End of year recap
Resolve to find bonanza
Bulls and bears will run
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Tuesday, December 31, 2024
Sunday, March 31, 2024
The Haiku of Finance for 03/31/24
Search for high returns
Asset class selection mix
All long-term holdings
Thursday, December 31, 2020
Saturday, September 30, 2017
Alfidi Capital at The MoneyShow San Francisco 2017
I had to attend the MoneyShow San Francisco 2017 because it has long been one of my favorite conferences. It has never lost its appeal since the first time I attended back in 2001 (or maybe it was 2002, I can't remember). I have my favorite speakers picked out weeks in advance but I try to learn something new every time I attend. Those of you who did not attend are about to get my full blast of recollections.
Kim Githler was as optimistic as ever in her welcome address. She has been running this conference for three decades and I don't think she ever gets tired. The webcast attendees now far exceed the live attendees. The future has arrived and my fellow Gen-Xers are the last generation to fully experience live trade conferences before they all completely migrate to AR/VR webcasts. Ms. Githler noted that her investing success factors included luck, something no analyst can ever quantify. Analysts will also never fathom the sheer greatness that my badge selfie below represents.
I picked up some useless knowledge right away from people I won't mention, and I put it down right away. The culprits shall remain nameless but their specious wisdom will become infamous. There is no way to determine whether trades in dark pools appear in NASDAQ Level 2 block trade quotes, or whether they indicate something directional for a ticker symbol. I had never heard of "stupid spreads" in options but apparently they're a periodic thing with professional traders who have worked in the big exchanges' trading pits. I had also never heard of a "double diagonal" spread, a much more frequently executed options play.
Other introductory speakers had more interesting things to say. I have my own thoughts about their theories in the next few paragraphs. Cash flow return on investment (CFROI) is an alternative to valuing equities by earnings. I think it's more reliable than venture investors' EBITDA method but less reliable than Buffettologists' earnings-based method. I can evaluate these methods by their real-world results. Venture investors lose a lot of money relying on EBITDA and Warren Buffett made a lot of money focusing on on earnings. The CFROI comparison to IRR and hurdle rate metrics reveals its limits, as those things fell out of favor with academics long ago when the CAPM came along.
Institutional investors are using more than a "periodic table of country returns" to allocate their portfolios among emerging markets. They are really counting on middle class growth in emerging markets to drive international stock returns, while they totally ignore geopolitical and country risk. It's the new BRICS-like fad. The whole BRICS concept was a Goldman Sachs marketing gimmick and the BRICS countries themselves fell for it by holding BRICS Summits. I am less interested in who the CCP Congress invites as its annual guest speakers. I am more interested in China's rank in highly credible indexes for economic freedom and development.
Advocates who say we have entered a new era in investing remind me of the Internet apologists common during the dot-com boom's terminal stage in 1999. People now totally ignore the tech unicorn bubble, the commercial real estate debt bubble, the high yield debt bubble, and the corporate debt bubble driving stock buybacks. The same people totally dismiss the ongoing retail collapse. Journalists are as guilty of this behavior as economists and analysts.
There is no obvious secret to investing success. Purveyors of said secrets totally ignore the Federal Reserve's ZIRP role in pushing stock market gains after the 2008 financial crisis. One such purveyor is a "Sovereign Investor" service, which I recognized as total baloney long ago for its non-stop hawking of extreme fear and greed. More conventional publishers ignore the hazards of extreme debt levels. Corporate balance sheets are more laden with debt than ever, and rising interest rates will increase interest expenses hardest for those companies with high short-term debt burdens, thus hurting earnings. A good basic thesis is to find undervalued stocks paying dividends, which is hard to do with the S+P 500 P/E ratio at an all-time high.
George Gilder thought there's life after Google. I think there's life after George Gilder. He still likes Bitcoin and gold, for crying out loud, a disappointment for me since I've actually studied the efficacy of hyperinflation hedges. He made no sense discussing IPOs, bizarrely comparing Bitcoin to the FANG stocks by saying Bitcoin's growth outperformed Google since that stock's IPO. Dude, Bitcoin is in a huge mania-driven bubble. The guy says free product giveaways prevent companies from learning; I say that's baloney. He should know that Google's main products are free (Search, Docs, Maps, etc.) yet obviously they are learning to make money selling ads and data. Sheesh, George. I think he's finally exhausted my patience by comparing Bitcoin and copycat ICOs to FANG companies with real earnings.
The featured artificial intelligence (AI) advocate mentioned The Innovator's Dilemma in the context of large companies pushing AI development. If his claim that 10.5% of Fortune 500 companies mentioned AI in their most recent conference calls is true (and I have no way to verify it), then he should not limit his picks of AI winners to the typical FANG stocks.
I had never heard of the US Regulatory Information Service Center, a GSA project tracking growth in economically significant regulations. One speaker mentioned it as a tracking tool for regulation acting as a drag on the economy. His stock picks for an era in which Ponzi-like government entitlement programs degrade GDP included water, energy, agriculture, and infrastructure, plus VIX volatility call options. I generally concur with that thesis, but timing is everything.
Ed Yardeni had a lot to say about the current administration in Washington. I disagree with his critique of mark-to-market accounting rules, which IMHO are necessary for transparency. It was hard to listen to yet another dismissal of geopolitical risk, assuming away any big wars. It gets tiresome to hear continual Pollyanna-like views that assume indefinitely low inflation.
Peter Schiff led the next introductory panel. I still like the guy even though he's been premature (just like me) on the next likely crisis for the financial markets. I agree with these particular experts that it's hard to find stocks at decent prices with indexes at all-time highs. I look forward to less blind worship of unfulfilled political promises and more attention to how a weaker US dollar will make commodities and emerging markets more attractive. Mr. Schiff is probably correct that excessive automobile loans are driving (no pun intended) the automotive sector's valuations. He appeared again later to reiterate his expectations of the next big market crash, a collapse in consumer spending, a debt default that destroys bonds, and a boon for dividend stocks paying out from earnings in stable currencies. I have had a similar thesis for quite some time. It is difficult to be patient while so many less observant people make money through complacency.
