I can't avoid these free expo passes to industry conferences. Mobile Commerce World 2013 at the Palace Hotel beckoned to me from across the Interwebs. I spent last week at the free executive roundtable sessions because, hey, let's face it, I'm an executive, so I qualify to attend. Did I mention that those sessions were free with the expo pass? They had free coffee and tea, so I couldn't lose. I'll relate the proceedings but I must first introduce my readers to some mobile tech terms.
Geofencing is when a user draws a geographical boundary onto an interface. Mobile commerce marketers use it to define areas where they can locate mobile users who are candidates for "push" media that convince them to spend money in stores. The ubiquity of person-specific metadata makes geofencing a useful tool.
PCI is short for "payment card industry," the kind folks at Visa, Mastercard, American Express and elsewhere who have been tracking your purchases for decades. PCI data enables marketers to mine your preferences and target ads just for you once you enter a geofenced area. The PCI has its own Data Security Standard (DSS) that mobile commerce pros want to refine to prevent fraud losses.
A software development kit (SDK) is something that your mobile OS developers at Apple and Google throw out to the app development community so they can go to town on all of those cheap apps you love to download.
These SDKs in turn lead to application programming interfaces (APIs) that form the kernels driving the apps you use. I'm not a programmer so don't ask me how they work. All I know is that people who play Angry Birds on Muni instead of reading the days news benefit from APIs at some level.
Retailers use stock keeping units (SKUs) to track inventory shipped as it is sold. SKUs provide deep data on item demand so retailers can forecast reorders and optimize the performance of their supply chains.
Omni-channel is the proliferation of customer contact methods through retail channels that now extend into mobile. Email, texting, apps, push media, and landing pages are all in there.
Now that we've dispensed with academic formalities, I can get back to the pressing matter of searching for hot chicks at Mobile Commerce World. There weren't very many, so I wasn't distracted while attending the executive roundtables. The first roundtable was on mobile wallets and payments. Needless to say, vendors like mobile commerce because it means more transactions get executed. The "always on" presence means impulse buys are easier for items whose prices exceed the cash in your wallet, provided some geofenced push media shows up once you walk into a store. Vendors like mobile because customers can pay for things without queuing at a Point of Sale (POS) terminal. One hurdle is that high fees for mobile payments will price the tech out of smaller markets where vendors can't scale up to reduce costs. Mobile pay data will be one more feed into Big Data to enable lead generation. I'm thinking that the pain felt by small and medium size enterprises (SMEs) who can't scale is something that cries out for disruption if a mobile payment service has the right combo of speed, reliability, and connectivity. Security in mobile payments is on everyone's minds but I'm waiting for the ultimate in authentication: biometric validation. It's infeasible right now but it's coming. Biometric i.d. alone or in a two-factor technique will drastically cut fraud IMHO.
The one standout panelist I noticed from the executive roundtables was Ben Milne, CEO of Dwolla. This guy really knew his stuff. He was charismatic, had an encyclopedic knowledge of payment metrics, and offered very detailed insights into consumer behavior. I learned from him that a system called NACHA facilitates automated check clearing as overnight settlement. The fact that the Automated Clearing House (ACH) network is not instantaneous provides room for mobile to disrupt the $34T in annual check clearing volume. Dwolla's name is cute; it suggests the words "dollar" and "wallet" to the casual listener. Dwolla got tangled in DHS's investigation into bitcoin transfers but they quickly complied and distanced themselves from bitcoin transactions. Pursuing a disruptive business model means navigating around regulatory roadblocks, just as e-payments navigate through cyberspace.
Another exec roundtable wanted to smooth the road to mobile adoption. Plenty of roadblocks stand in the way of wider mobile adoption. User difficulty at the front end and lack of connectivity to ERP Big Data at the back end stand out. One panelist made the memorable observation that apps are like venture-funded behavioral psychology experiments, and the most successful ones will be immediately copied. I've noticed that successful adoption once again comes down to integration into users' lifestyle experiences. It's obvious (to me anyway) that these vendors are using Customer Development to improve the mobile user experience in ways that reduce friction from things like customer service calls. I'm also impressed with the vendors' ability to recognize the portability of customer reward and loyalty programs (cashbacks, frequent flyer miles) into mobile. Everyone loves freebies, especially me. The vendors are also big on reducing friction by cutting the number of steps in a transaction and having prettier GUIs for late adopters. I had to LOL at the possibility that the industry thinks late adopters are dullards; maybe they're just cheap. One of the mobile payment sector's biggest metrics is basis points per transaction. Saving basis points is everything and they know that basis points lost to fraud is the equivalent of cash flow denied to a merchant. This is why multifactor authentication via biometrics, geolocation, PINs, and more is the future.
I should have skipped the panel that reviewed Telefonica's study on Millennials. The survey data itself has good benchmarks for marketers. The panel's interpretation of the data was just amateurish blather. The all-Millennial panelists talked way too much about how they felt as Millennials and were obviously inexperienced in addressing a live audience. They had little to say about whether their companies could effectively market to the Millennial segment or how their services crossed the chasm from Millennial early adopters to mass users like me. Kids these days are so self-absorbed. I'm middle-aged and I don't care. Meh, get off my lawn. One young panelist admitted surprise at the survey results that showed Millennials in the Middle East and Africa are concerned about terrorism. I'm like, dude, how could you not understand that people who live in politically unstable regions have legitimate concerns about terrorism?! Duuuude, come on. Maybe for all their tech connectivity, American Millennials track video games, sports, and reality TV shows more than world affairs. I've got the cure. I say more social media companies and mobile payment platforms should hire military veterans who've actually been to those unstable regions. There's a dose of reality upside the head for you kids.
The next roundtable I visited discussed some winning mobile commerce strategies. Retailers have figured out that mobile allows customers to research products while on the go. Their sales forces can access ERP data from the field and service technicians can access corporate data while on calls. This has "liberated" data from IT, and presumably from other stovepipes. The panel revealed that customers prefer basic product research over interactivity via mobile, so the inability of PC and tablet interactive media to translate to mobile isn't a source of friction. Marketers are figuring out each segment's contact preferences and adjusting their approaches to fit different targets. Mobile users are turned off by poorly coded apps and multiple steps, revealing an instant gratification experience that can make or break brands. This panel advocated planning for mobile failure contingencies, like a customer care strategy if an app or loyalty program doesn't work. They also advocated using good analytics and monitoring mobile channels for frequency of use, adoption, and frustration. One panelist foresaw the future of retail as WiFi enabled stores so their installed POS tablets weren't the only method for closing a sale. Mobile also turns traditional metrics like seasonality upside down. The panelists also advise retailers to build mobile channels in light of device specifics. Smartphones have different scrolls, calendars, and cookie acceptance standards.
Another roundtable focused on mobile interface with the larger enterprise. The panel's observation that enterprises must adapt their entire infrastructure to mobile platforms is the mirror image of what I've learned at enterprise-level IT conferences. Let me digress for a moment. The enterprise purveyors pushing cloud adoption all recognize SaaS and IaaS as flexible tools in keeping architecture updated. IMHO mobile adoption is the ultimate IaaS if enterprises can seamlessly fit their channels into the dominant mobile OS's. Optimizing the customer experience for mobile goes hand-in-hand with total enterprise transformation. One panelist seemed to be speaking from experience by endorsing a "mobile transformation team" with cross-functional reps and C-level reporting. He also said it should work closely with a "retail store transformation team" and the IT people who manage Big Data. I will assume that the retail store team will assess each store's ability to accommodate WiFi and the virtualization of the POS experience; that wasn't spelled out but I'll take it as implied. I'm getting the clear impression that mobile B2B solutions will require supply chain transformations as well. I can see third-party logistics (3PL) providers enabling the customization of shipping on the go. They're not there yet because a lot of the logistics sector is still wrapped up in optimizing real-time tracking and other technologies that have been around for a decade.
The next roundtable on assembling technology building blocks must have read this previous panel's minds. They admitted that enabling omni-channel unification means IT departments need to adopt more flexible BYOD policies. Nothing would be more off-putting for a customer in a store than a sales rep whose device can't interface with a customer's prior to a sale. One panelist boldly asked the audience if they had a mobile plan in place for their business. I can boldly answer YES because I've verified that my research website and two blogs all have display versions compatible with a mobile format. DONE. Score one for Alfidi Capital. One panelist observed that CMOs will likely own the mobile initiative with the CIO in support. My take is that the CMO will have to be a change champion for the entire culture and get the CIO's buy-in for new policies.
Oh BTW, those of you worried about privacy need to stop worrying because you have no privacy in a store. You see, retailers' in-store surveillance video systems can track customer traffic patterns and eye contact. This goes way beyond loss prevention efforts in stores and organized crime in the supply chain (like trailer theft at a warehouse). Retailers observe your real-time shopping behavior and use it to adjust their channels. It is not a stretch to imagine retailers storing video indefinitely and linking your movements and facial expressions to your payment history.
I sat in the startup showcase pitches. Several VCs and accelerators judged some mobile startups' business plan presentations. I won't reveal the startups' identities or proprietary pitches but some obviously stood out. The VCs liked seeing startups that had either detailed market segment data or some technology with a wow factor. Not every pitch followed Guy Kawasaki's 10-20-30 rule but the ones that got the most VC respect (as I just noted) didn't have to adhere to that convention. I'll boil down the pitching tips I picked up from this event. Startups, take note.
- Have metrics on retail risk, broken down by target segment and/or channel.
- Gamefication incentivizes app use and generates data the app provider can sell to vendors.
- Provide clarity on whether a business model is B2B or B2C.
- Show transactions beyond just mobile payment by having loyalty programs, calendaring, rebates, etc.
- Good apps collect analytics that will feed several transaction methods.
- Don't show a video in a pitch unless it portrays your product in action.
- A good value proposition is positioning as SaaS/IaaS that interfaces with vendor's existing IT. That saves time and money on a complete redesign just to capture data or improve the customer's front-end experience.
- Chat and instant messaging are underused channels for customer contact. They may have untapped potential.
The final roundtable was about the hope and hype around augmented reality. This technology allows users to create shareable content. Marketers have tested it with product tie-ins to movie premieres and found that customers who share images of themselves in stores with character cut-outs are more likely to buy stuff. I guess people really are that dumb. These "augmented apps" show users interacting with products. The rest of what I learned came fast and furious. One very important discovery is that product life-cycle management can now be measured with data generated by apps. Cross-referencing omni-channel app data reduces redundant advertising spending. Virtualized stores don't have to be designed to precisely resemble brick and mortar stores because they should allow personalization. Viewing physical objects via mobile allows users to get more content. Image recognition via apps may replace barcode scanning. IMHO we'll be seeing more of this augmented reality stuff.
I didn't spend much time on the expo floor except to see who was giving away free goodies. Lunch was not free but those sandwiches looked overpriced. I did score some free t-shirts but got no phone numbers of hot chicks; there just weren't that many of them present. Hopefully I'll see more babes when I return next year.
Addendum: I'd be remiss if I didn't mention the presence of the FIDO Alliance, Open Mobile Alliance, and Application Developers Alliance at Mobile Commerce World 2013. Those organizations develop technical standards and best practices for the mobile app community.
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.
Sunday, June 30, 2013
Observation for KMWorld "Measuring Collaboration Success"
I don't have time to read my various media inputs from cover to cover. I just focus on knowledge I can use. I value KMWorld for insights into knowledge management but sometimes knowledge hides in plain sight. Let's take a closer look at their June 2013 article, "Measuring Collaboration Success."
Forrester Research's very subjective, self-reported questionnaire drives the conclusions of a tradeoff chart measuring business units by their contribution to business value and their ability to drive change. I can tell what's missing just by looking at the chart. The least flexible business unit is manufacturing, followed by operations. The most flexible unit is sales. The missing variable is obvious: investment in fixed plant. Sales is a largely human element that can be changed at little cost by hiring and firing people in the sales force until the right people are in place. Minor tweaks to their CRM systems cost little. Compare this to the difficulty in changing a manufacturing unit without enormous new investments in physical infrastructure. Changing operations is almost as costly because it involves reengineering supply chains.
The whole purpose of KM is to optimize the performance of large, complicated organizations. That includes pushing KM practices down to capital-intensive business areas like operations and manufacturing. I would like to argue that applying operations research and KM together can reduce the delta in business value between new product development (which isn't always capital-intensive until physical prototypes go for testing) and manufacturing. The literature on KM is extensive but much of it is qualitative in nature. KM sorely needs a textbook treatment like Cloudonomics that can quantify the value added by reducing the costs of human latency or introducing new collaborative tools. That's the kind of thing I'd like to see KMWorld and Forrester Research address when they publish new KM thinking.
Forrester Research's very subjective, self-reported questionnaire drives the conclusions of a tradeoff chart measuring business units by their contribution to business value and their ability to drive change. I can tell what's missing just by looking at the chart. The least flexible business unit is manufacturing, followed by operations. The most flexible unit is sales. The missing variable is obvious: investment in fixed plant. Sales is a largely human element that can be changed at little cost by hiring and firing people in the sales force until the right people are in place. Minor tweaks to their CRM systems cost little. Compare this to the difficulty in changing a manufacturing unit without enormous new investments in physical infrastructure. Changing operations is almost as costly because it involves reengineering supply chains.
The whole purpose of KM is to optimize the performance of large, complicated organizations. That includes pushing KM practices down to capital-intensive business areas like operations and manufacturing. I would like to argue that applying operations research and KM together can reduce the delta in business value between new product development (which isn't always capital-intensive until physical prototypes go for testing) and manufacturing. The literature on KM is extensive but much of it is qualitative in nature. KM sorely needs a textbook treatment like Cloudonomics that can quantify the value added by reducing the costs of human latency or introducing new collaborative tools. That's the kind of thing I'd like to see KMWorld and Forrester Research address when they publish new KM thinking.
