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  • Met Coal: The Outcome Is Certain, The Timing Is Not [View article]
    Much of the steel in the U.S. is made using electric arc furnaces that do not require metallurgical coal, but do require scrap steel. Also, see the following article for an interesting discussion on replacement of metallurgical coal with direct injection of lower quality coal into the blast furnace

    The author's central thesis that there is no substitute for metallurgical coal would appear to be incorrect, as steel can be made using the electric arc process, or primary steel manufacturing can be done using greatly reduced (or no) metallurgical coal, as per the reference I cited. What effect the alternatives have on met coal consumption is an interesting, perhaps critical issue for the future of met coal production.
    Oct 6, 2015. 04:40 PM | Likes Like |Link to Comment
  • The Future Of Coal Companies [View article]
    "2- Ozone is made of NOx, among other elements, so regulating NOx would logically be regulating ozone. "

    The author attempts to correct is previously erroneous statement regarding ozone emissions by claiming that "ozone is made of NOx, among other elements". This is factually incorrect, and a pretty bizarre statement.

    Ozone is a molecule consisting of three oxygen atoms bonded together. The molecule is typically presented as O3. NOx is a term that describes a variety of nitrogen-oxygen molecules,including nitric oxide (NO), and nitrogen dioxide (NO2), and sometimes includes nitrous oxide (N2O). So of course ozone is NOT made of NOx.

    Perhaps the author means to say that ozone is created in the lower atmosphere through the reaction of NOx with sunlight, therefore emission of NOx contributes to ozone pollution in the lower atmosphere. That would be an accurate statement. In order to evaluate the contribution of coal burning power plants to the production of ozone in the lower atmosphere would require a careful analysis of the chemistry of lower atmosphere ozone, which is created by a range of processes, certainly not limited to burning of coal. Unfortunately the author has not done this, instead simply asserting, with no documentation, that coal burning is a major source of lower atmosphere ozone, hence will be adversely affected economically by a tightening of ozone regulations. This may in fact be correct, but certainly it is not possible to reach the conclusion based on the presentation by the author, including his various comments responding to comments about his original article.
    Oct 3, 2015. 02:47 PM | Likes Like |Link to Comment
  • The Future Of Coal Companies [View article]
    The author makes a variety of unsubstantiated comments in this article, and reaches unsupported conclusions. In particular:

    1. "The emissions from coal power plants release Mercury, Nitrous Oxide and Carbon into the air. " This is incorrect. Coal fired power plants burn carbon, and release carbon dioxide, NOT carbon. As to release of nitrous oxide, coal fired plants (and other fossil fuel plants) release a variety of nitrogen oxides, not just nitrous oxide. The exact mix is a function of the type of fuel burned, the temperature the fuel is burned at, and the types of pollution control equipment installed.
    2. "Mercury is the deadliest non-radioactive element on our planet." This is an unsubstantiated claim. On what basis is mercury more deadly say than fluorine, or beryllium, just to name two dangerous elements? Like most heavy metals, mercury is more dangerous in some forms (example methyl mercury) than others, and any such claim as the author makes requires careful definition of what the author means, and what he is trying to prove by the claim.
    3. "32% of ozone emissions come from electricity generation. The US Energy Information Administration statistics show that 39% of all electricity produced in the US comes from coal, therefore making coal account for 12.5% of all ozone emissions." This claim is mathematically incorrect. The author apparently believes that multiplying the percentage of ozone emissions that come from electricity by the percentage of electricity generated by coal will yield the net contribution of coal to ozone emission. It is easy to demonstrate that the mathematics here is completely wrong.

    Consider nuclear power, which generates approximately 20% of U.S. electrical consumption. By the author's analysis, nuclear power should account for 0.2 * .32 = 6.4% of total ozone production. However, nuclear power does not generate any ozone, as it does not involve burning of carbon based fuel. In order to determine the percent contribution of a source to overall ozone production, it is necessary to know how much ozone each type of source generates, not simply what fraction of electrical production the source represents.

    It is unfortunate that the author uses unsubstantiated claims and faulty mathematics to arrive at an investment conclusion. This is an investment forum, where I generally look for articles with solid investment recommendations. This article appears to be more of a polemic than an investment piece.
    Oct 1, 2015. 05:23 PM | 20 Likes Like |Link to Comment
  • Dividend Growth Investors: Stick To Your Process [View article]
    "When I speak of risk tolerance here, I am using the word in its conventional financial sense, where risk is equated to price volatility: More volatility = more risk."

