Climateer Investing

Tuesday, April 27, 2010

Earnings Heads-up: Allstate Insurance (ALL)

The company will be releasing numbers tomorrow after the close.
Although it ended down 4.40% at $33.27 on Tuesday there was an odd little item in the Wall Street Journal regarding Monday's action:

...Trading in Allstate rose to five times the normal level as investors picked up 75,000 calls and just 2,000 puts, according to Trade Alert. Calls convey the right to buy a stock, while puts convey the right to sell it.

A good chunk of the volume took place midway through the session, when one trader took steps to adjust a bullish position in Allstate's July contracts. After backing out of July $37 calls, which had been acquired in previous sessions, the trader purchased July $40 calls.

With the shares advancing more than 20% since early February, the trader appeared to be cashing out of a bullish bet, while retaining hope that the stock can rise even higher.

Allstate shed 39 cents, or 1.1%, to $34.80 on the NYSE. The company is to report first-quarter earnings on Wednesday....

"Auriga Sees First Solar Entry Point Coming" (FSLR)

As a follow-up to "Earnings Heads-up: "Bachman and Stone - Contrasting Views on First Solar Q1 Earnings for Tomorrow" (FSLR)", a bit more detail on Auriga's Mark Bachman's comments.

From Benzinga:

Auriga analyst Mark W. Bachman maintained his Hold rating and $143 price target for shares of First Solar, Inc. (Nasdaq: FSLR).

Bachman wrote that he thinks Wall Street estimates are overestimating First Solar's 1st quarter revenue, while underestimating the company's 2nd quarter prospects.

The analyst said that he believes the stock will fall after First Solar reports its 1st quarter financial results and that it will be a good entry point, as the stock should go up 3 months later when First Solar releases its 2nd quarter results.
Auriga analyst wrote, "we continue to believe the Street is being too pessimistic with regard to 2H10 module demand and First Solar’s pricing power, and is underestimating both revenue and EPS in 2010. We are $87 million in revenue and $0.34 in EPS above the Street and expect consensus estimates to move higher as the 2H10 demand picture begins to solidify....MORE

Earnings Heads-up: "Bachman and Stone - Contrasting Views on First Solar Q1 Earnings for Tomorrow" (FSLR)

UPDATE II: I forgot to add, FSLR earnings will be released after the close Wednesday. The stock is trading down a couple bucks at $129.95.
UPDATE: "Auriga Sees First Solar Entry Point Coming" (FSLR)"'

Original post:
You'll find some backround in the April 9 post "First Solar Earnings Seen Bottoming in 2Q" (FSLR)"'

Regarding the two analysts, we have this from March 19th's "SunPower Maintained at Outperform at Cowen - Cut EPS Forecasts (SPWRA)":

Cowen's Mr. Stone has not been on his game recently. Here's SPWRA compared to the NASDAQ and Claymore’s Global Solar Energy Index (TAN), over the last six months (from BigCharts):

Back on January 15 we posted "Cowen’s Stone Weighs in on Solar Sector - Thinks Stocks Are Oversold on Concerns About German FIT (FSLR; SPWRA; TAN; TSL)". The solar's have dramatically underperformed. He maintained an "Outperform" on FSLR as that stock dropped from $142.66 in mid-December to $98.71 on Feb. 25, 2010....

Whereas we treated Mr. Bachman a bit gentler in "Auriga Picks Up Solar Coverage on Eight Stocks; Assigns Buys to TSL, YGE and SOLF"':

Mark Bachman has been one of the better solar analysts.*
I didn't know that he had left Pacific Crest.
Or that he started spelling his name with a "C"....

Here's the latest, from SmallCapPulse:

Analyst Comments – Auriga’s Mark Bachman said this morning that he things the Street is still overestimating First Solar’s (Nasdaq:FSLR) 1H revenue while underestimated 2H results. He thinks “the Street will fix its mistake following the Q1 earnings call on Wednesday” but the news will put some short-term pressure on the stock. A contrasting view comes from Cowen’s Rob Stone, who expects Q1 results “in-line to slightly above the Street.”
Bachman’s Takeaways:

· Estimates “materially different from consensus” with Q2 revenue projection $78 million below the Street, and EPS $0.47 below the Street. Gross margin should approach 49%. Thinks First Solar is in for near-term pressure on the stock after the company reports tomorrow after the close.

· Maintains HOLD rating and $143 price target, 19x FY11 EPS of $7.52.

Stone’s Takeaways:

· Revised model for more H2-weighted 2010 and weaker Euro in 2011-13. Sees EPS in-line to slightly above Street estimate of $1.65 on $546 million in revenue, but the Street looks a bit high for Q2....MORE

"Goldman Bulls Emerge in Options Trades" (GS)

With the hearings underway you are getting as close to real-time reactions as I care to see.
The stock is trading up $1.67 at $153.70.
From MarketBeat (4:29 p.m. MONDAY):

Shares of Goldman Sachs have lost 17% since the SEC announced civil fraud charges against the bank, but a few options traders are willing to bet the stock can recapture a good chunk of those losses in the coming weeks.

Following a steep loss on April 16, the day the SEC announced its charges, shares of Goldman Sachs have come under added pressure as the bank faces lawsuits from shareholders alongside efforts on Capitol Hill to step up regulation of the financial industry.

