Wednesday, September 23, 2009

Public Vs. Private - What we learn from Arctic Exploration

Public vs. Private ownership, which can more effectively spur economic growth? Can Arctic Exploration give us a preview of what is ahead?

2009 has been Bailout-City as the US Government has saved numerous institutions in addition to seizing large stakes in AIG, Citigroup, Fannie, Freddie, and General Motors. The bailout pie has been prepared, sliced, divied up, and dolled out as effortlessly as leaflets in Vegas. Indeed, the Fed and government have gone "all-in" with not only monetary and fiscal policies but also with a new form of policy, that of bailing out anyone with a good lobbyist. Will these bailouts and gov ownership be beneficial or harmful to the US economy? We don't know how the story will end, but we do have something with which to compare - Results of Arctic Exploration - publicly vs. privately funded expeditions. (Joe Arctic Tundra)

In "Public versus Private Initiative in Arctic Exploration: The Effects of Incentives and Organizational Structure", Jonathan M. Karpoff organized a data set of 92 arctic explorations from 1818 to 1909 to study the successes and failures of privately and publicly funded expeditions. The goal was to determine which expeditions provided better results.

The Purposes of Arctic Exploration:
  • Navigate the Northwest Passage
  • Discover the North Pole
  • Discover the lost (publicly funded) John Franklin Expedition of 1845
The Rewards:
  • Cash Prizes
  • Lecture Fees
  • Larger budgets/funding for future expeditions
  • Book Sales
The Risks:
  • Loss of funding/budget shrinkage
  • Fewer rewards
  • Sickness
  • Death from accidents, exposure, scurvy, or starvation

Because the goals, prospective rewards, and penalties were similar for both privately and publicly funded expeditions, Karpoff argues it is possible (and fair) to compare the two subsets. Karpoff summarized: "I find that compared to private expeditions, government sponsored expeditions tended to be large and well funded. By most measures, however, the government expeditions fared poorly. They made fewer major discoveries, introduced fewer technological innovations, were subject to higher rates of scurvy, lost more ships, and had more explorers die."

Quantitative Proof:
Death of Crew Members per voyage:
Public - 5.9, Private - .9
Loss of Ships per voyage:
Public - .53, Private - .24
Scurvy Presense for voyages > 1 yr:
Public -47%, Private - 13%
Navigate Northwest Passage... Private
Discover North Pole... Private
Discover fate of Franklin Expedition... Private

So why did privately funded expeditions fare so much better than publicy funded counterparts? Karpoff suggested publicly funded expeditions suffered from :
  1. Poorly motivated and prepared leaders.
  2. Separation of initiation and implementation functions of executive leadership (aka, too many Chief Joes and not enough Indian Joes).
  3. Slowness to exploit new information (Joey come lately) about clothing, diet, shelter, modes of Arctic travel, organizational structure and optimal party size. (Joe two's company but three's a crowd)
What can Joe Shareholder learn from this study by Markoff? While there's no guarantee that AIG, Fannie, Freddie, GM, and Citigroup will suffer the same fate as these expeditions funded by governments, there is reason to suggest the same bureaucracies that burdened public expeditions will also curtail government owned businesses. Companies that lean on taxpayer assistance (Joe blind man on guard rail) face completely different incentive levels as well as muted risks and rewards. Hence, Joe's sentiment on government-owned stocks is bearish (Polar Bearish....that is.....) because of the possibility of getting frost-bitten by sliding stocks (Joe dogsled.....pulled by publicy funded dogs.....with scurvy).

If anyone wishes to read the entire document, just email and we'll send it off. Send this to all friends, enemies, family, associates and let's spread the private word publicly!

Wednesday, September 16, 2009

History of Joe and JoAnn - How they met - Part 1 of 2

Joe Shareholder was in his third year at St. Joe’s University near Philadelphia when he scored a summer internship at Lehman Brothers in New York. His job was to follow technical trading patterns and trade based on daily fluctuations. He traded all day long, but closed all positions by the end of the day. He was trained by a rookie trader named JoAnn who excelled at the position.

JoAnn grew up in a small community called Joetown in Morgan County, Ohio. She graduated from the University of Ohio State with a finance degree and accepted a job offer from Lehman Brothers shortly thereafter. Before Lehman Brothers fell on hard times and declared bankruptcy in the summer of 2008, JoAnn saw the writing on the wall (Joe Clairvoyancy) and sent her resume to various financial/investment companies in the area. She soon received an offer from “The-Company-Who-Shall-Not-Be-Disclosed”, who happened to be one of the premier investment banks in New York City. At first she thought this was a perfect fit, but later discovered some disturbing things about “The-Company-Who-Shall-Not-Be-Disclosed”.

