Thursday, July 31, 2008

Playing Oil Down.

Bought Powershares DB Crude (DTO) today. Very small position, pure trade, expecting oil to go down more near term. All caveats applied to trade are here: loss limit (I don't have stop loss now, but will sell if it goes below set price), time limit (will sell by the end of September no matter what) and taking profit in time (20% right now, time will tell). My oil target price is around $90, but I'll sell DTO sooner.

Full disclosure: at the time of publication author had long position in DTO.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, July 29, 2008

Thanks To My Readers

I want to say big THANK YOU to my readers. I appreciate your comments. I read them all. If I don't answer, then I just don't have anything more to say.

Today was a good day on the market. The main question is: was it Tuesday rally or for real? Or both? We'll see later. I'm starting doubting financials. Probably will enter Goldman Sachs again if opportunity is good, maybe Wells Fargo or Wachovia, but that's it. Or maybe, just as a speculation play, Etrade. Undecided so far. Of course, I still hold a small position in ANZ (ANZBY.PK), which is getting smaller and smaller...

The big mystery of this market: there is no rally in tech. Especially in tech which has no debt and mountains of cash. They don't have to refinance the debt, so why they are not going up?

Full disclosure: at the time of publication author had long position in ANZBY.PK and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Monday, July 28, 2008

Why Doom And Gloom?

I'm a little bit surprised by doom and gloom in financial press right now. Yes, we are definitely in slowdown. Yes, $4 gas is biting (but I traveled to Europe in April and gas was just under $8 there, and people still were driving around). But, we are not in recession yet! We are yet to see a quarter of falling output. I'm not Larry Kudlow, I can't say that everything is great all around. But come on! Unemployment is still low, inflation is still low, there are plenty of opportunities around. Let's work, let's make money, and yes, let's have a lot of fun! Stop talking about thrift, forget about austerity. Life is way too short to spend even one day in gloom, money is not a goal, it's a tool to make your life better! Don't pay attention to puritans around, they are dead wrong! Drink good wine or beer (just don't drive after), kiss your mate, eat great food, whatever your taste. Wear beautiful clothes, beautify your life, be happy! Enough whining!

Today was awful. Tomorrow is another day. I'm looking at my shopping list, and maybe it's time to buy something. Don't know what is it, playing this year by ear.

Couple more words on AT&T and Verizon. There was one more article on Saturday, citing loss of landline subscribers (here). I disagree. FiOS costs more than landline, and if Verizon can get one FiOS subscriber for three lost landline ones, it'll break even. It's not reality, it's perception. Telcos are raking money, pay big dividend, but market pushes stocks down, and risk is way too high. We'll see.

Friday, July 25, 2008

What a (Crazy!) Week!

Don't know if idea of rotation to financials is correct. Two weeks is not enough to see a trend. We'll see.

Cramer pimped Panera Bread and General Electric on Wednesday show. I did invest in Panera. And maybe I sold too fast last year. But I'm not going back. Restaurant business is no good right now, with exceptions of McDonalds and YUM. Those are places where people who are short on money are going, and that's why they are performing right now. General Electric... Last conglomerate standing. I will invest in it when it breaks up. Only Jack Welsh could handle that monster, and he's long retired. Conglomerates are so 20th century. Of course, more than 550 billion dollars in outstanding debt doesn't improve my opinion.

Great article by Daniel Gross on slate.com today (here). This is an answer to a question in my yesterday's blog. Yes, obviously AT&T and Verizon are losing landline subscribers, and they are losing them in the business world as well, maybe even faster (do you know that you can run a PBX on an obsolete Linux box with open source software? Just install Asterisk). But all that still doesn't explain precipitous drop this year. I think that Cramer is right, on valuation and dividend both AT&T and Verizon are good investment opportunities. And they have a lot of business apart from landlines. But the problem with market is that often perception trumps reality. And, obviously, current perception is that both companies are going to lose business. I don't know if it's a good long term opportunity either, it's impossible to make long term forecasts for telcos. Field is changing too fast. I think I'll stay away for now. I still don't know what to make of Comcast, it doesn't even have landlines.

Looking ahead. Let's have a great weekend and make some money next week!

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Thursday, July 24, 2008

Why Telcos Are Going Down?

Was wondering about AT&T (T), Verizon (VZ), Comcast (CMCSA) lately. First two are constantly pimped by everybody. Both have exiting new products: iPhone for AT&T and FiOS for Verizon. Verizon is also a local phone monopoly, i.e. recession-proof. Both have 5% yield, growing earnings and rock solid financial positions. Comcast is a cable monopoly, constantly raising prices, growing earnings and also has rock solid financials.
Why?

