Offshore wind farm lease
Uncle Sam will spoil your view
Green power done right
Friday, November 30, 2012
We've Already Passed The Fiscal Cliff
I am totally sick and tired of hearing about the so-called lack of progress in Washington on avoiding the fiscal cliff. The activity that media outlets are passing off as initial posturing prior to serious negotiations is probably nothing more than each political party pandering to its base. Politicians want to go on record with campaign-ready soundbites favoring more unsustainable promises just before they quietly vote to do pretty much nothing.
This past election cycle revealed that neither major party is serious about cutting spending on unfunded middle class entitlements. The leaders of both parties in Washington have sufficient political skill to engineer a legislative solution to the fiscal cliff that does nothing more than continue the status quo indefinitely. In practical terms, I would not be surprised to learn that Congress' leaders already have a draft bill ready for voting that does nothing more than raise the debt ceiling and extend any spending sequesters for a few more months.
The euro's weakness enables temporary U.S. dollar strength, which in turn enables the Fed's unlimited U.S. government securities buying in support of unlimited deficit spending. That's why politicians think they can get away with business as usual. The end of the euro, whenever that happens, will begin the countdown to the end of the dollar as the world's reserve currency. Then it will be business as unusual when Washington will have to force financial repression on America's middle class.
The United States government passed its point of no return when its debt/GDP ratio breached 100% in 2011. We've already passed the fiscal cliff and are now in a Wile E. Coyote midair suspension, willfully unaware of our situation until gravity turns our forward momentum into a downward parabola.
This past election cycle revealed that neither major party is serious about cutting spending on unfunded middle class entitlements. The leaders of both parties in Washington have sufficient political skill to engineer a legislative solution to the fiscal cliff that does nothing more than continue the status quo indefinitely. In practical terms, I would not be surprised to learn that Congress' leaders already have a draft bill ready for voting that does nothing more than raise the debt ceiling and extend any spending sequesters for a few more months.
The euro's weakness enables temporary U.S. dollar strength, which in turn enables the Fed's unlimited U.S. government securities buying in support of unlimited deficit spending. That's why politicians think they can get away with business as usual. The end of the euro, whenever that happens, will begin the countdown to the end of the dollar as the world's reserve currency. Then it will be business as unusual when Washington will have to force financial repression on America's middle class.
The United States government passed its point of no return when its debt/GDP ratio breached 100% in 2011. We've already passed the fiscal cliff and are now in a Wile E. Coyote midair suspension, willfully unaware of our situation until gravity turns our forward momentum into a downward parabola.
Thursday, November 29, 2012
Figuring Out Mines Management (MGN)
Mines Management (MGN) deserves my attention today. I always look for management that's truly experienced in the mining sector. Their current management team is heavy on finance and general corporate work but could benefit from more than just one principal officer who's a geologist.
Their Montanore project in Montana looks promising if they can get a final 2P estimate. It's fairly close to existing roads, so the site may be viable if they can solve any extant water problems and get approval for a power transmission line. It's important to note that their estimates use a long-term silver price of $6.24/oz, which is far more realistic than the current spot price of over $34/oz for a mine with an expected long life. If the inferred grade of about 2oz/ton Ag doesn't improve with further drilling and analysis, then MGN will have to keep its cash cost of production under $12/ton for this mine to be viable. Granted, the same dirt also has copper so they may have some wiggle room on cash costs.
Their La Estrella project in Peru is not as well-explored as the Montana project. Preliminary drilling results show 1.0g/t Au may be available, which is not terribly exciting but may be the new normal given the declining grade quality of new mines worldwide. That makes it worth pursuing.
The financial results so far have been disappointing. A review of their Q3 2012 10-Q reveals the company's candor about risk factors such as lack of 2P reserves and the likelihood of continued losses. Their burn rate appears to be at least $8M/year, and with less than $12M cash on hand as of this past September they'll have to raise more capital by December 2013.
I kind of like this one, even though the Peru project looks like a hedge on the Montana project's viability. Montanore doesn't need that much more work to get started if the final NI 43-101 confirms some decent reserves. I'll pay attention to whatever final data they publish.
Full disclosure: No position in MGN at this time.
Their Montanore project in Montana looks promising if they can get a final 2P estimate. It's fairly close to existing roads, so the site may be viable if they can solve any extant water problems and get approval for a power transmission line. It's important to note that their estimates use a long-term silver price of $6.24/oz, which is far more realistic than the current spot price of over $34/oz for a mine with an expected long life. If the inferred grade of about 2oz/ton Ag doesn't improve with further drilling and analysis, then MGN will have to keep its cash cost of production under $12/ton for this mine to be viable. Granted, the same dirt also has copper so they may have some wiggle room on cash costs.
Their La Estrella project in Peru is not as well-explored as the Montana project. Preliminary drilling results show 1.0g/t Au may be available, which is not terribly exciting but may be the new normal given the declining grade quality of new mines worldwide. That makes it worth pursuing.
The financial results so far have been disappointing. A review of their Q3 2012 10-Q reveals the company's candor about risk factors such as lack of 2P reserves and the likelihood of continued losses. Their burn rate appears to be at least $8M/year, and with less than $12M cash on hand as of this past September they'll have to raise more capital by December 2013.
I kind of like this one, even though the Peru project looks like a hedge on the Montana project's viability. Montanore doesn't need that much more work to get started if the final NI 43-101 confirms some decent reserves. I'll pay attention to whatever final data they publish.
Full disclosure: No position in MGN at this time.
Making Sense Of A Few Gold Newsletter Picks
I can't help but recall an insert with the Jefferson Companies pump mailer I wrote about yesterday. The insert pitched the firm's "Gold Newsletter" and claimed their picks had resulted in serious gains for investors. Let me briefly run down some of their picks here, along with where these companies currently stand.
Kaminak Gold (KAM.V): Currently trading near its 52-week low.
International Tower Hill Mines (ITH.TO): Currently trading near its 52-week low.
Underworld Resources (UW.V): No longer trading; Kinross acquired it in 2010 for the equivalent of C$2.62/share at a 36% premium.
Almaden Minerals (AMM.TO / AAU): Trading about halfway between its 52-week high and low. Still running a retained earnings deficit and annual net losses as of Q3 2012.
Rare Element Resources (RES.V / REE): No longer trades under RES.V, which is what the insert specifically cited (I'm not certain of this, but those shares may have converted to RES.TO if the company changed its listing). Trading as REE is very close to 52-week low. Running net losses for three years straight.
Hana Mining (HMG.V): Trading much closer to its 52-week low than its high; still moving its copper-silver project through the 43-101 process but no 2P reserves yet. Their PEA estimates of a 19.3% IRR and five year payback period fall short of the Sprott criteria for investing.
Bankers Petroleum (BNK.TO): Trading far below its 52-week high but at least its earnings are positive.
Silvercorp Metals (SVM.TO): Trading close to its 52-week low. It's good that retained earnings have grown this year and net income is positive.
I only see two companies on this list - Bankers Petroleum and Silvercorp Metals - that I would even remotely consider as a worthwhile investment with my own money. The others have unproven business models. Shareholders in Underworld Resources got lucky with the Kinross buyout but that may not make up for the other stocks' regressions to their one-year lows. I suspect that the so-called triple digit gains the "Gold Newsletter" touts were short-term pops attributable to paid publicity, but this is impossible to confirm because the teaser mailer doesn't included timelines for any of these gains.
This is why I don't invest according to pumper mailers and their paid newsletters. Hard assets investors need to look closely at NI 43-101 reports of 2P reserves, PEA estimates, and management track records in geology and mining engineering.
Full disclosure: No positions in any of the companies listed above at this time.
Kaminak Gold (KAM.V): Currently trading near its 52-week low.
International Tower Hill Mines (ITH.TO): Currently trading near its 52-week low.
Underworld Resources (UW.V): No longer trading; Kinross acquired it in 2010 for the equivalent of C$2.62/share at a 36% premium.
Almaden Minerals (AMM.TO / AAU): Trading about halfway between its 52-week high and low. Still running a retained earnings deficit and annual net losses as of Q3 2012.
Rare Element Resources (RES.V / REE): No longer trades under RES.V, which is what the insert specifically cited (I'm not certain of this, but those shares may have converted to RES.TO if the company changed its listing). Trading as REE is very close to 52-week low. Running net losses for three years straight.
Hana Mining (HMG.V): Trading much closer to its 52-week low than its high; still moving its copper-silver project through the 43-101 process but no 2P reserves yet. Their PEA estimates of a 19.3% IRR and five year payback period fall short of the Sprott criteria for investing.
Bankers Petroleum (BNK.TO): Trading far below its 52-week high but at least its earnings are positive.
Silvercorp Metals (SVM.TO): Trading close to its 52-week low. It's good that retained earnings have grown this year and net income is positive.
I only see two companies on this list - Bankers Petroleum and Silvercorp Metals - that I would even remotely consider as a worthwhile investment with my own money. The others have unproven business models. Shareholders in Underworld Resources got lucky with the Kinross buyout but that may not make up for the other stocks' regressions to their one-year lows. I suspect that the so-called triple digit gains the "Gold Newsletter" touts were short-term pops attributable to paid publicity, but this is impossible to confirm because the teaser mailer doesn't included timelines for any of these gains.
This is why I don't invest according to pumper mailers and their paid newsletters. Hard assets investors need to look closely at NI 43-101 reports of 2P reserves, PEA estimates, and management track records in geology and mining engineering.
Full disclosure: No positions in any of the companies listed above at this time.
Wednesday, November 28, 2012
Cayden Resources (CDKNF) Working Its Projects
Today I got a promotional mailer from the Jefferson Financial people titled "Mining Share Focus." They're touting Cayden Resources (CDKNF on OTC or CYD.V on TSXV), a junior Canadian-based explorer that's almost low-priced enough to be in penny stock territory.
The management team is long on finance expertise but thinner on geological expertise than I'd prefer. The CEO is a financier, not a geologist, and he and other members of the team still have active roles in the management of Keegan Resources (KGN). I won't focus on Keegan in this article other than to say it's difficult for a management team to devote itself fully to more than one company at a time. I consider side projects like Cayden to be a distraction unless they can be folded into the main company's portfolio.
Speaking of projects, Cayden currently has three that are active. The Morelos Sur project has a 43-101 report with a resource assessment, although I would prefer to see 2P reserves. The El Barqueno and Quartz Mountain projects have no technical reports yet and are still just options.
Let's check out their financial statements. Cayden had $1.7M in cash on June 30 of this year and had a net loss of $525K in the three months ending on that date. This burn rate will require them to raise additional capital no later than mid-April 2013 if they are to continue exploring their properties.
There's some promise here, especially if the Morelos Sur project's final 2P numbers show improvement over the inferred mean estimated grade of 1.38 g/t Au. It sure would be nice to see a junior find something a major wants to acquire.
Full disclosure: No position in Cayden Resources or Keegan Resources at this time.
The management team is long on finance expertise but thinner on geological expertise than I'd prefer. The CEO is a financier, not a geologist, and he and other members of the team still have active roles in the management of Keegan Resources (KGN). I won't focus on Keegan in this article other than to say it's difficult for a management team to devote itself fully to more than one company at a time. I consider side projects like Cayden to be a distraction unless they can be folded into the main company's portfolio.
Speaking of projects, Cayden currently has three that are active. The Morelos Sur project has a 43-101 report with a resource assessment, although I would prefer to see 2P reserves. The El Barqueno and Quartz Mountain projects have no technical reports yet and are still just options.
Let's check out their financial statements. Cayden had $1.7M in cash on June 30 of this year and had a net loss of $525K in the three months ending on that date. This burn rate will require them to raise additional capital no later than mid-April 2013 if they are to continue exploring their properties.
There's some promise here, especially if the Morelos Sur project's final 2P numbers show improvement over the inferred mean estimated grade of 1.38 g/t Au. It sure would be nice to see a junior find something a major wants to acquire.
Full disclosure: No position in Cayden Resources or Keegan Resources at this time.
Tuesday, November 27, 2012
Grizzly Gold (GRGZ) Has Yet To Growl
I got another mailer from a stock promoter, this time from Montgomery Gates' Wealth Generation Report, which has little more than some teaser paragraphs on its website at this time. The mailer touts Grizzly Gold (GRGZ on OTC), a junior explorer based in Nevada. Let's see if this one has any surprises.
The management team is pretty thin; the CEO is a geologist but his most recent experience has been in consulting rather than operating mines. I don't know what the other two directors actually do.
Grizzly's main project is the LB/Vixen property. It's cool that it's sandwiched geographically between two proven mines but that doesn't necessarily mean its geology contains ore bodies of similar quality. The property has changed hands several times in three decades with no successful exploratory results. The drill results they've listed so far on the project page don't exactly thrill me, with poor grades of Au 0.02-0.09 g/t and one somewhat promising hole apparently flooded. I'd like to know whether they plan to perform an aerial magnetic survey of their property before drilling any further, because that would kind of help find the hot spots.
The 10-K Grizzly released on Jul. 25, 2012 says they plan to run exploratory drilling at least through April 2013 provided they can fully fund it. Their 8-K from Oct. 18, 2012 indicates they successfully raised $250K at $1.00/share, and it's interesting to note that the public share price already started moving above $1.00 around that time. It has since fallen to $0.54/share as of today, so raising private placements isn't enough to permanently move the needle without better drill results.
Eyeballing the map they posted on their website shows that LB/Vixen is about ten miles from the nearest major road. Their capex budget, assuming they strike some decent grades, will have to cover scraping out at least ten miles worth of unimproved connecting roads if they don't already exist.
Grizzly is a long way from having a viable project but only a complete drilling program next year will reveal whether they have a property worth selling to a major producer.
Full disclosure: No position in GRGZ at this time.
The management team is pretty thin; the CEO is a geologist but his most recent experience has been in consulting rather than operating mines. I don't know what the other two directors actually do.
Grizzly's main project is the LB/Vixen property. It's cool that it's sandwiched geographically between two proven mines but that doesn't necessarily mean its geology contains ore bodies of similar quality. The property has changed hands several times in three decades with no successful exploratory results. The drill results they've listed so far on the project page don't exactly thrill me, with poor grades of Au 0.02-0.09 g/t and one somewhat promising hole apparently flooded. I'd like to know whether they plan to perform an aerial magnetic survey of their property before drilling any further, because that would kind of help find the hot spots.
