Blue Penguin Report

By Red Sox Steve

We recently took a look at Dow Chemical Company's business over the last few quarters. We got an idea of what it was up against, what it could control, what it couldn't, and how it survived. Now, let's overlay its stock performance onto the performance of the other Dow (Dow Jones Industrial Average which we'll call "Jones" here to avoid confusion!!), going back 3 years to see what we can discover. I'm taking the figures from Yahoo Finance, so if you want to check my work, they have a great charting function which you can tap in to, for free.

The first thing I notice is that during July 2006, Dow's stock took a hit (about $39 to about $34) while the Jones basically stayed flat. Dow recovered back to $39 by the end of that year, while the Jones continued its upward climb. As best I can tell from reviewing the July 2006 news reports related to Dow, it was a missed earnings expectation that triggered the selling of this company, which was the result of what some thought was increasing oil prices squeezing its profit margins tighter and tighter. That being said, reviewing ALL the news on the company during July 2006, Dow was positioning itself with a Saudi JV, and working on water filtration innovations, which will inevitably contribute to its solid and stable position in the chemical industry going forward. Dow's repositioning could have been the reason the stock recovered in an otherwise difficult short-term environment (high and increasing energy prices as well as a weakening dollar). Furthermore, it has had - and continues to have - a very strong balance sheet.

Fast forward one year to July 2007. Dow reached $47, before literally falling off a cliff while the Jones steadily moved upward throughout 2Q 2007, before they both muddled through the next 3 months. This is a sign that Dow's earnings news did not meet "expectations", as set by market participants in the media and the financial industry. In other words, massive selling which pushed the price down down down was the result of Dow not meeting an artificially derived earnings target, as set by Wall Street financial analysts. Yes, the stock struggled in the 3rd quarter, but this had more to do with the US economy than with the company itself. By July 2007, the severe weakness (housing, jobs & consumer spending) in the economy coupled with ever-increasing energy prices (as well as other raw materials needed by Dow) were enough to scare investors away from this company.

By mid-May 2008, Dow was at its 2008 high of $42. The Jones was also at nearly 13,000 and steady as the summer wore on. From $42, however, this was the beginning of a long slide into 3Q 2008.

In July 2008, as the economic reality of low taxes, high energy prices ($140/barrel), and cheap credit started to slowly reveal itself, Dow, which had taken a severe hit along with the Jones since a year ago, had gone down to $31 (July 15). By mid September, as the financial crisis took hold, Dow recovered to an intra-quarter high of $37. From there, Dow and the Jones performed poorly as a result of the doom and gloom in the global economy and because of a change in the political direction of the United States. Dow went down to $15 right after Christmas, although the market had factored in the Kuwait JV which we discussed last time.

After that, as news of the Kuwaitis backing out of the JV was released, and news of the Rohm and Haas deal being uncertain as a result, the stock went down to $11 at the end of January and $7 at the end of February. Because Dow was able to secure a bridge loan to push the Rohm and Haas merger through and avoid costly litigation with Rohm and Haas shareholders in the process, it has since received a vote of confidence from the market and as of April 22 is at $12.

In the meantime, the Jones in 2009 has lost about 10% of its value since Jan 2. There are little to no signs that the economic recovery is imminent, however, the only signs that things are getting worse are those which were related to the economy created under the prior administration - housing and unemployment.

Let's talk about a couple of other things:

1) Dividend

Looking over the last few years, the most difficult quarter of business (isn't this true for every business?) that Dow had was 1Q2009 - the Kuwaiti deal didn't go through, there was talk of potential litigation if the Rohm and Haas multi-billion dollar merger didn't take place, the global economy was in shambles and a new US president had just taken over. Nightmare scenarios all around! However, with the negative news in the economy having stabilized (don't want to speak too soon, but it's not as bad as it was even 2 months ago), the US economy is at least working on a recovery, as evidenced by the G-20 summit, healthcare reform, tax reform and targeted stimulus spending all taking place. Over the last few years, like many global corporations, Dow had the double benefit of being flush with cash and easily available credit (if needed) AND benefiting from lower corporate and high-income tax rates as well as a lax regulatory environment. It responded by continuing to position itself appropriately through mergers and joint ventures, gaining access to raw materials and leveraging its global reach in the process. There was no sign that the quarterly dividend payment was facing the threat of being cut.

