“It’s not what you don’t know that kills you, it’s what you know for sure that ain’t true.”

I return to this statement over and over as I play the markets.  Mark Twain had unending wisdom.  The speculating public, usually not so much.  November’s stock market returns were a delightful 10% for the S&P 500 and an eye-watering 18% for the Russell 2000; thank you very much hard and fast sector rotation.

Major Indexes November Returns (12-2-2020)

Despite this, ambiguity still reigns supreme currently.  Context is critical.  So does the ambiguity matter to long-term investors?  No.  But if you’re swing trading any asset classes in these markets then the ambiguity matters a whole lot.

Let’s use some simple, classic technical analysis to better illustrate how muddy the waters have become.  We’ll start with the S&P 500.  Depending on your trend-line bias, there’s a few different ways to perceive current action.

SPX Weekly (12-2-2020)

It looks like a very legitimate breakout.  It’s been a hard chop since late July, but I thought we might see yet one more leg down to the high 3100s or low 3200s.  The reason for this was the curious inter-market activity among various asset classes.  Typical correlations weren’t holding up in November and the breakout just felt fake.  But therein lies the problem of using “feel.”  Obviously, I don’t just go with the gut when allocating capital but it has often paid to at least listen to it.

We know that one major, semi-new factor driving markets is option activity.  Never before has one had to care so much about option Greeks to simply trade the underlying.  Observe the enormous rise in single-equity options premiums as a result of the tidal wave of buying, most of that in Calls by retail and institutional.

Buy to Open Calls Spot Premium (10-18-2020)

Options activity has seen market makers make unparalleled purchases in the underlying stocks in order to hedge their Call sales books.  As a result, volatility has chopped right along with the markets as moves have been fast and furious.  So where is volatility possibly headed next?  Again, the trend lines paint a couple of different pictures.

VIX Weekly (12-2-2020)

We have the current liquidity flood and more coming in 2021 to support fund flows into risk assets.  There’s also the beginning of a sector rotational move into value.  I don’t think that’s a done deal yet.  I think growth i.e. tech still has legs left.  I hypothesize that the bounce in energy and small caps is only the first strike of sector rotation, but the growth of SaaS and big tech will soon parry in 2021 which should stunt recent returns in energy and small caps…at least temporarily.

The one asset class that continues to dominate my thoughts is the US dollar.  I’m reading tons of obituaries.  They feel premature.  A swift move up to the 95 area would not surprise me here; swift relative to its usual multi-month cadence.  A “swift-ish” move in the USD would drop a hammer on commodities, which wouldn’t bode well for the recent rotation into energy.

USD Weekly (12-2-2020)

The grains and sugar have been on an unfailing tear upwards.  Typical COT activity would have already seen correlated reversals in these crops.  I’ve seen insinuations that perhaps we’re in a regime change for those specific assets, but like the death of the dollar, that innuendo feels a bit premature.

For my own long-term portfolio of equities, I continue to evaluate the plays that many deem to have great forward looking prospects as not only technology evolves but society as well.  They may seem obvious, but it’s hard to shake what a well chosen play can mean for the potential of a portfolio.  This means gene-editing, cutting edge biotech, AI, data dissemination, and two of the oldest vices on the planet with tremendously long runways as a result of only barely being legitimized.

In the short-term, I think the commodity shorts present a most compelling current opportunity but so much rides on the USD’s anti-correlation.

If you really want to generate some returns with equities, consider after hours trading.  This has been widely reported on for a few years now, but just look at a recent chart put out by Bespoke to truly illustrate the marked difference in strategies.

Bespoke After Hrs. Trading Since Inception (Nov. 2020)

Of course, 2020 has flipped that on it’s head.  See below, but after-hours is starting to reassert it’s dominance.

Bespoke After Hrs. Trading Since Start of 2020 (Nov. 2020)

Stay sharp.  Recent choppy action may not be over just yet.  And with everyone predicting an amazing 2021, including myself, it might just take a little time to get the real momentum going next year.

Another Bounce or Not

Hmmmm.  What to do in a market like this?

For your long portfolios, my advice would be to sit tight.  The odds are strong that we’re in a multi-week bounce before another little shakeout.

