Sunday, August 31, 2014

The Limerick of Finance for 08/31/14

China's manufacturing slows
That economy no longer glows
They will hit a wall
High speed now at stall
Reform must come if it still grows

Erdene Resource Development in Mongolia

This is the first time I have mentioned Erdene Resource Development (ERDCF / ERD.TO) on my blog.  It may also be the last time, unless they do something really impressive with their projects in Mongolia.  That country has a nasty habit of punishing foreign investors when it goes through fits of resource nationalism.

Mongolia ranks 83rd out of 175 on Transparency International's corruption index and 97th out of 178 on the Heritage Foundation's Index of Economic Freedom.  Those are really poor conditions in which to operate a foreign-owned business.  I remember the last time some mining executive (at another company) tried to tell me they knew the inner workings of Mongolia so well that their project could navigate any political pressures.  They were blindsided when Mongolia rolled up their project "for the good of the people," as kleptocrats always describe such actions.

The management bios show a geologist CEO who also holds leadership roles in other TSX-listed resource companies.  I am usually very skeptical of top executives who take a "lottery ticket" approach to stakes in other producers rather than focus exclusively on making one project succeed.  Other folks on the management team also have geology degrees, which is nice.

Erdene has several projects in Mongolia.  They have located deposits of gold, silver, molybdenum, and copper in various places.  They're also looking for coal.  The 43-101 compliant information they posted is of limited use if it only discusses MII resources at low ore grades.  I am not ready to invest in any resource company that cannot demonstrate comprehensive 2P reserves at economically viable grades.

Check out the financial reports on their website.  Their quarterly statement for June 30, 2014 shows a net loss more than 3x their cash on hand.  Erdene must continue to raise capital just to stay in business, putting their shareholders at risk of further dilution.

The stock trades in the pennies for pretty good reasons.  All of the geology expertise on the planet means little in an inhospitable political climate.  The best thing to come out of Mongolia so far has been the Mongolian BBQ cooking style.

Full disclosure:  No position in this company, ever.

Saturday, August 30, 2014

The Haiku of Finance for 08/30/14

Money Show event
Future of trade show sector
Totally online

Alfidi Capital at The MoneyShow San Francisco 2014

I attended the annual MoneyShow San Francisco last week, as has been my preference most years since 2001.  I wasn't on the speaking calendar this year but there were plenty of other experts to keep me occupied in 2014.  My original thoughts in bold text are the most important things to read in this article.

Kim Githler welcomed us to note that the show's younger demographic was now mostly online.  The ease of participating in online conferences and webinars points the way for a trade show industry in the midst of transformation.  Virtual shows are the future.  She reminded us of her favorite themes in globalization and diversification, but noted the use of hard assets as inflation protection.

Jim Jubak gave the first keynote on the questionable quality of government economic data series.  The four major data sets driving daily market action are US GDP, US unemployment, US inflation, and China's GDP.  Jim noted that China's GDP is definitely skewed because the sum of its provincial GDP data is greater than the national figure.  The farther down the reporting chain one goes in China, the more pressure local officials feel to report positive numbers.  I have followed ShadowStats for years and Jim thinks that site raises real concerns dating to the Boskin Commission's 1996 report.  The MIT Billion Prices Project once again receives praises for its accuracy.  I used to hear it praised at fringe meetings but now mainstream commentators like Jim see its value.  Jim also prefers the U-6 rate as an unemployment measure.  He specifically used the word "baloney" to describe US quarterly GDP numbers due to swing inventories.  That's one of my favorite words!  He prefers to use the real final sales numbers that take out swing inventories.  China's GDP mismatch with its export and energy numbers should IMHO drive analysts to use the Keqiang Index instead.  Jim's bottom line is that a bunch of completely unreliable data is driving market moves.  Amen, brother.

George Gilder spent his keynote endorsing Bitcoin and gold for their supposed time-based value.  George is a really smart guy with a long career of delivering bold insights, but I just wasn't buying his line this time.  I agree with him that financial markets are dysfunctional and that something's wrong when currency market trading is larger than financial markets and physical goods markets.  His insights into knowledge driving wealth and resource abundance are still valid, but I don't agree that Bitcoin and gold somehow build from the one diminishing resource - time - that we all face.  He would have made more sense if he had said gold's scarcity was a function of its extraction cost, but that does not support his time-based thesis.  He made little sense in describing Bitcoin; I don't think he understands that its self-limiting algorithm makes it scarce in the short run, but its ability to "fork" into new currencies obliterates that scarcity.  He totally lost me when he claimed Bitcoin drives an advance in information theory by creating a surprise entropy of "unexpected bits."  That sounds more like a theological argument for angels dancing on pin heads than something empirical.  He wandered off into an analogy that interest rates are the expected returns of an economy and profits are unexpected returns that correspond to Bitcoin's unexpected bits.  Oookaaay, George, but where are the corresponding expected bits that are inputs driving Bitcoin?  Sorry, dude, but the arguments for time-limiting currency bases make less sense the further you take them.  If Bitcoin is such a challenge to monetarism and central banking, then it should solve the periodically high velocity of money that limits monetarism's power.  Bitcoin is too volatile itself to damp down velocity, and too illiquid to use as a monetary base precisely because it is scarce.  Come on, George.  Fractional reserve banking allows economic growth when otherwise scarce hard assets (namely gold) would limit growth if they were currency bases.  Gold and Bitcoin, or other assets with George Gilder's self-limiting time-based supply, do not allow for credit-based growth.  I respect our society's distinguished thinkers for their lifetime of contributions, but even super-smart people can slow down in their old age.  I've watched people go senile and it isn't pretty.

David Blitzer from the Standard and Poor's Dow Jones Indexes spoke on how the DJIA is calculated.  Highly priced stocks skew its value, so the index designers consider range-bound stocks.  Index changes immediately drive turnover in that portion of an index owned by index funds and ETFs.  I have long known about arbitrage strategies for index changes but I've never tried to execute one.  Analysts who want to study such an opportunity should review the index inclusion guidelines and SPIVA studies on benchmark performance.  I have long been familiar with those sources, and once this insanely overvalued market drops to normalcy I'll be ready to pursue some index arbitrage.  I will be curious to see if TD Ameritrade's InvestorMovement Index keeps up a strong correlation with broader indexes on the way down.

I did not find the panel of "top financial advisors" to be particularly impressive.  Financial advisers succeed at relationship management, not analytical accuracy or market outperformance.  In other words, they succeed on personality and not technical competence.  They would be more appropriate in forums requiring emotional intelligence and it sometimes showed.  They all sounded fairly optimistic about the stock market, and IMHO fairly ignorant.  One lady thought Tesla Motors was profitable because of robots.  Wrong!  It's trying to be profitable because of tax credits and green energy rebates.  LOL.  These people sounded very conventional and pedestrian.  My jaw dropped when they said they still like certain types of bonds even after acknowledging the risk in this very old bond market bull run.  They really like emerging markets but IMHO they ignore weaknesses in the rule of law and transparency in those countries.  Hey folks, geopolitical risk is a fact of life in emerging markets.  It's stupid to paint with a broad brush saying some emerging markets can grow if you don't know how to hedge exposures to each country.  Sheesh.

Steve Forbes was a classic but he wasn't as funny as in years past.  I agree with him that today's political authorities know far less bout money than their predecessor.  His best zinger was about monetary policy:  "Government monetary stimulus is a form of counterfeiting."  LOL, that's awesome.  I believe he is correct that Russia is about to relearn a lesson the Soviets learned in the 1980s when oil prices declined and energy exporting countries suffered.  I still don't agree with his argument for a return to the gold standard.  He compares apples to oranges by claiming the historically average GDP growth rate under the gold standard would continue today.  Dude, I'd like to see data showing how all of the gold mined in the US since the end of the gold standard in 1933 would be a viable basis for our growth since then.  I would also argue that the US has had some form of central bank for much of its history, including those years when we held to the gold standard.  Central banking probably has a stronger relationship with growth than gold does with growth.  I do like what Steve said about weak currencies correlating with high crime societies as trust erodes, but correlation is not causation.  His strong point about the harm done by central banks is hard to refute without challenging his central argument that economic growth was higher during the US's gold standard era.  History does show that inflationary periods occurred after the Revolutionary War and during the Civil War; a gold standard did nothing to stop it.  Gold bugs need to compare inflationary periods to the US history of central banking and gold standards, or they can ride their gold hobby horse off into the sunset.

