Man, that was a great week, wasn’t it? Those crazy Greeks were stuffed with a bailout they may or may not have really needed, but at least they don’t need to collect taxes for a little while longer. Stocks went crazy as expected and OH! Forgot! QE2 ended, too.

Feels great. Makes me wanna buy stocks again.

Not.

At least, not yet. We have one more hurdle before we can start mending consumer confidence. We gots to get that whole debt ceiling thingy fixed. We can’t have Uncle T raiding the coffers and inciting savings and stalling spendings and all sorts of other-ings. Or maybe not? Maybe our leaders can actually curtail spending such that we don’t need to raise the debt ceiling?

BWAAA-HA-Ha-Ha-Ha!!! Oh man, I kill myself sometimes.

No sirree Bob, we need to raise that debt limit. We do all recall what happened to the market when it was questionable whether or not Greece would get the bailout it did or did not need, right? Can you imagine how the conversation starts when Congress starts to debate our debt limit?

“Oh, c’mon guys, look at the market, it’s ripping. It must mean the economy is fine, and therefore tax receipts will go up, and therefore we don’t need to raise the debt ceiling because we will suddenly be able to pay for it all. Shit, we should give ourselves a pay raise for being so smart.”

“Yeah, I don’t know what Bernanke and Obama are whining about. In fact, there is so much money about to come in, we should just head it off at the pass and lower taxes first. And give ourselves raises. Shee-it.”

Yeah, this one’s going down to the wire. I don’t think the market is going to like it.

On the other hand, folks are pretty bullish right now. I am seeing and hearing lots of bits and pieces about beats on recent company reports and stocks responding appropriately. I am also seeing lots of selective reports on these beats, in particular one JPM report stating that the S&P500 companies reporting so far have beat expectations – but this report distinctly left out out MU which is still trying to regain its pre-earnings price level. We will need to look at that more closely and without the polished veneer of sell-side bullishness.

Meanwhile, The PPT says the market needs to be shorted. I traded my early-week burlap hat for a bandanna and added a pair of burlap pants. I think I will stop there as I like the idea of running half-naked Rambo-style out of the woods and waving my gun around calling for the end of the world, likely about the time The PPT says the market should be bought.

See what happens when you short stocks for too long?

This is pretty funny. A pretty common phrase around here is “Dump a losing trade.” Sick a quant on the phrase and this is what happens.

Wow, look at this. From death-and-destruction to getting that little tickly taint feeling. All in a matter of weeks.

I am pretty happy with my rally. My bull-toad treated me well, but it is time to tuck him under my arm and look for my bear-toad. I am 2-for-2 now and ready to press my luck.

Adhering to my rule of trading the 3x’s off The PPT signals through this summer’s chop, it is time to sell my 3x bull position. This suggests I pop into a 3x bear position, but I am not convinced this is the absolute top of the current rally. We have a beginning of the month trade ahead of a 3day weekend which feels like it ought to be bullish, too. I will short a little TNA today just so I can sleep at night. I will add to this position in two more chunks if the market continues to climb. All I will risk is what my 3x bull-toad gave me over the past couple of weeks.

Going on to what makes me worried about this market, we have had a steady stream of misses and negative pre-announcements leading to stock evisceration. This is not occurring just in the tech space. I have not done an actual tally yet – I am sure some sell-sider somewhere is feverishly checking news reports and will summarize things nicely for us soon – but it sure feels like the bulls are losing so far. I think it continues through earnings season.

So as I shed my shiny suit and gaze into my closet filled with burlap, I reach in for simply a burlap hat. I expect to be fully clothed in burlap within a week or two.

Before pulling apart that file I posted previously, I thought I would go for the ‘quick and easy.’ Utilities are broken out nicely in GICS codes so it is easy to just scan across and see what it says. A little background first.

“We have an aging utility infrastructure on the verge of needing replacement. Most generating assets are near end of life. Investments in T&D lag because of NIMBY (go check out the fine work of Southern California indians on utilities, which is very similar to the work done by the same folks on nuclear waste transport). Global warming concerns have stalled new generation plans, and we are no closer to having a new nuclear power plant built than we were 10yrs ago. Rolling blackouts are the norm in more places than California.”

K-Pow! This should be a slam dunk! No dissecting of the data needed, should be a clear indication of declining capital intensity with utility data stacked up nice and easy to see. Here we go, a chance to prove in very simple terms something I had been chasing for quite some time. Let me show you how it’s done.

