No reason to chill
Conditions drive up real rates
All bad news for bonds
Conditions drive up real rates
All bad news for bonds
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.
Saturday, August 31, 2013
Bond Investors Should Not Chill Out At All
CNBC allows PIMCO to give us three reasons why bond investors should "chill out" and stop worrying. I'll give the folks at home three reasons why I'm not a bond investor.
1. Economic fundamentals don't support much of anything anymore. Go back to my article in June 2013 about the BIS study showing every asset market in the developed world pushed up by central bank monetary stimulus. Consumer spending is 70% of GDP, higher than ever in history, and it has to come down eventually. Government spending is higher than ever and has to come down eventually. If federal spending comes down after a hyperinflationary period, bond investors are toast.
2. Inflation is definitely coming back. People who haven't read Shadow Government Statistics don't realize that inflation is already here. Compare your grocery bill to what you paid last year, especially for energy-intensive staples like meat and bread.
3. Investors always misread the Fed. This is because many US investors haven't lived through hyperinflationary periods. The necessary precursors for such an episode are in place: a liquidity trap, government borrowing crowding out private borrowing, and political unwillingness to curtail government spending.
Bond gurus who assume that tapering QE won't require a higher Fed funds rate miss the boat. Any tapering will raise real rates by lowering the market value of existing bonds. Bond investors have no reason at all to chill out now that the bond market bubble awaits its pinprick.
1. Economic fundamentals don't support much of anything anymore. Go back to my article in June 2013 about the BIS study showing every asset market in the developed world pushed up by central bank monetary stimulus. Consumer spending is 70% of GDP, higher than ever in history, and it has to come down eventually. Government spending is higher than ever and has to come down eventually. If federal spending comes down after a hyperinflationary period, bond investors are toast.
2. Inflation is definitely coming back. People who haven't read Shadow Government Statistics don't realize that inflation is already here. Compare your grocery bill to what you paid last year, especially for energy-intensive staples like meat and bread.
3. Investors always misread the Fed. This is because many US investors haven't lived through hyperinflationary periods. The necessary precursors for such an episode are in place: a liquidity trap, government borrowing crowding out private borrowing, and political unwillingness to curtail government spending.
Bond gurus who assume that tapering QE won't require a higher Fed funds rate miss the boat. Any tapering will raise real rates by lowering the market value of existing bonds. Bond investors have no reason at all to chill out now that the bond market bubble awaits its pinprick.
Friday, August 30, 2013
The Haiku of Finance for 08/30/13
Cars and fuel cost more
Fed printing cannot fix this
Drivers going broke
Fed printing cannot fix this
Drivers going broke
Americans Really Can't Afford to Drive Cars
CNBC via Yahoo says Americans are driving less. I looked for the claimed source of this data at the Federal Highway Administration's Office of Highway Policy Information. The OHPI publishes monthly Traffic Volume Trends and the June 2013 report does show a -0.1% cumulative decline in vehicle-miles of travel (VMT) for 2013. I don't know where CNBC is referencing a report "released this week" because no such report is mentioned among the FHWA's press releases for August. I'm assuming they mean the monthly trends report. Journalists need to start using hyperlinks to data sources, just like us bloggers.
CNBC/Yahoo also mentions a John A. Volpe National Transportation Systems Center study showing a decline in driving. They don't link to the report in the article. I found that Volpe report myself. My readers gain intelligence when they follow the links to source material I diligently assemble. The report's PDF version does indeed show that the relationship between real GDP and VMT is breaking down. I read this data as another indicator that the QE-driven fake growth in GDP does not reflect the real economy. Driving ability is a measure of quality of life. Helicopter Ben can print money but he can't print cheaper fuel.
The crux of the CNBC/Yahoo article and the government's data is that Americans don't drive as much as in years past. The root cause is something that the Fed's QE cannot mask. Americans are getting poorer and are unable to afford historical driving habits. The Volpe report mentions several factors: people lack jobs, cars and gas are more expensive, higher debt burdens prevent car purchases. The Fed's monetary easing has not created real wealth to solve these problems. Median household income is lower now than it was at the beginning of the recession in 2007. Americans are owning their cars longer, and there is evidence that the higher quality of US-made cars means they need not be replaced as often. Those higher-quality cars are still more expensive now than in years past.
I think it would be more fruitful to compare VMT to trends in household income rather than GDP if the longstanding correlation between driving and the national economy is breaking down. The automobile industry needs to figure out how poor Americans will afford the cars they produce.
CNBC/Yahoo also mentions a John A. Volpe National Transportation Systems Center study showing a decline in driving. They don't link to the report in the article. I found that Volpe report myself. My readers gain intelligence when they follow the links to source material I diligently assemble. The report's PDF version does indeed show that the relationship between real GDP and VMT is breaking down. I read this data as another indicator that the QE-driven fake growth in GDP does not reflect the real economy. Driving ability is a measure of quality of life. Helicopter Ben can print money but he can't print cheaper fuel.
The crux of the CNBC/Yahoo article and the government's data is that Americans don't drive as much as in years past. The root cause is something that the Fed's QE cannot mask. Americans are getting poorer and are unable to afford historical driving habits. The Volpe report mentions several factors: people lack jobs, cars and gas are more expensive, higher debt burdens prevent car purchases. The Fed's monetary easing has not created real wealth to solve these problems. Median household income is lower now than it was at the beginning of the recession in 2007. Americans are owning their cars longer, and there is evidence that the higher quality of US-made cars means they need not be replaced as often. Those higher-quality cars are still more expensive now than in years past.
I think it would be more fruitful to compare VMT to trends in household income rather than GDP if the longstanding correlation between driving and the national economy is breaking down. The automobile industry needs to figure out how poor Americans will afford the cars they produce.
Thursday, August 29, 2013
The Haiku of Finance for 08/29/13
Dumb fast food worker
Wants more pay but has no skill
Get a life, loser
Wants more pay but has no skill
Get a life, loser
Stupid Fast Food Workers Demand More Pay
I laugh at the latest wave of stupidity sweeping America. Fast food workers think they deserve massive pay increases. I say they deserve exactly what they're paid right now, and if they don't like it they can take a hike so some ambitious teenager can earn extra cash after school.
The minimum wage that fast food workers earn was never intended to guarantee a level of income that supports an entire four-person household. Raising a family in post-Cold War America usually requires two wage earners because our halcyon days of prosperity are long gone. Put two such wages together and you've got a $30K household income, more than enough to sustain a family in most of America.
This entire stupid idea is pushed by SEIU and other labor organizers to increase their base. Private sector union membership has been declining for years. Employers don't like union demands, work rules, production stoppages, rampant absenteeism, and other problems caused by activists who possess more attitude than intellect. Consumers don't buy union label products because they want value for their dollar. The unionized work ethic and its entitlement culture destroyed the US automobile industry. Bring that culture to fast food and your burger will take an hour to serve.
Fast food workers can always work other jobs with equivalent prerequisites if they don't like flipping burgers. They can pick vegetables, sweep floors, haul boxes, or shovel manure. I've had to work some pretty worthless jobs in my life but I outgrew them once I acquired education, advanced skills, and leadership experience. I don't expect most adult fast food workers to take the hint because I suspect they cluster at the left end of the IQ bell curve.
Wednesday, August 28, 2013
The Haiku of Finance for 08/28/13
Income with no bond
Seek hard asset dividend
Resource play will pay
Seek hard asset dividend
Resource play will pay
America Needs Nuclear Fuel Of Some Sort
Every time I attend a materials conference, somebody mentions the American nuclear energy sector's need for uranium. The Megatons to Megawatts program ends this year. The Russian government will be free to sell its surplus warhead uranium on the world market. The US nuclear sector will need a new source of supply. I see four options.
1. The US government liberalizes permitting for uranium deposit exploration.
2. US utilities operating nuclear reactors buy more uranium on the world market.
3. North American uranium miners rapidly expand production at existing mines.
4. The US energy sector explores alternatives to uranium-fueled fission reactors.
Option #1 is in keeping with the federal government's liberalized approach to granting permits for oil and gas exploration on federal lands. The problem is that the whole uranium fuel cycle has become a political football thanks to the Fukushima disaster and the renewed controversy over storage at Yucca Mountain.
Option #2 pits US energy companies against other utilities around the world. This is how the free market normally works. The risk is that the inevitable hyperinflation of the US dollar will make it prohibitively expensive for any US companies to source raw materials outside the US. This includes energy sources. I do not expect uranium to be exempt from this dynamic.
Option #3 is probably feasible in the short term, given that increased demand from utilities for uranium supply will drive the price up in the US and encourage miners to produce more. This will of course cause them to exhaust proven mineral reserves at an accelerated rate. We're back to option #1 for more exploration.
Option #4 is a no-brainer. Notice the title of this blog article says "nuclear fuel," which does not necessarily mean uranium. I'm intrigued by the possibility of thorium fuel cycle reactors, which cause fewer problems than reactors powered by uranium. The EPA has clear standards for handling thorium. It's not like you can eat the stuff, but the safety standards are known to industry and thus not a barrier to operations.
Watch this blog for more commentary on thorium developments. I would attend the Thorium Energy Alliance annual conference if there were enough hot chicks there to make it worth my while.
1. The US government liberalizes permitting for uranium deposit exploration.
2. US utilities operating nuclear reactors buy more uranium on the world market.
3. North American uranium miners rapidly expand production at existing mines.
4. The US energy sector explores alternatives to uranium-fueled fission reactors.
Option #1 is in keeping with the federal government's liberalized approach to granting permits for oil and gas exploration on federal lands. The problem is that the whole uranium fuel cycle has become a political football thanks to the Fukushima disaster and the renewed controversy over storage at Yucca Mountain.
Option #2 pits US energy companies against other utilities around the world. This is how the free market normally works. The risk is that the inevitable hyperinflation of the US dollar will make it prohibitively expensive for any US companies to source raw materials outside the US. This includes energy sources. I do not expect uranium to be exempt from this dynamic.
Option #3 is probably feasible in the short term, given that increased demand from utilities for uranium supply will drive the price up in the US and encourage miners to produce more. This will of course cause them to exhaust proven mineral reserves at an accelerated rate. We're back to option #1 for more exploration.
Option #4 is a no-brainer. Notice the title of this blog article says "nuclear fuel," which does not necessarily mean uranium. I'm intrigued by the possibility of thorium fuel cycle reactors, which cause fewer problems than reactors powered by uranium. The EPA has clear standards for handling thorium. It's not like you can eat the stuff, but the safety standards are known to industry and thus not a barrier to operations.
Watch this blog for more commentary on thorium developments. I would attend the Thorium Energy Alliance annual conference if there were enough hot chicks there to make it worth my while.
Tuesday, August 27, 2013
Monday, August 26, 2013
The Haiku of Finance for 08/26/13
Federal tech labs
Stuck in bureaucratic rules
Speed up tech transfer
Stuck in bureaucratic rules
Speed up tech transfer
Tech Startups Must Check Out Uncle Sam's Tech Innovation Systems
I can't seem to get enough high-tech startup action these days. Everywhere I turn someone slings a new source of insight my way. I love reading the stuff that comes out of Innovation magazine from Technology Ventures Corporation. It should be required reading for anyone in America's disruptive class.
Did my fellow disrupters know that TVC has a TechWhiteboard chock full of government-funded innovations just waiting for some entrepreneur to commercialize them? Well now you do, and TVC isn't even paying me anything to say so. Those concepts are at varying Technology Readiness Levels (TRLs) but their developers are passionate enough to show them off to investors. You'd better get cracking on making marketable products out of those inventions and discoveries, because the Task Force on American Innovation has issued a bunch of reports documenting our country's eroding edge in research and development. The warning bells on this slipping lead have been sounding ever since the National Academy of Sciences published "Rising Above the Gathering Storm" in 2007.
Just don't count on more help from Uncle Sam than what he's already giving. DOE's Technology Commercialization Fund looked good on paper for a few years but it seems to have been superseded by other EERE commercialization initiatives. It took a gaggle of private groups from left, right, and center to publish "Turning the Page: Reimagining the National Labs in the 21st Century Innovation Economy" to jump start a redesign of the government's innovation ecosystem. Policymakers running the national lab system need to check out Brookings' Center for Technology Innovation to see the gaps that current policy leaves unaddressed.
The answers to many technology problems are buried somewhere inside the components of the Federal Laboratory Consortium. The entrepreneur's job is to go digging. I started digging years ago.
Did my fellow disrupters know that TVC has a TechWhiteboard chock full of government-funded innovations just waiting for some entrepreneur to commercialize them? Well now you do, and TVC isn't even paying me anything to say so. Those concepts are at varying Technology Readiness Levels (TRLs) but their developers are passionate enough to show them off to investors. You'd better get cracking on making marketable products out of those inventions and discoveries, because the Task Force on American Innovation has issued a bunch of reports documenting our country's eroding edge in research and development. The warning bells on this slipping lead have been sounding ever since the National Academy of Sciences published "Rising Above the Gathering Storm" in 2007.
Just don't count on more help from Uncle Sam than what he's already giving. DOE's Technology Commercialization Fund looked good on paper for a few years but it seems to have been superseded by other EERE commercialization initiatives. It took a gaggle of private groups from left, right, and center to publish "Turning the Page: Reimagining the National Labs in the 21st Century Innovation Economy" to jump start a redesign of the government's innovation ecosystem. Policymakers running the national lab system need to check out Brookings' Center for Technology Innovation to see the gaps that current policy leaves unaddressed.
The answers to many technology problems are buried somewhere inside the components of the Federal Laboratory Consortium. The entrepreneur's job is to go digging. I started digging years ago.
Financial Sarcasm Roundup for 08/26/13
A rare week with no conferences or business meetings to attend leaves lots of white space on my calendar. I am bereft of live events but news items still feed my sarcasm.
Another meaningless debt limit will come and go in October with absolutely no effect on federal spending decisions. Anyone who thought the national debt stopped growing took their eyes off the ball. The drama next month will allow the Republican-controlled House to posture against Obamacare while doing absolutely nothing about it. The ceiling will rise and deficit spending will continue. Only forced selling of Treasuries by central banks is going to stop this circus.
Durable goods orders are in a surprise freefall. The only people truly surprised were those who thought QE could conjure real prosperity out of thin air. The weak yen and euro make exports from those areas temporarily more competitive. Expect more competitive devaluation here to make US exports look better.
