Thursday, January 31, 2013

The Haiku of Finance for 01/31/13

Entitlement greed
Lazy losers want payments
They cannot do math

Wednesday, January 30, 2013

The Haiku of Finance for 01/30/13

Growth stat rolls over
Transport sector shows the way
This is no surprise

Surprise Q4 GDP Drop Doesn't Surprise Transportation Watchers Like Me

The bloom started to come off the overstimulated U.S. economy in Q4.  I wasn't surprised because I expected this downturn for months and consider it overdue.  The Federal Reserve's quantitative easing can levitate phantom growth for quite some time.  People who are surprised have been following slanted mainstream media for too long.  They should have been reading my blog instead.

I won't rehash the snarky, negative things I said about the alleged recovery in 2011 and 2012.  I watched with dismay the news headlines from the email feeds I get on my favorite sectors, particularly transportation.  I first noticed the newbuild orders for supertankers and container ships from carriers that were raising their rates to catch the rebound in the transocean goods trade.  I then noticed the headlines screaming about record profits and rising carloads at Class I railroads.  Then I started seeing reports of major profit growth at the largest trucking companies.  All of this news played out like a pig moving its way through a python for about eighteen months, with nothing coming behind it.

The transportation sector is my bellwether for the larger U.S. economy.  This country has run persistently high trade deficits for decades.  Imported goods move through the shipping, rail, and truck segments in a predictable order.  A bow-wave of expansion and contraction in those segments IMHO presages turning points in the broader economy.  We shall see just how descriptive this theory proves to be as the federal spending sequester cuts into durable goods ordered by defense contractors and other large government agencies.

Tuesday, January 29, 2013

The Haiku of Finance for 01/29/13

STEM workforce pressure
Guest worker wage arbitrage
Driving down income

Immigration Reform and Wage Arbitrage

Immigration reform is coming in the U.S.  The Administration believes it has a mandate to loosen immigration controls for visiting workers and corporate America is fully on board.  The hints floated so far offer glimpses into the future of the American middle class.

The tech sector claims it needs more than the current 65,000 H-1B visas to attract STEM professionals.  It's worth noting that a Congressional Research Service report from 2008 found that U.S. universities award just under 400,000 STEM degrees annually.  If this domestic pipeline isn't enough to satisfy the tech sector's demand for skilled professionals, then presumably all of those American-produced graduates are gainfully employed in STEM work.

It's unfortunate that the picture for American STEM graduates isn't so rosy.  Parsing a recent Microsoft report shows that many computer science jobs are held by people who never studied that subject.  A broader look at STEM career trends shows that foreign-born STEM graduates can stay in the U.S. for quite some time to seek work, while many companies continue to lay off tech workers.

One very telling statistic from a National Science Foundation study of the STEM workforce reveals that the involuntarily out of field (IOF) rate for recent graduates is 11.0%.  Think about it.  If 44,000 of those annual 400,000 STEM graduates can't find work in their field, why is industry pushing for even more than the 65,000 green cards for foreign-born workers?  The obvious answer is that the tech sector is not at all concerned about finding employment for those 44,000 lost workers.  It would rather use an influx of more than 65,000 foreigners to drive down wages for remaining STEM employees.

The push for more green card STEM workers has little to do with satisfying an unmet demand for skilled labor.  Tech employers can use an imported glut of qualified workers to press existing employees for wage concessions.  Wage "arbitrage" is sometimes a polite way of saying wage suppression, because that's an easy way for employers to control costs.  Compared to investing in automation or redesigned work flows, lobbying for lower wages via immigration reform has a big payoff.

Monday, January 28, 2013

The Haiku of Finance for 01/28/13

Glib liars love fraud
Fooling gullible backers
Until indictment

Financial Sarcasm Roundup for 01/28/13

It's time for another roundup of typically human tricks in finance.  BTW, if you're expecting a diatribe on Stolen Valor veterans, that's for another time and place.  Fighting fraud in the veterans' community isn't my only priority.  There's also plenty of fraud and stupidity in the finance community to keep me entertained.

The U.S. is angling for a big trade deal with the E.U.  Could this be the "grand bargain" we all heard so much about during tense moments in Washington?  Nah, this one's even grander.  It pits Europe's (read Germany's) desperation for revived exports against American farmers' hunger (pun intended) for continued protection.  I'd be very surprised to see a deal get done at Davos because most big shots are there to party, but if this is the U.S. negotiators' idea of a main effort then they probably aren't taking it seriously.  The farm lobby is more important to much of Washington than Europe's trade problems.

If Europe can't get a trade deal with the U.S., then by golly they can try for Latin America.  Chile is playing host to hopeful Euro-dealmakers and keeping its underclass out of sight.  The socioeconomic inequality might actually be a good thing for European leaders to see.  They'll be seeing more of it on their side of the Atlantic as their welfare state crumbles so it would be instructive to see what it takes to maintain stability in a plutocracy.

I'm disappointed that there may not be a U.S. government shutdown in March after all.  I was kind of hoping that the shock therapy of big spending cuts and worker furloughs would send the stock market tumbling, thus allowing me to buy in.  *Sigh.*  A sequester without a shutdown won't mean much because Congress will just postpone it again in another cosmetic deal.  Shutting things down for a couple of days would send a more serious message to the markets.

Investors who are drunk on the supposed housing recovery need to snap out of their daydreams. New home sales are down sharply, and the only people surprised were those who don't pay attention.  They'll keep dropping as long as banks are unwinding the foreclosure inventories they keep under wraps, lest regulators figure out they're insolvent.  These games of fake economic recoveries and phony sector growth get boring sometimes, so I'm glad I'm not playing.

I'll close today's sarcasm blast by welcoming the new readers I'll get who follow a certain Stolen Valor case. Hi folks!

