Saturday, December 6, 2008
I am very concerned about the direction President-Elect Obama seems to be headed as he tries to address what might be the biggest economic crisis the world has ever seen. Obama stated in his December 6 Youtube address that we cannot just throw money at the problem, but that is exactly what he has been doing so far. He supported the massive bailout of the financial system. He is supporting the bailout of the automakers. Bloated institutions with toxic balance sheets need to go bankrupt so we can clear the toxic debt out of the system. Shareholders of unsound businesses should be wiped out; bondholders should take losses. Instead, Obama is perpetuating a system where profits are privatized, and losses are socialized. His strategy is basically welfare for the elite.
Citibank and Bear Stearns should have gone under. Our country has hundreds of small banks and credit unions that have made wise lending decisions that would be thrilled to take market share away from the mega-banks, but Obama is picking winners and the winners are the most politically connected. If we need big banks to finance large-scale investment, then the Government should set up new banks with clean balance sheets, not prop up these worthless institutions with poor corporate leadership.
As for the automakers, the Big Three should allowed to fail. They should pursue a "prepackaged" bankruptcy that allows them to clear their debt, renegotiate with labor, and get back to making cars. If they have too many factories, they should sell some of them at fire-sale prices to up-and-coming battery-electric and plug-in hybrid manufactures. That is how the market is supposed to work. There is no way to save jobs if fewer people are buying cars! Bailout or no bailout, some jobs will be cut because demand is shrinking!
Finally, I am very disheartened that Obama made no mention of green-energy in the overview of his jobs plan. Solar, wind, and geothermal are the future of sustainable American energy. These technologies are quickly approaching "grid-parity" on an unsubsidized basis, but their progress will be stopped in its tracks without significant government support over the next few years.
If we keep throwing money away by constantly bailing out the well-connected entrenched elite and the dysfunctional corporations they own and run, the government may not have enough resources left over to create a better future for this country.
Obama will bankrupt our future if he continues down this road. How are our grandchildren ever going to dig themselves out of this mess? Obama says he welcomes diverse opinions about how to solve this problem, yet he hasn't invited anyone to join his economic team who actually saw this mess coming. People who don't understand the root causes cannot provide working solutions. Please check out Mike Shedlock's blog Mish's Global Economic Trend Analysis. Mr. Shedlock has been warning about this economic tsunami for years, but no one in power has listened. He understands the root of the problem and how to fix it. Here's a hint: it's not bailing out the shareholders, bondholders and executives of failed corporations.
I pray Obama stays true to his word and seeks guidance from those who saw this mess coming and understand that the root of the problem is too much debt. The solution cannot be for the government to try to Socialize the debt, as that just turns private debt into public debt. The debt MUST be allowed to be destroyed.
Wednesday, December 3, 2008
In Timminco's 2008 Q1 conference call, CEO Heinz Schimmelbusch indicated that 2008 sales prices for silicon metal would be somewhere around $1.40/kg which would give us around 25,000 MT of metallurgical silicon sold in Q3. Since all of the $20 million Q3 increase in inventory is attributed to the silicon business, Timminco seems to have added enough inventory to produce an additional 16,000 MT of metallurgical silicon for use in the UMG ramp-up given that gross margins in the metallurgical business of around 10% would not be applied to inventory.
This would be on top of the inventory build up from Q2. Granted the second quarter's inventory increase included a substantial amount of material for the magnesium business which would hopefully have been drawn down to some extent by the end of Q3. In any case, it is safe to assume that the $20 million inventory increase in Q3 is not all coal and quartz, so it is entirely conceivable that Timminco has built up 10's of thousands of metric tons of silicon metal that did not achieve the necessary purity levels for UMG silicon over the last few quarters, while producing less than 700 MT of finished UMG silicon. I am not claiming that there is proof of this happening, but it seems within the bounds of the inventory levels reported.
So the concern here is that to achieve profitability on paper in the silicon business, Timminco might have built up massive amounts of silicon metal for which they do not currently have customers and might not be able to refine into UMG in a profitable manner. Furthermore, in order to scale up to the planned 14,400 MT of annual UMG capacity, the future inventory could conceivably be enormous .
