Seeking Alpha

Eric Wanger's  Instablog

Eric Wanger
Send Message
Eric D. Wanger is the President and Chief Executive Officer of Wanger Investment Management, Inc. and serves as the Portfolio Manager of the Wanger Long Term Opportunity Strategy. Prior to founding Wanger Investment Management, Mr. Wanger was a senior investment analyst at Barrington Research... More
My company:
Wanger Investment Management
View Eric Wanger's Instablogs on:
  • The Debt Ceiling and Evil Robots From Space
    From the Desk of Eric Wanger

    The Debt Ceiling and Evil Robots From Space

    On Raising the Debt Ceiling

    There’s not much to say about the debt ceiling fiasco that hasn’t been said; I’m just glad the circus is over. Were we seriously considering telling our creditors we were going to start stiffing them because we just realized our spending is out of control? Maybe the next time Congress wants to debate a budget, they’ll actually debate a budget!

    PresidentNumber of Debt Ceiling IncreasesTotal % Increase In the Debt Ceiling

    Kennedy

    45%

    Johnson

    75%

    Nixon

    936%

    Ford

    541%

    Carter

    959%

    Reagan

    18199%

    Bush I

    948%

    Clinton

    444%

    Bush II

    790%

    Obama

    326%

    Source: http://progressivetoo.com.

    Dylan Matthews, a Washington Post blogger, points out that the very concept of a federal debt ceiling has been controversial since it was first legislated in 1917. Apparently, it has caused trouble before. In 1957, for example, the Air Force had to stop paying its bills because of the debt ceiling. Matthews quotes a Brookings Institution study that suggests this spending freeze led to a sudden $8 billion (1.7 percent of GDP) fall in defense spending, which contributed to the 1957-58 recession. (Source: http://www.washingtonpost.com/blogs/ezra-klein/post/past-research-on-the-debt-ceiling/2011/07/11/gIQAV8U6YI_blog.html.)

    Members of Congress Work Into the Night to Help Restore U.S. Financial Credibility

    I'm hugely in favor of big spending cuts. I just want to see a budget debate, not a public display of economic ignorance and financial irresponsibility. Our present and future creditors would surely love it if Congress could produce any budget, espe­cially a vigorously negotiated one. Likewise, I’m sure the whole world would be thrilled if the U.S. could simplify and rational­ize its Byzantine (and pork riddled) tax code.

    In the end I agree with both Ben Bernanke and Standard & Poors, the only loser in this fight was U.S. financial credibility. If you weren’t sure that our legislators would put partisan politics ahead of good fiscal governance, you are now. For Pete’s sake gentlemen, we’re now being chastised by Communists on mat­ters of fiscal responsibility!


    Evil Robots From Space: In 3D

    I just took our entire Chicago office to see the greatest movie in the history of the world. And by that I mean, of course, Trans­formers 3: Dark of the Moon. Dark side of the Moon? Nope, just Dark, no Side. Anyway, the last 45 minutes of the movie show our office building — 401 N. Michigan Ave. — and our entire north-of-the-river Michigan Avenue neighborhood being attacked, crushed, killed, and destroyed by giant killer robots, giant evil robotic dirigibles, giant fanged killer worm-snake ro­bots, giant multi-colored robot lasers, and giant robotic aerial drone things that, of course, destroy everything in their path.

    We watched the movie being filmed last summer. It was great seeing our entire neighborhood turned into a post-apoca­lyptic robot-trashed pyrotechnically enhanced wasteland. (And, given that we aren’t paying our interns squat this summer, tak­ing them out for bowling, pizza, and a movie was a really cheap way to thank them for an entire summer of hard work.)

    Ironically, there was probably too much swearing for me to feel comfortable taking my own children to see the film, but it made for an ideal office outing, especially when combined with bowling and dirty martinis.

    3D movies, as it turns out, represent an investable theme as a sub-sector of the entertainment industry. IMAX Corp. (NYSE: IMAX), RealD (NYSE: RLD), Dolby Laboratories, Inc. (NYSE: DLB), and others were, until quite recently, trading at astronomical valuations, fueled by investment banker and investor-relations hype. Valuations are now more reasonable. We like IMAX the most of the lot. They are in the business of delivering super-large scale movie films and equipment, includ­ing, but not limited to 3D films. They have a significant global backlog (nearly 100 facilities) in bringing new theatres online and do not depend wholly on a rapid U.S. recovery to fuel con­tinued growth.

