Thursday, September 30, 2010

Capitulation: Famous bear (Eliades) seems about ready to give up, for now

From MarketWatch:
A famous bear, who hibernated very profitably through the Crash of 2008, seems about ready to concede that the market’s next move will be up.

For some time, Peter Eliades’ Stockmarket Cycles has been in the position, unusual for any other letter, of expecting a big move to happen — but being frankly unsure of the direction. But it voted for down. ( See Aug. 9 column.)

Stockmarket Cycles doesn’t just employ extraordinary complex cycle theories, but it also uses them to call turns, or junctures, in the market.

There’s a lot of reason to suppose that trend-following, which means by definition that you miss highs and lows but comfortingly catch the middle of moves, is more effective on average, besides being easier on the nerves. ( See Mark Hulbert’s column March 17.)

But one of the lessons we’ve learned from three decades of Hulbert Financial Digest monitoring is that literally every method can work in the right hands.

And there have been times when Stockmarket Cycles has had a very hot hand indeed. It was one of the very few letters to make significant money during the Crash of 2008. ( See Dec. 17, 2008, column.)

StockMarket Cycles was also doing really well earlier this year. And it was still holding on over the year to date through August: Its portfolios were up an average of 0.5% by Hulbert Financial Digest count compared to negative 3.9% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

But betting on that break through an unusually strong September has been very costly. HFD monthly monitoring won’t be complete until the weekend, but I’m told that Stockmarket Cycles is down about 3.5%, a spread of some eight points below the market.

Still, dodging the Crash continues to do wonders for the letter’s longer-term performance. Over the last three years, it’s up 3.6% annualized versus negative 8.13% annualized for the total return Wilshire 5000.
Over the past ten years, Stockmarket Cycles is up an annualized 3.53% against a 1.07% annualized loss for the Wilshire....MORE

Jeffries Adjusts Targets on First Solar, SunPower Corporation, and Trina Solar Limited (FSLR; SPWRA; TSL)

The stocks are down a bit, up a bit and up 4%.
From Schaeffer's Research:

Analysts at Jefferies made their way through the solar sector today, adjusting their price targets and ratings on a slew of stocks. Canadian Solar (CSIQ) was singled out for an upgrade, while sector peers First Solar, Inc. (FSLR), SunPower Corporation (SPWRA), and Trina Solar Limited (TSL) all scored price-target increases. Here's a quick rundown of today's analyst actions:
  • Jefferies hiked its price target on FSLR to $160 from $142, but simultaneously backed its lukewarm "hold"rating on the security. The stock is fractionally lower at last check, with FSLR hovering near $148.72 this afternoon -- but following a recent rally, the shares are probably due for some consolidation. The stock's Relative Strength Index (RSI) is docked at 73, pointing to a short-term overbought situation....MORE

We're Swimming in Corn*, so Why Is Archer Daniels Midland's Stock Down? (ADM)

Ya got me. ADM makes stuff out of corn.
Quick and dirty, their products are food, feed and fuels.
And biopolymers. And de-icers. And superabsorbants used in adult incontinence products.
All made from corn.
Having a major feedstock trade lower will help the company. The question is when.
The stock is down 1.69% at $32.02.

From Bloomberg:
Corn Futures Drop Most in Eight Months as U.S. Boosts Inventory Estimate
Corn prices fell the most in more than eight months after the U.S., the biggest grower and exporter, said inventories before the harvest rose to the highest level since 2006.

Stockpiles on Sept. 1 totaled 1.708 billion bushels, up 2 percent from a year earlier, the U.S. Department of Agriculture said today in a report. Analysts in a Bloomberg News survey expected 1.407 billion, on average. Corn usage in the three months ended Aug. 31 was 2.6 billion bushels, up from 2.59 billion a year earlier.
The inventory number “is a negative surprise, and the market is adjusting to more of a supply cushion,” said Dale Durchholz, the senior market analyst for Agrivisor LLC in Bloomington, Illinois. “It’s like adding 2 million acres to this year’s harvest.”

Corn futures for December delivery fell 23.5 cents, or 4.7 percent, to $4.815 a bushel at 10 a.m. on the Chicago Board of Trade. A close at that price would be the biggest drop since Jan. 12. Earlier, the grain touched $4.7825, the lowest level since Sept. 13....MORE
From Barron's:
ADM Has Upside Grains 
AS WORLD POPULATIONS GROW, they will require more food and fuel. With its portfolio of food ingredients, livestock feed and biofuels, Archer Daniels Midland may well be the company supplying them.
Shares of the grain-processing powerhouse have already gained ground this year as shortages caused by bad weather in Europe and Canada pushed up prices for corn and wheat. But analysts say ADM (ticker: ADM) still has plenty of growing to do before harvest time, which also reflects its modest current valuation.

The stock trades at only 10.6 times forward earnings, below the 11.4 times for competitor Bunge (BG). Analysts argue ADM should fetch a premium to Bunge, based on its stronger average return on assets over the past three years.
ADM's grain storage and export businesses should continue to benefit from elevated grain prices. Two pending decisions by regulators on approving higher ethanol blends for cars could be additional catalysts over the next few months.
ADM recently finished a spate of capital projects related to its ethanol and bioplastics businesses, leaving more cash available to buy back shares. The shares also carry a 1.8% dividend yield, rounding out the solid picture.

To be sure, higher corn prices are a negative for ADM's high-fructose-corn-syrup business, which has already been battered by the perception of the sweetener as unhealthy. The volatility of commodity prices and ADM's complex hedging also make projecting the company's quarterly earnings particularly difficult, leaving room for misses. But analysts contend corn syrup isn't going away, and fans of ADM say it is best evaluated on a longer time line.

"We think that this is a tremendous long-term holding," says D. Tysen Nutt Jr., a senior portfolio manager at Delaware Investments, which owns ADM shares. "It's a great company at a reasonable valuation that is going to be part of this movement toward greater demand for food as economies and populations grow."

Nutt and his team at Delaware are more bullish on commodities than they are on stocks and see ADM as a way to play that. They estimate the shares could have something on the order of 50% price appreciation over the next three to five years.

Weather, as it often does, has played havoc with commodity prices. A drought in Russia, a key European supplier, and wet weather in Canada pushed wheat prices up more than 45% since the end of June. Corn prices rose more than 35% over that period on speculation that hot, dry weather damaged crops. Prices for both grains have eased recently, but Credit Suisse analyst Robert Moskow says there could be more upside for ADM if the arbitrage opportunities for the grain shortage in Europe play out....MORE
And you can't really swim in corn.
If you fall into a grain bin it is a virtual certainty that you will die unless you get help fast. 

"Dollar-Euro Exchange Rate and U.S. Stocks"

From CXO Advisory:
Whenever a trend in the dollar-euro exchange rate appears, experts theorize. A falling dollar is good because U.S. exports boom and domestic employment rises. Or, a falling dollar is bad because capital flees the U.S., and import prices spur inflation. Are there any reliable and exploitable relationships between the dollar-euro exchange rate and U.S. stocks? To check, we apply regressions and rankings to characterize the short-term and intermediate-term interactions between the exchange rate and the stock market. Using daily data for the dollar-euro exchange rate and the S&P 500 Index over the period January 2000 through (most of) September 2010 (about 2,700 trading days), we find that:

The following chart tracks the dollar-euro exchange rate (dollars per euro) and the S&P 500 Index over the entire sample period. During this time the dollar generally weakens (the number of dollars per euro rises), and the stock market exhibits fits of historically high volatility. Visual inspection suggests that the exchange rate and stock market sometimes move oppositely and sometime move together.
For a closer look, we relate past changes in the exchange rate to future returns for stocks.