Sunday, January 27, 2013

The Limerick of Finance for 01/27/13

Fed balance sheet grows to huge size
This expansion's extremely unwise
When banks run away
The consumer will pay
Inflation will come by surprise

Saturday, January 26, 2013

The Haiku of Finance for 01/26/13

Make a cheap smartphone
World will beat path to your door
Drive down mobile cost

Alfidi Capital Theory on Apple's Fall

My theory on a falling apple has little to do with Sir Isaac Newton's musings on gravity.  In case you haven't heard, Apple is no longer the world's most valuable public company as of this week.  Plenty of hedge funds sold off their AAPL shares on the disappointing earnings news. The Wall Street rah-rah bullish cheerleader chorus is still fond of this darling stock.  They want sucker retail investors to buy in to AAPL and save the bacon of their hedge fund manager friends.  I have no intention of playing the role of greater fool.

Apple is IMHO likely to lose its preeminent market position in mobile devices simply because it has always been a premium product maker for early adopters.  It has never been able to translate the enthusiasm of its boutique products' first buyers into staying power for cheaper products.  Apple has never been able to lower the price points of its products to compete with later arrivals.  Samsung's Droid phones will gain traction as their price points come down.

The future market for mobile devices will belong to the low-cost products competing in emerging markets that have either not reached their saturation point (North America and Western Europe are saturated) or are served with poor telecommunications infrastructure.  Your average African tribal shaman doesn't have the local equivalent of US$700 to drop on an iPhone and Apple isn't going to lower its prices.  Some other competitor - probably Samsung - will take that market with a cheap device that accommodates low bandwidth and intermittent service.

Something also needs to be said about walled gardens.  Apple's music store is nice but Google will probably win the app war.  Google has more back-end services that make apps useful, specifically Google Earth.  I'd like to see a head-to-head comparison of apps that manipulate embedded imagery or geographic data to prove my point, but I suspect Google would be the winner.

Full disclosure:  No position in AAPL or other companies mentioned at this time.  

Friday, January 25, 2013

The Haiku of Finance for 01/25/13

Maintain free cash flow
Keep capex under control
Future funding source

Thursday, January 24, 2013

The Haiku of Finance for 01/24/13

Debt limit soon gone
New law would suspend ceiling
Charade got boring

JPMorgan Chief Whines About Banking Regulation

JPMorgan CEO Jamie Dimon doesn't like the rules his bank has to follow.   That's too darn bad.  
His straw man analogy about not knowing how aircraft engines work is hilarious.  Any aviation mechanic with a high school diploma can explain how an aircraft engine functions.  Mr. Dimon's audience at Davos may readily accept such an argument; they're the type of crowd that tends not to get their hands dirty fixing things.

Let's brighten Mr. Dimon's day by reminding him just how much worse things could be for U.S. banks.  Tax code changes could require tax payments for unrealized gains on derivatives if they are marked to market.  This would probably destroy much of JPM's business model.  I don't expect such a tax treatment to be enacted in the final version of a reform bill because the finance sector would successfully lobby against it, but as a legislative tactic it scores points for making corrupt bankers squirm.

If bank CEOs don't like being taxed on their derivatives book, maybe they'll like Europe's financial transaction tax.  Big banks like JPM can get around it by trading in London while smaller, single-country banks will be forced to pay that tax.  JPM should count the blessings its size confers rather than complain.

Mr. Dimon should be especially pleased that regulators have been super-slow to coordinate regulatory reforms required under Dodd-Frank.  Bureaucratic lethargy is a gift to bankers who continue to trade for their proprietary books in the absence of the Volcker rule.  JPM's own London whale knew that quite well.

I have no sympathy for bank CEOs whose lax approach to risk engendered fraud.  They deserve a much tougher approach to regulation than what Dodd-Frank delivers.  Complaining about regulatory reform at a high-minded event is meaningless when said reform is delayed, fragmented, and watered down.

Full disclosure:  No position in JPM at this time.

Wednesday, January 23, 2013

The Haiku of Finance for 01/23/13

Miner low on ore
Good luck with going concern
Go out and raise cash

Orex Minerals (ORXIF) Has a Two-Country Strategy

Orex Minerals (ORXIF / REX.V) is exploring for precious metals in Sweden and Mexico.  The CEO has a background in financing and selling mining properties, but his current bio doesn't provide details on whether he's actually been a geologist who has successfully explored a project for ore.  I really like junior explorers when they have an experienced geologist in charge.

Their Barsele project in Sweden has a 43-101 report with indicated and inferred Au grades that are far below the 2.0 g/t I prefer to see in a viable project.  I know how difficult it can be to find grades like that today but someone has to try.  Their Coneto project in Mexico has no 43-101 reports and their preliminary technical reports were published in 2010.  My loyal readers know by now that I take final reports of 2P reserves more seriously than earlier reports of technical information.

Orex has several years' worth of financial reports available.  The latest quarterly report from October 31, 2012 showed C$1.5M in cash on hand and an annual burn rate somewhere north of C$2.5M.  It's hard to pin that rate down precisely because their cash burn has slowed dramatically in recent months.  They will need to raise more cash no later than the end of April 2013 if they want to survive at even that decelerated rate.

This company isn't right for my portfolio because their projects aren't mature.  I believe they need to show significant progress toward discovering high-grade ores at either of their current projects.

Full disclosure:  No position in Orex Minerals at this time.  

Just How Lame is Wall Street on Hard Assets?

I see it day after day.  Financial headlines talk up money managers who plan to rotate from bonds back into stocks.  The eventual end of the bond bubble means the easy money for fixed income managers demands a career re-think but the quality of Wall Street thinking leaves much to be desired.

Stocks are high partly because low borrowing costs enable easy corporate credit for capital spending, but too much expansion will be poisonous when the recession hits again.  Stocks are also high because low interest rates encourage American consumers to charge more unnecessary purchases onto credit cards they'll never pay off.  The same factor driving the bond bubble has also inflated stocks.  Exchanging one bubble for another isn't very bright.

