The Destroyer of Finance

 What a sultry, sweaty day… and on all such sultry days it is fitting that S all happens in the world.

 Some dude named Dell and his company had a good day after reporting a very nice improvement in sales.

 Oil has retreated somewhat to $127, but don’t expect gas prices to track perfectly.  Part of the reason is the refiners.  The profit margins for petrol refiners have gotten squeezed in recent weeks as they have been unable to fully pass along the increased cost of oil (this is me saying that if they had been able to, gas would be a good 10 cents a gallon more expensive).  The refiners will look to recover some of that margin as oil retreats in price.

 I know few out there are going to shed a tear for the refiners, but thems the breaks.  You could refine your own 87 octane if you wanted.  What… you can’t?  Guess you’re stuck then.  And all it would take would be a multi million dollar start up investment plus loads of money in federal compliance regulations.

 I was in the elevator lobby on my floor staring at the fairly large flatscreen we have hanging on the wall yesterday.  It was after market close and there were these people on CNBC with snazy ties and shiny shirts and perfectly groomed and producted up hair and stupid ass goatees just spouting stuff, and I’ve just got to say:

 D

 O

 U

 C

 H

 E

 .

 These same people were pondering which restaurants had hedged their food costs and which restaurants had decided to rely on the “free market”.  Sorry guys, by the ability to manage risk (hedges) is sort of a key element of “free market.”

 Also, I let my CFO onto the floor today.  My backstabbing fatass ex-boss would probably be green to see me greet a banking CFO by first name.

Company: USG Corp (NYSE: USG)

 Industry: General Building Materials

 2007 Profit: $76M

 Current Market Capitalization: ~ $3.37B

 Current Price/Earnings: ehhh… NA?

 Industry Avg. P/E: ~21.9

 Ok, so USG makes building products.  Home building products.  HOMEbuilding products.  Mostly they are gypsum based.  Now I don’t understand how you base your buisness around a wandering tribe of peoples from eastern europe, and clearly neither does USG.

 Where the housing market goes, so goes USG.  With the major part of USG’s business coming from sales of wallboard and related products in the US [84%, fyi] (although they do business in Mexco, Canada, and China as well) USG is tied to both the commercial demand from homebuilders (most important) and the retail demand from the home improving consumer.

 USG has recently stated that they believe the decline in homebuilding activity has leveled off… at about 50% of previous levels.  As for the retail consumer… well, have you seen retail sales numbers?  Things aren’t really expected to get any better anytime soon, either.  Analysts’ predictions for future earnings…, I mean losses, keep getting worse and some of this might be the three consecutive quarters with results at least 30% worse than expected.  From a profit of $1.06 a share in 2007 Wall Street now expects a loss of $1.30 a share in 2008… on a larger number of shares.

 On the other hand, USG is pretty much the world’s leader in production of gypsum wallboard.  They are in the middle of an effort to close old inefficient plants and open new plants in an attempt to lower costs and shed staff.  There will be costs associated with this plan (paying off all the people they let go, for one), and if the US housing sector stays in the doldrums it won’t really make so much of a difference.  While the cost that USG must pay for its raw materials has increased, the sagging demand from the housing sector has left USG getting only 64% as much per sq ft as they did a year ago.  Hell, they’re only getting 94.7% as much per sq ft as they did the previous quarter (nevermind last year).  USG’s gross margin on their products has fallen from 16.8% a year ago to only 3.5% this year.  USG does note that they successfully implemented a price increase near the end of the first quarter.

 On the positive side of things, USG has managed to hold onto more of its demand than the wallboard industry as a whole.  While the demand for wallboard fell 13% from a year ago, USG’s sales (by sq ft) fell only 3%

 The key will be holding onto their demand and making it through their reorganization effort.  Many of the the smaller wallboard producers will not survive the this shakeout, and with the attention given to cost efficiency now USG would definitely be in pretty good shape on the other side.  There is also, of course, the possibility of increased wallboard demand in emerging markets (in general) but China in particular, especially in the aftermath of the earthquake (they need to repair those lake dams after all).

 So am I going to keep rambling?  Always.

 Risk level: moderately high

 Current price: $34.05

 So the question is: Is there a reasonable probability that USG worth at least 30% more ($44.25)?

 I really don’t see it.  In fact, I’m not so sure that it’s worth $34.  Mid $20’s and I get interested OR if the second quarter’s results indicate that the restructuring is going well I’d re-examine.  Problem is that USG would have to have a profit level equivalent to 2006 levels (the height of the housing boom) to justify $44, and that’s assuming no further share dilution.  That’s pretty hopeful for any time in the next few years.

