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.
Monday brings me more headlines to ridicule. Join the fun, or else.
Central banks are planning something big. Euro-bankers have been running their fat garlic-stuffed mouths up to now about how much they love the euro but they've done little serious money printing. They're probably waiting for whatever U.S. market correction will quiet the Fed's anti-inflation hawks long enough for Helicopter Ben to activate his dollar swap lines.
Maybe we won't have to wait too long for central bankers to make their move. Maybe the ECB is serious about eating big losses on Greek bonds. This deliberate trial balloon signals that the Fed's swap lines are probably on a hair trigger. The U.S. was probably hoping this could wait until after November, so Secretary Geithner's visit may be a hasty reassessment of whether a Fed bailout of the ECB will trigger a run on the dollar.
My hints so far may not have been clear enough about my central thesis. The Anglo-American elite and the traditional Continental elite have competed with each other for world leadership since at least World War One, when the British Empire and the American Empire largely ceased to be rivals. The commoners on either side of the pond have little knowledge of this conflict and even less say in its outcome.
I like San Francisco's Exploratorium. I wrote it into my will because its approach to experiential learning has been breaking new ground in science education for decades. That's why I get concerned when I look at the breakdown of its investment portfolio (page 14 of their most recent financial statements). Check out the reported value of their portfolio as of June 30, 2011. The fixed income portion of $5.1M represents 21.25% of their portfolio, and it's all domestic (i.e., denominated in U.S. dollars). Forget for a moment the complete lack of exposure to hard assets, non-dollar pegged currencies, and fixed income investments in countries that have low debt and rich resources. The Exploratorium's equity investments will probably take a big hit of their own if global markets severely correct, but as long-term investments they can survive U.S. hyperinflation. The U.S. fixed income investments stand no such chance if Helicopter Ben gets his QE3 and the federal government launches capital controls.
Other San Francisco cultural institutions are sitting on a similarly precarious ledge. The California Academy of Sciences is another institution in my will. Their portfolio would fare even worse than the Exploratorium's under hyperinflation. Check out page 11 of the Academy's audited financial statements. Add up the $48.5M in U.S. government notes, $51M in other government obligations, and $145M in corporate bonds. That's 58.9% of their total portfolio that is extremely dependent on the U.S. dollar's stability.
The good news for the San Francisco institutions I've named above lies in their brand strength and market position. The leading cultural attractions in a major tourist city like SF have enormous pricing power as long as they can attract patrons whose spending power isn't impaired by a hyperinflated currency. I truly believe these institutions can continue to thrive through hyperinflation if they target their marketing to tourists from countries least likely to hyperinflate: Canada, Australia, New Zealand, Switzerland, and possibly other countries that have the sense not to bury themselves with sovereign debt. Museums in some American cities charge higher admission prices for out-of-town visitors, so tourists effectively subsidize attractions that are available to locals. This tiered pricing structure would work wonders for the financial security of cultural attractions in a hyperinflationary environment.
Of course, I could very well be wrong about prospects for serious inflation in the U.S. The Fed hawks may prevail in the face of macroeconomic deterioration long enough for equities to find their true equilibrium (hint: much lower) without monetary stimulus. The federal government may elect not to restrict Americans' investment choices. Panicky policymakers may not force banks to lend newly minted dollars to consumers, forcing a wage-price spiral. Then again, if even one of these preconditions fails, the U.S. can and will experience serious inflation that will render fixed income investments undesirable. That is reason enough for non-profits to consider diversification into hard assets and non-dollar currencies.
Just how did we get so much distance between macroeconomic performance and broad market valuation? Forget the old canard that stock prices are a leading indicator; if they were, we'd see a sharp downward turn in the DJIA before we see any disappointing macro reports.
Traders are placing way too much faith in the continued ability of central banks to inflate stagnant economies into prosperity. The Fed's QE2 had less juice in it than QE1 but traders pray for more, hoping to squeeze one last short covering rally out of their strategies before the big crash sends them all home. This is a stupid way to invest and that's why I don't invest hoping for a central bank steroidal shot.
