Monday, February 27, 2012

Reversing the Flow

The Natural Gas Market Flips Cheniere Energy's Plans Upside Down

Today Cheniere Energy (CQP) announced that Blackstone committed to invest $2Bn in inequity in the company's planned project to build natural gas liquefaction facilities on the Louisiana coast where CQP has an export/import terminal for gas.  Handy press release with details here:

This is interesting to anyone who follows the US natural gas market, which must be the only commodity on the planet that hasn't rallied in the past couple of years.  Cheniere is a company with an interesting past.  In the 2000s, CQP quite a lot of money (much of it borrowed) to build out a terminal in Louisiana that would allow the import of natural gas from ships.  At the time, the US was clearly short of natural gas and prices steadily increased, making imports from other parts of the world profitable even with the considerable expense of liquefying the gas at its point of origin, putting it on a ship, sailing it a long distance, and regassifying once it landed in the US.  Unfortunately for CQP, not long after the company was really ready to ramp up its import terminal (these things take lots of time to build) the shale drilling/fracking revolution took place in the US natural gas industry and supply from onshore wells considerably outstripped demand.  Even worse, much of the rest of the world saw demand for natural gas outstrip supply, as Europe, China and more recently Japan ramped up purchases of gas.  The strategy of importing cheap gas from overseas to sell at a premium in the US was suddenly upturned.  Since the infrastructure CQP had developed was only designed to bring gas into the US, the company had a problem.

Wednesday, February 22, 2012

Cognitive Dissonance: What To Make of a Divergence Between Share Prices and Fundamentals?

Divergence Between Dry Bulk Share Prices and Rates Leaves Many Scratching Heads

Over the past two months, there has been a very large divergence between dry bulk day rates and equity prices, with day rates plunging on the order of 50+% since the beginning of 2012 while equities in the sector have done almost exactly the opposite. The above chart is illustrative of this trend, showing the Baltic Dry Index (an index of day rates earned by various types of dry bulk ships) dropping while a representative equity (EGLE, a leveraged owner of Supramax class ships) rises significantly. This has caused a lot of head scratching and profanity among the people who follow this sector closely. The short to medium term outlook for the industry is anything but positive, so it is quite frustrating to the sector specialists to see such a huge difference between what they know is happening in their industry of focus and the stock prices of companies in that industry. As an analyst I encounter this conundrum frequently, especially in the case of beaten up sectors and hated companies. So what are we to make of such cases? Is this just a temporary flash in the pan caused by the unwashed masses trading securities they don’t understand? Have all the “experts” missed some massive, obvious fact?

Tuesday, February 21, 2012

When To Get Off The Bus

Figuring Out When To Sell

Every investor must figure out what to buy, when and how much to pay. We spend a huge amount of time and effort pursuing the next investment, and Gawd only knows how many gazillions of pages have been written on how to do it. However, unless you are Warren Buffett, every purchase ultimately requires one to make a decision about when to sell this particular investment and at what price. Unfortunately, much less attention is paid to the sell decision, in part because the investment industry is primarily focused on taking in funds rather than disgorging them. Yet make no mistake: when you sell and for what price is just as important as the purchase decision. There are a few key considerations on sell strategies which vary according to the nature of the investment and the goals of the investor.

Thursday, February 16, 2012

The Dangers Of Chasing Yield: Always Read The Fine Print

Walking Away From RadioShack Bonds Due To Inadequate Covenant Protection
One of the hazards of digging around in the discard bin of the junk bond market is that an investor is constantly looking through what other people have run the heck away from.  Sometimes they have run away with good reason, sometimes they have panicked unnecessarily.  The only way to have a reasonable idea of whether a given bond is an opportunity or a trap is to very carefully do your own due diligence, including reading all the fine print.

Monday, February 13, 2012

Real Life & Natural Gas

For the moment, real life has gotten ahead of me, hence my relative silence.  I will be caught up shortly and be capering for your amusement in this spot shortly.

In the meantime, I would submit the natural gas market as a prime example of foolish, overly short term tunnel vision driving valuations.  Natural gas has dropped from $6 per MCF to under $3 per MCF.  A mild winter, soft industrial demand and the amazing success of modern drilling techniques (fracking) have resulted in a glut of natural gas and the price has dropped to the point that it is no longer economical to drill many wells.  Look and listen and you can find many comentators claiming that the world has changed, "this time it is different" and natural gas prices will never recover.  Equities in the sector have been under a lot of pressure, with many down a quarter or more in the last 6 to 12 months.

Monday, February 6, 2012

The Limitations of Magic Factories

What Insurance Companies Can and Cannot Offer Investors

As many investors cast about for a way to generate returns and stretch their assets as far as possible amid ultra-low interest rates and a “lost decade” in the US equity market, the insurance industry has responded with a dizzying array of product offerings. Many of these products seem to offer returns unobtainable elsewhere and “have your cake and eat it, too” options. While many insurance products offer significant value and can materially improve an investor’s finances and risk profile, there are also a plethora of insurance products that are long on the “sizzle” and short on the “steak.” Considering that a number of insurance products amount to giving away 10% or more of the money you put into them, investors need to be wary. In order to figure out which products genuinely offer value and which are merely a way to generate salesmen’s commissions and insurers’ profits, it is helpful to understand the environment in which insurers operate and how they manufacture their products. This post discusses how to evaluate whether an insurance product is genuinely valuable and when you can probably get the same thing elsewhere for a fraction of the cost.

Wednesday, February 1, 2012

JQC: Profiting From A Metamorphosis

Hitting a Single With A Fund Under Transition
In a prior post (, I explained how I scan the world of closed end funds (CEFs) for bargains.  Usually the realization of excess value requires patience, and the time you must wait can extend well over a year.  However, from time to time an opportunity presents itself in the CEF world which offers a far more timely excess return.  The Nuveen Multi-Strategy Income & Growth 2 fund (ticker JQC) offers just such an opportunity for excess potential returns which are likely to emerge within a relatively short period of time.