The Haiku of Finance for 04/30/09

Goodbye to Chrysler
Hedge fund greed sank bond swap deal
GM will be next

Market Levitation Defies Economic Annihilation

The market opened up strongly this morning even in the face of worsening news:

The economy shrank at a worse-than-expected 6.1 percent pace at the start of this year as sharp cutbacks by businesses and the biggest drop in U.S. exports in 40 years overwhelmed a rebound in consumer spending.

Consumer spending's resurgence is very odd at a time when job losses are rising and workers in major sectors - financial services and automotive manufacturing - are facing pay cuts. Is the Commerce Department gaming stats on consumer spending to make them look rosier than reality? And why is the stock market still looking past the avalanche of bad news in this report?

I don't have the answers to those questions. I only have the answer to this question: What am I doing with my money in response?

I'm still shorting SPY, EFA, IWM, and VWO. Sooner or later (probably sooner) Mr. Market will take note of the bad news.

Foolish Investors Pursue Fools' Gold

People fooling themselves about the economy? Nah, it couldn't be:

Consumers hoping that the worst of the recession is over may be setting themselves up for disappointment as the US economy continues to deteriorate, a panel of economists and financial experts said Tuesday.

Surging unemployment and the slow-moving impact of the government stimulus program will stall any real economic recovery until 2010 or even later, the panel said. Consumers fearful of losing their jobs are likely to continue to spend less while the housing and financial crises continue to unwind.

Oh yes it is true. At least someone gets it besides me:

The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn "still has a way to run," Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC Tuesday.

World gross domestic product looks overestimated, because global consumption has been based on debt, and this cannot continue, Hendry told "Squawk Box Europe."

So when do I get to go on Squawk Box Europe? They know where to reach me. I could have told them this months ago. In fact, I did.

The Haiku of Finance for 04/27/09

Now prime mortgages
Face big defaults and writedowns
When will this bottom?

The Alpha-D Rationale for Gold Investing

I'll take this opportunity on a day when U.S. markets are closed to recap my philosophy behind holding two different gold instruments in my Alpha-D Portfolio.

iShares COMEX Gold Trust owns physical gold stored in a vault in London. One share = one tenth of an ounce of gold. I own IAU because its price is directly correlated to the daily bullion spot price; i.e. it's real gold.

Market Vectors Gold Miners ETF owns shares of publicly traded gold mining companies. I own GDX for several reasons: in case the government confiscates gold bullion from private owners as it did in 1933 (the miners' gold reserves are in the ground and can't be so easily grabbed); because GDX's returns aren't perfectly correlated with the spot price of bullion (owning non-correlated assets is the key to a well-diversified portfolio); and because it pays a small dividend (gold bars don't kick off cash like mining stocks do).

Please do NOT take this as a recommendation. This is merely a summary of my personal rationale for owning some gold. I have a portion of my assets in gold but I would never put the majority of my money into any one type of investment. I personally believe that the U.S. will experience serious inflation in the near future, and I expect gold to rise along with inflation. I could always be wrong, of course.

Alfidi Capital Hits 5,000 Page Views!

Thanks to my loyal readers, Alfidi Capital LLC has reached an important milestone. The combined page views for both the main website and this blog have now reached 5000 (exactly!) as of April 25, 2009. This helps validate my business model. I would of course like to market this firm more aggressively to get more viewers, but unfortunately I am engaged in a major project right now that takes up all of the time that I would otherwise have available for marketing. Let's keep those hits coming! :-)

China Went For The Gold . . . And Got It

Looks like Olympic medals weren't the only kind of gold China's been pursuing in recent years:

China revealed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes - or a pot worth about US$30.9-billion - and confirming years of speculation it had been buying.

This confirms what I've suspected for a while. China has been "shaping the battlespace" in its undeclared economic contest with the Anglo-West by stockpiling an alternative store of value that competes with the U.S. dollar.

