Monday, June 30, 2014

Financial Sarcasm Roundup for 06/30/14

Sarcasm is all around us, much like the Force in the Star Wars saga.  It permeates everything.  All living creatures, inanimate objects, and natural phenomena contain sarcasm.  I only address sarcasm in the finance sector.

China removed its foreign currency interest rate cap in Shanghai.  That tells me just how excited the PBOC is about enticing foreign investors to prop up Chinese banks.  I've covered China's precarious shadow banking system and fragile WMPs in past articles.  Foreign investors chasing cash yields in China are suckers.  Most conventional analysts will celebrate this move as a successful innovation pioneered in the Shanghai FTZ.  They have to cheer on the remaining China bulls in the West.  Anyone who forgot the sky-high cash yields available in Cyprus prior to that country's crisis will ignore similar conditions in China.  

A US federal judge blocked a payment Argentina was scheduled to make to US bondholders.  Sovereign immunity usually prevents these types of maneuvers from creditors but savvy US hedge funds have figured out how to use lawfare to extract full payments from Argentina.  The risk these hedge funds take is that blocking a partial payment to all of its bondholders, both exchangers and holdouts, will push Argentina to default.  I cannot know whether the holdouts relish the prospect of competing investors in the exchange group getting hurt first, but the thought of hedgies salivating at the chance to destroy competitors is the type of behavior I expect from people used to getting their way.  Argentina wouldn't have to worry about committing half their currency reserves to debt service if they hadn't messed up their economy so badly with hyperinflationary policies.  Buying debt from countries with a history of default and mismanagement is a fool's game but many fools on wall Street are determined to play it.

The BIS warns central banks that they must end their freewheeling experiments with money.  The bank gave the same warning last year and hardly anyone caught it - except me, of course.  I even mentioned the BIS's graphics during my talk at the San Francisco Money Show in 2013.  The BIS also helpfully names China as the country leaving its borrowers most vulnerable to rates.  Go back up to my comments on China's interest rate liberalization to see why they want to attract deposit money so badly.  The IMF in particular has made it a point to ignore warnings while it pushes the ECB into stimulus beyond its legal mandates.  Central banks playing catch-up behind rising real rates will demonstrate their impotence to stop either higher rates or currency devaluations.  There's even a helpful BIS warning about PIIGS home bias for sovereign debt, which will of course come back to haunt those countries when the next crisis hits their banks with more sovereign debt defaults and currency devaluations.  

The preppies and trust fund babies running most Wall Street firms all read the above news items to look busy.  They don't grok the insights or reduce their exposure to obvious threats.  That's okay.  I want them all fired and bankrupt when the pro-cyclical policy dysfunctions I've cited above destroy their AUM.  The BIS is correct and a lot of stupid people are wrong.  

Sunday, June 29, 2014

The Limerick of Finance for 06/29/14

Malaysia bull market gets old
Investors all need to be told
When value hits top
It may possibly drop
Some Malay fans will wish they had sold

Saturday, June 28, 2014

The Haiku of Finance for 06/28/14

Revenue driver
Customer acquisition
Also an expense

Friday, June 27, 2014

Thursday, June 26, 2014

Capitalizing On ForumCon 2014

I attended ForumCon 2014 in San Francisco last week.  I assumed it would be something like the social media events I attended last year, with an emphasis on SEO and other marketing methods.  It turned out to be a much more valuable view into a sector of the digital economy I have not analyzed in a long time.  My photos may not have the greatest resolution, but I was there for the knowledge and not the visuals.

I don't know the demographic breakdown of the attendees.  I got the impression most of them ran online forums and were in the market for hosting services, developers, and moderators.  The conference sponsors have solved forum monetization with advertising networks and affiliate marketing.  I was lucky enough to sit with my friend Ania Dziadon, and she shared her insights from running EasyFinance and AddOptimization.

One panelist mentioned that affiliate marketing is a natural way to monetize a forum because users who engage content through regular discussions are likely to make online purchases.  I don't spend enough time on forums like Reddit or Quora to understand how their audiences are segmented, but I think forums with very broad coverage are more easily monetized with ads than affiliate links.  Follow my thinking.  The RTB ad network can instantly configure display ads as discussion threads address new content.  The critical thing is to have a site moderator agile enough to enable new ad links as users create new discussion threads, or to just automate that function.  I get the panelists' complaint that display ads need special configuration, especially for mobile, but I suspect that interstitial ads (like those that appear between game levels in the mobile game sector) are worth a shot on some forums.

I learned a new term from one of the panels:  "user funnel."  That may be a different way of addressing the "conversion funnel" that tracks a forum user's progress to a sale, but then again not every forum will monetize with affiliate sales.  I share the panelists' concerns about large-format data tables displaying poorly in mobile, but my solution is probably not what they want to hear.  I would relegate data tables to separate files that can be downloaded from a link in a forum.  Video and audio embeds in a forum should display much better than data and I've seen a few forum sites where that isn't a problem.

It was cool to see David Spinks discuss a "lean startup" interpretation of online community launches.  That's exactly what new forum owners need to stay viable in their early months.  David has a good article at The Community Manager on how a lean community leverages that model.  A lean community should act like a product that solves user pain points.  The expert definition of a "Minimum Viable Community" kept coming up throughout the day when forum owners described how they add value.  The lean community method relies on metrics from social network analysis like strong ties, weak ties, and network density.  David's presentation was the first mention I'd heard of the sense of community theory in the context of online life.  I wonder if measurements of membership and influence are the same as in real life given the ease with which users can construct multiple online personas.  David's work at CMX Hub is worth a look for folks who get serious about adopting his approach and lowering users' barriers to entry.

Another speaker shed some light on valid metrics to track.  Unique visitors, loyal email subscribers, and monthly influencer reach by social media platform were a few favorites I heard mentioned.  I don't know what tools forum users prefer but I got the point that viable communities have an authentic language and true superstars.  Controversy with an emotional hook will engage a community.  I've seen that on popular political discussion sites, but IMHO controversy may not translate into sales.  That would mean people must buy something when they're angry, and online shopping is supposed to be as pleasant and frictionless as possible.  Controversy probably monetizes ad-driven Web communities more than affiliate-linked communities.

The talk on forum moderation brought me some revelations.  The truisms I learned in the US military about having mission statements, using two-way communication, and celebrating little successes all came out here as moderation essentials.  I had to wonder why forum owners thought disabled veterans made good full-time paid moderators.  I realize many injured vets have limited career options and may prefer an online job that allows them to work from home.  Moderation is a low-paying, unconventional career choice and forum gurus made it sound like another dead-end job.  I know that we vets sometimes have to take what we can get, but this kind of offering keeps veterans out of high-powered careers.  It must appeal to people who want a digital nomad's lifestyle.  They key metric for a moderator's efficiency is cost per comment processed, and machine-assisted moderation reduces that cost.  I was surprised to learn that disabling a guest login feature increases user engagement, presumably by requiring people to commit to registering an online identity.

