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.

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.

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.

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.

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.

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.

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.

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.