Rich Karlgaard drew from his book The Soft Edge to argue that corporate cultures matter in investing.  His argument for a "triangle of health" referenced other sources that have little to do with corporate functions.  Warren Buffett's thinking on durable cash flows, for example, has a lot to do with market position and switching costs.  He has had very little to say about corporate culture.  I have no objection to claims that fact-based disciplined thinking forms a strategic base, or that supply chain leadership and capital efficiency form a hard edge.  I am not convinced that internal culture delivers some long-term competitive advantage, because any change in C-level leadership will eventually change that soft edge.  It all makes for great reading and new management theories allow consultants to sell new feel-good concepts to executives who know little about their own professions.  I prefer to rely on fundamental analysis in judging an investment, because then I don't need to know whether an internal culture makes a company a nice place to work.

The tech trends panel looked for paths to big IPO events.  Bill Harris of Personal Capital, Jim Hurd of Green Science Exchange. and Cody Willard of Scutify all tried to figure out where we're going.  Disruption from drones, robots, wearables, nanotech, and cleantech is coming our way but it won't be readily apparent in equities.  Professional investors buying post-IPO on dips will probably do better than retail investors eager to jump on an IPO's first day.  Fallen angel companies in tech have a hard time recovering if their corporate life cycle is really a reflection of a dominant product life cycle.  All low-priced stocks have risk, and many nanotech plays are microcaps that may be worth something as merger plays.  This panel was lively and funny, with many nano-puns.  I would look at nanopriced nanostocks but I'd rather have mega profits than nanoprofits.

I got my picture taken after the keynote with Kim Githler, the founder and owner of the MoneyShow.  I thanked her for the speaking slot I had last year.  The rest of you who were too busy to attend will have to catch me at a future event.  Kim is an awesome businessperson and she can sense that times are changing for the trade show sector.  She sure looks happy to hang out with me, and I can't blame her.  Attractive women find me irresistable.

Steve Forbes signed copies of his latest book Money for fans on the expo floor.  I didn't buy a book and an earlier photo I took with him did not turn out well, so this is the only record I have that Steve was in the proximity of yours truly, Greatest Man Who Ever Lived, Anthony J. Alfidi.

TD Ameritrade's options seminar was based on lessons developed for their Think or Swim platform.  Once investors understand that volatility is a standard deviation of movement, they can understand its use in analysis.  The CBOE's VIX implied volatility measure intentionally omits short-term volatility, thus ignoring its imminent risk in favor of looking 30 days forward.  I suspect that any preference traders display for short-maturity options may have an explanation in behavioral finance; search for academic papers on "jump memory" to see for yourself.  I took away two good lessons from TD Ameritrade's presentation.  First, weekly options help price risk.  Those options' implied volatility has no directional bias but does indicate the probability of a move.  In other words, one standard deviation represents a 68% probability that a share price's move will stay within that measured range until the option's expiration.  Second, option markets are forward-looking by definition because they have expiration dates.  That's better than using technical analysis, which is only historical.  The implied volatility thus helps investors gauge the risk of an increased allocation to that security.  My only additional caveat is that the known effect of option order flow on security prices brings an additional risk factor, because large option orders just prior to expiration may move a share price in a manner that implied volatility does not anticipate.

Todd Petersen of PetersenLowe and the Diamond Market had a very informative presentation on colored diamonds.  Good for him.  I had a run-in with another colored diamond purveyor in 2013 who tried to rip me off, and I ended up backing down from a lawsuit because I didn't have enough information to prove they were up to no good.  Fortunately, I now have enough knowledge to avoid such traps in the future thanks to Todd's presentation.  He noted that high net worth investors (HNWIs) like the rarity of treasure assets such as collectibles, fine wine, and gemstones.  He made my day when he said that diamond sellers who aggregate the stones' returns are disreputable because each stone is unique.  Well, that's exactly what my erstwhile legal opponent tried to claim last year!  It's good to hear some sanity from the fancy colored diamond (FCD) sector.  I was intrigued to learn that the wealthy instill so much emotional meaning in their illiquid treasures that they consider their auction proceeds a valid philanthropic avenue.  There's a lot to know about conflict-free certifications, appraisals, and other factors for anyone who wants to invest knowledgeably in FCDs.  I wonder why diamonds capture so much of the HNWI imagination and whether lesser gemstones (rubies, emeralds, etc.) deserve similar consideration.  I'm sure I'll figure it out.  Todd had tons of expertise, and he even gave me some wisdom I can apply to Alfidi Capital.  Thanks, Todd.

I found one presentation to be totally useless in formulating a forward-looking economic outlook.  Some guy tried to fit investor psychology into secular bear markets but it looked like he had a hard time drawing conclusions that fit the data.  He referred to the Reinhart-Rogoff inflection point for sovereign debt overhangs without mentioning the controversy around their data errors.  The ratio of full-time workers to part-time workers is not as great of an indicator as he thinks.  Lots of other things determine the economy's inflection points, like credit availability, inventory swings, supply shocks, and margin debt.  Come on, dude.  Spend more time studying endogenous shocks than on adjusting bear market asset prices for inflation and you might have some workable theories.

I was one of a select few MoneyShow alumni who was invited to attend morning tea on the second day with longtime speaker Mark Skousen.  That's the kind of exclusive offer I get all the time.  I'm so darn special.  I ate way more free croissants with butter than anybody else, so I have that additional claim to fame.  Anyway, Mark spent a lot of time reminiscing for those of us who've been attending the MoneyShow for many years.  He pitched his latest book The Maxims of Wall Street by quoting many of Wall Street's mystery men.  He didn't quote me so I guess I'm not ranked up there with Warren Buffett just yet.  His best line was about his time in the CIA in the 1970s and how they fail at predicting crises.

The serious action on the second day kicked off with Barron's keynote on the economy and markets.  I have no idea which equity analysts he claimed see a record high wall or worry, or which fixed income pros seek safety.  I keep hearing the same bullish nonsense from both camps.  Barron's notes that money managers can't escape macro data and don't want to go against trends when everyone else is winning.  Anchoring bias for the pain of 2008 explains why some portfolio managers sit on the sidelines.  Well, I'm sitting there with a very small crowd, and I'm got getting up until these other bulls fall down.  Barron's struck the right note.

Piper Jaffray's keynote threw a bunch of technical chartist eyewash at the audience.  I ignored it.  I also ignored the claim that US treasury yields are higher than the G7 average because such a claim ignores the structural problems in all G7 countries.  I don't break down portfolio choices as "offensive" or "defensive" sectors but those simplistic and faddish ideas give money managers some cute talking points.  Portfolio managers who review sector relative strength charts are idiots.  I did at least get a free technical analysis periodical out of this session and it confirms how money pros take the wrong ideas so seriously.  Otherwise, this session was a look into how many dumb portfolio managers blindly follow trends.  Sheesh.