I learned another new term during a break in the panel action:  "supply-side platform (SSP)."  It is the content publisher's mirror image of the RTB ad networks' demand-side platform (DSP).  Don't ask me what it takes for a publisher to run an SSP.  I'm still trying to figure out how to maximize my own revenue from a DSP.

Startup pitches are a staple of tech conferences and the Tech Fest did not disappoint me.  I liked the one from Solve Media that inserted brand ads into captchas.  Requiring users to type an ad tagline or jingle is a brilliant marketing innovation that forces users to engage a brand.  They didn't win the pitch competition but I don't think I've heard the last of them.

Forum owners face challenges in growing their communities beyond 100 members and I paid attention to the talk on building addictive communities.  It's the kind of knowledge I can use as a self-publishing Web presence even if I never run a forum.  The motivating forces of pleasure, pain, hope, fear, social acceptance, and rejection avoidance matter as triggers for community participation but I've had difficulty transposing them to my Web readership.  Fear might work best for me.  I'll frighten the heck out of people so they don't miss a single article I write.  Seriously, real forums make social acceptance easy when people can show off their personalities and gain peer approval.  Getting people to follow habitualizing steps is the key.

The speculation on the Web's future was all over the place.  Here's my own take.  This is the single most important paragraph in my article.  Apps will somehow have to drive user collaboration and sharing so that app traffic will make it to discussion forums.  I think Disqus will be able to do this well.  The realization that image comments are winning hits, views, likes, shares, and whatever else over text comments is more evidence for me that digital civilization is regressing to a pre-literate stage of human maturation.  Images are easier to upload than typing text, and they obviously require less cognitive effort to process.  People are already stupid and they're getting more stupid by the day.  I'm not done with my ranting.  Discussion forums show us what happens when low-information proles have access to tech.  They flood the culture with nonsense like cat pictures and offensive comments.  I tried to relate to these people by posting LOLcat pics myself and it did not help me connect with average, stupid humans.  Stolen copyrighted photos on Instagram and Pinterest prove that most humans do not respect property rights or the rule of law.  I say bring on machine-based moderation to ban stupidity and illegality from the Web.  That is my main takeaway from ForumCon.

The final talk on purposeful design was excellent.  The limited scope of design in approaches based on aesthetics and content is less useful than something more purposeful.  Breaking design down into steps that build a clear purpose and manifesto into all decisions means design permeates even the most routine functions of a mature enterprise, or in this context a Minimum Viable Community.  I must have anticipated this approach when I published the Alpha-D Investment Philosophy on the Alfidi Capital main site.  I agree with the speaker that design should be simple and elegant, and I'm pretty sure my web design meets that goal, but the difference for me is that my design does not solve problems for anyone else but me.  That's the way it has to be.

ForumCon was a pleasant surprise from VigLink.  There were plenty of action items I can use to refine my own Web content.  I won't ever run a forum but I appreciate the hard entrepreneurial work forum owners put into moderation, conduct policies, design, and monetization.  Hats off to you, forum people.  

Wednesday, June 25, 2014

Tuesday, June 24, 2014

The Haiku of Finance for 06/24/14

Fool the consumer
Turn a want into a need
People will pay up

Destroying The Consumer Mind

I dropped into a Commonwealth Club lecture yesterday by consumer psychologist Kit Yarrow.  She elaborated on points from her book Decoding the New Consumer Mind.  I don't know how much consumer psychology has changed since Edward Bernays figured out how to push people's buttons. One of Dr. Yarrow's main points was that humans haven't changed much since we stumbled out of jungles into settled civilizations, but our desire for the latest and greatest technology has led to big changes.  Those broad facts don't do justice to the ease with which humans can be manipulated into thinking something they merely want is really some "need" they can't live without.

Tricking humans is a skill as old as spoken language.  The erosion of written language, critical thinking, and common sense in the digital age makes manipulation easier.  I don't think I have to recap a century's worth of propaganda to tell my readers that simple messages are powerful.  Humans are still tribal and we look to our tribe's totems and shamans for validation of personal identity.  The so-called "civilized" people I see shopping at Union Square's high-end outlets would probably go into severe depression if they couldn't get that latest Gucci handbag.  I'm pretty sure San Francisco's cognoscenti experience withdrawal symptoms if they can't release their frustrations through conspicuous consumption.

The iPhone is a classic example of a luxury want that humans think is really an indispensable need.  My idiot co-workers lined up all night in 2007 to impoverish themselves by paying a premium for the first iPhone.  It's a phone with a computer processor, folks, but Steve Jobs convinced lame non-thinkers that they couldn't live without one.  The masses use their iPhones in the same banal ways they've always used innovation.  They just do the same things they've always done, like solve crossword puzzles and waste their friends' time with random chit-chat.  No one really needed a smartphone and hardly anyone used it to invent the longer lasting light bulb.  Everyone wanted one because one of our techno-tribe's chief shamans, the late great Mr. Jobs, turned it into a new cultural totem whose possession determined one's intrinsic human worth.  No one who bought an iPhone had to actually think about the choice they made.  Thinking is so unnecessary these days.

I would like to see a follow-up treatment of Dr. Yarrow's insights titled "Destroying the Consumer Mind" because that's what repetitive use of pre-rational stimuli does to human cognition.  It should be a quick read because it must ideally be a how-to manual on turning bland thoughts into action items for the masses.  I would write it myself but I'm quite busy destroying all of the dumb things I can find in modern culture.  

Monday, June 23, 2014

Updating the Alpha-D Portfolio for 06/23/14

This weekend's options expiration made me get busier than usual in attending to my portfolio.  My long positions in GDX and FXC rose through the strike prices of the covered calls I wrote last month.  Those securities were called away and I repurchased them all in a wash sale, with no net change in the number of shares I own.  I wrote a new batch of covered calls on all of my holdings in GDX to expire next month, but I wrote no options on FXC.  I am pleased to note that the gold mining sector is beginning to recover from its doldrums and that Canada's rising inflation rate makes currency traders think Canada will raise interest rates.  Those are not the specific reasons why I own GDX and FXC but they do move those ETFs' share prices from time to time.

My covered calls on FXA and FXF expired unexercised.  I renewed the covered calls on FXF but I could not find a way to make any lucrative covered calls work on FXA.  I maintain those positions in the Australian and Swiss currencies against eventual US dollar hyperinflation.  That's also why I maintain my long positions in GDX and FXC.

One difference for me this month is the selection of additional options.  I wrote a cash covered put position under GDX, which I haven't done in a while.  I am risking the possibility that the economics of the gold mining sector are able to rebound.  If I am wrong, then I may at some point be forced to buy some more GDX at a very low price if shares are put to me.  I considered writing puts under FXA and FXC because I was looking for a way to make some extra cash, but it just didn't prove economical for me given this month's option chains.  I may regret not writing covered calls this month on FXA and FXC but the premiums were just too paltry to risk the shares being called away.

