Sunday, March 31, 2013

The Haiku of Finance for 03/31/13

Turn in that report
Boss must review the details
You get no credit

Exeter After Extorre

I haven't checked out Exeter Resource Corp. (XRA / XRC.TO) since after they spun off some of their gold properties as Extorre Gold Mines.  Yamana bought Extorre for US$404M last year, mainly to develop the Cerro Moro property's very good grades.  This begs the question of whether Exeter would have better off if it had retained its Extorre projects.

Exeter's CEO and two Co-Chairmen are all geologists.  That's good.  Given their collective experience, they should have made significant progress on their Caspiche project in Chile by now.  The project info compares it to neighboring projects under development, but the problem with Caspiche is that their 43-101 MII estimates of Au at 0.5g/t and Cu at 0.22% grade are disappointing.  The 2P reserves from the pre-feasibility study aren't all that high either.  Their projected production costs need to be extremely low to make it worthwhile, but their estimated costs of $606/oz gold equivalent aren't all that low.  I'm disappointed that they still don't have attractive 2P reserves after the years they've spent exploring it, and that their projected IRR's are far below the "Rick Rule" 30% threshold.

Exeter's financial statements from September 30, 2012 show cash on hand of CAN$57M and a burn rate of about -$1.3M/month, down significantly from 2011.  They can survive for about two years but they need to show some serious progress in developing Caspiche, mainly by obtaining a deep-pocketed partner.  If they had held onto the Extorre properties the company could have had either a huge war chest from the acquisition or a development commitment from Yamana by now.  I prefer not to invest in companies that miss such opportunities.

Full disclosure:  No position in any companies mentioned at this time.  

Saturday, March 30, 2013

The Haiku of Finance for 03/30/13

Cyprus beatdown plan
Working just as intended
Soon to go global

US And UK Have Their Own Cyprus Bank Plan

Cyprus delivered bad news to a lot of good folks who thought their money was safe in banks.  Don't think it can't happen here, in the U.S. of A.  It can, and it probably will.  The U.S. and U.K. have jointly developed a resolution plan for insolvent banks.  The good news is that the plan is designed to avoid tapping out taxpayers the way Hank Paulson's emergency $800B TARP did back in 2008.  The bad news is that this plan will hit depositors where it hurts.

Bank depositors are in fact unsecured creditors of a corporation.  Think about it; you're loaning money at interest to a business that promises to pay you on demand.  If that business goes bust, you lose what you loaned.  Federal deposit insurance masks the risk that a depositor will not get back all of their money.  I have no problem with depositors taking a hit on sums over and above anything covered by insurance as long as such risk is explained to them in writing when they open a bank account.  Plenty of people don't read the fine print.  I do read account fine print, and I also read financial statements to ensure I stay away from troubled banks.  

The joint U.S./U.K. plan is designed to wind down parts of troubled banks while preserving other parts that provide vital services to the economy.  The goal is to keep thinks like merchant services and check clearing functional while derivatives books are unwound.  The impetus for the 2008 mega-bailout was that viable non-bank companies faced the very real chance of getting locked out of short-term credit markets and not being able to pay their vendors.  That would have destroyed healthy parts of the economy.  No one wants to go through that again. The plan to avoid a repeat of that scenario is now in the public domain and the troika is using parts of it in Cyprus.  The experiment so far is proving successful in keeping the economy of Cyprus functioning.

Friday, March 29, 2013

The Haiku of Finance for 03/29/13

Show me a big bank
With no crony string to pull
They have back channels

TBTF Banks Winning Legal Libor Challenges

The notion that large banks face enormous legal liabilities for their actions during and after the financial crisis is overblown.  A U.S. federal judge just dismissed major portions of a complex pile of lawsuits against banks that manipulated Libor.  The small chance that the remainder of the lawsuits will end in settlements means banks once again absorb illegal behavior as an overhead cost.  This is very normal behavior in a crony capitalist system and indicates very clearly that large banks are increasingly able to operate with impunity beyond legal controls.

I can't connect the dots between a bank's lobbying effort, an appointed regulator's instructions to auditors that water down stress tests, and a judge's decision to ring-fence banks from civil penalties.  Nothing is ever that easy.  The actors in each phase of that cycle probably don't even know each other.  That does not prevent me from seeing which way the wind is blowing.  The troika's actions in Cyprus are a waypoint for rules and norms that will soon apply to every advanced economy.  The applications in the U.S. will differ in details but not in spirit.

Thursday, March 28, 2013

Tuesday, March 26, 2013

The Haiku of Finance for 03/26/13

Show me a pipeline
Energy or biotech
It must make money

Adamis Pharmaceuticals (ADMP) Preps Its Pipeline

Adamis Pharmaceuticals (ADMP) makes stuff I never knew existed.  I had no idea there were things called pre-filled epinephrine syringes but Adamis has one that they want to compete head-to-head against a leading brand.  They also have their "Savvy" broad spectrum anti-bacterial gel.  The syringe is in Phase 3 trials and the gel has completed Phase 3; my regular readers know that those are the gateways I use to consider whether a biotech company can de-risk its discoveries and deliver shareholder value.

Is there a market for any of these things?  EpiPen is a leading anti-allergen autoinjector.  This product seems to have experienced double-digit growth for several years and Pfizer's 2010 acquisition of King Pharmaceuticals tells us a lot about EpiPen's success.  If the EpiPen was about 56% of Mylan's Specialty division's $124M per quarter in revenue (I'll annualize it to $496M), then its sales were about $278M in 2010.  Extrapolating from those double-digit growth figures (34% in 2011, 42% in 2012) gives me estimated sales in 2012 of about $529M, although one anonymous analyst buried in this NYT article figured it would make $640M in 2012.  I have no idea what the real numbers are, so if you're that curious then go ask Pfizer's CEO.

My rough estimate is probably really far off the mark but my general point is that EpiPen is big business.  It has a near-monopoly on the U.S. autoinjector market, so Adamis has its work cut out if it expects to make a dent in that market share.  They will also have to compete against Teva, which has the right to sell a generic version of EpiPen starting in 2015 if it can obtain FDA approval.  The good news for Adamis is that they just closed a $500K private placement, but they lost -$5.6M in the last nine months of 2012 (according to their 10-Q from February 2013).  Adamis does have other potential solutions in its pipeline, so I'll probably check back if something else makes it to Phase 3.

Full disclosure:  No position in ADMP at this time.

Magnum Hunter Resources (MHR) After NuLoch

I should have noticed Magnum Hunter Resources (MHR) back in 2011 when it announced its intent to acquire NuLoch Resources in an all-stock deal valued at $327M.  I attended one of NuLoch's road shows back in early 2010 and wasn't particularly impressed, so I wonder what Magnum Hunter saw in NuLoch that I didn't see.  Well, I need not wonder very much.  MHR traded at $7.63/share when the acquisition was announced and today it trades at $4.21.  Any former NuLoch shareholders who have hung on since then are probably disappointed, and longtime MHR owners probably didn't like the dilution they experienced from over 42M new shares.

Dilution isn't bad as long as EPS rises to surpass its pre-acquisition level, presumably through whatever added value the new assets bring.  A quick look at Magnum Hunter's income statement shows continuing net losses since 2009, jumping to -$76.7M in 2011 and -$57M up through September 2012.  In other words, losses got a lot worse since the acquisition.  What went wrong?  They have plenty of leaders with experience in geology, petroleum engineering, and the energy sector.  Maybe part of their problem is that their balance sheet blew up with long term debt climbing to over $286M in 2011 and over $680M last year!  Their deferred long term liabilities are also going to bite at some point if they can't bring more producing wells online.

I'm glad I didn't jump after NuLoch when I had the chance.  Not every hard asset play is an inflation hedge and not every acquisition is destined to add value.

Full disclosure:  No position in MHR at this time.

Monday, March 25, 2013

Quick Peeks at IMF and NBER Data on US Business Cycle

I've added one more link to my Analytical Tools widget (scroll down my blog, on the right side) to illustrate a point.  The IMF Data and Statistics page has tons of stuff useful to serious financial analysts and economists. I used it find a time series data on GDP growth for the United States because I wanted to compare the IMF's numbers to the stats prepared by NBER on the business cycle.

