The Automaker Smackdown

I thought the carmakers were going to get everything they demanded, no strings attached. I'll admit that I didn't see this coming:

The White House rejected turnaround plans from General Motors Corp. and Chrysler on Monday, warning that more concessions were needed from unions and creditors before they could be approved. Fears of an automaker bankruptcy have been looming over investors for months, and the latest developments made the market even more uneasy about the industry.

Another CEO bites the dust. Carmakers are going to have to get seriously small and forget about double-digit topline growth if they want any kind of future.

Nota bene: Anthony J. Alfidi holds no position in any automaker.

The Haiku of Finance for 03/28/09

I-banker paycheck
Made of sterner stuff than law
Oligarchy rules

Calls for Restraint Fall on Deaf Ears

Leopards don't change their spots, and neither do predators in the financial world. Asking them to do so is an exercise in futility:

President Barack Obama told chief executive officers from some of the largest U.S. banks to “show some restraint,” even as he courted their support for his plans to stabilize the financial markets.

And yet the thefts continue apace. BofA wants to throw more of your tax money to the Thundering Herd at Mother Merrill:

Bank of America Corp. plans to increase some investment bankers’ salaries by as much as 70 percent following the takeover earlier this year of Merrill Lynch & Co., people familiar with the proposal said.

Base pay is supposedly going up, but anyone who says total compensation will not increase must think their audience is stupid. I-bankers always find a way to get more money from their firms. Always. If you don't believe me, just read this:

Goldman Sachs Group Inc.’s top 10 executives received $49.6 million from their investments in hedge funds and private equity funds during 2008, more than most of them earned in compensation after agreeing to forgo bonuses.

See, i-bankers who are denied compensation from normal cash flows can make up for it in other ways, such as selling stakes in proprietary funds back to the firm. These games are going to continue until Washington gets serious about prosecuting executives at banks that misuse TARP money.

The Haiku of Finance for 03/27/09

States are losing jobs
Yet inflation is ignored
Prices climb away

Jobless States, Plus Real Spending Declines

Unemployment shows no sign of bottoming out:

More states logged double-digit unemployment rates in February, with North Carolina and Rhode Island seeing their rates hit record highs.
(snip)

Seven states have unemployment rates that topped 10 percent last month. That's up from four states in January.

This is what happens when you outsource highly skilled manufacturing jobs to China and replace them with brokers pushing paper into a FIRE economy. Creating more paper money to light on fire (my puns rock!) won't bring back lost jobs, but it will drive up prices:

A price gauge tied to consumer spending rose by 0.3 percent in February and was up 0.2 percent excluding food and energy, indicating that the recession has contributed to a significant moderate in inflation pressures.

That little tidbit is buried at the bottom of supposedly good news on a consumer spending increase of 0.2%. Let's be clear about this: If consumer spending increased by 0.2% this February but the corresponding price gauge increased by 0.3%, the difference between the two is a decline in spending of 0.1% in real terms! I can't be the only one who noticed that!

I refreshed my bearish option positions this week. Now you know why. As the Mogambo Guru might say, this investing stuff is easy!

Nota bene: Anthony J. Alfidi is short uncovered calls on SPY and IWM.

The Haiku of Finance for 03/26/09

Big regulator
Watching over all finance
Long overdue move

Iron Fist of Universal Regulation Coming to Punch Wall Street . . . and Silicon Valley

Say hello to the new boss, not quite the same as the old boss:

Treasury Secretary Timothy Geithner on Thursday called for broad reforms to curb risk taking on Wall Street, including a new regulator to oversee the entire financial system in a bid to restrain behavior that led to the worst credit crisis since the 1930s.

The U.S. is about to create the equivalent of the U.K.'s Financial Services Authority to keep all of these spoiled preppies in line. Further down the article, we see just how large Uncle Sam's regulatory maw will be:

In one key move, Geithner said hedge fund advisers and others who control big pools of capital like private-equity funds and venture capital firms should be forced to register with the Securities and Exchange Commission.

Oh snap, they're going after PE and VC. Is that really necessary? It's not like VC partnerships have 30:1 leverage like zombie banks. That probably means I'll have to register Alfidi Capital at some point. I guess that's a small price to pay to keep the big boys in line.

