A Rising Tide Lifts All Boats

There’s a ton of divergences occurring. According to some “expert” voices in the blogosphere, the divergences don’t matter. That’s nonsense. Divergences do matter. They provide signals that can assist speculators on when to or when not to allocate capital. Additionally, maybe certain divergences signal to take some risk off the table. Sure a perma-bear or perma-bull can find enough signals in any nook or cranny they search to warrant their stated opinions, but that’s the nature of data and confirmation bias.

I would say caution is warranted across multiple markets. High-yield bonds i.e. junk bonds finally sold off with a recovery into a potential double top for JNK & HYG and in an earlier post, I had stated that junk selling may be the final piece the markets would need to see for a significant correction to occur. That may still be the case, but there are enough other factors to justify a cautious stance. Everything happens so rapidly in the markets now, so if you’re not nimble then say goodnight to any short profits. The NYSE A/D line was descending but has since resumed its climb to reach a new all-time high. Small caps(Russell 2000) sold off 8% during that last month’s downmove and many published analysts thought that may be the extent of the move. Turns out they were right…for now. My go-to indicators show strong potential for a continued down-move, however one of the indicators is flattening in the short-term. If long-term resistance gets broken on the RUT? Well then more damage could be on the horizon for a larger swath of the markets’ asset classes.

Preferreds can sometimes be a leading indicator of deteriorating credit conditions, reason being because they’re primarily issued by financial institutions and REITS. Along with most everything else, we saw preferred stock funds temporarily turn down but have since recovered into a lower zone that’s been essentially flat for the last few weeks. There were some major M&A deals that were scrapped last month, but who cares. Who cares about anything in the game of speculation if it isn’t related to a central bank, right? Seriously, who cares anymore? Everything just goes up anyway. Who cares about technical analysis? You can’t trade without volatility. There couldn’t be a worse time in modern financial history for a trader to try and stake his or her claim in the world by beating the markets.

Before you assume it’s all sour grapes with me because of my own trading results, please understand that like any other prudent asset allocator I maintain multiple portfolios for various strategies. Most are dedicated to sound asset allocation strategy as well as conservative stock selection across the best companies in the world; the kind of companies that can weather any storm. As much as I enjoy fundamental analysis and good old stock picking through the breakdown of a company’s financial statements and filings, I get more of a kick out of trading on the price action. My smallest portfolio is my trading portfolio and thus that helps to mitigate the damage of the strategies I’ve been utilizing the past couple of years. So no I’m not entirely bitter because the big bad bully market took all my marbles. I’ve still gots me marbles and I’m still playing the game. Strategies have to be shifted in light of the current environment where HFT and central bank support dictates market movements and investor sentiment. I’m certainly not alone in my mediocre trading results of the past couple years.

Up until 2012, the arcane magic of technical analysis still worked quite nicely. You could still use decades old strategies based on squiggly patterns of price & volume to regularly snag profits out of the market. But what does it say to you when some of the most respected traders of all time are consistently losing? What does it say to you when three of Schwager’s Market Wizards who run billions in AUM continue to come up with negative performance that is far below even the S&P 500 index? You have to really question why the hell you’re not holding a simple double or triple long ETF of the S&P 500 or why you think you can outsmart a rigged market. Have a look at HSBC’s latest scorecard of hedge fund performance. Observe the performance of the individually legendary Tudor, Kovner, and Bacon:


It’s this sort of performance and environment that takes some of the fun out of the game. Intrinsically, trading is a competitive endeavor so there’s no giving up on the fight to earn profits against the world, but right now is not a time to be fighting if you’re not winning consistently. It’s a time for reflection on strategies, skillset, and the overall approach to your trading business.

The lack of any real movement in the markets could be a seasonal effect. It could be a product of the gross market manipulations. Or it could be that something worse may be on the horizon. By now the CNBC interview with Sam Zell has been shared and commented on by virtually everyone in the financial media and blogosphere. I won’t beat it to death here, but his comments are worth noting. He’s not some chump billionaire always looking for the limelight or setting up a book sale or political career. He’s the original “Grave Dancer” and he took Blackstone to school in the $39B sale of his company, Equity Office Properties Trust, at the top back in 2007. His words are worth heeding, but as with every other expert, not following blindly.

