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I went on a trip to Machias Seal Island where there is an Atlantic Puffin colony off the coast of Maine and nearby Canada in 2007. I stayed at a Canadian island near New Brunswick called Grand Manan Island and took a charter boat from a guide to get to the puffin colony.

For an hour I was in a small blind bird watching. There was no light inside the blind so we could see out but (supposedly) the birds couldn’t see inside. However, I am sure that the Atlantic Puffins knew we were there because they kept walking right up to the rocks in front of the blind just a foot or two away and eyeballing us, which was great.
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Muse is a British band that is huge overseas but starting to get more of a following in the states. I recently saw them at the United Center (I saw them at Lollapalooza in the rain two years ago, a great show) and it was a very entertaining concert. Their set list from the show is here with links to the songs; someone updated this set list minutes after the show had ended.

I have seen a lot of concerts and the effects on the Muse show were top-rate. I have seen the band Tool which uses intense visuals & who put a lot of effort into their show and I did not see U2 but their last tour obviously looked state-of-the-art, as well.

Recently I saw a comedy special by Nick Swardson, who played “Terry” the roller-skating gay prostitute on the sadly canceled Reno 911! show. In this unlikeliest of places I heard something that made me think… the comedian was talking about how blase we are today, about the special effects for a movie like “Transformers”. He said that if people from the 1950’s saw that movie their heads would explode while today in the 21st century we just take it for granted.

As I watched the effects and sound on the Muse show I thought about how much the sound quality, visual effects and stage quality (the stage components rose and fell independently in synch with all the laser and light effects) and how they would just blow away anything from the 60’s – 80’s. If you brought in the top shows from those years the artists and fans would just stand there, mouth agape as they watched something like Muse, with their integrated lights / effects / and sounds.

As some people (generally baby boomers) talk about how rock music was better in different eras they obviously aren’t considering how much vastly improved the concert experience has been made by modern technology, when properly done. Not only are the visual effects better, but the performers have better microphones and monitors and supporting technicians on hand. The effects in those eras probably only were effective if you provided your own chemicals in the brain as enhancements.

Cross posted at LITGM

Recently I went to the dog show at McCormick place in Chicago. I highly recommend it – a lot of fun, especially if you bring kids. The fun isn’t the judging or the agility contests (which are cool) but involves walking around looking at all the breeds as they are being groomed.

Many of the dogs were in curlers of some sort as they prepared for the show but this one seemed particularly sad.

These two cracked me up – it was the “before and after” as the dogs prepared for the show. You wouldn’t believe the attention and effort that the owners lavished on these animals.

Here is a movie I made with all of my photos. If you can’t see the movie a link is here.
 
 

Whoo hoo! We are definitely the Second City, or maybe I should say, the second state, according to this Bloomberg article:

ILLINOIS, the second-lowest-rated U.S. state after California, will take bids on March 11 from banks seeking to underwrite $300 million of Build America Bonds and $56 million of non-subsidized taxable notes. The deal will finance school construction, according to John Sinsheimer, director of capital markets for Illinois. The state, which last sold Build America Bonds in a $1 billion deal on Jan. 28, is rated A2 by Moody’s, A+ by S&P and A by Fitch. A statutory requirement calls for 25 percent of all state debt to be bid competitively, Sinsheimer said. Banks led by William Blair & Co. will negotiate the sale of an additional $700 million in Build America securities in mid-March, he said. (Added March 2)

Not only is Illinois poorly rated from a credit perspective, we often don’t do a good job of selling the debt. This post described how a Chicago government entity issued bonds and sold them for an uncompetitive price, generating instant profits from the purchasers of that debt. You’d think that since the state of Illinois issues so much debt, at least we’d be good at it, but perhaps not.

Cross posted at LITGM

The Wall Street Journal wrote a front page article titled “Natural Gas Tilts at Windmills in Power-Generation Feud“. This article was well written and describes a controversy in Texas related to wind energy and their (inherent) inability to deliver reliable power.

Texas is unique in that it is “walled off” from the rest of the USA on its own grid called ERCOT. To be technically correct, the Texas grid doesn’t include El Paso (I used to consult out at El Paso Electric) but that part of the state really is more like New Mexico, anyways.

Texas has a large percentage of wind power – 6% for 2009. The other sources of generation are about 20% for nuclear, 30% for coal, and 45% for natural gas. Per the article:

Texas… has 9,400 megawatts of wind-power generation capacity – more than all the power plants in Utah. Texas has more wind power than any other state… more than three times as much as California.