I can make a case against AT&T and Verizon. They receive significant part of revenue from phone services to enterprises. It might be a news for many people, but small and medium businesses are switching long distance and especially international calling to the Internet. Some even completely switched phone systems to Internet. But VZ and T are also Internet providers. And Comcast provides no phone business to companies and a big Internet provider. Mystery.

If anybody has a clue, let me know. I'm going to investigate this myself and if I find anything, I'll publish it.

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, July 23, 2008

There Is Still Time To Get Out Of Russia

I wrote about it in my very first blog entry (here). For those who are still in doubt, today's article in NY Times (Kremlin Rules) is a mandatory reading. That's what might happen to your money invested in Russia.

Tuesday, July 22, 2008

To Financials!

This rotation is to financials. No questions about it. When Wachovia reports a horrible quarter and goes up, that's the sign. Don't know for how long, but I'm gonna participate.

Yahoo once again confirmed that, unfortunately it's a has been. And it might still earn you money, maybe. But not much. And too risky.

Intuitive Surgical rocks! And penetration abroad just started. Only two hospitals in China, two in India and one in Russia had a Da Vinci system last time I looked (couple of weeks ago).

Full disclosure: at the time of publication author had long positions in Intuitive Surgical and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Monday, July 21, 2008

Tired of Talk About Uptick Rule

I know that Jim Cramer doesn't read me. But I just don't understand his obsession with uptick rule. OK, when he was trading he had to deal with it. So what? When I was younger, girls liked me more than now. The biggest problem with this obsession: it misses the point. When there is rampant speculation on the oil futures market, which is threatening to kill world's economy, Jim is saying: it's supply/demand. Tell me Jim, what company was killed by shorts? Bear Stearns? No, it was killed by its own customers, it was classic run on bank, and FDIC doesn't cover brokerage accounts. There was a bear raid on Lehman Brothers, it failed. Any more proof of bear raids by shorts? They are actually too tame, because, strangely enough, Countrywide and WaMu are still alive! Naked shorting is illegal anyway, uptick rule or not. I just don't understand, why Jim isn't crying out loud that huge pension funds, sovereign funds and hedge funds opened huge positions on commodities markets and rolling them over, completely skewing market picture. I know that in the end they will lose big, nobody is so powerful as to defeat Mr. Market. He'll humble anybody. But for the short time, they are hurting everybody, at least people like me and you, who has to fill gas tank once a week.

I usually don't write about politics. But today's decision by Nancy Pelosi not to consider repeal of offshore drilling ban is a total outrage. We need oil. There is no substitution. Not now. Not in twenty years. She just made oil more expensive for all of us.

Tech market is killing me. Why Apple sell-off? Yeah, right, low outlook. Is it the first time? Or the second? Apple always lowballing its outlook. Somehow missed the fact that computer sales are up 41% compared to the last year's quarter. That's bread and butter, iPod and iPhone are just icing. I was reducing my Apple position for different reasons, but at current prices might buy back some.

Ditto for Google. Looks like earnings are lower than expected because of smaller interest on the cash pile. I am looking at adding to my position under 440.

Thinking on small bets for sector rotation. It might be healthcare, and drugs seem tempting after Genetech takeover, and, surprise, banking sector. Waiting for good entry points for Goldman Sachs (yes, I want it back) and maybe Wachovia or Wells Fargo.

Other news. Icahn lost with Yahoo!. He still can make trouble, force sale of Asian investments, which would be huge mistake at current prices or some other stupid decision. But MicroHoo! is dead. Dead dead. Microsoft either wants Yahoo! with people or wants to destroy it. But it won't pay $33 per share for destruction. Probably not even $25.

Full disclosure: at the time of publication author had long positions in Google and Apple and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Saturday, July 19, 2008

What a Week!

That was a roller coaster! Glad I increased cash position lately by trimming Apple. And happy that I made money on quick trade with Goldman Sachs. Looks like now is the time for trading volatility.

Jim Cramer was wrong. Oil can't go up in price indefinitely. After all, even if suppliers can't increase production fast enough, demand destruction works immediately. And parabolic chart is a sign that things are going to end badly. With a sharp drop, most probably. I don't know what happens next (or I wouldn't have to work for a living!), but in couple of years oil is probably going back to 50-70 range. Later on, it will go lower for a while. Maybe 40 dollars a barrel is a current minimum, but I'm not that sure. I still remember oil under $10 in 1998. Which means that all altenergy investments which are not supported by government, are toast. The only hope for oil bulls is the fact that oil industry is getting destroyed in Mexico, Iran, and probably Russia. Which will remove significant part of supplies. But new supplies are coming online in Iraq, Brazil, US, Canada, North Sea and other places.

