Friday, December 31, 2010

Alfidi Capital Report On REIT ETF Valuation

A brand spankin' new special report is available as of right now on the Alfidi Capital main website.  It's a description of a methodology for valuing a REIT ETF.  It even comes with its own fully-functional valuation template that analysts can tweak to their heart's content. 

I'm productive even on New Year's Eve.

Ring Out 2010

I'll make this fast so you can all go enjoy yourselves tonight.

The U.S. stock market had a good year in 2010 but that doesn't nearly make up for the fact that stocks' performance over the past decade has been the worst since the (previous) Great Depression.  I am fortunate that my net worth is much higher now than it was in 2000. 

Bonds had a terrific year thanks to all of the artificial demand from quantitative easing.  That effect is starting to backfire.  Yields on the 10-year Treasury are heading back to where they were at the beginning of the year.  The bloom will come off this rose thanks to out-of-control central bankers

Real estate . . . don't even get me started.  Read my blog posts for the last week or so to see the downward trend restarting. 

Now you can go have your fun.  Drink responsibly.  Have a designated driver, call a taxi, or take mass transit.  Try not to throw up on your clothing or your date. 

Thursday, December 30, 2010

Stupidity Guarantees More Crises In Finance

Stupidity isn't just confined to high-school dropouts.  Think-tanks do it too.  I've never heard of the TaxPayers' Alliance or Legatum Institute, but their theorists probably smoke the same jumbo-sized crack rock as the folks from our own Cato Institute.  They claim global regulation causes global crises.  That's cute.  The problem I have with that stupidity is that the credit crunch occurred in the absence of global regulation.  What is it with Right-Libertarians?  I used to drift that way myself until I realized the real world was nothing like Ayn Rand's fiction.

More stupidity will like this will bring on another crisis.  We're already well on our way there.  Europe hasn't learned a thing from watching the PIIGS flirt with disaster.  U.S. policymakers haven't learned that housing prices need to drop further for market equilibrium to take hold.  Global investors haven't learned that their risk appetites are being stoked by the Federal Reserve's quantitative easing. 

Here's a learning point for the rest of us.  Europe and other established economies may be on the ropes for a while, depressing their equity markets.  The iShares MSCI EAFE ETF is trading at a P/E of about 12 thanks to European trouble.  That's a lot cheaper than some other index-based products right now. 

Full disclosure:  Short cash-covered puts under EFA.

Wednesday, December 29, 2010

Spiking Bond Yields Will Accelerate Housing Double-Dip

These things all feed each other.  When our foreign creditors show insufficient appetite for our bonds, yields climb:

Treasury market yields rose Tuesday after the government’s sale of $35 billion in new five-year notes drew weak demand. The annualized yield on the notes was 2.15%, the highest market yield on five-year securities since June and up from the rate of 2.04% on Monday on previously issued five-year notes.

When yields rise, home mortgages get more expensive.  Floating-rate ARMs get more costly to service.  Homeowners lose equity faster.  Foreclosures, forced sales, and abandonment follow.  The market-clearing price for homes will sink:

Housing markets have taken a turn for the worse, with the widely followed S&P/Case-Shiller index declining more than analysts had forecast in October, lending credence to the housing bears who have predicted a double dip.

Those of you who bought houses as rental properties in 2010 made mistakes only if you went into debt.  That debt will be hard to service as deflation puts a ceiling on prevailing rents. 

Oh, before I forget, let's note that China is reducing its export quotas for rare earth metals.  This has nothing to do with the above, but everything to do with the gradual shift in prosperity from the Anglo-West to the East.  Tesla Motors will have a very hard time getting lithium for its batteries unless it digs its own mine in Afghanistan.

The Haiku of Finance for 12/29/10

Holiday shoppers
Spent all of their cash, went broke
Golden years are gone

Tuesday, December 28, 2010

Chinese Underground Lenders Signal Frothy Top

America had its freewheeling mortgage brokers during the housing bubble.  Those generators of unregulated, undocumentable mortgages catapulted the U.S. housing market over a cliff.  China now has something comparable with legions of underground lenders serving small businesses:

Second-quarter figures from the Wenzhou branch of the People's Bank of China showed that 89 percent of local people and nearly 57 percent of enterprises had either borrowed from or made deposits at non-bank finance companies.

You would think China's larger banks would take this as an opportunity to develop a market for commercial paper.  Lack of such a development illustrates the immaturity of fixed income trading in emerging markets.  Investors drawn to emerging market bonds need to take heed. 

I'll take this as a sign of an approaching top for China's own bubble. 

Full disclosure;  Long FXI with covered calls and cash-covered short puts.

YRCW New Counsel Notable For CEO Stint

YRC Worldwide hired a former CEO as its general counsel.  It touts his background in external affairs as a nod to the cooperation they'll need from creditors in recapitalizing YRCW's balance sheet.  A deeper reading of this is that his experience merging Embarq into CenturyTel may come in handy if YRCW is secretly looking for an acquirer.  Embarq was Sprint Nextel's local phone service, carrying data traffic over local private line switches.  That sounds almost like the telecom equivalent of an LTL trucker. 

Speculation means nothing at this stage.  Any potential suitor would face just as many financial and operational headaches as the current turnaround team.  Note that one of the keys to CenturyTel's acquisition of Embarq was its agreement to assume $5.8B of the target's debt.  It is not clear whether Arkansas Best or Con-Way or some other suitor would be so willing to save YRCW. 

Full disclosure:  No positions in YRCW, ABFS, or CNW at this time.

Monday, December 27, 2010

Newsreel for 12/17/10

Let's see what I missed by not watching television.

Japan's draft fiscal budget leaves economists unimpressed.  Mainstream analysts are looking for signs that governments are serious about implementing austerity measures.  Keep looking, folks.  We won't see seriousness anywhere for a while. 

Ireland nationalizes Allied Irish Banks.  It had to be absorbed even after it needed billions in government support.  The U.S. flirted with nationalizing Fannie and Freddie but chose half measures instead.  More debt cannot cure insolvency. 

The Asian verdict on China's interest rate increase is mixed.  I was too quick to note that the Chinese stock market initially showed a positive reaction to the rate increase, as it finished down 1.9%.  This supports the traditional theory that rising interest rates present a more challenging environment for equities. 

Rising oil prices baffle economists.  This bafflement doesn't prevent leading investment firms from forecasting further price increases.  Good investors don't bother with forecasting.  Knowing the unknowable is impossible.  Commodity prices move randomly over the long term (one year or more) and oil is no exception.  Peak Cheap Oil is probably more of a factor here than interest rates. 

Regulators warn that IT risk systems are still weak.  They will always be imperfect.  The complexity of the products and indicators they track makes them vulnerable to Black Swans.  Human managers can always override risk protocols if that what the boss wants.  A better solution is to keep investment products simple and prevent sales managers from dictating results to analysts. 

I'm still not interested in watching television.  I didn't miss anything important. 

The Haiku of Finance for 12/27/10

I fight corruption
Those who defraud and deceive
Shall be defeated

Did Baby Boomers Trade Retirement For Christmas?

We've heard this refrain before.  Americans approaching their golden years haven't saved for retirement: 

Through a combination of procrastination and bad timing, many baby boomers are facing a personal finance disaster just as they're hoping to retire. Starting in January, more than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years.

This season's retail results may indicate why this is so.  Shoppers are still very willing to part with their hard-earned money: 

Forget the returns line. People hit the stores after Christmas to buy, indulging the rediscovered retail appetite that may have made 2010's holiday shopping season the biggest ever.

I would love to see a generational breakdown of this year's shopoholics.  Did the Baby Boomers neglect their IRA contributions so they could have a glorious Christmas?  Did the Sixties' hippie kids keep on "living for today" right through tomorrow and the next day?  Did they spend all that they would earn tomorrow so that they could have today?  I know, that last sentence is a reference to an oft-heard line about sacrifice, but in this context it is an apt description of sacrifice through delayed gratification that did not occur at all. 

Entitlement can mean many things.  It can mean an expectation that Social Security and Medicare are fully collateralized insurance plans when they are in fact unfunded liabilities.  It can mean an expectation of ever-expanding material acquisitions with no regard for payment.  If entitlement means all of those things, it ultimately means insolvency. 

