Thursday, April 12, 2012

Delta ups the ante in war against Wall Street

I have discussed manipulation of the commodities space many times in this Blog, enjoy the latest addition. Aivars Lode

April 12, 2012: 9:04 AM ET

Delta is hoping to beat Wall Street at its own game by getting into the jet fuel trading business. If successful, one bank stands to lose the most.

By Cyrus Sanati, contributor

deltaFORTUNE -- Delta Air Lines is upping the ante in its war with Wall Street over jet fuel prices. The airline is hiring away oil traders from the Street and is now angling to buy a refinery on the east coast in an effort to cut costs and bypass speculators. If successful, Delta could encourage other airlines to follow suit, delivering a blow to the trading floors at some of the big banks.

The airline industry has lobbied Congress for years to rein in the explosion in financial speculation in the commodity markets. They believe that too much speculation in the physical and futures markets for oil products by Wall Street has led to artificially high jet fuel prices, crushing their profit margins. But while Congress has entertained hearings on the subject on several occasions, the airlines' calls have fallen mostly on deaf ears as they were pitted up against the financial services lobby, which has far greater pull in Washington.

Now Delta is looking to beat Wall Street at its own game by getting into trading. Its merger with Northwest Airlines in 2008 has given Delta the heft and enough cash on hand to start buying and selling jet fuel for its own account. Before the merger, Delta procured jet fuel in much the same way it bought snacks and napkins for its inflight service -- a refiner, broker or bank would quote them a price for fuel and they would take it or risk not flying that day.

In the last year Delta (DAL) has started to look at jet fuel as more of a financial product as opposed to just another line item of expense, a person with knowledge of the situation told Fortune. It has moved its jet fuel procurement division into its treasury services department and started to hire traders away from Wall Street, this person said. Delta recently hired oil trader Jon Ruggles away from Merrill Lynch to build out its trading operations in Atlanta. Ruggles has extensive experience trading oil products with stints at ConocoPhillips (COP), Trafigura and later at Merrill. Delta did not respond to requests for comment.

MORE: If the U.S. is now an oil exporter, why $4 gas?

Delta wants to move from being a price taker to a market maker. To do that, the airline is moving to buy or control some of the physical assets associated with jet fuel production and distribution, like a refinery. Owning physical assets is a tactic big banks like Goldman Sachs (GS) and Morgan Stanley (MS) have used for years to gain an informational advantage over their competition. Morgan Stanley owns crude and refined product storage tanks and pipelines to track the flow of oil products throughout the U.S., while Goldman bought power plants to give its electricity traders an edge.

Morgan Stanley continues to be a large player in energy trading, especially in jet fuel, where it is by far the largest financial player, according to independent brokers in the space. Morgan Stanley does not break out revenues from its jet fuel trading business, but it is believed to be substantial given the amount of volume it trades. Citigroup (C), Macquarie, JP Morgan (JPM) and Barclays (BCS) all have a sizable presence in trading jet fuel, but to a much smaller degree than Morgan Stanley. Meanwhile, Goldman has largely exited the jet fuel market as it scales down its trading operations, brokers say.

It is unclear what Delta is going to do with a refinery just yet, but it may be trying to emulate Macquarie, the Australian investment bank, in its arrangement with the Come-by-Chance refinery in Canada. The bank has what is known as a physical off-take agreement with the refiner, according to a person with knowledge of the contract. That means it agrees to buy most of the products the refinery pumps out. Macquarie would then take that physical supply and try to broker it out to end users, like the airlines. This agreement makes sense for Delta, as it could gain an informational edge in trading and a physical edge in flying without burdening itself with the cost and headache of owning a refinery.

MORE: Why you shouldn't buy bonds anytime soon

But to gain real pricing power over other airlines and to cut Wall Street out at the same time, Delta may choose to buy a refinery outright. The company is reportedly looking to buy the Trainer refinery in New Jersey, which is located near its hub at JFK Airport in New York City. The Trainer refinery is currently owned by ConocoPhillips, where Delta's new fuel chief cut his teeth trading oil a few years back.