The Haiku of Finance for 03/25/09

Pension plans nix stocks
But bond yields disappoint now
Just wait 'til next year

Pensions Plan for Poor Performance

Pension plan managers are growing shy after getting burned by equity markets:

After sustaining record losses in 2008, U.S. pension funds are unlikely to return to the high level of stock market allocations favored before the global financial crisis and will probably favor greater bond allocations, the author of a study said on Tuesday.

Unfortunately for both plan sponsors and this study's authors, they're going to get burned again. The bond market is going through its own bubble phase now; any investor reallocating heavily to fixed income (esp. Treasuries) right now is going to be very disappointed when Fed-engineered inflation rots away their returns.

Nota bene: Anthony J. Alfidi holds no bonds at this time.

The Haiku of Finance for 03/22/09

Buy some bad assets
Just get loans from Treasury
Quick way to get rich?

Treasury's Plan Leaks Out

A part of the Treasury's rescue package is slowly coming into view:

The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases and also sharing risks if the assets fall further in value.

The Public Investment Corp. may turn out to be a boondoggle for taxpayers, but its subsidized loans for asset purchases will be a boon to hedge funds and other private investors. I may just take a look at the Corp.'s eligibility requirements to see if I can qualify to buy some distressed assets.

The Haiku of Finance for 03/21/09

Equities go down
Bond market overvalued
Gold doing just fine

The Haiku of Finance for 03/20/09

AIG payouts
Anger many taxpayers
Bailout jeopardized

Microsoft Still After Yahoo; A Potential Special Situation Play

Told ya so!

Microsoft Corp. Chief Executive Steve Ballmer is still signaling an interest in a deal to buy part of Yahoo Inc.

Mr. Ballmer had to wait a decent interval after Ms. Bartz took over Yahoo to avoid any perception that a proposed deal would be a slight against Jerry Yang. IMHO once they sit down to negotiate, the final deal will be to buy all of Yahoo and not just the search business. Microsoft never ever ever walks away from a strategically necessary acquisition, and Yahoo is a much more affordable target now that its shares trade at around half of where they were a year ago.

Nota bene: Anthony J. Alfidi holds no position in MSFT or YHOO at this time.

The Haiku of Finance for 3/19/09

Transportation woes
Frieght carriers suffering
No good buys right now

Transportation Stocks Getting Bogged Down

Some transportation stocks are considered to be bellwethers for the larger U.S. economy. The two I've seen most frequently mentioned are FedEx (FDX) and Union Pacific (UNP); the first for its importance to B2B delivery, the second for its tonnage capacity.

FedEx is having some rough times, failing to beat the Street's expectations:

FedEx says its fiscal third-quarter profit tumbled 75 percent as severe weakness in the global economy offset the benefit of lower fuel prices.

Union Pacific's troubles are common to the entire railroad industry:

Since the end of February, Union Pacific, the largest railway by revenues, has announced that traffic was down still further – 19 per cent – for the first week of March, against the equivalent week of 2008.

Announcing the gloomy February figures, John Gray, senior vice-president of the AAR, made a plea for the industry to be granted some of the economic stimulus funds being spent by the new US administration.

Given their momentary weakness, are either of these stocks right for my Alpha-D Portfolio? FDX's five-year EPS growth rate is a pathetic 5.65%, far below its industry average. UNP still carries way too much long term debt (far more than 2x net income) and has a five-year ROE of only 10.77%.

No thanks. These stocks are getting beaten down for good reason. I will not go long FDX or UNP.

The Haiku of Finance for 03/18/09

Fed weighs its options
Some inflation, or much more?
Either way, it comes

Fed's Option: Hyperinflate

The Fed likes to think that it has options to help the economy, which is true up to a point:

One option advanced at its last meeting in January is buying long-term Treasury securities. Doing so would help further drive down mortgage rates and help the crippled housing market, economists said.

Another option put forward in January is expanding a Fed program aimed at bolstering the mortgage market. The Fed could boost its purchases of debt issued or guaranteed by mortgage giants Fannie Mae and Freddie Mac. Since that program was announced late last year, mortgage rates have fallen.

The point is that any of these options, once implemented, will destroy the value of the U.S. dollar by multiplying the amount of currency in circulation (yes, electronically created dollars count). This is great news for borrowers and bad news for savers.

It's terrific news for gold investors, like yours truly.

