Baker Hughes: A Special Situation

I haven't executed a special situation play for a while, but today's announced purchase of BJ Services (what a name!) by Baker Hughes provides a great opportunity:

Oilfield services company Baker Hughes Inc said on Monday it would buy peer BJ Services Co for $5.5 billion to broaden its product line and take on the industry's giants.

The price of BHI sunk by almost 7% in early trading. I believe the market is freaked out about the possibility that BHI is overestimating its ability to integrate the two companies and won't be able to realize its projected cost savings.

My play: I sold uncovered calls on BHI at 39 that expire this month. This limits my risk and any temptation I may feel to be more greedy. This buyout is not a done deal because the shareholders of both firms must still vote to accept it. Some other suitor could always come along and try to bid for BJS, so I'm not touching that side of the deal.

More Gold Options For The Alpha-D

I hold gold in my IRA. I haven't written any call options against them for a while but that has just changed. Today I sold covered calls against my IRA holdings of IAU and GDX. I sold them OTM but close enough to the current market price to make a decent premium. Having them sold away will not be very problematic as the gains won't be taxable, and if needed I can repurchase them without regard to the wash sale rule. IRAs are great for that.

Hopefully they won't be sold away. I have the gold hedge to preserve my IRA's buying power.

The Haiku of Finance for 08/29/09

Bankers in trouble
Loss reserves inadequate
Time to shut them down

Consumer Spending Head Fake Fools Market

The supposed restoration of the American consumer to his throne was a fluke driven by Cash For Clunkers, as noted here:

Auto dealers benefited from the Obama administration’s incentive plan, which ended this month, while retailers such as Kohl’s Corp. and J.C. Penney Co. struggled to lure customers shaken by mounting job losses. Spending gains aren’t likely to be sustained as incomes stagnate and households pay down debt, casting doubt on the strength of the economic recovery.

Despite the distortion of the auto subsidy spike, investors have still bid up stock prices at the behest of Wall Street. This market is levitating on the basis of pulled-forward automotive purchases that weaken both future car sales and current retail spending. Investors, be warned . . . you're betting on nothing.

More Banks On Brink Will Drive FDIC and Treasury To "Plan C"

Green shoots, eh? Check out how many more banks are going to collapse:

The number of problem U.S. banks and thrifts on an official watchlist rose sharply to 416 in the second quarter of 2009 from 305 in the prior quarter, as the industry recorded a $3.7 billion loss.

I recently posted my guess that the FDIC's activation of its Treasury line of credit would push the U.S. government further toward a failed bond auction. The near future will reveal whether I'm correct. Of course, the Treasury can always force its primary dealers to buy bonds if they're convinced the Fed will keep funding the loan facilities that make those purchases possible. This must be Treasury's much-discussed "Plan C" to save the nation from the next phase of its slow-motion financial collapse. That means inflation. That's why I own gold.

A Primer On Financial Career Archetypes

Careers in finance are fun and rewarding. If you want to win you have to arrive prepared and ready to roll. The specific type of job doesn't matter. You can be a banker, broker, analyst, manager, whatever, but in general you need to have "what it takes." Let's discuss the most common types of employee you'll find nowadays on Wall Street.

Here are three main types of people drawn to careers in financial services.
Type 1: The Angel. The conscientious, hardworking, intelligent person who insists on taking care of the client and delivering the highest quality service. This person is scrupulously honest and insists on strict adherence to laws, regulations, and the highest standards of ethical behavior.
Type 2: The Predator. The lying, thieving, conniving, backstabbing, manipulative, egotistical jerk. This person would sell their own mother down the river for a fast buck and epitomizes the "I'll be gone, you'll be gone" (IBG/YBG) absence of concern for the long-term effects of their actions on the health of clients and the industry.
Type 3: The Preppie. The spoiled, airheaded, condescending trust-fund baby who had their high six-figure first job handed to them after sleeping their way through four years in the Ivy League. This person is amused at anyone who has to work hard for a living as such things are so declasse for someone at their level.

Now that we've identified the three types of people you're most likely to meet in your Wall Street career, let's discuss their typical career paths.

Angels are immediately identified for eventual termination. They are given plenty of grunt work to keep them busy, the results of which will always be claimed by the other two types. They are widely viewed as weak and unfit for employment in finance, and will never earn anyone's respect with the way they do their jobs. Their honesty and devotion to detail quickly prove to be career liabilities because they pose a threat to the chicanery of their managers.