The Trainer refinery could possibly be retooled to pump out more jet fuel, but that would require significant capital expenditures. The cost savings, though, may be worth the initial cash outlay. The price differential between a barrel of crude and a barrel of jet fuel in the last year on the east coast has ranged from as low as $16 a barrel this winter to as high as $45 barrel last summer. Built into this differential are refining and trading costs associated with the supply and demand of jet fuel relative to that of crude. Delta could significantly tighten that price differential buy using its own jet fuel and by swapping it directly with other refiners that could supply fuel to Delta's other hubs.

Delta's success could encourage other airlines to trade and own physical assets associated with jet fuel production, essentially squeezing Wall Street traders and brokers out of the game. But Delta's success isn't guaranteed. Trading is a dangerous game where losses can pile up quickly. While the airline stands on much firmer financial ground than in the past, it still doesn't have a strong enough balance sheet to withstand considerable trading losses, especially with a refinery on its books.

Wednesday, April 11, 2012

Transportation and Young Adults: Driving is Down, Biking and Public Transport Way Up

In Aussie after the crisis in the 90's bicycle riding took off! Interesting the parallel. Aivars Lode

By Leslie Brokaw – 4/9/12

Biking and the use of public transportation are up significantly among 16 to 34-year-olds in the U.S., while driving has dropped.

New research shows that young people in the U.S., Canada, Germany, South Korea, and other countries are driving less, and, in the U.S., biking more and using public transportation in significantly higher numbers.

“Transportation and the New Generation: Why Young People are Driving Less and What it Means for Transportation Policy,” [pdf] a report by the U.S. Public Interest Research Group Education Fund and the Frontier Group, includes these statistics:
  • Driving is down: The number of vehicle miles traveled by 16 to 34-year-olds in the U.S. dropped 23% between 2001 and 2009. As well, the share of 14 to 34-year-olds without driver’s licenses grew between 2001 and 2010 from 21% to 26%.
  • Biking is up: In 2009, 16 to 34-year-olds in the U.S. took 24% more bike trips than in 2001 – even with that age group shrinking in size by 2%.
  • Public Transport is up: Public transport use by that same group also rose in the same period — passenger miles traveled are up by a huge 40%.
The report says that reductions in driving are “a phenomenon becoming characteristic of developed countries.” A 2011 study by the University of Michigan Transportation Research Institute showed that seven developed countries — Canada, Great Britain, Sweden, Norway, Japan, South Korea and Germany — had decreases in the percentage of young people with driver’s licenses. As well, “vehicle-miles traveled have either leveled off or fallen in Western European countries including Belgium, Denmark, France, Germany, Italy, The Netherlands and Spain.”
Among the reasons cited for the changes in the U.S.:
  • It’s easier to use a phone when you’re not driving. “Public transportation is more compatible with a lifestyle based on mobility and peer-to-peer connectivity than driving,” notes the study.
  • Environmental commitment. In a KRC Zipcar survey, 16% of 18 to 34-year-olds said they strongly agreed with the statement, “I want to protect the environment, so I drive less.” Only about 9% of older generations said the same thing.
  • Bike-sharing programs are more available. Technology “makes bike-sharing programs possible and convenient,” says the study. In just the past two years, at least nine U.S. cities have launched bike-sharing services, including Boston, Chicago, New York, and Washington D.C.
  • Car-sharing programs are also on the rise. Says the report: “Technology has also led to the creation of transportation options that did not exist 15 or 20 years ago. With car-sharing services such as Zipcar, for example, the Internet and smart phone applications allow users to reserve, pay for and locate cars easily, at any time of the day.”
The report notes that, of course, “people who are unemployed or underemployed have difficulty affording cars, commute to work less frequently if at all, and have less disposable income to spend on traveling for vacation.” But, significantly, the report says that the trend toward reduced driving “has occurred even among young people who are employed and/or are doing well financially.”
Phineas Baxandall, senior transportation analyst for U.S. PIRG Education Fund and a co-author of the report, says in a press release that the report has implications for transportation policy. “America needs to understand these trends when deciding how to focus our future transportation investments, especially when transportation dollars are so scarce.”
The report’s recommendation:
“America’s transportation policies have long been predicated on the assumption that driving will continue to increase. The changing transportation preferences of young people — and Americans overall — throw that assumption into doubt. Transportation decision-makers at all levels — federal, state and local — need to understand the trends that are leading to the reduction in driving among young people and engage in a thorough reconsideration of America’s transportation policy-making to ensure that it serves both the needs of today’s and tomorrow’s young Americans and moves the nation toward a cleaner, more sustainable and economically vibrant future.”

