Thursday, December 08, 2016

The Haiku of Finance for 12/08/16

Bitcoin travels far
Empty digits into air
Cash will not appear

Wednesday, November 02, 2016

Tuesday, October 25, 2016

The Haiku of Finance for 10/25/16

Starting new business
Means getting off common path
Takes a leap of faith

Monday, September 26, 2016

Wednesday, August 17, 2016

Wednesday, July 27, 2016

Tuesday, June 28, 2016

Tuesday, May 24, 2016

Friday, April 01, 2016

Thursday, March 31, 2016

Richmont Mines Hangs In For Long Haul

I am impressed with Richmont Mines (US ticker RIC). Their longevity and profitability in 2015 were rare in a junior resource producer. The main challenge ahead is to replace mined reserves, either with new discoveries or with better engineering to make discovered resources viable.

The management team must be doing something correctly. Their mining engineer CEO has been around other producing companies. It's nice for once to see actual mine operators running a mining company instead handing the place over to former consultants or investment bankers. Their other key people have been around the block in the mining sector for a while.

The company has two active mines in Canada, plus other properties in various stages of exploration and development. The PEA for the Island Gold mine and the latest 43-101 for the Beaufor mine are on Richmont's website. My problem is that the PEA is abbreviated and the 43-101 is in French. Someone in charge over there needs to show me the long forms in my own language. I prefer to examine complete primary source documents in English. I am going to take the company's word that independent parties have verified its 2P reserves and ore grades.

Results in recent years aren't stellar compared to the larger world economy, but are probably better than countless mining companies facing bottomless financial holes during a bear market for metals. Profit margin at 4.72% (from Yahoo Finance today) isn't great, but plenty of resource sector investors would like to see that kind of money after holding other beaten-down mining stocks. Check out Richmont's numbers at Reuters. Its five-year EPS growth rate of -18.39% shows that even solid operations can't hold back a bear market in metal prices. Its five-year ROE and ROA are both below one percent, which are also below their industry averages.

Richmont Mines is somehow surviving when its larger competitors are struggling and the sector's juniors are cratering. Someone has to occupy the middle of the market.

Full disclosure: No position in Richmont Mines at this time.

Friday, March 25, 2016

Thursday, March 24, 2016

James Bond Belongs On Wall Street

Wall Street often undervalues military veterans. Snobs who've never broken a sweat look down their nose at people who've worn muddy boots and dirtied their hands. The only veterans that might be exempt from the categorical cold shoulder are those with intelligence backgrounds. The appeal has little to do with qualifying skills and aptitudes. It has everything to do with a popular culture phenomenon that romanticizes intelligence work as something exclusive to a small elite, just like how Wall Street sees itself.

Intelligence analysis has a lot in common with financial analysis. Both rely on open source material for background data on geopolitical conditions and economic trends. Analysts in the US military and intelligence community use detailed methodologies for tracking changes in a competitor's strength. Private sector analysts have the same mentality when tracking a company's financial statements and news releases. Both types of analysts take the protection of confidential and proprietary information very seriously, and they take pains to safeguard privileged information from disclosure. It should be easy to make the argument that intelligence people would be assets on Wall Street. It's even easier to use a movie icon as shorthand for the advantages of having an intelligence pro in a financial house. That icon is none other than Agent 007, James Bond.

Anyone who's seen a Bond film knows the guy's fictional lifestyle. He travels the world with ease, wears a tuxedo to gambling tournaments at five-star hotels, drinks martinis, wears an expensive watch, drives a customized luxury car, and comes face to face with the most powerful and intriguing people in the world. James Bond is the archetype of alpha achievement and unquestioned competence, with a healthy serving of of sociopathy. Stereotypical financial titans think of themselves exactly the same way. Plenty of senior investment bankers and private equity fund managers negotiate high-stakes deals with intriguing international counterparts. They can afford a James Bond lifestyle in real life. 

Your typical high-powered Wall Street type gets deal flow from peer referrals, and hiring also works the same way. Image and prestige matter more than actual qualifications. An investment banker who sees a resume labeled "intelligence veteran" doesn't think about the candidate's analytical skills, geopolitical outlook, or cultural expertise. They think, "It's Agent 007. This person must have a lifestyle just like mine." That's all that matters.

Military veterans aiming for Wall Street careers can make this irrational bias work in their favor. Executives who think they need a Bond-like presence on their team are suckers for an intelligence veteran's pitch. The dumb trust fund kids running around Wall Street's mid-levels make hiring decisions on instinct. Action movies form their entire picture of military life. They'll hire for a "killer" advantage if they think a veteran brings shock and awe to a deal. You don't have to be a James Bond (or Jane Bond for the female equivalent) to close the deal, but the image's unspoken power just might open a door that would otherwise be closed to veterans.

Right this way, Mr. Bond. We've been expecting you . . . in the Fortune 500 boardroom.

Tuesday, March 22, 2016

Sunday, March 20, 2016

Someone Didn't Meet Investment Banking Thresholds In San Francisco

Investment banking is a fast-paced, high-powered business. Deal flow drives egos, reputations, and compensation. Bankers place large amounts of capital into circulation. The bigger the deal, the harder they work. They do not waste time with small deals. That is why it is so hard to believe some San Francisco blowhards who have claimed in my presence that their small-time reputations came from really big deals.

The Dummies book series describes the revenue threshold separating investment banks from business brokers. Small businesses don't need the specialized services of expensive investment bankers when they are better off finding a generalist intermediary. Most entrepreneurs who have bought or sold a small business figure this out on their own. Hilarity ensues when someone who has never owned a business tries to claim they know how this works.

I met the biggest lying phony of a lifetime a few years ago in American Legion Post 911 in San Francisco. The Legion took forever to shut that phony Post down but its sad legacy lives on in the denials of its former prime movers. The lying phony once claimed on Yelp that he had hired Goldman Sachs to sell his unspecified business, which of course never existed. Try getting a Goldman banker on the phone for any deal worth less than $100M or so and you'll be lucky if they don't just bust out laughing. Maybe a young top-shelf i-banker would take a deal under that threshold if they were totally stupid, or if they worked for a managing director who wanted to force them out for lack or revenue.

Another pathological liar crossed my path around 2012 through some investor relations events that I no longer attend. The guy's claimed record of bulge bracket deals in remote islands made no sense, especially after he started promoting penny stocks. That's a step down in prestige and income from globetrotting i-banking. His further connections to "deals" with companies having no verifiable revenue or visible operations made me shake my head. I can't be around people with such bizarre notions of successful deal-making.

Glib talk about deal thresholds can fool a lot of otherwise intelligent people. It doesn't fool me. I just love studying financial minutiae. Red flags fly fast and furious when someone within earshot brags about closing deals that can't be verified with simple sleuthing. The SEC doesn't always pursue small-fry liars like the Legion Post 911 idiot or the island-hopper. I enjoy picking up the trail where regulators leave off.

Friday, March 18, 2016

The Haiku of Finance for 03/18/16

Promising rainbows
Sales rep lied about treasure
Fool's gold in the pot

Thursday, March 17, 2016

The Haiku of Finance for 03/17/16

Spare change in the couch
Savings plan must start somewhere
Just not where you sit

Wednesday, March 16, 2016

Removing All Mystery From Modern Wealth Management Performance

Stock brokerage was a middle class career path in America after World War II, thanks to brokerages that hired military veterans to staff branch offices across the country. The sector morphed into financial advisory and became a playground for the spoiled kids of rich families. It happened gradually, then suddenly, much like the way spendthrift households go bankrupt.

Legions of stock brokers built their books of business with long hours of cold-calling complete strangers. Federal legislation behind the National Do Not Call Registry removed millions of potential wealth management prospects from the financial sector's reach. The USA PATRIOT ACT further required financial institutions to thoroughly know their potential customers, in the expectation that familiarity kept terrorists out of finance. Brokerages in the early 2000s knew these legal changes would quickly make mass cold-calling an obsolete way to attract new business. They needed some new juice.

Demographics answered the brokerages' growth dilemma. Some market researchers figured out in the 1990s that wealthy people increasingly preferred doing business with other people who were just like them. Being rich was the surest sign of trustworthiness. Everybody was getting rich in the 1990s from the dot-com bubble, so it all seemed so easy without any work ethic or basic financial competence.