The IMF's percent changes for US GDP from 1995 through 2010 do not show a recession after 2000, but merely a slowing in growth.  Refer to the NBER's confirmation that a recession began in the U.S. in March 2001 and ended in November 2001.  The IMF's annualized data broadly comport with the NBER's series on the U.S. business cycle.  The lesson for country-specific analysis is that analysts looking for nuances and turning points need data from more than one source.  Those sources must account for national-level activity over shorter periods that global organizations like the IMF sometimes aggregate into larger data sets.

The Haiku of Finance for 03/25/13

Booming energy
Fracking unlocks shale treasures
Plenty left to drill

Miller Energy Resources (MILL) for Oil and Gas

Miller Energy Resources (MILL) is one of those energy companies that I probably shouldn't review.  A glance at Yahoo Finance shows me how their two years of net losses, three years of declining retained earnings, and three years of negative FCF all fall short of my fundamental value criteria for an investment.  Their CEO and President are investment bankers rather than petroleum engineers.  These are all indicators that the company will have a hard time delivering shareholder value.

It shouldn't be so hard.  Miller is producing oil at Cook Inlet, Alaska and can explore for shale gas at Appalachian Basin, Tennessee.  The problem with making it all work is that the company's delayed delivery of the rig they needed in Alaska meant they couldn't drill for months.  This is the kind of contingency that experienced petroleum hands can avoid with enough planning and due diligence.

Investment bankers are useful for obtaining distressed assets, which is part of Miller's story.  What Miller needs now are petroleum engineers who can unlock whatever reserves remain in the previously producing wells Miller owns.

Full disclosure:  No position in MILL at this time.

Financial Sarcasm Roundup for 03/25/13

I've been plenty sarcastic recently about life, business, and even the arts.  Now it's time for my weekly official dose of sarcasm, in one full blast.

Cyprus sort of got its rescue deal.  I say "sort of" because the real price it had to pay was the end of its competitive advantage as a haven for Russian hot money and multinational offshore banking.  No self-respecting oligarch will ever again keep cash in a Cyprus bank.  The troika is taking a big risk but has little choice.  The ECB balance sheet has enough Cypriot debt to cause problems for its equity cushion if that island doesn't get a lifeline.  The troika is out of ammo for now, so any further deals will be a gift to Gazprom and the Russian government (not that there's much difference between the two).  One very important lesson policymakers learned is that any attempt to cram down deposits that are below the threshold of deposit insurance will trigger widespread popular resistance.  Future cram-downs now have a template with a sequence of red lines to cross, each with a higher pain threshold than can now be modeled.

BP's stock buyback is not as encouraging as it seems.  Any time a company buys back its own stock is a  signal that it can't find new projects to generate an NPV high enough to cover its own cost of capital.  Other supermajors are investing heavily in new projects in Africa and Southeast Asia, so where's BP drilling?  It's also a risky move if BP is assessed a $17B contingent liability for the Macondo blowout.  Making a slight adjustment to dividend policy would have been a cheaper way to send a friendly signal to shareholders.

China's new president is touring Africa to promote goodwill.  If the West's multinational resource producers don't get on the ball, China will beat them to new resource discoveries in Africa.  An old saying about the flag and trade alternately following each other applies here.  Trading nations expand militarily to protect their trade interests.  The OECD sees only the promise of China, not the threat.  If East African nations grant basing rights to the Chinese military, the Indian Ocean will become contested for the first time in centuries and India will face strategic encirclement.  Wake up, New Dehli, because you're about to be surrounded.

Bond market investors aren't worried at all now that Cyprus economy's ability to issue bonds has been devastated.  Never before in recent memory have Fixed-income portfolio managers been so utterly stupid.  They ought to see that this template will be applied in sequence to each of the PIIGS countries and them finally Northern Europe, yet they continue to talk their books.  I'm really glad I don't own any European bonds right now or work with people who are dumb enough to do so.  I'm also glad not to be downwind of whatever they're smoking.

Here's a hearty shout-out to my legion of new fans from concert halls and recital rooms across the nation.  I'll have a lot more to say about alternatives to union strikes very soon.  In the meantime, you musically-inclined folks need to go watch some old newsreels of labor unrest in the 1920s and '30s, just to know how lucky you are today.

Sunday, March 24, 2013

The Limerick of Finance for 03/24/13

Cyprus on the edge of a deal
Depositors think it's unreal
They'll lose what they save
Concerns are now grave
Eurocrats need more assets to steal

New Format for the Alfidi Capital Main Website

I chose a new template for the Alfidi Capital website because I felt like it needed a fresh look.  The old template offered by my web host service was no longer supported, so I would have had to change it anyway at some point as their platform evolved.  My long-time readers know that I don't care much about cosmetic appearances, so I'll tinker with it for a while to make sure it meets my minimal expectations for acceptability.

Please note that the page formerly titled "Consulting" is now properly called "Incubation."  The last real purely consultative relationship I had was aborted before I launched Alfidi Capital.  Describing what I do for startups as incubation accurately reflects my relationships with enterprises that fit my investment philosophy.

I also made a few minor edits to some other pages like my Legalistic Disclaimerism and Al-FAQ-DI.  I do that whenever I think of some creative new ways to make people laugh.  I love to showcase my brilliance and I just keep getting better.

I reserve the right to change the look of my site and blogs whenever I choose.  What will never change is the high quality of provocative, controversial, and downright hilarious commentary I provide via my business entity, Alfidi Capital.

Saturday, March 23, 2013

The Haiku of Finance for 03/23/13

Moscow snubs Cyprus
Not about base or gas field
Let troika take risk

Cyprus Reaching Boiling Point After Russia Let-Down

Cyprus came away from a key meeting in Moscow with no bailout from the Russian government.  This throws the ball back into Europe's court.  Speculation is flying around the Web that Europe's pressure on Cyprus is designed to squeeze Russia, or alternatively that Russia is seeking a strategic breakout in the Eastern Mediterranean with a gas deal.  The intersection of business and geopolitics is always fascinating

First of all, Nouriel Roubini hinted in a March 20 Tweet that Russia wants a naval base in Cyprus as part of any bailout deal.  I'm not sure where Dr. Doom got that idea.  Cyprus has a heavy British military presence, so a Russian base there would make about as much strategic sense as a Russian base in Gibraltar or Malta.  The Atlantic Wire picked up on this idea too, citing speculation in a report from Ekathimerini.  IMHO Russia doesn't have an immediate need for a Mediterranean naval base unless it is concerned about losing access to its base at the Syrian port of Tartus.

The advantage to Russia of a Cyprus base is unclear until we consider sailing distances.
Cyprus is 238 nm (one day's sail) to the west of Tartus, Syria, measured to Kyrenia.
Alternatively, Cyprus is 206 nm (0.9 days' sail) from Tartus if the closer port of Larnaca is the destination.
Cyprus is 393nm (1.6 days' sail) from the Port of Suez, Egypt.
Tartus is 432 nm (1.8 days' sail) from the Port of Suez, Egypt.

Any Russian navy power projection into the Mediterranean would probably pass through the Suez Canal, so Russia would shave about 40nm off the trip of any warships it sends (depending on where in Cyprus it wants to relocate its floating workshop).  That seems like a negligible advantage unless it wants to add other things like a listening post to monitor British and/or NATO activities in the area.  I just don't see the strategic impetus for Russia to make this part of a bailout deal.

A much more likely deal would be for Gazprom to acquire Cyprus' natural gas rights if Cyprus takes Russia's bailout deal.  Gazprom likes its dominant pricing power over Europe's natural gas supplies.  This deal is now much less likely IMHO because the Russian government is unwilling to provide a backstop by bailing out Cyprus' banks.  It is also noteworthy that Russia is deferring to the European troika on further details of a Cyprus bailout and that European Commission head Jose Barroso was in Moscow together with Prime Minister Dmitry Medvedev when Cyprus came away empty-handed.  If there is any intrigue between Brussels and Moscow over Cyprus, or any daylight between their public stances, it is not apparent from these indications.

Cyprus' precarious finances pose an immediate economic threat to Europe.  S&P downgraded Cyprus' sovereign debt again.  No one but crazy hedge fund managers is going to buy that debt without a bailout from Brussels.  Europe is going to have increasing difficulty with further bailouts as its industrial activity continues to decline.  Cyprus is now scrambling to impose severe capital controls on its citizens and Germany is warning that Cypriot banks may be shut permanently if the country won't accept the troika's bailout offers.

