The official "blog of bonanza" for Alfidi Capital. The CEO, Anthony J. Alfidi, publishes periodic commentary on anything and everything related to finance. This blog does NOT give personal financial advice or offer any capital market services. This blog DOES tell the truth about business.
I got a teaser mailer from some outfit called the McShane Letter, attesting to the stock-picking prowess of one Don McShane with help from some unattributed factoids. The object of this pumping missive is Legend Oil and Gas (LOGL), a Seattle-based explorer that used to be known as SIN Holdings. The disclaimer inside the mailer says Legend paid $850,000 for this promotional material, $24,000 of which went directly to Don McShane. None of that matters to me.
What does matter is the company's performance. Legend hasn't just managed to lose money every year since 2009. Their net losses have actually multiplied. I haven't seen anything like that after reviewing and trashing multiple penny stock pumper mailings.
Reviewing SEC filings is a must for serious investors. Check out their amended annual report dated May 10, 2012. They forgot to check the box indicating they're not a shell company. Now that we've got that straight, check out the annual report itself from March 2012. Legend had a deadline of today to raise an equity offering sufficient to pay off part of their outstanding credit facility. It looks like the equity commitment they received from Lincoln Park Capital Fund on May 18, 2012 is legally sufficient to meet that obligation. I also noticed that two separate inside holders filed Statements of Beneficial Changes in Ownership in April 2012 in which they disposed of some of their shares. Folks, company insiders who are confident of a bright future for the firm they help run would be buying shares, not selling them. Read the Risk Factors section of their 10-K. The loss of two key executives would materially harm their business, and those are the same two gentlemen who sold shares in April.
I've pulled back the covers far enough on this one. It's not for me, and neither are the wondrous musings of Mr. McShane in his newsletter.
Full disclosure: No position in LOGL at this time.
The Eurocratic elite has been in love with itself for so long that it can't see how far the continent has fallen out of love with them. The experiment with a unified Europe worked best when it was just Germany, France, and their tiny neighbors in a coal and steel community. The long-held assumption of the inevitability of unification means there has never been a backup plan for dis-unification. Planning for this imminent disorder will be ad hoc and will add to the crisis atmosphere just when calm is needed most. The Davos crowd is in for a shock because they had it too good for too long.
I for one relish the prospect of many stupid European private equity firms going out of business. A lot of LBO operators are very precariously overleveraged. That is music to my ears. It means that anything they own will be available at fire sale prices once they go bust. It also means that there won't be as many Euro-trash wanna-bes making snide remarks about my lack of a pedigree at black-tie events in San Francisco. They won't be able to afford tickets if they're out of work. I have no plans to go hunting right away for bargain properties in Europe, although I suspect the dollar will go a lot farther over there this summer. I'd rather wait for the follow-on effects here in the U.S. if European LBO shops have to exit U.S. equity positions in a hurry. Investors are already shutting off the flow of capital into the high yield debt that LBO shops prefer and redirecting it into the no-yield bond havens that won't outlast hyperinflation.
Successfully navigating a government through a political crisis boils down to the character of top leadership. I suspect that only Angela Merkel and Christine Lagarde have the requisite nerve to stay the course. Everyone else is going to bail. Whatever new leaders Greece elects in June will be the first to head for the exits. The single currency isn't ready to become a museum piece just yet. It's been a boon for Germany and still has a role in deterring French irresponsibility. The most realistic end game is the one I sketched out months ago, with a devolution to a "rump euro" roughly contiguous with the original Holy Roman Empire.
Peak Oil is looking more and more like Plateau Oil thanks to technologies that extend the life of existing wells. Doomsayers predicting the end of civilization will have a lot of crow to eat when they wake up from their Rip Van Winkle naps to find the lights still turned on a century from now. Bring on the fracking and horizontal drilling for wells on land. Fracking is still an imperfect technique after five decades of widespread use but the next generation of petroleum engineers will command hefty salaries figuring out how to perfect it.
My only problem is finding a company capable of exploiting an offshore bonanza. I sold out of Tidewater (TDW) a long time ago with a decent capital gain once I realized they were larding up their balance sheet with long term debt. Their share price has been all over the map for the past year but their net income has steadily declined since 2010. They need to shape up their finances before I will ever take a second look at going long the stock.