The article also reveals something that took me by surprise:

China is the world's largest gold producer and does not permit exports of gold ingots, only jewellery, leaving plentiful supplies for the domestic market.

I had always thought South Africa was the world's top gold producer. Not anymore! Now Asian producers have more pricing power at the start of the supply stream. This knocks another pillar out from under the Anglo-West's ability to dominate the world.

The article concludes with Hou Huimin, vice general secretary of the China Gold Association, forecasting the end of U.S. dollar hegemony:

"The financial crisis means the U.S. dollar value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage."

I couldn't have said it better myself. :-)

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

The Haiku of Finance for 04/22/09

Morgan Stanley sinks
How can they buy Smith Barney?
With more TARP money

Alpha-D Portfolio Updates for April '09, Part 3

Oh yeah, one more thing before I forget. I was very happy when Dow Chemical closed its acquisition of Rohm and Haas at a price just over $78 per share, because that allowed my uncovered ROH calls at 80 to expire unexercised. My special situations approach sure paid off that time.

Alpha-D Portfolio Updates for April '09, Part 2

I reset my short calls on SPY and EFA today, expiring in a couple of months. I've also decided to bet in a different direction with my gold holdings. I've decided to sell puts on IAU and GDX (and maintain my long holdings of the ETFs) because I believe, at some point in the very near future, the price of gold will finally begin its inexorable move upward. I don't want to be forced out of my long positions in gold when that happens, so I'd rather risk the possibility that I'll be forced to buy a little more gold.

Why do I believe in gold? Here's one reason. China has recently shifted its purchases of Treasuries to the ultra-short end of the curve, which will eventually force the U.S. to roll over more of its debt in the short term than in the long term. This accelerates the date at which the U.S. will face a bond market dislocation, thus furthering Beijing's long-term strategy of financially weakening the U.S. China's moves out of long-term Treasuries are also consistent with this approach.

BTW, I also purchased more FXI (with covered calls) based on the continuing strength of the Chinese economy.

Alpha-D Portfolio Updates for April '09, Part 1

This month was a slight disappointment for my Alpha-D Portfolio. I decided to buy back my short calls on SPY and EFA at losses last week when the share prices looked they would rise through the strike price. :-( Remember, I'm doing uncovered calls on these things because I believe the world economy has farther to fall, and I didn't want to be caught with uncovered in-the-money options after expiration. That's why I'm going to renew these bearish positions when the market opens tomorrow.

The Haiku of Finance for 04/18/09

A couple of calls
Didn't work out well this month
Close them at small loss

China On The Mend

Told ya so:

China’s economy, the world’s third largest, may rebound this quarter as Premier When Jiabao’s 4 trillion yuan ($585 billion) stimulus package cushions the effects of the global recession.

Urban fixed-asset investment surged by almost a third in March and industrial-output growth accelerated, reports accompanying China’s gross domestic product figures showed yesterday. First-quarter GDP grew 6.1 percent, the slowest pace in almost a decade, as exports slumped.

China manages to hang in there thanks to their national savings cushion. They've been slowing their purchases of Treasury debt, accelerating the U.S. government's bond auction failure date.

I'm long FXI with covered calls, and I'm staying that way.

Chinese Banks Grow Assets While U.S. Banks Dilute Equity

In a sign of relative strength, Chinese banks are able to grow their loan portfolios de novo, i.e., without artificial capital infusions:

President Hu Jintao said April 1 that China’s 4 trillion yuan stimulus plan was taking effect, after urban fixed-asset investment surged 26.5 percent in the first two months. China’s lending boom contrasts with the struggle in the U.S. to rid banks of illiquid assets and efforts by central banks from Switzerland to Japan to unfreeze credit.

The excerpt above hints at my next point. U.S. banks are unable to make capital available for asset growth without severely diluting their owners:

Goldman Sachs Group Inc., by selling stock to help it repay $10 billion to the U.S. Treasury, may pressure competitors to follow suit or appear dependent on government support, analysts said.