Leading brokerages hired consulting firms after the 2001 dot-com crash to redesign their new broker employment pipelines, compensation plans, and even their branding and cultures. The result was a collection of top-tier brokerage firms that defined success as walking in the door with enough money to instantly produce high six-figure revenue. Most firms would put this figure at a minimum $10M book of business. The only people who could pull this off were the trust fund kids born into serious wealth. Mom and dad hand over the family fortune to Junior, who takes a wealth management job to fulfill some stipulation in their multigenerational trust fund. Meanwhile, the brokerage's branch manager acts in loco parentis to ensure Junior sticks around during market hours. It all makes being rich look so easy, and that's enough to fool newly rich clients.

It's easy to become a top-performing wealth manager today. Just walk in the door with your family's $10M and do absolutely nothing. Anyone else hired in a wealth management branch who walks in with less money will be fired in a few months, because their expected production after half a year will curve up by the amount of revenue they would have made if they had walked in with $10M. In other words, wealth management firms employ the hard-working poor to generate qualified leads that their rich peers will collect after they are fired.

I have no empirical research to support my observations above. Chalk it all up to what I have personally witnessed since earning my MBA. Investors have every right to know what their hired financial professionals do with client money. In almost all cases, the hired pros do somewhere between nothing and less than nothing.

Thursday, March 10, 2016

Wednesday, March 09, 2016

Thursday, February 25, 2016

The Haiku of Finance for 02/25/16

Growth or value stocks
False choice ignores true metrics
Style funds get it wrong

Wednesday, February 24, 2016

Tuesday, February 23, 2016

Monday, February 22, 2016

The Haiku of Finance for 02/22/16

Supply chain genius
Unstick every bottleneck
Six Sigma route plan

Early Political Donors Face Diminishing Primary 2016 Expectations

The early shakeouts of the 2016 US presidential campaign have done more than dash the hopes of some long-shot candidates. The financial backers who committed piles of money to the early efforts of doomed campaigns also face major disappointments. Any expectation that money could transform this election are gone.

The Jeb Bush campaign was one of the largest wastes of money in American political history. The biggest Bush donors got badly burned and they now face candidates who are unlikely to consider their business interests. The current Republican front-runner has spent little on direct media or ground organizations compared to the other serious candidates. One of the cheapest modern GOP campaigns, in both popular votes and party delegates acquired, is possible with celebrity-powered free media that reads the cultural zeitgeist correctly.

The Anglophile Establishment in America has always had a bias in favor of large enterprises. Big sectors employ lots of unionized voters and are easier to protect with trade rules and tax breaks. The remaining Establishment hopes in either major political party lack popular appeal precisely because their longstanding ties to big business are so obvious.

The business community must now face the prospect of a future administration that owes them nothing. A progressive Senator promising unlimited free benefits and a real estate tycoon promising a free border wall will feel no loyalty to Wall Street or subsidized sectors, assuming they get their party nominations. America is on the cusp of a political transformation that may break the rule of an oligarchy unable to fathom its own shortcomings. Money could not buy political cover this time. Political "investors" must recalibrate what it means to earn ROI without political influence, if their fortunes even survive the next recession.

Sunday, February 21, 2016

The Haiku of Finance for 02/21/16

No post-crash learning
Theses built on fakery
Soon to feel the burn

Awaiting Some Tumultuous Market Tumble

It has been a long time since the 2008 financial crisis. Everyone who bet on a market recovery since then has been rewarded. Professional money managers think they have the recovery all figured out. Endless monetary and fiscal stimulus in the developed world made even the worst investment theses prosper. The experts have no idea how wrong they are about so much of the economy.

It is impossible to fairly value any publicly traded financial security when interest rates are permanently at zero. It is difficult to invest in fixed income securities when sovereign defaults in Greece, Puerto Rico, and elsewhere invalidate distressed debt investing. It is hard to buy real estate in desirable locations when credit-impaired mortgage borrowers drive up prices after putting no money down. It is ludicrous to endorse some nation's economic potential if its government statisticians falsify important data.

Painful lessons recede from memory when shamans apply fake salves to real wounds. The snake oil feels good for a while if the patient does not catch on to the placebo effect. Witch doctors on Wall Street have run away with investors' money since 2008. The cleverest and luckiest players have already left the game. Suckers remain, awaiting their chance to hold an empty bag while Wall Street's knaves clean them out.

The post-2008 economic recovery is mostly a mirage in Europe and the United States. China's growth miracle has been a mirage for some time. The BRICS were a cute marketing concept as long as investors never figured out that those countries had weak legal climates for investing. Privately funded unicorn startups are deflating, flushing their employees' stock options down the Silicon Valley drain. Investment concepts that looked great when capital had no cost were suitable only for fantasies. The market tumble that will snap people back to reality will be one heck of a tumult.

Saturday, February 20, 2016

The Haiku of Finance for 02/20/16

Apple theater
Pretend to protect data
Convince amateurs

Financial Sarcasm Roundup for 02/20/16

It's always a great day at Alfidi Capital. It's even greater when I'm throwing sarcasm at the financial world.

China replaced its stock market regulator with a bank economist. Trading one type of loser for another will not repair foreign investors' lost confidence. The symbolism of a former central bank official watching stock movements is that capital markets must do the state's bidding. They could try putting a panda bear in charge. It would be more fun to watch than a human regulator and just as effective given the system's pervasive corruption.

US law enforcement and Apple are testing each other's legal patience. It looks like so much theater to me. Apple has cooperated with data subpoenas before. It's fairly easy to unlock iPhone data anyway. It's so easy, a caveman could do it. The latest case should not be such a big deal but Apple has to at least go through a few hysterical motions to please Silicon Valley's hard-core libertarians and data geeks. The data privacy crowd simply does not grok the "layer cake" messaging methods that federal regulators often employ with the finance sector, and now with the tech sector. I do not expect the data crowd of Star Wars fans and Bitcoin nut jobs to uncover such subtle public performances.

The heart of Yahoo's operation is going to the highest bidder. The board should fire the CEO for dragging this decision out so long. I would have kept the core business and sold off everything else, but the Yahoo board never asked me to become CEO. It's their loss. I will LOL if Microsoft emerges as the ultimate buyer, getting a bargain for what they should have acquired in 2008. Silicon Valley's smartest people sometimes do some really dumb things. It took a series of geniuses over a decade to destroy Yahoo when it could have been saved under Microsoft.

I still use Yahoo Finance because I like the details. It enhances my net worth. Dumb people in the Valley continue to dump capital into doomed tech startups. Laughing at them all will enhance my well-being.

Friday, February 19, 2016

Wednesday, February 17, 2016

Tuesday, February 16, 2016

The Haiku of Finance for 02/16/16

Startup gets a prize
Not about earning profit
Just for looking good

Alfidi Capital Visits DeveloperWeek 2016

I did not have time for either the full CTO World Congress or DeveloperWeek in 2016. I had to make an appearance at DeveloperWeek's VIP reception at Galvanize SF because I am a VIP after many appearances at tech events in Silicon Valley. I avoided the sticky badge and went straight for the food and beverages, along with the snazzy brand icon photo below.

I sat for the brief awards ceremony in between my rounds of booze. Several well-funded startups have made a big splash among the media portals tracking software developers. I have always believed that the ultimate success milestone in monetization is actually making a profit rather than impressing tech writers. I hold a minority view as long as VC-backed startups can afford PR in tech media.

Any reception at Galvanize brings out a crowd of people who play at having tech careers but aren't really serious. They were mostly downstairs tonight for another tech reception. These people are usually in the second or third round of hires at VC-backed startups because they enjoy riding the freebie gravy train. The permanent adolescents in The City never grow up. They will still have roommates into their late 40s and will always complain that dating apps never have a match for their personalities. If someone could create a matchmaking app for total losers, the app would find a boatload of beta testers in San Francisco.

Congratulations to the DevOps people who won prizes at DeveloperWeek and other conferences. The hiring mixers are brimming with developers jumping into their prize-winning startups. I can drink any of them under the table if I have free food before social hour begins. Winning at drinking is easy for me even with an empty stomach but I have to let the public think that I at least make an effort.

Monday, February 15, 2016

The Haiku of Finance for 02/15/16

Rush to recession
Consumers ignore macros
Ask to be wiped out

Financial Sarcasm Roundup for 02/15/16

Happy Presidents Day, America. George Washington and Abraham Lincoln never imagined that the Internet would carry their noble messages to the far reaches of the globe. It also carries my sarcasm to those places.

Oil traders are getting more bullish. The bulls may have read my recent writings, or they may be figuring out that bankrupt oil producers can't pump forever before turning off wells. Oklahoma is drowning in liquid black gold and drillers are drowning in red ink. Consolidation this year means fewer slick operators selling flimflam and dry holes next year.

