Wednesday, October 5, 2011

What's That Sound I Hear? It's Us Eating Our Seed Corn!

You can't grow crops without seeds. That's why they have always been valued. They are essential to human existence and progress. Eating those kernels wouldn't be a good plan.

Financially, we are doing the equivalent. We are eating our financial seed corn and that's not prudent. You need capital to make more capital and the western world is destroying capital. Destruction by debasing currencies, destruction by artificially lowering interest rates, destruction by algorithmic high frequency trading, destruction by greed, and destruction by over-reaction all will prolong our despair and delay our recovery. 

How much capital has been destroyed since the beginning of July around the world? I haven't invested the time in determining the answer, but the number far surpasses any measure of Greece and the PIIGS. Yes, I know that "markets" have also worried about double dip recessions and European bank balance sheets, but come on, clearly we have over-reacted. 

The purpose of capital markets is to funnel cash to worthy companies. No matter whether it is in the form of debt or equity, it should make sound business sense. Our current environment is more like a casino mentality than investing capital to help companies grow. Five percent intra-day swings are proof that valuation has little to do with today's markets.

Just like in Washington, if some adults don't take charge of Wall Street soon, we will have eaten a good portion of our seed corn. Pension plans, university endowments, individual 401Ks, will all be decimated as the desire to buy a piece of a profitable company will have been extinguished. 

Three simple ideas worth immediate consideration are: first, much higher margin requirements on stocks, options, and commodities will require investors to risk their on capital and increase caution; second, bring back the uptick rule for short selling as it will slow down the speculation and enforce a ban against naked short selling; third, re-instate Glass-Steegle which separated commercial and investment banking and remove the investment bank's access to the Fed. 

If the special interests negatively affected by the three proposals don't like it and they, and their cronies in DC, continue to play business as usual while destroying our capital formation ability, then we need a Financial Tea Party to restore sanity in our financial leaders.

Wednesday, September 28, 2011

Lazard Stock Trades Like An IB Without The Trading Risk

Monday, Lazard was available at an all-time low. It has since bounced with the market, but remains attractive. This premier investment bank provides the investor exposure to the capital markets without the inherent risk of the typical investment bank's proprietary  trading desk. Financial advise isn't going away so LAZ, with its geographic and product diversification, will continue to perform.

Lazard operates closer to the old fashioned investment bank than the model chosen by Goldman Sachs and Morgan Stanley. LAZ is the world's sixth largest advisor and, of the top ten, the third fastest growing. Their customer base appreciates not only their financial acumen, but their unconflicted advise as they don't trade for their own account. Additionally, they have the world's largest restructuring business which provides a revenue cushion when M&A is lethargic. The banking and restructuring side of the business amounts to slightly more than half of the company. Asset management for clients handles $160 billion under management. Both sides of the business are producing revenue surpassing the peak year of 2008. Their business is truly global so you get continental diversification as well as currency.

Without the risks and leverage associated with trading, Lazard has a solid, low risk balance sheet. Long term debt has decreased from $1.2B to $.7B since 2008 and there are no maturities until 2015. They have no principal trading or lending book so assets are not suspect. 

Employees own 30 percent of the company and LAZ currently yields 2.7 percent. The biggest knock against the company has been the high level of compensation to their professionals. Management has been addressing the issue and is committed to bringing compensation expense as a percentage of revenue down. They succeeded in 2010 and so far in 2011. 

Without the home runs available from trading, LAZ will only see earnings grow through market share gains, but I'm more comfortable with that level of risk. I seem to never tire of catching falling knives so I bought some on Monday and so far I'm not bleeding. So far.......

Monday, September 26, 2011

Crusty Hasn't Written Because All My Ideas Have Lost Money

I've served all my readers faithfully by not opining about the bargains I've found over the past weeks. Lots of good companies have been pounded and could have been picked up for low valuations, even with a decent haircut to future earnings. The ones I bit on also pay a nice dividend and have low-to-reasonable pay-out ratios. However, they are all worth less today than what I paid. My vision seemed clearer when I entered the trades.

A week ago I had cataract surgery on my left eye. I can see like an eagle! Yet my vision of the future resembles the above eye chart. I'm pretty sure the stocks I buy are like the Big E, but things are kind of fuzzy. Over time, decent dividend payers should regain value and provide income. But what do you do with speculative positions that were blurry to begin with? Good question.

Most of my specs are solid, turnaround, companies. They've been killed and I think they still have value so I continue to bleed. But one company has been amazing and has actually made the past months fun, sort of.  When I bought it my vision was clear: hold for five years and let management build the brand and sell out to a larger company. Three plus years into the holding period my vision is foggy, but enjoyable. The company is my old friend Smart Balance [SMBL].

Twelve months ago SMBL sold for $3.50. Today it is pushing $5.50! During the market's last leg down, it has gained about 18 percent. BB&T upgraded the stock, but, other than that, nothing has changed. Management remains competent, the niche has promise, and they are not over-leveraged. But, they also don't make much money and sell at a salty valuation. The spreads business is not growing fast and milk hasn't been a huge success. Their new gluten-free products have not juiced sales/profits yet. I'm still a believer, and extremely happy as SMBL is one of my rare performers, but I wish my vision was clearer concerning the stock performance.

Next week I get my bionic right eye and with coordinated, clear eyesight, maybe I'll be able to see exactly why Smart Balance has been making me so happy. If not, who cares as it's fun to have a security that doesn't make me feel ill and stupid.

Friday, August 12, 2011

Care About Statistics That Matter

I scratch my head regularly if CNBC is droning on in the background when the chatter turns to the VIX. I suppose it is okay to track trends in market volatility, but evidently some people or machines, actually trade the index and care about it. Certainly the soothsayers of TV think it is important. I don't get it.

My eyes also glaze over when they talk about "fair value" in the early morning before the markets open. Supposedly the difference between fair value and the futures will tell where the markets will start the day. So what? It must have importance because a lot of time is devoted to discussing the subject.

While I'm on the topic of what I don't understand, I wish the television guys/gals and their gurus would learn that any single statistic or data point rarely has value. Trends are important, but a lonely piece of data is usually only a possible clue. But not on 24 hour television.

So, while it won't happen, I would like to hear more about balance sheets, income statements, costs, dividends, sales trends, and other actual business concepts that do affect actual values. Wouldn't that be nice?

Sunday, August 7, 2011

When Is A Growth Stock Not A Growth Stock?

