Wednesday, June 30, 2010

"Snoop Dogg tries to rent entire country of Liechtenstein"

From Foreign Policy's Passport blog:
In a too-good-to-check item, the Daily Mirror reports that rapper Snoop Dogg recently attempted to rent the entire nation of Liechtenstein for a music video:
The request surprised authorities in the state of Liechtenstein - population 35,000 with an area of 61.7 square miles between Switzerland and Austria.
Local property lease agent Karl Schwaerzler said: "We've had requests for palaces and villages but never one to hire the whole country before.">>>MORE

"Berkshire May Be Required To Post Up To $8 Billion In Collateral" (BRK.A; BRK.B)

I think it was Boston University's Zvi Bodie* who, shrugging off the restraints of his MIT PhD, pointed out to the "expected return" crowd that if it were true that the risk of negative returns decreases as the time frame increases, the cost of long-term puts should decrease the farther out you go.
Kind of an Emperor has no clothes thing to say.
I'm referring, of course to the equity index puts that Mr. Buffett sold.

From ZeroHedge:
Some bad news for Uncle Warren. In a note by Barclays' Jay Gelb, the insurance analyst evaluates the impact of FinReg on that "other" company and concludes that as a result of Berkshire having $62 billion in notional derivative exposure, the additional collateral requirement contemplated in the current version of Financial Reform (don't worry, the corrupt idiots in Congress will strip it before all is said and done), which amounts to 10% of notional, or 100% of option proceeds, would result in $6-8 billion in collateral posting requirements imposed on "America's Company." Even for Buffett, this is not purely chump change.
From Barclays:
  • As a financial entity, we believe Berkshire Hathaway will be classified as a major participant and not be grandfathered for avoiding additional collateral requirements.
  • Buffett said at Berkshire’s annual meeting in May 2010 that, if needed, he believes BRK could use existing investments including equities as collateral rather than cash, although it is unclear to us how much additional collateral would be required.
  • Notably, derivatives used by Berkshire’s MidAmerican & Burlington Northern operations as end-user hedges appear to be exempt from clearing requirements, but would be subject to margin requirements, although non-cash collateral is permitted to be posted.
  • Reiterate 2-EW rating on Berkshire Hathaway. We anticipate strong results in Manufacturing, Service, & Retail and Burlington Northern, stable results in Insurance and Utilities, and choppy investment results. Additionally, we believe headwinds to BRK’s book value growth in 2Q include anticipated mark-to-market impacts from falling equity markets, exposure to Goldman Sachs warrants, and potential mark-to-market derivative losses. Long term, we remain concerned about a lack of clarity around Warren Buffett’s succession plans because we believe he is synonymous with Berkshire Hathaway.
  • BRK.B currently trades at 1.34x 1Q10 BV (2.0x tangible BV), which is below its historical median of 1.7x (historical range: 1.1-2.7x). Our $88 price target is based on 1.3x YE 2011E BV of $69. Based on our assessment of potential investment marks, our current thinking is that Berkshire’s linked-quarter book value per share could fall 1-2% in 2Q10.
Here is some backgrounf on Berkshire's existing derivative exposure:
Berkshire Hathaway is party to approximately 250 derivative contracts with a total notional value (the nominal exposure to a derivative’s underlying securities) of $62 billion at 1Q10 and an average contract life of 11.25 years (details provided in Figure 1). These contracts generate substantial float for Berkshire of $6.3 billion as of year end 2009 since Berkshire collects premiums at the inception of the contract. Similar to insurance float, if Berkshire breaks even on the underlying contract, it has enjoyed the use of free money for years (although the company expects to perform better than breakeven). Warren Buffett considers himself the chief risk officer at Berkshire and is in charge of monitoring derivatives positions.

Berkshire Hathaway has attracted unwanted attention due to its growing derivatives exposure. The company increased its exposure to fluctuating investment valuations by selling long-dated put options on equity indexes and high yield indexes as well as credit default protection for states/municipalities and individual corporations with a total notional value of $62 billion. On a positive note, these contracts provided Berkshire with $6 bn of float for investment, the contracts cannot be settled prior to expiration, and the marks reversed to positive territory after 1Q09.

Economic risk from Berkshire’s derivatives appears manageable, in our view. This is because the equity put options are European style (only exercisable just prior to expiration), and require payment by Berkshire in about 11.25 years (on a weighted average basis) if the index price is lower than the level when the contract was written. Notably, in 2009 Berkshire reduced the strike prices and shortened the maturities of about 10% of its equity put options. That being said, Berkshire’s derivative contracts enhance its exposure to equity markets as well as to the debt service capabilities of states and municipalities in a challenging fiscal environment.

Berkshire’s derivatives contracts produce meaningful accounting swings in net income due to marking these securities to market each quarter. As a point of reference, Berkshire estimates a 30% increase in equity markets could result in about a $2-billion accounting gain in its equity put options, and a 30% decrease could result in about a $3 bn accounting loss (1.5% of shareholder’s equity). Berkshire’s cash at 1Q10 was $23 billion, which approaches Buffett’s internal minimum requirement of $20 billion.
But before you start worrying that the principle of return and risk apply equally to Berkshire know this: Warren is confident all is good....MORE
*William Bernstein (No slouch either, M.D. Neurologist, PhD. Chemistry, dabbler in Modern Portfolio Theory, Bestselling Author, etc.) in one of his Efficient Frontier pieces, "Zvi Bodie and the Keynes’ Paradox of Thrift" described the professor as "Academician, raconteur, and all-around good guy Zvi Bodie...".

Then he rips his lungs out. Very typical in the academy:
...What’s wrong with mass-market inflation-protected intermediation? Unfortunately, everything. First, TIPS, while relatively risk-free in the long run, can be rather nasty actors in the short run. As of this writing, the 29-year bond yields a real 2.7%; the 10-year bond, 2.1%; and the 5-year bond, 1.5%. To get those returns, the investor has to be willing to take about 12%, 6%, and 3% of (standard deviation) risk, respectively—not chopped liver, particularly at the long end. Bodie makes the same mistake here as his foils James Glassman and Kevin Hassett, who in Dow 36,000 postulated a new species of homo economus impervious to short-term volatility. At some point in the future, there will be a grinding bear market in TIPS (it may already have begun!), and it is a forgone conclusion that tens of millions of savers will sell out at the bottom, just as they have done historically and repeatedly with stocks. 

But there’s an even more fundamental problem with TIPS as the national core investment: lack of supply. When investors purchase stocks, they are syndicating corporate investment risk by allowing the companies’ owners to offload risk onto them in exchange for a risk premium. In effect, they are acting as companies’ insurance agents. With TIPS, the situation is far more complex, but mainly in the opposite direction. Here, it is the seller who is assuming risk, indemnifying the buyer against the risk of inflation. For the Bodie plan to work, the government, corporations, insurance companies, and mortgage suppliers must be willing to underwrite trillions of dollars of inflation-protection risk for retirement savers. Whether this is even feasible is anyone’s guess, but what is certain is the price paid by investors for such an amount of protection would be enormous. 

Bodie sagely points out that stocks do indeed become more risky with time, the proof of the pudding being that equity puts become more expensive with maturity, and not the other way around. The same, unfortunately, is true of inflation risk. Similar to stock puts, the nominal yield curve is usually positive, for exactly the same reason: with time, the risk of inflation rises. While one may be reasonably certain that we shall not see hyperinflation in the next five years, one cannot be so sure about the next three decades. Insuring against inflation for the next 30 years is a dandy idea and, at the moment, it is even reasonably cheap. But if demand mushrooms, prices will rise and yields will fall. In an extreme case, negative yields in the secondary market for Treasuries and in the primary non-government markets are entirely possible. (For those having a hard time imagining a negative TIPS yield, imagine what coupon would have been demanded by investors in Germany and Hungary in the 1920s for an inflation-protected investment.)

As pointed out by Rob Arnott and Ann Casscells in the January-February issue of Financial Analysts Journal, stocks and bonds are merely a medium of exchange between retirees and workers. (In January, I discussed the Arnott/Casscells argument in these pages.) At any point in time, there are x number of workers producing goods and services for y number of retirees. If there are too many retirees and not enough workers producing goods and services for them, it does not matter how well the retirees have saved in the aggregate—their standard of living will fall as the prices of their securities—TIPS included—deteriorate and the wages of workers rise. 

