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 can find amusement in just about anything, especially financial follies. Europe's move to curb high-speed trading comes after years of allowing a few dozen hedge funds to magnify market volatility. I'm glad I won't be anywhere near European stocks when that music stops.
One amusing thing in all of this bad news is that the U.S. isn't doing any better. Our GDP in Q2 was much lower than what we were told at the time. That's not enough to keep pace with population growth so of course median income will keep declining; watch for the fake numbers on that score which will be revised downward themselves when you're not looking.
This is only news to people who think we live in a magical candy-land where life gets better just because we elect leaders who say it will. People fall for that every time. That's what's really so amusing here.
The options trades I tried to execute yesterday didn't get accepted. I have no idea why nothing worked but I tried again today and they went through just fine.
I wrote covered calls on my long GDX position, some of which were very close to at-the-money and others that were farther out. I do this to gradually whittle down my gold position as inflation ramps up. This may seem odd to those gold bugs who are convinced that gold is always and everywhere the best possible hedge against inflation. I am not similarly convinced, and I do not regard gold with religious fervor. It has its use in an era of generally rising prices but it is of limited use in true hyperinflation. That's where the U.S. is headed eventually thanks to the Federal Reserve's permanent stimulus and the government's unfunded entitlements. I'm reducing gold as it rises to make room in my portfolio for other hard asset equities that will keep pace with hyperinflation.
I also renewed my cash-covered short put position under FXF, a currency ETF I wouldn't mind owning. The Swiss central bank can't hold down the franc's value forever. Maybe I'll just go ahead and buy some FXF next month.
I did not renew the options positions I've recently had around FXA and FXC. I'd rather just watch them while the euro's pending self-destruction forces the U.S. dollar higher and plays havoc with other primary trading currencies.
Let's make this as quick as possible. My GDX holdings rose through the strike price of the covered call options I wrote last month. I bought some back and let some go. Gold stocks are rising again thanks to QE3 hurting the dollar so I'll be trimming my position as it rises. Remember, gold and other precious metals respond positively to the beginning of hyperinflationary periods but they are poor long-term hedges against the entirety of a hyperinflationary period. That means I'll be looking to buy other hard asset equities pretty soon.
I sold off the last of my FXI, just as I said I would do for the past few weeks or so. My FXI holdings have greatly diminished since I opened the position a couple of years ago, and they did quite well much of that time. I have since come to my senses on the China story now that their economic figures are pretty much known to be fabrications. I won't return to any more non-U.S. indexed equity investments for the foreseeable future. The world's biggest economies have not decoupled and they'll all head down the slope together, at some point.
Here's how the Alpha-D looks right now. I'm long GDX, FXA, and FXC. I tried to renew the short option positions that expired for those two currency ETFs (and also FXF, which I'm not holding right now) but the orders wouldn't execute. I couldn't even write short options on GDX. What is up with that? I'll try again tomorrow.
My pile of cash awaits deployment after the inevitable crash. If I'm lucky, and the market crashes before the Fed and Uncle Sam launch their coordinated wage-price spiral, I may be able to buy U.S. equities at lifetime low prices. If I'm unlucky, and hyperinflation hits first, I'll buy a basket of hard asset equities I've been tracking and hang on for the ride.
BTW, you may have seen an excess of haiku and a dearth of analysis on my blog for the past few months. I am heavily engaged with several other projects that have come to dominate a huge amount of my time. You'll just have to deal with what I publish until I'm finished doing some important work. I'll tell you all about it when I'm done. I promise.
New Zealand is doing the right thing by maintaining a normal interest rate policy. Central bank intervention destroys a currency in the long run. Proof will come in a year or two when the euro will have dissolved and the dollar will have begun its own devaluation.
Full disclosure: No position in the New Zealand dollar, although I am considering buying some as a hedge against the U.S. dollar.
The "Dummies" book series is popular because it doesn't insult it's readers intelligence. I don't insult my readers because they're intelligent enough to get my analysis and humor. The people I do insult are too dumb to ever read my blog. This post is about them; more specifically, it's about a few signs of a renewed recession that they'll probably miss, because they're dumb.