Smarter portfolio managers would look for value in hard assets but I don't see much of that happening.  I periodically meet with representatives of a few family offices and private partnerships at San Francisco investment gatherings and they seem to be the only ones thinking outside of the box on asset class selection.  This is why I don't give advice on investments; no one ever listens to me anyway and most people aren't worth the time it would take to speak a couple of words.

The lack of general interest in hard asset plays means beaten-down stock prices will finally give me the entry points I need.

Tuesday, January 22, 2013

Alpha-D Updates for 01/22/13

This update is so simple, even a Notre Dame graduate can understand it.  Yeah, I have a bad attitude toward my alma mater.  Go see my Yelp reviews for clarity.

I wrote covered calls on GDX.  I remain long GDX as a hedge against the early onset of high inflation, and I will begin rotating out of it and into other hard asset investments as inflation increases in severity.

I remain long FXA, FXC, and FXF as hedges against the eventual devaluation of the U.S. dollar.

None of the problems afflicting the West have been solved since 2008.  Financial systems remain unstable and sovereign indebtedness is the favorite addiction of just about every elected government.  I retain large cash holdings that I will deploy into equities when markets crash.

Monday, January 21, 2013

Financial Sarcasm Roundup for 01/21/13

The stock market had the day off today for a federal holiday.  I did not receive any invitations to the various inaugural balls and parties tonight in Washington D.C. so I'll just have to make the best of it.

Atari is going through another troubled reorganization.  This isn't the same company that pioneered home video games in the 1980s.  Getting into mobile games may be a blessing in disguise once all the other early movers like Zynga realize they can't make money.  I'll bet some ten-year old would love to play Pac-Man or Defender on an iPad.

Global jobless workers are at an all-time numerical high.  They are now sufficiently numerous to populate their very own superpower.  Let's call it Nojobistan.  It has a GDP of zero and probably a negative net worth once we amalgamate the personal indebtedness of its citizens.

Another ex-Microsoftie brings the company's management secrets out into the open.  You mean to tell me that life at the top of a major corporation is a cutthroat, dog-eat-dog competition where only the most Machiavellian players win?  Really?  How about that.  Anyone not up for that can become a schoolteacher or government records clerk.

It's World Economic Forum time again!  Global big shots meet in Davos to discuss financial market manipulation over cocktails.  My invitation must have been lost in the mail.  I give them kudos for acknowledging the low level of trust the public expresses in their ability to lead.  That means it's time for the blue bloods to step aside and put me in charge.  Save me a seat for next year.

Sunday, January 20, 2013

The Limerick of Finance for 01/20/13

China says "Gini" won't risk unrest
Those stats should be put to a test
State numbers just lie
Portray a growing pie
Fudging numbers, like us in the West

Saturday, January 19, 2013

The Haiku of Finance for 01/19/13

Nervous Germany
Brings gold home from overseas
They don't trust the Fed

Report from Brown University's West Coast Accelerator 2013

I attended a terrific entrepreneurial event today down in Silicon Valley at the invitation of my entrepreneurial colleague Jonathan Speed.  He's the driving force behind the West Coast Accelerator of Brown University's Entreprenuership Program.  Brown University students get expert mentoring from technology executives and pitch their business plans to a panel of VCs.  The presenting teams deserve mentions here.

Consignd applies social media endorsements to e-commerce in consignment goods.  Boutique product designers have a difficult time with branding and distribution in e-commerce.  Consignd enables consolidated blogger endorsements of products offered for retail purchase.  I can see how this would appeal to people who buy stuff after following power users of Pinterest and other social media sites.  Popular bloggers could also use it to monetize their social media feeds by making product endorsements.  

Durgood is an online product recommendation site for buyers of durable goods.  Existing product review sites don't fully address non-obvious nuances like a home space's size constraints.  If you've ever bought a refrigerator or microwave without first measuring your kitchen door's swing radius, you'll understand how easily you can make a poorly sized purchase with many product reviews online.  Durgood users are presented with qualifying questions on their budget size, lifestyle, and home space to present them with workable product selections.  

Elevate is an umbrella brand for athletic apparel and equipment serving disabled athletes.  The current market for disabled athletes is fragmented with no clear pipeline for innovative products.  Elevate intends to license limited-run specialty equipment and donate a portion of its profit to disability awareness projects.  I noticed that this startup has a page on Start Garden, a funding project that selects portfolio candidates through crowdsourcing.  That's a unique twist on crowdfunding, and financier Rick DeVos is willing to see his VC fund's capital allocation decisions made by the public.  

Exersaur is designing an interactive watch that encourages children to exercise through social gaming.  I couldn't find a corporate website for Exersaur, but they do have a page at Brown's SII Hub.  The point of connecting the watch's animated character to an online community is to motivate children to track their fitness goals.  I've heard a lot about gamification at plenty of Silicon Valley technology conventions.  Pretty soon you'll be seeing game-like competitive metrics in your corporate performance evaluations, so getting your kids started early might help them win the corporate rat race as adults.

gSuccess is a mobile app developer for the standardized collegiate entrance exam market in China.  I couldn't find their official website, but descriptions of their concept are available at the MIT $100K Competition and the Dell Social Innovation Challenge.  Their concept is to incorporate study materials into apps that provide customized performance feedback and tips for improving test scores.  I'm curious about the price points of typical Chinese middle class mobile app users, and whether their rising per capita incomes will get them as addicted to downloads as Americans.  

LoveGov is a non-partisan political information platform that matches voters to causes they can support.  User-generated data from political preference questions and demographics will create a community of interest to political campaigns and public causes.  I think a whole host of user-driven sites with a narrow focus will spring up as Facebook exercises more control over the broad range of content now posted there by users.  Flagging controversial Facebook wall posts will eventually drive those users to niche services that welcome their preferences.