The latest brew-ha-ha in the news is the revelation that hot shots at TBTF banks colluded to suppress published rates for Libor. The nonsense you may hear about prosecutions is much ado about nothing. There will be no serious prosecutions of anyone above mid-level supervisor on a handful of trading desks. Those trading desks that are targeted will be those that are not central to the government's funding needs; i.e., Goldman Sachs and JPMorgan Chase are certainly exempt. Those few low-level traders that are indicted will be thrown under the bus by colleagues because they are not members of pedigreed families and did not join the proper social clubs at Ivy League schools. No senior bank executive will ever face jail time for collusion, price fixing, restraint of trade, or any other flavor of securities-related criminality.
You may be wondering how I can make this claim. It's simple. Read today's news that the Secretary of the Treasury knew of Barclays' participation in Libor fixing while he ran the New York Fed. Building a case for widespread, top-level collusion would require law enforcement agencies to subpoena the sitting Treasury Secretary (and perhaps his predecessor) and force him to testify against his peers in banking. That is not going to happen. No one with intimate ties to the Fed can be prosecuted for financial wrongdoing in plutocratic America. That would strike at the heart of the Fed's credibility, and the Fed is the one bedrock institution whose credibility cannot be in question as the U.S. economy heads into the second inning of Great Depression 2.0. It will need every ounce of trust it can finagle out of the markets to execute QE3 within the short window of opportunity presented by a severe equity market crash and foreign run on the dollar. I can question the Fed because I don't matter to our ruling elite. Fed and Treasury officials have the equivalent of get-out-of-jail-free cards as long as the TBTF insolvency crisis goes without resolution. The same goes for senior executives at those banks; they are part of our country's ruling class and are therefore irreplaceable. After all, who would take their places in the local country club dining rooms if they could no longer attend caviar tastings due to incarceration? It certainly won't be you, dear reader.
I was preoccupied yesterday with my portfolio updates and my summary of Intersolar, so I didn't get around to my regular Monday sarcasm. That means Tuesday can be a sarcasm day too.
China's CNOOC is making a play for Canada's Nexen. That is a bold move and obviously a hemispheric security concern. I don't know if our neighbors to the north have figured out that any business deal of this size from Red China is a strategic penetration straight out of the Politburo's playbook.
No wonder the Germans can't afford to give Greece any more bailouts. Moody's just slashed their economic outlook. That figures; bankrupt trading partners can't afford to buy what Germany exports. Maybe I could buy a few tons of some leftover German chocolate they have lying around once the euro tanks against the dollar.
Speaking of the dollar's relative strength, clueless investors continue to buy U.S. Treasuries in the forlorn hope that their bonds will mature before federal spending goes over its fiscal cliff. I can't understand the desire to pick up nickels in front of a steamroller. Bond investors will be lucky to receive a fraction of the principal they invested if Helicopter Ben hits his print button sometime after Election Day 2012.
In a final note on the unfolding second act of the world's financial crisis, Spain and Italy enacted temporary limits on short selling in financial stocks. Recall that the U.S. market regulators did this at the height of the financial crisis in 2008 and yet the markets kept falling until March 2009. The Fed's actions to pump liquidity into failing banks did more to arrest that decline than any short-selling limits. Please do not take this as an endorsement of the Fed's actions. Read my blog posts from late 2008 and early 2009 to see my advocacy for the seizure and forced recapitalization of bankrupt institutions as a permanent solution to their impairment.
I can hardly wait for the excitement in the markets to really get going this fall. These headlines are making me salivate. I can once again profit from the learning disabilities of Wall Street mandarins.