Power is generally dispatched in the following manner:

1) the grid control operator makes a request for how many megawatts of power that it needs for the next day
2) the various owners of generating capacity (wind, gas, coal and nuclear) submit their available power for the next day
3) the wind power is always taken because it has the lowest incremental cost, along with the nuclear power available as well as coal. Then natural gas is selected until demand is equal to supply, with older less-efficient “peak” gas plants turned off if there isn’t enough demand

The issue is that wind power can’t guarantee its available capacity. In general, if a generation owner “commits” to a certain amount of supply capacity and can’t provide the electricity, then that generation company is charged a penalty for failing to deliver.

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There has been much talk of a “renaissance” of nuclear power in the United States. While I personally am a big fan of nuclear power, in my posts I attempt to cull the reality from the hype. One key concept is that even if a few plants get built, they are not likely to significantly dent the capacity loss from plants being pulled from service out of our current fleet of 104 units.

Vermont Yankee

Recently the state of Vermont decided not to allow the renewal of the license for the Vermont Yankee nuclear plant. This decision was made by the Vermont Senate not the NRC itself (the NRC has allowed all licenses to be extended that have been requested so far, I believe). The NRC originally licensed reactors for 40 years and can provide a 20 year extension; Vermont Yankee went live in 1972 and thus it will not be in use past 2012 unless the license is extended. Per this article, Entergy intends to fight the state decision:

Late Wednesday, the Vermont Senate blocked the company’s application for a 20-year operating license extension for its Vermont Yankee nuclear plant. Entergy said in a statement that the effort to win the renewal, “is far from over.” The power company said it’ll work to prove its case to the Vermont legislature, state officials and the Vermont public. Entergy may be forced to shut down the plant in 2012.

Of course this begs the question as to how Vermont will now get its power; this plant provided 35% of all power (according to the Wikipedia link above) for Vermont in 2006 and certainly losing a fully paid for, base load nuclear station is going to require a lot of expensive replacement power from other sources. Since Vermont is on the east coast and there is a heavy transmission grid there other power sources should be available, but this likely will have a rate impact on the citizens of Vermont when they begin paying a higher price for out of state power.

Entergy and Spinning off Nuclear Assets

The plant is owned by Entergy. Entergy is run by Wayne Leonard, one of the smartest guys in the electrical utility industry, who purchased this plant back in 2002 (here is a link to the original purchase announcement, before it officially closed, back in 2001). It isn’t a “done deal” yet that the plant won’t get re-licensed, but if so, it would be expected that this would be a financial negative for Entergy because they likely assumed that the plant would have been re-licensed (because they are routinely approved by the NRC) when they purchased this asset back in 2002. Entergy is also thinking of spinning off their nuclear plants to shareholders; this is smart because the value of the nuclear assets are impaired by the fact that they are owned by distribution companies; as a stand-alone asset, they can charge whatever the market will bear and the distribution company will have to pay up or go without; when they are part of an integrated utility you can only raise rates so much without causing yourself problems since you own both sides of the value chain.

The state of New York woke up and realized the problems that independent nuclear plants would cause. Per this article:

New York’s utility regulator said on Thursday its staff found Entergy Corp’s (ETR.N) plan to spin off six nuclear power units, including three reactors in New York, to a new company, Enexus Energy Corp, was not in the public interest. The New York State Public Service Commission said in a release it was considering other options, including changes to the transaction to improve the financial stability of the three New York reactors and provide benefits to ratepayers. The staff concluded that the level of debt needed to finance the Enexus spinoff “is excessive when the business risks of this new merchant nuclear plant enterprise are considered,” the agency said.

Conclusion:

The re-licensing of Vermont Yankee isn’t a done deal yet. It is likely that Entergy will continue to negotiate with the state of Vermont and they want some sort of additional clean up or concessions to allow the sale to go forward, or a guarantee of some sort of rate reductions below what could be charged as “market” rates. Like the state of New York, the states have to move while they still have some leverage (when the plant owners are changing the license or getting re-licensed by the NRC, which may or may not require state approval) because the Federal Government is pretty much approving everything right now without significant conditions.

Given that the states don’t actually believe that significant new capacity will be coming on line anytime soon, and that renewables haven’t made any sort of significant supply contributions to date, letting these nuclear plants charge whatever the market will bear will have ruinous impacts on utility customers because there is no viable competition on the horizon in terms of significant new plants. There has never been a better time to own a paid-off nuclear plant than right now.