SPX Thru 2018 Holidays (Nov. 2018)

I’d suggest getting long after the next move downward.  Market behavior suggests a rally into 2019.  It could be the start of the final leg of the melt-up as “late-cycle” keeps getting bandied about out there.  Over the past few years, the drill seems to be a quick move down followed by the exhaustion-bounce followed by another move downward before regaining the up-trend (weekly charts).

For the contrarians, it’s hard not to look at China and energy as two obvious areas for medium-term plays.  If you play in the markets at all, I don’t need to throw up charts to illustrate the performance of both sectors of late.  Tencent and JD could be easy moneymakers.  And the energy toll roads can provide a nice yield along with cap. gains on an oil bounce over the ensuing months.

EPD has the infrastructure footprint and financial efficiencies that begs for yield-starved investors who’ve been waiting for a better opportunity for entry.  However, the company’s price remains quite steady in the $20 to $30 range.

Oil’s price action looks exhaustive.  Fundamentals appear to bear out an inexplicable magnitude of this sell-off.  If institutional traders on the wrong side are able to quickly offload positions, then there may be enough support by energy bulls to resume an up-trend without extreme volatility.  I remind energy traders of what we saw in H2 of 2016.

I liked the Starbucks story, but it quickly got white-hot before I could position with my long portfolios.

SBUX Retrace (Nov. 2018)

Based on the trajectory over the last several weeks, it wouldn’t surprise me to see a retrace down to the $56 – $58 range.  That’s a good spot to get positioned if you’ve been eyeballing this world-class caffeinator.

In the quasi-cash-equivalent area, muni-CEFs have presented recent value with their widened NAV discounts.  The discounts have come off a few points as investors have taken advantage of the historically free money and positioned accordingly.  The big question mark is interest rates.

Does the Fed raise rates next month?  If so, that could renew selling action in muni-CEFs and widen discounts again.

Interest rate tape reading has rates looking a little toppy.  Not like they’re going to topple over as we know the Fed will raise rates which will force support.  But still, I like interest rate-sensitive funds here to drive a little yield for a bit in place of sitting on excess cash.

          IIM Current NAV Discount (Nov. 2018)

          JPS Current NAV Discount (Nov. 2018)

Remember, these aren’t long-term investments.  We’re talking about using them as cash-equivalents, but their volatility makes them decidedly un-cash-equivalent.  We’re speculating on additional points on your money earned relatively conservatively.  Mind your stops.  Protection first.

Oil & Economics – All Q, No A

Almost nobody saw the crash in oil coming. A handful of savvy investors and analysts shared this thesis but were largely ignored. For all intents and purposes, “nobody” foresaw the action in oil which is the essence of the dumb crowd missing it again. Not inferring that I am not an occasional member of that dumb crowd, just commenting on the oil industry.

When oil prices dropped, the instant message that was and continues to be bellowed across the financial landscape is that the drop would provide a pseudo-tax cut for the great unwashed in the form of lower gasoline prices. Along this line of thought is that the commoners will spread this saved gas money throughout the economy in various outlets. This should in turn support GDP levels, which is of course fallacious. Through Q3 of 2014, the US is annualizing 5% GDP growth. WHOOOOO! Gonna get some cold cuts based on that level of growth!

The problem with the thesis that lower gasoline prices should support or maybe even boost GDP levels discounts two very important factors to the economy. Number one, nobody can predict the level of the money saved from lower gasoline prices that will go into personal savings. Number two and more importantly, the importance of the oil industry to national employment and economic growth has been totally discounted by far too many educated parties. Just look at how important the oil industry has been to America’s employment recovery.

(chart courtesy of Prof. Mark Perry)

Now add in North Dakota and it’s growth in employment thanks to the Bakken. Last month the Joint Economic Committee provided an update courtesy of the BLS. Since February of 2010, the national low point in private sector employment, North Dakota added 102,500 private sector jobs. A vast majority of those went to petroleum related companies, making the “US Employment Minus Texas” numbers look even worse. Maybe you’re one of those thinking in your head with a Patrick the starfish voice, “Yeah, but a percentage of that job growth for Texas and N. Dakota is dedicated to non-oil like teaching, retailing, food services, etc.” Sure there’s growth in those areas too but an overwhelming majority of the growth has come in industries like mining, logging, transportation, utilities, and construction; where the pay has been significantly higher on average than in the non-oil industries. An argument could even be made that a high percentage of the growth in non-petroleum based jobs was simply derivative growth from the petroleum industry.