Current sector rotation is still not clear. Where money is going? It's not tech, judging by reaction to misses by Google and Microsoft, which were not that bad. Financials? That would be interesting. I could say that financials don't deserve investment right now, but it's beside the point. Merrill Lynch reported awful quarter and it's still up. Funny enough, rotation to financials is exactly what US economy needs right now.

Let's see and make money!

Full disclosure: at the time of publication author had long positions in Google and Apple and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Thursday, July 17, 2008

Bye, Goldman, For Now.

Sold Goldman Sachs position today. I still think it's dirt cheap, but I just can't afford to sit on 15% profit in 2 days. Not in this market.

So, commodities bubble is pierced. What next? Banks? No way. Yes, they are down a lot, but they are down for a reason. We can only account for about 400 billion of writedowns, and forecast was between 600 billion and 1 trillion. There is more pain ahead. And, with all emergency government interventions, one thing is clear: at any failed bank, shareholders will be wiped out. Healthcare? Is it big enough? Let's see.

Full disclosure: at the time of publication author had no position in GS. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Friday, July 11, 2008

Opening Goldman

Bought a little bit of Goldman Sachs (GS) today, opening a new position. Wanted it for some time, but waited a day like this. Scary, sure, but you just have to buy something on a day like this. Blood on the Street.

Full disclosure: at the time of publication author had a long position in GS. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, July 9, 2008

Trimming More Apple.

Sold more Apple today, while it was up. Still more to go.

So, where is this sector rotation going? Commodities are done, even oil. Now what? Looks like even hedgies don't know.

I'm still surprised buy apparent lack of quant activity. They should've smoothed these sharp market gyrations. Looks like quant formulas don't work for now.

Full disclosure: at the time of publication author had a long position in AAPL. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, July 8, 2008

This Is Sector Rotation. Where To?

Interesting action last two days. Obviously, oil bubble is popping with swooshing sound. Funds are selling all commodities now, oil and natgas included. Should've happened earlier, but probably was postponed by end of quarter window dressing.

The big question now: where is money going? Watching Cramer right now, he thinks healthcare. I'm not that sure. If last two days action is any indicator, money is going to Internet (Google, Ebay, Yahoo), best tech (Apple, Research in Motion) and recession-proof companies (Phillip Morris International, Procter & Gamble). Strange a little bit. May be a sign of recession preparation, tech and Internet being less sensitive than economy in whole. Or maybe just fund herd mentality. We'll see.

Article on alternative energy is coming in couple of days.

Full disclosure: at the time of publication author had long positions in GOOG, EBAY, PM, AAPL and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, July 2, 2008

Alternative Energy Investment

Alternative energy. Dreams of clean, cheap, limitless energy. Yeah, right. Clean, cheap, limitless. Pick one of the first two, third one is impossible (just plain physics). This article looks at different sources of alternative energy from investment point of view. It only includes currently available technologies.

Energy Requirements In The Modern World

There are three areas of modern life which require different approaches to energy.
1. Electricity: cheap (relatively) to produce, easy to use, easy to distribute to static locations, impossible (so far) to store, impossible (so far) to distribute to moving locations.
2. Transport: in most cases, can't use electricity, because requires source of energy which can be stored and moved.
3. Heating. Can use electricity, but in most cases direct heating is cheaper. Includes heating of buildings and heating of water.

Some Physics

There are couple of physical laws relevant to discussion:

The law of conservation of energy: energy is never created or destroyed, it just getting converted from one form to another. Modern physics extends it to law of conservation of energy/mass: energy and mass can be converted to each other, according to Einstein equation: E = mc2, but the total remains the same.

Second law of thermodynamics. The essence of it is that thermal energy is a universal energy sink, all kinds of energy are eventually converted to heat. The most important for this discussion consequence of this law is Carnot equation: Emax = (Tmax - Tmin)/Tmax: maximum efficiency of thermal engine equals difference of absolute (Kelvin) temperatures divided by maximum absolute temperature.

Units of measurements. We'll use scientific units: Joule for energy and Watt for power. You need one watt of power for one second to product one joule. One kilowatt-hour (kWh) is equal 3600000 joules. One HP equals 736 watts.

Power Conversion

What is usually called power production is really power conversion (see law of conservation of energy). Mechanical energy is easily converted into electricity and used directly for transport. Any energy is easily converted into heat. Most often we need to convert heat energy into mechanical. There are several types of engines which can do it, listed here in order of efficiency:

Diesel. Max efficiency around 50%, unit power can be low to medium, power per mass is medium.
Gas turbine. Max efficiency around 40%, unit power medium to high, power per mass is high.
Steam turbine. Max efficiency around 35%, unit power is high, power per mass is low.
Gasoline engine. Max efficiency around 30%, unit power is low, power per mass is high.