Cross posted at LITGM

If you are interested in some wholesome family fun I highly recommend going to the IKC Dog Show at McCormick place in Chicago this weekend. Here is a link to the site.

The fun part about the show isn’t the judging or the events, it is the fact that you can walk around and see all of the dogs being groomed and prepped by their owners before the show. It isn’t every day that you see 5-10 of every type of dog breed imaginable in fine form. Here is a you tube video I made last year at the 2009 show (I had a song to it but they stripped it out so the video is silent; if I actually knew much of anything about dogs I could narrate it).

Cross posted at LITGM

Recently I wrote about how Interactive Brokers was offering to lend money at 1.25% in order to purchase stocks yielding 5% or more in dividends. I was struck by the low rate that they were able to offer as interest and the fact that there was a large universe of large companies offering such high dividend payouts (and not just companies that had a stock price decline with a dividend cut yet to follow so it was unusually high relative to the stock value).

To give Interactive Brokers some credit, the ad was kind of “tongue in cheek” in that it was made to look like it was written on a napkin like the classic business plan but there were enough elements there to get me thinking about what an odd state of affairs this represented.

Just recently this model started coming under siege. The Fed recently began tightening interest rates, increasing the discount rate to 0.75% from 0.5%. While the Fed has been denying that this is part of a long term policy shift, the markets have started to feel otherwise, as markets went down and yields increased on government debt. This won’t directly impact the 1.25% that they are able to borrow for on the “napkin” today, but it seems to be trending that way, even if this is just a first step.

On the other side, 2 large European firms just cut their high dividends. Daimler Benz (DAI), manufacturer of Mercedes autos, suffered a loss and canceled their dividend, leading to a drop of 4.6% in their stock price in one day. Societe Generale, a large French investment bank, cut their dividend from $1.2 Euros to $0.25 Euros (a drop of 79%) and their stock also fell 7.2% in a day.

The question is – how can companies pay out such high dividends in a sustainable manner when there isn’t much growth in the world economy and many of them are in mature industries? While 2 stocks don’t constitute a balanced statistical survey, they show that dividends are a function of profits and long-term profit view and to talk about them in an “historical” view is backwards.

The other side of this is that investing for yield in such a volatile area as stock prices shows that not only did the long term value of the income stream from dividends drop significantly (in the case of Daimler it dropped to zero, and for Societe it dropped by 79%) but then you can also see the impact on the underlying value of the shares, which dropped 4.6% and 7.9% in ONE DAY.

Cross posted at LITGM and Trust Funds for Kids

A while back I was in Sedona and took the Verde Canyon Railroad. This railroad was for mining but now is a popular tourist attraction. Here is a link to their web site. From the site:

The railroads of north central Arizona were all built to support Arizona’s richest copper mine located in Jerome, in the Mingus Mountains above Clarkdale. The Verde Canyon Railroad (formerly the Verde Valley Railroad, operated by the Santa Fe, Prescott & Phoenix Railroad,) was financed by Senator William A. Clark for $1.3 million dollars in 1911. Built miraculously in only one year, the 38-mile, standard gauge line from Clarkdale to Drake, AZ was constructed by 250 men using 200 mules, picks and shovels and lots of DuPont black powder explosives. Today, the same railroad would cost in excess of $40 million to build.

As always, I marvel at how fast these types of operations used to be built, in the days before government and lawyers strangled the life out of everything. I also doubt their “$40 million” figure, because you probably can’t build much of anything and get the permits to do so within our lifetime (the train line runs near a bald Eagle nest, which probably makes it impossible to construct anything).

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While there has been talk of a nuclear “renaissance” in the media for years, it is mostly hype. Existing nuclear plants in the US are running at a high capacity factor and making money for their owners, but there has been little tangible investment in new nuclear plants in the US.

Loan Guarantees and Financing:

One giant barrier to building new nuclear plants in the US is financing. We haven’t built a new nuclear plant in the US in decades so no one really knows what it will cost (and it depends on which design is chosen) but it is safe to assume that they will cost more than $8-10B each. Given that the entire market capitalization of most US electric utilities is smaller than this figure, as I discussed in this post in June of 2009, the idea that new nuclear plants would be built in large numbers was a pipe dream.

The Federal government (Department of Energy) was trying to assist by providing loan guarantees for these projects. I started reading through the Federal web site about what this really means and found this document which describes the arguments about 1) whether or not nuclear plants really qualified under this program because they aren’t really new technologies 2) how much equity the companies should be required to contribute to the project 3) various other data points that summarize the state of nuclear energy in the US (as of 2007, but still mostly relevant because not much has happened since then). If you are interested in nuclear power I highly recommend that you take a few minutes to download and read this PDF because it is filled with facts and opinions from the various actors.