The folks running this incubation program are doing everything right.  The best practices of many leading academic incubators include matching business students with university scientists who want to commercialize technology developed locally.  I think university-run incubation programs can really benefit from connecting entrepreneurs with technologists at government labs.  I'm specifically thinking of DOE Innovation Hubs and wondering whether their scientists are in contact with sharp business students.  The Livermore lab community has been a prominent participant in a public-private partnership that commercializes energy technologies.  If I were a student today, I'd check out Technology Ventures Corporation for the latest government research that deserves to be made into a viable business.

Well done, Brown students.  Your concepts reminded me of a business plan competition I participated in as a senior at Notre Dame in 1995.  My idea for copyright protection marks in digitized intellectual property briefed well but didn't win the top prize because I didn't have the coding experience to make it viable.  I had a virus-based idea that would have been too much trouble to execute in the portable media market.  Leading book publishers and movie studios were just about to beat me to the punch anyway with their own watermarks, so I wouldn't have had a chance to license it out even if I had made a finished product.  Every viable business idea has a correct time to launch.

Full disclosure:  I have no financial positions in any of the startups mentioned, nor was I remunerated in any way for this article.  

Thursday, January 17, 2013

Wednesday, January 16, 2013

The Haiku of Finance for 01/16/13

Mortgage help program
Just a stealth banker bailout
Caveat fine print

Tuesday, January 15, 2013

Report From 3rd Annual New Paradigms to Fund Life Science Innovation Conference

I sure do get lucky sometimes.  Last week JP Morgan held its famed health care conference in San Francisco.  I didn't get invited to that one but I scored something just as valuable.  I got to sit through several sessions of the 3rd Annual New Paradigms to Fund Life Science Innovation Conference at the Marines Memorial Club.  I didn't have time to attend the entire conference due to my meeting schedule but I enjoyed the funding panels.  My synopsis is below, with my own special insights in italics.

The panel on "Government Investing Opportunities to Fund Life Science Innovation" had experts from the National Institutes of Health and National Cancer Institute.  They put real teeth in the old saying, "I'm from the government and I'm here to help."  The NIH maintains a free biobank for research and uses its grant program to leverage other government resources in gene therapy, cell therapy, and production assistance.  The NCI manages an active portfolio of about 50 SBIR (Small Business Innovation Research) grants and also offers bridge financing and regulatory assistance.  The advantage of government agency SBIR grants is that they are non-dilutive funding that doesn't take IP away from a developer.  NCI even sponsors an investor forum matching successful Phase 1-2 startups with investors who will fast-track their product.  Hey, last year they held it in Santa Clara, so I ought to see if I can attend this year.

The panelists had a consensus on how biotechs execute successful fundraising.  Startups should have a good team, IP amenable to protection, and an explanation of how the proposed product meets an unmet market need.  My own interpretation of "good team" encompasses someone who is scientifically qualified to invent a device or discover a drug, plus a capable executive with serial entrepreneur experience.  Several years ago when I first started studying startups, I noticed the successful ones had teams with both scientific and managerial skills.  That insight comes in handy when making investments, and one panelist observed that academic researchers have little understanding of commercialization or manufacturing. This is why the best business schools create partnerships between their MBA candidates and their own university research labs.  These partnerships create business models for commercializing the lab researchers' tech and are favorites to win business plan competitions.  

NIH gives startups guidance prior to submitting their SBIR grant request.  I'm thrilled to see government agencies focus their grant funding on the successful commercialization of a product rather than just keeping startups alive.  Heaven help us if the SBIR process turns into a make-work program for unemployed scientists.  The panel mentioned the "numbers game" aspect of successful grant funding, with only 15% of grant applications getting funded, so startups need to work hard on their grant applications.  One panelist mentioned that DOD grant makers are risk-averse, so having a strong relationship with DOD is the key to getting their research grants.

I learned a new acronym from this panel:  STTR, i.e. Small Business Technology Transfer, a program for fast-tracking the commercialization of federally funded research.  I also learned that many biotech startups are "virtual" but many grants require much work to be done internally.  Hmmm, that places virtuals at a disadvantage because they outsource things like clinical trials.  The government's workaround is to have the startup directly expense on their budget some functions outsourced to contract research organizations.  Startups who outsource functions must write deliverables into those contracts and enforce non-payment for lack of progress.

One panelist mentioned HHS's Biomedical Advanced Research and Development authority (BARDA) as a funding source with the caveat that its mindset favors the military's "quad chart" briefing system.  That makes sense to me if BARDA's mission is to fast-track biological warfare countermeasures that must support interagency efforts with DOD.  The takeaway is that startups must learn to summarize their value proposition in one slide with a picture of their drug or device, its costs, and their deliverables.

The panel noted that SBDC-funded consultants can help walk startups through grant writing.  Startups must frame their investment pitch in a way that non-expert angels and family offices understand, and SBIR grant success gives credibility as a form of peer-reviewed validation.  The NIH panelist noted the impact of leaner federal budgets, with the expectation that a sequester would reduce its budget by 8.2%.  NIH would likely cut current grants, reduce actual contract awards to 90% of their authorized level, and reduce the number of years for a contract to run.  The panel also said that startups can increase their chance of successful grant funding by having more preliminary data.

The next panel had an interesting title:  "Patient Advocacy Group and Passion Capital."  I had this mental image of hot nurses making out passionately with their patients, but alas that wasn't discussed today.  The panelists did mention what their organizations do:  The Thiel Foundation funds innovation capital for radical early-stage startups; the Cystic Fibrosis Foundation does venture philanthropy to de-risk new treatment methods for their typical patients; FasterCures is a think tank that coordinates venture philanthropy funders and develops new financial instruments.

