The Haiku of Finance for 12/25/09

Happy Christmas day
China gives me a present
Profits (if it's true)

Alpha-D Updates for Dec. '09‏

Some of my options expired unexercised over the weekend. I'm always glad to pocket the cash. The remaining option positions (KEX, TDW, ANV, LMT, IYR) remain in place. I've made a few updates for this month.

Sold Jan 10 covered calls on FXI and GDX.

Sold Jan 10 puts under FXI.

Sold Apr 10 puts under COMS.

Sold Mar 10 puts under EFA.

I tried to sell Jan 10 puts under Chattem Inc. (CHTT) due to an all-cash buyout by Sanofi-Aventis (SASY.PA) but this probably won’t get filled.

Most Of You Will Be Unhappy

Our betters continue to program us to expect less so they can have more of what's left. Consider this piece, instructing us on how much happier we'll all be once we're poor:

The Great Recession--which is technically over, economists insist--may be morphing into a broader epoch: the Great Humbling. Millions of Americans who felt prosperous just a few years ago are now coping with long-term unemployment, sharp cutbacks in living standards, foreclosure, bankruptcy, and a deep sense of failure. That could persist for years. "This is not like earlier recessions, where things fell, then they bounced back to where they used to be," says Dennis Jacobe, chief economist for the Gallup polling organization. "We haven't seen this before. It's the only time this has happened since the Great Depression."

I predicted last year on this blog that we'd see more of these heartwarming stories on how great it is to be downwardly mobile. I suppose it's fitting that the article's scene is set in San Francisco, my town, where plenty of wanna-be aristocrats enjoy slamming doors in the faces of people like me. The article gives Americans instructions on adapting to their new lifestyle as serfs. The only thing missing is a description of the proper length of a curtsy when addressing a millionaire, or a warning to avert one's eyes when being scolded by one's lord. It uses several classic sales techniques to drive the prospect (that's YOU, the newly poor) to "close" on accepting less from life . . .

"You'll really don't want to be successful anyway. Look how unhappy those business commuters are to be rushing to work."

"You don't need more than a few thousand dollars to survive."

"Think how much happier you'll be when you don't have to worry about what to do with your money."

There is a tiny kernel of truth in these very suggestive thoughts, which is why they're so effective as sales pitches. They have a natural appeal at some level that inclines one to agree just to be agreeable. Most people probably would be better off if they had less money to waste on materialistic lifestyles that deplete the planet's resources.

I am not most people.

These sales pitches sicken me. I'm not about to settle for less in life. I've had enough experience with hidden sales pitches - both delivering them and being duped by them - to see the manipulation. My bosses at major investment firms - all preppies who never had to prove themselves - spoke to me this way before they fired me and took credit for the work I had done.

I refuse to be duped. I will not succumb to this siren song. I will never settle for less. Civilization's progress depends entirely on people who refuse to settle for less. Get lost, preppies, before I vomit all over your stinking pedigrees.

Buyout Hunger and I-Bank Starvation

PE firms think they can find public equity bargains even in a stock market rally driven by hype:

Buyouts are finally returning for the deal-hungry private equity industry, which is looking at 2010 to deploy huge cash reserves into deals that buyers hope could get back up to double-digit billions.

Good luck with that search. Plenty of investment banks will jump at the chance to help, given the paucity of merger deal flow headed their way:

Advisory fees generated by M&A deals totaled $18.9 billion, down 46 percent from 2008 -- the worst annual level since 2003. For the first time in six years, M&A was not the main source of fees for investment banks, representing just 27 percent of all fees earned this year, according to Thomson Reuters.

The time is ripe for a bunch of fee-starved i-bankers to push questionable deals to PE managers desperate to show off for their clients. Gotta look busy to earn those fees. Deal pitchbooks in the near term will be long on optimistic growth assumptions (headwinds: declines in consumer spending) and short on explaining how PE firms can wring operational efficiencies out of public firms that are already cutting to the bone.

I Really Missed the XTO Boat

Here's still more evidence that Exxon's acquisition of XTO Energy was extraordinarily prescient:

Natural gas prices jumped Thursday after the government reported that supplies fell by the largest amount ever for this time of year as frigid weather chilled parts of the Midwest and Northeast.

There must be the Rockefeller DNA still left in Exxon (formerly Standard Oil) somewhere.

XTO Was Undervalued

I had XTO Energy on my watchlist for a while, particularly in Q1 2009. I didn't buy it because I wasn't sure if its long-term earnings prospects were predictable. Well, Exxon is a lot more sure of its prospects than I ever was:

Exxon Mobil, the world's largest publicly traded oil and gas producer, said Monday that it had agreed to buy XTO in an all-stock deal valued at $31 billion, the biggest oil and gas deal in four years.

This was a big missed opportunity for me. I briefly considered an arbitrage play, but the all-stock nature of this transaction has dissuaded me. I'd rather not take a chance on owning Exxon right now as I need room in my portfolio for other stocks. The end of the cheap oil era makes any other energy producer somewhat more desirable, regardless of the status of its business model. The energy sector bears watching. I'll keep an eye on other independent producers like Occidental Petroleum (OXY) in case the supermajors launch more surprise deals.

The Haiku of Finance for 12/14/09

Global food prices
Due for a much sharper rise
Get ready to pay

We Haven't Beaten Inflation

Let's not let the Fed be too quick to pat itself on the back for levitating the U.S. out of a Great Depression. Inflation in some commodity prices is waiting for us:

Global food costs jumped 7 percent in November, the most since February 2008, four months before reaching a record, according to the United Nations Food and Agriculture Organization.

Farm prices this year lagged behind copper futures that doubled and oil’s 57 percent increase.

The Fed's deflation-fighting tactics will only accelerate the price increases driven by the natural forces described in the article. This is probably good news for gold (I still own ANV and GDX).

The Haiku of Finance for 12/10/09

Raise the debt ceiling
Forestall financial collapse
Pretend to pay bills

Taxes Reflect Reality, And Soon So Will Bonds

It's only a matter of time before you can strike "Greece" out of this article and replace it with "U.S.:"

Greek government bonds slid for the fifth straight day, sending the 10-year yield up by the most in more than a year, as Fitch Ratings said Prime Minister George Papandreou’s government doesn’t grasp the debt crisis’ severity.

Meanwhile, state tax revenue fell in FY 2008:

U.S. state government collections fell 16 percent to almost $1.7 trillion in fiscal 2008 from a year earlier, while spending increased 6.2 percent, according to the U.S. Census Bureau.

The original press release from the Census says it all. Data on current state tax receipts probably isn't any rosier. That hard dose of reality is going to smack a lot of bond ratings - both state and federal issues - upside the head soon enough. How soon is anybody's guess. You can only inflate so many bubbles before you suck all the air out of your economy. Greece's news today is the U.S.'s news in 2010.

The Haiku of Finance for 12/08/09

Greek debt may default
A crushing burden to bear
Stocks and bonds both slide

Inching Toward the Sovereignty Crunch

You wouldn't know it from the shape of the yield curve, but Treasuries and gilts are getting increasingly risky:

Moody’s Investors Service said its top debt ratings on the U.S. and the U.K. may “test the Aaa boundaries” because their public finances are worsening in the wake of the global financial crisis.

Think a sovereign debt downgrade can't happen in the Anglo-West? Think again! Look how quickly the possibility of a Greek sovereign default ramped its yield curve and took the air out of that country's equity market. We'll see action like that in the U.S. sooner or later (probably sooner).