Fortunately for shareholders (including this blogger), this is all just speculation for now. It is possible that some of the raw material increase is for specialty quartz with lower levels of impurities than what is available in Timminco's quartz mines. It is also quite possible that Timminco fully expected a large inventory build-up in the early stages of the expansion and they have a proven path to work it down in the coming quarters. In fact, they have given possible indication towards the latter in the Q3 conference call.
René Boisvert, the head of the UMG silicon expansion had this to say around the 35 minute marker during the 2008 Q3 conference call:
The quality level of [the mid-grade material in our inventory] in general is very high quality, but in most cases not as good as some of the other material that we've used as feeding stock. So it's higher quality than what we sell as metallurgical grade silicon to our, let's say, customers of the past few years, but not as high a quality as some of the other material we've used as feedstock. But in the 4th quarter because of our additional purification capacity, we'll be able to use that intermediate material in the process.Over the past two weeks, I have placed numerous calls to investor relations representative Lawrence Chamberlain and CFO Robert Dietrich. Given the nature of my questions, Mr. Chamberlain told me I would need to speak with Mr. Dietrich directly. As of this entry, Mr. Dietrich has not returned my calls.
...Some of the material produced [in our silicon metals division] did not reach what we considered the minimum spec for the purification process. But as we improve the purification process it enables us to use lower grade quality of material as a feeding stock.
My questions were as follows:
- Was the large inventory increase anticipated and if so why were shareholders not warned ahead of time?
- Does Management have verified path to working down this inventory in the coming months?
- What is the likelyhood that some of this inventory buildup intended for use in the UMG division will ultimately not be able to be refined to the level required by Timminco's UMG customers? What percentage?
- What is the likelyhood of further net inventory increases over the next three quarters as the expansion progresses?
In the meantime, current shareholders still have a few reasons to remain very optimistic. For one, the man in charge of the UMG silicon expansion, René Boisvert, has been furiously buying shares of the company at recent low prices. According to the Canadian insider disclosure system, www.sedi.ca, Mr. Boisvert has bought 59,000 shares of Timminco's common stock during the month of November at an average cost of C$3.74/share. This was a personal investment of C$220,633 by the one person who knows more than just about anyone else about the future prospects of Timminco's UMG silicon expansion.
Also, in the video below from Solar Power Internatioal 2008, Q-Cells CEO, Anton Milner weighs in on the prospects for metallurgical silicon. Fast forward to the 22:20 mark or so.
Q-Cells is one of the largest solar module manufacturers in the world and has substantial contracts for UMG silicon from Timminco. Q-Cells also has a contract for UMG silicon with Elkem Silicon, however Q-Cells recent financial statements discuss the Timminco partnership in detail with almost no mention of Elkem.
I hope to have more up on this soon. In the meantime, if you have more information on this topic that you wish to add to the discussion, please share your thoughts in the comments.
Tuesday, November 25, 2008
In a case with national implications, the Environmental Appeals Board of the U.S. Environmental Protection Agency ruled today that the EPA had no valid reason for refusing to require that best available control technology be used to limit carbon dioxide emissions from a coal-fired power plant proposed in Utah.This basically sets a legal precedent that could potentially be used to prevent any new coal-fired power plants from being built that do not have controls to limit carbon dioxide emissions. In most cases, meaningful carbon capture and storage controls are extremely expensive and put the cost of coal-based energy well above natural gas, geothermal, and utility scale wind energy. We will see how this plays out, but this is a huge victory for reducing CO2 emissions, and eventually eliminating the ability of corporations to externalize the costs of pollution in general.
The Sierra Club went before the Environmental Appeals Board in May to request that the air permit issued by EPA Region 8 for Deseret Power Electric Cooperative's proposed waste coal-fired power plant be overturned because it failed to require controls on carbon dioxide emissions that cause global warming.
As permitted, Deseret Power's 110 megawatt Bonanza plant would have emitted 3.37 million tons of carbon dioxide each year. It would be located next to the existing Bonanza Power Plant on Bureau of Indian Affairs land.