The original proposed Federal loan guarantees were too small relative to the tiny equity capital available from possible players and the large, looming overruns likely to hit these projects. The Federal government seems to agree because they raised the amount of guarantees per this article:

Budget for the coming year would add $36 billion in new federal loan guarantees on top of $18.5 billion already budgeted — but not spent — for a total of $54.5 billion. That’s enough to help build six or seven new nuclear plants, which can cost $8 billion to $10 billion each.

When these items were discussed back in mid-2009 I noted that the only company listed as a potential candidate with financial strength to pull off one of these plants was Southern Company. Also as I noted, it was amazing to me that the “journalists” who wrote up that story couldn’t do the rudimentary financial research that would have told them that same thing. In any case, today they announced that Southern Company was going to be the first company to receive a Federal loan guarantee for $14.5B for 2 units to be built near their existing plants at Vogtle.
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Back when Dan and I were invited over to Chicago Boyz they mentioned my posts on taxation and the energy industry as particularly interesting. Over the last few years I have not written that much on tax policy, because the news has been so uniformly bad that it is quite depressing to contemplate.

This article from the Wall Street Journal is titled “Escape from Taxation” and reviews the negative impact on the state of New Jersey caused by ever-increasing state income tax rates. As you can see in the table, the highest marginal tax rate on income in New Jersey has increased from 2.5% in 1976 to 10.75% in 2009. New Jersey’s growth used to be in part attributed to its lower tax burden when compared to New York state; today that gap has been (mostly) erased and with it has gone inbound migration of wealthy individuals and corresponding growth.
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Added Aqua in response to a comment on the Trump Tower. Obviously I took that photo in the summer because we haven’t had a nice sunny day like that for a while.

One good thing that came out of the Chicago real estate bubble…

Cross posted at LITGM

Our energy situation broadly cleaves into two main functions – natural gas, and electricity. Natural gas is used for industry, heating homes and powering stoves, and is taking a greater portion of the electrical generation load. Electricity also overlaps with gas when it comes to home heating and cooling, and is obviously a large component for industrial uses. However, the natural gas and electricity energy industries in the United States have moved in profoundly different directions over the last few decades. The purpose of this post is to describe where we are, as a country, with regards to natural gas. In short – we got it half right.

Natural gas has three main components, broadly speaking – 1) exploration / extraction 2) transportation 3) distribution. In general, natural gas is lightly regulated for exploration / extraction, has general principles for transportation (open access) and is pretty heavily regulated for distribution (local monopolies).

One critical difference between electricity and natural gas is that natural gas can be stored while electricity must be available at the specific time it is needed. Thus users and utilities can store natural gas and have it available for peak times, while the only way to meet peak load demand for electric utilities is to have units on line generating electricity during the hottest parts of the day or to “shed load” by pushing customers off-line to reduce demand.

Both electricity and natural gas are mostly consumed using North American (including Canadian) resources. While OPEC maintains an oil cartel, the fuel used to generate electricity (coal, nuclear fuel, gas) mostly comes from North America. While these resources can be transported across the ocean (for instance Japan imports virtually all of what it needs to fuel electricity) in the USA (and Canada) we have most of what we need for these industries. Until recently there wasn’t a practical way to bring in natural gas from regions that weren’t connected by pipeline, so we were bound to use North American resources.

Exploration & Extraction

The exploration and extraction of natural gas is a mostly unregulated industry (compared to electrical utilities, at least). The biggest constraint was that vast swathes of the US were placed off-limits for natural gas drilling due to environmental concerns. In the 1970’s, a moratorium was placed on new natural gas connections because it appeared that the US would run out of natural gas. However, improvements in extraction capabilities resolved that situation and wildcatters responded to higher prices by finding additional supplies.

Recently it looked as if we were going to run out of natural gas again. Futures prices on natural gas, which were around $2 / unit in the 1990’s, spiked to as high as $14 / unit in the winters of 2006-8 (prices are seasonal and typically move with the weather) but now are below $4 / unit due to the fact that massive supplies of natural gas have been located in shale formations as drillers redoubled their efforts in light of these high prices.

