Investing Linkfest 5/27/08
Last week, I attended Zions Bank’s (ZION) 7th Annual International Trade and Business Conference. Most of the speakers were very interesting. John Howard, the former Prime Minister of Australia, gave a lively keynote speech and subsequently fended off with aplomb the inane question of a clearly wide-eyed political science student from the university. Christopher Padilla, the United States Under Secretary of Commerce for International Trade (that’s a mouthful), spoke about the opportunities in a world featuring an emerging power in China.
The one speaker that intrigued me most was Matthew Simmons of Simmons & Company International. He spoke about “peak oil” and a world vastly transformed by the essential “drying up” of oil fields in Saudi Arabia in particular and the world in general. In a world of peak oil, we would not travel as much. Everything becomes more expensive because everything is less accessible and less transportable. New political and cultural shifts will take place that will reshape the globe as we know it. Simmon’s book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, which Zions was handing out free at the tables, is a sobering argument for why oil prices are so expensive right now. Of course, Simmons is an investment banker to the energy industry so everything he says must be taken with a grain of salt. For that matter, anything anyone says should be taken with a grain of salt. Always consider the incentives of the messenger.
Nevertheless, crude oil cooperatively jumped nearly 5% last week. Over the past year, black gold has doubled in price. Traders cite the falling dollar as one major driver of escalating spot prices, but Simmons would argue that exogenous factors such as foreign exchange rates assert much less influence than long term shortages of oil.
Two weeks ago, the markets turned in a defiantly strong performance. Equities in particular were bought up furiously by institutions like the latest Grand Theft Auto installment. Everyone loves a bull market and only the most strident bears and short sellers could lament upwardly trending indexes. But the economic indicators were still trickling out rather bleakly and thus I reasoned that the rally was overdone. The equity markets proceeded to give back all their gains and then some last week. Luck was a lady last week.
Macro
Back to oil. In the face of oil’s ascent, I dubbed our current era the Black Bubble. I attributed a good portion of crude’s rise to the influx of speculators and momentum investors/traders looking to ride the bubble to even frothier levels. It isn’t easy to make a contrarian call, so it was with great relief to find that George Soros, the billionaire hedge fund trader, philosophical political activist, and philanthropist, recently spoke of an oil bubble. He’s certainly a lot better at extracting alpha from the market than I am.
“Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles,” he said.
The comments are significant, not only because Mr Soros is the world’s most prominent hedge fund investor but also because many experts have claimed speculation is only a minor factor affecting crude prices.
However, Mr Soros warned that the oil bubble would not burst until both the US and Britain were in recession, after which prices could fall dramatically.
Mr Soros also warned that the Bank’s inflation report represents a “Faustian pact”, obliging it to keep interest rates high to control inflation, even as the economy is starting to slump.
He said: “The dislocations will be greater [than in the 1970s] because you also have the implications of the house price decline, which you didn’t have in the 1970s.”
Soros is speaking of the Bank of England here, but that is essentially the same “rock and a hard place” I expected Ben Bernanke and our own Federal Reserve would have to contend with. Not only is oil a key component of rising inflation, but food is the twin prong in the vice that is squeezing the consumer’s wallet.
The government likes to exclude oil and food from “core” inflation measurements. It is as if the pinheaded bureaucrats don’t think people buy food and oil. The last time I checked, food and oil are both very “core” elements of our budgets and lives.
So indeed, I believe we are in a Black Bubble. George Soros would know better how to express that outlook with an optimal trade. I’m much more of a long term investor and quite incompetent at finding the optimal trading vehicle.
Micro
Grand Theft Auto IV on Track to Set New Sales Records - Take-Two Interactive Software (TTWO), the publisher of GTA IV, is currently being courted by the much bigger Electronic Arts (ERTS). According to some reports, GTA IV will pass Microsoft’s (MSFT) Halo 3 as the best selling console video game of all time. Seems to me there is no GTA fatigue despite many different installments since the “game-changing” GTA III. Also seems to me that TTWO ought to hold out like Yahoo! (YHOO) for a higher price.
Travel Appears To Be Next Up For Google - Travelzoo (TZOO) has been a fashionable pick by some value investors. What’s not to like? The company essentially traffics in information, one of the most scalable and profitable business models ever invented by man. The company has healthy margins and return on equity (ROE), an unencumbered balance sheet, and a flock of short sellers ready to be squeezed. Heavy insider buying adds a cherry on top. But something wicked this way comes; Google (GOOG) is expected to extend its tentacles into the online travel information industry.
Mindray Medical: Strong Report and Fast Growth - Mindray Medical (MR), one of the leading medical device companies in China continues to hum along with breathtaking growth. More than half of the company’s revenues come from outside of the Middle Kingdom, but the recent humanitarian disasters brought on by earthquakes and aftershocks may send demand skyrocketing in the homeland.
A Wrench In The Machine? - Conventional wisdom says the United States is losing its manufacturing sector. Mostly true. Badger Meter (BMI) is one of the few companies thriving as a manufacturer of specialized industrial equipment. BMI makes water, oil, and fluid meters. ESCO Technologies (ESE) competes directly against Badger Meter in pushing the next generation of networked utility meters that will eliminate the need for the local utility company to send a technician out to read your water meter. Full Disclosure: I currently have a long or short position in BMI in one or more of my private investment partnerships.
Blackboard Application on Facebook - Having operated Web startups involved in the social networking space for over 3 years, most news items involving Facebook or Myspace (NWS-A) usually register a blah on the blah-bam scale. The new Facebook application by Blackboard (BBBB) is a bam. This web application will not change Blackboard’s fortunes much, but the idea that social networks, unlike the banal uses self-proclaimed social networking gurus foist on unsuspecting clients, can actually be used to facilitate something robust sends chills up and down my spine. The megatrend of online education cries for an intelligent implementation of an educational social network.
Natus Medical prices public offering of 4M shares - Shareholders reacted allergically to Natus Medical’s (BABY) registration of secondary offering shares. Turns out demand for the secondary offering was stronger than expected and the company’s stock rebounded. Natus Medical’s recent acquisitions make sense. Company management has shown an ability to allocate capital intelligently. The capital raised through the secondary offering will allow the company to bolster its competitive position as weaker competitors exit the industry by selling. Full Disclosure: I currently have a long or short position in BABY in one or more of my private investment partnerships.
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