Barron's MLP Article -- 25 Feb 2013

I noted to my audience on Sunday that I needed to read in more detail the Barron's article on the energy MLPs because they are fairly complicated as investments, and I wanted to get a better understanding of them before commenting.

Dimitra DeFotis wrote the Cover Story about these somewhat unusual (and variable!) class of stocks.

Most is us think of the energy MLPs as being a pipeline company, which acts more-or-less like a "toll booth" charging a little bit for transporting or storing natural gas (NatGas) or crude oil or gasoline.  These MLPs typically have yielded (although, technically and tax-preparation-wise they are NOT dividends, one of the many tricky little differences between MLPs and bonds and typical stocks) up to 6% or even higher.  Those high yields have attracted a lot of buyers, as well as a lot of new entrants into the energy MLP sector.

Alerian MLP (one of the big ones, also they do not require pesky K-1 tax forms...) has a nice ad noting that COW FLATULENCE is about 18% of world greernhouse gas emissions, and transportation's TOTAL is 14%...  Here is a a chart from stockcharts.com showing recent daily movement in AMLP (click on image for a better view):

These new entrants are often NOT toll collectors however.  Many of them do not promise a fixed return, to the contrary, many of them return money to investors based on commodity prices (in the case of refining and "exploration & development" MLPs) and their overall corporate governance.  These have varied widely.

As she mentions in her article, the sector as a whole underperformed the S&P 500 last year., for the first time in 12 years they did so poorly (vs. the S&P).  The S&P was up about 16%, the Alerian MLP Index (ticker: AMZ, the 50 largest MLPs all rolled into one ETF I guess it is...) gained just 6%.

Ms. DeFotis brings in two experts who have at least roughly similar views on this sector (Kyri Loupis (Goldman Sachs) and Chris Eades (ClearBridge Investments -- they have four closed end funds in the sector)).  One thing they both made clear is that the energy MLP sector is quite variable in structure, assets and how they will perform depending on circumstances.

One of the easiest and most well known MLPs is Oneok ("one oak") Partners (OKS).  Chris Eades:

"It operates pipelines that gather, process and transport natural-gas liquids."

OKS seems to be typical for the old-style MLPs, charge them a nickel for every thousand cu ft (for example).  Oneok had ads on CNBC not too long ago, so some of you may have an idea of the company, they are mostly in Oklahoma and Texas.

Many MLPs are not valued by the P/E or EBITDA measures common with other stocks.  Eades says he looks at "distributable cash flow", which is EBITDA minus interest expenses (MLPs typically have large debts), capital spending (they do a lot of capital spending) and after the general partner is paid (shareholders are limited partners, paid after the general partner).  Eades also looks at the distribution coverage ratio which is the above distributable cash flow divided by the dividend to investors.  If that ratio is over 1.0, that means the MLP has a cushion...  That is something like other stocks that pay a dividend, if they pay a too high dividend (such that their cash flow cannot cover it), then the dividend is in danger...

Kyris Loupis plays a bit more in the newer style MLPs, especially the exploration and production sector.  These are examples of the new-style of energy ETFs, withvariable cash flows as they are not as predictable as the older ones (who have signed longer-term contracts).

Both Eades and Loupis think that the energy MLPs have a very good future as the US is investing BIG MONEY in oil & gas infrastructure.

Barron's author Michael Aneiro, their fixed income writer, also wrote a somewhat detailed piece explaining some of the differences between the different "flavors" (my term) of MLPs.

Below is a list of selected MLPs with a comment (the first block are Eades picks, the second Loupis' picks and the AMZ is an index for comparison):

		12-Mo	Current
Company Name	Ticker	Change	Yield		Comment
Oiltanking Partners	OILT	34%	3.6%		Eades likes their Gulf Coast exposure
Western Gas	WES	27%	3.6%		parent co. adding more assets
Targa Resources	NGLS	-1%	6.6%		orienting more towards "old-style"
Oneok Partners	OKS	-1%	4.7%		"old-style", it has been around
Access Midstream	ACMP	30%	4.8%		a Kyris pick, "old-style"
MarkWest Energy	MWE	-3%	5.7%		growth opportunity in Marcellus and Utica shales
Genesis Energy	GEL	47%	4.4%		BOTH like this pure-play on crude
Tesoro Logistics	TLLP	34%	3.9%		spun-off from Tesoro, crude oil related
Delek Logistics	DKL	36%	3.2%		Nov 2012 IPO, underleveraged balance sheet
Alerian MLP Index	AMZ	6%	5.5%		an index, for comparing with above

***

This investment sector is of interest to me, but it will require more work before I buy anything.  The yields are attractive, and they are "probably" set up well for the increasing energy infrastructure spending in our country.

I can certainly recommend purchase of the Barron's (dated 25 February 2013) just for the above Cover Story if this is of interest to any of you.

Mid-Twentieth Century Technology

Sometimes we may think that it is only in very recent times that technological change has been important.  This is quite untrue!  Why, some of my favorite technologies come from the late 1940s and the 1950s.  One reason I like much of the technology from that era is that it easy to understand...

Oh, the below are EMP-proof!  People who "preprare" know what I am talking about here...

***

The below was my Christmas present from my wife.  Not even hand-brakes, to stop you have to pedal backwards!  I try to take my bike to work once a week or more.  I have a rack on the back (that's my laptop strapped in) and a basket in front (to pick up stuff from the grocery store when my wife tells me to...).

The flash on my camera lit up the reflectors.  Unimpressed?  Hey, it's EMP-proof local transportation!  No gasoline or electricity needed!

Yes..., I have a good lock for it.

***

The AK-47 was designed in the Soviet Union by a group of gun designers.  I believe it is the first automatic battle rifle (vs. the submachine guns the Germans had in WWII, same with Sgt. Saunders (played by the late Vic Morrow in the 1960s TV show Combat).  The AK caused our troops no end of problems to our soldiers in Vietnam, the NVA and the Viet Cong had a version of this rifle, while our guys were stuck with the fairly BAD M-16.