This panel agreed that venture philanthropy is now part of Big Pharma's ecology because it helps de-risk innovation.  Some venture-philanthropists run clinical trial networks, patient registries, and other projects that help de-risk startups beyond just funding.  VP is not for the faint of heart because investments do fail.  Great risk remains in rare and orphan diseases.  Investors must see a developmental pathway to a viable drug.  VPs can fill the gap left as VCs retreat from early stage pharma funding.  VPs can take the tech they funded to corporate partners who can fund further development pathways.  Big Pharma has stepped in to the venture space to cherry-pick promising drug ideas, partly because they are reducing their own in-house development infrastructure.

The next panel was "Crowd Funding Options:  How to Raise One Million."  Ooh, goody, one of my favorite subjects.  The panelists all have startup backgrounds themselves, seeing niches in home equity finance and donor-advised funding that they could fill.  One of the CEOs argued that crowdfunding enables private equity investors to adopt a diversification approach to a portfolio.  IMHO this is a sea-change mentality from traditional pure play approaches in PE/VC.  The advantages that VCs bring to a startup besides money include mentoring and connection with other centers of influence.  It's good that entrepreneurs can access diverse sources of capital, but they need to know that the advice they get from nickel-and-dime investors will be nearly non-existent.  The JOBS Act updates Title III general solicitation rules and opens venture investing to non-accredited investors.  Entrepreneurs must use digital media to package their pitch attractively.  There is a fraud deterrent mechanism to answer critics alleging the JOBS Act generates a criminogenic business climate:  Funds raised on a crowdfunding platform are escrowed until the startup meets its funding target, and funds are returned to donors/investors if the target goes unmet by a deadline.

There's a rule in crowdfunding:  "Expect to lose your money," because it's risk capital.  One panelist mentioned that fraud is more prevalent now in regulated finance, as per Bernard Madoff and home mortgage lending.  I wonder whether the panelists read my article on the JOBS Act from last year, because they echoed some of the themes I raised.  Crowdfunding forces transparency by enabling public chatter in social media.

Startups can prove their valuation by generating social media buzz from their prospective market, thus proving the existence of demand that will drive sales.  One suggestion was to attract heavy Twitter users to a high-profile event and get them Tweeting about your idea.  Another panelist theorized that Millennials turned off by the stock market will instead invest in crowdfunded portfolios of projects.  Entrepreneurs can "build a wave" by offering freebies to early adopters who can spark passion in a product.  Perks, rewards, and bonuses attract people.  IMHO a crowdfunding platform that enables gamefication will attract startups and investors by the truckload.

I asked my only question of the conference at this panel:  "There's talk of large brokerages looking to acquire crowdfunding portals.  What qualities will make crowdfunding portals attractive to an acquirer?"  The panel answered that big banks don't yet see the intersection of social media and finance.  Portals will prove their value by attracting capital and deal participants.  I'm hereby summarizing this value proposition:  An attractive portal turns cash flow (funding from non-accredited investors) into deal flow (IPO and acquisition candidates for investment banks).  You heard it here first at Alfidi Capital.  

The final panel I was able to attend was "Biotech's Migration Outside the USA:  Where are the Emerging Opportunities?"  I don't invest much outside the U.S. but some of the cultural insights from this panel are useful to international investors.  Returning Chinese expatriates who were educated in the West bring life science expertise back home.  "Venture tourists" can visit startups outside the U.S. but the difficulty in doing deals varies by country.  Innovation as an ecosystem is attuned to local culture and takes a long time to create.  IMHO the rule of law is indispensable, so I wouldn't go looking for innovation in junta-ruled places like Myanmar; instead show me a locale that's at least one decade removed from authoritarian governance.  The U.S.'s NIH investments in R&D infrastructure really do matter.  Once again, show me a country that has such a nationally-sponsored laboratory system in place.  Several panelists mentioned the risk aversion of many traditional Asian cultures as a deterrent to startup investing, and that educated Chinese professionals make unlikely entrepreneurs because failure is considered shameful.

I had to split for another meeting but this conference was a great deal.  I wish I could have stayed for the Biotech Idol pitches because I love hearing directly from entrepreneurs.  See you next year, biotech all-stars!

Monday, January 14, 2013

The Haiku of Finance for 01/14/13

Calculate cash flow
Expansion if positive
Lifeblood of business

Dart Mining (DTM.AX) Exploring for Metals

Dart Mining (DTM.AX) is developing Mo / Cu / Ag deposits in Australia.  I've finally figured out that small Australian companies name their head cheese Managing Director instead of CEO.  Dart's MD has worked in mining engineering and various sectors supporting the mining value chain, and its Chairman is a geologist.  That's pretty cool.

Their most advanced property right now is their Unicorn project, with power, water, and roads already nearby.  The MII grades for each of those three metals are very low compared to world averages for new discoveries.  IMHO the company will have a hard time making that project viable if metal prices collapse, even if the planned mine has a low strip ratio.  Their other projects are still exploration targets with no 43-101 data although a couple of their drill results show promising Au grades.  Dart Mining is benefiting from local government grants that help fund its early exploration program, which is undeniably helpful in conserving investors' cash.

Their 2012 annual report shows their burn rate has doubled to over $1M/year since they stepped up their drilling programs.  They had just under $3.5M in cash on hand on June 30, 2012, giving them about three and a half years in which to strike valuable grades at any of their active projects.

Dart Mining trades under a dime right now but they have plenty of time to discover valuable deposits.  I'd like to see what their drilling programs find later in 2013.

Full disclosure:  No position in Dart Mining at this time.

Relative Value of Leading Pawn Shop Stocks

Tough economic times drive demand for unconventional financial services.  Pawn shops cater to desperate borrowers who have low credit scores, troubled financial histories, and other problems that make them unsuitable risks for mainstream banks.  Opportunists can open their own pawn shops or invest in existing ones, including some that trade publicly.

Cash America International (CSH) is trading at about the mid-point of its 52-week range.  Its long term debt is almost five times its net income (far above the 2x level I prefer) and fluctuates wildly from quarter to quarter.  It has positive FCF but that fluctuates too, and I wonder why their capex is non-negligible if their business model is based on franchising (i.e., the franchisee should be paying the upfront store costs).  Its 5yr EPS growth and 5yr ROE are respectable but they're not beating their sector average.  That's too bad, because Cash America offers other non-storefront service like tax filing and insurance that can appeal to low income "non-banked" clientele.