The WTO is downgrading its global trade forecast for 2013. I'm puzzled by their continued insistence on some growth rather than none. They've caught on to all the noise made by doom and gloom prognosticators who will soon be hailed as prophetic. It's funny to recall the chatter from a few years ago about how the world's economies were supposed to decouple, mainly from portfolio managers looking to validate their theories about geographic diversification. The only useful diversification for the next few years will be in currencies not linked to the dollar or euro, or in countries with economies focused on natural resource production. Everything else remains coupled due to central banks' foolish penchant for monetary stimulus.
A majority of U.S. states is now reporting rising jobless numbers. These numbers won't be counted in federal unemployment statistics because the DOL's economists are more skilled at massaging unpleasant data than the amateurs in state capitals. Look for more dine-in restaurants to start accepting EBT payments, because catering to welfare recipients is a growth industry.
Every baseless rescue announcement in 2008 pumped the stock market up until the unavoidable liquidity crisis hit in September. The same nonsense is happening now, with European stocks rising on pump promises that can't be fulfilled without destroying the euro. Equity markets move in one direction while macroeconomic data moves the other way. Only dummies would ignore these clearly marked warning signs of a big fat global recession. Count on Wall Street analysts to stay bullish and money managers to keep buying equities and fixed income. They're dumb.
Bank of America is one of the systemically important financial institutions that has not been pre-selected to survive the next phase of the financial crisis. That's why it has to cut 16,000 employees and close branches to survive. They can start with any fraudulent mortgage document processors and loan-origination idiots left over from their takeover of Countrywide. The good news for BofA is that the most recent quarter shows it can be profitable on lower revenue.
I mentioned above that surviving institutions have been pre-selected. Goldman Sachs has been pre-selected because it tells governments and central banks what to do. JPMorgan Chase has been pre-selected because many political leaders put their assets there. Wells Fargo has been pre-selected because Warren Buffett owns its shares and raises lots of money for certain incumbent politicians. Any bank other than those three will be subject to forcible seizure, liquidation, and/or consolidation if it can't meet its required capital adequacy ratios in the event of a credit market seizure.
Bank of America's executives should be running scared, as should those of any other bank I didn't mention in the above paragraph. I wonder how many Merrill Lynch people would love to IPO themselves away from the BAC white elephant.
Full disclosure: One credit card account at Bank of America. One cash account at Wells Fargo. No relationships with any other firms mentioned. No equity positions in the stocks of any companies mentioned.
I'm skeptical of new federal taxes given my preference that the U.S. government reduce its spending as its main deficit-reduction method. Today I learned of a proposed tax I can tolerate, deficit or not. The House of Representatives will push a tax on stock, bond, and equity trades. I'd like to see that tax on stock trades come down from 0.5% to a more reasonable 0.1% just like for bonds, but that can be worked out in committee once Wall Street lobbyists start screaming.
I can live with this tax because it will be a smack in the face to high-frequency traders that currently drive the vast majority of the volume on the major exchanges. The small investor who socks away a few hundred a month won't miss an extra buck or two, but the hedge funds gambling with endowment money will have to seriously redesign their algorithms. A transaction tax will probably destroy strategies that seek minute pricing differences every split second. It will probably not hurt event-driven strategies like merger arbitrage or news release plays that don't require constant churning, but those strategies are far simpler to execute than something requiring math wizards.
The only drawback is that an additional 0.5% tax, on top of the potential increase in taxes on dividends to fund the inexorable deployment of nationalized health care, will reduce the after-tax return on equity investments to just about zero in a low-growth, low-interest rate environment. I don't believe low interest rates will hold if the bond market revolts against the dollar, so a spike in real rates would immediately crash U.S. stock markets and the housing market. Suckers who buy stocks now can look forward to zero or negative returns for a long time, but hey, at least their financial transaction taxes on their vastly reduced capital will be negligible.
BTW, this tax wouldn't be so necessary if Washington would cut unsustainable spending first, but that won't happen with so many Americans now addicted to EBT, disability pay, Social Security, and Medicare. Transaction taxes will be popular with the proles who want to stick it to fat cats. America - love it or leave it.
I never have a hard time seeing the silliness in business. Here comes proof. Check it out.
