A brand spankin' new special report is available as of right now on the Alfidi Capital main website. It's a description of a methodology for valuing a REIT ETF. It even comes with its own fully-functional valuation template that analysts can tweak to their heart's content.
I'm productive even on New Year's Eve.
Friday, December 31, 2010
Ring Out 2010
I'll make this fast so you can all go enjoy yourselves tonight.
The U.S. stock market had a good year in 2010 but that doesn't nearly make up for the fact that stocks' performance over the past decade has been the worst since the (previous) Great Depression. I am fortunate that my net worth is much higher now than it was in 2000.
Bonds had a terrific year thanks to all of the artificial demand from quantitative easing. That effect is starting to backfire. Yields on the 10-year Treasury are heading back to where they were at the beginning of the year. The bloom will come off this rose thanks to out-of-control central bankers.
Real estate . . . don't even get me started. Read my blog posts for the last week or so to see the downward trend restarting.
Now you can go have your fun. Drink responsibly. Have a designated driver, call a taxi, or take mass transit. Try not to throw up on your clothing or your date.
The U.S. stock market had a good year in 2010 but that doesn't nearly make up for the fact that stocks' performance over the past decade has been the worst since the (previous) Great Depression. I am fortunate that my net worth is much higher now than it was in 2000.
Bonds had a terrific year thanks to all of the artificial demand from quantitative easing. That effect is starting to backfire. Yields on the 10-year Treasury are heading back to where they were at the beginning of the year. The bloom will come off this rose thanks to out-of-control central bankers.
Real estate . . . don't even get me started. Read my blog posts for the last week or so to see the downward trend restarting.
Now you can go have your fun. Drink responsibly. Have a designated driver, call a taxi, or take mass transit. Try not to throw up on your clothing or your date.
Thursday, December 30, 2010
Stupidity Guarantees More Crises In Finance
Stupidity isn't just confined to high-school dropouts. Think-tanks do it too. I've never heard of the TaxPayers' Alliance or Legatum Institute, but their theorists probably smoke the same jumbo-sized crack rock as the folks from our own Cato Institute. They claim global regulation causes global crises. That's cute. The problem I have with that stupidity is that the credit crunch occurred in the absence of global regulation. What is it with Right-Libertarians? I used to drift that way myself until I realized the real world was nothing like Ayn Rand's fiction.
More stupidity will like this will bring on another crisis. We're already well on our way there. Europe hasn't learned a thing from watching the PIIGS flirt with disaster. U.S. policymakers haven't learned that housing prices need to drop further for market equilibrium to take hold. Global investors haven't learned that their risk appetites are being stoked by the Federal Reserve's quantitative easing.
Here's a learning point for the rest of us. Europe and other established economies may be on the ropes for a while, depressing their equity markets. The iShares MSCI EAFE ETF is trading at a P/E of about 12 thanks to European trouble. That's a lot cheaper than some other index-based products right now.
Full disclosure: Short cash-covered puts under EFA.
More stupidity will like this will bring on another crisis. We're already well on our way there. Europe hasn't learned a thing from watching the PIIGS flirt with disaster. U.S. policymakers haven't learned that housing prices need to drop further for market equilibrium to take hold. Global investors haven't learned that their risk appetites are being stoked by the Federal Reserve's quantitative easing.
Here's a learning point for the rest of us. Europe and other established economies may be on the ropes for a while, depressing their equity markets. The iShares MSCI EAFE ETF is trading at a P/E of about 12 thanks to European trouble. That's a lot cheaper than some other index-based products right now.
Full disclosure: Short cash-covered puts under EFA.
Wednesday, December 29, 2010
Spiking Bond Yields Will Accelerate Housing Double-Dip
These things all feed each other. When our foreign creditors show insufficient appetite for our bonds, yields climb:
When yields rise, home mortgages get more expensive. Floating-rate ARMs get more costly to service. Homeowners lose equity faster. Foreclosures, forced sales, and abandonment follow. The market-clearing price for homes will sink:
Those of you who bought houses as rental properties in 2010 made mistakes only if you went into debt. That debt will be hard to service as deflation puts a ceiling on prevailing rents.
Oh, before I forget, let's note that China is reducing its export quotas for rare earth metals. This has nothing to do with the above, but everything to do with the gradual shift in prosperity from the Anglo-West to the East. Tesla Motors will have a very hard time getting lithium for its batteries unless it digs its own mine in Afghanistan.
Treasury market yields rose Tuesday after the government’s sale of $35 billion in new five-year notes drew weak demand. The annualized yield on the notes was 2.15%, the highest market yield on five-year securities since June and up from the rate of 2.04% on Monday on previously issued five-year notes.
When yields rise, home mortgages get more expensive. Floating-rate ARMs get more costly to service. Homeowners lose equity faster. Foreclosures, forced sales, and abandonment follow. The market-clearing price for homes will sink:
Housing markets have taken a turn for the worse, with the widely followed S&P/Case-Shiller index declining more than analysts had forecast in October, lending credence to the housing bears who have predicted a double dip.
Those of you who bought houses as rental properties in 2010 made mistakes only if you went into debt. That debt will be hard to service as deflation puts a ceiling on prevailing rents.
Oh, before I forget, let's note that China is reducing its export quotas for rare earth metals. This has nothing to do with the above, but everything to do with the gradual shift in prosperity from the Anglo-West to the East. Tesla Motors will have a very hard time getting lithium for its batteries unless it digs its own mine in Afghanistan.
The Haiku of Finance for 12/29/10
Holiday shoppers
Spent all of their cash, went broke
Golden years are gone
Spent all of their cash, went broke
Golden years are gone
Tuesday, December 28, 2010
Chinese Underground Lenders Signal Frothy Top
America had its freewheeling mortgage brokers during the housing bubble. Those generators of unregulated, undocumentable mortgages catapulted the U.S. housing market over a cliff. China now has something comparable with legions of underground lenders serving small businesses:
You would think China's larger banks would take this as an opportunity to develop a market for commercial paper. Lack of such a development illustrates the immaturity of fixed income trading in emerging markets. Investors drawn to emerging market bonds need to take heed.
I'll take this as a sign of an approaching top for China's own bubble.
Full disclosure; Long FXI with covered calls and cash-covered short puts.
