bizzXceleration: Performance, Value and Profit

Needless to say oil prices are occupying everybody's mind right now - particularly since you can't go down the street without seeing $4/gal gasoline prices. Congress is holding hearings to chastise the speculative excesses with "inside baseball" players using the correlation is causation argument to prove widespread evil-doing. My favorite bloggers (BigPicture, CalculatedRisk) and financial writers (Jubak, Mauldin) have all put together excellent summaries recently that are worth reviewing. And of course the MSM (WSJ, NYT, et.al.) is covering the issue extensively. So here's our collection which we've been putting together for a couple of weeks now, and for which the time seems ripe.

The basic argument, which we plan in expanding into an analysis in a follow-on Part II, is the fight between fundamentals and speculators. As you skim over the readings below you'll find a wide sampling of sources and informed opinions but here's our take. Of the ~ $150 price/barrel target price the long-term fundamental price is in the $80-100 range. Another big chunk of that target is caught up with geo-political risk factors. And a third with speculative feedback on short-turn prices. Let's say that the proportions are roughly 60% fundamental, 20% risk and 20% speculation.

Except for one thing. The basic structure of the oil industry is that the major cost drivers are exploration and production; then distribution and processing (refining). As oil has gotten more scarce in inexpensive and readily (politically) accessible areas of the world there are non-linear rising costs to the two fundamental drivers. That's lead to a fundamental and long-term supply-demand imbalance as new oil production hasn't been keeping up with new oil demand and consumption. A partial result of that long-term dynamic of skating on the margin is that the system has been and is increasingly vulnerable to shocks as its' fragilities grow.

That's been the basic dynamic for at least three decades only it's gotten much more pronounced in this century. HOWEVER....there is another fundamental shift well underway that is greatly exacerbating all these innate structural characteristics.

Not only are new oil sources in increasingly hard to get to areas but the bulk of the world's known and potential reserves are no longer market priced nor controlled by private companies. Rather they are controlled by national oil companies or other political entities. Who's priorities are NOT long-run profit maximization.

Worse yet for those reserves controlled by political entities they are milking existing reserves to fund socio-political priorities and significantly under-investing in maintaining current flows while not developing new ones.

There are two bottomlines here:

1) oil is likely available but is getting increasingly scarce at prices we're comfortable with; i.e. the $80-100 baseline structural price, which shifted up from $40-50 in the last ten years, is likely go toward $150+. 20% X $150 = $60. 2 X $60 = $120. $150 + $120 ==> ~ $300 oil !

2) because oil is depletable and demand is growing there is a long-term scarcity premium that's being increasingly reflected in the base (cf. Prof. Hamilton's discussions below). In other words there is a rising scarcity rent being built into l.t. prices that's feeding speculation.

So below you'll find readings on the short-term and long-term pricing factors as well as the impacts on gas prices and the survivabilities of the refiners, or refining operations. You'll also find some fundamental re-thinking about the future prospects of Big Oil as we know. Which is pretty good though it generally doesn't reflect these deep structural changes evolving in the fundamentals of the industry....yet....other than by symptom.

The next steps of course are diagnosis and treatment....otherwise known as a National Energy Plan. Yeah, right. 

Continue reading "Oil Industry I (Readings): Prices, Fundamentals, and Big Oil Futures" »

Posted by dblwyo at 10:47 AM | Permalink | Comments (0)

Here's our rather massive collection of readings excepts related to the Finance Industry. Judging from the fact that the ETF, XLF, is up almost 4% to day clearly the worst is over. Of course that not only is there no good news on the economic front but that this has been a month of writedowns and downsizings gone wild we'll admit to feeling a tad disconnected to the new realities. With this large a collection it'll be hard to summarize and just skimming the headlines, let alone the excerpts, will just about put you in the picture. But we'll take a pass.

1. The general theory, other than the talking heads talking themselves into thinking the "worst is over", seems to be that this was the kitchen-sink finale and from now on it'll be tough, very tough, but clear sailing. Until we see fundamental reform and re-structuring we're going to be locked into this boom-bust financial cycle with increasing frequency and severity of breakdowns.