Impact on Environment

Every kind of energy production impacts environment. It can be air, water or ground pollution, contribution to global warming, heat pollution, ground footprint, water and air flow changes etc.

Electricity

Electricity is produced by converting chemical energy of fossil fuels, potential energy of water on high ground or nuclear energy. Biggest problem of electricity: it can't be stored in more or less significant quantities. Consumption varies depending on time of day, which means that significant part of production has to be quickly available on demand for peak consumption and quickly switched off when not needed. You need different plants to cover constant, or base consumption (load) and peak load.

Fossil fuel plants. Mostly coal fired, some use natural gas and crude oil. All convert chemical energy to heat first, then to mechanical and electricity.

Coal plants are efficient, produce relatively cheap energy (around 2.5 cents per kWh in US). Units are huge, usually 100000 kW or more, require a lot of time to start up. Good for base load, can't be used for peak production. Thermal efficiency is around 35% (steam turbine), hard to improve. Impact on environment: heat pollution, greenhouse gas (CO2) production, ground and water pollution (ash), air pollution (acid rain, mostly solved in US, still problem in many countries).

Natural gas plants. Energy produced is expensive, 7-11 cents per kWh, probably more with current price of natural gas. Units are small to medium (1000 kW to 25000 kW). Use either gas turbine or combined cycle (gas turbine + steam turbine). Gas turbine units are easily started and stopped, used mostly for peak power. Combined cycle units are very efficient (55% or more), but not as fast to start. Impact on environment: heat pollution, greenhouse gas (CO2) production, much less than coal, because most of natural gas energy comes from hydrogen.

Crude oil fired plants. Mostly extinct.

Nuclear plants. Currently (surprise!) they produce the cheapest energy. Granted, in US many of them went through bankruptcy, wiping out amortization costs. But, anyway, average nuclear power cost in US is 1.3 cent per kWh. Current plants are good for base load only. Thermal efficiency is about 30%. Impact on environment: heat pollution. Chernobyl was caused by idiotic design, nobody builds such plants anymore. There are big political problems though, including spent fuel reprocessing/storage. New technologies might come up (pebble bed), improving safety and thermal efficiency and possibly making nukes suitable for peak load.

Hydro plants. Very efficient and relatively cheap. No need for thermal cycle, so efficiency is almost 100%. Impact on environment: significant. To build plant you need to create an artificial lake, completely changing ecology in the area.

Alternative energy plants: wind turbines, solar panels, solar-to-heat plants, geothermal plants. There was a talk several years ago about so-called low temperature plants, but probably before spending money people took a look at Carnot formula (efficiency of thermal plant working on 10 degrees Celsius difference is about 3%).

Wind turbines. Efficient (mechanical energy). Low unit power, biggest turbine is 6000 kW. Power cost is about 8 cents per kWh after government incentives. Without them, probably around 15 cents if not more. Weather dependent. Impact on environment: turbine towers need to occupy a lot of land, changing landscape and air flows in area, noise pollution, birds killed, and possible infrasound effects. The latest might be a big liability problem near population centers.

Solar panels. Very inefficient. Cheap panels, made from silicon or tallium have efficiency around 10%. Panels made of exotic materials (gallium, for example) have efficiency of about 20%, but very expensive. Energy cost is usually prohibitive: between 30 and 70 cents per kWh. Weather dependent. Impact on environment: heat pollution, made worse by low efficiency, landscape changes: panels need to occupy a lot of land to produce significant amount of energy. Production of panels creates a lot of toxic waste.

Solar-to-heat plants. Efficiency about 25% now, can be raised to more than 50%. Require expensive movable mirrors, need direct solar light (weather dependent). Not enough information to estimate costs. Mirror cleaning is problem not yet resolved. Impact on environment: some heat pollution, big land footprint.

Geothermal plants. Usually build in areas with high underground temperatures. Use steam produced underground to drive steam turbines. Efficiency is under 20%. There are not many places in the world suitable. There is not enough information to estimate cost. Impact on environment: open cycle (when spent water is dumped) produces dump water which is not acceptable without cleaning, because it contains a lot of minerals, including heavy metals. Closed cycle requires intermediate cleaning of water. There is one investment candidate here: Ormat (ORA). It depends mostly on government subsidies, but governments in question probably can afford them for a long time: Iceland, New Zealand, Israel.