Second-quarter figures from the Wenzhou branch of the People's Bank of China showed that 89 percent of local people and nearly 57 percent of enterprises had either borrowed from or made deposits at non-bank finance companies.
You would think China's larger banks would take this as an opportunity to develop a market for commercial paper. Lack of such a development illustrates the immaturity of fixed income trading in emerging markets. Investors drawn to emerging market bonds need to take heed.
I'll take this as a sign of an approaching top for China's own bubble.
Full disclosure; Long FXI with covered calls and cash-covered short puts.
YRCW New Counsel Notable For CEO Stint
YRC Worldwide hired a former CEO as its general counsel. It touts his background in external affairs as a nod to the cooperation they'll need from creditors in recapitalizing YRCW's balance sheet. A deeper reading of this is that his experience merging Embarq into CenturyTel may come in handy if YRCW is secretly looking for an acquirer. Embarq was Sprint Nextel's local phone service, carrying data traffic over local private line switches. That sounds almost like the telecom equivalent of an LTL trucker.
Speculation means nothing at this stage. Any potential suitor would face just as many financial and operational headaches as the current turnaround team. Note that one of the keys to CenturyTel's acquisition of Embarq was its agreement to assume $5.8B of the target's debt. It is not clear whether Arkansas Best or Con-Way or some other suitor would be so willing to save YRCW.
Full disclosure: No positions in YRCW, ABFS, or CNW at this time.
Speculation means nothing at this stage. Any potential suitor would face just as many financial and operational headaches as the current turnaround team. Note that one of the keys to CenturyTel's acquisition of Embarq was its agreement to assume $5.8B of the target's debt. It is not clear whether Arkansas Best or Con-Way or some other suitor would be so willing to save YRCW.
Full disclosure: No positions in YRCW, ABFS, or CNW at this time.
Monday, December 27, 2010
Newsreel for 12/17/10
Let's see what I missed by not watching television.
Japan's draft fiscal budget leaves economists unimpressed. Mainstream analysts are looking for signs that governments are serious about implementing austerity measures. Keep looking, folks. We won't see seriousness anywhere for a while.
Ireland nationalizes Allied Irish Banks. It had to be absorbed even after it needed billions in government support. The U.S. flirted with nationalizing Fannie and Freddie but chose half measures instead. More debt cannot cure insolvency.
The Asian verdict on China's interest rate increase is mixed. I was too quick to note that the Chinese stock market initially showed a positive reaction to the rate increase, as it finished down 1.9%. This supports the traditional theory that rising interest rates present a more challenging environment for equities.
Rising oil prices baffle economists. This bafflement doesn't prevent leading investment firms from forecasting further price increases. Good investors don't bother with forecasting. Knowing the unknowable is impossible. Commodity prices move randomly over the long term (one year or more) and oil is no exception. Peak Cheap Oil is probably more of a factor here than interest rates.
Regulators warn that IT risk systems are still weak. They will always be imperfect. The complexity of the products and indicators they track makes them vulnerable to Black Swans. Human managers can always override risk protocols if that what the boss wants. A better solution is to keep investment products simple and prevent sales managers from dictating results to analysts.
I'm still not interested in watching television. I didn't miss anything important.
Japan's draft fiscal budget leaves economists unimpressed. Mainstream analysts are looking for signs that governments are serious about implementing austerity measures. Keep looking, folks. We won't see seriousness anywhere for a while.
Ireland nationalizes Allied Irish Banks. It had to be absorbed even after it needed billions in government support. The U.S. flirted with nationalizing Fannie and Freddie but chose half measures instead. More debt cannot cure insolvency.
The Asian verdict on China's interest rate increase is mixed. I was too quick to note that the Chinese stock market initially showed a positive reaction to the rate increase, as it finished down 1.9%. This supports the traditional theory that rising interest rates present a more challenging environment for equities.
Rising oil prices baffle economists. This bafflement doesn't prevent leading investment firms from forecasting further price increases. Good investors don't bother with forecasting. Knowing the unknowable is impossible. Commodity prices move randomly over the long term (one year or more) and oil is no exception. Peak Cheap Oil is probably more of a factor here than interest rates.
Regulators warn that IT risk systems are still weak. They will always be imperfect. The complexity of the products and indicators they track makes them vulnerable to Black Swans. Human managers can always override risk protocols if that what the boss wants. A better solution is to keep investment products simple and prevent sales managers from dictating results to analysts.
I'm still not interested in watching television. I didn't miss anything important.
The Haiku of Finance for 12/27/10
I fight corruption
Those who defraud and deceive
Shall be defeated
Those who defraud and deceive
Shall be defeated
Did Baby Boomers Trade Retirement For Christmas?
We've heard this refrain before. Americans approaching their golden years haven't saved for retirement:
This season's retail results may indicate why this is so. Shoppers are still very willing to part with their hard-earned money:
I would love to see a generational breakdown of this year's shopoholics. Did the Baby Boomers neglect their IRA contributions so they could have a glorious Christmas? Did the Sixties' hippie kids keep on "living for today" right through tomorrow and the next day? Did they spend all that they would earn tomorrow so that they could have today? I know, that last sentence is a reference to an oft-heard line about sacrifice, but in this context it is an apt description of sacrifice through delayed gratification that did not occur at all.
Entitlement can mean many things. It can mean an expectation that Social Security and Medicare are fully collateralized insurance plans when they are in fact unfunded liabilities. It can mean an expectation of ever-expanding material acquisitions with no regard for payment. If entitlement means all of those things, it ultimately means insolvency.
Old habits, acquired long ago and repeatedly reinforced, can prove very hard to break. Unbroken habits will break us all financially. Merry Christmas.
Nota bene: The author is a member of Generation X.
Through a combination of procrastination and bad timing, many baby boomers are facing a personal finance disaster just as they're hoping to retire. Starting in January, more than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years.
This season's retail results may indicate why this is so. Shoppers are still very willing to part with their hard-earned money:
Forget the returns line. People hit the stores after Christmas to buy, indulging the rediscovered retail appetite that may have made 2010's holiday shopping season the biggest ever.