JPMorgan Chase messed over the wrong Russian-American billionaire. I had previously thought that wealth managers only sought to stick it to their low-rung clients just to extract as much revenue as they could before those accounts departed to a discount broker. Now I see that even premium wealth managers will allow billionaires' portfolios to slide out of specified tolerances if it gets them more revenue. I still think JPM has nothing to worry about from other court cases. It's a SIFI and those other litigants are small fries with no high-powered connections.
Facebook's valuation continues its march into insanity. I have to LOL at the 180 P/E. Here's the simple math. Net income would have to be 9x larger for FB to have a P/E comparable to other tech companies. The market is pricing in a ramp-up in earnings that even Amazon hasn't produced after a decade. I'm still pricing in the inability of Facebook to make it happen in mobile, which implies a P/E collapse to about 20. That further implies a true valuation of $4.59/share, or just about the five bucks I've always pegged for an FB share. I'll believe Facebook has conquered mobile when its percentage of revenue from mobile ads equals the worldwide percentage of Web users who predominantly use mobile for Web access.
Nothing in the news today made me angry enough to use profanity in my home office. That's just as rare as having no business events on my calendar.
Full disclosure: No positions in any companies mentioned at this time.
Another meaningless debt limit will come and go in October with absolutely no effect on federal spending decisions. Anyone who thought the national debt stopped growing took their eyes off the ball. The drama next month will allow the Republican-controlled House to posture against Obamacare while doing absolutely nothing about it. The ceiling will rise and deficit spending will continue. Only forced selling of Treasuries by central banks is going to stop this circus.
Durable goods orders are in a surprise freefall. The only people truly surprised were those who thought QE could conjure real prosperity out of thin air. The weak yen and euro make exports from those areas temporarily more competitive. Expect more competitive devaluation here to make US exports look better.
JPMorgan Chase messed over the wrong Russian-American billionaire. I had previously thought that wealth managers only sought to stick it to their low-rung clients just to extract as much revenue as they could before those accounts departed to a discount broker. Now I see that even premium wealth managers will allow billionaires' portfolios to slide out of specified tolerances if it gets them more revenue. I still think JPM has nothing to worry about from other court cases. It's a SIFI and those other litigants are small fries with no high-powered connections.
Facebook's valuation continues its march into insanity. I have to LOL at the 180 P/E. Here's the simple math. Net income would have to be 9x larger for FB to have a P/E comparable to other tech companies. The market is pricing in a ramp-up in earnings that even Amazon hasn't produced after a decade. I'm still pricing in the inability of Facebook to make it happen in mobile, which implies a P/E collapse to about 20. That further implies a true valuation of $4.59/share, or just about the five bucks I've always pegged for an FB share. I'll believe Facebook has conquered mobile when its percentage of revenue from mobile ads equals the worldwide percentage of Web users who predominantly use mobile for Web access.
Nothing in the news today made me angry enough to use profanity in my home office. That's just as rare as having no business events on my calendar.
Full disclosure: No positions in any companies mentioned at this time.
Sunday, August 25, 2013
The Limerick of Finance for 08/25/13
Microsoft will show its chief the door
Tech sector awaits what's in store
He had a good run
But the PC is done
Mobile tech makes it look like a bore
Tech sector awaits what's in store
He had a good run
But the PC is done
Mobile tech makes it look like a bore
Use And Abuse Of Qualified Retirement Plans
Qualified retirement plans can be a minefield for people who intend to use them for something other than accumulate assets for retirement. I've lately listened to pitch artists who claim that setting up a QRP enables a beneficiary to invest in things that are normally prohibited from an IRA or other type of self-directed individual account. Well, folks, some things don't belong in personal retirement accounts for really good reasons.
Assets like precious metals, collectibles, real estate, tax lien certificates, and tax deed properties are encumbered with special risks that make them unsuitable for IRAs. Those products are illiquid and have other qualifications that make them difficult to value. Real estate investors already have vehicles like 1031 exchanges to defer their capital gains from real estate deals, so using a QRP to dabble in real estate is overkill. Policymakers designed IRAs to accommodate stocks, bonds, and their highly tradable proxies (index funds, etc.). The intent of the law is to allow the power of compounding, periodic rebalancing, and the reinvestment of dividends and interest to build an IRA investor's wealth over several decades. Tax regulations deliberately exclude exotic and illiquid instruments from IRAs precisely because of their difficulties.
Legal loopholes allow QRPs to invest in such illiquid things because regulators presume that QRPs are sponsored by institutions. The IRS requirements for a QRP are extensive, presumably because corporate sponsors have the resources to manage their administration. Those institutions are further presumed to be sophisticated enough and liquid enough to invest some small portion of their QRP holdings in illiquid things. Structuring a QRP for an individual investor strikes me as a greedy way to fit some securities vendor's illiquid pet projects into a retirement account that wasn't designed to hold them.
The IRS has plenty of guidelines for setting up retirement plans and accounts. Most individual investors are probably just fine with an employer's QRP-administered 401(k) account, along with a traditional IRA. I personally use an IRA because that's all I need as an individual with no corporate plan sponsor. I am not about to spend untold amounts on legal fees and regulatory filings just to pretend I need a QRP in the eyes of the law. I believe the law should frown upon those who abuse QRP loopholes.
Assets like precious metals, collectibles, real estate, tax lien certificates, and tax deed properties are encumbered with special risks that make them unsuitable for IRAs. Those products are illiquid and have other qualifications that make them difficult to value. Real estate investors already have vehicles like 1031 exchanges to defer their capital gains from real estate deals, so using a QRP to dabble in real estate is overkill. Policymakers designed IRAs to accommodate stocks, bonds, and their highly tradable proxies (index funds, etc.). The intent of the law is to allow the power of compounding, periodic rebalancing, and the reinvestment of dividends and interest to build an IRA investor's wealth over several decades. Tax regulations deliberately exclude exotic and illiquid instruments from IRAs precisely because of their difficulties.
Legal loopholes allow QRPs to invest in such illiquid things because regulators presume that QRPs are sponsored by institutions. The IRS requirements for a QRP are extensive, presumably because corporate sponsors have the resources to manage their administration. Those institutions are further presumed to be sophisticated enough and liquid enough to invest some small portion of their QRP holdings in illiquid things. Structuring a QRP for an individual investor strikes me as a greedy way to fit some securities vendor's illiquid pet projects into a retirement account that wasn't designed to hold them.
The IRS has plenty of guidelines for setting up retirement plans and accounts. Most individual investors are probably just fine with an employer's QRP-administered 401(k) account, along with a traditional IRA. I personally use an IRA because that's all I need as an individual with no corporate plan sponsor. I am not about to spend untold amounts on legal fees and regulatory filings just to pretend I need a QRP in the eyes of the law. I believe the law should frown upon those who abuse QRP loopholes.
Frac Sand Plays Getting Harder To Find
Frac sand is indispensable to natural gas producers using horizontal fracturing to reach deposits. The frac sand sector will likely mirror the natural gas sector it supplies with proppant. Natural gas prices crashed in 2012 as US exploration and production exploded. Frac sand producers will probably follow the same path. Only the lowest-cost producers will survive.
Stocks in this sector include Hi-Crush Partners (HCLP) and US Silica Holdings (SLCA), while other frac sand producers appear to be privately held. The determinant of value for any mineral producer is the difference between the long-term average market price of its product and its cash cost of production. I can't find any public source for the current market price of uncoated silica and other forms of frac sand. The USGS page on silica has multi-year reports on the broad "sand and gravel" genre but nothing specific to frac sand. Maybe the price in in the minerals yearbook; I'm not excited enough to look. This is a very young sector that only recently attracted special attention.
Check out Hi-Crush Partners' 10-K from March 2013. Calculating their cost of production means parsing Item 7 MDA. Dividing their cost of production ($18.5M for 2012) by their annual production of 1.49M tons gives us a cost of $12.41/ton. They reduced the amount of royalties they must pay so costs for 2013 will likely be lower. Check out US Silica Holdings' 10-K from February 2013. I honestly can't find their cash cost of production for frac sand from reading their Item 7 MDA.
My search for hard asset hedges against hyperinflation will not extend to frac sand. The sector is too small and is a hostage to natural gas prices. The production figures for the sector aren't readily available and neither is the market price for this commodity. Someone with deep industry experience in specialty sand and gravel products might be able to make some money here. It won't be me.
Full disclosure: No positions in any companies mentioned at this time.
Stocks in this sector include Hi-Crush Partners (HCLP) and US Silica Holdings (SLCA), while other frac sand producers appear to be privately held. The determinant of value for any mineral producer is the difference between the long-term average market price of its product and its cash cost of production. I can't find any public source for the current market price of uncoated silica and other forms of frac sand. The USGS page on silica has multi-year reports on the broad "sand and gravel" genre but nothing specific to frac sand. Maybe the price in in the minerals yearbook; I'm not excited enough to look. This is a very young sector that only recently attracted special attention.
Check out Hi-Crush Partners' 10-K from March 2013. Calculating their cost of production means parsing Item 7 MDA. Dividing their cost of production ($18.5M for 2012) by their annual production of 1.49M tons gives us a cost of $12.41/ton. They reduced the amount of royalties they must pay so costs for 2013 will likely be lower. Check out US Silica Holdings' 10-K from February 2013. I honestly can't find their cash cost of production for frac sand from reading their Item 7 MDA.
My search for hard asset hedges against hyperinflation will not extend to frac sand. The sector is too small and is a hostage to natural gas prices. The production figures for the sector aren't readily available and neither is the market price for this commodity. Someone with deep industry experience in specialty sand and gravel products might be able to make some money here. It won't be me.
Full disclosure: No positions in any companies mentioned at this time.
Saturday, August 24, 2013
Estate Taxes Have Little Effect On Family Farms
About a week ago at a business event I heard someone make the claim that estate heirs must often sell a family-owned farm to pay the estate taxes owed after the primary owner dies. I wondered about the facts behind this claim. Let's go get those facts.
The Congressional Budget Office study titled "Effects of the Federal Estate Tax on Farms and Small Businesses" (published July 1, 2005) determined that only a small percentage of estates with family farms have liquid assets insufficient to pay estate taxes. Estates can value farms at a lower "current use" valuation provided they remain in operation for another 15 years. Many family farms do not even meet the minimum valuation threshold that would subject them to estate taxes. These qualifications exist to protect small family farms from liquidation if estate taxes place them in jeopardy.
The Land Trust Alliance has done leading-edge work on tax matters affecting farmland. Families can use land trusts to shelter portions of inherited land from estate taxes. There are plenty of legal ways to pass farms intergenerationally through estates without getting people all worked up with scare stories about liquidation to pay taxes. Check out IRS rules on small businesses and estate taxes for more details.
Remember that estates are considered as a whole and farmland is just one asset of your dead relative's wealth. Stop listening to baloney stories from scare-mongers who want to prompt you into unnecessary action. Don't let some slick sales jerk frighten Grandma or Grandpa into an early grave with a hard sell on some scam transaction. Throw that jerk off your farm.
Rainbow Grocery Cooperative Is Full Of SF's Fruits And Nuts
I shopped at Rainbow Grocery Cooperative in San Francisco once, years ago, because it was the only place in San Francisco where I could find a bottle of mead. Once I became aware of what this place represents, the revelation shall keep me away forever.
Rainbow Grocery Cooperative is the type of place the rest of America throws in San Francisco's face as an example of our collective stupidity. The business model of a worker-owned co-op only makes sense if it delivers value to the customer. The product selection and layout of this grocery store deliver no such value. Much of the health fare (organic this, granola that) is overpriced compared to Whole Foods, with less variety. Many of the cheese and wine selections are overpriced compared to Andronico's. I compare prices everywhere I shop and just about everything at Rainbow is probably a better deal somewhere else.
The row upon row of craft-cult dietary supplements make me laugh. Organic items are supposed to be healthy in and of themselves. A balanced diet needs no supplements but cognitively challenged San Franciscans believe they need every special little grain of whatnot they can cram into their gullets. It's part of The City's superiority complex. Sprinkle that organic flax seed onto your quinoa and couscous, and wash it down with an acai-pomegranate-aloe smoothie. Do it, people, or you'll be standing in the corner at the next cocktail party. Some peasant raised those things on a certified conflict-free farm just for your special little stomach.
Shoppers need to know that some Rainbow Grocery supporters are openly sympathetic to Palestinian "liberation" organizations. Feel free to search the web for more info on Hamas, the Muslim Brotherhood, and other like-minded groups. If you love Loony Left causes and other forms of mental illness, then you'll find a home here with other malcontents and ne'er-do-wells on the fringes of our society. If you envy capitalist success, then Rainbow Grocery Cooperative is for you. It's definitely not for me.
Rainbow Grocery Cooperative is the type of place the rest of America throws in San Francisco's face as an example of our collective stupidity. The business model of a worker-owned co-op only makes sense if it delivers value to the customer. The product selection and layout of this grocery store deliver no such value. Much of the health fare (organic this, granola that) is overpriced compared to Whole Foods, with less variety. Many of the cheese and wine selections are overpriced compared to Andronico's. I compare prices everywhere I shop and just about everything at Rainbow is probably a better deal somewhere else.
The row upon row of craft-cult dietary supplements make me laugh. Organic items are supposed to be healthy in and of themselves. A balanced diet needs no supplements but cognitively challenged San Franciscans believe they need every special little grain of whatnot they can cram into their gullets. It's part of The City's superiority complex. Sprinkle that organic flax seed onto your quinoa and couscous, and wash it down with an acai-pomegranate-aloe smoothie. Do it, people, or you'll be standing in the corner at the next cocktail party. Some peasant raised those things on a certified conflict-free farm just for your special little stomach.
Shoppers need to know that some Rainbow Grocery supporters are openly sympathetic to Palestinian "liberation" organizations. Feel free to search the web for more info on Hamas, the Muslim Brotherhood, and other like-minded groups. If you love Loony Left causes and other forms of mental illness, then you'll find a home here with other malcontents and ne'er-do-wells on the fringes of our society. If you envy capitalist success, then Rainbow Grocery Cooperative is for you. It's definitely not for me.