US consumers are spending again. People who went broke during the holidays are now counting pennies saved on lower gasoline prices. They spend those pennies with abandon. Watch your neighbors who aren't saving; they won't survive the onrushing recession. Their homes will be for sale upon foreclosure and I might be waiting with a check in hand.

Franklin Resources' Mark Mobius likes Chinese stock bargains. He misreads garbage as a bargain. Western investors who aren't from Asian bloodlines will never understand the false fronts that Asian financial markets present. Dopey fund managers are born to get clobbered after they buy Chinese state-sponsored Ponzi schemes.

Oil ministers will talk through their mutual pain. Expect lots of crying, wailing, and whining about an oil market that is out of control. Emerging markets got more than they expected when Saudi pumping wrecked their capital accounts. The major oil producers could have used their dollar reserves to diversify away from oil production in the face of UN COP21's coming wealth redistribution scheme. Instead they chose to maintain kleptocratic rentier states and defend their currencies. No one in the developed West should cry for the oil countries that proved too weak to stand up to the Saudis and make their own production cuts.

Presidents Day sales don't apply to political campaign contributions. A dollar for your favorite candidate does not go farther over a holiday weekend.

Saturday, February 13, 2016

The Haiku of Finance for 02/13/16

Rig a floating rate
Dumb banks get caught and punished
Fix Libor worldwide

Financial Sarcasm Roundup for 02/13/16

Most people go out for fun on Saturday nights. Staying home to publish sarcasm is my idea of fun.

Apple is about to throw new versions of its hottest products at consumers. I believe Apple's most fervent customers are the same kinds of too-rich, too-dumb people I meet at San Francisco VIP events. Only a moron pays a premium every 18 months for an updated product with only incremental capability upgrades. Young urban trendies have to show off shiny gadgets because they live for today. They will have no retirement portfolio for tomorrow.

More banks will face Libor manipulation action. The ones that were too dumb or too greedy to settle early with regulators are going to bite the bullet. Only dummies and crooks try to rig markets anyway. The lack of Libor transparency cries out for an international regulatory solution. The World Bank and IMF are welcome to call me anytime if they want my help.

Greece's weak pension plan jeopardizes its chance for more bailouts. The story never ends. Greece ran out of game theory options last year and is now prostrate. Angry farmers who don't like contributing more to their pension funds will be even angrier when their future pensions won't even buy a gyro. I don't mind making jokes about gyros because the rest of the world makes fun of American hot dogs and hamburgers.

Sunday may shape up to be even more sarcastic than Saturday.

Friday, February 12, 2016

The Haiku of Finance for 02/12/16

Report revenue
Recognize the period
Record on sale date

Financial Sarcasm Roundup for 02/12/16

I had a busy day today. Important things demanded my attention. I read a whole bunch of very interesting material. I barely have time for sarcasm right now, but I make time.

The Federal Reserve's chair does not wish to be blamed for stock market turmoil. What a bunch of hooey. The Fed's ZIRP has done more to misprice securities valuation than anything else it has done in its history. Normalizing rates sooner would have depressurized the stock market without all of this pain from unsustainable gains. Other central banks took off with variations of the Fed's approach and now we see China's collapse hurting other markets. Way to go, banker gnomes.

Europe's sovereign debt market is seriously stressed. I wouldn't be surprised if some random announcement from one of the PIIGS' finance ministers makes the whole tamale implode. Suckers bought European government bonds and will soon eat their losses. The ECB's dollar swap line agreements with the Federal Reserve were an open secret among Transatlantic bankers in the last crisis. The rest of us won't find out for years just how much credit the Fed has given the ECB to support its bond purchases now.

I just did a Google search of "leveraged ETF" to see that these stupid products are more popular than ever. Investors chasing these things and advisers pushing them obviously can't do the math on daily leverage calculations. The best hope for sanity is a market crash that wipes out the 2x-3x bullish ETFs combined with a credit crisis that destroys the liquidity of bearish ETF sponsors. Brokerages programming their robo-advisers use passive ETFs without leverage for darn good reasons.

I should be busy tomorrow. I continue to ignore losers who demand my attention because I only have room on my calendar for winners.

Thursday, February 11, 2016

The Haiku of Finance for 02/11/16

Cash is always good
Nothing wrong with more money
Stuff pocket with change

Wednesday, February 10, 2016

The Haiku of Finance for 02/10/16

Gold back on the rise
Dollar tension lights up price
Bricks flow back to vaults

Financial Sarcasm Roundup for 02/10/16

Today is Ash Wednesday in the Roman Catholic Church. I am no longer a member of any religion so I don't need to attend church services. My sarcasm never went over well during prayers anyway.

Europe wants the G20 to target growth. Got it. One continent's finance people want the world's leading finance people to decouple global growth from China as quickly as possible. Panic is not yet in the air. The real panic comes when the world's bifurcated economies - one for financial flows, one for real goods - trend down together. The rest of the world (ROW, in money manager parlance) can't get China off its balance sheet fast enough.

Coal power plant cleanliness gets a breather, so to speak. The charred, hard carbon miners have taken a beating for years thanks to the world's zeal for lower emissions. I don't see how the world can substitute for metallurgical coal and coke in making steel. China's crashing demand has put the lid on steel demand anyway, so even coal's industrial use faces dark days. It would take a lot more backyard barbecues for charcoal demand to make up for declining coal power.

Gold prices respond positively to the Federal Reserve's interest rate hints. Gold traders and retail investors view the Fed's experiment as a mistake, proving they are a reactive audience. The Fed's "layer cake" message tastes bitter to gold bugs stuck in old views of monetary tightening. The new era of a ginormous Fed balance sheet that constricts traditional stimulus means gold traders missed the news about what normal interest rates now mean. A normal situation is where the FOMC makes any change, in any direction other to zero.

Tesla Motors lost money again but its shares kept rising. The more cars they sell, the more money they lose. Investors are really stupid to think that a money-losing car company will be worth more. There is something very wrong with Tesla's inability to control both its fixed costs and variable costs. Software entrepreneurs need a whole new set of skills before jumping over to hardware.

I would like to start a religion that celebrates Cash Wednesday. It would be an opportunity for me to stand up and wave cash around to the applause of my congregation.

Tuesday, February 09, 2016

The Haiku of Finance for 02/09/16

All cash real estate
Great plan for lifetime homestead
No mortgage needed

Financial Sarcasm Roundup for 02/09/16

New Hampshire voters have made up their minds tonight, mostly in favor of outsiders. I have made up my mind in favor of myself, because I can fix all of America's problems with sarcasm.

Silicon Valley startups aren't happy anymore. Unicorn employees are taking off their party hats, realizing that the unicorn they were riding to riches was a donkey in its own party hat all along. Employees who were counting on their stock options to pay for a McMansion are watching those dreams evaporate. Liquidation preferences are the well-connected VCs' way of walking away laughing at everyone who worked hard from the start. BTW, I have never seen the point of the Crunchies awards. A corporation's performance is not like a movie or pop song. The only performance that matters is the bottom line. Net income is the only award that pays bills.

Germany is lining up praise for Deutsche Bank. I recall hearing the same things from Bear Stearns and Lehman Brothers before they fell apart. It's too bad the ECB's bank stress tests weren't really stressful. Examiners could have looked under the hood at Deutsche Bank and figured out what needs fixing. Now investors need to take a look at the entire European banking sector's exposure and figure out who's sitting on powder kegs. Greek sovereign debt is the obvious first place to look, then Chinese sovereign debt, then other emerging market debt, then any rotten bananas stored in these banks' break room refrigerators.

San Francisco property owners are sitting on big bubble values. No one saw this coming, of course, after the dot-com bubble and housing bubble of the last decade. I love the mention of all-cash buyers looking for investment properties. The clueless private equity funds and assorted rich people who bought homes in The City sealed their own fates. I will buy what they abandon at bargain prices.

Voting is awesome. Medieval peasants would rebel against their lords when they didn't like working conditions. Today we have the bloodless option called elections to voice displeasure with Establishment elites. I would seriously consider voting for a candidate who formally adopts sarcasm as a campaign platform.

