Thursday, June 30, 2011

Too Hard To Short A Levitating Bond Market

I respect Jim Rogers for his contrarian bent and his focus on finding value in Asia and commodities.  I do differ with his penchant for trying to make market timing calls.  He wants to short U.S. Treasuries.  Oooooookaaaaay.  The difficulty in working a big short bet into an investment strategy is that no matter how sound the thesis may be, it can take forever to play out given unpredictable events. 

The U.S. bond market is strong thanks to ZIRP and QE, nothing else.  Those things are the result of political decisions that can be reversed in an afternoon.  Taking a short position in an artificially manipulated environment is an easy way to lose one's shorts in the short term even if the reasons for the trade are proven sound in the long term. 

This week's European action is telling.  I had thought Greek politics were too intractable to pass austerity programs, but lo and behold they did pass some and they'll probably get their bailout after all.  I would have been on the losing side if I had bet against a resolution to this crisis.  Some hedge funds undoubtedly did bid up the CDS spreads on Greek debt.  We'll see which ones made that call by the end of the summer if some funds have to close shop. 

Shorting an entire market is hard.  Shorting an individual stock, with far fewer unknowns, is a bit easier but no less nerve-wracking if you're unprepared to lose big. 

Memo To Lagarde: Lay The Smackdown On Greece

From: Anthony Alfidi, CEO, Alfidi Capital
To: Mme. Christine Lagarde, Managing Director, IMF
Subject: Greece Talking Points

Congratulations upon your selection as Managing Director of the International Monetary Fund. Please do your best to stay out of trouble. We don't want any surprises like the one we all recently got from your predecessor.

Your first order of business is to address this whole unpleasant Greek situation. Maintaining order in the international financial markets is a precondition for the United States' continued debt financing of its unsustainable lifestyle. A Greek default would set a dangerous precedent for larger, nuclear-armed nations to start living within their internally financed means. Here are some suggested talking points you should emphasize when scolding those unruly folks in Athens (written in your voice).

- No one is allowed to leave the eurozone. It is an inviolable, nonnegotiable compact of infinite duration, just like Jehovah's covenant with the Israelites but with more money.

- Banks in my home country of France hold much of your debt. I cannot allow you to rob their CEOs of their annual bonuses by threatening to default.

- German government officials have informed me that they are willing to fund your bailout if I arrange for France to give back Alsace-Lorraine. I told them they can just walk right in and make themselves at home. Done deal! Plus cha change!

- I need you to play ball because I really like my new job at the IMF. The views from my office are great and I don't want to go back to my old job at Baker & McKenzie. Those guys were always cracking jokes about my French accent and whether I was related to Pepe Le Pew and Inspector Clouseau.

- You really must stop all of these ugly protests and riots. You did not seek proper approval for this street theatre at the last Bilderberg conference and you did not recruit the agitators from our pre-approved lists of agent provocateurs / retired intelligence operatives.

- I expect your Parliament to pass its austerity measures forthwith, like sometime this week. Do not stop at the gyro stand on the way in to work. Do not pass GO. Do not collect $200.

- In the unlikely event that you are unable to pass your austerity package, I expect you to surrender unencumbered ownership of the Acropolis to the People's Bank of China. Please ensure the title deed is legible in both Greek and Chinese, and that it is delivered to the Chinese embassy in Washington, D.C. If you can't find the embassy right away, rest assured that it will relocate to 1600 Pennsylvania Ave. soon after the effects of your default are felt across the Atlantic.

- Whatever you do, don't you dare call me a cheese-eating surrender monkey. I do not eat nearly as much cheese as the typical Francophone.

Nota bene: The above "memo" is a satire of all the key players in the Greek debt drama. It has about as much chance of being taken seriously as any Fed pronouncement that economic recovery is underway in the U.S.

Tuesday, June 28, 2011

The Haiku of Finance for 06/28/11

Monday, June 27, 2011

China Buying Into Europe May Be Attempt To Push Dollar Down

The big news this week is China's continuing big move into European debt, giving the EU a little bit more wiggle room as it makes contingency plans for Greece's probable departure.  China doesn't take actions this big without attempting to hit several targets at once.