The Haiku of Finance for 08/24/13
Sustaining timber
Manage tree growth and logging
Tall green dividend
Manage tree growth and logging
Tall green dividend
Timber REIT Performance and Valuation Comparison
My search for hard asset hedges against hyperinflation continues apace. I've already checked out self-storage REITs. Now it's time to check out timber REITs and their related ETFs. The leading candidates are below. My sources are the same as before: Yahoo for P/E and margin, Reuters for EPS and ROE growth.
Rayonier (RYN)
P/E: 18.69
Profit margin: 23.15%
EPS 5yr growth: 8.11%
ROE 5yr growth: 21.01%
Plum Creek Timber (PCL)
P/E: 30.71
Profit margin: 17.77%
EPS 5yr growth: -4.76%
ROE 5yr growth: 14.74%
Potlatch Corp. (PCH)
P/E: 24.59
Profit margin: 11.83%
EPS 5yr growth: -11.09%
ROE 5yr growth: 24.49%
Comparing RYN to its two competitors gives me one interesting implication. The other two have increased their annualized ROE while their EPS have declined. I don't get that at all. The inverse of such a relationship (EPS up, ROE down) holds if a company changes to a more conservative capital structure with less debt. The long-term debt holdings of those PCL and PCH appear to be constant, so they don't seem to be levering up just to increase ROE. I wonder whether they've increased their shares outstanding in recent years, as that would account for a larger denominator in the EPS calculation.
A further inspection at the balance sheets of PCL and PCH show increasingly negative retained earnings for several years. RYN's balance sheet shows retained earnings to be large, positive, and increasing annually. That result, along with the positive EPS growth for RYN and negative EPS growth for the others, give me enough reason to favor RYN over its two competitors.
Rayonier has a couple of other things going for itself. Its free cash flow has been positive for three years. Its long term debt is far above the 2X net income I usually prefer in operating companies, but I'm bending that rule for two reasons. One, this is a REIT, where high debt is common. Two, I need a hyperinflation hedge, and hyperinflation reduces debt mountains to molehills. Oh yeah, one more thing. Rayonier's P/E ratio is a lot more fairly priced relative to the S&P 500's historic average of 14, so it's somewhat affordable.
Let's find out just how affordable Rayonier should be for me to buy it. I plugged its dividends into my Alfidi Capital REIT ETF valuation template, using the same assumptions I made for the self-storage REIT. I get an intrinsic valuation of $17.16/share, so applying a 10% discount means I won't pay a penny more than $15.44/share for RYN. It hasn't been that cheap since mid-2009 and it currently trades at $56.29. I'll wait for the market crash first.
I'll also mention timber REIT ETFs, specifically Guggenheim Timber (CUT) and iShares S&P Global Timber & Forestry ETF (WOOD). My objection to these ETFs is that their holdings are much broader than just timber harvesters. These ETFs hold operating companies that are in some ways only marginal users of timber products. Their expense ratios are also extremely high. That's why I'm ruling them out as candidates for my hard asset strategy.
I've found my pure play timber REIT candidate. I will wait to buy into Rayonier when the price is right.
Full disclosure: No position in any of the securities mentioned above at this time.
Rayonier (RYN)
P/E: 18.69
Profit margin: 23.15%
EPS 5yr growth: 8.11%
ROE 5yr growth: 21.01%
Plum Creek Timber (PCL)
P/E: 30.71
Profit margin: 17.77%
EPS 5yr growth: -4.76%
ROE 5yr growth: 14.74%
Potlatch Corp. (PCH)
P/E: 24.59
Profit margin: 11.83%
EPS 5yr growth: -11.09%
ROE 5yr growth: 24.49%
Comparing RYN to its two competitors gives me one interesting implication. The other two have increased their annualized ROE while their EPS have declined. I don't get that at all. The inverse of such a relationship (EPS up, ROE down) holds if a company changes to a more conservative capital structure with less debt. The long-term debt holdings of those PCL and PCH appear to be constant, so they don't seem to be levering up just to increase ROE. I wonder whether they've increased their shares outstanding in recent years, as that would account for a larger denominator in the EPS calculation.
A further inspection at the balance sheets of PCL and PCH show increasingly negative retained earnings for several years. RYN's balance sheet shows retained earnings to be large, positive, and increasing annually. That result, along with the positive EPS growth for RYN and negative EPS growth for the others, give me enough reason to favor RYN over its two competitors.
Rayonier has a couple of other things going for itself. Its free cash flow has been positive for three years. Its long term debt is far above the 2X net income I usually prefer in operating companies, but I'm bending that rule for two reasons. One, this is a REIT, where high debt is common. Two, I need a hyperinflation hedge, and hyperinflation reduces debt mountains to molehills. Oh yeah, one more thing. Rayonier's P/E ratio is a lot more fairly priced relative to the S&P 500's historic average of 14, so it's somewhat affordable.
Let's find out just how affordable Rayonier should be for me to buy it. I plugged its dividends into my Alfidi Capital REIT ETF valuation template, using the same assumptions I made for the self-storage REIT. I get an intrinsic valuation of $17.16/share, so applying a 10% discount means I won't pay a penny more than $15.44/share for RYN. It hasn't been that cheap since mid-2009 and it currently trades at $56.29. I'll wait for the market crash first.
I'll also mention timber REIT ETFs, specifically Guggenheim Timber (CUT) and iShares S&P Global Timber & Forestry ETF (WOOD). My objection to these ETFs is that their holdings are much broader than just timber harvesters. These ETFs hold operating companies that are in some ways only marginal users of timber products. Their expense ratios are also extremely high. That's why I'm ruling them out as candidates for my hard asset strategy.
I've found my pure play timber REIT candidate. I will wait to buy into Rayonier when the price is right.
Full disclosure: No position in any of the securities mentioned above at this time.
Friday, August 23, 2013
The Haiku of Finance for 08/23/13
The broad consensus
Central banks quant-ease markets
Worldwide price bubbles
Central banks quant-ease markets
Worldwide price bubbles
Alfidi Capital at MoneyShow San Francisco 2013
I had to attend the annual MoneyShow San Francisco last week. This was more than just another conference for me. I presented my first MoneyShow seminar ever. This was something I've wanted to do ever since I attended my first MoneyShow in 2001 during my MBA program. I spoke this year about my small-cap stock evaluation methodology on the first day of this year's show. If you want to hear my thinking, you have to invite me to speak at your high-powered conference. I paraphrase what a few other speakers said below. My thinking in response to the presenters is noted in italics below, as per my usual style of commenting on major public events.
Thank you to Kim Githler and Charles Githler for allowing me time on your show's calendar. Kim kicked off the conference in her usual way by covering her basic philosophies: capital preservation, the big picture, and adapting to change. She noted that strategies for handling inflation and deflation are different and that long-term stock market investors are rewarded. Her take on an old adage was a classic: "Finish your homework. People in India and China are starving - for your job." Charles spoke next; he thinks the US is at major risk of deflation (hence the Fed's QE goal of asset appreciation). He interprets rising real 10-year yields as the result of investors demanding more reward for the risk they take. Referring to the "2020 scenario" of energy independence for North America, Charles thinks materials and energy may outperform. I appreciated his mention of GDX and GDXJ (the gold mining ETF tickers) as beaten-down value plays that may also be useful as inflation hedges. There may be some life in my GDX holdings yet if other luminaries come around.
The first keynoter from TD Ameritrade covered his firm's Investor Movement Index (IMX), which I take to be a Big Data compilation of their clients' aggregate trade activity that measures market sentiment. I don't use sentiment indicators because I consider most retail investors to be reactive rather than contemplative. Some hedge fund somewhere can probably throw the IMX into one of their algorithms and measure its signal strength.
The keynoter from S+P Capital IQ said that bullish market action in January and February usually signals a positive twelve month total return, but I'm skeptical. Ask anyone who was in the markets from late 2008 to early 2009 how the crisis impacted their annual returns. He noted that the number of "all-time high days" in this bull market are below historical averages; once again, I'm skeptical that this is anything other than random noise. He noted that narrow yield differentials between the S&P 500 and the 10-year Treasury are generally good for bull markets but I must caveat that with some kind of adjustment for risk. Only in recent years have investors ignored risk and focused exclusively on total return, and that's only because QE has driven them out of cash and savings accounts. IHS Global Insight believes that most developed countries have passed the troughs in their business cycles. I'd like to see IHS's track record in forecasting economic turning points; it's not obvious from their product page.
Roger McNamee from Elevation Partners (and let's not forget his rock band, Moonalice, whom I've heard live) had ten hypotheses about tech that probably went over the heads of most MoneyShow attendees. I think MoneyShow attendees are much more intelligent than the average American, but not all of them are the type of innovators who would launch or fund a tech startup. He thinks there's no income overlap between mobile apps and the web, partly because apps are the search engines for mobile. He thinks Apple should pivot to the cloud and the Google's Android has spawned incompatible systems that degrade app experiences. He continued to pound Android, saying its OEMs often lose money on hardware. I'd take a look at Samsung's sales before I count out Android makers. Roger likes that HTML5 incorporates Flash, which gives it more design flexibility and makes monetization easier. He predicts that "home cloud" architecture offering remote access to lifestyle devices is coming. I see that as another manifestation of VCs going for IoT as the next funding trend, something I've blogged about this year. He also predicts that content providers will have to move to broadband distribution to survive given the decline of cable and satellite channels. His most alarming hypothesis is that the "sharing economy" allows consumers to imitate corporations' capital efficiency techniques (like outsourcing), his evidence being that Millennials are renting capital goods for short periods via Airbnb and Zipcar. I hope he knows what's driving this phenomenon. Millennials' income is constrained by student loan debt and lack of upward mobility. They must rent cars because they can't afford to own them. They must lease out their homes and apartments because they really need the extra income. Check out Roger's slide show on Elevation Partners' mission page.
Steve Forbes was the next keynoter. He's still pretty sharp but sooner or late the next generation of handsome, intelligent keynoters will have to replace the old guard, and that's exactly why I'm appearing at these conferences. Steve noted that middle class incomes are still declining after four years of so-called economic recovery, similar to a pattern in the 1930s. The MoneyShow audience applauded his prediction that the Democratic Party would lose the US Senate due to the Affordable Care Act's implosion. I'm sad to note that such a reversal is probably a pipe dream. Americans are addicted to entitlements at all levels of our society. These programs and their political sponsors will remain in place until a hyperinflationary depression eliminates their funding sources. Steve thinks fixing federal spending to a percentage of GDP is a more effective budgeting tool than a legislated debt ceiling. I don't think that is going to work. Government statistics are already significantly altered, gamed, adjusted, and otherwise misused as to be unreliable, according to Shadow Government Statistics. Targeting GDP will just incentivize the policy apparatus to artificially inflate GDP so the government can collect more revenue. The best guide for targeting federal revenue collection and spending IMHO is Hauser's Law. Steve went back to his advocacy for the gold standard, another impossibility because it's too inflexible as a rule. The Rentenmark is a better example because it was backed by a broad range of hard assets.
Jim Rogers was the final keynoter. He's still pretty sharp but he was starting to show his age while wandering all over the stage. He's proud of his young daughters for speaking Mandarin and showed off their videos from a speech exhibition. The guy has been a relentless China bull for something like forever. Someone needs to tell him that China's most important economic figures are falsified and that English is the international language of business. I could beat the ground about how China will get old before it will get rich, its resource shortages and little arable land, its economy's fixation on the pork cycle, and the insolvency of its shadow banking system. I do concur with the rest of his general advocacy of mining, energy, and agriculture. Jim set up his family's bank accounts in Asia because he doesn't trust the US dollar. I hope he calculated those banks' Basel capital adequacy ratios first. He noted that simultaneous monetary stimulus in the largest developed economies is unprecedented and that we should prepare for that to end. I've been saying that too but I don't think Jim reads my blog. He's shorting junk bonds. I'm not, because I don't want to pay the bonds' interest to a counterparty in addition to the margin interest I'd have to pay. He's still bullish on agriculture because a dearth of farmers will make farming careers more lucrative. Jim likes Canada's economy and currency but doesn't like US TIPS due to their tax consequences at maturity. He then rolled into a rambling Q&A and was very friendly with Asian women in the audience.
The vendor booths on the expo floor had more representation from hard assets companies and investment projects than I've ever seen at a MoneyShow. Big Oil (supermajors), Little Oil (prospectors), pipeline MLPs, timber, REITs, BDCs, and non-US agriculture were all there. I'll cover these selectively, in pretty broad swaths, working backwards.
Let's consider farmland. I can understand investing in agribusiness stocks with an international presence because they must publish detailed financial statements. A pure-play deal in Latin America or the Baltics requires a different kind of due diligence. Investors would have to physically travel to the country in question to see the land, meet the farmers, and examine the title document in the native language. That's more effort than I can make just for one potential investment. Please don't pitch me on the ability of coconut oil to treat Alzheimer's disease. Please don't tell me that a bunch of neem trees are a miracle without explaining the plan to cultivate them outside their native habitat. Plants have natural pests and predators. I'd say investors have natural predators too. I'd much rather invest in permaculture, which I can do right here at home.
Let's talk about business development companies (BDCs). I picked up flyers for a couple of these at the MoneyShow. In normal times BDCs are useful additions to a fixed income portfolio. These are not normal times. The likelihood of hyperinflation in the US means any security based on fixed income flows is the kiss of death. Too many BDCs have portfolios structured as loan funds. The companies owing those loans to the BDCs will pay them off with worthless dollars in hyperinflation. Structuring the loans as secured with liens on assets won't matter; the indebted companies will end hyperinflation much healthier as their liabilities are inflated away. BDCs that structure their investments as convertible debt or project equity might fare better in hyperinflation for a little while.
Let's mention REITs. John T. Reed's anticipation of nationwide rent control laws puts the kibosh on whatever refuge I might have found in commercial REITs. Residential REITs are similarly out of my consideration. The remaining option would be storage REITs, and I found a suitable candidate for my own money in my blog article earlier this week.