I did not need to see another walk-through of a trading platform but sponsors pay for the prime time they get. The best options trading platform must display Greeks. I learned a new options tactic called a "risk reversal," buying an OTM call spread and selling an OTM put spread. I suspect options will be very useful plays in advance of earnings announcements. Watching options with weekly expirations prior to a highly volatile stock's earnings announcement, along with the option's implied volatility, is probably worth my time.
We are all smarter thanks to the joint FINRA and SEC panel on outsmarting investment fraud. Check out FINRA's The Alert Investor, the SEC's Investor page, FINRA BrokerCheck, and the CFTC RED (Registration Deficient) List to see if someone pitching you a deal is legitimate. The regulators let us know that they have emerging concerns about cryptocoin ICOs, crowdfunding, simple agreements for future equity (SAFEs), and binary options. I will be on the lookout for shady operators in those areas so I can turn them in to law enforcement for prosecution.
Another options broker showcased some revolutionary trading system that promised to do everything except vacuum the floor. The dude argued that high frequency trading (HFT) can compress risk premia and lower volatility, but I think it actually magnifies those conditions. I need to see the dude's evidence. I did agree with him that all of the information available on very expensive Bloomberg terminals is freely available elsewhere. There is no way that volatility measurements will tell investors whether a stock is overvalued, undervalued, or fairly priced. Current data on corporate earnings and P/E ratios at all-time highs tell us more abut valuation than options volatility ever will. I mentioned above that watching volatile options in advance of earnings announcements was worthwhile; I put that activity in the context of making short-term profits from options trades, not in the context of long-term growth from finding undervalued stocks.
Utilities and REITs are still the favorites of experts who want the best of both world in dividends and growth. It's important to assess the predictability of dividends by finding the payout ratio, leverage ratios, and funds from operations (FFO). Higher interest rates will probably hit these stocks' valuations, making their yields more attractive. On the other hand, higher rates will hurt the balance sheets of the most highly leveraged stocks in these categories. Increasing consumer preference for online shopping over retail shopping will hurt REIT retail holdings. I did not believe one person's claim that REITs trading at premium valuations have a lower cost of capital. Commercial lenders are smart enough to distinguish market exuberance from underlying assets and earnings. I finally found good descriptions of the "genco" utility investment I heard about years ago. One MoneyShow expert described them as "merchant generators" where utilities build and operate plants without an exclusive geographic franchise. They are unregulated and risky.
One metric for evaluating an investment manager's track record is the upside capture / downside capture (UC/DC) ratio. A higher UC/DC ratio proves better performance. Most active managers have terrible UC/DC ratios over periods longer than ten years. They also have higher fees than passive investments. Active managers need to get out of financial market careers and do something more productive, like day labor or subsistence farming.
American investors seeking growth opportunities in Canada need to watch out for Canadian rules on something called a passive foreign investment company (PFIC), a designation that incurs an ordinary income tax liability for companies that don't even have income. It's another condition afflicting Canadian junior mining companies that still have difficulty raising capital.
Interest rates govern all yield plays. Martin Zweig's maxim "don't fight the Fed" does not hold for every market all of the time. Central banks must unwind their engorged balance sheets and interest rates are going to rise until those balance sheets return to normal. Watch the US Federal Reserve's bond roll off rate. Track the Fed's monthly "dot plot" interest rate model projections. Know the Atlanta Fed's GDPNow forecasting model. The Fed's political sensibilities determine the length of an interest rate cycle in months and the magnitude of its changes in basis points. The only Fed-proof bond substitutes are those dividend-paying stocks, MLPs, BDCs, and REITs with strong balance sheets, limited long-term fixed-rate debt, and no short-term debt or floating-rate debt.
I had never heard of one very prominently featured speaker in this year's lineup. I had to look him up to discover that he had been some kind of broker for most of his career. Now he produces a bunch of content. His talk reminded me of an old adage I heard about commodities many years ago, that the only people who made regular money trading the most volatile instruments were the brokers, not the traders or investors. He did make one interesting point about society's decline in risk-taking, which coincides with data I've seen on declines in new business formation. The rest of what he said was flat-out bizarre. I had no idea what he meant when he said liquidity providers must improve something or other, like order flow, maybe. Why did he throw disrespect at passive investing just because markets crashed in 1987, 2000, and 2007? They all came back. Oh yeah, it's because he makes money off of active traders who react with extreme panic. His next argument was that managers should show how they reduce the basis cost of their services. Well dude, that's what passive management does. Sheesh.
The star speaker above really tested the limits of my patience. He riffed one non sequitur after another, spouting "mechanics, strategy, repeatable, scalable" in word salads tossed into the air. He invented a new phrase called "economic bias" which seems to be an awkward interpretation of behavioral economics, and it underlies his claim that eBay "trades" improve decision making in business and finance. He cited zero sources for any of his quotes and stats, followed up with pedestrian observations about how important it is for successful people to demonstrate know-how and skill. No kidding, dude. I thought the guy was seriously stupid, or at least addicted to making stupid statements that played to the limited knowledge of his audience. I could not find one single observation he shared that's worth repeating in full, let alone adopting as a guiding mantra. Who knows what his new gig means. Warren Buffett doesn't make a fraction of the trades this guy's archetypal "decision-making skill builder" active trader makes, unless you count the times he says "no" to bad decisions, and he's the most successful investor ever.
Marilyn Cohen is still my favorite fixed income speaker. Check out the data on outstanding US Treasury maturity distributions; it's all free online. There's so much debt out there that it doesn't change Ms. Cohen's investment philosophy. Municipal bond investors will hear a lot more about "dark store theory" as the commercial real estate sector, already under pressure from online commerce, lobbies for reduced property taxes that will lower the revenue available to pay off muni bonds. One key insight she shared was to compare REIT yields to those REITs' bonds' YTMs. Some bonds will pay better yields given REIT share price gains. I attend Ms. Cohen's appearances at the MoneyShow just to appreciate such excellent knowledge.
There was some more nonsense going around another seminar about blockchain tech and crypto-currencies. One person claimed the blockchain's blocks and layers are encrypted, but hackers have proven that's not true for Bitcoin. The same person repeated the commonly accepted falsehood that Bitcoin is untraceable. That is totally stupid!