1Q2009 would have been the first time in over 90 years that Dow did not pay a dividend, and this was in the midst of the worst economy we've had in approximately 60 years. In other words, this confluence of events would have been the "perfect storm" that Dow needed to stop paying a dividend... but it didn't. Yes, the dividend was cut from $0.42/share in 4Q 2008 to $0.15/share in 1Q 2009, however it managed to keep its streak alive even in trying circumstances. This stock is a dividend payer, and is proving its quality in the worst economic downturn since WWII.

2) Balance Sheet

In spite of the fact that 2008 was the start of the worst economic crisis in a lifetime, Dow's balance sheet actually improved in a couple of key respects. First of all, it increased the amount of cash on hand, year over year. This was being done in an environment where both cash flow AND available credit were drying up. Second of all, we've got to be impressed with Dow's receivables (what is owed to them by their customers). From 2007 to 2008, Dow's receivables went from almost (approx) $6bn to almost $4bn. In other words, as all businesses were tightening their belts, Dow was able to DECREASE the amount of money it was owed during 2008. This is, in my view, remarkable for any company trying to do business in a deteriorating economy.

Overall, I've got to now do some "off-site" work as I investigate options prices. I have no idea of the costs involved, and, although I want to "go long" at this point, I have to see what options (heh heh...) are available to me to do so. I'll be back on The Ice Flow on Thursday with an overview of the nation that's been providing BMWs and Mercedes for the duration of the 20th century, Germany. See you then!

Posted by Red Sox Steve at 08:48 AM | Permalink | Comments (0) | TrackBacks (0)

By Red Sox Steve

Dow Chemical Company is over 100 years old, and, although it recently cut its quarterly dividend for the first time in more than 90 years, it still paid one. Dow, being part of the centuries old chemical industry, has been innovating its product line since the company's inception. Dow products now range from cushioning and foam items for bedding to food-related products like ingredients, oils and packaging. The entire company is a nearly $60bn business, with over 40,000 employees delivering products to 160 countries.

We already understand that we live in a globalized economy. All the more reason to like Dow - they have employees and customers all over the world, and are a highly diversified chemical company.

Within the last few months, Dow has been embroiled in a number of relatively uncertain circumstances, all related to the transformations it wishes to make as it positions itself for the 21st century. First, as announced on Dec. 1, 2008, Dow was to enter into a 50:50 joint venture (JV) with Kuwait's state owned petroleum company: Kuwait Petroleum Corporation (KPC is the parent of Petrochemical Industries Co. the company being merged)., with operation of the JV to begin on Jan 1, 2009. The new company, to be called K-Dow, was to be one of the world's leading suppliers of petrochemicals and petroleum based plastics.

Kuwait was being asked to spend slightly over $8bn (after other amounts were taken into account, a $6bn net payment) to fund its portion of the deal, and, just after the deal was announced, proceeded to cut costs internally. There was an even bigger problem with the deal. When the deal was first proposed, and announced to the media in late 2007, the situation from both sides was pretty clear: KPC could provide low cost raw materials that Dow needs (petroleum is needed in all aspects of the plastics industry), while Dow could provide industrial and technical know how, along with the global integration that KPC didn't have. It was contemplated by both sides to be a deal where Dow sells part of its own petrochemical companies into the new joint venture, and gets billions in cash the day the deal closes.