Target one is diversification.  China has been making noise for at least a year about diversifying its foreign exchange holdings away from Treasuries.  Telegraphing such an intent for so long without following through would have harmed China's credibility in capital markets. 

Target two is the U.S. dollar's reserve status.  Buying euros must precede buying European debt.  This props the value of the euro against the U.S. dollar; indirectly, a weaker dollar makes the renminbi stronger with no need for a forced revaluation. 

Target three is U.S. foreign influence.  Forcing Europe to become beholden to Chinese capital will make Brussels think twice before committing to U.S. pet projects like expanding NATO, increasing European defense spending, or funding economic development projects in emerging markets that would otherwise compete with China's drive for resources.

China is playing its weakening hand well.  Domestic inflation is forcing it to chase yield abroad, and euro-denominated debt is the new risky trade.  Buying European debt will give it some cushion against insolvent banks and real estate projects at home, for at least as long as the European experiment in unity lasts. 

The Haiku of Finance for 06/27/11

Defense cuts looming
Still want to buy defense stocks?
Think dual-use tech

Williams Fights Energy Transfer Equity For Southern Union

Energy Transfer Equity's (ETE) bid for Southern Union (SUG) should have been a done deal when it was announced.  Some acquisition targets are just too juicy to ignore.  Now Williams (WMB) is jumping into the fray with an all-cash $39/share bid for SUG.  Merger fights make life interesting.  The benefit to SUG investors is the enhanced price discovery from competing bids.  The problem is that the boards of both ETE and SUG have already approved their merger, so now a costly proxy fight among SUG shareholders is likely. 

This action might make for a good merger arbitrage play as long as Williams doesn't withdraw its bid.  I might have more to say in a few days once I have a chance to compare all three companies' financial statements. 

Sunday, June 26, 2011

The Limerick of Finance for 06/26/11

Situation in Europe is grave
Now China comes in for the save
They'll buy bailout debt
On recovery they've bet
Europe will become China's debt slave

Saturday, June 25, 2011

Financial Brands That Should Disappear

The folks at 24/7 Wall St do a great job stirring up controversy with their annual list of familiar brands that are in danger of disappearing.  It takes guts to go out on a limb and claim that some venerable companies are on their way down the tubes.  In the spirit of the moment, let's think about why some financial brands that should have disappeared are still around. 

Merrill Lynch.  These guys were spiraling down pretty hard in late 2008 until Bank of America agreed to buy them out.  The deal made little sense for BofA; they already had a presence in wealth management and investment banking and would have been stronger had they just stayed away from Merrill Lynch.  This is where ego trumps business sense.  CEOs who want to be known for closing the biggest possible deals retain the prerogative of throwing due diligence out the window.  Way to go, BofA.  Grabbing Mother Merrill did nothing but make your TARP bailout needs grow. 

Goldman Sachs.  Do a web search on this firm and you'll see its tentacles in every business sector on the planet.  The firm is insanely profitable but the way they do business raises questions about whether the firm has a conscience.  "Vampire squid" pretty much nails it.  Warren Buffett considers GS to be a good investment precisely because its amorality enables it to be so dominant in the financial markets.  Amorality is not necessarily a recipe for immortality.  Someday their enemies list will reach a critical mass and their moles at Treasury and the SEC won't be able to save them. 

AIG.  The continued existence of this firm is a strong argument that U.S. financial markets are rigged by the government.  The firm's credit default swaps in 2008 were so radioactive that they almost single-handedly took down the economy.  Hundreds of billions in TARP assistance later and taxpayers still hasn't received a decent return on their "investment." 

Compiling this list is depressing.  These firms will probably be around for a while.  That doesn't mean I have to do business with them. 

Friday, June 24, 2011

Thursday, June 23, 2011

Fed Confirms Structural Problems But Ignores Bank Exposure

Leave it to the Fed to be last to the party.  Recall the past pronouncements of Helicopter Ben wherein he claimed things were getting better.  Well, they're not.  The Fed says the economy is slowing down and the near future will not offer improvements.  I knew this months ago.  Read my past blog posts and you'll see how far ahead I was of the Fed's own analysts. 