I walked out of another seminar when the speaker claimed he could outperform Warren Buffett with market timing. The guy made really unrealistic claims about his methodology. It's really dumb to think he can time market entry and exit points based on directional indicators. I could not stand to listen to some totally stupid nonsense about using a 200-day moving average with some standard deviation of volatility to measure the market's natural range.
There's a cottage industry of publishers and custodians pushing "self-directed IRAs" as some kind of magical machine that can process everything but the kitchen sink into a tax-free deal. I have always said these things are a misuse of tax-advantaged retirement accounts. People at this MoneyShow wanted to take it to a whole new level of nonsense by putting real estate into 529 college savings plan accounts and health savings accounts! That is stupid, risky, and possibly fraudulent! One guy who thinks this is a legitimate way to earn a living wasted half of his allotted time on nothing. He offered private "hard money" lending solutions that charged higher mortgage rates to their properties' borrowers than banks, so I guess those small lot home buyers are all poor, stupid, or bad credit risks. Folks, please listen to me very closely now. Self-directed IRAs are the classic baloney shell game for people doing dumb things with real estate.
One of the major wealth management firms made me LOL to myself during their presentation on consumer trends. I just LOL that they thought Nigeria is a growth market for consumers and that every emerging market will follow South Korea's path to a developed market. More investment firms are publishing research on "Peak Auto" to describe the end of growth in the automobile market. IMHO future electric vehicle growth must cannibalize market share from internal combustion engine cars. I will make one other important point about consumer spending that the rest of you should know. Household net worth versus personal debt (as a percentage of disposable income) is an important way to assess consumers' actual capacity to spend, especially compared to consumer confidence.
I always win at the MoneyShow San Francisco. I win by absorbing information and spewing wisdom to the entire world. I also win by exposing stupidity. Alfidi Capital is all about winning. You can be a winner too if you think exactly like me. You'll be winning so much you'll get bored with it. I never get bored with winning. I look forward to attending another MoneyShow to continue my winning. I am willing to speak at the show again (as I did in 2013) to show others what a winner I am. The MoneyShow is for winners.
Kim Githler was as optimistic as ever in her welcome address. She has been running this conference for three decades and I don't think she ever gets tired. The webcast attendees now far exceed the live attendees. The future has arrived and my fellow Gen-Xers are the last generation to fully experience live trade conferences before they all completely migrate to AR/VR webcasts. Ms. Githler noted that her investing success factors included luck, something no analyst can ever quantify. Analysts will also never fathom the sheer greatness that my badge selfie below represents.
 |
| Alfidi Capital at the MoneyShow San Francisco 2017. |
I picked up some useless knowledge right away from people I won't mention, and I put it down right away. The culprits shall remain nameless but their specious wisdom will become infamous. There is no way to determine whether trades in dark pools appear in NASDAQ Level 2 block trade quotes, or whether they indicate something directional for a ticker symbol. I had never heard of "stupid spreads" in options but apparently they're a periodic thing with professional traders who have worked in the big exchanges' trading pits. I had also never heard of a "double diagonal" spread, a much more frequently executed options play.
Other introductory speakers had more interesting things to say. I have my own thoughts about their theories in the next few paragraphs. Cash flow return on investment (CFROI) is an alternative to valuing equities by earnings. I think it's more reliable than venture investors' EBITDA method but less reliable than Buffettologists' earnings-based method. I can evaluate these methods by their real-world results. Venture investors lose a lot of money relying on EBITDA and Warren Buffett made a lot of money focusing on on earnings. The CFROI comparison to IRR and hurdle rate metrics reveals its limits, as those things fell out of favor with academics long ago when the CAPM came along.
Institutional investors are using more than a "periodic table of country returns" to allocate their portfolios among emerging markets. They are really counting on middle class growth in emerging markets to drive international stock returns, while they totally ignore geopolitical and country risk. It's the new BRICS-like fad. The whole BRICS concept was a Goldman Sachs marketing gimmick and the BRICS countries themselves fell for it by holding BRICS Summits. I am less interested in who the CCP Congress invites as its annual guest speakers. I am more interested in China's rank in highly credible indexes for economic freedom and development.
Advocates who say we have entered a new era in investing remind me of the Internet apologists common during the dot-com boom's terminal stage in 1999. People now totally ignore the tech unicorn bubble, the commercial real estate debt bubble, the high yield debt bubble, and the corporate debt bubble driving stock buybacks. The same people totally dismiss the ongoing retail collapse. Journalists are as guilty of this behavior as economists and analysts.
There is no obvious secret to investing success. Purveyors of said secrets totally ignore the Federal Reserve's ZIRP role in pushing stock market gains after the 2008 financial crisis. One such purveyor is a "Sovereign Investor" service, which I recognized as total baloney long ago for its non-stop hawking of extreme fear and greed. More conventional publishers ignore the hazards of extreme debt levels. Corporate balance sheets are more laden with debt than ever, and rising interest rates will increase interest expenses hardest for those companies with high short-term debt burdens, thus hurting earnings. A good basic thesis is to find undervalued stocks paying dividends, which is hard to do with the S+P 500 P/E ratio at an all-time high.
George Gilder thought there's life after Google. I think there's life after George Gilder. He still likes Bitcoin and gold, for crying out loud, a disappointment for me since I've actually studied the efficacy of hyperinflation hedges. He made no sense discussing IPOs, bizarrely comparing Bitcoin to the FANG stocks by saying Bitcoin's growth outperformed Google since that stock's IPO. Dude, Bitcoin is in a huge mania-driven bubble. The guy says free product giveaways prevent companies from learning; I say that's baloney. He should know that Google's main products are free (Search, Docs, Maps, etc.) yet obviously they are learning to make money selling ads and data. Sheesh, George. I think he's finally exhausted my patience by comparing Bitcoin and copycat ICOs to FANG companies with real earnings.
The featured artificial intelligence (AI) advocate mentioned The Innovator's Dilemma in the context of large companies pushing AI development. If his claim that 10.5% of Fortune 500 companies mentioned AI in their most recent conference calls is true (and I have no way to verify it), then he should not limit his picks of AI winners to the typical FANG stocks.