I need a diagnosis and this company's stock price needs a prescription. This growth company has become a value stock and it continues to lose value! Reports out of Tel Aviv this morning show TEVA dropping another 6 percent as the world worries about the U.S. debt downgrade. The way the company's share price has performed the past couple of years, it will probably crater on Monday also in American trading.

What's wrong with this picture? The numbers presented below usually would not accompany the chart depicted below. Revenue has grown from$11B in 2008 to $16B in 2010. They will be $18.5B this year and $20.6B in 2012. Gross profit has been growing steadily and net income has grown from 600MM in 2008 to $3.3B in 2010 or $4.54 eps. Analysts have that growing to $5.06 this year and $5.63 in 2012.

Chart forTeva Pharmaceutical Industries Limited (TEVA)

Teva isn't a one drug company. They have numerous business units and a nice compliment of generic and proprietary drugs. Yet it sells at a PEG of 93 and forward earnings of 7X. Obama is scary, but can he be that scary? I thought I was picking up a steal in the high $40s but I've been wrong ever since with this growth stock. I'll probably be more wrong Monday.

Transports and Retailers Are Doing Fine

Among all of our daily news doom and gloom, are two recent articles that show evidence that the world of commerce is ongoing. One only has to look a bit to be assured that the world isn't ending. First, July same store sales at the nation's retail chains, the heaviest portion of "back-to-school" buying and the second most important time period for retailers, were up impressive numbers. Almost all grew from 4 to 9 percent over last year's performance. Those statistics were from a broad range of stores, specialty to department, not just discounters. The economy may not be rosy and we have a large number of unemployed and underemployed, but the safety net cushions those unfortunate and the 85 percent are not in depression mode.

Second, those goods have to move somehow from container to shelf and my trucking friends are busy, getting good rates, and adding to fleets. Again, some owner operators are going broke as are over-leveraged fleets, but the truckload carriers are busy. The second article was about hiring at the nation's train lines. The Union Pacific is headquartered in Omaha and Omaha based Berkshire Hathaway owns the Burlington Northern and that railroad also has a large presence in Nebraska. Both are hiring in large numbers nationwide. The jobs are across all categories, white and blue collar, and are the result of increased freight demand. Many require as much as 6 months training and aren't added without thought and commitment. Both roads are back up to pre-recession employment levels and are continuing to add people. The industry pays well in both salary and benefits so that bodes well for the economy. The freight being moved in greater quantities are agricultural products, energy, and autos.

I think I may send CNBC and all Wall Street firms complementary subscriptions to the Omaha World-Herald so they can find some factual, real world economic data to talk about and react to.

Friday, August 5, 2011

Panic Crept Into My Life Twice Yesterday

Twice yesterday I entered panic mode and hoped no one was watching. Several weeks ago I was ordered to buy some new underwear and I complied by picking up a nicely priced package of Calvin Klein's at Costco. Yesterday, at a public restroom urinal, I found out, after much rummaging, that there wasn't a fly opening in my new underwear. What the hell is that all about?

Later, at home, watching my computer screen, I nearly soiled my new Calvins as I observed sellers pitching stocks in full panic. Nothing new was on the horizon, but they found something to panic about and then the computers kicked in. 500 points down the drain on top of the serial drubbing we've been experiencing. Do these children really think that raising some cash, only to deploy it again in a couple of weeks is of value? I don't.

Debt ceiling, America's bond rating, Europe's problems, anemic economic growth; are any of these topics undiscussed? Soon talk will return of reasonable P/Es, attractive dividend yields, and a growing middle class worldwide; all positive for stocks. I'm pitching my new Calvins, but not my stocks.

Friday, July 29, 2011

Power-One Trumps The Debt Ceiling

Power-One's quarterly earnings release Thursday evening allowed me to relax on Friday. Instead of reading news releases and fretting over what to do next, I went to the movies to see Cowboys and Aliens. My PWER investment continues to make sense.

They posted a good quarter. Revenues continued to grow both year over year and sequentially. Profits were good and also grew. Guidance was basically maintained. The company sees renewed activity in Europe and made good progress in North America, China, and India. Selling prices didn't crater and inventory isn't piling up. I believe it was the most positive solar report this quarter.

The stock rose today in spite of Obama's debt ceiling issues and I believe it will continue to inch upward as thinking returns to the market. Power-One doesn't have the "Chinese accounting" baggage, sells inverters not modules, and has a power solutions side of the business that accounts for 40 percent of the company. Because of the foregoing I'm hopeful that it starts to trade at a premium like FSLR does in the module business. Today PWER is still very cheap on a PEG, P/E, B/V, and cashflow basis. That shouldn't last.

Now if I was just as confident and vindicated on JASO! I've added to PWER and am anxiously awaiting JASO's earnings release and guidance in mid-August.

Cowboys win.

An Opportunity To Buy Annaly Capital Management

I pity the fools that sold Annaly today in a panic. It might have been just market makers taking out stop losses at $14.05, but the sellers, either way, were abused as the stock immediately rebounded to the $16 level. I believe it will return to higher levels as people regain rational thought. A debt ceiling issue "may" affect the government's cashflow, but it doesn't hinder mortgage payments. People pay mortgages and GSEs only have to honor their guarantees upon default. A debt ceiling crisis isn't going to cause mortgage defaults.

If the debt ceiling or downgrade crisis affects Treasury rates and all other borrowers have to pay more, then mortgage rates will increase. Annaly will pay more for debt but so will the mortgagees that fund the bonds that Annaly buys. It's a spread business and NLY isn't a trader so they hold to maturity. They don't have to take a haircut if rates rise.

Annaly isn't overly leveraged, invests mostly in agency paper, and pays an enormous dividend which just got nicely bigger over the past couple of weeks. I've added to my position today and may do so again if the panic continues. The yield is now over 15 percent. Never bet the farm, but a few acres is warranted. I pity the fools that sold today and don't buy on Monday.

By the way, I know what I'm talking about because I brought Mr. T to Council Bluffs in the mid 1980s for the town's Pride Week Parade. Mr. T probably doesn't need the income Annaly throws off as his gold necklaces are worth a fortune today, but a retired banker can use dividend income and has thankfully increased his position.

Friday, July 15, 2011

Gimmee A Break. Do Something

Much hand wringing has gone on trying to solve the nation's debt ceiling authorization. You can't avoid the posturing, political theater, and warnings on the gravity of doing nothing and having the USA default. Well I'd rather face uncertainty than follow in the footsteps of Minnesota's crack team of legislators.