    This is the definition of risk in modern portfolio theory, but it is far from the common definition of risk, which is the potential to lose money. No doubt the author is fully aware that price volatility is simply a statistical measure of price fluctuation over a given time period, which has little or nothing to do with the potential for losing money. For example, a stock which is rapidly appreciating in value will have a substantially higher volatility than a stock that is slowly losing value, which will have a low volatility. If the goal is to avoid losing money, selecting low volatility stocks is a curious, likely ineffective, way to achieve this aim.
    Sep 30, 2015. 09:35 PM | 5 Likes Like |Link to Comment
  • $4 Gasoline By May 2016 [View article]
    It seems like quite a stretch to argue that fracked wells deplete by 68% the first year. Does the author mean that all fracked wells deplete this much? That the average well depletes this much? That the median well depletes this much? Clearly there is a distribution for the depletion of wells, fracked or not, and the depletion rate is going to be different for each well, and will depend on a variety of factors. Using an aggregate, unsubstantiated value of 68% (for U.S. wells only) to "prove" that gasoline prices are going to rise seems like a remarkable leap.
    Sep 30, 2015. 10:41 AM | 2 Likes Like |Link to Comment
  • Crude - A Few More Observations [View article]
    Oil is a worldwide commodity, produced throughout the world, shipped throughout the world, stored throughout the world. Discussing a worldwide commodity in the context of U.S. only production makes no sense to me. If the thesis is that a small reduction in U.S. production is going to result in a price rise, I don't see it. A price rise will occur when world production drops below world consumption long enough to impact investor sentiment. Given the capability of numerous countries to increase production (including Iran), I see little short to medium term price rise potential, short of an unpredictable black swan event.
    Sep 11, 2015. 09:32 PM | 4 Likes Like |Link to Comment
  • Despite 50% Drop SanDisk And Micron Are Not Attractive ... Yet [View article]
    An interesting article on a difficult technological area to understand.
    Early in the article, the author makes the following important comment:

    "With margins varying from losing money in some years to almost doubling in others it is almost impossible to value either company with a high degree of certainty."

    Later in the article, the author asks "The question then is when do the stocks become attractive investments?"

    At the end of the article, the author asks when Micron and Sandisk will become attractive investments. From my read on the article, the author seems to believe that the stocks as an investment mirror the company as an investment, or perhaps I misread the article? Many on SA and elsewhere have noted that the value of a stock may be totally disconnected from the "intrinsic value" or "fair value" of the company that the stock is a proxy for.

    If I were Warren Buffet, and I was considering purchasing the whole company, I would presumably be interested in the value of the company. On the other hand, if I am a common investor interested in perhaps a few thousand shares of stock, I would be interested in the future value of the stock. Perhaps the author can comment on whether he thinks the stock price is likely to mimic the "fair value" of the company, or if the author thinks there is no "fair value" of the company due to the wild swings in profitability.

    If there is no fair value of either company, and the stock price is totally disconnected from "corporate value", perhaps the author can comment on why he thinks the stock may become a reasonable investment when the number of competitors is reduced. Again, thanks for the article.
    Sep 9, 2015. 05:43 PM | 8 Likes Like |Link to Comment
  • Is A New Bull Market In Uranium Upon Us? [View article]
    The author fails to make a case for why a bull market in uranium will occur within the next few years. There is no discussion about relative supply versus consumption. No discussion about the total number of operating reactors he expects around the world over the next ten to twenty years (this would require analysis of new reactors versus closure of existing reactors)/ No discussion about the number of uranium mines available to open or restart should pricing improve.

    Restart of a small number of Japanese reactors will have little short term impact, as Japan has stockpiled fuel for the past five years or so, and has no need to purchase new uranium on the open market for several more years. Just as significant as the restart of a small number of Japanese reactors is the upcoming closure of several reactors in the U.S. and Europe.

    Certainly over the long run (twenty years or so) the consumption of uranium will increase, barring another accident, due to Chinese, Indian and other reactors coming on line. Whether that will result in price improvement for uranium is a difficult question, since uranium is not a rare metal, and there are large, high quality deposits available for exploitation, especially in the Athabasca region of Canada.