I would love to see a generational breakdown of this year's shopoholics. Did the Baby Boomers neglect their IRA contributions so they could have a glorious Christmas? Did the Sixties' hippie kids keep on "living for today" right through tomorrow and the next day? Did they spend all that they would earn tomorrow so that they could have today? I know, that last sentence is a reference to an oft-heard line about sacrifice, but in this context it is an apt description of sacrifice through delayed gratification that did not occur at all.
Entitlement can mean many things. It can mean an expectation that Social Security and Medicare are fully collateralized insurance plans when they are in fact unfunded liabilities. It can mean an expectation of ever-expanding material acquisitions with no regard for payment. If entitlement means all of those things, it ultimately means insolvency.
Old habits, acquired long ago and repeatedly reinforced, can prove very hard to break. Unbroken habits will break us all financially. Merry Christmas.
Nota bene: The author is a member of Generation X.
Comparing PCYC and VVUS
A guy goes into a pharmacist and asks for a painkiller recommendation. When the pharmacist asks him where it hurts, the guy says, "My portfolio! I'm thinking about researching drug stocks."
Okay, that was a bad joke. Pharmacists analyze drug prescriptions, not drug stocks. Alfidi Capital doesn't profess drug expertise, but there are pharmaceutical firms in the San Francisco Bay Area whose financial statements are available for review.
Pharmacyclics (PCYC) makes drugs that treat lymphomas and cancerous tumors. Their ROE this year was a stunningly negative 42%, but this is actually an improvement from their five-year average ROE of negative 81%. PCYC has shown three straight years of improvement in net income, although it is still negative and exceeding total revenue. The firm has over $70mm in current assets on hand as of this past September, which is probably enough to survive another three years assuming they can stabilize their net losses and properly manage their balance sheet.
VIVUS (VVUS) makes therapeutic treatments for obesity, diabetes, and other difficulties. Their current year ROE is slightly worse than PCYC's at negative 43% but shows no comparable improvement. Indeed, VVUS's five-year ROE is over negative 29%. Their annual net losses increased massively by 22x from 2007-2009, apparently due to a 50% drop in gross revenue starting in 2008 and a large increase in R&D spending. VIVUS does deserve credit for holding large amounts of short term investments and keeping its long term debt low.
These two stocks are not the right fit for my own investment philosophy but investors with specific knowledge of drug research may wish to review their product lines and market positions. Small pharmaceutical companies are difficult to analyze without an intimate knowledge of biology, chemistry, and the FDA approval process. The best that other investors and analysts can do is review their financial statements.
Full disclosure: No position in PCYC or VVUS.
Okay, that was a bad joke. Pharmacists analyze drug prescriptions, not drug stocks. Alfidi Capital doesn't profess drug expertise, but there are pharmaceutical firms in the San Francisco Bay Area whose financial statements are available for review.
Pharmacyclics (PCYC) makes drugs that treat lymphomas and cancerous tumors. Their ROE this year was a stunningly negative 42%, but this is actually an improvement from their five-year average ROE of negative 81%. PCYC has shown three straight years of improvement in net income, although it is still negative and exceeding total revenue. The firm has over $70mm in current assets on hand as of this past September, which is probably enough to survive another three years assuming they can stabilize their net losses and properly manage their balance sheet.
VIVUS (VVUS) makes therapeutic treatments for obesity, diabetes, and other difficulties. Their current year ROE is slightly worse than PCYC's at negative 43% but shows no comparable improvement. Indeed, VVUS's five-year ROE is over negative 29%. Their annual net losses increased massively by 22x from 2007-2009, apparently due to a 50% drop in gross revenue starting in 2008 and a large increase in R&D spending. VIVUS does deserve credit for holding large amounts of short term investments and keeping its long term debt low.
These two stocks are not the right fit for my own investment philosophy but investors with specific knowledge of drug research may wish to review their product lines and market positions. Small pharmaceutical companies are difficult to analyze without an intimate knowledge of biology, chemistry, and the FDA approval process. The best that other investors and analysts can do is review their financial statements.
Full disclosure: No position in PCYC or VVUS.
Sunday, December 26, 2010
Rich Is A Quarter Million Annual Income
Right now I'm listening to the weekend edition of Marketplace on NPR. There's a lot of discussion on the mentality of the wealthy. Many rich folks don't seem to think they're rich, even if they're centimillionaires. That's funny. I would definitely think of myself as rich if I reported that kind of adjusted gross income on my IRS Form 1040. I'll go with the argument that a $250,000 annual income qualifies an American as rich.
Pundits spent a lot of bandwith defending extension of the previous Administration's tax cuts. The focus was on redefining wealth upward to portray quarter-million incomes as non-rich. The meme won thanks to help from mass email lists and the blogosphere.
The Census has a detailed breakdown of thresholds for relative affluence based on educational attainment. The data for holders of master's degrees imply that I'm affluent. I'll buy that. The odd part is that the people I meet at the San Francisco Opera probably consider me to be unworthy of being affluent. I'll buy that too. I'll also buy their real estate out from under them when deflation wipes out their bond portfolios and hyperinflation leaves them too illiquid to pay their bills.
Pundits spent a lot of bandwith defending extension of the previous Administration's tax cuts. The focus was on redefining wealth upward to portray quarter-million incomes as non-rich. The meme won thanks to help from mass email lists and the blogosphere.
The Census has a detailed breakdown of thresholds for relative affluence based on educational attainment. The data for holders of master's degrees imply that I'm affluent. I'll buy that. The odd part is that the people I meet at the San Francisco Opera probably consider me to be unworthy of being affluent. I'll buy that too. I'll also buy their real estate out from under them when deflation wipes out their bond portfolios and hyperinflation leaves them too illiquid to pay their bills.
China Prepares To Fight Inflation
China has learned appropriate lessons from America's real estate bubble. It is preparing a tighter monetary policy to avoid wrecking its economy:
Normally, raising interest rates is bad for stocks. It increases companies' borrowing costs and tempts them to pay higher dividends to keep their earnings yields competitive with new bond issues. China's stock market is reacting much more positively to this news than theory would allow:
Chinese stocks like the news because it signals that the government is committed to smart growth policies. It also means the yuan will be more valuable, signaling to the currency markets that China will indeed let the yuan appreciate on its own terms.
Will the U.S. follow suit with interest rate increases? It's doubtful. The U.S. needs a weaker dollar to keep its exports attractively priced. That plus credit availability are supposed to keep GDP growth from stalling here. The U.S. is unable to accept a sharp downturn as the bitter medicine for asset bubbles. It may be forced upon us anyway.