The Haiku of Finance for 12/07/09

Discount brokers win
Grab clients from prestige firms
Take down those preppies

Full-Service Brokerages Lie About Losing Clients

The big full-service wealth management firms can't break their old lying ways. Even in the face of independent evidence, they continue to lie about their market position vis-a-vis discount brokerages:

The ad campaigns appear to have worked: Discount brokers took in 25 percent more assets from full-service advisory firms than they lost over the past two years, Aite said.

But full-service brokers claimed they were winning the war for clients, the financial services consulting and research firm said.

This does not surprise me. The brand-name, white shoe firms have lied about their products, research, solvency, and everything else under the sun, so it makes sense that they like to lie about their relative attractiveness over self-directed investing. Only idiots and trust fund babies (same difference) need a full-service advisor to hold their hands. The rest of us (the vast majority) are better off with index funds and a handful of stocks we know well.

The Haiku of Finance for 12/05/09

Short sale on a house
Bank takes a loss on mortgage
Clear out all that debt

Banks Pay Execs to Lose Even More of Your Money

We can always count on our mandarins to clue us in to something obvious:

Treasury Secretary Timothy Geithner disputed claims by Goldman Sachs Group Inc.
executives that the bank could have survived the financial crisis without government help and said it and other Wall Street firms should show some restraint in handing out bonuses this year.

Why didn't Treasury insist on pay caps for these undeserving bankers when it TARPed them up? The moral hazard remains. Bankers probably think they'll earn their bonuses with more money-losing gambits like these:

Banks are beginning to go along with short sales in increasing numbers, three years into a U.S. housing slump that pushed the economy into a recession and cut resale values by 30 percent from the peak in July 2006. Short sales almost tripled to 40,000 in the first six months of 2009 from the same period a year earlier. Yet for each short sale, there were 25 foreclosures started or completed in the first half of this year, according to data from the Office of Thrift Supervision and the Office of the Comptroller of the Currency.

At least short sales will clear bad mortgage assets off the banks' books. The bad news is that they'll lower the values of remaining homes. The Fed's attempt to reflate the housing market is looking increasingly troubled. All of this is good long-term news if it clears the debt overhang from the economy. It can't help but be bad short-term news for homeowners and economists looking for green shoots of recovery.

Nota bene: Anthony J. Alfidi has no position (thankfully) in GS at this time. He does not owe any mortgage debt at all.

The Haiku of Finance for 12/04/09

Whoa! Dollar rally
Spurred by good jobless report
Mortgage yields jump too

Preppies With Guns at Goldman Sachs

This makes me shake my head. These preppie fools are just now realizing that their business decisions have placed their lives at risk:

“I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.

I have a couple of decades' worth of experience with firearms. Buying a handgun offers little protection without the willingness to use it at the moment of truth. Then again, pulling the trigger won't be difficult at all if Goldman Sachs' heavy hitters are really as amoral as they're often depicted.

I'll offer some free advice for preppies who're serious about enhancing their chances for survival against an angry mob. Forget the firearms, as they will only delay the inevitable if the plebes are at the gates with guns of their own. There are concrete steps you can take right now that are far less aggressive. Do the following. Unwind your firm's credit default swaps, interest rate hedges, and other derivative positions. Shut down your TARP-supported firms and allow the U.S. Treasury to assign their assets to local banks and credit unions. Deploy the bulk of your net worth to build resilient communities in your local area. In other words, taking highly visible steps now to distance yourself from Wall Street's greed is a better insurance policy in desperate times than arming yourself against your destitute neighbors.

Don't even think about fighting an angry mob all by your spoiled, arrogant self. The global guerrillas can easily defeat you.

The First Leg of a (Hopefully) Long Drop

I have been waiting for this insane rally to peak, and I may finally get a nice Christmas present:

U.S. stocks declined moderately on Monday as weak data on holiday retail sales prompted questions about the consumer's ability to spend.

American consumers may finally be waking up to their new penury.

This rally has been spurred by overly optimistic investors (easily led along by Wall Street hype) and Fed liquidity pumping. Here's hoping that the Fed's desire to drain liquidity is more than just lip service. Goading investors into risky assets has been deliberate policy up for most of this year.

The Haiku of Finance for 11/29/09

Chinese gold records
Diversify from dollars
Middle Kingdom shines

China's Gold Isn't for You

China is now tops in gold:

China, the world’s largest gold producer, may have record demand and output this year as jewelry consumption soars and miners expand production after prices
reached all-time highs, according to the China Gold Association.

This supports the argument I made in my post on Nov. 27 that China's internal production is sufficient to soak up all of its internal demand. The spot price of gold on the world market is rising for many reasons. The unavailability for export of China's enormous gold production is certainly not the least of those reasons.

In my effort to avoid confirmation bias, note that the figures in the article are from an internal Chinese organization and thus subject to manipulation for reasons of the middle Kingdom's national pride.

Nota bene: Anthony J. Alfidi is long FXI, GDX, and ANV.

China's Net Effect on Gold‏

Here are some more of my thoughts on China and gold.

There's a lot to be said about how the average Chinese investor's rush into risky assets helps prop up a potential bubble in precious metals and other asset classes. Many Chinese are buying stocks, real estate, and gold with borrowed money. This may set China up for hard times in the short run if one of those asset markets has a downturn and your average Chinese investor has to sell other holdings to meet margin calls or loan payments.

China is now the world's top gold producer, so they are able to encourage gold investment domestically simply by restricting the export of bullion. This has little to no net effect on the world spot price of gold so long as all domestic Chinese demand for gold can be directed into the supply they withhold from the world market.

Diversifying away from the U.S. dollar is China's long-term goal and buying gold (in both individual and national accounts) is but one leg under that strategy. Every once in a while gold permabulls make a case for gold prices going into the stratosphere. Gold has appeal in uncertain times but I wouldn’t overdo it. It's just another asset class to me. Too many gold bugs make the classic mistake of falling in love with an investment rather than putting it into the context of a larger portfolio.

Nota bene: Anthony J. Alfidi is long FXI, GDX, and ANV at the time of publication.

The Haiku of Finance for 11/25/09

Turkey day coming
Cost of dinner declining
Eat the deflation

Not So Strong After All

Some time ago, I believe I predicted a downward revision:

The economy grew at a 2.8 percent rate last quarter -- less than originally estimated. And forecasts for the current quarter are for similarly slight growth before a drop-off next year.

That drop-off is coming sooner and harder than expected:

Major indexes were slightly lower Tuesday after the Conference Board said its Consumer Confidence Index rose to 49.5 in November from a revised reading of 48.7 in October. While better than expected, the report shows that consumers remain gloomy heading into the holiday season.

The markets are reacting sensibly, for once.

Alpha-D Portfolio Updates for Nov. '09‏

It's that time of the month again. Here's what I've done lately to try to make some money.

My shares of IAU finally went through the strike price of my covered calls. Wow! I've decided to walk away with several years' worth of capital gains and leave gold mining stocks as the sole "gold hedge" in my portfolio. I like bullion ETFs but I needed to free up some cash for potential equity purchases in the next few months.

Speaking of GDX, I did sell some off but I continue to write covered calls on the remainder.

I sold off some FXI and wrote calls on the remainder. I also sold cash-covered puts under FXI because I don't mind buying back what I sold at a lower price. I'm still bullish long-term on China but there may be a cause for concern behind recent talk of bubbles in Chinese stocks and property.

