The Daily Reckoning January 30th

|

Bankruptcy: The Glorious New Beginning

You remember when Hostess declared bankruptcy last November? There were outcries that the iconic snack pastry would be gone forever. Speculators began to stockpile the tasty treats

As Zero Hedge documented, eBay featured the following items:

Advertisement
  • For a price of $89.95, three boxes of SEALED Box of Hostess Chocodiles 3×10 Chocolate Twinkies
  • For a price of $99.99, four boxes of SEALED Box of Hostess Chocodiles 4×10 Chocolate Twinkies
  • For a starting bid of $500, one Box of Twinkies; Unopened
  • For a starting bid of $10, and a price of $595, a box of 10, opened and half-eaten
  • For a starting bid of $5,000, a single Twinkie
  • And finally, for a starting bid of $10,000 … a box of Twinkies (“one of the last boxes that will be available, its seller helpfully notes, before the Zombie Apocalypse”)

Even now, there’s a rotting Twinkie for sale on eBay. Supposedly, Twinkies will remain edible for decades, even outliving their cellophane wrappers (or so goes the mythology).

The belief was that unyielding union workers could make the Twinkie vanish. But that’s not how real capitalism works. However, we understand the confusion. In this bailout economy, whenever an enterprise is on the rocks, the workers cry out to their political friends that the employer must be saved or the jobs and products will be lost for good.

The government and media preached that not only would General Motors and Chrysler perish if the taxpayer didn’t step in, but all of the suppliers would be gone as well. Millions would lose their good, high-paying jobs. The Center for Automotive Research, a Michigan think tank, estimates that the bailout saved 1.5 million U.S. jobs by keeping GM and Chrysler, and the companies that depended on them, in business.

Uncle Sam shoveled $80 billion to the automakers, some of which has been paid back through a GM IPO. The taxpayers still own a slug of Government Motors and will be made whole only if or when the shares reach $51 (currently trading at $28). Chrysler still owes $1.3 billion.

And remember, this rescue happened in 2009. Time flies when you’re bailing out.

The automakers are now making a profit, but the U.S. Treasury’s latest figures estimate the Detroit bailout will ultimately cost taxpayers $25.1 billion. This number has been revised upward more than once, so don’t carve it in stone. Let’s just say at least $25.1 billion.

So $25 billion divided by 1.5 million jobs comes to nearly $16,700 per job.

Meanwhile, Hostess Brands couldn’t reach an agreement in November with the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union and began liquidation. According to the company’s website, “The wind down was necessitated by an inflated cost structure that put the company at a profound competitive disadvantage. The biggest component of the company’s costs was its collective bargaining agreements that covered 15,000 of 18,500 employees.”

The Obama administration must be more partial to cars than pastries. Administration officials were nowhere to be found as the company circled the drain. The shutdown of Hostess meant the closure of 33 bakeries, 565 distribution centers, approximately 5,500 delivery routes, and 570 bakery outlet stores, as well as the loss of 18,500 jobs.

The company was founded in 1930 and built some iconic brands such as Hostess, Wonder Bread, Nature’s Pride, Dolly Madison, Butternut Breads, and Drake’s brands.

General Motors was founded in 1908 and owns iconic brands such as Chevrolet, Buick, Cadillac, and GMC.

Chrysler was founded in 1925 and owns brands such as Chrysler, Jeep, Dodge, Ram, Fiat, Mopar, and SRT.

Here we are less than three months after Hostess filed for liquidation and the bids are flooding in for the assets of the company. Its hoping to sell the brands, factories, and other assets for $1 billion.

Advertisement

Flowers Foods Inc. bid $390 million for the bread brands. United States Bakery Inc. agreed to pay $28.85 million for the Sweetheart, Eddy’s, Standish Farms and Grandma Emilie’s bread brands, four bakeries, 14 depots and some equipment. “We believe the assets and brands will allow us to provide fresh-baked Franz Bakery products to a wider and diverse geographical base,” Bob Albers, United States Bakery’s chief executive, said in a statement.

Two bids came in Monday for cakes and bread that brought the total offered to more than $440 million. These aren’t final bids, but are what’s known as “stalking horse” bids.

Stalking horse bidders are selected by the company to make the initial bid in a bankruptcy auction. This allows the distressed company to avoid low bids on its assets. Once the initial bid is put in place, competing bids can commence.

Hostess then selected C. Dean Metropoulos & Co. and their financial partner Apollo Global Management to provide the initial bid for its cake brands that include Twinkies, Ding Dongs and Ho Hos. As I write, Forbes is reporting that Metropoulos and Apollo will bid $400 million for the treats. This would set a tasty floor for the bidding, and if they were outbid, they would earn a breakup fee.

The point to all this is that the beloved Twinkie will be back on the shelves before you know it. Plus, many of the jobs required to make them will be reinstated. Yes, there may be fewer of them and they may be lower paying, but hungry consumers will be served.

Taxpayer cost per job saved: nothing!