The following scatter plot relates change in the dollar-euro exchange rate over the past five trading days to S&P 500 Index return over the next five trading days during the entire sample period. For independence of observations, we winnow the sample by selecting every fifth trading day (538 observations). The Pearson correlation is for the two series is 0.13 and the R-squared statistic is 0.02, indicating that variation in the dollar-euro exchange rate last week explains 2% of the variation in the S&P 500 Index next week.
We replicate the test for two longer intervals:
Relating change in the dollar-euro exchange rate over the past 21 trading days to S&P 500 Index return over the next 21 trading days (sampling every 21st trading day for a total of 127 observations) yields a Pearson correlation of 0.04 and an R-squared statistic of 0.00.
Relating change in the dollar-euro exchange rate over the past 63 trading days to S&P 500 Index return over the next 63 trading days (sampling every 63rd trading day for a total of only 42 observations) yields a Pearson correlation of 0.18 and an R-squared statistic of 0.03.
Based on these analyses, movement in the exchange rate is of little use in predicting short-term or intermediate-term stock market returns.

As a robustness test, we look at subperiods....MORE

Hyperion to Build Demonstration Nuke the Size of two Hot Tubs for DOE Savannah River Site

First up, Platt's, Sep. 10:

Hyperion to build first small nuclear reactor at US DOE complex
Hyperion Power Generation has agreed to build a prototype mini-nuclear reactor at a US Department of Energy small modular reactor demonstration complex, officials said Thursday. The company signed a memorandum of understanding with the Savannah River National Laboratory Thursday to build the first demonstration reactor at the Savannah River Site in South Carolina. Hyperion is developing a 25-MW fast reactor that uses uranium nitride fuel and lead bismuth eutectic coolant. The parties aim to build an operational prototype by 2017 or 2018, said Mike Nevetta of Savannah River Nuclear Solutions, which operates the Savannah River Site. He also said Thursday that the demo reactor will not connect to the grid but will produce electricity for internal use on site. Constructing the Hyperion prototype will cost $50 million, which will largely come from private sources, said Deborah Blackwell, Hyperion vice president of licensing and public affairs....MORE
And a bit of backround from Nuclear Townhall, Sept. 29, 2010:
Deborah Deal-Blackwell is part of an ambitious brother-sister team that is shaking up the world of nuclear energy. Working hand-in-hand with the Los Alamos Laboratory’s Technology Transfer Division, Deal-Blackwell and her brother John “Grizz” Deal had already created several small spin-offs four years ago when they came in contact with Dr. Otis “Pete” Peterson, who had invented a small modular reactor he thought could be used in remote mining and tar sands development. Together they founded Hyperion Power Generation with Grizz serving as CEO and Deal-Blackwell as vice president for public policy and licensing.
 Deal-Blackwell immediately saw the possibility of wider applications for the reactor. She persuaded Peterson and Grizz, who was “entrepreneur-in-residence” at Los Alamos, to journey to Washington to make a presentation to the Nuclear Regulatory Commission. “At the time, the NRC didn’t even have anyone assigned to SMRs,” she recalls.
 What happened next is the stuff of legend. According to some stories, the NRC told them to go away until they found a customer. According to others . . . well, we’ll let her tell it. In any case, Hyperion has taken the small modular reactor idea and run with it, putting them on the map. Last March Secretary of Energy Stephen Chu wrote a Wall Street Journal editorial saying SMRs might be the future of nuclear energy in America.
 Now Hyperion has a customer. This month the company signed a memorandum of understanding with the Savannah River National Laboratory to employ a Hyperion Power Module to power its energy park. Tomorrow, after four years of effort, Deal-Blackwell and her co-founders will sit down with NRC officials in Washington to begin discussing how the Commission might begin regulatory review for the nation’s first small modular reactor.
 Here’s what Blackwell had to tell us about the effort:

 NTH:  What are the Hyperion Power Module ’s main features?

 DEAL-BLACKWELL:  It’s probably the smallest of the small reactors now heading toward licensure in the U.S. At 70 MWthermal / 25 MWelectric the HPM is really in the class of “mini”-reactors. Each reactor unit is 1.5 meters in diameter and 2.5 meters tall – about the size of two residential hot tubs stacked together. We wanted it to be small enough to fit on one truck, which is important because the unit is sealed at the assembly plant. It’s completely assembled off-site and buried in the ground in a specially designed vault. After that, it’s not to be opened or refueled. The whole assembly, including the electricity-generating component, sits on less than an acre. The entire plant can be constructed in just a few months. At the end of its useful life, which is around 10 years, we take the entire sealed reactor back to the factory where it can be refueled. We’ve got one of the few business plans that doesn’t involve leaving spent fuel on the customer’s site.

 NTH:  Does the design of the HPM have anything to do with submarine reactors or is this completely different?

DEAL-BLACKWELL: The Soviet Union created submarines using lead-cooled fast reactors that were so fast the West was forced into revamping its own technology. A lot of inspiration comes from the Soviets’ Alfa class submarine but our design team at Los Alamos National Laboratory has made significant improvements on our own....MORE
HT on the Nuclear Town Hall interview Next Big Future:
Hyperion Power Generation will meet tomorrow with the NRC to begin talk on regulatory review

"Honeywell’s Take on Wind Turbines and the Flying Donut From MIT" (HON)

From Greentech:
Military technology meets high altitude wind. 
Talk about swords to plowshares.
In a lab experiment designed to see whether the company could play a role in the emerging market for airborne wind, Honeywell engineers concocted a design for a flying wind turbine that is capable of generating 2 megawatts, which is largely based on technologies from unmanned flying vehicles it makes for the Department of Defense. The body of the turbine derives from the Predator B, while the auto-navigation and other electronics come from spy drones like this and other devices.

It hasn't been built -- Honeywell has only produced a detailed computer simulation -- but the basic components exist and the design shows what might be possible.

"Technologically, it is not an issue," said Eric Blumer, director of advanced technology, engines and air management research at Honeywell, at the Airborne Wind Energy Conference taking place at Stanford University.

Expect to see more concepts like this. Airborne wind -- turbines that fly in the sky and harvest energy from atmospheric wind -- has the potential, say proponents, of reducing the cost of wind power. These turbines, hypothetically, could also generate power more consistently than ground-bound turbines as well because of the more consistent winds that are present higher in the atmosphere. (That's a picture of the simulation, by the way.)

Are there hurdles? You bet. Only small prototypes exist. Airborne turbines will have to survive strong gusts, ice and unpredictable weather, and neighborhood groups will likely object to multi-ton devices twirling over the earth connected to shock cords that measure a kilometer or more in length. Utilities, the main customers, also have their hands full with trying to get permits for conventional solar and wind parks. Still, if these devices work, it could become a growth market for aerospace companies like Lockheed Martin, Honeywell and Boeing. Many defense contractors have already moved into solar and smart grid: you can call it the Utility-Industrial Complex.

"A wind turbine costs $5 a pound. An aircraft costs $500 a pound," said Fort Felker, director of the National Wind Technology Center at NREL. "We want the low cost of turbines and the reliability of an aircraft."
The Honeywell turbine would measure 57 feet across and carry two one-megawatt turbines. In 34 MPH winds at 5,000 feet, the device would travel at 172 miles per hour and generate a megawatt of energy. The generator sits in the back of the device to add stability. The tether that connects it to the earth would come from Honeywell's material science division.