Monday, April 9, 2012

Strategic Questions for an Accelerating World

Change is coming are you prepared? Aivars Lode

11:21 AM Monday April 9, 2012 

1. Expect consumer conversations. As the number of channels through which you can connect with customers increases, it becomes more difficult to out-market and out-advertise your competition. Today, the brands that set the pace are the ones that build a deep understanding of the needs, desires, and motivations of their customers--and then engage their customers in authentic, two-way conversations. Investing in deep consumer insight and designing your organization to connect with customers in more meaningful, relevant ways always earn you an advantage over your rivals.
Ask yourself: How deeply do you understand your consumer? Have you designed your offerings to promote meaningful engagement?
2. Anticipate competitive experiences. As Joseph Pine and James Gilmore rightly cited in 1998, we live in an Experience Economy. Consumers are driven more by the experiences that companies create than the individual features that products offer. Today, we are almost overwhelmed with offerings that connect on an emotional level, and we frequently substitute experiences across category. (We might trade a night at the movies for a rental watched on a large-screen television.) As consumers reframe choice, this reframes competition. Understanding how customers might trade other experiences for your own gives you a better handle on your actual competition (and will help you to become a stronger competitor).
Ask yourself: Do I understand my competitive field as defined by my consumer? How well am I delivering, and what impacts outside my industry should I anticipating?
3. Run fast, adaptive experiments. Over the past decade, through a natural evolution of software systems, we've gained access to new levels of analytics and data. Real-time tools allow us to rapidly measure and react to our environment, creating tighter feedback loops that deliver the evidence needed to create change. In the past, we've often relied on analytics to understand how our operations track against a plan. Today, savvy organizations use real-time analytics to constantly ask different questions of their data, using the answers to evolve their strategy. They regularly run rapid experiments, learn, and refine their offerings in rapid iteration cycles.
Ask yourself: What are you *really* learning from your data? How is it helping you to improve your offering?
4. Reframe partnership networks. There is a competitive nuance to today's markets that can create interesting bedfellows; many companies often serve the same customers with different complementary experiences. In these moments, savvy businesses are able to define themselves by their direction, not by their competition. This enlightened view of competition creates a new lens for opportunity and subsequent partnerships. These collaborations can happen very visibly (Apple's iPhone hosting Google Maps), or quite subtly (Amazon's web fulfillment for large brick-and-mortar retailers). As companies reframe partnerships in order to deliver superior experiences, they create new and often staggering competitive pressures that cause markets to move faster.
Ask yourself: Are you defining your direction through your vision or through your competition? Could rethinking how and with whom you partner improve your business?
5. Leverage software service platforms. Ten years ago, enterprise software required a major investment in technology, configuration, and training. Today, software functions can be "rented" though cloud solutions. Through this model, businesses gain scale and service at lower cost almost immediately, creating more capital for other investments and more focus for core offerings. If your competitor has a better handle on how to bring the right software service platforms into the organization, there's a good chance they're running leaner than you are, allowing them more time and money to focus on their customers.
Ask yourself: How can you redefine the way you leverage software? How can new digital offerings serve your business, reduce distraction, and improve your overall level of service?
Of course, these are just some of the strategies that successful companies use to evolve toward greater success. Based on your own experience, what questions and strategies would you add to this list?