Writing for Policymic.com a couple months ago, Lenny DeFranco wrote, “Let’s recognize that a company like Hostess is supposed to go out of business. Liquidation is a proper burial when you sell products no one wants and are unable to change.”

DeFranco said the whole idea that union wage demands and management incompetence took down the company was nonsense. “I think Twinkies lost their appeal when the possibility of having to survive a nuclear hellscape passed, or when people realized that subsisting on them in such a scenario would lead to a more agonizing death than leukemia,” he sniffed.

Well, Mr. DeFranco, the market is speaking, and the score looks to be Twinkie 840 million, DeFranco 0.

The same liquidation proceeding would have sorted out the brands, jobs, and assets of the automakers four years ago if Washington would have kept its nose out of it. No doubt some company would have bought Jeep, Cadillac, and the rest with production never missing a beat. Instead, taxpayers are $25 billion poorer, not to mention the odious CAFE standards Washington forced into the deal.

It turns out the Twinkie has an official shelf life of 25 days — not exactly immortal, but a long time for a baked good. But a fresh new supply is likely just months away.

Long live the Twinkie, thanks to bankruptcy

The lesson for economics, investors, and everyone is that bankruptcy can be a new beginning, a rebirth, the most bullish sign there is. It is not an end, but a light that shows the way to a wonderful future. Bankrupt but unsubsidized business can be a great place to place your bets on future growth. Now, if only all the bailed-out zombie institutions that are weighing on U.S. growth could be so lucky.

Yours,
Doug French

Original article posted on Laissez-Faire Today 

Bankruptcy: The Glorious New Beginning appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Doubling up a Scorching S&P

Investors are drooling over stocks — and with good reason…

The market’s in full-on melt-up mode. Nine out of the last 10 trading days have ended positive for the S&P. It’s an awesome sight.

But there’s a big, sneaky rally happening right under your nose. Yet no one’s really talking about it — mainly because everyone’s so amped up about the strength of the broad market.

Advertisement

Here’s what you’re missing: Crude is quickly moving toward $100. In fact, crude’s gains have more than doubled up the S&P since the beginning of November.

Take a look:

Doubling of the S&P

Crude has rapidly bubbled up since the beginning of December. If it finishes this week higher, it will be Texas tea’s eighth straight week of gains.

I also took the liberty of throwing in some equally ridiculous moves from a couple of related stocks. Hess Corp. (NYSE:HES) is fresh off gains of more than 9%… just yesterday (bottom right). The stock is up more than 18% during the past five trading days.

If that’s not enough for you, oil services stocks are absolutely killing it. Check out Halliburton Co. (NYSE:HAL) posting gains of more than 25% since November (bottom left). Shares have taken only a couple days off since the start of 2013. After raising guidance in its fourth-quarter earnings report earlier this week, Haliburton gapped dramatically higher for the second time this year.

I find oil services to be especially intriguing since the sector has yet to break above its 2012 highs. Sure, we’ve already seen some big moves. But it’s still early.

So snap out of it, Clampett! Get to stalking your favorite black gold plays today…

Greg Guenthner
for The Daily Reckoning

Doubling up a Scorching S&P appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Virtual Immortality

Immortality is the sole domain of the Almighty. But “virtual immortality” is fast-becoming the domain of groundbreaking stem cell therapies.

These therapies fall generally under the banner of “Regenerative medicine” — a field of medical innovation that seeks to reverse cellular aging by using rejuvenated cells to repair parts of the body that have been damaged due to illness, injury or age.

You may have seen the video of my rejuvenated heart muscle cells. Dr. Michael West performed this process in the offices of the company he runs, BioTime (AMEX:BTX). Starting with fibroblasts, or skin cells, from inside my left bicep, he increased the number of cells many times through routine cell propagation techniques. Then, he used genetic engineering technologies to convert some of those cells into induced pluripotent stem (iPS) cells, identical to the embryonic stem cells that I grew from.

The scientific term for those cells is “immortal,” because they don’t age. This is because their telomerase genes are active, which causes the clock of aging, telomere loss, to constantly reset.

For new readers, our cells have about 120 telomeres per chromosome when we are born. Telomeres are sort of like the ends of zippers. When the two sides of our DNA’s double helix unzip to replicate, it uses up one telomere. When a cell runs out of telomeres, it stops replicating. Before then, however, short telomere caps cause the cells to stop functioning optimally.

BioTime then programmed my iPS cells with the genetic code of heart muscle cells. The result was a population of cells essentially the same as those that my heart was made of when I was born. At that point, the cells were aging normally, though they were young biologically.

We chose to make heart cells only because they are among the only cell types that anyone can easily identify. They self-assemble into tiny clumps of beating heart muscle cells. A lot of people just “get it” when they see this demonstration of the power of regenerative medicine as practiced by BioTime. Personally, I’m in awe.

The point, however, is that cells at an earlier stage of development, called endothelial precursor stem cells, could have been made as easily as heart muscle cells. If they were injected into my body, they would restore my cardiovascular system to youthful function in about a year. In fact, BioTime subsidiary ReCyte is currently moving toward clinical testing of this technology. I plan to have that procedure done as soon as it is legal in some jurisdiction.