The unraveling proceeds apace.  I've criticized public officials like Ben Bernanke on this blog but I can see how even he would look for a way out of the Fed's leadership before things get really bad in Europe and the U.S. ultimately feels the effects.  I'll wait until Helicopter Ben makes his resignation official before I send my resume to the Obama Administration because I don't want to look too eager.

Oh, BTW, Boris Berezovsky died today.  I guess he won't be part of any bailout deal.

Friday, March 22, 2013

The Haiku of Finance for 03/22/13

Option hedging plan
Plot out the break-even point
Long and short combo

Options "Inside Baseball" From the Condor and Butterfly

I attended one of the Options Industry Council's advanced seminars here in the SF Bay Area last night.  I wanted to see how they presented options strategies and needed some refresher education on spreads.  I don't need to rehash the structures of condors and butterflies here. Think of this as an "inside baseball" look into aspects of the financial sector that sometimes escape public notice.

The audience was sufficiently mixed to reflect the Bay Area's diversity.  Every ethnicity was present among the 100 or so attendees but they were overwhelmingly male and older (mid-50s and up).  I noticed that almost everyone in attendance wore a pressed collared shirt, including me.  This one wardrobe choice contrasted markedly with a particular real estate seminar I once attended, where everyone dressed like a slob.  These folks also asked intelligent questions.  It was obvious that this OIC crowd was upscale, educated, and successful based on their sartorial details and knowledge.  These were serious makers, not ignorant takers.  Quite a few had attended these seminars before.  I had to miss the session on "Greeks" the previous day but a lot of these folks were there and their questions reflected what they learned.

The instructor was a trading floor pro with a background on the major exchanges.  He mentioned the Silicon Valley Options Group as a source of wisdom for traders, so that's one more thing I need to go experience on my very long list.  One funny guy in this class quipped about a trading strategy we wouldn't learn today - the "albatross."  Unlike the condor and butterfly, it's the one that doesn't fly.  Har-de-har-har.  Investors can use that line for every trade that doesn't work out.

Option types are proliferating because IMHO financial innovators need things to invent after they get bored with hedge fund algos.  Guess what . . . mini-options are now available representing 10-share lots.  I haven't seen them in my online brokerage's execution page so maybe you need a specialist to trade them.  I think that's one way for smaller investors to write covered calls on stocks with three-digit prices without overconcentrating them in a portfolio.  Other special options on stock splits, reverse splits, and other corporate actions have been around for a while.  Those can look cheap but have huge exposure.  I found out the hard way some years ago on that score.  It was cool to learn that weekly options now have 20% of all option volume.

Here's something about options brokers I never learned when I worked in a large retail brokerage myself.  A live broker always executes the buy leg of a spread first, then the sell leg.  Why anyone would call a live broker today when online brokerage orders offer instant execution is beyond me, but some old-school technophobe fogies must need it.

The market for reverse conversion strategies helps keep calls and puts generally in parity through options arbitrage.  I've known about put-call parity since long before I wrote a special report on what it can indicate about the state of the market.

Pin risk occurs when a security closes very near the strike price of an option at expiration.  This forces an option to be assigned when the counterparty orders it executed.  It usually aligns with a huge open interest option position because the supply and demand for a security at that price will make it "pin" to the strike price of that open position.  It's really a risk factor caused by stock investors hedging their positions close to expiration.  Large investors who "pound" a stock near expiration may have covered calls and don't want the position called away.  This can be costly and I wonder if large investors think about whether the cost of opening long puts or shorting the stock is worth preserving an unrealized gain.

I was surprised to learn that most option traders don't hold butterflies to expiration but close them out.  I'd like to find research confirming that discovery.  They also tend to unwind an open spread one leg at a time.  These oddities make me wonder if option traders just wing it (huh-huh, pun on condors and butterflies) when they enter a position.  I've unwound only a handful of option positions in my life.  The vast majority I held to expiration.  That's just the way I am.  I don't second-guess myself halfway through the execution of a strategy in which I have confidence.

Expected volatility has a big influence on whether spreads are profitable.  I personally do not forecast the movements of stock prices or other things because the future is unknowable and many forecasting methods in finance are little more than voodoo.  Some of the investors here revealed that they use technical chart patterns as stock forecasting tools to select their option strategies.  Oh boy, that's just great.  I consider that to be an amateurish and faux-sophisticated way to approach investing.

There are some ways that an open short call can be assigned to an option writer before expiration, like when it's in-the-money just before the ex-dividend date and the declared dividend will be greater than the short call's time value.  Market makers are the decision-makers on early assignment.  Pros seek out big open call positions close to the ex-date because they want to assign that call and collect dividends, which is often called "trading dividends."  I traded dividends myself (without options) when I was a beginning investor but it's a habit I outgrew when I discovered fundamental methods of analysis.  It's also worth noting that the risk of early assignment is only present for stocks and ETFs that pay dividends, so a no-dividend policy obviates this risk.

Did you ever wonder why some spreads are called condors and butterflies?  I never did but the instructor told us anyway.  A real live butterfly is narrower than a condor, measured by wingspan relative to the body.  The analogy to options is that a condor spread is wider because it stretches across four strike prices instead of a butterfly's three.  'Betcha didn't know that.  I didn't care all that much but maybe someone out there does care.

Condors work best when there's lots of liquidity in an options chain with narrow spreads.  The iron butterfly can have higher margin costs than its condor counterpart.  These insights beg the question of why anyone would choose a butterfly over a condor.  Beats me.  The iron butterfly gives me the impression that risk-seeking investors would prefer it over the iron condor.  The thing about condors that deters me from using them is the chance of a "blowout trade" happening when an investor is tempted to keep shorting the condor's wings while the stock price keeps dropping.  Ah, no thanks.

My own preferred option strategies are covered calls, cash-covered puts, short straddles, or simple directional bets for speculation (like my recent bet against the euro).  I don't need NASDAQ Level 2 quotes and I don't need to see the up-to-the-nanosecond national best bid and offer (NBBO) to decide to execute any options strategies.  I suspect that many options strategies are like the technical indicators that drive some forecasting, in that they exist only because market makers and analysts want them to exist.  It's a way to create a body of knowledge just to make pros look knowledgeable to outsiders.  There need to be more academic studies on things like the ROI of condors and butterflies to determine whether they truly add value to a portfolio.  The audit trails inside the longest-lived hedge funds probably have enough data for many such studies.  Civilization needs serious studies because I'm just not convinced that more complex strategies add more value to a portfolio than simple hedges.

None of the sample strategies the seminar examined had any losing trades.  Of course not!  Real trades do lose money from time to time.  Mine certainly have.  I've done enough options trades over the years that the winning trades more than make up for the losers and my net worth has grown as a result.  The sting of a losing trade creates a long and indelible memory for a serious investor.  I've learned from each of my losses.  Read about a few of them in my older blog articles.

One final episode amused me.  One guy standing near the soft drink table in back said he thought the ongoing financial crisis in Cyprus wouldn't hurt the U.S. economy.  So many people are oblivious, even among serious investors!  He truly believed that Americans would keep buying housing no matter what happened on that Mediterranean island.  I wasn't inclined to run through the dominoes of Cypriot bank insolvencies, a forced euro exit, Continental bank runs, more PIIGS euro exits, activated Fed-to-ECB swap lines that risk a run on the dollar, and all of the other grey swans my regular readers have seen me write about for years.  I just shook my head and grabbed a soda.  That was the only option I needed last night.  There will be many chances in the near future to execute other options.

Thursday, March 21, 2013

The Haiku of Finance for 03/21/13

Striking musicians
Greedy losers hate their jobs
Replace them all now

Suntech Power Holdings Watches Its China Unit Go Bankrupt

I haven't paid much attention to Suntech Power Holdings (STP) other than to note in 2008 that they claimed the ability to manage price declines in a strong market.  Well, they're back in the news today and those claims from four years ago look like a bunch of hooey.  Suntech's Chinese manufacturing subsidiary is in bankruptcy proceedings.  That's just great.  China's strategy of putting foreign solar competitors out of business by subsidizing its cheapest domestic manufacturers has now come full circle.