"Because of the trailing turbine, you have to work hard to go out of control," he said. If it became untethered, it would fly in lazy figure-eights. "This thing likes to fly. The stall speed is low," he added.

If it's so good, why doesn't the company go forward? For one thing, Wall Street analysts would beat them up.
"We can't do the VC thing. We have to go into established markets," he said....MORE

Wednesday, September 29, 2010

Rudolf von Havenstein: "The Most Influential Person in History You've Never Heard Of "

From ZeroHedge via Mangans [Adventures in Reaction]:

The man is Rudolf von Havenstein, the German central banker who brought about the Weimar hyperinflation of the early 1920s, also known as "der Geld Marschall".

I believe that there are a couple of important lessons from the story of von Havenstein. One comes from the fact that the man was a patriot and an aristocrat, i.e. he always thought that he had his country's best interest at heart. Despite that, he created one of the biggest economic firestorms ever to hit a civilized country. Admittedly, he faced some very tough choices, with Communists and Rightists battling in the streets, unemployment at record highs, industrial production plummeting, and Germany owing a huge war debt to the victors of WW1.

The second lesson from his story is the difficulty in ceasing to print money once it has already begun. It's frying pan or fire, take your pick.

Any resemblance to our current situation is purely coincidental....
Follow the Havenstein link, or the yellow brick road (if that's where your heart takes you).


"China Wants Smart Grid, But Not Too Smart" (SI; GE)

From the WSJ's China Real Time Report blog:

Whoever figures out how much electricity China uses stands to make lots of money.

The country is in the process of adopting a smart electrical grid, including Advanced Metering Infrastructure, or AMI, which includes equipment like meters for residences and companies.

China needs to update aging equipment and better link power producers, who tend to be in the northwest, with users, who tend to be located in the coastal southeast. That need represents major business opportunities for foreign equipment suppliers like General Electric Co., Siemens AG and Alcatel-Lucent, who are lining up to help build out smart grid and AMI.

GE has estimated the market at $60 billion over the next decade.
The presence of so many opportunities, however, raises questions about how much sacrifice global technology companies are willing to make in order to grab them: As in other sectors, foreign participants hoping to gain access to China’s smart grid market may need to tailor their products for China, lower prices and risk having proprietary technology stolen by local competitors.

The aim is to design ways for the world’s No. 1 energy consumer to more intelligently use electricity by employing technology to control appliances and supply power only when and where it is needed. Think smart electrical meters in homes that are linked to power suppliers and able to alert customers and producers to expected usage surges, adjust pricing on the fly and control the start-up of devices like dishwashers to maximize efficiency.
But foreign suppliers should not think too smart, or too pricey, according to one prominent Chinese industry researcher.

Hu Xuehao, principal expert at China Electric Power Research Institute, says leading AMI technology being developed in the U.S. and Europe is often much more advanced than China requires at this point. “Our AMI development has to depend on demand,” he said.

In a spirited answer to a question about whether China would buy metering equipment from foreign suppliers, Hu told a regional smart grid conference Tuesday in Shanghai that China’s electrical network has the technological sophistication to run the most advanced products but doesn’t always need them....MORE

Bilderbergers Briefed on Coming Global Cooling

From the Telegraph:
Whether you believe it’s part of a sinister conspiracy which will lead inexorably to one world government or whether you think it’s just an innocent high-level talking shop, there’s one thing that can’t be denied: it knows which way the wind is blowing.
(Hat tips: Will/NoIdea/Ozboy)

At its June meeting in Sitges, Spain (unreported and held in camera, as is Bilderberg’s way), some of the world’s most powerful CEOs rubbed shoulders with notable academics and leading politicians. They included: the chairman of Fiat, the Irish Attorney General Paul Gallagher, the US special representative for Afghanistan and Pakistan Richard Holbrooke, Henry Kissinger, Bill Gates, Dick Perle, the Queen of the Netherlands, the editor of the Economist…. Definitely not Z-list, in other words.
Which is what makes one particular item on the group’s discussion agenda so tremendously significant. See if you can spot the one I mean:
The 58th Bilderberg Meeting will be held in Sitges, Spain 3 – 6 June 2010. The Conference will deal mainly with Financial Reform, Security, Cyber Technology, Energy, Pakistan, Afghanistan, World Food Problem, Global Cooling, Social Networking, Medical Science, EU-US relations.
Yep, that’s right. Global Cooling.
Which means one of two things.

Either it was a printing error.

Or the global elite is perfectly well aware that global cooling represents a far more serious and imminent threat to the world than global warming, but is so far unwilling to admit it except behind closed doors....MORE


"Tudor Sells Completely Out of Renewable Energy Holdings (LON: REH)"

Mr. Jones is one of the global macro heavyweights although last time I looked his performance was slipping.
From Market Folly:
Just yesterday, we highlighted that Paul Tudor Jones' hedge fund had reduced its position in Renewable Energy Holdings (LON: REH) to a 3.99% ownership stake in the company. They've just filed another regulatory disclosure which reveals that the hedge fund sold completely out of REH and now own 0 shares due to trading on September 24th, 2010.

What's interesting here is that Weiss Asset Management (the investment manager to Brookdale International and Brookdale Global), have just acquired a 6.5% holding in Renewable Energy Holdings due to trading on the exact same day. So, it's somewhat likely that Tudor was essentially selling to Weiss....MORE
The advantage and disadvantage of global macro is It Is Not Easy. You have to pay attention and you have to understand the interrelationships of many markets and politics and weather and psychology and be facile in both words and numbers and in an ego-driven business be humble enough to learn the lessons the market will teach you.

It really helps to not take yourself too seriously, both to avoid the temptation to impose your will upon the market and to maintain enough perspective to spot opportunities ahead of the crowd.
Because global macro isn't easy the rewards can be tremendous.

"How to Start a Hedge Fund" and "Budding Gordon Gekkos Get Tips on Ponzi Scams in 'History of Greed'"

First up, Vanity Fair:
Financial regulatory reform cramping your style? Go rogue with’s step-by-step action plan.
If you’ve spent the last 5, 10, or 20 years enjoying the fruits of a blissfully unregulated financial system that created wealth for its adepts but nothing for the American people, then surely you’re steamed at the big regulatory overhaul that passed in Congress this summer. But there’s still something you can do: move over from the stringently monitored world of banking to the somewhat less monitored world of hedge funds. We spoke to an actual big-shot hedge-fund manager to pick up tips on how you too can start the rogue finance shop of your dreams.

Step 1: Create a hedge-fund team!

The bare essentials to get your new fund going: two junior analysts, a junior trader, and a chief financial officer. When you “spin off” from your current bank, it’s crucial to steal away some crack subordinates. A big selling point to potential investors is that you have a well-oiled, cohesive unit with a history of “crushing it.”

Actual big-shot hedge-fund manager’s tip: “Choose people who have a nose for ferreting out opportunities, but who are not willing to cut your guts out and try to replace you. You need junior-level people.”

Step 2. Name your fund!

Let’s face it: aggressive, testosterone-redolent names (e.g., Hungry Wolf Capital, Thor Hammer Fund, Tomahawk Capital Management) are as passé as Meatpacking District mega-restaurants and conspicuous luxury boxes at the stadium. Come off as attuned to the times with something gentle and/or arboreal (e.g., Sassafras Group, Bending Birch Asset Management, Larchwood Partners).