Saturday, June 29, 2013
Mineta Transportation Institute Holds Forth on Transportation Funding in 2013
The Mineta Transportation Institute held its annual policy summit last week at the Commonwealth Club. I have a background in both transportation and finance so I couldn't miss a chance to connect the two over a free breakfast. I got there so early I actually walked in right behind former Secretary Norman Mineta himself. I didn't speak with him because I'm just another commoner and there's no way he can do me any favors unless I write a big check to his institute. I'd rather hear what his invited policy wonks have to say, free of charge.
The first agenda item was an address from USDOT's acting General Counsel Kathryn B. Thomson. She briefly mentioned ARRA's $48B commitment to critical infrastructure but I'm concerned about whether it's being used effectively. She also mentioned a couple of programs that I think should be excellent candidates for consolidation into a national infrastructure bank. The first is the TIFIA program of loans and other credit instruments specifically for surface transportation. The other is the TIGER grant program for multiple transportation modes. If USDOT's approach to favoring public-private partnerships is correct, then an infrastructure bank that issues bonds linked to these programs is the way to go. I do see a potential hurdle in that federal highway improvements are funded by the Highway Trust Fund's revenue from the federal gasoline tax. Moving all federal infrastructure projects into a national infrastructure bank's inventory means revising the enabling legislation for every federal tax on transportation modes.
Ms. Thomson made us aware that federal gas taxes can no longer be the single funding source for our transportation needs. Hybrid cars use little gas and pure EVs use none, but their battery packs make them heavier than gasoline-powered cars. That's simple physics, folks, because the energy storage capacity of liquid hydrocarbons is denser than that of lead-acid or lithium-ion batteries. Heavy hybrids and EVs will wear out our roads faster. Here's my idea. Instead of a knee-jerk funding commitment to every meter of highway in the federal inventory, why not "red-line" those segments that are seldom used? Cities like Detroit and Stockton will have to downsize and unwind much of their development, allowing USDOT planners to declare some roads too costly to maintain. This is why ARRA's blanket approach to funding unmet "needs" has given me pause for some time. A planner may mark a road for the "need" column even if it leads into an urban area that deserves to be torn up and unbuilt.
The Q&A for Ms. Thomson was revealing. The USDOT favors California's high-speed rail program. IMHO federal planners are blind to that program's cost overruns, unneeded stops in rural towns, and pork payoffs. My ideal high-speed rail system for the Golden State would link no more than six cities: Sacramento, Oakland, San Francisco, San Jose, Los Angeles, and maybe San Diego. Anything more adds transit delays and costs. Nobody asked me to contribute, so of course we're getting a more expensive system than we need. Federal matching funds for high-speed rail make it too easy for state planners to add unneeded segments. Smart leaders in Ohio, Wisconsin, and Florida have turned down federal matching funds for high-speed rail since 2010. This unfortunately makes it easier for California to gorge at the federal trough instead of scaling down its own high-speed rail plans.
One comment gave me hope that there is room for disruption in the transportation sector. Positive Train Control (PTC) is an expensive mandate but the railroad industry is making progress to meet the 2015 deadline specified in the Rail Safety Improvement Act of 2008. The thousands of wireless devices and monitoring systems needed for PTC represent a great opportunity for entrepreneurs.
The next panel had experts from several different entities. I think they could have benefited from having a member of the National Research Council's Transportation Research Board (TRB) on the panel. I've been receiving the TRB's emails for years ever since I expressed an interest in joining the board. TRB puts out tons of white papers that should inform both the private developers who build near transportation infrastructure and the public policy planners who take development into account. The panel believed that public infrastructure and private development attract each other but they did little to enlighten us on the nuts and bolts of project finance. They spent little time addressing how projects could be funded but gave detailed coverage to MTI's latest study on how tax options can be sold to the public. Come on, folks, even USDOT just admitted there's more to transportation finance than gas tax increases.
It's time for me to go out on a limb, as I am wont to do. A public that lacks understanding of how its transportation priorities are determined will eventually get as riled up over transit tax increases as Brazil's current protesters. Fare increases set off the Brazil protests but they have a long list of other grievances. The American public needs to see benefits that impact them personally and emotionally if they're going to buy into a sales pitch. Only developers will be convinced by a transportation project's ROI, although that's important to demonstrate. That MTI survey shows that the gax tax appeal rests on resolving users' pain points.
The panel noted that the MAP-21 legislation will not be sufficient to fully fund the nation's needs for public transit. The full commitment for a public transit system that meets the nation's needs is a one-time cost of $70B. Even this doesn't account for pay-as-you-go funding of long-term sustainment. The panel acknowledged that federal funding will shift to favor those state projects that can demonstrate self-funding, which to me implies user fees. Some combination of a state gas tax, usage fees, general fund revenue, sales taxes, vehicle registration fees, naming rights, development fees, tolling, and other public/private hybrid solutions are inevitable in California. This combined funding mechanism needs to be in place far in advance of any further work on high-speed rail. Private investment committed too early to a public project, as the panel noted, will discount the project's completion too heavily and make it nonviable if future private funding is unavailable.
I did not hear one single comment during this entire forum on inland water transportation or port infrastructure. California has two of America's busiest ports - Oakland and Long Beach - and many ports in the country need regular dredging to remove buildups of silt that degrade their deepwater shipping channels. Port cargo throughput ability will be a serious national security enabler in the event of any major mobilization. NDTA keeps me updated on the lack of progress addressing this potential bottleneck at critical ports. America's inland waterways need serious upgrades to their locks and dams so barge traffic that supports the petrochemical and agricultural sectors can proceed unimpeded. The members of the American Waterways Operators know just how much they depend on the US Army Corps of Engineers to keep their traffic flowing. If you don't believe me, review the USDA's Agricultural Marketing Service data on barge rates for agricultural transportation. Take a guess at how much higher those rates would be if inland waterways are degraded or congested for lack of infrastructure repair.
I should not have been surprised that the panelists did not answer the question I submitted on transportation finance. I wanted to know whether California agencies could sustain municipal bond issuance in the face of either rising interest rates or high inflation. I can't blame them for not wanting to touch that in light of their revelations above about the difficulty of attracting long-term finance (from bonds that fund initial capital outlays) without mechanisms for sustaining annual finance in place (from user fees and other sources). Today's ZIRP environment is ideal for raising muni bond proceeds and states will never get a break like this again in my lifetime. Rising real interest rates will soon make the cost of new capital projects astronomically high. My ideal answer to my own question would rely on state agencies issuing inflation-indexed munis. They could get really creative and issue equity in publicly financed corporations modeled after Fannie Mae and Freddie Mac, provided the State of California does not provide unlimited guarantees for those corporations' liabilities.
California needs more than just money to complete its transportation dreams. It needs creative leadership. Gov. Brown, give me a call. I'll be happy to put your state agencies on sound financial footing if you pay me for my genius.
The first agenda item was an address from USDOT's acting General Counsel Kathryn B. Thomson. She briefly mentioned ARRA's $48B commitment to critical infrastructure but I'm concerned about whether it's being used effectively. She also mentioned a couple of programs that I think should be excellent candidates for consolidation into a national infrastructure bank. The first is the TIFIA program of loans and other credit instruments specifically for surface transportation. The other is the TIGER grant program for multiple transportation modes. If USDOT's approach to favoring public-private partnerships is correct, then an infrastructure bank that issues bonds linked to these programs is the way to go. I do see a potential hurdle in that federal highway improvements are funded by the Highway Trust Fund's revenue from the federal gasoline tax. Moving all federal infrastructure projects into a national infrastructure bank's inventory means revising the enabling legislation for every federal tax on transportation modes.
Ms. Thomson made us aware that federal gas taxes can no longer be the single funding source for our transportation needs. Hybrid cars use little gas and pure EVs use none, but their battery packs make them heavier than gasoline-powered cars. That's simple physics, folks, because the energy storage capacity of liquid hydrocarbons is denser than that of lead-acid or lithium-ion batteries. Heavy hybrids and EVs will wear out our roads faster. Here's my idea. Instead of a knee-jerk funding commitment to every meter of highway in the federal inventory, why not "red-line" those segments that are seldom used? Cities like Detroit and Stockton will have to downsize and unwind much of their development, allowing USDOT planners to declare some roads too costly to maintain. This is why ARRA's blanket approach to funding unmet "needs" has given me pause for some time. A planner may mark a road for the "need" column even if it leads into an urban area that deserves to be torn up and unbuilt.
The Q&A for Ms. Thomson was revealing. The USDOT favors California's high-speed rail program. IMHO federal planners are blind to that program's cost overruns, unneeded stops in rural towns, and pork payoffs. My ideal high-speed rail system for the Golden State would link no more than six cities: Sacramento, Oakland, San Francisco, San Jose, Los Angeles, and maybe San Diego. Anything more adds transit delays and costs. Nobody asked me to contribute, so of course we're getting a more expensive system than we need. Federal matching funds for high-speed rail make it too easy for state planners to add unneeded segments. Smart leaders in Ohio, Wisconsin, and Florida have turned down federal matching funds for high-speed rail since 2010. This unfortunately makes it easier for California to gorge at the federal trough instead of scaling down its own high-speed rail plans.
One comment gave me hope that there is room for disruption in the transportation sector. Positive Train Control (PTC) is an expensive mandate but the railroad industry is making progress to meet the 2015 deadline specified in the Rail Safety Improvement Act of 2008. The thousands of wireless devices and monitoring systems needed for PTC represent a great opportunity for entrepreneurs.
The next panel had experts from several different entities. I think they could have benefited from having a member of the National Research Council's Transportation Research Board (TRB) on the panel. I've been receiving the TRB's emails for years ever since I expressed an interest in joining the board. TRB puts out tons of white papers that should inform both the private developers who build near transportation infrastructure and the public policy planners who take development into account. The panel believed that public infrastructure and private development attract each other but they did little to enlighten us on the nuts and bolts of project finance. They spent little time addressing how projects could be funded but gave detailed coverage to MTI's latest study on how tax options can be sold to the public. Come on, folks, even USDOT just admitted there's more to transportation finance than gas tax increases.
It's time for me to go out on a limb, as I am wont to do. A public that lacks understanding of how its transportation priorities are determined will eventually get as riled up over transit tax increases as Brazil's current protesters. Fare increases set off the Brazil protests but they have a long list of other grievances. The American public needs to see benefits that impact them personally and emotionally if they're going to buy into a sales pitch. Only developers will be convinced by a transportation project's ROI, although that's important to demonstrate. That MTI survey shows that the gax tax appeal rests on resolving users' pain points.
The panel noted that the MAP-21 legislation will not be sufficient to fully fund the nation's needs for public transit. The full commitment for a public transit system that meets the nation's needs is a one-time cost of $70B. Even this doesn't account for pay-as-you-go funding of long-term sustainment. The panel acknowledged that federal funding will shift to favor those state projects that can demonstrate self-funding, which to me implies user fees. Some combination of a state gas tax, usage fees, general fund revenue, sales taxes, vehicle registration fees, naming rights, development fees, tolling, and other public/private hybrid solutions are inevitable in California. This combined funding mechanism needs to be in place far in advance of any further work on high-speed rail. Private investment committed too early to a public project, as the panel noted, will discount the project's completion too heavily and make it nonviable if future private funding is unavailable.
I did not hear one single comment during this entire forum on inland water transportation or port infrastructure. California has two of America's busiest ports - Oakland and Long Beach - and many ports in the country need regular dredging to remove buildups of silt that degrade their deepwater shipping channels. Port cargo throughput ability will be a serious national security enabler in the event of any major mobilization. NDTA keeps me updated on the lack of progress addressing this potential bottleneck at critical ports. America's inland waterways need serious upgrades to their locks and dams so barge traffic that supports the petrochemical and agricultural sectors can proceed unimpeded. The members of the American Waterways Operators know just how much they depend on the US Army Corps of Engineers to keep their traffic flowing. If you don't believe me, review the USDA's Agricultural Marketing Service data on barge rates for agricultural transportation. Take a guess at how much higher those rates would be if inland waterways are degraded or congested for lack of infrastructure repair.
I should not have been surprised that the panelists did not answer the question I submitted on transportation finance. I wanted to know whether California agencies could sustain municipal bond issuance in the face of either rising interest rates or high inflation. I can't blame them for not wanting to touch that in light of their revelations above about the difficulty of attracting long-term finance (from bonds that fund initial capital outlays) without mechanisms for sustaining annual finance in place (from user fees and other sources). Today's ZIRP environment is ideal for raising muni bond proceeds and states will never get a break like this again in my lifetime. Rising real interest rates will soon make the cost of new capital projects astronomically high. My ideal answer to my own question would rely on state agencies issuing inflation-indexed munis. They could get really creative and issue equity in publicly financed corporations modeled after Fannie Mae and Freddie Mac, provided the State of California does not provide unlimited guarantees for those corporations' liabilities.
California needs more than just money to complete its transportation dreams. It needs creative leadership. Gov. Brown, give me a call. I'll be happy to put your state agencies on sound financial footing if you pay me for my genius.
Gawd-Awful Opera Performance of "The Gospel of Mary Magdalene"
I've been mostly pleased with the reign of David Gockley at San Francisco Opera. Most of the performances of established works have been top-notch on his watch. The newly commissioned English-language works have been a bit off key. The latest misfire in American opera is "The Gospel of Mary Magdalene," a world premiere playing this summer. I sat through this one last night. I felt like I needed a resurrection afterwards.
The only decent performer was the female lead, mezzo-soprano Sasha Cooke. She hit all the right notes and physically exhibits the smokin' hot sensuality of a libertine temptress. I was really hoping she would take it all off like Barbara Hershey did when she played Mary Magdalene in The Last Temptation of Christ, but alas it was not meant to be. The other lead performers were forgettable and could barely sing over the orchestra. I was in a box seat and I could hardly hear Nathan Gunn as Yeshua until he somehow cranked up the volume in Act II. I enjoyed hearing him in "The Barber of Seville" in 2006.