The Haiku of Finance for 03/17/09

FOMC meets
Pondering larger assets
Buy them, inflate them

Fed Watchers Await Hints of Hyperinflation from FOMC

The FOMC meets this week. Bloomberg gathers up some chatter on what Helicopter Ben might have to do next:

Chairman Ben S. Bernanke and Federal Reserve policy makers may have to ramp up their purchases of mortgage securities and other assets after the economy and job market deteriorated further since they last met.

Hyperinflation may be here sooner than even the most paranoid goldbugs anticipate. Further expansions in the Fed's balance sheet may very well stave off a deflationary depression, and the price we will pay at some point is massive inflation. Any equity market gains in that kind of environment would be nominal rather than real, so a Japan-style lost decade or two for stock market investors would be unavoidable.

Nota bene: Anthony J. Alfidi is long IAU (with short covered puts) and GDX (with covered calls).

Yet Another Ridiculous Rally, and Why It Pays to Stay Away From AIG

Markets are up so far this Monday, which flies in the face of even more bad economic news:

Industrial production fell in February for the fourth consecutive month as auto cutbacks and collapsing exports hurt the broader U.S. economy.

Output at factories, mines and utilities dropped 1.4 percent last month, more than forecast, after a revised 1.9 decline in January, the Federal Reserve said today in Washington. The amount of factory capacity in use slumped to 70.9 percent, matching the lowest level on record.

The news is worse than expected, and yet the stock market performs better than expected. Mr. Market is as schizoid as ever.

On a side note . . . today a friend asked me what I thought of AIG. I told him that it no longer makes any sense to think of it as an operating company; it is instead a conduit for bailout money to counterparty banks that would otherwise be insolvent.

Nota bene: Anthony J. Alfidi is short uncovered calls on SPY; he holds no position whatsoever in AIG.

The Haiku of Finance for 03/15/09

Last week's brief rally
Sparked by Citigroup memo
Doesn't mean jack squat

The Haiku of Finance for 03/12/09

Bernie pleads guilty
Ponzi fraudster bound for jail
Others still walk free

The Haiku of Finance for 03/11/09

Citigroup profits?
I'll believe it when I see
Their earnings report

U.S. Stocks Stage Stupidity Rally

It all started with Citigroup's leaked memo revealing its alleged profitability; that plus Treasury's latest ephemeral rescue plan have sparked a hope n' glory rally, chasing will o' the wisps:

U.S. stocks rallied, extending yesterday’s 6.4 percent surge in the Standard & Poor’s 500 Index, as speculation grew the worst of the banking crisis may be over. Shares in Europe and Asia also advanced.

Come on, Mr. Market. You can't fool yourself forever. Not with news like this you can't:

Confidence in the world economy waned in March as the recession proved deeper than forecast and the U.S. mounted new rescues of financial institutions, a survey of Bloomberg users on six continents showed.

The Bloomberg Professional Global Confidence Index fell to 5.95 from 8.5 in February. A reading below 50 means pessimists outnumber optimists.

A lot of newly bullish suckers are going to get sucked into this rally as smarter people are covering their shorts. These newly optimistic investors will receive a rude awakening when Mr. Market realizes that the economy still sucks.

I''m staying short. That's all for now.

The Haiku of Finance for 03/10/09

Merck to buy Schering?
Better cough up some more cash
J&J sure can

Merck and Schering-Plough: A Special Situation?

Merck is serious about fending off counterbids for its proposed acquisition of Schering-Plough:

Merck & Co.’s agreement to buy Schering-Plough Corp. includes a termination fee of $1.25 billion if either company backs out, a penalty that may influence whether Johnson & Johnson makes a higher offer.

Also, if Merck fails to come up with the financing, it must pay Schering-Plough $2.5 billion and expenses, according to a document Merck filed today with the Securities and Exchange Commission.

Folks, this is nowhere near a done deal. Fist of all, JNJ has been on an acquisition streak lately, so it may very well be inclined to submit a counterbid. Most of those buys have been for smaller medical device firms that fill holes in JNJ's existing product lines, so swallowing a major competitor whole would be a much larger strategic move. Second, Merck is not 100% sure it can come up with the necessary financing, which explains why the bid is partly in stock.

This may prove to be a potential special situation play for me, but right now there is too much risk that the deal will fall apart. I'll wait to see what JNJ does in response, if anything.

Nota bene; Anthony J. Alfidi does not hold any interest in MRK, SP, or JNJ at the time this commentary was published.