No one is willing to turn off production at Suntech's Chinese plant as long as state-owned enterprises have a hand in its restructuring.  Local Chinese officials willing to help restructure the company's debt no doubt wonder what's in it for them.  Corruption will enrich some Party officials in Wuxi Suntech Power Holdings' regulatory food chain while continued overproduction depresses PV panel prices.  The tragedy of China is its inability to see how the state-directed mechanisms of its miracle growth story are now harmful as industries reach maturity.  I noticed that Suntech has a San Francisco office at 71 Stevenson Street.  Maybe I'll swing by and grab some coffee before they put the office furniture out on the curb for pickup.  Nah, I'm too busy.

Asking what comes next for bondholders gets an easy answer:  Bondholders get nothing.  One would know from reading the company's recent financial statements that they were having difficulties.  Their Form 20-F filing from April 27, 2012 has financial data after page 117, showing assets exceeding liabilities but with a retained earnings deficit of -US$365M for 2011.  They did incur a billion dollar loss that year, so things were looking bad even then if anyone cared to look.  The accounting of some Chinese publicly-traded stocks is so thoroughly obscure (and sometimes fraudulent) that nothing reported from that country can be taken seriously.  No sane U.S. investor could possibly decipher a Chinese manufacturer's business model unless they speak Chinese, have Chinese relatives, have lived in the mainland for years, and have a personal network of contacts in the Party who can feed them unaltered economic data.

I still haven't found that long-term solar play for my own portfolio.  I'm glad I didn't pick STP as some kind of sector play back in 2008.  I still like solar power and my adage from back then still stands:  The least complicated technology that uses the most widely available source material has the greatest likelihood of long-term commercial viability.  Some U.S. energy company could make a lot of money for decades with a concentrated solar power installation in the American West.

Full disclosure:  No position in STP at this time.

Assured Pharmacy (APHY) and Chronic Pain Drugs

Assured Pharmacy (APHY) isn't an ordinary pharmacy network; they specialize in chronic pain medications.     Trends in pain management indicate that chronic pain sufferers need more than access to drugs.  A pharmacist's relationship with medical groups that prescribe regular therapy seems to affect a pharmacist's value proposition.

Assured has been in business long enough to have a financial history worth examining.  APHY has been losing money for several years according to their financial statements.  High-margin drugs ought to give them pricing power but their cost of revenue is so close to their gross revenue each quarter that it makes me wonder why they can't leverage those drugs' prices into a gross profit that can at least cover their SGA expenses.  Their retained earnings deficit increased from -$23M in 2007 to -$39M in 2011.  I would be concerned about this long-term inability to add value if I were an investor; fortunately I'm not an investor.

Chronic pain drugs are mostly low-volume, high-cost products.  The pharmacy retail sector for these drugs seems to be fragmented, with many specialty pharmacies as stand-alone operations in a single area.  APHY's concept is a network more akin to pharmacies for common over-the-counter drugs.  Success with this business model demands economies of scale in purchasing large orders of drugs.  That's why large discount pharmacies succeed; their products are cheap and available in bulk.  The market for chronic pain drugs has a very different structure.  Franchising may work but Assured Pharmacy will need dedicated referral relationships with medical offices around the U.S. to fulfill the potential of their business model.

Full disclosure:  No position in APHY at this time.

Wednesday, March 20, 2013

Fire All Striking San Francisco Symphony Musicians

The unionized musicians of the San Francisco Symphony have gone on strike over compensation.  They claim they should be paid as much as other big-city musicians and have declared a work stoppage until they get what they demand.  This shuts down many of the in-house performances scheduled for Davies Symphony Hall and jeopardizes the performances of visiting artists who expect at least partial accompaniment from the Symphony.  It also forced cancellation of the Symphony's tour of the East Coast, including a performance at Carnegie Hall.  I was under the impression that every true artist in the world aspired to play at Carnegie Hall.  A pianist who happens to share my surname once played there as a child prodigy.

The reputation of one of the world's greatest performing arts ensembles is at risk because these union thugs in tuxedos are unsatisfied with a base salary of $141,700.  That is far above the San Francisco median household income of $72,947.  Consider that the median national income from that same Census source is $61,632; San Francisco's median is thus 18.36% higher.  It follows that a fair comparison for symphony musicians is not to the base salaries of other symphonies held hostage by collective bargaining but to nationwide statistics for musicians.  The BLS reports that the nationwide hourly mean wage for musicians and singers in performing arts companies (NAICS 711100) is $34.85.  The annualized equivalent, assuming a 40-hour workweek and 52 work weeks per year would be $72,488.  I will allow that employment terms offer vacation time, overtime, sick days, health benefits, and other adjustments to total compensation but a gross figure is useful in comparative analysis.  Let's apply the San Francisco premium I calculated above as 18.36% to this national figure, admitting some methodological imperfection because it is from a median set of figures and I'm applying it to a mean set of figures.  This premium gives us an adjusted annual income of $85,797.  Check my math if you'd like and I'll correct any errors.

Making over $85K per year to do something a talented high school musician can do for free is pretty generous.  Simple statistics tells us that's pretty much all a professional musician in San Francisco deserves.  Anything higher is a sum the market cannot bear for long without a return to a lower equilibrium through fewer ticket sales and lower ticket prices.  Music promoters and non-marquee acts figure that out pretty quickly because they operate in a free market.  San Francisco Symphony's unionized extortionists are unable to figure it out because their greed blinds them to market realities.  The Symphony's Board has a much better grasp on reality because it includes business professionals who must make a profit in the real world outside of collective bargaining.  The Board must close a four-year old operating deficit or there will be no future at all for this Symphony.  Math is a harsh mistress.

If the Symphony needs a scab player for the triangle or tambourine to help break the strike, then I volunteer to perform for free.  I've had no musical education at all but those instruments don't look that difficult.  I am even willing to solo "O Mio Babbino Caro" on a kazoo if Renee Fleming can't elbow her way through the union's picket line.  I'm pretty sure I could pick up the tempo if someone in the Davies front office would hum a few bars.

The greed of the Symphony's professional musicians is disgusting.  I would like to see the SF Symphony's Board of Governors and renowned music director immediately terminate the employment of every single one of the Symphony's striking musicians.  Replace them with the numerous musicians who compete for the small number of open spots in the company when they are available   Musicians who fancy themselves irreplaceable remind me of the federal air traffic controllers who were justifiably fired in 1981 when they arrogantly broke federal law.  The nation thanked President Reagan and even the leadership of the Soviet Union was impressed.  San Francisco is in dire need of such bold, decisive action.

The SF Symphony can do without the greed of Musicians Union Local 6 corrupting its performing artists.  Performing classical works in one of the greatest cities in the world is an honor and privilege that countless musicians dream of having.  The spoiled union brats on strike for exorbitant pay no longer deserve such an honor.  Their selfish action denies music to fans and brings shame to The City.

Addendum 03/22/13:  I shall state for the record that I am not in any way speaking on behalf of any party to this labor dispute.  No one involved in this dispute induced me to make this statement.  I do not stand to gain anything at all from any resolution of this dispute.  I speak only for myself in my capacity as a music fan exercising my First Amendment right to freedom of speech.

Tuesday, March 19, 2013

The Haiku of Finance for 03/19/13

Workers can't retire
Small savings, pensions won't last
Move in with grown kids

Acorn Energy Incubates Energy Innovation

Acorn Energy (ACFN) is an energy sector incubator executing a turnaround.  They lost money in 2009 and 2010, turned a profit in 2011, but returned to losses in 2012.  Their turnaround effort will depend on how their portfolio companies are positioned.  Let's see what they have to offer.

DSIT makes underwater acoustic systems.  I like that their physical devices are generic kits and their analytic system is COT rather than something that takes a decade of lab development to deploy.  This gives them a cost advantage when competing against leading defense firms.  I've noted that DSIT offers a couple of niche products that L-3 Ocean Systems doesn't have.  Not every country's navy needs gold-plated weaponry.

GridSense Systems sells smart grid monitoring and analytics systems.  There seem to be a ton of these types of systems on the market and some of their makers will be acquired by larger electric component makers.  I think the key for GridSense is to either be the lowest-cost provider or figure out how their systems tie into utility smart-grid programs.

Omnimetrix also ties into the smart grid sector with its remote monitoring applications.  These seem at first glance to compete somewhat with GridSense's products, with the main difference being that these are wireless and not hardwired into control lines.  The products focused on failure prevention, particularly for generators, are sufficiently different from GridSense's tower and line monitors to be non-competing.

US Seismic Systems offers seismic monitoring systems for the oil and gad sector.  This product line has the most immediate application to the U.S. boom in shale exploration.