 Everyone knows that I love wallboard,

 Manny Ramirez

 A word from your sponsors:

 SINO is, at this point, merely a company to keep your eye on.  Because it is small, because it is a new public issue, because it is Chinese…. There are more than the usual unknowns about it.  It also has a fairly small number of shares going around out there, so the stock is subject to manipulation on a daily basis.  Does SINO have potential upside?  Yes.  Is there any rush to get in?  No.  Just watch it for a while and see if it gets down to $12.  Even at $12 there’s downside potential for the short term (those crazy red Chinese stocks), but on a long term basis (at least a year) I’d think that you’d end up in the green (black, whatever).

 Financial Times reports that the banking sector combined to set aside $37B in the first quarter to cover future losses on loans.  That’s a lot of money, but expect to see more set aside in the second quarter.  There’s not as much media buzz around it as there used to be, but banks still aren’t real happy with the credit environment and aren’t expecting to be until sometime next year.

 A better than initially reported first quarter for the economy didn’t seem to do much for Sears/Kmart as the retail duo surprised Wall Street with a quarterly loss.  Their excuse?  People aren’t spending as much money.  Well… I can’t much say I remember the last time I went to Sears or Kmart myself.  For that matter, I can’t much say I remember the last time I SAW a Sears or Kmart.  I can understand Sears’ sales being off, but isn’t Kmart supposedly a value store?  In this economy shouldn’t it be hanging in there like Wal-Mart?

 Hold a good thought for Bear Stearns as the firm officially accepted JP Morgan’s buyout today.  It is expected that 55% of current Bear Stearns employees will get the Axe (not the body spray, bro).  The lesson we should learn here?  Don’t work for a company with the initials BS.

 Investment thought… for thought?  People who point to index funds as the ultimate investment tool for the average investor often highlight that most mutual funds fail to beat <insert index> over a specified period of time.  Therefore, you would be better off investing in the index.

 However, this argument leaves out that the index operates in a theoretical vacuum with no operating costs and no taxes.  It also overlooks the fact that while MOST mutual funds fail to beat the index, nearly all index funds fail to beat the same index.  This is because with the introduction of even minor management fees and the need to pay taxes on dividends and any capital gains, even a perfect mirror of the index will fall short.  On top of this, most so called index funds don’t truly invest in the entire index it is tracking, but rather invest in what the managers believe to be a “Representative sample” that will yield the same basic return.

 Index funds certainly have a place, but to argue that they are inherently superior to a well chosen mutual fund is a faulty stance.  So, just sayin’ is all.  Absolutes in the world of finance = guaranteed falsehood.

 Like the irony of the absolute statement I just slipped in there?  Finance is a comedy gold mine.

 I’m digging gold,

 John Harsanyi

 Let’s begin…

 I’ll be moving cubes sometime soon, and escaping the camera.

 In oil, we have another one biting the dust as Indonesia plans withdrawal from OPEC.  See, there’s this thing with OPEC: you have to be an EXPORTER of petroleum to be in the club.  Dropping output from mature fields + increasing domestic consumption = now net importer of oil.  Good times, no?

 Also, in Australia we have a demonstration that you don’t have to know what you’re talking about to get media coverage.  Despite the protestations of this Aussie, the theory of “Peak Oil” has almost nothing to do with reserves being depleted.  Further, any good “peakist” (ahem) would tell you that we’ll certainly have oil for the next 30 years and beyond.  The only question is how much will you pay for it.

 I know you’ve heard that here before.

 One of the Fed governors is resigning… Mishkin wants to go teach.  It’s not really all that newsworthy, but it’s a bit of curio.

 Oil is still holding strong around $130, despite surprising drops in American driving.  OPEC ministers insist that oil OUGHT to be selling for only $60 or $70, but much like distraught homeowners in California, it’s worth what people are willing to pay for it.

 On the market today, the boogey man jumped out of the “Financial” closet and made everyone crap their pants as a Citi analyst said that AIG might need even more fresh cash after just raising $20B (Citi said that?  Pot, meet Kettle.) and Midwest regional bank Key Corp upped its expected loan writeoffs for the year by about 50%.

 Also, I came across a new Chinese company through my DryShips following: Sino-Global Shipping (ticker: SINO).  It just had its IPO (debut) on the stock market about a week ago.  It’s not really technically a shipping company, but rather a shipping services company that facilitates port services in Chinese ports.  Keep an eye on it.  I think it’s too rich right now, but around $12 a share would be a strong deal.  If you can hold on for a ride and you’re big on China, then you might be willing to take a look at $14.