Now do you guys see why I'm staying long China and short the U.S.? We're going to see this story play out in many different ways over the next few years.

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

The Limerick of Finance for 04/10/09

Bank profits sure seem to be mending
Traders hope the bear market is ending
With reports yet to come
Earnings season's not done
Bear attacks will keep big banks from lending

The Haiku of Finance for 04/09/09

More Fed baloney
Sings of prosperity soon
I don't believe that

Propserity Ain't Just Around the Corner

Some folks would have us believe that prosperity is just around the corner:

Federal Reserve Bank of Minneapolis President Gary Stern said that while “appreciable strains” remain in credit markets, the resumption of U.S. economic growth “should not be too far off.”

Oh, fiddlesticks. Like a popular song from Great Depression 1.0 (which in turn was a cynical response to Herbert Hoover's assurance that trouble would soon be gone), opinion shapers today want us to sing away our problems. Wal-Mart is reporting disappointing sales numbers because consumer spending is still on the ropes and headed down for the count. Consumers are getting so pinched that they're forgoing insurance to conserve money for essentials. The bad news pipeline hasn't shut off, folks.

I'm staying short the markets. The Fed's pronouncements don't impress me at all. The only thing around the corner is more baloney.

The Haiku of Finance for 04/08/09

Pensions down the tubes
Muni bonds get riskier
Only gold looks good

Alfidi Capital Beats Moody's to the Punch on Degraded Muni Outlook

I went negative on munis a couple of days ago and now once again the big boys are (sort of) catching up to me:

U.S. local governments were assigned a negative outlook by Moody’s Investors Service, the first time the New York-based credit rating company gave such an assessment to the overall group of debt issuers.

I say "sort of" because my post was aimed at state government bonds, but the same principal applies here. Local governments will have just as hard of a time as states in paying off debt issues. Muni bonds whose interest payments don't come at least partly from revenue-generating development projects can't realistically be considered safe havens anymore. I am not going to open my wallet for munis anytime soon, and probably not for several years.

Don't Stress Over Phony Stess Tests That Strech Credulity

The Treasury Dept. will soon begin analyzing the massaged results of its baloney bank stress tests:

Regulators announced the tests two months ago as part of an effort to determine how much assistance big banks might need to continue lending if the economic downturn worsens. The government is wrestling with how to bolster the lenders without appearing to prop up banks that are beyond repair.

Why am I so skeptical that these tests will mean anything? I probably said things like this a few months ago, but now I'll run my mouth again because other analysts are starting to agree with my way of thinking:

From William Black:

There are no real stress tests going on.
(snip)

The regulators are overwhelmed because of personnel cuts (particularly heavy among their best, most experienced examiners that had worked banks that had engaged in sophisticated frauds).

William Black gets it and so do I. He elaborates on the likelihood that the stress tests are a mask for further fraudulent bailouts of bankers, both in the above interview and in his televised interview with Bill Moyers. Mr. Moyers' willingness to speak truth to power makes him a national treasure.

Relax, everybody. The non-stress tests are just another part of the scam the banking elite is running on the taxpaying public by way of their proxies in government. Nothing to see here. Move along. As for me, my last short of XLF's calls worked out fine, so I may be renewing that next month.

Your State Pensions Are All But Gone, California

Those of you who thought that 30 years of life as a DMV drone would secure a comfortable lifestyle in your old age are in for a shock: Those

Massive investment losses sustained by public pension funds are pressuring state lawmakers from New Mexico to New York to spend more taxpayer money to shore up their programs, boost the retirement age for newly hired government workers and seek more from employee paychecks.