Let's check out timber. I sat through one timber pitch recently. It was (of course) for a project outside the US. No thanks. Timber is a hard asset and thus a potential inflation hedge but it must be structured correctly if it wants my respect. I suspect that much of the infatuation with timber in recent years is the result of timber's correlation with the housing market. Housing booms drive demand for lumber and pulp. The financial sector started to take timber seriously when the Harvard Management Company hired a lumberjack to evaluate timber farms all over the world. The strikes me as analytical overkill. There are simpler and cheaper tools around for evaluating timber. The NCREIF Timberland Index shows the return history for timber investments. The index's declines since the housing bust are a contraindicator to contemporary claims that the housing sector is strong, but those declines may also indicate that the timber sector is underpriced. Institutional investors hire timber investment management organizations (TIMOs) to care for their trees but those structures aren't available to ordinary retail investors. The best the rest of us can do is evaluate timber REITs like Rayonier (RYN), Potlatch Corp. (PCH), and Plum Creek Timber (PCL). Compare them to the timber REIT ETFs with the adorable tickers CUT and WOOD.
Let's look at pipeline MLPs. The only thing preventing me from going long one of these babies (aside from finding one at a decent bargain) is the unresolved question of whether they can raise their rates at will or are limited by FERC to rate increases at set intervals. Pricing power counts for everything in hyperinflation. I'm still digging for the answer.
Let's wrap up my digression by mentioning oil and gas. You've heard me talk about energy many times already on this blog. I've discovered that there's a specialized part of the finance sector called "oil and gas lease banks" that provide capital specifically to drillers. Even oil and gas royalty trusts need access to capital because wells will mechanically fail over time. They must spend capex on maintenance and restoration of production. I don't invest in these tiny little well plays or their lease banks but some people just love the tax advantages. The IRS has an entire handbook devoted oil and gas, and there's a cottage industry of accountants and attorneys devoted to figuring it out. There's also a cottage industry of community banks with internal offices devoted to helping oil and gas royalty owners manage their income streams.
Okay, enough of my fixation with oddball asset plays. I'm switching back to the MoneyShow speakers. There were so many talks that I couldn't possibly cover them all, so I only attended those that mattered for my own portfolio or professional development.
Serial entrepreneur Bill Harris of Personal Capital explained how money meets tech in financial services. His three requirements for a money management service are that it should be virtual, secure, and personal. Virtualization should be a disruptive force in a sector that has four times as many bank branches now as it did before the ATM, especially now that digitization has transformed financial projects into intangibles. The security of vaults and access can now be delivered with smartphone 3-factor authentication (password / phone activation / voiceprint). Technology now allows for mass personalization that obliterates the old crasftsperson model of wealth advisory. Much of his talk hit the strengths of his finance startup, Personal Capital, without being a blatant sales pitch. Great presentation, Bill!
The MoneyShow promoters displayed their own proprietary investment sentiment indicator, collated from attendee responses. Attendees still expect a rising S&P 500 in 2013 and a steady unemployment rate at 7%. They plan on buying more stocks. Okay folks, but your due diligence needs to be as robust as mine. My own seminar presented a detailed due diligence checklist that I've spent years developing.
The Everbank folks think we're paused at a crossroads. They presented a FRED chart of nominal GDP growing, but to me that's more an indicator of inflation than economic growth. Their stats on just how little money most Americans have were depressing, like the median figure for financial holdings at $6000. I'm not in the top 1% but I feel like I should be compared to people at that level. Everbank noted that the only real job growth in the 2000s was defense-related. Manufacturing is no longer a job creating sector because it isn't labor intensive.
Legendary stock analyst Laszlo Birinyi spoke on inefficiency in the stock market. He had a couple of truisms, like "don't sell into strength," which I didn't quite grok. Maybe this WSJ data set is what he meant. He thinks money flows are the best tools for understanding the stock market but he didn't mention any sources. Maybe he means data like this money flows report in the WSJ's Market Data Center. It seems like a pretty raw supply/demand technique but I'll have more to say about it after I've studied Birinyi's own money flow methodology. He also uses a cyclically adjusted P/E to make buy/sell decisions and call market turning points. I've been wrong when I've tried to call market turning points so I'll check out his system. I agree with him that technical analysis doesn't work, but some speakers here will swear by it. Laszlo lamented that investors today are on their own because institutional money managers don't read, think, study, or practice. He said other money managers never asked him how he outperformed because they thought he was just lucky. I witnessed all of that behavior inside investment firms where I worked. I want nothing to do with those people.
Next up was Doug Roberts' Channel Capital Research speaking on the QE-driven rally. Follow the Fed to Investment Success lays out Doug's thesis. The Fed has driven down bond yields and boosted bond valuations, forcing investors to take on more risk. QE3 is different from previous rounds because of its indefinite size and duration. Hew drew a brilliant analogy with markets in the 1930s, where low to negative real interest rates and violent bear markets in equities destroyed investors. The oil shocks of the 1970s had similar effects, where inflation rose and equities dropped. Accommodative Fed policy can last longer than rational investors can expect. Crises and shocks can always surprise policymakers. Mean regression will penalize long-term returns. I asked Doug what could cause a run on the US dollar by foreign investors. He answered that a Middle East conflict could cause autocratic leaders to take power, or that China's internal conflict between its military leaders and its Western-educated business elite could become a power grab that sparks open military conflict. His basic analogy was with political turmoil in Germany in the 1930s.
Ronald Muhlenkamp, the patriarch of Muhlenkamp, gave his first talk on natural gas an an energy game changer. I'll cover his second talk farther down this article. He noted that natural gas at $3/mcf equals coal's price. Natural gas has always been a local commodity because it can't be shipped economically without being compressed into LNG or constructing pipelines. He gave an example of how the shale gas boom is lowering consumers' commodity charges on home heating bills. The cost spread of crude oil versus natural gas is currently too wide to be sustained. Changing the fuel mix of over-the-road trucks to NG will lower the price of diesel fuel. Steel plants now use NG as a feedstock. Comparing NG to other energy sources reveals that it takes seven or eight wind turbines to equal the energy output of one typical NG well. He also noted that NG wells have a much lower acreage footprint that solar or wind installations. Ron said that coal has gotten a lot cleaner and US carbon emissions are now below the levels specified in the Kyoto Protocols even though we never ratified that treaty. Other Kyoto signatories are still above the limits. Ron said that the concerns about water use in NG fracking are overblown because using 1M gallons on 40 acres is the equivalent of less than an inch of rain on said property. He mentioned that T. Boone Pickens' Clean Energy Fuels is building coast-to-coast NG filling stations for long-haul trucks. I asked Ron if the Henry Hub price is a decent proxy for world NG prices. He said not necessarily because NG prices really are discrete by region. Ron closed by saying that he likes Sam Walton's book on retailing because that's how the guy got rich as a middleman; as a purchasing agent, he delivered goods to markets more cheaply. I guess that's the analogy with NG distribution.
I listened briefly to a presentation on managed futures but departed because I'd heard the main points before, and I even gave a pitch like this once when I was a licensed broker at a large firm trying to sell a managed futures product. The CFTC has regulations governing futures commission merchants (FCMs) and introducing brokers. Alfidi Capital doesn't fall into either of those categories. The CME Group is a popular market for futures traders. I don't trade futures. I believe futures are only relevant for businesses that want to hedge against adverse price movements for commodities they produce or transport. Turning the futures market into just another casino for retail investors is IMHO an exercise in futility. How deep is a given futures market's liquidity? Can an investor really unwind positions instantly? What is the counterparty risk? I'll look for answers to these questions in a future blog article, with the sad case histories of Long Term Capital Management and MF Global as examples of what can go wrong. Oh yeah, one more thing on managed futures. Reg FD on selective disclosure pretty much eliminated the ability of actively managed futures to generate alpha.
The Forbes columnist roundtable was a fun panel, primarily because bond guru Marilyn Cohen was on it. The panel seemed to hold a consensus that the Fed's tapering is inevitable. IMHO the Fed is already losing control of the long end of the yield curve. The panel hinted that this is happening by noting big drops in the value of long term bonds and mortgage REITs. Every panelist had their own approach to ideal portfolio construction but Marilyn likes split-rated bonds (i.e. bonds where rating agencies differ on the ultimate rating, implying the bond may be undervalued) and individual junk bonds from firms that have pricing power. She also thinks the Detroit bankruptcy will be a seminal event for the muni bond market, predicting the case will go to the US Supreme Court and contagion coming to other states' bonds. The stock picking columnists on this panel mentioned stocks that are driven by consumers' disposable income. Those are stocks I avoid. They also mentioned some new spinoff ETF (maybe Guggenheim's CSD, I didn't catch the ticker), which is another thing I'll avoid because spinoffs are the result of active decision rules and don't belong in a passive index. One panelist said that some large gold miners tie their dividends to the price of gold. I didn't know that, but it makes some sense because the price of gold determines how much cash miners can get for their metal. The panelists discussed their sell disciplines. They all have price level rules except Marilyn. Her sell rule for a bond is to sell upon discovering any accounting discrepancy in the issuer, any private equity buyout attempt of an issuer (because the target issues new bonds that denigrate the existing bondholders' interest coverage), and any denigration of yield when rolling down the yield curve. Marilyn Cohen is brilliant, and I told her so after the panel was over. I heard her speak at the first MoneyShow I attended in 2001 and she's as sharp as ever. I respect her because she understands fundamental drivers of a bond's value. Marilyn shared a couple of her corporate bond picks and said bondholders don't like share repurchases because those actions divert cash flow from potential bond interest payments. The panel let the audience chew on the arbitrage potential between GDX and GLD by going long miners and short paper bullion. It's not a perfect arbitrage because it's an apples-to-oranges comparison, but it's a useful mental exercise in demonstrating that the price of gold has outrun the profitability of gold miners. Marilyn's final zinger was to say that I Savings Bonds are a bomb due to lack of inflation, but even she is skeptical of the US government's reported inflation numbers. Just wait, Marilyn, because when hyperinflation really takes off those I-Bonds will be even worse bombs.
I got to hear more from Marilyn Cohen when she held her own seminar on remedies for situations when management disregards bondholders. Check out her work at Envision Capital Management. Marilyn reiterated that M&A and spinoffs affect bonds, and that accounting improprieties are sell triggers for corporate bonds. Acquirers issue bonds to fund their takeovers, but a failed acquisition makes these newer bonds less desirable than older bonds. Private equity buyouts hurt existing bondholders if they don't have covenants with change of control provisions in their bonds. She said the median equity in private equity buyouts is 40%, and any less means existing bondholders suffer. She warned us all to stay away from covenant-light bonds and to read prospectuses for covenants. Bond indentures with change of control provisions ensure that your bonds are taken out at a premium to par. High coupon bonds deserve attention in buyouts; she sells them upon a buyout's announcement. Bond clawbacks can happen if an issuer has the right to buy back a percentage of bonds issued. A clawback action is more typical of junk bonds and not so much for investment grade bonds. Buyout targets take on the acquirer's bond rating. The bond indenture will describe the make-whole provision of any potential clawback offer. Bond buyers must beware of these clawback provisions! Marilyn also advised us all not to buy bonds in private equity companies themselves, because they use those bond issues to pay themselves dividends. She also told us not to buy pension obligation bonds, because they're taxable. She wants us to stay away from general obligation munis issued in problem areas (I'm thinking Detroit, Stockton, etc.) or that need appropriations. She really likes senior lien airport revenue bonds, personal income tax (PIT) bonds, sales tax revenue bonds, and water/sewer bonds. She also likes bonds of companies that just emerged from bankruptcy because they have clean balance sheets. Way to go, Marilyn!
I attended Ron Muhlenkamp's second seminar on the squeeze effects of taxes and interest rates. When someone impresses me, I elect to learn everything I can from them. He noted that government has never collected more than 20% of GDP as taxes; please refer to Hauser's Law for confirmation. If the federal deficit grows less than GDP, the debt-to-GDP ratio gets healthier. Ron also gave us a hint on how frugal lifestyles beget wealth. He said buying used cars helps you get rich, and one should never borrow to buy a depreciating asset. I'd caveat that by saying that a depreciating asset that generates cash flow may be worth the debt needed to buy it. Entrepreneurs who buy taxi cabs, dump trucks, limousines, or hearses should at least calculate the NPV including the periodic negative outlays for debt repayments. Ron noted that higher taxes won't cure the federal deficit because people will just work less. Defined benefit pension plans will bankrupt employers. I'm pretty sure I blogged about that at some point and that's why I read balance sheets to identify underfunded pension liabilities.
I attended Marilyn Cohen's second seminar on how the bond crisis is moving at glacial speed. Like I said before, I pay attention to people who know what they're talking about. She borrowed the term "Global Thermonuclear Devaluation" from finance guru Mark Grant to describe what happens after QE. The best thing Marilyn did for her audience today was to share a method for minimizing taxes. The Affordable Care Act's tax on capital gains from high earners is unpopular but bondholders can amortize premiums to avoid it. Amortize the premium of a taxable bond by taking it as an annual deduction on your income tax returns, rather than using it as a capital loss at maturity or sale. The Form 1099 from a brokerage will show the adjusted cost and premium only for the last year an investor owned a bond. Amortizing it annually will reduce the ACA's tax. Competent CPAs know how to calculate this amortization. I think the risk in this approach lies in the ability of the IRS to change allowable amortization on a whim. Marilyn thinks it's unique that all new bond issues are at premiums now because ZIRP keeps short term rates at zero. You'll never find bonds at par or discount anymore because of ZIRP. She thinks Payment-In-Kind (PIK) bonds are horrible because the issuer (usually distressed) can keep paying in PIKs like an eternal Ponzi. She noted that even private equity firms are now issuing PIKs. Which ones?! I don't think I want to find out. She admonished us to get more selective on munis, because Detroit really has changed everything. Many other muni issuers are just as troubled. Investors in general obligation (GO) bonds may become unsecured creditors. She said any bonds whose revenues rest partly on federal grants are risky, with Build America Bonds (BABs) as a prime example. The BAB indentures state that they can be called at par if the federal government cuts its subsidy. Sequestration puts all grants and subsidies at risk. She thought GARVEE bonds for highways were usually safe, until now. The Treasury Offset Program (TOP) can withhold money from these bonds' repayments. The federal assistance built into some munis is part of Marilyn's glacial crisis picture. She disparages "yield hogs," investors who just chase high yields with no concern for covenant risks. I saw a variant of the yield hog breed in some writers who extolled the value of high-interest savings accounts in Cyprus before that country's banking system went into lockdown. Marilyn thinks California's high speed rail project is a boondoggle and that's part of the reason she now prefers revenue bonds; GO issues are funding useless projects. She likes "intercept bonds" but I don't think those originate with California issuers. Marilyn uses Investing In Bonds for research and thinks everyone should use it too. Okay, I sure will.