Minnesota's two week government shutdown has been resolved. Minnesota's budget is now balanced. How? Trickery and slight of hand or, should I say, slight of accounting principles. The NYTs reported today "both sides agreed to balance the state's approximately $35 billion budget by finding an added $1.4 billion in revenue through accounting maneuvers, delaying payments to school districts and borrowing money against expected future payments from the tobacco industry." Brilliant!

Expect the same type of shenanigans from Washington. I hope I can continue to peddle fast enough to stay ahead of our legislative idiots and grow net worth while not becoming too cynical. Harder to remain upbeat than to increase wealth.

Tuesday, July 12, 2011

ADD Isn't A Stock Symbol, It's How The Market Is Functioning

Attention Deficit Disorder describes the hyperactivity of children, adults, and the Market. Parents, teachers, psychologists, and bosses can deal with the former grouping, I'm affected by the Mr. Market. The inability of markets to concentrate on what is truly important is maddening, but often helpful. We are in such times.

Investors should care about earnings/cashflow and the prospects for future earnings/cashflow. Additionally, they should keep an eye on the market's earnings yield, the inverse of the P/E, in relation to available bond yields. Stocks should move when there is a likelihood of change in those variables. They shouldn't gyrate every nano second as unrelated news is announced. But that is the world we invest in today. A world dominated by children and supercomputers. It drives me crazy, but also offers opportunities in mispriced values.

The market has recovered nicely from its Greek worries selloff, lessening the number of bargain securities. One area remains. Solar. The solar companies, with the exception of First Solar, are being given away. The Chinese manufacturers are going to dominate the module business; they are not going to go away. Some may have accounting issues, others will merge, and they all may lose money for a quarter or two, but there will be winners and the market has killed them all. Choosing between them is difficult. I've chosen JASO, TSL,YGE to spread the risk, but they are all cheap at current prices. The ETF TAN gives good exposure to solar, but it has a big position in FSLR and that is the only solar stock that isn't being given away. Big Chinese solar is cheap, but not without risk. But, at some point the ADD boys and girls will like the sector again and prices will rise dramatically.

A safer solar play is Power-One, an American inverter and power management company. It also is very cheap and has a bright future, plus the safety of not being Chinese-whatever that means. The hyperactive crowd will find this one eventually also.

Time for golf, and like in golf, keep your head down and don't pay attention to the daily drivel. Watch for future earnings, earnings yields, interest rates and not much else. Act when the ADD camp is stupid.

Friday, June 10, 2011

The Market Downdraft Is Politically Bad, But Fiscally Sound

The White House is probably a very uncomfortable place of employment of late. Unemployment is rising, state and local layoffs loom, two wars continue to drain the Treasury, and the stock market is behaving terrible. The loose money induced market has been, along with private sector job growth, the two bright spots of Obama's presidency. Both have changed negatively. An overly political White House cannot be happy about the situation.

But the market decline may actually be good for the country's deficit and, ultimately, Obama. After the past 18 month's performance, selling is producing capital gains that will begin showing up in quarterly tax estimates. There probably aren't a lot of losses to set the gains off against given the markets rise. Therefore, tax receipts up and deficit down. Now hopefully the Republicans can tie firm spending cuts into any debt ceiling increase before the Democrats figure out they have some increased revenue heading their way.

Once the selling stops, that cash will need to be redeployed. There aren't many good alternatives available. The economy isn't as robust as previously thought, but companies are still lean and profits good. Commodities are stretched and bonds subject to the potential effects of inflation. Cash earns nothing. The money will find its way back into equities and that pressure will elevate the indexes.

Like all investors, I haven't enjoyed the past six weeks, but the world's not coming to an end and other than a little portfolio adjusting, I believe it wise to stand pat. A bright spot in this bleak period is that none of my covered calls are going to be called away and I get to keep the premiums. As the market hopefully recovers, I haven't been sold out and won't have capital gains to pay. There's a positive aspect to bad markets, for both Crusty and Obama.

Friday, June 3, 2011

I'm In The House Of Blues

I haven't enjoyed the last several days. Yard work and investment declines put me in a foul mood. More than crusty, foul. Cutting limbs and trimming bushes is bad enough, but watching the Market panic over employment numbers is numbing. That big ape is really starting to shake the tree and investor resolve is waning. So far, I remain resolved but feel low.

Before long the crusty credit analyst may be channeling Blind Lemon Jefferson and the other blues greats. Moaning and howling may be necessary to stand firm until the "market professionals" hear a random statistic that renews their faith and the buying resumes.

Here goes:

My mama ain't left me, but I still feelin low
The cookie jar gettin empty and I gots years to go
Oooow, deep cotton keeps a risin, but I don't own none
I gots stocks and day goin down
I needs a new roof, I gots bills to pay
Oooow, the market man's shakin da tree today
The dog and mama done holdin on to me
But we be staying in the tree
Oooow, I don't wantsa be poor, I just wants a roof
Mama, the dog, and me wants a new roof, woof
Oooow, it never ends.

Big Mama Thorton I'm not, so hang on as the world isn't ending.

Wednesday, May 25, 2011

Near Miss On Diamond

Yikes! I turned on the computer a few minutes ago and Diamond Foods was up $4.61 or 6.7%. Yesterday I played golf out of town and I spent today catching up on home ownership projects. Procrastination saved me. No shorting or put positions started on Diamond. Money still in the bank.

Why the performance boost? B of A/Merrill raised DMND from Neutral to Buy and Diamond had a great day. All the ratios that encouraged me to be negative on Diamond are more extended today. There's more money to be made, but after a near miss I'll wait a few days and see if there is more buying. A reading of the Merrill research will also be in order, although I don't expect any deep insight.

Thursday, May 19, 2011

Families Are Under Increasing Pressures

The commercial correctly says that "depression hurts". Beyond that human tragedy is the economic toll. Galloping food costs, spiraling gasoline prices, and increasingly expensive imported products sold at Wal-Mart are pummeling the world psyche. Whether it's the Chinese, American, Greek, or Arab worker, they are all feeling the pressure of rising prices.

Several years ago, when prices were rising but at a slower pace, consumers had a few coping mechanisms. Rising home values, home equity lines of credit, and credit cards were available to minimize the pain. European and American middle class members enjoyed a life style that they couldn't afford. Those cashflow avenues have painfully shut for millions while daily living costs have accelerated annually. The world's citizens are becoming increasingly depressed.

How do you financially cope if you do not have access to credit? First, you nix any thoughts of discretionary purchases and make do with what you already own. Second, you travel less or differently and you trade down on daily product purchases. House brands will gather steam and brand names will see margins erode to compete. Third, debt payments will be stretched, defaulted, compromised, or eventually discharged in bankruptcy. Lastly, throughout the ordeal, consumers will agitate for pay increases and look for other, higher paying, employment. Even with high unemployment, employee churn will result in some wage pressure.