Well, something happened that I didn't expect when I prepared for my monthly rebalancing of my portfolio. My recently purchased long positions in FXA and FXC rose through the strike prices of the covered calls I wrote over them and were exercised away. I bought them back in a wash sale and wrote the covered calls again. I guess the relatively low inflation in Australia and Canada is making those currencies look more attractive than others. I'm still not ready to go long FXF, so I renewed the cash-covered put position under it that expired.
My covered calls on GDX and FXI expired unexercised and I renewed each position. I'm still a recovering addict from the China bull story but I just can't surrender my long FXI position; it's there for diversification. Gold still belongs in my portfolio as a hard asset hedge against hyperinflation and a stock ETF is the vehicle I choose instead of bullion. I have written a cash-covered short put position under GDX for the first time in recent memory, because I wouldn't mining owning more of the large-cap gold mining sector if the rest of the equity universe goes down the tubes.
I have no fixed income holdings and that's the way the Alpha-D is going to stay until the U.S. gets past whatever hyperinflationary episode is coming. My cash pile is looking prettier every month as the premiums from the options I write build it up. It awaits whatever trigger I deem necessary - the end of the euro, a run on the dollar, or some other financial cataclysm - for deployment. The market crash I expect will be the buying opportunity of my lifetime and I will ready to add energy, defense, and transportation stocks to my Alpha-D at bargain prices.
I attended this year's Intersolar North America trade show at Moscone Center here in San Francisco. I never turn down free entertainment and I figured I could score some free swag of some sort. I also figured I might learn something about how to make money investing in this sector.
Mayor Ed Lee gave his keynote speech and talked up the number of solar-related companies doing business in The City. Another guy talked about DOE's SunShot initiative to cut the industry's costs. See, that's the kind of thing Uncle Sam can do right. I say yes to basic technology research and regulatory sanity, but a big fat no to crony subsidies to well-connected companies like Solyndra that later go bankrupt.
My initial impression of the exhibitors' breakdown was that the major developers were mainly Chinese, the hardware vendors were mainly German, and the control system vendors were mainly American. The SEMICON floor was pretty cool, with lots of companies showing off the precision moves of their programmable robotic arms. I wish the hot chicks manning those booths had some programmable moves.
I caught part of the morning panel on supply chain security while I was cruising the booths for free chocolate candy. One speaker claimed that thin-film solar manufacturing uses less raw material than PV and requires 1/3 fewer production steps. I didn't stick around to ask the panel's representative from First Solar (FSLR) about the security of their tellurium supplies because I'm pretty sure I already know the answer (hint: First Solar probably won't find enough tellurium on this planet to meet their growth expectations out to 2020).
The "Policy 3.0" panel held forth many random insights. Here's my stream-of-consciousness rendering. Solar Tech and Solar 3.0 do a lot of important advocacy for solar sector policy; Solar Tech in particular has a working relationship with the White House OSTP. The weighted average cost of capital (WACC) for renewables is still higher than hydrocarbons due to perceived additional risks, but business that commit to a "total cost of ownership" strategy can take soft costs (back office, etc.) out of renewables. The future requires standardized approaches to project costs (analogous to the Kelly Blue Book for cars and Zillow for real estate) that can reduce project risks and make financing cheaper. The U.S. military already uses microgrids on bases (I already knew that). The solar industry's growth projections (in GW to be produced) demands an investment in a future workforce.
Another panel I made time to attend was run by TeamCalifornia and the State of California's GO-Biz office. There are tons of government-funded subsidies available for California-based businesses. The state's Go Solar California program subsidizes the installation of solar energy systems. Entrepreneurs can get help with marketing and placement in foreign trade missions through California STEP. The California Infrastructure and Economic Development Bank is state-sponsored entity that helps fund new development. People who say California has an anti-business climate because of its regulatory burdens should take a look at the "buy-side" strength of the above entities. Things still work in the Golden State and sometimes even Sacramento can help.