Oh yeah, I'm still long a put position against FXE, expiring next year.  If the euro cracks up I should make a small windfall, and if it doesn't then I will buy more long-dated puts.  I'm still sitting on a pile of cash.  That pile awaits a major market correction.  I note with satisfaction that public statements from the Fed and IMF indicate that crisis planning is in full swing.  The beginning of some market crisis will be a trigger for me to consider committing my cash to something.

Note bane:  This is not investment advice.  I have to repeat that admonition because there are still some idiots in the world who mistakenly tell me they think I'm an investment advisor, even though the home page of my Alfidi Capital website says I'm not.  People are idiots.  

Sunday, June 22, 2014

The Limerick of Finance for 06/22/14

Cyber spending should have some result
But security has its own cult
Focus on the real threat
Control what's on the net
Stopping damage is cause to exult

Compare US Cyber Threat Incidents To Mitigation

Two major cyber threat reports should keep security professionals busy for a while.  The Verizon Data Breach Investigations Report (DBIR) for 2014 includes data from US government cybersecurity organizations.  The US government's closest equivalent of this report is probably the OMB's annual FISMA report for 2014.  Let's compare and contrast.

The Verizon report revealed that accidents and insider misuse account for a significant percentage of the threat.  The OMB report revealed that cyber incidents are concentrated at six agencies, with the VA, HHS, and NASA as the top three impacted agencies.  The Defense Department experienced less than 10% of the federal government's cyber incidents but spends almost 90% of the government's cyber budget.  The remarkable part of that DOD spending is the 50% devoted to shaping the cyber security environment.  Note that HHS and the VA devote most of their cyber spending to detecting and mitigating intrusions, presumably from external threats.  If the majority of incidents are internal accidents and malice, as the Verizon report indicates, those agencies' cyber efforts are misdirected.

Consider the implications.  Uncle Sam is devoting the bulk of his cyber effort to what is very likely DOD's offensive capability in US Cyber Command and other special agencies.  He is also absorbing internal accidents and malice at three relatively less protected agencies, drawing from both reports.  The imbalance between targeting malicious foreign hackers and tolerating internal sloppiness is clear.  Consider that HHS and the VA are involved in managing a significant part of the US health care system.  The government's underattention to accidents and insider fraud in its health care cyber security places a significant portion of the US economy at risk.  There's a lot of very valuable data in the health care sector worth protecting.

The Alfidi Capital investment thesis does not account for the federal government's IT competence.  My analysis of several IT and telecom conferences in the past two years reveals that the mobile computing sector pays serious attention to app security.  Go back and read my stuff tagged "conference" to see how closely I've tracked this trend.  I've also tracked articles in Federal Computer Week that chronicle the government's immaturity toward IT policy.  Many FCW articles read more like tabloid coverage of whose career is hot as a federal procurement manager.  That Beltway culture is handicapping the federal government's approach to cyber security.

The big takeaway from these reports is that the federal government should think more like the private sector in mitigating cyber threats.  Vulnerability analysis precedes the response strategy and economic impact is always a major factor.  If the threats with the biggest economic impacts for the US are generated internally, then direct the response to human training and device management.  All of the federal agency CIOs need to have a copy of Cloudonomics open when they compute the budget lines they will request for cyber threat mitigation.  That may be too much to expect.  I'll wait for someone from the GSA's 18F digital innovation team to troubleshoot a comprehensive solution to this IT malaise.  In the meantime, I will mention the market opportunity in federal contracting to enterprise and mobile entrepreneurs I meet in the San Francisco Bay Area.  That's how I do my part for the nation.  

Microsoft Ventures Global Startup Day 2014 In San Francisco

Microsoft Ventures held its Global Startup Day 2014 showcase for the San Francisco area last week.  I got to attend because I am awesome.  Seriously, only the most awesome people get selected to attend these kinds of events and that's why Microsoft takes care to admit strong startups into its accelerator.  Holding this event at 111 Minna was unconventional for Microsoft but it sent the message that a big company groks the disruption of startups.

I was intrigued to discover that American Family Insurance's venture arm, American Family Ventures, is helping Microsoft underwrite these startups' adventures.  The insurance company's stated interest in home automation solutions makes some sense in mitigating insurance payouts from home accidents and burglaries.  Access to the Big Data in millions of policyholders' accounts is a boon to the startups mining it for validation.  Do you trust an insurance company to mask your personal identifying information?  Insurers have to follow privacy policies too, just like software companies.

The participating startups are all mentioned on the Global Startup Day page.  Most of them had significant non-US roots.  Microsoft must be throwing down the gauntlet to find non-US startups it can incubate.  I don't see many other US-based multinationals reaching outside this country's borders for startup candidates.  I'm probably not looking hard enough.

I really liked a couple of the startup pitches.  Applango implements SaaS metrics, something even the leading cloud service providers have difficulty delivering to customers.  Buddy manages enterprise data from IoT devices.  The market for collecting IoT devices' machine data will be huge and any data management providers need to understand the competing standards that telecom providers use.  I will also say that Miranda Gao, the co-founder of AllMobilize, looked stunning in her little black dress.  I don't think I need to say any more, unless she gives me a call.  Women tend to call me once I notice them and I can hardly blame them.

The expert panelists closing out the showcase were mostly venture investors familiar with the local software scene.  I thought they were generalizing too much by saying top startups come from the obvious major tech cities or hot national markets.  I say hot startups come from countries where the nexus of research labs, a strong rule of law, and favorable regulatory regimes enable entrepreneurs to make things happen.  The cultural ecosystem is paramount.  I am not impressed with supposedly knowledgeable VCs who chase "hot" markets just to attract investors in their funds.  These investors also think going global with a virtual model means startups don't have to be physically located in their largest addressable market.  Maybe they can get away with that if they're in a big global accelerator.  Microsoft can smooth out any regulatory difficulties they'll face in foreign jurisdictions.  Everyone else will have to at least talk to a couple of specialists in international trade.

The audience was packed with startup wanna-bes, venture investors, and people running other accelerators.  Menlo Park's US Market Access Center was on hand.  Corporate accelerators bring in startups who can benefit their ecosystems, and civic-funded accelerators should benefit their communities.  How many jobs have foreign startups brought to Menlo Park and San Jose after launching from the US Market Access Center?  San Francisco city planners should find out if they want to bring accelerator-sponsored startups to The City.  I would like to find out how to bring more attractive women into accelerators.  A few were on hand and one was on the venture investing panel (nice legs, babe).  They'll need more than bare legs in short skirts to make startups work.  They need yours truly, Anthony Alfidi, and I'll be at all kinds of startup launch fests around town.  