EZCORP (EZPW) is trading toward the low end of its 52-week range but has a P/E of just over 7; that's bad news for trend followers but good news for value investors.  Its net income has shown a distinct upward trend for three years and its balance sheet has a manageable level of long term debt.  FCF is strongly positive.  Their product lines are very simple, focused on various types of loans for goods with no other services.  EZCORP's recent purchase of online lender GoCash reflects this loan focus.  Their 5yr EPS growth and 5yr ROE are remarkably high, beating the sector average.  I must admit, I'm impressed.

First Cash Financial Services (FCFS) trades at a P/E of 20 and is near its 52-week high; my gut tells me it's probably overpriced on those metrics alone.  Their net income has risen dramatically in the last three years.  They did an excellent job reducing their long term debt to zero in 2011 only to allow it to balloon again this year.  That debt is still manageable (less than 2x annual net income at present) but erratic changes like that are worrisome.  FCF is positive and their 5yr EPS and ROE figures are strongly outperforming the sector.  One strategic disadvantage of First Cash is its brand confusion.  They have five different brands but their services are so similar that such a brand family complicates their marketing message.

The three companies above taken together have a combined market share that does not come close to sector dominance, so none of them have strong pricing power.  Gaining pricing power in a sector like this is nearly impossible because product inventory is so unpredictable in quality and turnover time.  Winning in a sector that emphasizes discount goods means reliance on brand strength (i.e., whichever has the best word of mouth in low-income demographics) and physical location (i.e., near HUB zones, Section 8 housing, and other areas with low costs of living).  The whole sector is highly fragmented and localized, so despite some opportunity for consolidation through acquisition these national chains have little incentive to do so.  Economies of scale in financial services come from consolidating back-office functions, and pawn brokerage is mostly a front office affair.

I suspect that peer-to-peer lending will soon pose a major competitive threat to pawn broking.  It won't undermine the high-end segment where large loans are collateralized with luxury goods but it will affect smaller loans.  P2P lending is cheaper for the borrower and more transparent for the lender.  It is more of a threat to smaller pawn shops that lend small amounts (under $5000) and do have other complementary business lines.

Pawn brokers aren't the only financial players who can profit from the pain of distressed borrowers.  Investors can make some bucks from this growing sector.

Full disclosure:  No position in any stocks mentioned at this time.

Financial Sarcasm Roundup for 01/14/13

There are many analysts and commentators in the financial sector.  If any of them are more sarcastic then me, I haven't seen them yet.  

Wealthy people are increasingly turning to pawn brokers for fast cash.  This is great news!  Some rich people pride themselves on conspicuous consumption, and now the reverse is equally conspicuous.  I don't feel sorry for the Hollywood stars and musicians who pawn their bling.  Their agents had every opportunity to hook them up with competent financial planners.  Non-celebrities who pawn high-value items probably have something to hide, like a bad credit history that a bank would shun.  The companion piece on spoiled rich kids tells me everything I already knew about human nature.  People say they want to work hard but rarely do.  They say they want their kids to have strong ethics but cave in to their every whim.  Our species seems to be hard-wired for hypocrisy.  Something in our genes gives us a Dr. Jekyll / Mr. Hyde predisposition to take impulsive action and then rationalize it afterwards.  Anyway, maybe wealthy people can pawn their spoiled kids' trinkets next once they run short of bling.  The brats don't deserve to inherit any of it anyway so the parents might as well haul it off.

Some Greeks may wish they had expensive stuff to pawn off.  Desperate Greeks are illegally chopping trees to get wood for heating.  Plenty of Americans will be following suit in a couple of years.  Sedentary suburban lives mean Americans' survival skills have atrophied and not everyone owns proper hand tools.  How about a government stimulus program to retrain people for careers in urban scavenging?  It sure would be good for sales at Home Depot, especially if the funds are programmed into EBT cards.  Yeah, I know, it's poor taste to ask people to prep for an obvious contingency.

Bankruptcy is one obvious contingency for the financially strapped.  Even bankrupt businesses are forced to pawn themselves.  Impatient banks are forcing busted businesses to find buyers ASAP or lose their last remaining lifelines.  The hidden context is the strong position of banks as senior creditors thanks to TBTF status.  Any subordinate creditor of a troubled company can expect to be pushed around in Chapter 11 thanks to Dodd-Frank.

Senior creditor privileges aren't the only advantages the SIFIs have under captured regulatory regimes.  JPMorgan may or may not release its report on how the London whale lost billions, depending of course on how the bank's senior officers feel on a given day.  The UK's concern for privacy protection comes pretty late after the disclosure of the names of the Whale, his team members, and the senior executives who did not supervise his trades.  Those top dogs are still on the job, minus a few token terminations, and they have learned nothing.  Rest assured that business will continue as usual.

Business here at Alfidi Capital will also continue as usual.  I've learned a lot from reading about the mistakes of the people above.

Sunday, January 13, 2013

The Limerick of Finance for 01/13/13

Hucksters are so brazen and bold
Fleecing fools once their story is told
Hold on to your coin
It's their plan to purloin
Finding suckers will never get old

Saturday, January 12, 2013

Friday, January 11, 2013

The Haiku of Finance for 01/11/13

Secret Fed credit
Trillions to prop up bad banks
Buffett bets on it

Old Bailout Lies Will Be New Again In 2013

Everything old is new again.  You've probably heard me say that before but it never gets old when I'm the one saying it.  The Taibblog nails the evidence behind the secret multitrillion-dollar Fed lending that saved the largest banks in 2008.  Know that the largest recipients never disclosed the sums they borrowed.  Know that the same bailout recipients also participate as the primary Treasury dealers.  Know that those dealers earn riskless profits from the spread between their zero-cost borrowing and positive yields on Treasuries they hold.  Know that the TBTF SIFIs have not changed their behavior at all.