The 10-K Grizzly released on Jul. 25, 2012 says they plan to run exploratory drilling at least through April 2013 provided they can fully fund it. Their 8-K from Oct. 18, 2012 indicates they successfully raised $250K at $1.00/share, and it's interesting to note that the public share price already started moving above $1.00 around that time. It has since fallen to $0.54/share as of today, so raising private placements isn't enough to permanently move the needle without better drill results.
Eyeballing the map they posted on their website shows that LB/Vixen is about ten miles from the nearest major road. Their capex budget, assuming they strike some decent grades, will have to cover scraping out at least ten miles worth of unimproved connecting roads if they don't already exist.
Grizzly is a long way from having a viable project but only a complete drilling program next year will reveal whether they have a property worth selling to a major producer.
Full disclosure: No position in GRGZ at this time.
Monday, November 26, 2012
The Haiku of Finance for 11/26/12
Hard asset wisdom
More than debt and equities
Real things over cash
More than debt and equities
Real things over cash
Synopsis of the San Francisco Hard Assets Investment Conference 2012
The San Francisco Hard Assets Investment Conference is my favorite trade show ever. It was different this year with the exhibitors split between two levels at the Marriott Marquis but the seminars and workshops were phenomenal. I'll provide my recaps of the many platform speakers from November 16-17 below. The bold words indicate wisdom I find worth applying in my own portfolio.
First up on Friday morning was Mickey Fulp, Mercenary Geologist. He took questions on his stock picks and other topics. He likes Athabasca Uranium and thinks that the SEC's probe into Molycorp is likely minor but will hurt other REE miners like Tasman Metals and Quest Rare Minerals. One guy in the audience threw out a random question about some movie called "Wall Street Conspiracy" that alleges organized crime is involved in uncovered shorting. Mickey thinks you have to find ways to make money in the markets anyway, although I think there's enough manipulation to make that difficult. Another guy asked about the disconnect between the price of gold bullion and gold mining stocks; Mickey uses the Toronto (TSX) Venture Exchange as a proxy for junior gold producers. He thinks big miners are now looking at dividend strategies and junior miners have underperformed because risk averse investors are dumping speculative stocks. Some clueless nutcase asked about a "billionaire gift tax;" Mickey had never heard of it and neither have I. When asked whether he likes silver producers, Mickey said he usually reviews silver companies that find silver deposits with base metals but would like to find a stand-alone silver company.
Jonathan Moore from Summit Business Media welcomed everyone to officially kick off the conference. Being an active participant is what I'm all about but the rest of the folks needed to hear it from Jonathan. He mentioned a couple of incentive games they had but I left those to attendees less fortunate than me.
Paul Van Eeden gave a keynote talk on "rational expectations." His take on monetary policy is radically different from what you'll find in most gold bugs' newsletters. He is correct in stating that the Fed will do anything to prevent deflation and that collapsed lending demand has destroyed the multiplier effect that would normally drive inflation. I differ with him in my expectation that this depressed multiplier is not at all a permanent condition. I expect some artificial stimulus to lending demand, probably from home mortgage modification programs. Anyway, Paul thinks the gold price's expectation of inflation is likely irrational because real world inflation hasn't fulfilled that expectation. I say just wait long enough for policy to force lending and gold will get all the inflation it expects. Paul also thinks gold, silver, and copper are still in a bull phase while every other metal has crashed (thanks to China's overbuilt infrastructure). He thinks junior stocks are acting like the prices of base metals because investors are losing their risk appetite, making them attractive buys. Paul concluded with his bullish case for the U.S. He said our high unemployment rate means labor is available, our low interest rates are good, and low energy costs from fracking and horizontal drilling are attractive. Maybe so Paul, but those interest rates won't stay low for long so any major producer that wants to buy a junior had better do so right now.
Adrian Day was up next, pondering whether miners have a tough road ahead if the resource boom is over. He noted that central banks have not restructured the balance sheet expansions they launched in 2008. He cited the U.S. Debt Clock's figures for how much the average American taxpayer owes in unfunded liabilities, which as of his address at the conference was over $1M/taxpayer. My SWAG-type estimate leads me to believe the Fed will be comfortable with a prolonged level of high inflation that reduces that liability to around $10K, or 1% of the present relationship. I have no historical basis for this estimate other than my impression that the average American won't tolerate outright cuts to entitlement programs and so policymakers must indulge this attitude by letting inflation do the job. Of course, the attendant second-order effects from high inflation won't be anyone's fault. I really need to get off this soap box and back to Adrian, who BTW said policymakers will do all it takes to keep interest rates low so the interest payments on government debt don't spiral out of control. He noted that many central banks are reducing their dollar holdings and that commodities move in long cycles as major economies industrialize and urbanize. I disagree with one thing Adrian said when he claimed China is still growing. I think their whole "industrialize and urbanize" phase is pretty much ending as they hit a demographic wave of peak earnings and wring debt out of government-backed development entities. I got over the China bull story even though it took me a long time to realize their numbers are fraudulent. Adrian's a smart guy and I'm counting on him to see the light soon.
I listened to Jeb Handwerger share some ideas from his newsletter. Here's one astute observer who notes that a significant portion of the U.S. population pays no income tax; he said two thirds but the exact number is up for debate if you include those who pay some state income tax. Jeb notes that Europe's socialist/Keynesian policies led to austerity and revolts, and that this is soon coming to the U.S. thanks to our entitlement programs (bingo, I agree). Jeb intrigued me when he said the fiscal cliff deal is already done in Washington and the public rhetoric is just politics. When you think about it, all Congress has to do is send the President a bill delaying the implementation of the year-end automatic cuts indefinitely. Presto! Cliff averted, can kicked, problems unresolved. I also agree with Jeb's statement that this means the Fed will print a way out of the fiscal cliff. He expects gut-wrenching hyperinflation to bring exponential gains to hard asset investors within a decade. Jeb picked up on something I've been seeing with increasing regularity since I started attending these shows, namely that new resource discoveries are getting harder. I even see that in weekly roadshow presentations from exploration companies that get excited over a few tenths of a gram of metal they claim to have found. Folks, these discovery dearths will drive major producers to acquire solid junior producers.
Keith Schaeffer told us that oil is worth a lot, natural gas is worth less than oil, and we can expect a boon for oil services. The Marcellus boon is enormous. Low inventories and rising production should support oil prices. Distillates are important to the world economy and demand for them remains high. New gas finds often have value-added products. A global policy shift against nuclear energy makes LNG attractive. No new refineries are being built in the U.S. He mentioned some stocks he likes because bottlenecks at refineries make them attractive, plus they pay dividends. I'll compare them in a separate blog posting once I have a chance to view their ROEs and other fundamentals. Good job, Keith.
I didn't spend much time with the exhibiting companies' pitches in the main hall but one had a funny tag line. The guy from Bullfrog Gold made my day when he said, "Bullfrog Gold is ready to jump!" That's a classic. I have no idea whether that's an accurate assessment so maybe I should cover them in a separate blog post.
Benjamin Cox from Oren Inc. gave an absolutely outstanding workshop on using data from financing rounds to evaluate a mining company's viability. Ben once worked for D.E. Shaw and brings a much-needed quantitative voice to the cottage industry of junior mining. His nuggets of wisdom came fast and furious and I enjoyed listening. Here it comes, line by line. A mining project that provokes NIMBY bumper stickers will likely have permitting problems. Management must work 70 hours per week. Companies repeatedly financing for small amounts with large dilution are problems. Inelastic demand for a commodity makes it desirable for mining (hey, I'm thinking there's hope yet for silver and rare earths). Zinc is useful in galvanized products for infrastructure so no zinc means buildings rust and fall down (listen up, China). The massive $5T in capital tied up in steel milling makes coking coal indispensable (well, I think there's more to it than that, like demand for steel and aluminum products, but it's an okay starting thesis). I was very intrigued by his admiration for co-branded mining companies because they can share supporting resources; I see these mining companies all the time but it seems to me like they're stuck between spinouts. Viewing them as mini-conglomerates puts them in a whole new light but let's not forget how the inefficiencies of conglomerate mergers in the 1970s put the whole "sharing resources" theory through a major wringer.
Benjamin continued on a roll by mentioning free tools investors should use: Google Earth to view a property's geography; USGS Mineral Resources Program to learn about metals; SEDAR for viewing Canadian public company filings; the Fraser Institute's Economic Freedom index to assess political risk; and common sense. He was of course pitching Oren's paid notification services but much of the data he used to walk us through mining deal financing was free of charge. Here comes more free wisdom from this sharp guy. Successful financing closes indicate a company that's executing its business model. Brokers are rational and charge more to raise money for harder projects. Broker fees are thus indicators of a project's difficulty. A fully subscribed book indicates success. A short time to close a deal is good, and so is an oversubscribed deal. Companies can review Oren's tear sheets to see if a broker fits their deal by average deal size, number of total deals, and percent of deals with warrants. A bought deal is a broker's promise to close a financing round with its own money, and for Benjamin that's a useful indicator of a broker's confidence in a company's prospects.
Benjamin surprised me when he said he likes companies that pay management decent salaries because real talent doesn't come cheap. Management that works for free indicates little value added. The exception for him is a management team that owns a big stake in their company because they're getting paid in equity. That's actually in line with Silicon Valley metrics for tech startups. One thing I like about Oren's model is their use of this data to find troubled deals, then examine the company from a vulture investor's standpoint to see if they have quality hidden assets worth buying. Man, this talk was a joy to behold because it's so rare to see a serial entrepreneur lay out a value creation philosophy with multiple applications.
It wouldn't be a hard assets show without a keynoter from James Dines, legendary analyst and employer of attractive female models. He was in classic form, sticking with his prediction of a further slowdown in China. He expects China to spark a dollar crisis when it reduces its dollar holdings for gold to bail out its insolvent banks. I'm skeptical of global warming, so I have a hard time swallowing his admonition against buying sea-level real estate. I further doubted his claim that rare earth mining stocks will recover after tax-loss selling. Come on James, a slowdown everywhere will keep REE demand down. He sees the U.S. government becoming the world's largest landlord with housing bailout programs. I think James is counting on more foreclosures while the Fed retains ownership of massive amounts of mortgage-backed securities to make that prediction come true. James is obviously a precious metals fan but warns us not to keep precious metals on our person or in our homes (yeah dude, that means you have to trust a bank vault instead). James predicts a whole bunch of disruption from online learning, religious wars, regional separatism, cyberwar in World War IV, and a U.S. police state. He restated the main geopolitical thesis from one of his books, that political activity oscillates between whether the state or the individual is supreme. He also plugged Photocyclops, his reprint service for his fine art photography. I had no idea he was into taking pictures, but then again his models provide some great scenery.
Rohit Savant from CPM Group broke down the costs of production, 50% of which is labor. The lead times of bringing new mines online mean supply changes will lag changes in operating margins, so profits rise or fall ahead of supply changes. Metal prices are the most important factor driving exploration spending. Country risk is the largest risk in mining. The dental sector is the third largest source of gold demand but palladium is becoming a more cost-effective substitute. A recent sharp rise in cash costs squeezed margins across the mining sector, explaining why gold mining stocks have underperformed bullion. His figure that 90% of gold from primary mines had a cash cost of less than $1052/ounce leads me to believe that many gold producers can survive as long as fear of inflation keeps gold prices high, even though they'd be unprofitable in normal times.
I skipped Ian McAvity's address because I heard enough of him in the past and I don't need to hear him anymore. I instead went to hear about Precious Metals Warrants but after forty minutes I realized I had heard precious little about how to invest. I did hear that currencies will engage in competitive devaluation at some point but with no indication of which those would be. I also heard praise for limit orders, which I consider to be amateur's tools. I stopped using limit orders years ago when I figured out that selling options could accomplish the same thing and even generate cash. I'll blog the stock picks I heard separately.
Rick Rule was the next keynoter. This guy is one terrific salesman. If I were running a brokerage I'd show recordings of his talks to the sales force because he can spin any macroeconomic environment into a bullish argument. Rick used a sales sign analogy to argue that people are good at shopping for goods on sale but not for financial assets. He thinks we're in a cyclical decline within a secular bull market for commodities because supply constraints will persist from a lack of exploration. He thinks the "return-free risk" proposition of Treasuries is questionable (I agree, which is why I no longer own fixed income). Rick expects to see takeovers in the gold sector; it produces a Carlin trend equivalent annually with no replacement from discovery. He laid out Sprott's three criteria for buying a mining stock: NPV greater than enterprise value of the company plus the capex of its mine; an IRR greater than 25% (ideally 30%); and a payback period of three years or less. He finished by noting that a company's timeline from preliminary economic estimate to bankable feasibility should be about two years, as this progression adds value and allows for arbitrage by investors. My takeaway from that observation is a company that can't go from PEA to feasibility in two years isn't a worthy investment.
Lindsay Hall from RMB Group gave a workshop on commodity futures options. She was one seriously hot chick and I wouldn't mind exploring an option in her future, if you know what I mean. It's too bad I didn't have time to get her phone number because I was too busy taking notes in her workshop. Maybe that's just as well, because she probably would have been too overwhelmed by my sheer manliness to focus on her presentation. Anyway, she cited figures projecting the U.S. will still have an imported oil dependency in 2035, which contradicts the IEA's recent report concluding the U.S. is on its way to oil independence. She devoted a large portion of her time to a bunch of scary headlines about Iran's threats to stability in the Persian Gulf. That is too much emphasis on sensational Iranian rhetoric with no analysis of the country's order of battle or out-of-cycle force movements. She mentioned some report that Iran successfully tested a missile that has range to U.S. bases in the region, but offered no consideration of the warhead's blast radius or circular error probability. I think it's cute when amateurs with sales backgrounds try to frighten other amateurs. Her pitch on option spreads made sense and even introduced the concept of an "oil CD," where you devote a portion of your capital to a bull call spread on oil futures and the rest to a CD with a matching maturity.
Louis James from Casey Research was on the platform talking about "quality, man." He meant that engineers' economic studies on feasibility drive a mining company's quality. A published study that doesn't move a stock's price may mean the study was meaningless. Saying "no" to many deals is good because we can wait for Warren Buffett's fat pitch when an engineering study shows us quality. I like this Louis guy. I first heard him last year at the Rare Earths Summit and he's definitely sharp.
The keynote panel on up and coming stocks churned out a bunch of picks in uranium, phosphate, and energy technology. I'll get to them all eventually in separate articles but it was cool to hear more about uranium in particular. I did not know that the uranium market had a supply glut when Japan's reactors all went offline.