Thursday, June 19, 2014

Wednesday, June 18, 2014

The Haiku of Finance for 06/18/14

Top startup mistake
Personality conflict
Choose partner wisely

Mobile Monday Knows Your Startup's Top Legal Mistakes

I attend Mobile Monday Silicon Valley events even though I don't work in the mobile sector's ecosystem.  I keep my finger on the pulse of mobile action and meet the folks who put those fancy apps on your smartphone.  The event this week was a chance for aspiring entrepreneurs to hear from attorneys on how not to make common legal errors.  I did not make any errors when I wrote my nametag.  It is truly a state of perfection.

The panel attorneys from Arent Fox and elsewhere handed out free wisdom like candy.  There was also free candy available from the Tea Room where they infuse their chocolates with green tea, oolong tea, chai tea, and other stuff.  I had my fill of chocolate and took the legal stuff seriously.

Following one's own privacy policy and assigning founder ownership stakes early are pretty basic things.  The preponderance of lawyers with diverse specialties makes me think there's a disruptive opportunity for an online lawyer rating and referral service.  Call it the attorney version of Yelp.  It's too bad Yelp has such a poor reputation that even lawyers should be reluctant to use it.

I hate to admit that likability is a factor determining whether VCs invest in a startup.  Investors believe in founders more than tech and will push them to pivot if Plan A doesn't work out.  I learned long ago that physical attractiveness and pedigree are key to likability.  The guest lecturer in my 2002 MBA venture capital class told us about how her high heels, fishnet stockings, and revealing cleavage helped her close several rounds of funding as a serial entrepreneur.  I have told several female entrepreneurs that leveraging sexuality is a successful tactic.  That's one reason many attractive women flock to me for wisdom, and other means of stimulation.

I liked hearing the tidbit about structuring owner and advisor equity stakes to align with those parties' fair time commitments.  Linking the vesting of an advisor's shares to their fulfillment of agreed objectives is an acceptable practice.  Setting term limits on an advisor's board participation is a helpful way around the discomfort of firing them for non-performance.  I remember last year when a startup I was mentoring through an accelerator demanded that I violate the accelerator's rules on time commitments and complete all of their worksheets for them.  I refused to violate the rules and the startup fired me as a mentor.  They retained a former poet with no entrepreneurial experience as a mentor.  That startup never made it through round one of the accelerator and the founder failed to commercialize any of his inventions.  I don't think it's difficult at all for an advisor to perform well for an ethical entrepreneur.

I learned a little bit about the culture of Silicon Valley.  The Valley ethos of "pay it forward" favors gratis introductions to build relationships.  Any startup advisor who demands compensation in exchange for introductions to investors raises a red flag in the Valley.  That alert must propagate through the Valley's networks like wildfire when it happens.  I marvel at the persistence of some "pay-to-play" entities that knowingly flout this ethos.  Their excuse is that many hopeless startups benefit from paid exposure to well-heeled groups even if no investment is forthcoming.  The reality is that naive startups get fleeced by paying entry fees to pitch fests where no serious investors will be present in the audience.

Some top-drawer law firms do demand a cut in exchange for investor introductions, but they can get away with that because they have access to so many real venture investors who look to them for deal flow.  I've also noticed that the top law firms will accept equity compensation from cash-poor startups.  I say that's a fair way to comply with the Valley's culture of mutual helpfulness.

I'm not going to castigate the legal climate of California.  I trust my state's business laws and I don't need a legal domicile in any other state that would subject me to an unfamiliar jurisdiction.  I unwound my LLC structure and Alfidi Capital is now a sole proprietorship because incorporating just didn't benefit me.  I don't know how California law treats employee non-agreements but plenty of Valley firms poach from each other constantly, so I suspect those agreements aren't worth much outside of something extraordinary.  The attorneys present at this Mobile Monday panel viewed non-competes as a form of golden handcuffs enforceable during corporate acquisitions.

Startups can protect their IP with a "file patent, sign NDA" approach.  Tech developers under contractual employment agreements may be tempted to leave early and take that tech to a competitor.  Filing a patent on that tech keeps it with the startup that agreed to pay for its development.  Requiring the contract engineer to sign an NDA clarifies their role as an employee hired to perform a specific service.  The disclaimer language assigning IP ownership to the startup, and not to the employee, should be airtight.  Don't ask me how to write it; I'm not an attorney.

I'll close with a video parody one of the attorneys liked.  Check out an imaginary Nikola Tesla pitching Silicon Valley VCs.  This never happened in history but some future super-genius will relate to the process.  All of the Silicon Valley biases are there.  Teams, lead investors, and pitch decks matter for any startup that isn't run by Nikola Tesla.  Those self-absorbed VCs like teams.  I don't like teams unless they leave me alone to do my thing.  I think Nikola Tesla would have loved to speak at Mobile Monday.  

Four Simple Money Things For San Francisco Simpletons

Some people are just too stupid to be in finance.  I saw plenty of them in major investment firms and nowadays I also see them as solo practitioners.  I attended a Commonwealth Club event this week for a book touting the four most simplistic things one can do with money.  True to form, San Francisco coughed up plenty of simpletons to give this banal material their usual rapt attention.

Here's all you need to know about these four simple things, straight from my brain to yours.  We earn money from work (although most people hate their jobs).  We save money for future goals (although most people don't do it; they'd rather pine for entitlement programs funded by taxes on someone else's savings).  We spend money on our lifestyles (although most spending is wasteful, impulsive, and aspirational).  We give money away to feel generous (although many charities are inefficient and fraudulent).  There you have it.  Lesson concluded.

I have not read the book.  I will not ever read this book.  I am not interested in pop-culture rehashes of behavioral finance research.  I prefer to examine the original research itself.  This subject's simplistic appeal tells me everything about why most humans will never have control of their own financial situations.

Humans respond to simplistic emotional hooks.  The more manipulative sociopaths in our species convince their low-information peers to make harmful decisions.  Evolutionary biology reveals that humans have a natural talent for self-deception.  Susceptibility to myth helped us socialize into larger communities where the hunter-gather work could be shared.  The same susceptibility to myth keeps people gathering into temporary tribes that attend stupid lectures.  That's why simplistic "wisdom" in finance is so popular.

Linking money attitudes to people's recollections of their childhoods establishes an emotional hook.  People must somehow become exceptionally vulnerable to sales pitches when recalling some formative experience.  It's like grown adults become kids all over again.  Being led around by the nose is a pathetic lifestyle.  I outgrew the need for external validation long ago but I am amazed that adults with advanced educations fall for it every time.

There must be a Big Data solution for human stupidity.  Total persistent surveillance at the point of sale for anything, combined with facial recognition algorithms in video searches, should enable multinational corporations to finally identify the inflection point at which a consumer's mind turns to mush.  Locating that moment will ignite a new generation of startup fortunes.  It will also permanently cement the susceptibility of the mass consumer into our cultural DNA.  I suppose I should marvel at the ease of manipulating the masses.  It will come in handy.