The European crisis has investors eyeing Latin America, including Brazil and Mexico.

See my older blogs where the press talked about how good an investment Europe was and why. Turns out it was not as I highlighted at the time!  Aivars Lode

Published 4/9/2012 in Florida Trend        
Wealth Management Sector Portrait
South of the Border
by Cindy Krischer Goodman   

South of the Border
The European crisis has investors eyeing Latin America.

While Europe stands out as a volatile investment market, Latin America has drawn the attention of investment strategists, who are particularly bullish on Brazil, with its growing middle class, low unemployment and large-scale projects in preparation for the 2014 World Cup and 2016 Olympic Games.

“We think Brazil will do very well because it’s a country that continues to reinvest in itself,” says Adam Carlin, director of wealth management with the Bermont/Carlin Group at Morgan Stanley Smith Barney in Coral Gables.

Already this year, Brazilian bank, oil and energy stocks are posting double-digit gains. Among the most favored stocks are Petrobras, a Brazil-based integrated energy company; Ultrapar, a Brazilian gas distributor; and Ita├║ Unibanco, Latin America’s largest non-government bank.

Francisco J. Cerezo, an international attorney with Foley & Lardner in Miami, also sees opportunity in Mexico.

“There’s still interesting work going on in Mexico across sectors. I think people haven’t been focusing on Mexico as much as they should.” Economists say Mexico’s domestic commerce, telecommunications, finance and real estate stand out in particular as high-growth sectors. They also point to the country’s advantage over Brazil and Chile — its geography and industrial mix make it less vulnerable to euro crisis shocks than other emerging markets. Also, because Mexico exports more manufactured goods than commodities, its trade is less vulnerable to sudden drops in commodity prices.

Most money managers in Florida say they prefer to gain broad exposure to Latin America through exchange-traded funds that spread their holdings across the region’s largest economies. Bill Stone, investment strategist with PNC Bank, says he likes both ETFs with broad exposure and those that track specific countries in Latin America such as Brazil and Mexico. Some examples are iShares MSCI Emerging Markets Latin America Index Fund or the country specific iShares MSCI Brazil Index Fund. Stone says top-ranked Latin America-focused mutual funds also are attractive as portfolio diversifiers. “We believe in the emerging market story,” he says.

Sunday, April 8, 2012

Commodity Prices Sag; More Downside Likely

Looks like no shortage surprise surprise! Aivars Lode thanks Ted for the Olson update.

With a number of technical oscillators on weekly charts bearishly
positioned, the Reuters/Jefferies CRB Total Return Index continued to
slip last week, extending a decline that originated in late February.
Natural gas prices have led the path lower and have proved to be the
weakest. Despite oversold conditions and a reduction in drilling rigs
from 886 a year ago to 647 now, some observers predict that sub $2
prices will arrive soon. In contrast, gasoline prices have increased
steadily and are now at uncomfortable levels. Nevertheless, the notion
of rising commodity prices has been waning in recent weeks due to
diminished expectations for another round of quantitative easing (QE).
In turn, this has resulted in lower precious metal prices as well as
lower prices of copper, nickel and aluminum.

A number of grain charts, including soybean, wheat and corn, also
suggest that a correction to lower levels appears likely over the
months just ahead.

Friday’s weaker-than-expected employment data, however, could revive
the idea that QE is not entirely off the table. Increased signs of a
more pronounced decline in global growth (particularly in the Euro
zone and China) might also raise the prospect of more QE in the months
just ahead.

For now, the Reuters/Jefferies CRB Total Return Index appears to be
aimed for a test of key “cross” trend line support located at the
293.50 level. If that level fails to hold as support, however, the
worry would be that a solid extension to the downside could result.
While troublesome for commodity producers and farmers, such a break
would be very positive news for consumers as well as for companies who
are large commodity users. That being said, it is worth keeping a
sharp eye on the 293.50 level.

Jim Donnelly, Olson Global Markets