Predators are initially successful based on their ability to lie, bluff, and bully their way around clients and the office. The more successful ones will ally with a Preppie to network their way up the ladder and gang up on Angels for fun. They predominate in sales but can also be found in management if they can ride the coattails of a well-regarded Preppie. They earn the respect of others by abusing and firing Angels and by outmaneuvering other Predators.

Preppies are the most successful of the three archetypes. Their extensive family connections will steer huge amounts of business to their employer as a matter of course, with little to no effort necessary. They show up late to meetings and vacation for months at a time because they know there will be plenty of Angels back at the office to do their work for them as long a few Predators are left behind to yell at them. It's okay if they fall asleep on the job because they always have an Angel at hand to take notes for them and explain what they missed. Preppies intermarry primarily with each other to extend their bloodlines, but sometimes the more adventurous among them will deign to marry a genetically healthy Predator (based on looks and personality). They usually rise to the top on the back of work done by Angels and Predators. Preppies are the star performers of Wall Street and darlings of the social scene in major metropolitan areas.

If you are a Preppie, you don't need to read my blog. All of your career insights will come from family members. If you are a Predator, you'll probably read my blog just to claim my ideas as your own so you can score a promotion (go to hell, jackass). If you're an Angel, for Pete's sake don't spend longer than a year or two working for Predators and Preppies. Start your own business and outperform them in life.

Day Traders Never Learn

Some people just shouldn't be allowed to invest their own money. Day traders are playing games with Phoney and Fraudie:

Shares of U.S. government-controlled mortgage lenders Fannie Mae and Freddie Mac soared for a second straight day on Tuesday after attracting the attention of day-traders looking to turn a quick profit with these low-priced household names.

Attention idiots: These two stocks are worthless. Worthless. They have no assets and lost billions of dollars last quarter.

Too many otherwise productive adults are willing to bet their hard-earned money on stocks that don't deserve to exist.

Nota bene: Anthony J. Alfidi has no position in FNM or FRE.

Updating The Alpha-D For Aug. '09

Some of my short option positions expired unexercised last Friday, so I did alright by hanging onto those premiums. I have renewed my option positions as follows:

FXI and GDX: short straddles that expire Sept. 2009.

IAU: short put that expires Sept. 2009. This netted me almost nothing as the bid collapsed just as I entered the trade!

ANV: short put that expires Mar. 2010. This is a new position based on my assessment that ANV is a junior miner that's going places. I remain long ANV itself.

For the first month in quite some time I have no position at all in IWM. I could not find an OTM call that would have made it worth my while to go short. I am not going long the ETF itself until we hit the next leg down in this W-shaped depression.

My previously set option positions in SPY, EFA, and VWO will expire next month. They're OTM so far . . . I like that.

The Haiku of Finance for 08/22/09

Bigger deficit
Bond blowout will choke us all
We're in for it now

China Has Had Enough Of U.S. Debt

The tipping point in Uncle Sam's debt binge is finally here. It came in bits and pieces but the overall outline is no longer in doubt:

China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury.

China holds more US government debt than any other country and cut its holdings of US securities by more that 3% in June, said the BBC's Chris Hogg.

The handwriting is on the wall but many Americans are illiterate. One by one, the U.S.'s foreign creditors will decline to buy our Treasury bonds. One by one, they will choose to stimulate their own economies and not ours. One by one, they will pursue autarkic programs and leave the U.S. to its fate. There is no need for another Smoot-Hawley tariff this time around to drive global trade through the floorboards. The eventual collapse of the dollar will accomplish that all by itself.

Nota bene: Anthony J. Alfidi is long FXI with a short straddle.

The Haiku of Finance for 08/19/09

Markets catch a cold
Chinese sneeze blows down world stocks
Cash gets some bed rest

China Closes Down, Spooks U.S.

It used to be that when U.S. markets sneezed, Asian markets caught a cold. Now it's the other way around:

World stocks sank Wednesday, with European indexes spooked by a 5 percent drop in China that strengthened fears stocks have become overpriced after this year's powerful rally.
(snip)

China's benchmark index has lost nearly 20 percent since Aug. 4 on worries about corporate profits, the strength of China's recovery and possible changes in Beijing's easy credit policy that has helped to fuel the bull run in Chinese stocks this year.

Dow and S&P 500 futures were down too; I expect Aug. 19 to be a down day for U.S. markets. This is the kind of news that illustrates how the world is changing, with China supplanting the U.S. as the nation to which the rest of the world turns for leadership. I look past the fact that China's stocks are down from their peak. That's why I'm holding FXI for a very long time.