Saturday morning brought back Rick Rule for some introductory Q&A prior to the official opening of the second day. Someone asked him about stories on fake gold bars; he mentioned that Sprott's policy is to buy only bars with well-known custodial histories and store them in the Royal Canadian Mint. Rick senses the possibility of a psychotic break in the market and was glad he had lots of cash on hand in 2008 to use when people made panic sell decisions. He thinks the euro/dollar ratio at 1:1 makes sense but they have two common problems. First, they are transfer mechanisms for unsustainable liabilities in societies that have lived beyond their means. Second, they are subject to downward manipulation (I presume through monetary stimulus). I like Rick's florid use of language when he says interest rates area function of confidence and that Western governments are at war with savers. I'll bet Mitt Romney would agree with Rick's statement that spenders outnumber savers and are a bigger constituency for low interest rates. Rick was astonished that the official CPI calculation doesn't factor in taxes and doesn't account for the aggregation of debt. I'm not so astonished myself, partly because we all have different effective tax rates and partly because accounting for unpayable debts would drive the official CPI through the roof. I was pleased when Rick said he had a high opinion of Allied Nevada, a junior stock I owned until it doubled a few years ago. I re-connected with one of that company's principal backers at this conference to thank him personally for doing a great job.
Rick Rule then got to the main part of his talk on how to interview the management teams of junior mining companies. Here's my recollection of his thought process. The first thing to know in interviewing management is that their prepared pitch minimizes management stress. Juniors create value by answering unanswered questions. Will they make a discovery? Is the discovery worth anything via execution? Junior companies are not asset plays because they typically don't have proven and probable reserves. They're really more like an intellectual property play in Silicon Valley that needs R&D. People are more important than property in early stages. Rick advises us to ask CEOs about their specific skill sets and previous successes. This will help find the Pareto 20% of managers who have the best chance to succeed. More questions for the CEO: Who's the second most important person in your company and why did you hire them? What are their specific skills and successes? What role does each director have? Use these questions to reach an early conclusion that some CEOs just want to raise money so they can cash out. Rick says that a small mine can't make you big money. If a CEO seeks a more attractive deposit they can expand, ask for evidence. Ask the CEO how they will test their exploratory thesis. A good explanation of an execution plan helps you eliminate companies that will generate a random result rather than a deliberate one. Another thing to ask a CEO: If your last success was at a different location, in different terrain, with different minerals . . . what makes you think you can apply those skill sets to a project you haven't done before? A medical analogy would be that oncology is not the same as neurology, so gold expertise does not necessarily translate to copper. Not all mining is the same. Rick's further questions for a CEO: How much money must you spend on ground over a specific time period? What's your monthly burn rate? How much cash do you have on hand now? Know that it takes money to answer the company's unanswered questions and succeed. More questions: What if limited drilling yields poor results? Will you continue? Most projects lose, so you need big winners to subsidize many losses. More questions: How will I find out about your company's success? Via press release, or may I call you to find out results? These answers reveal whether management thinks granularly about drill results. Rick warns us that we'll never get perfect answers to every question. The purpose of asking is to whittle down one's list of companies to a small list that will increase the chance of successful investing. Rick closed by saying that his prospect generator companies have significantly outperformed.
Pam Aden from the Aden Forecast was one keynoter I did not need to hear. She claimed we're in the twelfth year of a bull market, so I guess she hadn't heard of the 2007-2009 bear market. Maybe she meant gold and not stocks but it really wasn't clear from her data. She projected some charted bubble peaking in 2013, but what she meant still wasn't clear. Her whole thesis for buying gold rested on technical analysis of channels. Puh-lease. That's when I picked up and left.
Chris Berry from House Mountain Partners gave a great workshop on the supply and demand fundamentals behind the rare earth sector. I first met Chris this past March at TREM12 in Washington, DC, when I was on a panel with his father Dr. Michael Berry. He's a chip off the old block and sharp as a tack. He argued that each REE has its own supply/demand mix. Problems for major REE producers like Molycorp and Lynas spell opportunity for juniors. China's REE exports are down because global demand is weak. Chris thinks Moylcorp's book value is greater than its market value, so its problem is management rather than assets. He thinks that makes Molycorp a buyout target; I'm not so sure, because with earnings going negative and ROE negative for the last twelve months an acquirer would be hard pressed to add value simply by changing management. The debt load Molycorp carries from its last big acquisition will persist. Anyway, Chris also noted that lanthanum's record price increase last year only added one cent per gallon to the price of gasoline. He believes that REE juniors need to raise cash with a dilution strategy, off-takes, intellectual property, and supply chain integration. Bigger does not mean better for REE producers because they must have what the market wants; just look at Molycorp. Well done, Chris.
Brent Cook from Exploration Insights shared his wisdom. He said producers' margins are not increasing with the price of gold because cash costs are increasing and deposit quality is declining. Discoveries are down significantly and annual production is outpacing new discoveries. Majors must replace their lost production and quality deposits command a premium. Not all deposits are identical; geology must confirm an investment thesis. Topography determines whether mining facilities are physically realistic, and showed a photograph of steep hills cut by deep ravines as an example of an infeasible site with no flat areas for milling or heap leaching. Brent likes prospect generators with smart business models, some of which he describes in his free articles. His website has an excellent free report with insights into geology and mining, and a link to Sprott's free mining investment explanatory materials.
I went to Paul Van Eeden's workshop to hear more of his contrarian perspective. He's bearish on gold because he thinks it's too expensive. He also thinks the world has passed Peak Oil and that U.S. oil shale deposits are experiencing much more rapid decline rates than first predicted, making it unlikely the U.S. will fulfill the IEA's prediction of becoming a leading oil producer. He sees opportunity in natural gas given its low prices but depletion rates are high. I think Paul should read the NYT's investigative series on the shale gas bubble because it will help confirm his thesis that there's less to the shale revolution than what's advertised. He puts the fair value for gold at $800-900/oz (I say that's still too high, far above its historical average) and openly questions valuing it in U.S. dollars given U.S. inflation rates. I personally don't mind gold measured in U.S. dollars because I'm a U.S.-based investor, my portfolio is denominated in U.S. dollars, and my living expenses are in U.S. dollars. Paul noted that high gold prices mean miners produce low grade ore veins first, saving high grade deposits for times when gold prices are low. It was interesting to hear him say the Fed has stabilized its balance sheet by matching purchases of new securities with sales of ones it currently owns. Paul is a fan of this Fed's anti-deflation strategy. I marvel at the risk the Fed takes and wonder why it has yet to lose money on a trade. The next couple of years will reveal whether Paul is correct to place such confidence in Ben Bernanke's PhD thesis / wish fulfillment.
Chris Gaffney from EverBank keynoted his macroeconomic perspective. Investors now understand that Greek debt is riskier than German debt and so PIIGS interest rates have risen (IMHO hedge funds still haven't figured this out and that's why they're so dumb). Europe's rescue fund is too small to cover a potential default by Italy (IMHO analysts haven't figured this out yet and that's why they're so dumb). Chris thinks the euro will survive because it's too important to Germany as an export promotion mechanism. I strongly disagree with that notion. IMHO losing one eurozone member breaks a taboo and others will follow to avoid being the last Prisoner's dilemma victim remaining. I'm also pretty sure German taxpayers have limits to their patience and will vote out incumbents who wantonly subsidize profligate countries' debts. Anyway, back to Chris' arguments. He expects the U.S. federal government to push its fiscal responsibilities onto state and local governments forcing them into their own budget crises. He is not alone among the other gurus here in expecting a false solution to the fiscal cliff that will delay its consequences into the future. He likes Shadow Stats' inflation measure (so do I) and notes Paul Krugman wants more inflation (revoke that man's Nobel Prize in Economics). Chris uses the Economist's back page statistics to show how countries with high current account balances generate demand for their currencies. He finally gets to some currency picks. He likes Norway because it's an oil-based economy; Sweden for some odd reason I can't recall; Australia for its exports of natural resources to China (yeah, not for much longer); Canada for its strong banks; and also Singapore, China, and gold. I can't agree with his pick for Singapore because it's such a thinly traded currency or China because I think they'll have to hyperinflate away their debts just like the U.S. Otherwise, Chris really did his homework.
I never miss Al Korelin's address because the guy's a legend in financial journalism, although I'm pretty sure he hits the same basic themes every year at this show. He advises us all to get information from as many sources as possible, and to be diversified even within metals and other hard assets. He predicts the growth of U.S. government involvement in the economy will hurt the stock market and help hard assets. He prefers to invest in companies rather than commodities because companies give him leverage (i.e., it's a truism in mining that companies with a levered balance sheet will rise faster when metal prices rise because their prospects of paying off that debt just increased mightily). He evaluates mining companies on management, asset quality confirmed by assessment, ability to execute, and location in the world (i.e., minimal political risk). He also thinks the current administration will favor taxing mining companies as a revenue source. That's a scary thought, sort of like a windfall profits tax taken to an extreme for a hot sector.
I had to hear more from Louis James over at his workshop because his address on "quality, man" was so great. I like his irony when he said President Obama's victory provides clarity with an open advocacy of higher taxes and an anti-rich mentality. Louis thinks the precious metals markets haven't peaked yet. I think that's a kind way of saying they're overvalued, which is why I've reduced the gold portion of my portfolio from the large concentration I had a couple of years ago. Louis says not to panic when the market drops, just keep averaging down. His counterpoint to skeptics who say companies can't raise billions in capex for big projects is to evaluate the project's potential returns. Global capital markets are big enough to fund desirable projects now matter how big they look. Louis' next piece of advice will probably fall on deaf ears but it's worth repeating. He advises investors not to invest unless a company meets their decision criteria with high standards. I really do think too many people will ignore that and instead give in to some great story's temptation, but Louis does the public a great service by putting this out there anyway. Louis framed his "cash, courage, and contrarianism" approach for everyone to benefit. Courage enables you to ignore short-term market action if you are confident in your long-term strategy. Contrarianism enables you to buy a stock even if its price has been beaten down. Cash allows you to make this happen. Have all three factors and you're probably going to win, at least some times IMHO. He added that there's no one safe place to invest in mining because it's unpopular everywhere for being dirty, messy, and costly. His criteria for investing in a mining stock includes a 2x return in 12 months, which interestingly enough reminds me of Mickey Fulp's philosophy. Louis also thinks the gold/silver ratio is a poor indicator of either metal's price movement. I totally agree, and I roll my eyes whenever some analyst throws out a ratio of a metal to another metal, the DJIA, or anything else except a currency an investor must use to buy said metal.
It wouldn't be a Hard Assets show without Peter Schiff on the keynote roster. I got my picture taken with this true icon of finance when he appeared in his booth (check my Facebook archive). Peter went on a tour de force of the U.S. and its dollar. Here comes my summary of this man's brilliance, with no adulteration on my part. At some point, the Fed won't be able to fool the world anymore. It won't be able to withdraw liquidity (by selling securities) to fight inflation. The Fed must thus continue to lie and pretend there's no inflation. Inflation drives up mail delivery costs but the price of stamps is fixed to the CPI. That's why USPS is going bankrupt. "Fiscal cliff" means we actually have to pay for government spending with taxes, not debt. Politicians' promises aren't free and the fiscal cliff is the price we have to pay. Even the fiscal cliff's spending cuts aren't really cuts, but smaller future increases. The real cliff comes when the Fed can no longer keep interest rates artificially low. Artificially setting interest rates creates distortions, especially if inflation is greater than the official interest rate. Peter believes interest rates must rise to around 7% but this will cause pain. The U.S. government has admitted its debt is a Ponzi structure when our leaders say the government will default if they can't raise the debt ceiling. About one third of U.S. debt matures in a year and the Treasury plans to keep rolling it. Big banks will fail if interest rates rise and the Fed never stress tested this outcome. Banks profit now from the spread of the Treasuries they buy over Fed credit they owe. Higher rates will flip that spread and destroy banks. The deficit skyrockets when the U.S. government can't collect taxes in a recession to cover exploding spending on freebies (i.e., EBT cards for the bottom 47%). The U.S. has a reprieve right now due to Europe's problems making the dollar relatively stronger. If the U.S. tried to finance its sovereign debt by selling long term bonds, then long term rates would be skyrocketing. A sharp rise in interest rates will put trillions of losses on the Fed's balance sheet. The world will call the Fed's bluff when it takes its attention off Europe (if/when it blows up) and starts a run on the dollar. The U.S. Dollar Index will go into freefall, consumer prices will rise, and the Fed's credibility will be gone. Peter believes we face either hyperinflation or a deflationary collapse worse than the 2008 crisis. Politicians will opt for inflation because it buys them time but each round of monetary stimulus is less effective than the last. Peter expects a monetary crisis and sovereign debt crisis right here in America. My loyal readers know I expect a similar outcome. The funniest part of Peter's talk came when he asked rhetorically how the Fed and Treasury will bail each other out, because Treasury is required by law to make whole the Fed's losses but the Fed is buying Treasuries! The audience LOL'd but I was too sad to join in. I expect the government will have to invent brand new accounting rules for itself to make that problem disappear after the dollar crisis.
The next big speaker I cared about was Dr. Michael Berry, my fellow TREM12 panelist. I read his Morning Notes daily for insights into junior producers, and here come more of his insights with as little filtering as I can manage. Dr. Berry believes debt and taxes are negatively correlated (right on!) and some tax increases plus austerity are likely. It's easier to raise taxes than cut spending. Entitlement expectations finally make deliberate debt reduction impossible (hey, thanks to the 47% who enjoy being victims). The final curse of the reserve currency dollar is unrestrained debt issuance. The administration will demand much higher taxes in its second term (IMHO probably a negotiating tactic for now but who knows). "Taxmageddon" means rates up and credits down. The non-partisan Tax Foundation publishes tax changes by state. The effect of more taxation will be to decrease consumption and GDP. The Fed's ZIRP is financial repression (yes indeed!), forcing savings into Treasuries. Austerity's effect on household income will hurt the housing market. The administration believes it has a mandate to force more taxes on the wealthy but entitlement spending is unlikely to be seriously considered for reductions. This is all good news for precious metals, energy, and agriculture. Investments in ordinary debt and equity markets are likely to fall. Commodity volatility means trading opportunities (IMHO options and futures will come in handy). Dr. Berry looks for growth in water, potash, and silver stocks. Less liquid markets will sell off more quickly. Policymakers will expropriate your wealth! Dr. Berry showed his latest Discovery Investing scorecard and I noticed that some of the same companies were listed twice, both by their OTCBB ticker and TSX or TSXV ticker. Hopefully he can develop a filter that will prevent double-counting companies, unless of course the scorecard allows for arbitraging the same ticker in different markets. Dr. Berry's bottom line is that risk plays will help beat financial repression and taxation. Good show, Doc!