What would it do with the cash? I'm glad you asked! First, Dow understands, just like anyone who has gone to a gas station week after week, year after year, that commodity prices are cyclical. Not only that, but the most powerful man in the world for 8 years came from the commodities industry - oil and gas have proven to be pretty expensive when that happens. Dow knew this, and it knew it needed to position itself favorably in a world of expensive petroleum. It wanted to position itself to play the arbitrage, meaning that it was willing to give up a piece of its business in order to gain access to cheaper raw materials.

Enter Kuwait. Dow and Kuwait start discussing the deal in 2007. About 8 months later, the global economic crisis hits, the US elects Barack Obama, and all of a sudden oil and gas prices take a nosedive as alternative energy becomes a foreseeable possibility. This is good for the guy at the pump, but bad for the Kuwaitis because now they don't have the funds to do the deal anymore. Dow was left all alone at the altar. But wait, there's more.

Thing is, Dow wanted to position itself appropriately, according to its understanding of the commodities cycle, and at the same time, because Dow understands that its profit margins will eventually get squeezed when commodity prices turn back down, it needs to get into another area of the chemical business. Enter Rohm & Haas ("Rohm"). Rohm is what is known as a "specialty chemical company". Yes, it was a company founded by German immigrants (both named Otto!) before WWI, but it is dissimilar enough in structure and product line that Dow's acquisition of it gives Dow the diversity it needs to continue to profit, even in a commodities downturn.

Rohm has enjoyed high profit margins in areas like electronic materials (innovative ways to layer metals onto semiconductor substrates) and powder coatings raw materials (powder coatings are applied to various metals, similar to paint; however because powder coatings do not use a solvent, they tend to perform better than paint in protecting a surface; furthermore, powder coatings can be made of hydrocarbons and other nitrogen or oxygen based organic compounds). These items fall under the area of specialty chemicals, which Rohm has been developing for decades now. Rohm also has access to the emerging markets that will benefit Dow, such as Asia. Asia accounts for 11% of Dow's sales and 22% of R&H's sales.

The Rohm merger with Dow (where Dow was to pay about $15bn), was approved by Rohm shareholders in October 2008, and was proceeding apace until news of the Kuwaiti pullout occurred. All of a sudden, Dow was without the cash it needed to pull off the Rohm integration. After the announcement by the Kuwaitis that they were pulling out of the deal on Dec. 29, 2008, the stock price started to plummet from $15 to as low as $7 by early March. Things didn't look good for Dow's prospects to complete this deal - they needed a line of credit when credit was scarce because of the economic crisis, and, because Dow had previously offered to by Rohm for $78 a share, Rohm shareholders threatened Dow with a lawsuit if the deal didn't go through. On March 9, 2009, just before the parties were to litigate the matter, Dow was able to renegotiate some of its financing relationships in order to meet the terms of the deal. In other words, without going to court, and by getting access to a loan, Dow was able to consummate the deal. The Rohm shareholders got a huge payout as a result and Dow was able to get the specialty chemicals company it wanted. Since that time, the stock price has nearly doubled, which I believe is an indicator of the market's belief that Dow, in its 2Q 2009 form, is a solid company, operating in a recession economy.

This is an overview of the twists and turns that a multi-billion dollar multi-national "blue chip" company has had to navigate during a global economic crisis. Although Dow wasn't nimble enough to avoid taking a hit to its share price, it is a company that the 21st century is going to need, AND it is committed to reviewing and revising its position to meet both short and long term interests. This is a wise investment and we're going to look at how to play it in the weeks ahead.

Posted by Red Sox Steve at 11:10 PM | Permalink | Comments (0) | TrackBacks (0)

By Matthew

Remember those old advertisements?

You know the ones...with the sympathetic-sounding narrator saying things like;

'Awwww Schmucky...are you feeling blue? Thing got you down because your dog ran away, your cat went on your pillow, your bird mimics your mom telling you what a disappointment you've been, your ex-wife just hit the lotto and your current wife is on a 6 month vacation to Jamaica...

trying to 'sort things out'.

Awwww Schmucky, is THAT what has you down???'

