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.
I will throw a few thoughts on ethics out at the blogosphere for some weekend musing. Have at them with gusto. Marcus Aurelius was not the only one to jot down his meditations for all to see. People tell me I am a genius. Here is some proof.
One can never be more honest or more competent than one's boss. The moment you outshine your boss is the moment you become a threat to their career. Most humans are sufficiently insecure about their own place in a pecking order that they will sabotage or steal from capable underlings. The remaining minority could be a lot more productive if they work for themselves. Supervisors behaving badly can fake it for a long time if their subordinates stick around out of desperation.
Everyone who works for a large enterprise will eventually be forced to choose between career success and personal integrity. We all choose one or the other. These are mutually exclusive choices. If you avoid making the choice, your boss will make the choice on your behalf, and your acquiescence is the moral equivalent of concurrence. Choosing personal integrity usually leads to negative career consequences. Repeatedly choosing integrity eventually guarantees a path to either self-employment or starvation. Choosing career success means immediate monetary rewards, plus long-term legal risks that no one can hide forever. Col. John Boyd, America's greatest military theorist, framed the choice as "to be or to do" for his acolytes. Being means choosing extrinsic rewards of money and glory. Doing means choosing intrinsic rewards of moral clarity and professional productivity.
Escalating a decision to one's boss means surrendering moral responsibility for the outcome. Sometimes this is unavoidable. Enterprise policies often define escalation triggers, especially in crisis management. Junior employees can learn from watching seniors handle the escalation even if the results remain hidden.
Humans owe a duty of loyalty to their superiors at the beginning of a professional relationship. This duty grows stronger or weaker over time based on the superiors' behavior. Bosses who demonstrate ethical lapses deserve progressively less loyalty as their deficiencies become obvious. Prolonged exposure to a superior who is unethical or incompetent is a career hazard. Never hitch a wagon to a dead horse. Escaping from unethical people is a moral imperative, not to mention a salve for one's sanity.
That is all for tonight. I will be up in Santa Rosa tomorrow, watching a charity polo match. Wineries will have their wares on display. I may bring home a bottle or two.
Vista Gold(ticker VGZ) has a management team
with obvious experience in mining operations. It's always good to see
geologists and engineers running a junior mining company. I would have
more confidence in this company's potential if their operational results
matched the C-suite's pedigree. A producing mine would justify their high
salaries. Check their pay yourself on the ticker's Yahoo Finance listing.
OneMt. Todd, Australia
gold projectis their primary live option at this time,
with other projects that may pay royalties if other partners have their acts
together. The Mt. Todd site's most recent NI 43-101 report is dated July
7, 2014. Its key findings are disappointing. The 2P reserve
estimate is 0.84 Au g/ton for the Batman deposit and 0.54 g/ton for the heap
leach pad. Those are very low ore grades compared to profitable mines
worldwide. The MII resource estimates for Mt. Todd aren't any better.
The initial capex estimate of almost US$1.05B means they need a large
mining company as a serious partner. Their base case assumption of
$1450/oz as the gold price is too optimistic because gold closed at $1133/oz
today. I looked at their base case scenario of operating costs at
$756.11/oz and capex (presumably spread over the mine's life) at $292.33.
Adding those up to $1048.44/oz gives us the minimum gold price that makes
this mine economically viable. Gold's long-term average price is far
below that level, and a lot can happen over this mine's projected 13-year life.
Financial statements matter. I reviewed Vista's latest 10-Q
dated July 31, 2015. They had US$3.8M in cash on hand at the end of June,
plus $11.1M in short-term investments. That would ordinarily be a mother
lode of cash for a junior mining company. I have to wonder why they are
representing positive net income with zero operating revenue. Their
research and development grants from the Australian government (mentioned in
note 10 of the 10-Q) are no substitute for a live mine, so it's more
appropriate to doubt these grants' usefulness as recurring revenue.
Consider Vista's negative retained earnings of -$410M to
know how much investor capital has disappeared down dry holes.
This stock has traded below one dollar since the summer of 2013.
Since it now trades around $0.29, anyone who bought it in the past decade
is severely underwater. I see these kinds of companies all the time on
the investor relations circuit, clamoring for attention and waving term sheets
at private investors. Whatever potential that may have appeared in Mt.
Todd's earliest 43-101 reports has never materialized. That is why Vista
Gold does not belong in my portfolio.
I participated in a crisis management tabletop exercise today courtesy of the San Francisco Bay Area InfraGard Chapter. The local chapter of the Business Recovery Managers Association (BRMA) joined the fun. I was familiar with the structure of facilitated scenario-based role playing from many years of US Army Reserve staff training. The injects kept us thinking about how unpredictable a crisis gets for an enterprise. My genius ruminations are below.