Actual big-shot hedge-fund manager’s tip:“The goal is to project sturdiness without rapaciousness. You don’t want to be Three-Headed-Dog-Guarding-the-Gates-of-Hades Capital. And you don’t want to use your own name. Typically, guys use streets and towns from their childhoods. Or a tree, to convey strength and deep roots.”

Step 3. Hire a law firm!

You’ll need a good firm to incorporate your fund—first in Delaware, and then offshore in either the Caymans or the British Virgin Islands. But beware of big, sprawling, white-shoe corporate law firms that overcharge. Instead, go with the specialists who do this thing all the time.

Actual big-shot hedge-fund manager’s tip:“The Coke and Pepsi of the business are Schulte, Roth & Zabel and Akin, Gump, Strauss, Hauer & Feld. Avoid the high-tone and really big firms. They are too expensive and they don’t know what they’re talking about with funds. They’re too busy billing Pfizer millions upon millions to file their 10-K forms.”...MORE
HT: DealBook
If it turns out that your aptitudes don't lie in that field, Bloomberg has:
David Sarna’s “History of Greed” exposes the swinish side of finance. Will it also, like Gordon Gekko, inspire impressionable college kids to get up to no good?

The mere thought may repulse Sarna, a management consultant and former high-tech executive who remains passionate about the uses and abuses of markets.

“Capitalism is not about stealing, swindling or screwing the little guy,” he writes in this uneven yet handy compendium of frauds and scams. “It is about the individual improving his or her own situation by producing something of worth that improves the lives of others.”

We can only hope that his text doesn’t succumb to the law of unintended consequences. Witness how Oliver Stone’s assault on barbarians-at-the-gate capitalism in the original “Wall Street” turned many an MBA student into a trader or investment banker.

Contrary to his title, Sarna’s book isn’t a history. The great financial scandals of old -- John Law’s Mississippi Company and the South Sea Bubble, for instance -- are just briefly summarized in one chapter. In place of a continuous chronicle, Sarna offers up a series of sometimes dense case studies on fraud in its myriad forms, especially those practiced in the U.S. in recent decades.

Drawing on court records, news reports and his own unpleasant run-ins with flim-flam artists, Sarna takes us on a tour of the sleazy back alleys of markets. He lucidly explains how some unscrupulous operators manipulate shell companies while others pump up stocks they later dump at inflated prices. If you’re bent on becoming the next Bernie Madoff, these profiles in greed form a veritable guidebook on how to build your own financial weapon of mass destruction....MORE

"Case on Amaranth collapse gets class-action status"

Return with us now to those heady pre-fin-crisis days of Summer 2007 when the only thing you had to worry about was traders acting like traders i.e. "You get the downside while I take the upside and I'll be in clover before ye...".

From Reuters:
* Traders can sue as group; over 1,000 claimants possible
* Amaranth accused of manipulating futures contracts
* Amaranth collapsed in 2006 after $6.4 billion losses

NEW YORK, Sept 28 (Reuters) - A U.S. judge ordered Amaranth Advisors LLC, a hedge fund that lost $6.4 billion through bad bets on natural gas prices, to face a class-action lawsuit over its 2006 collapse.
In a ruling dated on Monday, U.S. District Judge Shira Scheindlin granted class-action status to futures traders who bought, sold or held natural gas futures or options on futures contracts from Feb. 16 to Sept. 28, 2006.

The decision means the traders may sue as a group, which could save litigation costs and result in a larger recovery than if they sued individually.
The case "involves more than 1,000 potential claimants who are asserting claims based on common issues," Scheindlin wrote. "Claimants likely have no interest in pursuing their own claims, which may be prohibitively small."...MORE
Through July and August of '07 I was using the Amaranth fiasco as an object lesson to show that the trade part of cap-and-trade was a government mandated disaster waiting to happen.

I could have used the California electricity market manipulations of 2000 and 2001 or any number of others but I kind of got a kick out of Brian Hunter.

Here's a post with links to a bunch of our other posts, "The man who lost $6 billion (Brian Hunter, Amaranth)" and which included a couple on a fund, Saracen, which had a strategy exactly opposite of Amaranth: 
Attempting the Reverse Amaranth
which, of course, resulted in:  
Saracen Attempts the Reverse Amaranth and...Yes!... Sticks the Faceplant Landing!
At least the traders had their prior bonuses.
Good times, good times.

House to Vote on Rare Earths and Critical Materials Revitalization Act of 2010 Today (MCD; AVL. TO; LYC.AU)

For all you strategists, here's the bill:
H.R. 6160

See also:
Rare Earth Metals: Stocks and a new ETF (AVL.TO; NEM.TO; QRM.X)

"Government's Plan to Sell Citigroup (C) Shares By Year End Could Fall Short" (C)

We're coming into earnings season. The last two quarters the Treasury stopped selling during a one month window preceeding Citi's release of their numbers. For the current quarter the date is October 18, according to the press release.
The October options stop trading on Friday the 15th.
From the Financial Times via StreetInsider:
The government's plans to sell all of its 7.7 billion common shares of Citigroup (NYSE: C) by year end may have been too ambitious, as slowing trading volume has impacted the Treasury's sale plan, the reported.

"The sales of Citigroup stock have slowed way down in July and August ," Linus Wilson, a professor of finance at the University of Louisiana, said. "The only option for the Treasury if it wants to exit Citigroup before the year-end seems to be to conduct a large secondary offering of the stake."

By the end of August, the government has sold less than half of its 7.7 billion shares, the report noted.

The government's current trading plan is set to expire on September 30, with or without it being completed, ahead of a quite period for third quarter earnings which is expected to begin on October 1.

Earlier in the month, reported that the government was nearing completing the sale of its latest 1.5 billion traunch. Even if the government completed the full sale of this traunch on time, it would still leave them with 3.6 billion shares remaining to sell before year end....MORE

Isn't it About Time for Another Iceland Volcano? (Bárðarbunga dude)

On April 15 we posted "You say Volcano, I say Eyjafjallajökull (Volcano could mean cooling, acid rain)":
Here's the BBC's Guide to Icelandic Pronunciation. Pity the poor newsreaders.
As best as I can make out it's something like:

Which ended up being fairly popular.
Here's the latest, from FromTheOld:

Iceland's Bárðarbunga volcano shows more activity lately
Sunday, September 26, 2010 - 14:21
Bárðarbunga is a powerful stratovolcano in Iceland and is located under the ice cap of Vatnajökull glacier. With a massive high of 6591 feet above sea level that makes it the highest mountain in Iceland it also makes for some powerful volanic activity when it erupts.
Iceland's Bárðarbunga volcano is said to erupt every 250-600 years if scientists are correct. What many dont know is that the most powerful volcano eruption on earth happened at Bárðarbunga some time ago....MORE
HT: ZeroHedge, prop traders and volcanologists.

That last statement re: most powerful is incorrect.
The eruptions that created the Yellowstone caldera were a bigger bang, something like 2000-2500 times as powerful as the Mt. St. Helens eruption in 1980.

Here's a list of some other biggies. 

See also:
"How to short a volcano" (What did Eyjafjallajökull screw up?)

Tuesday, September 28, 2010

"High-Frequency Trading: Not as Profitable as You Think"

From Deal Journal:

By the memes of financial journalism, high-frequency trading is a “lucrative” practice, which involves scraping billions and billions of pennies into nice-sized piles of dollars.