These are the key points he made on Squawk Box:

“The stock market is at an all-time, but economic activity is not at an all-time. People have no place else to put their money, and the stock market is getting more than its share. It’s very likely that something has to give here.”

“I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking. If there’s a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market.”

– “It’s almost every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue. When you got a demand issue it’s hard to imagine the stock market at an all-time high.”

– “This is the first time I ever remember where having cash isn’t such a terrible thing, despite the fact that interest rates are as low as they are.”

So forgive my redundancy for reposting what’s already been reposted a million times, but the original link and interview can be found at: http://finance.yahoo.com/news/sam-zell-stock-market-correction-124350576.html#

Just to provide a little graphical support to the bullet points by Zell, take a gander at the following chart shared by professor Mark Perry of the Carpe Diem blog:


Meaningful or meaningless? You know the answer.

Coming back to underperforming professionals, it’s not just trader hedgies having a rough go. Even the plain old vanilla mutual fund managers in the large-cap space continue to also underperform a benchmark of the S&P 500. In a recent MoneyBeat column, David Kostin was quoted: “Only 23% of large-cap mutual fund managers have outperformed the S&P 500 this year, rivaling the worst performance in the past decade, according to the chief U.S. equity strategist at Goldman. By comparison, about 37% of fund managers have outperformed the benchmark since 2003. Only performances in 2006, 2010 and 2011 have been as bad or worse than the current year’s pace.”

In times like these where the US ZIRP and the Euro NIRP forces money into stocks, Siegel’s Stocks For the Long Run probably sounds better and better for many investors if they haven’t already shoved all their retirement funds into Vanguard’s warm embrace. I want to take a moment here to plug the research of Stansberry Research & Associates. Specifically, I want to call out the work of Porter Stansberry, Dr. Steve Sjuggerud, and Dan Ferris. If you are unfamiliar with their work then maybe it’s time you familiarized yourself with them, if you intend to be individually selecting stocks for your portfolio(s). I have been using their services for close to a decade. And in today’s market environment, they continue to be on the leading edge of most all of the macroeconomic happenings while also providing some of the highest quality deep research on equity selection out there. With a subscription to their advisories, I can honestly say you’d probably be getting the best bang for buck out there in the newsletter game. Having read plenty of samples of sell-side research from Wall St., these guys stack up and will assuredly enhance your ability to safely build a profitable equity portfolio.

Full disclosure, I have absolutely no relationship with Stansberry Research & Associates in any other capacity than as a satisfied subscriber. Like other services I have touted, I’m certain they don’t even know this blog exists. Additionally, that link to their site does not pay me some sort of commission. I truly just enjoy the quality of their products and wanted to take a moment to share that with my own readers. In my much younger days, I tried most every newsletter out there…Motley, everything under Agora, Richard Russell, amongst many others as I was learning the game and was simply too lazy at the time to open a book to teach myself just yet. For the last several years, these guys are the only equity research I rely on aside from my own. So I would recommend you visit their site and maybe try a subscription or two, I’m confident you won’t be sorry.

In the meantime, the markets are boring. No volatility; just summer flatness. Even the financial media and blogosphere are completely boring. No originality in content and certainly nothing new or profound being reported…and that includes Marginrich.com. I’ll keep posting my thoughts on various market observations but my next post I intend to share my thoughts on a different type of speculation, and that is sports betting specifically on college football. Having evaluated all the major sports, NCAA football is the one sport that consistently provides asymmetrical profit opportunities against any sportsbook whether it’s online or at a casino. Don’t get me wrong it ain’t easy, but if you do the research and have a quality understanding of the variables that go into some basic handicapping, then profits can be made.

Be safe and allocate intelligently because a rising tide does lift all boats. Just don’t take your eye off the ball for any reason while throwing money around willy-nilly…and I’m sorry for being gone so long. Life happens.

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.