In options, however, a few traders are showing faith in Goldman’s stock through “butterfly spreads” in Goldman’s near-term options.

One trader, for example, showed up midway through the session Monday to pursue a butterfly in Goldman’s June options, buying June $160 calls and June $180 calls (the “wings” of the butterfly) while selling twice as many June $170 calls (representing the “body” of the butterfly trade).

Priced at $1.50, the overall position makes money if Goldman Sachs rallies above $161.50 before the options expire on June 18. It works best, however, if the stock reaches $170....MORE

More on the KBW Downgrade of AIG (and $6.00 price target) AIG

Following up on "AIG Is ‘Grossly Overvalued,’ Lowered to ‘Underperform’ by KBW". The stock is trading down 6.40% at $41.66.
From Notable Calls:

Keefe Bruyette & Woods is downgrading American International Group (NYSE:AIG) to Underperfrom from Market perform with a $6 target.

Rate the Shares Underperform. From a fundamental perspective, KBW views that AIG continues to own some very valuable businesses, however, in its totality, under the current operating and financial structure, they view that the publicly traded shares are grossly overvalued. They would caution investors that due to the highly volatile nature in which the shares trade, a short-term position in the shares, long or short, is highly speculative.

No Real EPS. KBW expects no net real EPS near term. After liquidity needs are met, they expect that earnings generated by the underlying operations are obligated to be used to make Series E dividend payments. While the company may report positive EPS, the firm believes these earnings cannot be valued in the normal sense because these earnings do not accrue to the common shareholder but to the preferred shareholder.

The False Premise of Tangible Book Value
In normal equity analysis, tangible book value is a natural starting point. Tangible book value is viewed to be a measure of the store of value created by a company over time, or an approximation of a run-off value. However, AIG’s capital structure is so unusual that we believe it does not fall under this definition. Would AIG be in business today without government aid? Or consider the CEO's public admission that selling all of the pieces of AIG would not be enough to fully repay AIG's debts. Doesn't this imply negative real worth, despite a positive book value calculation?

They illustrate the difference in capital structure between AIG and a typical insurer above. The typical insurer, P&C or life, carries debt loads at 20-30% debt-to-total capital....MUCH MORE
Notablecalls: As Keefe points out much of AIG's fate hinges on what the Government thinks about the situation and also how well the asset sales will go.

Note that this morning Times Online is reporting that Prudential’s biggest shareholder has been moving behind the scenes to orchestrate a potential break-up of the insurer as a radical alternative to its $35.5 billion Asian AIA acquisition.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7108969.ece

This should create additional uncertainty regarding the whole AIG situation and rhymes rather well with the current KBW downgrade.

I think AIG will trade down today, maybe to the tune of 6-7%, putting at least $42 level in play.

"AIG Is ‘Grossly Overvalued,’ Lowered to ‘Underperform’ by KBW"

UPDATE: "More on the KBW Downgrade of AIG (and $6.00 price target) AIG"
Original post:
Keefe, Bruyette and Woods appears to have developed a specialty in the "Government Owned Entities".

We covered their thinking on Fannie and Freddie in "KBW says Fannie, Freddie common shares worthless", "Fannie, Freddie shares dive on zero-value prediction" and "Fannie's And Freddie's Last Man Standing".

Here's the latest, from Bloomberg:

American International Group Inc., the insurer rescued by the U.S., was cut to “underperform” by KBW Inc. on the prospect that meeting government obligations will wipe out most of common shareholders’ value.
“The publicly traded shares are grossly overvalued,” said Cliff Gallant, a KBW analyst, in a note to investors today. “Under the current ownership and capital structure, we see little long-term value in the common shares.” Gallant said he expects AIG to fall to $6 in 12 months, compared with yesterday’s closing price of $44.51.

AIG turned over a stake of almost 80 percent to the U.S. in the 2008 bailout that swelled to $182.3 billion. The New York- based insurer has missed four rounds of dividend payments on a Treasury Department investment of more than $40 billion in preferred shares. Gallant said the Treasury is entitled to a 10 percent annual dividend from AIG, which posted a fourth-quarter loss of about $8.9 billion.

“Even if AIG does report earnings, the income will not be accruing to the common shareholder,” Gallant wrote. “After liquidity needs are met, AIG has a legal obligation to the preferred owners to pay this dividend, effectively eliminating any real earnings per share.” Gallant previously rated AIG “market perform.”>>>MORE

Société Générale's Albert Edwards: "Global economy to roll over in six to nine months’ time; bearish for shares"

We are fans.*
From Credit Writedowns:

SocGen’s Albert Edwards was out with a note today which is in line with my calls for a marked slowing of the economy toward the end of this year. He indicates that the rate of change in leading indicators in the real economy and in markets is rolling over right now. Edwards writes that this suggests softness in six-to-nine months (hat tip Scott).
I like his analysis because it depends on first derivatives or the rate of change rather than absolute levels which are misleading at turning points (see Has the increase in U.S. jobless claims peaked? from March 2009 for an example of first derivatives presaging the end of recession). Remember, a recession begins from a cyclical peak in economic activity. So, the economy is rising until that point. Analysts looking at absolute levels only will miss the slowing in the rate of change.
Edwards writes:
I have had a few e-mails recently about some of the key leading indicators reaching new cyclical highs last week, and what this means for our view. To be sure, the latest weekly reading for the Economic Cycle Research Institute (ECRI) key lead indicator reached a 99 week high. That, at first sight, looks very bullish for the continuation of this cyclical upturn. However, as with all of these lead indicators, it is the rate of change that is important. The ECRI also report a smoothed annual change in their index. Last week that slipped to +12.5% yoy, which is a 37-week low (see chart below). Now one doesn’t want to be too armageddonish at this stage, but this is clear evidence that in 6-9 months time there will be a discernible slowdown in the economic recovery from its recent moderate pace.
The same dynamic is true for the OECD and Conference Board leading indicators as well – as it is for the change in analysts’ global EPS optimism, which is rolling over and leading the OECD indicator down....MORE

*Mr. Edwards is one of our favorite gloomsters.

Our most recent visit was April 16th's "Société Générale's Albert Edwards: "We Are Now Only One Cyclical Downturn Away From Outright Deflation"'

Previous to that was the Feb. 24 "Société Générale's Albert Edwards: "Stocks Face ‘Ice Age’ Drop as Indicators Peak..." Euro to $1.25; We're all Doomed"

He, unlike fellow depressives Roubini or David Rosenberg Albert is amusing as he shares his despondent vision. And often right.

The following three calls were almost uncanny:

May 8, 2008
This Week’s Advice: Canned Food, Guns and a Ham Radio

June 26, 2008
Société Générale: “We see a y-shaped global recession. We are going down before looping backwards”

September 5, 2oo8
"Meltdown"-Société Générale

If you note the date of that last one, it came out two days before the government seized Fannie and Freddie, nine days before Bank of America bought Merrill Lynch for a song, ten days before Lehman Brothers filed for bankruptcy, eleven days before the first $85 Billion in bailout loot went to AIG and 21 days before $307 Billion in assets Washington Mutual was seized by the FDIC.

Finally Mr. Edwards introduced us to a possible graphic for the economic recovery in our June 4, 2009 post "Société Générale's Albert Edwards, über Bull":

An Armenian K:

Monday, April 26, 2010

"Vatican-backed ethical index given baptism"

I hope it works better than the Church of England's adventures in hedge funds and StuyTown.
Goldman Sachs' "We're doing God's work" CEO Lloyd Blankfein was not available for comment.
From the Financial Times:

Europe’s first Christian equity index was launched on Monday in response to increasing demand by investors for so-called ethical stocks in the wake of the financial crisis.

The Stoxx Europe Christian Index comprises 533 European companies that only derive revenues from sources approved “according to the values and principles of the Christian religion”.

BP, HSBC, Nestlé, Vodafone, Royal Dutch Shell and GlaxoSmithKline are among the companies in the index. Only groups that do not make money from pornography, weapons, tobacco, birth control and gambling are allowed to be listed.

A committee, which Stoxx says includes representatives of the Vatican, screens shares, which are drawn from the Stoxx Europe 600 Index.

Hartmut Graf, chief executive of Stoxx, said: “There has been more and more investor demand for a transparent index that helps funds buy stocks of companies that are religiously compliant and make revenues in line with Christian values.”

Mark Robertson, communications manager at Eiris, the ethical research group, added: “Since the financial crisis and following a great deal of controversy over how many financial institutions have made money, many more people want to invest in an ethical way.”

Some of the world’s biggest investment funds, such as Aviva Investors, Axa Investment Managers and Henderson Global Investors, have set up ethical funds in recent years in response to investor demand.

The Catholic Church and the Church of England are also seeking fresh ways to invest....MORE

Previously:

Stuyvesant Town Peter Cooper Village: "Church of England counts cost of New York property deal"
Church of England could lose [$35 Mil.] in StuyTown

Hedge funds win Church of England blessing (no new comments on 'Bank Robbing Traders')
Archbishop of Canterbury Tells Bankers to Repent
Short-Sellers `Clearly Bank Robbers,' Says Archbishop
Church of England accused of short-selling after its attack on 'bank robbing' traders

What would Jesus short?

From Ekklesia, Nov. 6, 2008:

Church of England faces investment gloom

The Church of England is expected to be praying for a big interest rate cut this morning from the Bank of England, as it faces further gloom over its investments.

The Church Commissioners had £13m invested in Man Group at the end of last year, the largest listed hedge fund manager. However, this morning the company was down 30% in early trading after its profits slumped - potentially wiping £4 million off the value of the Church's investment, overnight.

"Goldman Needs New Leaders; Citi Could Hit $8.50: Bove" (C; GS)

From CNBC:

Goldman Sachs and Citigroup stocks remain good opportunities for investors despite obstacles both companies face, analyst Dick Bove told CNBC....
...Citi continues its rebound and could see its shares nearly double in price to $8.50, said Bove, banking analyst for Rochdale Securities.
"If you're looking at the fundamentals alone, the stock should be a buy," he said.
As for Goldman, Bove said the stock remains a buy even as it needs a management change....MORE

It's baaack!: "Ethanol producer gets national attention, presidential visit"

In March I started posting on ethanol after a considerable hiatus (links below).