    As a research team, we are not totally convinced that 3D is a set of “products” rather than a set of “features.” Can 3D ca­pabilities be the sole business of a public company? We’re not sure. RLD is just such an example. They clearly made rapid and meaningful inroads into the U.S. theatrical 3D movie market. In fact, they seemed to exclusively capture AMC, Cinemark, and Regal, three of the biggest domestic operators. However, we agree with analysts like Richard Greenfield of BTIG, who wrote: “The major U.S. exhibitors are all paying far too much for 3D technology than they should be (Greenfield had a SELL rating on RLD at the time of this writing). Overseas, competition is real and building in the 3D technology sector with MasterIm­age, Dolby, Xpand, and IMAX all trying to grow their presence .

    3D effects are certainly cool and will certainly be here to stay. But in competitive industries, clever new features are not always enough to give new players the ability to survive long-term. Remember American Call Waiting Corporation? We don’t either.

    Regardless of the investment implications, we still had a blast experiencing the thrill of an entire squadron of U.S. Air­force Boeing Ospreys flying in low over Lake Michigan to en­gage the killer robot air force over Navy Pier. Imagine. It made our 3D glasses sing!

    Alan Turing (the father of computer science) would be proud of the dialogue. Never before in the history of cinema have the robots gotten all the good lines, turning the entire human race into a lowly bunch of meat-bag straight men. John Malkovich, John Turturro, Frances McDormand, Leonard Nimoy, and even the real Buzz Aldrinjoined in the fun.

    There’s no shortage of fear, anger and uncertainly out there, so we figured it was OK to have some fun. While the markets are unlikely to replay the depths of dispair we saw in 2008, it would be naive to expect decades of financial sinning to end in a simple one-dip hangover. It’s time we get our house in or­der. But, even then, it will take us a few more years to put our economy back on a sound footing. But I digress...

    As I said, Transformers 3: Dark of the Moon was the greatest movie in the history of the world. And yes, Mr. Ralph Wanger, CFA, that includes Destroy All Monsters, Abbott and Costello Meet the Wolf Man, Animal House, Young Frankenstein, and Yellow Submarine. Did you take your entire office to see the Blues Brothers when they trashed Chicago? No, I didn’t think so.

    Eric Wanger, JD, CFA

    originally published Q2 2011

    Nov 17 3:12 PM | Link | Comment!
  • Oil, Drugs, and Social Networking
    From the Desk of Eric Wanger
    Oil, Drugs, and Social Networking

    Our analyst team recently attended Global Hunter’s “land based drillers” conference, an overview of industry economics that included presentations by four firms that own, lease, staff, and operate land based oil rigs. These are relatively small pub¬lic companies that provide contract drilling services for clients that need gas and oil wells drilled. As one might expect, there was a lot of discussion about the prices of gas and oil. The price of oil was (is) impressively high based on a dramatic increase in middle-east unrest, heavy speculation, and big money flows looking for a place to invest. Likewise, the price of natural gas was (is) impressively low.

    Crude Oil (NYSE:WTI) & Natural Gas Prices: December 2008 – May 2011

    Source: Bloomberg

     

    Some of the more interesting things we learned:

    • Few in attendance believed that oil could maintain its (then) current $110-120 per barrel price levels for very long, believing that such high prices represented short-term speculative bets and middle-east risk premia, not underlying demand or supply issues.
    • On the flip-side, these same analysts seemed to think that $60-$70 is about as low as oil can legitimately go at this point given actual supply and demand conditions.
    • Relatively conservative balance sheets are in fashion among this crowd. While capital is plentiful and avail­able to these land drillers, they are terrified of taking more money than they can put to work right away. The last crash was so severe that it “put the fear of God” into their CFOs. None of these smaller land drillers are will­ing to get “overbanked” again.
    • Natural gas is once again a fuel of choice for electricity generation, especially in parts of the country (such as the Northeast) that have under-invested in nuclear power and can’t safely and cleanly burn coal.
    • As one might expect, the gas rig count continues to drop while oil seeking projects are exploding in number.

    Admittedly, that’s all pretty mundane stuff. Competent, in­teresting, possibly useful, but certainly dull. Dry as dust.

    Want something a bit more interesting? What did every single senior executive in the room mention as his number one concern after trying to get and retain customers? Every man­agement team in the room agreed:  Finding and keeping com­petent employees is the toughest problem they face. The reason? Rampant drug use!


