Energy – dare to disagree with Goldman

Goldman came out with a note today encouraging clients to dumb their oil holdings and lo and behold, oil is down 4% – correlation, not necessarily causation, I know, but still. Remember the good ol’ days when oil was at $10? Anyway, let’s put today’s move in context (this is the weekly chart through yesterday):

Still quite a bit higher than the roughly $85 we saw at the beginning of the year, not to mention the beginning of 2009. Simultaneously, we have witnessed the energy sector pretty much single-handedly pull the equity markets up, with a 14+% return vs. the S&P 500′s 6% total return.

I actually don’t have much exposure to oil per se, but I’m definitely overweight energy. So why am I NOT selling my NLR and KOL and FCG like I did SLV yesterday and rotating into utilities or healthcare? For one, when you get in at a good price, you can withstand a lot of market volatility. Secondly, the fundamental reasons why I took a position in energy (political instability, risk of rising protectionism, risk of inflation, increased capital investments, solid balance sheet fundamentals, yield, etc.) are all still in place. It’s that simple.

Some might say that a global slowdown will pressure oil, and they are absolutely right. However, I anticipated a slowdown already BEFORE I took a position and it STILL made financial sense. So either, the expected slowdown will come and I’ll generate solid yields with upside optionality in case of inflationary pressures, or a slowdown will not come and I’ll generate solid returns based on analysts mispricing the top line growth potential. In the meantime, I maintain a hedge against an increase in political turmoil, protectionism (that’s why I concentrated on locally available energy) and inflation. So while Goldman can make predictions about where oil is heading in the next day, week, month or year, I prefer to invest with a longer horizon and by looking at the total investment potential and risk as compared to other alternatives.

Relevant ETFs: XLE, USO, OIL, BNO, NLR, KOL, FCG

My 2 cents on Facebook

I just can’t resist making a minor comment in the flood of articles (from the WSJ): “The interest, amounting to several billion dollars in an equity offering likely to be no more than $1.5 billion, is a sign of investor fascination with the closely held social-networking company despite a dearth of available information about its operations and financial condition.”

So investors are flooding into a high-flying company with virtually no information other than the name, in a structure that is disadvantageous to shareholders on every level, etc. etc. etc. Is Facebook a genius selling its equity into the high of this rally or is it a sign of better times to come? All the frustrated investors that didn’t get a piece of Google are no anxious that they might miss this chance. Fear of missing the upside tends to signal a top, not a bottom.

Goldman’s plight might be the spark, but it ain’t all that

If you live in a cave and haven’t heard, the SEC came out in the middle of the day on Friday to charge Goldman with fraud over a securitization deal it helped underwrite for Paulson. Lots of nuance and many details to follow, but the gist seems to be that Paulson materially influenced the collateralized assets that he was trying to short and GS may have mislead ACA, the outside management firm hired to lend the deal some credibility. Now, the SEC isn’t charging Paulson (yet?) nor ACA (yet?), but rather is focusing on a single deal and a single senior VP at GS. In the worst case scenario for GS (best case for the SEC), GS misled and committed the fraud and will pay a fine. In the best case scenario for GS (worst case for the SEC), GS was marginally ignorant, and the SEC will once again look like it doesn’t understand the firms and securities it’s supposed to oversee.

Did the SEC really need to come out with this news in the middle of the day? By focusing on one transaction and not a pattern, will financial reform ever be effective? Is this politically driven by higher-ups?

Goldman will end up figuring this all out (and probably finding a way to profit from it), but this story shouldn’t be the focus going forward. The real focus is GLD and Paulson’s positions. Gold lost 2% on Friday. Why? Some are speculating that Paulson will need to raise cash in anticipation of redemptions, or other reasons. If that is the case, the market might be front-running Paulson by selling off any positions in which he is a large investors, GLD being one of them. Check out this news story. If that is indeed the case, then the following weeks could see a lot of volatility in Paulson’s names:

Top 10 Holdings as of 12/31/09

SPDR Gold Trust

GLD

NYSE

31,500,000

$3,380,265,000

17.08%

FINANCIAL

Bank of America Corporation

BAC

NYSE

151,034,229

$2,274,575,000

11.49%

FINANCIAL

AngloGold Ashanti Limited

AU

NYSE

42,849,864

$1,721,708,000

8.7%

BASIC MATERIALS

Citigroup Inc.