I've decided that I like the possibility of going long a couple of transportation-related stocks. I think Kirby (KEX) and Tidewater (TDW) have good long-term potential, but I'm not ready to buy them just now as I expect the broader markets to correct in the near future. I wrote cash-covered puts under both KEX and TDW so that when Mr. Market does decide to disappoint most everyone else, I'll end up buying two stocks I like at a discount to today's prices. My holdings of KEX and TDW will be an application of my focused value approach. I did my homework on both of them.

I maintained my long position in ANV and my cash-covered puts under it. They've turned a corner and I still think they have tremendous upside potential.

I also decided to hedge two bubbles that I think have formed in defense spending and real estate. I bought puts against LMT and IYR in the expectation the markets for both advanced defense goods and commercial real estate will sink between now and 2011.

That's all for this month.

The Haiku of Finance for 11/21/09

Dollar carry trade
Pushing up markets worldwide
Prepping a big crash

Dr. Doom, Gold, Housing, and Unemployment

Gold used to be regarded exclusively as an inflation hedge. This made sense when the U.S. had a gold standard but made less sense after the gold confiscation of 1933. It made almost no sense as a philosophy after the closing of the gold window in 1973. Gold today is useful as just another asset class that's not closely correlated to equities; nothing less, nothing more. It helps diversify a portfolio when uncertainty plays havoc with other asset classes.

Meanwhile, Dr. Doom thinks gold is getting too big for its britches (through no fault of its own):

Nouriel Roubini said investors are “chasing commodities” and there is a risk of new asset bubbles emerging as stock markets and commodity prices surge amid record-low lending rates.

Okay. Who wants to be overweight an asset class that is getting frothy? Not me. My gold has done well but I'll probably begin pulling some money out of it soon even if it's still far from topping out. Why raise cash? Well, it pays to have some laying around in case I find something cheap to buy, like a foreclosed property:

The outlook for the home market dimmed this week as residential construction and mortgage applications fell and loan delinquencies reached a record.

“I don’t think the housing crisis is over,” Mark Zandi, chief economist with Moody’s Economy.com, said in a telephone interview. “I think we’re going to see another leg down.”

Okay. I'm also betting that worries over rising unemployment will keep home prices depressed for a while. This is good for patient investors like yours truly.

Full disclosure: Long IAU and GDX (with covered calls).

Fed Set to Pull Props From Mortgages

So what's been driving up stock prices? Insane buying activity like this:

The $5 trillion market for bonds backed by the housing finance companies Fannie Mae, Freddie Mac and Ginnie Mae is in for a shock when the Fed stops buying at the end of the 2010 first quarter.

The end of the Fed's mortgage buying means prices of mortgage-backed bonds will fall to a new market-clearing equilibrium. That means yields on new mortgages will have to rise to make them attractive to lenders. The resurgent mini-bubble in home prices - and stocks - thus has until April 2010 to run. Long-term investors may consider trimming their stock holdings before this hits. Me? I'll be looking to buy equities next spring, or even sooner if holiday sales crater.

The Haiku of Finance for 11/14/09

Burlington Northern
Buffett's century long play
But not a bargain

China Approaching Bubble Territory

China may be one of my favorite long-term bets, but articles like this make me think it's about to overheat in the short term:

China is doing what it can to expand domestic demand and rebalance its economy, President Hu Jintao said Friday, calling for renewed efforts to improve international financial oversight to prevent future crises.

There's other evidence that retail loan growth is getting to the point where the average Chinese consumer thinks they absolutely must max out their credit to avoid being left behind. That's the same mentality that inflated the U.S.'s housing bubble all the way until it burst in 2005-6.

I've been long FXI for a while, but soon I may start to take some money off the table.

3Com: A Special Situation

HP announced a buyout of 3Com (ticker COMS) for $7.90 cash per share. I see the appeal, as HP's brand strength can help it sell 3com's product line in markets where 3Com has failed to penetrate.

This was too tasty for me to ignore. I bought some COMS and I'll hold it until the deal closes. It's that simple. No options plays this time. The annualized gain will probably amount to only around 4%, but that's better than any bond of comparable duration.

The Limerick of Finance 11/08/09

China knows Africa has it rough
And offers to help them build stuff
There's resources galore
A lot left to explore
With new wealth they'll all soon have enough

The Haiku of Finance for 11/06/09

Job losses no joke
"Create or save" didn't work
Misspent stimulus

Job Losses Have NOT Peaked

All of those fake jobs "created or saved" by the stimulus aren't showing up here:

The unemployment rate in the U.S. soared to a 26-year high of 10.2 percent in October and employers cut more jobs than forecast, underscoring why Federal Reserve policy makers say interest rates will remain near zero.

Things aren't getting better here in the U.S. Even Berkshire Hathaway is cutting jobs, probably to raise cash to pay off all of that BNSF debt they'll assume. Monetary stimulus remains in place but the fiscal stimulus will soon wear off. When it does, stocks will probably (hopefully?) start to pull back to a lower level that reflects the true condition of the economy.

Allied Nevada's Positive Earnings Surprise

Lo and behold, my one truly speculative gold play is finally paying off. ANV has reported its first profitable quarter:

Allied Nevada Gold Corp. ("Allied Nevada" or the "Company") is pleased to report its financial and operating results for the three and nine months ended September 30, 2009, including its first quarter of positive earnings in the third quarter of 2009. The results presented in this press release should be read in conjunction with the 10Q (third quarter report) filed with SEDAR and Edgar and posted on the Allied Nevada's website at http://www.alliednevada.com/. The financial results are based on United States GAAP and are expressed in U.S. dollars.

Of course, it's just one quarter's numbers, but now there's a factual basis for the faith that I (not to mention George Soros) have placed in ANV. I bought ANV as a new-venture bet on its founders, but now I think I can put my thinking on firmer footing. My confidence in my ability to value established stocks (confirmed by Warren Buffett's purchase of Burlington Northern) leads me to believe I can construct a similar valuation for speculative mining companies.

I will soon begin constructing a formal valuation methodology for mining stocks. The principles are simple: The company's intrinsic value should be the dollar value of recoverable ore in the ground minus the cost of extracting and processing that ore for sale. The details can get complex, so I've got a lot of thinking left to do. I'll let you know when my model is ready.

Nota bene: Anthony J. Alfidi is long ANV (with short puts covered by cash) at the time this post was published.

Buffett's Big BNI Buyout Bets On Buoyancy

Tuesday brought big news on Berkshire Hathaway's proposed buyout of Burlington Northern Santa Fe (BNI) railroad at $100/share, cash and stock. This transaction is a textbook window into Warren Buffett's equity valuation model.

Uncle Warren has dropped hints over the years on how he values a stock. Buffettology books (particularly those by Mary Buffett) have done an excellent job outlining his calculation of "owner earnings" (net income plus depreciation minus average capital spending), his use of the 10-year Treasury yield as a discount rate, and his preference for companies that consistently grow retained earnings per share over long periods.

I built an equity valuation model using these principles and got an interesting result. Discounting BNI owner earnings for the past four quarters at a discount rate of 3.5% (approximately the prevailing 10-year Treasury yield in recent weeks) results in a share price of slightly more than $150. Warren Buffett doesn't buy anything unless he can get a severe bargain, so paying $100 for a stock he believes is worth around $150 represents a 33% discount.

I believe Uncle Warren's key insight is his tweaking of the growth factor used in traditional DCF models. In place of the "b" retention rate for net earnings not spent on dividends, he substitutes the average long-term growth rate of retained earnings on the balance sheet. Multiplying this modified "b" by his version of ROE (owner earnings divided by shareholder equity) gives us the annualized growth factor "g" that he uses to estimate those future owner earnings.