In a note to my friends and family on January 21, 2008, I said:
...I am cutting my position in alternative energy to 8% or less of my holdings. This is no time to be a hero. Capital preservation is essential.Since then, there has been a spectacular decline in alternative energy stocks. For a broad measure of the alternative energy market, I like to look at the Powershares Global Clean Energy ETF (PBD). As shown below, the alternative energy equities market as a whole is down around two-thirds over the last six months:
The rest of my portfolio is Gold/Silver, US Govt Bonds, International Treasury Bonds, Yen, and shorting the market (where you make money as the stock market goes down). FDIC insured CDs and savings bonds are also safe for the time being. I strongly recommend selling most or all of your stock holdings. There might be some spectacular rallies along the way, but I am not going to try to time the market. The overall market trend is decidedly down. We won't hit the bottom of this for years. It is not too late to short the market. Just remember that there will be bumps along the way. I will wait for alternative energy stocks to stabilize before I even think about re-entering the market. Even then, it will be with a small position.
A few things that are starting to become clear. First, the dotted line that marks the bottom trend line of the recent sell-off is parallel to to the solid line that marks the upper trend line for the alternative energy bear market as a whole. This is a good thing. I believe this lower trend line is likely to hold. We are now towards the bottom of that trend range and are testing the upper dotted line that marks the top of the recent sell-off. At some point in the next month, I would like to see this ETF break through the upper dotted line, which would be a short term bullish signal that would allow the ETF to try to retest the solid upper trend line. In any case, this ETF is filled with a lot of unprofitable losers along with a few profitable winners, so a bottom will happen for winners such as FSLR and FAN long before this index shows signs of a true recovery. The P/E ratio of this ETF is still around 38 which is still high, even for growth companies.
The drop has been dramatic to say the least, far surpassing the 45% drop on the DowWilshire5000 composite index. A major factor in the scale of the decline is the fact that P/E ratios for alternative energy stocks were grossly inflated six months ago. P/E ratios of 60 or 100 were commonplace (note to investing newcomers, the lower the P/E the better). Now there are many good companies out there with P/E ratios under 10. STP, WFR, and FAN (ETF for the wind industry) come to mind.
Let's take a closer look at the First Trust ISE Global Wind Energy Index Fund (FAN). This ETF sports a much more reasonable P/E of 9.69. Just by valuation alone, I would say that FAN is much closer to a bottom than PBD, but let's take a look at the chart for a technical analysis perspective:
One of the first things that I notice when I look at this chart is that, unlike PBD, FAN is actually starting to show some support/resistance levels in the current price range. $9-10 looks like a near term bottom and if this ETF can break back above $14 it could really start to come alive. If it clears $14 that could be the sign of a very bullish "double-bottom" or "W" chart pattern. As you can see, this ETF moved back above the upper dotted trend line. If it holds above this dotted trend line, that would a further indication of near-term bullish-ness.
So how long will the overall weakness in the alternative energy sector last, and what should we be looking for to determine a final bottom for renewable energy stocks? That is a bit tough to say right now. The PBD chart above looks pretty darn ugly and while FAN is showing some strength it certainly isn't out of the woods yet. I currently have about 20% of my portfolio in alternative energy stocks, but that is primarily to balance out the 20% of my portfolio that is shorting the market right now. As I noted in Vicious Bear Market Rally Likely, I am trying to stay market neutral right now and there are very few companies out there that meet my criteria of sustainability and future profitability outside of the alternative energy world.
The real question facing renewable energy is that of fundamentals. Will there be enough demand to meet all the increased supply coming from these growing companies as the broader market continues to contract? I hope to address this issue in an entry very soon.
Sunday, November 23, 2008
Before we look at my analysis, check out this graph courtesy of blogger Doug Short comparing the current market decline to the Great Depression.