And then, of course the speakover would explain what headache remedy, new car, TV show or cigarette was certain to cure those ills.

Well...Buhbie, if your Portfolio full of disintegrating Stocks has you down, if your woman (or man) gives you a look when you think you might get lucky - a look that says 'yagadabefuckinkiddinme!', if your dog has been hanging at your best friends house for a week and your cat just ate the Salmon your spouse left on the bottom shelf for your dinner...

Guru has something even BETTER than medicine, autos or tabbacky to help you cope.

An overview.

A strategy.

An approach.

That, if followed, will allow you to make modest coin in '09, stanch the bleeding and position yourself wisely for 2012, or whenever this puppy will walk upright again.

Are you game?

I thought so.

* Overview

Stocks have been halved.

Not good.

But, in reality, the levels they held for much of the Bush 2nd Term (apt phrase, if ever there was one and explains why the first chance for a Bush double was averted by voters...) were entirely illusory. That may not be a source of comfort for you, but the Penguin is going to quote our old friend, Al Swearengen, of 'Deadwood' fame (2nd Quote of the day for Al, he made The Magic Carpet as well!)...

'...Damage don't end the world, or despair...or fucking beatings. The world ends when you're Dead. Until then, stand it like a man (woman, man who stands like a woman, woman who...etc.) and...
...give some back'.

That's the first thing. You have to bring yourself frontally BACK into the mindset of looking forward, if you lost Money - it's gone. It happens. It wasn't all your fault that's true...but;

a.) That doesn't make a fuck of a difference to anyone, for any reason. Fault is meaningless in Finance. If your situation is not litigious, then you were investing on your OWN decision, at your OWN risk, which means the losses...

b.) Partly ARE your fault. See the note above for the reality of such information.

What matters is to understand *What went wrong? Where were the signs? What to do differently now.

Depends on the Stock in question.

a.) If you owned Retail, Auto, Insurance, Investment Banking, Airlines, Banks, Mortgage Lenders, Homebuilders...you were probably allowing your ego and emotions to manage things.

Each of these areas had already seen the best of it's days well before the crisis. IF you owned the shares for a period of time and had profits in them, those are the times when you MUST be disciplined to take money OFF the table and sell. If you had just bought into those sectors, at high prices for some and amidst dramatically declining fundamentals for all - you blew it.

Forgive yourself.

Move on.

b.) If you owned Energy, International Stocks, Blue Chips unaffected directly by the crisis...you made a serious analysis about the path ahead and things went awry.

Again, it happens.

Penguin owned Energy throughout the Bush years and had unwound most of his profits long ago...but I was a buyer in the early stages of Fall, believing the OPEC easing was simply it's Quadrennial push to keep the GOP in the WH and prices would soar, post Election.

Ooops.

Demand got SO squeezed by customers gauged beyond contain for YEARS, customers who had now lost their home value, stock value and/or J-O-B.

Nowhere to drive.

Nowhere to go.

No money for Gas, even cheap Gas and no money for anything anyway, so keep the lights on, the cable paid, cheap food (starches are good in these periods when other humans won't be seeing a lot of you)
a touch of red liquid, green plant and something to schmush (doesn't have to be human, decide how much food you can spare).

SO Energy lost speed and didn't come back, The worm has turned on Fossil Fuels at long last.

Like much of this mess, that overarching POSITIVE has been borne of this short-term negative.

c.) Similarly, the initial take - that America would bear this catastrophe largely alone, and International Stocks were preferable - was understandable. It was also wrong. American demand cratering impacts all. American Banks and Banking IDEAS, infected Global Financial Institutions. They didn't hurt like we got hurt, but they were no safe harbor in THIS storm. A friend worked at BNP Paribas, a French Bank who had limited exposure to the Mortgage Securities market and little debt, they were in the right position and, like JP Morgan and Wells Fargo in America, looked to be the clear 'winner' in Euro Banking.

Enter Bernie Madoff. Exit BNP shares and thousands of workers.