I'm intrigued that Uncle Warren chose to assume BNI's relatively high long term debt load onto Berkshire's balance sheet. Apparently he thinks the cash flow from Berkshire's finance and insurance lines will be sufficient to pay that off. If this gamble works, it gives Burlington the operational freedom needed to continue investing in technological innovation.

It's almost a done deal pending regulatory hurdles. Anti-trust scrutiny will probably force Berkshire to divest its other rail holdings, namely Union Pacific (UNP) and Norfolk Southern (NSC). Forced selling of those large stakes might make them attractive plays for other value-oriented transportation sector investors. It would also give Berkshire additional cash if they need to sweeten this deal.

My play? I immediately sold a few short puts under BNI at 95 on the premise that Buffett's bid establishes a firm floor for the stock and will be approved without any glitches early in 2010. The worst-case scenario for this special situation would be a market dislocation that tanks Berkshire's own share price, forcing it to further dilute its own shareholders to maintain the agreed mix of cash and equity for this buyout. If my puts are exercised against me, my own worst-case scenario is that I end up owning a long-term position in either BNI (if the deal collapses) or Berkshire, two companies that the greatest investor of all time thinks are terrific to have.

Full disclosure: Anthony J. Alfidi is short Jan 2011 puts on $BNI at 95 (covered with cash) and holds no position in any other stock mentioned in this post.

Alfidi Capital Publishes Report on Put-Call Parity

Here's a short report I've created describing a way to find an arbitrage opporunity in a stock. I call it "Put-Call Parity Analysis of Market Ignorance." Read and enjoy.

Burlington Northern Santa Fe: A Special Situation

I haven't done much special situation investing lately, but today presents an opportunity that's too good to pass up. Rarely does one have the chance to ride the coattails of a master.

Warren Buffett has decided to go whole hog and buy BNI for $100 per share:

Warren Buffett's Berkshire Hathaway Inc. on Tuesday agreed to buy Burlington Northern Santa Fe Corp., making a $34 billion bet on the future of the U.S. economy.

The offer comprises both cash and Berkshire Hathaway stock. I'll have more to say about this tomorrow as I believe I've succeeded in deconstructing Uncle Warren's valuation methodology. I played this by selling Jan 11 puts at 95 on BNI. This is slightly under the $100/share acquisition price, with the transaction expected to close in about 3 months.

Thank you, Uncle Warren, and not just for this opportunity to make some quick cash. Thank you for discussing your investment philosophy in public over these many years, because I think I finally understand it.

The Haiku of Finance for 11/02/09

Stocks jump on Ford news
Cash for Clunkers paid them well
But that program's done

Dollar Weakness Driving U.S. Manufacturing?

Declines in consumer spending haven't curtailed growth in manufacturing output:

Manufacturing in the U.S. expanded in October at the fastest pace in more than three years, a sign that factories will be the main drivers of the economic recovery in coming months.

The article uses tortured logic to ascribe the jump in manufacturing to stimulus spending. The claim that "rising sales led to a record plunge in stockpiles" contradicts the data showing the inventory index rising to 46.9 from 42.5; that number indicates that stockpiles are rising, not plunging. Maybe the plunge claim refers to data from earlier in the year.

I can only hypothesize that a weaker U.S. dollar is making U.S.-made goods cheaper in foreign markets. Let's see some trade data to confirm whether U.S. exports are rising, as indicated by the rise to 55.5 from 55 in their gauge of export orders.

Let's not forget that manufacturing comprises only about 12% of U.S. GDP. Any growth there is welcome if it makes us a nation of builders and producers once again.

Effective Chinese Stimulus Needs Other Stimulators Too

China continues to grow (according to them, ahem):

The Purchasing Managers’ Index rose to a seasonally adjusted 55.2 in October from 54.3 in September, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. An index of export orders climbed to 54.5 from 53.3.

How reliable are their figures? I wish I had more time to delve into that, as I'm kind of busy. At least China stimulated something important - manufacturing - whereas the U.S. stimulates transfer payments from one constituency to another. China also wants other stimulators to keep stimulating into infinity. So much for the de-coupling of emerging markets from the developed world.

Nota bene: Anthony J. Alfidi is long FXI (with covered calls) at the time this post was published.

The Haiku of Finance for 10/31/09

Happy Halloween
Bad numbers spooked the market
No treat for the bulls

Consumers Prepare Early For a Blue Christmas

It is definitely not a good sign to see consumers caving in just as the stimulus effort is expiring:

Americans cut spending for the first time in five months and a gauge of confidence weakened, signaling consumers will make a limited contribution to the recovery without government incentives.

Here's our first inkling of a weak Christmas shopping season. I'm trying to avoid confirmation bias, but that's hard when I see stories like this one. It's even harder when federal lawmakers scramble to extend the first-time homebuyer tax credit.

The Haiku of Finance for 10/28/09

Politicized loans
Coming soon to your small bank
Fewer loans for you

Bankers See The Shifting Political Winds

Bankers can see right through the politicization of small business lending:

Bankers who gathered for the American Bankers Association annual meeting were hesitant to dismiss the administration's efforts, but said the government's programs have largely been unappealing for smaller banks.

They won't come out and say what I'm about to say because they don't want to be the victims of liquidity freezes and forced mergers. Lack of creditworthy borrowers and tons of paperwork aren't going to stop politically-driven loans from being made. Washington isn't happy that liquidity injections are tied up on bank balance sheets. They need that liquidity to circulate through the economy so that Americans won't notice their purchasing power disappearing or their middle-class entitlements becoming less of a liability. Inflation has a way of working that kind of magic and right now the mojo just isn't there. That will all change with the right political levers pushing loans to business owners in the ruling elite's favorite demographics. The conduit doesn't matter, although existing SBA-affiliated lenders are the most likely candidates.

Has there ever been such a thing as a bubble in small-medium enterprise (SME) lending? We'll find out soon enough. Here's a thought: Maybe some aspiring mendicants could assemble a REIT that would qualify for government-sponsored lending. That would kill two birds with one stone. It would scratch the government's lending itch and open a new category of liquidity recipient for Treasury's "Plan C" to bail out the commercial real estate sector.

Voila! All problems solved! They don't call me "Supreme Super-Genius" for nothing. Well, okay, that's what I call myself, but you get the picture.

The Haiku of Finance for 10/27/09

Doctor Doom calling
"Carry trades may unwind soon"
Dollar now at risk

Dr. Doom's Going To Get It Right Again

Nouriel Roubini, a.k.a. Dr. Doom for his accurate call on the credit crunch, is back with another bold warning for the markets:

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.
(snip)

Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

So is anyone paying attention? Especially serious investors? Some are, but most apparently are not. The bond market swallowed the Treasury's latest issuance without even blinking. Delusional homebuyers are paying premiums for a new housing mini-bubble driven by an expiring tax credit. At least institutional investors are starting to get nervous about an overvalued stock market.

As for me . . . I'm just waiting for a cheap entry point on some ETFs and stocks I've been watching.

Dangling Over The Precipice

Lots of juicy news items today indicate just how close we are to the cusp of a big downturn (or several). The rally was driven by the emergency stimulus, so much so that even the possibility of withdrawing the housing tax credit is enough to make the stock market very nervous. Meanwhile, the debt we're incurring with gimmicks like that housing credit is making the bond market nervous.