Well what’s the point? There are a couple of points, actually. Talking to one’s self consistently is a strong precursor to madness, so at least I’ve got that going for me…which is nice. Seriously though, one of my points is where does the job growth come from in America now that the oil patch growth and development has fallen off of a cliff? Amazon DC part-timers? Wal-Mart part-timers? McDonald’s part-timers? Maybe I’m failing to notice a forest through some trees here but I’m having a hard time seeing the downward trend in unemployment continue its happy descent into “full employment.” And for the 1 plus 1 crowd, if there’s less people employed then there’s less people to buy things. Maybe there will be enough growth across all the other non-oil and gas industries, but that chart up above sure says a lot about placing too much faith in that thesis.

The second point, which may be even more relevant, is where will the growth in US corporate capital expenditures now occur? It’s very late in this business cycle coming out of the Great Recession and capex output is still relatively weak compared to previous cycle recoveries at the same stage. Capex has been essentially carried by energy. Let’s look at some facts regarding US capex and the oil industry. Energy(primarily oil and gas) accounts for approximately a third of all capex in the S&P 500. That means it’s virtually irreplaceable. Need a visual? No problem.

(chart courtesy of Zero Hedge via Deutsche Bank and the Bureau of Economic Analysis)

So if I’m understanding the basic tenets of the TV economists’ argument, US GDP will be just fine despite the oil industry tightening their belts because American consumers will use all that money they saved at the gas pumps at their favorite retailer, service provider, or online. BOOM! Problem solved.

I just can’t reconcile that thesis with the facts as they are presented via the press releases of major oil companies. ConocoPhillips has already announced it’s slashing its capex budget by 20% for 2015, which means $3 billion less than 2014. Suncor, Canada’s largest company by revenue, is slashing it’s capex budget by $1 billion dollars for 2015 while also cutting operating expenses by up to $800 million in addition to a 1,000 person reduction in the workforce. Conoco did not announce layoffs in their presser regarding capex but you can be sure there will be layoffs there and across the board. We have yet to hear from the two giant US elephants of petroleum energy, Exxon and Chevron. Analysts are essentially expecting an average decrease of 25% in investment spending by energy companies.

This subject has been covered extensively at Zero Hedge. You can obtain additional details and their always-optimistic opinion right here and here. There are some blog and finance news snobs out there who look down their nose at Zero Hedge, but the fact of the matter is they do a good job credibly covering a wide swath of financial, economic, and geopolitical news; and literally everybody reads it. None the less, for you financy snobs that need a Wall St. bank’s take on capex, here’s a September 26th, 2014 report courtesy of UBS with impeccably timed commentary on capex. Here’s a couple of gems from their Equity Strategy team: 1. “Capex rising thesis still intact”, and 2. “…business fixed investment is forecasted by UBS economists to rise by 6.2% in 2014 and 7.8% in 2015.”

Let’s just see how the timing of that report’s issue coincides with the fall in the price of West Texas Intermediate Crude.


Does 7.8% growth in 2015 capex sound credible now? Well done UBS Wealth Management. Positive guidance on capex right before capex is about to be gutted via a 50% slide in the oil price. Let’s do some basic, rough arithmetic based on the Deutsche Bank chart up above. Thirty-two percent of $685 billion is $220 billion. Twenty-five percent of $220 billion is $55 billion. So approximately $55 billion of what was to be potentially spent in 2015 is going to be eliminated and yet employment or GDP should be unaffected as the economy is recovering in the US. That’ll be what gets sold by the main stream media.

Oil and gas notwithstanding, the capital expenditure reports coming out of the Federal Reserve branches were laughable. It’s all IT spending. Go read the December 3rd, 2014 Beige Book to see for yourself. Here’s an exercise for those who refuse to read the sleep-inducing report. Click that Beige Book link and search(hit ctrl-F) the document for “capital expenditure” and simply read the surrounding text. It’s mostly IT. I’m pretty sure that network upgrades and addressing cyber security concerns aren’t going to carry the US economy in conjunction with consumer spending, but we’ll have to wait for 2015 to play out.

