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.
Wall Street closed out another year with nonsense galore. The DJIA went nowhere for 2015 and even closed down today. You can be sure that some salesperson somewhere will pitch this as a buying opportunity in 2016. I won't pitch anything at all. Reviewing the year's action doesn't uncover much that anyone could sensibly pitch.
Stocks, bonds, and real estate remain severely overvalued worldwide. No one has to take my word for it. Anyone with a junior high school reading level can review reports from the Bank of International Settlements on how public market valuations have come uncoupled from macroeconomic reality. Hardly any professional portfolio managers will take those high-level warnings seriously.
Consider this the year-in-review from Alfidi Capital. There isn't much I can say here that I haven't been saying for the past several years. Mean reversions across multiple asset classes and geographies are long overdue. Predicting the timing is a waste of effort. Knowing the likely scale and consequences of the correction is more productive. Contrarians made fortunes in the Great Depression and 2008 financial crisis by preparing in advance and staying away from inflated risks. I am ready to watch Wall Street learn its hard lessons in 2016.
Social media users often tempt me to follow them down endless rabbit holes of replies. That is not how I prefer to spend my time. I would rather use my hours wisely in the pursuit of sarcasm.
The SEC's report on last August's volatility spike is out. It should have taken the SEC weeks, not months, to produce this report and it doesn't even draw any conclusions. A bunch of people at the SEC must be very concerned about how any hard evidence of malfunctioning markets would make them look bad or endanger their prospects with future employment on Wall Street. Fund managers are becoming very concerned about how liquidity interruptions in the bond market can trigger illiquidity in equity markets. They worry about being forced to sell stocks just to pay for bond fund redemptions. The SEC doesn't even get that the trading halts triggered in August can cause such illiquidity. We're sleepwalking into another market crisis and the SEC has no idea how to untangle its vine jungle of trading rules.
The wealthiest Americans have created their own private tax system. Affluenza has replaced civic obligation as the defining characteristic of this country's ruling elite. Rich people who claim they are willing to pay more in taxes aren't serious. Their claims are a stalking horse for increasing the burden on "tax donkeys" in the upper middle class of professionals who could displace them. I'll bet Bermuda is really nice this time of year. I wouldn't go there for vacation because these "income defense" people would just shoo me away. They don't even realize that they are the intended targets of their super-rich masters' desire to push the income tax burden downwards.
Bridgestone will allow Carl Icahn to walk away with Pep Boys. I think this deal is a play on the sharing economy for cars. Think about how car-sharing services will eventually hurt sales of new cars to Millennials who can't afford to drive anyway. Car-sharing services will still have cars on the road, driving constantly. Those cars will have to last longer and will need constant maintenance. Auto parts and services will always be in demand, even if corporations own most of the cars. Lots of aspiring Uber drivers can switch to jobs stocking parts at Pep Boys once Uber starts buying self-driving cars.
Let me get back to Bermuda as a tax haven. I don't see why Congress doesn't grant the same preferred status to Puerto Rico. Just think of all the professional income defenders who could then set up shop on that poverty-stricken island and help alleviate its insolvency. I guess the ultra-rich prefer to confine their tax donkeys to the same island where they take vacations, just to push them around in person. No one pushes me around. I'm a CEO, in case anyone forgets.
BioPharmX (ticker BPMX) is another small pharmaceutical company with big plans to shake up drug delivery in dermatology and women's health. Plans are one thing, operations are another. Talented management teams are supposed to translate strategic plans into operational success.
The company's management backgrounds make me wonder whether the right people are in the right positions. The current CEO and president both have very diverse backgrounds helping other tech-related companies, but growing a young drug company demands years of drug-specific focus. Their SVP for marketing has worked in plenty of sectors except drugs. I am used to seeing such oddly diverse backgrounds in small-cap mining companies that have trouble developing a viable project, but it is disappointing to see such a mix in a drug company.