The grim reality is that improvements in intermediation of the sort suggested by Bodie, while helpful, cannot avoid being overwhelmed by the twin bogeymen of human financial nature and demographics....

"NYT Digs Further Into the AIG Backdoor Bailout" -CJR (AIG; GS)

Felix Salmon had a good post this morning, "The inexplicable AIG waiver":
Louise Story and Gretchen Morgenson have another huge AIG/Goldman story today, which centers on one new and interesting piece of information: when AIG paid off its bank creditors in full, with the help of that monster government bailout, it also signed a waiver forfeiting its right to sue those banks, including Goldman.
The waiver is buried on page 385 of the 823 pages of documents that the NYT has, wonderfully, put online in a very easy-to-read form. (It’s also linked to the full 250,000-page document dump from the House Committee on Oversight and Government Reform, if you want to go trawling through the documents yourself.) I was rude about the NYT putting source documents online a couple of weeks ago; this is the best possible way of the NYT proving that I was wrong....
That's Felix, humble and lovable.
Here's the Columbia Journalism Review's The Audit blog (column?):

Regulatory capture doesn’t begin to describe what went on here
Just when you thought the AIG/Goldman Sachs backdoor bailout scandal couldn’t smell any fishier, The New York Times wades through 250,000 pages of a document dump and came out with a story showing in more detail how the government sold out taxpayers in order to secretly bail out giant banks.
Regulatory capture doesn’t really describe what happened here. It’s more like regulatory kidnapping.
The Times shows the Bush administration and the Federal Reserve Board of New York (under Obama’s Treasury Secretary Tim Geithner):
— Forced AIG to give up its right to sue the banks getting the backdoor bailout for any fraud they may have committed against the insurer
— Empowered a fresh-from-Goldman guy named Dan Jester to oversee the AIG bailout while allowing him to retain his (presumably substantial) Goldman shares [Goldman is an Audit funder]
— Rebuffed outside advisers’ plans to give the banks haircuts on what they were “owed,” which could have saved taxpayers $30 billion that instead went to pad Wall Street’s (and foreign banks’) bottom line (half of which gets paid out in bonuses and the like)
— Attempted—and succeeded for a couple of years—to cover all this up
This is business journalism at its best, and it’s no surprise to Audit readers that it’s Louise Story and Gretchen Morgenson who reported it. They’ve been responsible time after time for some of the most important journalism of the crisis.
Here, they quote a law professor, analyzing what this all means... 
MORE, including links that are worth a bookmark, if not an immediate look.

"What’s up with commodity currencies?" (AUD/USD; CAD/USD)

The Australian dollar was up a bit after getting whacked yesterday,
Yesterday we posted "Marc Faber June 16: "Short the Australian Dollar" (AUD/USD)", here's some more insight from FT Alphaville:
Having warned about increasingly negative sentiment towards the euro, Bank of New York Mellon’s Simon Derrick takes a stab at commodity currencies on Wednesday.
In a nutshell, they are behaving oddly. More specifically, he says, they’re behaving very much like they did ahead of the 2008 mega sell-off.
You see, according to Derrick, it was all very simple at first.
Eurozone jitters from December onwards led to a logical erosion of the store of value in the euro. This saw the euro lose 25 per cent of its value against gold and 21 per cent against oil.
Consequently, commodity-backed currencies like the Canadian loonie and Australian dollar flourished against the euro too. The former was up 17 per cent against the singly currency and the latter up 11.5 per cent. The next in line to benefit were the ‘safety’ currencies of the US dollar and the Japanese yen — both of which saw performances not far short of the CAD, according to Derrick.
The Swiss franc and British pound, however, remained relatively steady or even underperformed the euro. The underperformance of the first though, was largely linked to the Swiss National Bank’s (SNB) strategic policy of keeping the Swiss franc weak.
The thing is, ever since the SNB stopped its intervention path all these patterns of behaviour have changed somewhat, notes Derrick.
As he explains:
Since June 17th (the day that the SNB effectively stepped back from the currency markets), three currencies have stood out as the top performers amongst the majors: the CHF, JPY and GBP (with the EUR losing 3.7% against the first two currencies and 2.9% against the third). In contrast the EUR has fallen just 1.3% against the USD and has actually gained in value against both the CAD and AUD. In line with this it is noticeable that both gold and oil have also fallen in value against the European unit.
But, Derrick says it would be wrong to link the change to the SNB....MORE

Bullish Options Plays in Anadarko Petroleum (APC)

UPDATE: "UPDATED: Sometimes the Crowd is Right: Relatively Heavy Call Activity in Anadarko Petroleum (APC)"
Original post:
After opening down the stock is now up 3 cents at $36.70.
From What's Trading:
Anadarko Pete (APC) hit a morning low of $34.84 and came within striking distance of its June 9 low of $34.54. Shares are now down 60 cents to $36.07 and 3.5 percent off session lows.
In the options, a noteworthy risk-reversal on the ISE at 9:50 when a strategist sold 5000 Nov 27.5 puts at $3.41 apiece and bought [should be SOLD -ed] 5000 Nov 40 calls at $5.01. ISEE data also shows a separate block of 1042 July 45 calls were bought-to-open at 34 cents 20 minutes later.
Implied volatility in APC, the oil drilling company that was a 25 percent partner in the rig that caused the Gulf spill, is up 6 percent to 85.5 after Financial Times published a story late yesterday (Anadarko approved key BP well designs), noting that “both Anadarko and BP have confirmed to the FT that the US company was aware of design choices that lawmakers, who have accused the UK company of cutting corners to cut costs, have criticised.”

"A Mosaic Company Synthetic Short..." (MOS; MOO)

The headline continued "...Ahead of Earnings" but earnings are three weeks away, i.e. an eternity.
The stock is trading up 65 cents at forty bucks even, not bad considering this morning's yawner from Monsanto.
From Schaeffer's Research:
Options trader initiates a very bearish strategy on this agricultural concern
While the current earnings calendar is a bit thin, there are still quite a few heavy hitters scheduled to release their quarterly reports during the next month. Along those lines, The Mosaic Company (MOS) is expected to report a profit of 89 cents per share after the close of trading on July 22. The figure is a solid improvement over the company's earnings of just 33 cents per share in the same quarter last year. Historically, however, the company has been a poor fundamental performer, missing the consensus estimate in three of the prior four reporting periods.
As you would expect, options activity is starting to pick up on this agricultural concern, especially on the put front. Some 8,800 of these bearishly oriented contracts have changed hands on MOS today. In particular, options traders are focused on the September 45 strike, where more than 2,600 puts have changed hands so far.
While the September 45 strike has been the most actively traded, there was a much more interesting trade at the September 40 strike. Specifically, a block of 100 contracts traded at the ask price of $3.68 on the International Securities Exchange (ISE) at about 9:50 a.m. Eastern time. This block was marked "spread." The other half of this trade crossed on the September 40 call, where a block of 100 contracts traded at the same time on the same exchange for the bid price of $3.32. Given this data, it would appear that we are looking at a synthetic short position on Mosaic Company.