There were some incongruities in "Magdalene" that I could not explain. The two policemen used the word "correlation" a couple of times. I don't think the concept of a statistical correlation existed in ancient times. Historical works by Karl Pearson (Biometrika: "Notes on the History of Correlation") and Douglas Curran-Everett in Advances in Physiology Education trace its modern lineage as a mathematical concept. Another line in the libretto referred to the granting of "God's grace." The concept of grace has a long history in Catholicism but its usage in ancient times was different from what a modern audience would understand from a Sunday sermon. The libretto for "Magdalene" cited plenty of Old Testament references but I didn't see a supertitle reference for the "grace" line.
This opera can get away with odd word choices like those because it's conceived as a modern reimagining of history. The tourists (excuse me, "seekers") in modern slob dress wandering around the excavation site on stage represent contemporary audiences inserting themselves into an old story and drawing out new, subjective meanings. That works if the thrust of the story upon which artists hang those interpretations is believable. This particular telling of "Magdalene" did not deliver a believable story.
The story was hard to follow because the librettist, composer, and other designers threw in plenty of incongruous distractions where there should have been dramatic build-up. The pacing in Act I was incredibly slow. The relationship between the Magdalene and Miriam was never fully developed, but the story arc just clumsily assumed they would get along. The musical score was jarring in some places, with odd percussionist touches adding ham-fisted attempts at foreboding. The music during what should have been the most romantic interludes between Mary Magdalene and Yeshua was either poorly-timed or non-existent. This was definitely not Romeo and Juliet, a far superior representation of doomed lovers. I did appreciate the effort to reimagine the female Gospel characters by putting classic lines into their mouths, like the abbreviated "let this cup pass from me" soliloquy.
I can recall other modern works that successfully inserted modern sensibilities into ancient texts. I was so bored and frustrated with "Magdalene" that I started to imagine elements from those other works in this dreary opera just to liven things up a bit. I wanted to see the alien spaceship from Monty Python's Life of Brian land in the excavation. I hoped for a denouement where Mary Magdalene and Yeshua get married and run off to Gaul to found the Merovingian bloodline as described in Baigent, Leigh, and Lincoln's Holy Blood, Holy Grail. It could even have used some campy fight scenes from cult classic Jesus Christ Vampire Hunter to liven up the boring dialogue. The Magdalene's visit to the Nazarene's tomb featured a ghostly Yeshua rising from mist in the style of Bela Lugosi, making me wonder whether the librettist got his inspiration from underground literature like The Last Days of Christ the Vampire. Yeshua didn't suck any blood, which didn't matter because the whole show sucked anyway.
I'll wait for the next operatic performance of "Salome" to see a good modern take on ancient times. John the Baptist made an appearance in "Magdalene" but he's all over "Salome" in many ways. "Salome" also tends to feature its female lead showing her all-natural goodies the way nature intended. Aspiring librettists, take note.
The only decent performer was the female lead, mezzo-soprano Sasha Cooke. She hit all the right notes and physically exhibits the smokin' hot sensuality of a libertine temptress. I was really hoping she would take it all off like Barbara Hershey did when she played Mary Magdalene in The Last Temptation of Christ, but alas it was not meant to be. The other lead performers were forgettable and could barely sing over the orchestra. I was in a box seat and I could hardly hear Nathan Gunn as Yeshua until he somehow cranked up the volume in Act II. I enjoyed hearing him in "The Barber of Seville" in 2006.
There were some incongruities in "Magdalene" that I could not explain. The two policemen used the word "correlation" a couple of times. I don't think the concept of a statistical correlation existed in ancient times. Historical works by Karl Pearson (Biometrika: "Notes on the History of Correlation") and Douglas Curran-Everett in Advances in Physiology Education trace its modern lineage as a mathematical concept. Another line in the libretto referred to the granting of "God's grace." The concept of grace has a long history in Catholicism but its usage in ancient times was different from what a modern audience would understand from a Sunday sermon. The libretto for "Magdalene" cited plenty of Old Testament references but I didn't see a supertitle reference for the "grace" line.
This opera can get away with odd word choices like those because it's conceived as a modern reimagining of history. The tourists (excuse me, "seekers") in modern slob dress wandering around the excavation site on stage represent contemporary audiences inserting themselves into an old story and drawing out new, subjective meanings. That works if the thrust of the story upon which artists hang those interpretations is believable. This particular telling of "Magdalene" did not deliver a believable story.
The story was hard to follow because the librettist, composer, and other designers threw in plenty of incongruous distractions where there should have been dramatic build-up. The pacing in Act I was incredibly slow. The relationship between the Magdalene and Miriam was never fully developed, but the story arc just clumsily assumed they would get along. The musical score was jarring in some places, with odd percussionist touches adding ham-fisted attempts at foreboding. The music during what should have been the most romantic interludes between Mary Magdalene and Yeshua was either poorly-timed or non-existent. This was definitely not Romeo and Juliet, a far superior representation of doomed lovers. I did appreciate the effort to reimagine the female Gospel characters by putting classic lines into their mouths, like the abbreviated "let this cup pass from me" soliloquy.
I can recall other modern works that successfully inserted modern sensibilities into ancient texts. I was so bored and frustrated with "Magdalene" that I started to imagine elements from those other works in this dreary opera just to liven things up a bit. I wanted to see the alien spaceship from Monty Python's Life of Brian land in the excavation. I hoped for a denouement where Mary Magdalene and Yeshua get married and run off to Gaul to found the Merovingian bloodline as described in Baigent, Leigh, and Lincoln's Holy Blood, Holy Grail. It could even have used some campy fight scenes from cult classic Jesus Christ Vampire Hunter to liven up the boring dialogue. The Magdalene's visit to the Nazarene's tomb featured a ghostly Yeshua rising from mist in the style of Bela Lugosi, making me wonder whether the librettist got his inspiration from underground literature like The Last Days of Christ the Vampire. Yeshua didn't suck any blood, which didn't matter because the whole show sucked anyway.
I'll wait for the next operatic performance of "Salome" to see a good modern take on ancient times. John the Baptist made an appearance in "Magdalene" but he's all over "Salome" in many ways. "Salome" also tends to feature its female lead showing her all-natural goodies the way nature intended. Aspiring librettists, take note.
Friday, June 28, 2013
The Haiku of Finance for 06/28/13
Meeting was a waste
Founder has no tech or plan
Startup is clueless
Founder has no tech or plan
Startup is clueless
Thursday, June 27, 2013
Recommendations for New Secretary of Commerce Penny Pritzker
MEMORANDUM
DATE: 27 June 2013
TO: Sec. P. Pritzker, USDOC
FROM: A. Alfidi, CEO, Alfidi Capital
SUBJECT: Recommended DOC Action Items
Secretary Pritzker:
Congratulations on your swearing-in today as Secretary of Commerce. The U.S. Department of Commerce has been without a confirmed head for many months now and your bold, decisive leadership is sorely needed to shock the federal regulatory apparatus out of caretaker mode. I would like to present the following recommended action items for your consideration as policy initiatives.
1. Accuracy in statistics. The US government's economic statistics have been adjusted, smoothed, and manipulated for decades. The cumulative amount of adjustments since the early 1980s has rendered these statistics useless for business decisions. The DOC should lead an interagency effort to remove all of the politically-driven adjustments to statistics for inflation, unemployment, and money supply growth and return those statistics to their original composition. Use the methodology at Shadow Government Statistics as the standard.
2. Downsizing. Reduced federal spending means all agencies must shrink in size. DOC should do its part. The US Economic Development Administration and Minority Business Development Administration run duplicative programs; DOC should merge the two entities. The Economics and Statistics Administration should take the Bureau of Labor Statistics away from DOL and merge both the BLS and Bureau of Economic Analysis into the Census Bureau (this will help facilitate action item #1 above).
3. Investment. DOC is ideally suited to lead the national conversation in determining America's priorities for public investments. Your experiences on the President's Council on Jobs and Competitiveness and the President's Economic Recovery Advisory Board have no doubt left you fully versed on the magnitude of the challenges facing American business. Government's role in the economy includes the promotion and protection of public infrastructure used by private enterprise. DOC should lead the Administration's effort in passing the enabling legislation for the National Infrastructure Reinvestment Bank.
Feel free to contact me for details on the implementation of these initiatives. We can discuss the action items over lunch at the Army and Navy Club if you're buying. I am available for appointment to a temporary position in the Senior Executive Service if you need an action officer to shepherd these initiatives. I won't need a GSA fleet car; my Ford Mustang runs fine.
DATE: 27 June 2013
TO: Sec. P. Pritzker, USDOC
FROM: A. Alfidi, CEO, Alfidi Capital
SUBJECT: Recommended DOC Action Items
Secretary Pritzker:
Congratulations on your swearing-in today as Secretary of Commerce. The U.S. Department of Commerce has been without a confirmed head for many months now and your bold, decisive leadership is sorely needed to shock the federal regulatory apparatus out of caretaker mode. I would like to present the following recommended action items for your consideration as policy initiatives.
1. Accuracy in statistics. The US government's economic statistics have been adjusted, smoothed, and manipulated for decades. The cumulative amount of adjustments since the early 1980s has rendered these statistics useless for business decisions. The DOC should lead an interagency effort to remove all of the politically-driven adjustments to statistics for inflation, unemployment, and money supply growth and return those statistics to their original composition. Use the methodology at Shadow Government Statistics as the standard.
2. Downsizing. Reduced federal spending means all agencies must shrink in size. DOC should do its part. The US Economic Development Administration and Minority Business Development Administration run duplicative programs; DOC should merge the two entities. The Economics and Statistics Administration should take the Bureau of Labor Statistics away from DOL and merge both the BLS and Bureau of Economic Analysis into the Census Bureau (this will help facilitate action item #1 above).
3. Investment. DOC is ideally suited to lead the national conversation in determining America's priorities for public investments. Your experiences on the President's Council on Jobs and Competitiveness and the President's Economic Recovery Advisory Board have no doubt left you fully versed on the magnitude of the challenges facing American business. Government's role in the economy includes the promotion and protection of public infrastructure used by private enterprise. DOC should lead the Administration's effort in passing the enabling legislation for the National Infrastructure Reinvestment Bank.
Feel free to contact me for details on the implementation of these initiatives. We can discuss the action items over lunch at the Army and Navy Club if you're buying. I am available for appointment to a temporary position in the Senior Executive Service if you need an action officer to shepherd these initiatives. I won't need a GSA fleet car; my Ford Mustang runs fine.
Wednesday, June 26, 2013
Tuesday, June 25, 2013
Later Exits for Earlier Startup Investors
One truism in startup funding is that venture capitalists want to see a clean cap table before making a big investment. Some VCs don't like an excess of FFF investors - friends, family, and fools - who may pester the big-shot VCs and their hand-picked board members with juvenile questions. VCs sometimes ask founders to buy out their amateur partners so the cap table isn't so crowded. The "how" of this buyout is open for debate. I don't know if VCs expect the founders to commit whatever limited personal liquidity they have to a limited buyout, or if the VCs will allocate part of their own funding commitment for the FFF buyout.
I think VCs' cap table expectations are going to be increasingly frustrated as crowdfunding reaches its full potential. Crowdfunded companies are eventually going to raise a lot of early stage money from plenty of people. The FFF pool will grow exponentially and a lot of them won't be willing to sell until the startup reaches a mature exit. Crowdfunding portals that operate secondary markets will see more early trading of these limited stakes and VCs will have to get used to using the price action as a factor in their valuations.
The good news for startups is that crowdfunding will keep many of them alive longer and help more of them reach success earlier. The bad news for VCs is that they will have no choice but to tolerate more of those unwashed FFFs until the exit event. Founders whose business plans anticipate raising significant VC money in later stages will have to think seriously about implementing shareholder buyback agreements and other founders' agreements early in their company's life. VCs' attitudes toward some amateur investors didn't develop overnight and won't disappear until crowdfunding demonstrates its power to launch successful startups.
I think VCs' cap table expectations are going to be increasingly frustrated as crowdfunding reaches its full potential. Crowdfunded companies are eventually going to raise a lot of early stage money from plenty of people. The FFF pool will grow exponentially and a lot of them won't be willing to sell until the startup reaches a mature exit. Crowdfunding portals that operate secondary markets will see more early trading of these limited stakes and VCs will have to get used to using the price action as a factor in their valuations.
The good news for startups is that crowdfunding will keep many of them alive longer and help more of them reach success earlier. The bad news for VCs is that they will have no choice but to tolerate more of those unwashed FFFs until the exit event. Founders whose business plans anticipate raising significant VC money in later stages will have to think seriously about implementing shareholder buyback agreements and other founders' agreements early in their company's life. VCs' attitudes toward some amateur investors didn't develop overnight and won't disappear until crowdfunding demonstrates its power to launch successful startups.
Monday, June 24, 2013
Alpha-D Update for 06/24/13
I haven't made any changes to my portfolio in the past few months, until today. I sold covered calls over FXF because I believe the Swiss franc has stabilized in value. The Swiss can't hold down their currency's value forever and it is still useful to me as a hedge against both the dollar and euro.
I have not changed my other long positions in FXA, FXC, or GDX. Those are my other hedges against the US dollar. The gold mining sector has been absolutely hammered of late, which will be useful to me if I decide to add to my GDX position. I still have a bearish put position on FXE because I think the euro is toast.
My cash horde awaits the right time to deploy into individual stocks I follow and hard asset sectors like mining, agriculture, and the like. I love the plummeting stock market action of recent days and the sow rise in interest rates that will make investors flee bonds. Cheap assets are lifelong buys.
I have not changed my other long positions in FXA, FXC, or GDX. Those are my other hedges against the US dollar. The gold mining sector has been absolutely hammered of late, which will be useful to me if I decide to add to my GDX position. I still have a bearish put position on FXE because I think the euro is toast.
My cash horde awaits the right time to deploy into individual stocks I follow and hard asset sectors like mining, agriculture, and the like. I love the plummeting stock market action of recent days and the sow rise in interest rates that will make investors flee bonds. Cheap assets are lifelong buys.
