The official "blog of bonanza" for Alfidi Capital. The CEO, Anthony J. Alfidi, publishes periodic commentary on anything and everything related to finance. This blog does NOT give personal financial advice or offer any capital market services. This blog DOES tell the truth about business.
Here's my quick update. My covered calls on FXI and GDX expired unexercised. I renewed them. My short puts under GDX hit their strike price and were exercised; I'm now the proud owner of more GDX. I'm trying to keep my gold (GDX) allocation at about 7% of my net worth.
A couple of my California muni bonds are maturing soon and a couple more mature later this summer. I will not replace them with more munis. Like I've said before, things related to hard assets and forex are probably more suitable for me as asset protection tools.
I still have plenty of cash. I am watching the renewed recessions in Spain and the UK with interest, wondering when their troubles will trigger the end of both the eurozone and the global equity bull market.
The machinist union at Lockheed Martin has voted to strike. The company's offer to line out the defined benefit pension for new hires was a red line the union couldn't cross. That's too bad, because the future of defense companies like Lockheed depends very much on keeping pension liabilities down in the face of declining defense budgets.
Multirole fighters were affordable when their structural engineering and avionics were simpler. Reconfiguring multiple systems several times for the same airframe, including for a VSTOL version, has not proven to be the cost-saving procurement method originally promised. No one at DOD seems to care. That's too bad, because the federal government's eventual budget cliff-dive will render it unable to pay for its most coveted legacy weapon systems or backstop the losses of its prime contractors. The striking machinists need a plan B.
Stevia First started as something called Legend Mining. The very last thing Legend Mining did before changing its name to Stevia First was lease an office from their CEO's wife, according to their Oct. 11, 2011 8-K. I shouldn't have to tell you that they achieved zero success as a mining company, but their 2011 annual report tells you so anyway. They're not achieving any success selling stevia sweetener either; they've had no revenue since changing their corporate mission, they've depleted their cash, and they've increased their liabilities.
This particular deal by itself doesn't materially endanger the company as long as the wells in question keep producing. Chesapeake's shareholder equity cushion of $16.6B for the quarter that ended last December is plenty big to cover the notional loan amount of $1.1B. The bad news is that non-disclosure of this moral hazard raises questions about other potential sweetheart deals the company has not revealed. It also raises the issue of agency costs to shareholders if executives are accustomed to using their company's balance sheet as a backstop for self-enriching deals. This perk's sole purpose is to enable insiders to strip productive assets from a healthy company. If those assets suddenly become nonviable (lower natural gas prices and pipeline disruptions can do that), the loan could become non-performing but the company can't recover from this credit event because it already owns the collateral for the loan.
This deal is the embodiment of the self-licking ice cream cone theory, applied to business value creation. In the final days of the Soviet Union, Communist Party officials and intelligence operatives took control of state-owned assets to enrich themselves and become power brokers in post-Soviet Russia. I cannot determine how this deal is any different from those events.
The federal government will somehow close its enormous budget deficit. The effort begins with demarcation of boundaries. The debate so far does not include reforms of Social Security or Medicare as the Simpson-Bowles commission urged. Those are popular handouts that are highly visible in the lives of the lower middle class and working poor. The debate has instead begun with tax breaks that the middle and professional classes use to build wealth and prepare for a self-sufficient retirement.
Lawmakers have begun discussing "changes" to tax-advantaged retirement accounts. The only real change this could mean is the elimination of the tax-free treatment of gains in these accounts. It's funny how some brokerages have been encouraging clients with traditional IRAs to convert them into Roth IRAs in the hope of enjoying tax-free withdrawals someday. That hope is probably going to be dashed in a few years. Investors who converted their IRAs paid a tax penalty and probably wasted a chunk of capital in light of what's likely coming.