That's the exhaustive summary, with pithy italicized Alfidi Capital commentary, of all the seminars I attended. I already blogged about John T. Reed's MoneyShow seminar because it was too good to delay.
I want to impart a few more random but related Alfidi Capital observations before I wrap up this report.
#1) I am really starting to suspect that oil and gas royalty trusts belong in tax advantaged accounts but I need to look into some rules to be sure. The payouts from a royalty trust include both return of principal and additional yield. Eventually the principal will be zero as wells deplete.
#2) IMHO rising real interest rates will eventually crash the value of bonds (particularly Treasuries) that banks hold on their balance sheets, destroying their capital adequacy ratios.
#3) Pension liability analysis must be part of any public company valuation.
#4) The normal interest rate for a 10-year Treasury may very well be its average since 1962, which is 6.58%. The impact of a mean reversion to this figure from where we are now will be hugely adverse for stocks, bonds, and housing.
These four observations, plus everything else I learned at the MoneyShow San Francisco 2013, play a huge role in how I invest my own money. I'm totally convinced that the investing public is better off for reading my synopses of investment conferences and that my own seminar added tremendous value to MoneyShow 2013. I'll see you again next year.
Thank you to Kim Githler and Charles Githler for allowing me time on your show's calendar. Kim kicked off the conference in her usual way by covering her basic philosophies: capital preservation, the big picture, and adapting to change. She noted that strategies for handling inflation and deflation are different and that long-term stock market investors are rewarded. Her take on an old adage was a classic: "Finish your homework. People in India and China are starving - for your job." Charles spoke next; he thinks the US is at major risk of deflation (hence the Fed's QE goal of asset appreciation). He interprets rising real 10-year yields as the result of investors demanding more reward for the risk they take. Referring to the "2020 scenario" of energy independence for North America, Charles thinks materials and energy may outperform. I appreciated his mention of GDX and GDXJ (the gold mining ETF tickers) as beaten-down value plays that may also be useful as inflation hedges. There may be some life in my GDX holdings yet if other luminaries come around.
The first keynoter from TD Ameritrade covered his firm's Investor Movement Index (IMX), which I take to be a Big Data compilation of their clients' aggregate trade activity that measures market sentiment. I don't use sentiment indicators because I consider most retail investors to be reactive rather than contemplative. Some hedge fund somewhere can probably throw the IMX into one of their algorithms and measure its signal strength.
The keynoter from S+P Capital IQ said that bullish market action in January and February usually signals a positive twelve month total return, but I'm skeptical. Ask anyone who was in the markets from late 2008 to early 2009 how the crisis impacted their annual returns. He noted that the number of "all-time high days" in this bull market are below historical averages; once again, I'm skeptical that this is anything other than random noise. He noted that narrow yield differentials between the S&P 500 and the 10-year Treasury are generally good for bull markets but I must caveat that with some kind of adjustment for risk. Only in recent years have investors ignored risk and focused exclusively on total return, and that's only because QE has driven them out of cash and savings accounts. IHS Global Insight believes that most developed countries have passed the troughs in their business cycles. I'd like to see IHS's track record in forecasting economic turning points; it's not obvious from their product page.
Roger McNamee from Elevation Partners (and let's not forget his rock band, Moonalice, whom I've heard live) had ten hypotheses about tech that probably went over the heads of most MoneyShow attendees. I think MoneyShow attendees are much more intelligent than the average American, but not all of them are the type of innovators who would launch or fund a tech startup. He thinks there's no income overlap between mobile apps and the web, partly because apps are the search engines for mobile. He thinks Apple should pivot to the cloud and the Google's Android has spawned incompatible systems that degrade app experiences. He continued to pound Android, saying its OEMs often lose money on hardware. I'd take a look at Samsung's sales before I count out Android makers. Roger likes that HTML5 incorporates Flash, which gives it more design flexibility and makes monetization easier. He predicts that "home cloud" architecture offering remote access to lifestyle devices is coming. I see that as another manifestation of VCs going for IoT as the next funding trend, something I've blogged about this year. He also predicts that content providers will have to move to broadband distribution to survive given the decline of cable and satellite channels. His most alarming hypothesis is that the "sharing economy" allows consumers to imitate corporations' capital efficiency techniques (like outsourcing), his evidence being that Millennials are renting capital goods for short periods via Airbnb and Zipcar. I hope he knows what's driving this phenomenon. Millennials' income is constrained by student loan debt and lack of upward mobility. They must rent cars because they can't afford to own them. They must lease out their homes and apartments because they really need the extra income. Check out Roger's slide show on Elevation Partners' mission page.
Steve Forbes was the next keynoter. He's still pretty sharp but sooner or late the next generation of handsome, intelligent keynoters will have to replace the old guard, and that's exactly why I'm appearing at these conferences. Steve noted that middle class incomes are still declining after four years of so-called economic recovery, similar to a pattern in the 1930s. The MoneyShow audience applauded his prediction that the Democratic Party would lose the US Senate due to the Affordable Care Act's implosion. I'm sad to note that such a reversal is probably a pipe dream. Americans are addicted to entitlements at all levels of our society. These programs and their political sponsors will remain in place until a hyperinflationary depression eliminates their funding sources. Steve thinks fixing federal spending to a percentage of GDP is a more effective budgeting tool than a legislated debt ceiling. I don't think that is going to work. Government statistics are already significantly altered, gamed, adjusted, and otherwise misused as to be unreliable, according to Shadow Government Statistics. Targeting GDP will just incentivize the policy apparatus to artificially inflate GDP so the government can collect more revenue. The best guide for targeting federal revenue collection and spending IMHO is Hauser's Law. Steve went back to his advocacy for the gold standard, another impossibility because it's too inflexible as a rule. The Rentenmark is a better example because it was backed by a broad range of hard assets.
Jim Rogers was the final keynoter. He's still pretty sharp but he was starting to show his age while wandering all over the stage. He's proud of his young daughters for speaking Mandarin and showed off their videos from a speech exhibition. The guy has been a relentless China bull for something like forever. Someone needs to tell him that China's most important economic figures are falsified and that English is the international language of business. I could beat the ground about how China will get old before it will get rich, its resource shortages and little arable land, its economy's fixation on the pork cycle, and the insolvency of its shadow banking system. I do concur with the rest of his general advocacy of mining, energy, and agriculture. Jim set up his family's bank accounts in Asia because he doesn't trust the US dollar. I hope he calculated those banks' Basel capital adequacy ratios first. He noted that simultaneous monetary stimulus in the largest developed economies is unprecedented and that we should prepare for that to end. I've been saying that too but I don't think Jim reads my blog. He's shorting junk bonds. I'm not, because I don't want to pay the bonds' interest to a counterparty in addition to the margin interest I'd have to pay. He's still bullish on agriculture because a dearth of farmers will make farming careers more lucrative. Jim likes Canada's economy and currency but doesn't like US TIPS due to their tax consequences at maturity. He then rolled into a rambling Q&A and was very friendly with Asian women in the audience.
The vendor booths on the expo floor had more representation from hard assets companies and investment projects than I've ever seen at a MoneyShow. Big Oil (supermajors), Little Oil (prospectors), pipeline MLPs, timber, REITs, BDCs, and non-US agriculture were all there. I'll cover these selectively, in pretty broad swaths, working backwards.
Let's consider farmland. I can understand investing in agribusiness stocks with an international presence because they must publish detailed financial statements. A pure-play deal in Latin America or the Baltics requires a different kind of due diligence. Investors would have to physically travel to the country in question to see the land, meet the farmers, and examine the title document in the native language. That's more effort than I can make just for one potential investment. Please don't pitch me on the ability of coconut oil to treat Alzheimer's disease. Please don't tell me that a bunch of neem trees are a miracle without explaining the plan to cultivate them outside their native habitat. Plants have natural pests and predators. I'd say investors have natural predators too. I'd much rather invest in permaculture, which I can do right here at home.
Let's talk about business development companies (BDCs). I picked up flyers for a couple of these at the MoneyShow. In normal times BDCs are useful additions to a fixed income portfolio. These are not normal times. The likelihood of hyperinflation in the US means any security based on fixed income flows is the kiss of death. Too many BDCs have portfolios structured as loan funds. The companies owing those loans to the BDCs will pay them off with worthless dollars in hyperinflation. Structuring the loans as secured with liens on assets won't matter; the indebted companies will end hyperinflation much healthier as their liabilities are inflated away. BDCs that structure their investments as convertible debt or project equity might fare better in hyperinflation for a little while.
Let's mention REITs. John T. Reed's anticipation of nationwide rent control laws puts the kibosh on whatever refuge I might have found in commercial REITs. Residential REITs are similarly out of my consideration. The remaining option would be storage REITs, and I found a suitable candidate for my own money in my blog article earlier this week.
Let's check out timber. I sat through one timber pitch recently. It was (of course) for a project outside the US. No thanks. Timber is a hard asset and thus a potential inflation hedge but it must be structured correctly if it wants my respect. I suspect that much of the infatuation with timber in recent years is the result of timber's correlation with the housing market. Housing booms drive demand for lumber and pulp. The financial sector started to take timber seriously when the Harvard Management Company hired a lumberjack to evaluate timber farms all over the world. The strikes me as analytical overkill. There are simpler and cheaper tools around for evaluating timber. The NCREIF Timberland Index shows the return history for timber investments. The index's declines since the housing bust are a contraindicator to contemporary claims that the housing sector is strong, but those declines may also indicate that the timber sector is underpriced. Institutional investors hire timber investment management organizations (TIMOs) to care for their trees but those structures aren't available to ordinary retail investors. The best the rest of us can do is evaluate timber REITs like Rayonier (RYN), Potlatch Corp. (PCH), and Plum Creek Timber (PCL). Compare them to the timber REIT ETFs with the adorable tickers CUT and WOOD.
Let's look at pipeline MLPs. The only thing preventing me from going long one of these babies (aside from finding one at a decent bargain) is the unresolved question of whether they can raise their rates at will or are limited by FERC to rate increases at set intervals. Pricing power counts for everything in hyperinflation. I'm still digging for the answer.
Let's wrap up my digression by mentioning oil and gas. You've heard me talk about energy many times already on this blog. I've discovered that there's a specialized part of the finance sector called "oil and gas lease banks" that provide capital specifically to drillers. Even oil and gas royalty trusts need access to capital because wells will mechanically fail over time. They must spend capex on maintenance and restoration of production. I don't invest in these tiny little well plays or their lease banks but some people just love the tax advantages. The IRS has an entire handbook devoted oil and gas, and there's a cottage industry of accountants and attorneys devoted to figuring it out. There's also a cottage industry of community banks with internal offices devoted to helping oil and gas royalty owners manage their income streams.
Okay, enough of my fixation with oddball asset plays. I'm switching back to the MoneyShow speakers. There were so many talks that I couldn't possibly cover them all, so I only attended those that mattered for my own portfolio or professional development.
Serial entrepreneur Bill Harris of Personal Capital explained how money meets tech in financial services. His three requirements for a money management service are that it should be virtual, secure, and personal. Virtualization should be a disruptive force in a sector that has four times as many bank branches now as it did before the ATM, especially now that digitization has transformed financial projects into intangibles. The security of vaults and access can now be delivered with smartphone 3-factor authentication (password / phone activation / voiceprint). Technology now allows for mass personalization that obliterates the old crasftsperson model of wealth advisory. Much of his talk hit the strengths of his finance startup, Personal Capital, without being a blatant sales pitch. Great presentation, Bill!
The MoneyShow promoters displayed their own proprietary investment sentiment indicator, collated from attendee responses. Attendees still expect a rising S&P 500 in 2013 and a steady unemployment rate at 7%. They plan on buying more stocks. Okay folks, but your due diligence needs to be as robust as mine. My own seminar presented a detailed due diligence checklist that I've spent years developing.
The Everbank folks think we're paused at a crossroads. They presented a FRED chart of nominal GDP growing, but to me that's more an indicator of inflation than economic growth. Their stats on just how little money most Americans have were depressing, like the median figure for financial holdings at $6000. I'm not in the top 1% but I feel like I should be compared to people at that level. Everbank noted that the only real job growth in the 2000s was defense-related. Manufacturing is no longer a job creating sector because it isn't labor intensive.
Legendary stock analyst Laszlo Birinyi spoke on inefficiency in the stock market. He had a couple of truisms, like "don't sell into strength," which I didn't quite grok. Maybe this WSJ data set is what he meant. He thinks money flows are the best tools for understanding the stock market but he didn't mention any sources. Maybe he means data like this money flows report in the WSJ's Market Data Center. It seems like a pretty raw supply/demand technique but I'll have more to say about it after I've studied Birinyi's own money flow methodology. He also uses a cyclically adjusted P/E to make buy/sell decisions and call market turning points. I've been wrong when I've tried to call market turning points so I'll check out his system. I agree with him that technical analysis doesn't work, but some speakers here will swear by it. Laszlo lamented that investors today are on their own because institutional money managers don't read, think, study, or practice. He said other money managers never asked him how he outperformed because they thought he was just lucky. I witnessed all of that behavior inside investment firms where I worked. I want nothing to do with those people.
Next up was Doug Roberts' Channel Capital Research speaking on the QE-driven rally. Follow the Fed to Investment Success lays out Doug's thesis. The Fed has driven down bond yields and boosted bond valuations, forcing investors to take on more risk. QE3 is different from previous rounds because of its indefinite size and duration. Hew drew a brilliant analogy with markets in the 1930s, where low to negative real interest rates and violent bear markets in equities destroyed investors. The oil shocks of the 1970s had similar effects, where inflation rose and equities dropped. Accommodative Fed policy can last longer than rational investors can expect. Crises and shocks can always surprise policymakers. Mean regression will penalize long-term returns. I asked Doug what could cause a run on the US dollar by foreign investors. He answered that a Middle East conflict could cause autocratic leaders to take power, or that China's internal conflict between its military leaders and its Western-educated business elite could become a power grab that sparks open military conflict. His basic analogy was with political turmoil in Germany in the 1930s.
