Energy, Markets and Money

Energy, Markets and Money

A friend and former colleague of mine writes a lot of excellent stuff on energy and the Euro monetary crisis from his vantage point as a portfolio manager in London. It is worth reading.

I am also linking it to the Blogroll.

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Failed Energy Policy Leads to Legalized Theft in Argentina

This story hasn’t been big news in the US, but it is a pretty big deal in South America and Europe, particularly Spain.  Basically the Argentine government is going to steal majority control of YPF from Repsol and minority shareholders in retaliation for the failure of the government’s own energy policies.

Argentina to Nationalize Majority Stake in YPF

Argentina has gone from being self-sufficient in energy to being a net importer in the past few years and somebody has to pay for that fact. Nevermind that it was the government’s own policies that led to this outcome.

Isn’t it amazing that the below market prices mandated by the government led to strong demand growth? And that those same low prices, combined with export tariffs, led to an environment in which energy companies weren’t excited about investing in more productive capacity? When the laws of free market economics can’t be tamed by government mandate, the only solution is legalized theft, right?

The further shame of it is that Argentina is, as it turns out, incredibly resource rich. But between the government policies and difficulties with local labor unions (the primary difficulty being to get them to show up for work at all), there have been strong disincentives to investment in exploration and production in Argentina for foreign firms.

And that was before the nationalization of YPF. What are the odds that Argentina will be successful attracting foreign capital and expertise now? I did see that Hugo Chavez has offered his support and the assistance of Petroleos de Venezuela to the Argentine government. That ought to do the trick…

I’d love to dismiss this as just the ridiculous machinations of some out-to-lunch Leftist government. Actually, that is still a pretty good description of it, but what scares me is that it sounds like something the current Administration would support in this country. That isn’t to say that it could happen; it can’t. But if the President and his closest allies in congress were given truth serum, I think they’d admit that they would like to have the option. Equally appalling is that some of the same policies (e.g. limits on exportation) that have been so disastrous for Argentina  have proponents in the US.

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The President is Doing Something About Oil Prices…

…if by doing something, you mean making some vague accusations that “speculators”, rather than market forces, are behind current oil (and gasoline) prices. Obama isn’t the first president to get (unfairly) beaten up because gasoline prices increased. And he isn’t the first to endorse less than coherent explanations for why that might have happened. Pointing the finger at some kind of bogeyman is always easier than trying to deliver information that is politically uncomfortable. 

Obama Targets “Oil Market Manipulation”

My favorite part of the story is the President asking members of congress to “be on the lookout for price manipulation by speculators”. It evokes orders to Remain Vilgilante! from past periods of national crisis (e.g. WWII, the Red Scare, post-9/11) with the absurdist overlay of members of congress actually having a nuanced understanding of the world around them.

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Apple Touches $600 bln in Market Value Today

Apple Surpasses $600 bln in Market Value Today

Apple (AAPL) briefly surpassed the $600 bln mark in market capitalization today before closing slightly lower. The only other company that has ever surpassed that milestone was Microsoft (MSFT) which did so briefly in December 1999, during the hyper-inflated bubble period. Nine months after Microsoft reached (and receded from) that loftly perch, General Electric (GE) flirted with the $600 bln level, falling just short.

The most striking thing to me is that Apple might actually be deserving of that incredible valuation, while it was obvious to clearer eyed observers of the time that the valuations of Microsoft and GE were hyper-inflated by bubble-era thinking.

Microsoft’s $600+ bln market cap was based on a trailing P/E ratio of over 68x and represented a similarly incredible multiple of more than 63x trailing cash flow per share. GE’s near miss of the magic $600 bln level was likewise predicated on fat multiples: almost 50x trailing earnings and over 29x cash flow per share. Investors of that era were clearly comfortable paying up for growth, as Microsoft had a three year average revenue growth rate of 27% at the time, while GE sported a three year top line growth history of just 12% per anum.

The comparable statistics for Apple tell a startlingly different story: one of comparatively modest multiples and of ludicrous top line growth. Apple’s current trailing P/E is about 18x and its price-to-cash-flow is under 13x. This is compared to an average growth rate of just under 59% per year over the last three calendar years. Only once over the past nine quarters has Apple failed to surpass 50% in y-o-y revenue growth.

I have no idea what level of growth Apple can sustain in future years, nor whether it can maintain its current valuation level, but there can be little doubt it is far more deserving of its incredible current market value than its predecessor in “the $600B Club”.

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Some Facts about Corporate Taxes (from CFR)

There is a lot of misinformation about US corporate taxation out there. This is a useful resource in understanding a few of the issues involved in any attempt at meaningful reform of the corporate tax code. Most interesting to me were the very clear explanations of the distortions the current code causes.

Some Facts about Corporate Taxes (from CFR)

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