Allied Nevada Finds Gold And Raises Capital

I continue to be proud of the only single stock holding in my portfolio, a junior gold producer named Allied Nevada Gold Corp. They have recently reported good results from exploratory drilling at their Hycroft property:

Successful drilling in 2008 suggests that a large blanket of sulfide mineralization, associated with veining and brecciation, exists directly below the oxide mineralization at the Vortex. An inferred resource of 62.0 million tonnes grading 0.78 g/t gold and 48.1 million tonnes grading 68.14 g/t silver, for inferred resources of 1.5 million ounces of gold and 105.3 million ounces of silver was released for the zone in March 2008.

Suffice it to say that this is a very positive result. If the Vortex zone's mineral grades remain higher than those of the overall Hycroft property, it may very well become the "bonanza zone" of that property.

Results like this are the reason Allied Nevada is successful at raising more cash to fund further operations:

Allied Nevada Gold Corp said it would raise about C$100.4 million ($92.45 million) by selling 11.2 million common shares to a syndicate of underwriters co-led by GMP Securities LP and Genuity Capital Markets.

The underwriters have enough confidence to subscribe to the entire issue up front. Good for them. I felt the same way when I first met Carl Pescio, one of Allied Nevada's largest shareholders, before he helped create the company.

Nota bene: Anthony J. Alfidi is long ANV, with the intention to continue selling OTM puts under its market price.

Top Of The Mark(et)

This is the Top Of The Mark:

It's a storied bar on the top floor of the Mark Hopkins, one of the most renowned hotels on Nob Hill, one of the highest places in San Francisco. Many people spend a lot of money there on food, drink, and dates in pursuit of the good life. It's one of those places that makes me glad to be a San Franciscan.

This is the top of the market - the stock market, that is:

It's a storied place where the DJIA and other indicators reach the highest possible valuation given current fundamentals. Many people spend a lot of money there on growth stocks, can't-miss plays, and great sell-side ideas in pursuit of the good life. It's one of those places that makes me glad to be a contrarian investor.

I'm calling the peak of this sputtering bull market right about now. It may not be obvious for a few more weeks, but hey, I'll go out on a limb.

The Limerick of Finance for 08/15/09

Confidence of consumers still wanes
People can't spend if wallets stir pains
Their accounts are dried out
Nothing left in the spout
They'd save cash if they had any brains

The Haiku of Finance for 08/14/09

Consumers lose it
Confidence, that is to say
They don't want to spend

Consumer Confidence Falls In Aug. '09

Looking for hope that consumers will power their 70% of GDP back into healthy territory? Stop looking right here:

Confidence among U.S. consumers unexpectedly fell in August as concern over jobs and wages grew.

Today’s figures, including an unchanged reading in the cost of living, underscore the damage that the biggest drop in gross domestic product in any recession since the 1930s has had on households and retailers. With little sign that $1 trillion of injections into the banking system is feeding through to inflation, Federal Reserve policy makers are forecast to sustain their efforts until a recovery is secured.

I'm tempted to be modest and say that I couldn't have phrased that last paragraph any better myself. I'm not that modest. "Any recession since the 1930s" is a happy way of avoiding the admission that we're living through Great Depression 2.0. The drop in GDP has created a positive feedback cycle, with job cuts depressing consumer spending, which hits corporate earnings, which will force more job cuts, etc.

Will America rise to the challenge and retool for the industries of the future? Will spending on nanotech and renewable energy take priority over an unnecessary (IMHO) overhaul of health care? Time will tell. I won't predict the results of any future stimulus.

I will stay short my uncovered calls on SPY and IWM.

The Haiku of Finance for 08/13/09

Surprised by data?
Not me, not by a long shot
There's no bottom yet

Disappointing but Expected (To Me, Anyway)

Is this really so unexpected? Only people who bought into the bullish hype will be surprised at this:

Retail sales disappointed in July and the number of newly laid-off workers filing claims for unemployment benefits rose unexpectedly last week. The latest government reports reinforced concerns about how quickly consumers will be able to contribute to a broad economic recovery.

I've been saying for several months that the economy is not in recovery mode. I expect these figures to be revised downward in the months ahead. Meanwhile, rising mortgage rates will prevent home prices from recovering:

U.S. mortgage rates rose in the latest week as Treasury yields climbed, according to a survey released on Thursday, a move that may dampen home loan demand.