BioPharmX's BPX01 anti-acne treatment is still in its clinical stage, so it's impossible to know its retail price point in a market crowded with generics. The company's BPX03 for breast pain must compete directly with very cheap OTC pain relievers. New drugs treating common symptoms already covered by cheap treatments are usually redundant unless they offer massive improvements.
BioPharmX had a very unprofitable 2015 even after ramping up SGA expenses. They also lost money in the prior two years. A drug company whose ability to deliver a quality product is largely unknown must rely on some compelling "story" of unmet market needs and past management successes. The BioPharmX story needs a better second chapter.
Full disclosure: No position in BPMX at this time.
Aoxing Pharmaceutical (ticker AXN) is one of those Chinese drug companies that wanted a US stock market listing. Such listings are a smart move if a thriving foreign company wants to raise capital here or expand operations beyond its home country. Either option will now face an uphill climb after some December news items about the company.
At first glance, Aoxing's profit margin of 22.83% and operating margin of 35.8% should indicate health. These measures don't square with the company's five-year average ROA of -18.68% and five-year average ROE of -50.75%. Aoxing's 2015 financial results show a sudden reversal of fortune after net losses in 2013 and 2014. Significantly higher gross revenue helped in 2015, in spite of persistently rising total liabilities and several negative changes in operating cash flows. Aoxing's SEC 10-Q filing dated November 13, 2015 notes in its MD+A how a shift in sales strategy from a third-party agent network to direct sales drove revenue growth. The strategy's reliance on independent direct sales will face challenges as China's drug distribution market changes.
Reviewing English-language reports on China's drug market reveals reasons to be concerned about any young Chinese drug company's ability to grow. AT Kearney's "China's Pharmaceutical Distribution: Poised for Change" reveals a fragmented distribution market and poor supply chain visibility. The US FDA's country director for China testified in 2014 about how hard US drug regulators are working to ensure Chinese drug exports meet US standards. Aoxing's future success in distribution will depend very much on securing healthy relationships with the three or four Chinese companies that will likely absorb much of the country's drug distribution network during consolidation.
Pharmaceutical companies with strong IP portfolios can tolerate high debt/equity leverage because their drug patents are supposed to be money makers. Aoxing's leverage will test US markets' tolerance if the company cannot sustain its net income improvement into 2016. The market is already showing its concern as the price of AXN fell from US$2.20 on June 8 to $0.92 on December 24. The company cannot blame this share price disappointment entirely on China's currency devaluation. Investors have a right to wonder how Aoxing responds to its US legal critics and China's changing drug distribution landscape.
Tech big shots aren't satisfied with keeping their most productive rock stars in line. They want to push everyone's compensation down by encouraging the immigration of skilled tech workers who are accustomed to far less compensation than American-born STEM professionals. Temp workers on H-1B visas can come here for training and then return to the tech employer's branches outside the US. The foreign workers will earn much lower compensation there. Global wage arbitrage will drive American tech workers to compete with those lower wages. The Silicon Valley-funded Fwd.us pushes for a version of immigration reform that will open the door wide to permanently high immigration in STEM labor categories.
The legal settlement in the wage collusion lawsuit cost big companies $325M. The total funding for Fwd.us so far is much less than that sum. OpenSecrets.org's listing for Fwd.us notes that they spent $720K on lobbying in 2014 and $420K so far in 2015. That's a tiny fraction of the $50M they supposedly raised according to re/code, begging the question of whether they spent the rest on TV ads or other things that have nothing to do with adding grassroots pressure to a lobbying effort. Experienced Washington hands would have told them to engage the US Chamber of Commerce and other inside groups to identify which members of Congress are most amenable to a pro-business argument. Better luck next time.
Billionaires don't like paying a premium for highly intelligent people. Those people would then have the financial resources to start competing firms on their own. The Valley's mandarins would prefer that their most skilled professionals remain wage slaves motivated by non-cash perks, like gourmet food courts and on-site yoga classes. The road to neofeudalism will be paved with uncontrolled immigration. I am all in favor of sensible immigration reform that fills true labor shortages and offers illegals some kind of safe status. I just don't think Fwd.us has a clue how to make that case in Washington, if they're so inclined.