As you can see, the crash of 1929 happened more abruptly than the current decline. But in 1929, the initial crash was followed by a 10 month bounce where investors were not sure if the market was going to recover. Note that unemployment reached 8.7% in 1930 but still the market was able to stay above the 50% mark on the DOW for most of the year. Our unemployment level is still much lower than that today (at least officially). What this shows us is that even with very bad economic news, hope may last much longer than the market bears anticipate. Note also that there were a number of bounces during the 1930s decline that lasted 6 months or more.
With that background, let us turn to the current decline and examine what we might be able to expect going forward. For the big picture, let's look at a chart of the DWC over the last 25 years.
The blue line indicates a "double top" (2000 & 2007). This was the first major resistance/support line in the 2007-2008 collapse. Bulls (investors and traders expecting the market to rise) made many attempts in 2007 and early 2008 to try to keep the market above this resistance line but ultimately failed in 2008. The failure to maintain a level above 14341 in early June confirmed that we had entered a massive bear market.
The red line indicates the bottom of the "dot-com" bear market from 2000-2002. The market first ran into resistance at this level in 1997 on the way up. From 2002-2003 the bears (traders and investors betting that the market will decline) failed three times to push the market below this level, finally giving up and allowing the bulls to have another run at the blue line.
The pink line indicates a support/resistance line of market indecision. The market has had trouble clearing this level both on the way up and the way down in 1997, 1998, 2001, 2003, and again in 2008. Notice the wild swings between the red and pink lines in 2002-2003. The market has experienced extreme levels of volatility between these lines already in the past couple of months and I expect this trading range to hold for at least a couple of weeks and possibly up to 6 months more before we finally break decisively below the red line.
The yellow line indicates the next major support/resistance line above the pink line. If we break above the pink line in the next few weeks, I think we might make it back to the yellow line before the next major down-trend begins.
The purple line indicates the next major support once the red line fails. There is clearly a long way down without much to break the market's fall once we clear the red line. This is a further reason why I expect it to take a little while to clear the red line.
Now let us turn to the bottom of the Dot Com bear market in 2002-2003 to take a closer look at those resistance/support lines.
Note: the lines on the graphs are not in exactly the right place. Please refer to the colored numbers for specific support levels.
For starters, notice the wild swings between the red lines and the pink lines. Also note that the market tried 3 times to fall below 7273 and failed each time. I expect multiple attempts to fall below that level again this time around. Imagine placing a bet on which way the market was going to move during this time-frame in '02-'03. Every time investors thought they knew which way the market was headed, it turned around on them. This is what I would call a range of extreme market indecision. This time around it is much more likely that the ultimate direction is down, but it is very unclear how long it will take the market to come to that decision.
The yellow line is DWC 10,000, which has a lot of psychological significance, but was less important from a technical analysis (TA) perspective in 2002-2003 than the red and pink lines. (Usually the TA significance of a support/resistance line is determined by the number of times the market bounces off it.) However, the market did struggle with the 10,000 level a few times between 2001-2004, and as we will see below DWC 10,000 remained significant in 2008 as well. It is definitely possible that we will see 10,000 one more time before breaking through the red line decisively.
Let us turn our attention to 2008:
Notice that all of the support/resistance lines that were significant in the 2000-2003 bear market became significant in the 2008 bear market as well. I have included trend lines in the above chart to help us see the overall shape of the decline more clearly. The initial primary trend is indicated with solid black lines. The more recent panic is indicated with the dotted lines. Neither of these trends will survive forever. When the market clears the upper dotted line, it will be a confirmation that the current market panic is over and the market will be free to bounce back and forth between the red and pink lines. If the market clears the pink lines, it gives us an indication that the market might try to rally all the way back to the yellow 10,000 level. At some point, probably at least a couple of years from now, the DWC will finally rally back above the upper solid black line (at a much lower level). This will be an indication that the bear market is probably over. I will not hazard a guess at how low that will actually be.
Finally, let us take a closer look at the last couple of months:
Notice the significance of DWC 10,000 (the yellow line). The market tested the 10,000-10,269 every trading day between October 6-21 except for October 10 & 16. This was followed by another attempt November 4-5.