MOS September 40 call/put volume details

The Anatomy of a Mosaic Company Synthetic Short
Before we get into the particulars, a synthetic short options trade attempts to replicate as closely as possible a short stock position. The trader buys at-the-money puts and sells at-the-money calls in equal numbers at the same strike with the same expiration date. By using options, the trader gains considerable leverage, allowing for greater returns on the position than those that would be achieved by investing the same amount of money in a short stock position....MORE

MarketBeat's Matt Phillips Does Not Win the 2010 Bulwer-Lytton Contest

Back in May I thought Mr. Phillips was a shoe-in, I mean he won the prestigious Climateer Line O'the Day and everything..
Like the Germans in May 1940, a Five Star, Weekend Special, hit the ATM, lock:

Climateer Line of the Day: MarketBeat does Bulwer-Lytton Edition (ACN)
MarketBeat's Matt Phillips has a walk-off home run. Game over.
From their post "Accenture for a Penny: MarketBeat’s Investigation Continues!":
Like a rottweiler on a slightly undercooked leg of lamb, MarketBeat refuses to let go of its probe of the depths of Thursday’s Flash Crash, particularly the momentary trades that priced ostensibly healthy companies such as Accenture at one cent....
That makes "It was a dark and stormy night" read like Blake in comparison... has announced the 2010 winners. The winner was bad but the runner-up was atrocious:
Through the verdant plains of North Umbria walked Waylon Ogglethorpe and, as he walked, the clouds whispered his name, the birds of the air sang his praises, and the beasts of the fields from smallest to greatest said, "There goes the most noble among men" -- in other words, a typical stroll for a schizophrenic ventriloquist with delusions of grandeur.
Better luck next year, Matt.
And don't wait until May to flex those B-L muscles.
Study the master:
"It was a dark and stormy night; the rain fell in torrents--except at occasional intervals, when it was checked by a violent gust of wind which swept up the streets (for it is in London that our scene lies), rattling along the housetops, and fiercely agitating the scanty flame of the lamps that struggled against the darkness."
 --Edward George Bulwer-Lytton, Paul Clifford (1830)

UPDATED: Gulf Oil Disaster: "Are your ideas worth $10 million?" (BP)

UPDATE: "X Prize Foundation Announces $10 Million Oil Disaster Cleanup Challenge"
From Environmental Economics:
The X Prize Foundation announced today that it is developing a multimillion-dollar “oil spill cleanup X challenge” to come up with solutions to cleaning up shorelines and open water fouled by oil leaking from the BP Deepwater Horizon rig in the Gulf of Mexico.
Speaking at the TEDxOilSpill conference in Washington, Frances Beland of the X Prize Foundation asked the audience of 300, and many more watching the conference’s videostream, “What do you prize?” Beland told CNN after his appearance that the oil-related challenge will probably offer about $3 million in prize money for a cleanup solution....
The prof's have THE best Friday Beer Posts, here's the homepage.
Also at EnvEcon:
PhD Comics: Call for Papers!

Lighting: Veeco Instruments Catches a Reiterated Buy Rating from Citi (VECO)

The stock is up a buck at $36.11.
From American Banking & Market News:
Citigroup, Inc (NYSE: C) analysts reiterated a “buy” rating on shares of Veeco Instruments Inc (Nasdaq: VECO) and set a price target of $52.00.
The analysts wrote, “We have a new bottom-up model to assess MOCVD tool requirements based on LED demand. While we think the TV story has largely played out at this point creating risk for some order digestion (not CQ3, more CQ4/CQ1), this model suggests any order decline should be relatively mild and short-lived. We see LED demand fundamentally supporting industry MOCVD tool shipments of 800-900/yr through 2013 before reverting back to a 300-400 tool/yr run rate thereafter. If VECO is able to hold share at current run-rates (likely, in our view), this would imply the ~$4.00-4.50/yr EPS that many worry is peak is actually “normalized” EPS from 2010-2013. Using a low to mid teens EPS multiple (certainly reasonable given multiples in other peer groups like semis), this implies risk/reward is still favorable, especially if the stock were to again pull back to the low $30’s.”
Shares of VECO traded down 8.56% on Tuesday hitting $35.36 during mid-day trading.

"Surprising Corn Numbers"

A couple days ago I was wondering if there were any corn farmers who could make money with $3.00 corn.
Although a bushel is up 4 1/4 pennies today, the decline has been relentless. At 348.250 we're getting close to that three buck line.
From DTN's Market Matters blog: 
Corn, 87.87 million acres, soybeans, 78.87 million acres -- each up 2 percent from last year, but the corn number is well below most trade guesses, and the soybean acreage is at the high end.
And in the stocks report, USDA put June 1 corn stocks at 4.310 billion bushels, also below the low end of trade guesses. Soybean stocks are at 571 million bushels, below most traders' guesses, and wheat stocks were 973 m bu, about 23 m bu more than the highest estimate.
Given the assault the market has made on corn over the last couple of weeks, it will be interesting to see how traders adjust to this new set of numbers.

SEC Approves Eight Russian Shell Companies (AMOK.OB)

Better Get The Leg Irons Boys.
These Ain't Regular Criminals,
These is Stockbrokers.
-One of Climateer's favorite Barron's headlines.

Oh happy day.
Long time readers know I have a morbid fascination* with the underbelly of the markets; it's like watching the lions approach the wildebeest at the watering hole, you don't want to see it but you can't look away.

As they say on the nature shows:
"Sadly now, there can be but one outcome"

From the Wall Street Journal:
The SEC's Russian Roulette
IPOs From Ukraine and Russia Were Cleared, With Few Questions Asked
On Jan. 6, 2009, Ukragro Corp. of Zhitomir, Ukraine, made an initial filing with the Securities and Exchange Commission to sell stock to the public. Its sole employee and owner was a 79-year-old massage therapist.
The company had no revenue, $100 in assets and planned to open a string of health spas. Public records on file at the SEC show that the agency asked no questions and the application cleared through the commission eight days later.
Over the past two years, eight other start-ups reviewed by the SEC have been similarly headed by people in Ukraine or Russia, with no revenue or operations and minimal assets. Business plans ranged from renting bicycles in Kiev to selling cars in Siberia. All used the same small Seattle law firm, Dean Law Corp., to help with their initial SEC filings. The SEC cleared them to sell stock, in most cases without asking a single question, according to the public records at the agency.
The SEC declined to comment on its reviews of individual companies. John Nester, a SEC spokesman, said the agency's chairman, Mary Schapiro, has been "aggressively pursuing enforcement actions" and "is changing the direction and culture of the agency." Ms. Schapiro, for example, has formed a new division with broad powers to identify risky market practices, such as the trading of complex derivatives, and is trying to secure more resources.
In an email response to questions, Faiyaz Dean said his law firm's involvement with the companies "ended after our limited engagement of providing a legal opinion for their registration statements. Other than this, we are bound by attorney-client privilege and cannot answer any further questions."
The ease with which these companies—known as corporate "shells" because they didn't yet have operations—sailed through the SEC raises questions among some observers about the agency's ability to police the market for small-company stocks. Given that the shell companies "appeared to have little or no business results or experience," their filings should have been carefully reviewed for evidence of possible fraud, said Joel Seligman, president of the University of Rochester and author of a history of the SEC....

...In a statement, the SEC said it has begun asking new shell companies how they plan to meet federal requirements for preparing audited financial statements. The agency said it also is looking more closely at the role of outside auditors at such companies.

After Ukragro cleared the SEC, the shell company changed its name in September to Windsor Park Forex Inc. before it was acquired in January by Ron Ruskowsky, who became president and controlling shareholder. He changed the company's name again, to Amarok Resources Inc., relocated it to California and refocused its business to prospecting for gold in Nevada and elsewhere. It still hasn't reported revenue and has yet to strike gold but has announced raising $2 million in private stock placements.
Its stock has gone from pennies a share to as high as $2.75 a share, giving the company a market value of nearly $200 million. It currently trades at about $1.30 a share on the OTC Bulletin Board under the symbol AMOK.
Mr. Ruskowsky said he had nothing to do with the company's previous management. He said that in order to bring to market what he views as a promising gold-mining prospect, he purchased the Ukragro shell, which is permissible, without really looking into its past. Since Ukragro had passed through the SEC, Mr. Ruskowsky said he assumed "it should be clean."

Stuart Allen, a retired SEC investigator who still keeps an eye out for suspicious-looking promotions, said that when he read the Ukragro filing, he wondered how a 79-year-old massage therapist in Zhitomir, Maria Yahodka, came to incorporate the company in Nevada, and hire a law firm in Seattle and an accounting firm in Houston. An official at the accounting firm declined to discuss its dealings with Ukragro.

A man who answered the Ukrainian phone number on Ukragro's filing said Ms. Yahodka was unavailable.
Mr. Allen ran the name of the law firm, Dean Law Corp., through public databases. He found that several of the similar small companies also had used the firm recently. Mr. Allen said that as an SEC investigator, when he saw seemingly disparate small companies using the same accountants or lawyers, he would become suspicious that a single stock promoter might secretly control the firms. If that were the case, the companies would be required to disclose such a connection, he said, adding he doesn't know if that is the case with these companies.