The Fed's QE3 does a funny thing to commodity prices. It can't magically create more supply to satisfy demand, so any new demand is panic buying by hedge funds and other money managers who stampede into hard assets. That's happening in the oil markets now. Blame Helicopter Ben for making your driving addiction more expensive. There's plenty of blame for hedge funds too; their HFT algorithms play so much havoc with prices that they probably caused a flash crash in oil prices today. The onset of hyperinflation often brings uncontrollable swings in short-term input prices that make it impossible for producers to reliably plan production. This eventually hits the real economy with shortages of finished goods. People will be queuing in line at your favorite grocery store, hardware store, appliance store, and car dealer to draw lots for the chance to buy goods that might become available with no notice. Once again, thank Helicopter Ben for making your life more difficult.
The slowdown in U.S. manufacturing activity is coming just in time to make the national election season interesting. Hardly any Americans work in manufacturing anymore so they won't see the effects until their service jobs stocking shelves at Wal-Mart are eliminated. You can't put stuff on shelves if it's not getting made.
The ECB's attempt at QE won't be any more successful than the Fed's at propping up equity prices, given the restrictions on debtor countries' eligibility for the bond-buying program. I've written quite a bit on the political games European leaders have been playing to make the markets think everything will be okay. The market loses interest in the shuttle diplomacy of finance ministers if it doesn't produce corporate earnings or restore solvency to bankrupt countries. The markets can figure this out, unexpectedly. Politicians can't figure this out, which is expected.
What in the world is going on? What made Ms. Merkel change her mind? And what kind of pressure did she put on the rest of her government to do so? Somehow all of the stars have lined up to enable Germany to keep underwriting the inability of Greece, Spain, and Italy to meet their sovereign debt payments with real cash flow. Perhaps Germans are now more afraid of losing their export markets than they are of losing their credit rating. Perhaps they've even forgotten what the Weimar Republic hyperinflation did to their country and its place in the world. Or perhaps, as hinted in the article about Ms. Merkel's attitude change, she got sick of U.S. meddling after too much shuttle diplomacy from Tim Geithner and friends convinced her that U.S. support from dollar swaps and other methods aren't worth the geopolitical price Germany would have paid.
I can't wonder about motives; I should now consider effects. A speedy downgrade in Germany's sovereign credit rating is now likely, which will make it more expensive to borrow sums that support further loans to deadbeat countries. The Germans are about to learn what national-level vendor financing on subprime credit terms will do to the vendor nation's economic viability.
The euro has some life left in it, only because Germany is now willing to sacrifice its own precious fiscal solvency to keep its southern export markets afloat. The crisis is delayed once again, with final resolution (and dissolution) now postponed into 2013. I've gotta hand it to these Germans. They have forestalled a short-term crash in the euro, exchanging it for a much more painful crash later and ensuring their own finances will be severely hurt. That is a very high price to pay for another year or so of strong current account inflows.
I love it when I'm right, especially when I'm ahead of the rest of Wall Street. I wrote a few days ago about the danger to the U.S. economy from the looming ILA strike at East Coast and Gulf Coast ports, and said strike now looks very likely. I am not alone in noting the severity of what we can expect; Asian shippers are getting very concerned. The financial analyst community needs to take a serious look at how re-routing container ships to the Port of Oakland leaves the U.S. economy exposed to a shutdown from as little as a few hundred Occupy Oakland idiot activists. I do not feel sorry for any hedge fund managers who insist on ignoring fundamentals just to pick up nickels in front of this steamroller. I want professional money managers to keep doing exactly what they're doing now, piling on one bad call after another by following each other in a herd over a cliff.
One thing I don't need cluttering my workspace is yet another prediction of monetary easing from the Fed. These Captain Obvious statements are pointless in the face of Helicopter Ben's repeated statements of intent, plus the proclivity of every academic to spend their entire careers justifying a PhD thesis (go read Ben's "printing press" speech and his Princeton work). Anyway, those economists are correct about further stimulus doing nothing but they're missing one thing. Money velocity is at rock bottom. Steroid injections go nowhere if blood isn't circulating. That can all change in a heartbeat if politicians force banks to lend. I am still convinced that some form of forced lending, like the HAMP mortgage modification program but much larger, will be one of the transmission mechanisms for a wage-price spiral into serious inflation.
