Tag Archives: business

gold mining stocks?

January 9, 2014 By in Gold, Industry Analysis, Mining, Portfolio management, Stock ideas Tags: , , , , , , 1 Comment

gold mining stocks

I spent part of the day yesterday looking at gold mining stocks.

the potential attraction?  …over two years of dreadful performance.

Since mid-2011, the gold price is down by about a third.  Over the same time span, many gold stocks have lost between half and three-quarters of their value.  And that’s during a period when the S&P is up by about 50%.

Sentiment about gold has also taken a decidedly negative turn.  Hedge fund managers are no longer bloviating (how about that word?) about the superiority of the yellow metal over “fiat money.”  Boiler rooms are no longer filling the airwaves their odd sales pitch that “Gold has tripled over the past five years.  (Therefore you should) buy some now!!”

In addition, I think that 2014 will be a year of consolidation for the S&P.  So a 3% dividend yield plus the chance of, say, a 15% gain looks to me to be substantially more attractive than it might have been a year or two ago.

my verdict

I’m not so interested, for two reasons:

1.  I think the gold price is still too high.  In the past, the gold price hasn’t bottomed until it reaches a level where at least some existing mines become uneconomical.  This means that the cash a company must spend (not including non-cash costs like depreciation) to produce an ounce of gold is greater than the selling price.  As best I can tell (a long time ago, I would have considered myself an expert, but I’m certainly not one now), that’s below $1,000 an ounce.  The price may never get there, but, as an investor, I’m looking for situations with more upside than downside.  I don’t see that here.

2.  I don’t think companies have completely stabilized themselves yet.  The industry took on a lot of debt to fund what have turned out to be ill-advised capacity expansions at the top of the market.  That’s par for the course.

As far as I can see, these projects have by and large been at least temporarily mothballed.  However, there’s still the debt to deal with.  It isn’t so much that there are borrowings on the balance sheet that bothers me.  It’s that financially leveraged firms have to continue to mine in order to repay their lenders.  So supply isn’t taken off the market as quickly as it might otherwise be.  A number of companies had stock offerings last year.  Good for them, but this just prolongs the adjustment period.

All in all, I don’t find the risk/reward to be favorable enough right now.  Maybe in six months.

 

 

 

 

long-term market themes (iii)

December 20, 2013 By in Long-term themes, Strategy Tags: , , , , , , Leave a comment

software as a service/ cloud computing

Once, when I was younger and more foolish, I owned shares in the Japanese company Olympus for a short time (this was in the late 1980s – early 1990s, long before the financial scandal that ultimately brought the firm to ruin).

What interested me was Olympus’s endoscope business. An endoscope is an apparatus that consists of a monitor, a computer and a long fiber optic cable encased in a hose.  Doctors feed the cable into the body of a patient to check out the state of his insides.

This business is supposed to work on the razor/razor blade model.  That is, the big money is in replacing the cable-in-a-hose, which Olympus recommended doctors do every three years or so.

Olympus had a problem, though.  Its salesmen could never persuade doctors to replace their cable/hoses.  They’d have marketing campaigns where they’d warn the docs that the cable might snap off inside the patient’s body if it got too old.  But even that cut no ice.  I guess doctors figured the patient is sedated and that they could extract the broken pieces, if need be, without anyone being the wiser.

So far, there’s no obvious investment angle–just a recipe for trouble.

But…

…in the US Olympus had switched from selling endoscopes to doctors to leasing them.  The sales pitch was that monthly payments matched the doctor’s cash inflow better.  The buyer also took on no debt and was no longer responsible for maintenance/upgrades.

US sales skyrocketed.  So, too, did profits–because factored into the “more convenient” lease payments was cable replacement every three years.

The lightbulb’s gone on, I figured.  Next step is rolling out the leasing model worldwide.  So I bought the stock and sat back waiting for the earnings surprises–and stock price appreciation–to roll in.

They never did.  In a dot-connecting failure I’ve come to think of as characteristic of most Japanese manufacturers, Olympus thought leasing was ok for Americans but for no one else.  Once I realized this, I sold–without making or losing much money, as I recall (meaning it probably was worse than that).