In January, as part of Mr. Ruskowsky's purchase of the company, it declared a 60-for-1 stock split, which he said was a way to create more publicly traded shares.
In February, the company announced that it had acquired an interest in a Nevada gold-mining claim via a middleman from a Canadian company run by Mr. Ruskowsky's father. In a Canadian securities filing, the father's company said it had held the claim since 1989 and "has not yet been able to identify any known body of commercial grade mineralization."
'Buy' Call
Earlier this year, a publication called Intelligent Investor Report issued a "buy" recommendation on Amarok, saying the company had "proven gold deposits" and predicting the stock price "could soon be flying past $15 a share!" A small-type disclaimer said the report was a "paid advertising issue" financed with $335,000 spent by an Amarok shareholder. The report's editor and publisher, Jarret Wollstein, said his piece didn't say that any gold deposits were at commercial-grade levels....
There is also an ad for the WSJ Professional Edition:
Editors' Deep Dive: Shell Companies Often Dubious
*Here's a post from May of '08, just one of many examples:
Chameleons on the Pink Sheets
On April 22 I was rambling about Planktos and penny stock deals:
...A classic history would be a Vancouver "junior resource" company in 1979, after the collapse of the oil and gold markets became a solar deal in '81 , an Aloe Vera deal to the yuppies mid '80's, a biotech in '86 ("we're the next Amgen"or "A cure for AIDS"), then on to neutraceuticals or spas, Indian casinos, software, then the great "i", "e-" and ".com" gold rush. Someday I'll get around to checking if some lunatic scammer actually went with "".
The next group of parasites were the "homeland security" companies, then land deals. 
The "resource" scams never went away and became more prominent in 2002 after gold had moved off its $252 bear market low.  
We're in the Green boom (happy Earth day by the way) now, who knows what's next....

Today in EuroInvestor:
...The recently re-named Homeland Security Network, Inc. (Pink Sheets:HYSN), doing business as Global Ecology Corporation (GEC) announced today that it has received their initial order from its soil remediation project in Juarez, Mexico. The total value of the purchase orders, involving several of the partnerships soil-based products, is $2 million with delivery to begin this June....

"Short Sellers Use Bond Market To Bet Against BP And Anadarko" (BP; APC)

In early pre-market, BP is changing hands at $28.80 up $1.13. The ordinary shares are also trading higher in London.
Here's a follow-up to "BP Bonds Ooze Value" and "BP Bankruptcy Filing Would not Trigger Cross-default of Bonds" (BP) and "More on BP's Bonds (BP)".
From Dow Jones:
Fast-money investors such as hedge funds seeking to bet on further troubles for BP PLC (BP.LN, BP) and Anadarko Petroleum Corp. (APC) have been selling the companies' bonds short rather than using more traditional approaches of buying credit default swaps on their debt or selling their stocks short.
The shorting accelerated in early June after Moody's Investors Service lowered BP's credit rating to Aa2 and before another cut to A2 on June 18, said Will Duff Gordon, senior researcher at data provider Data Explorers in London.

Standard & Poor's lowered its rating on BP to AA-minus from AA on June 4 and to A on June 17.
Investors looking to short corporate bonds borrow them from another investor for a fee, sell the bonds and hope that they fall in value before buying the bonds back and returning them to the lender. In doing so, they hope to make an adequate return on their investment in excess of their borrowing costs.

Short sellers have used the bond market to bet against distressed enterprises, particularly in the gambling sector, but it is uncommon to short bonds of oil and gas companies. One theory offered for why firms may be using bonds instead of CDS or equities is that they feel it might be easier to profit via the bond market.
"My personal view is that it is a debt-downgrade play," said Duff Gordon. According to Moody's, the implied rating for BP is B2, based on the cost of insuring its debt against default; for Andarko, it is B3. Both are well below their current levels and deeply into what is called speculative-grade investments.
The jump in short selling was quick and sharp. On June 2, for example, investors had sold short 2.5% of BP's 4.75% bond due 2019; three trading days later, on June 7, fully 22.5% of the $1 billion issue value had been sold short. The figure is now around 24%.

Shorting of Anadarko's 8.7% bond due 2019 is around 20% of its $600 million issue. Anadarko is a partner in the leaking oil well in the Gulf of Mexico that BP operates.
"Based on its financial statistics, BP is still investment grade, even though one could make the argument it may not be," said Thaddeus Strobach, a credit strategist at the Royal Bank of Scotland.

The risk premium, or spread, on BP's 2019 bonds is 463 basis points, or 4.63 percentage points, over a comparable Treasury security, a measure of the extra return investors demand to own the riskier oil-company debt. That premium is similar to the spread on oil and gas companies rated BB--six notches below BP....MORE

Tuesday, June 29, 2010

US accepts international assistance for Gulf spill (BP)

About time.
From the AP:
The United States is accepting help from 12 countries and international organizations in dealing with the massive oil spill in the Gulf of Mexico, the State Department said Tuesday.The State Department said in a news release that the U.S. is working out the particulars of the help that's been accepted.
More than 30 countries and international organizations have offered to help with the spill. The U.S. hasn't made a final decision on most of the offers.
The United States rarely faces a disaster of such magnitude that it requires international aid, but the government did accept assistance after Hurricane Katrina.
Most of the countries and groups have offered skimmers, boom or dispersant chemicals, according to a chart on the State Department's website.
The chart indicated offers have been accepted from six countries — Canada, Mexico, Croatia, Holland, Norway and Japan. Offers also were accepted from two groups — the International Maritime Organization and the Monitoring and Information Center, which is operated by the European Commission.
The two organizations are offering technical assistance.....MORE

Here's the chart from the U.S. Department of State (4 page PDF)
Here's State's press release:

Deepwater Horizon Oil Spill: International Offers of Assistance
The National Incident Command and the Federal On Scene Coordinator have determined that there is a resource need for boom and skimmers that can be met by offers of assistance from foreign governments and international bodies.

The United States will accept 22 offers of assistance from 12 countries and international bodies, including two high speed skimmers and fire containment boom from Japan. We are currently working out the particular modalities of delivering the offered assistance. Further details will be forthcoming once these arrangements are complete.

The Unified Area Command (UAC) under the direction of the Coast Guard, is coordinating the oil spill response in the Gulf. It includes representatives of the responsible parties, affected states and other Departments and agencies of the U.S. Government. The National Incident Command (NIC), headed by the U.S. Coast Guard, is working with the Department of State to support the UAC as it sources equipment, supplies and expertise.

The 27 countries which have offered the U.S. Government assistance are: the Governments of Belgium, Canada, China, Croatia, Denmark, El Salvador, France, Germany, Ireland, Israel, Italy, Japan, Kenya, the Republic of Korea, Mexico, the Netherlands, Norway, Portugal, Qatar, Romania, Russia, Spain, Sweden, Tunisia, the United Arab Emirates, the United Kingdom, and Vietnam.
The international bodies offering assistance are: the European Maritime Safety Agency, the European Commission’s Monitoring and Information Centre, the International Maritime Organization, and the Environment Unit of the United Nations Office for the Coordination of Humanitarian Affairs and the United Nations Environment Program.

The Department has released a chart of offers of assistance that the U.S. has received from other governments and international bodies. The chart is updated as necessary to include any additional offers of assistance and decisions on accepting the offers. The chart is posted on the State Department Web site at:

Questions on the details of offers of assistance, and any additional discussions between other countries and BP, should be directed to the Unified Area Command. The UAC Joint Information Center phone numbers are 713-323-1670 or 713-323-1671. (Note: These are new phone numbers.)

Bearish Engulfing Pattern and "The Best Hedge Fund Manager of All-Time"

First a little chartology. The engulfing pattern comes in both flavors, bull and bear. It is a moderately accurate indicator of a reversal and one of the simplest to recognize.
In the DJ Industrials' chart below, the body of the red candlestick for the third week of June, 2010 "engulfs" the body of the prior weeks candlestick.

Don't confuse this with Churchill's comment on language, re: Lady Astor that "In this context, Mr. Speaker, the understanding is that Man EMBRACES Woman." Big difference between embrace and engulf.
(I've also seen a version ascribed to Margaret Thatcher)
You probably won't confuse it with the Abandoned Baby Pattern (I kid you not) which looks like this:

Abandoned Baby Candlestick example image from 

From BigCharts DJIA (weekly):

And a repost from April, '08:
Samurai Trader!
Homage to Homma
by John Needham, The Daniel Code Report | January 20, 2008

Our Hero
Munehisa Homma is an unsung Japanese hero. We know little of Homma’s life. In some reports his name is spelt Honma, and the activities that were to make him a hero are ascribed to any time from 1650 to 1750. This is his story.

