Friday, July 03, 2015

The Haiku of Finance for 07/03/15

Streaming top artist
Pricing power on portal
Premium to play

Behemoths of the Online Music Marketplace

Competition in the online music sector looks much like the cloud computing sector.  A small number of companies with huge audience penetration fight to distribute products whose unit production costs are close to zero.  Cloud computing and music are not completely identical; cloud storage space and performance are commodities where music can sometimes command a premium price.

The big channels include Apple Music, Google Play Music, Spotify, and Pandora Media.  All except Spotify are part of publicly traded companies.  Apple's cash hoard makes it the strongest competitor regardless of the other competitors' market penetration.  Apple can win any price war and drive less well-funded companies out, just as it can in cloud computing.  Apple Music and iTunes do not cannibalize each other thanks to matching through the iCloud Music Library.  Apple Insider describes the library's back-end technical challenges; those problems will lead to user cancellations if Apple doesn't fix them soon.

The key difference between cloud computing and music is not the commodification of storage but the brand image and performance of the final product's aesthetic features.  The UX design of the desktop interface and mobile app certainly matter.  The musical artists' published product is the aesthetic users ultimately want to experience.  Listener demand for some artists is price inelastic and those artists exercise outsize power over their distribution channels.  Taylor Swift's recent demand that Apple pay its artists during a free trial period has encouraged independent artists to view Apple Music more favorably.  Prince demanded that some streaming services pull his music.  The streaming services that retain access to the most lucrative music libraries - The Beatles, Elvis Presley, Frank Sinatra, etc. - will have to pay premiums to those artists' publishers, estates, or digital rights managers.

It is too early to tell whether music will become hostage to the walled garden trend in computing.  Your favorite artist may very well end up available only on one streaming platform.  Limiting exposure in such a way would be a tragedy for the listening audience.  Streaming services pursuing two-tier pricing models will continue to charge premiums for unlimited access and special access to the most popular artists, while enabling advertising sponsorship for free subscribers.  Keeping those top artists happy means streaming portals must expand both audience share and the presence of smaller artists on their platforms.  The bigger the audience, the bigger the advertising subsidy that makes up for the added costs of hosting popular artists.  A vast number of boutique performers on a streaming channel should attract a sufficiently sizable demographic base that makes "freemium" advertising permanently viable.

Full disclosure:  No positions in any of the companies named above.  The Alfidi Capital website and blogs use Google AdSense code to display advertisements.

Thursday, July 02, 2015

The Haiku of Finance for 07/02/15

Oil spill settlement
Final pre-tax charge is done
Sell chunks or get bought

Random Alfidi Musings for July 2015

Plenty of news items and local events have distracted me from my regular analytical work in recent weeks.  I should not allow such things to move me but the black swans flocking out of Greece and other places are a compelling spectacle.  Pushing aside the news flotsam leaves deeper currents at work.  I need to throw a few thoughts into the pond to see if they float.

Knowledge management practitioners bemoan the lack of metrics in their sector.  I have discovered plenty of metrics in human resources and information technology.  Those two sectors support the knowledge management capacity of any enterprise.  Combing their metrics should reveal some concepts worth formalizing.

Hedge funds that went long on Greek stocks or government bonds are now in regret mode.  Betting against them with short positions is not viable so long as the Greek stock market remains closed.  The Greek economy's structural problems are unsolvable until a post-euro hyperinflation runs its course.  Any Greek-flavored investment strategy is poisonous for years.  Bargain purchases of Greek-domiciled shipping stocks may be possible.  Those stocks will also be subject to the risk of further crashes in the price of oil and the Baltic Dry Index.

Financialization of everything means pension fund managers and endowment managers have no clue about their real risk exposure.  The clever people at major investment banks figured out how to offload their riskiest assets onto the Federal Reserve and the housing GSEs.  Repackaging these things for sale means the least clever buyers among institutional investors are stuck with garbage.  Money managers sitting on toxic mortgages will have short tenures after the next financial crisis.

My schedule will soon allow for a return to comments on specific companies.  The long stretches of haiku in recent weeks were never meant to be the sole content style for Alfidi Capital.  Stay tuned to see which retail investors want to badmouth me for criticizing their favorite ideas.

Wednesday, July 01, 2015

The Haiku of Finance for 07/01/15

Saudi give-away
Charity begins at home
Cash in a niqab

Tuesday, June 30, 2015

The Haiku of Finance for 06/30/15

Road upkeep funding
Many assessment sources
Pay repair backlog

Hanging Out at MTI Transportation Finance Summit 2015

The Mineta Transportation Institute (MTI) holds frequent conclaves at the Commonwealth Club of California.  I have attended several of their events, so of course I had to attend this month's Transportation Finance Summit.  Checking CalTrans for transportation financing data matters for engineers and urban planners who must spend tax dollars wisely.