C

NYSE

506,700,000

$1,677,177,000

8.47%

FINANCIAL

Boston Scientific Corporation

BSX

NYSE

99,135,000

$892,215,000

4.51%

HEALTHCARE

Comcast Corporation

CMCSA

NASDAQGS

44,000,000

$741,840,000

3.75%

SERVICES

Sun Microsystems, Inc.

JAVA

NASDAQGS

74,000,000

$693,380,000

3.5%

TECHNOLOGY

Capital One Financial Corporation

COF

NYSE

17,000,000

$652,800,000

3.3%

FINANCIAL

Suntrust Banks Inc.

STI

NYSE

30,380,700

$616,424,000

3.11%

FINANCIAL

Kinross Gold Corporation

KGC

NYSE

31,500,000

$583,322,000

2.95%

BASIC MATERIALS

Source: DaveManuel.com

Lots of gold exposure and lots of financial exposure. One thing that’s particularly telling was how quickly and how far GS fell on the news, while the market stayed relatively firm. Both sides are telling, depending on whether you’re a bull or bear. The bears will point out that a minor piece of news sent GS down 13%, meaning there are no buyers out there. The bulls will point out that the market was relatively stable and held up well, showing resilience in the face of bad news. I’m biased in that the valuations of the market lead me to look for weaknesses. GS is just one example yesterday and it overshadowed GOOG, which was down 7.5% despite positive earnings.

It will take time to understand the full ramifications of the case, but at first go, it looks like the SEC might be focusing on the trees over the forest (disclosure issues are minor compared to the prop trading conflicts of interest – which this case doesn’t have!!). That being said, eventually the market will continue to use the news as an excuse to realign valuations, so it’s only a matter of time.

Let Goldman go private

Goldman went public in order to take risks that the partnership didn’t want to take on, and in the process also found a way to compensate managers for doing things the partners would never have allowed – so let them go private. If Goldman wants to leverage 30 to 1, and all they are leveraging is partner capital, let them. They didn’t do it in the past. Why would they now. When did they increase leverage and VAR and other risk measures? When there was a disconnect between the capital providers and the managers. Not only that. Let them go private and ensure that government won’t provide a backstop. Just like any hedge fund, Goldman will end up doing a lot of risk adjustments if the partners are on the line (remember, in a partnership, they’ll also have some personal liability). If I were a Goldman spouse, I’d be thrilled, because suddenly, all the assets will go into the spouse’s names and the divorce lawyers, pre-nup attorneys, etc. will have exponentially more work (true, it will be the equivalent of a one-off event, but in this market, who cares).

So, let them do it, and don’t fall into the trap of thinking that they will, nor that it will provide a bid for the stock. This market will move with the regulatory winds, and is just a speculators game.

Notes from underground – Yra Harris

Buffett and Burlington

Something doesn’t make sense with this deal. For starters, it ain’t cheap. Depending on how you calculate it, he paid roughly 20 times earning – pretty expensive, unless you believe in high growth, which seems a bit optimistic for such a regulated industry. Second, at best, we are in a tepid economic recovery. With coal and ag hauls the main staples of the business, it’s tough to see them paying higher freight rates. Third, Buffett was sitting on a lot of cash, and with his stated view of a weaker dollar, why didn’t he just use more cash? Instead, he used stock, implying the stock might be overvalued in his eyes as well. Lastly, in order to accomodate the smaller holders, he’s splitting the class B shares, which will have the dual effect of placing Berkshire in the S&P index and begging the question of why not split the class A shares to a more manageable level?

Now, I am not a conspiracy theorist, but something doesn’t smell right here. Obama and the administration are pushing for infrastructure projects to spur job growth, Goldman (in which Buffett invested $5 billion in order to save) advises Burlington, then Goldman and Buffett enter joint bids to buy underpriced tax credits from Fannie.  Here’s a theory: Buffett announces that Burlington is building out more rail lines in key democratic strongholds, then, suddenly, Berkshire and Goldman get the go-ahead to purchase the tax credits. I hate these convoluted theories, but I can’t help it in this case. Something just smells funny.