I had wondered whether financial repression measures would have simply limited retirement accounts to buying only government debt, but this emerging discussion will simply neutralize the accounts altogether. Poor people don't have IRAs but they do love Medicare. The end of tax-free retirement investing means taxes will be raised on the middle class's passive earnings to preserve transfer payments to the poor. Those who intelligently saved for retirement will be punished and their meager wealth will be reduced to benefit those who chose not to save. This is redistributive policy at its worst. Don't say you weren't warned.
Today was the last day for American citizens to file their federal tax returns for tax year 2011. This calls for some reflection. This year's tax filing deadline happily coincides with Tax Freedom Day for the first time I can recall (not that I paid attention in years past, but I'm not the one responsible for the calculation).
I learned a couple of things from reviewing my filing documents for 2011. My realized short-term capital gains were lower in 2011 than they had been in 2010 because I didn't pursue as much event-driven investing, particularly M&A activity. I tracked a flurry of mergers in the fall of 2011 but chose not to act on them because of the precarious nature of this bull market in equities. I simply do not know when the bottom will fall out. I was thus unwilling to risk going long-equity or short-put with stocks that were M&A targets because I did not want to risk holding something if a market crash forced a merger to unwind. Stuff like that does happen.
I also learned that my tolerance for buying outstanding municipal bonds at a premium had some beneficial effects. The premiums I paid, small though they often were, helped negate the capital gains I realized from selling equities and writing covered calls. The net effect was to reduce the taxable amount of some of my gains while I collect the tax-free interest payments from the munis. The only drawback was the negative effect of the accrued interest I had to pay out on bonds that were outstanding issues held by my brokerage on behalf of the underwriter. It wasn't too much of a big deal because I always hold bonds to maturity, so the next coupon pays me back. After that, the rest of the tax-free cash flow keeps rolling in.
I have no reason to be smug about using muni bonds this way in the near future. I'm not buying any more fixed income instruments due to the severe threat of hyperinflation in the U.S. My remaining California muni bonds will mature this summer and I will not replace them. Some combination of TIPS and their ETFs, foreign currency ETFs, and hard assets (oil/gas/pipeline) MLPs and their ETFs will replace them in my asset allocation strategy. I have convinced myself that those things will more effectively preserve my purchasing power and generate more yield than traditional fixed-income instruments in a high-inflation scenario. The next year or two will determine whether I am making the right choice.
The sun is setting on the U.S. dollar's position as world reserve currency. China is building a currency clearance system that will probably end up matching the capabilities of the US-backed SWIFT system. Control of SWIFT gives the West leverage over rogue states like Iran. Shutting bad states out of the world's main interbank payments system gives those renegades the painful options of starving, bartering, surrendering, or threatening war.
China's yuan trading system is more than another jab at the dollar's increasingly fragile leadership. It is an alternative diplomatic structure that can give China leverage over emerging economies where the US also competes for political influence. Once China has this system in place it will no longer need to worry about parrying US diplomatic pressure on behalf of its trading partners.
The Fed is now torn between keeping the exit strategy for ZIRP in mind and keeping the monetary spigot open so the Chairman can deliver on his "printing press" promise (thus immortalizing his pro-inflation PhD thesis). This potential paralysis is a salient indicator for investors. It means the hawkish holdouts who question further stimulus can try to delay Ben's next QE round until the deflationary depression signs are too obvious to ignore. Those deflationary signs may become very obvious if further European market troubles spill over into US equity markets.
The lesson I draw from all of this seemingly convoluted reasoning is simple. A deflationary crash followed by a hasty monetary attempt at reflation is the most likely scenario I can foresee based on this tug-of-war between Ben's pro-inflationists and the Fed's anti-inflation hawks. This is why I have reserved a large amount of cash in my portfolio for large and fast purchases of equities once US stocks take the severe discounts I expect to see in a market crash. Any stocks I do decide to purchase in the event of a crash must be aligned with sectors that will respond well to a hasty Fed attempt at reflation, and I've concluded that hard assets (minerals, energy, agriculture) and sectors that support them (railroads, pipelines, some utilities and service providers) are aligned with my own knowledge base and risk tolerances.