Here's a Christmas Day cultural excursion for you folks, in the generous spirit of the holidays. I am a regular attendee of the annual San Francisco Great Dickens Christmas Fair. I figured out early on that many of the fair's performers also frequent the Northern California Renaissance Faire and the Guild of St. George. In addition to their day jobs in the performing arts and technology, these fair performers populate a huge arts subculture in the San Francisco Bay Area. I'll run down a few of the creative outlets where I'm pretty sure they spend time.
The Edwardian Ball (find the link yourselves) grew into its current incarnation as a two-day imaginary trip to the light and dark sides of Edwardian era culture. The ball has a very distinct steampunk vibe. The edginess of ball performers performers like the Vau de Vire Society (again, find the link yourself) is exactly what pushes the creative envelope. Some of the acts and exhibits have dark or adult themes, so the ball is not for minors. That's why I can't link to their sites. I respect my agreement with Google AdSense and its covenants on acceptable content.
The Gaskell Ball is probably the grandest of all of the formal ball events in this area. The setting at the Oakland Scottish Rite Center certainly evokes an ornate ballroom of the Victorian era, Belle Epoque, and Gilded Age. The black-tie charity galas I usually attend in San Francisco all support today's anarchic modern non-dancing, which resembles so many epileptic monkeys on drugs freaking out at random. Formal balls should be about disciplined ball dancing.
The Maker Faire Bay Area is the only event discussed here that I've actually attended besides the Dickens Fair and RenFaire. Check out my report from Maker Faire 2013. The steampunk and Burning Man crowd mixes with DIY techies here. It takes a combination of drones, printable circuits, and Tesla coil music to hold my attention.
I would attend these events if I had more free time. It looks like 2016 will be a very busy year for me, so I doubt that I'll be able to participate in some of these very appealing events. The list wouldn't be complete without mentioning Burning Man, but I have no desire to attend that one because of some very questionable activity there that no one seems to control. I think a Venn diagram mapping out the various fairs and events would show a lot of crossover. Historical period re-enactors, steampunk and dieselpunk aficionados, and modern tech innovators have a lot in common. San Francisco gives them many reasons to interact.
The whole world waits for Santa Claus while I count my natural intellectual gifts. I enjoy dispensing grace, like a benevolent monarch blessing worshipful subjects while posing regally upon my resplendent throne. I willingly carry the burden of genius through this season of joy. I am sufficiently joyful for a whole bunch of you readers. Sharing my Christmas wishes multiplies such joy.
My first wish is for Wall Street to quit ripping off investors. This happens in so many guises you'd think it's hard for crooks in suits to think of new scams. Lo and behold, their creativity never ceases. Hedge funds, structured notes, multi-manager funds of funds, late-stage unicorn startup funding, and other such garbage are things the investing public can do without.
Here's another wish: Wall Street needs to quit hiring trust fund kids. It's easy for these lazy creeps to bring in new money because they just whine and cry until their parents cough up dough. The problems come later when they refuse to do work and their less privileged co-workers have to pick up the slack. The whole banking sector would be better off not hiring these mental weaklings in the first place but those new asset referral bonuses are just too good for some managers to pass up.
I wish economic annihilation for all of my enemies and bonanza for myself and my many friends. Haters crawl out from their caves to spew racism at me on Twitter or slander me anonymously online. A whole bunch of English-speaking morons can't handle my genius so of course they compensate by embracing pure evil. True friends are more fun to have around, especially when they swoon after exposure to my overwhelming talent.
Finally, I wish the idiots who take shopping carts out of grocery store parking lots would acquire their own conveyances. I used to think this phenomenon was confined to low-income neighborhoods. Now I see it in well-off San Francisco neighborhoods. A whole bunch of financially secure people think it's okay to drag a grocery store's cart all the way home and not return it. The store then has to send its workers in a truck all over the place to haul these things back. They pass the cost on to you, people, while the staff in the store remain short-handed. If you're too weak to carry more than one bag of food home, then buy your own cart, for crying out loud.