Knowing how critical business processes will cross functional silos is a key to assembling the crisis management team (CMT). Prioritizing the processes that the enterprise must immediately sustain helps determine the resources the team will allocate in its earliest decisions. Having a single senior person designated as the communications manager ensures that all messaging themes are centrally routed before release and that all senior executives stay on message.
Outsourcing some of the response effort in public relations (PR), third party logistics (3PL), or business intelligence (BI) means the enterprise gains a surge capacity to meet an existential threat. One outsourcing risk is friction if the hired partners' IT systems are incompatible with the enterprise's systems, but the risk is worth taking.
The rehearsed crisis management plan should have escalation triggers in place so the CMT knows when decisions are beyond its authority. Sending the big decisions to the C-suite keeps the enterprise's strategy in mind. The business process recovery (BPR) team activates after the CMT has begun its work. The CMT minimizes damage from ongoing problems, and the BPR team fixes what is broken as the crisis passes.
Preserving an enterprise from a surprise threat is what boards pay executives to do. Protecting employee lives and shareholder investments means designated crisis managers must write plans and run drills for multiple scenarios. I no longer work for large enterprises but this InfraGard/BRMA joint exercise reminded me of how teams should work together. The Alfidi Capital crisis management plan is to be as brilliant as possible while Armageddon rages all around.
Uranium Energy Corp. (UEC) used to be named something related to gold. Another company now has their old name, so that's just water under the bridge. The global nuclear power is healthy enough to support strong demand for uranium production. It's too bad UEC isn't successfully meeting that demand.
UEC has 23 projects in motion as of this writing, with all but two in the US. Their problem is that almost all of these projects are still under exploration. They have one operational plant, one producing mine (sort of, depending on permits), and one project at the development stage. That's all they have after a decade.
Consider the numbers for those projects that have NI 43-101 reports. Anderson will require almost $44M initial capex, with a recovered production cost of $33.65/lb. It is sobering to see the base case NPV estimate (at a 10% discount rate, $65/lb market price) of $142.2M, when the total capex commitment is estimated at $139.2M in the 43-101. That's barely worth doing at all. Infomine reports the uranium price for Aug. 26, 2015 as $36.75/lb. If the Anderson project is barely worthwhile at $65/lb, it cannot be viable at current market prices.
I grabbed UEC's Q3 2015 10-Q dated June 9, 2015. The company had $1.4M in cash on hand as of April 30 and inventory of $2.2M. Their monthly burn rate is about -$1.8M, so they're pretty much surviving one quarter at a time. Note the negative retained earnings of nearly -$187M, because that's about how much investor capital the company has thrown down a bunch of holes in its lifetime. Further capital raises will be needed to fund the capex for projects like Anderson, so shareholders can expect further dilution.
Uranium mining and processing can be a radioactive business. Companies that try to do it for a decade without financial success may as well be radioactive themselves. I will not have money-losing companies like UEC in my own portfolio. Financial losses are radioactive to my ROI.
Full disclosure: No position in Uranium Energy Corp. (ticker UEC) at this time.
Bion Environmental Technologies has spent several decades developing a technology to treat the waste runoff from commercial livestock operations. Water treatment solutions should never mistake the nation's head count of cattle or pigs as a target market. Those are more properly supply chain inputs. I had to say that up front to clear the air before the analyst community dives in to big piles of manure.
The most important thing about this company is its lack of profitability. It has existed since 1987, which is plenty of time to develop a viable product and find a market in agribusiness. Bion has not made a profit in at least three years, with only a trickle of revenue. If these folks had something, they would have had it by now. Retained earnings were into negative nine figures by 2014. That's how much capital has been sunk into this concept over time.
I have no idea why the company is paying its executives while they fail to produce financial results. It is really embarrassing to listen to people spew horse manure about a technology that claims to clean up cow manure. There is nothing new about bacterial mitigation of effluent. Call me when something is financially viable. Oh, yeah, the stock has traded under a buck since late July. I don't think I need to waste any more electrons here.
Full disclosure: No position in Bion Environmental Technologies (ticker BNET) at this time.
I picked up some literature from the International Rice Research Institute that got me thinking about agribusiness. Rice is a popular crop worldwide. The dried grains maintain edibility for decades. Farmers in developing countries need decent prices for this staple crop, and their customers need a high-nutrient diet. Analysts need good data sources for rice production.
A quick perusal of Google search results related to rice farming reveals the ability to flood a field as a crucial input. Cold weather can prevent timely flooding. No farmer wants a frozen rice paddy. I don't recall seeing any rice fields whenever I visited Wisconsin, but that cold state does have plenty of cranberry bogs. I expect California's continuing drought to seriously harm water-intensive crops like rice. The microeconomics of farm management is beyond the scope of my blog.