I cannot predict the future with any certainty and I could be wrong; any wrong move I make will hurt me financially. If high inflation comes first, contrary to my expectations, I'd be forced to buy things like TIPS and hard assets at their very high current valuations. The difference between me and most preppies on Wall Street is that I'm actually thinking through a methodology for surviving a hyperinflationary great depression.
Nota bene: None of the above discussion is actionable advice for any investor. Consider it a form of entertainment to watch me think out loud.
I can't let the Yahoo Fantasy Finance stock trading game go without a mention. Games like this send the wrong message to the retail investing community because they encourage investors to ignore their normal risk profiles and go for risk-seeking short-term returns. Adding in cash prizes as a superficial incentive makes it worse. The few who win this game in the short time it will play out will be emboldened to keep playing it with their actual portfolios. I believe such behavior will do a disservice to investors who should really seek low-cost, long term ways to participate in equity markets.
Professional hedge fund managers have poor enough track records compared to market indexes. Ordinary investors won't do themselves any favors by mimicking hedgies' temperaments on a smaller scale. Tempting retail investors with day-trading riches is like playing with fire in an environment when risky loans to subprime borrowers are back in vogue and the continuing financial crisis in Europe adds extreme risk to American capital markets. I'm not playing any fantasy stock game. I'd rather preserve my real portfolio.
Full disclosure: No position in YHOO at this time.
I'm a recovering former fan of the Chinese miracle growth story. Too much forced infrastructure development and not enough balance from domestic consumer spending has left China's economy bereft of any driver for sustainable growth. The evidence accumulates by the day.
Tight oil supplies and declining world demand mean the Chinese growth train is off its rails. Domestic demand will not materialize until China gets inflation under control. With no end in sight to the curtailment of Iranian oil, relieving inflationary pressure on the average Chinese consumer demands a hawkish central bank orientation that would put severe pressure on the Chinese economy in the short run. Any remaining China bulls need to think of a case for buying and holding longer than the next five-year plan.
Carpenter Global Stock Advisory sent me a teaser letter late in 2011 for IZEA Inc. (IZEA). Hey, at least the ticker is easy to remember. It's got one of those snazzy net-names that branding consultants are paid $300/hour to generate in five minutes using some free software they downloaded from the web. Just kidding. I'm sure a lot of thought went into the name.
IZEA has a tough row to hoe. They compete in the part of social media where SEO meets sponsored blogging and tweeting. I'm not sure how they can differentiate themselves from services like Twellow, which provides some market data beyond what a basic Twitter account reveals. Bloggers who are tied to one advertising partner would probably love an open-architecture approach that connects them with multiple ad partners. The catch is that bloggers have to sign up to blog about . . . their advertisers? That's a pretty limiting deal; most bloggers publish because they love to speak freely. I think their offerings to publishers are a little complex, with free samples probably unnecessary and costly to administer.
They've only been publicly traded since this February and I suspect their IPO was premature given their net loss in 2011 was $1.8M worse than in 2010 (from their 10-K of Mar. 28, 2012). It's hard to control costs for a strategy that demands a lot of customization. Google mints money because much of its platform is customizable by users within strictly controlled limits.
Web 2.0 is a fun game to play but only a few of the hundreds of wanna-be players will end up winners. Quite a few social media optimizers and connectors will be bought out by the big players only to see their technology shelved (as Google did with Aardvark). These tiny companies can innovate but their technology is often perishable, because they have only a small window of opportunity to grow explosively before a big company tries to copy their model.
Full disclosure: No position in IZEA at this time.
Here comes another one. I got a free teaser mailer from Michael Williams Market Movers back in Oct. 2011. You know what's coming next. This teaser pumps All American Gold Corp. (AAGC), some gold explorer based in Indianapolis that digs in Nevada. Indianapolis? Really? I've never heard of a successful gold explorer based in that state. Indiana has little to do with this company other than the fact the CEO got his law degree from IU. BTW, neither of the two principals behind this one is a geologist. Strike one.