Sunday, June 23, 2013
Alfidi Capital Debut at Cleantech Open Academy 2013
I was privileged to officially begin my participation today in the Cleantech Open, one of America's most distinguished startup accelerator programs. I have been accepted into their Mentor Program and I am available to cleantech startups as a free advisor on general business topics. I spent this weekend attending my first-ever Cleantech Open Academy (down in Santa Clara) listening to eminent guest speakers help entrepreneurs jump-start their business plans. I can't describe many of the details because much of the information shared was proprietary with rights reserved. I am committed to protecting the confidentiality of the entrepreneurs' efforts. There are some lessons to learn nonetheless from sources the general public can access.
I entertain myself by running through my own version of popular business exercises. Here's my interpretation of Geoffrey Moore's positioning exercise, describing Alfidi Capital's position in the marketplace:
For (target customers): Geniuses such as Yours Truly
Who (have the following problem): Need supremely intelligent financial commentary with sarcasm
Our product is (describe the product or solution): Investment research
That provides (cite the breakthrough capability): Honesty and humor, free of charge
Unlike (reference competition): Anybody else who takes finance seriously
Our product/solution (describe the key point of competitive differentiation): Ridicules people who do stupid things with money
That was fun. I'll bet cleantech entrepreneurs get just as much as I do out of those kinds of thought drills. They might also get a lot out of tax equity financing, a project finance vehicle unique to the renewable energy sector. Chevron Technology Ventures no doubt gets a lot out of its sponsorship of the Cleantech Open, and startups can check Chevron's YouTube channel for helpful videos. Here's a free tutorial on perfecting your elevator pitch.
I'd like to see firm metrics on what drives revenue in cleantech. Other sectors have fairly common terms. Truck transportation has "yield" in revenue per hundredweight. Airlines have revenue passenger miles. Hospitality has revenue per square foot. The energy sector in general sometimes refers to BTU use but renewable energy has to account for subsidies like feed-in tariffs. Non-energy green tech should IMHO borrow tonnage-based metrics from construction, recycling, and related industries. I do not agree with VCs' use of metrics like EBITDA to evaluate a startup's viability. They made that mistake with dot-coms in the '90s and their investors are still paying the price. I think cleantech should learn from IT. We've all heard about cloudonomics. We need to hear more about "greenonomics."
Cleantech entrepreneurs have long reading lists. This includes Simon Acland's Angels, Dragons, and Vultures; Randall Bolten's Painting With Numbers; anything on customer development and lean startups; Osterwalder et al.'s Business Model Generation; and of course the incredibly insightful wisdom available here on the Alfidi Capital Blog. Yes, people, I really do deserve to rank among thought leaders and the people who invite me to these conferences are starting to recognize me.
I'm looking forward to mentoring my entrepreneurial charges. I expect to learn from them as well because I'll need to get spun up on details for sub-sectors I've never touched before. This is worth doing if it saves the planet, ensures America's economic vitality, and someday makes me a buck or two.
I entertain myself by running through my own version of popular business exercises. Here's my interpretation of Geoffrey Moore's positioning exercise, describing Alfidi Capital's position in the marketplace:
For (target customers): Geniuses such as Yours Truly
Who (have the following problem): Need supremely intelligent financial commentary with sarcasm
Our product is (describe the product or solution): Investment research
That provides (cite the breakthrough capability): Honesty and humor, free of charge
Unlike (reference competition): Anybody else who takes finance seriously
Our product/solution (describe the key point of competitive differentiation): Ridicules people who do stupid things with money
That was fun. I'll bet cleantech entrepreneurs get just as much as I do out of those kinds of thought drills. They might also get a lot out of tax equity financing, a project finance vehicle unique to the renewable energy sector. Chevron Technology Ventures no doubt gets a lot out of its sponsorship of the Cleantech Open, and startups can check Chevron's YouTube channel for helpful videos. Here's a free tutorial on perfecting your elevator pitch.
I'd like to see firm metrics on what drives revenue in cleantech. Other sectors have fairly common terms. Truck transportation has "yield" in revenue per hundredweight. Airlines have revenue passenger miles. Hospitality has revenue per square foot. The energy sector in general sometimes refers to BTU use but renewable energy has to account for subsidies like feed-in tariffs. Non-energy green tech should IMHO borrow tonnage-based metrics from construction, recycling, and related industries. I do not agree with VCs' use of metrics like EBITDA to evaluate a startup's viability. They made that mistake with dot-coms in the '90s and their investors are still paying the price. I think cleantech should learn from IT. We've all heard about cloudonomics. We need to hear more about "greenonomics."
Cleantech entrepreneurs have long reading lists. This includes Simon Acland's Angels, Dragons, and Vultures; Randall Bolten's Painting With Numbers; anything on customer development and lean startups; Osterwalder et al.'s Business Model Generation; and of course the incredibly insightful wisdom available here on the Alfidi Capital Blog. Yes, people, I really do deserve to rank among thought leaders and the people who invite me to these conferences are starting to recognize me.
I'm looking forward to mentoring my entrepreneurial charges. I expect to learn from them as well because I'll need to get spun up on details for sub-sectors I've never touched before. This is worth doing if it saves the planet, ensures America's economic vitality, and someday makes me a buck or two.
Saturday, June 22, 2013
The Haiku of Finance for 06/22/13
New venture purist
Wants brand-name degree team mates
Blind to real-world skill
Wants brand-name degree team mates
Blind to real-world skill
Friday, June 21, 2013
The Haiku of Finance for 06/21/13
Nervous market waits
Next sign of Fed direction
New hint pointing down
Next sign of Fed direction
New hint pointing down
Thursday, June 20, 2013
No Way Will The Fed End QE During Bernanke's Tenure
I did not have to listen to Fed Chairman Ben Bernanke's remarks yesterday to know what he was going to say. I've chronicled the Fed's mentality for years on this blog. The Fed isn't interested in reducing unemployment. It is actually interested in encouraging spending by promoting a wealth effect in asset classes.
The Fed has liberally provided support to bond valuations and suppressed interest rates by purchasing government bonds and mortgage-backed securities. Remove that demand, or even threaten to do so, and asset prices reset to a sustainable equilibrium. That equilibrium for bond valuations is much lower than where it is today.
Suppressing nominal interest rates means investors are forced to search for yield in assets besides cash savings. Investors have chased stocks. Corporate profits have historically been an average of 6% of GDP, and lately they've been almost twice that figure. Mean reversion in the earnings of a P/E ratio eventually affect the price as well. The equilibrium for stock valuations is much lower than where it is today.
Low rates encouraged home buyers to once again buy more house than they could afford. No one learned anything from the housing crash. Private equity firms bought up vacant homes to use as rental properties. Rising interest rates will cause them pain as home values sink to levels below what they levered up to buy. The equilibrium for home prices is much lower than where it is today.
The market is reacting predictably to the Chairman's remarks, with stocks and bonds slumping. Addicts react badly when they can't get their regular fix. That's why I don't think the Fed is serious about ending its monetary stimulus. Talking the markets down means nothing. Some black swan event will force the Fed to lose control of the yield curve no matter what it purchases.
The Fed has liberally provided support to bond valuations and suppressed interest rates by purchasing government bonds and mortgage-backed securities. Remove that demand, or even threaten to do so, and asset prices reset to a sustainable equilibrium. That equilibrium for bond valuations is much lower than where it is today.
Suppressing nominal interest rates means investors are forced to search for yield in assets besides cash savings. Investors have chased stocks. Corporate profits have historically been an average of 6% of GDP, and lately they've been almost twice that figure. Mean reversion in the earnings of a P/E ratio eventually affect the price as well. The equilibrium for stock valuations is much lower than where it is today.
Low rates encouraged home buyers to once again buy more house than they could afford. No one learned anything from the housing crash. Private equity firms bought up vacant homes to use as rental properties. Rising interest rates will cause them pain as home values sink to levels below what they levered up to buy. The equilibrium for home prices is much lower than where it is today.
The market is reacting predictably to the Chairman's remarks, with stocks and bonds slumping. Addicts react badly when they can't get their regular fix. That's why I don't think the Fed is serious about ending its monetary stimulus. Talking the markets down means nothing. Some black swan event will force the Fed to lose control of the yield curve no matter what it purchases.
Wednesday, June 19, 2013
Basel III Capital Versus Incurred and Expected Loss Models
The GAO recently put out a study of small bank failures caused by bad loans in commercial real estate. This kind of important work sometimes escapes wider public notice, although CFO Magazine noted this study's implications. The incurred-loss model banks use to estimate CRE loan failures may be too flawed for the extremely leveraged world we have created.
My concern with the incurred-loss model (and its possible replacement, the expected-loss model) is its reliance upon a limited set of historical data. Assessing losses based on the historical experience of a single bank would be fine if that bank never expands geographically or never expands its balance sheet faster than its long-term average growth rate. The US economy's present credit bubble, with overall debt-to-GDP at historic highs, puts even historically sound banks in danger by tempting them to make irresponsible loans just to match competitors' asset base growth. The GAAP approach to incurred or expected losses requires calculations to be performed in a vacuum, as if banks were atomized from the larger economy. These limited accounting-based models invite unpreparedness for losses triggered by six sigma Black Swan macroeconomic conditions.
The Basel III regime's approach to measuring risk capital should apply to small banks too, not just systemically important ones. Basel III capital rules add a leverage ratio to the assets banks must count as their Tier 1 and Tier 2 reserves. Small US banks applying this standard will be discouraged from attracting yield-chasing depositors by offering CDs with abnormally high yields. The usefulness of the Basel standard is that it applies across all national accounting standards. Banks won't be able to hide behind GAAP if they get in trouble.
Small banks, here's your chance to act like the SIFIs you try to emulate by offering "financial supermarket" services. Use every single one of Basel's designated shock absorbers, not just the ones designed for TBTF banks. Jump on the Basel III bandwagon and use its countercyclical safeguards to stay healthy during the next credit crunch.
My concern with the incurred-loss model (and its possible replacement, the expected-loss model) is its reliance upon a limited set of historical data. Assessing losses based on the historical experience of a single bank would be fine if that bank never expands geographically or never expands its balance sheet faster than its long-term average growth rate. The US economy's present credit bubble, with overall debt-to-GDP at historic highs, puts even historically sound banks in danger by tempting them to make irresponsible loans just to match competitors' asset base growth. The GAAP approach to incurred or expected losses requires calculations to be performed in a vacuum, as if banks were atomized from the larger economy. These limited accounting-based models invite unpreparedness for losses triggered by six sigma Black Swan macroeconomic conditions.
The Basel III regime's approach to measuring risk capital should apply to small banks too, not just systemically important ones. Basel III capital rules add a leverage ratio to the assets banks must count as their Tier 1 and Tier 2 reserves. Small US banks applying this standard will be discouraged from attracting yield-chasing depositors by offering CDs with abnormally high yields. The usefulness of the Basel standard is that it applies across all national accounting standards. Banks won't be able to hide behind GAAP if they get in trouble.
Small banks, here's your chance to act like the SIFIs you try to emulate by offering "financial supermarket" services. Use every single one of Basel's designated shock absorbers, not just the ones designed for TBTF banks. Jump on the Basel III bandwagon and use its countercyclical safeguards to stay healthy during the next credit crunch.
Tuesday, June 18, 2013
BLS Inflation Report Does NOT Show Much About Economy
I laugh when I see mainstream headlines spouting off about what macroeconomic data reports purportedly show. Reuters thinks stabilizing inflation will be a comfort to the Fed. Let's leave aside for the moment the fact that the Fed will continue its unlimited bond-buying programs to prop the valuations of the stock, bond, and housing markets.
The BLS CPI has major flaws, as noted in Shadow Government Statistics' deconstruction of the chained methodology. SGS's annual inflation estimate is about 4-7% higher than the official CPI, depending on the base year. Most mainstream analysts aren't interested in checking this discrepancy.
So-called worry about a "downward wage-price spiral" seems to me like a straw man. Fed economists probably know about the government's flawed reporting. The Fed members most worried about deflationary price moves are the members of Bernanke's pro-inflation faction who want to continue the bond-buying program. Concern about igniting inflation is actually driving more reticence inside the Fed, according to FOMC meeting minutes in April. It's important to note that the purpose of indefinite QE, as Fed members have admitted, is more about supporting asset markets that will generate a hoped-for "wealth effect" on consumer spending.
The BLS CPI has major flaws, as noted in Shadow Government Statistics' deconstruction of the chained methodology. SGS's annual inflation estimate is about 4-7% higher than the official CPI, depending on the base year. Most mainstream analysts aren't interested in checking this discrepancy.
So-called worry about a "downward wage-price spiral" seems to me like a straw man. Fed economists probably know about the government's flawed reporting. The Fed members most worried about deflationary price moves are the members of Bernanke's pro-inflation faction who want to continue the bond-buying program. Concern about igniting inflation is actually driving more reticence inside the Fed, according to FOMC meeting minutes in April. It's important to note that the purpose of indefinite QE, as Fed members have admitted, is more about supporting asset markets that will generate a hoped-for "wealth effect" on consumer spending.
Financial Sarcasm Roundup for 06/18/13
Sarcasm isn't just for Mondays. It's for any day of the week.
The Port of Los Angeles says its container volume is way down from a year ago. I think Americans are too broke to buy imported stuff and our Asian pals are too broke to buy our stuff. This indicator will of course have to be aggregated with other port traffic from around the country to mean anything. Maybe it means little if Great Lakes shipping traffic is picking up.
The US and Europe are starting to explore a free trade deal. No way is such a deal going to be consummated before the next financial crisis hits. Why policy elites would spend their precious time on this rather than financial reform is beyond me. This policy effort has a surprising amount of inertia given that the US has been without a Secretary of Commerce for a year.
Don't look now, but China is bailing out its commercial banks. I have had nothing to do with Chinese stocks for some time because I knew something like this was coming. Did someone in Beijing open a fortune cookie with a message about having busted banks in their future? Chinese pensioners and annuity owners are going to experience a revolutionary level of anger when these forced investments don't pan out.