The genius part is that tapped-out taxpayers will be forced to pony up to try to close the pension funding gap - and it won't be enough. This kind of drain on states' revenue sources make muni bonds a lot less attractive than they used to be, AAA-ratings aside; more tax revenue filling pension holes instead of potholes raises the default risk on munis as state treasuries empty. My home state of California is in particular trouble. Calpers' bad bets on private equity are exacerbated by its contractual commitments to fully commit uncommitted capital:

The California Public Employees’ Retirement System poured $1.71 billion into Apollo Management LP last year, more than twice as much as it gave any other private- equity manager, betting that the firm could exploit the global credit crisis. So far, the bet is coming up snake eyes.

No way am I buying munis now! I want to see some California munis backed by revenue from real projects, preferably transit infrastructure or energy projects. I'll wait as long as I have to for those issues.

Nota bene: Anthony J. Alfidi does not own any muni bonds at this time.

The Limerick of Finance for 04/04/09

Bank executives tell a tall tale
Huge losses make them cry and wail
But they never told us
That greed caused all the fuss
Hopefully they'll all end up in jail

The Haiku of Finance for 04/03/09

Bernanke hot air
"We can withdraw this credit"
Keeps markets aloft

Job Numbers Hit Bond Numbers

In normal times, investors would bid up low-risk assets when they see more people thrown out of work:

The U.S. unemployment rate jumped in March to the highest level since 1983 and service industries shrank at a faster pace, indicating the economy remains trapped in what’s likely to be the longest recession since the 1930s.

We are not in normal times. The world has reached its carrying capacity of debt and cannot stomach huge Treasury issues:

Treasuries fell as the U.S. prepared to sell an estimated $59 billion in notes and inflation-indexed securities next week, part of a record amount of debt the government is likely to issue this year.

T-bonds are being re-priced as moderately risky assets, and when the full force of Helicopter Ben's dollar drops hit they will be re-priced as high risk assets.

Nota bene: Anthony J. Alfidi has no position in long-dated T-bonds, although come to think of it he does have some old Series EE Savings Bonds locked away. He'll probably cash those out next year.

The Haiku of Finance for 04/02/09

New road to serfdom
All but inevitable
History has turned

Voices and Deaf Ears, Part 2 on Our Road to Serfdom

A few days ago I mused that i-bankers and others at the top of our society aren't really being forced to change their rapacious ways. Today's selections offer us insights on why this is so.

The Atlantic, one of the oldest Anglo-American journals of record, serves up an indictment of America's descent into Third World status:

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending.
(snip)

But there’s a deeper and more disturbing similarity: elite business interests — financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

The Atlantic's only real rival for the title of most intellectual publication in America is Harper's (and it's just as old!), whose editor emeritus Lewis Lapham has always held a rather jaundiced view of his peers in the ruling elite. His florid prose is always a joy to read (excerpted from Money and Class in America, 1988):

By abdicating their authority and responsibility, the sovereign people also relinquish their courage. Like rich old women in Palm Beach or a committee of dithering lawyers, the American electorate listens to the wisdom of its public servants as if to voices of minor oracles. Politicians and Cabinet ministers appear in the role of of the omniscient butler who finds phrases of art with which to conceal the embarrassments of the young master’s profligacy and reduced circumstances.

Finally, Rolling Stone offers us this colorful portrait of our dire straits as a result of the above:

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The authors all recognize that neofeudalism is here. I've seen it coming too, probably since my days at Notre Dame when I first encountered the children of one wing (the hard-right, hypermoralistic, hypocritical Catholic wing) of our ruling class. I have spent my adult life aspiring to join the ranks of America's patricians only to find that, in the main, they won't have me among them. No matter. The turmoil now brewing will allow me and others like me to simply displace them with new wealth, like the Darwinian process that allows mutated species to survive ecological catastrophes.

There were numerous warning signs on our national road to economic annihilation. Many of my fellow Americans seem to have mistaken them for billboard advertisements. I read every sign up close, took notes, and marked their locations. I will wait patiently for the day when I will sign the deed on a San Francisco mansion. Quite a few will be vacated by people who couldn't be bothered to pay attention.

Welcome, neofeudalism. Let the jousting matches for fiefdoms begin.