The foregoing scenario is damaging to individuals, governments, companies, and the world economy. Unless consumers find more cash, problems lay ahead. Corporations, so far, aren't handing out large increases in pay as the emphasis is still on cost control and the labor pool is far from tight. The US has determined that a .7% increase in Social Security is appropriate for its senior citizens; not a lot of extra cash to help offset rising prices. We all know the problems that the European countries face attempting to bail out their member states and keeping their banks solvent, thereby leaving little to improve lifestyles. The Chinese have been raising wages, but far less than the inflation they are experiencing.

Where am I going with this rant? It's time to be very careful, but an investor will probably still be wrong. Some galloping commodities, like silver, after parabolic rises will revert to the mean. Lighten up on those parabolic performers. If inflation isn't here yet, per the Fed, it sure is developing fast. Faster than economies are recovering. Get real confident about a company's ability to sustain margins and volumes or jettison the position. Buy some protection: inverse ETFs or puts or institute some short positions.

I sold Brunswick, boats/motors/bowling, short a couple of weeks ago and am toying with doing the same to Diamond Foods. DMND has been growing by acquisition and just announced a deal for Pringles. I suspicion that P & G got the best of the deal as DMND is assuming $850MM of debt and giving P & G shareholders 57% of the resulting company. Commodity input costs are going to impact margins, the debt load will be a lot larger, the company more complex to manage, and there will be lots of selling shareholders once the stock is distributed. Diamond will also likely reduce debt by selling some additional shares. I haven't pulled the trigger yet, but I'm pretty sure i will shortly. The stock has been a darling, but it is now selling for a very extended valuation and that's before the Pringles component is added and P & G wouldn't be disposing of the division if it was a barn burner with a stellar future.

Brunswick is counting on consumers to return to the boating market and Diamond is hoping that consumers keep buying snack foods at their current pace and practice. I don't think either will happen. Someone once said " A conclusion is the place where you got tired of thinking" and I'm tired. The end.

Saturday, May 14, 2011

Smart Balance Is Behaving Better

Smart Balance's heart healthy regimen hasn't been a financial winner for Al and Crusty. My game-plan has been buy it and tuck it away for 5 years and let Steve Hughes do his magic. Hughes has done it several times before and the bet was that he'd build a billion dollar consumer products lineup and dispose of it profitably. I'm several years into that plan and it hasn't gone smoothly, especially 2010.

After being as low as $3.35 several months ago, its share price has marched up to $5.50. I wish I could justify the rise by significantly improved operational performance, but I can't. The country's milk leader, Dean Foods [DF] has awakened during the same period and enjoyed a similar trajectory. I don't care if SMBL rides DF's coattails as I'm elated that I'm finally in the black again.

The company's recent conference call was positive and their current advertising strategy of combining products in each ad is effective. Milk is doing well, spreads are struggling somewhat, and their Whole Foods venture is promising. They remain upbeat about extending the brand.

Since I've got a couple of years left in my original plan, I'm staying the course. $5.50 makes it easier, as does my new found environmental wacko-ness. Healthy, natural, and organic brands have been able to grow in spite of the economy and I continue to believe that Hughes and his team are on the right track. I hope I prove to be as smart as Al.

Crusty Is Turning Into A Tie-Dyed, Environmental Wacko

Of late I've been listening to Dead CDs, wondering if the Fish will do a Midwestern tour this summer, and thinking about joining Nebraskans for Peace. I can trace the beginning of this behavior back to my purchase of Power-One, a leading manufacturer of solar/wind power inverters. That investment led to a position in JA Solar, a Chinese solar panel manufacturer. I'm in danger of morphing into an environmental wacko. Since I'm not a total convert yet, I hope I've bought my two alternative energy positions cheap enough to make me a prosperous wacko. Also, to keep this behavior from becoming religion, I remain very happy with my nuke related investment in Shaw Engineering and a passel of oil and gas producers.

The stock market appears to hate the alternative energy space. After a number of years as "high flyers", solar companies have fallen out of flavor. Markets are concentrating on the possibility of less governmental subsidy due to budgetary restraints and have killed valuations. Companies can be had for a couple multiples of cashflow. Even if inventory gluts, reduced margins, and falling sales do materialize and cut last years earnings in half, a purchase today represents only 5-6 times EBITDA and since solar is not going away, that's a very attractive entry point.

JASO sells for 3 X EBITDA, 1 X Book, has a 30% ROE, and very little debt. It has been around for a long time and is well respected. As a local company, it will do well as China builds out its solar plans and has facilities and joint ventures in all other areas of the globe. It has been a big player in Europe, solar's number one locale, and will be a big player as the rest of the world picks up any slack from European retrenching. They just reported 1st quarter results which were excellent and the guidance was positive as well.

Renewability, high oil prices, Mid-East tensions, and cheap valuations are all working in this wacko's favor. Peace.

Saturday, April 30, 2011

Religion And Investments Don't Mix

Zealotry may have a place in religion or social causes, but I prefer my beliefs to be rooted more in logic. Reason should triumph over dogma, but it won't faze the fanatic.

Investing should be driven by reason, not any other discipline. Obtaining good, consistent investment results is difficult and, over the long haul, impossible if clear thinking isn't the main driver of financial decisions. There's no place for religious zealotry in investing. Blind Faith leads to the poorhouse.

I intend on never visiting the poorhouse. That doesn't mean that bad investment decisions aren't in my future. I make them regularly, but they won't be mistakes of a major magnitude. Logic, financial analysis, and fear will keep losses to a minimum. I try hard to not turn any investment thesis into religion. I'm open to different opinions and criticism and if my thinking is proven to be flawed I'll exit. Not so for many investors.

I run across religious fervor daily for various investments. Irrational fervor and devotion for their positions. It's generally present in niche investments that have done extremely well and that performance has a missionary's impact on the converted. Nothing fazed the high-tech devotee during the bubble, the sub-prime/housing guru several years ago, the rare earth minerals fanatic, and the all-in commodities speculator of today. Logic is of little value when weighed against a continuing uptrend. Belief in continued success is paramount and that thesis is to be defended, no matter how weak the argument.

Miracles happen in connection with organized religion and they can happen also in investing. Timing is unpredictable and an irrational investment trend can go on for much longer than it should. But, investing results shouldn't be dependent on miracles and that is what is required if logic is taken out of the process.