The housing market isn't faring much better and has yet to return to a realistic historical norm specifically because of government intervention.

All of this nervousness afflicting big asset classes should be good news for gold. I'm seriously considering unwinding some of my gold holdings to have more cash available if these other asset classes crash. Only time will tell whether that's a wise move on my part.

The Haiku of Finance for 10/25/09

Recession over?
Commentators say it is
But I say they're wrong

The Haiku of Finance for 10/24/09

OPIC tech funding
Pays for Asia's future growth
U.S. wealth transfer

Sovereignty Crunch Forces U.S. Tech Subsidies Overseas

The U.S. government, instead of supporting innovation at home to help its economy out of recession, instead chooses to launch a new subsidy for innovation elsewhere:

The White House said the US Overseas Private Investment Corporation (OPIC) had issued a call for proposals for the fund, which will provide financing of between 25 and 150 million dollars for selected projects and funds.

The Global Technology and Innovation Fund will "catalyze and facilitate private sector investments" throughout Asia, the Middle East and Africa, the White House said in a statement.

Anyone who thinks this is solely a foreign policy outreach to give disillusioned Muslim youth an alternative to becoming suicide bombers is welcome to make me an offer on the bridge I own in Brooklyn. The real backstory is more complicated, and like an iceberg we can only see what's on the surface. Uncle Sam's creditors are beginning to flex their muscles. Sovereign wealth funds in Asia and the Middle East have probably begun to demand assurances from Uncle Sam that they won't be left out in the cold in the event he defaults on his sovereign debt. U.S. willingness to fund technology transfer is one such assurance, with the expectation that foreign creditors will continue to buy U.S. government debt (or least not sell their current debt holdings in a panic).

Civilization's center of gravity is gradually moving eastward.

IPO Trough Worse Than Dot-Bomb Drought

There is even more reason to believe that this phantom recovery is fake when its IPO revival produces less of a pop than the drought that followed the dot-com implosion:

Initial public offerings in the U.S. are suffering the worst returns since at least 1995 at the same time that the stock-market rally is spurring the most new listings in almost two years.

Investors need to be absolutely certain that they have iron-clad reasons to buy equities given current valuations. Articles like this can reinforce confirmation bias for bears like me, so of course I've also noted that this week's earnings announcements have given the market some positive earnings surprises.

The Haiku of Finance for 10/22/09

China and U.S.
Chasing stimulus effects
These end at some point

U.S. And China Prepare To Diverge On Stimulus

The U.S. ruling elite needs to hear this warning from Japan (but probably won't listen) on the pain that comes with excessive macroeconomic stimulus:

“If you learn your lesson from the Japanese experience, you don’t remove your fiscal stimulus until private sector de-leveraging is over,” Koo, 55, chief economist at the research arm of Japan’s biggest brokerage, said in an interview at his Tokyo office last week. “When we see the private sector coming to borrow again, I’ll be the loudest person on earth arguing for fiscal reform. That’s the exit.”

The quickest way to get to that private sector de-leveraging is to let highly leveraged firms go bankrupt. American leaders think this is too painful to contemplate. China thinks otherwise, and is signalling its readiness to endure some pain in the short term:

Chinese officials may be preparing to reduce monetary stimulus that propelled growth to 8.9 percent in the third quarter and led the world out of recession.

I disagree with the article's contention that the world is heading out of recession. Most of the G-20, at a minimum, is still very much in recession but you wouldn't know that from the way governments dress up their economic statistics. Granted, the Japan article addresses fiscal stimulus while the China article addresses monetary stimulus, but the effects of either on GDP are comparable.

Nota bene: Anthony J. Alfidi is long FXI with (covered call options) and is short cash-covered put options on SPY.

Greed Wins Again

Here we go again. The people who helped cause the problem are definitely not part of the solution:

A 40 percent jump in Wall Street bonuses this year may bring relief to New York City and Albany as the state and its biggest metropolis struggle with a combined $14 billion in budget deficits this fiscal year and next.

There's a larger lesson here besides the need for NYC to diversify its economy away from such a heavy reliance on the financial sector. The "masters of the universe" have learned absolutely nothing about the limits of their knowledge and the amount of damage their hubris can cause. Hopefully the next dip in the market (after Christmas?!) will drive this point home.

Updating The Alpha-D Portfolio For Oct. 2009

All of my covered calls in my taxable account expired without exercise last Friday. I have refreshed the covered short calls on IAU, GDX (some but not all of the holding), and FXI. I wouldn't mind seeing the IAU called away to make room for other equities I will eventually add once the market heads down at some point. My long position in ANV is unchanged, as is my cash-covered short put under ANV for March 2010. Remember, that's the one junior gold miner that's a very small but speculative play on gold. I have made no change to my cash-covered short put under SPY; it will expire in November. I also refreshed the cash-covered short puts I have had for a while under FXI, as I wouldn't mind owning some more of China at a lower price.

The covered calls I had on IAU and GDX in my IRA were exercised. I bought back the GDX and refreshed the OTM calls but I let the IAU go. I'm making room in my IRA for the long positions I will eventually establish for IWM, VWO, and IYR.

BTW, you can expect to see my first research reports on individual stocks I will cover by the end of the year. You won't see a report on ANV since I won't hold it for the long term, but other stocks will appear in the Alpha-D soon.

Banks May Have Peaked, Part 2

I mentioned this yesterday, and lo and behold I get more confirmation today. BofA announces a loss of over $2B:

The results, released Friday, worsened to a $2.24 billion loss after the bank paid dividends to preferred shareholders, including the federal government, which gave Bank of America $45 billion in taxpayer lifelines during the financial crisis.

It doesn't get any better than this for an observer like me who's been crowing about an insanely overvalued market. It can and probably will get worse for investors who've bought into the hype about a nascent recovery.

Nota bene: Anthony J. Alfidi has no position in BAC at the time this commentary was published.

The Haiku of Finance for 10/15/09

Banking profits up
Lots of shiny coins to count
Until more loans fail

Banks May Have Peaked

The golden boys and girls at Goldman Sachs rarely disappoint . . . that is, until just about now:

Goldman Sachs Group Inc. reported a surge in third-quarter profit driven by trading and investments with the firm’s own money. The shares declined as earnings fell short of the bank’s record.

GS is a roulette wheel disguised as a bank holding company; it is one big moral hazard. Other banks are also successfully disguising their problems:

Citigroup Inc., the lender 34 percent owned by the U.S. government, posted a $101 million profit, defying expectations for a loss as the company added the smallest amount to loan-loss reserves in two years.

Watch out, Citi, those pitiful loan loss reserves aren't going to help much when CRE really starts cratering in 2010. And in a surprise development, the market responds rationally to this news:

U.S. stocks dropped, dragging benchmark indexes down from their highest levels in a year, as Goldman Sachs Group Inc. and Citigroup Inc. fell on earnings that disappointed some investors.

If the banking sector's health is peaking, a renewed downturn in the larger economy may not be far away. That's why I continue to add to my cash pile.

Housing Crash Redux 2009

This is it. No, not Michael Jackson's posthumous album. I mean the beginning of the second part of the housing bailout:

Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.

That says it all. I don't think I have to quote any more from the NYT for you to get the picture. I'm so glad I went on record last year with my opposition to the housing bailout. I knew that if America started down that path it would spell the end of our status as a great power. A second mortgage bailout will cement our national decline and ensure that any hope of reversing it will be monumentally difficult within the remaining lifetime of Generation X.