Roger Conrad from Capitalist Times presented some unconventional income investing ideas.  It's good to be reminded that interest rates have less effect on returns in dividend stocks and REITs than they do on fixed income investments.  Some alternatives are not as useful as they appear.  The CBOE's tradable TNX 10-year Treasury index is really another leveraged product and I'm not sure how to estimate its fair value.  Plenty of ideas litter the landscape:  yield cos, gen cos, utility stocks (aka "utes"), MLPs, REITs, and natural resource royalty trusts.  This was the first MoneyShow where I heard someone describe telecom stocks as income plays, particularly when they spin off REITs.  Oookaaay, but some investors lost big when MCI WorldCom went bankrupt last decade.  Memories are short on Wall Street.  The big Kinder buyout of its MLPs is recent news on many people's minds, and it may set a precedent for further consolidation as operating companies watch MLP tax advantages erode.  Investors who hold Canadian-domiciled income investments were curious about whether IRS Form 1116 allows the recovery of foreign withholding taxes on qualified dividends.  They were also concerned about UBTI liability for MLPs held in IRAs.  That's beyond the scope of this blog because I'm not a tax adviser; I keep my own affairs simple by not owning such Canadian instruments.  I have long sought to find firm criteria for determining a dividend's sustainability, so that may be a subject for a future blog article.

Zions Direct shared some specialized fixed income knowledge.  Bond liquidity matters for investors who don't hold bonds to maturity, which IMHO is pretty stupid but some investors don't take portfolio volatility seriously.  Bonds below investment grade are less liquid and have higher bid-ask spreads.  Smaller size issues are less liquid because not every institutional bond investor will be able to fit them into their profiles at a moment's notice.  FINRA has a very robust Bond Market Data search capability.  Bond investors who are really into such searches should watch out for canary calls, Bermuda calls, and other things that can involuntarily remove a bond from a fixed income ladder.  The MSRB EMMA search tool is a cool way to find munis and read their official statements.  Those statements reveal which munis are subject to extraordinary redemption clauses that can make them riskier than general obligation bonds.  Zions also shared some insights into sinking fund mechanics.  Sinking funds allow muni bond issuers to retire bonds by lottery, and their clearing firm runs a second lottery to decide which bonds get called.  Hey folks, that's two layers of probability a bond call has to work through to remove it from a portfolio, and according to the laws of probability a large institutional investor holding many bonds of a given issue is more likely to get that call than any individual investor.  This is more evidence that individual investors need to quit worrying about the exotic exigencies of a single muni bond issue.  Bond investors who need to know more than what their brokerage tells them can check out SIFMA's Investing in Bonds tutorials.

Grom Social demonstrated their social network for kids.  Their extensive live monitoring must be costly, so IMHO they'll need dirt-cheap moderators.  I can see how their colorful avatars appeal to kids.  I can also see a problem with high turnover, because kids will leave the network as they mature.  Turnover means growth from new users will have to be about twice as big as their natural attrition rate.  The media buzz around their story reminds me of the Duck Dynasty franchise.  I think the biggest winners from this are the founding family monetizing their own unique story.

Mark Skousen appeared on my radar because I was interested in hearing about how politicians invest.  The US Senate Financial Disclosure site is searchable but that does not necessarily mean investors can get actionable investing insights.  OpenSecrets tracks political finance but that does not mean politicians' financial decisions are well-informed.  Washington, DC and Wall Street insiders do share semi-permeable membranes but that does not ensure something useful will pass through in either direction.  The Federal Reserve's market instructions pass through the FRBNY but their firewalls between traders and board members minimize the chances for unfair insider advantages.  "Insiders" in sectors that make heavy campaign contributions can demand regulatory advantages up to a point, like with the Affordable Care Act's protections for health care oligopolies.  That point ends when the insiders' parasitical rent extractions kill the host of the broader economy, and their regulatory capture then becomes untenable.  Much of the stuff I heard in this session was irrelevant to me.  Some themes like BDCs ignore the vulnerability of senior secured loan portfolios to high inflation, but the story sounds cute to people who think they're sticking it to insiders.  Banks' high net investment income from the Fed's yield subsidy has similar appeal, but the Fed can't keep those plates spinning forever.  Arguing that precious metals prices reflect inflation sentiment ignores the broad supply and demand fundamentals that really drive prices.

Mark Skousen went through a lot of what must be his typical script and topped it off by tearing up a one dollar bill, showing his disdain for fiat currency.  I picked up the shards after his lecture and he said I could have them.  There's the picture above, showing that a couple of the shards were unrecoverable from the floor.  I took them to my local bank branch this week and exchanged them for an undamaged one dollar bill, as the Federal Reserve allows.  I consider this dollar to be found income for tax purposes, just like picking up spare change off the ground.  I know the value of a dollar.

Here's a brief note on fracking.  Insider interest in its expansion is driven by market demand, not powerful people playing games.  Anyone interested in watching the fracking boom unfold can check out the North Dakota Industrial Commission's website for oil and gas data.  The retro '90s look of that site brings back memories of my old GeoCities site on Yahoo.  Ah, those were the days, when we could all get rich by doing nothing.  It happens again every so often.

The equity crowdfunding forum was brand new at this MoneyShow.  TheCrowdCafe tracks data for the sector.  JOBS Act Title III still hasn't passed, so the non-accredited investor community still has to wait for its shot at true crowdfunding.  The cumbersome, expensive legacy of Reg A state registered securities is still with us.  The panelists believe the next step in crowdfunding is Big Data predictive analytics revealing investor preferences, time between raises, and successful raise amounts.  I asked the panel whether they thought leading portals will become acquisition targets for big banks.  That is absolutely my favorite thing to ask anyone in crowdfunding.  They answered that acquisitions will happen because good crowdfunding portals are more capital efficient than big firms with legacy costs.

I attended Mark Skousen's evening talk on private equity.  That made for three Skousen events in one day.  It turned out to be three more than I needed.  I expected a talk on how private equity works and how investors of any qualification can participate.  The coverage of a few years' worth of returns from the traded stocks of leading private equity firms made me think ahead to the next available hospitality suite.  Folks, I've seen this stuff before, and a single price movement chart isn't going to tell me whether a stock belongs in my portfolio.  Mitt Romney worked in private equity but he had nothing to do with the publicly traded stocks of private equity firms, and Bain Capital is still privately held.  Most Americans didn't want to hear Mitt Romney's campaign pitch for private enterprise in 2012 because they're all dependent on some form of welfare now.  A nation of entitlement brats doesn't want successful people lecturing them on productivity.

George Gilder dropped in toward the end of Mark Skousen's evening talk.  There they are above, out in the hallway.  George is gesturing his approval of something Mark said and Mark is enjoying the attention.  I did not stick around for autographs because I had to go find some free food from a hospitality suite.  Fortunately one of the exhibitors promoting investment in Myanmar had some excellent free food and booze in their suite.  Mission accomplished.

I started my third and final day at the MoneyShow with Marilyn Cohen's bond expertise.  She noted how 10-year yields have defied most analysts' predictions.  US rates must look better than rates in the rest of the world.  Her key insight is that bond investors can use bonds with "moving parts" (floating Libor, coupon resets, etc.) to mitigate the risks of inflation and rising interest rates.  Bonds with coupon resets often come with call features.  She liked the bonds of one REIT but also thought the REIT itself was a good deal, a rare non-bond pick for her.  If you want to know more about her specific picks, you'll have to ask her yourself.  She was one of the rare contrarians at this MoneyShow who thought the stock market was at a peak valuation!  Woo hoo!  She's always been a genius in my book, and not just because she agrees with me.  Marilyn likes bonds with state intercept enhancements.  She also likes water and sewer bonds in good areas, defined as a prosperous region with stable incomes, no urban blight, and no municipal bankruptcies.  I'm pretty sure that Detroit and Stockton would not meet that definition of a good area for infrastructure bonds.