Old habits, acquired long ago and repeatedly reinforced, can prove very hard to break.  Unbroken habits will break us all financially.  Merry Christmas. 

Nota bene:  The author is a member of Generation X. 

Comparing PCYC and VVUS

A guy goes into a pharmacist and asks for a painkiller recommendation.  When the pharmacist asks him where it hurts, the guy says, "My portfolio!  I'm thinking about researching drug stocks."

Okay, that was a bad joke.  Pharmacists analyze drug prescriptions, not drug stocks.  Alfidi Capital doesn't profess drug expertise, but there are pharmaceutical firms in the San Francisco Bay Area whose financial statements are available for review.

Pharmacyclics (PCYC) makes drugs that treat lymphomas and cancerous tumors.  Their ROE this year was a stunningly negative 42%, but this is actually an improvement from their five-year average ROE of negative 81%.  PCYC has shown three straight years of improvement in net income, although it is still negative and exceeding total revenue.  The firm has over $70mm in current assets on hand as of this past September, which is probably enough to survive another three years assuming they can stabilize their net losses and properly manage their balance sheet. 

VIVUS (VVUS) makes therapeutic treatments for obesity, diabetes, and other difficulties.  Their current year ROE is slightly worse than PCYC's at negative 43% but shows no comparable improvement.  Indeed, VVUS's five-year ROE is over negative 29%.  Their annual net losses increased massively by 22x from 2007-2009, apparently due to a 50% drop in gross revenue starting in 2008 and a large increase in R&D spending.  VIVUS does deserve credit for holding large amounts of short term investments and keeping its long term debt low. 

These two stocks are not the right fit for my own investment philosophy but investors with specific knowledge of drug research may wish to review their product lines and market positions.  Small pharmaceutical companies are difficult to analyze without an intimate knowledge of biology, chemistry, and the FDA approval process.  The best that other investors and analysts can do is review their financial statements.

Full disclosure:  No position in PCYC or VVUS.

Sunday, December 26, 2010

Rich Is A Quarter Million Annual Income

Right now I'm listening to the weekend edition of Marketplace on NPR.  There's a lot of discussion on the mentality of the wealthy.  Many rich folks don't seem to think they're rich, even if they're centimillionaires.  That's funny.  I would definitely think of myself as rich if I reported that kind of adjusted gross income on my IRS Form 1040.  I'll go with the argument that a $250,000 annual income qualifies an American as rich.

Pundits spent a lot of bandwith defending extension of the previous Administration's tax cuts.  The focus was on redefining wealth upward to portray quarter-million incomes as non-rich.  The meme won thanks to help from mass email lists and the blogosphere. 

The Census has a detailed breakdown of thresholds for relative affluence based on educational attainment.  The data for holders of master's degrees imply that I'm affluent.  I'll buy that.  The odd part is that the people I meet at the San Francisco Opera probably consider me to be unworthy of being affluent.  I'll buy that too.  I'll also buy their real estate out from under them when deflation wipes out their bond portfolios and hyperinflation leaves them too illiquid to pay their bills.

China Prepares To Fight Inflation

China has learned appropriate lessons from America's real estate bubble.  It is preparing a tighter monetary policy to avoid wrecking its economy:

The People’s Bank of China increased key one-year lending and deposit rates by 25 basis points on Christmas Day in its second move since mid-October. The change took effect yesterday.

Normally, raising interest rates is bad for stocks.  It increases companies' borrowing costs and tempts them to pay higher dividends to keep their earnings yields competitive with new bond issues.  China's stock market is reacting much more positively to this news than theory would allow:

China’s stocks rose and yuan forwards climbed to the highest level in five weeks after the central bank increased interest rates for a second time since October, bolstering speculation inflation will be contained.


Chinese stocks like the news because it signals that the government is committed to smart growth policies.  It also means the yuan will be more valuable, signaling to the currency markets that China will indeed let the yuan appreciate on its own terms. 

Will the U.S. follow suit with interest rate increases?  It's doubtful.  The U.S. needs a weaker dollar to keep its exports attractively priced.  That plus credit availability are supposed to keep GDP growth from stalling here.  The U.S. is unable to accept a sharp downturn as the bitter medicine for asset bubbles.  It may be forced upon us anyway.

Full disclosure:  Long FXI with covered calls and cash-covered short puts.

Goldman Sachs Gets Smart On Bonuses

I've had my fair share of skeptical things to say about big firms like Goldman Sachs, but I do take note when they do something right.  Goldman is going to make a greater effort to tie compensation to performance:

The investment bank, based in New York, said in a regulatory filing this week that bonuses will be linked to financial benchmarks that might include return on equity, earnings, or the price of Goldman's stock or other securities issued by the company.

The good news is that top executives will have their fate tied more closely to the long-term health of the firm, so closing some big deals one year won't have an outsized impact.  The bad news is that this kind of structure tempts executives to play games with reported earnings and leverage that can skew compensation upward.  Please, Goldmanites, don't wreck your balance sheet just to shoehorn an extra dime into your deferred compensation account. 

The Limerick of Finance for 12/26/10

Holiday shopping went well
Retailers had plenty to sell
Spending cash is such fun
And when it's all done
After-holiday deals ring a bell

RIP Roy Neuberger

It's rare to see passion for the arts and finance combined in a single human life.  Roy Neuberger, founder of investment firm Neuberger Berman, lived such a life.  Mr. Neuberger passed away recently at the age of 107.

I honor him for achieving his stated life goal of using a finance career to promote the arts.  Too many investment professionals get those priorities reversed, using connections in the arts community merely to further their own pecuniary interests.  He was fortunate to begin his career with substantial wealth, and lucky enough to preserve it through the Great Depression.  Luck is an inescapable part of all success.  That luck later enabled him to support the work of countless artists. 

Good job, Mr. Neuberger. 

Saturday, December 25, 2010

Christmas Geese And Black Swans

Christmas has come but I'm not sure if the geese have gotten fat.  The old nursery rhyme at that link is a comforting reminder of simpler times and timeless values.  When the holiday ends, the real world returns.  What surprises could be in store for us?

State and local finance troubles can sink the municipal bond market.  This subject is getting beaten to death.  A "bond market collapse" does not mean funding will be permanently unavailable to governments that need it.  It does mean that interest rates will be much higher for solvent governments when bond investors freak out at municipal bankruptcies.

The PIIGS can still cause more trouble for Europe.  The EU's critical constitutional weakness is its reliance upon the sovereign authority of its constituent nations to raise taxes.  A truly continental budget would allow the EU to issue its own debt as raise taxes to fund things like debt bailouts.  Lack of that mechanism means the EU will need outside help if Portugal and Spain can't pay bondholders.  If the IMF can't help, China shows every willingness to step into the breach.  This is a convenient window for China to diversify away from the U.S. dollar. 

Real estate foreclosures could send the banking sector back into a tailspin.  Mortgage-relief programs aren't working out very well for many participants.  Healthy retail sales are helping commercial property owners collect rents right now, but it's hard to say how much of those sales are just future demand pulled forward.  Try sustaining this spending splurge with structural unemployment staying high for the forseeable future. 

The Sun could go supernova.  Hey, you never know.  Gotta cover all the bases. 

The events mentioned above may not come to pass.  Black swan disasters can have six-sigma probabilities, but they can still happen in an investor's lifetime.  Risk management techniques abound.  Muni bond risk can be hedged with credit default swaps (for large holdings from single issuers) or with options on a muni bond ETF.  Risk of a euro collapse can be mitigated by holding multiple currencies.  Real estate exposure is harder to hedge; REIT ETFs are optionable but the best tools are nonrecourse mortgages and free-and-clear ownership.  I know of no hedges against supernovas, so perhaps one of my super-intelligent readers can invent a working starship affordable for the average family. 

The Haiku of Finance for 12/25/10

Mystery shoppers
Do they track retail spending?
There's a lot to see

Friday, December 24, 2010

Shoppers Made Christmas Worthwhile

Congratulations to the American consumer.  You've truly outdone yourselves:

Shoppers came back in force for the holidays, right to the end. After two dreary years, Christmas 2010 will go down as the holiday Americans rediscovered how much they like to shop.