2. The structural flaws of the industry's business models have yet to be addressed because it's the work of a decade or more - fair, considering it took nearly three to evolve this mess. Speaking of boiled frogs. UBS recently came out with the most candid internal appraisal which could be paraphrased as, "boy, did we ever screw the pooch on this" and "there was a total lack of either adult supervision or responsible business management". Seems fair to us.

3. The writeoffs aren't over and the various institutions are going to be exposed to more as Housing continues its' dive off the cliff, bad mortgages and securities reset and other asset classes, e.g. consumer debt, business loans, etc. come under increasing pressure. Future writeoffs will continue the debacle most likely. Which will in turn continue to put pressure on capital and will likely lead to a need for more infusions - the capital base of many of the banks is inadequate as it is without more writedowns.

3. In reaction to the destruction of capital the banks are tightening up on credit enormously. The business cycle was going to put serious pressure on loans anyway and lead to defaults, losses and bankruptcies. Combine the two and we have yet another Perfect Storm. And the writedowns, infusions, capital pressures, losses, etc. will feedback on one another. In other words in addition to the writedown problems we are just heading into a classical increase in loan losses.

4. These troubles in slightly different form are percolating to other sectors. While not exposed to the securitization debacle the Regional Banks are just beginning to feel the pain and are headed down their own slippery slop, I mean slope.

5. Accounting for this mess has been disingenous to deceptive with Level III "funny-money" assets protected and inappropriately valued and with various manuvers being used to keep other writeoffs and impairments away from the balance sheet and the bottomline. Even if nothing changes there'd therefore still be serious risks hiding in the wings. 

6. Each major sector is having problems from LBO loans to the PE firms. For example no LBO's no fees. And the LBO debt is getting written off at ginormous discounts. The PE guys are going to have to re-discover their roots of actually focusing on and improving the operations of their portfolio companies. Hedge funds are being called on the carpet as well.

7. And this all doesn't mention the burgeoning job losses that have actually been fairly low so far.

8. When you look at individual companies from UBS to Merrill to Wachovia to National City to Credit Suisse are facing major hurdles unique to them as well as the general breakdowns.

9. There are few, almost no, good stories on any front in this mess of messes. A possible exception is JP Morgan where Dimon has provided discipline and adult supervision. As a result JPM may be in a good position to do a little shopping. We're hard put to find anybody else. Nominations are open.

Before or after your excerpt skim the one single thing we think you ought to dive in on is George Soros' interview on Charlie Rose: A conversation with George Soros, Chairman, Soros Fund Management. And take a look at the chart at the right which shows corporate profits over the long term both in absolute terms and as shares of the total. There's a lot of information hiding there. For example why did corporate profits surge so hugely in this decade ? Well ask all the people who didn't get the jobs a real recovery would have generated. But for our purposes it's the shares that tell the story. Look at shares of the Financials.After growing gradually with the slow evolution of all this cleverness from 10% to 20% in the '80s it stayed in the 20% range thruout the '90s. And then suddenly boomed to 30% around 2000. Rapidly ! Now what sudden major structural innovation, say on the order of Pharmaceuticals, Electronics or the Internet lies behind that ? What new major source of value was created ? In case you're wondering that's both a rhetorical question and something for you to ponder. Because if there were no such innovation, i.e. if Financial firms were able to grab a dispproportionate share of  profits thru a combination of a weak economy and financial engineering, then it's not sustainable. And we're back to our first point.

Happy Skimming ! 

Continue reading "Readings (Finance): It's Over, It's Over...Yeah Right" »

Posted by dblwyo at 12:37 PM | Permalink | Comments (0)

The title quote is (again) from Mr. Kipling's If and parts of it go like this:

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;

If you can fill the unforgiving minute
With sixty seconds' worth of distance run --
Yours is the Earth and everything that's in it,
And -- which is more -- you'll be a Man, my son! 