Sell a security short, write an article detailing the reasoning, and wait for the attacks. The faithful respond with vitriol and very few facts supporting their position. They are in the investment because it has gone up, they have become converts, and they believe it will always go up. It won't and they will be in the poorhouse. Investing, long term, is about making analytical decisions, not miracles. There's no place for religion in investments.

Monday, April 4, 2011

Today I will Experience Anti-Inflation

The mid-to-late 1960s were a colorful era, to say the least. Dayglo concert posters and strobe lighting symbolize that period of acid rock music. LSD was a mind expanding [per Timothy Leary], intensely color laden experience. I grew the hair, liked the music, but preferred the tamer indulgences.

My Macbook has been treating me to a late in life hallucinogenic show as it slowly dies. I've always been annoyed before as PCs crash and die after a few years. Vastly slowed performance, then a bunch of white numbers, letters, and symbols set against a black backdrop. Then I need to go to the electronics store for a replacement. Not the Mac.

My original Macbook, purchased when they came out in 1996, has been a work horse. It's been dropped twice onto hard flooring and the edges were held together by tape. But it always continued to work perfectly. The cursed colorwheel didn't even spin too often. Truly a good product and well worth the money spent.

But it now seems to be on it's last legs. Each morning it has been putting on a psychedelic light show of flickering, pastel lines. The show is so pretty that I don't even mind the inconvenience. After the performance, it lasts about 5 minutes, the Mac takes a bow and functions admirably the remainder of the day. I thought today might be the overdose as the performance lasted longer than usual, but I'm typing!

If it quits this afternoon, or the next day, I'll experience anti-inflation. We a regularly told that the USA has inflation well in check and the cost of living remains low in spite of galloping food and energy prices. In fact, since those two components are volatile, we should remove them from our core inflation calculation. How can this be? I'm about to actually benefit from anti-inflation and reduce my cost of living.

The Fed tells me that my new Macbook will have much more memory, speed, and features that its predecessor so that equates to a falling price. It won't feel like a lower cost when I write the check, but I will be able to take some solace in knowing that my personal rate of inflation isn't charging upward as it will have been tempered by all of the new Mac features. When I fill my tank I'll know that due to my buying a new computer my gas isn't really impacting me as much as it did at my last fill-up.

I'm rooting for the Macbook to survive even if it means I continue to be ravaged by food and energy costs without my electronics cost of living offset.

Saturday, April 2, 2011

I Stands Corrected

Some wag just informed me that my cartoon memory is faulty. Popeye used to say I can't stands no more rather than stans. Sounds plausible, but I always thought he slurred stans.

It's a good thing I'm a critically acclaimed financial blogger rather than a critically aclaimed linguist with a specialty in cartoon speech because I stands corrected after checking wikipedia.

I Can't Stans No More

Popeye had it right when he used to say " I can't stans no more" and then light into Bluto. He'd be pushed to the brink and then explode. Crusty has been pushed to the brink by the stupid financial press.

I can't stans no more talk about needing a rebound in housing and new home construction. It's idiotic to hope for or expect that they work together. They pull at opposite directions. The last thing America needs is a rebound in new home construction. Now, contractors and construction workers may need a rebound in new construction, but underwater homeowners sure don't. They need a reduction in supply and you don't achieve that by building new homes [the same rant applies to strip malls and commercial flex space].

Years of over building, over speculating, and over leveraging got us into our present situation and the sooner we stop adding to supply the better. We may stop adding to supply sooner if the financial media begins to understand the situation and ceases lamenting the poor new home statistics. What's good for Lennar and Dr Horton isn't good for American home owners.

Home prices aren't going to rise, in over built parts of the country, until those parts are no longer over built. Simple! At present, in process foreclosures, vacancies, and shadow inventory remain excessive. A better economy and population growth will help. So will better reporting and conservative lending.

Since government's pump priming hasn't helped and builders continue to build, what else may be a possible solution to static home prices? It's not an original thought, but the following makes sense. We currently give green cards to immigrants that follow the rules and come to American with substantial cash to open a business. The concept isn't new. If we want to jump start home pricing we need to stimulate purchasing from new buyers. Let's expand our current program that accelerates green card ownership if the immigrant not only opens the business, but also buys a home. Greatly expand the requirements for cash invested in the country and value of the home; and most of all, the number of new, qualifying immigrants we will allow. Our housing overhang and price problems will start to mend as supply contracts.

If we can stans no more we need to quit lamenting poor new home construction until supply recedes and we should consider expanding our immigration pool as a means of reducing supply.

Tuesday, March 29, 2011

I Bought Shaw As A Nuke Growth Company, I'm Keeping It As A Nuke Retrofit Company

Prior to the Japanese earthquake, I was very content to own Shaw Group, the big Louisiana based construction company. I built a position several years ago in the mid $20s and its price had moved up nicely to around $42 on the back of the nation's anticipated, renewed commitment to nuclear energy. Shaw, a minority owner of Westinghouse [ the owner of the latest and best nuclear reactors], and the major nuclear construction company had a half dozen plants under construction in China and the USA and another batch approved by oners and regulators. The future was looking good.

Then Japan's problems occurred and Shaw's stock price dropped to the $30 range. Fortunately for me,PWER, the renewalable energy inverter company, moved up nicely over the same timeframe reducing my pain. At its present pricing, $35, I think Shaw is a reasonable purchase. We will likely proceed will all approved plants, but with adjustments. Those adjustments will mean change orders and work to Shaw's advantage. Nuclear power supplies about 30% of our energy and it can't be replaced over night or over a decade. We have to have it, but we will try to make it safer and that benefits the contractor. Many functioning plants will be retrofited and Shaw will be selected as contractor. Not only have they built more plants than the competition, but as a 20% owner of Westinghouse, they are connected to the world's most advanced reactors, and also own specialized piping facilities. I believe Japan's issues will create a wave of business for Shaw.

Shaw has some screwy accounting and reporting due to its minority ownership on Westinghouse and some currency issues that accompany that ownership, but the company does a good job of discussing the issues. That said, Shaw is selling for about 12 X forward earnings and has a decent balance sheet. While not a screaming buy, or a "fat pitch", $35 is a good entry point for this quality engineer/contractor that also happens to do disaster remediation and major construction jobs, like all the dike rebuilding after Katrina.

Friday, March 11, 2011

Not A PWER Expert Yet, But Getting In Deeper

I'm still learning about alternative energy conversion as I lose money on my initial Power-One purchases. So far I've convinced myself that I will still do well with the investment. But, it's starting to feel lonely as there are plenty of sellers and naysayers.