The keynote speaker described the enormous backlog in the state's highway maintenance schedule.  County governments have an even larger backlog for local road maintenance.  I do not believe the state should play any role in funding or controlling local road development.  It is uneconomical to commit state funds to streets in municipalities that are not economically viable.  Vallejo, Stockton, and other places have overbuilt their suburbs.  Overgrown towns will eventually unbuild what they cannot sustain, just like Detroit.  Urban planning drives transit policy.  Too much uncontrolled growth gets us roads and bridges to uninhabited areas.

The latest MTI survey of public attitudes toward transit funding reveals nuances that policymakers should recognize.  The conventional wisdom that transportation taxes are unpopular breaks down as the public entertains options that commit funds to wise use.  Variations on specific uses of revenues get progressively higher support if policymakers address pollution, modern tech, and safety.

The expert panel revealed much about policy planning iterations.  Inflation-linked gas taxes may work but they are not a complete solution for fully funding road maintenance as gasoline use declines over the long term.  Big Data from in-car solutions offers a trove of insights into how daily car habits impact road use.  I think industry will easily share that data with regulators and drivers won't object.  The California Transportation Commission has a voice in the process if citizens want to air their privacy concerns about shared data.

The rural California counties that are too poor to raise revenue and too sparsely populated for efficient mass transit have unique planning challenges.  The obvious policy default is to orient their economies toward agriculture and encourage high residential density around a core that has exactly one rail link to the rest of the state.  Our ancestors had the answers generations ago, when rural folk did not expect to have urban lifestyles.

Sales taxes typically support local transit funding, without user fees that assess those who more heavily use infrastructure.  The panelists note that government planners are willing to explore assessments on ton-miles, vehicle weight, axle weight, and other metrics that require heavier vehicles to contribute more revenue for their extra burden on highway upkeep.  If axle count is in play, then I say hybrid cars are also in play for special assessments because their drive trains are heavier than internal combustion engines.

I had way more fun than most laypeople at this Transportation Finance Summit.  One participant even gave me some hints about supporting the Transportation Research Board (TRB) of the National Academy of Sciences.  I have subscribed to the TRB's email feed for years.  The board could benefit from finance types like me who contribute expertise on cost estimates and revenue options for a given policy mix.  I might just pay them a visit the next time I'm in Washington, DC.  

Monday, June 29, 2015

The Haiku of Finance for 06/29/15

Black swans have flocked in
Triple crashes just arrived
Feed on each other

Financial Sarcasm Roundup for 06/29/15

Wherever there is hope, there is also sarcasm.  A place without hope is the realm of despair, but it can also make room for sarcasm.

Greece walked away from Europe's debt deal.  The Tsipras administration threw down a gauntlet and threw the world's financial markets into turmoil.  Athens has no money, no plan, and no hope.  Many Greeks will have trouble paying everyday bills while their banks are closed for a week, or longer.  The new drachma printing presses may already be plugged in somewhere and ready to run hot.  Once they do, and the new drachma hyperinflates, Greeks will have a hard time paying the electric bill to light the Parthenon at night.

China's stock market is crashing.  The PBOC thinks cutting interest rates will prop up stock prices.  The language they use is even more blatant than what the Federal Reserve says to justify monetary stimulus.  China's hard landing will be even harder than the one due for US markets.  The Chinese stockbrokers who will soon be unemployed can all go live in one of those empty ghost cities springing up outside Beijing.  There's plenty of room.

Puerto Rico cannot pay its debts.  A whole bunch of US investors fell in love with the "triple tax free" narrative when their financial advisers sold them Puerto Rican bonds.  Now they have the pleasure of opening their brokerage statements to see verbiage like "bond in default, payments in arrears" for the foreseeable future.  Way to go, wealth management firms.

All this talk of financial trouble in Greece, China, and Puerto Rico makes me want to hunt for bargains.  Here's a thought.  I'll go to my nearest imported grocery store and load up on discounted pita bread, shrimp dumplings, and plantains.  I even have a name for the meal I could make . . the Black Swan Feast.  Get it?  A bunch of financial black swans are coming home to roost.  It calls for a culinary celebration, because I've been waiting for this opportunity to go short and then buy bargain assets all of my life.

San Francisco still keeps me entertained throughout this financial trouble.  A couple of useful idiots brandished their support for anti-Israel boycotts at the Commonwealth Club tonight.  One of them was a hot babe, and I thought it was a shame to waste such a lame brain on such a gorgeous body.  Give me a hot nerdy babe any day who can think for herself.  I'm certain they inhabit the Commonwealth Club.