Full disclosure: Long FXI with covered calls and cash-covered short puts.
The People’s Bank of China increased key one-year lending and deposit rates by 25 basis points on Christmas Day in its second move since mid-October. The change took effect yesterday.
Normally, raising interest rates is bad for stocks. It increases companies' borrowing costs and tempts them to pay higher dividends to keep their earnings yields competitive with new bond issues. China's stock market is reacting much more positively to this news than theory would allow:
China’s stocks rose and yuan forwards climbed to the highest level in five weeks after the central bank increased interest rates for a second time since October, bolstering speculation inflation will be contained.
Chinese stocks like the news because it signals that the government is committed to smart growth policies. It also means the yuan will be more valuable, signaling to the currency markets that China will indeed let the yuan appreciate on its own terms.
Will the U.S. follow suit with interest rate increases? It's doubtful. The U.S. needs a weaker dollar to keep its exports attractively priced. That plus credit availability are supposed to keep GDP growth from stalling here. The U.S. is unable to accept a sharp downturn as the bitter medicine for asset bubbles. It may be forced upon us anyway.
Full disclosure: Long FXI with covered calls and cash-covered short puts.
Goldman Sachs Gets Smart On Bonuses
I've had my fair share of skeptical things to say about big firms like Goldman Sachs, but I do take note when they do something right. Goldman is going to make a greater effort to tie compensation to performance:
The good news is that top executives will have their fate tied more closely to the long-term health of the firm, so closing some big deals one year won't have an outsized impact. The bad news is that this kind of structure tempts executives to play games with reported earnings and leverage that can skew compensation upward. Please, Goldmanites, don't wreck your balance sheet just to shoehorn an extra dime into your deferred compensation account.
The investment bank, based in New York, said in a regulatory filing this week that bonuses will be linked to financial benchmarks that might include return on equity, earnings, or the price of Goldman's stock or other securities issued by the company.
The good news is that top executives will have their fate tied more closely to the long-term health of the firm, so closing some big deals one year won't have an outsized impact. The bad news is that this kind of structure tempts executives to play games with reported earnings and leverage that can skew compensation upward. Please, Goldmanites, don't wreck your balance sheet just to shoehorn an extra dime into your deferred compensation account.
The Limerick of Finance for 12/26/10
Holiday shopping went well
Retailers had plenty to sell
Spending cash is such fun
And when it's all done
After-holiday deals ring a bell
Retailers had plenty to sell
Spending cash is such fun
And when it's all done
After-holiday deals ring a bell
RIP Roy Neuberger
It's rare to see passion for the arts and finance combined in a single human life. Roy Neuberger, founder of investment firm Neuberger Berman, lived such a life. Mr. Neuberger passed away recently at the age of 107.
I honor him for achieving his stated life goal of using a finance career to promote the arts. Too many investment professionals get those priorities reversed, using connections in the arts community merely to further their own pecuniary interests. He was fortunate to begin his career with substantial wealth, and lucky enough to preserve it through the Great Depression. Luck is an inescapable part of all success. That luck later enabled him to support the work of countless artists.
Good job, Mr. Neuberger.
I honor him for achieving his stated life goal of using a finance career to promote the arts. Too many investment professionals get those priorities reversed, using connections in the arts community merely to further their own pecuniary interests. He was fortunate to begin his career with substantial wealth, and lucky enough to preserve it through the Great Depression. Luck is an inescapable part of all success. That luck later enabled him to support the work of countless artists.
Good job, Mr. Neuberger.
Saturday, December 25, 2010
Christmas Geese And Black Swans
Christmas has come but I'm not sure if the geese have gotten fat. The old nursery rhyme at that link is a comforting reminder of simpler times and timeless values. When the holiday ends, the real world returns. What surprises could be in store for us?
State and local finance troubles can sink the municipal bond market. This subject is getting beaten to death. A "bond market collapse" does not mean funding will be permanently unavailable to governments that need it. It does mean that interest rates will be much higher for solvent governments when bond investors freak out at municipal bankruptcies.
The PIIGS can still cause more trouble for Europe. The EU's critical constitutional weakness is its reliance upon the sovereign authority of its constituent nations to raise taxes. A truly continental budget would allow the EU to issue its own debt as raise taxes to fund things like debt bailouts. Lack of that mechanism means the EU will need outside help if Portugal and Spain can't pay bondholders. If the IMF can't help, China shows every willingness to step into the breach. This is a convenient window for China to diversify away from the U.S. dollar.
Real estate foreclosures could send the banking sector back into a tailspin. Mortgage-relief programs aren't working out very well for many participants. Healthy retail sales are helping commercial property owners collect rents right now, but it's hard to say how much of those sales are just future demand pulled forward. Try sustaining this spending splurge with structural unemployment staying high for the forseeable future.
The Sun could go supernova. Hey, you never know. Gotta cover all the bases.
The events mentioned above may not come to pass. Black swan disasters can have six-sigma probabilities, but they can still happen in an investor's lifetime. Risk management techniques abound. Muni bond risk can be hedged with credit default swaps (for large holdings from single issuers) or with options on a muni bond ETF. Risk of a euro collapse can be mitigated by holding multiple currencies. Real estate exposure is harder to hedge; REIT ETFs are optionable but the best tools are nonrecourse mortgages and free-and-clear ownership. I know of no hedges against supernovas, so perhaps one of my super-intelligent readers can invent a working starship affordable for the average family.
State and local finance troubles can sink the municipal bond market. This subject is getting beaten to death. A "bond market collapse" does not mean funding will be permanently unavailable to governments that need it. It does mean that interest rates will be much higher for solvent governments when bond investors freak out at municipal bankruptcies.
The PIIGS can still cause more trouble for Europe. The EU's critical constitutional weakness is its reliance upon the sovereign authority of its constituent nations to raise taxes. A truly continental budget would allow the EU to issue its own debt as raise taxes to fund things like debt bailouts. Lack of that mechanism means the EU will need outside help if Portugal and Spain can't pay bondholders. If the IMF can't help, China shows every willingness to step into the breach. This is a convenient window for China to diversify away from the U.S. dollar.