Sometimes, even when you do everything RIGHT, it goes wrong. You cannot linger on such events. All you CAN do is position yourself well based upon the Data, monitor your position with an eye to your risk and constantly enhance your knowledge.

*Which takes us to the Blue Chips...

They come in many types and sorting them out is relatively simple.

a.) Some are parts of industries that are past their viable point. If a company has more history BEHIND it than ahead - and that can be said of the Autos, almost ALL of the Financials and Insurers, Oil & Gas...

..than it is time to write those companies OFF - Don't go there!

If you buy a domestic Airline stock, I will send Scout and Chester to your crib, and the boys don't play, ya dig?.

b.) Others are in trouble, NOT because of their industry but because of some Company-specific reason. In that case, you need to look deeply into the circumstances that ail it and gauge your risks - Penguin will be happy to discuss individual securities with you - send an e-mail.

In General, you want to avoid risk that doesn't have much upside. If you own something that is a solid company in a temporary jam due to the economic winds and a crisis that is resolvable, then avoid watching it dance around the nether regions of its price chart and follow the details. They will give you clues as to when you should look to:

@ Add to your position at a lower price, Dollar/Cost Averaging your purchase price to a lower break-even level - which means, when the stock returns to the price you ORIGINALLY paid for it - you are in a profit position.

@ See the position move forward. If a solid business is dealing with a merger or court case, the stock will fluctuate wildly in the periods before resolution. When a decision is made, one way or other, that uncertainty leaves the picture. Financial impact can be valued and a path back to previous levels can be speculated upon - meaning the Stock is back in play as a 'Buy', such stocks move rapidly upward when the news goes from unknown to known.

c.) Lastly, there are the PREFERRED category...these are Solid companies, with solid balance sheets, 21st Century Businesses with more FUTURE than past. Preferably ones that generate oodles of cash, and, who are we to complain (!) if it pays a Dividend?

We'll tell you WHICH Stocks fit that Preferred Category, in Penguin's view..in Part 2 of this series...

On Sunday.

Posted by Matthew at 03:14 PM | Permalink | Comments (0) | TrackBacks (0)

By Matthew

Where we are, this Monday morning, February 9, 2009...

...amidst all the teeth gnashing angst of the current Economic meltdown, domestic equities have been beaten up and tossed around...driving the Dow, NASDAQ and S&P 500 to points scarcely seen in a decade or more and eroding trillions of dollars of corporate value and investor dollars.

Stocks have plummeted, 401 (K) values have followed and a general malaise exists...

Snap out of it!

Owning stocks or being an investor (which you are if you have money that isn't used for day-to-day sustenance) is a J-O-B. As such, you have to insure that you show up for your money - regardless of conditions. Sometimes the tide will flow to your benefit and others, as now, it will be to your detriment. That is why, wherever possible, you must stay OUT of the flow and learn to navigate with your ideas around relative value and circumstance.

Every stock has a price that makes it appealing to own and a price that makes it a sell.

Determining that point is a Value built upon Measure. Securities can be analyzed using measurable statistics, technical tools and anecdotal observations and a 'fair' price can be ascertained, that price can then be measured against the overall climate (in this case - dire) and an adjusted price can be developed. In circumstances where the adjusted 'fair' price (AFP) for a security falls below the actual TRADING price for that security, a BUY is recommended. If the Share price is above the AFP, a SELL or avoid recommendation is achieved.

Such is the case with an entire segment of stocks - The Chemical Companies.

Posted by Matthew at 11:38 AM | Permalink | Comments (0) | TrackBacks (0)

Brown and Wen strengthen ties

Gordon Brown's press conference in London with Chinese premier Wen Jiabao was the perfect example of what a western nation should be doing to work with China on economic issues.

The UK is one the leading EU investors in China, so both would benefit significantly (as would Germany, a leading EU exporter to China) from forming stronger economic ties. Although the entire world is suffering from the effects of the global economic crisis, the UK and China are laying the framework for a strategic economic partnership.

