Thursday, January 29, 2015

The Haiku of Finance for 01/29/15

Managing some fund
Go along with Wall Street herd
No added value

Extraordinary Fund Manager Myopia

I answered a survey today from a major consulting firm that canvasses senior people in portfolio management and investment analysis.  I won't reveal the firm's name but I will get a copy of the survey upon publication.  The questions addressed investment professionals' expectations to see in the markets over the near term.  I expect a bunch of bad news, unlike many pros who manage serious money.

A whole bunch of obvious risks have not deterred asset managers from seeking safe havens.  Teachers' pension funds are piling into US residential real estate investments at all-time high prices.  Currency arbitrageurs have not been deterred by several trading firms' blowups after the Swiss repriced their currency.  Corporate earnings and P/E ratios at generational high points eventually revert to their historic means.  I could go on about these things but the only people paying attention are on the fringes of the finance sector.  Mainstream thinking among portfolio managers still encourages chasing yield.  The Wall Street crowd assumes central bank puts under asset markets can never fail.

Geopolitical risks should compound any sane money manager's planning.  Russia's diversion of reserve funds from infrastructure investment to bank backstops should signal a low-growth future.  Emerging market stocks that sold dollar-denominated debt will struggle to make higher interest payments while the dollar stays strong.  The enormous potential for instability in Venezuela, Argentina, and Saudi Arabia should throw cold water on any bullish case for those countries in 2015.  Money managers plow ahead anyway, oblivious to contrarian cases.

The hard asset hedge crowd has enough myopia of its own.  Perpetual fans of precious metals don't think about the impracticality of bullion bars in daily transactions.  Stocks in the natural resource sector have cratered since 2014 and will stay low as long as currencies of hard asset producing countries stay weak.  The oil sector shakeout means a lot of so-called bargain buys among junior producers will instead become bankrupt buys as major producers buy out their nonproducing assets.

Watching supposedly smart money managers make increasingly dumb bets is a fun pastime.  I like it when dumb people lose millions after greed and hubris destroy their judgment.  A penultimate day of reckoning awaits investment professionals who assume central banks will never lose control of currencies or yield curves.  Hedge fund managers will learn the hard way how to write farewell letters to their formerly wealthy clients.  I will relish bottom-fishing for cheap assets once myopic fund managers are wiped out.

Wednesday, January 28, 2015

The Haiku of Finance for 01/28/15

Huckster baloney
Mass pitch event for suckers
Picking some pockets

Dog-Gone Pitch Strikes Again With Real Estate Private Pre-Auction Baloney

My faithful readers may be familiar with my contempt for some dog-gone hucksters and their perpetual real estate seminars.  I blogged about this stuff almost five years ago.  Some organization obviously read my review of the seminar shortly after I published it and disliked it enough to have a flunkie respond.  They never bothered to remove my name from their mailing list.  So many employees are even dumber than I had estimated.

The result of someone's administrative oversight still arrive in my mailbox to this day.  I sometimes receive special invitations to attend a "private pre-auction real estate event" at hotels in San Francisco.  The group upgrades the venue sometimes, getting away from the airport hotels for more touristy spots.  The fold-out postcard always promises introductions to dealmakers hand-selected by a guru himself.  If they're anything like the hand-selected bums and losers I met at the original free seminar, the quality of their deals is likely to be zero.

Serious real estate investors can find real deals at local real estate clubs.  Your local bank can give you a heads up on any foreclosed properties from their REO portfolio they want to unload quickly.  Don't even bother hanging out with the bottom-feeders and shills that are likely to populate a mass-pitched event.

Reprising a Real Estate Festival of Baloney

This is a repost of an article I originally published in April 2010.  I took it down when the people I exposed threatened me with a lawsuit, and I did not wish to fight some deep pocketed operation in court.  I have since removed all references to this person's enterprise and to other real people who were connected to this promotion.

I love free stuff but hate wasting time.  Today I came up FAIL on both counts.