Quinton Hennigh from Exploration Insights gave a terrific workshop on separating the wheat from chaff in junior gold deposits. He mentioned that the DOW/gold ratio declines in tough times and heavy gold exploration coincides with that ratio's troughs. Costs are stable when mining proliferates but drilling costs have escalated in the last 20 years (I disagree with this scenario, as we see heavy mining activity today but with rising costs from higher energy prices). Digging deeper through more complex ore bodies drives up processing costs. He said he likes royalty companies because they pay better than junior producers! I think Louis "quality, man" James would like Quinton's investment criteria, so here they are. Criteria 1: Quinton likes juniors that find deposits a major would want to acquire. Criteria 2: Simple metallurgy suggests low processing costs. Criteria 3: Deposit veins are good when they good lateral and vertical continuity and are open in most directions. Criteria 4: Good deposits have uniformly high grades. That's a good wish list, so anything that doesn't fit is an investment candidate to throw away IMHO. Quinton also says juniors should avoid "chaff" veins. These ephemeral veins display poor continuity and tend to be "shooty" (I guess like shoots on a tree branch). Mineralogically complex veins have high processing costs. Mine engineers on site exercise "grade control" by differentiating ore from waste as truckloads of rock exit a pit. Too much waste means lost money. Oxidized rock is cheaper to process, so seeing it at shallow depth is a good sign. A high sulfidation gold system is bad because it is notoriously refractory and harder to process. It should also go without saying that concentrated ore bodies that are closer to the surface are cheaper to extract than dispersed ore bodies deeper down. Quinton's workshop answered a lot of the questions I had always pondered while staring at geological findings in company roadshow presentations.
The last key speaker I saw was Jay Taylor, another gold legend. Jay noted that debt in the U.S. has grown faster than income, making us an insolvent nation. M2 velocity is very low. Speculative investment vehicles hurt first in contraction periods (LOL bye-bye stupid hedge funds!). Jay is another guy who likes royalty companies and well-funded project generators! Maybe I'm missing something here, but it seems like experts recognize value in business models that return the value of extracted resources to investors by way of dividends and royalties.
Louis James from Casey Research was on the platform talking about "quality, man." He meant that engineers' economic studies on feasibility drive a mining company's quality. A published study that doesn't move a stock's price may mean the study was meaningless. Saying "no" to many deals is good because we can wait for Warren Buffett's fat pitch when an engineering study shows us quality. I like this Louis guy. I first heard him last year at the Rare Earths Summit and he's definitely sharp.
The keynote panel on up and coming stocks churned out a bunch of picks in uranium, phosphate, and energy technology. I'll get to them all eventually in separate articles but it was cool to hear more about uranium in particular. I did not know that the uranium market had a supply glut when Japan's reactors all went offline.
Saturday morning brought back Rick Rule for some introductory Q&A prior to the official opening of the second day. Someone asked him about stories on fake gold bars; he mentioned that Sprott's policy is to buy only bars with well-known custodial histories and store them in the Royal Canadian Mint. Rick senses the possibility of a psychotic break in the market and was glad he had lots of cash on hand in 2008 to use when people made panic sell decisions. He thinks the euro/dollar ratio at 1:1 makes sense but they have two common problems. First, they are transfer mechanisms for unsustainable liabilities in societies that have lived beyond their means. Second, they are subject to downward manipulation (I presume through monetary stimulus). I like Rick's florid use of language when he says interest rates area function of confidence and that Western governments are at war with savers. I'll bet Mitt Romney would agree with Rick's statement that spenders outnumber savers and are a bigger constituency for low interest rates. Rick was astonished that the official CPI calculation doesn't factor in taxes and doesn't account for the aggregation of debt. I'm not so astonished myself, partly because we all have different effective tax rates and partly because accounting for unpayable debts would drive the official CPI through the roof. I was pleased when Rick said he had a high opinion of Allied Nevada, a junior stock I owned until it doubled a few years ago. I re-connected with one of that company's principal backers at this conference to thank him personally for doing a great job.
Rick Rule then got to the main part of his talk on how to interview the management teams of junior mining companies. Here's my recollection of his thought process. The first thing to know in interviewing management is that their prepared pitch minimizes management stress. Juniors create value by answering unanswered questions. Will they make a discovery? Is the discovery worth anything via execution? Junior companies are not asset plays because they typically don't have proven and probable reserves. They're really more like an intellectual property play in Silicon Valley that needs R&D. People are more important than property in early stages. Rick advises us to ask CEOs about their specific skill sets and previous successes. This will help find the Pareto 20% of managers who have the best chance to succeed. More questions for the CEO: Who's the second most important person in your company and why did you hire them? What are their specific skills and successes? What role does each director have? Use these questions to reach an early conclusion that some CEOs just want to raise money so they can cash out. Rick says that a small mine can't make you big money. If a CEO seeks a more attractive deposit they can expand, ask for evidence. Ask the CEO how they will test their exploratory thesis. A good explanation of an execution plan helps you eliminate companies that will generate a random result rather than a deliberate one. Another thing to ask a CEO: If your last success was at a different location, in different terrain, with different minerals . . . what makes you think you can apply those skill sets to a project you haven't done before? A medical analogy would be that oncology is not the same as neurology, so gold expertise does not necessarily translate to copper. Not all mining is the same. Rick's further questions for a CEO: How much money must you spend on ground over a specific time period? What's your monthly burn rate? How much cash do you have on hand now? Know that it takes money to answer the company's unanswered questions and succeed. More questions: What if limited drilling yields poor results? Will you continue? Most projects lose, so you need big winners to subsidize many losses. More questions: How will I find out about your company's success? Via press release, or may I call you to find out results? These answers reveal whether management thinks granularly about drill results. Rick warns us that we'll never get perfect answers to every question. The purpose of asking is to whittle down one's list of companies to a small list that will increase the chance of successful investing. Rick closed by saying that his prospect generator companies have significantly outperformed.
Pam Aden from the Aden Forecast was one keynoter I did not need to hear. She claimed we're in the twelfth year of a bull market, so I guess she hadn't heard of the 2007-2009 bear market. Maybe she meant gold and not stocks but it really wasn't clear from her data. She projected some charted bubble peaking in 2013, but what she meant still wasn't clear. Her whole thesis for buying gold rested on technical analysis of channels. Puh-lease. That's when I picked up and left.
Chris Berry from House Mountain Partners gave a great workshop on the supply and demand fundamentals behind the rare earth sector. I first met Chris this past March at TREM12 in Washington, DC, when I was on a panel with his father Dr. Michael Berry. He's a chip off the old block and sharp as a tack. He argued that each REE has its own supply/demand mix. Problems for major REE producers like Molycorp and Lynas spell opportunity for juniors. China's REE exports are down because global demand is weak. Chris thinks Moylcorp's book value is greater than its market value, so its problem is management rather than assets. He thinks that makes Molycorp a buyout target; I'm not so sure, because with earnings going negative and ROE negative for the last twelve months an acquirer would be hard pressed to add value simply by changing management. The debt load Molycorp carries from its last big acquisition will persist. Anyway, Chris also noted that lanthanum's record price increase last year only added one cent per gallon to the price of gasoline. He believes that REE juniors need to raise cash with a dilution strategy, off-takes, intellectual property, and supply chain integration. Bigger does not mean better for REE producers because they must have what the market wants; just look at Molycorp. Well done, Chris.
Brent Cook from Exploration Insights shared his wisdom. He said producers' margins are not increasing with the price of gold because cash costs are increasing and deposit quality is declining. Discoveries are down significantly and annual production is outpacing new discoveries. Majors must replace their lost production and quality deposits command a premium. Not all deposits are identical; geology must confirm an investment thesis. Topography determines whether mining facilities are physically realistic, and showed a photograph of steep hills cut by deep ravines as an example of an infeasible site with no flat areas for milling or heap leaching. Brent likes prospect generators with smart business models, some of which he describes in his free articles. His website has an excellent free report with insights into geology and mining, and a link to Sprott's free mining investment explanatory materials.
I went to Paul Van Eeden's workshop to hear more of his contrarian perspective. He's bearish on gold because he thinks it's too expensive. He also thinks the world has passed Peak Oil and that U.S. oil shale deposits are experiencing much more rapid decline rates than first predicted, making it unlikely the U.S. will fulfill the IEA's prediction of becoming a leading oil producer. He sees opportunity in natural gas given its low prices but depletion rates are high. I think Paul should read the NYT's investigative series on the shale gas bubble because it will help confirm his thesis that there's less to the shale revolution than what's advertised. He puts the fair value for gold at $800-900/oz (I say that's still too high, far above its historical average) and openly questions valuing it in U.S. dollars given U.S. inflation rates. I personally don't mind gold measured in U.S. dollars because I'm a U.S.-based investor, my portfolio is denominated in U.S. dollars, and my living expenses are in U.S. dollars. Paul noted that high gold prices mean miners produce low grade ore veins first, saving high grade deposits for times when gold prices are low. It was interesting to hear him say the Fed has stabilized its balance sheet by matching purchases of new securities with sales of ones it currently owns. Paul is a fan of this Fed's anti-deflation strategy. I marvel at the risk the Fed takes and wonder why it has yet to lose money on a trade. The next couple of years will reveal whether Paul is correct to place such confidence in Ben Bernanke's PhD thesis / wish fulfillment.
Chris Gaffney from EverBank keynoted his macroeconomic perspective. Investors now understand that Greek debt is riskier than German debt and so PIIGS interest rates have risen (IMHO hedge funds still haven't figured this out and that's why they're so dumb). Europe's rescue fund is too small to cover a potential default by Italy (IMHO analysts haven't figured this out yet and that's why they're so dumb). Chris thinks the euro will survive because it's too important to Germany as an export promotion mechanism. I strongly disagree with that notion. IMHO losing one eurozone member breaks a taboo and others will follow to avoid being the last Prisoner's dilemma victim remaining. I'm also pretty sure German taxpayers have limits to their patience and will vote out incumbents who wantonly subsidize profligate countries' debts. Anyway, back to Chris' arguments. He expects the U.S. federal government to push its fiscal responsibilities onto state and local governments forcing them into their own budget crises. He is not alone among the other gurus here in expecting a false solution to the fiscal cliff that will delay its consequences into the future. He likes Shadow Stats' inflation measure (so do I) and notes Paul Krugman wants more inflation (revoke that man's Nobel Prize in Economics). Chris uses the Economist's back page statistics to show how countries with high current account balances generate demand for their currencies. He finally gets to some currency picks. He likes Norway because it's an oil-based economy; Sweden for some odd reason I can't recall; Australia for its exports of natural resources to China (yeah, not for much longer); Canada for its strong banks; and also Singapore, China, and gold. I can't agree with his pick for Singapore because it's such a thinly traded currency or China because I think they'll have to hyperinflate away their debts just like the U.S. Otherwise, Chris really did his homework.
I never miss Al Korelin's address because the guy's a legend in financial journalism, although I'm pretty sure he hits the same basic themes every year at this show. He advises us all to get information from as many sources as possible, and to be diversified even within metals and other hard assets. He predicts the growth of U.S. government involvement in the economy will hurt the stock market and help hard assets. He prefers to invest in companies rather than commodities because companies give him leverage (i.e., it's a truism in mining that companies with a levered balance sheet will rise faster when metal prices rise because their prospects of paying off that debt just increased mightily). He evaluates mining companies on management, asset quality confirmed by assessment, ability to execute, and location in the world (i.e., minimal political risk). He also thinks the current administration will favor taxing mining companies as a revenue source. That's a scary thought, sort of like a windfall profits tax taken to an extreme for a hot sector.
I had to hear more from Louis James over at his workshop because his address on "quality, man" was so great. I like his irony when he said President Obama's victory provides clarity with an open advocacy of higher taxes and an anti-rich mentality. Louis thinks the precious metals markets haven't peaked yet. I think that's a kind way of saying they're overvalued, which is why I've reduced the gold portion of my portfolio from the large concentration I had a couple of years ago. Louis says not to panic when the market drops, just keep averaging down. His counterpoint to skeptics who say companies can't raise billions in capex for big projects is to evaluate the project's potential returns. Global capital markets are big enough to fund desirable projects now matter how big they look. Louis' next piece of advice will probably fall on deaf ears but it's worth repeating. He advises investors not to invest unless a company meets their decision criteria with high standards. I really do think too many people will ignore that and instead give in to some great story's temptation, but Louis does the public a great service by putting this out there anyway. Louis framed his "cash, courage, and contrarianism" approach for everyone to benefit. Courage enables you to ignore short-term market action if you are confident in your long-term strategy. Contrarianism enables you to buy a stock even if its price has been beaten down. Cash allows you to make this happen. Have all three factors and you're probably going to win, at least some times IMHO. He added that there's no one safe place to invest in mining because it's unpopular everywhere for being dirty, messy, and costly. His criteria for investing in a mining stock includes a 2x return in 12 months, which interestingly enough reminds me of Mickey Fulp's philosophy. Louis also thinks the gold/silver ratio is a poor indicator of either metal's price movement. I totally agree, and I roll my eyes whenever some analyst throws out a ratio of a metal to another metal, the DJIA, or anything else except a currency an investor must use to buy said metal.