Real estate foreclosures could send the banking sector back into a tailspin. Mortgage-relief programs aren't working out very well for many participants. Healthy retail sales are helping commercial property owners collect rents right now, but it's hard to say how much of those sales are just future demand pulled forward. Try sustaining this spending splurge with structural unemployment staying high for the forseeable future.
The Sun could go supernova. Hey, you never know. Gotta cover all the bases.
The events mentioned above may not come to pass. Black swan disasters can have six-sigma probabilities, but they can still happen in an investor's lifetime. Risk management techniques abound. Muni bond risk can be hedged with credit default swaps (for large holdings from single issuers) or with options on a muni bond ETF. Risk of a euro collapse can be mitigated by holding multiple currencies. Real estate exposure is harder to hedge; REIT ETFs are optionable but the best tools are nonrecourse mortgages and free-and-clear ownership. I know of no hedges against supernovas, so perhaps one of my super-intelligent readers can invent a working starship affordable for the average family.
The Haiku of Finance for 12/25/10
Mystery shoppers
Do they track retail spending?
There's a lot to see
Do they track retail spending?
There's a lot to see
Friday, December 24, 2010
Shoppers Made Christmas Worthwhile
Congratulations to the American consumer. You've truly outdone yourselves:
Never mind that real unemployment is over 20% and largely structural now. Never mind that home prices will have to drop by another 23% or so to revert to their historical mean. Never mind any of that. It's time to party like it was 1999, when American civilization was probably at its apogee. Maybe Americans deserve one final blowoff before the economy heads back down into the gutter. Everyone needs some kind of Golden Age they can refer to in their memories.
Shoppers came back in force for the holidays, right to the end. After two dreary years, Christmas 2010 will go down as the holiday Americans rediscovered how much they like to shop.
Never mind that real unemployment is over 20% and largely structural now. Never mind that home prices will have to drop by another 23% or so to revert to their historical mean. Never mind any of that. It's time to party like it was 1999, when American civilization was probably at its apogee. Maybe Americans deserve one final blowoff before the economy heads back down into the gutter. Everyone needs some kind of Golden Age they can refer to in their memories.
Thursday, December 23, 2010
Saudia Arabia's Fiscal Reality
The Saudi government is basing its fiscal budget for 2011 on a world oil price of about US$50/bbl, which is more than a third lower than the current market price of US$90/bbl. It is now drawing on reserve funds and deficit spending to keep its multi-year US$400 billion infrastructure improvement program on track.
Saudi Arabia is very concerned about its ability to sustain its infrastructure projects in the face of both slackening oil demand (from a possible global recession) and constrained supply (from reservoir depletion). Despite Saudi Aramco spending $100 billion on improvements in production capacity to 12 million bbls/day, average daily output in 2009 fell by 11%. This inability to raise production may be more a function of dwindling reserves than insufficient infrastructure. They may be throwing good money after bad in the face of Peak Oil, much as Dubai did.
Wednesday, December 22, 2010
YRC Worldwide Asks For Stay Of Execution
YRC Worldwide is looking for a way out of a death spiral debt trap. Its creditors are giving it a little slack, but other stakeholders may not be so understanding:
I have to hand it to YRCW's management. They manage to stave off one short-term disaster after another. The Teamsters are a different story. The new creditors' agreement may embolden them to ask for accelerated reinstatement of the pension plan contributions they surrendered.
Recapitalizing a balance sheet involves writing down debt and/or injecting equity. Forget about the debt writedowns; creditors extended the payment timeline with the expectation that their positions won't be written down at all. That leaves YRCW with a need for more equity in Q1 of 2011. Hmmm, they just went through a reverse split to raise their share price past the de-listing threshold, so issuing more shares means dilution. They'll be right back in the NASDAQ de-listing queue with that move.
I still don't see a happy ending for this company, but comatose patients have been known to hang on for years before either reviving or expiring. I am not aware of any coma patient who could revive while a cancer was eating away inside them. YRCW's cancer is its unionized workforce. It is time to cut them out to ensure survival.
Nota bene: No position in YRCW. I know that's difficult for you Teamsters to comprehend, but you folks can't operate at my intellectual level anyway. I really only write for smart people.
YRC Worldwide is asking the Teamsters union and pension fund managers for more time to restructure the trucking company’s troubled balance sheet.
I have to hand it to YRCW's management. They manage to stave off one short-term disaster after another. The Teamsters are a different story. The new creditors' agreement may embolden them to ask for accelerated reinstatement of the pension plan contributions they surrendered.
Recapitalizing a balance sheet involves writing down debt and/or injecting equity. Forget about the debt writedowns; creditors extended the payment timeline with the expectation that their positions won't be written down at all. That leaves YRCW with a need for more equity in Q1 of 2011. Hmmm, they just went through a reverse split to raise their share price past the de-listing threshold, so issuing more shares means dilution. They'll be right back in the NASDAQ de-listing queue with that move.
I still don't see a happy ending for this company, but comatose patients have been known to hang on for years before either reviving or expiring. I am not aware of any coma patient who could revive while a cancer was eating away inside them. YRCW's cancer is its unionized workforce. It is time to cut them out to ensure survival.
Nota bene: No position in YRCW. I know that's difficult for you Teamsters to comprehend, but you folks can't operate at my intellectual level anyway. I really only write for smart people.
Tuesday, December 21, 2010
Monday, December 20, 2010
Updating The Alpha-D For Dec. 2010
Can you guess what changes I've made this month? Don't worry, I won't make you do that. I'll spell them out.
First, my entire TDW position got called away when it went through the strike price. I bought them all back in a wash sale (albeit at a slightly higher price then the called-away price). That's the risk I take with writing covered calls on a stock I'll hold forever. I renewed my short-term covered calls on TDW and even sold some cash-covered puts under the position. TDW is one stock I'm counting on to deliver long-term returns during Peak Oil.
My covered calls and short puts with GDX and FXI all expired, so of course I renewed them all. Gold and China are my way of hedging the eventual collapse of the U.S. dollar and so far they're doing fine.
I sold more cash-covered puts under EFA. The P/E of 12 still looks good to me. I'll go long when Mr. Market decides to capitulate on the rest of the world outside the U.S.
