-- Posted Sunday, 1 February 2009 | | Source: GoldSeek.com
By Andrew Mickey, Q1 Publishing
“MICKEY!”
“Yes, sir?”
“What is this mess? How tough is it to build a coat rack? Fix it!”
We just threw our coats in the corner. We’ve been putting them there for months. We thought nothing of it. That’s just where our coats went.
That all changed one rainy day when our commander stopped by and went crazy over a few of our coats drying in the corner. I thought the reaction was a bit extreme, but I guess that’s just the way things were. Anyways, how hard could it be to build something to hang our coats on?
Well…I was about to learn – the hard way. But what I learned while making this coat rack will help us make an absolute killing in infrastructure stocks over the next six months.
Time Isn’t Always Money
I was a young airman at the time. I had just been in the U.S. Air Force for a couple years and had been relatively immune from the bureaucracy. I wanted to be left alone, so I pretty much did as I was told. I just counted down days until it was all over and I could access my MGI Bill for school (keep in mind, these was the pre-Obama days when paying for college was your own problem, not the government’s).
I drew a rough diagram of a board with six pegs in it. It took about 30 seconds. In practically no time I was off to the Housing and Maintenance Operations Center (I forget the real name of it, I’m sure it was much longer – and therefore, important). I knew they had saws and wood there, so I figured it was a natural place to start.
I stopped in and said Colonel So-and-So (names really never mattered, but referencing someone of high rank would get you the attention) sent me over here and I need to build a coat rack and held up my scribbled design.
The contractor just laughed.
“You’ve got to go to this and that office (again, I’m not very good with names) to get pre-approved for a ‘material adjustment to a government owned or operated structure’ before coming here. See you next week.”
“Thanks, but if you look at my diagram here, it’s about a two-hour job. That’s including time for the glue to dry.”
He looked me up and down, could see that I was only about 20 years old and still quite unfamiliar with the “way things work”. He just laughed a bit more.
It didn’t take long for me to figure out what was so funny.
To make a long story short, a two hour job turned into a three week affair. All told, the total project probably cost $50 in raw supplies (a board, nails, and wooden dowel rod – this is government wood mind you), 13 signatures, and at least $5,000 in labor costs (writing letters of approval, filling out all the necessary forms, safety training – I was using a hammer which wasn’t in my official job description so I needed “training” - etc.).
It was one of many ridiculous affairs which helped me learn first-hand how truly inefficient the government is. It will, however, help us take advantage of the coming bust in infrastructure stocks.
The Truth About “Shovel Ready”
Earlier this month, we looked at the headlong rush into infrastructure stocks.
“Obama is coming! Obama is coming!” was the rallying cry. Stimulus was the word of the day. And all things infrastructure were as hot as ever.
None of it made any sense though. The market glossed over reality. Contractors are willing to place bids which only covered costs, 91% of U.S. construction is done by private firms, etc. It’s going to be a fight for all the government contracts and the lowest bidder will be the winner (in most cases).
Earlier this month we were anticipating $60 billion in infrastructure spending. With the House of Representatives bill, that’s down to almost $40 billion. Remember, only 9% of infrastructure projects are completed by public companies. So that leaves less than $4 billion to be spread across all the public infrastructure companies. That’s not going to amount to much for these companies over the next year or two.
And, of course, what does “shovel ready” really mean? Let’s have a look.
The nation’s mayors have identified about 11,000 or so projects as shovel ready. Everything from tennis courts to duck ponds to pothole repairs (even the hiring of a few police officers were thrown in there as shovel ready – I’ve read the whole list).
So the House of Representatives have set aside $40 billion for infrastructure projects. Now the ball is in the Senate’s court. They’ll surely increase the amount of money devoted to infrastructure. I’d bet $60 billion. That way they can say, “we increased the infrastructure spending 50%” and spin it some way so they come off as really great leaders.
Then it goes to the President’s desk to get signed. This probably won’t take long because we need urgent and decisive action. From there, that’s where the fun begins.
The money will be sent to the state governors for distribution. This is where local politics, which is far more corrupt and not very closely watched, plays a huge role. The money will be stuck in committee after committee as the state government decides who gets the money.
In the end, billions will be spent on planning, oversight, and contracting. Whatever’s left will make it into projects, the majority of which, likely won’t even start for at least nine months from now.
Basically, I see know way this part of the stimulus won’t be eventually viewed as an utter failure. I don’t tell you this to get you upset or beat you down, it’s because a chance to make lemonade from this government lemon exists.
A Disciplined Approach
In due time, the markets will realize the rally in infrastructure stocks has no foundation. Now, I realize in yesterday’s Prosperity Dispatch, one of the mistakes we identified that most investors make is they “believe the market is wrong” way too often. And there are only a few times you should bet against the market.
When you consider the run-up in infrastructure stocks (across the board they’re up between 50% and 100% since November lows), the complete and total lack of foundation for the rally, and the fact the market has priced in a lot of good news from federal government spending plans, this would be one of those times to bet the market is wrong.
Basically, if (or when) the Senators play the hero role and arbitrarily increase the amount of infrastructure spending in the bill, there could be another pop in infrastructure stocks. At that time, it’d probably be a good opportunity to stand up and say the market’s wrong.
A Word of Caution
Now, I realize investors with a long-term horizon (10 years+) would certainly be interested in infrastructure related investments. India is coming off a baby boom and desperately needs infrastructure. China’s economy, although it will have to go through very drastic shift, needs a lot more infrastructure
When it comes to infrastructure investments, I’d focus on the places which have a need for it, the means to pay for it.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
-- Posted Sunday, 1 February 2009 | Digg This Article
| Source: GoldSeek.com