Nevertheless, this experience taught me a valuable thing about market dynamics:

–when people, particularly medium- or small-sized businesses, own expensive equipment, they’ll ride it until it dies.  Then they’ll revive it, with duct tape and string if necessary, and continue to use it until it falls apart. Even then, they may keep it around for spare parts.

This is a particular problem with software, since it doesn’t often cease to function.  All the power resides with the buyer.

–on the other hand, when people lease stuff, and the large initial capital outlay is turned into a much smaller recurring expense, the obsessive desire to squeeze the final dollar of value out of the equipment disappears.  Market power swings decisively to the seller.

In the case of software, the benefits of this move are especially big, since many of the costs of distribution of the product go away. Everything is done automatically over the internet.

That’s the power of software as a service.

Another thing:  during the transition period between ownership and leasing, surprisingly large numbers of customers–who have previously been using what are, in relative terms, Stone Age tools–sign up.  ADBE is a case in point.

sketching out long-term stock market themes (i)

December 18, 2013 By in economics, Industry Analysis, Stock ideas, Strategy Tags: , , , , Leave a comment

I think next year will be one where secular forces rather than the business cycle will be the most important economic factor in determining stock performance.  So I’m going to write a number of posts to try to work out, at least to myself, what those forces are and how they’ll affect stocks.

This post is probably just a warm-up.

WWII ended a very long time ago.  But I think the mentality of that era still has an influence–most of it not so helpful today–on the way business is conducted in the US, especially for large, mature corporations.  I see three important areas:  organization, competition and communication.

organization

Many mature corporations in the US have been set up along military lines by citizen-soldiers returning from Europe and the Pacific.  Hey, it worked in the war, didn’t it.

That is, the firms they built have a cascading management hierarchy that’s based on face-to-face communication and on control from the top of workers who have progressively diminishing amounts of decision-making responsibility as we go down the organization chart.  At the top are “generals” who give orders; at the bottom are “privates,” who don;t think too much–they just execute.  Everyone drinks the corporate Kool-aid.  Seniority counts for infinitely more than brains.

Examples:  governments, almost any financial company, publishing,  MSFT.

This now-outmoded structure required large numbers of “lifers,” –willing, but not necessarily well-trained, workers who learned on the job.  In the pre-internet world, their large size was a strong protective barrier against competitors.  No longer.

Implications:  As mature corporations continue to lose market share to sleeker, smarter, more nimble rivals, demand for worker bees, already shrinking, will continue to lessen.  For a lot of industries, this is not news.  The important thing, to my mind, is that there are still a lot of large domestic-oriented corporations with loads of labor fat (think: bank branches vs. peer-to-peer lending).

The political/social side of this issue is how to retrain displaced workers.  The investment side is the huge scope for innovative firms to still take market share from inertia-bound behemoths.

More tomorrow.

 

 

November 2013 Employment Situation

December 9, 2013 By in economics, Employment Situation report Tags: , , , , , , Leave a comment

the Employment Situation

Last Friday at 8:30 am est the Bureau of Labor Statistics of the Labor Department, as usual, released its monthly Employment Situation report.  It was another unexpectedly good set of figures.

Pundits had been offering a figure of around +180,000 new jobs added during the month.  Their theory apparently was that the recent government shutdown, the bungled launch of Obamacare (with its attendant display of White House ineptitude) and assorted small signs of business as usual in Washington would retard employment growth  …as well as that the strong October jobs was an aberration which would be corrected in November.

It’s hard to believe that Washington’s antics are a plus for jobs.  Still, it may be that business is reverting to what its default position has been for the 30+ years I’ve been watching US financial markets–that is, that Federal government policy is more or less background noise, annoying and sometimes harmful, but basically irrelevant to commerce.  Therefore, run your business and ignore political posturing.