Given the Fed's track record of inaccurate prognostications, one must wonder whether any predictions it makes are accurate.  Right now the Fed Chairman claims a Greek default won't harm U.S. banks.  He said pretty much the same thing about the subprime mortgage crisis in 2007 and how its effects were contained from the rest of the economy.  The European Central Bank has a much more sober view of how dangerous the Greek crisis can get for banks.  U.S. money market funds heed the warning signs and scale back their exposure to European debt.  They must not be paying much attention to the Fed. 

The credit crisis is back.  It's not pretty or exciting. 

Wednesday, June 22, 2011

State Pension Plans And Hedge Funds Make Us All Miserable

Well, my evening is hereby ruined.  I was planning to have some fun watching videos of dancing cats or some such aimless baloney, but I had to go scanning financial headlines first.  It's a habit I just can't break.  Today I scanned some headlines that indicated I would be just miserable if I kept on reading.  Now I can share my misery with my readers.   

Let's read about desperate state pension fund managers drastically increasing their bets on hedge funds.  They feel compelled to roll the dice, swing for the fences, and do whatever it takes to increase their chances of meeting impossibly high discount rates that will fund future payout liabilities.  I stopped rolling my eyes long ago whenever I heard hedge fund managers spout their sales mantras of "equity returns with bond risk."  That kind of nonsense unwound many a hedge fund in the liquidity crunch of 2007-2009 and only the Fed's easy money policies saved the remainder. 

If reading about stupidity in finance doesn't make you miserable, paying higher taxes to fund it certainly will.  State and local government pension funds are so underfunded that the tax increases needed to save them will destroy taxpayers.  Let this sink in.  The extra taxes needed to maintain upper middle class lifestyles for municipal employees will eliminate the rest of the middle class within one generation. 

The easy fix is to eliminate defined benefit plans for government workers and pay out pensions that funds can support today, at sustainable levels, until they can be phased out in favor of defined contribution plans.  Nothing in government is that easy.  That means we'll do things the hard way with municipal bankruptcies, shutdowns of vital public services, and/or confiscatory levels of taxation. 

There you have it.  Now I hope you're all as miserable as I am for seeing once again just how much pain America is about to take thanks to its legions of useless professional money managers.  Misery loves company.  I also love keeping company with attractive women but there aren't any within arm's length right now.  That makes me even more miserable. 

Tuesday, June 21, 2011

The Haiku of Finance for 06/21/11

Hard choice for Europe
Let Greece and euro go bust
Or make more bad loans

Natural Gas Lights The Way To North America's Future Export Dominance

Hold your horses there, Peak Oilers.  There's plenty of hydrocarbons to go around this here North American landmass.  Record volumes of natural gas are heading to market.  Hedge funds playing this trade will get killed as long as technology makes fields easy to crack open.  Oh yeah, BTW, the abundance of cheap gas makes it a compelling opportunity for export to energy-hungry emerging markets.  The high price of oil makes this stuff look good.  Americans need to quickly get over their NIMBY bias against LNG terminals if we want to make seruous money. 

Remember when the U.S. led the world in petroleum exploration before Saudi Arabia learned how to pump?  We can have that era of dominance again with natural gas, which means we can keep the dollar as the world's reserve currency if we don't have to recycle petrodollars into U.S. Treasuries. 

Find a good pipeline play that covers Eagle Ford and other gas-rich areas.  Then watch the cash roll in while the gas flows out.  It all sounds so easy until you try it. 

Monday, June 20, 2011

Greece, Oil, And Stuff In The Headlines for 06/20/11

This week is off to a really great start.  European ministers can't agree on how to structure the next iteration of wasted money for a bankrupt Greece.  At least they provided enough breathing room for a very important no-confidence vote to take place in the Greek parliament.  That will give Germany the pretext to say "told ya so" and refuse to back a bailout.  The Group of Seven wants to get in on the action if only to go on record with bold assertions that yes, we all really must do something about this whole dreadful Greek crisis thing.  The growing danger to the world economy of daisy-chained bank implosions from a Greek default hasn't gone unnoticed by the IMF.  Nothing gets by those wily IMF wizards, except of course a massive cyberattack on its databases from an adversary with deep resources. 