It's Monday. That means it's time for my extreme sarcasm about business activity. U.S. markets were closed today due to Memorial Day but that doesn't mean my big fat mouth needs to be closed.
Marubeni is supposedly getting close to buying Gavilon. I've never heard of either one of these firms. Marubeni is some big Japanese grain dealer and Gavilon is a U.S. competitor. There isn't much to this story besides another consolidation play in a commodity dealer. It kind of reminds me of consolidation in the steel industry; now India and China dominate a very limited global field.
Now France wants Eurobonds, while the Economist opines in favor of Continental federalism. I need to burst the Economist's bubble. Only total federalism will establish the Continent-wide taxation system necessary to pay off any Eurobonds. Half-measures won't cut it and German taxpayers won't go for full federalism once they realize how badly it will ruin their credit. Putting some Eurobonds into tranches that partially cover participating states' obligations and are partially funded by strong creditor states (i.e., Germany) reminds me of the U.S.'s experience with Fannie and Freddie's amalgamated obligations. The key difference is that the U.S.'s housing CDO debacle was backed by the full faith and credit of Uncle Sam and his ability to levy taxes. Europe's half-effort won't cover squat. It will of course leave a lot of stupid hedge fund managers holding empty bags they thought were full of Euro-tranched super bonds.
U.S. national income is increasingly benefiting business profits and not worker income. There's plenty of research on how global wage arbitrage is pushing down wages in the U.S. One academic canard in financial thinking would call for workers to invest more of their income in the stocks of their employers to recapture some of this lost income momentum. I wouldn't go for such a canard just yet; U.S. stocks aren't bargains relative to earnings even though they're trading at inflation-adjusted levels last seen in the late 1990s. My point is that U.S. workers don't have many personal growth options through wage enhancing things like education or wealth enhancing things like conventional investments in U.S. equities. Stagnated workers can win by thinking outside the box, using tools created and traded in resilient communities.
Smart investors are starting their stampede out of junk bonds. I should throw in the caveat that maybe these are the people smart enough to let hedge funds buy up junk bonds and junk funds on the downslope to junk bond obliteration. This news makes me nostalgic for the early days of 2007 when I kept reading glowing headlines about the junk bond market's growth. I wondered then when it would all crash and realized I didn't want to be anywhere near junk bonds when they hit the floor. Well, crash they did later in 2007. The credit market seizures that started hitting in August 2007 were memorable. History doesn't repeat but it does rhyme. I'm not in junk bonds now, nor will I enter them until long after the U.S. bond market has crashed and America's likely hyperinflationary episode ends.
I used to work at UBS and I had zero success at doing business their way, so of course I relish watching them squirm. I believe many of their problems stem from the consulting geniuses they brought on in the mid-2000s to run many of their global departments. These whiz kids in their 30s had zero experience in traditional Swiss banking but they didn't let that stand in the way of their transformation efforts. I'm still waiting for the full effects of their genius to bear fruit. We shall see just how exposed UBS truly is to the Eurozone's debt crisis and whether the whiz kids did a bang-up job at erasing internal risk controls. Forget UBS.
Criminal clients who want to hide assets from the developed world's tax authorities are going to have a rough go. No Swiss-branded private bank can shelter them anymore because Swiss banking privacy laws are now full of more holes than Swiss cheese. I predict we'll see more billionaire tax cheats buying their way outright into the good graces of "frontier" economies' ruling elites. Oh, BTW, legitimate law-abiding clients won't benefit much from UBS either. There's nothing there in product or service that you can't get cheaper somewhere else.
Full disclosure: No position in UBS or JPM at this time.
Oh boy, this must be my lucky week. I got two separate mailers touting Great Wall Builders (GWBU), some penny stock that either has a new fuel-efficient vehicle technology or markets products for solar-integrated systems in homes. I honestly can't figure out which thing the company does because I can't find a website for them that describes what they do.