Never mind that real unemployment is over 20% and largely structural now.  Never mind that home prices will have to drop by another 23% or so to revert to their historical mean.  Never mind any of that.  It's time to party like it was 1999, when American civilization was probably at its apogee.  Maybe Americans deserve one final blowoff before the economy heads back down into the gutter.  Everyone needs some kind of Golden Age they can refer to in their memories. 

Thursday, December 23, 2010

Saudia Arabia's Fiscal Reality

The Saudi government is basing its fiscal budget for 2011 on a world oil price of about US$50/bbl, which is more than a third lower than the current market price of US$90/bbl.  It is now drawing on reserve funds and deficit spending to keep its multi-year US$400 billion infrastructure improvement program on track. 

Saudi Arabia is very concerned about its ability to sustain its infrastructure projects in the face of both slackening oil demand (from a possible global recession) and constrained supply (from reservoir depletion).  Despite Saudi Aramco spending $100 billion on improvements in production capacity to 12 million bbls/day, average daily output in 2009 fell by 11%.  This inability to raise production may be more a function of dwindling reserves than insufficient infrastructure.  They may be throwing good money after bad in the face of Peak Oil, much as Dubai did. 

Wednesday, December 22, 2010

YRC Worldwide Asks For Stay Of Execution

YRC Worldwide is looking for a way out of a death spiral debt trap.  Its creditors are giving it a little slack, but other stakeholders may not be so understanding:

YRC Worldwide is asking the Teamsters union and pension fund managers for more time to restructure the trucking company’s troubled balance sheet.



I have to hand it to YRCW's management.  They manage to stave off one short-term disaster after another.  The Teamsters are a different story.  The new creditors' agreement may embolden them to ask for accelerated reinstatement of the pension plan contributions they surrendered. 

Recapitalizing a balance sheet involves writing down debt and/or injecting equity.  Forget about the debt writedowns; creditors extended the payment timeline with the expectation that their positions won't be written down at all.  That leaves YRCW with a need for more equity in Q1 of 2011.  Hmmm, they just went through a reverse split to raise their share price past the de-listing threshold, so issuing more shares means dilution.  They'll be right back in the NASDAQ de-listing queue with that move. 

I still don't see a happy ending for this company, but comatose patients have been known to hang on for years before either reviving or expiring.  I am not aware of any coma patient who could revive while a cancer was eating away inside them.  YRCW's cancer is its unionized workforce.  It is time to cut them out to ensure survival. 

Nota bene:  No position in YRCW.  I know that's difficult for you Teamsters to comprehend, but you folks can't operate at my intellectual level anyway.  I really only write for smart people. 

Monday, December 20, 2010

Updating The Alpha-D For Dec. 2010

Can you guess what changes I've made this month?  Don't worry, I won't make you do that.  I'll spell them out.

First, my entire TDW position got called away when it went through the strike price.  I bought them all back in a wash sale (albeit at a slightly higher price then the called-away price).  That's the risk I take with writing covered calls on a stock I'll hold forever.  I renewed my short-term covered calls on TDW and even sold some cash-covered puts under the position.  TDW is one stock I'm counting on to deliver long-term returns during Peak Oil.

My covered calls and short puts with GDX and FXI all expired, so of course I renewed them all.  Gold and China are my way of hedging the eventual collapse of the U.S. dollar and so far they're doing fine. 

I sold more cash-covered puts under EFA.  The P/E of 12 still looks good to me.  I'll go long when Mr. Market decides to capitulate on the rest of the world outside the U.S. 

My long puts on LMT and IYR will expire next month.  I set them to hedge against the re-bubble in housing and the mega-bubble in the defense/aerospace sector.  Neither of those bubbles has popped yet.  If they expire worthless I'll net them as tax losses. 

My option sales gave me some cash.  I don't like sitting on cash, so I put some of it to work in a CD and a few T-Bills.  Yeah, that extra buck fifty in yield will put me right up there on the Forbes 400 some day. 

Finally, I've made no moves on KEX, FLIR, SCHW, or other stocks I've been watching since mid-2009.  They're great companies but they're just not on sale yet.  I'll wait. 

Sunday, December 19, 2010

The Limerick of Finance for 12/19/10

Risky stocks have so far gained the most
High performance is what they all boast
But with their junk debt
They're a poor long term bet
The next slowdown will make them all toast

EU Seeks Permanent Solutions To Temporary Problems

Government tends toward overkill in the service of an imperative to "do something" about problems that have natural solutions.  One case in point is the EU's search for a way to prevent future sovereign debt explosions:

European Union leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 as they struggled to bridge divisions over immediate steps to stabilize bond markets.

Solutions in search of a problem don't fund themselves.  They require a demonstrable commitment of other people's money:

The ECB, in charge of monetary policy in the 16-nation euro area, said it would almost double its capital to 10.76 billion euros to cope with bigger credit risk and market volatility. Euro zone members will provide the increase.

Ten billion euros is a drop in the bucket but it sets a precedent for more.  The ECB can always follow the Fed's lead and just print away Europe's debts.  Alternatively, we can all let sanity reign and allow bankrupt states to go bankrupt and wipe out their bondholders.  That's my solution.  It won't happen.

Saturday, December 18, 2010

YRCW Breathes Easier After Lawsuit

Troubled YRC Worldwide got an early Christmas present from the courts:

A federal judge on Thursday dismissed a lawsuit ABF Freight System filed against rival trucker YRC Worldwide and the Teamsters aimed at blocking a labor agreement central to YRC’s survival.

Of course, this does not mean YRCW will survive in 2011 or even turn a profit.  Note the Teamsters' apparent desire for an outsider to buy YRCW and save a lot of union jobs.  Unions will try tactics like lawfare and corporate subterfuge when they're stuck with accepting concessions. 

Full disclosure:  No position in YRCW.

Wednesday, December 15, 2010

You And BS Dress Code Hilarity

I couldn't pass this one up:

It took no fewer than 43 pages for the human resources department at the Swiss bank UBS AG to establish what bank personnel should consider acceptable corporate attire.

The spoiled brats and trust fund babies running You and BS think a detailed dress code can make up for years of poor strategy and illegal tax advice.  Flesh-colored pantyhose would make the perfect stocking stuffer for a certain Victoria's Secret beach bunny manager type I used to know when I worked there.  Good luck getting senior managers to give up cuff links. 

I used to work in one of their San Francisco offices several years ago.  The rich preppies running the show despised my honesty and competence.  They thought I was a joke.  Actually, their dress code is the real joke. 

Nota bene:  I have no position in UBS stock. 

Sunday, December 12, 2010

The Limerick of Finance for 12/12/10

An MBA is a mistake
It's one many workers will make
It's not worth a dime
So don't waste your time
Throw that diploma in a lake

Thursday, December 09, 2010

Smart Transportation Planners Wanted

There is intelligent life in Washington D.C. after all.  The Bipartisan Policy Center is calling for an overhaul of how our government plans its transportation spending.  The short version of a long story is that lack of comprehensive national planning leaves us with a patchy network unsuitable for a superpower. 

Improvement would be welcome news.  It would put an end to local nonsense thwarting the kind of national integration that global industry likes to see.    There is too much of such nonsense today with state governors turning down money for passenger rail lines that would help them build development around sustainable communities.  Shortsighted local politicians have no idea how much their communities will hurt when Peak Oil arrives and they missed the chance to build transportation systems to mitigate its impact.

Nobody likes kinks or hiccups in their supply chains.  Corporations will deploy capital elsewhere in the world where high-speed continental movement flows seamlessly into local distribution.  Politicians ignore this at their peril. 

Wednesday, December 08, 2010

Sovereign Debt Is Never Risk-Free

Let's get one thing straight.  There is no such thing as risk-free sovereign debt.  The European Union had excluded such debt from banks' capital requirements on the premise that it would never endanger a bank's balance sheet.  Now we all know better. 