The essence of the argument takes about one hundred words. From last week's "Ethanol Makes A Comeback" (GPRE; ADM; PEIX; VLO)":

...The profitability of the ethanol business depends on the so-called crush spread, the price difference between a gallon of ethanol and the corn that goes into it. The crush spread got crushed. In November 2008 VeraSun, a high-flying new issue from 2006 and then the second-largest producer of fuel ethanol, filed for bankruptcy. In May 2009 Pacific Ethanol, (PEIX) a producer funded by Bill Gates' Cascade Investments, followed suit. Aventine Renewable Energy also collapsed that spring.
What didn't change was the federal mandate. The U.S. consumes 138 billion gallons of gasoline per year. The government has decreed that "renewable" sources contribute 13 billion gallons in 2010, rising to 14 billion next year and reaching 20.5 billion in 2015...

POET is privately held.
From the Houston Chronicle's NewsWatch: Energy blog:

The world's largest ethanol producer is ramping up its national profile, with television commercials running coast to coast, news conferences in the nation's capital and presidential drop-bys.

Sioux Falls, S.D.-based Poet launched the television advertising campaign earlier this month. The commercials are a riff on the company name, because they feature employees singing the praises of ethanol in free verse.

Last week, the company's CEO, Jeff Broin, visited the National Press Club to declare Poet was on track to produce 3.5 billion gallons of cellulosic ethanol by 2022, following construction of a plant in Emmetsburg, Iowa that could begin production by 2012. The company already has 26 ethanol plants in seven states.

Now, the company is preparing for a chance to show off its corn-based ethanol production process to the commander-in-chief. President Obama is slated to visit the Poet Biorefining plant in Macon, Mo., on Wednesday.

The visit is part of a "White House to Main Street" tour that will also take Obama to Iowa and Illinois.

While in Missouri, Obama will get a chance to tour the Poet facility -- the first ethanol plant in the state -- which is capable of producing 46 million gallons of the fuel annually....

More on Buffett's Grandfather Clause in the Derivatives Bill (BRK.B; BRK.A)

In this morning's "Buffett Wants Grandfather Clause for Derivatives" (BRK.B) I said I'd be back with more. First some history.
The earliest mention of a simple derivative, an option, that I am aware of is found in Aristotle's "Politics", circa 350 B.C.E..
MIT's Internet Classics Archive uses the Benjamin Jowett translation.
From Book One part XI:

Enough has been said about the theory of wealth-getting; we will now proceed to the practical part. The discussion of such matters is not unworthy of philosophy, but to be engaged in them practically is illiberal and irksome.

The useful parts of wealth-getting are, first, the knowledge of livestock- which are most profitable, and where, and how- as, for example, what sort of horses or sheep or oxen or any other animals are most likely to give a return. A man ought to know which of these pay better than others, and which pay best in particular places, for some do better in one place and some in another. Secondly, husbandry, which may be either tillage or planting, and the keeping of bees and of fish, or fowl, or of any animals which may be useful to man. These are the divisions of the true or proper art of wealth-getting and come first.

Of the other, which consists in exchange, the first and most important division is commerce (of which there are three kinds- the provision of a ship, the conveyance of goods, exposure for sale- these again differing as they are safer or more profitable), the second is usury, the third, service for hire- of this, one kind is employed in the mechanical arts, the other in unskilled and bodily labor. There is still a third sort of wealth getting intermediate between this and the first or natural mode which is partly natural, but is also concerned with exchange, viz., the industries that make their profit from the earth, and from things growing from the earth which, although they bear no fruit, are nevertheless profitable; for example, the cutting of timber and all mining. The art of mining, by which minerals are obtained, itself has many branches, for there are various kinds of things dug out of the earth. Of the several divisions of wealth-getting I now speak generally; a minute consideration of them might be useful in practice, but it would be tiresome to dwell upon them at greater length now.

Those occupations are most truly arts in which there is the least element of chance; they are the meanest in which the body is most deteriorated, the most servile in which there is the greatest use of the body, and the most illiberal in which there is the least need of excellence.

Works have been written upon these subjects by various persons; for example, by Chares the Parian, and Apollodorus the Lemnian, who have treated of Tillage and Planting, while others have treated of other branches; any one who cares for such matters may refer to their writings.

It would be well also to collect the scattered stories of the ways in which individuals have succeeded in amassing a fortune; for all this is useful to persons who value the art of getting wealth.

There is the anecdote of Thales the Milesian and his financial device, which involves a principle of universal application, but is attributed to him on account of his reputation for wisdom. He was reproached for his poverty, which was supposed to show that philosophy was of no use. According to the story, he knew by his skill in the stars while it was yet winter that there would be a great harvest of olives in the coming year; so, having a little money, he gave deposits for the use of all the olive-presses in Chios and Miletus, which he hired at a low price because no one bid against him. When the harvest-time came, and many were wanted all at once and of a sudden, he let them out at any rate which he pleased, and made a quantity of money. Thus he showed the world that philosophers can easily be rich if they like, but that their ambition is of another sort....

Thales lived c. 624 BC to c. 547 BC.
There is no record of whether he and Warren got together for a game of bridge and a Dairy Queen Blizzard® after cornering the olive press market.