I was recently cold-called by some real estate seminar promoters.  These people probably got my phone number from the usual lists.  They were pitching a free seminar that I knew would be a tease for some huge rip-off.  This free seminar came with a twist:  A free book and digital camera, plus an appearance by a TV business personality, were part of the deal.

Who's the TV personality?  He won the first season of a reality TV competition and spent a couple of years under contract with the network as a shill for a blowhard real estate developer and his charities.  Now he's married to another entertainment talking head, completing his transformation from legitimate entrepreneur into soulless media package.

I wanted the free stuff, so I said yes, plus I really needed to amuse myself.  A week later their call center followed up by pitching me a "VIP seating" package that I politely turned down.  No way was I paying one stinking penny for what I consider to be free entertainment.  I hadn't even walked in the door and they were already trying to find a way to get my money.  They later sent me a confirmation email stating that the TV personality would appear by "remote linkup," and the real presenter was someone else.  Boy, was I in for a treat.

The momentous day of the seminar was today (actually, it was a day in April 2010, but remember this is a repost) at an airport hotel near San Francisco.  This particular hotel has been the scene of a few other free seminars I've attended, with the likes of two other shills pitching their garbage.

Who's one of those shills?  He's a self-promoting personal improvement guru whose amateurish sweat lodge retreat caused the deaths of three participants in October 2009.  His company can't pay any legal claims because it spent every penny customers had prepaid for future events that are now cancelled.  Brilliant!

Who's the other shill?  You know him as the author of one series of books about a rich parent who probably never existed.  I'll let you read what others say about the person's real estate knowledge so you don't waste your own time or money.

The time I spent waiting for the registration table to open gave me some entertainment.  A disheveled man carrying a ratty bookbag and wearing a shirt that looked like it hadn't been changed since 1979 asked me if this was the right place for the seminar.  I said yes, but I didn't want to break his heart by breaking the news that the TV celebrity would only be present electronically.  "My relatives all think I'm crazy for coming here," he said.  I wasn't about to argue with him.  During the seminar he actually started talking to himself.  I guess I didn't have to argue with him at all, since he was doing it for me.

I sat in the back of the seminar room because I suspected I might be making a quick exit, free stuff or not.  I asked one of the speaker-dudes if I could get my free digital camera now.  Unsurprisingly, he said "No, I have some things to teach you first."  Some young chick I crossed paths with asked me if we were supposed to do anything with the registration letter we got in the mail.  She chuckled when I said, "Of course not."  The suckers who were dumb enough to pay for VIP seating were sitting up in the front two rows, sectioned off with . . . wait for it . . . masking tape.  There were at least eleven of these idiots up there, soon to be separated from more of their money by the shysters running this carnival.

The guy next to me admitted he only wanted the free camera too.  "I have to get my wife a birthday present, and this looked like the best way since I'm unemployed and have no savings."  Wow.  I was mentally going through the items I remembered from a publicly available Real Estate Artist B.S. Checklist and all of the signs were appearing as predicted.  The audience members were all definitely the dregs of society, sloppily dressed and ugly.  Two guys even came wearing slippers.

The main event started.  The TV personality appeared all right, not via "remote linkup," but by a digital recording that looked like it had been edited from a Skype session.  He gave a generic introduction that mentioned no target audience, so it was obviously designed to be used repeatedly on the road.  I honestly believe that most of the people in the room were dumb enough to think he was speaking to them live.  Mr. TV Dude, I'll tell you right now, being associated with this promotional scheme is going to come back to haunt you when the whole thing collapses from lawsuits.

The main pitchman leading off was some guy I had never seen before.  He's pitched similar seminars for the blowhard real estate developer; the TV personality's recorded intro mentioned him as a former blowhard associate and triathlete.  I only knew him as the guy who told me I had to "learn something from him" to get a free camera at the end.  Both learning something and getting that free camera were looking increasingly unlikely.