There is no pure-play tradeable security covering only the rice subsector of agribusiness. Commodity ETFs and agribusiness sector ETFs have only limited rice exposure. Adventurous rice investors may look to CME Group's Rough Rice Futures for contract exposure. Rough rice futures can be a hedge for farmers, traders and others who are directly exposed to US rice production and NASDAQ's price quote, but these futures do not necessarily correspond to FAO's world rice price. Arbitrage is only possible when the same commodity has a different price in two markets. The US rice price and the world rice price are not the same thing, just as the WTI oil price is not the Brent price. Perhaps the rice price spread between the US and the world can tell us as much about production and distribution costs as the WTI-Brent crude spread.
I have noted that other commercial data services exist to track the rice business, but they mostly repeat the free data anyone can get from the USDA and FAO. The analyst community needs more than price knowledge to track the rice ROI. Weather, logistics, soil quality, and regulation all matter. Energy utilization also matters; fertilizer needs ammonia and natural gas, and pesticides need petroleum. The very divergent prices for rice make farming a challenge. I am glad to be an analyst, and not a rice farmer.
Full disclosure: No exposure to rice-related financial instruments at this time. The author does frequently eat rice, and has a few bags of the stuff at home.
Galaxy Resources recently changed its name from Galaxy Lithium. I never let a name change distract me from changes in operations. The company's current management team has a background more in finance than mining. I can totally understand if the company feels more confident about improving its financial situation than it does about improving its operations.
The company has three active projects at present. A couple of them appear to be only semi-active; the Mt. Cattlin (Australia) mine has been shut since July 2012 and the James Bay (Canada) project is still under exploration. The Sal de Vida (Argentina) lithium project is the only one left on which the market can hang some valuation. Galaxy's corporate website displays a summary of some NI 43-101 data for Sal De Vida's claimed 2P reserves. I cannot find the full 43-101 report for that project anywhere on Galaxy's website or in a SEDAR search of the company's filed reports. If a company has to make it this difficult to verify its claims, I cannot waste my time evaluating its operational potential.
I did download the company's annual report for the year ended December 31, 2014 straight from its investor relations page. Galaxy had a total net loss of over -AUD$56M in 2014, which wasn't nearly as bad as 2013's restated loss of over -AUD$104M. A reduced loss is still a loss. Their total current liabilities have exceeded total current assets in both 2013 and 2014, and with only AUD$13M in cash on hand they will absolutely have to raise a lot more money just to keep the lights turned on. It is impossible to determine whether their fundraising serves an operational purpose without access to a 43-101 report describing how the company should further develop its most viable project.
The stock trades in the pennies, typically under US$0.04 throughout the summer of 2015. One look at the EPS of -US$0.05 tells me this company is losing more than what the market thinks it is worth. There is no way that such a company will ever belong in my own portfolio. A company with aspirations to be galaxy-sized needs to have more than a big black hole of important information.
Full disclosure: No position in Galaxy Resources (GXY.AX) at this time.
Pythagoras was an ancient Greek dude who was really into mystical thinking, mathematics, and music. He was also into Egyptian mysteries that were pretty much worthless but history has forgiven him. His approach to music had a special focus on math and rules that governed harmony. Math is more advanced today. Our music should be just as advanced.
The Music Genome Project tracks songs into broad genomes with specific genes. The project aims to match lesser known music to listeners' existing tastes. Its obvious utility lies in signaling to artists how they can construct music that a clearly defined market demographic will buy. Consider that some white people like hip-hop and some African-Americans like country/Western. Race and gender demographics matter less in an era of Big Data when algorithms can match individual consumers with music they like.
Let's consider further that modern algorithms have something to learn from ancient philosophers. The golden ratio has guided architects and artists for centuries. Musica universalis was an imaginary form of music occurring naturally in the universe. I believe algorithms plotting these two concepts into something like the Music Genome Project could produce marketable music. Classical music has always followed precise modes, like 4/4 time for an orchestral work or the standard twelve notes in Western music notation. Applying math to ancient theories gives us more musical options.
Other musical theories like Sonido 13 are ripe for experimentation with algorithms. Music innovation should no longer be confined to obscure composers or theorists working in isolation. Computer science can theoretically generate new music automatically through an algorithm's continual processing. Generating enough new songs and compositions means some of them will find an audience. Pythagorean musical algorithms can apply the golden ratio to the music of the spheres, and to all other kinds of creations. Someone will buy it among the market for space and ambient music. Ancient concepts can be new again.
I checked out SVForum's "Disrupting Unemployment" event last night, part of the Innovation for Jobs (i4j) project. I drove on down to Microsoft's Silicon Valley campus to get acquainted with thought leaders cutting through the bleeding edge of career transformations. I had to get my fill of chicken fingers and dolmas before the intellectual action began. Check out my awesome badge selfie before I get down to business.
