Daily Download: Financial and Stock Investing News for 1-26-10

Good morning, investors and traders! You are reading the Daily Download (”Daily DL”), which includes summaries and links to the day’s selected economic and stock investing news. The Daily DL is maintained by Chain Bridge Investing (“CB”), which is a financial blog at www.chainbridgeinvesting.com. Chain Bridge Investing is constantly improving and adding new financial and investing content to the website. Please let us know if you have any suggestions at the following email address: .

General News & Headlines Summary

News not covered below: (1) Apple reported that its quarterly profit increased 50%  to $3.38 billion from $2.26 billion, while the company doubled its iPhone sales, which is becoming more accepted in offices, as it reported that it had shipped 8.7 million units;  (2) according to the National Retail Federation group, it is forecasting a 2.5 per cent rise in retail sales for 2010 primarily due to increased consumer confidence and pent-up consumer demand; (3) S&P warns that it may downgrade Japan sovereign ratings; (4) AK Steel Holding reported profit during the fourth-quarter and an increase in shipments; and (5) Philips Electronics NV reported profit in the fourth-quarter due to cost savings and successful restructuring measures.

Upcoming Economic Data for the Day (all times EST)

7:45 AM        ICSC-Goldman Store Sales

8:55 AM        Redbook

9:00 AM       S&P Case-Shiller HPI

10:00 AM    Consumer Confidence

10:00 AM    FHFA House Price Index

10:00 AM    State Street Investor Confidence Index

11:30  AM    4-Week Bill Auction

1:00 AM       2-Yr Note Auction

Initial Public Offerings (”IPOs”) for the Week of January 25- 29, 2010

1/25/10 Andatee China Marine Fuel Services (“AMCF”) – Provides blended marine fuel oil.

1/25/10 Terreno Realty (“TRNO”) – Real estate investment trust.

1/27/10 FriendFinder Networks (“FFN”) – Social networking and multimedia.

1/29/10 Daqo New Energy (“DQ”) – Polysilicon manufacturer.

1/29/10 IFM Investments (“CTC”) – Brokerage and mortgage services.

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

News

Budget Freeze is Proposed – The Wall Street Journal

Summary: President Obama is expected to propose a three-year freeze, which would affect approximately $447 billion in spending or 17% of the federal budget, in order to begin to tackle the deficit.  This freeze will implement limits on discretionary spending not related to the military, veterans, homeland security, international affairs, Social Security and medicare.  These significantly large portions of the budget will remain without limits.  Furthermore, some of the areas subject to the cap will face cuts, while others are allocated more funding.  Education and job creation investments are expected to receive additional funding, while the departments of Energy, Transportation, Agriculture, Housing and Urban Development, Justice, and Health and Human Services will be subject to cuts.  The administration emphasizes these are the steps to take to attack the current deficit.  Regarding, energy and the 2009 effort to fight global warming and emit greenhouse gases, many Democrats believe Congress will approve a much more modest bill with less acute measures.

CB: This is definitely a step in the right direction, however the main drivers of the budget deficit, which are Social Security and Medicare, have been left unchecked.  The plan does not enforce an overall limit on the deficit, and thus the U.S. may find itself in a situation where the deficit actually continues to increase, while this freeze is in effect.  CB will hold its tongue until more details are released, but an this may be good news for an investor in energy companies and agricultural commodities.  Yet, in the long-run the government should be investing more money into the energy sector because large changes to the current energy industry need to be made.  If you’re name is Matt Simmons, this proposal may not rank very highly in your mind.  Matt Simmons believes that drastic changes need to occur in the energy sector and funds will be needed to ensure that occurs, if these changes are not implemented then the U.S. could be in for a large oil shock.

Probe into NY Fed over AIG Disclosure – Financial Times

Summary: Neil Barofsky, the inspector general overseeing the troubled assets relief program, stated that his team is investigating whether the New York Federal Reserve violated rules by withholding detailed information on the $27.1 billion of payments to  AIG counter parties, primarily Goldman Sachs and Societe Generale, from the Securities and Exchange Commission (“SEC”) and his office.  These counter parties, who held the  AIG-issued credit default swaps received the full amount of the securities value, when many believe they should have received discounted payments.