I walk out of events that disappoint me.  I could not take more than twenty minutes of this Commonwealth Club seminar.  Twenty minutes is the upper bound on my attendance at something intolerable.  I attended this particular talk to identify four very simple things we all do with our money and that our attitudes toward such things are difficult to change.  That was evident in the event's single paragraph description.  I do not need some combination of Mister Rogers Neighborhood handholding and Jonathan Livingston Seagull transcendence to understand that financial security enables self-actualization.  Viewing money as some kind of "portal to self awareness" is terrific New Age drivel for the majority of Americans raised to be permanent children.  

Tuesday, June 17, 2014

Monday, June 16, 2014

The Haiku of Finance for 06/16/14

Office flirtation
Sure-fire path to advancement
Style over substance

Financial Sarcasm Roundup for 06/16/14

Fixed income investors deserve some sarcasm today.  Low interest rates have lulled them into thinking that bond valuations can only go up.  The search for total return in the bond market is going to end with a bunch of sleepwalkers getting smacked in the face.

Central bank intervention has brought the world's fixed income markets into periods of illiquidity.  Bond owners can't sell if buyers won't buy.  The Fed is now considering imposing exit fees on bond funds to prevent panic selling that crashes the entire market and drives up real interest rates.  I fully expect the Fed to put an instant lock-up on bond funds in a crisis, with rolling exceptions for politically connected pension funds (read:  unions) that need to meet distributions immediately.  Lots of retirees will wail about liquidity.  Stanley Fischer is earning his pay at the Fed already.

I'm absolutely certain I'm going to get the last laugh at the expense of a whole bunch of fixed income investors.  I'll LOL even harder at money managers who bought derivative bets on low yields and high valuations that they thought would last forever.  I don't know if there's enough bond collateral in existence to cover those derivative bets.  If not, then a whole bunch of futures contracts will be worthless as bond investors try to exit the market in a panic.  The investment banks that wrote those contracts on future debt issues will be unable to make good on delivery if central banks continue to buy the lion's share of sovereign debt issuance.  Some banks and insurance companies will get to relive 2008 all over again.

The buy-side investment management firms would love rules preventing sudden exits from bond funds, up to a point.  The tipping point comes if high inflation degrades their bonds so much that their balance sheets are impaired and they face insolvency.  Central banks and finance ministries would face a multi-faceted crisis.  Should the Fed and other central banks stop buying sovereign debt, leaving inventory in the market to fill those derivatives?  If so, they would have to backstop their primary dealers anyway just to ensure those investment banks have the liquidity to buy bonds that will make their derivative exposure whole.  Or should the central banks buy bond holdings from the buy-side firms that may face uncontrolled liquidations?  The discussion of a policy freeze is just the first consideration for financial regulators facing a global bond market at its peak.

The handwriting is on the wall and so many investors don't want to read it.  Fixed income investors who start liquidating now can rotate their wealth into other assets that can still generate yield after the bond market freezes worldwide.  Hard asset stocks, REITs, and ETFs await their turn at end of the global fixed income bull run.  Bond fund managers can pivot to hard asset yields a lot faster than individual investors.  Chair Yellen probably knows this but she can't time the exit.  No one wants the secret to get out until individual investors are securely in their fixed income policy straitjackets.  The average folks got handed a pile of bull once again.

Sunday, June 15, 2014

The Limerick of Finance for 06/15/14

No chart can say where stocks will go
Random walk turns a high to a low
Investing makes sense
When thinking's intense
Technicals are worth one big zero

Alfidi Capital On Fundamental Factors And Event Arbitrage

I am a fundamental investor, not a technical investor.  I was never really intrigued by technical "chartists" at all.  Perusing investment periodicals where technical traders held forth on magic formulas predicting direction was a source of amusement for me about ten years ago.  I put down those mags once I got to the ads in the back touting trade prediction services.  Folks, if a black box algorithm or crystal ball could predict stock market moves with uncanny accuracy, the author of said program would never let it see the light of day.

Hedge funds are no better than those useless ads and chart touters.  They just have a lot more money to play with than a typical technical investor.  Measuring thousands of signals for degradation is a waste of both human talent and computing power.  Investors in hedge funds may not realize they're paying a premium for a status-conscious product.  Maybe they do realize it and they just don't care.

Fundamentals matter.  Earnings determine whether a company is viable.  Quality of earnings (i.e., consistent operations and conservative accounting practices) determines whether a company will remain viable.  Modest long-term debt loads determine whether a company can survive a bad economic climate without violating any debt covenants.  Positive free cash flow suggests whether a company's capital spending supports its growth.  Market share determines whether a company has a durable competitive advantage that supports its pricing power.  The trailing twelve month P/E ratio tells us whether a stock is priced at a premium or a discount to the rest of the market.  Any P/E ratio over the US economy's long-term average of 14 is probably a premium, and any P/E that's at least 25% below that number is a candidate for deep value analysis.

Events can move stocks in the short term, but fundamentals drive value in the long term.  The market's "random walk" on any given day has nothing to do with candlesticks, moving averages, and trading volume ratios.  Events can move a stock's random walk in any direction.  The closer these events are to the heart of a company's operations, the more the move will matter if it opens an attractive entry point.  Apparently good news, like a one-time gain from an asset sale, can degrade earnings quality.  Bad news (like an earnings miss) can trigger the market's reevaluation of a stock.  A good intuitive analyst can figure out whether those news events reflect some persistent phenomena.  Merger and acquisition announcements open up arbitrage opportunities for those investors bold enough to buy the target and short the acquirer.  I've made some decent money in the options chains of announced merger transactions.  An index change opens another opportunity to find a discounted stock when index funds sell out of stocks dropped from widely followed benchmarks.

The Alfidi Capital approach takes the basics of investing very seriously.  The intellectual capital I invest into my analysis will eventually drive whatever financial capital I commit.  My thought process is unique and no other investor can duplicate my thinking.  That's why no one else can invest the way I do.  Any stupid losers out there who think they can imitate me would be wasting their time.  Investors who do their own thinking can outperform the market but they are truly rare.  Just sit back and admire the genetic rarity that is Yours Truly, Anthony J. Alfidi.  

Saturday, June 14, 2014

The Haiku of Finance for 06/14/14

Odd seasonal sales
Little sense outside retail
Someone can't forecast

Zecotek Photonics Moving To 3D

Zecotek Photonics (ZMS.V / ZMSPF) makes a bunch of high-tech products.  I've been sitting on this one for a little while, waiting for the company to impress me.  It may be a very long wait.  Their publicly available material touts a number of partnerships with high-profile research organizations.  The venture investing community sees the word "partnership" a lot from young companies, much more often than it sees the word "revenue."