One other speaker offering some insight did not generate insights I would find useful.  I won't name this person because I don't want to drive Web traffic to sources that I think offer little value.  Folks, I don't need to walk through a fictional character's literary history to conclude that confirmation bias is bad.  I also won't throw out CAPEs as a buy signal just because it doesn't time a sector rotation strategy very well.  I like watching the P/E ratio for individual stocks and the whole market, and CAPE Ratio Calculator is free to use.  Sector rotation is smack in the middle of the spectrum that puts stock picking on one end and broad market analysis on the other, and I'm no fan of splitting the difference that way in portfolio management.  I would like to see data supporting the claim that stocks with high institutional ownership are more sensitive to bullish analyst sentiment.  It may indeed open contrarian opportunities for investors tracking stocks with low institutional ownership, but those same stocks will also be less liquid.

Marilyn Cohen was up for a second time with some overlooked bond ideas.  I learned from her that muni yield changes usually trail broader bond market yield changes.  That makes sense if muni issuers' underwriters reset the offering prices of new issues when the 10-year Treasury yield moves.  She revisited her earlier mention of bond intercept programs, which are mainly for school districts.  States can divert school appropriations to pay school bondholders under such programs.  That's a good enhancement to munis.  She also likes port and harbor bonds, along with senior lien airport revenue bonds.  She definitely does not like pension liability bonds or health care obligation bonds.  She expects some hospitals to go bankrupt under ACA, destroying their bond holders.  She likes watching bonds that are connected to merger plays because their change of control provisions will activate.  I hope bond fund managers have fun watching the bonds of hard asset companies as the US enters hyperinflation.  Marilyn notes that bond market crises often cause stock market crises.  I agree with Marilyn that we can expect a very serious crash.  I can hardly wait.  She thinks bond ETFs may face serious problems in such a crash if investors sell in a panic.  I asked her about the possibility of bond exit fees, and she agreed it's likely.  Marilyn is totally awesome.

Morgan Housel of the Motley Fool told us why we can't have nice things in his afternoon keynote.  Bad investor behavior means many stock market investors underperform the indexes.  People buy high when they're greedy and sell low when they're fearful; Warren Buffett does the opposite.  Volatility is common, the world is complex, and compounding takes time.  Most investors lack the patience to see through that noise.  The P/E ratio isn't perfect but it is the single best statistical explanation of equity market returns.  That's good enough for me.  Read Morgan's site for the rest of his wisdom.

Wayne Allyn Root delivered the final keynote.  This was my first exposure to his bombastic personality.  I consider his performance to be entertainment and it's fitting that he aspires to a political career.  He threw lots of red meat at the audience and I got the impression he was test marketing some themes he can hit on the campaign trail.  Lots of his points got applause and some people objected vocally, so it made for a good stump speech.  If he runs as a Republican, he'll have to address some emerging research that shows economic performance to be superior under Democratic administrations in Washington.  I think his assumption that Americans' offshore wealth will return to the US with a tax holiday is unrealistic.  It may be there to facilitate trade or FDI, and no tax holiday will repatriate capital that is already productively deployed.  His stuff was great for the Tea Party, libertarian, gold and silver crowd.  He's definitely after the Ron Paul demographic because there's money to be made off those people now that their longtime patron saint is retired.  I'm surprised he didn't mention Bitcoin.  I'm sure he'll figure it out once his pollsters test it in Silicon Valley.  George Gilder even hung around until the very end.  That guy was everywhere.

The MoneyShow San Francisco 2014 was a winner for me.  I came out with more building materials for my own portfolio's architecture.  I'm amazed that the official program still mentioned Alfidi Capital as a participant even though I had no booth or speaking engagement.  I sometimes wonder whether my career would have taken a different turn if I had paid for a booth here in 2005 and 2006 when I was a financial adviser.  I can't turn back the clock to those days when I tried to find clients.  I can only look forward to a future where I never need to deal with humans.  The MoneyShow's wisdom will always be relevant to me.

Full disclosure:  I edited a brief mention of Tesla Motors in the "top financial advisors" above to clarify its attempt at profitability.  The company was not earning a net profit at the time of the MoneyShow San Francisco 2014.

Friday, August 29, 2014

The Inhospitable Hospitality Suite Feels the Wrath of Alfidi Capital

Here's a special message for one enterprise I encountered at a recent conference.  I won't name them to save them the embarrassment.  That is a rare instance of my generosity.  I'm pretty sure the arrogant chief of this outfit, or at least the human-shaped cardboard cut-out he employs as his public face, will read my screed.  Here it comes, dude.  You can't sue me if I don't identify you.

You people were marketing private placements in natural resource extraction to a wide audience that included both accredited and non-accredited investors.  Transparency and reliability really matter in such an effort but your enterprise doesn't have a clue what those words mean.  Being cagey about your data did not help your case at all.  Failing to reveal serious questions about your operating history will furthermore be an eventual detriment.  Your entity has run afoul of your state's securities board before, and I easily located hard-copy proof.  I don't think you've changed your ways since then based on the behavior I witnessed in your hospitality suite.

Opening a hospitality suite is supposed to be a generous way to introduce investors to an opportunity.  It is not an opportunity for a senior executive to sulk while a junior flunkie gives the analyst community a straight-arm deflection.  It is also unwise to brag about your supposed desire to avoid publicity while you're speaking at a freaking nationally-advertised conference.  The cognitive dissonance on that score is amusing.  No wonder you people generate such dissatisfaction.

Get your memories straight.  I did not encounter you people in a different city last year.  We may have crossed paths in San Francisco if you attended the same conference I did in recent years, aside from the conference this year.  There's a good reason I did not give you my business card this year.  The script you use on the idiots in your local dirt patch doesn't fly with yours truly.  There are no suckers at Alfidi Capital.

One of my contacts spent some time in your hospitality suite after we spoke.  Would you like to know what he discovered?  If you are dumb enough to sue me, it goes on record in court and your investors will find out all about it.  Do yourself a favor and stay away from future conferences in San Francisco.  I'm surprised you even found your way from your hotel room to the conference, since some of your team members didn't even know where your hospitality suite was located.

Finally, the words "best" and "gut" do not rhyme.  Neither does anything in your pathetic sales pitch.  Good luck probing those dry holes, idiots.  You'll find more such dry holes wandering on two legs late at night around your favorite run-down urban district.  They're a lot cheaper than the holes you want to drill and the result might even be more enjoyable.

The Haiku of Finance for 08/29/14

Falling consumer
Yet stock market keeps rising
One cannot sustain

The Invisible SEO Substratum of Page Structure and Content

Search engine optimization (SEO) is a never-ending quest for marketing gold.  I change my SEO tactics all the time in my quest for massive Web traffic.  The Holy Grail of a high Google rank remains elusive.  Emergent tactics give Web stars a cutting edge.

Backlinks matter.  Google's web crawler bots rank a site by the quantity and quality of links it receives from other sites.  Quality means high domain authority, and that formula is the subject of guesswork among the professional SEO community.

Landing pages matter.  Social media gurus think that landing pages using popular keywords, globally visible privacy settings, internal photo links, and deep content make a landing page more visible to Google's search algorithm.

Content matters.  More content on a page attracts more traffic.  Deep content counts for more than thin content.  A combination of images, text, and video linked together in a block is deep content.  Some combination of these blocks on a page is optimal but I suspect that varies by each social media site or content aggregator that channels syndicated content.

Enhancing visibility matters.  Rich snippets from a page that show up in search engines provide more SEO visibility.  Duplicate description tags boost traffic by grabbing additional content from a page and making it visible to searches.

Sharing matters.  I suspect that it matters more now that the unethical practice of purchasing Facebook likes and Twitter followers is widely known.  Sharing is one social media function that has not yet been outsourced to cheap labor using fake logins.  Sharing boosts a page's Google rank if it generates backlinks to the original content.

The implied call to action for webmasters is to optimize their public webpages and social media landing pages in ways that accommodate the phenomena above.  Building out these enhancements and actively curating content means the landing pages get noticed in Google searches.  Facebook's Custom Stories API is a good example of a tech that allows social media developers to easily build multifunctional content for multiple social media channels.