Brown is showing excellent leadership again (as he did in quickly capitalizing the UK banking sector last fall) - he waited until AFTER the Obama inauguration and the World Economic Forum in Davos to hold a UK-China summit in London:

"The most important agreement is... that we will extend trade between our two countries, and I believe the doubling of exports over the next 18 months is something that is absolutely crucial to helping the world's economy recovery."

This is a perfect example of what developed nations SHOULD be doing to align themselves with China. Yes, there are domestic crises (US GDP was negative 3.8% for 4Q 2008... a huge problem) and international problems (Russia, Iran), however a forward thinking government in the UK recognizes the secular trend: China has over 1bn people... a vast majority of them will move from agrarian to urban lifestyles over the course of the 21st century; India signs up 10 million new cell phone users every month - Chindia is rising and fast. The Obama administration needs to take note: do not put China at the end of the list for any reason. Barack, you dealt with Guantanamo and put an economic recovery plan together which they are fighting out in Congress (John Thune and Barbara Boxer are going at it on CSPAN this afternoon!). So things are happening in Washington right now that are very important to the global economy... just like an effort to cement ties with China would be.

Unfortunately, Obama and Geithner made a mistake: telling China that it must revalue its currency was the wrong move. The Chinese have been committed to three things: 1) domestic savings, 2) mass manufacturing of consumer goods for export to the EU and US, 3) purchase of US Government bonds (ironic because much of the money has been used to purchase goods made in China). In other words, the Chinese are acting as key creditors and suppliers. Sure, they are weaker because of the credit crunch, but they hold US Government AAA rated debt, AND are earning back the cash used to finance that debt. In short, the United States needs to work WITH the Chinese to get through this economic crisis AND build a strategic economic partnership which will hopefully spill over into other areas that are in our mutual best interest (global security, space exploration, environmental restoration). Barack, Tim, there's no time like the present to make nice with China!

Bolivia has almost half the world's Lithium supply

Bolivia, Peru, Chile - the occidental side of South America is chock full of commodities: tin, copper, and lithium. If battery-based transport is going to replace the combustion engine, then lithium is going to be central to that process. Lithium is a metal that can be used in anything that uses a rechargeable battery - private industry is licking its chops as it FINALLY concludes its in everyone's best interest to produce electric cars. Bolivia, under its salt flats in the Andes mountains has 5.4 million metric tons of 'reserve base' lithium according to a USGS January 2007 survey. In other words, almost HALF of all lithium in the ground in the world is in Bolivia.

We know from our previous readings here that Evo Morales, Bolivia's first indigenous president, has aligned himself with the reactionary/leftist governments in South America: Ecuador and Venezuela. Unfortunately, because of declining oil revenues, both of those nations lack the clout they once had. Because Morales' election has served to empower the indigenous people of Bolivia, we will hear more talk like talk like this coming from La Paz:

"The previous imperialist model of exploitation of our natural resources will never be repeated in Bolivia,” said Saúl Villegas, head of a division in Comibol (state run mining agency) that oversees lithium extraction. “Maybe there could be the possibility of foreigners accepted as minority partners, or better yet, as our clients."

Although the supply/demand model for commodities continues to change in favor of the consumer, high-tech development in industrialized countries will continue to incorporate different types of metals. It seems that whenever this has happened in the past, South American economies emerge as clear beneficiaries. We will also see the Morales administration take the same tough-minded approach to extraction industries that it has in the past. One way or another we now know that yet another critical commodity is found in large amounts in South America; this discovery will continue to foster economic and social development. It is incumbent on Bolivia to manage any revenues generated from lithium extraction wisely so that it can transform itself into a 21st century economy.

Bruno has bad news

In the current economic climate, the fact that the steel industry will suffer due to a lack of automobile and building construction is a given. That's why it was nice to read Bruno Bolfo's (chairman and owner of Duferco, the world's biggest steel trading company) recent comments via the Financial Times.

