CEC Portfolio Trades

426 CDS N-Sectors

Ratio History

March 11, 2010

Recent findings that certain scientists were being ostracized for disagreeing with the widely circulated and publicized theory that Mother Earth was warming at an alarming rate are evidence that human nature is fiercely competitive regardless of whether the human in question is writing liar loans in Vegas, securitizing them into AAA bonds on Wall St. or proposing theories that include six feet of water sloshing around everything south of Canal St. in New York City.  It is, as they say, the nature of the beast.

As it pertains to taking care of this small spec of dust the world calls home, responsible management of the limited resources available; as vast as they may be, seems logical.  After all, if there is no playing field there cannot be a game and without a game no one can be victor.

So while being green can be as annoying as cleaning your room was when you were a teenager, it is the responsible thing to do.  I use that word responsible here because there are a number of responsibilities that go along with being green and one of them is the fiscal responsibility of deciding which projects will provide recognizable benefits without bankrupting the beneficiaries.

The current feud raging between two sources of “clean energy” come to mind as owners of natural gas fired power plants are tilting against the providers of wind energy as the first provides a constant source of power while the second is subject to the whims of Mother Nature.

The fight, as you might expect, comes down to money as energy providers have historically been required to pay penalties when they don’t supply the power they are supposed to.  These rules, it seems, have been suspended for wind-energy providers as they claim they cannot control “which way the wind blows” to quote Bob Dylan.

According to the American Wind Energy Association, Texas alone has 9,400 megawatts of wind-power generation capacity, more that all the power plants of any kind in Utah.  That figure has increased from 2% to 6% in the last three years while NG’s share of the power market has shrunk from 46% to 42%.  The percentage of power by wind is expected to double by 2013.  Needless to say the “gas guys” aren’t too pleased with the prospect of losing 12% more market share in the near future.

The variability of the wind and the related inconsistencies in power production are at the heart of the matter as Kevin Forbes, director of the Center for the Study of Energy and Environmental Stewardship at Catholic University summed up the issue recently saying, “What wind is doing is giving us the feeling that we’re making progress displacing carbon, when in fact it isn’t displacing coal plants.  It is getting rid of your cleanest fossil-fuel source [natural gas] and it is making the challenge of running a grid much more challenging, because you never know when your forecast for the wind is right or wrong.  You are flying blind.”

As always the truth lies far behind the headlines.

FPL Group Inc. (FPL) is one of the nation’s largest developers of wind-farms through its NextEra Resources division.  Interestingly the company also generates most of Florida’s power needs using natural gas and nuclear power to do so.  CDS spreads for FPL traded as low as 55bps in September of last year, reached a recent high of 106bps on 2/17 of this year and closed last night at 87bps.  The stock had declined from $56.25 on 12/11/2009 to $27.51 on 2/12/2010 before recovering to $46.97 last night.

General Electric (GE) is also a big player in the wind game manufacturing the 400-foot tall wind turbines used in Texas and elsewhere in the world.  GE’s CDS trade under the Credit Corp entity as that is where a majority of the funding occurs.  Spreads have come down from the high 700bps level last spring to about 200bps give or take 25bps depending on things the company has no control over.  The 52-week high in GE was $17.01 on 9/22 of last year.  It has traded pretty much sideways since then closing at $16.51 last night.

It should be noted that in the spirit of greening America, Sen. Charles Schumer (D. NY) recently introduced legislation that would restrict all taxpayer money awarded through a wind-energy grant program to those companies that use the funds to create U.S. jobs.  The purpose of this legislation is to prevent a $15BN wind-energy project in West Texas which is a joint venture between China’s Shenyang Power Group, Texas-based Cielo Wind Power and the U.S. Renewable Energy Group.

I guess Chuck just wants the hole in the ozone layer over the lower 48 fixed.  You have to admit though, that takes “Think global, act local” to a whole new level.