The official welcome laid out the global problem at hand. A whole bunch of people in the world are either not gainfully employed at decent incomes, or not totally committed to their chosen work. My Google search for "percent of global labor force not earning sufficient income" turned up a bunch of reports from McKinsey, the US Department of Labor, and Pew Research showing how global markets increasingly challenge ethnic minorities and low-skilled workers. I am intrigued with i4j's thesis that new digital career-matching tools will reduce job frictions and add to personal income at the microeconomic level, eventually boosting the US's lackluster macroeconomic growth. I recall from my undergraduate studies in economics (yes, I still have all of my textbooks and course notes) that structural unemployment is the stickiest part of the unemployment picture. Rapid tech changes will add to that problem. I will tune in to the i4jECO Summit in January 2016 to see how thought leaders are solving that problem.
Legendary tech guru John Hagel gave the keynote last night. I have followed his work for many years and we are connected through friends, but last night was the first time I came face to face with this guy. He is totally brilliant. I'm sure he would find my own brilliance impressive but I wasn't there to steal his thunder. Anyway, John laid out the three challenges of automation, accelerating skill obsolescence, and a substandard educational system that hinder more effective career matches. He thinks society still needs institutions that can scale learning for a mass market. His key is connecting work to passion. Got it, scale and passion go together, sort of like peanut butter and jelly but without the bread.
My friend Robin Farmanfarmaian moderated the expert panel. I have no idea where she gets the energy to organize all of these high-profile events. I would need a fusion reactor to generate as much energy as she manifests. Alrighty then, enough about my energy deficit. The panel addressed the US's national competitiveness first. I am disappointed that the US is dropping in rank on a leading freedom index. That's what we get for adopting bailouts and managed health care regimes as the new normal. At least one panelist finally recognized that Silicon Valley's penchant for solving the rich world's problems in speedy transport and gourmet meal delivery won't always convert to developing countries that really need basic WiFi infrastructure.
The one panelist who insisted on being a negative Nellie eventually struck a few nerves. He was on a roll panning major telecom companies as losers, and describing a mostly jobless future where automation forces more people to earn less. His argument with another panelist about how coal workers recovered from mine troubles would have made more sense if either one of them had cited hard data. One audience member rudely called baloney on the negativity by citing The Seamless City, about how public-private partnerships and smart metrics solve urban blight. He could have waited until the Q and A to make his point without interrupting. I'd like to see San Francisco become a seamless city, once the mayor takes on the non-profits who lock up city contracts and grants.
One audience member claimed that some measure of worldwide return on assets now exceeds the return on work. I find that hard to believe without a citation. Record ROIs worldwide are lately more a function of central bank monetary stimulus. Once that steroid infusion ends, the pendulum should swing back to worker productivity. The HR community has metrics for the ROI of workforce investments, especially for job-specific training. Look them up at SHRM for yourself. Come on, people, nothing is impossible. The entrepreneurs in the audience working on people-centric innovations can get it done.
I stuck around longer than necessary in case anyone needed to partake of my wisdom, or in case any attractive women wanted my phone number. No one took me up on either count. That gave me time to grab more food and drink. SVForum held my interest all night.
I get withdrawal symptoms if I go for too long without sarcasm. It's a healthy addiction, much better than any narcotic. I have no experience at all with narcotics, for the record. Those of you who do use narcotics should stay away from me until you kick the habit.
Amazon's workplace culture is the focus of major Internet buzz. It doesn't sound all that bad to me. I've worked at places where Darwinism, lying, and backstabbing were hidden beneath veneers of civility and chivalry. Getting it all out in the open with official policy is big progress. Giving a big bonus to a manager who sells their mother down the river would make it official. I have blogged before that corporate culture is totally a function of CEO personality and HR policies, because people respond to charismatic leadership and environmental incentives. Amazon's culture would be a case study in success if the company were a financial success. The trouble for Jeff Bezos is that Walmart earns more net income in a year than Amazon has in decades. Walmart solves supply chain problems much more effectively than Amazon, without the internal sniping.
American Apparel is having trouble sticking around. The teen market is only so big and Millennials are delaying the age at which they start families. Middle income families can't afford boutique clothes for their kids anyway after watching their incomes stagnate for decades. Kids these days need to learn to wear homemade clothes from potato sacks and old drapes, just like their great-grandparents did way the heck back in ye olden days of yore. That'll teach 'em, yes indeed.
I will sign off for now because I need to go look out my window at the fog coming in from the Pacific Ocean. Anyone who wants me to entertain them when I'm not blogging can log on to Spotify and listen to my music playlists. Just search for Anthony Alfidi, or "tonyalfidi," because Spotify doesn't have a listing for "Greatest Man Who Ever Lived."
Full disclosure: No positions in any companies mentioned.
I had the misfortune of listening to a financial "expert" today who pointed out multiple loopholes in the Social Security system's enrollment and claims processes. Savvy enrollees have almost a dozen ways to game the system and milk it for more benefits. Only a small percentage of Americans figure out how to do this every year as they become eligible. Their impact on the system is probably small, but Social Security will be more unsustainable as a result.
