"Why are all these coats in a pile? 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 lying in the corner while they dried. 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 some pretty good gains in infrastructure stocks over the next few months.
Time Isn't Always Money
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. That was the easiest way. I just counted down days until it was all over and I could tap into my MGI Bill for school (keep in mind; these were the pre-Obama days when college wasn't a birthright).
It took me about 30 seconds to sketch a rough diagram of a board with six pegs in it. 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, more important). I knew they had saws and wood there, so it seemed like a good 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 to build a coat rack as I 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.
There is No Such Thing as "Shovel Ready"
Earlier this month, we looked at the hot money chasing down infrastructure stocks.
"Obama is coming! Obama is coming!" was the rallying cry. Stimulus was the word of the day. And all things infrastructure were getting a lot of attention.
None of it made any sense though. As usual, the market temporarily 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). This will hardly be a boon to most infrastructure companies.
But that didn't matter one bit. An estimated $60 billion in infrastructure spending was in the offing and some companies were going to benefit.
However, with the House of Representatives recently approved 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 and my cholesterol probably increased 10% just by reading the amount of pork that was in there).
Regardless, 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 they'll take it up to $60 billion. That way they can say, "We increased the infrastructure spending 50%" and spin it some way so they come off as righteous 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 nearly as closely watched as the national level chicanery, plays a huge role. The money will be stuck in committee, advisory boards, contracting approval departments, and every other layer of bureaucracy the state governments already have in place. Even if these projects are "fast-tracked," it's still going to take months for the money to make it to the front lines.
In the end, billions will be spent on planning, oversight, and contracting. Whatever's left will make it into projects.
Basically, I see no way this part of the stimulus won't be eventually viewed as an utter failure (well, that is unless we count the virtually uncountable "saved" jobs). 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 is out there.
A Disciplined Approach
In due time, the markets will realize the rally in infrastructure stocks has no foundation. Now, I realize in Thursday'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.
The world needs a lot of new infrastructure. India is coming off a baby boom and desperately needs more infrastructures to provide the basic necessities to its growing population. China's economy, although it will have to go through a very drastic shift over the next few years, needs a lot more highways, rail systems, etc.
Of course, there's also Indonesia, Singapore, Vietnam, Thailand, and on and on. The United States is right there too. The American Society of Civil Engineers recently gave the U.S. infrastructure a "D" grade. Which, to be clear, isn't anything new. The U.S. has been near the bottom of the class for quite a few years.
There's a critical difference between these countries though. All of them want infrastructure investments, but not all of them need it. For instance, about 20% to 30% of India's farm production rots on its way to the end consumer because of its outdated transit system. In the U.S., on the other hand, a few potholes have never really gotten in the way of getting food distributed to the population.
Also, many of these countries have been saving for years. They have the need and the means. They're not focused on how jobs will be created by a certain project; they're thinking how much economic benefit will come from a project. It's the other way around in the U.S.
That's why, when it comes to investing in infrastructure for the long term, I'd focus on the places which have a truly dire need for infrastructure and the means to pay for it and disregard any one-time boosts in the other countries which may have a perceived need, but are without the means and the will.
updated Feb 01, 2009
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