The fact is, it was PARTLY due to Chinese demand that steel and oil prices rose. The other factor was cheap and easily available money. In other words, there was more cash moving around the world in 2006 & 2007. By 2008 that game was over (by 2009 fuhgeddaboutit!). Pricing structures for these things have changed now. Cars and buildings will still need steel to be constructed, but the speculative elements associated with the prices of both are no longer. The steel industry refers to this as a 'lack of growth' and I have no problem with that - to me though, it's a 'repricing' that needed to take place as the global economy shrunk. We now know that cheap and easy credit does come with a price (no such thing as '0% interest'!), so we can conclude that any asset purchased with such credit will also have to be repriced downward as well (American, British and Spanish property owners, I'm looking at you). Just like the oil companies, this may be a negative as it relates to the steel producers' interests (US Steel may not get the 'slice of the pie' it insisted would be in the US economy's best interest back in January), but it is undoubtedly in EVERYONE'S best interest that mass produced items like steel and autos become cheaper, not more expensive.

I'm not hatin' on industry here, but as far as auto and steel global growth prospects are concerned for the next couple of years... good luck! You are going to need it.

Posted by Red Sox Steve at 06:44 PM | Permalink | Comments (0) | TrackBacks (0)

'Currency is like Pussy, it never goes out of demand'
from 'Tendencies and Contingencies'

Value is measurable.

Where honest numbers and reasonable anecdotal observation can be analyzed, one can determine the Book Value, Earnings before Taxes, Interest, Depreciation and Amortization (EBITDA), Price/Earnings Ratio (p/e), Sales, Revenue, Profit, Burn Rate, Cost Basis, Market Position...of a given Company. These conclusions can then be placed in context against the larger economy, industry, market and share price to determine if:

a.) The company is on solid ground, and for how long.
b.) The companies securities (Stock/Bonds) are worthy of investment.
c.) The companies investable securities are worthy of investment RELATIVE to other investments.

Where honest numbers and reasonable anecdotal observation can be analyzed, one can determine the Educational, Health, Savings, Political Climate, Environmental Circumstances, Tax policies, Birth Rate, Relative position...of a given Country, Region, City, Neighorhood. These conclusions can then be placed in context against the Entire World, Region, Historical conditions, Future extrapolations to detemine if:

a.) The entity is on solid ground, and for how long.
b.) The entities Stock, Property, Bond markets are worthy and capable of sheltering investment.
c.) The condition of the entities currency.

An experienced eye can also apply discounts and premiums to account for factors that are 'off the balance sheet' - political circumstances that inflate or deflate a given number or align policy in a particular direction.

There are a variety of tools that assist us in making these measurements AND in determining how to apply discounts and premiums to conditions AND assessing the Risks associated with unanticipated changes, mistaken analysis and off-the-balance sheet/real world occurrences (see Bernie Ebbers and WorldCom, Bernie Madoff, Ken Lay and Enron...).

Markets, Countries, Economies and History shift on these factors and they are the principle guiding interest of The Blue Penguin Report.

Analyzing factors of Risk, Valuation, Macro-Economics and Portfolio Balance.

Fundamental analysis.

Technical analysis.

No emotion. No cheerleading. No agenda. Nothing to sell.

Every Market Day. Every Weekend Day. Seven Days a Week. 365 Days a Year.

In-Depth. On-Target. Accountable.

We certainly hope to see you here.

Posted by Matthew at 01:39 PM | Permalink | Comments (1) | TrackBacks (0)

We have recently been made aware of the fact that the steel industry, like the auto industry before it, and the financial industry before that, is looking to influence U.S. government policy in the hopes that the supply/demand model will shift more strongly in its favor. Industries have lobbied the government for these changes for a few main reasons: 1) domestic job creation (and thus an increase in the political power of the industry), 2) a boost to company profits, and 3) a desire to remain relevant in the US economy of the 21st century, all irrespective of the effect that government spending concentrated in this single area will have on our futures.