Germany still wants to put the kibosh on the ECB's newfound willingness to destroy that country's credit rating with unlimited sovereign bond buying. The German constitutional court may vote to block German contributions to European rescue funds. That court needs to read Mario Draghi's speeches again, paying particular attention to the enormous caveats he put in about the austerity criteria any destitute country has to meet before getting a bailout. No way are Greece, Spain, and Italy going to meet those criteria with their economies already in austerity-driven death spirals. No way will they get more than token bailouts that temporarily prop up European stocks. No way is the ECB going to save the euro.
I've listened to what the major party candidates have said in the past couple of weeks. They deserve our attention and respect. I do respect their intentions for America, but understanding their plans requires me to parse the rhetoric from their convention speeches.
The main themes I heard from either party touched the grievances of the middle class in an America increasingly bereft of upward mobility and income security. The Republicans tout seriousness about balancing the federal budget, but it's easy to find independent analyses of how the numbers don't add up. The Democrats remind us of the automobile industry's bailout but ignore the financial loss the federal government still incurs.
The rhetoric about saving Medicare for future recipients is necessary for votes but mathematically impossible without serious benefit cuts and cost controls. The rhetoric about making college affordable is useless in an age when more unqualified students take on crushing debt loads and then settle for low-paying jobs. This rhetoric will set voters up for inevitable disappointment.
There is no intent at present, in Washington or elsewhere, to resolve the federal government's untenable fiscal condition. The fiscal cliff at the end of 2012 is the last opportunity for our national leaders to accept the necessary short-term pain that will preserve whatever shreds of credibility that U.S. currency and sovereign debts have in the eyes of the world. Whoever is President in January 2013 can attempt to navigate the country over that cliff and prepare it for the long, hard slog afterwards that leads to a balanced budget. The alternative is business as usual, which IMHO will postpone fiscal sanity until after a hyperinflationary depression has made further tricks impossible. That outcome is an event horizon beyond which something unfamiliar to our national character can emerge, to our collective detriment.
Forget the charges of gender wars and missing birth documentation. Rhetoric doesn't matter. Reality is unavoidable. A balanced budget would be as real as it gets for America.
Pricing the stock high enough to discourage flippers was a dumb rationale. No corporate executive should try to outguess what a bunch of random traders will do once shares are in public hands. Just ask Dick Fuld of Lehman Brothers, who famously told his executive team that he wanted to "kill" short sellers for betting against his company. Facebook would have been better off leaving some money on the table and pricing its IPO somewhere in the high $20s. Let the underwriter and initial traders get their pop and then back off.
Morgan Stanley must be one seriously messed up firm for allowing a client to be more concerned with a handful of flippers in the aftermarket than the insiders who have held on since Facebook's beginning. I've said in the past that FB should be priced in the single digits. I might as well say the same thing about MS now. Companies this dumb with business models based on nothing but hype deserve each other.
Full disclosure: No position in FB or MS at this time.
That new banking supervisor will have a full plate of stuff to do on day one. The first task will be to explain Moody's continuing downgrade of the EU's credit outlook. Even Germany can't escape the harsh eye of Moody's this time. I like to think that Warren Buffett has admonished Moody's not to miss another brewing debt crisis like it did with the U.S. subprime mortgage debacle. I'm probably wrong but it's a cute fantasy.
Spain's more intelligent investors aren't waiting for another Moody's downgrade. They're pulling their savings out of Spanish banks and decamping for more stable climes and currencies. It's too bad some Spanish folks chose England as their safe haven, because that's one of the countries that just saw Moody's cut its credit outlook. The coming breakup of the eurozone will leave a lot of investors very sad for not moving out of a worthless currency while they had time. Americans will have some time to enjoy the dollar's reserve status after the euro dies but this will not be a long-lived reprieve. I have purchased some foreign currency ETFs and I will definitely open some kind of foreign bank account very soon to hold a stable currency. The handwriting is on the wall in big bold letters.
I had some fun playing with The Economist's global debt clock. It's kind of jarring to see both Australia and the U.S. colored red for high debt, as Australia's public debt burden isn't nearly as onerous as ours. Calling Libya a low-debt country is hilarious. I would not want to own Libyan currency as a hedge against the dollar, especially given the likelihood of a Muslim Brotherhood takeover there.