The Social Security Administration (SSA) publishes its financial reports every year. The FY14 statements show the SSA receipts and outlays as part of the total finances of the federal government. Remember that the next time someone says Social Security is an insurance program with its own asset base as collateral for liabilities. It is no such thing. It is a transfer payment from current taxpayers to current beneficiaries. More well-informed people legally gaming the system will increase the burden on current payees to keep the system solvent.
I read the "Highlights of Financial Position" section of the SSA's FY14 report. The chart on page 31 for the number of months of expenditures the FY-end asset reserves can pay shows a decline from 42.5 in 2010 to 37.1 in 2014. That should concern anyone who thinks they can extract more early benefits with legal tricks. I will quote directly from page 31's long-term financing discussion: "Social Security's financing is not projected to be sustainable over the long term with the tax rates and benefit levels scheduled in current law." The trust fund asset reserves will be depleted by 2033. The fawning, laughing fools who listened to today's financial expert have another 18 years to jump through loopholes for a few thousand dollars more each year in benefits.
I am getting much better at suppressing my inclination towards eye-rolling and smirking when self-proclaimed experts say dumb things. Today's expert showed his ignorance by claiming financial advisers don't sell TIPS because investors can get them commission-free directly from the US Treasury. True, but many advisers manage ETF wrap accounts that include TIPS ETFs that are eligible for covered call writing. A yield-enhancing ploy like covered call income more than makes up for a few basis points of expense.
I felt disturbed when this expert claimed the US would renege on the bonds it owes to China before it would renege on the nonmarketable, intergovernmental holdings owned in the SSA's funds. He thought it was a joke. This guy had no clue what a selective bond default would do to the sovereign debt rating of the US. Selective defaults would make further bond issuance much more costly, jeopardizing the government's ability to fund future benefit recipients. Just ask Greece's finance minister. The valuations of bonds SSA currently owns would logically suffer if government accountants were honest and marked them to market. Since the bonds are technically nonmarketable, some exceptional financial excuse could keep their valuations artificially high so the SSA trust funds could remain technically solvent. Any argument for selective default also completely ignores the hyperinflation risk the US would experience in the event of a global run on the dollar. The international bond market would purge as many Treasuries as possible, making the Federal Reserve the instant buyer of last resort for every US bond on the planet. Way to go, mister expert.
The audience entertaining this dude today just laughed it all up. I won't disclose the expert's identity or the venue, but suffice it to say it's one of my favorite intellectual haunts in The City. The expert admitted that the US government wants a broad constituency of payers and beneficiaries to maintain Social Security's political support. The financial services sector would call that a Ponzi scheme given its obvious unsustainability. The eventual political changes to the program will force means tests and lower benefits. It makes more sense for old folks between the ages of 66 and 70 to claim benefits ASAP before they evaporate. Maybe they'll make a few bucks before the whole Ponzi collapses. People in the audience were laughing heartily at the expert's lame jokes toward the end of the presentation. I could not laugh at all. The eventual impoverishment of many Americans who falsely assumed Social Security would be there for them is no laughing matter.
Full disclosure: No investments in TIPS or ETFs related to TIPS at this time.
The informal economy is out there on the fringes of mass consciousness. It rears its head every so often when the mainstream media ask Burning Man attendees what they do for a living when they're not making art or smoking dope. Gray market transactions enter the official economy through financial sleight-of-hand when auditors and inspectors are distracted. There are many ways for underground entrepreneurs to go legit.
Wisdom Hackers seek philosophical explanations relevant to modernity. The Human Agency takes wisdom a step further, transforming it into brand new things. Social entrepreneurs outside large organizations can test-market their ideas with an Ashoka fellowship. The League of Intrapreneurs leverages the guerrilla skills of people already working inside established enterprises, in the spirit of the social capital movement. Ask Alexa Clay for examples of how an "Amish Futurist" would question technology.
The Anglo-American Establishment has taken note of the informal economy. Attempts to channel its energy for the benefit of the existing order are underway. OpenIDEO takes the open innovation concept out of its UC Berkeley birthplace and into the technology sector. Google Dot Org puts one of the world's most powerful brands behind tech ideas that can change the world. The Aspen Ideas Festival works like a TED Talk that morphed into a salon conversation with an agenda to make the world better.
Elite guidance is essential if the informal economy's youthful enthusiasm is to produce anything beneficial on a large scale. The movement's thought leaders have a penchant for multi-disciplinary thinking that risks becoming undisciplined. Throwing around buzz phrases like "bohemian, sharing economy, sense of place, artisans," etc. tends toward verbal decoration of things that lack practicality. I listened to one grown-up bohemian (a hot babe, I must say) wax on about how a small town is really an inherent company that resists outsiders and creates horizontal networks that scale across an entire country. That sounds a lot like neofeudalism to me. She didn't come out and say it but a member of the elite class will recognize the concept's future value in managing society.