    Perhaps the author may wish to consider the possibility that the bull market in uranium is not likely to occur for at least five years, and there are better current investments available than uranium.
    Sep 8, 2015. 06:12 AM | 9 Likes Like |Link to Comment
  • Intrinsic Valuation Of The S&P 500 [View article]
    I want to thank the author for an interesting and well presented analysis of DCF valuation of the S&P 500. There are of course other ways to develop an "intrinsic value" for a financial instrument, many of which have been discussed in various articles on SA and other sites.

    The critical question I have difficulty understanding is the connection between the "intrinsic value" of the S&P 500 and the price an individual investor, or the market, is willing to pay for the financial instrument. The author apparently believes that if the intrinsic value of the S&P 500, as determined by DCF, is above the current selling price, then it is likely that the price will rise. At least I think that is what the author is saying. And similarly, if the intrinsic value is below the current selling price, then the S&P average is likely to fall.

    Is this a fair understanding of the point of the article? Clearly one of the critical difficulties in predicting market direction is that, as the author has clearly noted, the "intrinsic value" depends on several variables which have no absolute value, but are simply estimated based either on historical data or some sophisticated mathematical analysis of the economy. Since stocks are traded at auction by millions of potential buyers and sellers, about whom we know little, it is certainly possible that there are thousands, perhaps millions, of opinions about what the "intrinsic value" of the S&P is at any given time.

    Even if we assume, without proof, that the average investor makes decisions about buying and selling based on the difference between current price and their personal intrinsic value, what actionable investment advice can we derive from this? Everyone has a different intrinsic value, we don't know anything about the distribution of those values, so how can we evaluate whether the market is oversold or overbought at any given time, let alone determine probable movement direction over an investment timeframe?
    Aug 27, 2015. 10:05 AM | 4 Likes Like |Link to Comment
  • Natural Gas Is Likely To Head Higher [View article]
    "I believe there's a good chance it might head higher in the short- to medium- term."

    I had trouble understanding this sentence, which I think is a prediction of sorts. Does the author mean that there is a better than 50% chance that the price of natural gas might head higher? Is that meant to be an actionable investment thesis, or some sort of probability puzzle?
    Aug 26, 2015. 07:40 PM | 2 Likes Like |Link to Comment
  • In Today's Overheated Market, Control Risk In Your Retirement Portfolios With Sound Valuation [View article]
    This is a very interesting article in a long line of articles with similar themes presented by the author. I believe the author is correct in terms of valuation of the company based on long term profits that the company is expected to earn. The intrinsic value of the COMPANY can be modeled based on some form of discounted cash flow, as the author likes to do with his FAST graphs and other tools.

    Here is where I differ with the author. The author appears to believe that the intrinsic value of the STOCK can be computed based on dividing the intrinsic value of the company by the number of outstanding shares. When the stock is trading above this figure, the author argues that the stock is overvalued, and of course if the stock is trading below this value, the author argues that the stock is a bargain, and will eventually return to "fair valuation".

    This seems obvious, yet I have never seen any hard evidence that the intrinsic value of stock can be derived by dividing intrinsic value of the company by the float. Certainly in the case of Cisco, the author carefully points out that the stock has not traded at what he argues is fair value for ten years. In fact, Cisco stock may never trade at fair value, except on those rare occasions where the market price just happens to intersect with the "intrinsic value" as determined by the author. This might happen as infrequently as once or twice per decade.

    If the assignment were to develop an intrinsic value of the company on behalf of a potential buyer, then certainly DCF is an appropriate tool to value the company. No doubt folks like Warren Buffer do some sort of DCF to determine how much to pay for BNSF or Kraft or whoever they are buying next.

    However, buying a few shares of stock is radically different than buying the company. I know that there are those who argue that buying stock is buying a piece of the company and its future earnings, but that seems to me to be a stretch at best. Walk into corporate headquarters, wave your shares at the front desk, and ask to speak to the CEO. Not likely to happen. In fact, unless you own a large portion of the shares, your opinion about how to run the company is totally irrelevant to those who run it.

    At best, it might be argued that you should buy stock "as though" you were buying the company. There might be some merit to this argument, perhaps it is better to buy stock in a company that you would like to own as opposed to a company where you think the stock might appreciate, but you don't really like the underlying business, perhaps for ethical reasons.

