balance is always the right plan and these accounts are attractive. Add them to dividend paying stocks along with some bonds and you have a good cushion for a stock portfolio.