    Rampant Drug Use

    Working on an oil rig is a tough job. It’s dirty outdoor work. It’s hot. It’s cold. It’s wet. It’s icy. Nobody ever said it was work for wimps. But it pays really, really well. Here is a job that doesn’t require a high school diploma that can start at over $50,000 per year. Furthermore, hard working, experienced rig crew mem­bers can make in excess of $100,000 per year if they are respon­sible and can manage others.

    Obviously, these companies have to maintain a zero toler­ance posture on drug abuse. Their people are operating heavy machinery in tough outdoor conditions. The equipment is heavy and prone to difficulties. Injury is common and safety is a constant concern. Yet, in a world where populist politicians regularly complain that American workers can no longer get a decent job without a fancy education, I am listening to a bunch of senior corporate officials telling me that they can’t find a suf­ficient numbers of workers that will come to work straight and sober for $50,000 per year.

    Admittedly, there’s not much to do for fun on your days off, but that’s hardly a new problem. When did bored, lonely, and recently-paid oil, gold, coal, timber, or cattlemen ever behave like Eagle Scouts on their personal time? The highly paid “suits” at the conference were not complaining about whiskey or vene­real disease among the lowly, poorly paid, or disenfranchised. They were complaining about the rampant, recreational use of cocaine, methamphetamines, heroine, andother hard-core, ad­dictive illegal drugs among unionized workers earning solid middle-class wages.

    One official told us that merely announcing mandatory drug testing dramatically lowered his job application rate. An­other told us that his firm went to hair follicle testing because urinalysis only caught marijuana abuse and was too easy to fool by people using methamphetamine or cocaine on their days off.

    Americans demand drugs — lots of drugs. So it is a basic law of economics that there will be huge efforts put into supplying drugs to Americans — and the current policy regime keeps it so profitable that it is worth killing people for the right to sell drugs. It was no different with oil, booze, or even newspapers back “in the day.” People beat and even killed each other competing for the right to own the channels of distribu­tion.

    Basic economics guarantees that as long as Americans are willing to pay high prices for drugs, illegal or not, nearly infinite effort will be put into meeting that demand. No honest free-marketeer can deny this fact.

    In 1931, Aldous Huxley wrote Brave New World, a science fiction novel rooted in social commentary (“Praise Ford!”). He foresaw our future in his eerie utopia with our entire population continually popping state-sanctioned recreational narcotics. In his world, psychotropic drugs were a tool of political control as much as of psychic self-medication. But as far back as 1931, he saw taking pills as part of the fabric of our society.


    What We Think About Energy and Other Commodities

    In the long-run, the price of oil will keep ramping higher, but the short-term will inevitably see the same zigzaw pattern we have always seen. In the short-term, the price is as likely to head back down to $70 per barrel as it is to jump back up above $110. Many oil and gas stocks have or will become cheap again after coming off huge bull-market run-ups. Stocks like Double Eagle Petroleum (NASDAQ:DBLE) and Venoco (NYSE:VQ), for example, can be pur­chased at or below the value of their proven hydrocarbon re­serves. It might be awhile before these stocks peak again, but it’s hard to argue with tangible asset value.

    America continues to be awash in coal. But Americans, at least right now, universally despise this abundant natural re­source. Why aren’t we investing in the technology necessary to burn coal cheaply and cleanly? I’m sure the answer is political. In any case, high quality coal is expensive and dirty coal is cheap. And coal is expensive to export to the countries clamoring for supplies of it. Unfortunately for us, coal stocks are hard for us to buy, because they are so cyclical and momentum driven.

    Food prices have soared. Droughts in China and other Asian regions have caused significant food shortages. Weather problems havecoupled with market distorting subsidies (such as America’s Ethanol subsidy for corn farmers) to create the wealthiest American farmer we’ve seen in a long time. One result, American farm land is selling for huge prices, maybe even at “bubble” levels. We are hard at work looking to invest in things that wealthy farmers want to buy.

    Corn Prices: January 2009 – May 2011

    Source: Bloomberg

     

    Lastly, there is another tech-bubble under way. This time it’s the social networking companies likeFacebook, GroupOn, LinkedIn, and others that are acting like the proverbial cow jumping over the moon. Are GroupOn and LinkedIn going to be Googles or Alta Vista? Are they going to be Yahoo’s or NeXTs? Hard to tell. But I doubt any of the investment banks will return any of their hefty fees when we find out.