It's difficult for a non-engineer like me to assess the technical capabilities of these products.  They need to provide either cost savings or performance advantages at cost to penetrate existing markets.  The success of each of these product portfolios in grabbing market share will determine whether they should be spun off from Acorn Energy or acquired.  It's good that Acorn has almost no long-term debt, and their receivables have finally grown large enough to cover short term liabilities from quarter to quarter (as of September 2012).  That is a tenuous survival strategy given their negative free cash flow, which if uncorrected will eventually force a drawdown of their cash balance.  Mere survival isn't sufficient to dig out of the retained earnings deficit that has almost doubled since the end of 2011.  Acorn's companies need managers who know how to grow markets.  This turnaround story will be about human capital.  I'll check back in one year.

Full disclosure:  No position in ACFN or other companies mentioned at this time.

International Minerals in Nevada and Peru

International Minerals (IMZ.TO) has mining projects in Peru and elsewhere, hunting gold and silver.  The CEO is a geologist and lifelong miner, hanging with this company since inception.  That's a feather in their cap because I like seeing geologists in charge of junior mining companies.  The rest of their management team also have mining sector backgrounds.

The best thing about this company is that it has 2P reserves at several properties.  The geology and logistics of each project are different so operating costs won't be uniform across the company, but the Au and Ag grades at each are attractive enough to justify production.  The maturity of this company's business model requires evaluation on fundamental metrics rather than exploratory ones such as burn rate.  Their five-year ROE lags the mining sector as a whole and is under my Buffett-inspired threshold of 15%.   Their financial reports reveal net income of  US$4.8M in 2012 after earning a profit of $60M in 2011.  This was followed by a a profit of $9.6M in Q1 FY 2013 (ending Sept. 30, 2012) and a stunning Q2 loss of -$10M as of Dec. 31, 2012.

International Minerals has been around for a while and it's come a long way from it's penny-stock doldrums in the late 1990s.  They seem to know how to convert the MII resources of their properties into desirable 2P reserves, but I wonder whether they will be able to continue such engineering feats if the price of gold declines and their free cash flow drops below their need for continued capex spending.  The decent management team needs to correct the company's erratic recent performance.

Full disclosure:  No position in International Minerals at this time.

Monday, March 18, 2013

The Haiku of Finance for 03/18/13

Cyprus bailout theft
Precedent for more stealing
Nothing is safe now

Financial Sarcasm Roundup for 03/18/13

Prepare yourselves . . . for sarcasm.

The Cyprus deposit theft is egregious.  Anyone who read what I wrote yesterday knows this is bad and that natural gas as bailout collateral would have been a far less damaging option.  If you read about what I did with my money today, you'll know I believe this bailout-theft is a marker on the road to the euro's dissolution.  Eurocrats wargamed the tamest possible parameters in their bank stress tests because they are afraid to model a six-sigma event like a retail bank run or a chained series of popular revolts.

The IMF's push for a European banking union is an effort to close the barn door after the horses have escaped and the barn has caught fire.  There may not be much of a European banking system left after the events set in motion by the Cyprus debacle this week have run their full course.  The IMF might have more credibility if it renamed itself "Impossible Missions Force" because that is the task it is setting for itself.

Stupid institutional investors rushed into U.S. Treasuries out of fear.  The point of seeking security from deposit confiscation in an asset class that cannot keep up with inflation escapes me.  Professional money managers will be stuck on stupid until their portfolios are devastated and they are starving in the street.

It's cute that young students want relationship management roles in financial services.  I'd tell them that wealthy clients don't want them but the youngsters won't listen.  The only relationships most of them will handle in a wealth management office involve answering phones and fetching coffee.  Clients want one and only thing from a relationship manager, and that is wealth.  Whipper-snappers fresh out of college don't have wealth unless they come from wealthy families, in which case they will be handed all the relationship management work they ever wanted without lifting a finger.  Mommy and daddy's little broker makes the country club geezers proud.

Are you prepared yet?  Don't answer me.  Just prepare for more sarcasm.

Alpha-D Update for 03/18/13

This is definitely one of the simplest portfolio updates I've ever published.  My covered calls and cash-covered puts on GDX expired unexercised.  I did not renew them.  I did not make any changes to my GDX holdings.  They remain useful as a hard asset hedge against high inflation.

I did not make any changes to my positions in FXA, FXC, or FXF.  They are currency hedges against the potential devaluation of the U.S. dollar.  I have no open options positions on those ETFs.

The only change I did make was to buy a long put against FXE, the CurrencyShares Euro Trust.  I did this because I believe the euro in its present form is doomed.  Read my articles yesterday on the EU/ECB/IMF extortion of bank deposit account holders in Cyprus.  No bank customer in any of the heavily indebted euro countries will feel safe holding cash in a European bank now that their confidence has been shattered.  My bet on a very long-dated FXE put is a bet that the euro will be much less valuable or even nonexistent in a few years.

Watch Cyprus this week.  Their government has two options.  Option one:  They can accept the European bailout and harm their depositors, accelerating a run on European banks.  Option two:  They can reject the bailout and force Cyprus' banks into bankruptcy, which will require Cyprus to immediately leave the eurozone.  Once one country leaves, other PIIGS will be tempted to follow.

Game theory predicts that the first defector from a sub-optimal regime is the winner.  All other subsequent defectors pay progressively larger penalties the longer they wait to defect.  I am sitting in cash that I will deploy at some appropriate point once the chaos is in full swing.

Sunday, March 17, 2013

The Haiku of Finance for 03/17/13

Natural gas bond
Need clear title to big field
Build a new pipeline

Cyprus Bank Deposit Levy and Natural Gas Bonds

Cyprus' president has pledged to cover the value of its imminent savings deposit levy with an equivalent value of natural gas bonds.  It's hard to say whether Cypriot savers should take this promise seriously without some analysis of its viability.

Let's use the European bailout sum for Cyprus of US$13B as a proxy for the amount of savings about to be confiscated from Cyprus' resident depositors.  I need a proxy because I have no idea how much the government of Cyprus will actually collect from this levy.  The natural gas revenue needed to back the bonds that would make savers whole would likely come from the Aphrodite field.  Title to this field is unclear; Turkey has made a competing claim for the sovereign right to control drilling.  There is currently no pipeline from Cyprus to either Turkey or Crete which could deliver the gas to market; that would cost US$1B to build and Cyprus has no money.  Building a $10B LNG terminal is ten times as unlikely, because Cyprus is still broke.  The energy supermajor that ends up building it will get the lion's share of the revenue from the gas field as compensation for its costs and will have to deal with the likelihood of being shut out of other projects in Turkey.

The lack of drilling and delivery infrastructure means that no Aphrodite gas will go to Europe until 2018 at the earliest.  A lot can happen with the price of natural gas in five years.  The wide availability of shale gas in the U.S. will keep the price down in North America.  Europe's need for gas is met mainly by Russia, and Gazprom can adjust its rates at will to pressure Russia's neighbors.

There is no single European energy market and the price of natural gas by country varies widely.  The caloric value of natural gas is about 1000 BTU per cubic foot (cf), so this gives us a way to find the value of the Aphrodite field if we have a single market price.  I will use the U.S. price because the CME trades the Henry Hub futures market in natural gas, giving this particular commodity some price predictability for several years.    BTW, that's the instrument that global hedge funds will use to speculate on gas prices and that energy producers will use to hedge delivery contracts.

The current U.S. natural gas Henry Hub spot price is $3.72 per million BTUs.
The Aphrodite field contains an estimated gross mean average of seven trillion cubic feet (i.e., 7 tcf) of natural gas, according to Noble Energy.
Math:  ($3.72 / 1M BTU) x (1000 BTU / 1 cf) x (7 tcf) = $26.04B total present value

The good news for Cyprus is that the total value of their natural gas discovery is about $26B, twice the value of what Cyprus is expected to receive in the bailout.  This begs the question:  Why didn't Cyprus just pledge the value of its gas field as collateral for the bailout instead of giving in to Brussels' demand that they shake down depositors?  Brussels may trust cash up front more than the expected future value of gas revenues, given the competing sovereign claims and lack of infrastructure.  A bird in hand is worth two in the bush.

The savings levy itself is not quite a done deal until a majority of the fractious Cypriot parliament votes for it.  This will be fun to watch.