It wouldn't be a Hard Assets show without Peter Schiff on the keynote roster. I got my picture taken with this true icon of finance when he appeared in his booth (check my Facebook archive). Peter went on a tour de force of the U.S. and its dollar. Here comes my summary of this man's brilliance, with no adulteration on my part. At some point, the Fed won't be able to fool the world anymore. It won't be able to withdraw liquidity (by selling securities) to fight inflation. The Fed must thus continue to lie and pretend there's no inflation. Inflation drives up mail delivery costs but the price of stamps is fixed to the CPI. That's why USPS is going bankrupt. "Fiscal cliff" means we actually have to pay for government spending with taxes, not debt. Politicians' promises aren't free and the fiscal cliff is the price we have to pay. Even the fiscal cliff's spending cuts aren't really cuts, but smaller future increases. The real cliff comes when the Fed can no longer keep interest rates artificially low. Artificially setting interest rates creates distortions, especially if inflation is greater than the official interest rate. Peter believes interest rates must rise to around 7% but this will cause pain. The U.S. government has admitted its debt is a Ponzi structure when our leaders say the government will default if they can't raise the debt ceiling. About one third of U.S. debt matures in a year and the Treasury plans to keep rolling it. Big banks will fail if interest rates rise and the Fed never stress tested this outcome. Banks profit now from the spread of the Treasuries they buy over Fed credit they owe. Higher rates will flip that spread and destroy banks. The deficit skyrockets when the U.S. government can't collect taxes in a recession to cover exploding spending on freebies (i.e., EBT cards for the bottom 47%). The U.S. has a reprieve right now due to Europe's problems making the dollar relatively stronger. If the U.S. tried to finance its sovereign debt by selling long term bonds, then long term rates would be skyrocketing. A sharp rise in interest rates will put trillions of losses on the Fed's balance sheet. The world will call the Fed's bluff when it takes its attention off Europe (if/when it blows up) and starts a run on the dollar. The U.S. Dollar Index will go into freefall, consumer prices will rise, and the Fed's credibility will be gone. Peter believes we face either hyperinflation or a deflationary collapse worse than the 2008 crisis. Politicians will opt for inflation because it buys them time but each round of monetary stimulus is less effective than the last. Peter expects a monetary crisis and sovereign debt crisis right here in America. My loyal readers know I expect a similar outcome. The funniest part of Peter's talk came when he asked rhetorically how the Fed and Treasury will bail each other out, because Treasury is required by law to make whole the Fed's losses but the Fed is buying Treasuries! The audience LOL'd but I was too sad to join in. I expect the government will have to invent brand new accounting rules for itself to make that problem disappear after the dollar crisis.
The next big speaker I cared about was Dr. Michael Berry, my fellow TREM12 panelist. I read his Morning Notes daily for insights into junior producers, and here come more of his insights with as little filtering as I can manage. Dr. Berry believes debt and taxes are negatively correlated (right on!) and some tax increases plus austerity are likely. It's easier to raise taxes than cut spending. Entitlement expectations finally make deliberate debt reduction impossible (hey, thanks to the 47% who enjoy being victims). The final curse of the reserve currency dollar is unrestrained debt issuance. The administration will demand much higher taxes in its second term (IMHO probably a negotiating tactic for now but who knows). "Taxmageddon" means rates up and credits down. The non-partisan Tax Foundation publishes tax changes by state. The effect of more taxation will be to decrease consumption and GDP. The Fed's ZIRP is financial repression (yes indeed!), forcing savings into Treasuries. Austerity's effect on household income will hurt the housing market. The administration believes it has a mandate to force more taxes on the wealthy but entitlement spending is unlikely to be seriously considered for reductions. This is all good news for precious metals, energy, and agriculture. Investments in ordinary debt and equity markets are likely to fall. Commodity volatility means trading opportunities (IMHO options and futures will come in handy). Dr. Berry looks for growth in water, potash, and silver stocks. Less liquid markets will sell off more quickly. Policymakers will expropriate your wealth! Dr. Berry showed his latest Discovery Investing scorecard and I noticed that some of the same companies were listed twice, both by their OTCBB ticker and TSX or TSXV ticker. Hopefully he can develop a filter that will prevent double-counting companies, unless of course the scorecard allows for arbitraging the same ticker in different markets. Dr. Berry's bottom line is that risk plays will help beat financial repression and taxation. Good show, Doc!
Quinton Hennigh from Exploration Insights gave a terrific workshop on separating the wheat from chaff in junior gold deposits. He mentioned that the DOW/gold ratio declines in tough times and heavy gold exploration coincides with that ratio's troughs. Costs are stable when mining proliferates but drilling costs have escalated in the last 20 years (I disagree with this scenario, as we see heavy mining activity today but with rising costs from higher energy prices). Digging deeper through more complex ore bodies drives up processing costs. He said he likes royalty companies because they pay better than junior producers! I think Louis "quality, man" James would like Quinton's investment criteria, so here they are. Criteria 1: Quinton likes juniors that find deposits a major would want to acquire. Criteria 2: Simple metallurgy suggests low processing costs. Criteria 3: Deposit veins are good when they good lateral and vertical continuity and are open in most directions. Criteria 4: Good deposits have uniformly high grades. That's a good wish list, so anything that doesn't fit is an investment candidate to throw away IMHO. Quinton also says juniors should avoid "chaff" veins. These ephemeral veins display poor continuity and tend to be "shooty" (I guess like shoots on a tree branch). Mineralogically complex veins have high processing costs. Mine engineers on site exercise "grade control" by differentiating ore from waste as truckloads of rock exit a pit. Too much waste means lost money. Oxidized rock is cheaper to process, so seeing it at shallow depth is a good sign. A high sulfidation gold system is bad because it is notoriously refractory and harder to process. It should also go without saying that concentrated ore bodies that are closer to the surface are cheaper to extract than dispersed ore bodies deeper down. Quinton's workshop answered a lot of the questions I had always pondered while staring at geological findings in company roadshow presentations.
The last key speaker I saw was Jay Taylor, another gold legend. Jay noted that debt in the U.S. has grown faster than income, making us an insolvent nation. M2 velocity is very low. Speculative investment vehicles hurt first in contraction periods (LOL bye-bye stupid hedge funds!). Jay is another guy who likes royalty companies and well-funded project generators! Maybe I'm missing something here, but it seems like experts recognize value in business models that return the value of extracted resources to investors by way of dividends and royalties.
Alrighty, it's time for the closing keynote panel moderated by Rick Rule. He had to get in a jab at James Dines for his attractive models but they mostly behaved themselves this year. Rick asked his panel how this year's election will matter. They thought is eliminated the possibility that a new President would fire Ben Bernanke, thus continued QE. James raised his usual ruckus about a coming calamity. Rick asked what the equity market is indicating. Some panelists said it portends a serious bear market and more poverty for Americans. James (of course) didn't even answer the question except to mention tax loss selling and even obliquely predicted a new political party (where that came from, who knows). Rick poked James by saying, "There's a couple of candidates in your booth that I'd vote for." Rick asked if the bond bull bubble would continue. One panelist thought that any reversal would mark the trade of the decade. James (again the original) thought pension funds will disappoint people and that it's smarter to live off capital than negative yield (yes, folks, there's a difference and some part of that capital will at least pay a dividend). Rick asked about monetary inflation and gold. Someone said a comment I really liked: "Gold is not an inflation hedge, it's a crisis/inflation hedge." I suppose I should put the emphasis on crisis but I'll let my readers chew it over. Rick asked whether deflationary periods are bullish for gold. One guy said that historically gold did better in real terms during deflation but we no longer have analogs for comparison because the world has used fiat currencies since the 1930s. Here's where Jim Dines went off on a wild tangent about China pursuing resources in Africa. I wish the guy would just give a straight answer once in a while, but when you're the senior mind in the precious metals analyst community I guess you have free reign. That means I have something to look forward to in three decades. Anyway, Rick's final question was about where the markets are in the junior resource cycle and whether anyone has a favorite subsector or stock. One guy thinks we're in a tremendous buying opportunity thanks to short selling. Jim likes REE stocks and said bullions are outperforming their respective stocks. He was a classic at the end, saying, "Whether you're rich or poor, it's good to have a lot of cash." I should have mentioned that one of my life goals is to be on one of these panels someday. I also should mention that the only real standout stock I noticed this year was Ucore, and I'll have more to say about it in a later article.
My only pet peeve about the show is that the organizers change the name every couple of years. It was the Gold Conference for a couple of decades, ending with the first year I attended in 2005. Then it was the Resource Conference, then Hard Assets, and next year it will be the Metals and Minerals Conference. These constant changes dilute the brand and lead to confusion for people who might be attracted to the resource sector but don't follow it regularly.
I'll render a final observation on my incentive to keep attending. James Dines deployed his local models once again but wouldn't allow me to have my picture taken with them. Bummer. I did notice that the investor relations dude hired by one of the junior miners kept hitting on those Dines Newsletter models. I've seen this IR dude do this at other conferences and I wonder when he'll find the time to promote the company that hired him. Argh, kids these days.
Full disclosure: No positions in companies mentioned unless specifically noted. No consideration was offered, rendered, or accepted for any mention of any financial or information service mentioned. Nothing in this article constitutes an endorsement of any product or service.
Sunday, November 25, 2012
The Limerick of Finance for 11/25/12
Holiday shopping time is so grand
Retailers should strike up a band
People rush in to buy
With no thought as to why
Low interest rates give them a hand
Retailers should strike up a band
People rush in to buy
With no thought as to why
Low interest rates give them a hand
Saturday, November 24, 2012
The Haiku of Finance for 11/24/12
Black Friday shopping
Shove ahead and waste money
People are so dumb
Shove ahead and waste money
People are so dumb
Americans Get Their Black Friday Groove On
Americans love their shopping sprees. Marketers have pushed people's buttons for decades and impulse buying at high markups does not deter the programmed masses. Black Friday is going well so far for retailers. Those smart phones are really helping consumers find the hottest deals, so marketers will take note of how to program push messages in social media once they've mined data streams from mobile service providers. Opening the shopping season one day earlier probably won't hurt overall results. When Americans are told to spend, they do so with abandon.
I was quite amused by multiple news stories of people pushing, shoving, kicking, fighting, sneaking, and cutting their way into line just for the privilege of being first to throw money away. Some people chose to steal goodies from other shoppers. Maybe there's something wrong with me for finding such stories funny but I just don't like people enough to think otherwise. People who base their pride on wild spending during the most costly shopping period of the year don't deserve my sympathy.
I did some shopping today at my local discount clothing store, where there were no lines or shouting and the prices are rock-bottom throughout the year. I stocked up on socks, of all things, because I'm not going to count on simple retail items being available in abundant quantities during a hyperinflationary depression. I have been quietly accumulating the basic things I'll need in advance of the next crisis.
Americans' spending binge will continue until it cannot continue. Interest rates at zero are untenable. I won't be anywhere near a retail chain or its common equity when our country passes the necessary inflection point.
I was quite amused by multiple news stories of people pushing, shoving, kicking, fighting, sneaking, and cutting their way into line just for the privilege of being first to throw money away. Some people chose to steal goodies from other shoppers. Maybe there's something wrong with me for finding such stories funny but I just don't like people enough to think otherwise. People who base their pride on wild spending during the most costly shopping period of the year don't deserve my sympathy.
I did some shopping today at my local discount clothing store, where there were no lines or shouting and the prices are rock-bottom throughout the year. I stocked up on socks, of all things, because I'm not going to count on simple retail items being available in abundant quantities during a hyperinflationary depression. I have been quietly accumulating the basic things I'll need in advance of the next crisis.
Americans' spending binge will continue until it cannot continue. Interest rates at zero are untenable. I won't be anywhere near a retail chain or its common equity when our country passes the necessary inflection point.
Friday, November 23, 2012
Thursday, November 22, 2012
The Haiku of Finance for 11/22/12
Thankful time of year
Glad for cash, women, and fun
In a free country
Glad for cash, women, and fun
In a free country
A Very Alfidi Capital Thanksgiving in 2012
I grew up watching those corny TV holiday specials like everyone else in Generation X. There was always some special message about giving, sharing, kindness, or some such that those cute little animated characters wanted to share with us. I've got some cute little messages of my own that are just filled with holiday cheer.
I'm thankful for whoever the heck clicks on my pages. You people must be geniuses or else you wouldn't be attracted to my compelling content.
I'm thankful for the sponsors of business conferences who allow me to attend and even have me in a speaking role once in a while. Those folks know talent when they see it and I obviously have it.
I'm thankful to be a self-employed blogger, where I can say whatever I like in public and make stupid people angry. I'm thankful not to live in a police state where some pompous poobahs can have me arrested for goring their sacred cows.
I'm thankful to live in San Francisco, the greatest city in the world. My social calendar is always full of fun events, especially during the Christmas season. I'm also thankful that lots of attractive women show up at these events.
I'm thankful for today's buffet spread at the Palace Hotel. I marveled at the wide variety of menu items. I had ham, turkey, roast beef, salmon, shrimp, steak medallions, several different seafood and vegetable salads, paella, sushi, specialty cheeses, ravioli alfredo, caviar, pate, and champagne. I overdid the dessert servings; someday I'll learn not to have more than a couple of confections. I'm also thankful for the hot chicks in form-fitting dresses who attended. Why were they dressed like they were at a cocktail event looking to score? Beats me. I was too busy eating to get their phone numbers so maybe I had my priorities all wrong.
Most importantly, I'm thankful to be financially secure enough to afford the things I mentioned above and to have the good health needed to enjoy them. The bounty on display at the Palace Hotel is the product of a capitalistic society, where people are free to pursue their dreams. The bottom line is that I'm thankful to be an American. I don't expect Americans to be thankful for my existence but that's okay.
I'm thankful for whoever the heck clicks on my pages. You people must be geniuses or else you wouldn't be attracted to my compelling content.
I'm thankful for the sponsors of business conferences who allow me to attend and even have me in a speaking role once in a while. Those folks know talent when they see it and I obviously have it.
I'm thankful to be a self-employed blogger, where I can say whatever I like in public and make stupid people angry. I'm thankful not to live in a police state where some pompous poobahs can have me arrested for goring their sacred cows.
I'm thankful to live in San Francisco, the greatest city in the world. My social calendar is always full of fun events, especially during the Christmas season. I'm also thankful that lots of attractive women show up at these events.
I'm thankful for today's buffet spread at the Palace Hotel. I marveled at the wide variety of menu items. I had ham, turkey, roast beef, salmon, shrimp, steak medallions, several different seafood and vegetable salads, paella, sushi, specialty cheeses, ravioli alfredo, caviar, pate, and champagne. I overdid the dessert servings; someday I'll learn not to have more than a couple of confections. I'm also thankful for the hot chicks in form-fitting dresses who attended. Why were they dressed like they were at a cocktail event looking to score? Beats me. I was too busy eating to get their phone numbers so maybe I had my priorities all wrong.
Most importantly, I'm thankful to be financially secure enough to afford the things I mentioned above and to have the good health needed to enjoy them. The bounty on display at the Palace Hotel is the product of a capitalistic society, where people are free to pursue their dreams. The bottom line is that I'm thankful to be an American. I don't expect Americans to be thankful for my existence but that's okay.