Their existing product lines in imaging systems have to compete against much larger companies.  I suspect their most promising offerings will be among the 3D displays and 3D printers they are developing.  Mature versions of those products are very desirable in the eyes of the dominant 3D players.  The company's executive team has both research and corporate experience, but commercializing an IP portfolio takes a blend of those lanes with some crossover experience.  I want companies to state exactly how their key people took an idea from incubation (in a government lab, their garage, or wherever) all the way to successful sales.

The company has consistently published financial reports during the years it has actively traded as a stock.  That is a lot more than I can say for quite a few junior companies that are dual-listed on US and Canadian exchanges.  Zecotek's unaudited quarterly financial statements for January 31, 2014 show that they earn much of their revenue in the final months of a calendar year.  I never expected to see that kind of result outside of consumer retail, except for sectors with seasonal needs (construction comes to mind).  This is an equipment wholesaler, whose customers should be able to forecast their needs years in advance.  I think Zecotek is still struggling to find a market for their stuff.  Oh yeah, their net losses increased from 2013 to 2014.

I may check out Zecotek again in the future, but only if I have nothing else going on.  This one just doesn't fit my portfolio.

Full disclosure:  No position in Zecotek Photonics, ever.

Friday, June 13, 2014

Wednesday, June 11, 2014

The Haiku of Finance for 06/11/14

Sucking capital
Spend it all with no progress
Headed for nowhere

Solid Resources Has Yet To Achieve Solid Earnings

Solid Resources (SLDRF / SRW.V) has been a junior resource company for several years.  I first heard about them in 2011 and on rare occasions since then I've wondered when they'll produce a profit.  I reviewed the management team's bios and it's not obvious to me whether some of these folks have degrees in geology or experience operating a successful mine.  Mining professionals need to run mining companies.

They have a couple of new projects under consideration but my focus here is their Doade Pesqueira property in Spain.  The company has performed exploratory drilling in this area since 2003.  That's a long time to prospect without starting a mine.  The project's NI 43-101 report from April 2014 recaps some data from almost a quarter-century earlier.  This report then declares no mineral resources or reserves and recommends spending another CAD$7.5M over the next two years on exploration.  Folks, I don't know about you, but a decade of work so far shows nothing but a need to commit more money from investors.

Take a look at their financial statements.  The quarterly statement dated September 30, 2013 shows cash on hand of almost $352K, not nearly enough to fund that $7.5M estimated program.  Raising more capital means massive dilution for shareholders.  Look at that retained earnings deficit, almost $25M!  That's a proxy for the amount of capital spent so far with little result except a 43-101 report declaring . . . no resources.  The expenses for consulting fees, investor relations, management fees, and professional fees far outpace the expense line for project investigation.  I don't invest in junior resource companies where money goes everywhere but into exploration.

This stock has traded in the pennies the entire time it's been public.  The reasons for this low valuation should be obvious.  If they're not obvious to you, then don't bother reading my blog.

Full disclosure:  No position in Solid Resources, ever.

Tuesday, June 10, 2014

Monday, June 09, 2014

Revolutionary Resources Must Cover Costs And Carbon

The Commonwealth Club addressed natural resource shortages and mitigation strategies today.  I have yet to read Resource Revolution so I'll withhold judgment on the author's arguments.  I keep hearing about resource constraints in the context of these billions of middle class consumers the developing world is supposedly creating.  I don't think they're coming, but the developed world has plenty of room to grow.

US energy use has tracked population growth and GDP growth fairly closely for much of this nation's history.  The EIA's Annual Energy Outlook has all the details.  The post-WWII explosion in US GDP had a lot to do with rising domestic oil production.  Petroleum has the highest energy content of any energy source you can name.  The current US fracking boom and the widespread adoption of efficient technologies has prolonged the US's ability to generate high GDP growth.  Transitioning to a post-hydrocarbon energy future makes maximum possible use of this window of opportunity

More analysts need to consider the impact of the sharing economy on resource use.  Millennials using ZipCar and Airbnb won't generate demand for the steel and wood used in new cars and hotels.  Analysts should also consider whether the developing world's aspiring middle classes will bump right up against the food-water-energy security nexus limits on population size and composition for a given watershed.

There is plenty of analytical controversy over why oil prices remain high despite declining driving in the US and cheap alternatives like natural gas (at least in North America).  I'm pretty sure it's because the production cost curve for oil is rising around the world and cheap oil is getting harder to produce.  Keeping those costs manageable may require energy companies to adopt sustainable ESG criteria that will keep them in the hunt for investment dollars worldwide.

Resource sector analysts have discovered the "carbon bubble,"  a new methodology for valuing investments in hydrocarbon production.  Claiming that hydrocarbon investments are "stranded assets" because their eventual carbon emissions will negate any economic value they produce is IMHO a baloney calculation.  Physical plant has a natural depreciation schedule and expected salvage value.  The carbon itself now has economic value because it is a useful input into other green processes.  Here's my ultimate carbon capture cycle . . . coal production to energy plant to CO2 emission capture.  The fly ash from coal burning makes concrete.  The captured CO2 is a feedstock for algae production, which processes into biofuel.  See folks?  There are no stranded assets anywhere in that carbon chain.

Carbon credit markets will make the price of carbon even more transparent as different parts of the energy supply chain bid on it.  It's a legitimate resource and it needs a global price, just like oil.  All it takes is enough demand and some adaptive accounting rules to make it official.  That's the real resource revolution I'd like to see.

Sunday, June 08, 2014

The Haiku of Finance for 06/08/14

Broadband audience
Social and mobile channels
Ad metrics adapt

BroadbandTVcon 2014 Fits Right Into Silicon Valley

I opened up a brand new chapter in Alfidi Capital history by checking out BroadbandTVcon this month.  I only had time to attend the first day but there was enough content to spark my interest in the sector.  I took my traditional corporate badge photo prior to the first keynote, but it came out less than perfect.  Tough luck.  I was still there.

The morning keynoter from HuffPost Live could easily have a second career as a comedian or motivational speaker, although maybe there isn't much difference.  Media executives are all about panache.  HuffPost's discovery that most web article commenters engage each other instead of the article content makes sense anecdotally.  Low-information people log on to media sites to become stars themselves rather become more well-informed.  That's why HuffPost's elevation of their engagement screen to "above-the-fold" positioning in the UI drove their traffic up.  They have discovered some interest in deep dive formats beyond short-form broadcasts, but I am not surprised that such "analysis" comes from amateurs who offer only emotional hooks for the audience.  It is obvious that mobile adoption is driving content towards short-form and low-information content.  I have seen the future of webcast media, and it is downscale.  I like HuffPost's revelation that humans don't share what they search, but rather they share their "aspirational selves."  They search naughty images but share cute cats.  Our superegos are such hypocrites; advertisers meet our id-level desires as well.  I would do video broadcasting myself, but I need strong metrics.  I need monetization metrics that track subject matter (by keyword), length, page views, social media shares, page placement, live vs. recorded contrasts, and video / text mix per article.