Another buzz term is "pre-competitive collaboration." It reminds me of the misfit squatters I met when I wandered into their Freespace temporary autonomous zone back in 2013. Civic hacking needs room to experiment, and some experiments will fail. Hackers need not be skeptical of MOOCs just because they don't offer the "deeply immersive conversations" (another buzz term!) that educated them in ivory towers. Thought leaders hung up on wishy-washy thinking about the nature of the self, subjectivity, emotional intelligence, postmodernism, and cross-cultural metanarratives sound immature.
The "idea people" in social capital startups are prone to existentialist angst and alienation. They need to put down the Albert Camus collection at some point and hand the informal economy over to the Big Data people who can calculate a social enterprise's potential. The freethinking hippies and hard-core data nerds need each other provided they work with each others' strengths. Misfits are simply wired differently, with brain chemistry far into the outlier range of what neuroscience measures. They will not be found in the middle bulge of any normal distribution, and their ideas will thus be incomprehensible to most people. They also risk being victimized by remaining too long in the informal economy, where the hustlers in pirate subcultures will eventually confiscate their wealth. Get those open innovations out of the gray market and into the light of the above-ground economy's accelerators, where mass adoption and elite investment await.
We will hear a lot more about the informal economy in the years ahead. The real economy in developed countries gets more dysfunctional by the day. Underemployment is now a fact of life for Millennials with student debt. Their constrained incomes need augmentation from micro-scale entrepreneurial action. They will find profits in System D enterprises that deserve to be legitimized.
The second coming of 2015's oil bear market is going on right about now. Plenty of bargain hunters who thought they bought into the bottom of the oil rout a few months ago are having buyer's remorse. Watch Brent fall to 49 today and WTI fall to 43 as Saudi pumping cuts the legs out from under US shale producers. Energy stocks can still get cheaper. Finding the ones likely to survive this bear market takes serious sleuthing.
Forget about hunting junk bond bargains. The oil services sector in the US is not done culling its own herd. Junior producers are still pumping at full volume just to make it look like they can service their high-yield debt with cash flow. That charade still has a few more months to run. Any hedge funds or well-heeled private investors who think energy sector junk bonds have bottomed are welcome to try their luck. Some people learn the hard way.
Other oil targets abound. Owning BNO means betting on Brent crude futures and owning USO means betting on WTI crude futures. Any compression between the Brent and WTI spot prices reduces the potential for arbitrage between these two ETFs. More exotic bets like DBO and USL look like very complicated ways of leveraging a single commodity price. Simple securities have fewer risks than complex ones. The ETFs and other instruments betting on the magnitude of changes in oil prices have more moving parts than I can track.
The least complex ETF for exposure to the oil producing sector is probably XLE, Holding a representative sample of large energy producers means each producer's operating costs are diversified away. A simple equity ETF also has no internal leverage, so it does not expose its owners to exorbitant expenses or magnify their losses. The P/E of 22 still looks high and resembles the broader equity market's high P/E after years of central bank stimulus. A weakening sector should be priced at a bargain to the broader market, so XLE may have further to fall.
The price of oil itself may have further to fall. Saudi Arabia is not reducing its production. Storage is full in the US and shipping companies are seeing booming business in chartering tankers just for offshore storage. Iran may have already begun selling the oil it has stored and will certainly increase production later in 2015 as the end of sanctions allow it to export. I do not believe oil traders have priced in the effects of full production from Iran and other Middle Eastern countries that badly need hard currency. More pain for the US oil sector means more bargain entry points for investors.
Full disclosure: No positions in any securities mentioned.
One of my pet peeves about tracking investment in the natural resource sector is the often amateurish approach some executives take when developing projects. Junior companies often mistakenly assume that completing a preliminary economic analysis (PEA) is a milestone in itself, without realizing the importance of planning their fundraising to fulfill the PEA's requirements. Fortunately, help is available for junior mining companies. Front-end loading (FEL) and the Project Definition Rating Index (PDRI) will make all the difference.
Process-oriented sectors use FEL stages to segment a project into deliverable milestones, with the hardest thinking up front. This is a key approach for successful project managers who complete projects on time, under budget, and with little degradation in net present value (NPV). Independent Project Analysis (IPA) has tracked project efficiency for decades, and their publicly available literature reveals how FEL adds value. The mineral sector is one of the least successful in delivering project value, according to IPA's research. I can totally see why after thinking about all of the junior mining company presentations I have attended.
Mining startups may lack the human capital to incorporate PDRI scoring into their first FEL stage. Experienced project geologists who become junior mining company CEOs are more likely to keep up on industry developments that exemplify FEL planning. I cannot recall ever hearing a mining company CEO with a background in banking or consulting who ever described their active projects in FEL or PDRI terms. All the hints they need are in their initial NI 43-101 reports. Properly sequencing those discoveries into development milestones is within a modern geologist's professional competence. Former investment bank analysts who take over as mining CEOs probably won't take the hints.