Allow me to offer the EU a way out of its quandry on how to weight sovereign debt.  Skip the reliance on rating agencies.  Calculate a simple weighted formula for a given nation's bonds covering its entire existence as a sovereign state, then weight a zero value for any years in which that nation's debt was in arrears.  Let's say Country X has been independent for 100 years.  If it defaulted in 1933 and recovered in 1936, that's four calendar years weighted as zero.  The country's bonds thus have an expected value of 96% of their face value. 

My simplistic approach lacks the sophistication of the complex models built by PhDs at credit rating agencies and investment banks.  Those entities have proven themselves incompetent at assessing risk, so the Alfidi method is a clear improvement. 

Tuesday, December 07, 2010

Ireland Beats U.S.

It's hard to admit that a second-rate European economy has a better grip on macroeconomic reality than the U.S.  Today's headlines prove it true.  The U.S. continues on a delusional course of unsustainable fiscal profligacy:

The White House and Republican leaders in Congress reached a sweeping agreement Monday to extend expiring income tax cuts for two years, extend unemployment benefits and cut how much millions of workers pay in Social Security payroll taxes.



Meanwhile, Ireland bites the bullet and sits down to a cold supper of austerity:

One of the toughest budgets in the history of the State, involving substantial tax increases and welfare cuts, is expected to be approved by the Dáil today following the declaration by Independent TD Michael Lowry that he will vote for the measure.

Observers with at least half a brain can see that the reality facing Ireland will eventually face the U.S.  Such observers must be found outside Washington, D.C. 

Monday, December 06, 2010

Newsreel for Monday 12/06/10

Scanning today's headlines brings us gems.

A sluggish housing sector drags down the transportation sector.  You know how economists have been saying that housing recoveries typically lead recoveries from recessions?  Here's what we get when that doesn't happen.  There's no recovery folks!

The Teamsters tried to get two underperforming truckers to merge.  See what happens when unions get too much power?  They try to foist disastrous strategic decisions on their employers.  I have no idea why any executive team would take a Teamster proposal seriously after seeing them try a stunt like this. 

Uncle Sam's DOT is sending big bucks to the states for transportation.  It's too bad that most of it goes to road projects.  Rail and barge traffic is much more economical and energy efficient in moving tons per mile. 

The U.S. and South Korea are almost free trade partners.  There is more to this deal than meets the eye.  America desperately needs to prevent Asian countries from falling into China's orbit as its military supremacy wanes.  Kicking open a free trade door with an Asian tiger is one way to maintain a regional foothold. 

U.S. lawmakers want to continue handouts of all kinds, whether tax cuts or jobless benefits.  Stupidity still grips Capitol Hill.  Our nation's leaders will never wake up to the unsustainability of deficit spending.  Working on Capitol Hill must be like living inside a bubble, where the unpleasant realities of the outside world never intrude. 

Unemployment is finally catching up to college grads.  Now a whole bunch of liberal arts grads can learn their most important lesson in life:  A bachelor's degree in anything except a hard skill is worth nothing.  That degree in women's studies will come in handy when you're panhandling as long as you show some cleavage. 

China raises the reserve requirement for its banks.  This is what we should have done with our own banks!  Once again China shows the world why it is a more responsible custodian of capital.  Let's see if China has the guts to allow some overleveraged banks to implode. 

Sunday, December 05, 2010

The Limerick of Finance for 12/05/10

Bernanke says bond buys are great
But he's got a lot on his plate
Helping bond market out
Will spark a dollar rout
Gee, Fed Board's a job I would hate

The Head-Fake Recovery of 2010

This economy is looking more and more like the early 1930s before the Great Depression really cratered people's hopes.  Green shoots seem to be sprouting into another jobless recovery, like the early 2000s:

Despite weeks of brighter economic news, employers still aren't hiring freely. The economy added a net total of just 39,000 jobs in November, the government said Friday.

This steady drumbeat of somewhat brighter news ignores some major icebergs on the horizon.  Iceberg #1 is the inability of the federal government to come to terms with its addiction to debt, as evidenced by lack of agreement on implementing austerity measures:

Despite receiving a majority endorsement, the president’s deficit commission failed to obtain the 14 vote supermajority needed to pass its $4 trillion deficit reduction proposal as the “official” plan of the commission to Congress.
 

It's very telling that players from both parties know what must be done but cannot summon the courage to do anything.  The bond market will have to do it for them. 

Iceberg #2 is the massive debt burden facing local and state governments, thanks to unfundable promises:

But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.


Anyone counting on their muni bonds to provide comfortable returns in their golden years will be rudely surprised when local governments start going bankrupt.  The foolishness of borrowing to fill gaps in pension funding should go without saying, but this is a new America that our founders wouldn't recognize.  Someone has to point the finger.  I'll gladly take on that job. 

I could go on like this until the cows come home but that would be too, well . . . depressing.  We'll be in for enough Depression soon enough.  The great head-fake recovery of 2010, sustained by unprecedented peacetime deficit spending and the Bernanke Put under the bond market, must come to its eventual end. 

Friday, December 03, 2010

Unemployment Surprise Casts Doubt On Recovery

Still think the U.S. economy is recovering?  Unemployment is getting worse:

The U.S. economy added fewer jobs than expected in November and the unemployment rate rose, dashing hopes that the recovery is gaining momentum.
That rate rose because job growth is not keeping pace with the growth of the working-age population.  In other words, not enough McJobs in retail and customer service are available to absorb the nation's cohort of liberal arts graduates. 

Employment figures are traditionally considered a lagging indicator.  Taken in conjunction with growth in the Non-Manufacturing ISM Report for November, traditional economists might interpret this collective news as typical of an early recovery.  That opinion isn't justified for an economy with a 300%+ debt/GDP ratio. 

Wednesday, December 01, 2010

Fed's European Bailout Details Revealed

Here's confirmation of something that has leaked out in pieces for many months.  The Fed's crisis backstop extended to Europe:

The Federal Reserve revealed details Wednesday of trillions of dollars in emergency aid it provided to U.S. and foreign banks during the financial crisis.

I'm surprised that some of the aid was in the form of revolving credit facilities.  Using it to support short-term borrowing and corporate paper would be one thing, but was this support also used by European banks' prop trading desks?  Inquiring minds would like to know. 

Central banks also drank deeply from the well.  That explains why foreign buyers of U.S. Treasuries haven't balked at buying enormous new bond issues.  They know the "Bernanke Put" in the bond market has supplanted the "Greenspan Put" in equities. 

The global financial elite is uniformly terrified of deflation and is willing to let the U.S. lead a headlong charge into renewed asset bubbles.  How about that. 

We should ask ourselves whether the Fed's new QE2 purchases will first target bond inventory at these same European banks now that the EU is fully engaged in bailing out the PIIGS.  There is no reason not to anticipate a repeat Fed bailout if the EU / IMF rescue of Ireland and Greece falters. 

Tuesday, November 30, 2010

Newsreel For Tuesday, 11/30/2010

I can't find a snappy common theme in any of today's financial headlines so I'll pick a bunch of random items.

Ocean shippers have swung wildly from loss to profit.  This tells me that some major carriers are not skilled at either securing long-term contracts (which would stabilize revenue), hedging fuel costs, managing idle fleets, or all of the above.  Spot rates seem to merit only a passing mention as a contributing cause. 

Striking truckers are teaching India how hard it is to deal with unions.  Competing with the BRICs is more than just a race to the bottom in wages.  It also entails exporting innovations to emerging markets eager to compete on quality.  Sometimes you get the good (technology, Six Sigma) with the bad (unions) that the Anglo-West has to offer.

Consumer confidence (read delusion and denial) is levitating thanks to short attention spans.  This helps explain the great retail sales figures for Thanksgiving weekend.  People are emptying their wallets like there's no tomorrow.  If the U.S. heads over the debt cliff like our European friends, there may not be much of a tomorrow for America's middle class anyway.

Pay freezes are headed for Uncle Sam's workers.  A small ray of sanity shines its way through the clouds of insolvency's gathering storm.  It won't be enough to stop a bond market dislocation but it's the thought that counts.  Justice demands the inclusion of military pay and benefits in any freeze.  No one should be exempt from austerity.  Neither should pensions be spared.