Panels are always fun and I assembled a whole bunch of lessons from the random executives on hand.  Cable TV's value proposition is declining and rising percentages of subscribers show interest in cord-cutting.  People won't pay premiums for reduced value forever.  I have long believed that a la carte subscription channels solve an untapped pain point for dissatisfied cable customers.  I now believe that social / mobile broadcasters must deliver news and first-run shows to tap even more pain points in"time-shifted" broadcasts.  Netflix's success with "House of Cards" shows us the way.  The ad people here at BroadbandTVcon thought that ads in video-on-demand (VOD) offer huge upsides in monetization and targeting.  I cannot believe how dumb cable broadcasters are for thinking that bundled channel packages enable content discovery among customers.  Those idiots have never used web searches, or social media, or maybe even email.  I'm certain that the next decade will bring the destruction of the cable TV business model that has existed since the late 1960s.  Say goodbye to the multichannel video programming distributor (MVPD).  Cable TV will end up like VCR, a quaint tech that had a window of opportunity in the pre-digital age.

Get ready for Alfidi Capital's ultimate curveball prediction on broadband monetization.  The basic monetization metric in broadband will mirror mobile e-commerce:   LTV of a viewer compared to their acquisition cost.  Measuring both will make some traditional audience scoring methods useless.  Broadcasters will  have to migrate to the RTB ad networks on the Web for tracking data.   You heard it here first.

If you want to know who's really watching what on which devices, don't ask the traditional broadcasters just yet.  They have not used programmatic marketing equations until now.  Their interest in RTB data will metastasize when some broadcaster acquires an RTB network to do more than just master their algorithm.  They want to know the CPMs showing where dynamic ad insertion into VOD pays off the most.  Nielsen does track online campaign ratings (OCRs) but I'm not going to assume broadcasters know how to price their offerings until they plug RTB data into programmatic solutions.  The lack of NTSC-type standards for dynamic ad insertion into mobile devices means any broadcaster generating the most attractive traffic from RTBs will absolutely own standards definition.

The disguised sales pitches from various sponsors required me to read between the lines for more universal lessons.  Monetization strategies for VOD come in different flavors:  subscription (SVOD), transaction (TVOD), and advertising (AVOD).  That breakdown reminds me of the mobile game sector's discovery that interstitial ads work better than banner ads.  I suspect the most successful mobile broadcasters will use RTB data predictions of optimal CPM to manage their content streams.  Over-the-top (OTT) content is more than just the junk mail offers from broadband providers that I immediately recycle.  It's the business model that will program all those VOD ad types.

Smartphone users must be frustrated when they discover that their smartphone will only work as a universal remote for TV if they have a household subscription for all services - phone, Internet, TV - from the same broadband provider.  Even with universal standards, service providers erect walled gardens to prevent consumers from bundling competitors' services.  The downsides aren't just for consumers.  Broadband companies can't run predictive analytics if they can't see what customers are watching or surfing on competitors' networks.  These companies will have difficulty predicting the ad inventory they'll be able to deliver in their fourth quarter, which drives about half their annual ad revenue.  The upside for entrepreneurs is that walled gardens to defeat transcoding (video file conversion from produced formats to playback formats) generate pain points that entrepreneurs can solve.

I asked one speaker whether the big social media companies are serious about defeating fraudulent accounts and paid "liking" that rips off advertisers.  The answer I got is that they will have to adapt prevailing broadcast standards identifying non-human traffic that advertisers don't want to reach.  ComScore's tech is one representation of those broadcast standards.  I still think Facebook and Yelp will be slow to fully implement comScore and Nielsen audits as long as they are under pressure to generate earnings that justify their inflated P/Es.  Zuck and others want the gravy train to run as long as possible.  Social media companies do use auditing data to estimate the target rating points (TRPs) they can generate from gross rating points (GRPs).  Both social media companies and broadband providers know that Big Data offers a big analytical leap over the previous use of small samples and panel data to measure audience size.  The Coalition for Innovative Media Measurement (CIMM) is driving the train on Big Data metric adoption in mobile / social / broadband integration.  Multiplatform users are the drivers of most of the digital audience's consumption, in true Pareto 80 / 20 fashion.  This means omnichannel ad buys (radio / TV / Internet) require metrics for reach, frequency, impression, GRP, and TRP.  This stuff matters to advertisers.  It is transparent to broadband subscribers.

Television isn't like the cable-vs-satellite choices for the lower-class families on my block when I was growing up in the 1980s.  Broadcasting has become atomized to match the delivery channels of multiple mobile platforms.  Audiences for both long-form and short-form TV have fragmented down to the individual viewer.  You make your own network now.  The BroadbandTVcon customization of television fits the spirit of Silicon Valley.  

Saturday, June 07, 2014

Friday, June 06, 2014

The Haiku of Finance for 06/06/14

Negative rate plan
Force money to circulate
Ramp velocity

ECB Negative Rates Paint Europe Into Corner

The world has had an entire day to process the ECB's decision to impose negative interest rates on European banks.  Any bank keeping deposits at the ECB is playing a losing game.  Banks that have no choice must make up their losses with massively cheap lending or arbitrage games in other areas.  I expect some banks to test the waters by charging their retail depositors negative interest on savings accounts, forcing them to spend and invest.  That's how these policy errors play havoc with citizens' lives.

This move has severe philosophical implications.  Negative interest rates magnify the time value of money by turning cash into a wasting asset.  Combined with inflation, which has been a nonzero value for most of Europe's postwar history, negative rates accelerate the debasement of consumers' purchasing power.  Europeans are now forced to immediately spend their earnings or invest them in assets whose risk profiles lie outside what would normally be their portfolio's efficient frontier.  The ECB has just laid waste to modern portfolio theory.

The ECB has stepped into darkness and the world's financial markets are not registering an iota of care.  US equity indexes are at record highs and the CBOE VIX volatility measure is comatose.  Investors worldwide are lounging blissfully unaware of this decision's risks.  Negative rates on bank reserves will force banks to lend cheaply.  If they're borrowing short, they risk exposure to an ECB policy reversal or a surprise drop in the euro's value.  The cheap lending will accelerate monetary velocity, which will massively magnify any rise in Europe's rock-bottom inflation rate.  Europe has painted itself into a corner.  It will make a mess on the way out.

Thursday, June 05, 2014

The Haiku of Finance for 06/05/14

Tax defeasance plan
Bonds offset new assessments
Wealth transfer done right

SF Prop A and California Prop 41 Tax Defeasance Through Muni Bonds

San Francisco Voters passed Proposition A this week, calling for a $400B muni bond issue to fund seismic retrofits of first responders' facilities in the City.  California voters passed Proposition 41, diverting bond proceeds raised for CalVet home and farm loans to low-income housing for homeless veterans.  San Francisco voters will eventually pay higher property taxes to pay off the principal and interest of these bonds.  Taxpayers are also investors.  They can effectively get their money back through a form of defeasance.