Alfidi Capital does not have some multidisciplinary team of designers, analysts, and engineers.  I do all of this myself, and my main focus is generating content.  If my writing is good enough, it will overcome whatever I can't do to max out my visibility to Google.  

Wednesday, August 27, 2014

The Haiku of Finance for 08/27/14

Bank cyber attacks
Hackers probing defenses
Risk of data breach

Funders and Builders Chat at Momentum VC

Momemtum VC has got momentum (pun intended) in San Francisco's mobile startup community.  I attended their fireside chat last week at Digital Garage's DG717 to hear how mobile startup founders get stuff done.  The two founders on hand shared insights on how they built their success stories.  I'll assemble their observations into some stream-of-consciousness mashups with my own thoughts in the mix, followed by some very insightful thinking straight from a venture capitalist.

If proximity terminals are to be compatible with analytics solutions, they also need to accept real-time data from other sources.  Such tech is useful in more than just badge and barcode reading; it can adapt to retail with commerce going mobile.  Retailers are very interested in using data from in-store video feeds.  Motion capture and facial recognition software are already in the pipeline for retail POS enterprise data.  Techies, make sure your mobile hardware has enough room for software that will push data through all of these streams.

I agree with these sharp mobile founders that entrepreneurs sometimes lack the emotional skills to succeed in large corporations.  I had too many bad experiences with bureaucratic types myself to ever go back to their way of thinking.  I like watching entrepreneurs launch into the creative tension of making something brand new.

The people in the Bay Area mobile startup community obviously know each other and frequently work together.  This builds a bench strength of capable serial entrepreneurs.  One founder said his job is to assemble a team that acquirers want to retain.  I would add that not every acquirer will go for the whole team in a buyout if they only want key people in an acqui-hire.

The sales team needs to be motivated by money, because that's a startup's only real metric.  There are multiple ways to monetize data and IMHO the founding CEO should compare each potential stream's NPV to set the sales team's initial priorities.  One founder said he liked an energetic sales team but their energy can grate on the nerves of the startup's technical people.  A strategic marketing plan generates a sales script that keeps the sales team faithful to product characteristics.

I was not aware that Traction and other portals are now connecting freelance content marketers to brands that need specific campaigns.  I was aware that marketing narratives must be compelling but it's hard to reach the "suspension of disbelief" phase without an iconic brand that carries an emotional connection.  Apple is probably the standard for such disbelief; people keep paying premiums for their incrementally improving product releases.

I learned a new acronym:  FOMO means "fear of missing out."  This fear of being disconnected from digital culture probably drives demand for those overpriced incremental improvements I mentioned above.  Startups whose marketing embodies FOMO have an edge, and I suspect investors who match patterns will seek that edge.  One founder recommended a Paul Graham essay on pattern matching; I couldn't find it right away but it's probably buried among Paul's tons of wisdom.

One additional participant was venture capitalist David Blumberg of Blumberg Capital.  The dude was super-sharp and relentlessly positive.  IMHO some entrepreneurs who become VCs share very  unique traits . . . transformative vision, lots of imagination, and divergent intellects conducive to pattern recognition.  They also have really charmed lives.  Doors just magically open.  David related numerous instances where his career took an unexpectedly successful turn when he was in the right place at the right time.  His upbeat attitude probably had a lot to do with other people's willingness to open their minds to his ideas.

David noted how software startup cost barriers are now lower than ever, and freemium mobile startups who keep their back-end service costs low can make that business model work.  His take on the 2001 dot-com crash was that bubbles happen when greedy investment bankers throw easy money and their own DNA into tech startups.  I often wish I had experience with investment bankers to see just how badly they pollute things they touch.

I don't know whether David read Paul Graham's thinking on pattern recognition, but he said something about it that opened my eyes.  If business models are more important than tech, then VCs use their pattern recognition abilities to compare those models.  Recognizing product cycle length, required support, and other factors are patterns that reveal the future.  They also leverage the business domain expertise of the startups already in their portfolios to perform due diligence on other startups.  He closed with the "six T's" categories VCs use when evaluating a startup:  Theme, Team, Terrain (market and competitors), Timing (go-to-market strategy), Tech, and Terms.  Wow!  That is some major insight into VC pattern recognition ability.  Thanks, David!

The tension between tech-focused engineers and revenue-focused marketers is as old as the tech sector.  It came up several times in these conversations and I've heard it expressed in different formats before.  David summarized it with a joke:  "How do you tell the difference between an engineer and a marketer?  Engineers don't know how to lie, and marketers don't know when they're lying."  The serious role of the CEO is to ensure the engineers produce something marketable and that marketers stay on the script that keeps them honest.

I'll make one more general comment about the San Francisco startup scene.  I've noticed that a lot of incubation co-working spaces have some pricey amenities.  Designing things like art, terraces, and other ornate extras into work spaces raises the incubator's cost.  Anything non-functional that raises a cost also raises the startup's hurdle rate.  The discount rate VCs apply to tech startups is always extremely high, and it makes little sense for incubation sponsors to raise it even higher by adding costs to commercial real estate.  I like startups that operate on a shoestring because I take a dirt-cheap approach to everything in life.  I can't imagine succeeding any other way but some broke San Franciscans are determined to live premium lifestyles.  Momentum matters more when it comes at a bargain price.

Full disclosure:  I have a tiny sweat equity stake in a mobile startup.  That entity is not involved with Momentum VC at the present time.  

Tuesday, August 26, 2014

The Haiku of Finance for 08/26/14

Candlestick Park plan
Housing and multi-use plots
Vibrant future land

Farewell to San Francisco's Candlestick Park

I never saw the San Francisco Giants or San Francisco 49ers play at Candlestick Park.  I was always too busy with my professional life to make time for a game.  The pending end of Candlestick Park's useful lifetime prompted me to find some way to see the venue before it is gone.  Fortunately, there was one way remaining.

The San Francisco Recreation and Park Department had a plan thanks to Amanda Tugwell.  She conceived and managed a public tour program that allowed people to see the Stick one more time while its operations wind down.  I secured a spot for myself on today's 9:30AM tour, with a discounted ticket price of $15 thanks to my veteran status.  Being a veteran has its perks, including a savings of three bucks off this ticket price.

I did not attend the Paul McCartney "Out There" concert that closed out the park's official schedule.  Friends said it was a cool show but I wasn't about to pay through the nose and fight traffic to see Sir Paul.  I'm sure the guy can sing quite well.  I would have been tempted to pay if Van Halen had played instead.

Amanda served as our tour guide and took us through the stadium, pointing out its notable features.  The statue of St. Francis of Assisi outside Gate A is supposed to be moved to Golden Gate Park at some point, and the "founders' bench" honoring the 49ers' first owners is supposed to move to Levi's Stadium in Santa Clara.  Once inside the gate we checked out the SFPD's two-room jail cell for fans who get too rowdy.  I'd sure like to throw some people I know in there.

We spent some time in the press box while some folks in our group told stories of their favorite games.  One common memory was the Loma Prieta earthquake in 1989.  The fans kept chanting for the game to go on, unaware that parts of The City and the Stick were severely damaged.  I was a high school student in Sacramento at the time, plotting my eventual escape to San Francisco.

The door to the SF 49ers locker room was immediately across from the visitors' locker room.  The trash talk must have been thick in the air if the two teams ever crossed paths.  I asked Amanda where the cheerleaders' locker room was located; it was upstairs somewhere and we would not get to see it.  Darn.  I was looking forward to seeing where the gals undressed and showered.  I'm pretty sure I'd have no difficulty getting an NFL cheerleader to date me, thanks to my extreme manliness.  My schedule is quite full so the ladies will have to get in line.

The 49ers locker room was exactly like what you'd expect from watching NFL games on TV.  No one is supposed to walk on the big team logo on the floor out of respect for tradition.  I played by that rule today.