Conclusion: in electricity production, alternative energy is not profitable without government subsidies in foreseeable future. Because such incentives can't continue indefinitely, long term investment in this area is not possible. Short term speculative investment possible in times of energy panic (like now), should be restricted to the best companies. Short note on T. Boone Pickens new idea: getting richer at taxpayers expense.

Transport

Transport, with some exceptions, need to carry energy source and power plant. Hence transport energy requirements: power units should have high power to mass ratio, energy source with high energy density, easily transportable. Here come oil products: diesel fuel, energy density of 39 megajoules/liter and gasoline, 35 megajoules/liter. Fuel tank of a small car (50 liters or 13 gallons) contains 1750 megajoules of energy, or 486 KWh.

Sea and river transport. Transport units are big, can use more efficient heavier power units. Most use diesel power. Oil tankers use steam turbine, which allows use of crude oil as a power source. Cheapest transport available. Alternative energy: none. Can use nuclear power, but power units are much more expensive than diesel so far, and nukes as ship power units are politically not acceptable for now.

Rail transport. Can use electricity. Electrified railroads are much more expensive, but have better capacity, because locomotives can pack much more power per unit. Especially good in mountains. Where electrified roads are not economically feasible, railroads use diesel power. Alternative energy: none.

Aviation. Almost all aviation uses gas turbine power, either in jet (turbofan) engines or turboprops. There are still some gas powered piston engines in use, but they are marginal. Alternative energy: there are some attempts to use biofuels, natural gas and hydrogen. Neither can compete with jet fuel (kerosene produced from oil). Best replacement for oil might be kerosene produced from natural gas or coal. There is only one company in the world right now with marginally profitable technology: Sasol ltd (SSL). Might be an investment opportunity if oil price holds above $100 for significant time. Not sure if this is alternative energy, but there is nothing else for now.

Automobile transport. Currently uses diesel or gasoline engines. All attempts to create viable electric vehicle, from 1890s to 1990s (it's nothing new!), hit the same wall: energy density. We know that fuel tank of a small car contains about 486 Kwh. Efficiency of car gasoline engine is about 20%, electric car has about 90%. Electric car needs battery capacity of about 100 KWh. Such chemical batteries are plain impossible. Add here charging problem: you can fuel a car in about 5 minutes, you need several hours to charge an electric car, and conclusion: electric car is only good for short daily trips. Forget family vacations in such car! Or fishing trips upstate. Or lots of other things people do. Biofuels: only sugar cane ethanol might be economically feasible if oil keeps above $100 per barrel. Brazil is the biggest producer, but I couldn't find public companies with US ADRs. Corn ethanol is a waste of taxpayers money, corrupting farmers and killing people in Africa. Soy diesel fuel isn't any better. Impact on environment of either is huge: tropical rainforests are cleared now to plant more corn and soy. Maybe somebody can genetically engineer some bacteria which directly produces gas or diesel fuel. Will not be profitable for the nearest 20 years.

Conclusion: for transport use, acceptable alternative fuels are: synfuel from coal for aviation and automobiles (not exactly what greens would endorse), and sugar cane ethanol. Invest in Sasol for synfuel. Let me know if there is an opportunity to invest in Brasil ethanol. Electric cars are not in the picture.

Heating

There are two major heating applications: heating of houses and heating of water. This is where we really have viable alternative energy solutions.

Geotermal energy. Lousy electricity producer, because it's hard to get high enough temperature into steam turbine (remember Carnot equation?). But great for house and water heating. The only problem: there are not many places on Earth where it's feasible. I haven't found any public companies so far, any help is appreciated.

Solar energy. Again, lousy electricity producer, but good for water heating. For obvious reasons, restricted to places where weather cooperates: temperature is always above freezing. But there are a lot such places on Earth. I personally saw a lot of solar water heaters on Greek islands, in Israel and Cyprus. I think it can be used successfully in California, New Mexico and Florida. Again, I haven't found any public companies.

Conclusion: there is a great opportunity for geotermal and solar energy in house and water heating. Unfortunately, there are no public companies to invest in.

Not included

Short note on things not included in this article:

1. Hydrogen energetics. Misleading term, because hydrogen is not a source of energy but a method of storing and transporting it. Not very good at that: hydrogen is a gas, with molecules so small it leaks through steel pipes. I don't think it will be feasible. Ever.

2. Fuel cells. Can be part of hydrogen energetics or used with hydrocarbon fuels. For the last 10 years, fuel cells were about 3 years to mass production.

3. Thermonuclear energy. 10 years in future for the last 50 years. This one will be used sometimes, but we don't know when.