Cities shouldn't be spared austerity measures, and they can read the handwriting on the wall.  Lack of a revenue backstop mean muni bond yields will get a lot more volatile in 2011.  Picking winners in muni issues will attract some serious bottom-feeders.  I'd like to see what my favorite Bay Area governments will offer.  San Francisco's financial position will become even more precarious than it is now. 

Monday, November 29, 2010

Consumers Lose Their Minds Over Thanksgiving

I'm the first to admit it when I'm wrong about something.  I had thought retailers were getting desperate by opening their doors days earlier and starting holiday promotions weeks in advance.  Now it seems they were more greedy than fearful:

U.S. consumers spent an estimated $45 billion over the Thanksgiving weekend, up 9.2 percent from last year, the National Retail Federation estimated in a report that brightened prospects for freight transportation.

Wow.  American consumers are unable to resist the siren call of the shopping mall even when European insolvency screams at them from the headlines.  You'll have to pry credit cards from people's cold, dead fingers before they give up the spending habits that have pushed the U.S. debt/GDP ratio to all-time highs. Retailers stocking up for the holidays probably pushed up trucking tonnage in October.  That's nice for national carriers.  It's too bad that a repeat of this stunning news isn't likely next year, with mounting mortgage losses threatening to push banks back into dire straits.  I'll hazard a guess that the money people aren't sending to their mortgage servicers is what fueled this Thanksgiving rush.

Sunday, November 28, 2010

The Limerick of Finance for 11/28/10

The EU has new bailout rules
With plenty of leverage-based tools
Taxpayers pay first
When the losses are worst
Rich bankers have played them for fools

Saturday, November 27, 2010

Synopsis Of The SF Hard Assets Investment Conference

I made my annual pilgrimage to the downtown SF Marquis Marriott for the 2010 San Francisco Hard Assets Investment Conference.  I've been a pennant-waving fan of this tremendous roadshow since my first visit in 2005, which was the very last year it was known as the Gold Conference.  The name change reflects the broadening base for paid sponsoring companies, who now include explorers and producers of all kinds of minerals. 

The free lectures are always very rewarding.  The two most valuable presenters this year were Tim Wood and Mickey Fulp, who spoke separately on the details of mineral geology and how they determine whether a mining company's ore is economically recoverable.  Here's the most important take-away for investors and analysts:  A mining company's value is ultimately determined by its proven and probable mineral reserves, not the gross amount of "resources" they claim to have discovered.  Furthermore, the economic recoverability of those reserves depend on multiple socio-economic and regulatory factors unique to each property. 

Jim Letourneau warned his attendees about mining executives who manage multiple companies, which reveals that they're more interested in collecting "lottery tickets" on a lucky property than focusing on effectively managing a single project. 

I was disappointed that Jack Lifton was a no-show for his scheduled lecture on Sunday morning.  I was looking forward to his take on the massive surge in attention for the rare earth metals sector.  Jack is The Man on rare earths. 

Brent Cook's lecture gave some credence to the Peak Gold hypothesis.  He noted that world gold production has declined since 2000 and that major gold producers are unable find enough new deposits to make up for lost production. 

A large number of exhibiting companies this year have capitalized on the rare earth metals theme.  Some of the uranium and cobalt developers have apparently realized that their trace findings of rare earths have value after all, although with some producers that value is limited to a marketing hook.  You could swing a dead cat in the exhibit hall and hit half a dozen gold or uranium producers claiming to also hold deposits of rare earths.  Time will tell whether those deposits are recoverable. 

I miss the sporadic appearance of renewable energy producers I've seen in years past. Come on, where was U.S. Geothermal and Nevada Geothermal? I recall at seeing least one of them in years past. They were absent this year. 

Quite a few exhibiting companies had stories worth telling.  Here are some highlights of companies that deserve further analysis.

Inter-Citic Minerals (ICI.TO).  This is a Chinese gold producer with financial backing from leading producer Zijin Mining Group.  I don't recall seeing a Chinese gold company at previous conferences.  China's new strength as the world's top gold producer will bring increasing attention to exploration plays there.  Inter-Citic must be doing something right, because their share price has been hovering around the value assessed by Zijin's private placement in April.  Maybe their claim of a 1:1 resource to reserve conversion ratio is the reason.  This one bears watching. 

Nautilus Minerals (NUS.TO).  Nautilus is a unique company mining one of the last resource frontiers on Earth - the deep ocean floor.  They've exhibited at several conferences in the past and they're still around.  Their share price saw better days in 2006 and 2007 but their technology is too compelling to ignore.  The mining industry can't afford to write off players like Nautilus. 

Dacha Strategic Metals (DAC.V).  Dacha's portfolio approach to rare earth metals sets it apart from exploration and development plays.  Trading these commodities on the open market may negate a miner's operating risks, but stockpiling them carries storage costs.  An investment in Dacha is a bet that large buyers (like U.S. defense contractors) will soon look for ways to fill gaps in their supply chains. 

Dacha isn't the only rare earth story at this conference.  Commerce Resources (CCE.V), Avalon Rare Metals (AVL.TO), Rodinia Lithium (RM.V), and Rare Earth Metals Inc. (RA.V) all wanted a piece of the action.  It's also worth noting that resource companies aren't the only players clamoring for attention at the conference.  One investment bank in particular, Forbes & Manhattan, played a key role in sponsoring several companies' booths.  There's money to be made in natural resource development, and mining isn't the only way to make it. 

A run-down of the show wouldn't be complete without a mention of the Dines Letter spokes-models.  I don't know if James Dines gets his models from the same local agency year after year, but other exhibitors should take note that his booth consistently had heavy traffic.  Those gals give new meaning to technical market terms like "double top" and "bottom bouncing."  See you next year, ladies! 

Full disclosure:  No positions in any companies mentioned at this time, although that may change in the future.  I did not receive any compensation whatsoever from International Investment Conferences, the organizers of the SF Hard Assets Investment Conference and its affiliated shows. 

China Sends Foreclosure Demands To U.S.

China has sent its latest foreclosure notice to the U.S. by way of a People's Bank of China adviser:

The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said.


These are are more than merely helpful suggestions.  Nothing in superpower affairs is ever so innocent.  Each of those three polite hints will serve to strengthen China's strategic position.  China is putting the U.S. on notice that a gradual transfer of its hegemony is an acceptable alternative to China's sudden exit from the U.S. Treasury market.  China wants to avoid a sudden drop in the value of its Treasuries and is seeking a typically face-saving alternative to the "nuclear option" of a bond market selloff or boycott. 

The U.S. is not likely to take the hint.  The bond market will thus have to force Uncle Sam to pay attention. 

Thursday, November 25, 2010

Warren Buffett Truly Earns Medal Of Freedom

The single greatest living investor of our lifetime is going to receive the single greatest honor of his life:

President Barack Obama will name billionaire Warren Buffett one of fifteen winners of the 2010 Medal of Freedom, a White House official said on Wednesday.

No one has done more to exemplify a virtuous lifestyle for an investment professional than Warren Buffett.  He has articulated a comprehensive, common-sense investment philosophy that anyone can decipher and follow and has stuck to it throughout his career.  He has little in common with most Wall Street professionals and that is precisely why he is far more successful than them.

Warren Buffett isn't perfect.  His personal relationships haven't exactly been conventional but he has never tried to hide them.  Some of his investment calls have been less than admirable - like his Goldman Sachs rescue - but he has made them to further the interests of the Berkshire Hathaway shareholders who've entrusted their money to him. 

Congratulations, Uncle Warren.  You've earned it. 

Euro Meltdown Can Split Belgium

Here's a follow-up to yesterday's observations on European debt.  Contagion doesn't just spread internationally.  It can also hit parts of Europe's internal systems that were previously considered healthy, like Belgium: 

In the bars of Antwerp and the cafes of Bruges, the talk is less of Christmas markets and hot chocolate than of the rising cost of financing a national debt which stands at 100% of annual national income. 

Like Ireland, struggling to fend off criticism of its austerity package, there are signs that international bond investors are starting to view Belgium as living on borrowed money and borrowed time.