The U.S. hegemonics out there will also not be pleased to hear that the U.K. has announced plans to develop 32 gigawatts of off-shore wind-generating capacity by 2020.  This would put the U.K. at the top of the wind-power league tables in a sector that currently provides 150 gigawatts world wide, 1% of which is offshore with half of that in the U.K.  That effort will require the installation of 6,400 turbines over the next ten years.

There are no “Buy Britain” restrictions on who is able to supply the equipment.  Instead interested suppliers will enter competitive bids.  Imagine that, no legislative barriers, just the best price for the taxpayer’s money.

Enjoy the week.

Jim Delaney

CEC Portfolio Trades

426 CDS N-Sectors

Ratio History

March 10, 2010

Before there were dedicated 24-hour sports networks ABC would broadcast “Wide World of Sports” every Saturday afternoon.  The tagline for that show: “Spanning the globe to bring you the constant variety of sport… the thrill of victory… and the agony of defeat… the human drama of athletic competition… This is ABC’s Wide World of Sports!”, seems as if it could apply to today’s financial markets without too much editing, “Spanning the globe to bring you the constant variety of economic indicators…the thrill of finding an indicator you can believe….the agony of finding out you can’t…the human drama of trying to make sense of all of the cross currents of information…these are today’s financial markets.”

In my effort to “span the globe” in search of information indicating whether this recovery is lasting or temporary I thought we might look at those things that span the globe.  Well, span might be a bit overarching, but at least those things that criss-cross it frequently and that would be the massive container ships carrying raw materials in one direction and finished goods in the other.

One of the main indices for shipping activity is the Baltic Dry Index (BDI), the “dry” here meaning not “wet” which really means anything that is not oil.  The problem is that what was a very accurate indicator of global commerce is being watered down by the supply of new ships that were ordered when it looked like the world would continue on its path to ever higher consumption.

Given the lag between order and launch those ships are hitting the water at a time of less than peak demand.  “What you’re witnessing is a huge number of ships ordered during the peak of the market in 2007-08 being delivered now due to the usual lead times involved,” was how Amrita Sen, a commodities analyst at Barclays Capital in London put it.  Because of this Plamen Natzkoff, a dry bulk freight strategist at Citigroup in London, believes that the BDI “will be less responsive to shifts in demand as the over supply of vessels becomes more pronounced.”

Interestingly, as the fog rolls in on the BDI Genko Shipping has decided to carve out a piece of itself and offer 16.3MM shares of an entity it will call Baltic Trading (BALT) at about $15 per share.  This equity is meant to mimic movements in the BDI and if the IPO is successful, BALT will use the $245MM raised to buy six big bulk carriers which will ply the planets oceans in search of spot shipping assignments.  The entity will have no debt so its shares are designed to more accurately reflect changes in global shipping rates.

To the extent that BALT will provide a lighthouse of information on the dark waters of global commerce data there is a risk that folks might not like what they see.

Shedding some of its own light on shipping, A.P. Moller Maersk AS (MAERSKB DC DKK) recently reported its first loss since the company floated its first boat in 1904.  “The loss was significant, but 2009 was an extraordinary year with historically low rates and low demand”, was how CEO Nils S. Andersen put it.  Nils went on to say that he expected Maersk to turn “a modest profit” in 2010.  Emphasizing his view that “shipping is not a commodity” and that Maersk “wants to provide superior service based on customer needs”.  These are wonderful sentiments but the BDI and BALT could make for some rough seas in convincing people of such.

There are no CDS traded on Maersk and there are no good substitutes within the CEC universe as all of the names there represent air and ground shippers.  It should be noted, however, that the CEC strategy is currently long 10 of the 11 stocks in that sector with the exception of YRC Worldwide (YRCW) which is more of a story stock at this point given its brush with bankruptcy caused by outsized pension obligations.

As for shipping in general, needless to say it would be a good thing if all those ships “spanning the globe” pulled into harbors of profitability.

Enjoy the week.

Jim Delaney