The steel industry, like the auto industry, requires that both small and large players compete internationally. Also similar to the auto industry, a majority of steel production happens in Japan, Western Europe and the United States in the developed world, and China, India and Latin & South America in the developing world. In the auto industry, “local” production by foreign companies takes place to the extent that the US subsidiary of a foreign company is able to make a profit. Steel produced anywhere in the world requires a corresponding amount of iron ore (the main component in most kinds of steel) which can come from anywhere in the world. The domestic auto industry, which is relied on very heavily by the steel industry, has attempted numerous times since about 1979 to procure government funds and/or guarantees in an effort to support an unsustainable business model. Unfortunately, in both industries, U.S. companies continue to compete with foreign companies in almost the exact same countries who already have the support of their government – healthcare and worker pensions in countries like Germany, Japan, and even China have been funded by their respective governments for a number of years now.

In 1982, just as the US was coming out of a multi-year economic slump, the chairman of US Steel at the time declared: “Imports are on the rise again… Imports… representing 25 percent or more of the total apparent supply in the domestic market are a damaging burden on the American steel industry and its employees. Each million tons of steel represents around 5,000 jobs per year; and to the extent that these imports reflect subsidization by foreign governments or sales at less than fair value, the jobs of American steelworkers are being stolen. At a time when our industry is operating below half of capacity and a third of our employees are out of jobs, this is an unacceptable state of affairs.”

What we are seeing in both the steel and auto industries is that producers in other countries are figuring out how to be competitive, while at the same time there remains very little that the United States can do to re-create the gap that had previously existed between it and other nations: many countries now are able to either produce what is needed locally or import to cover any excess demand. After WWII, the US was a leading steel industry employer and steel producer; since then there has been a steady erosion of that position because producers in other nations, especially developing nations, have joined these markets.

The United States steel industry has painted itself into a corner in a few different ways: 1) due to the current economic crisis, the demand for steel has decreased, and iron ore producers are now seeing a downward trend in iron ore delivery contracts, 2) imposing any tariffs on imported steel in order to create (this is the exact opposite of the “invisible hand” of the markets) profits for local companies would create negative effects for the buyer, 3) In each of 2006 and 2007, China has led the world in steel production, producing approximately 4 times as much steel per year as the 2nd place country, Japan.

My view is that this provides additional evidence that US policy makers must consider when addressing the domestic needs of this industry. There was a time when the United States controlled the world steel market through economic and diplomatic might, so that our product could be the dominant one both here and abroad; however, in the steel industry and the auto industry that time has come and gone. According to a 2008 World Steel Association report, the U.S. is a net importer of 32 million metric tons of steel, while China is a net exporter of the same amount. Because the U.S. steel industry produces 98 million metric tons of steel currently, it would need to increase capacity by 30 percent just to meet domestic demand. It is hard to see that happening without major costs involved for an already crippled industry, and furthermore, producing any more steel will drive down its sales price. On top of this, in competing with Western Europe and Japan, there is no way that domestic steel companies can continue to be profitable if worker entitlements remain on their balance sheet.

At the Lima Conference for Developing Countries in 1975, it was noted that developing countries had 70 percent of the world’s population, and only 7 percent of the world’s industrial production. The goal set at the conference was to achieve, by the year 2000, 25 percent of the world’s steel production – as of 1992, the figure was 29 percent. It is inevitable that the economic contribution (and political clout) of steel producers will continue to decline here in the United States just as it is increasing in countries like China, India and South Korea; hopefully, our leaders will have the foresight to realize that we must reallocate resources (public and private) towards growth in areas that are oriented towards the 21st century such as science, technology, and alternative energy sources because our steel industry is in a position where it is no longer able to compete with the manufacturing capabilities of countries that are at lesser stages of development than the U.S.

Posted by Red Sox Steve at 12:11 PM | Permalink | Comments (0) | TrackBacks (0)