The final panel I attended was run by Joint Forces for Solar, an industry marketing initiative supported by Intersolar. Here's another stream-of-consciousness summary. The U.S. solar market has had compound annual growth (CAG) of 73.9% since 2008 and most of that growth has been outside California, so California is no longer a majority of the U.S. solar market. The declining cost of PV makes converting plants from concentrated solar power (CSP) to PV more attractive. Nota Bene: I disagree with that insight, because that kind of tech conversion is exactly what drove Solar Trust of America into bankruptcy. I do agree with the panel's consensus that reducing project financing costs will have significant benefits: accelerating installation; cheaper and simpler components; large-run batches of standardized components; and more long term certainty in the price of power a solar installation delivers. Incentive policies are still needed but they won't be around forever. I thought one panelist's support for continued favorable policies was tantamount to an admission that solar is only viable with policy supports. Later-stage projects have less risk and thus more predictable ROIs for developers, but investing at a late stage usually means a single-digit ROI. Pension funds typically invest late stage in solar projects and expect a 6-8% ROI. "Solar integrators" doing design, logistics, servicing and other functions seems to be a declining business model.
The technically-oriented vendors' booths were fun to watch with product demonstrations but I had to find things relevant to my work as a finance dude. I was more interested in learning about the structure of this industry and methods of financing projects. I got to meet exhibitors like Clean Power Finance and Main Street Power that arrange financing for solar projects and design power purchase agreements (PPAs) for utilities. I also got an introduction to insurance services offered by Assurant, GCube's One Point Solar, and Energi. The structure of the solar sector is starting to remind me a little of the shipping industry, with some specialized insurance carriers and investment banks focusing all of their expertise on a niche. I also discovered some very insightful media sources for industry data, namely Greentech Media'sGTM Research, Renewable Energy World, and Solar Server. The article feeds I can get from those sites should satisfy my need for blogging subject matter.
I would be remiss if I didn't note the heavy amount of candy, booze, and hot chicks all around this convention. I snagged free chocolates at pretty much every vendor booth that offered them. It seemed like at least 15% of the vendors had some mini-bar or afternoon happy hour with free beer and mixed drinks. I have never seen so much free booze at a trade show, so I had to pace myself and not get wasted. I had to write this article sober. Many of the vendors had figured out the importance of staffing their booths with hot chicks. The folks at Schletter Inc. went so far as to style their booth like a German beer garden and hire local models to portray frauleins. I got my picture taken with these models, as you can see above.
Intersolar and SEMICON were fun and I'd definitely go again. I can now try to finagle my way onto the speaking platform for next year.
Full disclosure: No positions in any companies mentioned. No consideration received from Intersolar / SEMICON promoters in exchange for this blog article.
I feel sorry for Nevada Geothermal Power (NGLPF). I saw them exhibit at the Hard Assets Conference in San Francisco when it was called the Gold Conference years ago (and then briefly the Resource Conference). I never bought the stock because I couldn't figure out why a company that claimed it had healthy properties wasn't making any money. Now the other shoe has dropped.
Nevada Geothermal Power is at risk of going out of business, according to its own auditors. A federal loan guarantee of $98.5M was for naught. The company will hold an emergency shareholder meeting on July 24 to discuss recapitalization and de-listing from the OTC exchange. That is a sign of a drowning company. Exchange listing costs are minimal for a firm with healthy cash flow, so de-listing is a desperate move to buy a month or two. Recapitalization will probably require a debt-for-equity swap large enough to dilute shareholders into nothing. The share price is already under a nickel, so a restructure will make the revalued share price not worth measuring on an exchange anyway.
Geothermal is an awesome technology when dome right but even the biggest players have a hard time giving shareholders a decent return on their capital. Thanks for trying, NGP. Maybe they can still pull off a resurrection.
Full disclosure: No position in NGP (NGLPF), ever. No position in other companies mentioned at this time.