The IMF isn't the only acronymic organ of nascent global governance that's suddenly gone impotent.  The IEA is asking the world's oil producers to pretty-please raise their oil output so prices can come down and the developed world can start spending its way to prosperity again.  Nice try.  Better luck next millennium.  Russia isn't about to fall in line just to save the West from insolvency.  It's too busy consolidating its stock exchanges and preventing capital flight prior to elections to take requests right now. 

The IEA can start to relax with oil futures headed down anyway thanks to decelerating GDP growth in the developed world.  The free market takes care of these things without jawboning. 

The world is in for a new golden age provided it avoids financial implosion in Europe, stagflation in the U.S., and North vs. South resource wars.  Fun times ahead!  Life just keeps getting better for everyone. 

Sunday, June 19, 2011

The Limerick of Finance for 06/19/11

Spanish workers are out on the street
Anger boils while they can't make ends meet
But the debt binge must end
Creditors aren't your friend
Europe's leaders are feeling the heat

Ancient GPS And Imperial Power Projection

Last week I attended a thought-provoking lecture at the War Memorial Veterans Building in San Francisco.  Jarom Vahai is a local military veteran who has done pioneering academic work on ancient civilizations and their technologies for terrestrial navigation.  Check out his presentation yourself (here's another version); readers can comment on his work at this blog.  The thumbnail summary of his argument is that ancient civilizations built giant structures to serve as navigational aids aligned with the Earth's curvature and astronomical markers.  These are not just showy tombs for royals.  Travelers setting off on global journeys could use pyramids and monoliths as waypoints in the same way we use global positioning system technology today.

This got me thinking about how and why the ancients would build such things.  It takes a lot of capital to build something like Stonehenge or the Pyramids at Giza.  Such public works projects are only available to societies that are already commercially successful.  Building infrastructure that is useful in launching global expeditions implies that a powerful civilization wants to go somewhere far away, on military expeditions or trade missions.  Interestingly enough, Mr. Vahai's research indicates that the alignment of an ancient civilization's pyramids correlates with whether it was primarily a commercial power or a military power.  His research also implies that some pyramids may have doubled as public works projects that could pump water (pending confirmation with more research).  That is potentially a breakthrough observation, and it actually makes sense that a civilization good at building things to enable global expansion would find multiple uses for these structures. 

A civilization that can project power beyond its borders is a global power and a force for changing human civilization.  The U.S. military uses GPS to coordinate air strikes and photo reconnaissance missions far from its shores.  Knowing where you are and where you're going is indispensable for success.  The ancients figured that out long before we came along.  It took the rest of us thousands of years to catch up. 

Friday, June 17, 2011

Europe Chooses To Ignore Greek Reality

Central bankers and financial regulators must think they're living in an alternate universe where arithmetic doesn't apply.  The EU and IMF have agreed to release loans to Greece after all, with no discernible progress towards even minimal controls on that country's profligacy.  Continental regulators are doing their part to aid and abet this insanity by ignoring the gaping holes a Greek bond default will blow in European banks.  Stress tests are nothing but meaningless finger drills. 

Europe is really pushing its luck.  These moves give the trans-Atlantic ruling elite more time to sell off their remaining insider holdings under the guise of routine diversification.  Just listen to those golden parachutes unfurling in the breeze with plenty of room to spare.  China undoubtedly watches this action with dismay, regretting its decision to go long European sovereign debt in pursuit of a political lever.  The recent cyberattacks on the IMF appear in a new light now.  Was the IMF warned to prop up European debt or else face the wrath of Asian traders and cyberwarriors?  Stay tuned for the next chapter in a centuries-old drama. 

Thursday, June 16, 2011

Something's Gotta Give In Container Sizes

One shipping company can start an industrywide trend with a push for something different, or it can doom itself with a strategic misstep.  APL Logistics is pushing ahead with plans to field more 53-foot shipping containers simply because they match well with U.S. truck configurations.  The problem is that U.S. trucks are the only leg of the global transportation system that is out of step with global container standards. 