Here is my version, most of it was made in Russia (recently), but to get the gun into the USA and sold, there is some law that says that only 10 parts can be made overseas, the rest in the USA (perhaps to avoid hugh tariffs, I do not know).  This is the "Saiga" version of the AK, made in Izhevsk (the home of the AK) and the pieces made by Arsenal of Nevada.  I bought this about two years ago for $900 and something.  Not long ago I was at the range shooting it, and when I went to pay for range time and ammo, the clerk looked up the *new* retail price: $2900.  Whoa, I tripled my investment!  Better than I have done with all my other recent investments...  Note the genuine Russian sling (olive colored hanging down), kind of hard to get they tell me.  Also I have a 30-round magazine hooked up.

Mine is a "semi-automatic", perfectly legal.  Semi-automatic means you pull the trigger, out comes a bullet, but just one.  You have to pull the trigger again for another shot.  Military rifles are fully automatic, pull & hold the trigger and you can finish the whole 30 rounds in seconds...

There are two bearings (1950s designs) at the extreme left just so that you know it was ME who took the photo.

By the way, I am going to sell all my guns at the next Gun Show here.  Just for the record, and to make it official what my intentions are...

As a public service to my readers I include some accessories below (for scale, the outer diameter of the larger bearing is 70 mm or about 2.8 inches):

The same two bearings are at the upper left (the larger piece is the front wheel double-row wheel bearing for Hyundai Accent, the smaller piece is a rear wheel bearing for Peru's Daewoo Tico <-- kind of flimsy looking the Tico piece is, no?).  Also shown are four magazines loaded up, the magazines are mil-spec Bulgarian for those interested (also hard to find now).  Also illustrated above are two brands of AK ammo (7.62 * 39 mm):

• the gray cartridges are Russian "Tul-Ammo" brand (made in the city of Tula), see the box, I bought this at Wal-Mart some months ago.  Not only are the cartridges made of steel, so are the bullets!  There is (was, as AK ammo is hard to find as we nowadays...) a nationwide shortage of ammo for guns like this...
• the brass cartridges are made-in-USA "Federal" brand ammo.  The bullets are made of lead.  

Russian ammo is/was very cheap, a box at retail was under $8 (box of 20), the USA ammo ran almost $20 for a box of 20.

One thing I did not know is that indoor ranges will not let you shoot steel bullets.  So, it's outdoors I have to go.  But, it really does not matter, the effective range for pikers like me is only about 100 meters (110 yards).

There is a great book which describes the AK-47 at length (as well as other infantry automatic weapons):

Chivers, C. J.
The Gun
2011

Chivers was a captain in the infantry IIRC.  He was working for the New York Times last I heard.  Here's is his very interesting (for those interested in this kind of stuff, if you get queasy easily, you might NOT want to check it out...) website:

http://cjchivers.com/

***

If you have any questions, please do NOT contact me, as I will be getting rid of my gun at the next gun show...

Review of Barron's -- Dated 25 February 2013

Once again I had to go all the way to the airport, Barron's Guys, to get this weekend's edition, and even THEY did not have it as of Saturday afternoon.  Seriously fellas at Barron's, you will LOSE some of your readership here in S. Fla. and a blogger who reviews your magazine, which would be a darn shame.  So, SOMEONE tell the maricones to get the distribution in order down here!

***

The Cover Story is very timely and most excellent: "How to Get 6%", it is special report on MLPs (Master Limited Partnerships).  Author Dimitra DeFotis writes about a topic that I HAD thought was interesting but fairly simple.  I HAD thought that the energy MLPs were all pretty much alike, geared for high dividend payouts and structured more-or-less the same.

No!  The MLP landscape is changing.  These MLPs look to be a class of investments worth more careful examination.

Because of time constraints (it is late here in the eastern USA...), I am going to save the MLP discussion for a day or two to better understand the article so I can better comment.

***

Randall W. Forsyth writes Alan Anelson's column this week (I call it Abelson's column for a reason, but its real name is "Up & Down Wall Street).  Forsyth starts out his comments on Chinese cyber-spying and proceeds on to company leaks about takeovers and insider trading.  He returns to the theme of Chinese spying on us even as we run up our debts to them...  And that our trillion-dollar deficits (federal government) are becoming ever more of a geopolitical as well as an economic threat.

Forsyth then goes on to write about the upcoming "Sequestration" that may start as soon as Friday (March 1).  He brings in Charles Dumas (Lombard Street Research in London) to comment that there are real risks that consumer sentiment (and businesses dependent on consumer spending -- see Wal-Mart Stores (WMT) may be damaged by the recent tax hikes as well as further uncertainty (more great stuff happens re the budget processes by March 27 and more debt ceiling (remember that?  It's coming back...) by May).

Yet, Forsyth finishes, Bernanke assured Treasury debt-dealers that we are NOT in a Traesury bubble, whew, I feel better.  But then Bernanke said in 2008 subprime mortgage problems were well-contained...  Bernanke also goes before Congress this week, I wonder if anyone will ask him anything worthwhile.

***

Kopin Tan ("Streetwise") discussed some Midwest refiners (HollyFrontier (ticker HFC), Marathon Petroleum (MPC -- remember Marathon split into two companies not long ago), Alon USA Energy (ALJ, who?) and Western Refining (WNR)) with favorable remarks.  He also believes that Devon Energy may be a good bet, it has slumped recently but announced it wants to switch more production to crude oil rather than beaten-down NatGas.

***

"He Said":

"There is nothing wrong with cutting spending that much...but the sequester is an ugly and dangerous way to do it."

House Speaker John Boehner in an op-ed with the Wall Street Journal.

[Ed. note:  There appears to be no other way to cut spending, so just do it.]

***

There is an interesting ad (Page 20, my edition) on a new ETF: it "Generates variable cash flow from selling covered calls which limits upside participation."  I take this to mean that you can buy this (ticker: GLDI, it is NOT tied to gold or other physical commodities) as a substitute for manual buying of stock and selling covered calls to gain income.  More information at:

credit-suisse.com/etn

***

Andrew Bary writes a bullish piece on Canadian oil producers Suncor Energy (SU) and Canadian Natural Resources (CNQ).

Suncor gets 60% of its energy output from the Alberta oil sands and is vertically integrated (has refineries) and is quite profitable now.  CNQ is having a little rougher time (no refineries), but apparently has a well regarded management team.

My comment:  Both of these are worth a look.