I'm gradually building cash that I can use after the market tanks to buy equities. I don't think I'll have to wait very long for another real estate-related implosion to bring that on. If both FDIC and FHA need simultaneous bailouts . . . hello 1932 all over again.

The Limerick of Finance for 10/11/09

The Fed's worrying about cash
Because they've printed up quite a stash
It's just sitting there
Not going anywhere
Once devalued, it will head for the trash

California's Interminable Fiscal Crisis

I predicted back in July that California's financial outlook would be shaky. That post was specifically about an unwise investment philosophy for CalPERS. Sure enough, California's financial stupidity isn't limited to investment (mis)management. It also includes budget (mis) management:

Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.

The Golden State is seriously tarnished due to the lingering effects of the housing bubble. It will prove increasingly unable to meet its fiscal obligations, including interest on its muni bonds. The article above mentions the state's inability to sell all of the G.O. bonds it needed, and I suspect we'll see more partial bond sale failures in the months ahead. Why any investor would want to buy debt from this state is beyond my ability to understand. I will not take a position in Cal munis until I am convinced the state is NOT a bankruptcy risk.

The Haiku of Finance for 10/08/09

Cal bond yield rises
State fiscal woes yet to come
Junk status assured

The Haiku of Finance for 10/06/09

Reverse mortgages
Another bad idea
Greed will never die

Reverse Mortgages Are Another Sucker Product

In the darkest corner of every super-salesman's heart is a bottomless pit of greed and depravity. Stories like this make me shake my head:

Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn’t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report titled "Subprime Revisited,’’ that was released today by the Boston-based NCLC.

It sure looks like tapped-out Baby Boomers who have no liquid savings for retirement are easy pickings for reverse mortgages. It will only take one big hiccup in the bond market to send rates skyrocketing and home values plunging, and then these seniors and their lenders will be wiped out.

No way would I go for this if I were a homeowner. I'll take the slow and steady approach to wealth building, thank you very much, and that requires little to no debt.

ISM's Service Sector Isn't So Rosy

You think today's ISM report heralding an increase in non-manufacturing activity is a bullish sign? Only if you don't read what really drove the increase:

Federal Reserve efforts to unlock credit and government measures such as “cash-for-clunkers” and a tax credit for first-time homebuyers are reviving demand and likely helped the economy grow last quarter. Nonetheless, last week’s report showing job cuts accelerated in September is a reminder that gains in purchases may not be sustained as incentives expire.

Come on, folks. Take away the stimulus and you take away the rosy economic results. I can't short the market while these stimulus measures are in place because average investors are piling into what they think is another great bull market. Scared to be left behind, reader? Here are some investment voices who aren't worried about being left behind:

New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery.

If you don't believe them, believe this guy:

Nobel Prize-winning economist Joseph Stiglitz said unemployment is going to keep rising and should be the main focus for policy makers, and that gains in the stock market indicate investors have been “irrationally exuberant” about a recovery.

These guys are all on the same sheet of music. I'll add my voice to the same choir. IMHO this market is overvalued and headed for a decline, but I'm not going to bankrupt myself by shorting into an overbought rally.

The Haiku of Finance for 10/03/09

Stimulus won't help
Economy keeps sliding
Next year will be worse

Stimulus Continues While Recovery Fizzles

Policymakers know more than they let on. They are terrified of unwinding stimulus policies:

Treasury Secretary Timothy Geithner said signs of economic recovery are “stronger” and have appeared “sooner” than expected, while reiterating it’s not yet time to roll back stimulus programs.

They know that deviating from ZIRP will pull the plug on this non-recovery:

“Deflation is definitely a threat right now,” Nobel laureate Joseph Stiglitz, 66, a professor at Columbia University in New York, said in a Sept. 22 interview. “The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while.”

This week's disappointing economic news is going to get worse and these experts know it. They know job losses will head skyward in 2010:

U.S. job losses unexpectedly accelerated last month and the unemployment rate reached the highest level since 1983, signaling any recovery in consumer spending and economic growth will be slow to develop.

Are you prepared for economic annihilation in 2010? I certainly am, thanks to my gold holdings and cash reserves.

The Haiku of Finance for 10/02/09

Non-farm payrolls down
Job losses even bigger
Sure you see green shoots?

No Jobs? No Recovery

Investors hoping to harvest some green shoots need to read about this really bad jobs report:

U.S. employers cut a deeper-than-expected 263,000 jobs in September, lifting the unemployment rate to 9.8 percent, according to a government report on Friday that fueled fears the weak labor market could undermine economic recovery.

If you buy stocks or indexes now for the long term, you're probably overpaying. I'm increasing my cash pile and waiting for bargains.

Sinking Data Finally Sinking In?

Perhaps some rationality is returning to this highly inflated stock market after all. Newly disappointing manufacturing data gives the market pause:

The Institute for Supply Management said its index of manufacturing activity in September slipped to 52.6 from 52.9 in August, well below analysts' expectations of 54. It was the second month in a row the reading came in above 50, which indicates growth, after contracting for 18 months.

That's not much of a drop but it's certainly indicative that orders aren't picking up in advance of an expected recovery. The stock market is headed down right now. I have renewed hope of being able to obtain SPY and EFA at decent prices by the end of the year.

Manufacturing Data Bombs, And So Does CIT

First, a surprise drop in a manufacturing indicator:

The Chicago Purchasing Managers Index fell to 46.1 in September rather than rising to the 52 that economists expected. The index, considered a precursor to the national Institute for Supply Management index to be released on Thursday, pointed to a Midwestern manufacturing industry than is weaker than had been expected.

Well, it's not weaker than what I expected! Ha, seriously, the whole green shoots meme was a cute little bullet from some Fedster's talking points memo. Those green shoots are drying up pretty fast at places like CIT Group:

CIT Group Inc. shares plunged Wednesday as the commercial lender is reportedly trying to craft an exchange that would cut its debt and offer bondholders an equity stake in the company in a bid to avoid bankruptcy.

Weaker than expected manufacturers . . . and a weakening lender to those same types of manufacturers. Come on, folks, admit that we're moving through the eye of this economic hurricane and back into the gale force winds of a renewed credit crunch.

The Haiku of Finance for 09/28/09

Pimp-Co sees savings
That means less cash will be spent
Prolonging downturn

Misleading Pemex Headline

Sometimes I think financial writers want to make investors become stupid. Judge for yourself with this one:

Mexican oil production fell again in August but state oil company Pemex said it had some early indications the rapid fall in output at its giant Cantarell field may be slowing.

Notice the headline doesn't do the text justice, as it lacks nuance with nary a mention of the oilfield's "rapid fall." Cantarell will deplete sooner or later. Why imply otherwise?

Durable Goods Decline Mows Down Green Shoots

The evidence mounts that the U.S. economy is not in recovery mode:

Demand for U.S. durable goods unexpectedly fell in August, signaling companies are planning to curb spending on concern gains in sales will not be sustained.

The lasting damage of programs like Cash for Clunkers is to fool pundits and consumers into thinking we can borrow our way out of an insolvency-induced contraction. Purchasing managers and operations managers should know better, hence their realism in trimming orders.

The Haiku of Finance for 09/24/09

Fed musings aside
Buyup programs won't subside
They chose inflation

Wall Street and Fed Overestimate The Recovery

At least money managers are starting to mention that a wall of worry just might exist:

“There’s a little bit of a wall of worry right now, but the market just feels like it wants to go up,” said Michael Mullaney, a Boston-based fund manager at Fiduciary Trust Co., which oversees $9 billion. “There’s going to be a very strong near-term economic rebound greater than expectations. I think we’ll end the year higher.”