The Administration now reveals it's time for Ben to leave the Fed. Helicopter Ben's enthusiasm for fulfilling his hyperinflationary PhD thesis is cooling faster than the Chinese economy. This hint has been choreographed with other hints to reassure the markets that the heir apparent, Janet Yellen, will continue present policy. The designated patsy will reap the final fruit of the Bernanke Fed's monetary stimulus policy.
Iran's election results will not change Iran. Ignore lip service to internal reform and re-engagement with the world. The ayatollahs set policy for the elected figureheads. The world price of oil can still be held hostage by an Iranian miscalculation in the Strait of Hormuz. I still think Persian women are hot provided they don't wear burqas.
The Port of Los Angeles says its container volume is way down from a year ago. I think Americans are too broke to buy imported stuff and our Asian pals are too broke to buy our stuff. This indicator will of course have to be aggregated with other port traffic from around the country to mean anything. Maybe it means little if Great Lakes shipping traffic is picking up.
The US and Europe are starting to explore a free trade deal. No way is such a deal going to be consummated before the next financial crisis hits. Why policy elites would spend their precious time on this rather than financial reform is beyond me. This policy effort has a surprising amount of inertia given that the US has been without a Secretary of Commerce for a year.
Don't look now, but China is bailing out its commercial banks. I have had nothing to do with Chinese stocks for some time because I knew something like this was coming. Did someone in Beijing open a fortune cookie with a message about having busted banks in their future? Chinese pensioners and annuity owners are going to experience a revolutionary level of anger when these forced investments don't pan out.
The Administration now reveals it's time for Ben to leave the Fed. Helicopter Ben's enthusiasm for fulfilling his hyperinflationary PhD thesis is cooling faster than the Chinese economy. This hint has been choreographed with other hints to reassure the markets that the heir apparent, Janet Yellen, will continue present policy. The designated patsy will reap the final fruit of the Bernanke Fed's monetary stimulus policy.
Iran's election results will not change Iran. Ignore lip service to internal reform and re-engagement with the world. The ayatollahs set policy for the elected figureheads. The world price of oil can still be held hostage by an Iranian miscalculation in the Strait of Hormuz. I still think Persian women are hot provided they don't wear burqas.
Monday, June 17, 2013
The Haiku of Finance for 06/17/13
Crowdfund real estate
Locally own small projects
Big parcels later
Locally own small projects
Big parcels later
Crowdfunded Real Estate Limitations
The crowdfunding phenomenon is now taking on real estate investing. Sites like RealtyShares and iFunding are enabling small-time retail investors to become silent partners in projects they could not otherwise afford. Passive investments in real estate have been around forever in the form of limited partnerships. Crowdfunding things like trust deeds just lowers the entry barrier. It does not change the threshold for due diligence.
The key to success in real estate has always been location, location, location. A crowdfunding investor can only perform a minimal assessment of a property's value without physically visiting the property. Anyone can log on to Zillow and view the most recent valuations of neighboring properties, or check a parcel's assessed value at the county assessor-recorder's office. Those are beginning steps. The next steps involve property appraisals, traffic analysis, and other checks on the track record of property managers. Those things can be crowdsourced to some extent but there's no complete substitute for traditional on-site legwork.
Investing in residential property since the housing bust poses additional challenges. Getting clear title is a problem if a home mortgage was bundled and changed hands several times. I can't know whether a given trust deed on a crowdfunding portal has title problems without checking with a title search company first.
I am concerned that novice investors could be hurt by a severe downturn in the housing market just as they were hurt in the housing crash that started in 2006. Buying a share of a note secured by a trust deed is like becoming a hard money lender rather than a title owner. The investor owns a share of a syndicated loan, denominated in dollars as a fixed-income instrument that pays a predetermined yield. If the US economy experiences high inflation, those note owners will see the value of their note evaporate as the dollar loses its value. Meanwhile, the actual property owner (either through an LLP, private REIT, or whatever) laughs all the way to the bank at the stupidity of those crowdfunding note holders. That doesn't happen in normal times but these aren't normal times.
I think crowdfunding would work best for small projects that members of a community can see firsthand. Urban farmers could form a land trust, for example, and crowdfund it to establish community gardens in a blighted urban neighborhood. Charities like Habitat for Humanity could crowdfund a housing project for a low-income buyer and hand them title when the project is done. The valuation for such projects would have fewer variables to calculate because they're brand new and presumably unencumbered with the problems of previous owners. Crowdfunding portals can eventually be useful for conventional real estate investors once the housing market stabilizes, with the median property value for a given metropolitan area at somewhere between 2x and 3x of the area's median income. I am looking forward to seeing miscellaneous real estate investments like liens and rights-of-way traded on crowdfunding portals.
Investors who have neither the time nor skill to evaluate a crowdfunded real estate project can always choose a publicly traded REIT or real estate index fund (or ETF) instead. A widely held fund has two advantages over a single property. It has no entry barriers or limitations for non-accredited investors and it arbitrages away the location problem by holding a large number of properties. Maybe some sharp investment manager will crowdfund a private REIT.
The key to success in real estate has always been location, location, location. A crowdfunding investor can only perform a minimal assessment of a property's value without physically visiting the property. Anyone can log on to Zillow and view the most recent valuations of neighboring properties, or check a parcel's assessed value at the county assessor-recorder's office. Those are beginning steps. The next steps involve property appraisals, traffic analysis, and other checks on the track record of property managers. Those things can be crowdsourced to some extent but there's no complete substitute for traditional on-site legwork.
Investing in residential property since the housing bust poses additional challenges. Getting clear title is a problem if a home mortgage was bundled and changed hands several times. I can't know whether a given trust deed on a crowdfunding portal has title problems without checking with a title search company first.
I am concerned that novice investors could be hurt by a severe downturn in the housing market just as they were hurt in the housing crash that started in 2006. Buying a share of a note secured by a trust deed is like becoming a hard money lender rather than a title owner. The investor owns a share of a syndicated loan, denominated in dollars as a fixed-income instrument that pays a predetermined yield. If the US economy experiences high inflation, those note owners will see the value of their note evaporate as the dollar loses its value. Meanwhile, the actual property owner (either through an LLP, private REIT, or whatever) laughs all the way to the bank at the stupidity of those crowdfunding note holders. That doesn't happen in normal times but these aren't normal times.
I think crowdfunding would work best for small projects that members of a community can see firsthand. Urban farmers could form a land trust, for example, and crowdfund it to establish community gardens in a blighted urban neighborhood. Charities like Habitat for Humanity could crowdfund a housing project for a low-income buyer and hand them title when the project is done. The valuation for such projects would have fewer variables to calculate because they're brand new and presumably unencumbered with the problems of previous owners. Crowdfunding portals can eventually be useful for conventional real estate investors once the housing market stabilizes, with the median property value for a given metropolitan area at somewhere between 2x and 3x of the area's median income. I am looking forward to seeing miscellaneous real estate investments like liens and rights-of-way traded on crowdfunding portals.
Investors who have neither the time nor skill to evaluate a crowdfunded real estate project can always choose a publicly traded REIT or real estate index fund (or ETF) instead. A widely held fund has two advantages over a single property. It has no entry barriers or limitations for non-accredited investors and it arbitrages away the location problem by holding a large number of properties. Maybe some sharp investment manager will crowdfund a private REIT.
Sunday, June 16, 2013
The Slow-Motion Financial Implosion of Detroit
I wrote about Detroit's financial problems three years ago when the city's leadership had a viable plan to fix the city by downsizing its infrastructure. The Detroit Works Project had a blueprint for renewal in 2010. The city has since squandered the time and money it could have committed to that plan and is now facing imminent bankruptcy. This disaster was a long time in the making.
Read Detroit's financial statements. The CAFR for FY 2012 has the bottom line up front on page 2, with an accumulated deficit of $326.6M from several years of operating deficits. The CAFR itself is ironically interspersed with happy photos of fun things going on in Detroit. Maybe next year's CAFR can show the Mayor and his state-appointed emergency financial managers turning shovels on bare dirt where their offices used to sit. The Single Audit Report is even worse, with up-front warnings of material weaknesses in Detroit's internal controls over financial reporting. The federal government has every right to cease funding programs in Detroit given these weaknesses, but politics means more than financial sense.
Detroit's credit rating at Moody's has seen almost nothing but downgrades and downgrade reviews since 2010, with the exception of February to December of that year when credit facilities backed by the State of Michigan stabilized Detroit's outlook. The city had that window of opportunity (during which I wrote my blog article on Detroit's potential for unbuilding) to quickly begin its downsizing. The city instead has been paralyzed by public employee unions whose members have enjoyed generous pay and benefits for years and are still resisting fiscally responsible cuts to benefits.
I think Detroit had the right intention to downsize itself but picked the wrong means to execute. Reviewing the Detroit Works Project's strategic framework reveals color-coded maps of the city's center. The city designated much of its inner core as blighted where no redevelopment would be allowed and tried to pigeonhole specific industries into specific neighborhoods. That's micromanagement, and it's dumb. Detroit is in no position to pick and choose which companies it will allow to move in. Contrast this approach with San Francisco, which has given tax breaks to several digital media companies that came to The City regardless of the neighborhood where they chose to settle.
Detroit's detailed plan for renewal is probably going to come undone out of necessity if receivership forces it to move faster. Farms and ranches will sprout again within city limits and former unionized workers had better learn how to plant rows of corn. City managers should radically and immediately liberalize their approach to zoning.
The lessons of Detroit for the state of California are obvious. Sacramento policymakers are committed to more of what hasn't worked: more spending on underperforming public schools, more taxes on high income earners, more regulations on business, and more protection for public employee benefits. None of that is going to work in Detroit now that Motor City is crossing an event horizon on its way to collapsing into a singularity.
Read Detroit's financial statements. The CAFR for FY 2012 has the bottom line up front on page 2, with an accumulated deficit of $326.6M from several years of operating deficits. The CAFR itself is ironically interspersed with happy photos of fun things going on in Detroit. Maybe next year's CAFR can show the Mayor and his state-appointed emergency financial managers turning shovels on bare dirt where their offices used to sit. The Single Audit Report is even worse, with up-front warnings of material weaknesses in Detroit's internal controls over financial reporting. The federal government has every right to cease funding programs in Detroit given these weaknesses, but politics means more than financial sense.
Detroit's credit rating at Moody's has seen almost nothing but downgrades and downgrade reviews since 2010, with the exception of February to December of that year when credit facilities backed by the State of Michigan stabilized Detroit's outlook. The city had that window of opportunity (during which I wrote my blog article on Detroit's potential for unbuilding) to quickly begin its downsizing. The city instead has been paralyzed by public employee unions whose members have enjoyed generous pay and benefits for years and are still resisting fiscally responsible cuts to benefits.
I think Detroit had the right intention to downsize itself but picked the wrong means to execute. Reviewing the Detroit Works Project's strategic framework reveals color-coded maps of the city's center. The city designated much of its inner core as blighted where no redevelopment would be allowed and tried to pigeonhole specific industries into specific neighborhoods. That's micromanagement, and it's dumb. Detroit is in no position to pick and choose which companies it will allow to move in. Contrast this approach with San Francisco, which has given tax breaks to several digital media companies that came to The City regardless of the neighborhood where they chose to settle.
Detroit's detailed plan for renewal is probably going to come undone out of necessity if receivership forces it to move faster. Farms and ranches will sprout again within city limits and former unionized workers had better learn how to plant rows of corn. City managers should radically and immediately liberalize their approach to zoning.
The lessons of Detroit for the state of California are obvious. Sacramento policymakers are committed to more of what hasn't worked: more spending on underperforming public schools, more taxes on high income earners, more regulations on business, and more protection for public employee benefits. None of that is going to work in Detroit now that Motor City is crossing an event horizon on its way to collapsing into a singularity.
Saturday, June 15, 2013
Comparing Economic Headlines to the Reconstructed Truth
Reading mainstream reports of economic activity can sometimes be misleading. I generally trust reports from private sector reporting groups like The Conference Board and the Association of American Railroads because their business members are responsible for results in the real world. I am less inclined to trust inflation and employment reports from government agencies anywhere in the world because they are subject to politically-directed changes.
I like to compare headlines to the blurbs on Shadow Government Statistics that update one economist's reconstruction of unadjusted US government data. Shadow Stats has maintained its alarmist tone despite the mostly positive headline numbers reported in public media for the past year. Some headlines are beginning to converge with Shadow Stats' larger conclusions. US wholesale prices have just increased more than what many economists had forecast. The data caught up to Shadow Stats' notes on rising inflation.
People are free to believe whatever they want. I am impressed with Shadow Stats' critique of government statistics and that is why I give John Williams' assessments more credibility than what headlines have reported. I do not feel sympathy for investors who have tied their asset allocations to conventional theories and official data. Anyone could have searched the web years ago for alternative explanations, just as I have done.
I like to compare headlines to the blurbs on Shadow Government Statistics that update one economist's reconstruction of unadjusted US government data. Shadow Stats has maintained its alarmist tone despite the mostly positive headline numbers reported in public media for the past year. Some headlines are beginning to converge with Shadow Stats' larger conclusions. US wholesale prices have just increased more than what many economists had forecast. The data caught up to Shadow Stats' notes on rising inflation.
People are free to believe whatever they want. I am impressed with Shadow Stats' critique of government statistics and that is why I give John Williams' assessments more credibility than what headlines have reported. I do not feel sympathy for investors who have tied their asset allocations to conventional theories and official data. Anyone could have searched the web years ago for alternative explanations, just as I have done.
Friday, June 14, 2013
Ranking Investment Information Sources by Stupidity
I write this blog to be a lone voice of intelligence crying out in the wilderness. There is too much stupidity in the investing world for me to defeat alone even if I had several lifetimes. The best I can do is identify stupid things that deserve ridicule.
Here's a bunch of totally stupid sources, in progressive order of magnitude (i.e., the one at the bottom of the list is the stupidest; I had to point that out in case one of my readers is stupid).