It's not entirely clear that many are indeed keeping their heads nor looking at the facts as they are. By and large the outlook is still too, entirely too, sanguine and fails to grasp the full extent and scope of the on-going tsunami's in Housing and the Credit Markets and what that'll do for the Finance Industry. Nor what's happening with the core economy - let's all not forget shall we that there's a real economy turning down out there with consumption starting an Acapulco cliff diver's warmup routine. On the other hand of those few who get it in their/our attempts to shake out some of the complacency we may get a little too alarmist. Yes these are serious problems that carry grave and serious risks with them. But we've coped with worse before and in recent memory.

The long-term outlook is in fact not bad. Certainly we have strong markets, a robust and innovative economy and a skilled and educated workforce. All of those things need to be better of course. But the question is will we keep our heads and make it so. Or panic and huddle in the blankets in the basement ?

We could summarize, explain and interpret the following readings but the titles and excerpts seem to follow, IOHO, pretty much carry themselves. While they're all worth clicking thru on to read the whole that last two (first from Jesse Eisinger of Portfolio who holds up the doom is coming end of things and next from Warren Buffett who holds up the we can cope, it's not that bad and keep your  head up and your powder dry end) are especially worth reading in their entirety. 

Continue reading "IF You Can Keep Your Head: Readings & Perspectives" »

Posted by dblwyo at 03:22 PM | Permalink | Comments (0)

The bridge between the economy and company performance is the markets, going both ways. But the keystone of the bridge, that holds everything together and which the rest of the linkages depend on, is earnings. As of right now we think that keystone is crumbling under the growing credit and economic pressures. We also think that the analyst community is somewhere between optimistic, wildly optimistic and perhaps on drugs. The question is do we drink the koolaid along with them. And we're definitely not alone in those views. Before going on may we suggest spending the ~3 min. on the accompanying video from the FT and their very astute financial reporter John Authers (btw his regular daily vidclips appears to us to be extremely valuable and worth checking on). If you click thru you'll be taken to the vidclip on the earnings outlook but you can see the gist of the argument in the chart. With Financials included analysts as a whole are looking for a 60% jump in late '08 and excluding financials are looking for low double-digit growth thru '09 ! Which we think completely misundertands what's going on with the economy and where we're at in the business cycle. And is also very unrealistic in the face of an accelerating slowdown, tighening credit and rising worldwide inflation. To help you make your own judgements we've collected a large batch of readings and links in the readon section, in three parts. First is a collection of overview stories followed by a collection of our own posts analyzing the deeper structural characteristics of earnings followed by a week-to-date collection of earnings reports.

Continue reading "Readings (Earnings): The Real Earnings Realities that Ain't...YET" »

Posted by dblwyo at 12:28 PM | Permalink | Comments (0)

A friend has put up his own blog relatively recent on Be Your Own Economist:

 BE YOUR OWN ECONOMIST

 The friend is Dr. Michael Lehmann, retired econ prof at UC San Francisco (UCSF). I mention this for two reasons, one of which is that his name might be familiar. Mike's the authoer of, the Be Your Own Economist books, or more formally:The Irwin Guide to Using The Wall St.reet Journal, 6th Edition by Michael B. Lehmann . Which some of you may recognize. Back in the day I read an early edition (hmm...shall I mention which one ?). Actually the 1rst but over the years perhaps my favorite was the  4th. Highly reccomended. Let me explain.

Presumably if you're visiting this site you've got some concern with the direction of the world, particularly the direction of the economy, markets and buisness ? Mike's book is as good an introduction to the data sources (which are largely on-line now) and how they're reported in the WSJ as anything ever written IMHO. His old web site (I understand a new one is under construction is BeYourOwnEconomist.com ) as well as his blog carry pointers and guidelines to the data sources. More important is it'll provide you a guide to understanding the business cycle and how the data fits each part. And beneath that how it should look - or conversely what it means. His blog does a nice job of taking a macro-issue and working thru clearly, cleanly and directly using some nice, relatively simple charts.