 Also, if you’ve been requesting that I highlight a small cap company and/or not catching my cues on DryShips (you know who you are) then don’t say I’ve never responded.  SINO’s market value is a mere $28 million.

 On government, here’s a fun game on balancing the budget.  It does a good job highlighting the difficulty of balancing the national budget, but I can’t say I really agree with the limited scope of your budget options and the lack of side effects from various decisions.

 Want to know how to balance the budget according to this thing?  Tax everyone to damn hell and cut military expenses big time.

 Still, it’s entertainment.

 Side note on Bank of America:  I forgot about their little cash kitty on the side called China Construction Bank.  The holdings are worth at least $21B, and even accounting for the sensitive nature of dealing with the Red Chinese gov’t, they could tap that ass for $10B in funds if they really needed to without being forced to dilute their shareholder base.  I’ll go ahead and say with that remembrance being remembered, BAC at under $34 is looking pretty solid.

 New blog title?  Inspired by Dr. Oppenheimer quoting of the Bhagavad Gita after the nuclear test success, “Now I am become death, the destroyer of worlds.”  I don’t wear long tattered black robes, so I am obviously not death, but if I’m real lucky maybe one day I can wear spectacles and be the destroyer of finance.

 Plus the new title is a lot shorter,

 Morgan Fox

 Seems like forever.

 The new work set up is awkward, so its been cutting into blog time, plus they’ve got a damn camera up on the ceiling for some reason.

 So, anyway, we’ll see.

 The news of the day is some more housing angst and consumer moping.  I’d just like to mention something:

Prices nationwide are at levels not seen since the third quarter of 2004

 Oh no!  Decades of wealth building have been undone!

However, the index is still up 60 percent versus 2000.

 All in all, that’s still fairly strong.  Might I point out that the S&P 500 is still LOWER than it was in 2000?  Or that the Dow Industrials is up less than 10% over the same time?

 Can I demand a government bailout for my 401k?

 Speaking of bailouts, DryShips was back down to $85 earlier today (about $87 now).  It’s a very attractive investment at these levels.  Compelling?  Very compelling.

 As I said before, you should NEVER bet everything on a single company, but if you had to do so you could do a lot worse than DryShips.

 On a related note, I now own about 25 tons worth of shipping capacity. 

 On Bank of America, I’m disinclined to label the issue a compelling value, preferring it being only a good value or even just an average value owing to continued softness in credit markets and weak consumer sentiment.  BAC has all its junk hanging out when it comes to consumer debt, and senior management has already exiled its investment banking division in disgrace (only 2 years after Mr. Lewis, CEO, announced a $800 million investment plan to build up a top 3 investment bank.  I know because I was there for that announcement.)  If you could know that BAC wasn’t going to raise capital, then I’d be willing to go so far as to say it’s a compelling value, but since that can’t be known, and IS a possibility… “good” is as good as it gets.

 I think that’s underrated humor.

 Also, I swear to Al Gore that I’ve been hearing for well on 13 years now about how the damn Smart car is going to take the US by storm with its crazy fuel efficiency and nimbly bimbly small wheelbase.  Put up or shut up… I’m about to file the Smart Car in the same cabinet as the flying car.

 For what it’s worth, on a cost per mile basis, the new VW diesels are still more fuel efficient… although the Smart Car itself is notably less expensive (and smaller).

 So, excuse the formatting problems, if there are any.  I’m trying the whole “type it up in word and paste” thing.

 Cisco Unified Phone VOIP = the suck,

 Jay Gould

 I’m getting the hang of this Detroit thing.  I managed to mug two people before getting mugged myself last night.

 Kidding.

 Or am I?

 Also, Detroit is a really bad place to be a racist with Tourette’s syndrome.  Just sayin’.

 Oil got over $133 today.  Here’s some explanation why.

That’s all ive got for now, Tiger’s game tonight.

 Approximate odds I will make a negative comment about Detroit’s political culture sometime today: 5/2

 Approximate odds I will stare across the river and feel a brotherly conection between my Texas roots and the Quebecois: 3:1

 Approximate odds I will recoil in horror at feeling kinship with descendants of the French: 1:1

 Approximate odds I will be found in a gutter with a 40 of malt in the vicinity of 8 mile: 120 lightning armadillos: 1

  I declare Detroit to be the most corrupt city in the United States, excluding all political capitols and the state of Louisiana.

 Also, I was given an extremely dirty look when I made an off color remark about Sen. Kennedy after seeing a bit of CNN.

