Feb

1

Last Jan. 31 I picked water and coal as the plays for the year. In that time, the Dow. has gone down .2% while the S&P dipped 4.51%. The water stocks listed showed a slightly positive return of 1.56%. I didn't list any coal selections since I owned too many and wasn't particularly crazy about the rest.

It can be revealed now that I held CNX (+116.75%), FCL (+57.39%), and ICO (+17.25%). However, after Congress completely passed over coal in the energy bill and the geniuses running California, Florida, Nevada, and South Carolina banned new power plants utilizing the product, I bailed on two of the three (I leave it to you to guess which I still hold). Please look carefully at the states that pointed the way in the anti-coal charge - none really appreciate the cold since they so rarely experience it - I was thrilled last week, then, when I heard it was snowing (and sticking) in Santa Barbara.

Coal's out performance, however, hinged on three unusual events: floods in Australia, power outages in South Africa, and snow storms in China. I still believe it's our best hope for somewhat alleviating the energy shortage. However, I'm in a smaller minority than a year ago. I also mentioned that coal-to-liquid stocks might be a good bet. Very wrong. Every potential alternative energy source received a few nickels and dimes from Congress - not CTL, though, and the stocks tanked badly. And the best of the bunch, Sasol, is now advesely affected by the SA power crisis.

A closer look at the water stocks shows that Companhia de San Basi (SBS) once again was the best performer among the foreign entries gaining 37.96%. Suez (SZEZY) gained 23.92%, and Kelda Group was up to 20.22%. The American stocks were lead by Lindsay (LNN) with a 99.09% gain, and then a huge gap down to Northwest Pipe (NWPX) with a modest 10.45% move, and last year's American leader, Layn Christensen (LAYN) with an OK 4.39% push up. Major diappointments were Gorman-Rupp (GRC -31.16%) and Watts Water (WTS -31.00%). Tetra (TTI) was the biggest loser at -32.51%. The only loser among the foreign stocks was United Utility (UUPLY) at -4.81%.

Please note that neither Suez nor United were Pink Sheet stocks when selected a year ago. Both are huge companies and both decided they didn't need the NYSE or SarbOx. This trend has gained momentum this year and I expect it to continue. (Can you blame them when the utlimate authority and high priest of foreign investment is little Chuckie Schumer?) To keep abreast sign up with otcqx.com/otcqx/home as they not only announce the delistings but provide information on the quality of the companies moving.

In conjunction with these moves and others from the NYSE, a Mastercard survey revealed that London is now considered the leading center of commerce, besting NY in economic stability, ease of doing business, financial flow and business center ("depends on the clustering effect of business formation, supported by efficiency in logistics and transportation linkages").

In a similar vein, Bob Adams of New Global Initiatives hired Zogby to get a feel for American emigration. The results indicate 1.6 million households have already decided to leave, 1.8 million are seriously considering it, and 7.7 million are "serious about leaving and may do so." Since no similar study has been conducted, these figures may well be normal. However, when constituents as diverse as Russian airlines and Uruguayan day laborers will not accept dollars, it's possible that the bloom is off the rose.

Of course, much of the concern revolves around how serious and extensive the fall-out will be over poorly extended mortgages, the CDOs in which they're packaged, and the financial heft of the counter-parties who have guaranteed these pieces of dreck. No one need worry about the dollar as it is establishing itself as a carry-trade funding currency (although Bernanke still has 250 basis points to cut before he achieves Japanese levels - and if Cramer has anything to say about it, it will happen.)

I'm in the process, a very slow process, of puttng together my favorite "pinks." Some of the world's great companies refuse to play by our rules (e.g., Nestle, Samsung, Gazprom) yet can provide some great returns. Unfortunately, there exists an irrational fear of stocks listed in the Pink Sheets. Admittedly, many, many are dogs, but there are quality issues also.

Before I sign off, though, I have a question for a group which lives and breathes the dogma of "ever-changing cycles." If "the cycle" is your touchstone, why are recessions so feared and, in some cases, denied? Without them there would be no cycle. An occasional flushing is essential to any system, so why don't we just get it over with and carry on?
 


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7 Comments so far

  1. Anatoly Veltman on February 1, 2008 9:03 am

    Eskom’s darkest secrets:
    Why is everyone terrified to go public on the two core reasons for Eskom’s homemade Armageddon?

    It flashed out innocently on the wires on February 19, 2002: “Eskom, the world’s leading buyer of coal, said yesterday that it might favour black-owned local producers over BHP Billiton and Anglo American, the two top mining companies, in future purchases. The state-owned monopoly power supplier might turn to black miners for all of the 30m tons a year of coal it might need to add by 2015, said chief executive Thulani Gcabashe”.