The relevant lesson from their financial statements is that they have generated no revenue for three years and seem to be making little progress toward generating any business. I can see their biggest operational problem right now. They appear to ship ice with their drink mix packages. That adds the cost of refrigeration and additional storage space to what should be a bulk dry goods movement pipeline. That is really dumb. It's even dumber to have a wholly-owned subsidiary called Smoothie Inc. just to market these things. There is no purpose to such a confusing corporate structure for a company this small.
Let's check out New Zealand Energy Corp.(CVE:NZ or NZERF) today and see how well they're doing drilling for oil and gas in the land of kiwis. The good news is that it's had positive net income for the last two quarters, and I'll admit that I'm impressed to see that from a junior resource company so soon after their IPO. Most junior exploration companies struggle along with barren properties for years and do nothing but raise further capital that ends up in the pockets of senior management. This one isn't like that. They even had a massive pile of CAD$70M in cash as of March 31 to continue their exploration program. Hallelujah.
It's Monday. That means it's time to bust out of your workday boredom and pay attention to my bitterness.
Federal prosecutors are supposedly making a criminal case against bankers over Libor. I don't believe for a minute that DOJ is serious about prosecuting bankers who fudged Libor. This is the same DOJ that could find no criminal wrongdoing in the financial crisis of 2008 or bankers' extortion of municipalities though interest rate swaps. They haven't even indicted John Corzine for his theft of billions from MF Global clients. Puh-lease. Let's get real. Government prosecutors won't prosecute the heads of banks who will employ them in the future for corporate legal work. Expect a few eight-figure settlements later this year and nothing at all afterwards. Only smaller players get caught and punished, like the CEO of now-busted Peregrine Financial Group.
I was embarrassed when the U.S. government elected to keep GM and Chrysler alive with pre-packaged bankruptcies and bailouts. The government still hasn't been made whole on those deals. Now France is heading down pretty much the same road if it decides to save Peugeot. Automaking gravitates to lower-cost locales, which now even includes the non-unionized southern states of the U.S. Keeping high-cost producers alive keeps their products priced artificially high, ensuring an endless cycle of government bailouts and business failure. Unionized automakers will continue in this zombie pattern until the taxpayer has had enough and allows them to fail.
The defense bubble I've been warning about for years is about to pop. Wall Street is finally pricing in the likelihood that forced budget cuts will hurt the earnings of major federal contractors. This is good news for cheap analysts like yours truly, because there are some decent defense stocks I'd like to pick up at a discount. It's bad news for all of the Pentagon watchers and players who are still in denial about the inevitable end of major contingency operations. I've known plenty of people on active duty who were counting on jobs with contractors as second careers. They really need to switch gears now and make other plans.
Too many idiots holding this stock expect it to be bailed out no matter how many stupid decisions its head managers make. They could be right, or they could be diluted to atoms if Uncle Sam grabs a boatload of new warrants in exchange for cash.
Too many hedge funds will trade this stock based on news blips. Real corporate governance no longer exists in America because institutional investors have farmed out much of their portfolios to hedge funds that don't perform fundamental research or due diligence of any kind. I miss CalPERS' activism from over a decade ago. That went out the window when their moronic leaders in Sacramento doubled down on hedge funds and other illiquid nonsense.
Too many financial journalists will forget all about this loss in a few weeks. They need to ignore it to keep getting invited to the right cocktail parties and galas.
Too many JPM people are probably spoiled preppies who get rewarded for failure. That's the biggest reason why we can expect to see this news again. Even if the problems in my above paragraphs were magically solved, preppie traders and managing directors simply enjoy blowing other peoples' money. The CIO had to walk the plank but I seriously doubt anyone who leaves will see their severance pay clawed back. That's not how things work in the new plutocratic America. Pedigree engenders "trust" and competence engenders ridicule.
Oh yeah, JPM is one of those firms that wouldn't hire me. Serves them right to lose money.