First of all, she felt like TCWSNBD manipulated commodity markets. She found it ironic that they’d issue press release statements upgrading certain commodities and stocks immediately after establishing strong positions in them. (Joe conflict of interest) Take crude oil for example. Each time TCWSNBD announced crude oil futures would rise to X amount, it eventually did - largely because oil was bid up by investors rather than actual commodity users. (Joe Smoke and his twin brother John Mirrors) This padded the pockets of execs at TCWSNBD, but hurt the average Joe’s filling up their cars and trucks with fuel. (Joe Cruel Oil, not Crude)

Her distaste for TCWSNBD was exacerbated when AIG needed taxpayer support after the stock market crashed in Sept/Oct 2008. Mega-insurer AIG owed TCWSNBD considerable amounts of money when stocks tumbled because of credit default swaps gone sour. Credit default swaps are basically insurance securities protecting an investment in case stocks fail. (Joe high stakes poker) Instead of demanding payment through asset liquidation (Joe face the music), or even simply share in the losses of AIG (Joe - at least turn an ear to the music) she felt TCWSNBD used strong-arm tactics with the gov to bailout AIG so they’d get the full amount owed. Indeed, after AIG received the bailout funds under the guise of “too big to fail”, a good chunk of change was funneled directly to TCWSNBD as well as many other CWSHND either.

JoAnn eventually decided she’d had enough big city banking so she quit her job and returned to Joetown. Upon hearing this news Joe randomly decided he’d pull the plug and move there as well. When JoAnn asked why he also wanted to move there, Joe simply replied he’d always wanted to live there one day and said the town was very “attractive”. Joe soon invited JoAnn to the annual city Joe-Down, which is a hoedown to anyone not familiar with Morgan County. She accepted and they had a great time dancing to the country music with good ‘ol country folk. (Joe, facing the music and JoAnn at the same time).

Wednesday, September 2, 2009

Natural Gas ETF, the natural way to Double your Cash by Feb

Okay it’s about time we got to the fun stuff right? Anybody out there want to make a little money? (Joe Oracle of Joetown, OH) If you follow Joe’s advice, you’ll see how it’s very possible to make loads of money investing in this fund. In fact, it could very easily double by Christmas time, or at least by February. (Joe, "already got that month marked on the calendar")

Anyway, back to business.
Natural Gas - Right now the price of natural gas is trading at a seven year low due to the weak economy and enormously large inventory. This is great news for everybody except natural gas suppliers, as heating bills this winter should be quite a bit lower than last. (Joe Nest Egg) Investors have also likely turned a keen eye toward natural gas futures as it has dropped steadily over the last couple of months from about $12/MMbtu to under $3 now. Because actual commodity trading can be complex and difficult for the average investor, a better option in Joe’s opinion is to buy shares of a fund already invested in natural gas. Here at JoeShareholder, we have the perfect fund for all your natural gas needs - UNG. UNG is an ETF (exchange traded fund) which Joe Shareholder has been watching closely ever since it crossed under $20/share from its high of around $63 in July of last year. Now that it’s hovering around $10, Joe simply couldn't stand it any longer, and plunged in. (Joe the Plumber) Granted, commodities were all over-priced in July, but after a sharp drop initially at the beginning of this year, most commodities have rebounded somewhat. Not natural gas, however - it’s still dropping. Below are three reasons why Joe believes this ETF should do quite well over the next several months.

Home heating during the winter:
Typically natural gas follows the same patterns of overstorage during the summer to undersupply during the winter. The reason is simple, people heat their homes and businesses with natural gas. Here’s a supply graph representing the last four years.

As you can see the supply starts dropping in September/October and usually starts to rise again in about February. Since we’re just barely into September, a good strategy might be to wait a few weeks, watch inventory levels released each Wednesday, and buy sometime in late September. (Joe, I hope this isn't the only "investment" I'm buying in late September)

Hedge against inflation:
As we mentioned in the last post, the Fed accidentally lost the keys to the printing press after locking the door with the machines running full tilt. Not only that, but Congress has been active signing bills they don’t read and spending money we don’t have. (Joe, if it’s too thick to read, sign it, and if it’s not yours, spend it) These factors have contributed to a significantly weaker dollar, which signals that investors are very nervous about a possible bout with hyper-inflation down the road. One of the best ways to beat inflation, or at least temper the storm, is to invest in commodities. Although any commodity would be a good investment should the dollar crash, right now natural gas seems to have the best upward potential. (Joe July in Phoenix)

Money has to go somewhere:
Right now the stock market is overvalued according to many analysts. The aggregate price/earnings ratio for the S&P 500 is currently about four times higher than the historical average. (1) Also, insiders - who represent corporate executives as well as large fund managers - are selling more than buying at an astounding ratio of about 30 to 1! (2) (Joe roadside vendor in Tijuana, Mexico) Although not an exact science, usually when insiders sell at this magnitude it represents market peaks. If indeed the stock market begins to drop, money will likely flow into other markets, one of which will likely include commodities because of the pressure on the dollar.
Although Joe considers natural gas his competition for keeping JoAnn warm during the cold winter months, he also understands the need for natural gas as well as the need to hedge against inflation. At around $10/share, it’s just too inviting. (Joe Telepathic Communication) Also, September is the month the leaves start falling, so it's a great time to rake in profits. (Joe no pun intended) If you feel the same way as Joe, send this link to any friends who might benefit from doubling their money by Feb. Click here to see what others are also saying about natural gas.

Joe Disclaimer:
All equities carry inherent risks, invest at your own.