Monday, February 08, 2016

Sunday, February 07, 2016

The Haiku of Finance for 02/07/16

Random stock movement
Meaningless in the short term
Can't forecast long term

The Limerick of Finance for 02/07/16

Wells Fargo's big mortgage fraud due
Resolved after folks went to sue
Now they're clear for new scams
Ignore credit exams
Underwriters must still get a clue

Saturday, February 06, 2016

The Haiku of Finance for 02/06/16

Pointless gathering
Startup marketing wasted
Low maturity

Clueless Tech Scene Partying Away Super Bowl 50

You may have heard that Super Bowl 50 is playing in the San Francisco Bay Area this year. I still think the football team that used to call San Francisco its home should change its name to the Silicon Valley 49ers, but that can wait.  The weekend build-up to our nation's prime secular festival transformed part of downtown San Francisco into something resembling a clean, normal city. I had very little to do with the festivities other than accept an invitation to a pre-party. The tech startup sponsoring the party had a chance to display competence and blew it.

The startup's app is completely dependent on data feeds and user interactions from another well-known tech company. The relationship resembles Zynga's early dependence on Facebook but even more tenuous and economically unjustifiable. I asked this particular startup's marketing person if they could survive without being parasitically attached to their host body. The person had no idea. I asked about their monetization strategy. They had none. I offered my observation that startups devoid of monetization paths typically disappear rather quickly. The twenty-something marketing person had no concern at all, as if the capital entrusted to their startup by early-stage investors was a lifestyle gift.

Ladies and gentlemen, the entire second wave of dot-coms that are about to crash and burn is populated by the kinds of people I meet at these tech mixers. Many of them have no business expertise, no planning ability, no marketing sense, and nothing besides some mediocre tech skill they extrapolate into a flashy single-purpose app. I did not see any point to this particular pre-party other than to have a good time on someone else's dime. I can even assess the startup team's immaturity by how ready they are to start their sponsored party. Chips and booze are not hard to come by but their late arrival reveals a startup founding team that has never performed basic logistics tasks. Hey kids, throwing a party for partners, analysts, and investors is not as easy as pulling a beer out of your parents' fridge.

Super Bowl money really cleaned up this town. The City finally found someplace to put the homeless this weekend besides in the way of tourists. Many of the tech people "working" their way through Silicon Valley startups stand a good chance of becoming homeless themselves in the next couple of years. Their lack of business acumen gives me short-sale opportunities, plus open social events where I consume free food and booze. I can eat and drink any of them under the table.

Financial Sarcasm Roundup for 02/06/16

We are well into 2016 and it doesn't feel much different from 2015. This situation cries out for remedy.

The tech stock crumble continues to drive the NASDAQ down. The whole enchilada is headed to its intrinsic value, which is somewhere north of zero. We can soon party like it's 1999 all over again, except valuations will be more like 2001. Pink slip parties will soon replace Silicon Valley's ubiquitous tech mixers. Come to think of it, those two kinds of parties are indistinguishable.

China wants to throw it down with the EU at the WTO. It's a bluff, like a male gorilla charging in the jungle. China has no intention of addressing any traded disputes in the WTO. It sees the TPP coming and wants no part of multilateral dispute resolution. Making noise at the WTO distracts is lip service to international norms that suckers in Western financial institutions will buy.

Twitter teases its users with a possible new algorithm. It won't matter whether Twitter make sits tweets more relevant, or longer, or more colorful. The horse named Medium has already left the barn. Ordinary schmucks who self-publish have multiple options now besides Twitter. I could go into a ton of reasons about why Twitter makes little sense but the biggest one is its inability to make a profit. It will make a good blog article later on, so stay tuned.

The 50th Super Bowl is tomorrow. Makers of snack chips, hot dogs, and chicken wings have probably had great sales for the past week. Americans should enjoy this while it lasts. Living beyond one's means makes overindulgence possible. I will probably stay home and get work done unless someone offers me free food and booze.

It would feel more like 2016 if we had a real market crash and recessions. That would really differentiate this year from 2015. I have waited so long for this to happen.

Friday, February 05, 2016

The Haiku of Finance for 02/05/16

Chinese Chicago
Small stock exchange selling out
Deep dish dim sum mix

Financial Sarcasm Roundup for 02/05/16

I avoid watching politicians debate each other on TV because I have more important business tasks to accomplish. I realize I'm giving up a huge source of inspiration for sarcasm. Oh well, we can't have it all in life.

Here comes a new oil barrel tax to fund green technologies. The UN COP21 architects would be proud. I have no problem with this fee. It will destroy part of the US shale industry, but that's to be expected after years of overinvestment in wells that are only economically viable at higher oil prices. Kermit the Frog once said that it's not easy being green, but he didn't mean green energy.

The IMF lectures China on getting into better financial shape. Good luck with that one. China is flailing around for a workable economic policy. Beijing cannot admit that its Ponzi scheme is unraveling because it can't afford to frighten away the Western investors who were dumb enough to start trading the yuan onshore. The IMF can't afford to look bad after adding the yuan to its reserve basket. It all looks like two poker players in a televised tournament who know they can't bluff each other anymore but are still bluffing the audience.

The mortgage bond market just isn't much fun anymore. Taking the punch bowl away is good news for responsible homeowners because there will be fewer secondary bids for mortgage products that should not exist. Issuing paper backed by other paper is usually pretty dumb. Of course, if the Federal Reserve ever had to sell a big chunk of its MBS holdings, the banks would have to hire back MBS traders in a hurry. Catching a falling knife is usually pretty dumb.

More political debates are ahead. They won't mention any of the issues I blogged about here. That's too bad.

Thursday, February 04, 2016

The Haiku of Finance for 02/04/16

One more penny stock
No need to waste time looking
Just note poor earnings

IGEN Networks Defies Explanation

About five years ago, someone who does not deserve mention told me and a few other people in the vicinity about some hot idea. It had something to do with IGEN Networks (ticker IGEN). I could not figure out the opportunity at the time, which is why I ignored it. Five years later, the market can't figure it out either.

The stock has traded in the pennies for something like several years. The retained earnings deficit is -$7M and growing with every quarterly loss. I cannot recall the last time I have seen such a severely negative profit margin, operating margin, or ROE even in a penny stock. The business model has something to do with cloud, M2M, and wireless. I hear that all the time from Silicon Valley companies with serious experience and solid partnerships. I don't have to waste my time with anything else.

I do not feel sorry for the investors who bought the stock from January to March 2009, before that year's 1:100 reverse stock split. I don't know why I held onto this reference for so long. I should clean out my archives more thoroughly. There is nothing else worth saying about IGEN Networks.

Full disclosure: No position in IGEN, ever. I am too smart to do that, ever.

Financial Sarcasm Roundup for 02/04/16

The US Congress does not feel like rushing through a review of the Trans-Pacific Partnership. It is unusual to see lawmakers take their time with important legislation. They typically pass major lobby-backed items in record time, like the Affordable Care Act. "We have to pass the bill so we can see what's in it," or something like that. There's no time to lose when there's money on the table gathering dust.

Vanguard can now buy a bigger block of Chinese A-shares than ever before. Suckers! If you don't know who the mark is in a group of people, it means you are the mark. Western investors keep falling for any China story, whether it was the bull market everyone thought they could ride to planetary dominance or distressed-value bargain investing. Investors raised in Anglo-West cultures, where anti-corruption auditing and property rights are norms, simply cannot fathom that those traits do not characterize the Chinese economy.

The corporate bond market's signals have analysts scratching their heads. Dumb analysts don't realize that the US economy has been truly stagnant since the 2008 financial crisis, with overstated GDP growth and understated unemployment and inflation. National policies to avoid mortgage defaults and backstop corporate credit have only postponed the inevitable crack-up. No one on Wall Street wants to admit that the bond market is toast because that would have investors running for the exits. A whole bunch of careers and firms are bound to implode.

Wednesday, February 03, 2016

The Haiku of Finance for 02/03/16

Small cloud service scale
Scaling cost trailing leaders
Cloud needs rainmaker

Fusion Telecommunications International In Cloud Services

Fusion Telecommunications International (ticker FSNN) is a small player in cloud services. The management team has experience in previous telecommunication and networked communications enterprises, which is part of the cloud computing spectrum but not the whole enchilada. Their current CTO at least has data center experience. Big companies like Google, Amazon, and Salesforce dominate the cloud sector. Anyone muscling into their market share must bring serious computing power.

A simple rundown of this company's summary statistics from Yahoo Finance reveals their present condition.

Profit Margin (ttm): -11.88%
Operating Margin (ttm): -6.41%
Return on Assets (ttm): -5.89% 
Return on Equity (ttm): -138.70% 

Those annual numbers are discouraging. It's even more discouraging to search FSNN on Reuters and find long-term financial highlights. Fusion's 5yr sales growth exceeds the industry's average but they are still not profitable. Revenue and net income per employee both underperform the industry. The company's 5yr ROA, ROI, and ROE are all negative. The management team has its work cut out.