The natural gas industry, as we can see above, is able to use market forces to respond to price signals. Drillers used innovation and new technology to find new supplies which in turn brought down the high prices. If the extraction / exploration industries were heavily regulated and monopolized (like power generation), it is likely that they would just have utilized the high prices as an opportunity to reap large profits rather than to expand supply.
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Like the famous Seinfeld episode where Kramer struggles to figure out how to profit from the fact that Michigan offers a 10 cent return on recycled bottles, I have been starting at this ad from Interactive Brokers for some time now. This had has been run in myriad financial papers and I have seen it all over the place. It is notable for the fact that it looks like it was drawn “on the back of a napkin” like the fabled dot-com business plans.

The specific elements of the investing plan are as follows:
- Interactive brokers can make margin loans at 1.25% annual interest. This LOW rate of interest is made possible by the country’s current super-low rate policy
- Some stocks are offering dividends as high as 5%. In the current low interest rate environment (you are likely to get 2% on CD’s & government paper, and almost nothing on your money market and bank deposits), that 5% rate seems very enticing, especially since dividends are taxed more favorably on individuals than interest income (dividends are as low as a 15% rate, while interest income is as high as 35%+)
- Interactive brokers will offer you LEVERAGE. By leverage, this means that they will LOAN you more money than you have in your brokerage account so that you can invest and magnify your returns, either UP or DOWN
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I knew it must be time for the annual “dance” regarding the Chicago Transit Authority budgets when I saw this sign up on a bus stop near the Merchandise Mart. The sign detailed the threatened cuts to bus routes if 1) the CTA doesn’t get more money 2) the unions don’t give back their recently negotiated pay raises.

This is no way to run a state. This article in the Chicago Tribune describes the annual ritual:

The CTA made an offer today that its labor unions could refuse, and they quickly did: Give back a 3.5 percent pay raise this year in return for reducing employee layoffs and major cuts in bus and rail service that are set to begin Feb. 7.
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Oh no… the ice is breaking up… these non-native Canadian Geese, which don’t even bother to migrate but just hang out fat and happy… they could maybe be extinct in our lifetime (uh, probably not by a long shot).

In this article titled “Why Many Investors Keep Fooling Themselves” by Jason Zweig from the Wall Street Journal, Mr. Zweig does an excellent job of explaining why individuals assume that they will receive a rate of return that is too high, which means that either they are not saving enough to meet their goals or that they are taking too much risk of running out of money.

This post describes what the rate of return means in practical terms, and why it is important.

One of the core elements of investing is the assumed “rate of return”. Along with your base investment (or amount that you are periodically adding, say annually), your time frame (number of years out you want to go), the “rate of return” is the percentage variable used to determine whether you will have enough to retire and / or meet your needs for a specific goal (such as will you have enough funded to send your child to college).

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Check out this photo from BBC news of a “Frozen Britain”. It is damn cold in the states here, too. Al Gore – maybe I am missing something? Or should I go through the emails from those researchers trying to hide all of their data again…

Recently I covered iBonds, which are a government bond that you can purchase online that provides assurance against increases in inflation and other tax benefits. The amount you can purchase is limited, however, to $5000 / year, and you can’t redeem them for 12 months, which makes them unsuitable as a short-term cash vehicle.

Certificates of Deposit (CDs) Through a Brokerage:

If you are looking for a practical way to earn interest income with the minimum risk possible than certificates of deposit are a good alternative. When I was growing up you had to physically go to a bank and set up a CD, and then you had to retain paperwork for each instrument. In addition, you wanted to disburse your funds among a number of banks to get around FDIC limits, as well. Finally, the CDs were not easily redeemed, although you could redeem them in some circumstances depending on the issue with a penalty on interest.

Today – all of above disadvantages and inconveniences with certificates of deposits have been eliminated. You can buy CDs online (I used to go through a voice broker, but last time the guy showed me how to do it myself, online, so now I will just purchase them that way), they are integrated with your brokerage statement so there is no additional paperwork (on issuance, or at year end for taxes) beyond what you already receive, and also there is a “secondary” market when you can re-sell your CD if you need the proceeds sooner. There is no “guarantee” that you will be able to sell your CD at the price you want, but since a CD is a simple commodity with a rate, timing payment frequency, and a duration, I’d expect that you’d be able to sell it for something very close to the market price and receive not only your cash back but essentially be made whole on your interest. However, the overall interest rate market may have changed which would mean that your CD would be worth “more” or “less” if you had to sell it – longer dated CDs that I purchased a couple of years ago are now selling for more than 100 cents on the dollar (say 102) but that would only come into play if I decided to sell them prior to their redemption date, which I don’t plan to do.

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