Citi Threw More of Your Money Away

Sheesh. These guys just can't stop chucking our TARP money out the window:

Embattled banking giant Citigroup Inc. spent about $3.5 million to provide rewards for top-performing advisers at its Smith Barney brokerage unit.

The good news is that this isn't nearly as bad as John Thain blowing about $4B on Merrill Lynch bonuses. The bad news is that it hasn't stopped.

Nota bene: Anthony J. Alfidi has no position in C.

The Haiku of Finance for 03/07/09

Jobless rate surges
Get used to bad news ahead
Preppies get fired too

The Haiku of Finance for 03/06/09

FDIC cash
Needs refill to grab bad banks
It will be spent soon

FDIC Defined: "Financial Disaster Is Coming"

I recently wrote about how I declined the opportunity to purchase a CD from GE whose price and yield were reset due to credit market action. We can look forward to more such episodes from other CD issuers in the near future. You see, the FDIC is asking for its own bailout in anticipation of more bank insolvencies:

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

The Connecticut Democrat's effort -- which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner -- would give the FDIC access to more money to rebuild its fund that insures consumers' deposits, which have been hard hit by a string of bank failures.

Our watchdogs know what's coming. The stress tests in progress at major banks are probably uncovering massive losses on mortgages and other non-performing assets. The FDIC needs to be prepared to shutter a lot more failed banks in 2009.

TALF Errata

In previous posts I have discussed the inflationary impact of the Fed's Term Asset-Backed Securities Loan Facility, a.k.a. the TALF. I was under the impression that the TALF had already been placed into operation, but I was mistaken. The program did not become operational until this week. This Federal Reserve press release from Nov. 2008 announces the TALF's creation, but the actual lending did not begin until March 3, 2009 according to this press release from the Federal Reserve Bank of New York.

I apologize for any confusion.

The Haiku of Finance for 03/05/09

Markets drop big-time
GM sick, bad job data
Citi breaks the buck

China Teases While Dow Drops

Yesterday I commented on what looked like an addition to China's stimulus package. Well, today the Red Dragon decided to backpedal:

Copper futures fell for the first time in three days after Chinese Premier Wen Jiabao indicated the government doesn’t need to increase stimulus spending to achieve its target for economic growth.

.
Copper wasn't the only thing dropping. U.S. markets were down big time today, so anyone who started investing in 1997 is almost back to where they started (although they're still a little ahead if they were smart enough to reinvest their dividends). China's tease about its stimulus plans has little to do with the extraordinary weakness in the U.S. economy.

I hold firm to my belief that China is a better long-term bet than the U.S. The next decade should prove me right.

Nota bene: Anthony J. Alfidi is long FXI (with covered calls) and short uncovered calls on SPY.

The Haiku of Finance for 03/04/09

China beats U.S.?
They'll have to grow and save more
That shouldn't be hard

China Can Afford What U.S. Cannot

China is stepping up its domestic stimulus efforts:

Chinese Premier Wen Jiabao will today propose new steps to bolster the world’s third-biggest economy, adding to a 4 trillion yuan ($585 billion) spending plan.
(snip)

China will spend more on infrastructure and to boost manufacturing in addition to the stimulus package announced in November, Reuters reported, citing an unidentified official at the country’s top economic planning agency.

Meanwhile, the U.S. is increasingly unable to afford jack squat:

The U.S. economy “deteriorated further” in almost all corners of the country over the last two months as consumer spending slumped and manufacturing declined, the Federal Reserve said in its regional business survey.

The end of this depression, whenever it comes, will reveal that China has emerged as the primary contender for the U.S.'s role as guarantor of global economic stability. I am prepared to eat those words if I am wrong.

Nota bene: Anthony J. Alfidi is long FXI (with covered calls) and short uncovered calls on SPY in anticipation of the role reversal mentioned immediately above.

The Haiku of Finance for 03/03/09

GE going bust?
That would be a disaster
Suppliers would die

GE Going Bust?

GE's public assurances of health are starting to look suspiciously like those we heard from Bear Stearns and Lehman Bros. just before they tanked:

General Electric Co. is trying to convince shareholders it can weather the economic storm, but investors keep running for cover.

In a letter to shareholders Tuesday, Chief Executive Jeffrey Immelt reminded them that one of world's largest industrial conglomerates has taken strong steps to protect itself from a recession that is rapidly spreading around the globe and threatening its wide range of businesses, from jet engines to lending.