This what happens when you flood the bond market with Treasuries to pay for wildly unsustainable federal spending. They crowd out every other form of fixed income investment and force issuers to ramp up yields to make their paper attractive. Banks facing higher debt costs are then forced to raise mortgage rates to cover the cost of that debt.

I do not see a bottom in this recession.

The Haiku of Finance for 08/12/09

Madoff money man
Goes to jail, bankers stay free
Where is the justice?

Crime Doesn't Pay . . . For Some People

Note to fraudsters: You can't always get away with ripping off your clients:

After months of secretly working with the FBI, Bernard Madoff's right-hand man emerged in federal court on Tuesday and pleaded guilty to conspiracy and other charges, contradicting claims by the disgraced financier that he acted alone.

Now if only we can jail the bankers being paid to fraudulently hide junk assets on their balance sheets. Nah, forget that, regulators would rather just ask them to be more discreet when cashing their chaecks:

Bonuses are already set to rise next year, according to New York-based pay consultant Johnson Associates Inc. The incentive compensation for employees in fixed-income divisions of banks may jump 40 percent to 50 percent from last year, the New York- based firm said. Bonuses at asset management firms may fall as much as 35 percent, the report showed.

Last time I checked, mortgages are considered to be fixed-income instruments. That's how they're rated, packaged, and marketed to CMBS buyers. The co-conspirators (banks' fixed-income credit analysts) in hiding the banks' fictionally performing mortgage assets are thus planning to pay themselves even more next year.

What are the crooks rewarding themselves for? Cooking their books, of course. Analysts and auditors who falsely portray non-performing mortgage loans as high-quality assets succceed in delaying inevitable home foreclosures. That gives a whole bunch of unemployed homeowners the impression that the economy isn't getting worse. Does it feel like a bottom? A lot of people are fooling themselves into thinking so:

Optimism on U.S. equities climbed the most since April, according to the Bloomberg Professional Confidence Survey. Investors expect equities to rise during the next six months in a record seven countries, with indexes in Brazil, Italy, the U.K., France, Mexico, Japan and Switzerland forecast to advance.

Good luck, folks. I'm not one for self-delusion. There is no economic recovery. Commercial real estate harbors the next set of defaults to hit the economy. When those hit, we'll be right back in a credit crunch.

I'm staying short.

China Ready To Rise, U.S. Banks Ready To Sink

China may very well be able to power at least some parts of the world out of Great Depression 2.0:

China's exports, retail sales and factory output improved in July, the government said Tuesday, adding to spreading signs the global economy might be recovering from its worst downturn since the 1930s.

Closer to home, banks are still plagued with problem assets just waiting to blow up:

In its latest assessment of the $700 billion financial system bailout, the Congressional Oversight Panel warns that banks still hold many risky loans of uncertain value. If unemployment rises sharply or the commercial real estate market collapses -- as many economists fear -- the banking system could again lose its footing, the panel says in a report to be released Tuesday.

Wall Street's odd rally of late is beginning to peter out precisely because news like this keeps leaking out.

It should be clear by comparison of macroeconomic news why I'm long FXI and short calls on SPY.

Daisy-Chained Bankruptcies For Those With Eyes To See

Gang, things aren't getting rosier. Need proof? More bankruptcies are coming:

More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said in its latest report on Aug. 4. The increase came after a 36.5 percent rise in personal bankruptcies nationwide in the first six months, to 675,351, according to the ABI research group, which interprets data collected by the National Bankruptcy Research Center.

More bankrupt consumers means fewer shoppers at your local mall. That means retail bankruptcies, then commercial property bankruptcies. More bankrupt homeowners means fewer home mortgages get paid off. That means more bankrupt banks.

Corporate treasurers see the warning signs of a future cash crunch. They're being proactive. By contrast, the Fed is reluctantly preparing to launch its Plan C after problems in commercial real estate have become obvious. They're being reactive. Why is it that measures of market volatility can anticipate the trouble ahead but policymakers can't? I'll answer my own question. It's not that they can't anticipate trouble; they simply won't because it would be an admission that stimulus measures have failed. Mr. Market can't be fooled for long.

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

More Bank Failures Will Spark Debt Monetization

There are green shoots all right . . . coming up through the rotten floorboards of banks:

U.S. bank failures rose to 72 this year with the collapse of two lenders in Florida and one in Oregon amid the worst economic slump since the Great Depression.

The needle on the FDIC's reserve fund gets closer to empty with each new insolvent bank. With the Fed decidedly in favor of monetizing all new U.S. debt, our path to massive inflation is assured once the FDIC calls upon its credit line at Treasury.