I had never heard of the US Regulatory Information Service Center, a GSA project tracking growth in economically significant regulations. One speaker mentioned it as a tracking tool for regulation acting as a drag on the economy. His stock picks for an era in which Ponzi-like government entitlement programs degrade GDP included water, energy, agriculture, and infrastructure, plus VIX volatility call options. I generally concur with that thesis, but timing is everything.
Ed Yardeni had a lot to say about the current administration in Washington. I disagree with his critique of mark-to-market accounting rules, which IMHO are necessary for transparency. It was hard to listen to yet another dismissal of geopolitical risk, assuming away any big wars. It gets tiresome to hear continual Pollyanna-like views that assume indefinitely low inflation.
Peter Schiff led the next introductory panel. I still like the guy even though he's been premature (just like me) on the next likely crisis for the financial markets. I agree with these particular experts that it's hard to find stocks at decent prices with indexes at all-time highs. I look forward to less blind worship of unfulfilled political promises and more attention to how a weaker US dollar will make commodities and emerging markets more attractive. Mr. Schiff is probably correct that excessive automobile loans are driving (no pun intended) the automotive sector's valuations. He appeared again later to reiterate his expectations of the next big market crash, a collapse in consumer spending, a debt default that destroys bonds, and a boon for dividend stocks paying out from earnings in stable currencies. I have had a similar thesis for quite some time. It is difficult to be patient while so many less observant people make money through complacency.
I did not need to see another walk-through of a trading platform but sponsors pay for the prime time they get. The best options trading platform must display Greeks. I learned a new options tactic called a "risk reversal," buying an OTM call spread and selling an OTM put spread. I suspect options will be very useful plays in advance of earnings announcements. Watching options with weekly expirations prior to a highly volatile stock's earnings announcement, along with the option's implied volatility, is probably worth my time.
We are all smarter thanks to the joint FINRA and SEC panel on outsmarting investment fraud. Check out FINRA's The Alert Investor, the SEC's Investor page, FINRA BrokerCheck, and the CFTC RED (Registration Deficient) List to see if someone pitching you a deal is legitimate. The regulators let us know that they have emerging concerns about cryptocoin ICOs, crowdfunding, simple agreements for future equity (SAFEs), and binary options. I will be on the lookout for shady operators in those areas so I can turn them in to law enforcement for prosecution.
Another options broker showcased some revolutionary trading system that promised to do everything except vacuum the floor. The dude argued that high frequency trading (HFT) can compress risk premia and lower volatility, but I think it actually magnifies those conditions. I need to see the dude's evidence. I did agree with him that all of the information available on very expensive Bloomberg terminals is freely available elsewhere. There is no way that volatility measurements will tell investors whether a stock is overvalued, undervalued, or fairly priced. Current data on corporate earnings and P/E ratios at all-time highs tell us more abut valuation than options volatility ever will. I mentioned above that watching volatile options in advance of earnings announcements was worthwhile; I put that activity in the context of making short-term profits from options trades, not in the context of long-term growth from finding undervalued stocks.
Utilities and REITs are still the favorites of experts who want the best of both world in dividends and growth. It's important to assess the predictability of dividends by finding the payout ratio, leverage ratios, and funds from operations (FFO). Higher interest rates will probably hit these stocks' valuations, making their yields more attractive. On the other hand, higher rates will hurt the balance sheets of the most highly leveraged stocks in these categories. Increasing consumer preference for online shopping over retail shopping will hurt REIT retail holdings. I did not believe one person's claim that REITs trading at premium valuations have a lower cost of capital. Commercial lenders are smart enough to distinguish market exuberance from underlying assets and earnings. I finally found good descriptions of the "genco" utility investment I heard about years ago. One MoneyShow expert described them as "merchant generators" where utilities build and operate plants without an exclusive geographic franchise. They are unregulated and risky.
One metric for evaluating an investment manager's track record is the upside capture / downside capture (UC/DC) ratio. A higher UC/DC ratio proves better performance. Most active managers have terrible UC/DC ratios over periods longer than ten years. They also have higher fees than passive investments. Active managers need to get out of financial market careers and do something more productive, like day labor or subsistence farming.
American investors seeking growth opportunities in Canada need to watch out for Canadian rules on something called a passive foreign investment company (PFIC), a designation that incurs an ordinary income tax liability for companies that don't even have income. It's another condition afflicting Canadian junior mining companies that still have difficulty raising capital.
Interest rates govern all yield plays. Martin Zweig's maxim "don't fight the Fed" does not hold for every market all of the time. Central banks must unwind their engorged balance sheets and interest rates are going to rise until those balance sheets return to normal. Watch the US Federal Reserve's bond roll off rate. Track the Fed's monthly "dot plot" interest rate model projections. Know the Atlanta Fed's GDPNow forecasting model. The Fed's political sensibilities determine the length of an interest rate cycle in months and the magnitude of its changes in basis points. The only Fed-proof bond substitutes are those dividend-paying stocks, MLPs, BDCs, and REITs with strong balance sheets, limited long-term fixed-rate debt, and no short-term debt or floating-rate debt.
I had never heard of one very prominently featured speaker in this year's lineup. I had to look him up to discover that he had been some kind of broker for most of his career. Now he produces a bunch of content. His talk reminded me of an old adage I heard about commodities many years ago, that the only people who made regular money trading the most volatile instruments were the brokers, not the traders or investors. He did make one interesting point about society's decline in risk-taking, which coincides with data I've seen on declines in new business formation. The rest of what he said was flat-out bizarre. I had no idea what he meant when he said liquidity providers must improve something or other, like order flow, maybe. Why did he throw disrespect at passive investing just because markets crashed in 1987, 2000, and 2007? They all came back. Oh yeah, it's because he makes money off of active traders who react with extreme panic. His next argument was that managers should show how they reduce the basis cost of their services. Well dude, that's what passive management does. Sheesh.