The intermodal industry is built around the twenty-foot equivalent unit (TEU), a decades-old measure of container traffic that relates directly to the size of a standard oceangoing container.  One retailer complains that the 53-foot box makes transloading easier.  They may be a lonely voice in the sector.  Their distribution model is built around cheap Asian imports flowing from West Coast ports to East Coast markets.  There is no guarantee that model is sustainable if rising energy costs make Asian imports more expensive. 

Do longer containers pose problems for infrastructure in some places?  State highway planners will have to think of new routes for extra-long trucks.  Longer routes will add to shipping time and costs.  LTL truckers and railroads are used to the TEU standard.  Forcing them to change will force them to think about dropping some shippers as customers. 

Even APL admits that only a small part of its fleet can handle 53-foot containers.  Committing to newbuilds that can stack configurations other than the TEU will drive up per-ship costs as the shipbuilding industry adjusts to boutique requirements.  Even analysts won't be happy with this move, because they'll have to adjust their traffic calculations to equate cargo volumes carried by two different configuration standards. 

Betting against the TEU configuration is probably a bad idea.  It reminds me of the U.S.'s refusal to adopt the metric system for weights and measures, which adds to the administrative costs of foreign manufacturers who want to ship goods here.  Retailers who think their buying power will force carriers to adopt a new container standard assume the rest of the world will adjust.  The world is pricing in the end of American dominance in more ways than we know. 

Wednesday, June 15, 2011

Growing Logistics Costs Point To Margin Compression

Thank the oil speculators identified in my earlier post today for the growth in logistics costs that is outgrowing the overall economy.  If the cost of moving stuff - a big expense for any company that makes things - is rising while overall revenue growth is stagnant or falling, net income compresses.  Ceteris paribus applies but energy costs are an input to other expenses besides transportation.  The GDP growth figure is that topline revenue number for the economy. 

This is great news only for the transportation sector (one of my favorites, thank you very much).  It is very bad news for the manufacturing sector.  We are in the double-dip recession right now, and declining GDP growth will eventually hit the transportation sector too as customers curtail shipping for lack of sales.  Poor retail sales figures in May show us what's coming. 

Oil Price Speculation Confirmed By Sleepy Regulators

Our Arab "friends" were on to something when they claimed hedge funds were making life difficult for them by gambling on oil prices.  The CFTC confirms that the vast majority of investors in long futures contracts are not the end users of commodity products.  Futures contracts are great for producers who want to hedge against price swings in the stuff they produce.  Anyone else who wants in is playing games with things they don't understand.

Hedgies' attraction to commodity gambling is obvious.  Greed for yield drives their pursuit of new asset classes to churn.  One remaining question is whether or not the Fed's quantitative easing really is driving hedge funds to go long commodities, the results of which turn up in food price inflation around the world.  We'd have to somehow link incentives for banks to keep their excess capital on deposit with the Fed to increased lending to hedgies.  With those excess deposits unavailable for things like mortgage loans, are banks then forced to turn to their reliable money maker - margin to hedge funds? 

This also begs a question of what regulators plan to do with their newfound knowledge of this high-stakes gambling.  My bet is that they'll do nothing but talk.  CFTC auditors all want to work on Wall Street too, just like their SEC cousins, so excessive zeal in cracking down on speculators won't help their careers.  Nothing will change. 

Tuesday, June 14, 2011

Greece Rating Cut, And The First Domino Is Tipping

S&P just cut Greece's sovereign debt rating to triple-c, and that is not at all the kind of Triple Crown race you'd want to win.  At least the Greeks beat the other PIIGS to the bottom, so they should get a prize of some sort (maybe a Grecian urn with the ashes of their country's economy stored inside). 

This shouldn't be funny.  There's nothing funny about the coming Greek default and the chaos it will cause when it pulls down European banks that hold Greek debt.  There may be something funny about Greek chaos reducing oil prices just as certain OPEC members are preparing to raise production.  Any prop traders who recently bought CDS swaps on Greek debt or went long oil futures are going to get burned badly in short order.