From the Wall Street Journal comes word that the exemption is dead:

Democrats to Kill Derivatives Provision Pushed By Berkshire

Senate Democrats agreed Monday to kill a provision from their derivatives bill pushed by Berkshire Hathaway that would have allowed the company to avoid a significant financial hit, people familiar with the matter said.
Sen. Ben Nelson (D., Neb.) initially helped push the provision into a bill passed by the Senate Agriculture Committee last week. It would have prohibited the government from requiring companies to hold collateral against their existing derivatives trades. The change would have aided Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.

Berkshire Chief Executive Warren Buffett has been able to use the company's strong financial position to post little collateral against its big derivatives portfolio, freeing up capital for investing elsewhere.

The provision's demise is a blow to Berkshire Hathaway, which had lobbied strongly for its inclusion, and could bring challenges from other companies who contend Congress can't force them to amend the terms of existing contracts....MORE

"...Pork Signals Record Meat Prices" and China's Strategic Pork Reserve (SFD)

I just threw Smithfield's symbol into the headline, neither story directly mention's the country's largest hog and pork producer. We first mentioned the Strategic Pork Reserve in an October 2007 post "Is China Going to Own the World?".
First up the Wall Street Journal's ChinaRealTimeReport:

The Vital Role of China’s Pork Prices

While property values go through the roof in China, the price of an important consumer staple is plunging: pork. It’s roiling farmers, but making some economic policymakers quite happy.

Pork prices have fallen 14 weeks in a row according to China’s Ministry of Agriculture, their lowest level in four years, and cheaper even than some vegetables. In the first week of April, the average hog price was 9.43 yuan ($1.38) a kilogram.

The porcine price plummet has forced the government to add to its much vaunted frozen pork reserve, a series of icy warehouses around the country it set up a few years ago to stabilize pork prices.

One Chinese press report, citing government statistics, says live pig prices have dropped 21% this year. Another report says pork prices have fallen below the lowly lentil. (In Chinese)

The hope is that by adding to the frozen pork hoard, the government demand will take enough meat off the market to drive prices back up.

Why does the government want higher prices? Farmers are complaining. According to several stories in the Chinese press too many slaughtered pigs are coming to market, driving farmers to despair.

Pork plays a vital role in China’s commerce. There are almost half a billion pigs in China, one for every three people. In gross terms, like in humans, China dwarfs other countries in pigs. And there’s no India of pigs to rival China. The next biggest producer is the U.S., which has 65 million pigs, according to the United Nation’s Food and Agriculture Organization. In fact China produces more pigs than the next 43 pork producing countries combined.

The cause of the recent glut of pigs was a reaction to a shortage just a few years ago. An epidemic of blue pig ear disease wiped out pigs across the country and sent pork prices skyrocketing, leading inflation to dangerous levels. The virus attacks pigs’ reproductive systems....MORE

From Bloomberg:

Carnivores’ Dilemma Widens as Pork Signals Record Meat Prices

U.S. meat prices may rise to records this summer after farmers reduced hog and cattle herds to the smallest sizes in decades, the result of surging feed costs linked to demands for more ethanol.
Wholesale pork jumped as much as 25 percent this month to 90.68 cents a pound last week, the highest since August 2008, U.S. Department of Agriculture data show. Beef climbed 22 percent this year to $1.6896 a pound on April 23, the most expensive since July 2008. Chicken’s gain in March was the most in 20 months.

Demand for pork chops, steaks and chicken breasts is rising as the economy improves, backyard barbecues resume and China and Russia allow more U.S. imports. Domestic supplies may drop to a 13-year low because of culls to stem losses caused by corn prices that doubled after former President George W. Bush set targets to increase ethanol use.

“Ethanol-induced prices in meat are just now getting to the marketplace,” said Steve Meyer, the president of Paragon Economics, a meat industry consultant in Des Moines, Iowa. “Consumers are going to see the highest prices they’ve ever paid in meat and poultry because of the decisions made to make corn into ethanol.”

Hog futures have almost doubled from a low in August to 85.175 cents a pound on the Chicago Mercantile Exchange on April 23. The price may reach $1 by June, said Tom Cawthorne, director of hog marketing at broker R.J. O’Brien & Associates in Chicago. CME cattle jumped 14 percent in the past year.

Meat-Price Outlook

Retail prices may hit records in the next 90 days as U.S. demand peaks during summer grilling season, said John Nalivka, a former USDA economist and the president of meat consultant Sterling Marketing Inc. in Vale, Oregon. The previous records were in 2008 for pork at $3.026 a pound in September, based on monthly averages tracked by the USDA since 1970, and for beef at $4.526 a pound in August. Chicken’s peak was $1.857 a pound in May 2009...MUCH MORE

"Buffett Wants Grandfather Clause for Derivatives" (BRK.B)

UPDATE: "More on Buffett's Grandfather Clause in the Derivatives Bill (BRK.B; BRK.A)".
Original post:
We'll have more on this later today. From DealBook:

As Democrats moved closer to an overhaul of financial regulations Sunday, The Wall Street Journal reported that Warren Buffett — the man who once branded derivatives as “financial weapons of mass destruction” — has been fighting against the deal.