Ronald Muhlenkamp, the patriarch of Muhlenkamp, gave his first talk on natural gas an an energy game changer. I'll cover his second talk farther down this article. He noted that natural gas at $3/mcf equals coal's price. Natural gas has always been a local commodity because it can't be shipped economically without being compressed into LNG or constructing pipelines. He gave an example of how the shale gas boom is lowering consumers' commodity charges on home heating bills. The cost spread of crude oil versus natural gas is currently too wide to be sustained. Changing the fuel mix of over-the-road trucks to NG will lower the price of diesel fuel. Steel plants now use NG as a feedstock. Comparing NG to other energy sources reveals that it takes seven or eight wind turbines to equal the energy output of one typical NG well. He also noted that NG wells have a much lower acreage footprint that solar or wind installations. Ron said that coal has gotten a lot cleaner and US carbon emissions are now below the levels specified in the Kyoto Protocols even though we never ratified that treaty. Other Kyoto signatories are still above the limits. Ron said that the concerns about water use in NG fracking are overblown because using 1M gallons on 40 acres is the equivalent of less than an inch of rain on said property. He mentioned that T. Boone Pickens' Clean Energy Fuels is building coast-to-coast NG filling stations for long-haul trucks. I asked Ron if the Henry Hub price is a decent proxy for world NG prices. He said not necessarily because NG prices really are discrete by region. Ron closed by saying that he likes Sam Walton's book on retailing because that's how the guy got rich as a middleman; as a purchasing agent, he delivered goods to markets more cheaply. I guess that's the analogy with NG distribution.
I listened briefly to a presentation on managed futures but departed because I'd heard the main points before, and I even gave a pitch like this once when I was a licensed broker at a large firm trying to sell a managed futures product. The CFTC has regulations governing futures commission merchants (FCMs) and introducing brokers. Alfidi Capital doesn't fall into either of those categories. The CME Group is a popular market for futures traders. I don't trade futures. I believe futures are only relevant for businesses that want to hedge against adverse price movements for commodities they produce or transport. Turning the futures market into just another casino for retail investors is IMHO an exercise in futility. How deep is a given futures market's liquidity? Can an investor really unwind positions instantly? What is the counterparty risk? I'll look for answers to these questions in a future blog article, with the sad case histories of Long Term Capital Management and MF Global as examples of what can go wrong. Oh yeah, one more thing on managed futures. Reg FD on selective disclosure pretty much eliminated the ability of actively managed futures to generate alpha.
The Forbes columnist roundtable was a fun panel, primarily because bond guru Marilyn Cohen was on it. The panel seemed to hold a consensus that the Fed's tapering is inevitable. IMHO the Fed is already losing control of the long end of the yield curve. The panel hinted that this is happening by noting big drops in the value of long term bonds and mortgage REITs. Every panelist had their own approach to ideal portfolio construction but Marilyn likes split-rated bonds (i.e. bonds where rating agencies differ on the ultimate rating, implying the bond may be undervalued) and individual junk bonds from firms that have pricing power. She also thinks the Detroit bankruptcy will be a seminal event for the muni bond market, predicting the case will go to the US Supreme Court and contagion coming to other states' bonds. The stock picking columnists on this panel mentioned stocks that are driven by consumers' disposable income. Those are stocks I avoid. They also mentioned some new spinoff ETF (maybe Guggenheim's CSD, I didn't catch the ticker), which is another thing I'll avoid because spinoffs are the result of active decision rules and don't belong in a passive index. One panelist said that some large gold miners tie their dividends to the price of gold. I didn't know that, but it makes some sense because the price of gold determines how much cash miners can get for their metal. The panelists discussed their sell disciplines. They all have price level rules except Marilyn. Her sell rule for a bond is to sell upon discovering any accounting discrepancy in the issuer, any private equity buyout attempt of an issuer (because the target issues new bonds that denigrate the existing bondholders' interest coverage), and any denigration of yield when rolling down the yield curve. Marilyn Cohen is brilliant, and I told her so after the panel was over. I heard her speak at the first MoneyShow I attended in 2001 and she's as sharp as ever. I respect her because she understands fundamental drivers of a bond's value. Marilyn shared a couple of her corporate bond picks and said bondholders don't like share repurchases because those actions divert cash flow from potential bond interest payments. The panel let the audience chew on the arbitrage potential between GDX and GLD by going long miners and short paper bullion. It's not a perfect arbitrage because it's an apples-to-oranges comparison, but it's a useful mental exercise in demonstrating that the price of gold has outrun the profitability of gold miners. Marilyn's final zinger was to say that I Savings Bonds are a bomb due to lack of inflation, but even she is skeptical of the US government's reported inflation numbers. Just wait, Marilyn, because when hyperinflation really takes off those I-Bonds will be even worse bombs.
I got to hear more from Marilyn Cohen when she held her own seminar on remedies for situations when management disregards bondholders. Check out her work at Envision Capital Management. Marilyn reiterated that M&A and spinoffs affect bonds, and that accounting improprieties are sell triggers for corporate bonds. Acquirers issue bonds to fund their takeovers, but a failed acquisition makes these newer bonds less desirable than older bonds. Private equity buyouts hurt existing bondholders if they don't have covenants with change of control provisions in their bonds. She said the median equity in private equity buyouts is 40%, and any less means existing bondholders suffer. She warned us all to stay away from covenant-light bonds and to read prospectuses for covenants. Bond indentures with change of control provisions ensure that your bonds are taken out at a premium to par. High coupon bonds deserve attention in buyouts; she sells them upon a buyout's announcement. Bond clawbacks can happen if an issuer has the right to buy back a percentage of bonds issued. A clawback action is more typical of junk bonds and not so much for investment grade bonds. Buyout targets take on the acquirer's bond rating. The bond indenture will describe the make-whole provision of any potential clawback offer. Bond buyers must beware of these clawback provisions! Marilyn also advised us all not to buy bonds in private equity companies themselves, because they use those bond issues to pay themselves dividends. She also told us not to buy pension obligation bonds, because they're taxable. She wants us to stay away from general obligation munis issued in problem areas (I'm thinking Detroit, Stockton, etc.) or that need appropriations. She really likes senior lien airport revenue bonds, personal income tax (PIT) bonds, sales tax revenue bonds, and water/sewer bonds. She also likes bonds of companies that just emerged from bankruptcy because they have clean balance sheets. Way to go, Marilyn!
I attended Ron Muhlenkamp's second seminar on the squeeze effects of taxes and interest rates. When someone impresses me, I elect to learn everything I can from them. He noted that government has never collected more than 20% of GDP as taxes; please refer to Hauser's Law for confirmation. If the federal deficit grows less than GDP, the debt-to-GDP ratio gets healthier. Ron also gave us a hint on how frugal lifestyles beget wealth. He said buying used cars helps you get rich, and one should never borrow to buy a depreciating asset. I'd caveat that by saying that a depreciating asset that generates cash flow may be worth the debt needed to buy it. Entrepreneurs who buy taxi cabs, dump trucks, limousines, or hearses should at least calculate the NPV including the periodic negative outlays for debt repayments. Ron noted that higher taxes won't cure the federal deficit because people will just work less. Defined benefit pension plans will bankrupt employers. I'm pretty sure I blogged about that at some point and that's why I read balance sheets to identify underfunded pension liabilities.
I attended Marilyn Cohen's second seminar on how the bond crisis is moving at glacial speed. Like I said before, I pay attention to people who know what they're talking about. She borrowed the term "Global Thermonuclear Devaluation" from finance guru Mark Grant to describe what happens after QE. The best thing Marilyn did for her audience today was to share a method for minimizing taxes. The Affordable Care Act's tax on capital gains from high earners is unpopular but bondholders can amortize premiums to avoid it. Amortize the premium of a taxable bond by taking it as an annual deduction on your income tax returns, rather than using it as a capital loss at maturity or sale. The Form 1099 from a brokerage will show the adjusted cost and premium only for the last year an investor owned a bond. Amortizing it annually will reduce the ACA's tax. Competent CPAs know how to calculate this amortization. I think the risk in this approach lies in the ability of the IRS to change allowable amortization on a whim. Marilyn thinks it's unique that all new bond issues are at premiums now because ZIRP keeps short term rates at zero. You'll never find bonds at par or discount anymore because of ZIRP. She thinks Payment-In-Kind (PIK) bonds are horrible because the issuer (usually distressed) can keep paying in PIKs like an eternal Ponzi. She noted that even private equity firms are now issuing PIKs. Which ones?! I don't think I want to find out. She admonished us to get more selective on munis, because Detroit really has changed everything. Many other muni issuers are just as troubled. Investors in general obligation (GO) bonds may become unsecured creditors. She said any bonds whose revenues rest partly on federal grants are risky, with Build America Bonds (BABs) as a prime example. The BAB indentures state that they can be called at par if the federal government cuts its subsidy. Sequestration puts all grants and subsidies at risk. She thought GARVEE bonds for highways were usually safe, until now. The Treasury Offset Program (TOP) can withhold money from these bonds' repayments. The federal assistance built into some munis is part of Marilyn's glacial crisis picture. She disparages "yield hogs," investors who just chase high yields with no concern for covenant risks. I saw a variant of the yield hog breed in some writers who extolled the value of high-interest savings accounts in Cyprus before that country's banking system went into lockdown. Marilyn thinks California's high speed rail project is a boondoggle and that's part of the reason she now prefers revenue bonds; GO issues are funding useless projects. She likes "intercept bonds" but I don't think those originate with California issuers. Marilyn uses Investing In Bonds for research and thinks everyone should use it too. Okay, I sure will.
That's the exhaustive summary, with pithy italicized Alfidi Capital commentary, of all the seminars I attended. I already blogged about John T. Reed's MoneyShow seminar because it was too good to delay.
I want to impart a few more random but related Alfidi Capital observations before I wrap up this report.
#1) I am really starting to suspect that oil and gas royalty trusts belong in tax advantaged accounts but I need to look into some rules to be sure. The payouts from a royalty trust include both return of principal and additional yield. Eventually the principal will be zero as wells deplete.
#2) IMHO rising real interest rates will eventually crash the value of bonds (particularly Treasuries) that banks hold on their balance sheets, destroying their capital adequacy ratios.
#3) Pension liability analysis must be part of any public company valuation.
#4) The normal interest rate for a 10-year Treasury may very well be its average since 1962, which is 6.58%. The impact of a mean reversion to this figure from where we are now will be hugely adverse for stocks, bonds, and housing.
These four observations, plus everything else I learned at the MoneyShow San Francisco 2013, play a huge role in how I invest my own money. I'm totally convinced that the investing public is better off for reading my synopses of investment conferences and that my own seminar added tremendous value to MoneyShow 2013. I'll see you again next year.
Thursday, August 22, 2013
Saving College Really Means Saving Securitized Student Loans
The Administration has a bold plan designed to keep American youth flowing into the post-secondary education pipeline. This plan will rate institutions of higher education on the quality of after-college careers their graduates achieve and steer more federal grant money to those colleges that score well. I think this plan is brilliant in several ways (from a plutocratic perspective, anyway).
It will reward those universities whose graduates gravitate toward high-paying occupations. The Ivies and Seven Sisters alumni who go into law, finance, and corporate management will see their schools richly rewarded. The for-profit diploma mills whose grads head back to the fast food counter will get nothing. This will accelerate the college market shakeout that is long overdue. A large number of people don't belong in college, so fewer colleges means more workers don't need to waste their time with something beyond their ability.
The next part of the plan's brilliance lies in its perpetuation of student loan indebted servitude. It does little to control students' costs. It continues funding Pell grants and does not make student loans dischargeable in bankruptcy. Helping economically disadvantaged students is nice but it will come at the expense of middle class students who will continue to be priced out of college unless they take out enormous loans.
Most significantly for the financial markets, the plan grandfathers pre-2008 loans as ineligible for income-based repayment plans. This preserves the value of cash flows from students to loan servicers to holders of securitized student loan pools. The Administration's plan is thus a backstop (or "bailout" if you please) for the valuations of collateralized Sallie Mae securities in the portfolios of every pension fund in the US. That is the single most important thing to know about any plan for education reform in the US.
I like the plan's allowance for experimentation with competency-based models and MOOCs. Those concepts will succeed just fine without federal funding so this federal "help" will probably end up corralling them into something the educational establishment can control. That control will never succeed, of course, but regulators are going to try. Information wants to be free and much of what we know as education will soon be free thanks to MOOCs.
The myth that credentialing leads to rising income and social status has served the nation's elite well as a cash cow. It will disappear only after much resistance and probably a round of hyperinflation.
It will reward those universities whose graduates gravitate toward high-paying occupations. The Ivies and Seven Sisters alumni who go into law, finance, and corporate management will see their schools richly rewarded. The for-profit diploma mills whose grads head back to the fast food counter will get nothing. This will accelerate the college market shakeout that is long overdue. A large number of people don't belong in college, so fewer colleges means more workers don't need to waste their time with something beyond their ability.
The next part of the plan's brilliance lies in its perpetuation of student loan indebted servitude. It does little to control students' costs. It continues funding Pell grants and does not make student loans dischargeable in bankruptcy. Helping economically disadvantaged students is nice but it will come at the expense of middle class students who will continue to be priced out of college unless they take out enormous loans.
Most significantly for the financial markets, the plan grandfathers pre-2008 loans as ineligible for income-based repayment plans. This preserves the value of cash flows from students to loan servicers to holders of securitized student loan pools. The Administration's plan is thus a backstop (or "bailout" if you please) for the valuations of collateralized Sallie Mae securities in the portfolios of every pension fund in the US. That is the single most important thing to know about any plan for education reform in the US.
I like the plan's allowance for experimentation with competency-based models and MOOCs. Those concepts will succeed just fine without federal funding so this federal "help" will probably end up corralling them into something the educational establishment can control. That control will never succeed, of course, but regulators are going to try. Information wants to be free and much of what we know as education will soon be free thanks to MOOCs.
The myth that credentialing leads to rising income and social status has served the nation's elite well as a cash cow. It will disappear only after much resistance and probably a round of hyperinflation.