The jerseys of famous former players hang high on the walls.  I'll bet more than a few of the multimillionaires on pro sports teams are banging each others' wives and girlfriends non-stop.  Rich people tend to do that when they're bored.

Amanda took us to another locker area that used to be the 49ers lockers when they shared the stadium with the Giants.  I stood where Steve Young's locker used to be situated.  The room later became the coaches' and trainers' area when the 49ers took over as sole tenant.

Amanda noted that the 49ers won all of those championships on the wall without the modern demands that wealthy athletes make upon their ball teams.  The ultra-modern Levi's Stadium has everything the players and rich patrons want.  We shall see whether it produces a comparable string of Super Bowl victories.

The final whiteboard lineup represents whatever the coaches were planning for the 49ers' final home game at Candlestick Park in 2013.  I have no idea what this stuff means but I captured it for posterity.  The tunnel leading out to the field used to have a Bill Walsh plaque that players would touch for good luck, much like the "Play Like a Champion Today" sign at the University of Notre Dame's stadium.  I never touched that sign when I was a Notre Dame undergrad and I never miss a chance to denigrate that school.  I do not like my alma mater at all.  I'm pretty sure the 49ers could beat the daylights out of the Fighting Irish any time they want.  Unknown vandals purloined the Bill Walsh plaque before it could be moved to Levi's Stadium.  If anyone knows who pulled that shameful stunt, they should contact SF Rec and Park and the 49ers to rectify the situation.

We got on the field and I asked Amanda to throw me one of the footballs she brought.  I fumbled the catch.  I threw it back to her and missed by at least one body length.  I can at least say I threw a football around on an NFL field for one day.  The goal posts were already down so attempting a field goal was not meant to be.  I never had the skills for team sports, so finance is definitely the better career for me.

We ended our tour in the players' former parking lot, where posters recount the 49ers' most memorable plays.  I remember watching "The Catch" on live TV as a kid.  My fascination with San Francisco probably started at right about that time.  I thanked Amanda for the great job she did as our tour guide.  Her innovative tour concept made money for The City.  Any sports organization should be glad to have her on board.

I did not wax nostalgic for Candlestick Park because this tour was my only experience inside the stadium.  Plenty of San Franciscans must have indelible memories of the Stick.  Families remember the fun times they had in the stands, cheering for their favorite team.  Wealthy people in the luxury suites remember the ostentatious displays of privilege that impressed their business partners and closed deals.  Players and coaches remember their bowl ring victories, shocking defeats, colossal paychecks, and the fun times on the road banging nameless chicks.  The San Francisco 49ers have moved to Silicon Valley, and hopefully they'll change their name to reflect their new neighborhood.  I'm not glad to see them go, but I am glad I got to see their old home at Candlestick Park.  

Monday, August 25, 2014

The Haiku of Finance for 08/25/14

Buying mortgage note
Workout payments or foreclose
Not a passive play

Avenues to Real Estate Paper Notes

Passive income from real estate is a fascinating topic.  Anyone who finds income from property-secured notes boring is free to stop reading now.  I pick up tips from real estate sources every so often about how cash flow notes work.  I have never invested in one but I know just enough to figure out where to start.

Beginning with cash flow notes means finding reliable information.  Personal Real Estate Investor magazine has plenty of articles on strategies for selecting properties and avoiding bad decisions, but I didn't find anything there on cash flow notes.  Google searches for "cash flow note investing" and related word combos reveal plenty of sites claiming to offer education on note investing.  The most realistic introduction to the topic I've found is W.J. Mencarow's The Paper Source, which offers plenty of free background information on researching notes.

Brokering notes seems more difficult than buy-and-hold investing because it requires a constant search for counterparties.  Investing in a note for the long term simply requires a search for available inventories.  The secondary market for notes linked to real estate are private placements, but I suspect that crowdfunding portals covering real estate will eventually list them for sale.  That would be a huge step forward for transparency.

Professional investment managers offer funds that buy pools of available notes and work with homeowners who are delinquent on payments.  This turns non-performing notes into performing notes after a few months of renewed payments.  The key to success for these firms is their ability to buy nonperforming notes at large discounts.  I do not have firm data on the size of this market; banks obviously have some non-performing notes they want to remove from their balance sheets to avoid impairments.  Fannie Mae and Freddie Mac sell large blocks of notes as "tapes" priced in nine figures.  Hedge funds and private equity firms buy these tapes and resell them in smaller lots to private money managers.  Fund managers who refuse some non-performing loans in those tapes may give the large private equity firms the chance to foreclose on homes and become landlords.  Foreclosing on hundreds of houses is a lot of work, which is why most private equity firms getting into landlording prefer to make all-cash offers on normal home sales.  A smaller fund that buys their non-performing notes directly from a bank has a similar opportunity to become a landlord.

Investing in these notes reminds me of tax lien investing.  The similarity with tax liens is that purchasing one allows the opportunity to foreclose and take possession of real property.  The difference is that investors must purchase tax liens from municipal government agencies, and must purchase notes from banks or large asset managers.  Purchasing liens may offer an investor seniority over a mortgage note owner, although I have read conflicting interpretations on how one is senior to the other.  Nolo's discussion of liens and mortgages in foreclosure illustrates how recording dates can complicate matters.  That is a very important thing to know if competing investors seek the most expeditious route to foreclosure.  Nolo's discussion of mortgages and deeds of trust will be of interest to investors purchasing notes outside their own state.  Knowing which category prevails for a note will determine whether the foreclosure process is attractive.

Foreclosing on delinquent notes is not the only result of a note investing strategy.  Buying and holding them to collect the cash flow is the stated rationale of the private funds lining up to buy them and restructure their payment terms.  Retail investors who do not qualify for the gates in privately managed note funds always have the option of buying publicly traded funds that manage ABS and MBS paper.  That route does not involve the cumbersome, labor-intensive approach through private placements.  Privately managed pooled note funds have defined life spans and high fees.  They are not transparent and the field is prey for scams.

I would consider cash flow notes for my own portfolio in normal economic times.  These are not normal times.  The strong possibility of hyperinflation in the US means debtors can pay back liabilities with future dollars that are worth much less.  Owning a cash flow note backed by real estate exposes the holder to asset destruction during hyperinflation.  The underlying real estate remains but the note becomes worthless.  Aspiring landlords should remember how high inflation can turn their pile of notes into a pile of manure.

Nota bene:  None of this discussion constitutes investment advice.  I have to state that out of concern that some nutcase will make false claims against me.  I do not give personal financial advice.

Sunday, August 24, 2014

The Limerick of Finance for 08/24/14

People can't afford to retire
When their financial straits are too dire
Those who refused to save
Dug themselves a nice grave
It's too late to pull out of that fire

Saturday, August 23, 2014

Friday, August 22, 2014

Thursday, August 21, 2014

Wednesday, August 20, 2014

The Haiku of Finance for 08/20/14

Always be closing
Success secret is selling
Revenue matters

House Flipping is Back in Vogue

I have never flipped a house.  Buying and fixing a distressed property requires a combination of repair skills that I do not possess.  I admire professionals who do it well but I suspect that there is only so much renovation talent to go around.  The present bull market in residential real estate is goading plenty of amateurs to try flipping homes.  The people on the left end of the bell curve for rehabbing talent are getting in over their heads.

Cable TV shows like Property Wars and Flip That House make it all look so easy.  Anyone can do this, right?  Well, not really.  Mastering the intricacies of a new vocation takes a lot of time and effort.  Watching a TV show doesn't cut it.  Even the experts have a hard time doing their jobs.  One "Property Wars" dude had extremely severe business and financial problems in Arizona.  Attending some overpriced coaching sessions don't cut it, either, because a lot of so-called coaches are hired for their sales ability rather than subject-matter expertise.