Mr. Buffett’s company, Berkshire Hathaway, has been lobbying for changes to the overhaul that would prevent his finances from being overly impacted by the bill, The Journal said.

Berkshire would like a provision to the bill ensuring that existing derivative contracts would not be affected by the proposed rules. Berkshire has $63 billion worth of derivatives on its books, according to Barclays Capital, The Journal reported....MORE

Market Ticker is grumpy:

Here Come The Hypocrites! (Berkshire)

That didn't take long...

WASHINGTON—Democrats took a step toward their goal of overhauling financial regulation, reaching a tentative deal to set restrictions on trading in exotic financial instruments known as derivatives.

Among the considerations still in the balance: A big provision being sought by Warren Buffett in recent weeks. A key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Mr. Buffett's Berkshire Hathaway Inc., potentially helping the famed investor avoid a financial hit, congressional aides say.

I thought these were weapons of financial mass destruction Warren?

What's the problem? You don't want to be forced to recognize the economic and accounting reality of your transactions? I don't see why that should be a problem.

Posting margin on underwater positions is a reality for everyone who trades on margin - and you do a lot of it. There's no reason why anyone - you included - should not have to put forward margin - in cash - just like everyone else.

Yeah, I know, Berkshire is "Strong". So what? That's not material to the point at hand, which is that when you are short a "PUT", which is effectively what you are, and the position is underwater, you should be required to post margin!

Reliance on "future economic strength" to avoid this requirement is a big part of why the system nearly blew up. You were a part of it writing those contracts, and you now want to be exempted from safety and soundness requirements on something you identified - in public - as a dangerous practice.

Sorry, but no.

The provision, sought by Berkshire and pushed by Nebraska Sen. Ben Nelson in the Senate Agriculture Committee, would largely exempt existing derivatives contracts from the proposed rules. Previously, the legislation could have allowed regulators to require that companies such as Nebraska-based Berkshire put aside large sums to cover potential losses. The change thus would aid Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.

Why should you be exempt on an underwater position? This is a cash margin deposit and secures your performance. As the position comes back into the money (if it does) for Berkshire the margin requirements would disappear.

Of course if you're wrong and the contracts do not come back into the money, then your margin becomes a realized loss.

That's the real problem that is being addressed here - the possibility that these "margin deposits" become not speculative but rather realized losses. Berkshire could avoid this by declaring bankruptcy if it was to run into trouble in the future sticking the holder of these PUTs with the inability to collect....

Al Gore, No Score! "Johnson Control Upgrading to Outperform – Well Positioned for Cyclical Recovery - Baird" (JCI)

Mr. Gore's Generation Investment Management held a pretty big chunk of JCI through the downturn but apparently sold the last 1,810,352 shares during the fourth quarter. Here's G.I.M.'s most recent 13F. For comparison purposes here's the Nov. 10 filing.
In pre-market action the stock is up $0.87 at $35.37.
From Notable Calls:

Baird is upgrading Johnson Control (NYSE:JCI) to Outperform from Neutral while raising their price target to $42 (prev. $33). Firm says JCI could be a $60 stock in 3-4 yrs time.

Firm notes that while they have been chasing the stock higher in recent months, it has outperformed the market by only 3% since its last earnings report and has been lagging the industrials sector of the S&P 500. This is one of the best business models in the automotive space with a well-diversified revenue steam across end markets and geographic regions. With automotive now less than one-half of revenue and one-fourth of profits, investors have increasingly viewed and valued the stock as an industrial.

The catalysts behind their upgrade are:

Rapid Profit Recovery: The company’s second fiscal quarter (March) was a record for any second quarter. Contributing to this was strong recovery in revenue, up 32%, driven by Interior Experience and Power Solutions along with parts of Building Efficiency (residential and Global Workplace Solutions). Additionally, margin recovery was significant driven by cost-cutting, volume and equity income from China in Interior Experience along with volume and productivity in Power Solutions and Building Efficiency.

Strong Growth in China: Strong economic activity in China is driving strong results across all business units; most of these investments are in minority-owned joint ventures with the profit growth most visible in the equity income line. Interior Experience is benefiting from the strong automotive demand and dominant market share. Power Solutions has a leading share of the OEM battery market and emerging end market demand bringing more advanced battery technology to this market. The Building Efficiency business is also well positioned....MORE

...Notablecalls: Nice call, my only question is - will Baird have the power to move the stock? JCI traded 11 million shares on Friday.

Otherwise the chart looks good, close to breaking to new highs.

$35.50 is the line in the sand. It will get there but will it be surpassed?

"U.S. Treasury to Sell 1.5 Billion Shares of Citigroup Stock" (C)

UPDATE: "Goldman Needs New Leaders; Citi Could Hit $8.50: Bove" (C; GS)"
Original post:
In early pre-market the stock is down 9 cents at $4.77. Average daily volume for Citi is 579,780,000 shares.
From Bloomberg:

The U.S. Treasury Department plans to sell “up to” 1.5 billion shares of Citigroup Inc. in the government’s biggest step yet to exit the 27 percent ownership of the bank it rescued during the financial crisis.
The Treasury will give its agent, Morgan Stanley, “discretionary authority” to sell the amount, and expects to give clearance to sell additional shares thereafter, the department said in an e-mailed statement today. “Treasury will begin selling its common shares in the market in an orderly fashion under a pre-arranged written trading plan.”