Wall Street sell-side analysts. This should be an obvious source of baloney after the big settlement a decade ago that forces investment banks to offer more independent research. Corporate clients of i-banks still have egotistical executives who need their egos stroked, so sell-side research persists to give them coverage. Investors who use analysts' garbage will probably underperform the markets. Analysts put a lot of thought into calculations and arguments that will resonate with sophisticated investors. They're more dishonest than stupid because they do have college educations, but knowingly choosing the easy wrong over the hard right is not a smart life choice.
Popular "investing" magazines. I used to think articles with headlines like "The Five Mutual Funds You Must Buy Now" had some kind of special revelations. I must have been stupid. Magazines sell by inflaming people's base desires. Fear and greed drive even purportedly intellectual content like financial writing. My own financial writing is driven by sarcasm and contempt.
Television networks. CNBC is the worst of the bunch but Fox is right up there. Watching clueless hedge fund managers make fools of themselves on TV is a sport but know-nothings take their pronouncements seriously. If I had a nickel for every time some guest on CNBC said "You want to buy stocks that are going up" I'd have . . . a whole bunch of nickels.
Mass-mailed pump sheets. These are hilarious. I get them all the time and they make great blog fodder. They stay in business because some micro-cap companies can't get publicity any other way.
Co-workers at the water cooler. Even people I worked with at major investment firms knew less about investing than me. I can only wonder whether their clients could relate to them out of shared stupidity. If investment firms are this dumb, just imagine how dumb the typical worker must be at non-financial companies.
Your mother-in-law. Need I say more? I rest my case.
I have greatly reduced my own stupidity over the years by tuning out these stupid sources. Pursuing non-stupid sources like my graduate school finance textbooks and the life wisdom of Warren Buffett, John Bogle, and others is way better than staying stupid.
Here's a bunch of totally stupid sources, in progressive order of magnitude (i.e., the one at the bottom of the list is the stupidest; I had to point that out in case one of my readers is stupid).
Wall Street sell-side analysts. This should be an obvious source of baloney after the big settlement a decade ago that forces investment banks to offer more independent research. Corporate clients of i-banks still have egotistical executives who need their egos stroked, so sell-side research persists to give them coverage. Investors who use analysts' garbage will probably underperform the markets. Analysts put a lot of thought into calculations and arguments that will resonate with sophisticated investors. They're more dishonest than stupid because they do have college educations, but knowingly choosing the easy wrong over the hard right is not a smart life choice.
Popular "investing" magazines. I used to think articles with headlines like "The Five Mutual Funds You Must Buy Now" had some kind of special revelations. I must have been stupid. Magazines sell by inflaming people's base desires. Fear and greed drive even purportedly intellectual content like financial writing. My own financial writing is driven by sarcasm and contempt.
Television networks. CNBC is the worst of the bunch but Fox is right up there. Watching clueless hedge fund managers make fools of themselves on TV is a sport but know-nothings take their pronouncements seriously. If I had a nickel for every time some guest on CNBC said "You want to buy stocks that are going up" I'd have . . . a whole bunch of nickels.
Mass-mailed pump sheets. These are hilarious. I get them all the time and they make great blog fodder. They stay in business because some micro-cap companies can't get publicity any other way.
Co-workers at the water cooler. Even people I worked with at major investment firms knew less about investing than me. I can only wonder whether their clients could relate to them out of shared stupidity. If investment firms are this dumb, just imagine how dumb the typical worker must be at non-financial companies.
Your mother-in-law. Need I say more? I rest my case.
I have greatly reduced my own stupidity over the years by tuning out these stupid sources. Pursuing non-stupid sources like my graduate school finance textbooks and the life wisdom of Warren Buffett, John Bogle, and others is way better than staying stupid.
The Haiku of Finance for 06/14/13
Small-cap investing
Value comes from more than growth
There must be a moat
Value comes from more than growth
There must be a moat
Thursday, June 13, 2013
PolyMet Mining (PLM) Found Metals in Minnesota
PolyMet Mining (PLM) is working a copper and precious metals deposit in Minnesota's Mesabi iron range. This company deserves a fresh look. The CEO is not a geologist but it's good that he has tons (no pun intended) of mining experience. The rest of the D&O team has a decent amount of experience in the resource sector.
They have a very recent 43-101 report for their Northmet project. The Cu equivalent percentages in both their M&I and 2P categories look to be an above average discovery. The really good news is that they have an existing mill that is more than large enough to handle their projected production. Their IRR estimate of 30.6% would impress even Rick Rule. This is a sufficiently de-risked project that will enable production. My remaining concern is whether they can maintain a competitive cash cost of production over the mine's expected life span.
Massive financial backing from Glencore has been a boon for PolyMet and they still have to complete their permitting to get production started. Their most recent 10-Q dated April 30, 2013 shows that they have US$19M in cash on hand. Comparing their net losses for the two quarters depicted in those statements gives a burn rate of about $485K/month. They can survive for a couple of years but permitting will require significant cash outlays, so further capital raises are not out of the question. Existing convertible debt will significantly dilute existing shareholders if the company executes the remainder of its plan and impresses the market.
I kind of like this stock, although I'm not ready to invest just yet. I don't expect permitting to be a major problem, so I'm willing to revisit PolyMet in about six months to assess their progress.
Full disclosure: No position in PLM at this time.
They have a very recent 43-101 report for their Northmet project. The Cu equivalent percentages in both their M&I and 2P categories look to be an above average discovery. The really good news is that they have an existing mill that is more than large enough to handle their projected production. Their IRR estimate of 30.6% would impress even Rick Rule. This is a sufficiently de-risked project that will enable production. My remaining concern is whether they can maintain a competitive cash cost of production over the mine's expected life span.
Massive financial backing from Glencore has been a boon for PolyMet and they still have to complete their permitting to get production started. Their most recent 10-Q dated April 30, 2013 shows that they have US$19M in cash on hand. Comparing their net losses for the two quarters depicted in those statements gives a burn rate of about $485K/month. They can survive for a couple of years but permitting will require significant cash outlays, so further capital raises are not out of the question. Existing convertible debt will significantly dilute existing shareholders if the company executes the remainder of its plan and impresses the market.
I kind of like this stock, although I'm not ready to invest just yet. I don't expect permitting to be a major problem, so I'm willing to revisit PolyMet in about six months to assess their progress.
Full disclosure: No position in PLM at this time.
Wednesday, June 12, 2013
Petrosonic Energy (PSON) Brings Something Sonic to Oil
Here we go. Tobin Smith's Next Big Thing Investor mailed me a full-color teaser promoting Petrosonic Energy (PSON). This stock has one of the more original business models of any small-cap I've seen in a mass mailer. Most de-asphalting technologies in crude oil refining use solvents. Petrosonic uses - as their corporate name implies - sonic energy. They're certainly adventurous in locating their pilot project in Albania, which has a lot of heavy crude oil to process from its on-shore fields. For the record, I've never dated Albanian women.
The CEO has experience as an oil executive but I'm concerned about whether the rest of the team has experience in petroleum engineering. It's not obvious from their bios as presently written. Refining oil isn't something just any manager knows how to do. I have no idea whether their technology actually works, so we'll have to wait for data from their downstream refinery. Do the Petrosonic people speak the Albanian language? Do their local partners speak English? That would be pretty important to know if they're going to understand the results of this particular engineering process. Albania ranks 113 out of 176 in Transparency International's 2013 corruption index. That's very important to know for anyone who wants to do business there.
Their 10-Q for May 30, 2013 admits to going concern doubts, and they will have to continue raising capital. They did something clever by paying for investor relations and legal services with stock that can be repurchased. It's nice that they're willing to conserve cash that way. I'd be even more impressed if their technology really works. They ended their most recent quarter with almost $2.2M cash on hand and a net loss of $765K. That means they can last the rest of 2013 before another capital raise dilutes shareholders. Oh BTW, they used to be called Bearing Mineral Exploration. Whatever.
Petrosonic Energy is a risky play that doesn't fit my portfolio at this time. Let's see if they can deliver scientifically verifiable results from their test project. Tobin Smith can tell us all how it's doing if he takes a trip down to Albania.
Full disclosure: No position in PSON.
The CEO has experience as an oil executive but I'm concerned about whether the rest of the team has experience in petroleum engineering. It's not obvious from their bios as presently written. Refining oil isn't something just any manager knows how to do. I have no idea whether their technology actually works, so we'll have to wait for data from their downstream refinery. Do the Petrosonic people speak the Albanian language? Do their local partners speak English? That would be pretty important to know if they're going to understand the results of this particular engineering process. Albania ranks 113 out of 176 in Transparency International's 2013 corruption index. That's very important to know for anyone who wants to do business there.
Their 10-Q for May 30, 2013 admits to going concern doubts, and they will have to continue raising capital. They did something clever by paying for investor relations and legal services with stock that can be repurchased. It's nice that they're willing to conserve cash that way. I'd be even more impressed if their technology really works. They ended their most recent quarter with almost $2.2M cash on hand and a net loss of $765K. That means they can last the rest of 2013 before another capital raise dilutes shareholders. Oh BTW, they used to be called Bearing Mineral Exploration. Whatever.
Petrosonic Energy is a risky play that doesn't fit my portfolio at this time. Let's see if they can deliver scientifically verifiable results from their test project. Tobin Smith can tell us all how it's doing if he takes a trip down to Albania.
Full disclosure: No position in PSON.
Tuesday, June 11, 2013
Entrepreneurs and Innovators Need Ninja Action and Customer Development
The Commonwealth Club invited Steve Blank and Gary Shapiro to talk about "Startups, Entrepreneurs, and Ninja Innovation" last night. I've heard Steve Blank talk previously at the first-ever Veterans Hackathon in 2012 and I got an autographed copy of his book The Startup Owner's Manual. I definitely had to hear what these two tech dudes had to say about ninjas. There weren't any ninjas on hand to demonstrate proper throwing star techniques. The bottom line was that ninjas were flexible, stealthy, and able to win against overwhelming odds. Entrepreneurs should behave the same way. My recollections of what they said are interspersed below with my random thoughts thrown in for flavor.
I wanted to hear more about Steve's advocacy of the Customer Development methodology and how it led to Eric Ries' Lean Startup Movement. Steve writes about it at his site and there are plenty of other references in the public domain.
I agree with these guys that big companies don't reward risk very well. There was an oblique mention of Steve Jobs starting some secret development group with Apple. I've never heard of that one. I have heard of the text book case of how 3M developed sticky notes pretty much by accident after they thought a weak adhesive was a product failure.
It's cool that companies are recognizing the importance of innovation by establishing senior "VP of Innovation" titles. I am skeptical of our two panelists' assertions that new market creation is more important than market share. I've written before that an "innovation premium" based on forecasts of future growth is an unsatisfactory way to assess the value of innovation. IMHO the ability to innovate is an important part of a SWOT analysis, along with factors external to the firm like barriers to entry and switching costs.
The panelists also think that following other innovative companies is a bad strategy. Really? I think Samsung is doing a heck of a job developing cheaper tablet computers that will eventually take market share from Apple's iPad.
These guys are totally correct that even lean startups need to master a knowledge base of business skills. That's why it's great to see so much open-source material on customer development and lean startups. I also think Gary is onto something by pushing for the serendipity of attending trade shows to learn an industry's structure and make connections. I have learned tons of things from attending investment conferences and trade shows in Northern California. I have not attended Gary's Consumer Electronics Show but if it means I get to see some Las Vegas showgirls then I'll mark my calendar.
I like the comment that vaporware head fakes constitute a ninja-esque tactic. Microsoft did this a lot in the 1990s with announcements of phantom products that never made it to store shelves. It works if it induces a competitor to spend precious R&D money and market research time to counter a product that doesn't exist. Marrying this with the panelists' admonition that entrepreneurs should hire people who complement their weaknesses begs an interesting question. What would happen if an startup CEO hires a "VP of Innovation" just to churn out vaporware, while the real innovation gets done in a secret product development group? Media attention would focus competitors on the high-profile VP while the real products get developed under the radar.
The panelists were skeptical of stealth-mode startups because they deny developers the input from the customer development process that makes the final product work. Okay, I get it, customer development creates a feedback loop. IMHO some things may have to be developed in secret, but if they don't work they might be good candidates for the vaporware cover story. BTW, the US military has a hard time learning that troops who use new equipment should be involved in development from the start.
I found it very interesting that the panel thinks patents may be inhibiting innovation if they engender lawsuits. Wow, somebody from inside the startup priesthood finally calls out patent trolls who buy patents just to sue other innovators out of existence. I agree with them but it's hard to take financial incentives out of lawfare while still protecting IP under the law. Getting rid of patent control regimes needs a cost-benefit analysis. The benefit is a revolution in open-source innovation, with people copying designs everywhere for their home 3D printers. The cost is a dearth of large-scale capital formation because successful innovators will have no economic moat behind which they can accumulate capital.
Steve and Gary noted that VCs push out founding CEOs in favor of COOs because they want someone who creates repeatable business processes that will drive growth. I don't think that's all bad. The founding CEOs should accept this reality and recognize how it frees them to start another enterprise. Serial entrepreneurship is wealth creation. I lament together with our panelists that large VC funds' "2 and 20" compensation makes them apathetic. Okay, just get rid of the 2% annual management fee for undeployed capital. Institutions like CalPERS can police up their multi-strat philosophies to weed out the VCs who just sit in cash without investing it. Something tells me that won't happen voluntarily. The success of crowdfunding could be the big change that forces VCs to wake up and compete for dollars.
I also think Steve and Gary have inadvertently discovered a business opportunity by remarking that VCs are supposed to be good at recognizing patterns of successful entrepreneurs. If VCs are so terrible at articulating this pattern recognition skill set, there's a data mining opportunity for startups that develop knowledge management interfaces. Attention startups! Grab NVCA's membership list and offer custom-tailored deep dives into their deal histories that map technology life cycle S-curves for each enterprise and array them against sector growth, founder personalities, and other factors. You heard it here first.
I need to hang out with more people like Steve and Gary. That means more hackathons, trade shows, conventions, and Commonwealth Club appearances are in my immediate future.