The first domino in the chained collapse of European equity markets and the euro itself is about to tip over.

Monday, June 13, 2011

IMF Attack Implies National Fingerprints

A major computer security breach at the IMF begs the question of the instigator's identity.  Why, who could have done such a thing?  (I've always wanted to say that line.)  Let's run through a lineup of the most likely suspects.

China.  The Chinese have the most to gain from penetrating the IMF's databases.  They've been shopping for European debt for some time, both to seek discounted value (Greece, et alia) and to diversify away from investments in a shaky U.S. dollar.  They certainly have the computing horsepower and brainpower to pull off this kind of stunt.  Motive + Means + Opportunity = fun speculation.

Russia.  Other BRIC nations have money to spend and agendas to advance.  Some in the post-Soviet Russian establishment have never gotten over the humiliation of losing the cold War.  The IMF is a leading institution identified with the American power. 

Non-state entities.  Here's where wild cards can come into play.  Big hedge funds have plenty of computing power at their disposal.  Some hedge fund executives may just be amoral enough to authorize a little extracurricular adventure for their whiz-kid traders.  A small, tight team of computer PhDs could probably whip up a spear phishing algorithm in their spare time between arbitraging yield differentials.  The motivation is obvious.  Getting a special look at sovereign debt valuation metrics confers the ultimate inside trading advantage.  The fact that such action is illegal on so many different levels won't deter a determined hedge fund team staring redemptions in the face. 

This is all guesswork on my part.  I have no idea who did this and I condemn any such action.  Hacker shenanigans make it harder for honest investors like yours truly to operate. 

Disastrous News for Inland Shippers On The Mighty Miss.

I'm glad I sold off Tidewater (TDW) once I saw its deteriorating fundamentals.  Now here's another reason to shy away from inland shippers and offshore servicers for a while.   Recent flooding has poured so much silt into the Mississippi River channel that business Brahmins around N'awlins are asking for $95mm worth of dredging.  That kind of money is more than double the Army Corps of Engineers' entire dredging budget, but don't think of this as a potential stimulus.  Emergency dredging has "broken window fallacy" effects.  That money will have to be diverted from something else that's just as urgent while Congress is trying to keep federal spending from triggering defaults (on federal contracts, not debt service payments). 

Things are thus worse than I thought on several fronts and I'm notorious for pessimism. It's bad news for barge operators, both captive oil company fleets and independent operators like Kirby (KEX).  Barge operators can do the math on how much less cargo they can carry if drafts are maxed at 43 feet.  Shippers of bulk grain and petrochemicals will have to calculate how much extra storage space they need dockside while they wait for underutilized barges to make return trips.  Excess inventory has a carrying cost.  Maybe this is good news for certain railroads whose trestles haven't been washed away by floods. 

Full disclosure:  No positions in either stock mentioned at this time.

Sunday, June 12, 2011

The Limerick of Finance for 06/12/11

Oil fracking has led to a boom
It shows old fields still have some room
It's been used for years
With no base for health fears
Just ignore all these prophets of doom

Saturday, June 11, 2011

Trust In Banks Is Misplaced, Just Count The Ways

What's wrong with U.S. banks lately?  Plenty.  They can't stop hackers from breaking into their systems and stealing your private data.  Maybe they'd have better security if they paid their IT staff as much as their junior rainmakers.  The Fed wants to increase the number of banks who provide it with details about their capitalization.  Look for more banks to raise their campaign contributions to fight that one, especially with an election year coming.

European banks aren't any better off.  For the sake of my readers who aren't aware of European banks' exposure to Greek debt, Germany's leaders are very aware of the disastrous consequences a Greek default would have on their banks' viability.  Find a European bank whose solvency isn't threatened by sovereign debt defaults and you'll be the luckiest investor in the world, until three seconds later when some hedge fund arbitrages the alpha out of that share price. 

There are many more reasons not to trust large banks.  I've mentioned enough to give me a reason not to invest in them for now. 

Full disclosure:  No positions in bank stocks at this time. 