I’m not saying this attitude is good or bad, right or wrong.  It seems to me that customers of both Wall Street and Main Street are saying that the economy is continuing to heal on its own.  But now, Wall Street is responding by bidding stocks higher; Main Street is adding more employees.

Anyway, the November numbers:

–The economy added +203,000 new jobs during the month.  Private industry added +196,000 new positions.  State and local governments chipped in +14,000.  The Federal government (excluding effects of the shutdown) subtracted 7,000 jobs.

–September jobs figures were revised up by +12,000 to +175,000; October numbers were revised down by -4,000 jobs to +200,000–meaning a net increase of +8,000 new positions.

–144.4 million people are employed in the civilian workplace.  That’s up by 0.7% year on year.  Hourly wages have risen by 2.0% to an average of $24.15.  The workweek has expended slightly.

The net result is that total civilian wages paid in the US have risen by 3% over the past year.  Given that inflation is running below 2% and that borrowing costs are extremely low, the figures seem to show that the real purchasing power of the workforce in the US is steadily increasing.

my take

What I find interesting is Wall Street’s reaction to a report showing economic strength–modest, yes, but still strength and at least as good as we’ve had in the recent past.

Stocks went up.

No perverse “good news is bad news” reaction.

I think this is a potentially important sign that even short-term traders see no benefit to reacting to any news as it were a sign of renewed economic crisis.  If that’s right, and Wall Street is returning to “normal,” then it will be safer to use historical patterns of market behavior to predict what’s likely to happen in 2014.  That’s good for us as investors.

 

high yield (i.e., junk) bonds

November 29, 2013 By in bond market, junk bonds, junk bonds, securities markets Tags: , , , , , , Leave a comment

Addled perhaps by too much turkey and a football triple header, I’ve decided to write a (very) brief outline of the development of junk bonds .  Today’s post is the first of two installments:

The first junk bonds were “fallen angels,” that is, corporate bonds that were investment grade when they were issued but whose credit ratings fell as the issuing company encountered difficulties and its finances deteriorated.

In an investment banking class in business school in the late 1970s, I heard a speaker from Drexel Burnham Lambert, the junk bond kings, deride the corporate bond establishment as a bunch of clubby coupon-clipping Ivy Leaguers without a brain among them, who simply sold such poor-performing bonds without analyzing the underlying fundamentals.  Drexel, he said, thanked God for creating these slackers, whose pockets they picked daily.

He then gave an example of a small oil exploration company that was in the midst of a sharp positive surge in profitability but whose bonds were still priced as if Chapter 11 loomed the next day.  As it tuned out, working as an equity analyst, I covered the company he mentioned.  Everything he said was accurate–and apparently unknown to the general run of bond managers.

The problem with the Drexel business at that time was that you used up the available pool of fallen angels pretty quickly.  How did you make money then?

The innovation of evil (and I do mean evil, despite the SEO puffery you see if you Google his name) genius and convicted felon Michael Milken was to realize Drexel could offer junk bonds as original issues.

Companies with less than pristine credit were already getting financing from banks, which were making a fortune on the business.  They were taking in retail deposits that they paid, say, 3% interest to customers on–and lending the funds to sub-prime corporates at, say, 12%.  To state the obvious, that’s a gigantic spread.

Suppose, Milken, thought, Drexel were to float bonds for these companies at 9% instead and market them to junk bond mutual funds + pension investors.  Retail investors would get around an 8% yield after fund expenses, the companies would get a cheaper interest rate, Drexel would collect enormous investment banking fees.  Everyone, ex the banks, would be happy.

The banks would be “disintermediated” (cut out of the action), as the term goes, in the same way as money market funds were cutting them out of the market for time deposits.

As it turns out, there was another gigantic plus for the issuing companies.  The junk bond fund managers appear to have had either terminal brain freeze, clubby Ivy League bond backgrounds, or absolutely no prior experience in corporate lending.  Cluelessly, they failed to require that the junk bond issues they bought have any of the protective covenants that Banking 101 would have taught you to demand.  No wonder sub-prime issuers were chomping at the bit to obtain Drexel’s underwriting services.

More on Monday.