The first 30 minutes of the seminar told me everything I needed to know about what the promoters thought of their audience's intelligence.  More signs from the B.S. checklist appeared.  The pitchman dropped hints at a luxurious lifestyle by showing pics of a huge development he claimed to have some part in finishing.  The rubes in the VIP seats must have been suitably impressed.

I decided to leave after two slides insulted my intelligence.  The first was a chart that looked like a standard distribution of real estate foreclosures.  The obvious problem (to my MBA-trained mind anyway) was that the timeline on the graph ran from 2007-2012 but a box imposed on the chart - split down the middle - said the bulge of foreclosures would be 2010-2011.  In other words, a two-year timeline was symmetrically imposed on a six-year timeline even though they both had different midpoints.  It was also a perfectly symmetrical distribution, which for a timeline makes no sense at all.  The statistically illiterate people in the audience probably missed that one.

The next insult was too much to bear.  The platform pitchman said that banks don't like holding foreclosed properties because they don't want to manage real estate.  Fair enough.  Then he said this whopper:  "When the bank forecloses on a mortgaged property, it's no longer an asset for the bank.  It becomes a LIABILITY."  That's complete BALONEY.  A home owned by a bank is still an asset; it's just not producing any income, from mortgages, rents, or otherwise.  It does not move from one column of a balance sheet to another, although it does change asset categories and can be written down in value significantly.  Analysts like yours truly know this; idiots and suckers wearing slippers to seminars will never know it.

I couldn't take any more.  I left after exactly 40 minutes of this circus.  I wasn't going to wait around for another six hours in the hope of getting the TV personality's free book, some free digital camera that was probably junk, and whatever free lunch they mentioned.  It was probably going to be a baloney sandwich.  I'd had my fill of free baloney for the day.

I hope you all enjoyed this blast from the past.  It's almost five years old and I still think it's funny.  All that I have read about this particular real estate promotion since I wrote this article in April 2010 convinces me that they have not changed their ways.  I will not name names because I don't need a reprise of the legal liability they threatened to throw at me a few years ago.  The reprise of the article, stripped of identifying information, is enough.  

Tuesday, January 27, 2015

The Haiku of Finance for 01/27/15

Greek debt in standoff
Europe knows cost of outcomes
All will harm euro

Greek Debt Game Theory

Greece's new leaders run a nation whose sovereign debt is about 175% of its GDP.  Most of the Syriza party's cabinet are untested in senior leadership roles.  Entering negotiations with ambit claims is probably beyond their ability.  The European troika should take them at their word when they say that Greece cannot afford to pay its debts in full.  This understanding sketches out the boundaries of a high-stakes Prisoner's Dilemma.  Game theory can help us understand the dilemma's probable outcomes.

The probable end state of most Prisoner's Dilemmas is the defection of the party who first realizes the advantage of abandoning a compromise solution.  The first to defect maximizes their own self-interest.  The classic formulation of this dilemma presumes that the two primary parties do not know each others' intentions.  The European troika and Greece's Syriza know each other's intentions exactly, so an immediate defection from a negotiated solution is not likely.  The problem is that Syriza's absolutist campaign rhetoric leaves little room for a negotiated solution.  Electing amateurs who have never strategized or negotiated beyond a marketing campaign places a crisis-riddled nation at a distinct negotiating disadvantage.

The troika's bankers and economists have obviously considered several scenarios, including a Greek debt default and exit from the euro.  Their negotiating position includes consideration of the cost to Europe of Greece's untenable positions.  Greek Prime Minister Alexis Tsipras has until the Feb. 12 EU summit in Brussels to telegraph any softening of his demands for lifting austerity.  He has stated a willingness to "negotiate" but has not budged on his commitment to reinvigorate the Greek welfare state.

Game theory indicates several possible outcomes if we assume the Greek position is fixed.  One set of scenarios should include some form of renewed European generosity that is insufficient to meet Greek demands.  Another should include hard European demands that Greece adhere to its debt covenants if it wants a loan lifeline after Feb. 28.  The least likely scenario is Greek capitulation to any demand, even a temporary one, to secure said lifeline.  A turnabout acceptance of austerity would shatter Syriza's governing coalition and prompt snap elections again.