We can expect the next phase of the unresolved crisis to come unannounced.  The watchdogs are asleep and the crony capitalists have distracted us with self-serving platitudes.  No less a personage than Warren Buffett assures us that his favorite banks will not get the country in trouble.  He is too clever by half.  He secured his banks with bundled campaign contributions to last year's successful Presidential contender.  He will be rewarded with bailouts for his banks if they get into trouble, so he is disingenuously correct by saying the banks won't be getting the country into trouble.  The country got itself into trouble by handing control of the government to Wall Street.  There's no going back now.

Big Winners In Greenwashing

Today's "Lost In The Wash" seminar on sustainable products at the Commonwealth Club got me thinking about how sustainability (or lack thereof) impacts a company's bottom line.  Consumers can search for sustainable products by using the GoodGuide and businesses can engage the services and networks of BSR to make their supply chains greener.  One comment from the panel revealed how funny consumers can be; about 70% of consumers say they want to buy sustainable products but less than 3% actually buy them.  Consumers may not know where to get information on green products.  Corporations know how to make their stuff greener, but it may not make much difference to their bottom lines.

Companies that make inflated claims about their products' sustainable impact greenwash their brands.  Irate consumers full of righteous indignation can rate the most egregious advertisements on the Greenwashing Index.  The economy rates these advertisers on their profitability, as reflected in financial statements.  Do the greenwash ratings match up with financial performance?  Let's see.

GE got a bad greenwash rating in 2009 for its Ecoimagination campaign.  GE's stock was tanking in 2009 along with the rest of the market, but it has recovered since then and its five-year ROE has been pretty healthy (despite negative EPS growth).  Chevron also got hammered for a couple of its ads but its stock has also rebounded nicely from 2009, along with very healthy EPS and ROE.  Outrage from vocal green consumers didn't hurt investors in these alleged big greenwashers.

The advertising ratings are subjective but the financial results are not.  The FTC has crafted some handy-dandy guidelines for making environmentally friendly claims in advertisements, so IMHO the folks at the Greenwashing Index should recalibrate their scoring system to match those guidelines.  The index's ad submissions are too small in number to be statistically significant so I can't take them seriously as a measure of consumer sentiment.  Some media-savvy activist sites can punch above their weight.

TerraChoice (part of Underwriters Laboratories) publishes a much more comprehensive "Sins of Greenwashing" report.  The 2010 report unsurprisingly refrains from naming any corporate violators.  That's a smart move for a consulting company catering to the Fortune 500.  Reading up on all of the new standards and labels provides corporate marketers with plenty of rebranding targets that go way beyond the Good Housekeeping Seal of Approval (and BTW there's a Green Seal too).

The big winners from greenwashing aren't necessarily the consumers who are worried about the processed foods they stuff into their pie-holes, or even the uptight activists who make careers out of making life difficult for job creators.  The real winners are the corporations who can re-brand themselves to fit a hip trend and the consulting firms that help them pull it off.  The focus on greenwashing has created another marketing niche.  Nice work, if you can get it.

Thursday, January 10, 2013

The Haiku of Finance for 01/10/13

Orphan drug status
Big advantage in pharma
Can make a cash cow

Ohr Pharmaceutical (OHRP) Developing Squalamine

Ohr Pharmaceutical (OHRP) might be on to something.  Their main project right now is a squalamine eye drop solution to treat age-related macular degeneration (wet AMD).  The topical application of this solution is a different modality from the injection treatment that presently dominates the market.  The mere thought of injecting something into a patient's eyeball probably gives sufferers the creeps, so an eye drop solution is an easier bridge for a patient to cross.  About 200,000 new wet AMD cases are diagnosed each year but I can't find a comparable price for the competing injection, so it's hard to estimate the value of this part of the market.

The eye drop drug is in Phase 2 trials and its intravenous application with ovarian cancer patients has received orphan drug status, a key regulatory advantage.  The incidence of occurrence of both wet-AMD and ovarian cancer will determine the total size of the market for this drug.  About 20,000 new cases of ovarian cancer occur each year but Ohr's squalamine drug was applied in conjunction with carboplatin in its Phase 2 study, so if they have a combined effect then patients will need insurance coverage for both drugs.  Generic versions of carboplatin are available and the price per dose was over $9000 in 2006.  Using that as a comparable price, I can estimate first-year sales for the ovarian cancer market of $180M.  That is generous and comes with caveats.  My estimate works if Ohr's squalamine drug makes it to FDA approval, and if every new ovarian cancer patient gets a dual dose regimen (which in turn depends on doctors' inclination to prescribe it and insurance companies' coverage).

Let's not ignore the other drugs in their pipeline.  Their AVR-118 drug aims to treat cancer cachexia, for which most treatments have been ineffective.  That seems to be a potentially larger market than the market for ovarian cancer drugs and the competitive field is devoid of approved drugs.  If AVR-118 is a winner, Ohr will dominate the cachexia treatment field.

I like Ohr's strong management team.  The CEO and chief scientist have been through multiple rounds of drug development.  I don't know whether Ohr's drugs will ultimately win FDA approval but I am impressed with the positioning and progress of the two drugs mentioned above.  I'll check back on this one in about a year.

Full disclosure:  No position in OHRP at this time.