Real estate gurus have plenty of strategies to sell to their clients, in the hope that one will stick when the others are out of favor in the market.  Rehabbers who flip houses are no different.  Their niche strategies include something called "wholesaling," which has a bunch of sub-strategies like selling contracts, assigning contracts, double closes, and of course the reverse wholesale.  Maybe that last one is like a reverse cowgirl position, but with more work and less fun.  My Google searches on these topics reveal that they involve committing to buy properties just to assign ownership to another rehabber or investor.  I wonder what the law has to say about that.  Selling a property as a third party with no equity is the job of realtors.  Doing a realtor's job without the appropriate licensing is legally questionable IMHO.  This is why many real estate professionals engage attorneys during closing.  BTW, a lot of the websites that turned up in my searches for those terms looked really shady, with little content and lots of ads.

I cringe when I hear real estate gurus promote their workshops as some kind of "summit" that only specially-qualified insiders can access.  The next cringe comes when they ask attendees to join their investment team, usually through some proprietary hard money lending partnership.  The pitch is that investors who don't want to do all the hard work of finding fixer-upper homes can just put their money on autopilot while the pros take it and . . . do something with it.  Beginning rehabbers who give up on flipping are juicy prey for gurus' workshop pitches.

I'll bet that real estate courses from UC Berkeley Extension and other bodies are a lot more authoritative and affordable than any guru seminar on house flipping.  Peer-reviewed bodies of knowledge are less likely to come with self-serving snake-oil pitches attached.  I have always liked John T. Reed's real estate offerings because he cites market data and laws to support his ideas.  I have yet to hear a guru's pitch that mentioned legal requirements for seller financing or bank REO purchases.  They all make it sound so easy, when in fact it's hard to get things in writing when working with alternatives to conventional home purchase channels.

Aspiring real estate flippers need data before they start hunting for property to rehab.  NAR's Research and Statistics shows which markets are affordable and which properties are selling.  The "foreclosure discount" is a commonly accepted way to estimate the success of a buy-and-flip strategy in real estate rehabilitation.  Subtracting the median foreclosure sales price from the median sales price in a region determines the foreclosure discount.  The discount can be misleading because foreclosed homes may vary widely in quality from most homes.  Zillow notes that comparing foreclosure resales to their estimated full fair market value makes for a more accurate foreclosure discount.  The more accurate discount offers far less of an attractive gain for flippers; they will have to add even more value with a rehab effort.

I continue to wonder why any competent real-estate professional would insist that tax-advantaged retirement accounts are appropriate vehicles to hold physical property.  People who think it's cool to flip houses in their IRAs need their heads examined.  The IRS has a ton of restrictions governing how money in an IRA can be used for real property.  Working with those restrictions is a lot less efficient than rolling real estate gains into a tax-deferred 1031 exchange.  It's also a lot cheaper to buy property through tax liens than buying the property outright.  Conserving capital that way eliminates the need to find hard money lenders or questionable business partners.

The unanticipated costs of attorney fees, title searches, high-interest loans, and miscellaneous project expenses will chip away at the huge gains flippers thought they would make.  The US housing market crash after 2006 should have taught Americans not to play games with their homes.  That sad era should have humbled those who buy more house than they can afford, lie to obtain financing, use their home equity as an ATM machine, or flip homes like they're playing in casinos.  The sad part now is that the Federal Reserve's QE and ZIRP have brought back all of these phenomena.  Borrowing cheaply to flip quickly is in vogue once again.  I'll watch the frenzy from the sidelines while amateurs lose their shirts, and my cash will be ready when San Francisco levies its tax liens.

Tuesday, August 19, 2014

The Haiku of Finance for 08/19/14

Cost and benefit
Determine fate of program
Fund or terminate

The Cost-Benefit Framework for Police Militarization in America

Police militarization is on many Americans' minds after the recent unrest in Ferguson, Missouri.  One very important aspect of this discussion is hard to find but deserves a public airing.  The cost of police militarization is hidden deep in budget lines at all levels of government.  Taxpayers bear this cost and should ask what benefits they receive in return.

The Defense Logistics Agency (DLA) Law Enforcement Support Office (LESO) administers the DOD 1033 Program, which provides free materiel to local law enforcement agencies that request it.  The LESO notes that it transferred over $449M worth of materiel in 2013.  That's about $1.43 per capita, assuming the entire cost was funded with current year appropriations.  The program began with the NDAA for FY1997, so any comparison with results should start at that year.

The materiel in question includes armored vehicles, body armor, night vision equipment, surveillance devices, and other implements intended for use in high-threat tactical situations.  It is appropriate to consider whether situations requiring such equipment have occurred with more or less frequency since 1997.  It is also appropriate to consider the cost of crime as an opportunity cost that more robust policing should mitigate.  Slate notes that intermittent efforts to calculate the costs of various crimes have periodically filled our knowledge gaps.  I did not see statistics in that article for the cost of high-threat tactical situations.  Mark Cohen's landmark 1998 study "The Monetary Value of Saving a High-Risk Youth" is focused on the cost-benefit relationship in crime prevention, not high-threat tactical situations.

Let's consider other tools.  The RAND Corporation's Cost of Crime Calculator allows citizens to compare the costs of crime in their neighborhoods.  RAND's "Hidden in Plain Sight" study concludes that investing in police personnel (i.e., the number and quality of the humans in the force) has a favorable cost-benefit result.  It does not specifically cover high-threat tactical situations or use of materiel, but it points the way to understanding how to frame them.  "Hidden in Plain Sight" compares the annual cost of crime in a locality to that area's gross municipal product (GMP), aka gross metropolitan product.  Analysts can thus isolate the cost of a singular high-threat tactical situation, such as arson damages from a riot or sales lost due to store closures during a protest, and compare it to GMP.  We can then compare that financial loss to the cost of DOD 1033 Program materiel used to mitigate said situation to determine a cost-benefit relationship.

Analysts have national data standards on crime costs.  The FBI's Uniform Crime Reports aggregate crime data for all US municipalities, now updated with the UCR Data Tool for searches.  The NIH study "The Cost of Crime to Society" outlines standards for sensitivity analysis and endogenizes intangible costs that will likely follow most violent criminal events.  Analysis of high-threat tactical situations should adjust the NIH's base cases for the cost of DOD 1033 Program materiel committed to violent crime incidents.

This framework is only the beginning of a cost-benefit analysis.  Every municipality should run the numbers for DOD 1033 Program materiel deployed in response to local violent incidents.  High-threat tactical situations such as riots, bomb threats, and active shooter hostage situations are infrequent but dramatic.  Anecdotal reporting suggests that police forces are inclined to use military-grade gear to perform routine functions, with little regard for utility, fuel cost, or maintenance needs.  Serving a search warrant is obviously cheaper on foot than in an armored personnel carrier.  Municipal police forces should ask themselves whether their community's criminal statistics justify requests for heavy gear that they may never need.  Citizens in a free society have a right to ask whether a gas-gazzling surplus MRAP has a better cost-benefit result than a standard police cruiser.  

Monday, August 18, 2014

The Haiku of Finance for 08/18/14

Funding costly mine
No chance of cash flow ever
Do not even start

California Gold Mining Pokes the Mother Lode

Today I noticed California Gold Mining (CGM.V / CFGMF) making its way across the financial landscape.  It is based in Canada but explores projects both in Canada and the central California Mother Lode.  It is good that the management team is qualified in geology and mining engineering but it's hard to tell from their bios just how much time they spent away from mining when they worked in finance.  Adding value in mining means bringing projects to maturity, not just raising capital.

The Canada project has a 43-101 mineral estimate and PEA.  The technical report's indicated resource grades at less than 1g/t Au are not all that attractive.  The PEA from 2013 concludes that the negative cash flow of -$43.3M from an expected five-year mine life makes the project uneconomical.  They would need a gold price over $1800/oz to make it attractive.  That's a long way for the spot price to climb from here.