I'll serve up my brief thoughts on WellPoint's decision to buy Amerigroup for $4.9B in cold cash even though I don't have a dog in this fight at present. The strategic rationale is probably a bet on Medicare's ability to deliver new consumers of managed care plans (courtesy of the federal government's mandate) at a very high cost to those clients. The cynic in me just can't avoid picturing the captive audience of Americans who will soon find their care rationed at an unavoidably high premium.
The lock on a captive market is probably the only good reason for a company trading at a P/E of 8 (i.e., a discount to the S&P 500's long term average of 14) to buy a target now trading at a P/E of almost 29. WellPoint only had $2.2B in cash on last quarter's balance sheet, so borrowing another $2.7B will put its long term debt over $11B. That's more than 4x its present net income, and adding Amerigroup only brings in about another $200M in net income (while assuming responsibility for another $400M in Amerigroup's long term debt). I consider any long term debt load greater than 2x net income to be dangerously high, something to be avoided in my Alpha-D Portfolio.
WellPoint may be counting on the prospect of added pricing power in a consolidating market for anyone held hostage to Medicare. This deal does not appeal to me, unless I can sell some puts under AGP before the deal closes. I may just do that if the AGP options chain remains viable for a few more days. The prospect of making some quick cash from under a stock price supported by an all-cash transaction is the only good thing I see here.
Full disclosure: No position in WLP or AGP at this time, although I reserve the right to sell cash-covered puts under AGP in the very near future.
My mailbag archive is now empty after many weeks of digging into the teasers sent by stock pumping houses. I am now ready to deplete the pile of teasers I've received in just the past few weeks. Let's start with one from Daniel Ameduri's Future Money Trends. This one pumps Circle Star Energy Corp. (CRCL), an energy explorer with several projects in Texas and Kansas. You know something, their corporate logo kind of reminds me of the Texaco logo. Circle Star isn't quite in that league yet.
I'd be more confident of this company's eventual success if I could see some positive financial results. Unfortunately their income statements since 2008 show zero net income (actually tiny losses). I'm more interested in their most recent financial statements (namely their 10-Q dated January 31, 2012). Note 2 to the financial statements expresses doubt about their ability to continue as a going concern and reveals their non-stop losses that led to an accumulated capital deficit of -$8.6M. That's a big hole to dig out. Note 8 reveals that the company wrote a $7.5M note payable (really an I.O.U.) and had difficulty making the payment that was due in December 2011. I find it odd that this company started as an a developer of an online help desk interface and still hasn't decided whether to abandon that line of business. It is even more odd that this strategic confusion, their I.O.U.s, and lack of oil revenue aren't mentioned in the Risk Factors paragraph.
This one's not for me. Their interests in working wells are too small at present to produce notable revenue and they need more capital to develop their unexplored properties.
Full disclosure: No position in CRCL at this time.
Prepare yourselves. I'm about to spew more bile on the business world. Here we go.
One Eurocrat wants to outlaw Libor manipulation in the wake of revelations from Barclays et alia that they were playing games with interest rates to avoid going bankrupt. Outlawing interest rate manipulation by bankers would be kind of like outlawing the breathing of air. It's what bankers do. It's such a natural state of affairs that central bankers give it a wink and a nod. Here's a better idea: Instead of restricting Libor's bidding process, make it transparent by putting in on the European Central Bank's website in real time. That way no one's in the dark.
Europe has more to worry about than fallout from this Libor debacle, like how to pay bondholders while sticking it to their taxpayers. A bunch of Continental ministers are going to meet one more time to pretend to solve their countries' insolvency woes. I think they just get together for the great food and champagne, and to reminisce about past World Economic Forum junkets where Bono hectored them on economic development. Germany knows that Spain and Italy can't afford to raise more debt but they don't want any net importing countries kicked out of the euro. That's Germany's problem in a nutshell, and that's why every German politician of note has been using double-talk to stall for time. The "Davos culture" of transcontinental elitism may survive in salon format but its inability to solve real world problems makes me wonder whether it's worth going that far just to eat steamed lobster.