Homma ran the family rice trading business and rice was the lifeblood of Japan. More than a food, rice was a culture, Rice growing villages lived their whole lives around the rice planting, growing and harvesting cycle. Various parts of this cycle were celebrated with festivals and formal ceremonies. Rice was a precious commodity. Rice was more than a commodity; rice was a culture central to Japanese life. From rice came Sake the famous Japanese rice wine, rice cakes, rice flour, rice vinegar and much more. The rice plant produced not only its precious grains but a large amount of lush green foliage which when dry became straw. Rice straw too was an essential part of Japanese life. From straw, traditional villagers in the north made hats, clothes, utensils and the exquisitely fine rice paper. They made important religious figures, masks, decorations and a hundred other everyday items.

Rice was the Japanese economy. Feudal rulers, Daimyos collected grain from the farmers as land tax and sold it from their storehouses. Rice trading was the Japanese way of life for farmers and the merchant class. Soon rice would replace currency as the value of worth in the Feudal land of Japan.
Today would be the most important day of Homma’s life, the day he would launch himself on the great adventure that would see him reach dizzying heights of fame and fortune; the day that would eventually see a humble rice trader of the merchant class achieve the greatest honour his country could bestow....Either bookmark or follow this link, it is worth your time.
1440 Wall Street says simply:
You might not use candlestick charts, but you should probably read the story of Munehisa Honma, the greatest trader of all time.
and includes a link to another take on the story.

Was Alliance Bernstein Selling the Yanzhou Coal that JPMorgan was Buying? (YZC; JPM)

Earlier this month we posted on Yanzhou/JPM a couple times, See below.
From Chinavestor:
Alliance Bernstein L.P. has been unloading Yanzhou Coal (HKG:1171) (NYSE:YZC) lately. We reported earlier when Alliance Bernstein L.P. has raised its shareholding in Yanzhou Coal Mining Co. ltd. (HKG:1171) (NYSE:YZC) to 7.02% from 6.98% on November 25, 2009. AllianceBernstein L.P. paid HK$15.274 for Yanzhou's H-shares then.

But now the tide has been turning and the company has been shorting Yanzhou Coal H-shares(HKG:1171). According to a statement on the website of the Hong Kong Stock Exchange (HKEx), AllianceBernstein L.P. has sold 6,440,000 H-shares in Yanzhou Coal for HK$117.97 million ($14.769 million). The average price of the share transaction was HK$17.854 apiece....MORE
*JP Morgan Buys MORE Yanzhou Coal, Upping Stake to 13.23% (JPM; YZC)
JPMorgan increases stake in China's Yanzhou Coal to 11.13% Loses Money on Coal Trade (JPM; YZC)

"Whitney: The Problem With Citi" (C)

From CNN Money:
Meredith Whitney says Goldman Sachs is more flexible and can adapt to reform better than the Citi 'behemoth.'

HT: DealBreaker, who writes:
I mean, where to start? They’ve got some freaky ass rules in place that say their CEO to build the $10 million Zen Garden of his dreams, you’re not allowed to catch BJ’s on the company jet, and, most offensively, you can’t even have a discussion about putting a whiteboard marker in your underling’s ass over email. Strictly vis-a-vis financial reform, though, Citi’s only problem is that it’s not Goldman Sachs.

"Retail Investors Diving into BP Shares" (BP)

The stock is up $1.05 at $28.10. impressive considering the DJIA looks to be closing in on DOWN 300.
From MarketBeat:

Retail investors are piling into shares of BP PLC in big numbers, betting that they can scoop up a bargain as the oil giant’s share price crumples. Most of them ought to be playing their hand more cautiously, according to one investor behavior guru.

“We’re seeing a lot of new investors who have never traded in BP now trading in the shares, and sad to say, a lot of them are buying,” said Jay Pestrichelli, a managing director at online brokerage TD Ameritrade who is tasked with keeping a close eye on investor behavior among Ameritrade’s 6 million clients.
The sadness, Pestrichelli explains, is based on his belief that much of the enthusiasm that’s made BP the brokerage’s most highly-traded stock among so-called “active” retail investors is based on a misguided belief that they can call BP’s bottom. “There’s a reason why they say you don’t try to catch a falling knife,” says Pestrichelli....MORE
Earlier today:
Oil Spill: The Worstest Worst Case Scenario- A Sinkhole Swallows Everything (BP)

Ethanol: "Move Over Fruit, Meat-Flavored Vodkas Moving In"

Note the dateline.
From the AP via New York Times:
WASILLA, Alaska (AP) -- Prepare your palate for carnivorous cocktails.
The Alaska Distillery in Wasilla just recently launched its Smoked Salmon Flavored Vodka, about a year after the Seattle-based Black Rock Spirits introduced a bacon-flavored vodka.
Both savory spirits were intended to complement Bloody Marys, but are finding wider uses among mixologists.
''I think there was some madness and some drunkenness involved, honestly,'' said Toby Foster, an Alaska Distillery partner and the one charged with coming up with new flavors with Alaska themes....MORE
HT: the Los Angeles Times' Money & Company blog who begins the post:
Here's your tie-one-on Tuesday roundup of consumer news from around the Web:
-- The average woman spends $25,000 over the course of a lifetime on shoes. (Note to wife: Not that there's anything wrong with that.)...

Oil Spill: The Worstest Worst Case Scenario- A Sinkhole Swallows Everything (BP)

Yesterday we had the WaPo's Joel Achenbach:

Oil spill: Even worse worst-case scenarios! (BP)
My geology professor from way back sent me his worst-case scenario for the gulf disaster:

Somewhere, you might want to bring in the Lusi mudflow in Indonesia. The Wikipedia entry has the basic story. (There are 6.8 oil barrels in a cubic meter.) Lusi is a blowout that's been going for several years. There is no present hope of containing it....
From bnet:
Apocalypse in the Gulf: Could a Sinkhole Swallow the Deepwater Horizon Well -- And BP?
BP has confirmed that the failed blowout preventer (BOP) on its Deepwater Horizon well in the Gulf of Mexico is tilting sideways at an acute angle 12 to 15 degrees from perpendicular. Geologists and petroleum engineers are now debating the worst case scenario: growing evidence that the Macondo discovery well’s casings beneath the ocean floor have been irreversibly damaged, possibly to such an extent that it may be impossible to cap the well.

The Deepwater Horizon had recently completed promising exploratory drilling — to a vertical depth of about 18,000 feet (3.4 miles as measured from the rig floor), not including vertical depth to canyon floor (about 5,000 feet) — when it exploded as the rig crew prepped a temporary seal for the well on April 20.
BP spokesperson Toby Odone acknowledged to reporters last week that the 45-ton BOP was tilting, which the company attributed to  a shift in the collapsed riser piping (from the rig accident).
Since the failure of last month’s “top-kill” effort to stem the flow, knowledgeable scientists have argued about the potential significance of BP’s inability to maintain enough topside pressure — to “squash” the column of superheated fluids erupting upward — during the plugging efforts. One  popular hypothesis making the rounds online is that the underground well casing is fractured beyond repair. Some geologists and petroleum engineers argue that the top-kill failure could have resulted from too much “kill mud” leaking out of cracked pipe casings into the surrounding rock formation instead of flowing deeper into the well. (Click image for a larger version.)
BP cites a broken disk inside the well as the cause of the top-kill failure. Admiral Thad Allen, the incident commander for the BP oil spill response, has confirmed on recent conference call updates that structural problems in the well casing of the sunken Deepwater Horizon rig cannot be ruled out. Commenting on BP’s decision to halt the top-kill contingency, Allen — President Obama’s point person — said:
There was some discussion at that point about the uncertainty of the — of the condition of the casings in the wellbore which you would want to do is drive so much mud down there and such a pressure that you might cause a problem and the problem was they (scientific summit that included Interior Secretary Ken Salazar and Energy Secretary Steven Chu) didn’t know and they still don’t know the condition of the wellbore.  For that reason, they erred on the side of safety on how much pressure they would exert, and when they got near those pressures without having success in killing the well — killing the well, that’s when they backed off.
We know little about the underlying geology of the spill site since BP has held that information close, claiming that it’s “proprietary” data. Scientists are clamoring for BP to publicly release geological survey data on the underlying “Lower Teriary” formations (rock layer formed 65 million to 250 million years ago). Remotely operated vehicles (ROVs) are streaming video feeds of high pressure columns of oil and gas bubbling up from fissures in the sea floor — flowing from likely stress fractures in the underground piping.
A much talk-about anonymous posting at The Oil Drum, a blog often frequented by petroleum engineers and other oil-industry specialists, captures the fears of many scientists and environmentalists alike:
That the system below the sea floor has serious failures of varying magnitude in the complicated chain, and it is breaking down and it will continue to.
What does this mean? It means they will never cap the gusher after the wellhead. They cannot…the more they try and restrict the oil gushing out the bop [blowout preventer]?…the more it will transfer to the leaks below. Just like a leaky garden hose with a nozzle on it.
Don Van Nieuwenhuise, director of geoscience programs at University of Houston, told New Orleans Times-Picayune reporter Rebecca Mowbray that BP ran out of casing sections before it hit the reservoir of oil, so it switched to an inferior material — something called liner — for the remainder of the well. Consequently, the BP well has several weak spots that the highly pressurized oil could exploit. Specifically, the joints between two sections of liner pipe and the joint where the liner pipe meets the casing could be weak, said Van Nieuwenhuise.