Certainly, despite a certain amount of background in the field (M.A. in Econ) Mike's book served me well to learn applied and jargon-free business cycle analysis, which has in turn, served me well in general over the years. In fact if it's a subject you'd care to pursue we have four sources to recommend to you, which are discussed below. Mike's book and blog, Joseph Ellis' "Ahead of the Curve", Paul Krugman's "Peddling Prosperity" and Greg Mankiw's "Macroeconomics" books. UPDATE: Actually five, the fifth being China's economic transformation and outlook referring to Greg Chow's excellent books on the subject.

Continue reading "Social Notes: Be Your Own Economist and Related Readings" »

Posted by dblwyo at 08:53 PM | Permalink | Comments (0)

Well we've been maundering on about the credit crisis, the mechanisms and Fed policy and strategy a few times in the last week. So, how're things going ? Judging from the markets and today's futures this is all coming under control again. Judging by the uptake on the ECB fundings and the Fed auctions there's a lot of folks out there looking for cash and liquidities. So is that good or bad - btw the ECB pumped $500B into the credit markets this week. Not the $50, 70 or 80 of prior efforts. Below you'll find some interesting readings worth your time to at least skim the excerpts of. Ones that you should look at include CalculatedRisk's comments about a $2T catastrophe in the housing market, Jesse Eisenger's story on the coming commercial real estate kabumpf (which CR has been forecasting down to the cyclic structure and timing for almost a year now - hint, hint,...) and Paul Krugman's essay on the risks of a Liquidity Trap. The one we'll particularly draw your attention to is Dennis Berman's on how the crisis could get worse. Partly because it tells us that at least the propagation of this Ebola credit virus is edging into awareness but mostly because, based on our little model, we don't think they've got the scope and scale of this thing at all grasped.

 How the Crunch Could Worsen Wall Street's latest parlor game is best played with a comforting cocktail in hand: trying to guess just how the ever-fragile banking crisis could tip into doomsday territory. The scenarios have the air of gritty science fiction -- a huge capital crunch triggered by bond-market selloff and a money-market bloodbath. The scenarios have, by all accounts, a slim chance of occurring. But they are a reminder of how much the rapidly changing financial system, for all its innovation, is still built on confidence. Here are two leading scenarios as described by Wall Street bankers, traders, and regulators. The bond-rating selloff: In the doomsday case, a bond-insurer downgrade or bankruptcy sets off this bond-market fire sale. The consequences of this could be unpredictable and severe. Breaking the Buck and Much More: Confidence is at the very heart of the money-market mutual fund, where the sanctity of the "buck" is one of the last American absolutes. "Breaking the buck" -- meaning to lose one's invested principal -- has proved so utterly verboten that it's only happened once. If the value of this SIV paper drops even further, it could touch off losses through the money fund. What would happen if a money manager had to make the choice between "breaking the buck" or paying for, say, a crippling $2 billion shortfall? For some on Wall Street, the threat is less about the capital shortfall and more about an ensuing crisis of confidence in money funds, leading to liquidations, which in turns creates forced sell-offs and still greater losses.

Continue reading "Speaking of Avalanche Warnings: More Credit Crisis Readings" »

Posted by dblwyo at 08:56 AM | Permalink | Comments (0)

Well most of the folks in the Finance Industry must be feeling like they're living in "interesting times" (we'll spare you the old saw which my Chinese friends tell me is Thai in origin). If they don't now they will soon and likely all thru next year. In some ways there aren't many surprises here in either the short-term or the long-term. Lots of stories in the last year or so have had lots of executives and others admitting this was a "dance" built on thin, thin ice. Personally my preference would have been to stop dancing and either get off the water or find some way, better yet, to brace it up or stop melting it.

Well like the Chinese peasants of old who wanted nothing more than to run their farms, grow mulberry and make silk so as to build a prosperous life for themselves and their descendents the worker bees are about to reap the harvest sown by the Power and Thrones. Let's make up a new one - "when Princes dance in the Capital the pipers are paid by the peasants".

Time to pay the pipes and it looks to be expensives.