The likely range of outcomes under game theory is thus some sort of Greek default that prompts the country's withdrawal from the euro.  Europe's leaders have calculated this cost and believe it to be manageable, but they are tempting fate by inviting Greece to negotiate.  The public statements of both EU and Greek leaders indicate that this is the full range of policy outcomes, yet one outcome is also a possibility.  Systemic stability has emerged as an overriding policy consideration on both sides of the Atlantic since the 2008 financial crisis.  Printing euros to maintain a unified eurozone is the most powerful option available to Continental leaders committed to a unified currency.

The negotiations may be mere political theater if the troika is sufficiently confident that ECB monetary stimulus can paper over Greece's problems long enough for a renewed bailout to push the country into growth.  The math gets complicated depending on how enthusiastic economists are for the effects of debt on growth, but the philosophy is not complicated at all.  The ECB quantitative easing timetable can immediately shift to accommodate bond purchases that support further Greek bailouts,  The cost of that option is the decimation of the euro's buying power against the US dollar.  Brussels has yet to indicate whether the cost of the euro's dismemberment or the cost of its devaluation is more tolerable.  Mr. Tsipras' conduct in Brussels will trigger Europe's choice.  Alfidi Capital judges a Grexit to be just as likely as a quantitative easing bailout.

Full disclosure:  Bearish on the euro; long put position against FXE.  

Monday, January 26, 2015

The Haiku of Finance for 01/26/15

Potato crop yield
Enhance harvest with data
A lot more French fries

Financial Sarcasm Roundup for 01/26/15

The final week of January requires a final blast of sarcasm.

Wall Street is launching its business continuity plans as winter storm Juno hits the Northeast.  The world won't miss a few hundred useless Wall Street relationship managers if they froze in place for a couple of days.  I'm pretty sure a few hamsters running in miniature plastic wheels could keep the financial sector humming.  Automation is making most of these humans redundant anyway.  The storm is the perfect test case for AIs.

Some OPEC big cheese is now warning about much higher oil prices.  Well, dude, blame Saudi Arabia and the other Gulf sheikhdoms for flooding the market with oil to protect their market share.  Driving more expensive shale producers out of business is a surefire way to frighten capital away from exploration and production.  Analysts underestimate the long lead times needed for new infrastructure.  Capped wells can be turned on quickly but many gas pipelines to shale fields and tar sands are still in the planning stages.  The smaller servicing companies that are about to go bankrupt won't be able to keep their fleets of trucks and portable rigs in storage, so those will be sold for scrap or converted to something else.

China's brokerage firms are going nuts with margin accounts and ignoring regulators.  This blatant juicing of Chinese equities is going to end very badly for the retail investors who get suckered in at the very end.  I hope the traders involved have lots of dried noodles stored up for the lean times awaiting them after the inevitable crash.

In other news, I am now the proud owner of a bag of potatoes.  They don't last as long as canned food but they are quite tasty with salt.

Sunday, January 25, 2015

The Limerick of Finance for 01/25/15

Greek leftists have won their big prize
Euro watchers cannot feign surprise
Throw doubt onto debts
Bond shorts will place bets
Pricing yield for some time won't be wise

Saturday, January 24, 2015

The Haiku of Finance for 01/24/15

Automate advice
Cut out brokers from clients
Obsolete selling

Automation Will Destroy Financial Advisers

Way back in the day, financial advisers were hard-working sales people who matched investors with products they needed.  The profession morphed into a refuge for trust fund babies who needed a real job on their resumes to meet their multi-generational trust's inheritance requirements.  The brokerage infrastructure grew into a multi-headed hydra, mixing an investment bank's cute ideas into proprietary products.  The age of Big Data and artificial intelligence (AI) is about to turn this whole enchilada inside out.