Large, well-capitalized companies in the resource sector have an easier time building a strong project team early in a mine's life cycle. Junior mining companies should do similar quality work at a smaller scale if they want their projects to show robust economics. Waiting until a bankable feasibility study is complete after several years of exploration is too late. Delays in determining project completion requirements adds risk and makes junior miners less desirable as acquisition targets. Small-cap mining companies that take FEL and PDRI seriously will demonstrate better long-term project economics and increase their chance of achieving an attractive valuation. Widespread adoption of FEL and PDRI concepts among junior resource sector companies would be a welcome innovation.
I somehow picked up a one-page, two-sided flyer for ChineseInvestors, a.k.a. ChineseFN. I am reluctant to link to their website because my browser froze when I loaded their page. I take that as a bad omen. I had better luck examining their ticker CIIX at Yahoo Finance. It turns out I didn't need the luck, or the knowledge.
ChineseInvestors intends to be a web portal for middle class Chinese investors seeking investment opportunities outside of China. Addressing the legal specifics of how Chinese citizens can move their money outside the People's Republic of China is beyond the scope of a financial blog. Chinese elites have no difficulty deploying money into California real estate and other hedges against economic annihilation at home. Elites can easily grease any wheels needed inside their country to get cash out. China's middle class will not have such an easy time given Beijing's need to artificially prop its stock market.
Even if ordinary Chinese investors could count on easily moving capital, there is no reason to believe ChineseInvestors is successfully positioned to exploit such movement based on its present finances. I reviewed the company's unaudited 10-Q dated April 14, 2015. They had less than US$688K in cash on hand as of Feb. 28, 2015. That is enough to cover their negative net income of over $448K that quarter, but it does not make up for an unrealized loss on available investment of almost $1.5M. The company's burn rate indicates it must continually raise new capital. That is a really crummy way to run a business. It's even crummier given the accumulated deficit of $9.7M, with no turnaround in sight.
It should go without saying that ChineseInvestors does not belong in my own portfolio. I came off the China bull story years ago. Every public report of falsified government statistics and emergency stimulus measures from that country confirms that I made the right decision. Chinese citizens are stuck with a bad hand.
Full disclosure: No position in CIIX at this time.
The first Republican Party presidential debates for the 2016 elections are happening tonight. I am not watching them because I do not watch TV. I tried to keep up with a couple of live blog feeds but the posts were not very enlightening. Most of the contenders seem to be sniping in sound bites. Politicians have little control over cultural matters but some voters insist on hearing about such distractions. I would like to know where these politicians stand on fixing the US government's fiscal imbalances.
The Bowles-Simpson National Commission on Fiscal Responsibility and Reform laid out a plan to balance the US government's finances. The rest of Washington, DC did not take it seriously. Both major parties would rather use select line-items as political footballs and campaign stunts. The signed audit statements for the federal government's major entitlement programs show them continuing to accrue unfunded liabilities. The difficult policy choices that could resolve those liabilities grow more difficult with each passing year.
The financial markets ignore the US government's perennial deficits while our dollar is strong. Petrodollar recycling supports demand for our sovereign debt as long as Saudi Arabia is OPEC's swing producer, and as long as that monarchy remains politically stable. The US has not yet met Greece's fate. The President we elect in 2016 will face the wrath of the world's financial markets if the US government is unable to stabilize its finances. Our popular fascination with candidates' one-liners and hairstyles will not excuse us from history's judgment if we cannot get solid financial solutions from them before we give them our votes.
Bubble economies happen all the time. They tend to happen in isolation, when investors in one country or sector gets overly excited about a single, big story. It is very unusual to see them happen in tandem across multiple asset classes in many countries. The Bank of International Settlements and other disinterested international observers have noted the bubble conditions of the developed world's stocks, bonds, and real estate since at least 2013. The march to new heights has gone uninterrupted without a major correction.
Low interest rates have transformed conservative savers into bold risk takers. Venture capitalists throw every last penny they have into unicorn startups solving problems of convenience for the wealthy. The Economist compares today's Silicon Valley unicorns to kitesurfers. It's a valid comparison because engaging in either "sport" requires a lot of free time and money. Higher interest rates mean money will no longer be free.
Paying something other than zero for capital means companies that have been throwing money away will reconsider their ways. Borrowing to buy back stock and pay a rising dividend will no longer be a CFO's Plan A in the weekly C-suite conference. The effect of a rate change on the stock and bond markets may not be immediate. Federal Reserve policy changes normally have a six-month lag before they affect the larger economy, but the markets are not the economy. Traders' reactions will be firmer if subsequent FOMC meetings keep interest rates moving up, in regular basis point increments, at regular intervals.