Sunday, June 28, 2015

The Haiku of Finance for 06/28/15

Get cleantech action
Serious startup wisdom
Accelerate now

Hitting Off at Cleantech Open National Academy West Coast 2015

Most of you know that I enjoy mentoring startups.  I get my kicks out of it for the third year now that the Cleantech Open has kicked off its 2015 season with the National Academy sessions for the West Coast.  I attended the show down at GSVlabs on the peninsula this month.

I used to hear a lot about traction at startup conferences.  Luminaries have finally come around to defining traction as sales revenue.  All of the third party validation proving a technology's function means little if no one wants buy its output.

Guy Kawasaki had a new acronym for us to master:  MVVVP means Minimum Viable Valuable Validating Product.  I prefer the original formulation of a minimum viable product (MVP) because it focuses solely on the tech's workability.  The value and validation come not from the MVP tech but from the target market.  Guy's other formulation of Milestone, Assumption, Tests, and Tasks (MATT) is useful for motivating a startup's daily accomplishments.  I had to LOL at the mention of the "bozo explosion," where lame executives hire less capable people than themselves, which leads to an inevitable collapse.  It takes a lot of courage to hire people better than yourself.  I can't hire anyone like that because no one is better than me.  That's why I work alone.

I did not know about the Biomimicry Institute's Global Design Challenge prior to the academy.  I have known about biomimicry ever since Dr. Hunter Lovins presented the subject at the Commonwealth Club a decade ago.  Cleantech people should look to nature for inspiration rather than reinvent the wheel.

Entrepreneurs must link Customer Development and the Business Model Canvas as a holistic effort.  Using a capital-efficient framework is implied in those models and the Cleantech Open's experts made it official.  CustDev will quickly and cheaply eliminate unworkable hypotheses.  One speaker mentioned Rob Fitzpatrick's The Mom Test as the exemplar for explaining a business model simply.  The irony is that these approaches require brutal honesty between customer and vendor.  In my experience, most human beings abhor honesty.  People have fired me from jobs, ejected me from social networks, and threatened me with physical violence for being brutally honest.  It's easier said than done.

The Chasm Institute had plenty of tools for startups to work through as they "cross the chasm" from early adopters to mass adopters.A product's inherent complexity can be a barrier to mass adoption, so further product iterations should resist the temptation to over-engineer it with undesired features.  I'll bet that startups who successfully leverage their partnership networks can cross that chasm.  Startups tend to overuse the word "partner" without differentiating whether partners are in their supply chain, manufacturing value chain, or marketing channels.  Marketing channels are the path across the chasm.

Entrepreneurs had plenty of time to work on their pitches at the Academy.  Brand audits and SWOT analysis enable better storytelling.  The "Weissman score" is not a plot device anymore and information scientists are beginning to use it seriously.  We'll know the score has gone mainstream when content marketers start publishing test results from web properties.  Data science doesn't connect emotionally with a mass audience.

Conventional wisdom on pitches now includes use of Marimekko charts and 2x2 metrics.  Look those up online for examples.  Marimekko charts illustrate market segments, showing how a market strategy can reach different segments as a startup achieves milestones and collects capital injections.  The 2x2 matrix shows a product's differentiation within its sector.  Those things are effective visual displays if entrepreneurs have robust marketing data.  Making up stuff is not acceptable.  Investors want to see how tech development milestones reduce risk.

Here's one of my new pet peeves about venture capitalists.  Some VCs claim they don't understand business models that are heavily dependent on subsidies for financial viability.  Pfffftttt, yeah right!  Everyone in the Valley loves Tesla Motors even though subsidies and tax breaks rule its financial viability.  The same goes for its twin, SolarCity.  The whole cleantech sector would not be where it is today without massive government subsidies de-risking things so scaredy-cat VCs can jump in later.

I need to grab a copy of Sull and Eisenhardt's Simple Rules because they went like hotcakes among the Cleantech Open crowd.  My simple rules at Alfidi Capital are to be honest, publish daily, and attract hot babes.  The "two pizza rule" for product development teams is still popular.  I would jump into more product development roles as long as I'm not paying for the pizza.  Oh yeah, being cheap and scoring free food are some other simple rules I use.

Government labs are serious about getting the private sector to use their assets.  The National Energy Research Scientific Computing Center (NERSC) offers free supercomputer access for companies.  Whoa, that's a heck of a deal.  It may even be better than free pizza.  DOE Small Business Vouchers are also encouraging startups to use government labs.  Startups jumping into these programs need to link their participation to their Technology Readiness Level (TRL).

It's good to see large corporations use a corporate development philosophy that includes reverse logistics and life cycle termination.  One corporate development participant here described a whole slew of supply chain services they offer to help startups with product delivery.  Wow, here's how partnering makes a difference on the back end.