Finally, Dr. Doom weighs in on the approaching perfect storm. This storm has been brewing through decades of debt-induced overspending, infrastructure malinvestment, and unsustainable middle-class entitlements. I say bring it on. My Alpha-D portfolio can navigate the mightiest of macroeconomic winds, unlike the asset allocations of many whiz-kid hedge funds that will probably be wiped out. Many fortunes were made in the first Great Depression by people who stayed solvent and bought at the bottom.
The mailbag is getting thinner. A few more blog posts and I'll have run through all of the penny stock teasers I've been receiving for months. Today's selection is a pumper from Carpenter Global Stock Advisory. It's about Coyote Resources (COYR), a junior exploration company in Nevada. It's trading at just over seven cents a share right about now. Let's try to ascertain why.
Coyote has two properties in Nevada. The Tonopah property was once a producing mine. The Golden Trend property has yet to produce anything. The remaining ore at Tonopah is probably recoverable but Coyote will have to raise enough capital to remove the shaft blockages and reconnect the mine to local infrastructure. By their own preliminary estimate, dewatering alone will cost over $4.6M, surface processing will cost $7.5M, and permits will cost $7.5M. Read all about it in the company's roadshow brochure.
Let's recap. The CEO left and sold all of his shares, the closed mine is still blocked and waterlogged, the company has not raised capital needed to re-open the closed mine, and the other exploratory property is still an unknown. Good luck making money on this one folks.
I'd like to thin out my teaser mailbag as much as possible. Today's selection was published by Breakaway Stocks. The subject is Avatar Ventures (AVVC), which has something to do with mobile media. That's a deliberately broad characterization because I can't figure out exactly what they do. Their Google Finance blurb says they make aftermarket adapters that plug into your car's dashboard and display wireless emails and text messages on an LCD screen. That's an accident waiting to happen; drivers are distracted enough already with screaming kids in the back seat.
Their corporate website makes a little more sense with offers of mobile site content management, so maybe Google Finance should update that profile statement. Their statements reminds me of the discussions of SAAS from this year's Enterprise 2.0 Conference, only this model seems to go a step farther with content-as-a-service. The SAAS field is pretty crowded and the established players are pretty well-funded. Standing out will require something really special, like a geo-location architecture that enables advertising targeted down to a city block's level of specificity. I do not know whether Avatar will move in such a direction. Their services right now appear to be ordinary SEO and other services that are pretty commonplace.
My ancient mail pile gets thinner by the day. Here's another pump mailer from Tobin Smith's NBT Equities Research. This one touted Pulse Beverage (PLSB), maker of flavored drinks. The soft drink market is already crowded with vitamin-flavored water, sports drinks, trendy fruit juices, and such things. I don't know how this brand can stand out unless a major label takes a dive.
What do the numbers tell us? Net income has been negative since 2008. The company only made $11K of gross revenue in 2011. Their assets reported in the quarter ending March 31, 2012 are pretty dog-gone low for a company that aspires to serious penetration of the beverage market. Come on, only $34K in total inventory after all this time in operation? I will give the management team credit for serious experience in the beverage industry.
Note #3 in their 10-K dated March 31, 2012 mentions the requirement for another $1.5M in capital to get their juices to market. Check out their press releases since that date. They appear to have plenty of distribution agreements in place, but they really need investors to step up with additional capital for that distribution network to be viable.
The stock debuted at a buck in 2011 and is worth about half that now. Anyone who bought this stock when the touter mailer came out in the summer of 2011 has lost money. I will never be able to explain why companies like this go public in the equity markets before they have proven themselves financially.