The Haiku of Finance for 08/07/09

Joblessness improves
But wage growth lags inflation
Spending can't keep up

Jobless Numbers Perk Up Markets

Today I'll recap and expand some comments I made on today's stories over at Clusterstock. Mr. Market is happy that the latest stats on joblessness surprised to the upside:

The pace of U.S. job losses slowed more than forecast last month and the unemployment rate dropped for the first time in more than a year, the clearest signs yet the worst slump since the Great Depression may be ending.

Payrolls fell by 247,000, after a 443,000 loss in June, the Labor Department said today in Washington. The jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent.

I'm going to be a Negative Nellie here and rain on Wall Street's parade. The improvement in job losses says nothing about the durability or quality of jobs that exist. Consider that the government's "Cash for Clunkers" subsidy probably saved the jobs of auto salesmen who would otherwise have been let go. When this artificially stimulated demand can no longer be pulled forward, the job numbers around Christmas are likely to be a disaster.

Furthermore, real wages for most Americans have remained stagnant for over 30 years. Reducing the rate at which low-income jobs are destroyed does not help the economy grow when those workers are more focused than ever on saving money. The article mentioned that year-on-year wage growth is 2.5%, but inflation is much higher than that (check out Shadowstats) due to the Fed's quant easing! Real earnings won't grow until the consumer comes back. I've said that before and I'll say it again because I know Wall Street won't listen.

I'm still short.

The Haiku of Finance for 08/06/09

July sales are weak
Don't look for spending to rise
Until jobs come back

Consumer Cutbacks Trim Green Shoots

Don't go around talking about an economic turnaround in the second half of 2009 until you consider the effect of consumers' wallets staying shut:

Shoppers, worried about job security and finding fewer options among the sales bins, remained tight-fisted in July, resulting in sluggish sales for many merchants and raising concern about the back-to-school shopping season's health.
(snip)

The International Council of Shopping Centers-Goldman Sachs tally fell 5.0 percent in July compared with the year-ago period. July's pace was in line with the 5.1 percent drop in June and worse than the 4.5 percent decline averaged since February, the beginning of retailers' fiscal calendar. Michael Niemira, ICSC's chief economist, estimates that the tax holiday factor depressed July's results by 0.5 percentage points and will boost August's sales figures by the same amount.

Citing a change in some states' tax holiday periods this year is IMHO a negligible explanation for the weak sales. If that 0.5% tax factor were added back in the decline would still be in line with the average decline this year of 4.5%. Things are not improving at all.

That's why I'm staying short SPY and IWM calls.

Tax Revenue Disappoints

Amid all the good news about earnings declines not being as bad as expected, there remains the puzzling effect of lower earnings - namely lower tax revenues:

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

Expect the federal deficit to be even worse than estimated. Much of the good news we've seen lately, like rising car sales from the "Cash for Clunkers" subsidy, represents the one-time effect of a massive fiscal stimulus. When the stimulus is gone, so is growth, and the bond market may not be able to absorb another debt-drenched stimulus. That means Fed quant easing as far as the eye can see.

Do Generations X-Z even know how much poorer they'll be for the rest of their working lives as a result of such macroeconomic foolishness? I'm an X'er who is positioned financially to benefit from this. Their missed opportunity is my gain.

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

The Limerick of Finance for 08/02/09

Some say the recession is easing
Which doubtless would be very pleasing
But with jobless rates up
And spending drying up
Some predictions aren't much more than teasing

Feel The Pain Of 2008's Revised Data

If this doesn't convince the average equity analyst that the data inputs for their models have a serious upside bias, then nothing will. New numbers show just how bad off we all are:

The world’s largest economy contracted 1.9 percent from the fourth quarter of 2007 to the last three months of 2008, compared with the 0.8 percent drop previously on the books, the Commerce Department said yesterday in Washington. Gross domestic product has shrunk 3.9 percent in the past year, the report said, indicating the worst slump since the Great Depression.

The real pain will begin later this year when the federal stimulus money starts to run out. We will discover to our chagrin that very little of the money we've spent went to things like high-speed rail, solar panel arrays, or other stuff that might actually generate revenue for more than a quarter or two.

We'll be seeing a lot less of happy stories like this one about winning streaks in the stock market.

Nota bene: Anthony J. Alfidi is short uncovered calls on SPY and IWM because these disappointing results will eventually be reflected in falling stock prices.