Wednesday, November 21, 2012
Tuesday, November 20, 2012
The Haiku of Finance for 11/20/12
Try to innovate
Disrupting normal business
Make something brand new
Disrupting normal business
Make something brand new
Notes From E2 Innovate in Nov. 2012
I did it again. I got to attend another conference with a free expo pass, specifically E2 Innovate in Santa Clara. I only had time to attend the morning keynote addresses on the first day due to some pressing engagements in the afternoon. I made it worth my while anyway by taking notes on whatever it is the tech sector is up to these days.
I arrived way too early because I'm just so driven to be the first to register at conferences. While I was catching up on some reading I noticed a wonderful opportunity over by the coffee stand and continental breakfast table. This whiteboard at the E2 Innovate Conference and Expo was a blank slate just begging me to cover it with sarcasm. The organizers suggested that each breakfast table have "topics" but it fell to me to cause a ruckus with some real innovation.
Here's the transcription in case my writing isn't legible.
Topic 1: Bonanza!
Topic 2: How to Avoid Getting Owned/Pwned
Topic 3: David Petraeus Goes "All In" With His Biographer
Topic 4: Cloud Software Piracy for Fun and Profit
Topic 5: UFOs: Fact or Fiction
Topic 6: The Fiscal Cliff and Your Mother-In-Law
Topic 7: Reducing Drunken Antics at E2 Innovate
The freelance media guy at my breakfast table was doing some interviews and wanted me on camera. The attention hound in me said that was a-okay. He asked me how I innovate and I gave an extremely poor answer; I think I said something really garbled about how I go to these conferences to listen for people's "knowledge gaps" and then respond. Man, was I dumb. I should have said that I listen for people's lies so I can ridicule them and make people angry. Alfidi Capital admires innovators but this isn't some experimental tech lab where I'm designing the next wonder widget. I innovate by thinking up weird things to say.
Alright, it's time to find out whether I learned anything from the illustrious speakers. Paige Finkelman introduced each one. In case you haven't been following my musings, she introduced the Enterprise 2.0 Conference I attended last year. I'm glad she's still around. She showed some slides on the history of the lawnmower but the end result of every lawnmower innovation was still a thing that cuts grass. Likewise, her point was that the end goal of every innovation in business is still to make money, so enterprise software should leverage more meaningful experiences for customers.
First up was Ben Fried, CIO of Google, talking about "Google on Google." What a conundrum! It's simple enough to avoid tautology but demands some thought. I just Googled "Google" and came up with Google this and Google that. What could this mean? Only Google knows, so let's get back to the guy's speech. He said two factors drive enterprise technology: the rise of global-scale consumer web services, and the rise of tech-savvy workers even before they enter the workforce. I learned a new term called "peripheral self-service distribution systems," which respect workers' ability to get a job done. These things are bins and shelves where people can check out the tools they need and drop them off when done. Google's bins are often full at the end of the day because responsible adults bring items back. Wow. That is a revelation for me. My experience with large workplaces has led me to believe that such personal responsibility is impossible. The military never trusted me with equipment unless I signed detailed hand receipts for everything right down to a computer mouse. Large investment firms trusted me with paper clips but senior people were rewarded for stealing whatever they could grab out of my hands. Google's culture sounds too good to be true.
Mr. Fried shocked me with more revelations about his colleagues' maturity. Googlers can choose Windows, Mac, or Linux systems plus whatever personal productivity tools they need. Their monthly "tech bill" shows the cost of what they select. That is incredible. I'll have to see it to believe it. Somebody get me a tour of Google's campus. Mr. Fried said this user choice reflects respect and empowerment, and users help to minimize costs. I was stunned taking all of this in. I really think it helps that leading tech brands like Google have the prestige to attract the best talent. It must be great to hire only smart people in the first place. Irresponsible people get weeded out in the hiring process. Working with nothing but superstars is a luxury I would have loved in my formative working years, but then I wouldn't have developed the bitterness that caused me to launch Alfidi Capital.
Mr. Fried said IT departments shouldn't skimp on tech buys for workers; yeah, that's easy to say with all of the money Google makes. He gave up a classic quote: "Enterprise software is a racket, and we are all the suckers." Once again, that's easy for him to say because Google sells the enterprise solutions that suckers have to buy. He closed by endorsing cloud computing because it saves money through metered cost of usage; unused time for support systems thus incurs no cost. Hey, that's a hidden plug for Google Docs. I love reading between the lines. I also love Google. Their Blogger platform is the host for this blog and their AdSense program makes me money. Google rules the interwebz because it's just so darn good at figuring out what people do with information. I should have bought Google stock years ago. I like this guy's money quote: "Innovation can't be installed." Maybe not, but installing Google Chrome may be the next best thing.
The nest speaker was Michael Fauscette, talking about the next generation enterprise platform. His initial thesis was that connectivity matters throughout economic, social, and technical domains. Connectivity enables a platform shift to smart things in meters and systems. Businesses must be flexible and adaptable because knowledge sharing is the new power in enterprises. I like what the guy's saying, but his thesis that people find value and respect in a decentralized, transparent enterprise applies mainly to knowledge workers, not the semi-skilled labor that predominates in many sectors. I guess I come from such a deprived background that hearing people talk about respect and trust in a workplace is a severe culture shock for me. The guy said something about how transactions turn into decisions that build relationships, and IT people must build systems to enable this flow. Well, I don't have any relationships here at Alfidi Capital, and the only decision I make is about how often I run my mouth. Whatever transaction that becomes is between Google and my advertisers. BTW, this dude is brilliant but my world is oriented backwards from his description.
Mr. Fauscette said that aging core systems behind corporate IT can't be replaced but a "social layer" can be overlaid to enable collaboration. Great idea; it sounds like a market opportunity for someone who can make a scrolling message feed run on code translated from FORTRAN. He also said cloud services will be granularized and modularized, not like big-box software, and the must be context-aware to think of what the user wants. He endorsed "sense and respond" as the new business model and thinks every app is a system of relationships. That IMHO poses a challenge to app developers who focus on games and other solipsistic apps that have little to do with connecting to other people to get things done. Collaborative apps, like the Google Apps that Mr. Fried liked so much, are probably the hot market for developers.
Next up was Kevin Cavanaugh from IBM, talking about participation with activity streams. The only real participation I do with activity streams is challenging my Facebook friends with weird news items so maybe there's an insight here I can use to be even more provocative. This guy says we should measure ROI in terms of an underlying process like product delivered or sales generated. He said a major Mexican cement producer cut its time to market by moving expertise to where it was needed instead of moving material. He eventually argued that worker productivity can be enhanced by analyzing activity streams that enterprise apps measure. IT pros should have analytics for the social use of systems. Mobile capability is the design point for social systems and their embedded transactions. Okay, if I understand this correctly, IT people need to find ways to mine employees' activity to show their bosses how they add enterprise value. I think the IT community is reinventing itself beyond being a corporate cost center and into something the C-suite relies upon to make business decisions. I'm more interested in the IT enablers for business intelligence and knowledge management but the whole cultural change is a breath of fresh air. I'm pretty sure the IT community will always need socially inept geeks and misanthropes at the bottom rungs of coders and techies but their managers need a real business mindset.
I had no idea that the next talk on "new walled gardens" by Fritz Nelson and David Berlind would be the best one I heard that day. They gave a rundown of some recent enterprise tech acquisitions and said that more big companies are buying ventures that develop social and communication tools built for clouds. Companies have figured out that having competitors' apps on their platforms hurts their sales of apps and mobile platforms. The walled garden is a tech company's self-contained ecosystem of platform, apps, and cloud services. Tech companies want to provide more services to get you addicted to staying in their walled gardens. Whatever device they sell is merely a front end to the cloud-based enterprise apps in the garden. They taught me another cool new term: "personalized digital cloud," or PDC. I guess that's the suite of cloud apps whenever you log on to your mobile thingy when you're outside wandering around. I hope people don't do that while they're driving.
These guys then compared the "signal strength" of Apple, Google, Amazon, and Microsoft. They all have infrastructure for app stores, storage, devices, search, commerce, and other popular tools. I noticed that Yahoo wasn't even on their scorecard! Yahoo tried to be the original walled garden but their core offering never got beyond search. They mentioned it afterwards as a potential partner or acquisition target for another media company that may build out its own walled garden. They said the IT corporate workforce eventually won't be able to manage the complexity of several walled gardens. Business users will eventually pick one comprehensive solution, and the lack of a walled garden approach will eventually doom minor tech platforms. They expect acquisitions to fill gaps in the "signal collection" of search and commerce. Consumers themselves will be forced to choose a walled garden. This is all pretty heady stuff. I'm a non-mobile holdout with simple tech needs so I have the luxury of keeping my tech options open. I think marketers can profit by figuring out what a consumer's tipping point would be for complete adoption of a single walled garden. Ease of use? Security from identity theft? Sheer number of options available? IMHO the greatest incentive will be to erect switching costs for users who defect from one model. Right now there is very little cost for someone who abandons Google for Microsoft or vice versa.
Now we get to the VC panel on venture money for red hot enterprises. The moderator was Christina Farr from VentureBeat. She introduced the partners from various VC funds. Here's my recollection of what they all said, interspersed with my sarcastic comments.
Startups are now thinking up consumer-oriented tech that helps people do their jobs better; I wish they'd think up some tech that would keep stupid people away from me so I could do my job better. Tech ecosystems have made it much easier to start new companies that offer niche enterprises; I think that's a kind way of saying that overengineering big ERP systems provides job security to subcontractors. Deep enterprise software capability is now blending with consumer-oriented expertise, and consumer distribution metrics are now being used in enterprise-wide architecture. I take that to mean ERP buttons now have to be pushed by non-programmers who grew up on first-person shooter games. Time card punched yet? Ka-pow! Budget report submitted? Ka-boom! Low conversion rates require enormous uptake from millions of users to make a viable business, so think hard about price points after free adoption. Yeah, tell that to Zynga, where 95% of their gaming audience never converts to paid games. They'll probably go down the tubes after people who pay to play their sorry games on Facebook get hooked on the next free thing. There are still many messy problems in enterprise IT: data management, business processes, middleware. Startups can unlock ROI with solutions for those problems but that will take a long time due to companies' inertia. Here's my solution: Create an app that C-suite execs can use to send automated nagging alerts to their CIOs demanding they convert legacy systems ASAP. I'd call it the Nag-O-Matic. A startup in a hot, trendy space doesn't necessarily entice VCs to invest. VCs want entrepreneurs who have precise insights into their market and have a defined path to cross the chasm. A series of execution steps matters more than a hot product. VCs are really smart and hard to deceive, at least compared to the fools who threw money away in the 1990s on Internet startups. There are vertical opportunities in health care, education, engineering, and government due to lack of progress since the client/server days, and this means opportunities for vendors. It also means special opportunities for vendors owned by underrepresented demographics. Those big old-school employers often have supplier diversity programs that buy from entrepreneurs who are veterans, women, and minorities. They recommend reading Aaron Ross' Predictable Revenue describing the software sales process. They also warned that entrepreneurs shouldn't think they can "sell vitamins as aspirin." IT customers are sophisticated and know what they want.
Well, this concludes another exciting adventure at an enterprise conference. It didn't take me long to walk around the expo floor because there were only about two dozen exhibitors. I had to make like a tree and leave because I had a bunch of other work to do that I couldn't do from there; like I said earlier, I'm still a tech dinosaur in some ways and I don't need a whole bunch of mobile gizmos just yet. I do need to figure out how to get tech women appreciate the extreme manliness that I exude. Call me, babes, and let's do some innovation together after hours.
I arrived way too early because I'm just so driven to be the first to register at conferences. While I was catching up on some reading I noticed a wonderful opportunity over by the coffee stand and continental breakfast table. This whiteboard at the E2 Innovate Conference and Expo was a blank slate just begging me to cover it with sarcasm. The organizers suggested that each breakfast table have "topics" but it fell to me to cause a ruckus with some real innovation.
Here's the transcription in case my writing isn't legible.
Topic 1: Bonanza!
Topic 2: How to Avoid Getting Owned/Pwned
Topic 3: David Petraeus Goes "All In" With His Biographer
Topic 4: Cloud Software Piracy for Fun and Profit
Topic 5: UFOs: Fact or Fiction
Topic 6: The Fiscal Cliff and Your Mother-In-Law
Topic 7: Reducing Drunken Antics at E2 Innovate
The freelance media guy at my breakfast table was doing some interviews and wanted me on camera. The attention hound in me said that was a-okay. He asked me how I innovate and I gave an extremely poor answer; I think I said something really garbled about how I go to these conferences to listen for people's "knowledge gaps" and then respond. Man, was I dumb. I should have said that I listen for people's lies so I can ridicule them and make people angry. Alfidi Capital admires innovators but this isn't some experimental tech lab where I'm designing the next wonder widget. I innovate by thinking up weird things to say.
Alright, it's time to find out whether I learned anything from the illustrious speakers. Paige Finkelman introduced each one. In case you haven't been following my musings, she introduced the Enterprise 2.0 Conference I attended last year. I'm glad she's still around. She showed some slides on the history of the lawnmower but the end result of every lawnmower innovation was still a thing that cuts grass. Likewise, her point was that the end goal of every innovation in business is still to make money, so enterprise software should leverage more meaningful experiences for customers.
First up was Ben Fried, CIO of Google, talking about "Google on Google." What a conundrum! It's simple enough to avoid tautology but demands some thought. I just Googled "Google" and came up with Google this and Google that. What could this mean? Only Google knows, so let's get back to the guy's speech. He said two factors drive enterprise technology: the rise of global-scale consumer web services, and the rise of tech-savvy workers even before they enter the workforce. I learned a new term called "peripheral self-service distribution systems," which respect workers' ability to get a job done. These things are bins and shelves where people can check out the tools they need and drop them off when done. Google's bins are often full at the end of the day because responsible adults bring items back. Wow. That is a revelation for me. My experience with large workplaces has led me to believe that such personal responsibility is impossible. The military never trusted me with equipment unless I signed detailed hand receipts for everything right down to a computer mouse. Large investment firms trusted me with paper clips but senior people were rewarded for stealing whatever they could grab out of my hands. Google's culture sounds too good to be true.