Nieuwenhuise added that efforts by BP to try to stop the oil or gain control of it have been tantamount to repeatedly hitting the well with a hammer and sending shock waves down the pipe. “I don’t think people realize how delicate it is,” he told the paper. Nonetheless, Van Nieuwenhuise believes oil from a blown out well rupturing the casing and bubbling up through the ocean floor is unlikely — a worst-case scenario — as he ’s never actually heard of such an occurrence.

Weak joints, shock waves down the pipe, cracks and fissures in the sea bed – does a down-hole blowout seem such a remote “worst-case scenario?” Oh, and let’s not forget the incessant, abrasive-mixed plume of oil, natural gas, and “itty-bitty” grains of sediment surging through the drill piping at incredible pressures. Anyone care to wager the integrity of the pipe liner ain’t what it used to be after having been effectively sandblasted for the last 70 days?

The late Larry Flak, an engineer recognized the world over for his acumen in containing deepwater well blowouts, presciently warned back in 1997 (before drilling at depths of 30,000+ feet was feasible) of the dangers ultra-deepwater blowouts might pose:...MUCH MORE

Marc Faber June 16: "Short the Australian Dollar" (AUD/USD)

UPDATE: "What’s up with commodity currencies?" (AUD/USD; CAD/USD)
Original post:

Via Contrarian Investors' Journal:
And as a special tip, I think I would short the Australian dollar, because talking about a housing bubble, Australia has 10 times a bigger bubble than China. In Australia you have what you said we don’t really have in China, namely the low leverage that we have in China, we have the opposite in Australia, very high household leverage. … So I think a big downfall is about to happen.
From FXstreet via NASDAQ:

USD appreciates against the AUD and NZD
The AUD/USD continues on its intraday plunge, currently trading around 0.8570, a fresh two-week low for the pair. After some volatility at the session opening, the AUD found a downward trend that shed 170 pips.

The Kiwi's session followed suit, plummeting 1.69% intraday versus the 1.70% of the AUD/USD and currently trades around 0.6959, a 12-day low for the NZD, as risk aversion takes over markets.
Sorry about the delay in passing on Dr. Faber's tip, it can be difficult keeping up with the man.

"State and Local Governments' Fiscal Outlook: Steady Decline through 2060" -GAO

You read that right.
That's from the Highlights page of the March 2010 Update.

HT: Sense on Cents.

Goldman Sachs Rates Berkshire Hathaway a Buy; Bear Bets on a Reversal in Class 'B' Shares (BRK.B)

The B shares are trading down 54 cents at $80.46.
First up, Reuters:
Historic disconnect between intrinsic value, share price 
* Berkshire invested $5 billion in Goldman in Sept. 2008 
* Geico, MidAmerican, Burlington Northern to fuel growth
* Slowing economy, big storms, Buffett retirement may hurt
Berkshire Hathaway Inc (BRKa.N) (BRKb.N) shares may rise 25 percent in the next year as a recovering economy lifts profit and investors recognize that Warren Buffett's company is undervalued, Goldman Sachs analysts said, starting coverage with a "buy" rating.
Analyst Christopher Neczypor set price targets of $152,000 for Berkshire's Class A shares and $101 for its Class B shares, saying a "disconnect" between the market value and intrinsic value of Berkshire is "close to a multi-decade high."
Goldman Sachs Group Inc (GS.N) received a $5 billion preferred stock investment from Berkshire in September 2008. Buffett has praised the leadership of Goldman Chief Executive Lloyd Blankfein and defended Goldman's marketing of securities that led to a U.S. Securities and Exchange Commission civil fraud lawsuit. Wall Street banks have procedural safeguards to keep equity research units independent.
Neczypor said earnings at Omaha, Nebraska-based Berkshire will benefit from growth in auto insurance sales through direct-to-consumer entities such as its Geico unit, as demand for energy from its MidAmerican Energy unit increases, and as more customers depend on shipping through its Burlington Northern Santa Fe railroad unit.
He also said recent acquisitions have reduced Berkshire's dependence on equity investments, and "provides greater clarity into the source of future value for the company."
He said the risks to this forecast include an economic slowdown, losses at Berkshire's insurance and reinsurance units from catastrophes such as hurricanes, and the ability of the 79-year-old Buffett to find appropriate successors....MORE
And from Schaeffer's Research:
Speculative trader looks for a sharp decline by this well-known conglomerate
Class "B" shares of Berkshire Hathaway Inc. (BRKB) have pulled back roughly 1% today, as the stock appears to be stalling once again near $82-$83 per share. This region marked the stock's March 2010 highs, and a rejection for BRKB here could create a bearish technical formation called a double top for the security. Should such a pattern take hold, the equity could be in danger of retesting its near-term low of $70 per share in short order.

Weekly chart of BRKB since January 2010 with 10-week and 20-week moving averages

Whether due to speculation on the stock's short-term direction, or another more subtle reason, BRKB's options have been quite popular today. So far, call volume has more than doubled the stock's daily average, with some 3,946 contracts changing hands. Meanwhile, put volume has spiked to nearly five times BRKB's daily average, with approximately 9,000 contracts crossing the tape. Overall, the most active strike has been the August 80 put, where some 5,600 contracts have traded.

Digging through BRKB's put volume at the August 80 strike, I ran across a block of 500 contracts which traded on the American Stock Exchange (AMEX) for the ask price of $2.85, or $285 per contract. This block was marked "spread." After a bit of digging, I found the other leg of this spread on the August 70 put, where 500 contracts traded for the bid price of $0.73, or $73 per contract. Given this data, we could be looking at the initiation of a vertical put spread, or a debit spread, on Berkshire Hathaway Class "B" shares....MORE

Siemens Sees Strong Profitability, Decides to Open a Bank (SI)

Premarket the stock is trading down $1.85 at $91.38.*
That headline was a juxtaposition. First up, Bloomberg:
Siemens AG, Europe’s largest engineering company, predicted “continued strong profitability” in its third quarter as demand rebounds for factory automation gear, health-care products and light bulbs.
Profit at Siemens’s energy, health-care and industry divisions will approach the 2.1 billion euros ($2.57 billion) the Munich-based company reported in its fiscal second quarter, Chief Financial Officer Joe Kaeser said in a statement today. New orders and sales in the third quarter will exceed the corresponding prior-year figures, Siemens said.
The Munich-based maker of power plants, trains and medical scanners raised its outlook for full-year earnings on April 29, and Siemens said today orders and sales rebounded simultaneously for the first time in almost two years as customers restock goods. Siemens relied on emerging markets and a recovery in its short-cycle business to spur growth, Kaeser said....MORE
A couple days ago Deutsch Welle reported:
Siemens becomes the bank it always was 
German technology conglomerate Siemens hopes to be granted a banking license so it can expand its portfolio of financial services and exercise greater control over its multi-billion euro investments.
German electrical engineering giant Siemens said Monday it was confident the Federal Financial Supervisory Authority (BaFin) would approve its application for a license to conduct banking business.
The application was prompted in part by the global crisis in the banking sector and in part by a need for greater flexibility in providing financial services to big customers, according to Siemens chief financial officer Joe Kaeser.
Safe investments
"In the current situation, with a legislative environment that is not totally transparent, we can be affected if banks have problems," Kaeser said in an interview with the German newspaper Sueddeutsche Zeitung.
"Our liquidity now amounts to about 9 billion euros, which means we really need to be able to make safe investments. We can do this ourselves....MORE
Large piles of euro banknotes 
  Siemens has liquid assets worth some 9 billion euros

The Dow Jones headline is
Siemens Renewable Division Order Backlog More Than EUR8 Bln

*On Thursday we posted:
Siemens: Bernstein Downgrades; Sees Good News Priced In (SI)

"Who Wins in the Tesla IPO?" (TSLA)

This is neither an offer to sell nor a solicitation of an offer to buy...