One simple math comparison illustrates the competitive disadvantage Fusion faces. Customer acquisition cost, or CAC, is a make-or-break metric in cloud computing. Analysts can approximate a company's aggregate CAC without even knowing its detailed product pricing or the seat count of the solutions it sells. We can divide the cost of revenue by gross revenue to find a rough CAC percentage. It's really the inverse of gross profit, but it's worth finding to see whether other expenses are contributing to a problem. Let's use the numbers in Yahoo Finance for the most recent quarter to show current conditions.

Fusion's rough CAC percentage in this method is $13.5M/$24.5M, or 55.10% for the quarter ending September 30, 2015. Compare this rough CAC to the figures for Oracle (ticker ORCL) and Salesforce (ticker CRM). Oracle came in at $1.85B/$8.99B, or 20.58% for the quarter ending November 30, 2015. Salesforce clocked in at $0.42B/$1.71B, or 24.56%. Fusion thus spends twice as much for a dollar of revenue as its larger competitors. What's really hurting the company is that SGA expenses have remained stubbornly high as a percentage of revenue even while revenue increased for several years. Oracle's SGA is usually a smaller percentage of its revenue than Salesforce's comparable numbers, which is partly why it is more consistently profitable than Salesforce. Mitigating both SGA and the cost of revenue will be a challenge for Fusion while growing its revenue.

Data storage is now a commodified supply chain input where the low-cost providers are market winners. I do not know whether Fusion can scale its services to the point where it mitigates its cost disadvantage. The company's retained earnings deficit of -$172M has grown year by year, quarter by quarter. It is not obvious how a smaller cloud provider can compete against larger companies without maintaining a cost advantage. Any investor who bought into FSNN in late March 2015 when it was over $4/share, only to see it close under $2/share in early February 2016, learned that the hard way.

Full disclosure: No position in FSNN at this time.

Financial Sarcasm Roundup for 02/03/16

Groundhog Day came and went without any animals feeling Jungian existential angst. Climate change has more impact than a rodent's shadow on winter's length.

The ECB lowers expectations for more monetary stimulus. It could mean anything, or nothing. The ECB now mimics the Fed as it discovers it has the ability to move stock markets and resolve bad banks' balance sheets. Central banks don't make policy errors anymore. They send "layer cake" messages in a bifurcated economy. Retail investors will hear something about selling bonds that may have peaked in value. European bond fund managers will hear something about not expecting support for their asset valuations. Crying then begins in earnest in bond fund boardrooms.

The UK must wonder if the BOE plans for negative interest rates. "I say, Jeeves, is that a minus sign in your savings account? Why yes, it is indeed, old bean. Good God, man, such poppycock used to be confined to less dignified countries like our former colonies. Oh, fiddlesticks. This calls for a shot of brandy." BTW folks, anyone who wants to pull another George Soros move and attack the British pound should watch how far the BOE tries to push this NIRP speculation.

China will keep cutting banks' reserve ratios. It's just like getting a haircut every month until you're forced to go bald, and then the barber scalps you. Forget about responsible bank stewardship. That just flew out the window in a desperate search for capital to prop up China's failing stock and property markets. I guess Beijing couldn't entice enough Western banks to launch onshore yuan trading branches. There are plenty of suckers in both the West and China who will try to catch falling knives behind a bamboo curtain.

Your average groundhog does not follow the financial markets as closely as I do. That's another bragging point for Alfidi Capital.

Tuesday, February 02, 2016

The Haiku of Finance for 02/02/16

Drugs for rare disease
Very hard to develop
Lucrative per dose

Soligenix And Rare Diseases

Soligenix (ticker SNGX) pursues several treatments for rare diseases and other critical problems. It is always intriguing to watch new drugs develop in the hope they can make life easier for pain sufferers. The management team has the requisite background in drug development to make this company worthy of serious analysis.

The company's SGX942 drug for oral mucositis is one of their leading products. Research for the oral mucositis treatment market from 2014 showed a significant number of competitors with treatments in their development pipelines. The Oral Cancer Foundation notes that Amifostine and palifermin are currently used in limited treatment of OM's effects. The National Cancer Institute's most recent coverage of OM also mentions Amifostine and palifermin. Amifostine is widely available from a subsidiary of AstraZeneca. The NCBI PubMed cites research on how clinical trials have established Amifostine's cost savings potential. A drug that beats Amifostine must generate mean per patient supportive care costs savings of at least $1472 (based on the cost difference in that PubMed article) if Medicare and health insurance reimbursement mechanisms are to find such an alternative compelling.

Several US government research agreements support Soligenix's development of biodefense products. Using federal research funds is a good move if it keeps the rest of an enterprise moving toward its larger business goals. The government's defense needs typically include drug stockpiles for emergency use. These stockpiles are not frequently consumed and typically need replenishment only when batches expire. Investors should note that the small government market and its infrequent demand will limit a drug maker's quality of earnings.

I reviewed Soligenix's most recent 10-Q filing dated November 12, 2015. The company had cash on hand of US$4M on September 30 that year. Their quarterly net income of almost $2.8M was largely due to a positive change in the fair value of their warrant liability. They continued to incur losses from operations of almost -$1.3M, although that is an improvement from the comparable 2014 quarter's loss from operations of over -$5.1M. Soligenix's success at raising non-dilutive funding keeps it in the game until its drugs can find large markets.

The good news for Soligenix is that it has many product options that have advanced through several trial phases. The risks for any drug company include some of the health care sector's structural problems I identified as ultimate lessons from the JP Morgan Healthcare Conference in 2016. Headwinds facing the health care sector can affect every company's valuation. Insurance affordability and the solvency of payment intermediaries can challenge companies like Soligenix that do everything they can to be successful.

Full disclosure: No position in SNGX at this time.

Financial Sarcasm Roundup for 02/02/16

There are always voters in an election year who think a politician can make the stock market go up. There's always a politician ready to pander to those voters. They are all stupid.

Bond yields are tanking in Japan. The two-year yield dropping to -0.11, even less than the BOJ's -0.10 rate for excess reserves, is totally crazy. How can they be profitable on any product with a duration of less than two years? This totally scrambles overnight lending to businesses. I want every hedge fund manager who jumped on the Japan bandwagon to be blown out of the water. Forcing the dumbest fund managers out of business will be a shock to the really dumb investors who trusted in non-existent genius.

Now the Federal Reserve is thinking about negative rates. The rest of the world sometimes laughs at America for the dumb things we often do here. Now we have the chance to be as dumb as the rest of the world in monetary policy. The shock of initiating NIRP may lift the US stock market as investors leave cash and enter riskier equities. The rush should last for about six months, the typical duration of monetary policy's lagged effects. After that, the deflationary death spiral across multiple asset classes will be impossible to prevent. Lethargic Americans will wonder what happened.

Leading financiers want better public company shareholder relations. Anything with Warren Buffett's approval will probably work. JP Morgan's involvement indicates confidence that its balance sheet will survive long-term turmoil. Better corporate governance is an imaginary prophylactic against corporate raiders. Private equity firms will target well-run firms anyway if they're undervalued. The best corporate governance policy would be an electric shock device attached to a board member's chair, activated if they fall asleep during a quarterly meeting.

Vote for panderers and they will do absolutely nothing for you. I promise. You can't vote for me because I work for myself.

Monday, February 01, 2016

The Haiku of Finance for 02/01/16

Iowa voter
Likes farming and ethanol
Vote for subsidies

Financial Sarcasm Roundup for 02/01/16

It's time for caucuses in Iowa. If sarcasm were a Presidential qualifier, I'm certain that my name would be at the top of the ballot.

JP Morgan is jumping on the blockchain bandwagon. All aboard! You all know I've trashed Bitcoin many times but the blockchain tech that succeeds it may be worth a look. The SIFI banks doing this will have to completely own their particular blockchain tech and disallow developers from forking it. They will also have to reserve a significant amount of data center space in case the hashes get out of hand. I suspect the world's central banks will have to standardize some part of a blockchain's code for money transfers. The whole movement risks turning into spaghetti code if central banks don't get involved.

China wants more foreign banks to trade its currency. It's a fun way to celebrate the yuan's new IMF reserve currency status. More importantly, it's a clever way to entice foreign banks to pump fresh currency into China so the PBOC can postpone the economy's day of reckoning. A stronger yuan means less PBOC money printing and less immediate stress on China's currency reserves. Have fun while it lasts, Beijing. The game will be up pretty soon. Foreign banks won't be happy to find out that empty real estate developments and shadow wealth management products are their currency trading counterparties' collateral.