Pass the eggnog and I'll mix it with brandy. I do that all the time during the holidays. I can metabolize booze like you would not believe because I'm the next step in human evolution. Santa can squeeze his fat red behind down someone else's chimney tonight, unless he has a big pile of cash to give me with no strings attached.
Attention Wall Street and the rest of the financial services sector. Today is Festivus and you know what that means. I've got a lot of problems with you people, and you're going to hear about it! You have all disappointed me very much this past year. I was spewing lots of Festivus grievances this morning on my Twitter account and now here comes the main event.
First of all, financial commentators who should know better kept casting the Federal Reserve's prospective interest rate change as something either "hawkish" against inflation or "dovish" for GDP and employment growth. Nobody even bothered to track the shift in the Yellen Fed's thinking as something where any change would lead to a return to normalcy. Wall Street disappoints me when its public mouthpieces can't slice the "layer cake" messaging.
Fund management companies continue to roll out garbage securities products. All of the leveraged and inverse ETFs out there can't possibly outperform the simpler passive ETFs but hardly anyone wants to state the obvious. I'm happy to say it myself. Simple, passive, broad market ETFs are cheap and efficient. Boutique but still passive ETFs for sectors and commodities have their place as hedges. Complex, leveraged, and "active" ETFs are expensive wastes of time.
The sector is still hooked on active management as an excuse to charge an arm and a leg for "outperformance" that never happens. Come on, folks, indexing sounded the death knell for active investment management decades ago but fund managers are still in denial. Robo-advisers are now completing the circle by cutting the costs of personalized risk management down to a few basis points. Financial advisers and their back offices will still be in denial long after AIs have taken their jobs.
Enough with the hedge fund craze already. It was cute to watch math PhDs play with algorithms for a couple of years, but now an entire enabling subculture has grown up around these stupid products. Hedge funds are nothing more than elaborate schemes for transferring wealth from dumb rich people to clever rich people. Cheap capital helps enable this stupidity. Illiquidity in a market crisis will end it.
I would gladly challenge any Wall Street CEO to a Festivus feat of strength because I know I'll win. I train for this stuff day and night. Alfidi Capital exists to shove a shiny Festivus pole right up Wall Street's crawl space.
Here comes the special Christmas holiday 2015 edition of my sarcasm. Tonight I spent a brief interlude at CoInvent's holiday party at General Assembly's San Francisco office. The party was fine and I got my fill of free booze. I can't complain about parts of the startup ecosystem that competently execute their business models. I can only blast some sarcasm at other parts of Silicon Valley culture that are not living up to their reputations.
I spoke with one longtime contact at tonight's party who sells office furniture. He remembers the 2001 dot-com crash all too well, and how easy it was to pay bargain prices for like-new high-end office furnishings. I mentioned the recent deflation of a few unicorn startups, you know, the ones with undeservedly high valuations. I'm pretty sure he can expect loads of office bargains coming his way soon as other unicorns fail to deliver on their early investors' expectations.
Everyone I met had something to pitch. Anyone who arrives at these types of things without a pitch should think of one really fast. My pitch was "I want free wine," and lo and behold the free wine materialized right in front of me. That was fast. I didn't even have to ask. I did ask for free food but none was forthcoming. Only one of my two pitches was effective.
The CoInvent holiday party intended to raise money for Charity: Water. I am all in favor of building clean water projects in developing countries. Before you know it, those underprivileged folks will be watering lawns and washing mud off SUVs just like we do here in the U.S. We can then teach them something about water conservation after they've wasted all of the water they never knew they could pump.
San Francisco tech events just aren't the same if I'm not gracing their presence. Techies flock to hear my wisdom when I attend anything. I celebrate the winter solstice with my own personal Saturnalia that lasts as long as I feel festive. Ancient people worshiped the gods of nature. Modern people worship the god of tech and finance . . . that would be me, yours truly, Anthony J. Alfidi.