I went over some of my reasons for shying away from IPO's when A123 came public in September, 2009. 
(priced at $13.50, first day close $20.29, close yesterday $9.88)
I am interested in the VC biz and here earth2tech did a bang-up job:

Tesla Motors, the electric car startup scheduled to launch an IPO on Tuesday, has racked up millions of dollars from a slew of investors since its founding in July 2003. For some of those backers who took a chance on this greentech venture early on, Tesla’s initial public offering could spell “ka-ching.” Here’s the rundown on who among Tesla’s executive directors and officers own what portion of the company, who will and won’t be selling shares at the IPO, according to Tesla’s S-1 filing, and what their stakes will be worth (on paper, at least) if Tesla’s stock trades at $15 per share, the mid-point of the company’s estimate.

Shareholder Pre-IPO Stake Shares Being Offered Value of Offered Shares*
Elon Musk, CEO, Chairman and Product Architect. Also the CEO, CTO and Chairman of SpaceX, and Chairman of SolarCity. Co-founded PayPal and Zip2. 28.3M shares (35.62 percent) worth more than $424.5M at $15 apiece. 909,212 $13,638,180
Herbert Kohler, member of Tesla’s Board of Directors since May 2009. Heads up electric vehicle development for Daimler and serves as VP of Blackstar Investco, owned 60:40 by Daimler and Abu Dhabi’s Aabar Investments. If Musk leaves the CEO post before 2013, his replacement has to beapproved by Kohler under Tesla’s financing agreement with Daimler. 7.48M shares (9.56 percent) worth more than $112.3M at $15 apiece. 0 $0
H.E. Ahmed Saif Al Darmaki, member of Tesla’s Board of Directors since September 2009, representing Abu Dhabi’s Al Wahada Capital Investment. Darmaki is Planning & Development Director of the Abu Dhabi Water and Electricity Authority, which invests through Al Wahada. 7.3M shares (9.32 percent) worth nearly $109.5M at $15 apiece. 0 $0
Antonio Gracias, member of Tesla’s Board of Directors since May 2007, representing Valor Equity Partners, where he is chief executive officer and chief investment officer. 4.91M shares (6.27 percent) worth nearly $73.7M at $15 apiece. 0 $0
Steve Jurvetson, member of Tesla’s Board of Directors since June 2009, representing VC firm Draper Fisher Jurvetson, where he is managing director. Jurvetson is also a director of Musk’s SpaceX. 2.8M shares (3.53 percent) worth nearly $41.5M at $15 apiece. 0


Monday, June 28, 2010

"Hedge Fund Managers Smoking Out Opportunities In Emerging Market Of Legalized Weed "

From DealBreaker:
Americans spend roughly $25 billion a year on marijuana, according to the Harvard economist Jeffrey Miron, which gives some idea of the popularity of this drug. Eventually, we might be talking about a sizable sum of tax revenue from its sales as medicine, not to mention private investment and employment. A spokesman for the National Organization for the Reform of Marijuana Laws says hedge fund investors and an assortment of financial service firms are starting to call around to sniff out opportunities. “We’re past the days when people call here to ask if marijuana will give men breasts,” says Allen St. Pierre, the executive director of NORML. “Now, the calls are from angel investors, or REITs — people who are looking for ways to invest or offer their services.”
Also, out of nowhere, and as though she maybe has an ax to grind is this lady, slamming business schools for not adequately preparing people to sell pot....MORE

Insurance: Is the industry too reliant on models? (BRK.B)

We have A LOT of posts on models and modeling. Financial, climate, high-fashion.
What it all boils down to is a line that Alfred Korzybski used in a different context: "The map is not the territory".
Model designers and model users must always remember that their models are not reality.

This is the second extensive piece that REACTIONS magazine has done on the subject in the last month. The first was an interview with General Re's (Berkshire Hathaway) CEO  in "Insurance: "CEO FORUM: Gen Re's Tad Montross on model dependency" (BRK.A)"

Risk modellers are preparing many updates to their models worldwide, which could have an effect on pricing. But are insurance and reinsurance firms over-reliant on them?
Catastrophe models have become invaluable tools for the insurance and reinsurance industry, giving underwriters a scientific understanding of natural perils, in order for them to accurately estimate potential catastrophe losses to their portfolios and manage their exposures. The problems arise, however, when large, unexpected events happen. Real-life events such as September 11, Hurricane Katrina have taught the industry that models only know what has already been and this has frequently led to criticism.
In the past, risk modellers have suffered from the syndrome of workmen blaming their tools. Following Katrina, for example, many insurers and reinsurers complained that flood risk was not included in the models, meaning losses were far higher than they expected.

So with forecasters predicting an above average season for the number of tropical storms and hurricanes forming in the Atlantic basin this year, how seriously should the industry take the forecasts and risk model loss calculations and what influence will the latest risk models have on the market?
What the models offer the industry is the ability to estimate potential losses for a number of different uncertain events and a combination of variables. There has been much advancement in catastrophe models - both in the technology used to build the models and the data used to feed the models - that have improved companies' understanding of risk and loss potential.

According to Karen Clark, president and CEO of risk modelling consulting firm Karen Clark & Company and founder of AIR Worldwide, most of the recent risk model developments in the US have been with earthquake models. New studies by the US Geological Survey, a source of data for all risk modellers, has resulted in a "significant decrease in the earthquake risk, particularly in states such as California," says Clark. She says, while not decreasing pricing for every reinsurance treaty, this held down potential price increases for earthquake-exposed business.
A new RMS US earthquake model released in 2009 led to a reduction in US earthquake insured loss estimates and changed the industry's understanding of the geographical distribution of exposure. The effects of this have largely been digested by the market and now companies are waiting to see what the latest model developments will bring.

Most of the new models in the pipeline relate to wind and storm risk. In the coming year, Eqecat is releasing a basin-wide Asia typhoon model, AIR is launching updated models for US hurricane, European extra-tropical cyclone, and typhoon models for Asia, and Risk Management Solutions (RMS) is releasing a new Europe windstorm model and is in the process of building a new Atlantic hurricane model.

According to Neena Saith, senior catastrophe response manager at RMS, her firm's new Atlantic hurricane model will combine a large amount of high resolution data with a great number of claims forensics. Using historical data of hurricane activity, Saith says RMS will be able to run advanced numerical models to understand particular hurricane processes, such as the interaction between a storm and the surface upon making landfall....MUCH MORE

Oil spill: Even worse worst-case scenarios! (BP)

Joel Achenbach is the Washington Post writer whose line:
...When in doubt, go with the most hysterical headline.
(Rule one of blogging is that the End Of The World will be good for page views.)
-World War Five

struck our fancy a couple years ago.
Here he is at Achenblog:
My geology professor from way back sent me his worst-case scenario for the gulf disaster:

Somewhere, you might want to bring in the Lusi mudflow in Indonesia. The Wikipedia entry has the basic story. (There are 6.8 oil barrels in a cubic meter.) Lusi is a blowout that's been going for several years. There is no present hope of containing it.