    By now, every South African who’s not deaf, dumb and blind knows that Eskom’s coal stockpiles at its coal fired stations are down to a day or two of supply, instead of the more prudential two months’ worth. So-called “black economic empowerment” (BEE) is one of the two core reasons for Eskom’s homemade Armageddon. Eskom’s insane policy of chasing increasing procurement from blacks - regardless of the consequences - is at the heart of why South Africa now finds itself in a wheelchair with flat batteries.

    The second core reason for Eskom’s cataclysmic decline into festering swampland is its determination to enforce “affirmative action” (AA), regardless of the consequences. This is a more deadly force, given that the consequences of forcing “greybeards” out of Eskom to anywhere else, preferably the streets, has translated into fatal mistakes in maintenance.

    Eskom owns high technology power stations, utilizing First World boilers, steam turbines, generators and rocket-science shafts. As the years have piled up since 1994, so Eskom’s maintenance has increasingly decomposed. To now name BEE and AA as the core reasons for Eskom’s meltdown may be the most politically incorrect thing in the world, but it’s written right across the skies. Government and Eskom have not once mentioned BEE or AA among the vile plethora of reasons for crippling failures over the past few weeks.

    Typical spin goes like this: “during the week of 14 January 2008, there were over 5,000 MW of power plant not available due to unplanned outages. Some of the reasons for these failures were: Boiler tube leaks/failure; various smaller equipment failure; generator output reductions (load losses) as a result of coal quality, and problems with coal supply”. Rather than negotiating increased coal feed with the likes of BHP Billiton and Anglo American, the public are told that “it is crucial that Eskom working with the DME [Department of Minerals and Energy] begin acquiring higher quality coal that will enable generators to run at full capacity”.

    The DME does not supply coal. Instead, it has powers to whip, bludgeon and abuse private sector coal diggers like BHP Billiton and Anglo American. The bedfellows are well matched: the arrogance of the DME’s ruling cabal equals the arrogance and insolence of Eskom’s executives. Gcabashe went so far in 2002 to state that “options now included reserving a quota of coal purchases for black-owned companies”.

    To the trained eye, the spin from Eskom and government cannot disguise the systemic wreckage that BEE and AA have drenched over South Africa’s power stations and electrical distribution system. The country’s once world-class power stations are being frog marched toward the filthy graveyards of Africa’s atavistic heritage.

    Economic crime on this unimaginable scale can be most readily compared to the indescribably huge carcasses of once-world class copper mines in southern Katanga Province, Democratic Republic of the Congo. On 31 December 1966, the Congolese government, led by erstwhile dictator Joseph-Désiré Mobutu, seized the keys of Union Minière du Haut Katanga, a Belgian trust founded in 1906.

    The new entity, state-owned Gécamines (La Générale des Carrières et des Mines) malevolently inherited one of the world’s richest contiguous copper, cobalt and zinc fields. But a good number of skilled professionals remained on site, and as recently as the late 1980s, each year, Gécamines was producing nearly 500,000 tons of copper, 60,000 tons of zinc, and 14,000 tons of cobalt.

    Mobutu renamed himself Mobutu Sese Seko Kuku Ngbendu Wa Za Banga (”The all-powerful warrior who, because of his endurance and inflexible will to win, goes from conquest to conquest, leaving fire in his wake”), and launched raid after raid on the cash at Gécamines.

    This finally culminated in his downfall as president, and the virtual destruction of Gécamines, which had always demanded substantial maintenance and expansion capital expenditure to remain in business. In recent years, Gécamines has produced less than 10,000 tons of copper a year, and less than 1,000 tons each of zinc and cobalt.

  2. Barry Gitarts on February 1, 2008 11:22 pm

    Problem with the pinksheets is there is little visibility into the bid/ask spread so you have to basically buy and via market orders. Its also not uncommon to see pinks trading at big premiums to their domestic exchange listings.

  3. Lon Evans on February 2, 2008 3:18 am

    Why am I still short?

    Well, the latest reason, derivative swaps to school districts, nationwide.

    You can only fuck a system for so long before it abjures from further abuse.

    “Really honey, I’m sore.”

    Isn’t it ironic that the “Gladiator,” himself, Mr. Spitzer is now the champion of those he built his political career upon in attacking for their excesses.

    ‘All animals are created equal. Some are just more equal than others.’

    Apologies to Mr. Orwell.

    lon

  4. George Parkanyi on February 2, 2008 1:58 pm

    These comments follow on Mr. Veltman’s.

    The concept of the nation-state itself is flawed - especially when it has no basis in demographics. It perhaps works better when more aligned with ethnic/cultural/linguistic homogenaeity (e.g. Japan) and/or symbiotic co-existence (e.g. Switzerland), but I think the time has come to revisit the whole notion.