The deal is part of a goal announced last month of selling about 7.7 billion shares the government received as part of New York-based Citigroup’s participation in the $700 billion Troubled Asset Relief Program. President Barack Obama is aiming to recoup “every single dime” of taxpayer money from the TARP fund after popular opposition to the Wall Street bailout.

“We’re putting TARP out of its misery,” Treasury Secretary Timothy F. Geithner said in an interview with CNN television aired yesterday. “This is going to cost us much less in fiscal terms than even the S&L crisis,” he said, referring to the collapse of savings and loan banks in the 1980s and 1990s.

Geithner said the government is withdrawing from the financial industry after forcing lenders to “recapitalize with private money.”

SEC Filing

Citigroup has filed a prospectus supplement on the sale with the Securities and Exchange Commission, the Treasury said in today’s statement. The department received the shares last year in exchange for $25 billion in preferred stock, at a price of $3.25 per common share. Citigroup closed at $4.86 on the New York Stock Exchange on April 23....MORE

Here's the 424b2 supplement to the Feb. 19 prospectus.

Friday, April 23, 2010

Climateer Line(s) of the Day: Greece Calls for Activation of Bailout Edition

Here's this morning's headline at the New York Times:

Greece Calls for Activation of Financial Rescue

And here are some of the Twitter comments at MarketTalk:

4:55 So Greece surprises absolutely nobody and calls for "activation of the support mechanism."
What is this, an episode of Star Trek?

4:56 Mr. Scott, you have to activate the support mechanism in three minutes or we're all dead!

4:57 Cap'n, no starship has ever activated a support mechanism in three minutes.
I canna change the laws of physics, Cap'n!

4:57 Jim, you activate that support mechanism now you're liable to blow up the whole ship!

4:58 If we don't activate the support mechanism now, Doctor, the ship will blow up anyhow.
Logically, there is no choice.

"Derivatives bill calls for US carbon market study" (GS)

I don't care how many safeguards the politicos put in place, the traders are smarter and more creative. Before it imploded, Lehman Brothers, a bunch of thieving whores from the top down, was one of the prime cheerleaders of cap & trade and a member of USCAP.

If you think you are going to corral Goldman in this most artificial of markets you're "420".

From Reuters:

Agency heads would send report to Congress

* Study would include existing and prospective markets
* Senate climate bill unveiling expected Monday
WASHINGTON, April 22 (Reuters) - A tough new proposal to regulate U.S. markets calls for top regulators and government officials to conduct a study on transparency in emerging U.S. carbon markets as part of the financial reform package.
The heads of the Treasury Department, the Commodity Futures Trading Commission and other U.S. agencies would be required to study oversight of existing and prospective carbon markets, according to the proposal, part of a bill passed by the Senate Agriculture Committee this week.
The goal of the study is "to ensure an efficient, secure, and transparent carbon market, including oversight of spot markets and derivative markets," the bill said.
Senator Blanche Lincoln's Agriculture Committee voted to advance the bill this week. It will be merged with the Senate Banking Committee's financial reform package, expected to be debated next week, which will likely include a crackdown on the unregulated $450 trillion derivatives market.
Emerging carbon markets are either voluntary or regional because the U.S. government does not limit emissions of gases blamed for warming the planet, considered a requirement before the launch of a national market.
Ten states in the U.S. Northeast operate a carbon market on power plants. In addition, the Chicago Climate Exchange (CLIE.L) also runs voluntary carbon markets.
Some critics of carbon markets say that not all of the credits that are traded in them represent true emissions reductions....MORE

"Power companies abandoning coal" (CPN; PGN; SO)

Eventually good for the natgas crowd.
From the Houston Chronicle's NewsWatch Energy blog:

More power companies are favoring natural gas or other emissions-friendly fuels over coal, because of tighter clean-air rules and big gas finds, the WSJ reported.

Houston's Calpine Corp. is the latest to announce plant conversions, the WSJ said. Wednesday the power producer said it is buying 19 power plants from Pepco Holdings for $1.65 billion. The plants are mostly natural gas and two of the coal fired plants will be converted to natural gas, Bloomberg said.

The deal gives Calpine access to a clean fleet that will boost margins, entry to the Pennsylvania, New Jersey and Maryland markets and a more diverse portfolio.

Calpine's CEO told the WSJ that it didn't want to burn coal because it prides itself on having a clean portfolio of plants powered by gas or renewable energy.

Other big utilities planning to convert their coal-fired plants are North Carolina's Progress Energy and Atlanta's Southern Co.

Progress is shutting down 11 coal plants by 2017 and building new gas-fired ones at two of the four sites. Southern plans to convert a power plant in Georgia from coal to biomass or wood waste, the WSJ said. It's also building three new gas-fried plants at its McDonough plant to retire the coal units....MORE

"Ethanol Makes A Comeback" (GPRE; ADM; PEIX; VLO)

From Forbes:

That bountiful corn crop is going to turn into profits for Green Plains Renewable and others.