Wednesday, January 09, 2013

Monday, January 07, 2013

The Limerick of Finance for 01/07/13

Technology transfer is great
Marketing innovation can't wait
New gadgets and such
Don't cost all that much
Go commercial before it's too late

Saturday, January 05, 2013

The Haiku of Finance for 01/05/13

Private banking biz
Special attention for rich
Not worth premium

Friday, January 04, 2013

Thursday, January 03, 2013

The Haiku of Finance for 01/03/13

Fed has misgivings
Bond-buy side effect looms large
Blown-up balance sheet

St. Elias Mines Under A Dime

It's easy to say that St. Elias Mines (SLI.V) is in mining but that's hard to prove since they're not running any producing mines.  The backgrounds of their management team make little obvious sense for mining.  The CEO has no obvious education or work experience in geology or mining, although she does have some video tips on career success that also shed no light whatsoever on mining.  There's also a paralegal and a couple of perennial board members on the team who have no apparent background in mining.  Hey, how's that working out for you folks?

They have a dozen projects but not much progress of note at any of them.  I see a lot of noted comments on the project pages like "drilling suspended" and "available for option" indicating either lack of economically significant discoveries or lack of funding to initiate exploration.  Junior miners that pursue discovery models create value by optioning off development rights to larger miners; they can use the cash to keep exploring or spin off an optioned project into a stand-alone producer.  Lack of progress is common with many projects in such a model but success is required at some point to justify further investor interest.

St. Elias has pretty much been a penny stock since its debut in 1998, except for a stretch from March 2010 to January 2012 when it was up over a buck, then over two bucks, then back down to about a buck.  Now the share price is under a dime.  I look for junior miners that have the ability to create lasting fundamental value, and I'm not going to look at St. Elias Mines again.

Full disclosure:  No position in St Elias Mines at this time.  

MAG Silver (MVG) In Mexico

MAG Silver (MVG / MAG.TO) mines silver in Mexico.  I've never been south of the border but I hear there's lots of tortillas down there, plus attractive women.  I don't know whether MAG Silver employs attractive Mexican women but if they do they should pay them in pesos rather then tortillas.

I have no quibble with the management team because they have the proper backgrounds.  They have a lot of projects in play.  The Cinco de Mayo project's MII resources look low at first glance but the moly grades actually exceed the average grades found in porphyry copper deposits.  The rest of their projects may show promise after more exploration but it's too early to tell.

Their Q3 financial statement for 2012 reveals US$44M in cash on hand, but they'll need much more than that to complete several simultaneous drill programs.  The diverse project portfolio requires a look at fundamentals from a value perspective.  Their FCF is severely negative and so is their five-year average ROE.

I can't understand why the market values MAG Silver at over $10/share when they've been losing money since 2008.  Inferred grades only get you to the threshold of a production decision.  I could understand the optimistic valuation if one of their larger projects were close to starting production but I can't be so optimistic with so many other undeveloped properties eating up capital.

Full disclosure:  No position in MAG Silver at this time.

Wednesday, January 02, 2013

The Haiku of Finance for 01/02/13

Production cash cost
Labor, energy, transport
Make ore viable

Silver Lake Resources (SVLKF) Mines Australian Gold

Silver Lake Resources (SVLKFSLR.AX) mines gold in Australia.  Did I ever mention that I visited Australia in 2001?  I didn't go to any gold mines but I met other multinational executives in Melbourne.  What a nice town.  I didn't date any Australian women.  Next time I'm down there I'll have to check out some of these gold miners.  In the meantime I'll just have to settle for their financial numbers.

My regular readers know that Australian company management nomenclatures sometimes throw me for a loop.  The Silver Lake team looks solid even though there's no clear "CEO" title.  I can live with the lack of translatable titles when the whole team is steeped in geology and mining engineering.  

This is an established mining company, so a project-by-project comparison is less useful than a fundamental evaluation that encompasses the whole company's multi-project performance over time.  Their net income for the past three years has been consistent and they have no long-term debt.  FCF turned positive in their 2012 annual statement after having been negative for two years prior.  I can understand the need to invest in new infrastructure at developmental stage projects but at some point this will hurt net earnings if they can't put new properties into production.  Their five-year ROE is pretty remarkable at 19.12%.  

I'm pleased with the quality grades from Silver Lake's operating mines.  They need to keep their company-wide cash cost of production far below US$600/oz if they are to create value in the long term.

Full disclosure:  No position in Silver Lake Resources at this time.

Tuesday, January 01, 2013

The Haiku of Finance for 01/01/13

Con artist beware
Law enforcement watches you
Time to go to jail

Max IRA Contribution Upped To $5500 For 2013, No Confiscation In Sight

Investors need to check out the IRS rules for tax-advantaged retirement accounts in 2013.  One notable item is the increased cap for IRA contributions, now $5500.  I made the maximum contribution to my IRA this morning for tax year 2013.

I've been seeing a lot of chatter on the Web lately about national plans to confiscate personal retirement accounts or force their holders to purchase government bonds.  I have not uncovered any official record of any such plan under consideration at any level of government.  One prominent economist has made a series of public proposals advocating a mandatory annuity-based account system but the political blogosphere has somehow magnified her ideas into a looming threat of confiscation.  Calm down, people.  Confiscation of IRAs and 401(k)s would be far more disruptive to the U.S. financial sector than FDR's gold confiscation.  Mutual fund companies and big banks would cry uncle at the lost fee income and their lobbyists would be out in force.  I doubt that any compromise proposal to custody mandatory annuity accounts with the few politically favored big banks would satisfy any Wall Street concerns over lost fee revenue.  Any way I slice this one, I just don't think confiscation is any more than a very remote "black swan."

Congress has also considered methods of encouraging contributions to IRAs.  Recent hearings considered new incentives that would make retirement account contributions easier.  The Administration is even proposing tax credits that will encourage small employers to enroll employees in IRAs.

People can relax for now.  A replay of the 2008 financial crisis may put a lot of untouchable ideas back on the table but taking away IRAs isn't likely to be one of them.  I suspect that removing their tax exemption or tax deferral would be within the realm of extreme possibility, but even that would occur before outright confiscation (or forced conversion to bond-buying managed annuities) would ever be considered.  I made my IRA contribution this year with the risk of eventual taxation in mind, and I would prefer to earn tax-free capital gains while they're available.