    In Africa the nation-state is a disaster. The boundaries of these “nations” were determined arbitrarily between the European powers of colonial times, yet within these boundaries lives a wide-ranging ethnic diversity organized along tribal lines. (In chatting with a Canadian foreign officer after a soccer match, he told me the tiny Ivory Coast alone has 60 different ethnic groups and as many languages!) Before modern colonial times these groups somehow co-existed, but also competed for territory, resources, and influence - as did all other ethnic groups on the planet. The stakes were lower when all they had were clubs, spears and arrows (as it was in the West with swords and muskets until military technology took off in the 19th century and ultimately gave us Hiroshima and Nagasaki. People usually don’t think of WW2 as a nuclear war.).

    Fast-forward to today. That cultural diversity still exists, but someone has to rule these “countries”, so typically one ethnic/tribal group dominates. Their power base either lies within their own ability to rule by force over the other groups, and/or they are artificially supported by 1st and 2nd world political and economic interests that want access to the resources. The tremendous corruption and privelege of these ruling groups fosters huge resentment amongst the rest, who mostly remain disenfranchised and dirt-poor. That’s why a supposedly “stable” and benign country like Kenya can suddenly spiral into chaos when the ruling ethnic group loses some of it’s grip.

    Because of this power model, it is hugely difficult to establish institutions that operate under the rule of law for the benefit of the general populace. Great men like Nelson Mandela notwithstanding, African politics still appears to be for the most part a game of musical chairs where some strongman gets to rule by force for a while, line his and his cronies’ pockets, then get out while the getting is good or eventually get thrown out by the next guy waiting for his turn. If they move their booty overseas (typical), then it isn’t even recycled back into the local economy. And the so-called developed world hasn’t done these countries any favours in this respect by legitimizing this behaviour.

    So is it a surprise that Eskom deteriorates under African management? Not at all. It’s not because Africans aren’t wonderful or capable people, it’s that the environment is so corrupt and unstable that it is nigh impossible for sustainable, equitable institutions to take root. Even if children go to university and learn how run and manage their mines and industries, the incentive is greater for them to simply take their knowledge and live abroad more safely and with more opportunity. So the outsiders come in, pay the protection money, and they do it. Or if they don’t or are driven/kept out, things quickly fall apart. Robert Mugabi, take a bow.

    Africans need to learn to co-exist amongst themselves within the nation-state context before they can make it truly work for them. (It’s not just Africans either - look at what people had to go through AGAIN within supposedly civilized Europe in the old Yugoslavia and Albania, and much of the Middle East suffers from the same issues.) And who’s to say our notion of the nation-state and capitalism for that matter is even right for Africa? As long as we sanction these “governments” in the U.N. for what is really our own self-interest, we’re not doing the average African any favours. And with all the weapons that have poured in, how are we to expect the literally hundreds of ethnic groups to organize/stabilize themselves in a civilized fashion when most are armed - or could easily become so? Rwanda is the poster-child for THAT dilemma.

    It’s a tragedy. I don’t know what the answer is, but I’m sure it isn’t the continued support and/or sanctioning of despotism and kleptocracies - and the economic looting (us included). The on-the-ground NGO work is good; it keeps people alive and provides some hope and upliftment, but Africans need to find a better way toward economic self-determination and co-existence amongst themselves and with the rest of the world.

    Even for us I think the nation-state is obsolete. It’s insular and divisive. The EU is on the right track.

    Cheers,
    GP

  5. George Parkanyi on February 3, 2008 8:35 am

    Hi Lon,

    Be careful with your assumptions about losses. All that money that was “lost” in CDO’s and credit derivative swaps didn’t just vanish into thin air. It circulated into the global economy. Whoever benefited initially has redeployed that capital in salaries, investments, spending, whatever … Unless it is disruptive enough to bring down the whole global financial infrastructure itself (which it isn’t when you put into the perspective of global GDP), it’s no big deal. And the aggressive rate-cutting and liquidity stimulation is the correct response. That creates money, money circulates, and life goes on.

    You could be right about stocks going further down, but they WILL come back up as they always have, unless there is a complete breakdown of civilization as we know it. I don’t think we’re there yet by any stretch of the imagination. Personally I think we’re now in the next up-leg of the bull market, looking at how stocks powered ahead on Friday. You and I see it differently right now, but that’s healthy, because opposing views is what makes markets. Our collective view at any time hits the ground at the bid and offer.

    I highly recommend Ken Fisher’s recent book “The Only Three Questions That Count” for a very different and well thought out perspective on the common myths and assumptions we investors and speculators take for granted, or even gospel.

    Cheers,
    George

  6. Tom on February 4, 2008 1:34 pm
  7. Mike G on February 11, 2008 1:52 am

    I was thrilled last week, then, when I heard it was snowing (and sticking) in Santa Barbara.

    Question your sources.
    It snowed a smidge in the mountains behind Santa Barbara and dissipated in a few hours. We get a light dusting of snow on the peaks every few years.
    It has snowed in the city only once in recorded history, in 1962.

    What this has to do with energy sources for power plants escapes me. Choosing a less-filthy energy source to fuel electric utilities deserves to be punished by cold weather?

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