The Band of Angels showed up to describe a convincing financial narrative.  I am not convinced that there is publicly verifiable proof of a connection between contact frequency and closing sales.  Venture Beat published an excellent article in 2014 about how some commonly quoted sales statistics are worthless.  I worked at a major wealth management firm from 2005-06 where the best sales people closed all of their business with one contact.  It was easy for them because their rich families gave them all of their money immediately.  There are other ways to be convincing besides citing statistics invented out of whole cloth.  Once again, emotional hooks and the early involvement of financial backers make a big difference.  People from Band of Angels are generally pretty cool.

Someone mentioned CAGIX but did not describe how to use it.  Another guru suggested bargaining for discounts from supply chain partners based on how they benefit from a startup's product.  I think that would work if the startup has CustDev data to back up any claims.  Since introductions from referrals are now the norm among venture capitalists, it makes little sense to even run through the traditional pitch fest circuit.  The reality of VCs throwing money away passively is even more depressing than their reliance on inbred referral circles, but that's why many of them fail.  I am not surprised that Silicon Valley's elite have become so insular.  I expect the next tech sector crash to sweep away the ones that have added zero value.

Bill Reichert always excels when he teaches us how to "get to wow" when pitching.  Venture capitalists are only human, as I described above, and they invest when they fall in love with a team.  You can read his wisdom online so I don't need to repeat his thesis here.  I do need to repeat his warning that entrepreneurs should not lie, because too many of them think lying is okay.  I have personally met people in the startup community who excuse lying as an "everybody does it" thing.  That's one reason why almost everybody fails at startups. Investor due diligence uncovers lies about founders' backgrounds.  Customer due diligence uncovers product flaws that destroy reputations.  I could go on but only a few honest people on the planet will ever grok what I say about integrity.

The closing keynote on how society is transitioning from coal to solar was a big winner.  Scarcity makes some energy sources more expensive, but tech advances are making solar cheaper.  Thermal coal prices are certainly crashing as utilities switch to cheap natural gas.  I concur with the broad argument that the coal sector is in decline and deserves Wall Street's short interest.  I do not know at this time whether non-coal substitutes for metallurgical coal are viable.  The metal refining sector still needs coke for steel production.  Clean coal technology also exists, and it may extend coal's viability if it reduces carbon impact or produces attractive byproducts (i.e., CO2 feedstock for algae-based biofuel).  The lack of obvious non-coal substitutes for steel making mean coal companies with large metallurgical coal deposits may be bargain plays.  Some part of the coal sector will still be viable for several decades regardless of the energy sector's trends favoring solar over coal.  This is the heart of an Alfidi Capital thesis I shall develop in future research.

I normally get plenty of unsolicited attention at these types of business events.  I was on my best behavior at the Cleantech Open 2015 academy.  Mission accomplished.

Saturday, June 27, 2015

The Haiku of Finance for 06/27/15

Couple gets married
For richer and for poorer
But sign pre-nup first

Friday, June 26, 2015

The Haiku of Finance for 06/26/15

Risky investment
Predict uncertain cash flows
Need high discount rate

Thursday, June 25, 2015

The Haiku of Finance for 06/25/15

Slick pitch presenter
Prey on gullible clients
Run mouth to grab cash

The Strange Confluence of Cash Flow, Real Estate, and Maybe Even Futures

I am really curious about a whole bunch of financial concepts.  I get even more curious when one or more purveyors of proprietary strategies join up in a marketing maelstrom.  Let's explore a recent confluence of several practitioners.

Go ahead and try to locate a source for someone named Dahl Downing and something called Cash-Flow Strategies.  Google Search results gave me absolutely nothing.  There is nothing morally or legally objectionable about squeezing every last cent of wealth enhancement into an IRA.  I also do not object to flipping income-producing properties or participating in tax deed auctions provided the players involved know what they're doing.  I just cannot understand doing these things without referencing a credentialed expert source or appropriate legal guidelines.  It takes a lot more than having an "invested IQ" to pull these things off.  It also takes more than a couple of slap-dash Web portals that warrant a Google warning about hackers.

Background homework on the stars of Flipping Vegas is just as entertaining as one could imagine.  Perhaps a computer algorithm or a paid gaggle of trolls have published a large number of negative comments all over the Web.  Anything is possible.  It is also possible that a lot of consumers with real complaints just need to vent their opinions.  Contracting out a presentation to pitch an abundance of education probably won't help matters.

There are better ways to spend time than chasing wild rabbits into dark holes.  I elected not to waste one of my weekend mornings listening to slick seminars on real estate.  I did not need to find out whether cash flow or futures were also on the agenda once I saw a whole bunch of shabbily dressed people milling about a hotel lobby waiting to register.  I really am better off on my own, thank you very much.