    Eric Wanger, JD, CFA, President,
    Wanger Investment Management, Inc.

    originally published Q1 2011

    Nov 17 3:07 PM | Link | Comment!
  • Teflon, Rockets and Pension Funds
    Teflon is really cool: Nothing will stick to it. It’s the slipperiest, slickest, most friction-free stuff around. The stickiest, messiest, gooiest mess slides right off. Teflon is used in industry whenever friction simply won’t do. Because nothing sticks to it, it’s appli cations seem endless. In the pantheon of chemically engineered gods, Teflon stands near Zeus.

    When a person is referred to as “Teflon,” it means that noth ing sticks to them in the political sense. Ronald Reagan was sometimes referred to as the Teflon president. He was such a masterful politician that he could jump fully clothed into a vat of pure nasty and climb out smelling like a rose. He dodged scandal after scandal, gaff after gaff, like some kind of Moham med Ali of politics, floating like a butterfly and stinging like a bee. In public life, Teflon is the “X factor” which separates the very good from the truly great. Political careers are made and destroyed in the public forum, without a judge or a jury. Politi cal teflon is that amazing ability to stand calmly and assertively while political opponents hurl chamber pots filled with shame and blame, only to watch it all slide off without leaving so much as a crumb on one’s suit. And that, of course, brings us to the subject of public pension funds.

    DuPoint Inventor Roy Plunkett discovered Teflon in 1938, DuPontTM Teflon® fluoropolymer is one of the most slippery materials in existend and resists both heat and chemicals.

    It is well understood that public pension funds around the country are in a state of utter disarray. According to the Pew Center on the States, employees’ public pension and health in­surance funds were underfunded by more than $1 trillion in 2008. Grossly negligent financial mismanagement, irrespon sible return assumptions, and imprudent risk taking have com­bined with chronic underfunding to leave a swath of destruc tion in their wake. State governments around the nation have failed to stash away anything close to the amount of money their (often elderly) beneficiaries are owed. Had these fiducia ries operated in the private sector, they would have been fined or even jailed under ERISA. One study found that the average funding rate across the 59 city and state pension plans surveyed was 54 percent. Another study estimates that teacher pension systems across the nation are underfunded by $484 billion. The Pew Center on the States rated state pension funds on a 4 point scale and gave zero points to Alaska, Colorado, Illinois, Kansas, Kentucky, Maryland, New Jersey and Oklahoma. In the private sector, there would be FBI raids, press conferences, and men in suits hiding their faces behind handcuffed wrists on the evening news.

    But has anyone been punished because $1 trillion (some es timates place it at $3 trillion) has gone astray? No.Will anyone be punished in the future? It’s doubtful, but the lawsuits have just begun to fly. Why? The individuals that approved the over blown rates of investment return are faceless, the committee members that approved the underfunded budgets have moved on, and the deficits are so big they have no meaning to the aver age person. The public debate has nowhere to go but to other is sues—issues that can be used to win legislative seats, sway elec tions, enhance prosecutorial resumes, or buy voters with pork. That’s Teflon in action. Despite the enormity of the crisis, there is nothing political for it to stick to so all of the blame and em barrassment will simply slide off.

    Examine the current political debate regarding public pen sions: It has been cleverly shifted to the current salaries and ben efits currently being paid or promised to existing state and fed eral workers. That’s clever sleight of political hand, but diverts us from the real issue. Teflon is at work and the taxpayers will be left to clean up the mess.

    No discussion of teflon would be complete without ac knowledging the most non-stick man of the last century, Wer ner Von Braun. Read Michael Neufeld’s excellent biography of him. It’s excellent and done to standards which should make the Smithsonian proud.

    Werner Von Braun was a German rocket scientist straight from central casting. Remember Dr. Strangelove? Yeah, that guy. Von Braun was a founding father of U.S. rocketry; both ballistic missiles for war and the manned space program for peace.

    Portrait of Werner Von Braun.

    As one of the principle architects of our manned space program, he was the father of the Saturn V rocket (still the most impressive rocket in human history for my money) and the tall, handsome, blonde-hair, blue-eyed, German accented, face of the “dream of space” for a generation of Americans. His entire professional life was devoted to the dream of putting men into orbit and onto the moon.“I aim at the stars,” he is famously quoted.

    For the conclusion of this article please visit:

    http://www.wangerinvestments.com/newsletters/2010-q3/teflon-rockets-and-pension-funds

    Eric Wanger, JD, CFA President,
    Wanger Investment Management, Inc.



    Dec 01 12:22 PM | Link | Comment!
Full index of posts »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.