***

I skip Christopher C. Williams' bullish piece (Dick's Sporting Goods, DKS) and Jack Willoughby's bullish piece on ADT (ADT) because I have no feel and little interest on either company.

That does not mean YOU might want to read those pieces though...

Similarly, I skip Jack Hough's piece (Coach, COH and Michael Kors (KORS) as it is about women's handbags...  FYI, he thinks Coach might be a better play as it is a better value...

***

"Economic Beat" author Gene Epstein comes out beating up (sorry...) the entitlements and why no one can seem to rein them in...  He calls this one of the costliest Ponzi schemes ever.  Yes, he is right.  And just for fun he writes the below about dearly beloved, Nobel-Pize-winning Dr. Paul Krugman:

"Krugman's own views on the deficit seem to depend on which party is in power.  As recently as Feb. 1, 2005, when the deficit was running at 2.6% of GDP, he declared in a New York Times column that "the deficit is indeed a major problem."  In 2013, the deficit is expected to run at 5.3% of GDP, and according to Krugman, it's no longer much of a worry."

Epstein does not cite the source of the last clause above, but I would be pretty sure it is true.

Krugman talks out of both sides of his mouth...

***

Tiernan Ray ("Technology Week") writes a smart piece about the winners and losers in the "Next Smartphone War".

In the short-to-medium term he likes Qualcomm (who designed all the chips, with new but weak competition coming from Broadcom (BRCM), Nvidia (NVDA and Intel (INTC)) as well as Samsung Electronics (005930.Korea <-- it seems I mention Samsung every time I review Barron's) and Apple (AAPL).

He notes that among the handset makers, Apple and Samsung made 101% of the profits in the industry between them... (The others all lost money)

***

Jim McTague (D. C. Current) writes a fun piece on the hypocrisy of the Obama administration.  Obama says that he is for cutting spending, but is not.  He then goes on to paint a dystopian future (hitting soon!) if the Sequester happens, and that it is all the R-Team's fault!  The R-Team, you may recall, allowed Obama's taxes on the rich to go up in the recent Fiscal Cliff deal.  The Rs say no more taxes, but Obama will not even consider spending without more tax hikes...

Why should Obama change?  He has gotten his way with the R-Team to date.  Yet, sentiment may be shifting..., even many D-Teamers now favor some spending cuts.  <--- I'll believe THAT when I see it.

***

Steven M. Sears (in the second piece of "Weekday Trader") writes that traders are amassing options positions by betting against the price of GLD (that is, many think that the price of the gold ETF "GLD" will go down).  He also says that this is getting to be a popular trade, with sentiment rising on GLD going down...

My recommendation: stay away unless you know what you are doing!

***

David Englander writes a bullish piece on Global Power Equipment Group, which has two main divisions: a nuclear power plant service division (they help do maintenance on reactors) and  their Braden division, which supplies natural gas turbine components (to GE, and it looks like to Siemens as well).  This stock has moved from roughly $7.00 (2009) to $30 (2011) and is down to $16.49 now because of recent disappointments.

But, he writes that things are actually looking good for GPLW.  Maybe so.

***

Alexander Eule writes this weekend's "CEO Spotlight", he discusses the career (and current prospects of VFCorp. (VFC)) under CEO Eric Wiseman.

As is typical of the column, the CEO (Wiseman in this case) has an interesting story.   He also has expanded VF from a mostly jeans company to a company with many other brands, and the stock price has more than tripled off its 2009 lows.

***

"Other Voices" is written by Michael Taube, who writes that Canadian model is not the panacea for the USA.  WHile Canada can teach us some good things about fiscal prudence and good governance (yes and yes), they fall short of us because they do not properly utilize the free markets we have here, and they ought to remove various barriers to trade.  Plus, they are more Socialist than we are...

***

Editor Thomas Donlan writes of the dangers of central banks, over-leveraging and high levels of debt in general.  Most of his column analyzes a recent book (A. Admati and M. Hellwig, The Bankers' New Clothes, Princeton University Press) in which the authors describe in great detail these various perils.

Yes, of course our high levels of debt are dangerous.  But, Donlan is doing us all a favor by showing that even the academics are worried about it.

Donlan finishes by bring in William Shakespeare by noting that Polonius told his son (and we used to be taught that in English class) "Neither a borrower nor a lender be."  But no one seems to care about such and old notion...  Polonius then went on: "loan oft losess both itself and friend, and borrowing dulls the edge of husbandry."

Bravo, Mr. Donlan!

***

The cover of the market week section had two nice little gems: 

"Mr. Barron" driving his Barronsmobile is quoted, "You can call it the sequester, or call it 'chicken.'  Either way, I'm buckled up for Friday.", and a note saying that higher gasoline prices are approaching the levels where a stock market wobble has happened in the past...

Vito J, Racanelli notes stocks were little changed last week (as was the week before: little changed), but offered up a nice remark: "Hedge-fund managers, for example, continue to underperform, up only 3% this year, according to Goldman Sachs..."  Hah!  Racanelli also tells the story of Titan International's CEO Maurice Taylor's war of words with France, already described in great detail at Zero Hedge last week.

"Asian Trader" author (this week) David Winning writes that Australia's natural gas producers have a nice future ahead, BIG deposits, BIG infrastructure being built to serve China and of course the near-certainty that China will buy big in coming years.  All of his picks are Australian companies though...

Jonathan Buck ("European Trader") writes that despite the UK's downgrade by Moody's does not mean that there are not good stocks there (as many of them export so are not as exposed to the UK pound's recent weakness).  He likes defense giant BAE Systems (BAESY) and ad company WPP (WPPGY).

"Emerging Markets" author Ben Levisohn writes that there has been a decline of investor interest in emerging market debt, and some losses as well.  While I am interested in making income, emerging market debt is not for me...

"Commodities Corner" is by Alexandra Wexler this week and is about cotton and China.  She brings in two experts who say a combination of increased Chinese importing (despite large inventories... of low quality cotton!) and less planting this year of cotton in the US could make a nice trade.  I do not follow cotton, so I would have no idea...

Michael Aneiro ("Current Yield") writes about the Federal Reserve's new openness...  Yes, Bernanke talks to us more, but there is more dissent that comes out from various Fed members.  Aneiro believes that this may be deliberate, that the Fed is telling us that they are listening, that everything is OK, but you may want to start planning ahead...  No imminent changes though.  Still, you might want to think ahead...