I can thank Karl Denninger of The Market Ticker for this very alarming insight into GE's immediate future. Investors are beating down the price of GE puts because they are very skeptical of the firm's near-term profitability.

GE might be one firm where a good bank / bad bank model might be appropriate. Separating the imploding financial unit, GE Capital, from the healthy industrial pieces might help those parts of GE that make things:

General Electric Co.'s aircraft engines business group received a $438.1 million contract modification from the U.S. Navy for fighter engines, the Defense Department said Tuesday.

I recently intended to buy some GE three-month CDs as part of my cash management strategy. My brokerage called me to let me know that my trade had been cancelled last week because the CDs had to be re-priced. Now I know why. I decided last week not to look this gift horse in the mouth and passed on my broker's offer to purchase the CDs with their new (and more attractive) yield. The hand of fate has intervened on my behalf. Yes, I know CDs are FDIC insured, but a GE bankruptcy would be more disruptive to the markets and the FDIC's balance sheet than even AIG's insolvency.

Nota bene: Anthony J. Alfidi does not hold any positions in GE. In 2008 he had put cash into CDs from GE Capital; those CDs matured before this post was published.

The Haiku of Finance for 03/02/09

Loser AIG
An endless pit for your cash
Kiss it all goodbye

AIG Wins at "The Biggest Loser"

Today the markets closed at their lowest levels because, among other things, a once-storied insurance company announced the largest loss in U.S. corporate history:

A new definition of desperate times: Even as the government threw a stunning new $30 billion lifeline to American International Group on Monday, the beleaguered insurance giant confirmed it had lost more than twice that much, $62 billion, in a single three-month period.

And many more billions of federal dollars are almost sure to be shoveled into the company for a simple reason: Officials fear its collapse would cripple financial markets in the U.S. and around the world.

We will never stop paying for AIG. Never. This bankrupt insurance giant is slowly bankrupting the United States Treasury. Whatever assets AIG has promised to transfer to the Treasury's balance sheet are undoubtedly worthless. The second paragraph hints at the backdoor nature of this bailout: an outright AIG bankruptcy would force its counterparties (Goldman Sachs et al.) to immediately write down the value of swaps they hold with AIG. Those firms would then be just as insolvent, forcing the U.S. government to choose between immediate nationalization and liquidation of the affected firms or acquiescence to a global systemic collapse.

The U.S. government has taken nationalization off the table. Its creditors in Asia will not tolerate a repudiation of the debt and equity they hold in U.S. banks. The Sovereignty Crunch is crushing the United States of America. Uncle Sam is responding with inflationary measures, including throwing money at AIG that will eventually be spit out of the Fed's inflationary printing press.

Nota bene: Anthony J. Alfidi holds no position in AIG, except indirectly in his role as taxpayer to the U.S. government.

The Haiku of Finance for 03/01/09

EU just says "no"
Declines East's bailout request
Painful but wise move

Europe Chooses Its Fate, Wisely

The European Union has probably just consigned half the continent to sovereign bankruptcy by denying a bailout request from its poorer Eastern members:

European Union leaders rejected pleas for an aid package for eastern Europe and EU funds for carmakers, bowing to German concerns over budget deficits as the economic slump deepens.

I especially like the smackdown they gave to General Motors' request for a handout. In the long run, the absence of bailout subsidies for failed industries is a good thing. Countries will be forced to live within their means. In the short run, the economic pain will be intense. The wisdom of taken lumps early in a downturn is illustrated by Russia's recent economic performance:

Russia, the worst-performing major stock market in 2008, was Europe’s best last month as the ruble rose and reserves stabilized. Every neighboring market crumbled.
(snip)

The central bank steadied the ruble, which gained 0.5 percent against the dollar last month, by pledging to raise interest rates and curtailing loans that banks were using to bet against the currency. Investors anticipate government plans to provide $200 billion in loans and reduce taxes will bolster the economy and push up the Micex, which is down 66 percent from its record high in May.

Russia is “still better off than others, mostly because of the reserves,” said Beat Siegenthaler, chief emerging-markets strategist in London for TD Securities.

.
See what happens when your central bank avoids a ZIRP race to the bottom and shuts off wild loans to gambling banks? Your currency and capital markets remain attractive. If only the Anglo-West could follow suit. Alas, China and Russia signaled their willingness at the World Economic Forum to fill the leadership vacuum left by the West's dithering.

Nota bene: Anthony J. Alfidi is short uncovered calls on EFA.