The bottom line is that 2015 is going to be a most interesting year for the US economy and the rest of the world for that matter, too. Just look at the volatility we’ve already seen across currencies, central banking behaviors, geopolitics, etc. I’m still seeing plenty of rosy projections for the US economy, coming off that 5% read, and maybe I just need somebody to crack me in the head to help me see the data in a better light.

Some Musings About Q3

Musing 1. Why do new home sales data releases by HUD possess any significance?

Maybe so that the HFT houses have a headline for an algorithm to pump millions of unfilled bids into a market. It’s baffling. For me, the most important part of a release by HUD regarding new residential sales is the Explanatory Notes. In this section they tell you how wrong their data could be and they lay out all the statistical errors that could be occurring due to things such as “bias, variance from response, nonreporting, and undercoverage.” Reported numbers are consistently displayed with standard deviations of plus or minus percentages in the teens or twenties. For example, September’s results show a 0.2% (+/- 15.7%) above revised August new home sales.

That means the actual number may have been as low as -15.5% or as high at 15.9%. The dispersion is so wide as to render the results effectively meaningless, which is why there are always revisions. But why would revisions possess any more statistical relevance when weighed against the potential of HUD’s self-reported surveying errors? Observe the median sales price from August to September. It went from $275,600 at the end of the summer to $259,000 in the beginning of the fall. While the average price of a new home sale dropped from $348K to $313K. Drops of that magnitude have to make you question the credibility of the August new home sales pricing data. Did prices for a new residence actually drop that much in a single month or was it that the data was massaged to begin with? Not even the Census Bureau will provide a quality answer. I know the confidence level of the statistics is at least 90% but c’mon. Honestly.

Can you imagine if other industries were allowed to utilize such wide standard deviations in their statistical reporting. Take biotech. “Each participant that takes the pill in the study has approximately a 50% chance of increasing their lifespan by 12 more years…plus or minus 40%.” Or how about plane engine manufacturers. “We believe this critical engine component will operate in extreme conditions with a failure rate of 0.03% (+/-72.7%)” These are extreme, outlandish examples to be sure, but you hopefully get the point. Admittedly, my statistical skillset is decidedly above the average dolt off the street, but assuredly below regular practitioners such as finance & economics professionals or academics. The book is still open on whether or not to reject the null hypothesis that MarginRich is actually just one of the said dolts off the street.

Musing 2. What’s the big deal about oil reserves vs. oil resources?

This musing stems from an article I read at Bloomberg that was titled, We’re Sitting on 10 Billion Barrel of Oil! Ok, Two. The theme was expanded on at Zero Hedge that potentially the whole petroleum renaissance is nothing more than smoke and mirrors. Now I enjoy Zero Hedge as much as the next bloke, but I wouldn’t expect them to so quickly jump on the extremist bandwagon when it comes to E&P’s sharing their opinions on resources.

The basic gist of the Bloomberg piece was that oil and gas companies are grossly irresponsible in reporting resource potential in their corporate presentations versus the actual reserves they are filing with the SEC. However, before they get into the meat and potatoes of the article they share a giant caveat about investors and the differences between reserves versus resources. The authors quote Scott Sheffield, CEO of Pioneer Resources, one of the largest players in Texas with significant rig counts in the Permian and Eagle Ford. Sheffield states that experienced investors know the difference between the two numbers. Specifically, “Shareholders understand. We’re owned 95 percent by institutions. Now the American public is going into the mutual funds (or ETFs), so they’re trusting what those institutions are doing in their homework.”

Precisely. Experienced and sophisticated investors know that resource potential is not the same as current, existing barrels of oil in ground. That doesn’t mean that through innovative techniques that a high percentage of those resources cannot be converted into reserves. Patience and demand are the keys to the development of refined exploration techniques that can continue to expand the US energy base. The article implies that the shale boom is potentially a large scandal waiting to blow-up with Enron-like repercussions. That is an epically gross exaggeration. E&P companies have time and again improved or grew reserves at rates consistent with estimates. Additionally, we’ve seen the oil and gas players consistently beat reserve estimates established by the EIA for various geographic areas.