Wind Power Grows 39% for the Year – The New York Times

Summary: According to the American Wind Energy Association, the wind power industry increased its capacity by 39% in 2009 and now accounts for 2% of the nations electricity.  The 9,900 megawatts of capacity that was added in 2009 was the largest amount ever.  This growth in wind power has been significantly aided by the stimulus package, which included many incentives for wind power investment.  New natural gas projects and new wind projects combined to account fro nearly 80% of the new generation capacity added in the U.S. last year.  At present, nearly half of the components used in a wind turbine are produced in the U.S..  While some believe that by 2020 wind power will account for nearly 180,000 megawatts (five times the current install base), the industry lacks the proper number of transmission lines to bring the wind power to the grid;.  Furthermore, growth in 2010 might be slower than 2009 due to a slow down in projects late last year.  Yet, at present, 29 states have adopted renewable power standards that mandate by certain dates that a designated amount of power come from renewable sources.

CB: First, all the states’ renewable power standards can be found on the U.S. Department of Energy website.  For those not familiar with the wind industry, or at least wind turbines, CB provides some of the following information, which is on the various components of the turbine.  In no way is the information below all encompassing, it is meant to provide some information on the industry to get one started.

(1) Rotor blades represent approximately 22.2% of the cost of the wind turbine. At present, LM Glasfiber (“LM”), a Danish company, is the only public independent blade manufacturer.  According to 2008 newly installed capacity, LM holds nearly 27% of the current market.  LM has supplied blades to more than 20 customers, including eight of the top 10 global wind turbine manufacturers.  LM’s business is to manufacture, service, transport, and replace blades.  The second largest independent blade manufacturer is the privately-held, Brazilian Tecsis, which provides blades for GE Wind.  Nevertheless, there are a number of relatively small private companies that also produce blades.  Most of the major wind turbine manufacturers with the exception of GE Wind, Acciona, and Ecotecnia, produce their blades in-house.  Nevertheless, they purchase additional capacity from independents.

There have been many quality issues regarding the blades of: Suzlon, LM, Vestas, and Clipper.  Two causes for these defective blades are: (a) the current methods and materials are not as reliable as the blades become larger to support the increased MW output of the turbines; and (b) a portion of blades are damaged during transit.  As blades become larger transportation becomes more difficult. Large companies like LM should have an advantage due to its numerous facilities that are located near areas of high turbine demand.  Logistics and transportation are significant costs for the independent blade manufacturer.

As blades become longer their skins generally have thicker core sections.  Consequently, this trend is likely to increase core material requirements such as glass fiber, carbon fiber, thermoset resins, core, and metal.  Currently, Gamesa and Vestas are now using carbon fiber in some of their blades to reduce the weight to power ratio.  Their two suppliers are Hexcel and Zoltek, two publicly traded composites companies.  Carbon fiber demand could increase as the blades become longer and MW output increases.  One study stated that by 2017 wind turbine blade demand would be the leading use of carbon fiber.  Two carbon fiber companies are Zoltek and Hexcel.

(2) Generators represent approximately 3.4% of the cost of the wind turbine. The majority of  turbine manufacturers typically design their own generators.  When manufacturers outsource the production of generators the primary suppliers are usually large industrial companies like Siemens.  At present, Siemens wind revenue is aggregated with the rest of its energy sector revenue. Moreover, in 2008, ABB, another industrial, had $900 million orders for its whole wind division compared to $38.3 billion in total company orders, wind accounts for nearly 2.0% of total orders.

With the primary wind turbine manufacturers moving towards vertical integration, many of the previously independent generator manufacturers were acquired. Furthermore, there are signs that other industrials such as Eaton Corporation are leveraging the economies of scope in the power and generation field and entering the wind generator market, thus increasing the difficulty for the potential pure players to enter the market.

Companies successfully adopting new technology focused on a reliable direct drive and/or permanent magnet technology may offer either (a) an opportunity for these large industrials to increase their wind market share or (b) a significant market-entry opportunity.  The permanent magnet solution eliminates the need for a gearbox, while increasing efficiency, increasing average life of the generator’s parts, reducing weight and size of the generator, and lowering operating costs.  ABB, Siemens, and Eaton all have their own versions of this permanent magnet generator.  Nevertheless, there is a privately-owned, independent, generator manufacturer called Danotek Motion Technologies.  Danotek has created a variable speed permanent magnet generator that has sparked the interest, as demonstrated through financial investments, of GE Energy and a couple venture capital funds.

(3) Gearboxes represent approximately 12.9% of the cost of the wind turbine. The gearbox market is heavily concentrated with the five companies accounting for roughly 90% of the market, while the leading two companies, Winergy and Hansen, represent nearly 60% of the market.  With vertical integration increasing, the manufacturing of gearboxes has become more of an in-house activity as a result of: (a) Gamesa acquiring Echesa; (b) Siemens acquiring Winergy; and (c) Suzlon acquiring majority ownership in Hansen.