Wednesday, August 21, 2013
Fed July Meeting Notes Hint Taper That Will Never Come
I've said it before and I'll say it again: The Fed is not going to taper of its own accord. It will not taper on a boat, nor will it taper with a goat (apologies to Dr. Seuss). The FOMC meeting notes from July hint at a taper sometime between now and 2014, or whenever, depending on how much improvement they see in the macro numbers. Pfffffffttttt! That's me showing what I think of such baloney.
Every hint of a taper makes the US stock market sink. Consumers are still losing income and can't power a recovery through spending. Read what I wrote back in June about the BIS's finding that central bank monetary stimulus in the world's largest economies is the only thing moving stocks, bonds, and housing higher.
Bubbles are fun to ride on the way up. Timing the popping is impossible. I've avoided this mother of all bubbles and many of my peers in town have not.
Every hint of a taper makes the US stock market sink. Consumers are still losing income and can't power a recovery through spending. Read what I wrote back in June about the BIS's finding that central bank monetary stimulus in the world's largest economies is the only thing moving stocks, bonds, and housing higher.
Bubbles are fun to ride on the way up. Timing the popping is impossible. I've avoided this mother of all bubbles and many of my peers in town have not.
Tuesday, August 20, 2013
Standby Equity Purchase Agreement (SEPA) And Equity Line Funding
I recently discovered an innovative financing arrangement for young companies called the Standby Equity Distribution Agreement, sometimes also called the Standby Equity Purchase Agreement (SEPA). Please don't confuse this acronym with the Single Euro Payments Area, Solar Electric Power Association, Science Education Partnership Award, or Southeastern Power Administration. None of those things have anything to do with a SEPA financing agreement. I only mention them to keep my readers away from distractions.
The company must first register with the SEC by filing the appropriate forms. Companies that execute a SEPA sign a term sheet with a private investor that allows said investor to buy shares in predetermined dollar amounts. The term sheet defines the funding formula under which the company will sell shares to the investor to net its desired amount of capital. That's why this type of deal is also called an "equity line," because it resembles a credit line that draws predefined amounts of capital in tranches.
My concern with this type of arrangement is that it may resemble a floorless convertible debenture that becomes toxic. The term sheet must define a floor price that prevents an investor from bidding down the public trading price of the company. This protects the company from an unscrupulous investor who shorts the stock into a death spiral and prevents it from raising further rounds outside the SEPA. The investor can then buy a controlling interest for very little money and the pre-SEPA investors are diluted into irrelevance.
The SEC knows that convertibles pose risks of dilution. I won't let this death spiral happen to any company in which I hold an early-stage equity stake. I want to see covenants in the term sheet that prevent it from becoming a toxic convertible. The company must define the price floor using a convention like the volume-weighted average price (VWAP) that will enable it to cancel a draw down if the price moves adversely during the funding window. The term sheet should limit the SEPA to the growth period of the company, say two or three years. Beyond that time the company should have sufficient cash flow that it won't need to return to private investors to seek more capital. I also want a covenant that prevents the outside investor from short-selling the stock once they purchase it under a SEPA. The threat of legal action for violating this covenant should be sufficient to scare away SEPA investors who secretly covet total control after cramming down the stock.
Term sheets for equity line SEPAs limit the funding window to a number of days after the company issues the private investor a draw down notice. I am agnostic as to how long this window should be open. It would seem that a company with a very volatile stock should keep the number of days the window is open in the single digits. Less volatile stocks allow the company a longer period during which the VWAP is not expected to deteriorate. Volatility is difficult to anticipate during the pre-registration phase when the term sheet is being drafted and the stock is not trading publicly. The length of this window comes down to trust between the company and investor. I typically don't trust anyone, so my incubated company had better get a longer window for more flexibility. Investors who want to negotiate anything shorter should be prepared to give up something favorable, like fewer shares for the dollar amount invested in each tranche of the equity line.
I can do only so much as an angel investor who does not own a majority stake in a startup. The entrepreneurs need the services of a good securities attorney to help draft the term sheet for a SEPA. I could probably find a few here in the SF Bay Area. I'm not an attorney and my blog articles do not constitute legal advice. The SEPA is useful if its term sheet protects companies from exploitation by predatory investors.
The company must first register with the SEC by filing the appropriate forms. Companies that execute a SEPA sign a term sheet with a private investor that allows said investor to buy shares in predetermined dollar amounts. The term sheet defines the funding formula under which the company will sell shares to the investor to net its desired amount of capital. That's why this type of deal is also called an "equity line," because it resembles a credit line that draws predefined amounts of capital in tranches.
My concern with this type of arrangement is that it may resemble a floorless convertible debenture that becomes toxic. The term sheet must define a floor price that prevents an investor from bidding down the public trading price of the company. This protects the company from an unscrupulous investor who shorts the stock into a death spiral and prevents it from raising further rounds outside the SEPA. The investor can then buy a controlling interest for very little money and the pre-SEPA investors are diluted into irrelevance.
The SEC knows that convertibles pose risks of dilution. I won't let this death spiral happen to any company in which I hold an early-stage equity stake. I want to see covenants in the term sheet that prevent it from becoming a toxic convertible. The company must define the price floor using a convention like the volume-weighted average price (VWAP) that will enable it to cancel a draw down if the price moves adversely during the funding window. The term sheet should limit the SEPA to the growth period of the company, say two or three years. Beyond that time the company should have sufficient cash flow that it won't need to return to private investors to seek more capital. I also want a covenant that prevents the outside investor from short-selling the stock once they purchase it under a SEPA. The threat of legal action for violating this covenant should be sufficient to scare away SEPA investors who secretly covet total control after cramming down the stock.
Term sheets for equity line SEPAs limit the funding window to a number of days after the company issues the private investor a draw down notice. I am agnostic as to how long this window should be open. It would seem that a company with a very volatile stock should keep the number of days the window is open in the single digits. Less volatile stocks allow the company a longer period during which the VWAP is not expected to deteriorate. Volatility is difficult to anticipate during the pre-registration phase when the term sheet is being drafted and the stock is not trading publicly. The length of this window comes down to trust between the company and investor. I typically don't trust anyone, so my incubated company had better get a longer window for more flexibility. Investors who want to negotiate anything shorter should be prepared to give up something favorable, like fewer shares for the dollar amount invested in each tranche of the equity line.
I can do only so much as an angel investor who does not own a majority stake in a startup. The entrepreneurs need the services of a good securities attorney to help draft the term sheet for a SEPA. I could probably find a few here in the SF Bay Area. I'm not an attorney and my blog articles do not constitute legal advice. The SEPA is useful if its term sheet protects companies from exploitation by predatory investors.
Storage REIT Performance and Valuation Comparison
Storage is one sub-sector within real estate that may hold its value throughout an inflationary period provided it is not subject to local or national rent controls. I want to start testing this theory to see just which leading storage REITs deserve my attention. Let's pick a few, shall we? Yahoo Finance gives me the P/E and margin. Reuters gives me the EPS and ROE growth.
Public Storage (PSA)
P/E: 34.44
Profit margin: 51.91%
EPS 5yr growth: 26.64%
ROE 5yr growth: 10.99%
Extra Space Storage (EXR)
P/E: 32.31
Profit margin: 29.26%
EPS 5yr growth: 19.93%
ROE 5yr growth: 5.55%
Sovran Self Storage (SSS)
P/E: 32.46
Profit margin: 26.92%
EPS 5yr growth: -0.99%
ROE 5yr growth: 5.19%
Cube Smart (CUBE)
P/E: N/A, 3yrs net losses
Profit margin: 1.69%
EPS 5yr growth: ???
ROE 5yr growth: -2.52%
I can immediately rule out EXR, SSS, and CUBE for their poor ROEs. I really don't need to look any farther than that if some potential portfolio selection fails even one of my screening criteria. That leaves PSA as the sole self-storage REIT contender. Their long-term debt has trended down for the last three years to the point where it's now less than 2x their net income (and that's been steadily rising BTW). Their free cash flow is mightily positive. Wow, Public Storage is really firing on all cylinders here.
The final step for me is to determine a REIT's intrinsic valuation. I use my hand-dandy cap rate REIT valuation template just for these occasions. Yeah, I know, I wrote that report with REIT ETFs in mind but it still works fine for stand-alone REITs of any kind because they still have to pass through their earnings as dividends. I plugged in the last five years worth of dividends, left inflation at 5% (based on eyeballing SGS's revised estimate), and set my cap rate and discount at 10% each. There's no expense ratio in a single REIT. I got an intrinsic value of $44.99/share and a desired purchase price of $40.49/share. This entry point is a long way down from where PSA currently trades at over $156/share. That doesn't surprise me given PSA's P/E ratio over 34. Everything is seriously overvalued thanks to quantitative easing. I don't pay a premium for anything.
I keep reminding myself that entering the REIT space either through individual securities or ETFs is prohibitively expensive as long as markets are levitating based on nonsense. I will wait for a market crash. The good news is that I now have one more possible anti-inflation hedge.
Full disclosure: No position in any of the securities mentioned at this time.
Public Storage (PSA)
P/E: 34.44
Profit margin: 51.91%
EPS 5yr growth: 26.64%
ROE 5yr growth: 10.99%
Extra Space Storage (EXR)
P/E: 32.31
Profit margin: 29.26%
EPS 5yr growth: 19.93%
ROE 5yr growth: 5.55%
Sovran Self Storage (SSS)
P/E: 32.46
Profit margin: 26.92%
EPS 5yr growth: -0.99%
ROE 5yr growth: 5.19%
Cube Smart (CUBE)
P/E: N/A, 3yrs net losses
Profit margin: 1.69%
EPS 5yr growth: ???
ROE 5yr growth: -2.52%
I can immediately rule out EXR, SSS, and CUBE for their poor ROEs. I really don't need to look any farther than that if some potential portfolio selection fails even one of my screening criteria. That leaves PSA as the sole self-storage REIT contender. Their long-term debt has trended down for the last three years to the point where it's now less than 2x their net income (and that's been steadily rising BTW). Their free cash flow is mightily positive. Wow, Public Storage is really firing on all cylinders here.
The final step for me is to determine a REIT's intrinsic valuation. I use my hand-dandy cap rate REIT valuation template just for these occasions. Yeah, I know, I wrote that report with REIT ETFs in mind but it still works fine for stand-alone REITs of any kind because they still have to pass through their earnings as dividends. I plugged in the last five years worth of dividends, left inflation at 5% (based on eyeballing SGS's revised estimate), and set my cap rate and discount at 10% each. There's no expense ratio in a single REIT. I got an intrinsic value of $44.99/share and a desired purchase price of $40.49/share. This entry point is a long way down from where PSA currently trades at over $156/share. That doesn't surprise me given PSA's P/E ratio over 34. Everything is seriously overvalued thanks to quantitative easing. I don't pay a premium for anything.
I keep reminding myself that entering the REIT space either through individual securities or ETFs is prohibitively expensive as long as markets are levitating based on nonsense. I will wait for a market crash. The good news is that I now have one more possible anti-inflation hedge.
Full disclosure: No position in any of the securities mentioned at this time.
Emerging Market Currencies Scared Down By Fed Taper Talk
BRIC currencies are sinking like stones. That's good for the dollar in the short run because the dollar still looks like the cleanest dirty shirt in the clothing pile. India's rupee is hitting all-time lows. That's good for anyone in the US who wants to import curry spices from India or go there for cheap medical tourist surgery. Australia is not an emerging market but it remains a standout case in non-US markets. Australian debt is in demand even though its currency is falling. Some non-Australian investor is thus getting a major bargain.
Please don't take rising real interest rates in the US as some kind of vote of confidence in the US dollar. The flight from riskier currencies does make the US dollar more attractive but it also makes capital more costly inside the US. This will eventually drive US equity markets down as higher mortgage rates hurt consumers and higher borrowing costs hurt business cash flows. Whatever panicky QE buying the Fed then conducts in response to deteriorating fundamentals will make currency traders lose their confidence in the dollar. I thus expect the dollar to be the last domino to fall among the developed economies' currencies.
If the Fed's hints at tapering were intended to drive investors out of emerging markets and into US Treasuries and equities then it was the most brilliant head-fake ever from a central bank. I don't give the Fed's leaders that much credit, so the more likely explanation is that these emerging market currency selloffs are the unintended consequences of the Fed's risk-off hint. Central banks are not the all-powerful meta-attractors they pretend to be. Monetary policies have unintended consequences, especially when they inflate asset bubbles all around the world. Global markets have postponed the run on the dollar for now.
Please don't take rising real interest rates in the US as some kind of vote of confidence in the US dollar. The flight from riskier currencies does make the US dollar more attractive but it also makes capital more costly inside the US. This will eventually drive US equity markets down as higher mortgage rates hurt consumers and higher borrowing costs hurt business cash flows. Whatever panicky QE buying the Fed then conducts in response to deteriorating fundamentals will make currency traders lose their confidence in the dollar. I thus expect the dollar to be the last domino to fall among the developed economies' currencies.
If the Fed's hints at tapering were intended to drive investors out of emerging markets and into US Treasuries and equities then it was the most brilliant head-fake ever from a central bank. I don't give the Fed's leaders that much credit, so the more likely explanation is that these emerging market currency selloffs are the unintended consequences of the Fed's risk-off hint. Central banks are not the all-powerful meta-attractors they pretend to be. Monetary policies have unintended consequences, especially when they inflate asset bubbles all around the world. Global markets have postponed the run on the dollar for now.
Monday, August 19, 2013
Natural Capitalism Puts A Price Tag On The Planet
Who says you can't put a price tag on Mother Nature? Not me, folks. Everything has a price, except my own personal integrity.
The World Business Council for Sustainable Development (WBCSD) put out its Vision 2050 report on how to make the world sustainable by, you guessed it, 2050. I find their draft architecture for integrated reporting in the financial sector to be fascinating. The WBCSD's work matches up with similar work the World Resources Institute is doing on markets. Businesses that adhere to these frameworks and the Sustainability Accounting Standards Board protocols will have a leg up in attracting capital.
These initiatives aren't some pipe dream from radical agitators. They are the product of capitalists who believe in true prosperity. Read Nature's Fortune by the former investment banker who now heads the Nature Conservancy. These folks don't walk around chewing granola while they sabotage bulldozers in some rain forest. They make investments in nature that pay off. I want to make a buck too so I'm jumping on this bandwagon. Stanford University's Millennium Alliance for Humanity and the Biosphere has a consensus statement from super-smart pointy-hat scientific types who've studied the heck out of the biosphere's living systems.