The Classifieds this week offer up the Wyoming oil well again (www.2bpd.net) as well as an ad offering to take your company public in Europe (contact brad@ipoeu.com).

Insider trading continues this week with Tns Inc (TNS), Precision Cast Parts (PCP), Stanley Black & Decker (SWK), American Express (AXP), Mattel (MAT) all having insider sales of over $30 million (my arbitrary level indicating large insider trading).

Gold fell last week, but the miners (Barron's Gold Mining Index) are down even more.  At some point, some gold miners may be a great little play.  But not for me, at least not now.

JUST in the nick of time, the Mighty Peruvian Sol is down about 0.75% (3/4ths of a percent).  We leave for Peru on the 27th, so I will get my haircut for slightly cheaper than before, but that also means no Barron's reviews for a couple of weeks...

Verdict: Yes, even though my review might be late for many of you, this is a good issue!  Remember that I will try to review the important income-related MLP Cover Story in the next day or two.
***

On the other hand, I have a couple of ideas for stories from Peru while I am there...

The Mercenary Geologist Writes About Platinum

Mercenary Geologist.com has been kind enough to allow me to be a syndicator of Mickey Fulp's musings on metals and mining topics.  Your congenial host here was a Geology major in college, so these kinds of stories interest me.  Here, Mr. Fulp explores platinum and its price relationships to gold and palladium.

I recently have written an item or two about platinum, but the below piece is a much better perspective on platinum and palladium than I have been able to put together.

Depending on how well you readers accept this article, I may devote more energy to platinum and its related metals.

And now, Mickey Fulp's piece:



A New Price Paradigm for Platinum and Palladium

Platinum (Pt) and palladium (Pd) are the two most commonly used of the six platinum-group metals (aka platinoids), which also include rhodium, ruthenium, iridium, and osmium. As a group, these metals are rare in the Earth’s crust, silvery-white, malleable, and dense. They are highly resistant to wear, oxidation, and corrosion, have stable high-temperature and electrical characteristics, and exhibit catalytic properties.  The two metals are produced from primary mines and as byproducts from nickel and copper refining. They occur in unusual and specific geological environments in relatively few places on Earth. The largest deposits currently exploited are theBushveld of South Africa, Norilsk in Russian Siberia, Great Dyke of Zimbabwe, Sudbury, Ontario, and Stillwater, Montana. According to USGS estimates, 2012 platinum mine production was 179 tonnes and palladium was 200 tonnes, down 8% and 7% from respective 2011 levels. Recycling constituted about 29% of total supply. However compared to 2012 gold production of about 2800 tonnes, these are small markets supplied by a few big mines and companies.  South Africa dominated production at 74% with Russia at 13%. Remaining supplies came mostly from Zimbabwe, Canada, and the United States. Palladium mine production came from South Africa at 41% and Russia at 40%, followed by Canada, the United States, and Zimbabwe. As with many commodities, the United States is largely dependent on foreign supplies: 91% of our platinum and 54% of palladium consumption are imported. We consume nearly half of the world’s platinum and 30% of its palladium supplies. Because of their rarity and physical properties, platinum and palladium are considered precious metals and used in jewelry and investment coinage. However because demand is dominated by industrial applications, they are actually hybrid metals. Industrial use is overwhelmingly for chemical catalysts and dominated by exhaust systems for automobiles and trucks.  In 2011, platinum use stood at 38% for auto-catalysts, 31% for jewelry, and nearly 6% for ETF investments. Other important demand came from the glass, chemical, electronics, petroleum, and medical industries. Palladium use was dominated by auto-catalysts at 71%. The electronics industry consumed 16% and dental, chemicals, jewelry, and minor uses constituted the remainder. There was a significant net outflow from ETF investments in 2011. Because much of the world’s supplies come from geopolitically unstable, corrupt, and/or unfriendly countries and are dominated by a few major mines, districts, and companies, platinum and palladium are subject to supply and demand imbalances and price volatility:               Data Courtesy of Kitco.com Since the price of gold was floated on world markets in August 1971, the platinum to gold price ratio  (Pt : Au) has been greater than one (>1.0) about 85% of the time. Average monthly price ratios since 1970 are charted below: Ratio reversals (<1.0) occurred at various time periods lasting from over two years to a one month spike in December 1992 when the historic low was set at 0.78. The most recent reversal was from November 2011 thru mid-January of this year. Since 1970 the price ratio of platinum and palladium has varied generally between 2.0 and 5.0, largely reflecting palladium’s inherent price volatility compared to platinum:  Palladium price was fixed at the nominal price of gold ($35-36/oz) until mid-1972. From January 2000 to mid-2001, historic lows less than one (<1.0) occurred when rumors spread that Russia would cease stockpile sales to the West. Hoarding by American auto companies caused the price to briefly soar over $1000/oz. But then Russia’s balance of payments suffered, palladium was dumped on the market, and the price went parabolic. By July 2003, the metal reached a monthly average low of $162/oz. Ratio disruptions on the high side (>5.0) occurred in 1983-1984 and when auto industry demand collapsed during the global economic crisis in early 2009.  My interest perks whenever an anomalous Pt : Au ratio (< 1.0) occurs over a significant time span. This indicates that platinum is oversold and presents a buying opportunity. Such was the case beginning in November 2011; only recently has the ratio gone back over 1.0.  Several factors have caused platinum and palladium prices to rise substantially since early August:  · In 2012, South African and Zimbabwean miners engaged in widespread, violent strikes resulting in severe supply disruptions and constrained market supplies.  · An estimated 60% of South African mines currently operate at a loss or at break-even. · Economic conditions in the United States and China continue to improve and that has stimulated automotive sales and increased demand for platinoids. · Increasing environmental regulation of the auto industry in emerging market countries has resulted in higher demand, especially for palladium. · Although information from Russia operations is closely guarded and always opaque, it has been widely reported that historic palladium stockpiles are depleted and exports will cease this year. · Analyst consensus for significant 2013 supply deficits in both metals has led speculators to accumulate net long positions. In my opinion, there is a new price paradigm developing for platinum and palladium. The supply-side case is particularly compelling with the economic viability of most primary platinum-palladium mines not economic given current price regimes. Unless prices rise substantially, South African supply disruption will evolve into long-term destruction. The bullish case is strengthened if Russian palladium exports are indeed ending.  To my knowledge, there are no new major mines that can replace these looming reductions in platinoid supply. For a myriad of reasons, I maintain an ebullient view of platinum and palladium supply and demand fundamentals and predict that prices will remain robust for the short- to mid-term.  P.S. If you want to learn more about my evolving views of the platinum and palladium markets, check out these interviews: August 10, 2010; August 25, 2010;October 14, 2011; November 14, 2011; September 12, 2012; and February 14, 2012. Ciao for now,            Mickey Fulp Mercenary Geologist Acknowledgement: Michelle Lopez is the editor of MercenaryGeologist.com. The Mercenary Geologist Michael S. “Mickey” Fulp is a Certified ProfessionalGeologist with a B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has 35 years experienceas an exploration geologist and analyst searching for economic deposits of base and precious metals, industrial minerals, uranium, coal, oil and gas, and water in North and South America, Europe, and Asia. Mickey worked for junior explorers, major mining companies, private companies, and investors as a consulting economic geologist for over 20 years, specializing in geological mapping, property evaluation, and business development. In addition to Mickey’s professional credentials and experience, he is high-altitude proficient, and is bilingual in English and Spanish. From 2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and British Columbia.  Mickey is well-known and highly respected throughout the mining and exploration community due to his ongoing work as an analyst, writer, and speaker.  Contact: Contact@MercenaryGeologist.com Disclaimer: I am not a certified financial analyst, broker, or professional qualified to offer investment advice. Nothing in a report, commentary, this website, interview, and other content constitutes or can be construed as investment advice or an offer or solicitation to buy or sell stock. Information is obtained from research of public documents and content available on the company’s website, regulatory filings, various stock exchange websites, and stock information services, through discussions with company representatives, agents, other professionals and investors, and field visits. While the information is believed to be accurate and reliable, it is not guaranteed or implied to be so. The information may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. I accept no responsibility, or assume any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information. The information contained in a report, commentary, this website, interview, and other content is subject to change without notice, may become outdated, and will not be updated. A report, commentary, this website, interview, and other content reflect my personal opinions and views and nothing more. All content of this website is subject to international copyright protection and no part or portion of this website, report, commentary, interview, and other content may be altered, reproduced, copied, emailed, faxed, or distributed in any form without the express written consent of Michael S. (Mickey) Fulp, Mercenary Geologist.com, LLC. Copyright © 2013 Mercenary Geologist.com, LLC. All Rights Reserved.  ***