The virtual financial adviser is an interim step toward full automation.  A new generation of financial salespeople are managing relationships via Skype and Google Hangout, all without ever meeting their clients in person.  Tech-savvy investors want a personal touch but don't have time to trek to meetings.  The brokerages with the most tech-savvy compliance architectures have approved social media channels for marketing.  The firms' other IT challenge is grafting on archiving systems that allow firms to record client contacts in social media.

Human advisers working remotely are a bridge to the wave of full automation about to break over anyone in finance who manages client relationships.  A full stable of fully digital wealth management firms deploy AI interfaces that cut out human advisers completely.  Machine learning teaches cloud-based AI algorithms how to behave when a human client asks financial questions.  Fully automating client relations cuts out the layers of back office people who processed client orders and designed financial products.

The end of overhead in wealth management means a drastically lower headcount.  Employee compensation is the single greatest expense in the finance sector.  Eliminating the lazy idiots kicking back and counting their bonuses will save money for clients.  Part of the cost avoidance will undoubtedly leave more earnings on the table for the shareholders of automated brokerage firms.  The SEC should breathe a sigh of relief at the dramatic reduction in broker misconduct complaints.  Fewer human operators of any system mean fewer human-caused errors.

The creative destruction that the cloud / AI / Big Data paradigm brings to finance will change Wall Street for the better.  Branch managers won't have to act in loco parentis for trust fund baby brokers because neither will be needed anymore.  Client decisions aggregated into Big Data packages will arbitrage away the investment products that cost too much and deliver too little alpha.  I suspect index funds and ETFs will be the biggest product winners because they are simple to build, cheap to operate, and easy to distribute to AIs from wholesale channels.

I wish tech had been this mature when I was a financial adviser from 2005-2006.  I could have blasted out emails, scored social media followers, and closed accounts electronically.  Tech has finally caught up to the needs of sophisticated clients.

Nota bene:  Alfidi Capital is not a registered investment adviser (RIA).  Anthony J. Alfidi is not a financial adviser.

Friday, January 23, 2015

The Haiku of Finance for 01/23/15

Amazon bull case
Morgan Stanley smoking stuff
LOL at free shipping

Thursday, January 22, 2015

The Haiku of Finance for 01/22/15

Central bank nonsense
Claiming fear of deflation
Come to your senses

Everyone Who Does It Can Still Be Wrong

I recently had a very unpleasant conversation with someone who thinks that brazenly unethical actions in business are somehow excusable because "everyone does them."  Her moral lapse was breathtaking for someone who claimed to possess more than one advanced degree.  I might as well describe what's wrong with this mentality.  Some of you will benefit.

If you had good parents, they probably told you at some point that you shouldn't do some dumb thing just because all of your idiot friends were doing it too.  Phrasing it for a pre-teen goes something like this:  "If everyone jumped off the Golden Gate Bridge, would you do it too?"  The pre-teens who don't listen become adults like the young woman I mentioned at the top of the article.  Lots of dumb kids grow up to be idiot adults.

Entrepreneurs often find the temptation to embellish their backgrounds irresistible.  Those who give in to temptation invite disappointment when investors complete their due diligence and find no corroboration.  Investors check out people's educational backgrounds.  Alluding to a nonexistent degree in a pitch is cringe worthy behavior.  Attending a couple of seminars at Stanford doesn't count as an educational qualification.  People should know this, but they don't and they pitch anyway.

Lying early and often about something leads down a slippery slope.  Misrepresenting product capabilities, warranty commitments, or the legal fine print of a contract is usually actionable in civil litigation.  Pitching lies to a lot of very stupid people is often a quick way to riches and a long road to court problems.  The court then forces disgorgement of said riches, with other penalties piled on top.  Check out case histories at the FTC and SEC for businesses that tried to get away with making false claims.

Even grown-ups need reminders that the lowest common denominator behavior of crowds is not an acceptable substitute for ethical reasoning.  Adults who can't take the hint need to stay far away from me forever.  Business people who lie cannot be leaders.