The OMB is ready to review the US DOL's fiduciary rule for retirement advisers. Well, that sure took long enough. I blogged about this proposed rule in 2015 and I am all in favor of tighter controls. The industry's claimed concerns about stronger rules forcing them to drop smaller, less profitable clients are baloney. Automation is reducing the cost of servicing small clients to zero. Robo-advisers can implement fiduciary rules automatically. I want OMB and the rest of the administration to turn the screws on the retirement plan sector and make greedy brokerages howl with the pain of fiduciary compliance. That will force them to fire more humans and accelerate the automation shift.

May the most sarcastic candidate win. That would be me, of course, in any election year. Always vote your conscience, America.

Sunday, January 31, 2016

The Limerick of Finance for 01/31/16

Chinese copycats steal at will
Cheap knock-offs still give them a thrill
They make a quick buck
Counting only on luck
Cashing in on some grey market bill

China's Shanzhai Economy Mocks Innovation

China has a long tradition of "shanzhai" knock-off goods. Companies shamelessly copying global brands without compensation or even attribution contribute to China's poor reputation for quality manufacturing and intellectual property (IP) protection. Shanzhai extends to more than just brand image. It permeates every aspect of China's allegedly miraculous growth, including real property and government statistics. Its persistence poses risks to Western investors who underestimate China's resistance to cultural change.

PwC republished Booz's 2009 report regarding shanzhai as an innovative phenomenon. It may have appeared innovative when China was trying to convince the West that its booming production would translate into what we would recognize as an advanced economy. Things never worked out that way. Breakneck production without the rule of law to protect innovation eventually turns off international investors.

China somehow managed to fool amateur observers into thinking that everything would be okay once it grew out of its wild frontier phase. The Atlantic in 2014 interpreted shanzhai as an evolutionary crowdsourced ecosystem for innovation. Silicon Valley would recognize innovation without IP protection or market share as an invitation to further piracy. The Wall Street Journal had a similar analytical lapse in 2009, more from a political and cultural standpoint. Astute observers integrate social and political trends into economic analysis if they understand those trends from a native perspective.

Native mainland Chinese have not developed the legal and political traditions the Anglo-West relies upon to protect property rights, including IP. Some Chinese innovator making shanzhai wearable tech is unconcerned with the product quality or global branding that leads to defensible market share. They're still in it for the fast buck because they cannot count on legal protection outside China or political protection within China. Western observers who cannot see shanzhai through Chinese eyes would find this inscrutable. Personal connections through "guanxi" matter more than rules and laws. The Chinese Commonwealth "bamboo network" diaspora matters more than sovereign trade agreements. The West continues to misinterpret these concepts by pretending to see in China what it wants to see in its own culture.

Shanzhai has metastasized beyond consumer goods into real property. Freakonomics noted in 2013 how shanzhai skyscrapers copy other popular building designs. Run a Google image search of China's property boom to see entire cities containing replicas of Paris' Eiffel Tower, quaint European town squares, and parts of Manhattan. China's government economic statistics have long been unreliable, according to descriptions of the Keqiang Index. Replacing that index with something the UNDP or WTO can audit would be a sound step. Instead, the WSJ reported in 2015 that China's State Council would replace the Keqiang Index with measures tracking quality of life. The state is acting in the spirit of shanzhai innovation, copying Western ideas wholesale without grokking how enforcing laws means breaking personal ties.

The shanzhai apotheosis is a huge red flag for US investors with exposure to China. Mainland China's economic growth is more mirage than reality, notwithstanding CSIS's "Broken Abacus" 2015 nonsense that China's economy is bigger than what it self-reports. Try reconciling national-level economic data with provincial-level data and see how China's national authorities guide subordinate governments into supporting its fabrications. Investors betting on US-traded instruments for Chinese stocks or ETFs are gambling that reality will eventually catch up to fantasy. Shanzhai's continued dominance of Chinese business culture makes that a poor gamble.

Full disclosure: No positions in any Chinese investments. BTW, I have corrected the spelling of "shanzhai" after publishing this article.

Financial Sarcasm Roundup for 01/31/16

Sarcasm on Sunday is way better than attending church. You could listen to some preacher lie about the nature of the universe, or you can listen to me tell the truth about finance.

Alphabet and Apple battle it out for the valuation world heavyweight championship. Both companies are symptoms of the Silicon Valley tech bubble. Investors have chased these stocks because ZIRP made savings accounts look stupid. Apple's (AAPL) P/E is deceptively low at 10 and Alphabet's (GOOG) is really high at 31. Both companies depend very much on smartphone users replacing costly phones more often than necessary in the developed world's saturated markets. Financial advisers who toggle their portfolio optimization searches with "high risk" aren't doing their risk-averse clients any favors by selecting overpriced tech stocks.

The IMF and its lending cartel will review Greece's bailout progress. It's really sick how the world's most important financiers play "extend and pretend" with a country that has no interest in paying its debts. Forcing losses on creditors would clear up credit quality questions a lot faster than extending maturities. I would have hung the foreclosure sign on the Acropolis by now but the IMF never called me to ask for advice. Athens should hire me to fix their problems if they can pay me in something other than gyros (which I really like to eat BTW).

Big SIFIs are cutting the biggest deals with the SEC to settle dark pool allegations. I have always wondered why investors deliberately walk into something they know is dark. The banks telling investors they will get the best execution in dark pools are also the same source of prime brokerage credit for HFT hedge funds trading in those pools. Willfully blind investors, duplicitous banks, and greedy HFTs all jumped into those dark pools to rip each other off. The traditional investors are always the dumbest money in the room, so of course they got taken to the cleaners.

I told you this was better than a church sermon. I'm more entertaining and honest than any religious leader. I should start my own religion so people can properly worship me.

Saturday, January 30, 2016

The Haiku of Finance for 01/30/16

Energy market
Demand for cheapest sources
Cost of pollution

Financial Sarcasm Roundup for 01/30/16

Saturday is supposed to be a slow news day, but it's never too slow for sarcasm.

The US economy probably slowed down in Q4 2015. Business surveys from the private sector are probably more reliable than government figures. Federal agencies have been monkeying around with their methodologies for too long under political pressure to report rosy results. Voters get fed up with ruling elites when official results don't square with daily life. The next administration can do a lot to restore Americans' confidence in government just by reporting honest numbers.

The Zika virus is boosting a few life science stocks. Curing disease is a good reason to invest in drug makers. Day trading a stock with the expectation that disasters will pump a quick profit is immoral, not to mention just plain stupid. There is no assurance that the UN WHO or any other powerful body will hand these companies a contract. Greed and wishful thinking drive dumb investor reactions to headline dangers. There is no drug to cure stupidity.

Hedge funds misjudged the yen. The BOJ invalidated a whole bunch of investment philosophies overnight. I've said before that currency positions are useful mainly as hedges for cash reserves, not pure-play bets. Hedge funds are running out of ideas if they think betting big on a currency is innovative. George Soros made a big currency bet once against the British pound and it worked once. There is no law that says it must keep working. People running hedge funds can work as janitors after the yen bankrupts them.

Xerox is splitting itself. Carl Icahn wins again. I've always admired the guy because he forces companies to do right by their shareholders. He would probably make an excellent US Treasury secretary if Donald Trump wins the presidential election. I would like to see some corporate raiders and deal-makers break up some of the US government's less efficient agencies. Privatizing Social Security and Medicare could work like an insurance company spin-off. I wouldn't buy those split stocks because I've read the Bowles-Simpson reports on those entities' eventual insolvency, but some mutual fund manager is dumb enough to go for it.

Most writers would sign off by saying they hope everyone else's Saturday is going well. I'm not like most writers. I don't care about how your Saturday is going. My Saturdays are the definition of awesome.

Friday, January 29, 2016

The Haiku of Finance for 01/29/16

Microcap sector
Track imperfect trend data
Benchmarks not so great

Small Business Indicators For Microcap Sector Choices

Microcap stocks are notoriously hard nuts to crack. They are the part of the capitalization-weighted investment universe that is typically less liquid, transparent, and profitable than large-cap choices. Investors do have some indicators they can use to estimate turning points in the microcap sector's aggregate health. A small number of microcap ETFs help diversify away company-specific risk.