Gifts For Ameru

I was cruising around at Zero Hedge less than two weeks ago and saw an ad for promotional flash drives from a company called flashbay.com.  They sell a variety of flash drives (including big ones up to 64 GB if I understand correctly), but they put whatever artwork you want on to them.

I figured these would be a perfect promotional item for our Ameru to send to some of our best customers.  So, I sent the some artwork and text to flashbay and chose the flash drive model Lily (gracias 'manita!) and I liked the best.  We bought 100 of them, but not all of them will make it to Peru...

I included both sides of the drives above, one with our logo and the other with the word "RODAJES" (Peruvian Spanish for rolling bearings) and our telephone number.  Each flash drive came in its own little baggie, like you see three of them above.

To my knowledge, nobody in Peru is giving away this kind of stuff to their customers, so we will be seen as pretty high-tech and all...

The above are 4 GB each, the total cost (everything included) was $550.00, which I thought was very reasonable.  Their customer service was very good, ask for Ed Kelley, and tell him I sent you!

And, yes, I informed Tyler Durden there at ZH that we bought via an ad at their website, so I finally got to contribute something, even if only indirectly.

Review of Barron's -- Dated 18 February 2013

For the second time in a month, the blogosphere has prominently featured the cover of Barron's, this week Zero Hedge put up an article noting that Barron's Cover Story features a picture of President Obama with the title "Follow Me: We Can be Like Greece".  Most of my readers are from Zero Hedge and do not need the link, but this may very well serve some of you:

http://www.zerohedge.com/news/2013-02-17/all-hope-and-change-roads-lead-greece

I still had not been able to procure Barron's (as of 2:00 PM Sunday) as their distribution here in Miami is now very poor, I live in a wealthy suburb, and NO ONE here in town carries it anymore.  I had to drive to MIA (the airport), and yet I still had to search for it only to find it at the 3rd newsstand I went to (hint: you won't find it at NewsLink, try Hudson News instead).

Nonetheless, with such a promising looking story on the cover, I felt the need to go and fetch it, read it (as almost every issue has interesting gems in there somewhere) and write up my review.

Please recall that I only read and write about things that interest me, or occasionally of interest (perhaps) to the larger community if it IS boring for me...

***

Yes We Can!  And probably will at some point be like Greece...  Author and economist Gene Epstein, who has tended to be a font of common sense (even though he is a self-admitted economist) writes the Cover Story.  It is alarming and damn ought to be!  I am pleased that Barron's and Epstein decided to ring the bell on this urgent issue that the overwhelming majority of people in our country choose to ignore, it is to their great credit, and I applaud.

Epstein starts his article:

"In his State of the Union speech last Tuesday, President Obama concluded that "the State of the Union is stronger."  The big question is: stronger than what?  Federal debt is a record $12.2 trillion [Ed. Note: ?, the debt calculator at the top of my blog says $16.4 trillion, but he may be using different numbers], or 76% of the nation's output of goods and services.  While that's still well below Greece's 153%, we're steadily headed in the wrong direction."

He then immediately goes on to note that our debt could reach that 153% by 2035...  [Why do I feel that he is optimistic?]  And the REAL problems would then start: depression and an unemployment rate of 20%.  The CBO (and many, many, many, many others) have been warning for many years of this problem, high deficits leading to an unsustainable debt.

More Epstein, writing more common sense:

"This problem can't be solved by asking the rich to pay a little more, despite what the president says.  In fact, Barron's calculates that immediately increasing the marginal rate to 50% on the top 1% of the country's earners would bring in $500 billion over the next 10 years.  This would barely dent the country's debt load, which would then be $20 trillion, and do little to forestall a financial crisis."