Aurcana Corporation (AUNFF) and Silver

Aurcana Corporation (AUNFF / AUN.V) is a Canadian junior miner operating silver projects in Texas and Mexico.  The CEO does not appear to have a background in geology or mining engineering, yet the company is earning positive net income.

Commercial production at their Shafter project began in December, which is good news for a mine that has a 43-101 report.  I find it odd that the 2P numbers aren't readily apparent (I couldn't find them in the 43-101) but they started producing anyway.  Their La Negra project is not yet producing but has an updated resource estimate, with huge silver grades and decent copper grades.

A quick SEDAR search for their financial statements reveals profitability, which is helping them dig out of a C$26M retained earnings deficit (as of September 2012).  That financial hole reveals just how much value future operations must add for the company's share price to climb out of penny stock land.

I'm not sure why the stock hasn't moved given the existing production at Shafter and large potential at La Negra.  The stock is barely above its 52-week low.  Let's see if a feasibility study on La Negra makes the share price jump.

Full disclosure:  No position in Aurcana at this time.

EU Forces Cyprus to Destroy Its Depositors

Europe is testing the limits of its citizens' patience.  The government of Cyprus has announced a levy of between 6.75% and 9.9% on depositors accounts in Cypriot banks.  This stunning move comes at the behest of the ECB as a requirement for Cyprus to remain in the eurozone.

Early reaction from ordinary citizens is entirely predictable.  One guy parked a bulldozer in front of his Cyprus bank.  The outrage expressed on social media channels is palpable.  Calling it a "bail-in" with exchanges of shares in the banks as compensation means nothing if those bank shares ultimately prove worthless.

The tone of mainstream media coverage is as outrageous as this decision.  Talking heads are congratulating Europe's leaders and trying to confine the debate to choices between some confiscation or total confiscation.    The IMF's advocacy of a total "bail-in" for every account larger than 100K euros means that option is still on the table if this measure doesn't stabilize the Cypriot banking system.  That may now become a self-fulfilling prophecy as depositors start making panicked withdrawals.

I am not surprised that Europe's leaders think the savings of common citizens are collective assets to be appropriated as they see fit.  I am not surprised that sovereign governments are bailing out criminally incompetent bankers with the savings of people who have done the right things during their working lives.

I will be very surprised if there are no bank runs in the PIIGS countries on Monday and Tuesday.  Account holders in Europe have a very limited window of opportunity to protect their life savings before more onerous financial repression comes their way.  This confiscatory grey swan is about to lay a big fat goose egg all over European financial markets.

Saturday, March 16, 2013

The Haiku of Finance for 03/16/13

Greedy geezers lie
Demand full entitlement
Bankrupt everyone

Alliance for Retired Americans Declares War on Mathematics

I recently stumbled across one of the most unproductive, brain-dead organizations you've never heard of until now.  The Alliance for Retired Americans is a lobbying group focused on delivering as much of America's productive wealth to greedy senior citizens as possible.  Yes, folks, that's really what they're doing and I'm not pulling any punches.

Check out their FAQ to see a great example of economic illiteracy:

We are opposed to any form of privatizing Social Security and Medicare. The Alliance is also fighting any new tax breaks for the wealthy at the expense of programs that help seniors.  We are also opposed to raising the retirement age.

In other words, they want the federal government's unfunded entitlement programs to be paid in full forever.  Their crucial "Issues" include preventing any cuts to benefits (with no mention of how future benefits will be funded), support for the Affordable Care Act's mandatory care and free checkups (again, with no clue how to pay for them), joy that legislators cannot find a compromise to reduce the federal budget deficit (with no understanding that deficit spending imperils the nation's credit rating and currency), and other points that ignore the math of the real world.

The morons who promote this Alliance need to read the Bowles-Simpson Commission's final report, which lays out the math.  The Alliance rejects outright some common sense reforms like using chained CPI for inflation-indexed programs and increasing the retirement age for Social Security recipients.  This group feeds the image of greedy geezers ripping off young savers and Alan Simpson himself blasted them for their ignorance.

My own recent encounter with two local activists from the California group Sen. Bowles excoriated (a.k.a. CARA) was the trigger for this blog article.  One activist spoke at a breakfast meeting I attended and made the following points (recapitulated from memory, as her talk was not recorded).  My comments are in italics.

"A big portion of the cost of health care is profit for the service providers.  I wish we didn't have to have that, because then we could afford more services."  Idiot, the profit motive is what incentivizes those providers to offer those services.  Take away the profit and you'll have no services at all.

"The rich need to pay their fair share in taxes."  Dummy, read this excellent explanation of how impossibly high taxes would have to rise to meet the funding shortfalls reported by the trustees of the Social Security system.

The speaker's breakfast companion, an able-bodied but overweight older woman, was too lazy to get her own breakfast plate.  I spoke up in the Q&A after the talk to personally insult the speaker and I was shouted down for being rude.  You're gall-dang right I was rude and I'll do it again if I get the chance.  These CARA takers abhor makers.  Her speech was the most intellectually dishonest and financially illiterate talk I've ever had the displeasure of hearing at a breakfast meeting.

The Alliance for Retired Americans is a union-sponsored monstrosity.  Its advocacy of fiscal irresponsibility ought to bring shame to its advocates but that is too much to expect given the gross stupidity in every statement on its website.  They ignore the data available from the government's own financial statements on the inevitable insolvency of entitlement programs because their union supporters are a greedy, lazy, and stupid pack of liars.  Unfortunately, they speak for a large number of citizens.  That is why no entitlement reform will ever come from deliberate action in national policy.  The global bond market's revolt will be very painful for these idiots when it destroys the real value of their monthly benefit checks.

Friday, March 15, 2013

The Haiku of Finance for 03/15/13

Data mining pro
Use free, easy Web sources
Superior brain

More Alfidi Analytical Tools Add Up in March 2013

My search for good statistics and decision tools never ends.  I'm throwing some more at you this month.  Find the new ones in my analytical tools widget in the far right-hand column.

Esri Thematic Atlas is a downloadable app that links demographic and economic data to geography.  I can see urban planners and municipal development officials using it to make zoning decisions but its power goes far beyond that application.  I plan to use it to track regional energy use and other economic activity.

USGS LandSatLook Viewer is free data on human use of land.  It's not directly related to financial markets but it can provide useful background info on tradeoffs between economic development and environmental preservation.

Cass Freight Index tracks shipping activity in the U.S.  I consider it to be a concurrent indicator of turning points in the broader economy as measured by GDP.  It's also indicative of sustainable activity in the domestic trucking sector.

The Baltic Dry Index is published by the Baltic Exchange.  It amalgamates measures of ocean freight into a general barometer of the global shipping sector.  I consider it to be a concurrent indicator for turning points in the global economy.

The Association of American Railroads statistics page is an excellent source on activity in U.S. Class I railroads.  I consider the weekly data on railcar loads under Rail Time Indicators to be a concurrent indicator for the U.S. economy.  Their other stats are very useful in comparing railroads' traffic to their financial results.

One more addition for this month is the Callan Periodic Table of Investment Returns.  It compares the returns of several asset classes in a graphic format that resembles the scientific community's periodic table of elements.  This format allows for an easy demonstration of how portfolio diversification works.  Mean reversion is all that matters in diversification by asset class.  I use it very simply to determine which asset class is undervalued in a given year.  An undervalued asset class is a far more worthy addition to my own portfolio than a class that has outperformed and now trades at a premium.  In simple terms for an indexed strategy, the class at the bottom is the most likely "buy" and the class at the top is the most likely "sell."  In real terms, I haven't bought any of these classes in recent years because the liquidity-induced bubble in all of them is bound to burst.

All of these tools give me source data for my blog articles.  Some of them will help me determine what to buy as the economy heads for its inevitable reckoning with reality.  Don't bother copying my strategy or actions, because those are for me only and not intended for anyone else.  You might get a kick out of watching me do what I say I do.  Stupid people like Notre Dame grads and Mickey Ronin won't get it and that's awesome.

UBS Pays Bonus to Execs Who Lost Money

It doesn't get any dumber than this at one of my previous employers.  UBS lost $2.6B in 2012 but paid its executives exactly that much in bonuses.  I do give the Swiss credit for precision in matching the bonus to the loss amount.  The supervisors I witnessed there in 2005-06 were sometimes competent and sometimes clueless.  They should note that moving up the ladder will require them to be more clueless than ever.