The first part of that quote is an understatement. Just a little wall, you think? The second part of the quote makes me sad. Wall Streeters are going to stake a whole bunch of other people's money on the hope for a continued rebound through the Christmas shopping season. They're not alone in their misplaced optimism for a fast recovery; the Fed is planting the same meme in the media:

Federal Reserve officials may signal that the U.S. economy has started to recover while maintaining their pledge to keep the benchmark interest rate near a record low for an “extended period.”

Actions always speak louder than words. The Fed is keeping interest rates low because the economy is not at all out of danger. I'm not shorting anymore because all this stimulus action is pushing stocks into blowoff top territory. I may have been a few weeks premature by calling a market top recently but I'm convinced I'll be vindicated soon enough.

Refreshing The Alpha-D For Sep.-Oct. '09

I'm not doing uncovered shorts anymore. That was too risky as my short calls on some widely traded ETFs went against me in a big way this month. Furthermore, the risk of not being able to access my account in a timely manner to cover those shorts is a real risk management threat that I realize I must now mitigate. I would like to take positions in the major indexes at some point, which is why I've written a couple of OTM puts (covered by cash) on SPY that expire before the end of the year. The worst that could happen is that I'll have to go long a small amount of SPY at a discount of more than 20% from last Friday's closing price. I am still quite bearish on the major indexes, but I am willing to risk owning a little SPY for many years as long as I get it at a big haircut.

I have renewed my covered calls on all of my holdings of IAU and FXI. I also sold a few calls on GDX because I am willing to risk some but not all of those holdings getting called away. If there is one gold security I wish to retain through this long economic crisis, it the one that represents established gold miners (GDX) rather than gold contracts (IAU) which may turn out to be merely paper.

I am not selling any puts under VWO, EFA, or IWM. I'll be patient and wait for large declines in each of those.

A Very Bad September For The Alpha-D

I unwound my expiring uncovered calls on Sept. 17 when I bought them to close . . . at big losses. Although I still have decent unrealized gains from my long equity holdings, this was a disastrous month compared to the rest of 2009.

This month’s realized loss has wiped out all of my realized gains for this year, and then some. That sucks. If I were a hedge fund manager I’d probably be fired. That’s the great thing about working for myself – no one can fire me based on poor short term performance. I truly believe it will be at least a decade for my investment philosophy to show measurable results. That’s fine with me, because I don’t have to prove anything to anyone.

I’ve said all along that I’m a long term investor, and like Warren Buffett I’d have a hard time getting hired or keeping a job today with money management firms that measure themselves by the month rather than by the decade. Lately I’ve been too focused on the short term myself, taking short-term profits from uncovered calls while broad indexes have been climbing a wall of worry. I have also underestimated the stupidity of professional investment managers who are all too eager to bid into an overvalued market in their never-ending quest to beat the other guy’s alpha.

I’ll remind myself of Uncle Warren’s wisdom: Be fearful when others are greedy. Investors jumping back into the market are getting greedy, so I need to be more fearful. I’ll lay off the uncovered ETF calls for a while and instead focus on finding some long-term value plays for my focus portfolio. Those are things I can measure with much more mathematical precision than the broad market sentiment that drives index prices.

Debt Bomb Fuse Is Lit

So, did the stimulus end the recession? If you think so, read this:

The Federal Housing Administration said Friday that its financial cushion will sink below mandatory levels for the first time in its history, but officials insisted the agency won't need to be rescued.

They may be denying the need for a bailout now, but their tune will probably change in a few months. Speaking of bailouts, read this:

The chairman of the Federal Deposit Insurance Corp. says she is "considering all options, including borrowing from Treasury," to replenish the dwindling fund that insures bank deposits.

Just as I had predicted last month! The next leg of the downturn is a little behind schedule due to the stimulus but it cannot be delayed indefinitely. The more debt we run up to delay its onset, the more we worry our foreign creditors:

Russia's Prime Minister Vladimir Putin on Friday said other currencies besides the dollar should be used as global reserves to reduce the risks posed by swelling U.S. debt.

Putin, who spoke at an international investment forum in the Black Sea resort of Sochi, chided the United States for "an uncontrolled issue of dollars" and said the American currency's dominance had been "one of the triggers" of the global crisis.

The nightmare for the U.S. economy should come around the middle of the Christmas shopping season as retailers and their landlords start to panic. I am preparing to raise cash for the next couple of months in anticipation of some major bargains in the stock market.

The Haiku of Finance for 09/17/09

Go for massive debt?
You've gotta be kidding me
No way would that work

Ken Fisher's Contrarian Call to Bankrupt Everyone

I once respected Ken Fisher. I thought he had some interesting things to say about arbitrage pricing when he spoke at the San Francisco Money Show in 2002. I lost all respect for him when he spoke there again in 2006 after he claimed that American's home equity was a good substitute for savings in the bank.

Ken Fisher has now given me a reason to never consider respecting his opinion again with his call for massive increases in Americans' debt:

The U.S. has too little debt, not too much, Fisher says. The U.S.'s return on assets is high and interest rates are low, so our borrowing capacity is much higher than our current debt levels.

Also, Fisher says, you have to look at the U.S. in the context of the world, because the U.S. is only 25% of world GDP. The world is way under-leveraged, so one country's particular debt-to-GDP ratio doesn't matter.

Some financial icons manage to outlive their reputations for brilliance. Warren Buffett and Alan Greenspan come to mind. Now it's Ken Fisher's turn to be ignored. Apparently he hasn't watched I.O.U.S.A. or visited Perot Charts. Maybe he's still stuck in the 1980s when his acumen as a portfolio manager and analyst was at its peak.

Folks, please don't listen to Ken Fisher if you want to survive the next few years of malaise. Just stay out of debt for the foreseeable future. That's my own plan.

The Haiku of Finance for 09/16/09

Warren calls bottom
Says recession won't get worse
I say he's way wrong

Uncle Warren Gets Bottom Call Wrong

Sorry, Mr. Buffett, but you're premature in calling the bottom of this Depression:

Warren Buffett, the billionaire investor who last year called the financial crisis an “economic Pearl Harbor,” said the U.S. economy has “hit a plateau at bottom.”

The Sage of Omaha is getting slow in his old age, as evidenced by the languishing performance of his railroad stocks and ConocoPhillips. The railroads he owns violate his preference for avoiding investments in companies with small debt loads.

Come on, Warren. You're smart enough to check rail car loading data. Have your staff look up container traffic from Asian ports and make note of the decline from last year. The Christmas shopping season will be a disaster for retailers and we'll be right back into a credit crunch for a not-so-happy new year.

Warren Buffett has been buying stocks, and I've been shorting the U.S. indexes. I've made a little money this year and Warren has lost a lot. I've also missed the big S&P rally because I'm convinced it's a prelude to a very large decline.

The Haiku of Finance for 09/14/09

Change regulation?
That's change we can believe in
So let's get it done

Alfidi Capital Special Report: IPO Filing Price Range Valuations

I've been busy for quite some time working on a very large project, but I have made time to publish a special report on valuation methodologies for IPOs. Check it out at Alfidi Capital.

Commercial Property Woes Reveal Bank Insolvency

Reading between the lines in this Bloomberg article tells us everything we need to know about why the economy is in a phantom recovery and why this bear market rally is built on nothing. Let's take a look at commercial real estate:

Commercial-property sales in the U.S. this year are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s.