The front cover of Michael Williams' teaser brochure says it has a $7.95 value. That's cute, because AAGC is only worth about six cents right now. Ask yourself if you'd really pay almost eight bucks for pump letter on a stock worth almost nothing. Then ask yourself how much money you would have lost if you had bought AAGC when this teaser came out in Oct. 2011, when it traded between $0.15 and $0.30. Strike three.
Warren Buffett is awesome in so many ways. That's why I hate having to call him out for giving bad advice to home buyers and real estate investors (those aren't necessarily the same things). Uncle Warren says he'd buy fist-fulls of single-family homes if he could given the broad decline in home values across the U.S. Well, he really could with all of the cash Berkshire Hathaway controls, so why doesn't he? Let me explain.
Mr. Buffett likes the principle of buying anything at a discount and he can't help but sound off on a general trend. The trouble with applying discounting to home buying is that value in real estate always comes from three things: location, location, and location. Part of the problem with the U.S. housing market is that too many single-family homes were built too far from viable communities. The San Francisco Bay Area gives me more evidence of this than I care to see. The most depressing drive I made in 2011 was a long loop northward through the Dublin / Pleasanton area along the Hopyard / Dougherty corridor past clusters of brand new suburbs. Those suburbs are not tied to any major economic drivers that I could see. There were no factories, mines, or power plants around. These McMansion non-neighborhoods are car-focused in an age when cheap oil is increasingly more difficult to extract. I am not one to buy real estate that has little chance of ever being economically viable.
Uncle Warren's remarks remind me of the comments he made at the height of the 2008 financial crisis when he stated his willingness to buy a bond insurer that was in trouble, if only it could truthfully estimate its value. It couldn't, of course, so Mr. Buffett's comments only provided clarity. He did not act on his own advice but anyone who did got fist-fulls of very questionable equity.
It's unfortunate that some money managers still have more money than sense. Private equity funds are actually taking this approach seriously and are raising money to buy large numbers of distressed residential properties. It's ironic that the story leads off with an auction in my very own greater San Francisco suburban area, as if the buyer couldn't see what I see. Good luck with that. The REIT numbers work for large apartment complexes because those properties are located in viable large cities. Running the numbers for single-family homes means these private equity funds will be bidding for homes that never should have been built because they are too far from civic life for an affordable commute. I suspect these ambitious funds will be very disappointed with their yields when they discover that renters no longer want to live an hour away from their jobs. Maybe throwing a random comment out to the crowd is Mr. Buffett's way of seeing how many investors will go for it, thus clearing the field of people who can't see nuances.
Warren Buffett has nothing to worry about. He's been living in the same home for fifty years and has been working from it for much of that time. Smart money managers should do as he does, not as he says. I work from home too.
The bad jobs numbers don't surprise regular readers of Shadow Government Statistics. John Williams' lone voice of sobriety provides investors with an excellent baseline for interpreting news. We'd all be better off if the "official" numbers caught up with what used to be reality.
I spent over a year as a financial advisor at a major wealth management firm. I worked harder than I ever have in my life to acquire clients. Every prospect I encountered - with two exceptions - completely ignored my military experience as a selling point for my abilities. The two exceptions were unique; one had very little liquid net worth to invest and the other was a phony who had zero net worth. All of the other prospects regarded my military background as something to disregard.
People with serious money to invest want it managed by someone who's achieved a comparable level of success. I find it telling that the Edward Jones survey above mentioned households with incomes of $100K or so. I hate to break this to the 1300 ex-military advisors they employ, but their careers will be short if they focus on acquiring people at that income level. Wealth management firms are increasingly discarding advisors who pursue clients with net worth under $1M. Making $100K/year isn't going to get anyone to millionaire status in an America beset by price inflation, equity overvaluation, creeping hyperinflation, and a rapacious elite bent on regulatory capture and financial repression.