I wanted to hear more about Steve's advocacy of the Customer Development methodology and how it led to Eric Ries' Lean Startup Movement. Steve writes about it at his site and there are plenty of other references in the public domain.
I agree with these guys that big companies don't reward risk very well. There was an oblique mention of Steve Jobs starting some secret development group with Apple. I've never heard of that one. I have heard of the text book case of how 3M developed sticky notes pretty much by accident after they thought a weak adhesive was a product failure.
It's cool that companies are recognizing the importance of innovation by establishing senior "VP of Innovation" titles. I am skeptical of our two panelists' assertions that new market creation is more important than market share. I've written before that an "innovation premium" based on forecasts of future growth is an unsatisfactory way to assess the value of innovation. IMHO the ability to innovate is an important part of a SWOT analysis, along with factors external to the firm like barriers to entry and switching costs.
The panelists also think that following other innovative companies is a bad strategy. Really? I think Samsung is doing a heck of a job developing cheaper tablet computers that will eventually take market share from Apple's iPad.
These guys are totally correct that even lean startups need to master a knowledge base of business skills. That's why it's great to see so much open-source material on customer development and lean startups. I also think Gary is onto something by pushing for the serendipity of attending trade shows to learn an industry's structure and make connections. I have learned tons of things from attending investment conferences and trade shows in Northern California. I have not attended Gary's Consumer Electronics Show but if it means I get to see some Las Vegas showgirls then I'll mark my calendar.
I like the comment that vaporware head fakes constitute a ninja-esque tactic. Microsoft did this a lot in the 1990s with announcements of phantom products that never made it to store shelves. It works if it induces a competitor to spend precious R&D money and market research time to counter a product that doesn't exist. Marrying this with the panelists' admonition that entrepreneurs should hire people who complement their weaknesses begs an interesting question. What would happen if an startup CEO hires a "VP of Innovation" just to churn out vaporware, while the real innovation gets done in a secret product development group? Media attention would focus competitors on the high-profile VP while the real products get developed under the radar.
The panelists were skeptical of stealth-mode startups because they deny developers the input from the customer development process that makes the final product work. Okay, I get it, customer development creates a feedback loop. IMHO some things may have to be developed in secret, but if they don't work they might be good candidates for the vaporware cover story. BTW, the US military has a hard time learning that troops who use new equipment should be involved in development from the start.
I found it very interesting that the panel thinks patents may be inhibiting innovation if they engender lawsuits. Wow, somebody from inside the startup priesthood finally calls out patent trolls who buy patents just to sue other innovators out of existence. I agree with them but it's hard to take financial incentives out of lawfare while still protecting IP under the law. Getting rid of patent control regimes needs a cost-benefit analysis. The benefit is a revolution in open-source innovation, with people copying designs everywhere for their home 3D printers. The cost is a dearth of large-scale capital formation because successful innovators will have no economic moat behind which they can accumulate capital.
Steve and Gary noted that VCs push out founding CEOs in favor of COOs because they want someone who creates repeatable business processes that will drive growth. I don't think that's all bad. The founding CEOs should accept this reality and recognize how it frees them to start another enterprise. Serial entrepreneurship is wealth creation. I lament together with our panelists that large VC funds' "2 and 20" compensation makes them apathetic. Okay, just get rid of the 2% annual management fee for undeployed capital. Institutions like CalPERS can police up their multi-strat philosophies to weed out the VCs who just sit in cash without investing it. Something tells me that won't happen voluntarily. The success of crowdfunding could be the big change that forces VCs to wake up and compete for dollars.
I also think Steve and Gary have inadvertently discovered a business opportunity by remarking that VCs are supposed to be good at recognizing patterns of successful entrepreneurs. If VCs are so terrible at articulating this pattern recognition skill set, there's a data mining opportunity for startups that develop knowledge management interfaces. Attention startups! Grab NVCA's membership list and offer custom-tailored deep dives into their deal histories that map technology life cycle S-curves for each enterprise and array them against sector growth, founder personalities, and other factors. You heard it here first.
I need to hang out with more people like Steve and Gary. That means more hackathons, trade shows, conventions, and Commonwealth Club appearances are in my immediate future.
Monday, June 10, 2013
The Haiku of Finance for 06/10/13
What could happen next
Fed turns off stimulus buys
End of bull bubble
Fed turns off stimulus buys
End of bull bubble
Sunday, June 09, 2013
Why I Do Not Want To Be a Landlord
I've been doing a lot of thinking about real estate lately. Some years ago I attended free seminars that were totally worthless. Lately I've been listening to experienced real estate professionals. I now have more sources and references for my knowledge base than I could ever use. One of the more common avenues to success in real estate is owning income-producing residential property. This means investors have to manage their property and tenants as a landlord. Once I started learning about all of the responsibilities a landlord must fulfill, I realized it's a poor fit for my negative attitude toward human beings. The feudal appeal of having serfs as tenants on my land has lost its shine. Let me describe the ways in which landlording would complicate my life and inconvenience me to no end.
I wish I could charge people an arm and a leg for living under my benevolent protection, but alas many communities have rent control laws that prevent landlords from raising rents on long-term occupants. San Francisco is one such town. The City has a rent board that determines what private property owners may do with the property they own. The City is also home to a very vocal tenants union that agitates for rent control. The union's symbol is the classic workers' fist smashing a cartoonish landlord. The clear message is that radicals who believe property is theft and profit is evil will use every means available to destroy the capitalists who provide them with climate-controlled shelter from the elements. No thanks. I will not be a landlord in San Francisco if it means I become the target of idiots with no life.
Owning rental property in less restrictive areas means figuring out how much to charge for rent. Figure extra charges for after-hours service calls, inspections, and non-routine maintenance. Having a live response to an overnight maintenance call may be worth the expense if it prevents water damage from destroying property. Watch out for those leaks above the ground floor. Fees for late rents are of course limited by local laws. I'd like to charge people double rent for wasting my time and insulting my intelligence but that's probably prohibited by some do-gooder San Francisco ordinance.
Locked-out tenants are a pain in the behind. I don't want to get calls at oh-dark-thirty from someone who lost their key or left it on the kitchen counter. Having a locksmith on call is not something I relish. I can just imagine a nosy neighbor snooping as the locksmith opens the tenant's door, then calling the cops to report a break-in, and then snickering as the locksmith calls me to complain about wasted time. Yeah, Neighborhood Watch would be all about busybodies watching me lose money. That is a headache I do not need.
Keeping tenants informed is another landlord task I don't want to do. Many tenants are dumb enough to need reminders of when their rent is due, so landlords need to time their newsletter publishing so the reminder ends up at the top of the shoebox, or hatbox, or breadbox, or glovebox, or wherever ghetto tenants like to stuff their overdue bills. Landlords can sometimes use this retardation to their advantage. If the newsletter contains requests for confirmation of safety measures like smoke detectors or carbon monoxide detectors, keeping proof of confirmations can limit landlords' liability in the aftermath of emergencies. Furnaces and air conditioning units are among landlords' most expensive repairs, but I worry that reminding tenants to change filters will fall on deaf ears. Having laundry facilities on site means more maintenance expenses, plus complaints from some tenant who claims a machine ate too many quarters.
Competent businesses consider the cost of acquiring new customers. Landlording as a business means figuring the cost of acquiring new tenants through advertising. Window signs might be more effective than lawn signs that get kicked over, and some high school kid on the corner holding a sign and waving might be a source of amusement. I would give an illiterate tenant a cheeseburger just to see them wave a big sign on the street corner with my name on it. Selecting new tenants means abiding by HUD's Fair Housing regulations. Some tenants fall into legally protected classes. Others that aren't protected don't have to live with me if I don't want them around. Frankly, I don't want anyone around. I don't want animals around either and they're not a protected class, so landlords can have special fees and insurance requirements for our furry friends.
I always wondered why the rental applications I've filled out were so detailed. It turns out that landlords need to collect as much info during the intake process as possible to allow them to garnish wages and collect judgments. County tax records provide a public record of tenants' true addresses, which makes sending judgment notices easier. I sure don't want any known drug offenders on my property, because law enforcement could execute a civil asset forfeiture action against me if I rent to them in full knowledge of their activity. Checking the sheriff's records helps keep the riff-raff away. I'd rather save myself the trouble and keep everyone away.
I have difficulty believing any of the so-called asset protection strategies real estate professionals claim they use. I had an LLC structure until very recently for Alfidi Capital until I determined that paying the $800 per year to the State of California wasn't getting me any benefit. I did not have the time to treat the LLC as a separate entity that would give it corporate veil status. It also obviously carried my name, and I was the registered agent because I don't need to retain a lawyer for routine business functions. My LLC was useless and I'm in the final stages of converting Alfidi Capital from an LLC to a sole proprietorship. I will never again waste time and money using an LLC for anything that I can handle myself, including real estate. Insurance policies are probably cheaper than an LLC and land trusts are probably more anonymous. I'm no expert on land trusts but I'm wary of their potential for misuse. Would a property management company be willing to accept designation as a trustee of a land trust if the named beneficiary is the landlord's LLC, but the landlord has no property insurance? Who would sue who if something goes wrong? I don't want to spend time in court just to find out.
I'd rather take a less costly stance with my asset protection posture. The California superior court system has searchable databases of civil cases online. I've searched San Francisco Superior Court's records many times for the names of local troublemakers whom I do not wish to have in my life. It's educational to see who pops up as the initiator of frivolous lawsuits. I don't want litigation addicts as business associates. Landlords should beware of having them as tenants.
Landlords also have to manage the cash they receive and spend. It comes in by check, money order, electronic payment, etc. It goes out any way you like. You're the boss and you're running this business. I'm not. The process of evicting a bad tenant and preparing a unit for the next occupancy takes time, requiring cash reserves on hand to cover an estimated tenant failure rate. I suspect that corporate experience with uncollectible accounts receivable would be helpful here. Credit card companies sell their charge-off accounts to judgment collectors and other miscellaneous investors. Maybe landlords who don't want to pursue deadbeat tenants are a good source of deal flow for judgment recovery aficionados.
Disaster-prone areas call for their own category of Darwin Awards. I've always been fascinated by the stupidity of developers who build there, investors who buy there, insurers who underwrite there, and tenants who live there. I will never buy developed property on a floodplain. I will never buy property in the San Francisco Bay Area that does not meet seismic code requirements. I sometimes wonder whether architects who design structures that resist hurricanes and tornadoes have disruptive ideas for real estate developers in the Gulf states and Midwest. Somebody could make a buck.
Limits on landlording turn me off. Some paychecks are resistant to garnishment (like Social Security). Lawsuits and judgment collections can be a landlord's best friend. Landlords may have to pay interest on the deposits they collect. Limiting the deposit to cover first and last month's rent may or may not be helpful in avoiding interest charges. I have no desire to maintain records for thirty years that will allow me to calculate the return of some granny's deposit to her estate's executor once she croaks.
Tenants turn me off too. Low income properties are full of risky tenants who cause nightmares. I remember living in a Richmond, California apartment complex near the Hilltop Auto Mall. The City of Richmond bought it in 2003 to convert it into Section 8 housing while they spent tax dollars renovating the real low-income projects downtown. Life in my apartment complex soon deteriorated from an already low status. Tenants would enter the rental office bragging about being late on payments. Druggies left their detritus in the entryways and tenants left their human waste in the hallways. These people really were human waste with all of their behavioral problems. Section 8 of the Housing Act of 1937 now has a devoted constituency in the underclass. Housing voucher recipients strike me as the equivalent of parolees, people who leave and reenter the Section 8 program through revolving doors that affirm their victimhood. HUD even goes so far as to provide links to tenants' rights organizations, advocating against property owners whose taxes help fund HUD's operations. Bottom feeders are disgusting. I moved out of the ghetto in 2004 and I'll never live that way again. No way will any low-income tenant ever occupy my radar as a business professional.
Want to hire a property manager to do all of this work for you? Well, that requires work too. You'll have to consider how long they've been in business and whether they have the staff to handle all of the properties they manage. If they manage property out of your area, that means you're on the hook for long-distance absentee landlord status. If they have judgments against them, well, guess who they pass their bills to for payment. I'm not paying even a fraction of my income from an investment to someone else.
I had fun as a kid playing fake landlording with the Monopoly board game. The secret to success in that game is to own everything on a given street to capture renters who are highly mobile. Owning more properties means reinvesting your rent in improvements (houses, hotels) until you own the board and win by bankrupting everyone. In real life, the have-not takers will hamstring the landlord makers with regulations and lawsuits. They will also empower their political allies with subsidy vouchers, non-profit advocacy groups that subsist on foundation grants, and loudmouth activists. Everyone wants to be on the side of the angels as long as it means a free lunch. Real landlording isn't like Monopoly. The real world makes it difficult to win.
Some investors thrive as landlords. They love tracking all of the daily details and solving human problems. Good for them. They have the skills and patience to perform a very necessary market function and deserve handsome rewards for their results. They are welcome to own all of the income-producing residential property which will never see a bid from me. There are many strategies available to real estate investors who do not want to be landlords. I'd rather develop land, manage human-scale agribusiness projects, own oil and gas leases, rehabilitate vacant buildings, own rights-of-way and easements, purchase tax liens, buy REITs and ETFs, or do just about anything else. Any of those choices are more preferable to me than dealing with live human beings. Even dealing with dead human beings as a cemetery owner requires adherence to special regulations. I do not want people on my property, living or deceased. I can't wait to tell those kids to get off my lawn. All I need is the lawn so I can start yelling.
Full disclosure: I do not own real estate at this time.
I wish I could charge people an arm and a leg for living under my benevolent protection, but alas many communities have rent control laws that prevent landlords from raising rents on long-term occupants. San Francisco is one such town. The City has a rent board that determines what private property owners may do with the property they own. The City is also home to a very vocal tenants union that agitates for rent control. The union's symbol is the classic workers' fist smashing a cartoonish landlord. The clear message is that radicals who believe property is theft and profit is evil will use every means available to destroy the capitalists who provide them with climate-controlled shelter from the elements. No thanks. I will not be a landlord in San Francisco if it means I become the target of idiots with no life.