Now comes some new research that suggests those piles aren’t as big as many had thought.
University of Pennsylvania researchers Michael Kearns, Alex Kulesza and Yuriy Nevmyvaka recently ran HFT simulations of their own, with an eye toward the overall profitability of the trading practice.
They did this by assuming that every trade was a winning one–the “Omniscient Trader Methodology,” as they call it.

Their final estimate–which they consider an almost cartoonishly large estimate–was $21 billion for the “entire universe of U.S. equities in 2008 at the longest holding periods.” Against an overall trading volume of roughly $50 trillion, the final numbers are pretty meek, they conclude....MORE
Hmmm...Omniscient Trader... I wonder if I can still trademark it.

"Here at Omniscient Trader we believe..."

Hapoalim Securities still Downbeat on First Solar, They're getting Closer to Being Right... (FSLR: SPWRA; STP; TSL; YGE)

...with every tick the stock goes against them.
After trading up to $151 earlier today, the stock is now at  $148.06 up 15 cents.
We first met Hapoalim in June's "Hapoalim Cuts First Solar Target to $65 on Cadmium Telluride Risk; It Won't Matter and Probably Sets an Intermediate Low (FSLR)" with the stock a bit lower than today:
The stock is at $105.35 +0.37 in subdued pre-market trade.
This fear is not immediate and for First Solar may not even be relevant in five years. I'm not sure Hapoalim understands the politics, the science or the company I'll explain after the jump....
We next heard from them in August:

"Hapoalim Securities Cautious On Solar Names" Climateer Asks "Who Really Cares What they Think?" (FSLR, SPWRA)
I am not all that impressed with Hapoalim.
Back on June 8 we posted "Hapoalim Cuts First Solar Target to $65 on Cadmium Telluride Risk; It Won't Matter and Probably Sets an Intermediate Low (FSLR)".

The stock did indeed set an intermediate low that day, at $100.19. It started running and didn't look back until it hit $140.00 on July 23.

On July 29 FSLR reported second quarter numbers.
The next day Hapoalim upped their target with nary a mention of the CdTe risk that was ostensibly the reason they initiated at sell:

Analysts at Hapoalim Securities maintain their "sell" rating on First Solar ( FSLR), while raising their estimates for the company. The target price for FSLR is set to $100....MORE
...I'm starting to think that Hapoalim could cost an investor some real money.
It appears they fired the first analyst. Here's the latest via Barron's last Saturday:
Solar Outlook: Cloudy 
Likely oversupply will batter many of the stocks. An analyst is bearish on First Solar and Suntech, somewhat bullish on Trina and SunPower.

WHEN AARON CHEW TOOK OVER Hapoalim Securities' coverage of the solar power industry this summer, he succeeded the sector's best-known bear, Gordon Johnson (Barron's, Sept. 28, 2009). Chew is only modestly more optimistic than his predecessor.

Barron's: What makes you such an expert?
Chew: I was in equity research at JPMorgan for about four years. Then I worked at a clean-tech incubator in New York.

An incubator?
Sort of like pre-venture capital. You are helping very early-stage startups get off the ground… I linked up with solar integrators, developing cash-flow models for small commercial projects in New Jersey. After that, I got this platform at Hapoalim, where there is no investment banking. Our only function is to provide research for investors.

You launched your coverage when?
In mid-July.

How have you done?
Trina Solar (ticker: TSL), which we rated a Hold, is up about 23%. First Solar (FSLR), which we rated a Sell, is up around 8%. The others have declined. Hold-rated SunPower (SPWRA) is down 3%. Sell-rated Yingli Green Energy Holdings (YGE) is down about 4%. Sell-rated Suntech Power Holdings (STP) is down 16%. That said, our thesis centers on 2011. Most analyst estimates and valuations don't reflect the likelihood that price declines will compress industry earnings.

What drives solar installations?
Financial incentives set by governments, such as the "feed-in-tariffs" that make utilities pay above-market rates to renewable-power producers. Europe is the big driver of solar and has been for years. But from September 2010 to January 2011, incentives will fall by double-digit percentages in the markets that make up three-quarters of the industry. Germany's feed-in-tariff will have been cut by 38% over 13 months. In Italy, a series of cuts next year will total almost 20%. France cut rates 12% in September and the Czech Republic—a surprisingly big market—is reducing rates by at least 20% in January. So either demand will slow or prices will come down.

What's your demand forecast?
I've seen bullish forecasts for 15 gigawatts [GW] next year. [A gigawatt is enough electricity to power 100,000 homes.] I forecast 13.3 GW, and an expected 12.7 in 2010. That assumes Italy grows 23%, to 2.1 GW; the U.S. grows 45%, to 1.5 GW, and China almost doubles, to 1.1 GW.
But key markets will decline or stay flat. It will be hard for the industry to reach 15 GW in 2011 unless Germany grows to 7 or 8 GW. Installations surged in June, and I expect Germany to exceed 6 GW this year. That is a huge number—more than Japan, the U.S., Italy and France cumulatively installed in all their histories. But in 2011, I forecast 5 GW in Germany, and that's at the high end of the range assumed by integrators with whom I've spoken.

What kind of supply do you foresee?
Oversupply has cast a shadow for two years, but it hasn't impacted results or pricing since the fourth quarter of 2009. The reason is "bankability." Banks don't lend money for the product of every new manufacturer out there. We have actually been in a state of tight bankable supply for the last couple of quarters. Production capacity at bankable module manufacturers was 2.2 GW in the first quarter of 2010, 2.4 GW in the second quarter, and 2.9 in this third quarter— and it will be 3.3 in the coming fourth quarter. Our demand number of 12.7 GW for 2010 averages to 3.2 GW quarterly.

So the tight supply is on the verge of loosening up. Looking ahead, bankable manufacturers' capacity will rise from 14.2 GW at year-end 2010, to 18 GW at year-end 2011. Compare that to my forecast for demand of 13.3 GW, or even the bullish forecast of 15 GW.

You must take into account Samsung [005930.Korea], LG [066570.Korea] and Hyundai [005380.Korea] coming into the picture. Samsung came into the DRAM memory-chip industry and was the only company to figure out how to gain market share in a profitable way.

What decline do you therefore foresee in actual sales prices?
It ranges from 18% to 24%, depending upon the manufacturer. Most analysts assume that prices fall in line with the incentive cuts coming in January. But you will probably see a decline of 10% to 15% in the first few months of 2011, and then a further decline through the year.
The other problem is that the potential for reducing production costs has shrunk. Since 2008, the biggest source of savings for silicon solar-module producers was the drop in polysilicon price from $300 a kilogram to $50-to-$60. That saved $1.50 a watt. Poly prices could continue falling to $40, but that won't provide much more than 10 cents a watt in savings.

Play this out, company by company.
Suntech Power Holdings may be most at risk. They do not produce silicon wafers. That adds another layer of cost. Suntech plans to make wafers, but it will take some years and a lot of money. And they'll face 20% price declines next year. I have their EPS of 56 cents in 2010, dropping to 52 cents in 2011, despite volume growth of 23%.

Your target price on Suntech is what?
It's 6 bucks. The stock is over 9 now. I'm definitely most cautious on Suntech and First Solar.

What about First Solar?

It's the most highly valued company in the solar universe. They arguably deserved a premium valuation in the last couple of years, because they've had the lowest cost structure and the most attractive module prices. But their competitive advantage is withering away. First Solar uses a thin-film technology, which avoids the high raw material costs of silicon; they are producing a couple of gigawatts a year, so they have the scale to spread out costs. They produced modules in the second quarter for 76 cents a watt, which is lower than the best silicon module producer, Trina. And that doesn't even account for Trina's polysilicon costs.