The California project has some legacy exploratory data but I do not see a 43-101 report for this property on their website.  I also have doubts about the distance of the site from water sources (specifically the Merced River), assuming they plan to separate ore with heap leaching.  Finally, the photos of hilly topography make me wonder whether there is room on site for a mill and tailings area.  Those elements need flat terrain to be viable; changing the topography through engineering will add cost to the project.

I don't think I even need to look at the financial statements for this one.  The stock trades at about a nickel given the uncertainty of the above projects.  I track junior mining companies because someday I'll find one that deserves to be in my portfolio.  California Gold Mining isn't there yet because I need to see development of a mine plan and not some idle poking around the Mother Lode.

Full disclosure:  No position in California Gold Mining at this time.  

Financial Sarcasm Roundup for 08/18/14

It's time for me to spew my weekly cynicism at the financial world.  Let's go.

Chair Yellen's upcoming Jackson Hole appearance is worth watching for what she says about Americans stuck in part-time work.  Jeez-louise, do you think she'll admit that the Fed's low-interest rate policy has little to do with this?  Keeping interest rates low has kept non-viable businesses alive and priced many Americans out of first-time home purchases.  It has had little effect on spurring new job growth, as the St. Louis Fed admitted in April 2013.  Ms. Yellen is wasting her time if she thinks the Fed can solve the economy's structural problems with more credit.  Anyone at Jackson Hole brave enough to dissent won't be heard among the crowds of central bankers snoring away.

Bond analysts tell investors not to worry about the fixed-income market's size in the mutual fund universe.  This is too funny.  Comparing the bond funds' size to the total fund universe and saying it's normal ignores how central bank stimulus has inflated equity valuations along with bond valuations.  A normal share of a multiple asset bubble is still an inflated share.  Comparing cash reserves to a previous bond market rout ignores the zero-interest rate policy that was not present in the last bear market.  I don't know what bond analysts are smoking but they need to stay downwind of sane investors.

The ECB is not making that case to banks that its cheap cash is worth taking.  Remember that the ECB is not the Fed.  It does not have the same policy approach to repos or bank reserves.  Euro-area credit institutions hold their reserves with their national central banks, not with the ECB, so enforcement requires more coordination than in the US.  This means quantitative easing looks very different in Europe, and proceeds more slowly.  I expect the ECB's LTRO to give way to more STRO, as the ECB learns the Fed's lesson of moving its duration pig-in-a-python toward the short end of the yield curve.  This will of course increase the ECB's risk of insolvency, just as the Fed has larded up its balance sheet with low-quality assets.  It also risks shutting off funding for the various troika bailouts in the eurozone, if interest rates rise.  That would be very good for my personal bet against the euro.

These central banks are a rich source of sarcasm this week, if nothing else.  They have no idea how much fun they add to my life.

Alpha-D Update for 08/18/14

Here's the latest and greatest Alfidi news.  All of my covered options from last month expired unexercised.  I renewed my covered calls and cash-covered puts around GDX; gold mining remains a useful hedge against US hyperinflation.  I renewed my covered calls on FXF; the Swiss franc remains stable in value and is useful to me as a US hyperinflationary hedge.

I renewed my covered calls on FXA and FXC; I believe the Australian and Canadian currencies provide additional hedges against US dollar hyperinflation.  I have been encouraged by a steady stream of news items from those two countries that indicate a disinclination to pursue extraordinary monetary stimulus.

I am still long a put position against FXE; I remain pessimistic on the euro's long-term survival prospects.

I continue to watch other potential inflation hedges with fascination.  I track timber REITs, public storage REITs, pipeline operators, and stocks in the mining and energy sectors.  They are all at incredibly high valuations.  I also occasionally check valuations of select stocks in my old favorite sectors - defense, logistics, and finance.  I don't see a single stock in any of those sectors that I would buy right now.

The Fed's perverse monetary policy has inflated the value of everything under the sun.  Masking the true cost of capital does a fundamental disservice to investors who seek value.  My own entry point is far below where US stock markets think equities are valued.  I am not throwing away my money.  Sit back and admire my genius, because that's all you can do with what I say.

Nota bene:  I've said it before, and I'll say it again.  None of this discussion constitutes personal financial advice.   I do not ever make securities recommendations to anyone; not on this blog, or in person. or any other way.  I declined to renew my securities licenses in 2006 after I was terminated as a financial adviser for failing to acquire clients.  

Sunday, August 17, 2014

The Limerick of Finance for 08/17/14

Carlos Slim says Latinos need wealth
Pushing funding for training and health
There's no doubt they'll succeed
Following Slim's own creed
No need to chase business by stealth

Saturday, August 16, 2014

Friday, August 15, 2014

The Haiku of Finance for 08/15/14

Tax inversion drive
Escape high-tax location
Unburden earnings

Alfidi Capital at Startup and Tech Mixer August 2014

I attended the Startup and Tech Mixer for the first time ever last week.  This series has been a fixture on the local scene for some time, so it was about time I made my presence known.  The multi-floor event at the W Hotel was crammed with artisan vendors, glow-light fun, and parts of the local startup ecosystem.  I'm pretty sure I'll cross paths with Sustainable Silicon Valley again now that we've formally connected.  I couldn't stay with the exhibitors forever because I needed a front-row seat for the speakers.

The kickoff panel discussed alternative ways to work and live in the 21st Century.  Eliot Peper pitched his fiction book Uncommon Stock, which resides in a genre of literature called the "startup thriller."  I did not know this niche existed, although the Tom Clancy style of "techno-thriller" has been around awhile.  The panel's insights on piecemeal work as the new career paradigm dovetailed with the stuff I've been doing for the past few years, but the panel should have discussed just how difficult it's going to be for most people doing it.  Check out the panelsts' backgrounds in Eliot Peper's blog article.

The single most important take-away from this panel was one founder's description of how he graphed his company's weekly results in a 2x2 matrix.  The X-axis was for things they're good at doing.  The Y-axis was for things they enjoy.  The goal of all of their decisions (operations, hiring, etc.) is to move their cloud of data points to the upper right quadrant.  Getting stuck in the lower left quadrant means you're on the wrong path in business and life.  See folks, the 2x2 matrix comes in handy in the real world.  Startup founders who didn't learn this stuff in grad school should jump into accelerators like Techstars.

Fred Kofman discussed his Conscious Business work.  Business could use more philosophical thinking and Fred really delivered.  Bounded rationality helps us sort information to manage our typical cognitive load.  The challenge for thinkers like Fred is to help people find ways to take control of situations instead of making excuses for victimhood.  I've got a real-world application already.  Someone needs to tell San Francisco's anti-gentrification protesters that they're wasting time throwing righteous indignation at landlords and Google's commuter buses.  Those agitators need some conscious business to take charge of their earnings and be productive.

The conscious stuff made me more conscious of what enterprises can do to encourage their employees.  Startup founders can start by creating a culture of personal responsibility.  They can model take-charge behaviors and refrain from whining about unfair things that are out of their control.  Don't obsess about the market size of your competitors, the complexity of regulations, or the expense of multiple taxes.  We can't change those things at our level.  We can only impact them once our startups' revenues are big enough to give us a seat at the adults' tables.

I had to run to another event, so I missed hearing Chip Conley speak about his role with Airbnb.  He did a brilliant job building the Joie de Vivre hotel chain and I want to know why he made the switch to a sharing economy enterprise.  It is rare for an establishment icon to risk cannibalizing his primary business' revenue by endorsing a disruptive startup.  Startup founders often know they're winning when one of two things happen.  First, the establishment gangs up on them with lawfare, and many hotels and homeowner associations are pushing zoning challenges to Airbnb hosts.  Second, a respected establishment player jumps ship to back the startup.  We have not heard the last of the Airbnb story.  I have not heard the last of Startup and Tech Mixer.