Owning rental property in less restrictive areas means figuring out how much to charge for rent. Figure extra charges for after-hours service calls, inspections, and non-routine maintenance. Having a live response to an overnight maintenance call may be worth the expense if it prevents water damage from destroying property. Watch out for those leaks above the ground floor. Fees for late rents are of course limited by local laws. I'd like to charge people double rent for wasting my time and insulting my intelligence but that's probably prohibited by some do-gooder San Francisco ordinance.
Locked-out tenants are a pain in the behind. I don't want to get calls at oh-dark-thirty from someone who lost their key or left it on the kitchen counter. Having a locksmith on call is not something I relish. I can just imagine a nosy neighbor snooping as the locksmith opens the tenant's door, then calling the cops to report a break-in, and then snickering as the locksmith calls me to complain about wasted time. Yeah, Neighborhood Watch would be all about busybodies watching me lose money. That is a headache I do not need.
Keeping tenants informed is another landlord task I don't want to do. Many tenants are dumb enough to need reminders of when their rent is due, so landlords need to time their newsletter publishing so the reminder ends up at the top of the shoebox, or hatbox, or breadbox, or glovebox, or wherever ghetto tenants like to stuff their overdue bills. Landlords can sometimes use this retardation to their advantage. If the newsletter contains requests for confirmation of safety measures like smoke detectors or carbon monoxide detectors, keeping proof of confirmations can limit landlords' liability in the aftermath of emergencies. Furnaces and air conditioning units are among landlords' most expensive repairs, but I worry that reminding tenants to change filters will fall on deaf ears. Having laundry facilities on site means more maintenance expenses, plus complaints from some tenant who claims a machine ate too many quarters.
Competent businesses consider the cost of acquiring new customers. Landlording as a business means figuring the cost of acquiring new tenants through advertising. Window signs might be more effective than lawn signs that get kicked over, and some high school kid on the corner holding a sign and waving might be a source of amusement. I would give an illiterate tenant a cheeseburger just to see them wave a big sign on the street corner with my name on it. Selecting new tenants means abiding by HUD's Fair Housing regulations. Some tenants fall into legally protected classes. Others that aren't protected don't have to live with me if I don't want them around. Frankly, I don't want anyone around. I don't want animals around either and they're not a protected class, so landlords can have special fees and insurance requirements for our furry friends.
I always wondered why the rental applications I've filled out were so detailed. It turns out that landlords need to collect as much info during the intake process as possible to allow them to garnish wages and collect judgments. County tax records provide a public record of tenants' true addresses, which makes sending judgment notices easier. I sure don't want any known drug offenders on my property, because law enforcement could execute a civil asset forfeiture action against me if I rent to them in full knowledge of their activity. Checking the sheriff's records helps keep the riff-raff away. I'd rather save myself the trouble and keep everyone away.
I have difficulty believing any of the so-called asset protection strategies real estate professionals claim they use. I had an LLC structure until very recently for Alfidi Capital until I determined that paying the $800 per year to the State of California wasn't getting me any benefit. I did not have the time to treat the LLC as a separate entity that would give it corporate veil status. It also obviously carried my name, and I was the registered agent because I don't need to retain a lawyer for routine business functions. My LLC was useless and I'm in the final stages of converting Alfidi Capital from an LLC to a sole proprietorship. I will never again waste time and money using an LLC for anything that I can handle myself, including real estate. Insurance policies are probably cheaper than an LLC and land trusts are probably more anonymous. I'm no expert on land trusts but I'm wary of their potential for misuse. Would a property management company be willing to accept designation as a trustee of a land trust if the named beneficiary is the landlord's LLC, but the landlord has no property insurance? Who would sue who if something goes wrong? I don't want to spend time in court just to find out.
I'd rather take a less costly stance with my asset protection posture. The California superior court system has searchable databases of civil cases online. I've searched San Francisco Superior Court's records many times for the names of local troublemakers whom I do not wish to have in my life. It's educational to see who pops up as the initiator of frivolous lawsuits. I don't want litigation addicts as business associates. Landlords should beware of having them as tenants.
Landlords also have to manage the cash they receive and spend. It comes in by check, money order, electronic payment, etc. It goes out any way you like. You're the boss and you're running this business. I'm not. The process of evicting a bad tenant and preparing a unit for the next occupancy takes time, requiring cash reserves on hand to cover an estimated tenant failure rate. I suspect that corporate experience with uncollectible accounts receivable would be helpful here. Credit card companies sell their charge-off accounts to judgment collectors and other miscellaneous investors. Maybe landlords who don't want to pursue deadbeat tenants are a good source of deal flow for judgment recovery aficionados.
Disaster-prone areas call for their own category of Darwin Awards. I've always been fascinated by the stupidity of developers who build there, investors who buy there, insurers who underwrite there, and tenants who live there. I will never buy developed property on a floodplain. I will never buy property in the San Francisco Bay Area that does not meet seismic code requirements. I sometimes wonder whether architects who design structures that resist hurricanes and tornadoes have disruptive ideas for real estate developers in the Gulf states and Midwest. Somebody could make a buck.
Limits on landlording turn me off. Some paychecks are resistant to garnishment (like Social Security). Lawsuits and judgment collections can be a landlord's best friend. Landlords may have to pay interest on the deposits they collect. Limiting the deposit to cover first and last month's rent may or may not be helpful in avoiding interest charges. I have no desire to maintain records for thirty years that will allow me to calculate the return of some granny's deposit to her estate's executor once she croaks.
Tenants turn me off too. Low income properties are full of risky tenants who cause nightmares. I remember living in a Richmond, California apartment complex near the Hilltop Auto Mall. The City of Richmond bought it in 2003 to convert it into Section 8 housing while they spent tax dollars renovating the real low-income projects downtown. Life in my apartment complex soon deteriorated from an already low status. Tenants would enter the rental office bragging about being late on payments. Druggies left their detritus in the entryways and tenants left their human waste in the hallways. These people really were human waste with all of their behavioral problems. Section 8 of the Housing Act of 1937 now has a devoted constituency in the underclass. Housing voucher recipients strike me as the equivalent of parolees, people who leave and reenter the Section 8 program through revolving doors that affirm their victimhood. HUD even goes so far as to provide links to tenants' rights organizations, advocating against property owners whose taxes help fund HUD's operations. Bottom feeders are disgusting. I moved out of the ghetto in 2004 and I'll never live that way again. No way will any low-income tenant ever occupy my radar as a business professional.
Want to hire a property manager to do all of this work for you? Well, that requires work too. You'll have to consider how long they've been in business and whether they have the staff to handle all of the properties they manage. If they manage property out of your area, that means you're on the hook for long-distance absentee landlord status. If they have judgments against them, well, guess who they pass their bills to for payment. I'm not paying even a fraction of my income from an investment to someone else.
I had fun as a kid playing fake landlording with the Monopoly board game. The secret to success in that game is to own everything on a given street to capture renters who are highly mobile. Owning more properties means reinvesting your rent in improvements (houses, hotels) until you own the board and win by bankrupting everyone. In real life, the have-not takers will hamstring the landlord makers with regulations and lawsuits. They will also empower their political allies with subsidy vouchers, non-profit advocacy groups that subsist on foundation grants, and loudmouth activists. Everyone wants to be on the side of the angels as long as it means a free lunch. Real landlording isn't like Monopoly. The real world makes it difficult to win.
Some investors thrive as landlords. They love tracking all of the daily details and solving human problems. Good for them. They have the skills and patience to perform a very necessary market function and deserve handsome rewards for their results. They are welcome to own all of the income-producing residential property which will never see a bid from me. There are many strategies available to real estate investors who do not want to be landlords. I'd rather develop land, manage human-scale agribusiness projects, own oil and gas leases, rehabilitate vacant buildings, own rights-of-way and easements, purchase tax liens, buy REITs and ETFs, or do just about anything else. Any of those choices are more preferable to me than dealing with live human beings. Even dealing with dead human beings as a cemetery owner requires adherence to special regulations. I do not want people on my property, living or deceased. I can't wait to tell those kids to get off my lawn. All I need is the lawn so I can start yelling.
Full disclosure: I do not own real estate at this time.
Saturday, June 08, 2013
The Haiku of Finance for 06/08/13
Build on vacant lot
Home and business in one place
Sky is the limit
Home and business in one place
Sky is the limit
Friday, June 07, 2013
Verastem (VSTM) and Anti-Cancer Drugs
Verastem (VSTM) believes its drugs can destroy cancer stem cells that are notoriously resistant to chemotherapy. Scientists have been on a quest for years to find drugs that are effective on cancer stem cells. Anti-psychotic drugs recently showed promise in fighting stem cells. Nanomed treatments may be the next big thing. This is clearly a hot area for research, so Verastem needs to stand out from the crowd.
I am extremely impressed with the management team's qualifications. They probably have the best bench strength of any small pharma company I've seen in recent years simply because their key people have led life science companies that were acquired. This means they clearly know how to deliver products that Big Pharma finds valuable. The single best risk-management technique for any young company is the presence of serial entrepreneurs in the executive team.
Their main drugs are in Phase 1 studies. I'm not scientifically qualified to evaluate their characteristics, so I can only comment on their market potential for treating ailments like mesothelioma. Eli Lilly's Premextred (brand name Alimta) treats mesothelioma and had over US$1B in sales in 2012. Verastem's drugs need to be more effective than Alimta to dent those sales, so we'll have to wait for the trial data. Any Big Pharma company that wants to take some market share way from Eli Lilly should take a serious look at Verastem.
Verastem's 10-Q for May 9, 2013 said they have over $28M in cash on March 31. Their quarterly loss was -US$9M, so they can expect to raise more capital by the end of the year (unless they start tapping into their US$38M in short-term investments). Verastem is too risky for my portfolio at his time but I am optimistic that their talented management can deliver meaningful results.
Full disclosure: No position in VSTM or other companies mentioned at this time.
I am extremely impressed with the management team's qualifications. They probably have the best bench strength of any small pharma company I've seen in recent years simply because their key people have led life science companies that were acquired. This means they clearly know how to deliver products that Big Pharma finds valuable. The single best risk-management technique for any young company is the presence of serial entrepreneurs in the executive team.
Their main drugs are in Phase 1 studies. I'm not scientifically qualified to evaluate their characteristics, so I can only comment on their market potential for treating ailments like mesothelioma. Eli Lilly's Premextred (brand name Alimta) treats mesothelioma and had over US$1B in sales in 2012. Verastem's drugs need to be more effective than Alimta to dent those sales, so we'll have to wait for the trial data. Any Big Pharma company that wants to take some market share way from Eli Lilly should take a serious look at Verastem.
Verastem's 10-Q for May 9, 2013 said they have over $28M in cash on March 31. Their quarterly loss was -US$9M, so they can expect to raise more capital by the end of the year (unless they start tapping into their US$38M in short-term investments). Verastem is too risky for my portfolio at his time but I am optimistic that their talented management can deliver meaningful results.
Full disclosure: No position in VSTM or other companies mentioned at this time.
Thursday, June 06, 2013
Tungsten Corp. (TUNG) Making the Rounds
Trinity Investment Research is busy again. I never miss a chance to review the brochures they mail to me. Today's spotlight is on Tungsten Corp. (TUNG), riding a wave of Internet chatter about Warren Buffett's supposed interest in tungsten. It's true that his Berkshire Hathaway's IMC has backed Woulfe Mining, but that doesn't necessarily mean the Oracle of Omaha suddenly likes metals. He has always been averse to investing in commodified industries and prefers things with durable advantages. Korea is a dominant tungsten producer, so a presence there is rather durable.
Tungsten Corp.'s President is not a trained geologist and (based on his published bio) has not run a mining company until now. Their VP is a geologist. That's nice but I'm not impressed yet. They'd be more impressive if they could show measurable progress toward operating a mining project.
They are exploring projects in Idaho and Nevada. They have an option on the Nevada property, which in the single photo available appears to have no existing infrastructure. They have another option in Idaho near an area that used to be actively mined. I'd rather see 43-101 compliant reports than options on pieces of history. We may not see 43-101 data because this is a US-listed stock with no Canadian ticker, so there's no impetus for them to follow the Canadian reporting regime.
I've checked out their annual report dated April 26, 2013. They had no revenue and just over $5k in cash on hand. They did raise $500K on April 8 but their expense projection of $650K over the next twelve months implies they will have to raise more money later in 2013. Shareholders can expect dilution from further fundraising. I do not understand why a company with this kind of risk has a market cap of almost $64M.
It sure would be nice if Trinity Investment Research publishes a follow-up piece to tell us all how well this stock does in a couple of years. I don't need a follow-up because I'm just not interested.
Full disclosure: No position in TUNG or other companies mentioned at this time.
Tungsten Corp.'s President is not a trained geologist and (based on his published bio) has not run a mining company until now. Their VP is a geologist. That's nice but I'm not impressed yet. They'd be more impressive if they could show measurable progress toward operating a mining project.
They are exploring projects in Idaho and Nevada. They have an option on the Nevada property, which in the single photo available appears to have no existing infrastructure. They have another option in Idaho near an area that used to be actively mined. I'd rather see 43-101 compliant reports than options on pieces of history. We may not see 43-101 data because this is a US-listed stock with no Canadian ticker, so there's no impetus for them to follow the Canadian reporting regime.
I've checked out their annual report dated April 26, 2013. They had no revenue and just over $5k in cash on hand. They did raise $500K on April 8 but their expense projection of $650K over the next twelve months implies they will have to raise more money later in 2013. Shareholders can expect dilution from further fundraising. I do not understand why a company with this kind of risk has a market cap of almost $64M.
It sure would be nice if Trinity Investment Research publishes a follow-up piece to tell us all how well this stock does in a couple of years. I don't need a follow-up because I'm just not interested.
Full disclosure: No position in TUNG or other companies mentioned at this time.