Bloomberg provided a snapshot of companies to graphically show the disparity between the two numbers:


Any speculator in hard assets, knows what the steak and the sizzle are in natural resources. The reserves are the steak. The resources are the sizzle. It would help if more of the E&P players would utilize the P’s more in their presentations for the retail players who want to get in on the action. The P’s stand for proven, probable, and possible. Proven or 1P reserves have a high probability of being produced and you can count on the number. Then there is proven and probable, which is 2P; and then proven, probable, and possible is 3P. The higher the number of P, the less likely the company can produce the reserve. However, that doesn’t eliminate the current or future viability and economic potential of the resource. These P-designations, standard nomenclature in the industry, are easy to understand and not nearly utilized enough in company presentations. Oil and gas are no different than gold, silver, platinum, copper, or any other natural resource. All natural resource companies report reserves and resources and it’s up to the speculators to conduct their own due diligence.

Musing 3. There’s some serious Kool-Aid drinking at First Trust

First Trust is an investment advisory firm founded back in 1991. They’re fairly sizeable in that through their assortment of ETFs, mutual funds, and other various products; they’ve been able to garner $32 billion in assets under management. A hefty sum by any measure, but very small compared to the biggest players in the game.

The Monday Morning Outlook is a weekly little opinion piece that First Trust puts out that also includes a schedule of important economic releases for the week. Content is hit or miss with this shop, however, there was one piece from last month that struck me as an egregiously, cowardly article. You can have a read for yourself to see if I’m out of bounds in my assessment. I admit that based on my own opinions shared at this site, that I could be labeled a doom & gloomer, but I simply refuse to un-acknowledge the current and future distortions that have and will occur in asset markets around the world thanks to central bank interference.

The piece titled Why Do Stocks Keep Rising?, from September 8th, pumps First Trust’s fist in the air behind a sis-boom-bah of how the markets have continued their upward ascent despite the steady flow of negative-impact events over the last 5 years. They don’t understand how pessimism can remain so ingrained for certain pockets of investors under such conditions. I know it’s a quick 1-page offering that they throw up every Monday, but you can’t just break out the pom-poms and then stick your head in the sand without truly acknowledging the reasoning of the very parties you are criticizing. Amateur hour!

They don’t touch on how central banks have kept the cost of capital at virtually zero for longer than any period in history despite an “improving” economy and “improving” employment. They extol the virtues of the rising profits across industries but share nothing on top-lines and how that will affect profits going forward. Or how slashing SG&A and CapEx in combination with share repurchases has significantly affected stated earnings to the positive. Nor do they expound on how these behaviors are unsustainable. They fail to acknowledge that the current situation of central bank involvement in the developed nations has absolutely no precedent, and thus, no back-testable strategy for when the house of cards begins to wobble.

As an investment adviser it behooves them to cheerlead so as to grow assets under management higher and higher. That’s fine and they have a right to share a one-sided puff piece. They should just try not to be so damn cowardly the next time they want to cheerlead investing in a rising market right before a 7%(which I stated will not be the low) haircut commences.

Before signing off, I wanted to touch on the current action in the S&P 500. In my last article, I had stated that if the price action is simply a bounce within a larger correction that I thought the 1,950 area to be a solid resistance point before turning down again. Today’s close at 1,964 is still around 1,950, so we’re not quite out of the woods just yet. If we move onto sustained new highs then I will offer a mea-culpa, but I continue to think that caution is warranted. I’ll leave you with a chart shared by Lance Roberts at STA Wealth that displays the price action in the S&P 500 during the last two corrections that reached a depth of 10% or more.


Burning Trash – It’s the Green Thing to Do

Were you aware that waste to energy (WTE) also known as energy from waste (EfW) is considered a “green” renewable energy source by the EPA? Yeah, it’s not exactly earth shattering news as the past 10 years have brought many advances in this field. In fact, incinerating municipal waste or biomass has been in use since the 1880’s with the advent of incinerators. Air quality control standards were just a touch lax back then and for approximately the next 75 years. In fact here’s a quick history lesson, courtesy of the EPA:

The first US incinerator was built in 1885 on Governors Island in New York, NY. By the mid-20th Century hundreds of incinerators were in operation in the United States but until the 1960s little was known about the environmental impacts of the water discharges and air emissions from these incinerators. When the Clean Air Act (CAA) was enacted in 1970, existing incineration facilities became subject to new standards that banned the uncontrolled burning of municipal solid waste (MSW) and placed restrictions on particulate emissions. The facilities that did not install the technology needed to meet the CAA requirements were closed. Combustion of MSW grew in the 1980s, with more than 15 percent of all U.S. MSW being combusted by the early 1990s.  The majority of the non-hazardous waste incinerators were recovering energy by this time and had installed pollution control equipment.  With the newly recognized threats posed by mercury and dioxin emissions, the EPA enacted the Maximum Achievable Control Technology (MACT) regulations in the 1990s.  As a result, most existing facilities had to be retrofitted with air pollution control systems or be shut down.