The Fed's messaging since the end of QE has been a gamble that predictability matters in market psychology. The gamble presumes that messaging is more powerful than economic reality. I do not believe the Fed can sustain regular interest rate increases from the ZIRP baseline without harming both its own balance sheet and the US economy. It may not matter if an unsustainable interest rate increase becomes an uncontrollable one, should a panic selloff in the bond market cause the Fed to lose control of the yield curve. September will be a test for the markets.
The Fed telegraphed the tapered end of its quantitative easing for months to psychologically prepare financial markets. The end of QE did not come as a shock. The same drip campaign is preceding what increasingly looks like a small rate increase this year. Qualifying the comments with lots of "maybe" and "data dependent" verbiage gives the FOMC some wiggle room to push the rate increase further down the calendar. Despite the fuzzy language, calling a rate increase likely by the end of 2015 is an unmistakable signal that the Fed is willing to experiment.
The rate change, if it comes, will probably be the smallest increment possible. No more than a 25 basis point rise is needed to test reactions in the bond and stock markets. Such a small increase won't stress the valuation of whatever MBS garbage the Fed still owns by very much. The Fed's acolytes must have already performed that very confidential stress test, and they could not have falsified the results if they want to preserve the institution.
Central banks do coordinate with each other and the IMF. The noises from the IMF earlier this year at the height of the Greek crisis signaled that the Fed dare not make its move while the eurozone's unity was at risk. The euro is now off its death bed and ambulatory for the time being. Any further sovereign debt flare-ups in Greece, Spain, or Italy between now and September will postpone the Fed's rate hike.
Higher US interest rates are good for the strong dollar and bad for other major currencies. Rising rates will cause further pain for the gold mining sector, because gold loses its appeal as an alternative store of value when the US dollar is strong. Many base metal prices are already at multi-year lows thanks to demand destruction in China, but gold still has not tested its long-term historical average. The Fed may make a lot of gold miners poorer very soon. That is very good news for bottom-fishing value investors like yours truly.
I attended an excellent lecture tonight at the Commonwealth Club by Dr. Eugenie Scott, the former Executive Director of the National Center for Science Education. The room was packed and I was lucky to get a seat way in the back. There is no way I can be sarcastic about a distinguished senior scientist outlining a method for improving Americans' scientific understanding. Her logic was impeccable, and her credentials for reaching out to unscientific Americans are unimpeachable. My only challenge tonight is to get Americans to listen to her. My fellow citizens shall thus be the object of my sarcasm.
Dr. Scott mentioned that the National Science Board's Science and Engineering Indicators track several aspects of scientific development in the United States. Readers should note that this resource does not track creationism, intelligent design, Biblical mentions of dinosaurs, or other things that Americans may believe if they are not exposed to science. She cited evidence that facts alone are insufficient to convert science-averse people; some emotional trigger must often be present. I guess it works like Paul the Apostle's conversion on the road to Damascus, but in reverse . . . you know, like, away from a non-rational belief towards a belief supported by evidence.
If the main engine for climate change denial is political conservatism, and the main objectors to evolution are religious conservatives, then conservatives have a lot of work to do. I should fault the conservative business elites (many of whom are closet agnostics) for cynically funding troglodyte local and state politicians. Pandering to low-information voters has a cost. Come on, conservatives, you don't need the tax breaks and zoning favors so badly that we have to hamstring the nation's scientific education as an unintended consequence. Liberal politicians will legislate the same breaks if business elites can stomach their rhetoric.
The preferred communication method for Dr. Scott and her allies when engaging unscientific American leaders is the presentation of a messenger the denier audience finds trustworthy. Dr. Scott wants us to find thought leaders from the same tribes as the deniers who will assuage their concerns about bad consequences. Maybe I should offer myself as an ambassador of reason. After all, I have a Notre Dame degree I've never used and I've met plenty of people from that school who fit the denier pattern. I was slightly sympathetic to climate change skepticism myself until I actually read more science and less denier propaganda. The Commonwealth Club's Climate One program really helped, although some of their experts really need to polish their arguments. I did not need any emotional argument to move my opinions; I simply compared the two sides of the argument on their evidence and found the skeptics to be deficient. My dual backgrounds in finance and military intelligence make that behavior a force of habit. I never needed any convincing that evolution works as advertised, because I've met many fellow "humans" whose behavior qualifies them for the chimpanzee cage at a zoo.
Americans have rested on their scientific laurels for long enough. The amazing output of our government and university labs leaves most Americans in the dark. People don't grok the connection between rising living standards and commercialized research. It's time to present American science deniers with emotional arguments that hit them in the pocketbook. Show people how much poorer and sadder they'll be without STEM-educated experts inventing gadgets and materials they use daily. The American way of life is not negotiable, as former President George H.W. Bush said prior to the 1992 Earth Summit in Rio de Janeiro. That sounds like a very conservative rationale for supporting the STEM education and pro-science public dialogues that will enhance our way of life.