The star speaker above really tested the limits of my patience. He riffed one non sequitur after another, spouting "mechanics, strategy, repeatable, scalable" in word salads tossed into the air. He invented a new phrase called "economic bias" which seems to be an awkward interpretation of behavioral economics, and it underlies his claim that eBay "trades" improve decision making in business and finance. He cited zero sources for any of his quotes and stats, followed up with pedestrian observations about how important it is for successful people to demonstrate know-how and skill. No kidding, dude. I thought the guy was seriously stupid, or at least addicted to making stupid statements that played to the limited knowledge of his audience. I could not find one single observation he shared that's worth repeating in full, let alone adopting as a guiding mantra. Who knows what his new gig means. Warren Buffett doesn't make a fraction of the trades this guy's archetypal "decision-making skill builder" active trader makes, unless you count the times he says "no" to bad decisions, and he's the most successful investor ever.
Marilyn Cohen is still my favorite fixed income speaker. Check out the data on outstanding US Treasury maturity distributions; it's all free online. There's so much debt out there that it doesn't change Ms. Cohen's investment philosophy. Municipal bond investors will hear a lot more about "dark store theory" as the commercial real estate sector, already under pressure from online commerce, lobbies for reduced property taxes that will lower the revenue available to pay off muni bonds. One key insight she shared was to compare REIT yields to those REITs' bonds' YTMs. Some bonds will pay better yields given REIT share price gains. I attend Ms. Cohen's appearances at the MoneyShow just to appreciate such excellent knowledge.
There was some more nonsense going around another seminar about blockchain tech and crypto-currencies. One person claimed the blockchain's blocks and layers are encrypted, but hackers have proven that's not true for Bitcoin. The same person repeated the commonly accepted falsehood that Bitcoin is untraceable. That is totally stupid!
I walked out of another seminar when the speaker claimed he could outperform Warren Buffett with market timing. The guy made really unrealistic claims about his methodology. It's really dumb to think he can time market entry and exit points based on directional indicators. I could not stand to listen to some totally stupid nonsense about using a 200-day moving average with some standard deviation of volatility to measure the market's natural range.
There's a cottage industry of publishers and custodians pushing "self-directed IRAs" as some kind of magical machine that can process everything but the kitchen sink into a tax-free deal. I have always said these things are a misuse of tax-advantaged retirement accounts. People at this MoneyShow wanted to take it to a whole new level of nonsense by putting real estate into 529 college savings plan accounts and health savings accounts! That is stupid, risky, and possibly fraudulent! One guy who thinks this is a legitimate way to earn a living wasted half of his allotted time on nothing. He offered private "hard money" lending solutions that charged higher mortgage rates to their properties' borrowers than banks, so I guess those small lot home buyers are all poor, stupid, or bad credit risks. Folks, please listen to me very closely now. Self-directed IRAs are the classic baloney shell game for people doing dumb things with real estate.
One of the major wealth management firms made me LOL to myself during their presentation on consumer trends. I just LOL that they thought Nigeria is a growth market for consumers and that every emerging market will follow South Korea's path to a developed market. More investment firms are publishing research on "Peak Auto" to describe the end of growth in the automobile market. IMHO future electric vehicle growth must cannibalize market share from internal combustion engine cars. I will make one other important point about consumer spending that the rest of you should know. Household net worth versus personal debt (as a percentage of disposable income) is an important way to assess consumers' actual capacity to spend, especially compared to consumer confidence.
I always win at the MoneyShow San Francisco. I win by absorbing information and spewing wisdom to the entire world. I also win by exposing stupidity. Alfidi Capital is all about winning. You can be a winner too if you think exactly like me. You'll be winning so much you'll get bored with it. I never get bored with winning. I look forward to attending another MoneyShow to continue my winning. I am willing to speak at the show again (as I did in 2013) to show others what a winner I am. The MoneyShow is for winners.
Sunday, February 21, 2016
The Haiku of Finance for 02/21/16
No post-crash learning
Theses built on fakery
Soon to feel the burn
Theses built on fakery
Soon to feel the burn
Awaiting Some Tumultuous Market Tumble
It has been a long time since the 2008 financial crisis. Everyone who bet on a market recovery since then has been rewarded. Professional money managers think they have the recovery all figured out. Endless monetary and fiscal stimulus in the developed world made even the worst investment theses prosper. The experts have no idea how wrong they are about so much of the economy.
It is impossible to fairly value any publicly traded financial security when interest rates are permanently at zero. It is difficult to invest in fixed income securities when sovereign defaults in Greece, Puerto Rico, and elsewhere invalidate distressed debt investing. It is hard to buy real estate in desirable locations when credit-impaired mortgage borrowers drive up prices after putting no money down. It is ludicrous to endorse some nation's economic potential if its government statisticians falsify important data.
Painful lessons recede from memory when shamans apply fake salves to real wounds. The snake oil feels good for a while if the patient does not catch on to the placebo effect. Witch doctors on Wall Street have run away with investors' money since 2008. The cleverest and luckiest players have already left the game. Suckers remain, awaiting their chance to hold an empty bag while Wall Street's knaves clean them out.
The post-2008 economic recovery is mostly a mirage in Europe and the United States. China's growth miracle has been a mirage for some time. The BRICS were a cute marketing concept as long as investors never figured out that those countries had weak legal climates for investing. Privately funded unicorn startups are deflating, flushing their employees' stock options down the Silicon Valley drain. Investment concepts that looked great when capital had no cost were suitable only for fantasies. The market tumble that will snap people back to reality will be one heck of a tumult.
It is impossible to fairly value any publicly traded financial security when interest rates are permanently at zero. It is difficult to invest in fixed income securities when sovereign defaults in Greece, Puerto Rico, and elsewhere invalidate distressed debt investing. It is hard to buy real estate in desirable locations when credit-impaired mortgage borrowers drive up prices after putting no money down. It is ludicrous to endorse some nation's economic potential if its government statisticians falsify important data.
Painful lessons recede from memory when shamans apply fake salves to real wounds. The snake oil feels good for a while if the patient does not catch on to the placebo effect. Witch doctors on Wall Street have run away with investors' money since 2008. The cleverest and luckiest players have already left the game. Suckers remain, awaiting their chance to hold an empty bag while Wall Street's knaves clean them out.