Buffett joins Goldman’s Fannie tax credit bid: WSJ

Goldman and Buffett trying to buy tax credits from FNM that will have annualized returns of 30%. Am I the only one who things the government is underpricing these things?

NEW YORK (MarketWatch) — People familiar with the plans say investor Warren Buffett’s Berkshire Hathaway has teamed with Goldman Sachs in the investment bank’s attempt to buy $3 billion of tax credits from taxpayer-owned mortgage firm Fannie Mae, The Wall Street Journal reported on Wednesday. The paper, citing an unnamed investor who had analyzed a similar possible investment, said a deal could could produce annualized returns of at least 30% for Berkshire and Goldman. The paper said a Berkshire Hathaway representative did not have an immediate comment on the report, and that Goldman Sachs and Fannie Mae declined to comment. Treasury officials told the paper they are still reviewing the proposal.

http://www.marketwatch.com/story/buffett-joins-goldmans-fannie-tax-credit-bid-wsj-2009-11-04

A must read from Mike Shedlock

Mike Shedlock is one of the “must read” writers posting these days. His analysis is always well thought out, clear, and impactful. He wrote a piece earlier today about his outrage over the lack of outrage at the influence peddling, lobbying, Goldman-izing of the geopolitical elite. It’s a must read for concerned citizens and investors. Maybe by being more informed, outraged, and vocal we can get some real changes in place:

I don’t know about you, but I am outraged.

I am outraged and not just about Goldman Sachs, but about a process that allows, even encourages political pandering, by time and time again rewarding leveraged riverboat gamblers and failed institutions and at taxpayer expense.

I am outraged that real people are suffering massively while the influence peddlers have stolen the country for their own personal benefit.

I am outraged at a political system that is totally unresponsive to the American people.

I am outraged by campaign contribution and lobbying processes that allows corporations to buy votes with donations.

I am outraged how legislators ignored the wishes of the people who clearly did not want these bailouts in the first place.

I am outraged that very little of this is in mainstream media. Why is this stuff not on the frontpage of every newspaper in the country or at least in the editorial pages?

I am outraged that the average US citizen is not aware of any of this, instead depending on CNBC, or “The View” for their interpretation of the world.

I am outraged how special interest groups have exercised their power to monopolize the economy for the benefit of themselves, US citizens be damned.

I am outraged that all these bailout programs are doing nothing to alleviate the massive consumer debt problems. Every program, virtually every program was designed to bailout lending institutions, not consumers.

I am outraged at fees charged by banks receiving bailouts.

I am outraged over government pension plans and government pay scales massively out of line with the private sector.

I am outraged that Congress and this administration thinks the solution to massive budget deficits are still higher budget deficits in excess of a trillion dollars.

I am outraged about indictments. Paulson Admitted Coercion to force a shotgun wedding between Bank of America and Merrill Lynch yet no indictments were handed out. Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.

I am outraged that US citizens are not concerned enough and not educated enough to demand change.

I am outraged that the two party system has failed. Neither party has delivered meaningful change on budgets, on taxes, on social security, on deficit spending, on the size of government, on military spending, or fighting needless wars.

I am outraged at a Fed that purports to be “inflation fighters” when the only source of inflation in the word are central bankers, and their fractional reserve lending policies.

I am outraged that Greenspan and Bernanke could not see a housing bubble that 1000 bloggers could see.

I am outraged at the selective memory of Bernanke when speaking to Congress about these problems.

I am outraged that Bernanke’s one sided response to asset bubbles, letting them grow without end, then bailing out the financial institutions that cause them.

I am outraged the Fed exists at all. It is a useless organization that cannot see bubbles, that panders to banks, that supports inflationary policies that are tantamount to theft by fraud.

I am outraged that the Obama Administration promised changed and did not deliver. “Yes We Can” was a lie. The reality is “It’s Business As Usual, Only Worse, With Higher Deficits”.