Friday was potentially a key reversal day for the near term. As you can see, the market hit both the lower dotted trend-line and the red resistance/support line on Thursday, and bounced up pretty hard on Friday. If I had to guess, I would have to say that the DWC will rally back to at least the lower pink line before retesting one of the two red lines. At that point, we will probably retest the upper dotted trend line. After that, it's back to the red lines or up to the top pink line (or the yellow lines) if the upper dotted trend-line fails.
I am not sure if this level of technical analysis works because everyone believes in it and trades accordingly, or if it is truly a natural function of our collective human psyche, but these support/resistance lines clearly have a track record for giving us insights into the probabilistic nature of market psychology. Of course no one can predict what the market is going to do with absolute certainty, but time and time again, technical analysis proves itself to be a useful tool coping with the market's seemingly chaotic nature.
I will likely stay out of this mess. I will either go all cash, or try to stay market neutral (a balance between long and short positions) throughout this period until we break at least a couple hundred points below the lower red line.
As a side note, so far my favorite alternative energy stocks have not rallied very hard, and I am concerned that a downtrend might still be intact for them. I have theories as to why this might be the case, which I hope to share in the next few days. I have a number of posts I am trying to get out and I am not sure when I will get to that one.
On the other hand gold stocks performed very well and Mish just posted that he thinks gold stocks are a good buy at these levels. Mish is a true expert in deflation and has written many times about how he thinks gold will behave throughout this deflationary period (such as here and here). More importantly, he called the top in gold in March when it happened. My IRA would be a lot happier right now if I had listened to him. I do not intend on making that mistake twice; I plan to buy more gold related stocks and/or ETFs this week. Mish has been almost 100% accurate about every twist and turn so far during this collapse. In addition to gold, he called the stock market top in real-time and has been absolutely prophetic with regards to real estate, the financial system, banks, consumer spending, unemployment, treasury bonds, the value of the dollar, oil prices, and many many other topics. Very few people alive understand the current crisis better than Mish. It is too bad Obama didn't think to do a little bit of research on who actually saw this mess coming when he picked his economic advisers; Mish would have made a great Treasury secretary.
Saturday, November 15, 2008
Here is an email I sent out to my friends and family last Thursday with a little more detail on my current strategy:
It's been a crazy few months to say the least since the last time I wrote to this group. As a whole, the US stock market is down about 44% from the peak. I wish I could tell you that it is almost over, but sadly I cannot. I think it will be at least a year, and possibly as late as early 2012 before we finally hit bottom for the stock market. Also, I think the housing market is probably on a similar time-line. As has been the case so far, the market will not go straight down. There will continue to be rallies of false hope as people try to time the bottom. They will fail. I think the Dow will go to at least 6000, and possibly as low as 3000. I think it will be a minimum of 10 years and a maximum of 25 years before the stock market makes a complete recovery to its 2007 highs. I hate to be so pessimistic but I am trying to give people some alternatives to not loosing any more money and possibly make a little back in the process. I know some people have been reluctant to cash out of their 401k's for fear of a 4% early withdraw tax or whatever it is. Huge downside risks remain. 4% could easily be lost tomorrow. If I had to pay a 10% fee to get out of a long position in US or global equities, I would do so happily. Time is of the essence. Another crash could happen today or within a couple weeks.
Before I get to my current portfolio allocation, I want to give a little note about my experience so far throughout this decline. I had never shorted the market before this experience and I had some real growing pains. At one time I was down about 20% from my personal peak last November/December. I got a little too reckless with shorting the market during a couple bounces and took some losses. At this time, I've managed to get back to break-even and am probably up 5% over the last year. I do not mean this to brag or gloat. Far from it. I just want to give you the perspective that if you've had some losses, it is possible to recover. But you must be smart and cannot rely on letting the market recover on its own.
Right now, the market is at a critical point. The S&P500 is within spitting distance of a major support level. If it breaks significantly below 840 again in the next couple of days, it will probably drop another 15% or so before Christmas. There is also a possibility of a bounce that could last anywhere from 2-6 months before it continues downward. I think the bounce is less likely at this point, but it is definitely a possibility. However, my opinion is that to count on a bounce is just gambling at this point. It is not a high probability bet.