Belgium faces the additional challenge of internal ethnic tension between its Flemish and Walloon constituencies.  Belgium's problems are a microcosm of Europe's.  National identities reassert themselves because ethnically distinct groups never fully accepted allegiance to supranational governance.  The dividing lines between opposing solutions to Europe's debt crisis are now solidifying along nationalist and tribal lines.  Flemish advocates for austerity oppose their national government's profligacy.  Germany's resistance to further bailouts opposes the EU's desire for unity.

The great European experiment in forging a transnational identity for the Continent is in its sunset years. 

Wednesday, November 24, 2010

European Debts Eating Away At Global Stability

It would take a lot to sink the MSCI EAFE Index.  Markets in Europe, the Far East, and Australasia would have to decline in tandem.  That's the great thing about investing with an index covering multiple parts of the world that are too far removed from a U.S. investor's locale.

One of that stool's three legs is being eaten by termites.  Europe's PIIGS are once again making news:

Anger and fear about Europe's seemingly unstoppable debt crisis coursed through the continent Wednesday. Striking workers shut down much of Portugal, Ireland proposed its deepest budget cuts in history and seething Italian and British students clashed with police over education cuts.

I guess "Old Europe" is getting some more grey hair with all of this stress. Speaking of stress, didn't Europe apply stress tests to its own banks recently?  Yeah, those worked out just fine.  They were designed to hide problems instead of reveal them, just as their counterpart tests in America did. 
Full disclosure:  My short puts under EFA might get triggered next month after all, if European contagion spreads to Asia.

Tuesday, November 23, 2010

Ceres' Hidden Agendas

Everything in high finance happens for a reason.  Ceres, an alliance of institutional investors and environmental interest groups, recently released a ringing endorsement of investments in low-carbon technologies:

Citing potential climate-related GDP losses of up to 20 percent by 2050 and the economic benefits of shifting to low-carbon and resource-efficient economies, investors released a major statement today calling for national and international policies that will spur private investment into low-carbon technologies.

The statement was signed by 259 investors from North America, Europe, Asia, Australia, Latin America and Africa with collective assets totaling more than $15 trillion—more than one-quarter of global capitalization. Signatories included Allianz, HSBC, APG and a dozen U.S. public pension funds and state treasurers. It is the largest-ever group of investors to call for government action on climate change.

Institutional investors don't line up behind public policy changes unless there's money to be made.  There are probably several hidden agendas at work here.  Carbon credit trading is a potentially a huge new market in derivatives for global investment banks.  Any expansion of the physical market for carbon capture and carbon control technologies will mean more market participants in the bid-ask spread on carbon credits. 

Don't forget the importance of infrastructure investing to market makers.  The more national governments spend on infrastructure to lower national carbon production, the more creative financing they'll need.  Pushing $100mm blocks of Build America Bonds would make any underwriters' day.  Ceres should be careful what it wishes for, as some low-carbon investments can easily become boondoggles.  Take this U.S. Department of Energy loan to an unproven company that purports to develop a natural gas powered van for wheelchair users.  Only Uncle Sam would be dumb enough to give a loan to a startup and not ask for a convertible feature that turns it into equity. 

Go green.  Collect the green (money).  Nice business model.

Monday, November 22, 2010

Updating The Alpha-D Portfolio For Nov. 2010

Here's what I didn't change this month.  I maintain my long puts against LMT (hedging the defense bubble) and IYR (hedging the housing sector). 

I also maintain my long holdings of GDX (gold sector bull), FXI (China bull), TDW (energy services bull and compelling fundamental value).  My covered calls on each expired unexercised and I refreshed them.  I also sold short puts under those three securities.  If they remain range-bound, I keep the cash.  If they drop in a flash crash, I pick up more of what I like at a discount. 

Here's one significant change. For the first time in over two years, I wrote a small number of short puts under EFA.  I do not have a long position yet in EFA but I'm willing to risk acquiring some.  I don't mind a Euro currency crisis or Asian capital controls as the trigger.  I consider EFA to be a way to own non-U.S. markets I can't track myself.  I'm not quite ready to take the same approach with SPY because I'm waiting to see whether a bond market dislocation puts the S&P 500 on sale. 

I didn't add much to my fixed income holdings other than buy a one-month Treasury with my cash proceeds from selling options.  The sickeningly low yields on Treasuries reduce the effectiveness of this yield-enhancement approach.  I just need to stay in the habit of rolling cash into F.I.  It will pay off when interest rates rise after the U.S. is forced to live within its means. 

Sunday, November 21, 2010

The Limerick of Finance for 11/21/10

The Irish have asked for a loan
The EU may throw them a bone
That sounds really nice
No one's thinking twice
With more debt Europe sinks like a stone

Saturday, November 20, 2010

The Greatest Generation Goes Greatly Into Debt

The Greatest Generation saved the world from fascism but didn't save enough for retirement.  That's why they have to go into debt to maintain their lifestyles:

Retired Americans are racking up credit-card debt like never before, be it for vacations or medical expenses, and a surprising number have no intention of paying it off before they die.

Several generations of middle class entitlement programs have taught Americans the value of a free lunch.  The trouble is that Social Security and Medicare aren't enough for people who've been conditioned to think that their living standards should keep rising into their golden years.  I can't even begin to understand the mentality of people who feel entitled to buy luxuries but refuse to save enough to afford them. 

It's too bad the Baby Boomers saved even less for retirement than their parents did.  They'll be left with nothing when Grandma's estate is liquidated at auction to pay the credit card bills she ran up on her last trip to Paris.  C'est la vie!  Indeed. 

Our political leadership will never be able to force austerity measures on an audience like this.  That's why they're willing to let the Fed be the bad guy by inflating away the government's unfunded liabilities.

Friday, November 19, 2010

Here Come The Irish, For A Bailout

Students at my worthless alma mater, the University of Notre Dame, had a lot of favorite chants that livened up football games and distracted the home crowd from the poor performance of the Fighting Irish on the field.  One such chant was "Here come the Irish!"  The thinking behind this one was to scare the visiting team into running away in fear at the sight of the Blue and Gold.  It never worked.

This chant may actually be an appropriate way to announce the queuing up of the real Irish for a European bailout.  Irish debt will still be a bad bet for investors but now all Europe's taxpayers will share the pain of a default.  Stalling on needed tax increases won't help Ireland reassure European investors that they can put their house in order.  The EU has learned nothing from dealing with Greece.  Then again, Greece is making fitful progress towards forcing austerity on its people, so there's some slim hope for sanity after all. 

All of this makes me wonder if the iShares MSCI EAFE ETF will be headed down.  Its P/E of 12 makes it almost a good deal but it will take more than Continental-sized defaults to make the price reasonable for entry. 

Nota bene:  No position in EFA at this time. 

Thursday, November 18, 2010

GM Undead

GM has returned from its near death experience.  Without buying into all the Wall Street hoopla aimed at retail investors, I'll apply some common sense before I call it a night tonight.

I wouldn't buy the stock of a formerly bankrupt company that sells a high-cost product in a mature industry.  I wouldn't buy stock in a company whose every operational decision will be subject to veto by the federal government and labor unions. 

Enough said.  That's a wrap for tonight.

Nota bene:  No position in the "new" GM.

Tuesday, November 16, 2010

ABFS Stands Up To Teamsters

ABF Freight Systems gets my vote for company of the year by standing up to corrupt unions!  They are taking the Teamsters to court.  Their challenge to the National Master Freight Agreement may also have the hidden benefit of pushing YRCW over the edge into bankruptcy.  Let that be a lesson to any carrier that doesn't put its unions out of action - they'll be out of business themselves!

Nota bene:  No position in YRCW or ABFS. 

Monday, November 15, 2010

Monday Newsreel, 11/15/10

Let's check the headlines, shall we?

U.S.-South Korea free trade talks aren't necessarily dead yet.  I'm pessimistic.  No way do Koreans want Uncle Sam's QE to have inflationary spillover into their economy. 

A tax-cut extension is in the works.  Fiscal madness continues as our mandarins prove unable to convince spoiled Americans to take their medicine.  This is the perfect fiscal twin to the Fed's monetary irresponsibility. 