But crystalline silicon remains a far more efficient product...When silicon modules were priced at $3.50 a watt, a couple of years ago, First Solar saved you more than 60 cents per watt. But as silicon module prices fall to a $1.25 a watt, the savings from thin film narrow to about 20 cents per watt. Then the higher efficiency of silicon delivers more energy for a given land or rooftop area and more value over the life of the system.

That's why First Solar has built a pipeline of utility projects. These are mammoth projects, between 200 and 500 megawatts apiece, compared to a few megawatts for standard commercial projects. You have to go through elaborate regulatory approvals. So delays are likely.

A bigger concern is pricing. The few buyers for these multi-hundred-megawatt projects may pay less for the projects than Wall Street assumes. It is hard to see why project buyers would pay more than $2.75 per watt. Assuming a system gross margin of 25-to-30 cents a watt and non-module costs of around $1, First Solar's module prices on these projects will be less than $1.50 per watt, especially if there are cost overruns.

How will that affect earnings?

I have EPS declining next year, below $5, as their ASP [average selling price] falls 26%. If that is too negative and ASP falls just 15%, you still get 2011 EPS of less than $6—compared to a consensus forecast of over $8. I don't see why investors are paying over 17-times, the consensus forecast for the stock. At 15-times, a more realistic EPS of 6.50, the stock would be at 100.

What about Yingli Green Energy?
For Yingli, I have 72 cents a share for this year, dropping to 55 cents in 2011. I would be more positive on the stock, were it not for my concerns about Yingli's cash flow and capital spending. I expect them to ramp up spending on polysilicon capacity despite the likelihood that worldwide poly capacity will surge over the next couple years. With poly prices under pressure, Yingli may be destroying more value than it is creating. An appropriate valuation for the stock is 7- or 8-times consensus EPS of $1.12. My target for the stock is $8.

Aaron Chew's Punts & Pans

Company Ticker Recent Price
SunPower SPWRA13.92
Trina Solar TSL26.67
Company Ticker Recent Price
First Solar FSLR$143.23
Suntech Power STP9.35
Yingie Green Energy YGE11.65
Source: Bloomberg
How about your other stocks?
I'm cautiously optimistic on Trina and SunPower. Trina has the most attractive cost structure in the group. If you want exposure to the space, they are best-positioned to survive an environment where module prices approach a dollar a watt. My target of 21 for Trina may be too low, but I would be more inclined to buy it on a selloff in the sector and wouldn't pay more than 20 bucks.

What are your estimates on Trina?
I have it earning $2.33 a share in 2010, dropping to $1.81 in 2011.

You mentioned SunPower.
That's an interesting case. Not enough for me to have a Buy rating, but SunPower is exposed to the right markets. Their recent acquisition of SunRay gives them a high market share in Italy, one of the most promising markets. And they don't have much exposure to Germany, one of the more troubled markets going forward. I am growing confident that when SunPower offers 2011 guidance in the next few months they will surprise to the upside.

Isn't it a high-cost producer?
That's a disadvantage, but its new production facility in Malaysia is a joint venture with AU Electronics—the LCD-manufacturing experts. And it sells more finished systems than simple modules. SunPower gets 15%-plus price premiums, because of its highly efficient product. It offers efficiency of around 19%, in terms of the amount of solar energy you convert to usable electricity, versus 15% for competing silicon products. I like the risk/reward of buying SunPower below $11, ahead of what I expect to be a strong first half of next year.
In Hapo's favor, they don't follow the Hope-it'll-Change garbage issues.

"Monsanto Plunges on Concerns About SmartStax Corn-Seed Yields" (MON)

 The stock is down $4.52 (8.52%) at $48,55.
We haven't looked at MON very often over the last few months. The stock was oozing down on an ongoing series of dissapointments but I had no conviction on the short side. [chicken -ed]
I'll get back to posting on it after the shake-out.
From Bloomberg:

Monsanto Co., the world’s largest seed company, fell the most in four months in New York amid concerns that its new SmartStax corn seeds aren’t performing as well as predicted.

Monsanto, based in St. Louis, dropped $3.58, or 6.8 percent, to $49.49 at 11:06 a.m. in New York Stock Exchange composite trading, the biggest decline among companies in the Standard & Poor’s 500 Index. The shares earlier fell as much as 8.4 percent, the biggest intraday drop since May 27.

Early harvest data show SmartStax seeds, which have eight added genes to protect against weeds and bugs, are yielding 3 percent to 5 percent less than cheaper seeds with two or three added traits, said Laurence Alexander, an analyst at Jefferies & Co. in New York.
“The initial data is weaker than we expected,” Alexander, who is based in New York and rates the shares “hold,” said in a report today.

Monsanto will provide credits for 2011 seed purchases to farmers who are dissatisfied with SmartStax corn or Roundup Ready 2 Yield soybeans, and that could become a “headwind” for the company next year, he said. Monsanto said Sept. 20 that early harvest data showed some new SmartStax corn hybrids were missing yield projections....MORE

A Big Deal: Aluminum Corp. of China to Invest $1.5 Billion for Majority Stake in Rare Earth Company (ACH)

As far as I know this is the largest rare earth investment to date. Molycorp's August IPO netted MCP $379.2 million.
From Chinavestor:
Aluminum Corp. of China (NYSE:ACH), China's biggest producer of the industrial metal, said it will make investments of not less than $1.5 billion to acquire a majority stake of Jiangxi Rare Earth and Rare Metals Tungsten Group. The agreement was reached Sunday at the Expo Central China 2010.
Under the terms of the agreement, Aluminum Corp. of China (NYSE: ACH) will help Jiangxi Rare Earth and Rare Metals Tungsten Group develop rare earth minerals resources over the next three to five years....

Société Générale's Dylan Grice: "Higher crop prices 'permanent'" (ADM; SYT)

The Economist post immediately below combined with this one reminded me of something we put up back in 2007.
I'll re-post it after the headline story.
From Agrimoney:

Chinese demand for food commodities may be playing a bigger role than analysts believe in the rally in grain prices, and betrays a shortfall which may lead to "permanently higher prices", one of Europe's most respected economists has said.
While Russia's drought-hit harvest created a spark for the surge in grain markets, which has seen Chicago wheat prices stabilise 60% above late-June levels, China's dependence on agricultural imports may fuel long-term strength, Dylan Grice said.
Mr Grice, with Albert Edwards, forms one of the City's best-respected economic teams, at Societe Generale, the French bank which on Wednesday advised investors to sell down soft commodity positions, citing concerns over regulation.
However, Mr Grice's paper, which advised investors that shares in groups such as America's Archer Daniels Midland, Australia's Incitec Pivot, Europe's Syngenta and Singapore Golden Agri Resources "might be worth looking at", represents a longer-term view.
'Permanent structural shift'
He compared the rally in grain markets to the jump in oil prices in 1973 caused by an embargo by producers' cartel Opec, which worked so "spectacularly" because the US had by then run out of spare production capacity.
A similar embargo in 1967 had no impact, because the US at the time still had a surplus of its own supplies.
The" violence" of the 1970s' jump in oil prices, which have never recovered in real terms to levels before the embargo, and their "continued volatility was caused by a permanent structural shift", Mr Grice said....MORE

The Economist has been around for a while and sometimes that longevity can result in a story unto itself: 
This story from The Economist got me thinking
(I know, alert the media).
Rising food prices are a threat to many;
they also present the world with an enormous opportunity
FOR as long as most people can remember, food has been getting cheaper and farming has been in decline. In 1974-2005 food prices on world markets fell by three-quarters in real terms. Food today is so cheap that the West is battling gluttony even as it scrapes piles of half-eaten leftovers into the bin.
That is why this year's price rise has been so extraordinary. Since the spring, wheat prices have doubled and almost every crop under the sun—maize, milk, oilseeds, you name it—is at or near a peak in nominal terms. The Economist's food-price index is higher today than at any time since it was created in 1845 (see chart). Even in real terms, prices have jumped by 75% since 2005. No doubt farmers will meet higher prices with investment and more production, but dearer food is likely to persist for years (see article). That is because “agflation” is underpinned by long-running changes in diet that accompany the growing wealth of emerging economies—the Chinese consumer who ate 20kg (44lb) of meat in 1985 will scoff over 50kg of the stuff this year. That in turn pushes up demand for grain: it takes 8kg of grain to produce one of beef....
And what was I thinking about?
Farm implements!