Thursday, June 09, 2011

The Haiku of Finance for 06/09/11

Tapping oil reserve
A really bad idea
Save it for war use

OPEC In Transition To Somewhere

OPEC is going through some kind of maturation process, or perhaps a winter of discontent, or some other metaphor for a phase of life that will probably take it to a new level of (dis)organization.  OPEC can't agree on whether to change production quotas.  History has shown that such disagreements tempt one member country to go it alone and raise production while prices remain high, in a mad dash for a revenue spike.  That won't sit well with countries whose supergiant fields are maturing (Saudi Arabia, Mexico) and not amenable to production boosts without years of new investment. 

Meanwhile, there's life left in supposedly mature North American petroleum production.  ExxonMobil has found plenty of oil in the Gulf of Mexico.  Heads up, BOEMRE, you'll have to speed up those GOM permits if the Administration is to make good on its promise to keep the U.S. out of recession.  Maybe the U.S. could join OPEC as the new swing producer if it keeps up the pace of offshore discoveries. 

The death of OPEC has been predicted for decades.  Those wily producers always manage to surprise the world with their longevity.  The only thing that can hurt the bloc is a permanent decline in oil production.  That isn't on the scene just yet. 

Wednesday, June 08, 2011

U.S. Offers To Subsidize Greek Default

It isn't enough for the U.S. government to throw money at underwater homeowners to prevent them from walking away from crushing debt burdens.  Now it feels compelled to offer a subsidy to Greece to stave off a sovereign default.  Can't we just let people and countries go bankrupt so they can start over?  Uncle Sam sure is getting nervous about something. 

It's easy to draw an inference that the European banks exposed to Greek debt are also counterparties in interest rate swaps and other deals with U.S. banks.  A Greek bond restructuring will pull down banks on both sides of the Atlantic in a cataclysmic daisy chain.  Alternatively, if Greece and other bankrupt countries leave the euro to hyperinflate their debts away, the euro's collapse would drive currency investors into the U.S. dollar.  A resurging dollar would make U.S. exports more expensive and make a double-dip recession unavoidable for the U.S. economy.

This Greek melodrama really poses a Scylla-and-Charybdis dilemma for monetary policymakers.  The Scylla of debt default can compete with the Charybdis of currency destruction to see which will do greater damage to the U.S. economy in the near future.  European bankers may be ready to throw in the towel and let Scylla devour some of Greece's bond holders in exchange for stability.  Scylla has fans on this side of the Atlantic too; U.S. leaders are openly flirting with a temporary default on U.S. financial obligations

Dear readers, we may be weeks or even days away from a replay of the credit crunch of September 2008. 

Tuesday, June 07, 2011

Stock Promoters Getting Sloppy And Getting Punished

Pump-and-dump schemes are even older than the financial markets in which they now operate.  When Schmedlap in 2000 B.C. was touting his camels in the Egyptian desert to unsuspecting tribesman, he probably embellished their stamina just a little bit.

Things haven't changed.  Pumpers touting stocks with poor prospects do the same thing.  Some firm called Wall Street PR just coughed up $382,000 to the SEC for promoting MitoPharm.  I've never heard of MitoPharm and after this news I don't want to hear about them.  Another promoter was playing games with unregistered shares of Universal Food and Beverage and as a result won't be doing anything with penny stock shares anymore.  I want nothing to do with penny stocks anyway, but those of you who do should take note of the sharks plying the waters ready to eat you alive. 

Full disclosure:  Alfidi Capital is not a "pumper" or stock promoter.  This firm does not accept any compensation from companies mentioned in its blog posts or research reports. 

Monday, June 06, 2011

Total Divestiture Of TDW

When I went long TDW over a year ao, I thought the stock was winner.  It seemed to have everything going for it, at least according to the Buffett-derived value investing criteria I use to select equities.  It had good ROE and cash flow, and management seemed to know how to add value.  All of that has changed as of this June.

TDW's earnings have fallen 79% in the most recent quarter.  Its EPS growth is now negative, along with its operating cash flow (with little hope of a turnaround).  This is very disappointing in an environment when petroleum prices are at a premium.  Long term debt has exploded from $275mm in 2010 to $700mm now.  That is a huge disappointment and a major burden to carry.  Imagine one of Tidewater's ships dragging several giant anchors through the Gulf of Mexico while underway.  That's the kind of drag on the company this new debt represents. 