Hmmph. Damn if those utilities aren’t investing. It turns out utilities have been building like crazy. No idea what the heck they are building, but at least we can see our increased utility bills in the capex they have spent over the past 20yrs. As a group, utilities spent ~18% of 2010 revenue – money from you and me – to build more stuff. Around 6yrs ago, they spent ~11% of revenue building more stuff. That’s a pretty nice jump. Looking at the averages over the past couple of decades, 18% is near the top of the range, so it is hard for me to believe capital intensity increases in the coming years. In fact, it looks like capital intensity among the utilities could actually go down.

Well that stinks. Another really good bull case shot to shit. In the case of looking at utility capex and determining who would benefit from potentially rising capital intensity, I am now more inclined short than long on the PWRs of the world. That is, if I really thought my utility bill had a chance of going lower. Instead I will just leave the whole thing alone and look for other ideas.

Back to the original idea that our utility infrastructure needs help. What more can we ask of the utilities if they are already spending almost 20% of revenue to build out capacity? This capex is passed on to the rate base, so it is not as if taxes are paying for it (though you could argue different in regulated markets…). The NIMBY hurdles get a lot of press, but would the utilities be able to build faster without NIMBY? What would capex go to – 30% instead of 20%? Can you imagine what your utility bill would look like given capex gets passed to the rate base?

In one fell swoop, I am off my high-horse banging on utilities and NIMBY and an aging utility infrastructure. Honestly (and I know I am repeating myself), how much faster could the assets be replaced?

Back to the drawing board. Gonna look at refiners and then telecom. This will require me to pull out separate tickers since the GICS codes don’t differentiate enough.

I had this grandiose post in mind, bristling with flowing prose and insightful analysis. As I thought more and more about it, I realized that a large part of my ideas were based on feelings I had from the superficial reading I had done on each of the various industries. Granted, it’s a start, but I am doing no one a service by acting like an expert when in fact I am regurgitating a framework brought on by scant newsflow. I am reminded of when I tried to take on telecom from a 30,000ft view and had to step back and say “Whoa! that’s big.” Some of these other things are just as big or bigger.

As a reminder, my goal is to find industries that need to invest and then look at companies providing the picks and shovels. The starting point was looking at declining capital intensity and increasing end market prices. Let’s start at the beginning and poke some holes, shall we?

The definition of capital intensity is capex divided by sales. The idea is to determine what level of capex is required to sustain sales. There are all sorts of issues with this idea and all sorts of things to keep in mind when looking at the data of individual companies. What sort of efficiencies are at play? How does inflation impact capex today vs 10 years ago? Is new equipment more capable than it was 10years ago? Is the company growing or is it in some sort GDP related steady state? You get the idea. It is very easy to toss stones at this glass house.

But it is a great starting point to chase down specifics. You can look at a group of companies in the same industry to see how things trend as a whole and then look deeper. Take chips for example, a recently famous sector for rising capital intensity. If you see capital intensity declining over time and know that further growth requires more investment, a higher capital intensity going forward combined with a previously declining set of capital intensity metrics is a good place to look for growth. I am guessing oil is another area where we would find a similar characteristic.

So here we are. Many of these industries I really don’t know much detail about but I am guessing this data will give an idea where to look. I started with the Excel file of S&P500 constituents from the S&P website, sorted it by GICS code, and then started throwing formulas at it, hoping to see something magical pop out at me. Not so easy.

Turns out the GICS codes are pretty broad.  So I started breaking things down within the GICS codes. I found I had better luck picking a bellwether and then heading for Google Finance to look for associated companies and then grouping those companies for comparison. Google Finance links these things through something like a GICS formula, I am sure, but I am in no mood to invest the time to discover what that formula might be in the Factset universe. So I thumbed through the S&P500 looking for companies that invest in capital equipment.

Which brings me back to what I said above. In the end I thought it would be best just to pass on the info. So here you go: S&P500 estimates and past 20yrs capital intensity as broken out by individual company in an Excel file. Go crazy.

I will use this to chase down specific industries over the coming weeks and start looking at specific companies afterward. I am in no rush. I don’t plan to buy anything during this adventure until sometime in August or September.

Recent failures aside, Bill Gross proves once again he is a flaming idiot.

There are two reasons we pay taxes: protection and education. Without either we slide backward into darker times.

I won’t argue that our taxes are diluted or sometimes diverted elsewhere, and I won’t argue that the cost of education – college or otherwise – is too high. That doesn’t mean we stop in these most basic ventures.

But his first line

A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college?

identifies himself as someone who has given up on America. I guess that is already obvious given his public forum. Whatever, he clearly has no idea what will bring this country up from its current doldrums.

It amazes me that someone with so little faith in the country whose populace has entrusted its money for him to invest, can say things like this with a straight face. Let’s hope Bernanke continues to push this ancient motherfucker toward that manhole just a few steps away.