Greece raises first itsy-bitsy warning flag that it won't be able to repay the EU and IMF on time.  No kidding.  Maybe all those protestors scared Athens.  What's scarier is that no one in the Western nations seems able to tolerate austerity.  The proverbial man on horseback in each country watches this folly and awaits his chance to put things "back the way they used to be" in exchange for power.  This never ends well.

China is going bargain hunting.  It's spending more on FDI and not just to lock in access to resources.  They probably want to get ahead of any capital controls that emerging nations will erect to prevent the U.S. from exporting inflation. 

Sunday, November 14, 2010

The Limerick of Finance for 11/14/10

APEC wants a big free trade zone
No nation can go it alone
In a currency war
With inflation in store
The U.S. can't throw them a bone

Saturday, November 13, 2010

Inflation Didn't Wait For Fed's QE

Here's an above-the-fold kind of report on a below-the-radar topic.  Even the Drudge Report picked up on this one.  Inflation in non-core stuff like groceries is already at Wal-Mart:

A new pricing survey of products sold at the world’s largest retailer showed a 0.6 percent price increase in just the last two months, according to MKM Partners. At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate.
 

The practice of reporting "core inflation" is worth noting for its fraudulent origins.  It grew out of political pressures during the Nixon-Ford era to underreport the high inflation bedeviling America in the 1970s.  Inflation ended but this fictional statistic took on a life of its own.  It's a shame that members of our mandarin class, like the Fed's governors, don't shop among those most hurt by their monetary policies.  They could then see first-hand the destruction caused by faulty policies like quantitative easing. 

Ask a poor person if they consider their monthly spending on groceries and utilities as something "non-core" to their existence and watch the reaction.  I'll bet it's a combination of shock and awe.

Friday, November 12, 2010

Signs Of Black Friday Retail Desperation

Retailers are starting to panic over the possibility of very disappointing holiday sales.  Toys R Us has decided to open its doors on Thanksgiving with big discounts for fools who think their spoiled brats don't have enough plastic junk.  Sears and Wal-Mart are doing the same.  Nothing is sacred to retail, and some year national retailers will be open all Christmas Day so Joe Six-Pack can impoverish himself some more.  The latest in credit card technology will help low-end Americans spend even more without making the effort to become financially literate. 

Black Friday comes but once a year.  Americans will pay for it all year long. 

Thursday, November 11, 2010

Deficit Commission Hints At Pain To Come

The blue-ribbon panel charged with giving Uncle Sam a way out of his indebtedness hasn't quite finished its report but its leaders are launching their biggest trial balloon yet:

A proposal released Wednesday by the bipartisan leaders of the commission suggested cuts to Social Security benefits, deep reductions in federal spending and higher taxes for millions of Americans to stem the flood of red ink that they say threatens the nation's very future. The popular child tax credit and mortgage interest deduction would be eliminated.

Such clear thinking is rare in Versailles-on-the-Potomac, which is precisely why these proposals won't be adopted until the bond market forces America into action.  Cut the child tax credit?  Joe Six-Pack will be mad that he's no longer being subsidized to bring more squealing mouths into the trailer park.  Eliminate the mortgage interest deduction?  No way will the homebuilders lobby tolerate that.  Cancel Grandpa's Social Security and Medicare?  Run that by the AARP and watch the TV ads scare the bejeezus out of everyone at the old folks' home. 

Americans will react to this with a snore but that's okay because our rulers know us all too well.  They'll print money until one day when annual inflation is at 25% and Grandma's Medicare Part D isn't enough to pay for her meds.  When that day comes, we'll need a new enemy to distract us from our problems and provide a ready rationale for sacrifice.

Wednesday, November 10, 2010

Success And Ethics Only Mix One Way

The NYSE Group's chairman wants us to think that career success in a large organization is compatible with high ethical standards of conduct.  I beg to differ.  The massive bonuses paid out to bank executives under TARP are proof of this incompatibility.  Those executives knew their financial sausage factories were selling mortgage backed securities whose valuations could never be supported by underlying property values.  Anyone raising a red ethical flag during that process would have been canned.  Go along to get along, and you'll get rewarded with big bucks.  Sell that garbage quick with big lies and collect that bonus.  Don't worry about the client getting hurt afterwards when "I'll be gone and you'll be gone."

My post's title hints that success and ethics only mix in one way.  That way is self-employment.  When your only boss is your own conscience, no one can order you to falsify documentation or misrepresent an investment product.  Say "thanks, but no thanks" to Wall Street's hucksters when they try to tell you otherwise. 

The Haiku of Finance for 11/10/10

Perfect trading days
Doesn't pass baloney test
No bank has such luck!

Tuesday, November 09, 2010

Bad News For U.S. Truckers in November

Here's the ugliness in brief.

The Cass Freight Index fell 2.7% from September to October.  Truckers who raised their rates in October made dumb moves.

Wholesale inventories keep moving up.  Truckers, this trend is not your friend, because every parcel in inventory that goes unsold is something that doesn't need to be replenished.  No replenishment, no transport. 

The Ceridian-UCLA Pulse of Commerce Index (a mouthful) is down just a hair.  It measures truckers' purchases of diesel fuel, which is an odd way to estimate logistics activity since it doesn't account for tonnage.  Correct me if I'm wrong.  I wouldn't use this index as anything more than anecdotal evidence for a slowdown as I don't trust econometric extrapolations of GDP growth from just one data input. 

The price of diesel fuel is still climbing, which makes little sense in light of the Ceridian-UCLA index's findings until you consider regional bias.  Refinery outages on the East Coast have a funny way of making prices jump. 

This is all mostly bad news, and yet some truckers like Old Dominion are determined to keep hiking base rates.  I wouldn't do that if I were running a trucking company in this environment.  I'd use the above data in the next collective bargaining round to force the Teamsters to cough up some givebacks.  I guess I care more about shareholder value than being nice.  I'm funny that way. 

Full disclosure:  No position in ODFL.

California's Election Implications

My friends on the Right have lately sent me many republished opinion pieces lamenting the return of a former Governor to his old office in Sacramento.  They are aghast at the prospect of higher taxes.  I am more sanguine. 

Whoever was elected would have to close the Golden State's budget gap somehow.  Folks, it's gonna be either higher taxes or much less spending.  A lot of people will howl either way.  I say cut spending, especially the big white elephant known as unionized babysitting education.  The techers' lobby will fight that and they'll probably win, so everything else will be cut.  Welfare recipients will lose all of their present benefits and then some because they don't have a well-funded union to lobby in Sac-town, so they'll have to shape up or ship out. 

Repealing extra car taxes was a dumb move.  Californians need to be weaned from their addiction to suburbs and long driving commutes so Peak Oil doesn't destroy us, and the car tax was one way to do it.  Those taxes will return. 

The state will cut its pension plan contributions.  The math is unavoidable. 

One conservative columnist mentions California's oil reserves and lack of full-length three lane highways in the same paragraph and doesn't see the irony.  He's never heard of Peak Oil.  My modest riposte is to sequester whatever oil is left in the ground until high-speed rail is built.  Recoverable reserves are civilization's insurance policy. 

The return of a political dynasty is not a cataclysm.  California will still exist long after any of its leaders alive today are gone.

Monday, November 08, 2010

G-20 Tires Of U.S. Hegemony

The Group of 20, responsible for producing 85% of the world's GDP, are learning the hard way about the folly of putting all of their eggs into the U.S. dollar's basket.  Key leaders are staking out positions prior to the summit:

Officials from Germany, Brazil, China and South Africa were among those expressing concern that the Fed's money printing could weaken the dollar, drive up commodity prices and send uncontrollable waves of investor cash into emerging markets.



We can thank the Federal Reserve's loose money policies for making the rest of the world's rich countries go sour on American leadership.  Frustration with the U.S.'s irresponsibility has grown to the point where the head of the World Bank - an institution founded and controlled by the U.S. - is floating the possibility of a new gold standard for global currency exchange

The G-20 will have plenty on its plate besides managing America's relative decline.  Preventing a rare earth trade war is now on the agenda, but this will likely be handled as ineffectively as the group's recent non-accord on managing trade imbalances.  Note how China's actions drive the agenda; their rare earth embargo is a thrust that the U.S. and others must parry. 