UBS also paid its new head i-banker $26M before he even showed up.  I'm not sure what this guy did at BofA to justify that kind of incentive, since BofA has only survived the last five years thanks to government handouts.  The clawback provisions won't matter because they won't be used.  The promise of future M+A action will largely go unfulfilled as the global economy re-enters recession.

The financial sector is the only part of our economy that rewards leaders who do not deliver shareholder value.

Full disclosure:  No position in UBS at this time.

Thursday, March 14, 2013

The Haiku of Finance for 03/14/13

Jamie Dimon charge
Senate says he hid losses
Just a smoke report

NovaCopper (NCQ) in Alaska

NovaCopper (NCQ / NCQ.TO) is a junior copper explorer that NovaGold spun out last year.  The spinoff's CEO is the geologist who founded that parent.  I like serial entrepreneurs who launch new projects in their field.  Note that the Thayer Lindsley award for 2009 was shared by several geologists and explorers involved with the Donlin discovery.  Just sayin' you gotta give credit where it's due.

The preliminary findings from their Upper Kobuk projects are definitely intriguing, with indicated and inferred  resources far above typical copper grade discoveries.  Photos of the project show a fairly challenging topology to mine but the valley floor may have sufficient space for a mill facility and tailings site; it's just hard for me to assess it without being there or seeing a vertical view with elevations and a distance scale.  Their presentations shed some additional light.  One longitudinal cross-section of the Bornite South Reef shows a substantial amount of overburden that will be costly to remove.

The good news on logistics is that NovaCopper has a solid plan to finance the construction of a 200-mile road connecting their project to the highways that lead to Anchorage.  I didn't see any power lines or water wells in those photos, so I hope they have a plan for the infrastructure they'll need.  They also need a final 43-101 with a 2P estimate, but if the grades stay as high as promised the project will be very satisfying to pursue.

Their most recent financials from November 2012 showed cash on hand of US$22M and net losses of US$31M.  They will need to raise a lot more money ASAP to continue their developmental work, so investors should expect further dilution.  That's even worse news for anyone who held NCQ stock since inception in April 2012, when it traded at $4.72; it closed today at $1.86.

NovaCopper has a  potentially rich find but will need lots of capital to make it work.  I'm not an investor yet but I won't count out a team that made NovaGold work.

Full disclosure:  No positions in any companies mentioned.  

Wednesday, March 13, 2013

The Haiku of Finance for 03/13/13

Double those exports
Council guessing at numbers
No one did the math

Rising U.S. Exports Unable to Close Trade Deficit

The President has made doubling U.S. exports a national priority.  It's awesome when our nation's leaders set mighty goals for our progress, and for big things like the Apollo moon landings we can definitely deliver.  Doubling exports is a bigger undertaking than manned space flight, which is why we need industry's brightest minds on the President's Export Council to make it happen.  The President and his Council think we're "47 percent, 50 percent" of the way to the goal.  Well, which of those percentages is it?  Let's make sure we have the correct numbers.

The U.S. Census Bureau's Foreign Trade Division maintains the nation's official import and export statistics.  Clicking the "Data" tab takes us to a page where we can find a historical series of trade data.  I like the PDF version of the data going back to 1960.  The line for 2009 shows total exports of US$1.58T, and in 2012 we had total exports of US$2.19T.  That's an increase of $610B, or 38.6%.  That's nowhere near the 47-50% claimed by the chairman of the Export Council.  I have to walk my readers through the elementary school math because leaders in business, government, and media are unable to figure this out.  Meeting the President's goal of doubling exports by the end of 2014 means we have to get to US$3.16T no later than 21 months from now.  That's about another one trillion, almost twice as much as the $610B gain that took three years to get.  Imagine the acceleration in export growth required in a shorter time frame and you'll see the likelihood of what we finance types call a bad news event.

Let's not forget the chart on the Census's summary page showing us where the nation's trade deficit currently stands.  I've reproduced the chart for January 2013, the latest month for which data is available.

That beige-colored band in the middle is the trade deficit.  No matter how much we raise the value of our exports, they can't catch up to imports.  The trade deficit's gnarly beige band persists month after month.  The quote for this chart dated March 7, 2013 says it all:  "The Nation’s international trade deficit in goods and services increased to $44.4 billion in January from $38.1 billion (revised) in December, as imports increased and exports decreased."

I'm totally unqualified to serve on the President's Export Council because I can perform grade school math and report the results in plain English.  I'm also unqualified to serve as chairman of the Federal Reserve or Secretary of the Treasury because I think spending money we don't have and debasing the money we do have has obviously not closed the trade deficit.  On the other hand, it's nice to be self-employed, because I don't have to make up export numbers just because that's what the boss wants.

Tuesday, March 12, 2013

Monday, March 11, 2013

The Haiku of Finance for 03/11/13

China stagnating
Inflation rising so soon
Bad debt crisis next

Financial Sarcasm Roundup for 03/11/13

Europe is boiling over again with Greece, Italy, and Spain all having fits of one sort or another.  Options expire Friday and I'll have yet another opportunity to either go long gold stocks or wait around for even cheaper share prices.  This is the stuff dreams are made of, as the old movie line goes.  Dreams are also made of sarcastic comments on business news.

The EU has another mendicant demanding attention.  Cyprus needs a bailout or the whole house of cards comes down right now across the Continent.  No bailouts for any of these troubled countries means they fail to meet the deficit spending limits of EU membership.  Any investor who goes long the euro now gets what they deserve.  On an unrelated note, I once knew a really hot girl from Cyprus.  She never needed a bailout.

U.S.-domiciled multinational corporations have long known how to keep profits away from the IRS.  They don't repatriate their profits from operations outside the U.S.  This reduces their corporate Treasury options but that is irrelevant for those companies that find high NPV projects in other markets.  The cost of doing business in the U.S. is becoming an increasingly high barrier to new investment, thanks to the Affordable Care Act.  Assigning IP to foreign subsidiaries isn't the only trick to ensuring profits stay overseas.  There's always internal transfer pricing for companies with complex supply chains.

The BIS thinks big banks have an advantage in trading currency because the size of order flow has some kind of predictive power.  I'm calling BS on the BIS and their stinking report.  Order flow size is just another source of noise in valuing currency.  Hedge funds dumb enough to use this as a signal will be hurt when the signal strength degrades.  I can easily illustrate how this indicator could collapse.  A run on the dollar will be the largest order flow increase in the history of the currency markets, indicating something that every market participant will already know (the death of the dollar as a reserve) when it happens.  Only economic fundamentals determine a currency's real value.  It would be just as dumb to say that daily NYSE volume indicates the stock market's future value but some hedge fund idiots will believe that too.

That run on the dollar gets postponed every time the eurozone does something stupid.  Mme. Lagarde's endorsement of more ECB rate cuts is just the thing to reduce the euro's attractiveness as a store of value.  Europe wants to play beggar-thy-neighbor with Japan and the dollar will rise in the short term as long as they keep this up.  The Fed beat all of the developed economies to the bottom by being first with ZIRP.

The Chinese economy is clearly headed for stagflation.  I'm so glad I sold out of my China equity ETF in 2012.  Curious readers can find more support for my opinion on China's coming malaise in this summary article describing last week's WorldAffairs 2013 conference in San Francisco.

I do act on my own sarcastic thinking, at times of my choosing.  No one else on the planet can benefit from what I say but smart people may find my transparency entertaining.  I'll bet even "Mickey" reads my genius language, but he's too dumb to understand it and doesn't have any money at all.

Saturday, March 09, 2013

The Haiku of Finance for 03/09/13

Show me a safe bank
Lying, gambling not allowed
Low Texas ratio

Stress Test Fraud Marries Endless QE

The bank stress tests in the U.S. and Europe are total baloney.  I've said it before and I'll say it again for the benefit of whoever is stumbling upon my wisdom for the first time.  Comparing the safety of Citigroup and JPMorgan is like comparing whether a ton of bricks or a ton of lead is more useful as a flotation device.  Citigroup had multiple TARP bailouts and JPMorgan let the London Whale gamble with its entire capital cushion.  The whole notion of safety means little to investors who are outside the small circle of politicians and industry insiders who have made provisions for the next round of bailouts.