 Stupid enclave of naive socialists… and they wonder why their city is a puss oozing abcess on Satan’s ass.

 They can’t even keep their office buildings at a reasonable temperature.  It’s a beautiful 67 outside, but it’s almost 80 inside the office.  Can’t we just open a window?  Please?

 Detroit someone tonight,

 Blogger

 When the boss is away, the peasants stockpile axes and spears.

 First things first, on crotch rot: it sucks.  I don’t really have any factual research to base this conclusion on, but I feel confident that my bold declaritive position will remain unchallenged for all eternity.  It sounds uncomfortable, and it makes all your gear gross and stuff I’m sure.  Studies show that crotch rot = no bangin hot genital collisions with the other sex, therefore I conclude that the condition is caused by a lack of bangin hot genital collisions.

 Everyone, makes sure to maintain a high volume of bangin hot genital collisions to protect yourself from grossnasty crotch rot.

 Second things second, you’d think a big (relative to me) corporation could manage a move without forcing all its employees to be stabbed in the anus with a poker forged from blazing hot solar plasma.  I’m in freaking Texas, for god-lord’s sake:

 Turn.

 On.

 The.

 Airconditioner. (yes it’s oneword)

 Also, were is my printer?  Is it with my printer paper?  I don’t know, because I can’t find either of them.  Excuse me, have you seen my printer.  It’s about the size of a really obese 4 year old child.  It’d be sort of a sickly looking grey color, and be very unpleasant to deal with.

 No?  How about some printer paper.  There’d be about 6 boxes of regular and 3 boxes of legal sized paper, white on the bottom with green lids.  Be great to use for some freeweights if you were really really strong.  And didn’t have any handy weights already.

 Well shit.  At least my laptop works great after IT abducted it while I was away and re-imaged the hard drive.

 No?  Excuse me, have you seen my files?  You know, the ones with the excel macros built into them that I spent quite some time torturing my extremely primitive VBA skills to create?  I’d like to issue an Amber alert for them.

 Oh, and can some one figure out how to make this brand new flourescent light stop flickering?  Great demon lord, I summon you from the pits of the maintenance department!!!

 Third things third: Detroit Tigers game Wednesday night.  Hope I don’t get mugged on my way there/back. 

 Moving into the new office space, so things are sort of hectic.

 That and I still need to look up my flight plans for my 3 day Detroit tour.  Sigh.

 I never got around to really saying anything about Horizon Lines, but I think I would have classified it as a “good” value, but not “compelling” due to the price fixing investigation.  Anyway, it’s up about 5% today.  It’s one to keep an eye on for the future.

 I don’t have a lot for today (again), so I’ll just call it quits for today.

In the arid mountains of New Mexico… and it is very, very wet.

I could be tears of joy because of Trinity, DryShips, and another venture I haven’t profiled yet called Aegean Marine (ANW). More likely it’s just rain.

In case anyone else had noticed, this lunatic name “Cramer”, who has his own TV show, has also been flogging Trinity and Dryships in the last week or so. Important? No. Furthermore, you should probably never listen to Cramer or his ilk, at least not for investment advice. Especially not investment advice, and only maybe for trading advice.

Why? On Feb. 15th, Cramer said about Dryships:

“No, no. We’re not going back there. I don’t see a recovery.”

If you bought it then (~$80), you’d have about a 37% profit as of today. Of course, along the way, you would have watched your money shrink by 30% (down to ~$56) before recovering, which would test any investors fortitude.

The problem with Cramer is that has has to entertain as well as inform, and do it while filling a specified amount of time with content.  So he gets input from a cast of many as to what stocks to pick, what stocks to pan.  Some are good, some are mediocre, some are bad.  Cramer doesn’t really have enough time to properly research and understand every stock he talks about, only enough time to familiarize himself with the basics.

Then, like all TV personalities, they just do what the teleprompter tells them to do.  By the time his words reach your eyes or ears, there’s already been so much frontrunning as to render the tip almost useless.  The investment guy who gave the tip?  He’s already been giving his clients the same advice, of course.  That’ his job.  He’s probably also told at least half a dozen other people the same tip.  The guy on Cramer’s staff that wrote up an overview and the teleprompter script from Cramer?  You better believe he’s been on his cell.

In the end, you’re getting a used up tip.  Plus, Cramer gives you such incredible whiplash with his recommendations that the brokerage fees would kill a normal farm animal if you tried to keep pace with him.

Cramer is good for giving overviews of industries and possibly bringing some bit of news to your attention that you didn’t know about.  He’s good for ideas and things to keep an eye on, but not for NOW NOW NOW investing/trading.