At present, many turbine manufacturers are trying to eliminate the gearbox, for the following reasons: (a) gearboxes are heavy; (b) gearboxes are responsible for the greatest percentage of outage time; and (c) gearboxes usually result in high maintenance costs.  Consequently, the leading positions of the quality gearbox suppliers are reinforced due to  turbine manufacturers eschewing the risk of changing suppliers, thus creating a barrier-to-entry.  In addition, technology risk and low-margins usually deter new entrants.

In 2008, the shortage in bearing supplies was a key determinant of supply shortages of gearbox.  Gearboxes and their bearings tend to be customized to each individual turbine design, thus deterring standardization and creating a higher probability of defect.  As turbine sizes increase, bearing manufacturers have to redevelop their product which is subject to long lead times.

(4) Bearings represent approximately 1.2% of the cost of the wind turbine.  Historically, these have been a large supply bottleneck for the turbine manufacturers.  The shortage is a result of: (a) fast industry growth; (b) the malfunctioning of current bearings; (c) the increasing size of the turbines due to the fact that these bearings have to be customized as turbines increase in size, which can result in lead times near 16-to-18 months.  Few suppliers are able to design, engineer, and manufacture large bearings.  The bearing manufacturing market is highly concentrated, with the leading bearing supplier Kaydon holding 65% market share in the wind turbine bearing market.  Yet, overall, wind accounts for a small portion of the overall bearing production, while the majority of bearings are made for the automotive, spacecraft, aircraft, and marine vehicle industries.

(5) Towers represent approximately 26.3% of the cost of the wind turbine. Towers tend to be standardized and are primarily produced by local construction and manufacturing companies.  These towers are primarily made of steel.  Yet, new structures are being created that utilize a latticework and concrete.

European States Need to Borrow EUR 2.2 Trillion – Financial Times

Summary: According to Fitch Ratings, the European governments will have to borrow €2.2 trillion in 2010 in order to finance their budget deficits.  This estimated borrowing represents a 3.7% increase from the €2.12 trillion of debt issued in 2009.  The countries and their respective projected debt issuances are as follows: (1) France with €454 billion; (2) Italy with €393 billion; (3) Germany with €386 billion; and the (4) U.K. with €279 billion.  Furthermore, France, Germany, Spain and Portugal are increasing their potential exposure to interest rate increases by taking on significant short-term fiscal debt.  Fitch Ratings stated that its concern was with every European country operating in a budgetary deficit in 2010, and four countries having deficits greater than 12% of their GDP.

View of the Day: Silver Poised for Strong 2010 – Financial Times

Summary: The price of silver will most likely continue to rise in 2010.  Silver will gain momentum from a rebound in the global economy and the expected rise in price of gold.  Historically, gold and silver have had a very strong correlation.  During 2009, silver exchange-traded funds witnessed a 50% increase in their holdings.

Housing Sales Fall by 16.7% – The Wall Street Journal

Summary: According to the National Association of Realtors, existing home sales decreased an unexpected 16.7% from November, a record monthly decrease.  There is concern that this lack of demand may be a sign of things to come as the government withdraws its support from the housing market.  The chief fear is that home prices will drop with decreased demand and create another wave of foreclosures as home values become less than the respective mortgage obligation.

More Links of Note

O-Regional Gangsters – The Reformed Broker

Seven Surprising ETF Trading Stats – ETF db

Beware the 4 New Asset Bubbles – Fortune

Total Debt to GDP Trumps Everything Else – PragCap

Jeremy Grantham’s Quarterly Update – PragCap

Coal and Treasuries – Gregor.us

Go Long on China’s Investment Boom – Financial Times

Insider’s View of the Real Estate Train Wreck – John Mauldin

When Nations Turn into Hoarders – Financial Times\

Is There an Overlooked Reason for Fed Secrecy on AIG? Naked Capitalism

Chain Bridge Investing (“we” or “CBI”) states at the outset that the opinions, judgments and derivation of thinking in this writing are solely Chain Bridge Investing’s. It is imperative that any judgment or valuation you take from information dispersed by CBI be examined within the context of your portfolio investment and overall objectives. To that end we urge you to contact your investment advisor or portfolio manager to insure that the information or suggestions proposed by CBI conforms to your needs and financial strategy.

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Tagged with AIG, AK Steel, Alternative Energy, Apple, Energy, Existing-Home Sales, Federal Reserve, Goldman Sachs, iPhone, Matt Simmons, National Retail Federation, Oil, Philips, President Obama, Silver, Societe Generale, Wind Power