Sunday, November 07, 2010

The Limerick of Finance for 11/07/10

Small banks are all going down hard
While big ones turn cash into lard
Chopper Ben is in flight
Giving foreign banks fright
A bank run is not some canard

Pentagon's Plan For Rare Earth Shortages

The U.S. Department of Defense is preparing to release a study of rare earth metals and their importance to national security. This study comes in the wake of findings from the GAO and other sources highlighting the critical role that rare earths and other “technology metals” play in U.S. national security. Media reports indicate that the DOD report will downplay the impact of rare earth shortages on US military applications. 

On Oct. 8, 2010, the DLA Strategic Materials section released its implementation plan for the transformation of the National Defense Stockpile (NDS) into the Strategic Material Security Program (SMSP).  It discusses process, milestones, and program criteria but does not mention rare earth metals as an acquisition objective. The DLA Strategic and Critical Materials Report for FY 2009 lists the materials stockpiled in DLA’s inventory on page 57. The inventory does not contain any rare earth metals

The coming DOD study apparently contradicts the GAO study from April 2010, which clearly indicated that major defense contractors were canvassing their supply chains for assurances of rare earth metal supplies, and that the Hellfire missile in particular is dependent on a special chemical available only from China at present. The National Defense Stockpile has been shrinking since the mid-1990s as policymakers have authorized the sale of resources no longer deemed critical to national security. Washington allowed this to happen without considering how strategic competitors could affect the availability of resources. America's potential peer competitors are not so short-sighted.  China is considering the creation of its own strategic metals reserve. 

The private sector is not waiting to seize the opportunity posed by latent demand for rare earth metals. Goldman Sachs helped finance the reactivation of the Mountain Pass mine in California, formerly a leading producer of rare earth metals. It now forms part of Molycorp (MCP). Another company, Rare Earth Elements (REE) has seen a massive increase in its share price this year due to investor excitement (panic?). Most other rare earth miners and refiners, like Great Western Minerals Group (GWG.V), tend to be small and unpublicized. That may change very quickly if the U.S. government is serious about addressing its potential rare earth supply problems.

Full disclosure:  No positions in any stocks mentioned.

Saturday, November 06, 2010

YRCW Loses Big Bucks In Q3 2010

Nail by nail, the coffin for YRC Worldwide is closing.  Their Q3 loss this year is a great big $62mm, which will come as a big surprise to those penny-stock true believers whose wishful thinking kept them long this turkey.  Way to go.  Tonnage improvements don't matter if they make your company less profitable.

Shedding unused terminals won't help either.  Do the math.  Selling another $40mm or so worth of excess property by the end of the year won't be enough to close the Q3 net loss, let alone mitigate whatever losses are looming for Q4.  I've been 100% right about this company and the Teamsters will never admit it. 

Full disclosure:  No position in YRCW / YRCWD. 

U.S. Slips In Corruption Rankings

One inevitable consequence of the financial elite's capture of America's political machinery is an increase in corruption.  It is easier for observers outside the American political system to notice this trend.  Transparency International has released its Corruption Perceptions Index for 2010.  The U.S. has slipped from 19th least corrupt in 2009 to 22nd this year. 

Implications for U.S. investors are worrisome.  Securities investors who seek to redress fraud through regulatory relief can expect little responsiveness from regulators preoccupied with placating their future employers on Wall Street.  Litigation is still a viable option, provided plaintiffs can fight lawfare from deep-pocketed big banks.  The best option for investors with an axe to grind is to have extensive contacts within a captured system.  Knowing which favors to call in and which levers to push is very valuable in a hollow state. 

Thursday, November 04, 2010

American Empire Goes To India

The Anglo-West seeks a return to a subcontinent it once abandoned.  The new Rome sends its royal entourage to impress the locals in a variety of ways.  A mighty flotilla will project Smart Power (TM) into India's tourist traps.  A royal tunnel will magically appear to protect sovereigns from the sight of unwashed commoners, and BTW it sounds way cooler than your typical red carpet.  Even coconuts are being harvested early lest they mature into ripened ICDs:  Improvised Coconut Devices.  Everything must go according to plan.  Nothing can be left to chance. 

India may very well scoff at this spectacle after it's over.  New Dehli has its own supersonic cruise missile program and a standing agreement with Russia to develop a fifth generation tactical fighter aircraft.  It's not like they need all of America's know-how, but they would like to cherry-pick what they can afford.  The country is also fairly unique among Asian nations in the readiness of its middle class to absorb domestic production that can't be exported.  That's a handy trait to have as central banks threaten to launch currency wars in response to the Fed's inflationary folly.  The trigger for part two of Great Depression 2.0 won't be a reenactment of Smoot-Hawley tariffs.  It will come from the responses of Asian central banks to the inflationary pressures of capital inflows.  India will be ready. 

Full disclosure:  No investments in Indian securities (yet). 

Wednesday, November 03, 2010

Fed Destroys Your Money

The Federal Reserve has just thrown down the gauntlet to China and other big buyers of U.S. sovereign debt.  It has announced that quantitative easing, phase 2 will begin the imminent devaluation of the dollar and continue indefinitely.  The first pile of junk food in Helicopter Ben's shopping cart will probably be junk-bond grade MBS backed by nonperforming mortgages originated by Freddie Mac, that ward of the state that continues to lose your money

I have a small portion of my net worth in short maturity Treasuries that will soon roll over, and an even tinier portion in California muni bonds that mature in late 2011.  Those portions are going to stay small indefinitely (i.e., for as long as the Fed remains indefinitely insane).  The bulk of my cash is looking for a good home in stocks of commodity producers and transporters.  Inflation is on its merry way to your pantry and gas tank. 

Monday, November 01, 2010

The Million-Dollar Job From The Recovery Act

The boondoggle that is the American Recovery and Reinvestment Act of 2009 continues to amuse the remaining independent thinkers in America, namely yours truly.  I wanted to see for myself how recovery dollars are spent in my neighborhood (hat tip to John Robb at Global Guerrillas for locating this tool).  I typed my home ZIP code - 94132 - into the handy box provided.  The result was a colorful map that looked a little like the SBA HUBZone's GIS tool.  I was mildly amused several years ago to discover that I live in one of San Francisco's HUBZones.  Maybe the same GIS mapping contractor got some extra work thanks to the Recovery.gov site.

Anyway, here's a screen capture of the resulting map.



Those numbers in the black box at the lower left may be difficult to read, so here they are in plain text.  A total of $4,769,713 in stimulus money has created 3.70 jobs in my San Francisco neighborhood.  All of those jobs are amalgamations of contract estimates from San Francisco State University, the recipient of pretty much all of the money.  Clicking on the blue dot at SFSU reveals the details of the contracts and grants, primarily for scientific studies.  What's left unmentioned (until now) is that those studies end when the money runs out.  There will be no permanent job growth from the stimulus in my locale.  Those 3.70 jobs created are the weighted averages of probably several dozen part-time graduate students' credited research hours. 

If my rhetoric leaves you underwhelmed, just do the math.  The stimulus spent $1,289,111 per "job" created.  By contrast, I spend about $150 per year on my website and business cards to maintain my own job as a freelance investment analyst and market commentator.  That makes me about 8500 times more effective as a job creation machine than the federal government.  The flip side is that I could probably create 8500 new jobs with the same amount of money Uncle Sam just spent.  Don't believe me?  Fine, just give me that money and I'll show you how it's done.  :-)

Lee Majors played Col. Steve Austin, the Six-Million Dollar Man, in the heyday of 1970s cheesy television long before "Stone Cold" Steve Austin brought a new kind of cheesiness to mass entertainment.  The fictional Col. Austin was the product of a government program designed to create a human being with enormous potential.  The federal stimulus has attempted something similar but with less spectacular results. 

Nota bene:  SFSU became my landlord several years ago when they bought the apartment complex where I reside.  They're a fine landlord but I don't plan to spend the rest of my life here.  I am neither emploed by nor a student at SFSU.