The three questions I constantly ask myself are: is solar/wind energy going away, is PWER a leader/survivor, and am I over-paying for the company? My recurring answers are No, Yes, No.

Economical or not, every country in the world is gravitating, to some degree, to alternative power generation. Subsidized yes, but becoming less so as oil prices increase. No one likes being hostage to oil producer states.

Alternative energy when produced needs to be converted into grid power and that's where PWER, and a slew of competitors, comes in. They also do about a $300MM business in power management for data centers and have about $200MM in cash, but evidently the market doesn't care! Power-One does about $700MM in inverter revenue and is the world's second largest inverter seller. New factories in Arizona and China are spearheading expansion into those two large markets for renewable projects. With a number two industry position, new factories, plenty of cash, and virtually no debt, I don't think PWER is facing failure. They could get acquired though by an Emerson or GE if they wanted to get serious about the market.

At a $7 share price, I can live with a poor first half of 2011 as plants are started up and inventory gluts are worked out. The company and analysts are still very upbeat about the full year performance, but if wrong, it's been priced into the share price. If margins fall dramatically and SGA gets out of control, causing net income to fall to $.50 a share, that 's only a P/E of 14 for a leading growth company.

Today I upped my ante and bought some January 2012 $5 calls. I paid about $2.85 for the options so I'll start, hopefully, breaking even at about $7.85. PWER finished the day at about $7.25. I liked the company in the $8s range, so I was happy to add to my position at an even lower price. PWER has 10 months to prove the naysayers incorrect and Crusty wise. In the meantime I continue to learn more about the industry.

Saturday, February 26, 2011

Testing The Water With Power-One, Inc

Power-One goy killed about two weks ago and dropped over 20 percent. It has flat lined at about $9 since the big downdraft. The cause, like so many other slaughters, wasn't a poor earnings report, they beat street earnings and revenues handily, but provided lowered guidance and mentioned the word "glut". That's how 205 can fly out the window.

PWER has two businesses: power solutions for data centers and inverters for alternative energy. They've been in the solutions business for a long time and it keeps chugging along. The sexiness is in the inverter business where they convert the energy from solar and wind generation into power that can be sold to, and used by, power companies. The reduced sales are in the latter, as is the glut. The company expects it will take a quarter or two to work excess inventory, at the distributor level, through the system. PWER doesn't sell their inverters in the US or China, Europe is their main market, but they entered those two markets at the tail end of Q4. They are the second largest inverter company so they have a reasonable shot at gaining some traction in the US and China. The more successful they are the faster the excess inventory goes away and revenues resume their trajectory. Even with the glut, the reduced guidance calls for revenues of $1.1B-1.3B, exceeding 2010 revenue of $1B. PWER made $.96 eps, including a $.14 charge, in 2010. Analysts have been taking dow estimates, but concensus is still $1.16 eps. At $9, PWER is selling very inexpensively. Its cashflow multiple is also a gift. They have several hundred million dollars of cash and almost no debt.

I've started a position and hope that I continue to gain confidence so I can build a larger holding, but what do I know about solar and wind? Believers have all sorts of sum-of-the-parts valuations that get to $20+ and a commanding market share in a growing industry. But, a glut is a glut, and why did the glut develop? I'm comfortable enough to tip my toes in, but not ready to wade out deeper. Hopefully I will be a quasi solar/wind power inverter expert within a short while and be able to know whether I should dive in or rush back to the shore.

Sold Silver Friday And Reinvested In Gold

About two years ago I put on similiar sized positions in gold and silver [ GLD, SLV ]. My worry was the same as most people, rising inflation and currency debasement. Since I wasn't targeting growth, just protection, I elected to stay with physical metal in a vault, not miners or intermediaries.

To my pleasant surprise, I got growth. Gold moved very nicely and silver skyrocketed. For many years the two precious metals have traded closely, but this past year silver took off. Gold was up, I'm trusting memory here, about 25% and silver about 100%! A look at any comparative chart will show it much more dramatically than my previous statement. Was silver really undervalued, compared to gold, by that much? Are they now at parity? I've read all the literature and silver bulls still love the metal and silver short sellers are giddy with anticipation.

I tell myself that I don't care what happens to the price of silver from here forward because I only want to own the metal for protection. Additionally, those two similiar positions had changed dramatically because of silver's 4-to-1 move and needed to be rebalanced anyhow. So, I sold SLV and intend to buy back more GLD as it pulls back when some of the geopolitical issues subside. I don't believe silver has another 100% year in it, and if it did run too far, it may give much of that gain back. My chances for price appreciation are better in GLD, plus I'm getting the protection I want. Silver has a large element of speculation in it at present and I prefer the sidelines after being lucky.

Now if silver jets up another 50% I'm going to memorize the preceding paragraph and try to feel better.

Thursday, February 10, 2011

The Corporate Cash Logjam May Begin To Flow

For the past several years we have heard about the huge cache of corporate cash that has piled up on large companies' balance sheets. Both political pundits and financial reporters have chronicled the fact that, for various reasons, big companies were hoarding, not spending cash. The implication was clear:when the spending starts the economy will strengthen, jobs will be created, the market will rally, and all will be well with the world.

Recent days have produced two clear signals that the logjam may start flowing. First, Obama chastised the Chamber of Commerce audience to start investing that cache of corporate cash in American projects and creating American jobs. The implied threat is that Obama will be watching and corporate cash totals shouldn't continue to grow while the American economy and unemployed workers are under stress. Implied threat or not, creating jobs for Obama's sake may not be in the best interest of corporations unless they make financial sense. What is in the best interest of America's corporations is to not incur the wrath of the Government.

Yesterday Dow Chemical announced, in my opinion, their version of how can we best reduce our cash totals prudently. After deciding that they had enough cash to fund all viable business expansions, they raised their quarterly dividend by 5 percent and approved a new $7B stock buyback in addition to the $2.5B still authorized. Over the next several years they are going to return lots of money to shareholders. If they saw 10B of projects that would hit their IRR hurdles, they'd invest in those money making projects. I read DOW's decision as disciplined management that isn't going to be pushed into reckless spending just to please the President. But, they aren't going to be caught in the spotlight either with lots of cash and facing potential regulatory repercussions.

While I believe we will see many more dividend increases and stock buyback authorizations, corporate cash is going to be increasingly put to use in strategic Mergers & Acquisitions. All three actions will be beneficial to the stock market as money will be flowing. The impact on the national economy and the unemployment rate may not be dramatic, but it will raise the major stock averages this year.