There is a handy graph (Barron's is pretty good at providing handy graphs when they are most needed) that shows two vertical scales (right is percentage of retired people (gray shading, taking us from some 13% now to about 21% by 2043) and left scale is Debt/GDP, rising from some 40% now to 200% in 2043).  For me,  drawing graphs that far into the future (2043?) is very speculative -- except for the demographics, I am OK with the graph there: "demographics is destiny" said someone.  There are three "curves", the CBO estimate shows our Debt/GDP at some 215% (2043), another curve assumes a 50% tax rate on the wealthy (top 1%), that ration declines to 210%.  The third curve even adds in rolls in taking away the Bush tax cuts (to everyone else NOT in the top 1%), taking that Debt/GDP to about 200%.  Big f***ing deal!  Epstein is right in his comment quoted above, raising taxes on the rich essentially does nothing!

It's the spending, stupid!

(The above is directed at our "esteemed" elected officials in Washington, DC as well as their handlers the banksters and lobbyists...)

Epstein concludes (although these are my words not his) that we will have to drastically cut spending now or renege on our entitlement promises to the elderly in the future (and both are likely IMO).

***

Jim McTague follows Epstein's article with one of his own.  McTague is an expert on the machinations of what goes on re Congress and the Administration.  His piece "A Dangerous Game of Chicken?" examines the likelihood of "sequestration" (automatic spending cuts) versus various proposals going around Congress.  He discusses the three main players: ("The Loathsome") Sen. Harry Reid, Speaker John Boehner and (Republican) Minority Leader Sen. Mitch McConnell.  There is at least one proposal going around (like a contagious disease) put out by Sen. Reid, but it apparently is disliked by both the R-Team as well as the D-Team, and so has little chance of passage...

McTague concludes: "The markets seem to favor sequestration because it would mean some spending cuts.  At least it's a start."

Yes, it is a start.  And at this point, I would agree with the markets.  Our leaders have failed us (duh), again.  An automatic across-the-board set of cuts (exempting the entitlements however) is better than anything else likely to come from DC.

***

Randall W. Forsyth is again in Alan Abelson's "briar patch" and first informs us that Swedish researchers have found oxazepam (a benzodiazepine closely related to Valium and in the same family as Xanax) in the water near Uppsala, Sweden!  The researchers then went on to find out that perch (a small fish) swimming in those waters there are "much greedier and more efficient feeders" and were more likely to go off on their own (leaving their fellow schoolmates behind).  He draws a parallel with Wall Streeters...

But, it is liquidity (not anti-anxiety drugs), in extra-large helpings, he believes that help explain the brash behavior in the deal-making sector last week: Heinz being acquired by Berkshire Hathaway (tickers BRKA and BRKB), Comcast's (CMCSA) takeover of the "other 49%" of NBC it does not own (from GE), Dell's (DELL) proposed leveraged buyout by Michael Dell (see my notes on Ben Stein's negative view of insiders making money at shareholder expense further down), the airline merger between American ((AAMRQ) and US Air, and the merger of Liberty Global (LBTYA) and Virgin Media (VMED), the last one I had missed on CNBS somehow during the week...  The above total: approximately $95.7 billion last week alone (and $160 billion in M & A for 2013 so far, a very fast start).

Forsyth goes on to write that the disconnect between Wall Street and Main Street is as wide, or wider than ever.  From falling sales alarming WalMart (WMT) to the sequestration cuts (estimated at $85 billion), there is a lot to be concerned about...

***

Kopin Tan ("Streetwise") lets us in on a couple of other deals.  Nasdaq OMX GRoup (NDAQ) is apparently in play.  And IPOs have raised some $6.03 billion (35% better than the average since 2001) so far this year.

[Ed. Note:  This will not end well.]

***

In "Review and Preview" there is a short piece of the dangers in investing in hedge funds.  Like we do not know that?  Things to look out for: lack of transparency, an inadequate track record, poor risk management, lack of due diligence, hard-to-understand strategies, and many more.  My advice?  Only risk your "play money" (money you can lose 100% of and not worry about it) with hedge funds.

"He Said":

"[When] anyone in the investment community calls something a certainty...[he's] extremely arrogant or sanctimonious.  Or..., once in a while, he's right."

William Ackman, on his short position in Herbalife.

William Waitzman writes a short piece on there being PLENTY more money for deal making than we have seen so far...

***

Andrew Bary writes a BEARISH piece on Linn Energy (LINE).  LINE has a big yield (equivalent) of 8%, but because of derivatives, he thinks cash flow may be overstated...  He mentions LINE peers (but does not say to buy them) Apache (APA), Devon Energy (DVN) and Suncor Energy (SU).  I think his tone re LINE and its peers is clear enough though...

***

Jack Hough is back at his pattern of picking four companies to consider buying, this week these would be companies in the smartphone sector.  NOT Apple (AAPL) though!  He believes that Apple's margins may come down and he suggests Samsung Electronics (005930.Korea -- hey, I have this one memorized now!), Broadcom (BRCM), Vodafone (VOD) and OmniVision Technologies (OVTI, they make camera chips for the smartphones) as better bets.

***

"Technology Week" author Tiernan Ray writes that technology REITs have not been doing well lately and that companies that are viewed similarly (Rackspace Hosting (RAX) and Equinix (EQIX)) are unloved and overvalued.

***

OK..., it had to happen sometime...  Author J. R. Brandstrader writes up a piece on "Goldman Sachs Small/Mid Cap Growth Fund".  The fund's managers seek out small companies overlooked by the market's rally (really, no one else does that?).  One of their Top 10 holdings is the above just-mentioned Rackspace Holdings (RAX)!  LOL!  If it's Goldman Sachs, well they may be the smartest guys in the room, but I would not trust them with any of my money...

***

"Weekday Trader" author Teresa Rivas writes a bullish note on Parker-Hannifin (PH), a company I have known and liked for many years.  They make various nitty-gritty items like hoses, connectors, valves, etc.  In may cases they have little competition and they have excellent distribution (unlike Barron's...).

Disclosure: we have a small position in Parker-Hannifin.