On the other hand, there are some alternative energy companies that are starting to look incredibly cheap. I've actually started buying a sizable position in some of these companies to balance out my short position in the market (a position that moves opposite to the market). It is likely that all of the alternative energy stocks I list below will still go down in value over the next few months. However, this is the ONE industry that is pretty much guaranteed to do well in the next couple of years and Obama has explicitly guaranteed his support. I will try to do another post when I decide to take a net long position in alternative energy, probably in then next 12 months. When that happens, there will be a TON of money to be made. I think this is the best hope for those who have lost 40% or more so far in the market so far. The timing will be critical though. I do not want to jump in with both feet too early.
At this point I am taking a fairly balanced position "longs" and "shorts". This is a "hedged" approach that should do OK regardless of which direction the market goes from here. That is to say that the alternative energy stocks should offset the "short" positions if the market goes up from here. And the shorts will hopefully offset any losses from alternative energy stocks over the next few months if, as I project, the market continues to tank. All the alternative energy companies listed are among those I consider best equip to weather the storm.
One of the "shorts" I am listing below is an "Ultra-short Consumer Services" (SCC). Earlier this year I mentioned another Ultra-Short in the real estated industry (SRS). I ended up getting burned on that one because it didn't accurately track the underlying index and wasn't able to meet its objective of providing 2X the inverse returns of the real estate index it tracks. As far as I can tell SCC does a much better job tracking its underlying index. As a note, I am not invested in SCC because I get my short exposure through Put options instead (a much more complex trading vehicle). However I am invested in GRZZX. I do not recommend going 100% short or 100% long. We are in deflation and return OF your capital is more important than a return ON your capital. If you balance your long positions with short positions you should experience much less volatility.
30% Alternative Energy Stocks
FSLR- First Solar, the global solar energy leader by installed cost to the end user.
WFR- MEMC, a solar silicon manufacturer with a huge amount of cash in the bank and still growing quickly
FAN-an ETF for the wind industry
TIMNF- Timminco, an up and coming solar silicon company with a new process that makes solar silicon at half the cost of the bigger players. Timminco is traded on the Canadian exchange.
ABAT- Advanced Battery, a quickly growing lithium ion battery company located in China
30-40% Short equities (these move in the opposite direction as the market)
GRZZX Grizzly Short Mutual fund. This is the best purely short mutual fund that I've been able to find. Unfortunately it has a minimum investment of $10K. If this fits into your price range, I highly recommend it. It seems to be very well managed.
SCC Consumer Services Ultra-short ETF. Careful this one is very volatile. It will double gains if the market continues to slide, but losses will be doubled as well if the market recovers (highly unlikely, in my opinion).
RWM Short Russel 2000 index
SH Short S&P 500 index
30-40% cash, treasuries, yen and fixed income
Cash in a FDIC insured savings account (less than $100K per account. current limit is $250k but that could conceivably change back to $100k with little notice)
FDIC insured CDs
IEF and IEI ETFs that are backed by US treasuries
FXY an ETF backed by Japanese yen
Gold and Silver are a wild card
Currently, my entire IRA is in gold and silver. I've taken massive losses to my IRA because of this. Nevertheless I believe precious metals will recover quickly once the deleveraging is done (sometime in the next year). In the meantime, at this point they look like they could go much lower. Gold could go as low as $550 or so before it finally hits bottom. I have no estimate on how low silver could go. Therefore I think it would be prudent to be conservative with precious metals investment until the prices have signaled a reversal.
Finally, if you haven't been following Mish Shedlock at http://globaleconomicanalysis.
Last but not least, I am not a professional investment adviser. This post should not be considered investment advice. This is my perspective and my current approach to investing based on the research I have done. Whatever investment decisions you make (including doing nothing), you do so at your own risk. As they say in the investment community, do your own due diligence.
For full disclosure, I am personally invested in FSLR, WFR, ABAT, TIMNF, FAN, GRZZX, IEF, IEI, FXY, GLD, SLV, and a variety of put options on stocks that i think will continue to decline.