Saturday, February 5, 2011

Vulcan Materials' Shipments Peaked In 2005

The recession and it's impact on certain industries remains far from over. The aggregates industry, forgive the play on words, is bedrock to the U.S economy. However, it hasn't been very hospitable to owners in recent years. The lesson to learn is that even industries with scarce resources, difficult permitting, and central to the economy can experience significant troubles, especially if balance sheets get stretched. Vulcan [VMC ] is the poster child for this phenomenon.

Don James, Vulcan CEO, stated in the company's recent earnings release that shipments are down over 50% from the peak in 2005! He offered some positive comments about the tide turning, but pinned 2011 shipment growth on a resumption of residential building activity, no further deterioration in non-residential construction, and a timely passage by Congress of the Federal Highway bill. Three large orders. I don't envy Mr. James as he's in the hot seat, or should be.

James didn't create the Subprime building bubble, but he also did a poor job of protecting the downside of his business. At the peak of the mania, Vulcan made a large acquisition of Florida Rock for a premium price. To make matters worse he leveraged the purchase. Then VMC continued to pay a healthy dividend even while its payout ratio was very elevated. By comparison, Martin Marietta Materials [MLM], avoided the large M&A deals, didn't load up the balance sheet with as much debt, kept a reasonable dividend in relation to earnings, and has remained more profitable in spite of the same type of shipment declines.

The comparison i want to make is not that MLM is run better than VMC, but that extremely bad things can happen even in wonderful industries if stupid decisions are made. The recession is over, but VMC is still plagued by its section of the economy and its leverage. The same scenario can affect any commodity based industry that is mined or drilled. New supply has been flowing into most mining, and drilling arenas and an economic slowdown can wreak havoc on those participants that use lots of debt to bring on the new capacity.

My suggestion, in addition to staying away from VMC, is reposition portfolios to only include mining and drilling companies that have pristine balance sheets and management's that are not enamored with big acquisitions. When the next downturn arrives, and shipments fall in half, you want your companies to survive ala Martin Marietta as opposed to Vulcan Industries.

Saturday, January 29, 2011

Everyday You Aren't Selling You Are Buying

I am often asked if I still own a security that I've opined on. If the answer happens to be "yes", I often find myself issuing a disclaimer such as "but I'm not adding to my position at present". The implication is that it is no longer a bargain, therefore I'm not adding. But, by not selling, I am making the same decision as buying. So, I must continue to like the company at its current valuation. I found it more compelling when it was cheaper, but evidently I would buy it today if I still own it. I find myself going through this circuitous logic regularly.

Two Master Limited Partnerships, DEP and EPD, have prompted my introspection. These two mid-stream oil and gas service partnerships have been stellar performers. Now, selling at all time highs I wonder if they shouldn't be sold. They aren't selling at ridiculous valuations, but they are getting extended, especially the bigger of the two, EPD. DEP's multiples are more reasonable. At today's pricing they will still yield about 5.5%, not all dividend income as some is return of capital. Both are growing, adding assets, and well managed.

Dan Duncan, the founder and force behind both companies died near the end of 2010. He left the companies with a capable cadre of management and his heirs a nice bonus, zero estate tax on his 10-20B estate! I liked him when alive, admire his timing in death, and plan to keep his two companies for the foreseeable future. I'm not selling, so I guess I remain a buyer.

Aaron Rents [AAN] Is An Auld Lang Syne Holding

Yesterday I accomplished two things. That's big in retirement world! First, I bought more shares of Aaron Rents [AAN] as the market was marking them down by 7 percent and, second, the wife and I attended the annual Burns Supper.

Burns Suppers, held world-wide to commemorate the birth of Scottish poet Robert Burns are full of poetry, kilts, bagpipers, and scotch malt liquor. I appreciate all of the foregoing. There are also lots of Scots speaking with thick brogues. I missed a lot of the presentation because I couldn't catch the cadence of the brogue. Earlier in the day I believe the market was having a Scottish moment as well, because I couldn't understand why they were throwing out a solid company like Aarons.

I've written about Aaron's before, lastly in 2009, so I won't delve into any numbers today as they've continued to perform well. Last quarter was solid and future guidance acceptable. The company uses debt sparingly and sells for a modest 12 X forward earnings. In a past life I owned 25 furniture rental stores, understand the accounting, and feel confident that a growing number of customers like the rental experience. So, the sell off presented an opportunity to add to my position.

I didn't understand the market's behavior Friday anymore than I understood the Burns revelers last evening. But Robbie Burns, that cool dude in the sunglasses, would understand my toasting auld lang syne to my long-time, old friend Aaron Rents as the market presented me with a New Year's opportunity to buy some more shares at a discount.

Thursday, January 27, 2011

The Cure For High Prices Is High Prices

A quick, cursory glance at almost any commodity chart will lead the viewer to only one conclusion: watch out! Agricultural products, precious metals, industrial metals, rare earth minerals, energy, etc. have all experienced a steep ramp up over the past 6 months.

That increase in price has been explained by a weak dollar, upcoming inflation, emerging market growth, a rebounding economy, permitting difficulties, and the growth of commodity influenced ETFs. Given the foregoing, demand has been significant and prices have risen. Investors have taken notice, but so have producers.

Timing anything is notoriously difficult. This cycle will be no different than trying to figure out when tech stocks would peak or the last deadbeat would receive his triple subprime home equity loan. You can sense it's coming, but when?

My guess is that we're about 2 years away from the cure kicking in. The process has already begun as high prices has encouraged large numbers of new mining projects in various stages of permitting/buildout and we are beginning to see a significant number of untilled acres being planted. The cure for high prices is high prices.

To avoid the impact of increased supply, world economies need to get going and keep going. Any stutter along my 2 year guestimate and investor/speculator confidence could weaken, causing prices to start a readjustment process. ETF money isn't the same as industrial demand and if that segment of demand starts to move elsewhere, the new supply will look overwhelming!

Like the greater fool that I often am, I'm sticking with my allocation of commodity related companies and ETFs. The likes of Bunge, Cloud Peak, and Devon are likely to remain in my portfolio even after my 2 year threshold. But, the ETFs, GLD, SLV , and EWZ, are likely to be sold as months elapse and we get nearer to increased supply and weaker demand.

The recent sell off in many commodities will likely be reversed and owners will be rewarded by further moves upward, but sometime over the next couple of years, high prices will drum up supply and prices will correct. It always happens.

Thursday, January 6, 2011

Rare Earth Comments Signal Inexperienced Owners

My posts receive much more exposure on Seeking Alpha than they do on this site. Consequently that's where I get the most feedback; usually of little value.