One of the hit songs from the 1943 Rodgers and Hammerstein musical Oklahoma! describes corn that is "as high as an elephant's eye." It's not a bad image for the 2009 corn harvest, 13.1 billion bushels plucked off 86 million acres. This was not entirely a blessing for farmers, since bumper crops come with depressed prices. But it was good news for the beleaguered ethanol industry.
Thanks to congressional politics, the corn ethanol industry has been through a dramatic boom and bust in recent years. Initially favored by Senator Robert Dole and then promoted as a self-sufficient "green" source of energy independence, ethanol may or may not make the atmosphere more carbon-free. What is not in doubt is that it is federally required....
...The profitability of the ethanol business depends on the so-called crush spread, the price difference between a gallon of ethanol and the corn that goes into it. The crush spread got crushed. In November 2008 VeraSun, a high-flying new issue from 2006 and then the second-largest producer of fuel ethanol, filed for bankruptcy. In May 2009 Pacific Ethanol, (PEIX) a producer funded by Bill Gates' Cascade Investments, followed suit. Aventine Renewable Energy also collapsed that spring.
What didn't change was the federal mandate. The U.S. consumes 138 billion gallons of gasoline per year. The government has decreed that "renewable" sources contribute 13 billion gallons in 2010, rising to 14 billion next year and reaching 20.5 billion in 2015....MORE

Insurance: Catastrophe! Travelers Reports- '“Weather had a big impact on our results,”' (TRV)

The stock is trading at $53.18, down 61 cents.
Bloomberg brought home the headline quote from TRV's CEO.
When we posted "Berkshire Hathaway's "Buffett Picks Insurer Cooperation Over Competition " (BRK-B; BRK-A)" on Feb 26 I said:

This is worth keeping an eye on. After a hurricane season with no U.S Atlantic or Gulf landfalls catastrophe bonds scored big and the reinsurers pocketed a bunch of premiums. The state of Florida's decision to self-insure also worked out.

This year may not have as favorable an El Nino/Southern Oscillation, I'll post the latest NOAA advisory after the headline story....

The question of course was:
Why is Mr. Buffett buying equity in reinsurers rather than writing the business himself?
The quick and dirty answer is: He likes to get paid for the risk.

As the May 1 BRK annual meeting appraoches I'll be posting snippets of Mr. Buffet's thinking on the insurance/reinsurance business. For right now take my word for the fact that the insurers are not getting paid for the risk they are assuming. That's why I headlined our April 19 post "Hurricane Watch: Thinking of Shorting the Property/Casualty Insurance Companies (AIG; ALL; BRK.B; CB; HIG; TRV)"

I'll leave this introduction with a quote from Berkshire's 2002 annual report. We arrive on the scene just as Warren and Charlie realize they just bought a big 'ol derivatives book and must reduce the risk:

...But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily).

In fact, the reinsurance and derivatives businesses are similar:
Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.

Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years....

Here's Bloomberg on Travelers travails:

Travelers Profit Declines 2.3% on Catastrophe Costs (Update3)

Travelers Cos., the property insurer added to the Dow Jones Industrial Average last year, said first-quarter profit dropped 2.3 percent as the cost of catastrophe claims increased more than fivefold.
Net income fell to $647 million, or $1.25 a share, from $662 million, or $1.11, in the same period a year earlier, the New York-based insurer said today in a statement. Operating income, which excludes some investment results, was $1.22 a share, missing the $1.38 average estimate of 19 analysts surveyed by Bloomberg.

Travelers, led by Chief Executive Officer Jay Fishman, 57, is competing for business with Chubb Corp. and American International Group Inc. as demand for commercial coverage drops and industry rates decline. At the same time, insurers face claims from first-quarter catastrophe damage including record rainfall in the U.S. Northeast.

“Weather had a big impact on our results,” said Brian MacLean, chief operating officer, in a conference call today. Travelers faced “a very active catastrophe quarter.”...
...‘A Terrific Bite’

Travelers has increased prices for renewing commercial policies to protect revenue as businesses cut jobs and worksites, reducing the need for coverage. Industrywide, U.S. property and casualty insurance sales dropped the most in five decades last year, according to the Property Casualty Insurers Association of America. Policy sales fell 3.7 percent to $419 billion, a third straight annual decline.

“The recession cut into many of the drivers of premium, things like retail sales, payrolls, the number of autos that get sold,” said Michael Murray, an assistant vice president for financial analysis at Verisk Analytics Inc. who collaborated on the study. “The recession took a terrific bite out of the demand for insurance.”...MORE

Previously:

Insurance: "Chubb Profit Gains 36% to $464 Million on Investments" (CB)
Where are the Catastrophe Bond Issuances? (BRK.B; BRK.B)
"Reinsurance Industry Approaches Record Levels" (BRK-B; BRK-A)
This is just a bookmark for a piece I had promised and not delivered, divining the insurance industry's thinking on global warming.
I put Berkshire in the title because in addition to being the world's third largest reinsurer they recently upped their stake in #1 ranked* Munich Re to 7.99%.

Berkshire Hathaway also owns 3% of Swiss Re and has 3Billion Swiss francs worth of some yummy 12% notes, convertible at 25CHF i.e. 120Mil. shares, current outstanding 354Mil.; last trade 52.35 CHF.

*Munich Re and Swiss Re have swapped the #1 ranking the last few years. We'll have the final 2009 tally by June.