The post-2008 economic recovery is mostly a mirage in Europe and the United States. China's growth miracle has been a mirage for some time. The BRICS were a cute marketing concept as long as investors never figured out that those countries had weak legal climates for investing. Privately funded unicorn startups are deflating, flushing their employees' stock options down the Silicon Valley drain. Investment concepts that looked great when capital had no cost were suitable only for fantasies. The market tumble that will snap people back to reality will be one heck of a tumult.
Tuesday, January 05, 2016
Clueless CEOs Irritate Investors
Studying the ancient Stoic philosophers has taught me to take life's complications in stride. Things that used to irritate me don't bother me so much anymore. I am still morally obligated to identify sources of irritation so other investors, who are not as mature or brilliant as I am, can avoid them. Executive pitches to the investing public are one prime source of bother.
Reviewing my notes from financial events I attended in 2015 reminds me of how clueless some CEOs can be. One junior mining company guy was totally guessing at his company's timelines for project development. Where the heck were his updated NI 43-101 reports? I couldn't find them and he didn't have them. He also cluelessly claimed a silver mining credit would reduce the cash costs of production, which is not entirely accurate. Credits may in fact offset cash costs when calculating all-in sustaining costs (AISC), but only process improvements or cheaper inputs (water, power, etc.) can truly reduce cash costs in mining. Changing accounting terms does not make a physical process cheaper or more efficient. Sheesh, that's what happens when anyone other than a geologist runs a mining company. Truly competent mining CEOs understand these nuances.
Inexperienced CEOs think throwing around names of powerful supporters will matter. Those corporate backers and industry legends may have little to no involvement in running the company. They sure do make for nice presentation filler when a company has no earnings, patents, or serial entrepreneur leadership. A prominent corporate partner is useless if they offer weak financial backing or incidental strategic value. Putting an industry legend on a board of directors works when that director is personally advising the CEO every day, not when they drop in once a quarter to review executive compensation.
Aspiring CEOs should have academic and career experience relevant to their company's industry. Geologists should run exploration companies. Computer scientists should run software companies. Medical doctors and biochemists should run drug companies. All of this should be obvious but many investors don't seem to care. Presenting CEOs who can't speak with confidence, or who mumble at crucial discussion points for particulars that drive project success, are really telling me they don't know how to be CEOs.
Presenting a corporate story that depends on someone else's theoretical action just falls flat with me. I have listened to CEOs who claim their business will succeed if only some other government builds phantom infrastructure that does not exist. I hear that all the time in the resource sector. I'll believe the project is viable when the road, power line, or port facility is finished.
I could warn investors to stay away from clueless CEOs until the cows come home. Only a few people will listen. The rest of the investing public craves the seduction of an entertaining story, even if its parts are stitched together from fiction. I'm on the hunt for CEOs who openly lie about their corporate finances so I can turn them in for a regulator's bounty. I have to ignore the others who just want to waste my time.
Reviewing my notes from financial events I attended in 2015 reminds me of how clueless some CEOs can be. One junior mining company guy was totally guessing at his company's timelines for project development. Where the heck were his updated NI 43-101 reports? I couldn't find them and he didn't have them. He also cluelessly claimed a silver mining credit would reduce the cash costs of production, which is not entirely accurate. Credits may in fact offset cash costs when calculating all-in sustaining costs (AISC), but only process improvements or cheaper inputs (water, power, etc.) can truly reduce cash costs in mining. Changing accounting terms does not make a physical process cheaper or more efficient. Sheesh, that's what happens when anyone other than a geologist runs a mining company. Truly competent mining CEOs understand these nuances.
Inexperienced CEOs think throwing around names of powerful supporters will matter. Those corporate backers and industry legends may have little to no involvement in running the company. They sure do make for nice presentation filler when a company has no earnings, patents, or serial entrepreneur leadership. A prominent corporate partner is useless if they offer weak financial backing or incidental strategic value. Putting an industry legend on a board of directors works when that director is personally advising the CEO every day, not when they drop in once a quarter to review executive compensation.
Aspiring CEOs should have academic and career experience relevant to their company's industry. Geologists should run exploration companies. Computer scientists should run software companies. Medical doctors and biochemists should run drug companies. All of this should be obvious but many investors don't seem to care. Presenting CEOs who can't speak with confidence, or who mumble at crucial discussion points for particulars that drive project success, are really telling me they don't know how to be CEOs.
Presenting a corporate story that depends on someone else's theoretical action just falls flat with me. I have listened to CEOs who claim their business will succeed if only some other government builds phantom infrastructure that does not exist. I hear that all the time in the resource sector. I'll believe the project is viable when the road, power line, or port facility is finished.
I could warn investors to stay away from clueless CEOs until the cows come home. Only a few people will listen. The rest of the investing public craves the seduction of an entertaining story, even if its parts are stitched together from fiction. I'm on the hunt for CEOs who openly lie about their corporate finances so I can turn them in for a regulator's bounty. I have to ignore the others who just want to waste my time.
Saturday, September 05, 2015
The Haiku of Finance for 09/05/15
Invest or gamble
Better to assess risk first
Rolling dice is worse
Better to assess risk first
Rolling dice is worse
Friday, July 31, 2015
Alfidi Capital Visits The MoneyShow San Francisco 2015
The annual pilgrimage to the MoneyShow San Francisco has been my ritual since graduate school. Experts keep my financial knowledge base refreshed. Times change and shows like this one will eventually be completely virtual. The highlights for 2015 covered the disruption of financial advising and health care. I don't need to repeat the most important talks because those will eventually be webcast. I do need to share my impressions from the MoneyShow.
A former Bear Stearns economist led off by describing our post-monetarist environment. I won't blame an economist for Bear Stearns' collapse. Executives have the right not to listen to their top advisers. I will blame those economists who think zero interest rates and low reserve requirements are a permanent condition. Low commodity prices are already here, so that horse has left the barn. Economists don't get paid to predict something that has already happened. I'm all on board with weaker countries heading for crisis and more negative trends for US corporate earnings.