It's ten o'clock at night somewhere and you're running an off-grid power source for some remote site, or even an urban site on the grid that needs back-up power. Suddenly some component in the generator fails and part of your site is without power. Your smart microgrid software management system kicks in and instantly routes power from other generators to the affected area. Coverage is instantly back on. In theory, this is how every microgrid power system should work. In reality, everything comes down to the grid's supply chains.
Hydrocarbon-based power generators are well understood after decades of use in construction and mining. Renewable energy micropower systems are just now coming into their own. The recently concluded 2015 United Nations Climate Change Conference (aka Paris COP21) climate and energy accords will make any hydrocarbon-based power source increasingly expensive in perpetuity. The market for off-site renewable power thus gets a big global regulatory boost.
The major equipment providers should start retooling now to offer the kinds of off-grid renewable power sources that will now be in vogue. The component supply chains for these things are not always completely portable to renewables. Putting solar panels on a generator means sorting through lots of Chinese panel makers and German rack makers. A lot of Chinese solar companies won't be around in a decade as that country's industry shakeout proceeds. Equipment makers should choose their solar suppliers with future reliability and surge order capacity in mind.
Quite a few apartment complexes and office towers here in San Francisco have some kind of power backup system. The property managers will have to seriously consider replacing any diesel-powered systems they own with renewable systems once COP21 emissions controls become US standards. Here comes a bonanza for equipment companies riding the leading edge of generator and storage system adaptation. The ones whose products survive will do their homework now on solar and battery components.
Today was opening day for Star Wars: The Force Awakens. I went to see it and it was pretty awesome. Lots of spaceships were shooting lasers at each other and blowing up stuff. Stormtroopers were running around and some other people were swinging lightsabers. It was all really cool. In the real world, the Federal Reserve raised its target interest rate range by 25 basis points. That turned out to be really cool too.
It would be nice if the Fed could raise interest rates all the way to a more normal level, like to 6.00%. That would be the required shock therapy to kill off uneconomic business projects by pricing them out of the range of reasonably available capital. The Fed continues to aid and abet the mispricing of capital by keeping interest rates much lower than their historical norms.
Future investors will thank the Fed once asset prices crash if only the Fed cared about true normalization. US equity markets don't care much for normalization and they yawned in response to the Fed's move. A truly normal interest rate move would act like the planet-sized superweapons we see in the Star Wars universe by blowing up bad investments. That's exactly what the galaxy could use right about now. I normally favor the light side of the Force. The Fed's refusal to truly normalize rates keeps fundamental analysts like me in the dark about intrinsic valuations.
Forbes thinks we should buy stocks before the Federal Reserve raises its interest rate target. Some editors forgot to mention that even a slightly higher cost of capital will force companies with weak balance sheets into serious trouble. I shake my head whenever a media publication that is obviously not a licensed brokerage purports to give financial advice to readers whose personal situations it cannot know. There's more to bank stocks than book value. Buying one without knowing its Texas ratio or capital adequacy ratio is like buying a pig in a poke.
Lower oil prices offer some support to long-term bond prices. I'll believe that correlation holds when someone shows me data for a time series longer than 48 hours. Interest rates still govern the yield curve in every country with a bond market. Any rise in the Fed's target rate means oil loses its hold on bond prices and the long end of the curve comes under downward pressure. It must be a slow news day when bond traders need to swallow an argument for tracking oil prices instead of the risk-free rate of return. I never ignore sovereign credit risk, but that concern escapes bond fund managers who take their eye off the ball and get distracted by oil.
I have noticed lots of mixed reactions lately about the IMF's acceptance of the Chinese yuan as a reserve currency. There's always an echo chamber blathering about how this is some harbinger of China's renewed rise to world dominance. Gimme a break already. When China matches the US's ranks on various data indexes for development and the rule of law, it will be trustworthy as a regional hegemon. I think a lot of the noise about the yuan is driven by portfolio managers who would like their Chinese positions to be more liquid in case they have to sell out quickly. Chinese elites buying vacation homes in California are already selling out.
Once again, there is no financial advice to be found at Alfidi Capital. I don't write this way to help anyone. I amuse myself when nutty market events are on my radar.