Here comes another mailing-inspired blog article. I just got a teaser brochure from Tim Fields Untapped Wealth. Most of you know where I'm about to go with this now that you've seen the promotional source. This brochure touts Rackwise (RACK), some kind of provider of data center management (DCM) software. I don't focus on the software sector, but that doesn't give me a disadvantage when I need to screen out stocks that should never become candidates for my capital. All I have to do is look at fundamentals.
Rackwise should not have gone public based on their fundamentals. They lost more than twice as much money (i.e., negative net income) in 2011 as they did in 2010. Their executive team is a mixed bag; the CEO and CFO have little direct experience running software companies but other team members have held a variety of positions in growth-oriented software companies. Their 10-K from March 2012 mentions their significant operating losses and expresses doubt about their ability to continue as a going concern. BTW, multiyear losses would be tolerable in a tech startup focused on spending to grow revenues, but the 10-K admits they've cut back on some promotional expenses to conserve cash. That 10-K also mentions a master licensing agreement with Intel to deploy Rackwise's DCM software in all of Intel's data centers. The agreement was completed in November 2011 but I'm not clear on whether Rackwise will realize significant revenue from this development. Meanwhile, Rackwise's CEO was awarded stock options that vested at $1,527,000 as a reward for this transaction. Well, that's just great work (and great for my sarcasm too). Whether this massive options expense is justified by bottom line success remains to be seen.
BTW, their product isn't very original. I've known about data center power management since at least 2009, when I was partly responsible for running a data center in a large enterprise. My team monitored the diagnostics constantly and they noticed that the temperature in the server room was approaching an intolerably high level due to a cooling system failure. They shut down the servers immediately and kept them offline until the cooling system could be restored. Rackwise's system is not really a big improvement over the tech we used three years ago.
Rackwise might have a chance if their Intel license develops into some kind of JV. Right now they have no chance of impressing me until they can turn a profit.
Full disclosure: No position in RACK at this time.
Plenty of market commentators are all over the trouble Greece is giving the euro. Even the EU's leadership is now openly admitting the need to prepare for Greece's departure from the Eurozone. The strongest remaining Eurozone nations will face difficulty selling debt if they continue to insist on backstopping their deadbeat neighbors. Witness Germany's new zero-interest bonds; investors' tolerance for zero interest won't last long if Germany can't let Greece leave its cage. The EU has probably already laid contingency plans and so has the Fed, but the rest of us not in the know won't hear about them until after they're executed. My best guess is that the next round of EU / IMF financing will bypass Greek banks entirely and go to Spanish and Italian banks exposed to the sovereign debts of their respective countries. This is a risky bet that Greece (and maybe Portugal and Ireland) can be triaged from the euro. Future financing rounds have probably also incorporated dollar swap lines from the Fed, which of course we won't hear about either until this next crisis is long past.
I'm not staking my own capital on any question of whether the EU can afford to let any of its southern economies leave the currency union. I'd rather focus on the effects outside Europe. Any shock to the euro from sovereign defaults and bank runs on the Continent will make the U.S. dollar look pretty dog-gone good as a reserve alternative. That sunshine will last until whatever fiscal cliff in the U.S. - from expiring tax cuts, sequestered spending, and what not - sparks a run on the dollar worldwide and a spike in U.S. short-term interest rates. The U.S. may hit its fiscal cliff in early 2013 or may muddle through for a while longer, as the Eurozone has done to my continual amazement.
I have no plans to go anywhere near U.S. stocks or bonds in anticipation of this mess. My preferred hiding places are going to be the currencies of countries with fairly low debt-to-GDP ratios, specifically Canada, Australia, and New Zealand.
Here it is again. My options from last month all expired unexercised. It's always nice to hang onto cash earned from conservative hedges. I have renewed my covered calls on FXI and GDX to expire next month. I also renewed a short cash-covered put position under GDX, which I am increasingly likely to do as the price of GDX keeps dropping. I realize I'm risking having more shares of GDX put to me but I don't mind doing so if they're getting cheaper. A bigger pile of a hard asset ETF is one thing I wouldn't mind holding as the U.S. approaches hyperinflation.