I am outraged there is not enough outrage over this.

Where the hell is the outrage?

http://globaleconomicanalysis.blogspot.com/2009/10/where-hell-is-outrage.html

 

Position limits – have we learned nothing?

I can’t put my finger on it, but I know it’s all related. Writing about it definitely helps clarify, but then again, it makes me more flabergasted. I’m speak of the direction our policy – on multiple fronts - is headed.

From healthcare to contract law to trading, policy makers seem to believe that government and bureaucracies are the best allocators of resources, best sources of price discovery, and most efficient providers of services, while at the same time believing that increased regulation can encourage wage growth, competitiveness, and productivity. For fun, here’s an article, sent by a friend on the impact of some of these policies: http://victorhanson.com/articles/hanson071809.html.

Today, I won’t go into healthcare (although for those interested, there’s an interesting interview with Daniel Palestrant, CEO of Sermo, an online physician’s community, about the fact that the AMA is not accurately representing the doctors of this country: http://www.cnbc.com/id/15840232?video=1196233131&play=1. I spoke to Daniel and the interview doesn’t do their research justice, and his attack on Howard Dean only scratched the surface of the hypocracy of the current leadership.) Instead, I’ll mention that the current debates on The Hill about speculative limits in commodities scare me. In the 1970′s, with inflation running rampant, the Nixon administration, in its misdirected brilliance, decided to place price controls on everything from meat to lumber. Well, the small time players got hurt and the guys who were smarter went around the price controls and played in the futures markets. Now, we have a new administration thinking they need to control prices and better yet, control volatility. Well, someone should point out that speculators play on both sides; they provide better liquidity, more price discovery, and smaller spreads. Without speculators, hedgers wouldn’t be able to trade and everyone from small time farmers to large conglomerates like General Mills would face increased costs of business. In and of itself, more players do not lead to increased volatility – quite the contrary.

http://www.marketwatch.com/story//spotlight-on-goldman-as-commodities-hearings-begin-2009-07-28

So GS is on the hotseat again, this time for being too large a player in the hedging space. But that’s what they do. They provide an investment opportunity to pension plans and institutional players and then hedge. Should you place speculative limits? Fine, but let’s define speculation and hedging differently. Not all natural hedgers are pure hedgers. For example, many oil companies and airlines and producers take speculative risk beyond the positions their hedging. Same is true for “speculators”, some of whom are actually hedging different risks in their portfolios. The definitions, in my opinion, actually become so nuanced and convoluted as to be virtually irrelevant. I wish someone from GS would get up and say that and more importantly that someone in DC would listen.

CIT on the brink, GS gets upgrade?

What’s going on today? CIT, a major ABS lender is on the brink of bankrupcy and GS gets a price target of $186?

CIT started as a company specializing in factoring. Monetize your A/R for a chunk of change. Securitization made financing even cheaper. Biggest competitor was GE Capital. Difference? GE gets government assistance to prop it up. CIT is let down.

In the meantime, GS is on track to report stellar earnings. Well, they’re the only ones left standing. They got government backing when they needed it. More importantly, they got bailed through AIG, which few realize. They come out smelling like roses, but I’m not buying it. As one of our readers recently pointed out this is companies gaming the bureacracy, not companies adding to GDP or productivity or creativity or anything.

This just doesn’t add up for me.

Goldman Reverses U.S. Stock Advice, Says Shun Overseas Sales

Nov. 6 (Bloomberg) — Goldman Sachs Group Inc. strategists
advised U.S. stock investors to buy companies that generate most
of their sales in America and avoid those with high overseas
revenue, reversing a strategy they had advocated through July.

David Kostin, who leads Goldman’s New York-based portfolio
strategy team, recommended shares of 50 companies that get a
large percentage of sales in the U.S., including Union Pacific
Corp. and Kohl’s Corp., on expectations that foreign economies
will deteriorate at a faster pace. Money managers should reduce
holdings of companies with the most non-U.S. sales and sell short
those with high revenue from western Europe, according to a
research note dated yesterday.

http://www.bloomberg.com/apps/news?pid=20601213&sid=al..sz9RIqTA&refer=home

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