My cardiovascular system will then have the life expectancy of an infant’s, which will vary according to genetics, behavior and the new medical therapies that will come online in the future. Scientists are currently working on strategizing the use of this technology to replace virtually every cell and organ in the body. The acquisition by BioTime of Geron, incidentally, significantly accelerates the timeline of regenerative medicine by bringing the vast majority of stem cell patent rights into one company. Most of those people working on the many possible regenerative therapies will license technologies from BioTime.

So anyway, if every cell in your body was replaced by a rejuvenated version, it would restore your apparent biological age to prime health, probably about age 25. We’ve got a long ways to go before all the details are worked out, but I think we’ll see it come together within the next 30-40 years. Moreover, the intermediate solutions, such as BioTime’s cardiovascular rejuvenation, will allow far more people to make it that long than is currently understood. Other medical breakthroughs will also increase our chances of making it to that cutoff point.

These breakthroughs will have a profound impact on life expectancies, which will increase the number of people who will be able to avail themselves of stem cell therapies.

Regenerative medicine is going to change the way we think about mortality, and it will do it for many people alive right now. Theoretically, those therapies will allow periodic rejuvenation of all your body’s cells, indefinitely staving off the diseases of aging and aging itself. Nevertheless, that’s not immortality.

Neurosurgeon Dr. Sanjay Gupta, better known as CNN’s chief medical correspondent, also believes that regenerative medicine will prevent death by aging for many people alive today. He refers to this as “virtual immortality.”

Something’s going to kill you someday, even if it’s not aging. A deeply religious friend of mine recently pointed out to me that even if we lived until our sun burned out and went supernova, that time span is trivial compared with eternity — which is the definition of real infinite immortality.

Immortality is clearly outside the domain of this newsletter and science itself. Regenerative medicine, however, is going to change the way we think about mortality. As radical as it may seem now, it’s going to be taken for granted in the not-so-distant future, and those who know it’s coming are going make fortunes every step of the way.

Regards,

Patrick Cox
for The Daily Reckoning

Virtual Immortality appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Advertisement

The Energy Sector Is Breaking Out

In bull markets, it’s good to see investors rotate in and out of different stocks.

Some sectors establish themselves as market leaders for a while. As a rally progresses, you’ll begin to see profit taking on some of these names, prompting traders to look elsewhere for strong momentum moves.

Of course, it’s a sign of a healthy rally when you see this “market of stocks” environment. It’s great for traders, too — mainly because there’s always a stock out there that’s in play or ready to make a big move.

Today, I’m going to show you one of these sectors that is beginning to break out. It’s a great place to look for new setups. In fact, you might even come across your next trade from this group of stocks.

I’m talking about the energy sector.

Late last week, I wrote to my Rude Awakening readers about how energy stocks and gold have diverged — with gold moving lower as energy names begin to break out to the upside.

Before the divergence, gold and the energy sector had underperformed the S&P for more than 18 months. Both sectors were essentially flat over the past year and a half…

But the energy sector is starting to make a move. The Energy Select Sector SPDR (NYSE:XLE) has exploded over the past three trading weeks, rising more than 7%. XLE posted 52-week highs Friday — and then again this morning as well. Take a look:

You can clearly see the breakout above the 2012 highs. Also, it’s important to note that unlike many other strong sectors, XLE has not yet taken out its 2011 highs.

The Consumer Discretionary SPDR (NYSE:XLY) and Health Care SPDR (NYSE:XLV) have each posted four-year highs within the past two trading sessions. Yet over the past four weeks, XLF has outperformed them both. This relative strength shows that energy shares — which have lagged the market for some time — are looking to play catch-up:

I suspect we’ll see XLE make a serious run at its 2011 highs in short order…

Also, it doesn’t hurt that earnings season (so far) has been especially kind to energy stocks. Across the board, we’re seeing stronger-than-expected earnings, with nearly 64% of companies that have already reported beating estimates. That’s the highest rate since the fourth quarter of 2012, according to Bespoke Investment Group.

The upside surprises are even more impressive. Energy names are leading the charge, with a collective positive revenue surprise of +3.28%, according to Virtus Investment Partners. Now, I’m not saying you should be trading earnings reports. But it doesn’t hurt to have this tail wind when looking at energy names.

Also, if energy names start popping, you might want to keep a close eye on the oil services sector. There hasn’t been a breakout in the Market Vectors Oil Services ETF (NYSE: OIH) just yet, but this is, obviously, a closely linked sector that has also been very strong relative to the market at large:

 

While it’s still pretty far from its 2011 highs, OIH could continue its strong run if it breaks above horizontal resistance at $44. It’s definitely worth watching.

Best,

Greg Guenthner, CMT

Original article posted on Daily Resource Hunter 

The Energy Sector Is Breaking Out appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Advertisement
avatarThe Daily Reckoning - The Daily Reckoning posted Wednesday, January 30th, 2013.

Post a Comment

* Copy This Password *

* Type Or Paste Password Here *