I mentioned recently that I'm strongly interested in adding natural resource MLPs to my portfolio as a hard asset hedge against future hyperinflation. I still plan to do so at some point but I'm much more skeptical now that using ETFs of MLPs is a viable way for me to do so. Those ETFs have some odd ways of recalculating their daily NAVs that have the same effect as using leverage. I hate leveraged ETFs and want to stay as far away from them as possible. I may just go for a few reasonably priced MLPs and their associated operating companies (i.e., pipelines).
I'm also still looking for long positions in currencies of countries with low debt/GDP ratios and high transparency. If I can't find correspondent banks in countries such as Australia, New Zealand, and Canada then I will need to look at currency ETFs.
I also wonder whether an agribusiness stock will perform adequately as a hard asset hedge. People still need to eat even if the domestic currency they use to buy groceries is depreciating. Maybe owning a farm or even a backyard greenhouse is a substitute for such a stock; the big difference is that I would literally eat the yield.
My remaining California muni bonds mature in about a month. I will not replace them with any fixed income instruments at all, although I would consider the sovereign debt of the three countries I mentioned above if those bonds were available to U.S. investors in their pure individual forms. I am still not sure whether an ETF of TIPS will keep up with a hyperinflating U.S. dollar until I finish analyzing the fine print. I do give myself a lot of homework but it's worth my time if it protects my net worth from chaos in the U.S. economy.
Nota bene: I am not a financial adviser, planner, or counselor. Please bear in mind that the above discussion is not any kind of financial advice for investors. Like I've said in my legal disclaimers, nothing I say in any of my materials constitutes investing advice. I do not tell other people what to do with their own money. Enjoy my discussions as a form of entertainment.
The China growth story is still sputtering, but some pillars take longer to collapse then others. PetroChina has just surpassed Exxon in oil production. The Chinese government created PetroChina to serve its geopolitical goal of maximizing the material prosperity of its people. Pumping as much oil as possible is the priority, with capitalistic concepts like ROI as a secondary concern. Please note that PetroChina (PTR) has an ROE of over 13% and has added steadily to its retained earnings. The stock is a success story primarily due to geopolitical realities. They can sustain that growth if they can muscle into more acquisitions in Africa and the Middle East.
Today I'll revive a tradition that I maintained a couple of years ago. I had posted rundowns of some key business headlines about once a week. My problem then was that my summary comments just weren't snarky enough and the titles of my posts weren't very catchy. I may have remedied those problems by pushing up the sarcasm throttle and calling this the "Financial Sarcasm Roundup." Let's run some headlines today with my full-blown invective and see if anyone pays attention.
The State of California is weighing in on a solar project down in the SoCal desert.K Road Power promises that its Calico Solar plant won't get in the way of endangered tortoises and other critters. That's not good enough for environmentalist groups but it sure is good enough for me. I spent some idle time down in the SoCal deserts as a kid when I was forced to visit the dead branches of my family tree. Any animal hardy enough to survive down there probably has enough survival instinct to move out of the way of bulldozers. It's really funny that environmentalists are lobbying against a green energy project. They don't understand that the absence of this solar project means more reliance on the fossil fuel power plants they despise so much.
I've been pondering Chinese forex policy lately. News that China will allow its banks to short U.S. dollars is more than just a safety valve in the event of a run on the dollar. It allows banks to hedge any long positions they have in U.S. Treasuries. Placing limits on short positions is smart but basing those limits on annual turnover is not. Safe limits would be based on the net notional value of currency positions marked to market daily, complying with Basel rules on capital. Western banks are pretty good at getting around capital adequacy rules, so perhaps China is just taking a less subtle approach.
Don't expect to see a whole bunch of Chinese banks piling into dollar shorts all at once. Greece's potential exit from the euro makes that currency look increasingly weak and the dollar look relatively strong. That means the U.S. federal government can continue to finance its ginormous budget deficits cheaply and Chinese banks can breathe easier about the value of their Treasuries. Wait a few months after the euro breaks apart. The British pound and the dollar will then be in the spotlight.
Full disclosure: No short positions in the U.S. dollar or long positions in other currencies at this time.