    My conclusion after studying this matter is that stock price and intrinsic corporate value are disconnected. Stock price, whether it be over the short term, medium term, or long term, is driven by investor psyche, which is controlled by a great deal more complex issues than how much profit the company actually earns. Unfortunately the most sophisticated, carefully performed valuation of the company may have little or no value in predicting the direction of stock price over the short, medium or long term.
    Aug 20, 2015. 01:26 PM | 13 Likes Like |Link to Comment
  • Emerge Energy Services - Buy The Drop For Long-Term Gains [View article]
    Perhaps the author can help me understand the business of frac sand better. The author carefully notes that frac sand consumption is increasing, both on a per well basis, and on a total basis. The author also notes that frac sand pricing has been hammered over the last year or so. The author attributes this to the drop in the price of oil. This part I do not understand.

    Conventional economics suggests that the price of frac sand is driven by the relative supply versus consumption. The author claims that consumption is up. The author does not discuss total supply, which presumably consists of the amount of sand produced by Emerge and its competitors. But I do not see why the price of frac sand is directly connected to the price of the product (oil) it is used to produce. That would be like claiming that if Starbucks lowers the price of a cup of coffee, that would cause a drop in the price of beans. Exactly the opposite of what economics suggests.

    If Emerge is getting hammered on pricing, that is likely because there are competitors out there willing to sell a similar product at a lower price, not because oil goes up or down. I could see reduced oil price resulting in a reduction in drilling and fracking, which would reduce total consumption of frac sand, but the author claims quite the opposite. So help me understand the economics of the game.
    Aug 19, 2015. 08:14 PM | 1 Like Like |Link to Comment
  • Stillwater Mining: Deteriorating PGM Market Is Now In Plain Sight [View article]
    I am a bit confused by the conclusion reached by the author. The author carefully points out that the platinum and palladium market is heading downward, both in terms of pricing and consumption. The author notes that this is not likely to change for a year or more. Based on this data, why would the author recommend purchase now, rather than waiting a year or so, when by the author's data the price should be lower? Does the author believe that the Stillwater stock price is going to appreciate in advance of the theoretical uptick in PGM pricing? If so, what is the basis for this belief?
    Aug 18, 2015. 12:46 PM | Likes Like |Link to Comment
  • Greenbrier Is Our Favourite Rail Car Manufacturer [View article]
    This was a well researched, well put together article on a relatively obscure company in an important sector. I want to thank the author for sharing his knowledge with the SA community.

    I have some knowledge of the railroad industry, and I certainly agree with the author that railroads are generally slow to adopt new technology, perhaps because conservatism is baked into their DNA. At one point the author noted that slowing backlog would likely reduce profitability of Greenbrier. Perhaps the author can expand on this seemingly critical point. Does Greenbrier have options to maintain profitability in the face of a reduction in new car orders, for example shifting of production to lower cost facilities, reduction in workforce, automation of production, that sort of thing. And even in the face of reduction of growth in new car orders, how quickly does this begin to impact profitability? They still seem to have a large backlog, will it take several years to impact profits, or does the author believe the impact will be more immediate?
    Aug 18, 2015. 08:39 AM | 2 Likes Like |Link to Comment
  • Don't Try To Time Micron, Just Buy Now [View article]
    Micron is a classic case of a company with one value, and a stock with another. If you were going to buy the company, it might well be worth $30 a share, based on cash flow, potential growth, and market position. The stock is a completely different story. Since the value of the stock is strictly based on a daily auction, any discussion about the intrinsic value of the company must account for the apparent disconnect between company value and stock.

    The author has noted that investor sentiment is poor based in part on weak management, concerns about the future of DRAM, and lack of excitement about the XPoint product. Analyst projections about future profits seem to vary significantly, based on what assumptions are made about the future of DRAM vs. NAND memory, the future of XPoint, and the future of the management of Micron. Certainly one thing is clear, a tech company trading at 6 times earnings is an anomaly, and until investors choose to believe in the Micron story, the stock cannot recover to 15 times earnings or whatever you choose to believe it is "rally" worth.

    In disclosure, I own Micron shares, I am currently selling covered calls on them, based on my belief that a buyout is not imminent. I could be totally wrong, someone may buy them tomorrow, and I will lose out on the potential profit, but that's the game.
    Aug 15, 2015. 01:32 PM | 7 Likes Like |Link to Comment