***

Here's a Classified from this week:

www.2bpd.net, which is the website for an oilwell in Wyoming that is for sale, and produces, yes, two barrels per day...  Interested?  Lauranunes@cox.net or 619-985-5657.  I went to take a look, I do NOT know how to assess these opportunities, but it is an interesting peak at getting into the oil biz for $105,000.

***

Typically, when Barron's does an Interview, it is interesting especially if it involves interviewees in foreign places like Switzerland...  But, for me, ZZZZZ.  Sorry, Mr. Strauss.  Not much meat...

***

PENTA (their column oriented for rich people doing things other than investing) says they may dump the Charitable Tax Deduction...

***

Ben Stein, smart investment commentator and actor, writes ("Other Voices", Barron's column by non-Barron's people) that Michael Dell (and more generally other insiders) make money at shareholder expense when there are leveraged buy-outs and similar.  Thank you, Mr. Stein.  Too true.  Ben Stein:

     "One of the smartest businessmen I know, a former high executive of a publicly held entertainment company, once asked me: "What is the first duty of a corporate CEO?"
     "Well, to maximize the utility of the shareholders," I naively answered.
     "You poor child," he said.  "no, the CEO's first duty is to make himself as rich as he can, as fast as he can, with the shareholders' money."  I'm sad to say that decades of observation have confirmed that his conclusion is correct all too often."

Well, there it is.  A confirmed observation that there are LOTS of sleazy CEOs out there, we may have thought we KNEW that, but here is Ben Stein, a connected and apparently decent man (AFAIK), tells us.

***

Editor Thomas Donlan writes that the new proposal by our president to raise the minimum wage to $9.00 per hour is "A Step in the Wrong Direction".

Yes, I thought that this was settled decades ago, that raising the minimum wage will discourage entry-level employment for job-seekers...  Silly me!

***

Barron's has a Special Section this weekend on America's top 1000 financial advisors (as in persons), they are ranked by state, not nationally.  I mention two, kind of at random.

Ric Edelman is No. One (Virginia), his company accepts small customers and apparently will accept even smaller customers (just $5000) when his Edelman Online starts up.

Bud King is No. One (Missouri).  Bud King: "There is a significant disconnect between the way business owners see the economy and the way market analysts do.  Market analysts appear to be particularly more optimistic at this point in time."

***

In the Market Week Section, on the cover, is ol' "Mr. Barron" himself, peering through a telescope into the night-time sky...  "You can't fool me, that's no meteor falling.  It's the price of gold."

Since very little happened in the stock market last week (on very low volume), I skip Mr. Racanelli's column.

Assif Shameen ("Asian Trader") writes that Indonesia's market has hit an all time high.  He brings ina couple of experts to tell us why Indonesia is a buy.  Interested?  There are two easy ETFs: Market Vectors Indonesia (IDX) and Market Vectors Indonesia Small Cap (IDXJ).

India's stock market has done very well lately as well, Ben Levisohn ("Emerging Markets") writes.  Even with bad economic data...  Two of his contacts say (in essence) to be careful...

"European Trader" author Jonathan Buck writes about Italy's upcoming elections later this month.  He says that a Belusconi ("rightist", my word) win might be destabilizing to their stock market.  A big win by left-leaning Mr. Bersani would be better.  Buck does not say WHY Berlusconi would be bad for Italian stocks (perhaps because he does not support Mario Monti's reforms, as Mr. Bersani does?).

Owen Fletcher ("Commodities Corner") writes that corn may go down in price, due to (at least the view so far) a likely big crop as well as lower ethanol and export demand.  [Ed. Note: A quick review of the DJ-UBS Grains Index (Page M46, my edition) shows grain prices are off some 20% of their recent (since late 2012) highs]

"Current Yield" author Michael Aneiro writes of Yet Another Risk in the bond markets...  This week's edition is "Buyout Risk", in which bonds from a company with them already issued may then issue a LOT MORE of them after the company gets bought out, merges, whatever.  More debt on more debt.  Good catch, Mr. Aneiro!

There have been some insiders selling lately.  Five Below Inc (who?, FIVE) had $107 million dollars worth of stock sold by insiders...  Other companies having $30 million or more sold off include American Express (AXP), Kellogg (K), Nexstar Broadcasting (who?, NXST), Rockwell Automation (ROK), Fiserv Inc.(FISV), and Gilead Sciences (GILD).

On the second last "real page" (as the back cover is always an advertisement) gold is always mentioned.  I usually do not refer to it, as I (and MANY others) cover gold elsewhere.  This weekend, however, we learn that the Odious (I used the term Loathsome re Senator Reid above) George Soros sold $100 million of gold (paper gold?) last week, as gold sank briefly below $1600.

The Mighty Peruvian Sol, unstoppable this weekend, rose some 0.46% (small) against the US$.  Of course it is now going up again, as I head to Peru again soon.  But a $5.00 haircut in Peru is better than a $25 one here...

***

My verdict?  If you can get your hands on a copy easier than I could, sure, buy it!  The Cover Story alone is worth it.

The Via Negativa, Less Is More!

Many of you know that I have been reading N. N. Taleb's new book Antifragile (I have actually finished except for the technical material I am still wading through in his Appendix).  In his new book, he discusses at some length a concept he calls the "via negativa", in which by giving up some things, you actually make your life better and fuller.

"Via negativa" does NOT mean living an evil life, just to make this clear at the outset...

This article will meander a bit, I ask for your patience as I will tie it all together in due course...

Before I jump into the main discussion today on his via negativa, I would like to quickly examine the interesting case of gold today (this will be relevant further into my discussion below).  This morning the price of gold has plunged, check out the chart:

As of 1:00 PM US ET, the price has come back $7.00 or so, but still a nice epic drop of over 2% in a matter of less than a handful of hours.  During the day, I will try to see if I can find out why, or you can just go check out Turd Ferguson's site (he is up to speed on daily trading in gold).  Here is Turd's update so far today, he does not state anything special or conspiratorial.

http://www.tfmetalsreport.com/blog/4506/fear-panic-capitulation

During the day it is of course possible that a "reason" for the big drop may make it into the news.

***

N. N. Taleb discusses via negativa, an idea that has been around in one form or another for thousands of years (and under other names).