The NFIB's Small Business Economic Trends (SBET) is one possible proxy for the sentiment of small business owner-investors. It combines data on both future plans and current results. The December 2015 report puts the Index of Small Business Optimism at 95.2, below the long-term average of 98. The small sample size and seasonal adjustments limit the index's usefulness. The SBET also does not disclose the average revenue, net income, or asset quality of its sampled businesses, so investors cannot presume any strong equivalency with microcap stocks.

The Wells Fargo / Gallup Small Business Index is probably a more robust indicator than the NFIB SBET. Gallup's index methodology also relies upon a small sample size but discloses a revenue range that could easily include the lower bound of the microcap sector's revenues. The index is one more addition to an investor's toolkit. BTW, this index also registered a decline in optimism in late 2015.

The Paychex IHS Small Business Jobs Index covers a vast sample size, so data quality here is less of a concern than with the previous two indexes. Measuring job growth helps investors determine whether small companies can afford to expand and handle higher sales volumes. Job gains at the end of 2015 were on a slight downward trend since early 2014, punctuated by some up months.

Dun and Bradstreet’s U.S. Economic Health Tracker covers a Small Business Health Index for payments and credit, with a large data set. The Tracker shows small business performance worsening so far this year, with weak payment performance. That makes two weak optimism indexes, a declining jobs index, and a weak payment/credit health index so far to start 2016.

Our macroeconomic data indicators for small businesses are not the only ways to understand microcaps. Investors need to know how different index providers assemble the microcap universe, because this ultimately determines ETF composition. The Boglehead wiki on US micro cap index returns compares several microcap indexes. The Wilshire index has the longest history, so performance data for products based on that index would be the most reliable.

Only a small number of ETFs cover the microcap sector. PowerShares Zacks Micro Cap ETF (ticker PZI, expense ratio 0.70%) and First Trust Dow Jones Select MicroCap ETF (ticker FDM, expense ratio 0.60%) are very thinly traded. Investors will face more difficulty with trade execution in thinly-traded securities. The Zacks product follows a proprietary index and the First Trust product follows a select index, so their returns are not directly comparable to those of ETFs that follow wider indexes.

The iShares Micro-Cap ETF (ticker IWC, expense ratio 0.60%) is more actively traded and has a larger market capitalization than PZI or FDM, and its construction from the Russell Microcap Index makes its methodology more reliable. Other details are less encouraging. It is currently heavily weighted toward the finance, health care, and information technology sectors. Those areas are all very much in bubble territory thanks to the Federal Reserve's easy credit (finance), unsustainable Medicare payouts (health care), and VC-funded startup unicorns gorging on cloud services (IT). Consider also how the R-squared result for IWC (at its Yahoo Finance risk data) declined from 77.77 at the 10-year mark to 47.66 in the most recent three-year period. The more recent period's performance thus has progressively less to do with the underlying index. That is a worrisome sign for an ETF that is supposed to stay very close to an index's results.

Investors are welcome to track the above four macro indicators and relate them to the microcap sector's leading products. Weakening indicators imply tougher times for small businesses. Leading index products that are increasingly divergent from their benchmarks (and more expensive than large-cap ETFs) are causes for concern.

The sad tales of microcap stock promotions gone wrong are always with us. The bad old days of investor relations conferences and seminars have given way to spam email stock scam promotions. Microcaps are easy prey for all manner of bad actors. The most broadly diversified instruments will at least give investors exposure to larger trends that can lift young, high-risk public companies to larger capitalizations.

Full disclosure: No positions in any securities mentioned.

Financial Sarcasm Roundup for 01/29/16

People take self-identification to new extremes in the digital age. I self-identify as sarcastic, which ought to be a distinct personality type.

Japan's central bank goes for negative interest rates. That should pry the last yen out from under savers' mattresses and push Japanese investors into riskier territory. The positive feedback loop from such a nonsensical policy will never solve Japan's structural problems. Switzerland did this for a while but they had a strong currency. Japan's results will be worse.

Puerto Rico expects to issue new debt. The old debt isn't working out too well, so the new stuff will have to pay junk-bond type interest. Paying out 5% just isn't going to cut it with investors who got burned. No one likes taking a valuation haircut. I am so glad I never owned Puerto Rico bonds. They will make very nice wallpaper after several re-issues.

Theranos keeps having one problem after another. Specious tech claims and poor lab conditions should not justify a multi-billion dollar private market valuation. A whole bunch of top-shelf VC firms have staked their reputations on a business they never understood. I can imagine the panicked phone calls up and down Sand Hill Road about what desperate measures anyone can take to keep this unicorn from tipping over. Save the energy for the post-mortem court cases, people.

I may try self-identifying as a housecat just to see how people react. Nah, just kidding.

Thursday, January 28, 2016

The Haiku of Finance for 01/28/16

Safely transport oil
Pipelines are still the best way
Railcars come second

Safely Transporting Oil By Railroad

The oil price crash impacts the railroad sector. Transporting freight gets cheaper, but demand for railcars to bring oil out of the Bakken fields and other places where pipelines were never laid is now dropping off. Refer to US DOT MARAD's 2008 study "Impact of High Oil Prices on Freight Transportation" for technical discussions of how the rail sector behaved under different conditions. Times have changed, perhaps permanently. Safety rules can also change with the times.

Railroad accidents made headlines when America's oil shale boom was roaring. Horrific, sensational railcar explosions are less useful justifications for transportation policymaking than statistics. The US DOT's Federal Railroad Administration (FRA) Office of Safety Analysis has the data. Running a ten-year report shows that total accidents declined by over 31% from 2006 to 2015, with percentage declines in every single subcategory. Rail transport has gotten safer than ever during the oil shale boom.

Oil shale's critics used to claim that Bakken oil was more volatile and thus more dangerous to ship in railcars. The National Transportation Safety Board's (NTSB) chair debunked this claim after some high-profile accidents. A refining industry study also found that Bakken crude fits within existing oil safety standards. The volume of fuel spilled, not its chemical composition, determines its potential hazard. Anyone can search the American Fuel and Petrochemical Manufacturers (AFPM) website for "Bakken crude" and see the evidence.

Forest Ethics does the public a disservice with its alarmist Oil Train Blast Zone tool. The relatively small number of rail accidents could never endanger millions of Americans, as the tool misleadingly implies. Requiring railroad operating companies to emplace blast barriers around every yard and connecting track in populated areas would be costly and probably unnecessary. It would be better for the railroad industry, along with FRA and NTSB, to take a Six Sigma approach to estimating deaths from oil-related transport accidents. Reducing mortality is important and statistics will show us exactly which locations need better safety measures.

Policy advocates are often remarkably ignorant of science, math, and economics. I don't think a typical anti-hydrocarbon advocate can perform an energy returned on energy invested (EROEI) comparison between biofuels (for example) and hydrocarbon fuels. They are welcome to start with refining and transport data from the Western States Petroleum Association and the California Energy Commission but I don't think they'll have the patience to get very far.

I am not prepared to demonize tar sands and oil shale as "extreme fuels" in the style of some renewable energy advocates. Hydrocarbon energy will be part of human life for a few more decades until renewable energy's infrastructure catches up. Pipelines are the safest and cheapest way to transport oil over long distances. Railcars are still the next best way despite the pleadings of safety paranoiacs.

Financial Sarcasm Roundup for 01/28/16

Hatred and love are powerful emotions. Sarcasm is not an emotion but it may be even more powerful.

The Federal Reserve made markets nervous yesterday. I say tough luck for wimpy stock market experts. Big players have had it too easy with ZIRP subsidizing their gambling. Moving toward a more historically normal interest rate environment means crybaby institutional investors will lose money. Just look at the confused commentary coming from Wall Street's idiots. They don't remember what normal feels like and their bond trading desks are full of Millennial whipper-snappers who think credit is always free.

The US Treasury alerts us to derivatives clearinghouse risks. That sure throws some cold water on the theory that transparency and mark-to-market pricing would make derivatives less threatening to the economy. The Fed and SEC have planned for trading halts and fund backstops. Now they need to think about liquidity backstops for clearinghouses. I suspect that will be a bridge too far in a crisis, so AIG-style instant firm resolutions will be the preferred risk mitigation tactic instead.

China's statistics chief is in trouble. Beijing couldn't keep their numbers frauds hidden forever and now they need a public scapegoat in true Manchurian style. The news may fool a few Western investment firms (the ones that don't understand China) into thinking things will get better when the head stats guy is replaced. A couple of high-profile career terminations won't stop the Chinese stock market's slide.

I try really hard not to hate people, even if they deserve it. Hateful people deserve sarcasm instead.