There. Now you know everything there is to know about the history of burning waste for the provision of energy. I’ve always been intrigued by the notion of WTE. Not that I’m fascinated with trash and fire, but you have to admit it’s a neat concept that kills several birds with one stone. Back in August during my daily travels around the web, I came across some particularly interesting charts regarding CO2 emissions and costs by energy source. Observe the following pair of charts courtesy of ZeroHedge via Goldman via the EIA (a division of the DOE).clip_image001Solid waste? I thought for a second that it couldn’t be right, but the reason that waste is considered such a “clean” source of energy is because solid waste does not include all types of trash. Obviously tires and plastics or any other sorts of waste generated from petroleum are not included in that category as they are not renewable. Then there’s the cost in USD per megawatt hour in the chart below. You can see that biomass incineration is not all that more expensive than some of the recognized cheaper options that we are all familiar with, such as conventional coal, some forms of natural gas, or nuclear. Hell, it’s never going to be cheaper than wind or hydro but it’s not terribly more expensive either, considering the additional benefits garnered. Hydro or wind don’t help to decrease landfill space utilization or provide recyclable ferrous and non-ferrous metals. The ash leftover from the process takes up approximately 10% of the space in the landfill that the un-incinerated waste would have utilized.clip_image002Now I know that you may be thinking that isn’t biomass wood pellets or other organic forms of energy sources, such as waste from the wood mills or agricultural residues. Sure, but the biomass class of energy also includes the biogenic waste that gets tossed out with all the rest of the trash on a daily basis i.e. recyclable paper products, food waste (which us Americanos are notorious for), yard clippings, etc. There seem to be more pro’s compared to cons for an increased employ of WTE technology in the US. Why is it that there is only about 90 WTE plants in the US, with the vast majority concentrated on the east coast? We have about 90 of these facilities for approximately 300M people but the European Union countries have about 400 WTE facilities for their approximate 500M people.

It just seems to me like there’s an opportunity there for cities, counties, or states to take advantage of the multiple benefits of utilizing WTE facilities within their jurisdictions. The following chart, from the EIA, depicts America’s total disregard for the WTE option (there’s a lot of white):clip_image003The Clean Air Act amendment back in 1990 essentially forced the hand of the WTE industry to shape up the emission standards which is how the energy is now considered renewable. It’s not just about CO2. The dioxins and furans, which are so toxic, and yet were so prevalent previously are virtually a thing of the past with current emission technology. Compliance with federal regulations for emission standards set the stage for WTE facilities, which now employ multiple levels of filtration during the process and through the flue stack to generate a “clean” emission. Here’s a picture of the process, courtesy of Waste Management:clip_image005The technology advancements in the final stages of the process are truly remarkable. And I absolutely refuse to believe the lack of facilities is about the economics of constructing a plant that renders the WTE option unfeasible for so many cities and counties. I recognize that every municipality has their own financial situation to deal with but what about all the damn sports stadiums built at a cost of a billion or more over the last 20 years. The taxpayers generally fund a considerable portion of those stadiums. Those stadiums do bring jobs, tax revenues, and often tourism to the community but they provide virtually no benefit in the form of carbon footprint reduction, power generation, or metals recovery. For the most part, it would seem as if the major culprit behind the lack of WTE utilization in the US is politics. It’s a general statement but I’ll provide you with a perfect recent example.