My long puts on LMT and IYR will expire next month. I set them to hedge against the re-bubble in housing and the mega-bubble in the defense/aerospace sector. Neither of those bubbles has popped yet. If they expire worthless I'll net them as tax losses.
My option sales gave me some cash. I don't like sitting on cash, so I put some of it to work in a CD and a few T-Bills. Yeah, that extra buck fifty in yield will put me right up there on the Forbes 400 some day.
Finally, I've made no moves on KEX, FLIR, SCHW, or other stocks I've been watching since mid-2009. They're great companies but they're just not on sale yet. I'll wait.
First, my entire TDW position got called away when it went through the strike price. I bought them all back in a wash sale (albeit at a slightly higher price then the called-away price). That's the risk I take with writing covered calls on a stock I'll hold forever. I renewed my short-term covered calls on TDW and even sold some cash-covered puts under the position. TDW is one stock I'm counting on to deliver long-term returns during Peak Oil.
My covered calls and short puts with GDX and FXI all expired, so of course I renewed them all. Gold and China are my way of hedging the eventual collapse of the U.S. dollar and so far they're doing fine.
I sold more cash-covered puts under EFA. The P/E of 12 still looks good to me. I'll go long when Mr. Market decides to capitulate on the rest of the world outside the U.S.
My long puts on LMT and IYR will expire next month. I set them to hedge against the re-bubble in housing and the mega-bubble in the defense/aerospace sector. Neither of those bubbles has popped yet. If they expire worthless I'll net them as tax losses.
My option sales gave me some cash. I don't like sitting on cash, so I put some of it to work in a CD and a few T-Bills. Yeah, that extra buck fifty in yield will put me right up there on the Forbes 400 some day.
Finally, I've made no moves on KEX, FLIR, SCHW, or other stocks I've been watching since mid-2009. They're great companies but they're just not on sale yet. I'll wait.
Sunday, December 19, 2010
The Limerick of Finance for 12/19/10
Risky stocks have so far gained the most
High performance is what they all boast
But with their junk debt
They're a poor long term bet
The next slowdown will make them all toast
High performance is what they all boast
But with their junk debt
They're a poor long term bet
The next slowdown will make them all toast
EU Seeks Permanent Solutions To Temporary Problems
Government tends toward overkill in the service of an imperative to "do something" about problems that have natural solutions. One case in point is the EU's search for a way to prevent future sovereign debt explosions:
Solutions in search of a problem don't fund themselves. They require a demonstrable commitment of other people's money:
Ten billion euros is a drop in the bucket but it sets a precedent for more. The ECB can always follow the Fed's lead and just print away Europe's debts. Alternatively, we can all let sanity reign and allow bankrupt states to go bankrupt and wipe out their bondholders. That's my solution. It won't happen.
European Union leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 as they struggled to bridge divisions over immediate steps to stabilize bond markets.
Solutions in search of a problem don't fund themselves. They require a demonstrable commitment of other people's money:
The ECB, in charge of monetary policy in the 16-nation euro area, said it would almost double its capital to 10.76 billion euros to cope with bigger credit risk and market volatility. Euro zone members will provide the increase.
Ten billion euros is a drop in the bucket but it sets a precedent for more. The ECB can always follow the Fed's lead and just print away Europe's debts. Alternatively, we can all let sanity reign and allow bankrupt states to go bankrupt and wipe out their bondholders. That's my solution. It won't happen.
Saturday, December 18, 2010
YRCW Breathes Easier After Lawsuit
Troubled YRC Worldwide got an early Christmas present from the courts:
Of course, this does not mean YRCW will survive in 2011 or even turn a profit. Note the Teamsters' apparent desire for an outsider to buy YRCW and save a lot of union jobs. Unions will try tactics like lawfare and corporate subterfuge when they're stuck with accepting concessions.
Full disclosure: No position in YRCW.
A federal judge on Thursday dismissed a lawsuit ABF Freight System filed against rival trucker YRC Worldwide and the Teamsters aimed at blocking a labor agreement central to YRC’s survival.
Of course, this does not mean YRCW will survive in 2011 or even turn a profit. Note the Teamsters' apparent desire for an outsider to buy YRCW and save a lot of union jobs. Unions will try tactics like lawfare and corporate subterfuge when they're stuck with accepting concessions.
Full disclosure: No position in YRCW.
Wednesday, December 15, 2010
You And BS Dress Code Hilarity
I couldn't pass this one up:
The spoiled brats and trust fund babies running You and BS think a detailed dress code can make up for years of poor strategy and illegal tax advice. Flesh-colored pantyhose would make the perfect stocking stuffer for a certain Victoria's Secret beach bunny manager type I used to know when I worked there. Good luck getting senior managers to give up cuff links.
I used to work in one of their San Francisco offices several years ago. The rich preppies running the show despised my honesty and competence. They thought I was a joke. Actually, their dress code is the real joke.
Nota bene: I have no position in UBS stock.
It took no fewer than 43 pages for the human resources department at the Swiss bank UBS AG to establish what bank personnel should consider acceptable corporate attire.
The spoiled brats and trust fund babies running You and BS think a detailed dress code can make up for years of poor strategy and illegal tax advice. Flesh-colored pantyhose would make the perfect stocking stuffer for a certain Victoria's Secret beach bunny manager type I used to know when I worked there. Good luck getting senior managers to give up cuff links.
I used to work in one of their San Francisco offices several years ago. The rich preppies running the show despised my honesty and competence. They thought I was a joke. Actually, their dress code is the real joke.
Nota bene: I have no position in UBS stock.
Sunday, December 12, 2010
The Limerick of Finance for 12/12/10
An MBA is a mistake
It's one many workers will make
It's not worth a dime
So don't waste your time
Throw that diploma in a lake
It's one many workers will make
It's not worth a dime
So don't waste your time
Throw that diploma in a lake
Friday, December 10, 2010
Thursday, December 09, 2010
Smart Transportation Planners Wanted
There is intelligent life in Washington D.C. after all. The Bipartisan Policy Center is calling for an overhaul of how our government plans its transportation spending. The short version of a long story is that lack of comprehensive national planning leaves us with a patchy network unsuitable for a superpower.
Improvement would be welcome news. It would put an end to local nonsense thwarting the kind of national integration that global industry likes to see. There is too much of such nonsense today with state governors turning down money for passenger rail lines that would help them build development around sustainable communities. Shortsighted local politicians have no idea how much their communities will hurt when Peak Oil arrives and they missed the chance to build transportation systems to mitigate its impact.