I've spent enough time mingling with affluent types and their aspirational hangers-on in San Francisco to understand how they shop for luxury goods. Wealthy people like to fondle expensive goods before making a purchase, just like a predator cat plays with its prey before making the kill. The thrill of the chase for a rich person creates an ecstatic endorphin rush from possessing something that less-competitive peers can't acquire. Rich folks also like to be seen shopping in public because they love it when their friends in high society see them throw down a few thousand bucks on a handbag. Such behavior burnishes a wealthy person's reputation. It's imperative to many rich people that they are publicly known as having plenty of money to burn. They also value having relationships with salespeople who work in high-end retail because they love having lesser human beings at their beck and call. All of these psychological entanglements preclude an online shopping experience from ever displacing upscale retail outlets as the purveyors of luxury goods. The only online shopping a rich person would ever be willing to do would be to buy a book or CD on Amazon; those items don't come in luxury models.
Now that I've deconstructed the rationale for LuxeYard's existence, let's look at their fundamentals anyway. They lost over a million bucks last year while revenue was negligible. They ended 2011 with $300K in cash but with a free cash flow of negative $714K they'll burn through whatever cash they get in no time flat. Oh yeah, this year they took on over $8M in debt. This liability reflects the issuance of convertible preferred shares, for which the company obtained $2.6M in net proceeds. This makes further dilution inevitable, so shareholders can look forward to stock worth even less than the current $0.39/share. I'll give them a tiny amount of credit for scoring revenue of $155K in Q1 this year (according to the 10-K dated May 15, 2012) but their cost of goods sold was over $211K in the same quarter. The more goods they sell, the more money they lose.
Way to go, LuxeYard. Pile the lead ballast even higher on a sinking ship. Amazon does online merchandising right because they sell cheap commodified products. Luxury goods don't move that way.
I am grateful to be a resident of San Francisco, where the city's leaders at least try to balance the budget and prevent city employee compensation from getting out of control. I feel sorry for poor old Stockton, which has been run into bankruptcy after a couple of decades' worth of unsupportable promises to city government employees and retirees. Read that linked article all the way to the end to find a retired city employee demanding the termination of the current city manager. The city manager inherited the problem driven by the greedy demands made by people like her for many years, but she wants to fire the guy for trying to solve the problem and save the whole town. Americans are enthralled with their entitlements. Letting go will be loud and painful.
Stockton's pain is just beginning. The city's 2011-2012 annual budget proposed a deficit of $161M, with only a $5M reduction from the previous year. It's right there on page 2 so we can't miss it. This meager stab at a return to solvency wasn't going to cut the mustard. The numbers describing the city's inability to meet its obligations were in plain sight for any city government employee to see.
Stockton was a nice little farm town before the housing boom paved over its best acreage with unneeded McMansions. I've driven through it several times. The city has a decent downtown, waterfront, and working port. All it needs to do now is take a page out of Detroit's playbook and launch a de-urbanization program. Use eminent domain to bulldoze the suburbs built since 2003 and return Stockton to a level of physical infrastructure that its tax base can support.
The state government can theoretically bail out a city or county government but the folks in Sacramento are having a tough time balancing the state's budget (again). I allowed the last of my California municipal bonds to mature this month and I won't buy any more. The state can't default on its bonds unless a referendum or the Legislature amends the state Constitution. That's not a good enough reason for me to buy Cal munis with the U.S. dollar facing devaluation from Fed QE and potential abandonment from international bond investors.
Full disclosure: No positions in City of Stockton bonds at this time.
Digging into my old mail pile reveals yet another tout piece from Carpenter Global Stock Advisory. This one was for Bering Exploration (BERX), another Eagle Ford shale play. The company website relates practically zero information besides a few names and phone numbers.
The financials from Google Finance say a little bit more. Negative net income since 2008. Retained earnings that have grown increasingly negative since 2008. Share price under a buck even though it's only been public since December 2011. Oh, BTW, the company used to be known as Oncolin Therapeutics. I have no idea what they used to do under that name but it doesn't look like they're doing much anyway now.
That's enough for this one. Really.
Full disclosure: No position in BERX at all, ever.