This is the kind of stuff I read late at night when I'm not thinking about attractive women. Mother Earth is certainly attractive and she's worth every penny we can spend on her, just like a real woman.
The World Business Council for Sustainable Development (WBCSD) put out its Vision 2050 report on how to make the world sustainable by, you guessed it, 2050. I find their draft architecture for integrated reporting in the financial sector to be fascinating. The WBCSD's work matches up with similar work the World Resources Institute is doing on markets. Businesses that adhere to these frameworks and the Sustainability Accounting Standards Board protocols will have a leg up in attracting capital.
These initiatives aren't some pipe dream from radical agitators. They are the product of capitalists who believe in true prosperity. Read Nature's Fortune by the former investment banker who now heads the Nature Conservancy. These folks don't walk around chewing granola while they sabotage bulldozers in some rain forest. They make investments in nature that pay off. I want to make a buck too so I'm jumping on this bandwagon. Stanford University's Millennium Alliance for Humanity and the Biosphere has a consensus statement from super-smart pointy-hat scientific types who've studied the heck out of the biosphere's living systems.
This is the kind of stuff I read late at night when I'm not thinking about attractive women. Mother Earth is certainly attractive and she's worth every penny we can spend on her, just like a real woman.
Financial Sarcasm Roundup for 08/19/13
This particular roundup goes out to the moron who accused me of slandering him online after I was generous to him at a conference. I didn't slander the guy; I insulted him. He's too dumb to know the difference. My sarcasm is meant for stupid losers just like him.
BofA is legally assimilating Merrill Lynch. This is one more nail in the coffin for those Merrill loyalists who thought their former parent would eventually be spun out. BofA got a pretty raw deal when it was talked into saving Mother Merrill during the 2008 crisis. It just goes to show how easily investment bankers can outwit commercial bankers in deals.
Greece's debt holders no longer need to fear haircuts. Germany is backstopping the hedge funds that hold Greece's post-bailout sovereign debt. Someone at Davos must have made an algorithm-laden threat at the CDS spreads of leading Germany companies. Germany's public statements on Greece are no longer reliable. Frau Merkel is bending with the trans-Atlantic consensus that quantitative easing is good enough.
The tech sector is slumping. I got the impression from keynoters at several enterprise IT conferences that the tech sector has been having an increasingly difficult time lately squeezing additional margin out of services. That's one reason why they're pushing cloud so hard. The tech slowdown also indicates that social media has reached saturation and cheaper smartphones will add less to bottom lines. You tech people need to go back and read everything I've blogged about enterprise IT, "innovation premiums," and overpriced smartphones to see how your darling business models are turning out. There's still lots of room for disruption within inefficient IT models and tech providers know it.
Major energy producers are buying less land for shale exploration. The hot air is slowly escaping from the shale balloon because shale drilling is a victim of its own success. The booms in North America have flooded the markets with so much cheap natural gas that there's little point in drilling for more. This tempts me to look into natural gas royalty trusts to see which ones are undervalued.
Pension funds are cutting out their middlepeople. Investing by committee is a great way to underperform the broad market but the investment committees at plans and endowments are determined to keep doing it. The dumb money is not going to get smarter but at least they'll be saving money on fees. This development is good news if it forces underperforming hedge funds and private equity firms out of business.
Alpha-D Update for 08/19/13
This month's update is just as simple as last month's update. My covered calls on FXF expired unused so I wrote some new ones with an expiration date next month. The Swiss franc appears to be stable. I do not expect it to rise significantly until either the eurozone or the US go into high inflation.
I maintain a long position in GDX as a hard asset hedge against the US dollar. I maintain a long position in FXA, FXC, and FXF as currency hedges against the US dollar. I maintain a long put position against FXE as a bet that the euro will not be able to retain its present form or value.
I picked up a huge amount of information at this year's MoneyShow, just like last year. It's going to take me a while to write it all up. There may be some ways for me to deploy the cash I'm holding.
I maintain a long position in GDX as a hard asset hedge against the US dollar. I maintain a long position in FXA, FXC, and FXF as currency hedges against the US dollar. I maintain a long put position against FXE as a bet that the euro will not be able to retain its present form or value.
I picked up a huge amount of information at this year's MoneyShow, just like last year. It's going to take me a while to write it all up. There may be some ways for me to deploy the cash I'm holding.
Sunday, August 18, 2013
The Limerick of Finance for 08/18/13
Central banks drive markets to the moon
There's been talk of some tapering soon
Stimulus will not stop
That would make markets drop
No one wants to pop this big balloon
There's been talk of some tapering soon
Stimulus will not stop
That would make markets drop
No one wants to pop this big balloon
Saturday, August 17, 2013
Hearing John T. Reed's Seminar At MoneyShow SF 2013
John T. Reed was back this year for another lively talk at the MoneyShow San Francisco. I've followed his writings for several years and I attended his talk at the 2012 MoneyShow. The dude shared a wealth of minute details assembled from research he conducted for his book How to Protect Your Life Savings from Hyperinflation and Depression, 2nd Edition. I got the first edition and I've taken many of his suggestions very seriously.
John's talk this year introduced a ton of tips from his book and his recent exploration of the US-Canadian border. His overall approach is still familiar to his longtime readers, that managing hyperinflation or depression risks is like having homeowner's insurance. "Being early is the same as being wrong" is a bad strategy only if it's pursued at high cost or high risk, like hedge fund manager John Paulson's gold strategy.
John wants us to owe US dollar denominated debts and not own dollar-based fixed-income instruments. Liquidity is important to pay US bills during hyperinflation and owning hard assets isn't enough. John's book goes into detail on liquid hard assets that are suitable for barter but bill paying requires access to currency. The currency of choice should not be contaminated by US hyperinflation and must lie beyond the reach of US capital controls. I believe CurrencyShares ETFs held in US brokerage accounts can accomplish this goal but John prefers solid currencies held in banks. My readers know that I am long FXA, FXC, and FXF in my own US accounts (that's money from Australia, Canada, and Switzerland). Check out his writings on the subject; he explains his approach better than I can. I intend to have a Canadian bank account open just as soon as I determine which one has the strongest capital adequacy numbers under the Basel III accord.
Speaking of currencies, John expects the currency markets to be the harbinger of US hyperinflation if non-US investors decide to sell dollar holdings all at once. Foreign investors and central banks that get fed up with Fed QE will cause a run on the dollar that will shock Americans in no time flat. We can then watch the graphs at MIT's Billion Prices Project turn sharply vertical and stay that way.
John adapts his real estate knowledge into concepts that work as inflation/deflation hedges. He likes life estates, Home Equity Conversion Mortgages (HECMs), and a special concept he calls "reverse defeasance" that converts US dollar annuities into foreign currency lump sums. He also expects hyperinflation to destroy the value of long-term leases in commercial properties, so landlords should protect themselves by only making month-to-month lease agreements that they can can raise to keep up with inflation. John considers REITS in self-storage and timber harvesting to be acceptable inflation hedges in a liquid portfolio.
I only had one comment during John's talk. Buying preserved food is a good hedge against rising food prices but I mentioned that we need not worry about the expiration dates on canned goods. I've read about studies conducted by both the US Department of Agriculture and US Army that validated the nutritional content of ordinary canned food more than forty years after the canning date. Here's an NPR story from 2012 that validates the discovery that canned food retains much of its quality for decades, based on research that was done in the 1970s on canned food from the 1930s! The USDA even has a handy-dandy Complete Guide to Home Canning, in care of the University of Georgia's National Center for Home Food Preservation. I wonder whether Uncle Sam will be able to keep this excellent research funded during hyperinflation.
Hey John, here are two action items to consider for one of your future articles. They make sense to me as additional tools your readers can use as inflation/deflation hedges.
Item 1: Home food production with aquaponics. Backyard gardening is a diet supplement and affordable alternative to paying inflated prices in stores. Consider an aquaponics installation as a closed-system production method that produces food constantly regardless of weather or available space. Aquaponics systems can be maintained indoors, out of the view of potential food thieves in the neighborhood. The only downside is that buying the implements may attract the attention of law enforcement agencies who monitor gardening shops to see who's cultivating illicit stuff. Maybe it would be wise to invite the local chief of police over for a tour of one's aquaponics installation so the brass knows it's legal. Here's a YouTube video produced by Purdue University demonstrating aquaponics. I think this can be done in a garage, basement, commercial warehouse, or self-storage unit.
Item 2: Common stocks in hard asset sectors. Thanks for mentioning my currency ETF ideas in your Reed Theory Fund article. There are other things investors can select if they don't want to abandon their IRAs or other tax-advantaged US investment accounts. Common stocks in companies that generate revenue from hard assets - specifically mining, energy, and agribusiness - already have geologically confirmed hard asset inventories that they liquidate on world markets. Some of the world's largest basic materials companies are domiciled outside the US and earn revenue in currencies other than dollars. BHP Billiton (mining, energy) is in Australia and Potash Corp. (fertilizer for agribusiness) is in Canada, two of your choice countries. These types of stocks typically pay cash dividends and have option chains available for covered call writing. If desperate consumers in Europe, Japan, and the US crave food, fuel, and basic commodities, these types of producers stand to benefit.
Excuse me, but I need to get over to my bank and pick up a few rolls of pennies and nickels as soon as the MoneyShow is over. Those are John's equivalent of put options that retain their face value in deflation but have tremendous intrinsic value in hyperinflation if changes to legal tender laws allow investors to unlock the coins' melt value.
Full disclosure: John T. Reed did not compensate me in any way for this article. I do not receive any royalties from his books or other engagements. I'm sharing these insights because John does great work and investors need all the information they can handle.
John's talk this year introduced a ton of tips from his book and his recent exploration of the US-Canadian border. His overall approach is still familiar to his longtime readers, that managing hyperinflation or depression risks is like having homeowner's insurance. "Being early is the same as being wrong" is a bad strategy only if it's pursued at high cost or high risk, like hedge fund manager John Paulson's gold strategy.
John wants us to owe US dollar denominated debts and not own dollar-based fixed-income instruments. Liquidity is important to pay US bills during hyperinflation and owning hard assets isn't enough. John's book goes into detail on liquid hard assets that are suitable for barter but bill paying requires access to currency. The currency of choice should not be contaminated by US hyperinflation and must lie beyond the reach of US capital controls. I believe CurrencyShares ETFs held in US brokerage accounts can accomplish this goal but John prefers solid currencies held in banks. My readers know that I am long FXA, FXC, and FXF in my own US accounts (that's money from Australia, Canada, and Switzerland). Check out his writings on the subject; he explains his approach better than I can. I intend to have a Canadian bank account open just as soon as I determine which one has the strongest capital adequacy numbers under the Basel III accord.
Speaking of currencies, John expects the currency markets to be the harbinger of US hyperinflation if non-US investors decide to sell dollar holdings all at once. Foreign investors and central banks that get fed up with Fed QE will cause a run on the dollar that will shock Americans in no time flat. We can then watch the graphs at MIT's Billion Prices Project turn sharply vertical and stay that way.
John adapts his real estate knowledge into concepts that work as inflation/deflation hedges. He likes life estates, Home Equity Conversion Mortgages (HECMs), and a special concept he calls "reverse defeasance" that converts US dollar annuities into foreign currency lump sums. He also expects hyperinflation to destroy the value of long-term leases in commercial properties, so landlords should protect themselves by only making month-to-month lease agreements that they can can raise to keep up with inflation. John considers REITS in self-storage and timber harvesting to be acceptable inflation hedges in a liquid portfolio.
I only had one comment during John's talk. Buying preserved food is a good hedge against rising food prices but I mentioned that we need not worry about the expiration dates on canned goods. I've read about studies conducted by both the US Department of Agriculture and US Army that validated the nutritional content of ordinary canned food more than forty years after the canning date. Here's an NPR story from 2012 that validates the discovery that canned food retains much of its quality for decades, based on research that was done in the 1970s on canned food from the 1930s! The USDA even has a handy-dandy Complete Guide to Home Canning, in care of the University of Georgia's National Center for Home Food Preservation. I wonder whether Uncle Sam will be able to keep this excellent research funded during hyperinflation.
Hey John, here are two action items to consider for one of your future articles. They make sense to me as additional tools your readers can use as inflation/deflation hedges.
Item 1: Home food production with aquaponics. Backyard gardening is a diet supplement and affordable alternative to paying inflated prices in stores. Consider an aquaponics installation as a closed-system production method that produces food constantly regardless of weather or available space. Aquaponics systems can be maintained indoors, out of the view of potential food thieves in the neighborhood. The only downside is that buying the implements may attract the attention of law enforcement agencies who monitor gardening shops to see who's cultivating illicit stuff. Maybe it would be wise to invite the local chief of police over for a tour of one's aquaponics installation so the brass knows it's legal. Here's a YouTube video produced by Purdue University demonstrating aquaponics. I think this can be done in a garage, basement, commercial warehouse, or self-storage unit.
Item 2: Common stocks in hard asset sectors. Thanks for mentioning my currency ETF ideas in your Reed Theory Fund article. There are other things investors can select if they don't want to abandon their IRAs or other tax-advantaged US investment accounts. Common stocks in companies that generate revenue from hard assets - specifically mining, energy, and agribusiness - already have geologically confirmed hard asset inventories that they liquidate on world markets. Some of the world's largest basic materials companies are domiciled outside the US and earn revenue in currencies other than dollars. BHP Billiton (mining, energy) is in Australia and Potash Corp. (fertilizer for agribusiness) is in Canada, two of your choice countries. These types of stocks typically pay cash dividends and have option chains available for covered call writing. If desperate consumers in Europe, Japan, and the US crave food, fuel, and basic commodities, these types of producers stand to benefit.
Excuse me, but I need to get over to my bank and pick up a few rolls of pennies and nickels as soon as the MoneyShow is over. Those are John's equivalent of put options that retain their face value in deflation but have tremendous intrinsic value in hyperinflation if changes to legal tender laws allow investors to unlock the coins' melt value.
Full disclosure: John T. Reed did not compensate me in any way for this article. I do not receive any royalties from his books or other engagements. I'm sharing these insights because John does great work and investors need all the information they can handle.