Okay, this isn't much of a surprise, although CRE industry veterans quoted in the article are aghast that they've never seen a buyer's drought of this magnitude in their careers. The lesson for investors is farther down:

The default rate on commercial mortgages held by U.S. banks more than doubled in the second quarter to 2.88 percent, according to New York-based Real Estate Econometrics. It may reach 4.1 percent by year end, the highest since 1993.

That may mean more pain for banks that hold the mortgages and signal that this year’s gain in real estate investment shares may be overdone.

Banks are nowhere near healthy, depsite all of the happy talk you hear on CNBC. Bankers are happily paying themselves huge bonuses again, and I suspect they're doing so out of fear that they may never see such income levels again if the banking system heads over a cliff soon. Three more snips from the article will show us where we're headed:

“We’re not forcing the banks to disgorge” distressed properties, said Susan Wachter, professor of real estate at the University of Pennsylvania’s Wharton School in Philadelphia. “It’s a different crisis, a far worse crisis.”

FDIC regulators who should know better are not forcing banks to write off bad loans and seize properties, so technically insolvent banks continue to function.

Maturing commercial property loans are high on the “worry list” of San Francisco Federal Reserve President Janet Yellen, she said in a July 28 speech to the Oregon Bankers Association.

Leaders at the Fed know banks' true conditions and are maintaining a ZIRP funds target to forestall the second phase of our systemic crisis.

The entire real estate dynamic has shifted, said Frank Liantonio, executive vice president of Cushman’s capital markets group. Liantonio, 60, with a career that goes back to the early 1970s, said he’s been through six down cycles from the mid-1970s to the dot-com bust of the early 2000s. This is the worst, he said.

“Property is no longer controlled by the owner,” he said. “It’s controlled by the lender, and the lender in most instances doesn’t have the ability to take the charge to earnings and sell the property. That’s one reason why you’re not seeing any transactions.”

I bolded part of that final quote to show how the continuing insolvency of our banking system keeps the real estate market frozen. This is why REITs and ETFS like $IYR have rebounded recently. Investors are attracted to the false hope that commercial real estate will remain attractive because of the inability of insolvent banks to foreclose on defaulted loans.

Note that IYR is up almost 100% and XLF is up almost 140% from their March lows. These price levels are unsustainable given the slow-motion crash in CRE disguised with the full complicity of bank regulators.

Disclosure: Anthony J. Alfidi has no position in XLF or IYR at this time.

The Haiku of Finance for 09/11/09

Younger markets boom
Chinese expansion stronger
Consumers happy

I'll Believe This When I See It

The Treasury Department is trying out its latest sleight-of-hand move on the investing public:

U.S. Treasury Secretary Timothy Geithner said the government is moving to withdraw some of its support for financial markets and cautioned that the recovery will have “more than the usual ups and downs.”
(snip)

Other, unused programs will be allowed to expire, including a program guaranteeing money-market mutual funds and the Capital Assistance Program, which was established earlier this year to provide extra money to banks that needed it and couldn’t access private markets.

Withdrawing "other, unused programs" doesn't count for jack squat when the Treasury intends to keep buying banks' toxic assets. Furthermore, hopes for repayment of another $50B in TARP money are blithely ignorant of the stats on souring credit card loans and commercial real estate mortgages. Treasury's pronouncements depend heavily on the business media's gullibility and inability to perform real analysis.

Time will tell whether Treasury is serious about kicking the props out from under the financial markets. My bet is that they're not serious, which is why I'm hanging onto the gold hedges (IAU and GDX) in my portfolio.

The Haiku of Finance for 09/09/09 (what a date!)

Wealthy trading down
Mansions getting too costly
Hey, let's make a deal

Wealthy Trading Down While I Look to Trade Up

I've discussed in the past how some wealthy people I've met have expressed distaste for my non-privileged background. That's why articles like this one make me sit up and take notice:

Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.
(snip)

Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Chicago bankruptcy attorney Joseph Baldi.
(snip)

“Real-estate is an incredible thing on the downside,” said Jason Green, a bankruptcy attorney based in Washington. “Equities can only go to zero. Property can go well below zero,” because of ongoing expenses such as property taxes, insurance and maintenance on primary residences, vacation homes and investment properties.

The nation's real estate explosion is not limited to subprime borrowers who bit off more McMansion than they could chew. It now touches the real mansions of bona fide multimillionaires who never thought they'd have to trade down. I'm guessing that these distressed properties will start to hurt the loan books of luxury lenders like First Republic pretty soon . . . which in that case means more trouble for Bank of America and Merrill Lynch (First Republic's parent).

I don't engage in schadenfreude because I wouldn't want it done to me. Watching people get poorer is no fun. That's why this is a reminder for me to live within my means and stay out of debt. My net worth at this moment is somewhat higher than it was at the beginning of this year, thanks to my frugality, investing discipline, avoidance of debt, and some really good luck. That luck is sometimes what separates a downwardly-mobile wealthy dude from an upwardly-mobile striver like yours truly.

On the other hand, some foreclosed mansions will soon be on the market. There's always hope that I could pick up something nice in San Francisco on the cheap.

Gold Breaking $1000

The spot price of gold is flirting with breaking $1000/ounce today:

The gold contract for December delivery traded up $6.50, or 0.7 percent, at $1,003.20 per troy ounce on the New York Mercantile Exchange. It had gone as high as $1,009.70; that is the highest since it hit a record of $1,033.90 on March 17 last year.

Go gold! My faithful readers (all three of them) know that I am long IAU and GDX. I wrote covered calls on GDX (plus a few extra uncovered ones) and some covered calls on IAU to generate a little bit of yield. I figured why not, as gold had stayed in the $900-980 range for several months. If my holdings are called away, I'll buy them back in a wash sale. I'm just glad to see my patience with gold finally pay off. :-)

The Haiku of Finance for 09/07/09

Labor Day weekend
Markets are closed on Monday
No trading today

The Haiku of Finance for 09/05/09

Business real estate
Defaults will bust banks again
Bad loans all over

Unemployment Doesn't Faze Stock Market

Equity markets aren't blinking so far today even though joblessness in the U.S. shows no sign of abatement:

The pace of U.S. job losses slowed in August while the unemployment rate reached a 26-year high, signaling the recovery from recession will be slow to develop.

We're more than two-thirds of the way through the third quarter. Back to school spending has been a disappointment. The recovery that optimists have forecast for the second half of 2009 has a ton of catching up to do, so we'll have to see a blowout Christmas shopping season. That will be tough to deliver with homeowners defaulting on their prime mortgages.

I'm still short the U.S.

The Haiku of Finance for 09/03/09

IPOs resurge
Desperation to cash out
Not bullish at all

Bubble Lending Drives Chinese Manufacturing

Okay, now I'll finally admit that Chinese equities have probably formed a bubble. Here's some hard evidence:

China’s manufacturing expanded at the fastest pace in 16 months in August, driven by record lending in the first half of the year, two surveys showed.
(snip)

Gains in output, orders and jobs added to evidence that Premier Wen Jiabao can meet his 8 percent growth target for the year as a stimulus package counters
falling exports.

That second snippet goes to show that Chinese data is just as subject to puffery and political manipulation as U.S. data. This unfortunate tendency is something that investors all over the world will just have to accept. Chinese investors may be nervous but I'm not. Any bursting of this bubble makes it cheaper for me to add to my FXI holdings, on the premise that China's pursuit of natural resources lays a foundation for long-term growth.

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

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.