Venerable tech guru George Gilder peered ahead into life after Google. If wealth is knowledge and growth is learning, then Mr. Gilder should be one of the richest people on the planet. I guess information theory doesn't always equate to investment theory if information ignores capex requirements. Bell's Law of computer classes describes a corollary of Moore's Law. Both are useful to determine the amount of capex to commit to enterprise development. Neither are useful in making personal investment decisions. I am not clear on Mr. Gilder's formulation of "bank assets ex cash" to describe the Fed's daily borrowing. A Web search of that phrase brings up legal discussions about dividing assets in a divorce. Adding the Federal Reserve to this Web search brings up the FRB's H.8 release, so I wonder if Mr. Gilder really meant to describe the assets and liabilities of commercial banks. He may have the big picture mostly correct about cloud layers but I still don't think blockchains will give him a magic currency.
The next panel in George Gilder's Telecosm Forum echoed the kind of stock picks he made 30 years ago when he said something about Intel. Bullish talk about SDN, cloud, and front-haul data processing for apps makes me think that data center REITs will do better than wireless telecom tower REITs if I had to choose between the two. Bring on the fog computing. Tech picks only go so far. Intel took off because it was tied to Microsoft Windows' desktop monopoly. These tech stocks only work as growth stories if they are tied to network effects that impose huge switching costs on millions of retail users.
I have sought a decent predictive model in life sciences for years. The finance community cannot rely upon the same old milestone drivers of stock price movements for drug development companies. I had a gentlemanly confrontation with another investor at the MoneyShow who became frustrated that one participating company did not mention its employee headcount, ticker symbol, annual revenue, target market, or other characteristics. Granted, those are details any analyst should ferret out in due diligence. The one valuable insight I did find was a computational algorithm that enabled better understanding of molecular-level biological processes. That one insight would be worth more to the finance sector than a stack of SEC filings. Financial analysts should read Isaiah Berlin's "The Hedgehog and the Fox" about the difference between divergent, multifaceted thinkers and singular, profound thinkers. Great investors can switch effortlessly between either perspective.
Silicon Valley is taking down Wall Street. New fin-tech concepts start with domain knowledge from human experts, then add machine learning. What if the human experts are flawed? Are they truly the best in their class? True finance experts are rare because their unique brain chemistry enables "six sigma" insights. Warren Buffet, Charles Munger, Burton Malkiel, Carl Icahn, Bill Gross, and John Bogle are true experts not because their methods are peer-reviewed, but because their intellects and temperaments combine for abnormal results. Obviously it is difficult but invaluable to tap them, so lesser experts are poor substitutes. The panel remarked that descriptive analytics give deep insights into a portfolio's geopolitical risks, like the probability of a regime change as a sell trigger. George Gilder just had to mouth off from the crowd during one Q+A. His complaint was that if every investor becomes a passive investor as robo-advisers herd them into low-cost index funds, they really become "parasitic investors" who mimic each other and deprive the market of growth and learning. All I could do is shake my head when I heard him blathering. Come on, George. Does he not understand index investing at all? The growth and learning happens within these stocks as they innovate, become more productive, and increase earnings. Developing new investing theories like modern portfolio theory and arbitrage pricing theory adds learning to a portfolio's efficient frontier. Index investing enables all of that growth and learning by minimizing the costs of wasteful active trading. I do not need Mr. Gilder to tell me how to invest.
Another biotech thesis was a pick and shovel play on specialized real estate for life science research campuses. That idea works as long as it rides the biotech bubble. I did not see any data on this particular idea's performance. Dropping brand names of top pharma companies' revenue is only relevant if they are tenants in such real estate.
I quietly LOL'd at a "tag cloud investing" slide covering cloud, China, wearables, and other trends completely out of context. More computing power, faster data transfer, cheaper data centers, app proliferation, and microbial engineering all have something to do with lifting the fog around innovation and change. Wireless capability has not yet caught up to storage or processing, so maybe there's some untapped opportunity in those wireless tower REITs after all.
Carver Mead invented Moore's Law. He wrapped up the Gilder Telecosm Forum with a peek into the basics of the universe. Quantum systems are so different from anything we understand in our daily reality. They have nothing to do with the thermal system disorder that gives time its one-way direction. I appreciated the reference to sci-fi author Robert Heinlein when he said we should "grok" quantum information exchanges intuitively. He concluded by predicting a revolution in science itself that would resemble technology's revolution. The guy was pure genius. I live for the chance to hear people like him speak in person.
After the telecosm comes the many microcosms of talks on specialized topics. I like business development companies (BDCs) as an idea but their fixed rate loan portfolios make them poor performers during high inflation. I would consider an ETF for BDCs but only in a normal economy with normal rates for growth, inflation, and debt interest. I am very skeptical about companies issuing debt just to pay extraordinary dividends or buy back stock, and some of them may end up in BDCs' portfolios.
I prefer options as hedges or yield enhancements, not as the "strategic" investment some brokerages want to pitch. Too many options specialists favor short term trading. They are gamblers rather than fundamental analysts. "Beta weighting" that ties options to equities sounds like an interesting concept. I will let others tie up the Greek letters they need to explain it.
The long march of ETFs into the fore brings passive investing to cheap robo-adviser platforms. These products have restored asset allocation as the primary driver of portfolio returns. Financial advisory relationships can now be valued in minuscule basis points as venture funding for robo-advisers makes cheap solutions more desirable. Cheap "core" portfolios mean the only "satellites" adding value must be extremely unique. I will remind myself not to trade any ETFs within one hour of the market's open or close, when bid/ask spreads are widest.
I an newly fascinated with farmland REITs. I wonder if the ROI of raw farmland correlates with agribusiness stocks or food commodity prices. Aqua farms and solar farms are boutique touches that may add value to farmland in some areas. Easements for pipelines, highways, and other infrastructure also add value. Farmland exposure is one more type of hard asset hedge. Such a REIT makes farmland liquid, and it retains pricing power during inflation if its owned farmland is leased to tenant farmers under short-term leases. Wow, I may have stumbled on a real game-changer.
One MLP expert said an MLP's distribution sustainability depends on where it operates in the energy chain: upstream, midstream, or downstream. Upstream MLP prices swing with the WTI crude oil price. Midstream MLPs are a larger, diverse sector. Downstream MLP refineries are tied to both crude and fuel prices. The crack spread of a low crude price and high fuel cost equals profitable refineries. Some MLPs issue bonds, so analysts should know how bond yields tie to issuers' credit ratings and distribution history.