Mr. Fried shocked me with more revelations about his colleagues' maturity. Googlers can choose Windows, Mac, or Linux systems plus whatever personal productivity tools they need. Their monthly "tech bill" shows the cost of what they select. That is incredible. I'll have to see it to believe it. Somebody get me a tour of Google's campus. Mr. Fried said this user choice reflects respect and empowerment, and users help to minimize costs. I was stunned taking all of this in. I really think it helps that leading tech brands like Google have the prestige to attract the best talent. It must be great to hire only smart people in the first place. Irresponsible people get weeded out in the hiring process. Working with nothing but superstars is a luxury I would have loved in my formative working years, but then I wouldn't have developed the bitterness that caused me to launch Alfidi Capital.
Mr. Fried said IT departments shouldn't skimp on tech buys for workers; yeah, that's easy to say with all of the money Google makes. He gave up a classic quote: "Enterprise software is a racket, and we are all the suckers." Once again, that's easy for him to say because Google sells the enterprise solutions that suckers have to buy. He closed by endorsing cloud computing because it saves money through metered cost of usage; unused time for support systems thus incurs no cost. Hey, that's a hidden plug for Google Docs. I love reading between the lines. I also love Google. Their Blogger platform is the host for this blog and their AdSense program makes me money. Google rules the interwebz because it's just so darn good at figuring out what people do with information. I should have bought Google stock years ago. I like this guy's money quote: "Innovation can't be installed." Maybe not, but installing Google Chrome may be the next best thing.
The nest speaker was Michael Fauscette, talking about the next generation enterprise platform. His initial thesis was that connectivity matters throughout economic, social, and technical domains. Connectivity enables a platform shift to smart things in meters and systems. Businesses must be flexible and adaptable because knowledge sharing is the new power in enterprises. I like what the guy's saying, but his thesis that people find value and respect in a decentralized, transparent enterprise applies mainly to knowledge workers, not the semi-skilled labor that predominates in many sectors. I guess I come from such a deprived background that hearing people talk about respect and trust in a workplace is a severe culture shock for me. The guy said something about how transactions turn into decisions that build relationships, and IT people must build systems to enable this flow. Well, I don't have any relationships here at Alfidi Capital, and the only decision I make is about how often I run my mouth. Whatever transaction that becomes is between Google and my advertisers. BTW, this dude is brilliant but my world is oriented backwards from his description.
Mr. Fauscette said that aging core systems behind corporate IT can't be replaced but a "social layer" can be overlaid to enable collaboration. Great idea; it sounds like a market opportunity for someone who can make a scrolling message feed run on code translated from FORTRAN. He also said cloud services will be granularized and modularized, not like big-box software, and the must be context-aware to think of what the user wants. He endorsed "sense and respond" as the new business model and thinks every app is a system of relationships. That IMHO poses a challenge to app developers who focus on games and other solipsistic apps that have little to do with connecting to other people to get things done. Collaborative apps, like the Google Apps that Mr. Fried liked so much, are probably the hot market for developers.
Next up was Kevin Cavanaugh from IBM, talking about participation with activity streams. The only real participation I do with activity streams is challenging my Facebook friends with weird news items so maybe there's an insight here I can use to be even more provocative. This guy says we should measure ROI in terms of an underlying process like product delivered or sales generated. He said a major Mexican cement producer cut its time to market by moving expertise to where it was needed instead of moving material. He eventually argued that worker productivity can be enhanced by analyzing activity streams that enterprise apps measure. IT pros should have analytics for the social use of systems. Mobile capability is the design point for social systems and their embedded transactions. Okay, if I understand this correctly, IT people need to find ways to mine employees' activity to show their bosses how they add enterprise value. I think the IT community is reinventing itself beyond being a corporate cost center and into something the C-suite relies upon to make business decisions. I'm more interested in the IT enablers for business intelligence and knowledge management but the whole cultural change is a breath of fresh air. I'm pretty sure the IT community will always need socially inept geeks and misanthropes at the bottom rungs of coders and techies but their managers need a real business mindset.
I had no idea that the next talk on "new walled gardens" by Fritz Nelson and David Berlind would be the best one I heard that day. They gave a rundown of some recent enterprise tech acquisitions and said that more big companies are buying ventures that develop social and communication tools built for clouds. Companies have figured out that having competitors' apps on their platforms hurts their sales of apps and mobile platforms. The walled garden is a tech company's self-contained ecosystem of platform, apps, and cloud services. Tech companies want to provide more services to get you addicted to staying in their walled gardens. Whatever device they sell is merely a front end to the cloud-based enterprise apps in the garden. They taught me another cool new term: "personalized digital cloud," or PDC. I guess that's the suite of cloud apps whenever you log on to your mobile thingy when you're outside wandering around. I hope people don't do that while they're driving.
These guys then compared the "signal strength" of Apple, Google, Amazon, and Microsoft. They all have infrastructure for app stores, storage, devices, search, commerce, and other popular tools. I noticed that Yahoo wasn't even on their scorecard! Yahoo tried to be the original walled garden but their core offering never got beyond search. They mentioned it afterwards as a potential partner or acquisition target for another media company that may build out its own walled garden. They said the IT corporate workforce eventually won't be able to manage the complexity of several walled gardens. Business users will eventually pick one comprehensive solution, and the lack of a walled garden approach will eventually doom minor tech platforms. They expect acquisitions to fill gaps in the "signal collection" of search and commerce. Consumers themselves will be forced to choose a walled garden. This is all pretty heady stuff. I'm a non-mobile holdout with simple tech needs so I have the luxury of keeping my tech options open. I think marketers can profit by figuring out what a consumer's tipping point would be for complete adoption of a single walled garden. Ease of use? Security from identity theft? Sheer number of options available? IMHO the greatest incentive will be to erect switching costs for users who defect from one model. Right now there is very little cost for someone who abandons Google for Microsoft or vice versa.
Now we get to the VC panel on venture money for red hot enterprises. The moderator was Christina Farr from VentureBeat. She introduced the partners from various VC funds. Here's my recollection of what they all said, interspersed with my sarcastic comments.
Startups are now thinking up consumer-oriented tech that helps people do their jobs better; I wish they'd think up some tech that would keep stupid people away from me so I could do my job better. Tech ecosystems have made it much easier to start new companies that offer niche enterprises; I think that's a kind way of saying that overengineering big ERP systems provides job security to subcontractors. Deep enterprise software capability is now blending with consumer-oriented expertise, and consumer distribution metrics are now being used in enterprise-wide architecture. I take that to mean ERP buttons now have to be pushed by non-programmers who grew up on first-person shooter games. Time card punched yet? Ka-pow! Budget report submitted? Ka-boom! Low conversion rates require enormous uptake from millions of users to make a viable business, so think hard about price points after free adoption. Yeah, tell that to Zynga, where 95% of their gaming audience never converts to paid games. They'll probably go down the tubes after people who pay to play their sorry games on Facebook get hooked on the next free thing. There are still many messy problems in enterprise IT: data management, business processes, middleware. Startups can unlock ROI with solutions for those problems but that will take a long time due to companies' inertia. Here's my solution: Create an app that C-suite execs can use to send automated nagging alerts to their CIOs demanding they convert legacy systems ASAP. I'd call it the Nag-O-Matic. A startup in a hot, trendy space doesn't necessarily entice VCs to invest. VCs want entrepreneurs who have precise insights into their market and have a defined path to cross the chasm. A series of execution steps matters more than a hot product. VCs are really smart and hard to deceive, at least compared to the fools who threw money away in the 1990s on Internet startups. There are vertical opportunities in health care, education, engineering, and government due to lack of progress since the client/server days, and this means opportunities for vendors. It also means special opportunities for vendors owned by underrepresented demographics. Those big old-school employers often have supplier diversity programs that buy from entrepreneurs who are veterans, women, and minorities. They recommend reading Aaron Ross' Predictable Revenue describing the software sales process. They also warned that entrepreneurs shouldn't think they can "sell vitamins as aspirin." IT customers are sophisticated and know what they want.
Well, this concludes another exciting adventure at an enterprise conference. It didn't take me long to walk around the expo floor because there were only about two dozen exhibitors. I had to make like a tree and leave because I had a bunch of other work to do that I couldn't do from there; like I said earlier, I'm still a tech dinosaur in some ways and I don't need a whole bunch of mobile gizmos just yet. I do need to figure out how to get tech women appreciate the extreme manliness that I exude. Call me, babes, and let's do some innovation together after hours.
Monday, November 19, 2012
Alpha-D Updates for 11/19/12
This month's portfolio update was extremely simple. All of the options I wrote last month expired unexercised. I renewed the short covered calls I typically write over GDX. I tried to execute some other option plays but for whatever reason they wouldn't take in the system. Perhaps that is just as well. I won't try again until after next month's options expiration weekend. I expect the U.S. equity markets to become extremely unstable as the eventual effects of quantitative easing, the fiscal cliff, and the eurozone's insolvency become obvious.
I remain long GDX, FXA, FXC, and FXF, with no other equity positions. I have the rest in cash. I have no fixed income exposure because I don't want inflation to destroy my net worth.
I remain long GDX, FXA, FXC, and FXF, with no other equity positions. I have the rest in cash. I have no fixed income exposure because I don't want inflation to destroy my net worth.
Sunday, November 18, 2012
The Limerick of Finance for 11/18/12
Wal-Mart just did something I like
Warns union to go take a hike
Shoppers will stay away
Walkouts hurt workers' pay
Black Friday is no time to strike
Warns union to go take a hike
Shoppers will stay away
Walkouts hurt workers' pay
Black Friday is no time to strike
Insights from SRA Impact Investment Dialogue, October 2012
Impact investing is the hot new thing in capitalism. I attended Security Research Associates' Impact Investing Dialogue, an expert panel they launched with their annual Fall Growth Stock Conference in late October. I'll run down the main points the panel raised below, with my extraordinary insights in italics.
Impact investors are still too risk-averse to fund pre-revenue startups. Well, for crying out loud, they need to get over those first-date jitters. Either go big or go home.
Deal flow is still relationship-based, so VCs and money managers cultivate entrepreneurs for years. Not for long IMHO. Crowdfunding will wipe out some of the early-entry barriers to fundraising for social enterprises.
Impact investing seeks opportunities serving low-to-middle income consumers. Grameen Bank broke the mold.
Philanthropy can be integrated into asset class choices. I dunno, there has to be an ROI for it to matter. The ROI might be measured in charitable deductions' contributions to a lower tax burden but any new policy ideas out of Washington will have a say in that.
Fair trade products are an import/export opportunity. True, but too much of the fair trade community is exposed to single source supply risk. Read my 2011 article on fair trade cocoa to see the importance of building multiple suppliers into a fair trade business model.
Injecting business approaches into philanthropy will encounter tax law hurdles and cultural differences, but benefits are possible. Culture is the biggest one. I recently had a very bad experience trying to incubate new enterprises within an established, nationally-known non-profit. The people I had to deal with had zero understanding of how to cultivate a high-risk startup. They had been entry-level non-profit drones or government employees their entire lives and had never been exposed to risk-taking entrepreneurial personalities.
The Opposable Minds concept is like our opposable thumbs' evolutionary advantage. It means grasping two fundamentally opposing concepts (like business and philanthropy) to create a superior integrated solution. I haven't heard of this idea. It sounds legit but I need to read more about it. I have long believed the management consulting sector reinvents itself every few years by pushing new concepts on an unsuspecting public. I also suspect business leaders lap up these new concepts because they were too busy playing office politics on their way up the ladder to actually learn how to add value.
Impact investing happens in between pure ROI and pure philanthropic giving. Agreed, but then you need some hybrid measure of its value to convince money managers to keep doing it. A family office that does impact investing will need to measure how it lowers the portfolio's tax burden. A venture capital fund doing it will need to see some technology spinouts that they can commercialize.
Poor societies need more than access to capital; they need basic infrastructure. The most important thing they need is the rule of law! Impact investors can use the Heritage Foundation's Index of Economic Freedom to determine the likelihood of their investment going to some thug.
Impact investing is a highly fragmented, inefficient market that needs structure. Consolidation has already begun. Social Capital Markets (SOCAP) is a clearinghouse for this sector and I expect it to take a leading role in publishing whatever guidelines investors need.
Angel investors can find entrepreneurs who build enterprises that add social value. It's more like the other way around. Determined entrepreneurs go looking for angel clubs to give pitches. I still think it's funny whenever some wealthy person claims they found a new idea all by themselves after a dedicated first-generation striver banged on their door repeatedly to get their attention.
Microfinance can convert a non-profit structure into a for-profit structure that will add value. I didn't know that. Non-profit leaders need to seek good legal advice before they try converting their legal charter into something else.
The "informal economy" served by microenterprises is an uncorrelated sector. True enough, so the challenge for the finance community is to use metrics that convert System D activity indicators into a broad index. That also gives law enforcement agencies and securities regulators a means to track the underground economy, so some actors will be reluctant to self-identify. This is an area that cries out for an innovative financial solution, right up my alley.
Founders can look for credit enhancement instruments that make an equity offering attractive to institutional investors. I wrote about a few crowdfunding platforms that are developing pretty robust models. I believe those platforms that accommodate things like warrants, LEAPS, and contingent value rights will have a huge edge in attracting participants.
I appreciated the fact that two of the panelists were attractive women. Thank you Sonen Capital and Elevar Equity for showing off your finest assets. I always like to see quality in finance. I'll definitely keep watching the impact investing sector, and not just for the eye candy.
Impact investors are still too risk-averse to fund pre-revenue startups. Well, for crying out loud, they need to get over those first-date jitters. Either go big or go home.
Deal flow is still relationship-based, so VCs and money managers cultivate entrepreneurs for years. Not for long IMHO. Crowdfunding will wipe out some of the early-entry barriers to fundraising for social enterprises.
Impact investing seeks opportunities serving low-to-middle income consumers. Grameen Bank broke the mold.
Philanthropy can be integrated into asset class choices. I dunno, there has to be an ROI for it to matter. The ROI might be measured in charitable deductions' contributions to a lower tax burden but any new policy ideas out of Washington will have a say in that.
Fair trade products are an import/export opportunity. True, but too much of the fair trade community is exposed to single source supply risk. Read my 2011 article on fair trade cocoa to see the importance of building multiple suppliers into a fair trade business model.
Injecting business approaches into philanthropy will encounter tax law hurdles and cultural differences, but benefits are possible. Culture is the biggest one. I recently had a very bad experience trying to incubate new enterprises within an established, nationally-known non-profit. The people I had to deal with had zero understanding of how to cultivate a high-risk startup. They had been entry-level non-profit drones or government employees their entire lives and had never been exposed to risk-taking entrepreneurial personalities.