Nobody likes kinks or hiccups in their supply chains. Corporations will deploy capital elsewhere in the world where high-speed continental movement flows seamlessly into local distribution. Politicians ignore this at their peril.
Improvement would be welcome news. It would put an end to local nonsense thwarting the kind of national integration that global industry likes to see. There is too much of such nonsense today with state governors turning down money for passenger rail lines that would help them build development around sustainable communities. Shortsighted local politicians have no idea how much their communities will hurt when Peak Oil arrives and they missed the chance to build transportation systems to mitigate its impact.
Nobody likes kinks or hiccups in their supply chains. Corporations will deploy capital elsewhere in the world where high-speed continental movement flows seamlessly into local distribution. Politicians ignore this at their peril.
Wednesday, December 08, 2010
Sovereign Debt Is Never Risk-Free
Let's get one thing straight. There is no such thing as risk-free sovereign debt. The European Union had excluded such debt from banks' capital requirements on the premise that it would never endanger a bank's balance sheet. Now we all know better.
Allow me to offer the EU a way out of its quandry on how to weight sovereign debt. Skip the reliance on rating agencies. Calculate a simple weighted formula for a given nation's bonds covering its entire existence as a sovereign state, then weight a zero value for any years in which that nation's debt was in arrears. Let's say Country X has been independent for 100 years. If it defaulted in 1933 and recovered in 1936, that's four calendar years weighted as zero. The country's bonds thus have an expected value of 96% of their face value.
My simplistic approach lacks the sophistication of the complex models built by PhDs at credit rating agencies and investment banks. Those entities have proven themselves incompetent at assessing risk, so the Alfidi method is a clear improvement.
Allow me to offer the EU a way out of its quandry on how to weight sovereign debt. Skip the reliance on rating agencies. Calculate a simple weighted formula for a given nation's bonds covering its entire existence as a sovereign state, then weight a zero value for any years in which that nation's debt was in arrears. Let's say Country X has been independent for 100 years. If it defaulted in 1933 and recovered in 1936, that's four calendar years weighted as zero. The country's bonds thus have an expected value of 96% of their face value.
My simplistic approach lacks the sophistication of the complex models built by PhDs at credit rating agencies and investment banks. Those entities have proven themselves incompetent at assessing risk, so the Alfidi method is a clear improvement.
Tuesday, December 07, 2010
Ireland Beats U.S.
It's hard to admit that a second-rate European economy has a better grip on macroeconomic reality than the U.S. Today's headlines prove it true. The U.S. continues on a delusional course of unsustainable fiscal profligacy:
Meanwhile, Ireland bites the bullet and sits down to a cold supper of austerity:
Observers with at least half a brain can see that the reality facing Ireland will eventually face the U.S. Such observers must be found outside Washington, D.C.
The White House and Republican leaders in Congress reached a sweeping agreement Monday to extend expiring income tax cuts for two years, extend unemployment benefits and cut how much millions of workers pay in Social Security payroll taxes.
Meanwhile, Ireland bites the bullet and sits down to a cold supper of austerity:
One of the toughest budgets in the history of the State, involving substantial tax increases and welfare cuts, is expected to be approved by the Dáil today following the declaration by Independent TD Michael Lowry that he will vote for the measure.
Observers with at least half a brain can see that the reality facing Ireland will eventually face the U.S. Such observers must be found outside Washington, D.C.
Monday, December 06, 2010
Newsreel for Monday 12/06/10
Scanning today's headlines brings us gems.
A sluggish housing sector drags down the transportation sector. You know how economists have been saying that housing recoveries typically lead recoveries from recessions? Here's what we get when that doesn't happen. There's no recovery folks!
The Teamsters tried to get two underperforming truckers to merge. See what happens when unions get too much power? They try to foist disastrous strategic decisions on their employers. I have no idea why any executive team would take a Teamster proposal seriously after seeing them try a stunt like this.
Uncle Sam's DOT is sending big bucks to the states for transportation. It's too bad that most of it goes to road projects. Rail and barge traffic is much more economical and energy efficient in moving tons per mile.
The U.S. and South Korea are almost free trade partners. There is more to this deal than meets the eye. America desperately needs to prevent Asian countries from falling into China's orbit as its military supremacy wanes. Kicking open a free trade door with an Asian tiger is one way to maintain a regional foothold.
U.S. lawmakers want to continue handouts of all kinds, whether tax cuts or jobless benefits. Stupidity still grips Capitol Hill. Our nation's leaders will never wake up to the unsustainability of deficit spending. Working on Capitol Hill must be like living inside a bubble, where the unpleasant realities of the outside world never intrude.
Unemployment is finally catching up to college grads. Now a whole bunch of liberal arts grads can learn their most important lesson in life: A bachelor's degree in anything except a hard skill is worth nothing. That degree in women's studies will come in handy when you're panhandling as long as you show some cleavage.
China raises the reserve requirement for its banks. This is what we should have done with our own banks! Once again China shows the world why it is a more responsible custodian of capital. Let's see if China has the guts to allow some overleveraged banks to implode.
A sluggish housing sector drags down the transportation sector. You know how economists have been saying that housing recoveries typically lead recoveries from recessions? Here's what we get when that doesn't happen. There's no recovery folks!
The Teamsters tried to get two underperforming truckers to merge. See what happens when unions get too much power? They try to foist disastrous strategic decisions on their employers. I have no idea why any executive team would take a Teamster proposal seriously after seeing them try a stunt like this.
Uncle Sam's DOT is sending big bucks to the states for transportation. It's too bad that most of it goes to road projects. Rail and barge traffic is much more economical and energy efficient in moving tons per mile.
The U.S. and South Korea are almost free trade partners. There is more to this deal than meets the eye. America desperately needs to prevent Asian countries from falling into China's orbit as its military supremacy wanes. Kicking open a free trade door with an Asian tiger is one way to maintain a regional foothold.
U.S. lawmakers want to continue handouts of all kinds, whether tax cuts or jobless benefits. Stupidity still grips Capitol Hill. Our nation's leaders will never wake up to the unsustainability of deficit spending. Working on Capitol Hill must be like living inside a bubble, where the unpleasant realities of the outside world never intrude.