The Economist's food-price index was created in 1845.
In 1846 The British Parliament voted to repeal the Corn (grain) Laws, reducing the tariff on imported grain, effectively opening the British market to American wheat.
Our post "Global Warming, Politics, Laws and Opportunity" had this list of annual sales of Mr. McCormick's reaper:
1840------- 2
1843------ 29
1844------ 50
1845------ 58
1846------ 75
As can be seen, the politics had quite an effect on the McCormick family fortunes.
In Global Warming, Politics, Laws and Opportunity--Part II:
As reported by The Economist May 16, 1846, the British House of Commons had repealed the "Corn Laws", eliminating the tariff on imported wheat, the day before. Corn in this usage is not maize but rather is generic for grain. Prime Minister Peel won the battle but lost his premiership, the quote of the day was "Peel and repeal."
Click that Economist link. I'll wait.

May 16, 1846 "Corn Laws Repealed by the House of Commons"
The bill was ushered through the Lords by the Duke of Wellington, Peel lost his job and the era of cheap food began. It lasted 160 years.

The Economist reported both ends of the story.
Not many publications can say that.

Wikipedia has this last bit:

The Economist
was founded in September 1843 by James Wilson with help from the Anti-Corn Law League; his son-in-law Walter Bagehot later became the editor of this newspaper.

What was old is new again.
The Economist story is now behind the paywall but if you are interested it appears the Desertification blog copied the whole thing out, HERE

Too Funny. The Economist Goes With the "Don't mention the war" Headline

The Economist!
Ya gotta love it, even if it's one of their lead blogs rather than the magazine itself.
From The Economist's Charlemagne's notebook:
ACCORDING TO those in the room, it was “very lively”, “very harsh” or even a “big argument”. Today's row between President Nicolas Sarkozy of France and José Manuel Barroso, president of the European Commission, was also entirely predictable after Brussels threatened to take legal action against France over its expulsion of Roma migrants.
What has given extra potency to the affair is the constant evocation, directly or more euphemistically, of the Nazi past by all sides in the debate. I feel that Hitler’s genocidal murder of Jews, Gypsies and others was too appalling to be invoked lightly. More often than not, those involved would be better off heeding the words of John Cleese: don’t mention the war....
They link to the Fawlty bit of genius, we embed:

"ABB's sees higher sales, EBIT in third quarter" (ABB)

From MarketWatch:
Swedish power and automation technology group, ABB (ABB 21.04, +0.07, +0.34%) (SE:ABB 144.20, -0.70, -0.48%) on Friday lifted expectations for third-quarter sales and adjusted earnings at the company's annual capital markets day in Zurich, Switzerland. 
In an address, Chief Financial Officer Michel Demare said ABB's third-quarter 2010 sales in local currencies and earnings before interest and taxation margin adjusted for derivative transactions and restructuring-related costs will be higher than in the same quarter of 2009. He said this comes despite the fact third-quarter EBIT margin is normally weaker than the second quarter due to a different business mix. 
"Our short-cycle businesses continue their robust recovery, but the long-cycle infrastructure business still faces headwinds," said Demare. He added that ABB's cost savings program remains on track to reduce costs by $3 billion by end 2010.

"Mexico's Drug War: The Battle to Remain Safe, Low-cost and Competitive"

Not the drug lords, the whole freakin' country. And the investors the country needs.
This is "National Security Interests" stuff.
From Knowledge@Wharton:
Mexico became a manufacturing mecca thanks, in part, to its inexpensive labor and proximity to the massive U.S. market. But there is a new reality on the ground in that country these days: a surge in violence tied to the war on drug cartels that Mexico's President Felipe Calderon mounted after his election in 2006. The result has been a wave of kidnappings, extortion and murder that is threatening the country's economic health and causing multinationals to examine closely how they operate and invest in Mexico.

"A failure to attract new capital is a major risk," warns Wharton marketing professor Jerry Wind, director of the SEI Center for Advanced Studies in Management. "If [the violence] continues, a lot of talented people might leave the country."

The cost of Calderon's war on the cartels has been steep. Since he took office four years ago, the government estimates there have been more than 28,000 deaths tied to the conflict. And each day seems to bring new horrors -- the recent discovery of 72 murdered migrants in a mass grave and the subsequent disappearance of two government officials investigating the crime, a bombing in the tourist hotspot of Cancun, and evidence that the cartels may be gaining expertise in car bombs.

Just as troubling has been the increase in attacks in the modern and once-safe city of Monterrey. While violence along the U.S.-Mexico border -- the route for drug traffickers to transport narcotics into the United States -- has not been a surprise, the problems in Monterrey, 130 miles south of the border, have been an unexpected nightmare. Home to manufacturing operations of large companies like General Electric and Whirlpool, Monterrey has seen politicians and citizens murdered and roadblocks set up throughout the city by roving gangs, a tactic apparently aimed at showing the gangs' power and also disrupting police activity. "The violence [in Monterrey] is bordering on obscene," says Daniel Johnson, senior chief of kidnap response at ASI Group, a Houston, Tex.-based global risk management firm. "It is a major concern for companies operating there."

To date, the impact of these security issues on the country's economy has been overshadowed by the severity of the global recession. Last year, Mexico's gross domestic product declined 6.5%, a painful contraction exacerbated by an outbreak of the swine flu and a slump in oil prices. This year, Rafael Amiel, director for Latin America at IHS Global Insight, an economic and financial analysis firm, expects Mexico's GDP to grow 5.1%.

At the same time, Amiel says there are no signs of a major exodus of foreign dollars from the country. Foreign direct investment averaged $1.6 billion per quarter in the four quarters ending March 2010. While there was a surge in the second quarter to $6.1 billion, Amiel says that uptick was driven by one deal, an acquisition by Heineken. Excluding that, foreign direct investment in Mexico remains weak, although he notes that this is a function of the stresses on the global economy, not Mexico's challenges with the drug cartels. "Employment growth is about what you would expect at this point in the recovery and we don't see firms moving out of Mexico due to the violence." Still, Amiel warns that if the situation on the ground in Mexico worsens, this could change. He figures a major escalation in the violence could shave half a percentage point off GDP growth.

How the drug-related crime in Mexico ultimately impacts the country depends in part on how multinational firms respond. For now, experts like David Robillard, managing director in the Mexico City office of risk consulting firm Kroll, say there are no signs that big multinationals are considering pulling out of Mexico. But Robillard does know some firms that have decided to put additional investment in Mexico on hold for now. And he notes that other firms that are looking to set up operations in Mexico for the first time are considering locations further south in the country, away from the crime hotspots. In addition, more corporate boards are asking management to take a hard look at their companies' exposure to risks in Mexico. Finally, some U.S. government workers in Monterrey have moved their families back to the U.S. following a drug-related shooting near their children's school.