Back to the Gulf: Having oil and gas spew up through the seafloor, away from the plumbing in the well, would say that the surface casing had failed. Like you, I find the rumors about oil leaking through the seafloor are not yet convincing. However, the possibility belongs in a worst-case scenario. The verb in the oil patch is "to crater." Around 1960, it became a slang synonym for any kind of failure, "we cratered."

Going further into possible bad news: About the time the two relief wells are penetrating into the reservoir near the bottom of the Macondo well, here comes a Category 5 hurricane. The hurricane heads straight for the wells. Both of the relief wells activate the emergency disconnect from their risers. The disconnect works on one rig and fails on the other. The crew on the still-connected rig has to be evacuated and the rig sinks in the storm. We get Act II of the drama.

Four weeks later, the disconnected rig gets hitched together again and is ready to work, and here comes a Category 4 hurricane.

Some late-season hurricanes do not travel across the equatorial Atlantic. They are born in the southern Caribbean and move north quickly, with only a brief warning. Hurricane Hugo of two years ago was an example. Make that second hurricane a Caribbean hurricane.

BP files for bankruptcy. Anadarko files for bankruptcy....

You might warn your readers to mix up a strong drink before starting to read the piece. My recommendation is the "Papa Doble," a double grapefruit daiquiri. The recipe is in Hochner's biography of Hemingway, but normal people have to add sugar.
Here's my story in today's paper -- crazy stuff. (But wait: Whatever happened to that Loop Current thing? Wasn't the oil supposed to be at the Outer Banks by now? Didn't I report that on the front page of The Washington Post???)...MORE

Climateer Line of the Day: Société Générale's Albert Edwards/G20 Edition

From City Wire:
 Albert Edwards, strategist at Société Générale, said:
"The clowns pulling the levers of fiscal and monetary policy will take us back into recession."
Here's more:
We are walking on deflationary quicksand
The UK is heading for a double dip recession and a Japanese style deflationary spiral that will send the deficit higher, according to SocGen’s perma-bear Albert Edwards.
He warns that the fiscal situation could become so bad that central banks will be forced to print money, which could even spark a return to the days of double digit inflation.

‘The clowns pulling the levers of fiscal and monetary policy will take us back into recession. But this time outright deflation beckons and we will all be turning Japanese,’ he says. ‘Our view is that governments are insolvent. Ultimately, central banks will be forced to print and print for fear of the alternative. And maybe 20%+ inflation will indeed prove to be the ‘best’ (or least bad) way out of this mess.’
Edwards points out that most forward-looking indicators are now signalling a second half slowdown with the only area of debate around its actual magnitude. Added to this, core inflation rates are below 1% in the eurozone and the US, meaning we are just one recession away from Japanese-style deflation.

‘Investors have yet to fully acknowledge that we are now walking on the deflationary quicksand that will inevitably suck us towards fiscal and financial ruin- you ain’t seen nothing yet,’ he says. ‘Recent fiscal tightening will hasten the speed of our descent into this quagmire. The market reaction to the acknowledgement of that fact is likely to be unprecedented in its savagery. The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant.’
‘The super-inflationary end will result will become obvious to all.’

Edwards slams the years of lax monetary policy, saying that although the transferral of private debt to the public sector is not unusual, the sheer scale of the current situation is what makes the outlook so bleak. He even goes as far to accuse the likes of Alan Greenspan, Ben Bernanke and Mervyn King of being ‘criminally negligent’ for the current ‘stinking fiscal mess’....MORE

Batteries: Goldman Sets Buy On Enersys; Neutral On Ener1, A123 (ENS; HEV; AONE)

From Tech Trader Daily:
Goldman Sachs, which this morning stated coverage of the solar sector, also launched coverage on a trio of electric vehicle battery plays.
Analyst Mark Wienkes has a Neutral view on the group as a whole. “We find more realistic growth expectations have reconciled with valuation multiples to reflect what we expect will be a multi-year waiting period prior to clarity on plug-in hybrid and elecric vehicle mainstream market adoption,” he writes.
Here’s a look at his stock calls on the group:
  • Enersys (ENS): He contends the company, which makes lead-acid batteries, is a “solid but under-followed and under-appreciated performer,” and starts the stock with a Buy rating and $29 target price....MORE

More on BP's Bonds (BP)

Last Tuesday's "BP Bonds Ooze Value" and "BP Bankruptcy Filing Would not Trigger Cross-default of Bonds" (BP) was one of the week's more popular posts. Here's MarketBeat with an added wrinkle (Friday):

BP Getting Crushed: What Does its ‘Yield Inversion’ Mean?
BP shares are down about 5% at last glance. The latest catalyst Friday seems to be a cross-asset  read from Nomura suggesting that trading in the credit and stock markets “suggests the market is concerned about a near-term credit event around BP.” Nomura’s lead analyst Alastair Syme writes:
“Creating a scenario that puts near-term liquidity (of US$11bn-plus) at risk looks remote, however we recognise that with an uncapped well, hurricane season and continued media focus the market will struggle to get much comfort.”
To make his point, Syme points to the so-called yield inversion in BP’s bonds.
Wait! Don’t let “yield inversion” turn you off! We’ll explain! Short version: Under normal circumstances investors receive a lower interest rate for short-term loans. They get more interest for longer-term loans. Why? The longer-term the loan, the more time there is for something to happen that would interfere with the payback, i.e., more risk. And for investors, higher risk equals higher reward — at least in theory.
That’s under normal circumstances.

But BP’s woes in the gulf are anything but normal. As a result BP’s shorter term debt is now yielding — or paying an interest rate — that’s higher than the longer term debt. For instance, one heavily traded bond, which matures in March 2012, traded with 9.48% yield recently. Meanwhile, further down the curve a bond that matures in March 2019 is trading at a yield of 7.74%, less than the shorter-term bond....MORE

Take That, Monsanto: "Biggest Agricutlural Breakthrough in 10,000 Years?" (MON)

Dr. Hazlett at the Climate+Energy Project gave us the heads-up on what could be some seriously disruptive research.
From The Land Institute's Scoop:
Jerry Glover, Land Institute soil scientist, is in the national spotlight again. Written with co-lead author John Reganold, Jerry's article in the June 25th issue of Science magazine's Policy Forum section highlights the numerous advantages of perennial grain crops over their annual counterparts. "Increased Food and Ecosystem Security via Perennial Grains" states that perennial grains promise to slow the degradation of cropland as well as provide greater food security in the face of ever-harsher climates. In all, 29 scientists from the United States, Argentina, Australia, China, Mexico and Sweden collaborated on the report.
"Perennial plants generally have longer growing seasons and deeper rooting depths, and intercept, retain and utilize more of the natural precipitation," Glover writes. This is becoming even more important as farmers are forced to grow crops on marginal land more prone to soil erosion in order to feed an ever-growing population....MORE
From Washington State University:
Journal "Science": Agriculture’s Next Revolution—Perennial Grain—Within Sight
Earth-friendly perennial grain crops, which grow with less fertilizer, herbicide, fuel, and erosion than grains planted annually, could be available in two decades, according to researchers writing in the current issue of the journal Science.
Perennial grains would be one of the largest innovations in the 10,000 year history of agriculture, and could arrive even sooner with the right breeding programs, said John Reganold, a Washington State University Regents professor of soil science and lead author of the paper with Jerry Glover, a WSU-trained soil scientist now at the Land Institute in Salina, Kansas.
“It really depends on the breakthroughs,” said Reganold. “The more people involved in this, the more it cuts down the time.”
Published in Science’s influential policy forum, the paper is a call to action as half the world’s growing population lives off marginal land at risk of being degraded by annual grain production. Perennial grains, say the paper’s authors, expand farmers’ ability to sustain the ecological underpinnings of their crops.
“People talk about food security,” said Reganold. “That’s only half the issue. We need to talk about both food and ecosystem security.”
Perennial grains, say the authors, have longer growing seasons than annual crops and deeper roots that let the plants take greater advantage of precipitation. Their larger roots, which can reach ten to 12 feet down, reduce erosion, build soil and sequester carbon from the atmosphere.  They require fewer passes of farm equipment and less herbicide, key features in less developed regions.
By contrast, annual grains can lose five times as much water as perennial crops and 35 times as much nitrate, a valuable plant nutrient that can migrate from fields to pollute drinking water and create “dead zones” in surface waters....MORE
HT on the above link: Next Big Future who has more info.