Continue reading ""Interesting Times" for the Finance Industry: Readings & Resources" »

Posted by dblwyo at 09:43 AM | Permalink | Comments (0)

Whee, are we having fun yet ? How do we manage to have everybody and his brother talking about a 1/4 point rate cut and then have the markets drop almost 3% in a couple of hours ? So much for prescient markets doing look aheads. And then come back almost 1/2- way to the previous high ? And then loose 1/2 of that in the first half of today ? Clearly everygody and all their relatives, friends, and acquaintences was expecting 50 bps and a stronger statement.

Which really means that the markets don't have a clue, that the full extent of the credit crisis isn't well understood and we've got a long way to go and this may not only be the tip of the iceberg. It may be the first of a fleet of icebergs. It also means that Mr. Market and all his little minions really hasn't a clue as to what's going on.

Not sure I do either but, pardon the small taste of hubris, our feeling is a little schadenfreudish and also reflecting a small bit of our prescience in a couple of prior posts. The recent on that summarized the Economic and Market conditions and made the argument that we're enterring a new sentiment regime (for which the last couple of days seem to be ample proof): WRFest 9Dec07: the Dance Goes On, or the Emerging Cusppoint Shift. 

And a much earlier one on the "rocks in a pond" where this crisis isn't likely to be restricted to just mortgage related debt instruments. However there's so much going on that before diving into some specific thoughts & analysis we thought we'd try and provide a backlog of readings that those will be based on and which might be helpful to put into your library.

Those links and pointers are below the line but the one that provides an excellent historical summary of the long-term structural trends that underping the present crisis is Alan Greenspan's from the WSJ. BtW - it's so good that we've put the entire thing up as a PDF file for your enjoyment.

Continue reading "Understanding the Credit Crisis: More Readings & Resources" »

Posted by dblwyo at 12:55 PM | Permalink | Comments (0)

A few weeks ago a friend of mind asked me to compile a list of recommendations for an executive reading list. The final list ended up, without a lot of annotation, as a WishList on Amazon with the top selections slightly annoted as a recommended readings list. A couple of weeks ago the NYT ran an interesting article on CEO reading lists and how eclectic they were:

C.E.O. Libraries Reveal Keys to Success Michael Moritz, the venture capitalist who built a personal $1.5 billion fortune discovering the likes of Google, YouTube, Yahoo and PayPal, and taking them public, may seem preternaturally in tune with new media. But it is the imprint of old media — books by the thousands sprawling through his Bay Area house — that occupies his mind. Serious leaders who are serious readers build personal libraries dedicated to how to think, not how to compete. Perhaps that is why — more than their sex lives or bank accounts — chief executives keep their libraries private.

 Jeff Matthew's of NotMakingThisUp recently posted a series of entries detailing his pilgrimmage to Omaha for the annual BRK meeting and the Warren reinforces the point, indeed.

“What should I do to become a great investor?”

Buffett’s emphatic answer reminds me of “The Graduate,” when Mr. McGuire famously tells Dustin Hoffman’s character, Benjamin, that one word—“Plastics”—as if it is the key to the universe.

Buffett says:

“Read everything you can.”

It is advice Buffett will give in different ways throughout the morning and afternoon.

For Buffett strongly believes—and Munger later concurs—it was the reading he did in his formative years that shaped his approach to investing and prepared the groundwork for the next fifty highly successful years.

And he’s not kidding when he says to “read everything you can”:

“When I was ten,” he says, “I’d read every book in the Omaha Public Library with the word ‘finance’ in the title.”

Buffett does not advise reading a particular book, nor does he steer the budding Buffetts towards any particular investment style, even though the impact of Benjamin Graham’s “The Intelligent Investor” on Buffett is widely known.

Rather, he advises reading everything possible to find the style that suits the individual:

“If it turns you on, it probably will work for you.”

Well since the prior entry was on Kaptain Karl's (Carl Icahn) views on the general lack of performance of senior executives and the lack of value delivery of their companies it struck me that a small step in the direction, and following Warren's sage advice, might be to share my little shopping list. Or at least the first part of it though.

To come up with such a list though - and it's both eclectic and has a certain personal skew - one has to start by asking what's the purpose of the list.

Continue reading "Read, Read, Read: a Little Starter Executive Reading List" »

Posted by dblwyo at 02:46 PM | Permalink | Comments (0)