Hello there, board people. I noticed some recent news articles about how your board is considering some serious pruning at Yahoo. I'll offer a brief outline of what I think you should do before shopping around to some private equity firms. I am available to discuss this plan over lunch at a fine Palo Alto restaurant provided I don't have to pay the bill.
First, sell Yahoo's Alibaba stake to the first taker. No one outside of China's ruling elite knows how to fairly value Alibaba. China's securities rules and Alibaba's own corporate structure are so opaque to Western observers that any continued involvement risks a very bad surprise. I strongly suspect a lot of Chinese-domiciled companies whose shares trade in US markets are not doing nearly as well as they or their Wall Street enablers claim.
Next, spin off every property not directly touching Yahoo's longtime core functions of search and email. Google did something similar recently when it split off its more experimental projects into Alphabet. The Yahoo spinoff will thus be a collection of multimedia projects that probably don't work well with search and email anyway. The spinoff would be an attractive acquisition target for a large media company that wants to leverage its legacy cable broadcasting infrastructure into new digital things.
Finally, offer the remaining rump of Yahoo, based on search and email, to Microsoft as an acquisition. The offer should recapture the intent of Microsoft's 2008 attempted acquisition that would have added Yahoo's search capability and email user base to Microsoft's more successful product lines. Microsoft is already the cloud provider that Yahoo will never become. Unwinding the unneeded parts of Yahoo is best done before integrating with Microsoft, as it reduces inevitable cultural friction.
Please thank Ms. Mayer and her Yahoo team once all three deals are complete. They have tried their best but they are not helping Yahoo remain an independent company. I do not foresee a role for any of them at Microsoft or a media company after they are done with Yahoo. They have not proven their ability to integrate media projects with search or anything else. Maybe they could land at startups after their golden parachutes deploy. They can learn to be hungry and push for growth all over again.
The Alibaba sale and media property spinoffs should add enough cash to Yahoo's treasury to make the rump company palatable for Microsoft to safely digest. I'm not going to run the numbers on this scenario because that's not my job. I'm the "idea guy" here. My big idea restores Yahoo to its best value proposition and ends its odd status as the only 1990s-style Web portal business model still standing in the cloud age. Its legacy projects will survive in other companies whose business models are more coherent. Saving Yahoo means ending its independence. Let's close the books on this original dot-com era story.
Full disclosure: No position in Yahoo, Microsoft, or any media company at this time.
The anticipation over the Federal Reserve's likely target rate increase is approaching fever pitch, at least for a few thousand economists, bond traders, and analysts who are otherwise surgically attached to capital markets information systems. We can amuse ourselves with what-ifs while awaiting the Fed's formal announcement.
What if the Fed raises rates by only a notional amount, like 25bps? Money market fund managers will probably breathe a sigh of relief that they won't face extraordinarily large redemptions. We cannot say the same for fixed-income fund managers, especially those with actively managed portfolios skewed towards the long end of the yield curve.
What if the Fed raises rates more than the notional amount, like anything from 25bps to 100bps? Money market funds would scramble to meet redemptions if they own anything other than overnight paper. Some of the funds would have to lean on the Fed's emergency tools, making all of the dry runs up until now worthwhile. The US equity markets would likely suffer a severe drop as companies with the weakest balance sheets immediately face higher overnight borrowing costs.
What if the Fed leaves rates unchanged? Bond fund managers breathe a sigh of relief for another quarter and the US stock market gets a little bump. The market bump continues into January if Christmas sales are better than expected. The large investors moving markets, particularly hedge funds, will tend to ignore whether the holiday sales are better or worse than last year's numbers. They only notice the headlines.
The first scenario for a 25bps increase is the most likely one, but doing nothing is always an option. A larger rate increase is probably not an option given its consequences. The Fed needs to test its new emergency levers under real world conditions before it puts the economy on a path to a more normal yield curve. The end of the Fed's emergency lending policy for SIFIs changes one such lever significantly. Testing with minimal stress is always best, but the test must come at some point.