"Not a day goes by that we are not asked by our multinational clients about a specific threat to their company [in Mexico]," notes Fred Burton, vice-president of counter-terrorism and corporate security at global intelligence firm Stratfor. Some firms are quietly doing what he called "gameboarding"-- studying other places to shift their operations to in case the situation in Mexico reaches a crisis. "Companies are still making money there but the cost of production is increasing," Burton says. "That doesn't bode well for the country.

The way companies handle those decisions -- whether they relate to Mexico or any other location around the globe -- comes down to an analysis of the risks and rewards. Erwann Michel-Kerjan, managing director of the Risk Management and Decision Processes Center at Wharton, says companies often break these issues down into a matrix. First, they will come up with a rundown of the top 10 or 15 risks they may face in a certain region. Then they gather information on how likely those risks are. The task at that point is to figure out how, if at all, the risks can be mitigated or controlled. This may involve changes in security processes at a plant, increased insurance against certain events or setting up back-up operations in case one location becomes disabled. "Ideally, you want to prevent every problem," Michel-Kerjan points out. "But in reality you don't have the resources to do that."...MORE

The World's Next Big Oil Play: Paris? (I'm talkin' France, not Texas) TRGL

Be skeptical, be careful.
There has been some production in the basin since the 1980's, this is not a new discovery.
Toreador Resources (TRGL) just moved above the high it made in May but is still below the January highs and far below the $36+ it traded at in 2005 i.e. there is overhead supply.

From Next Big Future:
Paris Basin Shale Oil Could have more recoverable oil than the Bakken oil field

The Paris Basin has an area of ~170,000 km2, encompasses most of the northern half of France and extends into Luxembourg, Belgium and Germany.

IHS has identified three possible unconventional hydrocarbon plays in the Paris Basin, France:
the Lias Shale oil play, the Permo-Carboniferous Shale gas play, and the Upper Carboniferous coalbed methane play. Analysis based on IHS proprietary data and public sources indicates the presence of a thick sequence of Palaeozoic sediments. We have constructed a preliminary stratigraphic succession of the Palaeozoic sediments and mapped their distribution, which could help in exploration of the Palaeozoic reservoirs as an extension of known conventional petroleum systems. Our analysis of the Paris Basin indicates that the basin still holds good hydrocarbon potential, both for conventional and unconventional plays, and merits a new phase of exploration, especially considering its excellent infrastructure and recent advances in technology.
Estimates range from just a few to many tens of billions of barrels of oil in the Paris Basin. Much like the North American shale plays, these formations have been drilled through many times – there are over 1,000 wells drilled into the Basin – so exploration risk is low. It’s completion risk – how to best unlock the oil from the rock – that is the main risk.
Activity by explorers in this part of France has been growing, and is now hitting a fever pitch. A huge land race is underway, with applications for more than 1.6 million acres pending approval for several companies, including Toreador Resources (TRGL-NASD)* in the US, Vermillion Energy (VET.UN-TSX) and Realm Energy (RLM-TSXv) in Canada....MORE
Paris Texas is not in oil country, there is one derrick at Gene's flea market, moved there from east Texas.

It does however have an Eiffel Tower:

With a cowboy hat on top.

Monday, September 27, 2010

How 3M Got Its (Innovation) Groove Back (MMM)

Do it or die.
This is a subject we take seriously, links below.
From Fortune:
3M's innovation revival
3M is everywhere. That's the point George Buckley, the chairman and CEO of 3M, is trying to make as he talks about his favorite subject, inventing things. Last year, he says, "even in the worst economic times in memory, we released over 1,000 new products."

As if on cue, Buckley's new iPhone rings, showing a photo of his daughter. "Daddy's in a meeting," he says, and hangs up.

"I'm told there's some 3M inside that phone," I say. Buckley replies, "There's lots of 3M inside." He can't say exactly what 3M (MMM, Fortune 500) gadget is in the iPhone; Apple's (AAPL, Fortune 500) skittish about such things. But point well made: 3M is everywhere.

Apple and many others couldn't do what they do without 3M. The St. Paul company produces a mind-bending 55,000 products. Some of them you know -- Post-it notes, Scotch tape, Dobie scouring pads, Ace bandages, Thinsulate insulation. But most you don't, because they're embedded in other products and places: autos, factories, hospitals, homes, and offices. Scientific Anglers fly-fishing rods and Nutri-Dog chews? Yup. They also come from 3M.

Somehow they all add up to a business with $23.1 billion in revenue and $3.2 billion in net income in 2009, placing 3M at No. 106 on the Fortune 500. It has also recovered nicely from the recession. Sales grew 21% and net income 43% in the first half of 2010. The stock? Up about 20% in the past 12 months. The company's shares have consistently outperformed the S&P 500 and other conglomerates, including GE (GE, Fortune 500). Says Buckley: "The magic is back. It is an absolute joy to behold."

3M has long been synonymous with innovation. Founded in 1902 as the Minnesota Mining & Manufacturing Co., it has deployed a range of practices to promote out-of-the-box thinking.

Long before Google (GOOG, Fortune 500) gave its engineers one day a week to pursue their own ideas, 3M let its researchers do the same with up to 15% of their time. Several years ago folks in the company's infection-prevention division decided on their own to see whether 3M's Littmann electronic stethoscopes could be wirelessly connected. Last year 3M introduced the first electronic stethoscope with Bluetooth technology. It allows doctors and med students to listen to patients' heart and lung sounds as they go on rounds and then transfer those sounds to software programs for deeper analysis.

In another unusual practice, 3M awards annual Genesis Grants, worth as much as $100,000, to company scientists for research. The money is allocated by their peers and is spent on projects for which "no sensible, conventional person in the company would give money," says Chris Holmes, vice president of 3M's abrasives division.

Management efficiency came at a cost to creativity
Despite such practices, many inside and outside 3M, including Buckley, think 3M lost some of its creative juice under James McNerney, the acclaimed GE alum who led the company from 2001 to 2005 and is now CEO of Boeing (BA, Fortune 500). It's not that McNerney, the first outsider to run 3M, did a poor job. The company had become sluggish, and McNerney whipped it into shape. He streamlined operations, laid off 8,000 people, and imported Six Sigma management techniques, popularized by GE, to analyze processes, curb waste, and reduce defects. "He brought the discipline and the focus on execution we needed," says Mark Colin, who oversees a 3M business that makes products for mobile devices. Earnings grew, margins improved, and shareholders cheered.

But the efficiency gains came at a price. Scientists and engineers griped that McNerney, an MBA, didn't understand the creative process. Six Sigma rules choked those working in the labs. "It's really tough to schedule invention," says Craig Oster, a mechanical engineer who has been with 3M for 30 years. (Boeing said McNerney would not be available for comment.)

Why is that important? Because as 3M's older products grow outmoded or become commodities, it must replace them. "Our business model is literally new-product innovation," says Larry Wendling, who oversees 3M's corporate research. The company, as a result, had in place a goal to generate 30% of revenue from new products introduced in the past five years. By 2005, when McNerney left to run Boeing, the percentage was down to 21%, and much of the new-product revenue had come from a single category, optical films. (3M also has a history of acquisitions and has announced deals recently.)...MORE
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