The Opposable Minds concept is like our opposable thumbs' evolutionary advantage. It means grasping two fundamentally opposing concepts (like business and philanthropy) to create a superior integrated solution. I haven't heard of this idea. It sounds legit but I need to read more about it. I have long believed the management consulting sector reinvents itself every few years by pushing new concepts on an unsuspecting public. I also suspect business leaders lap up these new concepts because they were too busy playing office politics on their way up the ladder to actually learn how to add value.
Impact investing happens in between pure ROI and pure philanthropic giving. Agreed, but then you need some hybrid measure of its value to convince money managers to keep doing it. A family office that does impact investing will need to measure how it lowers the portfolio's tax burden. A venture capital fund doing it will need to see some technology spinouts that they can commercialize.
Poor societies need more than access to capital; they need basic infrastructure. The most important thing they need is the rule of law! Impact investors can use the Heritage Foundation's Index of Economic Freedom to determine the likelihood of their investment going to some thug.
Impact investing is a highly fragmented, inefficient market that needs structure. Consolidation has already begun. Social Capital Markets (SOCAP) is a clearinghouse for this sector and I expect it to take a leading role in publishing whatever guidelines investors need.
Angel investors can find entrepreneurs who build enterprises that add social value. It's more like the other way around. Determined entrepreneurs go looking for angel clubs to give pitches. I still think it's funny whenever some wealthy person claims they found a new idea all by themselves after a dedicated first-generation striver banged on their door repeatedly to get their attention.
Microfinance can convert a non-profit structure into a for-profit structure that will add value. I didn't know that. Non-profit leaders need to seek good legal advice before they try converting their legal charter into something else.
The "informal economy" served by microenterprises is an uncorrelated sector. True enough, so the challenge for the finance community is to use metrics that convert System D activity indicators into a broad index. That also gives law enforcement agencies and securities regulators a means to track the underground economy, so some actors will be reluctant to self-identify. This is an area that cries out for an innovative financial solution, right up my alley.
Founders can look for credit enhancement instruments that make an equity offering attractive to institutional investors. I wrote about a few crowdfunding platforms that are developing pretty robust models. I believe those platforms that accommodate things like warrants, LEAPS, and contingent value rights will have a huge edge in attracting participants.
I appreciated the fact that two of the panelists were attractive women. Thank you Sonen Capital and Elevar Equity for showing off your finest assets. I always like to see quality in finance. I'll definitely keep watching the impact investing sector, and not just for the eye candy.
Saturday, November 17, 2012
Friday, November 16, 2012
Thursday, November 15, 2012
FHA Going Broke, Thankfully
The insolvency of the federal government's middle class entitlement programs is well-documented, at least for the high-information component of the electorate. We can now add home mortgage guarantees to the mix. The FHA does not maintain the required minimum capital reserves for the loan portfolios it supports. Credit rating agency analysts will be loathe to note this in the footnotes of whatever reports they publish.
Banks will ignore this news because they don't want to frighten their corporate clients into thinking they're just one mouse click away from a global credit market freeze. Maybe the Fed can extend the FHA a credit line and then hyperinflate it down to nothing. Maybe the two major political parties can pass a hat around among their donors and take up a collection to fill the FHA's hole. My preferred alternative is to let the FHA go bust when the next foreclosure round forces banks to write off mortgages, which means we can use Dodd-Frank to forcibly collapse some financial institutions that shouldn't exist.
Wednesday, November 14, 2012
Tuesday, November 13, 2012
Greece And U.S. Don't Really Have Two Years
Here's today's "whoa Nellie" moment. There will be more in years to come. Europe is willing to give Greece two more years to meet its fiscal adjustment targets. That's pretty silly considering Greeks are rioting right now over cuts to government spending. They'll really light things up the longer that two-year reprieve window drags out their pain. Leaving the euro for a hyperinflating neo-drachma will be just as painful but will probably end sooner.
The U.S. probably doesn't have two years either to solve its fiscal shortfalls but we don't know it yet thanks to the dollar's ever-more precarious status as the world's reserve currency. Lining up business leaders to provide cover for tax increases will probably help but there shouldn't be any promises of business tax breaks in return for support. Wealthy investors selling assets now are getting ahead of the game, so let's not count on any giant revenue boosts next year from higher capital gains taxes. The Laffer Curve's implication that higher tax rates don't necessarily raise gross collections is becoming a self-fulfilling prophecy.
Jobless benefits are a potential casualty of the fiscal cliff but IMHO the federal government is not likely to slaughter this sacred cow. The lesson of last week's election is that working-age Americans like their free handouts and will punish politicians who talk about taking them away. Americans have become more like Greeks than they know. Whatever compromise comes out of Washington will probably impact the rich first and the poor last, until hyperinflation makes everyone poor.
I have no idea whether Americans deprived of government benefits will be up in arms like Greeks. America got its history of social unrest and agitation out of its system by the late 1960s thanks to an elite consensus in favor of a welfare state. The end of the welfare state's income-support programs and lifestyle entitlements (SocSec, Medicare) will test our social fabric, and our elites are willing to postpone that day of reckoning even if it means they continue to bear a proportionately large share of the nation's income tax burden.
The U.S. probably doesn't have two years either to solve its fiscal shortfalls but we don't know it yet thanks to the dollar's ever-more precarious status as the world's reserve currency. Lining up business leaders to provide cover for tax increases will probably help but there shouldn't be any promises of business tax breaks in return for support. Wealthy investors selling assets now are getting ahead of the game, so let's not count on any giant revenue boosts next year from higher capital gains taxes. The Laffer Curve's implication that higher tax rates don't necessarily raise gross collections is becoming a self-fulfilling prophecy.
Jobless benefits are a potential casualty of the fiscal cliff but IMHO the federal government is not likely to slaughter this sacred cow. The lesson of last week's election is that working-age Americans like their free handouts and will punish politicians who talk about taking them away. Americans have become more like Greeks than they know. Whatever compromise comes out of Washington will probably impact the rich first and the poor last, until hyperinflation makes everyone poor.
I have no idea whether Americans deprived of government benefits will be up in arms like Greeks. America got its history of social unrest and agitation out of its system by the late 1960s thanks to an elite consensus in favor of a welfare state. The end of the welfare state's income-support programs and lifestyle entitlements (SocSec, Medicare) will test our social fabric, and our elites are willing to postpone that day of reckoning even if it means they continue to bear a proportionately large share of the nation's income tax burden.
Monday, November 12, 2012
Sunday, November 11, 2012
The Limerick of Finance for 11/11/12
Austerity's path is not done
Greece says this next round is the one
Creditors still demand
A far stronger hand
Protesters don't think this is fun
Greece says this next round is the one
Creditors still demand
A far stronger hand
Protesters don't think this is fun
Saturday, November 10, 2012
Winning at VEDC Access to Capital 2012 in San Francisco
The Valley Economic Development Center (VEDC) cares enough about small business owners to link them to sources of investment. I liked their San Francisco event so much last year that I had to come back for a second helping. I thoroughly enjoyed attending the VEDC Access to Capital Business Expo 2012 in San Francisco and was lucky enough to be selected as a panelist for one of their "Where's the Money?" expert workshops. I was the only blogger on a panel full of institutional financiers and did my best to show off my genius . . . er, I mean, enlighten the audience about post-modern innovations in raising capital.
The other panelists were pretty cool. They were from banks and other institutions that offered products running the gamut of SBA-backed loans and accounts receivable factoring. My turn to explain myself came after everyone else had pitched their value propositions. I explained crowdfunding in the context of its immediate predecessors, microfinance and P2P lending, and predicted that any crowdfunding portal that could offer a combination of debt, equity, and exotic project finance options would be a very attractive acquisition target for a major broker/dealer someday. I threw in a couple of details about the JOBS Act's definition of an emerging growth company and how startups that want to benefit from its registration exemptions need to use only the handful of portals that have registered with the SEC. I finished off by proposing four best practices that can help a startup maximize its chances for successful fundraising and reduce its chances of incurring lawsuits or criminal penalties. Here they are, and perhaps they'll start some kind of movement toward standardization. The first three practices describe documents a startup should post on its crowdfunding portal, and the fourth is something to execute daily.
1. Business plan. Post your two-page executive summary, mega-slideshow of your business model's execution, and two years worth of projected monthly cash flows on the crowdfunding portal.
2. Prospectus. A good business attorney can help draft an offering memorandum that will comply with the JOBS Act and the rules the SEC should publish sometime early in 2013.
3. Term sheet. Use the free term sheet generators that major law firms have built for free on their websites as part of their offerings to entrepreneurs.
4. Social media campaign. Entrepreneurs need to get savvy about using social media to drive investor traffic to their crowdfunding portals.
I admitted to the audience that the crowdfunding environment is kind of like the Wild West where anything goes right now until the SEC publishes its final rules. The sector reminds me of where e-commerce was in the 1990s when eBay and PayPal were just gaining traction. I still remember rival companies pushing "digital cash" solutions back then that ultimately went nowhere once secure portals figured out how to accommodate traditional cash. That kind of shakeout is coming to crowdfunding, so it pays for both investors and entrepreneurs to be reputable from the start. I got a few laughs when I mentioned that I blogged about crowdfunding last night, so they had a healthy sense of irony about my blatant self-promotion.
The audience members were pretty sharp and had some good questions. One guy asked me if U.S.-based crowdfunding portals were open to investors and companies from outside the U.S.; I admitted I had no idea. That is really the kind of thing the SEC should seriously consider through public comment on its rulemaking process. Internationalizing a U.S. crowdfunding platform would make this country a leader in financial market innovation (and no, hedge fund algorithms don't count as innovation in my reckoning). Another audience member asked about the best time to bring angel investments into a startup. I said words to the effect that investing should be a natural outward progression from one's own capital (savings and couch pillow spare change), to friends and family money, then crowdfunding, then angel investors, and finally VCs. I truly believe crowdfunding can bridge the financing gap between personal sources and the larger world of professional investors.
I also stuck around for the next "Where's the Money?" panel on fundraising. I liked what Youth Business America does with microfinance and what Midland American Capital does with invoice factoring. My recollection of the panel's responses follows. Banks have many credit channels: practice finance, SBA, and equipment finance to name a few. Relationships matter in lending because banks consider their clients' exit strategies. Non-bank lenders often bring technical assistance with business planning, plus outside partners from SBA, SCORE, SBDC, and others. Non-bank financiers can also help a startup become eligible for more stringent bank lending by putting cash on its balance sheet. One audience member at this second panel asked about crowdfunding, and a panelist said it's useful for projects with ROIs that are hard to define (like a music album or art project). He was correct and I didn't speak up to interrupt because it wasn't my panel anymore. I know when someone else deserves to shine.
Lunch at the Hyatt Regency San Francisco was as terrific as I remember from last year, with salad greens, chicken in cream sauce with rice pilaf, and some kind of carrot cake dessert thing. I hung around afterwards to snag some extra biscuits and rolls that others foolishly left behind. Yeah, I'm frugal like that if it spares me the expense of dinner. I'm ultra-cheap and proud of it, woo-hoo!
There were only a small number of hot chicks at this entire forum. I got into a conversation with a really hot gal from Europe who wanted to digitally self-publish research on politics and diplomacy, and I kept thinking about how cool it would be to make out with her right there at the conference. Well, unfortunately business comes first.
The lunch speakers were pretty good. The Wells Fargo lady talked up her bank's support of the nation's "recovery" but I remember hearing the same kind of talk last year and evidence for said recovery is still spotty if you track data from Shadow Government Statistics. She did have some good insights about using critical thinking to challenge our assumptions and get beyond simple choices between positive and negative extreme outcomes. I'll do that the next time I have to choose between a blonde, brunette, or redhead and ask them if they'd all like to date me simultaneously. Yes, I'm serious, I really do think that way.
The next lunch speaker was the regional SBA guy. He had some good advice, like getting whatever business licenses you need early in your startup process or you'll pay twice as much for them later (presumably through opportunity costs of lost business). His charge to the crowd was to max out the use of free resources like SBA and VEDC. I hope the audience appreciates these free goodies, because the federal government's fiscal pressures will put all taxpayer-funded business programs in jeopardy very soon.
The founder of Chasing Lions Cafe told us how his home equity loan financed his first cafe; his home ended up underwater while his business stayed profitable. The keynoter from ZinZin talked about branding because that's what the firm he founded does for a living. I'll summarize his main points. He said succeeding in a down economy tells you that you did something right, while doing it in a good economy means you never know the true cause. Great branding doesn't just happen; it must be debated and advocated as a compelling narrative. He challenged us to ask ourselves the following questions about the core of our brand identity:
1. Who are you / What do you do / Why should anyone care?
2. What's the great promise of your brand?
3. How will your brand change the world?
The ZinZin dude said competing on price and features makes your business a commodity; I'll bet he's been reading Harvard Business Review. He also said a strong name, memorable story, and business actions that back up your story make a great brand. Be bold! Have a disruptive name and message that force people to slow down and pay attention. Make a big bang. End of story.
Okay, mister ZinZin, I'm taking you up on those challenges. Here's how I answer your big three questions for the Alfidi Capital brand.
1. I'm Anthony J. Alfidi, Supreme Super-Genius / I make people angry with my obnoxious blog articles / People who are easily offended should care about how I ridicule the stupid things they do with money.
2. My brand advocates unlimited freedom, radical honesty, and side-splitting humor about finance.
3. Alfidi Capital will change the world by humiliating dishonest financial "professionals."
I didn't hand out any business cards because exchanging contact information with other people isn't part of my self-publishing business model. I did make one serious mistake by writing my name on some contact sheet when a clueless woman asked for a way to reach me. I told her to Google my name but frankly I shouldn't have gone to that much trouble for her because I have no intention of getting in touch with her. Maybe I should have rudely told her to get lost (you know, the whole business actions in support of my brand story thing) but some people are just so clueless they tug at what's left of my heart strings. In the future I'll just spell my name once and people need to be quick enough to write it down for reference and move along. I told quite a few other inquisitive people to look up my name printed in the program and they figured it out, geniuses that they all are. Business professionals don't need my card anyway because I'm pretty visible around San Francisco. I'm branded as an independent blogger and I need to minimize direct human contact to succeed.
There you have it. I plan to attend Access to Capital San Francisco next year as a keynote speaker. I promise I'll make it unforgettable.
Nota bene: None of the companies or institutions mentioned have given me
any compensation or consideration for this blog article. My recollection of this
conference is provided as a public service.
Subscribe to:
Posts (Atom)