The city of Cleveland, as of the summer of 2013, shot down a plan to commission a WTE facility. The facility would have cost $180M, which breaks down to approximately $782 per ton of waste annually. That’s actually on the lower end of the cost scale when compared to international WTE facility cost analyses. Now when you factor in 30 year contracts for trash haul and power generation combined with a captive audience for your customer base along with materials recovery, you’re telling me the economics can’t work? Can Cleveland do any worse in the management of their municipal waste at this point? Anybody can go on the city site and take a quick look at the 2011 books (the last available) and see that the city’s Division of Waste Collection and Disposal had revenues of $14M against expenditures of $24M. Now I ain’t exactly tip-top on my governmental fund accounting, but the last I checked that was called a deficit of $10M. Money couldn’t be any cheaper right now so it can’t be the cost of capital for a city the size of Cleveland and a potential bond issuance, with A1, A2, and A3 ratings by Moody’s for a series of bonds. What about equity partnership? Certainly Waste Management, Covanta, or Veolia would be a viable partner with plenty of access to capital and resources to facilitate funding. How about private equity? The revenues would be very small to the comparative asset base for players such as Brookfield Asset Management or Blackstone, but access to guaranteed income streams that could perform in the face of potential inflation are pretty attractive investment options these days for plenty of players.

Ultimately, it comes downs to politics. A certain group of constituents, armed with all the wrong information but definitely all the right votes, voiced their opinions loud enough to get the project essentially declared dead. No doubt after the city had wasted hundreds of thousands of dollars or potentially millions on those “oh-so-important” consultants exploring WTE project options to cover the rear ends of anybody involved…gutless councilmen, city planners, and the like. I find it hard to believe that the biggest cities in Denmark, Germany, France and the other Euro area players have such different information about emission dangers and are so much less informed than Cleveland and her constituents.

While we’re on bad politics and just to beat a dead horse even deader, what about all those lame-brained schemes by Obama’s boys at the DOE to fund all those ingenious solar power and electric car operations? Let’s just do a quick run-down and see how the costs of those mistakes compare to Cleveland’s potential WTE facility.

1. DOE loan of $529M to Fisker Automotive in 2009 – TOTAL LOSS
2. DOE loan of $527M to Solyndra in 2009 – TOTAL LOSS
3. DOE loan guarantee of $400M to Abound Solar in 2010 of which only $68M was drawn – TOTAL LOSS
4. DOE loan guarantee of $2.1B to Solar Trust in 2011 of which none was drawn; but proves stupidity of the administration making allocation decisions
5. DOE grant of $249M to A123 Systems of which $130M had been granted as reimbursable expenses – TOTAL LOSS
6. DOE grant of $118M to Ener1 in 2009, bankrupt in 2012 – TOTAL LOSS
7. DOE grant to Ecotality of $133M, bankrupt in 2013 – TOTAL LOSS

Apparently, it never occurred to the current administration to seek out high potential WTE opportunities across the US that I’m positive could have benefitted from some of that money that was essentially flushed down the toilet a few years back.

It’s amazing how a rant can sort of take on a life of its own in one’s brain. Anyways, from an investment standpoint there isn’t a whole lot of compelling options. Covanta is by the far the number one WTE player in the US with approximately 50% market share. A distant second, you have Waste Management but they are more focused on the gas produced from their landfills, for which they definitely have the dominant position. WTE plants aren’t really WM’s thing. Veolia has an incredibly large international presence but they are highly focused on water and municipal transportation management in the US as opposed to WTE. The political aspect leaves the players in the game of WTE almost too much at the mercy of others.

However, from a pure investment standpoint Waste Management presents a long-term compelling opportunity because of its overall market share in the trash space and consistent cash generation. Even if we’re only talking about WTE then Covanta does have its merits. Sam Zell is the Chairman and largest shareholder. Marty Whitman, of the Third Avenue fame, has a huge chunk. They have a little under $400M in NOL’s to utilize and they consistently generate over $200M in free cash flows, which is enough to service that fairly large debt level compared to their current cash level. The dividend yield is around 3%. Aside from those merits though, is the fact that the short percentage of the float is over 10%. Plus, a lot of the normal valuation standards show that it’s a little bit rich at these prices and ROE suggests potentially poor allocation of capital by management.

The point I was trying to make was not to expound on the investment merits of the WTE space. Instead, I simply wanted to share my curiosity as to why WTE’s American presence is so weak. Why is this not a higher growth industry? There are only a handful of points presented here behind my marked bias, so if you’re interested in obtaining a bit more depth in the WTE industry or the companies therein then get out there and do some research.

Read, Read, and Read some more.