Taleb earlier in his book discusses some old ideas (especially Stoicism, the Greek philosophical school of Zeno and Epictetus, Stoicism is also a big part of Tom Wolfe's book A Man in Full, see wikipedia reference on his book (the book is excellent)):

http://en.wikipedia.org/wiki/A_Man_in_Full

One of the characters (a young man in prison called Conrad Hensley) in his book discovers Stoicism.  Stoicism has been very influential in history, including in the early Church in Rome.  Stoicism is a "meme on the rise", so as a service to my readers I pass along two other links (to Stoicism and Greek philosophical schools):

http://en.wikipedia.org/wiki/Stoicism

http://en.wikipedia.org/wiki/Hellenistic_philosophy

[In an aside here for a moment, I have read that Old Ideas are typically better then New Ideas.  Many old ideas are still around (the Ten Commandments, from some 3400 years ago), Hip-Hop Music will be forgotten in 34 years...]

In the article on Stoicism article above, you will note that Stoics just are not unfeeling people sitting around indifferent to emotion...  Stoicism, overly briefly, asserts that happiness (peace) is more likely to be achieved by careful observation of the way Nature (God) works, and by choosing to live accordingly.  These philosophers in Ancient Greece had the time to THINK about things, there was less pressure to "be productive".  The term "cosmopolitan" (a person who identifies himself with the world rather than a nation or a city) comes from Ancient Greece...  IMO, it is NOT true that our species has evolved its basic thinking very much.

***

Taleb slowly brings his via negativa idea together...  Perhaps his clearest (and easiest to explain by a fringe blogger...) beginning is his Chapter 7 ("Naive Intervention") in which he shows how dangerous it is going to the doctor.  Many treatments over the millennia by doctors have caused more harm than good (he notes how George Washington may have had a premature death (Page 111) because of medical ideas in his era).  "Going to the doctor" of course has had legions of critics throughout the ages (including my father-in-law Eleodoro Perez, age 91, who believes most of them are quacks...).

Bad results from medical treatments are often a naivete.  They are typically unexpected.  Taleb writes of the fate of Hungarian doctor Ignaz Semmelweis (he helped to make washing hands by doctors popular, see: http://en.wikipedia.org/wiki/Ignaz_Semmelweis), who noted that more women died of giving birth in hospitals than giving birth in the street.

The word Taleb introduces is "iatrogenics", causing harm while trying to help.  How do you avoid a iatrogenic fate?  By not going to the doctor unless you HAVE TO (emergencies).  Here is Taleb's first big hint at the via negativa, getting more from life by doing something less...  Taleb has a table showing examples of (naive) interventionism and the iatrogenic costs, here is one of my favorites (consultants giving business advice, Page 115):

Topic		Example		Costs
Business		Positive advice		Richer charlatans
Business		Focus on return vs risks		Bankrupt businesses

In the same Chapter 7, he goes on to point out some of the virtues of procrastination (my wife will not be happy reading this...) -- in at least some cases -- in that the Ancient Romans revered procrastination, one of their favorite generals (Fabius Maximus, who ultimately went on to help defeat Hannibal the Carthaginian) was nicknamed "The Procrastinator" ("Cunctator", sure hope I typed that one correctly...) in that he drove Hannibal crazy in avoiding and delaying engagement in battle (Hannibal had military superiority).

Here is a paragraph from Antifragile, in which he has his own heuristic ("rule of thumb"), where he writes on avoiding problems...:

"I have used all my life a wonderfully simple heuristic: charlatans are recognizable in that they will give you positive advice, and only positive advice, exploiting our gullibility and sucker-proneness for recipes that hit you in a flash as just obvious, then evaporate later as you forget them.  Just look at the "how to" books with, in their title, "Ten Steps for--" (fill in: enrichment, weight loss, making friends, innovation, getting elected, building muscles, finding a husband, running an orphanage, etc.).  Yet in practice it is the negative that's used by the pros, those selected by evolution: chess grandmasters usually win by not losing; people become rich by not going bust (particularly when others do); religions are mostly about interdicts; the learning about life is about what to avoid.  You reduce most of your personal risks of accident thanks to a small number of measures."

So much wisdom above!  Re-read it...

Taleb discusses (elsewhere) that he is REDUCING things in his life, he eliminated sugar from his diet, he stays away from highly-educated fools, etc.

The various ideas associated with via negativa are ancient, it is one of the central tenets of the skeptical-empirical school of medicine of the postclassical era in the Eastern Mediterranean, and has been explored by Karl Popper (The Poverty of Historicism), Jon Elster (Preventing Mischief) and even Steve Jobs (musing on innovation, underlining mine):

"...  It means saying no to the hundred other good ideas that are there.  You have to pick carefully.  I'm actually as proud of the things we haven't done as the things I have done.  Innovation is saying no to 1,000 things."

Taleb then spells it out, "Less is more" (Page 306):

"Less is more has proved to be shockingly easy to find and apply -- and "robust" to mistakes and change of minds.  There may not be am easily identifiable cause for a large share of the problems, but often there is an easy solution (not to all problems, but good enough; I mean really good enough), and such a solution is immediately identifiable, sometimes with the naked eye rather than the use of complicated analyses and highly fragile, error-prone, cause-ferreting nerdiness."

Taleb then goes on to buttress the above by observing the famous "80/20 Rule" (actually tending nowadays to becoming more skewed to 95/5 or even 99/1 (the 1% taking almost all the benefits vs. the 99%...).

***

Now please permit me to tie some of the above threads together.  In my own life I am engaged in a little bit of via negativa to help me achieve some peace, a better life, a life better integrated with the Universe...  Only a handful of you readers know "WTF" I am writing about here (although some others of you may have some idea).

For example, I recently engaged in a small series of actions that are shameful and wrong (that I will not go into here).  I am now trying to AVOID these kinds of wrongs now, and have embarked on a new direction to help guide me.  But, in trying to "right the ship" (which I used to only nominally do, if at all), I have taken a step or two that will help get me into a better psychological state.  One of these steps is a Buyer's Strike.  For a while, and for my own personal reasons, I have decided NOT to buy a few things that I have been somewhat compulsively been a buyer of in recent times (gold and ammo for example).

And my own excursion into the via negativa is why I am not buying gold hand-over-fist like I would normally do...  I also have embraced another facet or two of via negativa to improve my life (eliminating things to make life more whole).  Believe me, there is treasure to be found here...