My advice for investing is as follows:

1. Invest in no load (no commission), low management fee mutual funds that are rated at least 4 star by Morningstar.  Fidelity is generally a convenient place to find a selection of these.  Believe it or not, and too any Ameriprise advisors (and others of the type), I’m sorry, but just because the fund charges you a 3% fee per year doesn’t mean it’s better (or has better managers) than a fund that charges you 1% a year.  All it really means is that you’re probably getting charged a 1.25% commission fee that is getting kicked back to your investment advisor.
2. If you feel the need for stock investing instead of mutual fund investing, then take it slow.  Identify a stock you feel is a “compelling value”, become comfortable with both the company and the industry, and then hit it hard.  Two addendi (addendums?): A) There is never a deadline for making your move.  If you feel like you’re going to miss the boat if you don’t buy the stock right this second, then you should not buy the stock.  B)  Never bet it all on black, but make sure you can invest enough in one stock so that the brokerage commissions don’t kill you.  I prefer to keep the commissions (for buying and selling combined) to under 1% of the amount initially invested.
3. Always have options the you keep on the back burner.  Keep an eye on a couple mutual funds and a handful of stocks.  This way, if you become uncomfortable with a stock you are in, you can move back into the pacificity of a mutual fund or into a different company that you deem to have reached a level of being an excellent value.

I try to classify potential investments in 4 categories (you could make it 5, but why bother).

1. Compelling Value: This company is unfairly undervalued and is intrinsically worth more than it is currently at.  This sort of stock will have a “fair” value (in your opinion) at least 30% or so higher.  TRN, DRYS, and ANW were all in this category (at 33%, 50%, and 50% respectively).  No outrageous assumptions are required for this company to achieve its goals.
2. Good Value: You’re really comfortable with the value of this stock and you think it is undervalued, but you don’t feel quite so strongly about it as you do a “compelling value”.  Again, this company doesn’t require any overly aggressive (or even aggressive, really) assumptions to reach its goals.
3. Average Value: Its not bad, there’s solid potential for an increase in value.  Most good mutual funds fall into this category (you might classify them as “Average Plus”, but I don’t want to get too granular).
4. Below Average: Why?  Also, you could create a 5th group called “Terrible value”, but again, why bother?  These companies will typically need to assume indefinite periods of very aggressive growth and/or the continued lack of competition, but unreasonable assumptions.

I also would try to maintain a “two tier” rule, meaning that I wouldn’t sell a Good Value investment that I already have to buy a Compelling Value.  I also wouldn’t sell one investment to buy another in the same level (you’re just burning money on commissions).  The exception: there’s never a reason to hold a company who’s future value you perceive to be below average.

Also, speculating is bad.  I have proven it.

Yes, oil is expensive (can I get $128?)… stuff stuff.  I’m on a giant laptop that shocks me about every three minutes, so I’m already feeling like a deathrow inmate.

On my watchlist for potential  tier 1 or 2?  Bank of America (BAC) and Horizon Lines (HRZ).

So, if Eliot Spitzer has to cut his hooker budget from $2000 a visit to $1000, would the Fed see that as a reduction is quality of living?

William Seward

 How is it that we get by with so much stuff that is charitably described as “jury rigged”?  It’s amazing.  Of course, my grandfather had a slightly different yet explosively uncomfortable phase he used.

 Old people are funny, no?

 Don’t hold your breath for blog tomorrow.  I’m certain there will be a way to survive, I’m just not sure what it is.  Given that I’ll be stuck in a small metal box sitting behind a continuous chain of small explosions, it will be difficult to bring fire to the people.

 Hillary Clinton won the culturally diverse, academia oriented state of West Virgina by a not inconsiderable margin.  What does this mean: A) nothing, B) it gives her more excuse to hang on for Puerto Rico (which she’ll win) and some other states that she has a good shot at winning.  She’s actually got a decent chance of running the table in terms of remaining primaries.  I seriously doubt she’ll still manage to end up with the party nod after convention, but she’ll make things interesting.

 The other effect is that it just goes to show that Obama might not be able to win West Virigina, so maybe I have to change my electoral map projections to account for that.

 I’m still hanging with my Bloomberg deal.  Obama + Bloomberg = November party for the DNC.  Obama + Clinton = November party for a different national organization (and not the GOP).  Obama + other = push.

 Today is my last day in this cube.  I’ll be in a new (Actually brand new) cube on monday in our new HQ building.  I’ll also be back on the train which means:

• I save a shi-ton on gas money
• I might run into my giant douche bag ex-manager.  One can hope.

 So sad.