A San Francisco property owner can theoretically buy a sufficient amount of city and state muni bonds whose interest payments will offset their property tax increases.  They would have to buy whatever new general obligation issues are specifically intended to fund these most recent ballot measures.  If enough San Franciscans do it, their increased property taxes transform into tax-free income.

Here's an illustration of how this would theoretically work.  The San Francisco June 2014 Voter Information Pamphlet and Sample Ballot described the fiscal impact of Prop. A.  The City Controller estimated that Prop. A's fiscal impact is an average tax rate of $9.61 per $100,000 of assessed value through 2040.  Offsetting this with a purchase of San Francisco muni bonds means buying enough of them to pay at least that much in annual interest.  The California Voter Information Guide for Prop. 41 has a similar analysis but does not reveal the property tax rate impact for assessed property.  Darn, that's no help.  California's bonds carry the lowest rating in the nation because this state can't get its act together.

I logged into the brokerage where I maintain my portfolio and searched their bond inventory.  The California GO bond inventory revealed coupons of 4.25%-5.25% for maturities out to 2029, which is the target maturity implied by Prop. 41's analysis.  The San Francisco GO coupons for all maturities past 2014 ranged from 4.00%-5.00%.  Buying one SF GO 4% bond of $5000 face value will pay $200 in interest per year, more than enough to offset a Prop. A tax assessment on $100,000 worth of property.  I'll assume the same holds true for the state's Prop. 41 assessment; buying one $5000 California GO bond should be sufficient.  The bottom line is that San Francisco real property owners can elect to set aside the liquid equivalent of 10% of their real property's value (i.e., two $5K muni bonds for each $100K) as a defeasance for the taxes to fund these bond issues.  That's what I would do if I owned real property in this town, but I don't tell anyone else what to do with their own money.  I would of course receive much more from interest than I would pay in taxes, so muni bond defeasance of property taxes sure looks like a transfer of wealth from City taxpayers to bond holders.

I won't debate the political merits of either measure except to say that I voted against them.  I generally oppose issuing new government debt unless it is earmarked for spending on capital goods in the "public commons" that enhance economic activity.  I suppose I can live with Prop. A because it supports The City's long term capital improvement plan, but City Hall needs to cut other things first IMHO before planning bond issues.  I also won't recap my hyperinflation warning, which would make any bond purchase worthless.  Hyperinflation would rapidly eliminate property tax burdens anyway so defeasance would be a waste of effort.

Full disclosure:  None of this analysis constitutes financial advice; go see a registered financial advisor for that service.  I do not own any muni bonds at this time.  I do not own real property with assessable value in San Francisco.  

Wednesday, June 04, 2014

Monday, June 02, 2014

The Haiku of Finance for 06/02/14

Trends revert to mean
Surprise data wrecks forecast
End of momentum

Financial Sarcasm Roundup for 06/02/14

Read my words and discover the contempt I have for humanity.  Stupid losers are everywhere.  They deserve nothing but my sarcasm.

Pimco's Total Return Fund is watching investor withdrawals whittle away its flagship product.  The trickles will turn to a deluge as investors realize the air is leaking out of the bond market bubble.  Chair Yellen can keep the plates spinning a while longer if the Fed has to restart QE purchases.  Everyone in the fixed income universe forgot about mean reversion while the fixed income party was going full steam.

The Administration's emission rules are going to put the coal sector in a world of hurt.  Climate change advocates have a religious fervor for reengineering our society, with or without a scientific basis.  The only thing dumber than blind faith in weak science is forcing others to pay for those beliefs.  Renewable energy stocks may get a small push from new rules on power plant emissions.  I doubt the Administration's push to convince other polluting countries in the developed world will bear fruit.  US coal companies will just export to China and India if the coal can't be burned domestically, and those nations will have no incentive to cooperate with US climate goals if they would otherwise lose access to our coal.  Way to go, Washington.

Ecuador is swapping gold for liquid assets, presumably some instruments denominated in US dollars.  Goldman Sachs took them to the cleaners and all the Ecuadoreans can do is lie about the deal.  It's obviously an asset swap but Ecuador's finance ministry and central bank both refer to it as an investment.  They must think the global financial community is as stupid as their own citizenry.  This swap only works for them if the US dollar retains its value for three years, a highly doubtful prospect if the US experiences hyperinflation.  A dollar devaluation means they'll only get back a fraction of the gold they're swapping out.  Goldman and other banks now have a case study they can use to liberate hard assets from other dollar-dependent countries before the party ends.  I'll remember that the next time I'm stocking up on stuff.

Humans run around like chickens with their heads cut off.  I exist to collect up the headless chickens and cook them for supper.  The brainless losers who don't read my blog might as well be headless.

Oclaro (OCLR) Needs Clear Path To Success

I had to check out Oclaro (OCLR) just to get spun up on the subject matter at all of the tech shows I'll attend this summer.  They have about half the revenue of some major competitors, but their market cap of $225M trades at half their own revenue.  The fundamentals from Yahoo Finance and Reuters will tell us something.

P/E:  N/A
Profit margin:  -0.97%
EPS 5yr growth:  N/A
ROE 5yr growth:  -26.61%

Oclaro consistently loses money and underperforms its sector.  It's hard to assess a P/E multiple and EPS for a consistent loser.  I'll take a guess at why they've been losing money since 2011.  Just follow my narrative down the rabbit hole.  Their major competitors include Avago (AVGO), Finisar (FNSR), and JDS Uniphase (JDSU).  Those companies have positive EPS and trade at healthy P/E multiples.  Take a look at their profit margins below to see why the market rewards them so favorably.

AVGO:  21.71%
FNSR:  7.94%
JDSU:  5.83%

Compare those numbers to Oclaro's profit margin above.  The big players' market shares undoubtedly give them some pricing power if their legacy products are integral to someone else's product lines.  Oclaro will have enormous difficulty chipping away at those market shares.  Their position is even more precarious with several years of negative free cash flow.  Companies use FCF to invest in plant and equipment that will improve product quality.  This company's FCF history means it can't do that, so they can't compete on quality.  They also can't compete on price because they can't afford to cut prices any further; profit margin is already negative.

This is either a company in need of a turnaround or a sad case of failure to realize potential.  I'd rather attend a tech show to learn why an optical component OEM doing direct sales can't turn its earnings positive.

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

Sunday, June 01, 2014

The Limerick of Finance for 06/01/14

Economy's first quarter drop
Ignored by markets at their top
Investors pursue
Without any clue
That bubbles are due for a pop