The stress tests have to be frauds because the stealth bailouts they mask have been underway for some time.  The Fed cannot tighten its loose monetary policy because SIFIs need the Fed's purchases to take bad mortgage-backed securities off their balance sheets.  I don't bother reading news commentary about whether job growth is sufficient to meet the Fed's criteria for ending QE.  That is deliberate misdirection worthy of the most skilled illusionists in human history.  

Real safety can be found in the balance sheets of financial institutions that never needed TARP money.  That would include the large number of credit unions, discount brokerages, and smaller banks with very stringent home mortgage origination criteria.  Let's throw in any institution that has zero exposure to student loans (good luck finding one).  

Full disclosure:  No position in C or JPM.  

Friday, March 08, 2013

Thursday, March 07, 2013

Wednesday, March 06, 2013

The Haiku of Finance for 03/06/13

Why use gas fracking?
Seems like waste of energy
Carbon frack instead

Terrace Energy (TCRRF) and Oil in Texas

Terrace Energy (TCRRF / TZR.V) is a Canadian company with oil wells in South Texas.  Yee-hah.  Their President is a petroleum engineer, which is good news for a producer.  I can't figure out why they've got a separate CEO who's not an engineer, or what all those directors do to add value.

I kind of admire this one for having initial operational success.  They've got producing test wells, for crying out loud.  They think they can drill another 72 wells at their Olmos project.  They also see potential at their Eagle Ford project.  Potential is nice but sustained production is better.  Their operating cost per BOE looks dirt cheap but it's too bad they have to use "gas fracking," a method of injecting natural gas that I consider to be a waste of a potential energy source.  Their cost is cheap as long as natural gas in North America is cheap.

Terrace Energy's October 2012 financial statement showed C$1.5M in cash on hand.  They have started earning revenue so the question of a burn rate should be moot in 2013.  Terrace is a young company so there isn't much for me to add at this point.  Maybe I'll say something else about them in a few months.

Full disclosure:  No position in Terrace Energy at this time.  

Tuesday, March 05, 2013

The Haiku of Finance for 03/05/13

Those who invest now
Cannot see small business pain
Stress will not abate

Dropping In On SPTechCon 2013

I've been a power user of Microsoft SharePoint during my stints as a knowledge manager with large organizations, so I couldn't resist the chance to check out SPTechCon 2013 this week in San Francisco.  I got the free Exhibit Hall pass because I only needed a quick view of the main events.

The keynoter today was the Microsoftie responsible for the SharePoint 2013 product rollout.  His demo went smoothly with only a couple of faults that could have crashed his laptop.  The basic structure of this version of SharePoint appears to be a hybrid cloud that enables mobile updates to documents stored in the enterprise version of SkyDrive.  The "create new site" landing page replaces the old hollow function placeholders with tiles connecting to the most-used functions.  Page admins can now drag/drop documents from the desktop into a SharePoint directory without first switching to the old icon/window view.

One big difference is that URL character strings are shorter!  I was often frustrated with the old SharePoint's inability to read path strings longer than a couple of hundred characters.  I wonder if the 2013 version will truncate special characters instead of rejecting them.

Clicking a document shows you who has access to it, and you can email them immediately to share updates. That's what collaboration is all about.  A SharePoint site now has its own Outlook mailbox, so SharePoint documents and Outlook messages can now be rendered in each other's environment.  This is good if it saves time ordinarily spent downloading a document to your desktop only to attach it to an email message.  The risk I see is the chance users will edit a document in Outlook without passing the updated version to the SharePoint document repository.  I'd like to know how Microsoft has dummy-proofed that outcome.

The mobile version of SkyDrive will cache downloads of documents you edit.  This is how Microsoft's cloud service links files on a user's desktop in the workplace to their mobile synch platform.  You can edit docs on your smartphone and upload them back to the cloud.  Users can also follow updates to content in a newsfeed, with the option of following users, sites, or documents.  I first noticed the trend towards Facebook-style newsfeeds in SharePoint add-ons at one of the Cloud Connect / Enterprise 2.0 conferences I attended in recent years.  Microsoft's corporate development strategy noticed the trend and made appropriate acquisitions prior to this rollout.  I would like to know whether this newsfeed looks the same across all mobile platforms.  Many enterprises are adopting bring-your-own-device (BYOD) policies, so the interface between SharePoint and SkyDrive needs to look the same whether it runs on Android or the iPhone.  The federal government  is all aboard the BYOD movement and is one of Microsoft's biggest customers, so Microsoft needs to get this one right.

My biggest concern with previous SharePoint editions was the search function.  It was okay for finding random documents on a general topic but it was never good for complex queries.  I was never able to use it to find the URL of the parent organization responsible for a site's hierarchy.  SharePoint 2013 goes a long way toward solving that by displaying the photo I.D. of users who author documents.  Their photo I.D. reveals a link to their position in the organization's hierarchy, making department location possible.  This is good news!  It means a product engineer who searches for "marketing" can eventually locate a marketing manager who has published documents on that topic for the enterprise's marketing department.

The Microsoft guy took a picture of the audience with his smartphone and immediately posted it to his enterprise SharePoint newsfeed.  That's a cool trick.  I can see how engineers and geologists in the field could use that to send a site photo back to their office for collaborative analysis.  His other cool tricks covered developer functions that could instantly build basic apps.  SharePoint is maturing from a content management platform to a problem-solving tool.

The vendors in the exhibit hall had more problem-solving tools on display.  Most of their apps related to business analytics and user identity management.  My biggest problem was finding some snacks.  One booth was smart enough to bring a popcorn machine but I was disappointed that other booths had very little candy.  I was also disappointed that there were very few attractive women manning the booths.  Hey vendors, if you want my attention you need to include hot gals in your roadshows.

I'm a big picture thinker, so I didn't need the workshops on programming, module construction, and system integration.  I'll eventually take a closer look at business intelligence and GIS applications.  SharePoint is going to be one of the main tools enterprises use to exploit the Big Data we generate with our credit card purchases and social media preferences.

Full disclosure:  No position in MSFT at this time.

Monday, March 04, 2013

The Haiku of Finance for 03/04/13

Government worker
Go learn some new maker skills
Don't hope for a check

Financial Sarcasm Roundup for 03/04/13

I must state up front that the federal sequester has not impacted the operations of Alfidi Capital.  This firm doesn't run on government largess.  It runs on my limitless supply of genius.

The sequester happened because the consequences for the U.S. government's finances and the economy were minimal, despite lots of scary rhetoric.  The potential shutdown of the government is more serious, and that's why the negotiations in Washington are more likely to get a deal.  No one in D.C. wants to see the interest costs for new debt jacked up.  The U.S.-based credit rating agencies are sufficiently deterred from cutting the nation's sovereign credit rating but the bond market won't be fooled for long.

Professional fund managers are losing their heads again.  The slowing Chinese economy is spooking hedge fund managers into cutting their exposure to commodity derivatives.  Okey-dokey, derivatives are one thing but hedge funds have no business fiddling with those anyway.  IMHO only industrial end-users are knowledgeable enough about demand for stuff to use hedges.  Commodity prices will indeed suffer as the global recession becomes obvious but the low-cost commodity producers left standing will trade at bargain valuations.

Corporate earnings are up while hiring stays down.  Executive greed for more bonuses isn't the only reason.  American workers are less productive and more expensive than workers in emerging economies.  If you don't believe me, just look around your own office.  Observe the room full of obese slobs goofing off on the Internet instead of making things happen.  Oh yeah, let's not forget how Obamacare has made hiring one full time employee more expensive and troublesome than engaging a temp firm to bring in two or three part-time employees.

Portuguese demonstrators don't like living within their means.  Gee, that's too bad.  They won't like hyperinflation either but that's what they'll get after they're kicked out of the eurozone.  The U.S. will see a lot of this self-pitying and indignation eventually.  It will be fun for me to watch because I'll be able to buy things that stupid people can't afford anymore.

Here's some advice for U.S. government workers based on the headlines above.  Don't feel sorry for yourselves because Uncle Sam is cutting your pay by 20%.  Don't take to the streets like the Portuguese and complain about subsidies that will be permanently gone.  Instead, go learn some marketable skills that have nothing to do with your present job pushing papers around.  Real skill at making real things will come in handy once our society turns off many of the subsidies it can no longer sustain.  Start by taking classes at General Assembly and then market your project work online.  I know I'm talking to human beings here, so asking people to get off the stoop and take charge of their lives might be a waste of effort.  Maybe one or two people out of a few million will get the message.