The Economist has some other fun signals to send us this week. "Charlemagne" tells us not to expect any game-changing moves from the ECB as long as national governments (read: Germany) can veto any pro-euro money printing. The Economist's regular columnists are anonymous because they are insiders of the highest caliber, so these articles are really quasi-policy statements. Reading between the lines is a test for those market analysts (like Yours Truly) who add value. The ECB isn't the only central bank to watch here. That's the real meaning of comments like "single-handedly" and the passing mention of the Fed's Jackson Hole conference in the second paragraph. Just because the ECB can't save the euro doesn't mean the Fed won't step in and give it a try.
Here's one more tidbit from The Economist: Spain is still in line for a bailout after Greece. Even Captain Obvious can see that. What we can't see takes some textual analysis. Greece's tranche payments have been delayed until October, so the "troika" is unwilling to call Greece's bluff and refuse further loan modifications. This "extend and pretend" playbook is now being handed to Spain so European leaders can pretend to bail out Spain and the Spanish can pretend to remain solvent. Europeans have thus bought themselves a few more months of breathing room after some hurried shuttle diplomacy from Tim Geithner convinced them not to breakup the Eurozone before the U.S. elections in November. I hope I haven't confused my dear readers too badly. The "limited hangout" from The Economist tells me that the euro crash can't be put off much longer than two or three months, so it may even coincide with the U.S.'s fiscal cliff. Prepare accordingly.
This article needs a rallying cry. Sarcasm today! Sarcasm tomorrow! Sarcasm forever!
Okay readers, prepare yourselves for the first of several Money Show seminar reports I've been promising you. This one's about my idol, John T. Reed, and his seminar on what he's learned after several decades of investing in real estate. I like this guy because his writing is clear, honest, and extremely well-researched. That is a rare set of qualities in the broad world of financial commentary.
John briefly recapped his career as a property manager, broker, and author. Much of his introductory views of real estate are a reflection of what he's written in his free articles online and in his book How to Get Started in Real Estate Investment. One of his best insights is that real estate investors should follow a strategy comparable to private equity investors by purchasing homes to which they can add value for resale (i.e., turning "disasters into fixers"). Leverage is okay if you can get it on your own terms, with no balloon payments, restrictive terms, or unethical options.
Aspiring real estate investors will benefit from John's checklist-driven approach to managing risk and hedging against adverse actions. I suspect his methodology is derived at least in part from the checklists he had to navigate as a West Point cadet and U.S. Army officer. BTW, John, thank you for your military service, from one who currently serves. You may not need to hear that, but I needed to say it. I am very interested in pursuing the investment strategies John identified that fall short of outright ownership of managed property, like liens and easements.
I consider those books to be among the most important I have ever read in my life. I have read them cover to cover several times and highlighted the passages that I use as active references in my financial decisions. The starter book on real estate gave me some strategies that I'm actively pursuing. Succeeding is something I wish I had read as a teenager because its points on matching your career to your natural strengths would have saved me a lot of grief many years ago. The Hyperinflation book is the kind of tome that comes along once in a lifetime and is worth reading if you intend to survive the years of turmoil that have just begun to afflict the U.S. economy. I have been following John's admonition to "buy everything you need for the rest of your life, right now" since the summer of 2011. Check out his description of liquid hard assets if you need to start making a shopping list. I can now ride out several years of product shortages, logistics bottlenecks, and wage-price spirals in the U.S. thanks to John's suggestions. I still need to find some "junk silver" for my hard asset portfolio. I really like the self-publishing book but I plan to use it in a different way than what John intended. You see, the e-publishing revolution means people can buy e-books on impulse for their Kindles and other electronic book readers. Having an e-book publishing presence IMHO leaves a much lighter burden for the self-publisher by eliminating physical inventory and other headaches. Hey John, consider writing an updated version of HTWP for the e-book era.
I will disagree with one of John's chapters in Succeeding. John is a big advocate of marriage and argues that there's someone for everyone. I simply do not trust anyone enough to want to share my life with another human being. I cannot afford to waste one more minute of my life with people who treat me poorly or do not want me around. Some of us were meant to be alone.
I was absolutely thrilled to hear John T. Reed in person and I even praised him to the Money Show lady who was prepping him for a video interview the next day. I respect this man's diligence and integrity, and that is why I take his writing very seriously. Please note that he hasn't paid me anything at all to say this, even though his wisdom is priceless.
Full disclosure: Long positions in FXA and FXC with covered calls; short position in cash-covered puts under FXF.