Unemployment is finally catching up to college grads. Now a whole bunch of liberal arts grads can learn their most important lesson in life: A bachelor's degree in anything except a hard skill is worth nothing. That degree in women's studies will come in handy when you're panhandling as long as you show some cleavage.
China raises the reserve requirement for its banks. This is what we should have done with our own banks! Once again China shows the world why it is a more responsible custodian of capital. Let's see if China has the guts to allow some overleveraged banks to implode.
Sunday, December 05, 2010
The Limerick of Finance for 12/05/10
Bernanke says bond buys are great
But he's got a lot on his plate
Helping bond market out
Will spark a dollar rout
Gee, Fed Board's a job I would hate
But he's got a lot on his plate
Helping bond market out
Will spark a dollar rout
Gee, Fed Board's a job I would hate
The Head-Fake Recovery of 2010
This economy is looking more and more like the early 1930s before the Great Depression really cratered people's hopes. Green shoots seem to be sprouting into another jobless recovery, like the early 2000s:
This steady drumbeat of somewhat brighter news ignores some major icebergs on the horizon. Iceberg #1 is the inability of the federal government to come to terms with its addiction to debt, as evidenced by lack of agreement on implementing austerity measures:
It's very telling that players from both parties know what must be done but cannot summon the courage to do anything. The bond market will have to do it for them.
Iceberg #2 is the massive debt burden facing local and state governments, thanks to unfundable promises:
Anyone counting on their muni bonds to provide comfortable returns in their golden years will be rudely surprised when local governments start going bankrupt. The foolishness of borrowing to fill gaps in pension funding should go without saying, but this is a new America that our founders wouldn't recognize. Someone has to point the finger. I'll gladly take on that job.
I could go on like this until the cows come home but that would be too, well . . . depressing. We'll be in for enough Depression soon enough. The great head-fake recovery of 2010, sustained by unprecedented peacetime deficit spending and the Bernanke Put under the bond market, must come to its eventual end.
Despite weeks of brighter economic news, employers still aren't hiring freely. The economy added a net total of just 39,000 jobs in November, the government said Friday.
This steady drumbeat of somewhat brighter news ignores some major icebergs on the horizon. Iceberg #1 is the inability of the federal government to come to terms with its addiction to debt, as evidenced by lack of agreement on implementing austerity measures:
Despite receiving a majority endorsement, the president’s deficit commission failed to obtain the 14 vote supermajority needed to pass its $4 trillion deficit reduction proposal as the “official” plan of the commission to Congress.
It's very telling that players from both parties know what must be done but cannot summon the courage to do anything. The bond market will have to do it for them.
Iceberg #2 is the massive debt burden facing local and state governments, thanks to unfundable promises:
But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.
Anyone counting on their muni bonds to provide comfortable returns in their golden years will be rudely surprised when local governments start going bankrupt. The foolishness of borrowing to fill gaps in pension funding should go without saying, but this is a new America that our founders wouldn't recognize. Someone has to point the finger. I'll gladly take on that job.
I could go on like this until the cows come home but that would be too, well . . . depressing. We'll be in for enough Depression soon enough. The great head-fake recovery of 2010, sustained by unprecedented peacetime deficit spending and the Bernanke Put under the bond market, must come to its eventual end.
Saturday, December 04, 2010
Friday, December 03, 2010
Unemployment Surprise Casts Doubt On Recovery
Still think the U.S. economy is recovering? Unemployment is getting worse:
Employment figures are traditionally considered a lagging indicator. Taken in conjunction with growth in the Non-Manufacturing ISM Report for November, traditional economists might interpret this collective news as typical of an early recovery. That opinion isn't justified for an economy with a 300%+ debt/GDP ratio.
The U.S. economy added fewer jobs than expected in November and the unemployment rate rose, dashing hopes that the recovery is gaining momentum.That rate rose because job growth is not keeping pace with the growth of the working-age population. In other words, not enough McJobs in retail and customer service are available to absorb the nation's cohort of liberal arts graduates.
Employment figures are traditionally considered a lagging indicator. Taken in conjunction with growth in the Non-Manufacturing ISM Report for November, traditional economists might interpret this collective news as typical of an early recovery. That opinion isn't justified for an economy with a 300%+ debt/GDP ratio.
Thursday, December 02, 2010
Wednesday, December 01, 2010
Fed's European Bailout Details Revealed
Here's confirmation of something that has leaked out in pieces for many months. The Fed's crisis backstop extended to Europe:
I'm surprised that some of the aid was in the form of revolving credit facilities. Using it to support short-term borrowing and corporate paper would be one thing, but was this support also used by European banks' prop trading desks? Inquiring minds would like to know.
Central banks also drank deeply from the well. That explains why foreign buyers of U.S. Treasuries haven't balked at buying enormous new bond issues. They know the "Bernanke Put" in the bond market has supplanted the "Greenspan Put" in equities.
The global financial elite is uniformly terrified of deflation and is willing to let the U.S. lead a headlong charge into renewed asset bubbles. How about that.
We should ask ourselves whether the Fed's new QE2 purchases will first target bond inventory at these same European banks now that the EU is fully engaged in bailing out the PIIGS. There is no reason not to anticipate a repeat Fed bailout if the EU / IMF rescue of Ireland and Greece falters.
The Federal Reserve revealed details Wednesday of trillions of dollars in emergency aid it provided to U.S. and foreign banks during the financial crisis.
I'm surprised that some of the aid was in the form of revolving credit facilities. Using it to support short-term borrowing and corporate paper would be one thing, but was this support also used by European banks' prop trading desks? Inquiring minds would like to know.
Central banks also drank deeply from the well. That explains why foreign buyers of U.S. Treasuries haven't balked at buying enormous new bond issues. They know the "Bernanke Put" in the bond market has supplanted the "Greenspan Put" in equities.
The global financial elite is uniformly terrified of deflation and is willing to let the U.S. lead a headlong charge into renewed asset bubbles. How about that.
We should ask ourselves whether the Fed's new QE2 purchases will first target bond inventory at these same European banks now that the EU is fully engaged in bailing out the PIIGS. There is no reason not to anticipate a repeat Fed bailout if the EU / IMF rescue of Ireland and Greece falters.
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