Goodbye, TDW.  I've sold off my entire long holding in this stock (at a decent profit, I must admit) and unwound my covered call position.  I only wish I had sold off this stock when it was over $60.  I had considered initiating formal research coverage of TDW until I realized that its recent financial results leave too much to be desired.  I don't think I'll come back to this stock, as there are undoubtedly healthier plays in the energy and offshore services sector.

Full disclosure:  No more positions in TDW; all long equities and short calls unwound today prior to publishing this post. 

Saturday, June 04, 2011

Jobs And Stocks On The Down Trend

Stocks have been headed down for a month.  Culprits abound.  Blame the coming end of QE, which quant traders program into their algorithms as a sell event.  Blame a very weak jobs report, which should smash any statements that the economy can generate jobs from more fiscal stimulus.  Blame European difficulties in cobbling together a Greek rescue that will keep stress-tested banks from turning over. 

I was premature when I called the peak of the markets at the end of summer 2010.  I didn't miss much by keeping a big chunk of my net worth in cash since then, with some exposure to China, gold, energy services, and one merger arb play.  Calling a peak now is tempting but I've learned my lesson.  Waiting patiently for a market decline and new bottom will prove more satisfying. 

Friday, June 03, 2011

YRCW Teamsters Scrape Out Pension Contributions After All

So this is what the fuss was all about.  YRCW is still losing money and yet resumes contributions to the Teamsters' pension plan instead of focusing its cash on operations.  Contributing $21mm per quarter is a meaningful chunk of the company's current burn rate and is precisely 21% of the new capital they are supposed to arrange from restructuring their debt.  The Teamsters never took their eyes off the prize; by agreeing to a debt restructuring, they ensured they would be able to further pillage the company of cash while it continues to spiral down the tubes.  Greed wins again. 

If the company had chosen to file for bankruptcy months ago, it could have torn up that horrendous agreement with the Teamsters and start fresh with a new agreement giving them exactly zero pension contributions.  That is now a missed opportunity and YRCW's other creditors will be poorer for it. Trucking companies with their eyes open can now see exactly what happens when union members get board seats.  The unionized workforce will always put its own needs ahead of the company's, even at the risk of their employer's survival.  Heads up, Arkansas Best (ABFS) . . . you could be next.

Full disclosure:  No position in YRCW or ABFS.  I have better places to put my capital to work than in unionized companies. 

Thursday, June 02, 2011

Find The Wisdom At Wisdom Tree

The financial services sector needs innovation as much as any other part of the economy.  That's the only way to achieve growth and deliver value over the long-term.  The bad news about innovations is that many of them don't work out as intended. 

Wisdom Tree rolled out ETFs based on value-adjusted weights rather than market cap weights.  A fine idea, until the underlying fundamentals of the ETFs' constituents demand broader portfolios.  The firm recently announced major changes to the composition of several of its ETFs.  The problem with value weights is that changing economic conditions will demand more rapid changes in portfolio composition as the ETFs' holdings become even broader.  This will raise transaction costs and make these ETFs less competitive than index-based products from Vanguard, BlackRock, and other players who compete primarily on cost. 

Wisdom Tree's experiment in ETF construction is necessary.  It will run its course.

Full disclosure:  No position in any Wisdom Tree products. 

Wednesday, June 01, 2011

Too Late To Bet On Freight

I've long suspected that transportation data generates good leading indicators for the direction of the overall economy.  If the housing market's double-dip is insufficient proof that the U.S. economy is slowing, the reversal of freight volume growth should be convincing.  The slowdown is hitting several transportation modes and mirrors new data from the Institute for Supply Management confirming a May slowdown in manufacturing growth.  There's less to transport if less stuff is being made. 

If freight traffic is peaking, then similar peaks in carrier earnings and transportation sector stock prices should follow shortly.  Watch out below.  Those of us with large enough nets can catch falling bargains.