The rare earth bubble article stirred the pot pretty good. My thesis was rare earths aren't rare, rising prices will attract big miners, REE companies are selling for insane valuations, and finally, if you want to be near the space, buy FCX or TC as they will benefit if the bubble doesn't explode and you'll not lose your nest egg if it does. Most commentors didn't want to get it.

I usually get this type of response when I advocate shorting a stock. All the supporters rally with inane logic and never dispute the central facts. Same thing here. The owners of REE stocks defended the price rise with all types of mineral trivia, mine location, and personal attack. Nobody bothered to re-think their investment and convince me that paying $5B for MCP, a development stage junior, that has committed most of its eventual production to W.R. Grace at a fixed price and therefore won't materially benefit by any huge run up in REE prices, is a prudent investment. That attitude and lack of discipline is how bubbles develop and one is developing, if not already present.

I did receive one comment worth reading. A person that could actually read and understand called me on my reference to Alfred Einstein, hoping it was Albert's brother. I have no idea as what I was thinking about when I typed that other than I probably had a scotch in my hand and wasn't concentrating deeply. It's better to make typing errors than investment errors.

Wednesday, January 5, 2011

A Tale Of Two Companies

If Charles Dickens was alive and well in Omaha, instead of writing A Tale Of Two Cities, he may have tackled A Tale Of Two Companies. Omaha is home to two agricultural manufacturing companies that are both well run and in some business lines, direct competitors. Valmont Industries [VMI] and Lindsay Corporation [LNN] control the center pivot irrigation industry and also have significant operations in utility poles [VMI] and highway crash cushions [LNN]. Both are consistently profitable and financially sound; indications of sound management.

Valmont is the larger of the two and has numbers that are generally superior to LNN. VMI has a 10% operating margin to Lindsay's 9%, while producing a ROE of 11% vs LNN's 10%. Sales grew 20% last quarter at Valmont with the aid of an acquisition and only 4% at Lindsay. But the stock market views things differently.

Chart forValmont Industries, Inc. (VMI)
Lindsay has been the clear winner as far as the market is concerned. Consequently, you now pay 16 X cashflow, 3.4 X book value, and 24 X forward earnings. A buyer of Valmont only pays 10.7 X cashflow, 2.7 X book, and 18 X forward earnings. Valmont is not priced cheaply. Lindsay is just priced expensively.

I expect Lindsay will revert to Valmont's level of valuation and will continue to explore put option pricing and the availability of shares to borrow. In the long run i like both of these companies, but, at present, Lindsay is clearly over valued.

Rare Earth Minerals Are Not In a Secular Bull Market. It's A Bubble

Scarcity generally does lead to higher prices. But one still has to be careful. In the case of rare earth minerals, I'm afraid Alfred is going to be correct once more. Speculators are pushing any and all rare earth related stocks skyward with no regard for logic and financial analysis. All they heard was that China was no longer going to be an exporter of rare earths, leaving the rest of the world in a shortage. True to form, they've chosen the wrong companies to exploit any bull market in rare earths. As always, it is insanity and will not end well for the uninformed.

The major beneficiaries of the rare earth boom have been small, junior miners such as Molycorp [MCP] and General Moly [GMO]. However, they really don't have a business yet and are basically development stage companies. GMO has basically no revenue and a $450MM market capitalization, while MCP, also without any revenue, is valued at $5B! It's all on the come.

The problem is that rare earths are not rare! Until recently they were just by- products of other mining projects. Giants such as Freeport McMoran [FCX] are in the rare earth business and will be more so as pricing increases. So is large moly miner Thompson Creek Metals [TC].

Chart forMolycorp, Inc. (MCP)

The above chart shows where the insane money has been flowing. I own TC, for its molybdenum business and in process gold/copper project, not for any rare earth miracle. Thompson is a conservatively financed and well managed company. It has over $1B of sales, $500MM of cash, no debt, and a market cap of of only $2.5B. That's right, it has half the market capitalization of MCP!

Remain sane with proven operators, not story stocks.

Tuesday, January 4, 2011

Secular Bull Markets Don't Guarantee Short Term Success

It's Tuesday and the wife is positively giddy as she watches Glee on television. That same giddiness and glee is also present in the commodities space of the stock market. The trend is up, the trade has worked, and the story is intact. Investors/speculators continue to pile into any and all real asset plays as an inflation hedge, a dollar hedge, and a participation in emerging markets. I've done so myself. But I worry.

"What the commodity markets are telling us is that we're living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. In other words, commodities are in a real, secular bull market, not a bubble." The forgoing quote is a sentiment that I encounter daily in articles, newsletters, and analysis. I don't disagree, but that does not mean that a nasty correction cannot happen in spite of the commodity shortages.

An example. The aggregate industry in the U.S. is a wonderful, regionalized monopoly. Supply is limited by the inability of operators to easily obtain permits for new quarries, mines, and facilities. The scarcity is real. Until 2008 the share prices of all aggregate companies marched steadily upward based upon their ability to raise prices, even in the face of declining volumes, due to limited supplies. It was a secular bull market in rock. Then as the real estate recession moved from residential real estate development to commercial development to road building, the price increases no longer stuck well enough to offset the huge volume declines. Share prices declined. I was on the right side of that trade and did well.

The aggregate business is still a good one, if your balance sheet is conservatively financed, and the permitting of new projects hasn't become any easier, but the share price declines show that shortages can become oversupply rapidly. That oversupply can affect the conservatively financed and the aggressive companies alike [MLM and VMC, respectively]. Commodities, and commodity companies, face the the same dilemma as the rock suppliers.

Should China experience a "hard landing", commodity volumes will drop drastically, prices will be slashed, and share prices will no longer enjoy a positive trend. Inflation and a weak dollar won't be able to compensate for a stalled China. Emerging markets are going to emerge and use huge amounts of raw materials, but their progress doesn't have to be in a straight line. Raw materials are in a secular bull market, but they aren't immune to dislocations caused by retrenching markets.

If China were to stall, the secular bull market in commodities goes into neutral for several years. I don't have an opinion on China's ability to manage their economy, but I do have an opinion on how my raw material/commodity investments are structured. If China craters, I only want to own companies with pristine balance sheets that can easily survive until the emerging markets bounce back. I don't own "junior" miners, rare earth hopefuls, and leveraged operations that are taking on large, debt funded, expansions to supply China.

I don't have the conviction to sell materials stocks short, like I did the aggregate operators, but that could change! In the meantime I hope the China led recovery continues, and should it not, that my conservative materials positions perform well enough to get me to a prosperous resumption of the secular bull in commodities.

Glee's over so I can quit typing.
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