Wednesday, January 27, 2016

The Haiku of Finance for 01/27/16

Over-rated stuff
Eventual implosion
More chances to short

Financial Sarcasm Roundup for 01/27/16

It's not enough to have weekly sarcasm. I need to exhibit daily sarcasm. Alfidi Capital must be the unchallenged premium source of financial sarcasm every time the sun rises.

Iran's president says getting filthy rich cures radical nutjobs. He didn't quite say it like that but I like to think that's what he meant in translation. Reuters is too kind to quote heads of state that way. Iran is about to unlock $150B in frozen assets and return to exporting oil as sanctions are lifted. It pays to play nice with one's neighbors. Iran should spend that windfall on something other than harassing student protesters. Meeting the Pope may be the key to convincing Rome's street vendors to import Iranian lavashak (a.k.a. Persian fruit leather, or pressed fruit rolls). I smell a sweet deal.

Credit rating agencies are still messed up. It's about time regulators squeezed these people until they squeal. Selling ratings for MBS and other garbage helped cause the 2008 financial crisis. Dumb money does not perform due diligence even one level deep, let alone for the two or three levels needed to understand securitized products. Continued problems will bring another chance to short every falsely rated financial product in sight.

The corporate debt mountain is ready to topple. Bring on the implosion. Publicly held companies that can't service their debt will get wiped from indexes and bring shorting opportunities to patient investors like me. Defaulted corporate bonds and bankrupt ETF prospectuses will make nice art projects.

I can really get used to a daily sarcasm habit. I will enjoy force-feeding this diet to my regular readers. Eat it, people.

Tuesday, January 26, 2016

The Haiku of Finance for 01/26/16

Eat bread in a tweet
Diet stock jumps on the news
Tasty fat profit

Regulatory Risks Of Leveraging Federal Lab Innovation

The Federal Laboratory Consortium is a gold mine begging for exploration. Technology gathering dust in lab basements and filing cabinets needs entrepreneurs to make it economically viable. The regulatory landscape has holes at the federal level that beg to be filled. Here are some Alfidi Capital tips for small and medium-sized businesses (SMBs) looking to make tech innovation work while avoiding regulatory traps.

The Brookings Institution published "Going Local" in 2014 about how DOE's labs should support regional economic growth. White papers are full of ideas that gather dust, just like great tech ideas without people implementing them. The lead time for processing a cooperative research and development agreement (CRADA) or a work for other agreement (WFO) may be too long for specific product development but just right for a basic tech demonstration. The SMB moving a tech concept out of the lab's basement may be suited for small-scale funding typical of the NREL's technical and analytical service agreements.

The President's Council of Advisors on Science and Technology (PCAST) report "Big Data: A Technological Perspective" from 2014 will set federal policy on data privacy for years. Government regulations crossing multiple agencies' jurisdictions has a way of guaranteeing a market for products. Large firms faced with the regulatory risk of meeting Big Data privacy mandates will need solutions. Small firms should factor privacy compliance into their product development milestones.

The American Academy of Arts and Sciences report "Restoring the Foundation" in 2014 recommended permanent Presidential attention to R+D spending. Federal tech funding as a GDP percentage cannot stagnate forever. Its eventual recovery will provide funding opportunities for SMBs ready to jump into grants and contracts.

Watching the slow progress in implementing all of these reports' recommendations is disheartening. Untangling the jumble of federal advisory committees shepherding regulatory reform is outside the private sector's control, unless the President appoints business-friendly people to run the process. American SMBs cannot wait for reform. They should master the funding application system now and gain experience working through the system.

Financial Sarcasm Roundup for 01/26/16

The Beatles once sang about having "A Hard Day's Night." That's unintentionally sarcastic. If your hard day continues into the night, you may have a lifestyle problem.

JP Morgan Chase wants to turn your smartphone into an ATM. People need to think hard about this very risky approach. Tapping a smartphone to an ATM means anyone who holds the phone can get your cash. It will be a boon for pickpockets and armed robbers. JP Morgan's IT people need to code some hard-core biometric identification tools into their ATM app before it goes live. I think a saliva sample would work nicely. Just lick your smartphone's screen before you tap for that cash.

Apple's iPhone sales are slipping. Here's the latest evidence that a long-term bet on endless China growth is the corporate strategy of five years ago, not today. The inevitable US sales peak will come when Apple's too-stupid early adopter segment finally realizes that they can do without spending $800 every eighteen months for an incremental improvement in camera resolution. Oh yeah, the Apple Watch looks like the company's first dud since the Newton scratchpad. I knew the Watch was useless as soon as I saw it. Watches cannot be scaled down versions of smartphones due to their display size but nobody at Apple was thinking about biometrics. Tech marketers fall for their own hype at the tops of market bubbles.

Oil producers that cut costs can survive earnings season. The ones who drilled $60/boe wells expecting to make $100/boe forever are toast. I was really getting sick of hearing from unproven junior E+P companies tout their shale wells. They can have their remaining employees take turns sucking the oil out through big straws if they can't afford fracking fluids anymore.

I usually have a great day's night, unlike the Beatles. I studiously avoid the Notre Dame Club of San Francisco because those people used to ruin both my days and nights when I met them. No one can ever ruin me now.

Monday, January 25, 2016

The Haiku of Finance for 01/25/16

Private mortgage deals
Real estate notes and trust deeds
Weird and hard to do

Amateur Private Real Estate Finance Includes Notes And Trust Deeds

Private lending has been around for property developers ever since those ancient Pharaohs built their pyramids. Our capital markets today allow for much more public participation and transparency. Bank depositors provide capital for secured mortgages. Real estate investment trust (REIT) investors provide capital for property developers, augmenting the capital available from syndicated bank loans. The private capital market for small-scale real estate investors is now fragmented with boutique solutions. Many such creative real estate investing solutions are complex and not intended for amateurs. They are even fertile grounds for scams.

The assignment of a contract for the purchase of real estate sounds to me like brokering a transaction without being a properly licensed Realtor. I would not want to be in the shoes of an assignor or assignee if a property they're flipping was on some Realtor's multiple listing service and the Realtor files a complaint with their state's regulatory body. Private parties who are not licensed and do not adhere to government regulations or the National Association of Realtors' code of ethics open themselves up to serious risks if they can't complete an assignment deal.

Hard money loans are more expensive for borrowers than bank mortgages. These loans do not conform to standard credit guidelines and default at higher rates. Inexperienced hard money lenders can easily become suckers for a fast-talking sales pitch. Even experienced lenders can be stuck with a non-performing loan book in a significant market downturn, and they may not always have recourse to a bank that can help them offload troubled properties.

Seller financing strikes me as being just plain dumb. A borrower who cannot get a mortgage from a conventional source probably should not qualify for any loan at all, even from a private source. A seller willing to trust such a person's creditworthiness is trading the speed of an easy title transfer for the huge risk of non-payment. The advantages of this deal type all skew towards an unethical buyer: easy money, fast ownership, and rent-free living space if they never intended to pay up. Perhaps a desperate seller would do such a deal just to get rid of a very bad property, which would be just as unethical if the property had serious deficiencies.

The so-called "subject to" real estate deal sounds unbelievably complex for anyone who is not an experienced real estate attorney. The paperwork needed to get iron-clad agreements looks daunting. I looked for authoritative sources in my "subject to" Web search and found mostly amateurish promotions for this deal category that did not adequately describe risks.

Mortgage assumption is possible in some situations where the FHA or VA is involved. The good news is that banks and government regulators have rules for this quasi-official process. Buyers meeting conventional mortgage standards can use assumable mortgages if they meet lending standards and have enough cash to make any needed down payments.

These types of deals can lead investors to participation in real estate notes and trust deeds. Mortgage notes are a form of securitization paralleling the real estate sector's whole-hog embrace of mortgage-backed securities. Real estate trust deeds serve as security for loans that avoid third party participation. Notes and trust deeds are small-scale versions of the financing that mortgage REITs and trust deed investment companies (TDICs) provide. I will never understand why amateur investors would spend their precious time pursuing small lot notes and single trust deeds when professionally managed REITs and TDICs are diversified, well-capitalized alternatives.

Modern finance has tamed what used to be the wild world of real estate finance. Investing in real estate today is as easy as selecting REITs in a brokerage account. REITs come in multiple flavors: commercial, residential, mortgage-only, ETFs, you name it. The publicly traded ones all have prospectuses and histories of SEC filings for transparency. Privately originated notes, trust deeds, and other financing methods are less liquid and transparent than publicly traded securities. Some amateur investors will insist on biting off more risk than they can chew, just to fulfill their fantasies of becoming real estate moguls from their living rooms.