I employed all of my military-acquired skills to establish trust, build rapport, demonstrate an extreme work ethic, prove my integrity, and persevere in the face of adversity. All of those traits turned off people with serious money. All of those attributes got me terminated. Most veterans hired as financial advisors don't realize that they're just filling an affirmative action quota and will be gone in a year. That's why brokerages can afford to brag that some percent of their sales force is comprised of veterans. They know that annual turnover for lack of production enables them to keep hiring and firing unsuspecting veterans over and over again. Americans who say they want military veterans as financial advisors probably don't make enough money to afford an advisor in the first place. Too many people just don't know what they're talking about.
This unheralded DOD accounting change will add a measurable burden to the federal government's already large unfunded liabilities. The defense industry lobbyists who pushed for this change shouldn't gloat. Any acceleration in the U.S. government's default/hyperinflation inflection point accelerates the day when defense contracts will be paid in hyperinflated dollars or go unfunded altogether. The defense sector has gained hypothetical relief for its balance sheet and credit rating pressures in the face of an oncoming fiscal train wreck.
Look at the last four quarters' worth of financial statements. Revenue at the end of 2011 was about where it was a year prior but net income is still negative. Retained earnings is even farther in the hole. Free cash flow is still negative. I guess even cutting back on break room donuts isn't helping where it counts financially.
It's hard to say which YRCW constituency is the dumbest: the executives running the place, the Teamsters who think it will turn around, or the creditors who keep agreeing to debt restructures. I'd like the creditors to explain just what assets they expect to recover from the company in the event it finally expires. Please note that unemployed Teamsters do not count as assets.
Local officials shouldn't pin any false hopes on reactivating development of the project with a relatively tiny amount of DIP financing. Whatever hardware exists at the Blythe project site will either be sold and carted away to a smaller site or will sit in the sun until another deep-pocketed solar developer comes along. Maybe I could buy the whole thing for a buck fifty and restart it as originally configured for solar thermal generation. I'd be smart enough to take the DOE loan guarantee this time.
The U.S. DOE should take away one very important lesson from its numerous efforts to accelerate domestic solar production. Solar PV panel technology is a commodified industry. The lowest-cost producers are in China so it makes little sense to subsidize U.S. panel manufacturers or even full sites that have to compete purely on base material cost. The U.S. DOE should limit its industry promotion to the kind of basic research in material science where its national labs have always excelled. DOE's Innovation Hubs can commercialize the tech.
DOE loses when it tries to pick "winners" in a commodified sector who get a subsidized cost of capital. Utilities and ratepayers lose when the subsidized winners abandon their projects. Taxpayers lose when the subsidized companies can't compete.
I've been following Intellicheck Mobilisa (IDN) for about two years. They have some intriguing technology and I'd like to see them achieve some real business success. Their management team is certainly capable enough and has been around long enough to turn this maker of ID scanners into a consistently profitable company.
Part of the problem is the structure of their market. They sell handheld ID scanners to government agencies. Breaking into the market is difficult for a small firm because they have to compete against existing products from large defense firms. If scanners are built to last and the physical configuration of the cards they read hardly changes, the market can fill up pretty quickly and stay full for years. Intellicheck is doing some strategic things right by being located in a HUB Zone and being listed in the GSA Register. Local military installation commanders do have a wide degree of latitude over procurement for local security solutions. Intellicheck could help itself with more visibility at military-related trade shows and more effort in areas where military and federal installations are highly concentrated.
I often root for the little guy and the security market badly needs a diverse supply base. Intellicheck's challenge is to turn the momentum they get from their publicly announced milestones into consistent earnings. Competing for homeland security news recognition and getting recognition as a fast-growing tech company only go so far. IDN's share price was north of $7 in the spring of 2007 until it collapsed in 2008 along with the rest of the market. Since then it has gone pretty much nowhere for years with the exception of a brief run-up to about four bucks in early 2010. The stock even managed to slide during much of the last decade while the U.S. has spent enormous sums on defense. Intellicheck's strategy must evolve beyond the basics if it is to thrive during the coming years of severe cuts in defense spending.