I'm going to start weaning myself from a reliance on Yahoo! Finance for information. I'm increasingly disappointed with the selectively bad macroeconomic reporting they republish from the newswires and the editorializing that often slips in from Yahoo!'s amateur contributors. Case in point is this puff piece restating the now-exhausted China bullish growth story. I'm a former China bull myself and I now hate to admit that the story has run out of steam.
Anyway, I need more intelligent sources. Yahoo! has disappointed me several times this year with stories hailing "job creation" in the U.S. even with millions of people dropping out of labor statistics in frustration over not finding employment. I'm going to try configuring Google's custom settings to see if that will give me the news feeds I need.
Carlyle's investment performance has a lot do with the health of its favorite sectors: defense, aerospace, and health care. Growth in those sectors has been driven by big factors (like government spending) out of Carlyle's control for much of the firm's existence. Those fire hoses are going to run dry in a couple of years. U.S. defense spending will decline as our land wars in the Middle East and Central Asia wind down. Aerospace is on the ropes again thanks to high oil prices and perennial bankruptcies (here goes AMR through Chapter 11). Health care spending will be whittled down by some combination of government-imposed cost controls and a probable hyperinflation attempt by the Fed.
More importantly from my perspective is that Carlyle is one of the private equity firms that wouldn't hire me years ago went I sent them my resume. I thought at the time that my knowledge of finance and military affairs would have made me a shoe-in for one of their analyst jobs. It turns out that my expertise was less relevant than my lack of a pedigree. The one Carlyle employee I've ever met was a junior analyst with a bachelor's degree from Notre Dame, my alma mater. His response to my inquiry for an informational interview was to brush me off. The dude was two years younger than me and had no MBA (I had just finished mine) and considered me to be a loser. That told me more about what Carlyle values in their employees than any formal interview would have revealed.
My pedigree and connections didn't meet Carlyle's expectations. My industry knowledge and academic credentials were irrelevant. Carlyle built a successful business model on inside connections to big shots who understood where government spending goes. Now that government spending has peaked in the face of an inevitable decline, Carlyle's performance is starting to disappoint Mr. Market. This lackluster IPO is the first sign.
Full disclosure: No position in CG or any of its portfolio companies at this time. No position in AMR either.
Oceangoing shipping is an industry that is very resistant to technological change. The basic hull designs and propulsion systems of supertankers and container ships haven't changed much in decades. The cost of a new large ship and a port facility to match its configuration is enough to make innovation prohibitively expensive. Game-changing technology in shipping has a different flavor than some new app in social media.
I have been watching FastShip since 1995. Their concept of adapting the hull designs for speedboats to large ships configured for containers and roll-on / roll-off cargo had the potential to speed shipping times. Give them credit for big, bold thinking in technology. The problem is that shaving a day or two off trans-Atlantic shipping times won't make a material difference in the economics of most finished goods. Pacific Ocean lanes might have been a different story but FastShip never tried to go there. A speedy cargo ship would mainly be attractive as an alternative to air freight for perishable food that must be delivered fast. It's unfortunate that FastShip never raised enough capital to build their first ship and dock; the company went bankrupt in March. FastShip's end clears the way for an application of speed on a smaller scale. I would like to see a shipbuilder spend some R&D on a medium-size (Panamax or smaller) hydrofoil or hovercraft for use on short routes.
Shipping innovation lives on in propulsion. Gamma Light and Heavy Industries (GLHI) has developed The Gamma Propulsion System (TGPS) to cut fuel consumption and emissions. If this really works as advertised, the impact of oil price volatility on shipping costs will be dramatically reduced. Shippers can curtail their slow steaming incidents and reduce the cost of any fuel hedges they use.
Comparing these two technologies is instructive for shipbuilders. Radical redesigns to hulls and docks are costly and have little payoff except in niche applications. Power train improvements can be adapted to existing hull designs. That's how you score innovation in shipping.
Full disclosure: No positions in any companies mentioned.
Some outfit called The Penny Stock Hunter (out of a P.O. box in Florida with no website identified) sent me a glossy teaser for Sunpeaks Ventures (SNPK), some kind of specialty drug distributor. Oh yeah, here it comes again.