Dividend paying companies became investors' little darlings as the Federal Reserve forced everyone to chase yield. I wonder about the typical payout ratio of a sustainable dividend. Are there valid REIT metrics too? How about lease length and type (i.e., triple net versus others), credit rating, and occupancy rates? I'm pretty sure any company whose dividend growth exceeds US GDP growth will outperform the market because it has some durable competitive advantage, unless they're taking on debt just to raise dividends. I would favor REITs with short term leases over long term leases because they have better pricing power during periods of high inflation.
Activist investing works for investors who have lots of money and can add value by directly advising company management over the long term. It's probably not suitable for the retail investor. The SEC's Form 13 series helps us follow the money trail, and I would add that Form 4 filings are also useful. Underperforming companies with clean balance sheets and low insider ownership may not stay so clean for long if they become activist targets, because bad management will lard them up with debt. I stay away from retail investment products that claim to use activist investing because they may not have the managerial acumen to fix what ails an underperforming company.
Marilyn Cohen of Envision Capital Management is always one of my favorite MoneyShow experts. Her approach to bold and brave bond investing acknowledges that many bond issues are rated in the BBB range. I bet calling it a "bold brave bonds" talk was a play on that BBB rating. She thinks investment grade bonds are the most overvalued part of the bond market because institutions have gravitated to them over Treasuries. Any investor can check SIFMA's Investing In Bonds and MSRB's EMMA for bond data but those sites don't give the whole picture for specialized bonds. Investors must track local factors affecting muni water bonds and prison bonds. I agree with Marilyn that the IMF and Federal Reserve obviously collaborate, and that Greece's problems will continue.
I made the mistake of sitting through one panel on a "high growth" subject that was really all about growing something that gets people high. Yes indeed, the hot trend of investing in a certain green plant has hit the retail investing mainstream. I have never used that plant, nor will I ever use it. The product remains illegal to cultivate or sell under current Federal law but that has not stopped states like California from experimenting with decriminalization. The sector's advocates need to stop putting the cart before the horse and outline a path to legalization that is consistent with the rule of law in a constitutional republic. Big Pharma and agribusiness lobbies can be this young sector's allies if they will work with the US Congress on drafting legalization bills. Once the President signs such a bill into law, then Warren Buffett and whoever else can buy all the land they want for cultivation. I wonder what the CFTC will do with futures contracts for this plant after legalization.
Disruptive tech investing now has a unique approach thanks to BDCs. Apparently some BDCs have startup exposure in their loan portfolios. Exit events generate special dividends. The BDC shares experience run-ups prior to a startup's IPO and can then be shorted after the IPO. I think one way to play a BDC in advance of such an IPO is to buy-write the BDC with at-the-money calls and let it be sold away. It could then be a short sell after the shares are called away. I may just try that at some point with my own money, if we ever have a normal stock market again.
I will not embarrass one finance professional who tracks emerging markets. Ignoring international indexes like Transparency for corruption and Heritage for economic governance carries huge risk. Anyone who thinks the Chinese government is the best in the world needs their head examined. That country's rush to urbanization was a huge malinvestment. Their top leaders can't be that bright if they think state intervention in the stock market will stop a selloff. It is delusional to think Chinese companies will add Westerners to their boards for better governance. Boards are always rubber stamps for executives. Westerners typically ignore the Asian "two faced" approach to business with the non-Asian world. The Chinese way of "getting things done" pollutes the environment, steals IP, and overbuilds infrastructure. I will not invest in instruments that follow that approach.
Marilyn Cohen returned for a second talk on nitty-gritty bond investing. I dislike bond ETFs as much as Carl Icahn. Bond ETFs add imperfections that negate the role individual bonds are supposed to play in portfolios. Marilyn thinks institutional selling could trigger a bond market crash, combined with broker/dealers who who are unwilling or unable to commit capital to trades. Detroit's bankruptcy destroyed the myth that governments will raise taxes to pay off general obligation bonds. The new world of muni bonds mean bondholders will get the bad end of any deal in restructuring. She thinks muni bond investors should track facts: balanced budgets, good reserves, accurate spending projections, days of cash on hand, timely financial statement filings, and statement footnotes that reveal promised benefits and unfunded liabilities. The opposite or absence of such factors would indicate poor municipal management, giving reason to avoid such bonds.
Some ideas are too bad to deserve attention. Hard targets for return on capital make sense in a normal environment, but not now. Fully-invested herd followers have no contrarian edge. Separately managed accounts are totally stupid. Index changes remove poorly performing companies for price reasons, not fundamentals, and that is why index arbitrage strategies generate alpha.
Investing for income that anticipates inflation means having something other than plain vanilla bonds. We all have our pick of mortgage REITs, BDCs, convertible debt ETFs, sector ETNs, specialty finance companies, and LNG shipping companies. I love the funny term "offensive assets" because I've never heard a non-defensive strategy with that label. Allow me to vent a frustration here. All of these freaking newsletter publishers love the bubble sectors! Finance, housing, biotech, and health care get plenty of attention. Hardly anyone at the MoneyShow sees stock or bond corrections coming. I had good returns in past years by writing covered calls on high-dividend securities. I just won't risk it while central banks are pumping everything.
Anyone who expected more detail from me should have attended the MoneyShow themselves. I have blogged only a fraction of the things I learned. The remainder is mine to keep until such time as the markets allow me decent entry points. Investment wisdom is only truly actionable when an investor thinks on their own. I invest only for myself, and the MoneyShow always helps make that easier.
A former Bear Stearns economist led off by describing our post-monetarist environment. I won't blame an economist for Bear Stearns' collapse. Executives have the right not to listen to their top advisers. I will blame those economists who think zero interest rates and low reserve requirements are a permanent condition. Low commodity prices are already here, so that horse has left the barn. Economists don't get paid to predict something that has already happened. I'm all on board with weaker countries heading for crisis and more negative trends for US corporate earnings.
Venerable tech guru George Gilder peered ahead into life after Google. If wealth is knowledge and growth is learning, then Mr. Gilder should be one of the richest people on the planet. I guess information theory doesn't always equate to investment theory if information ignores capex requirements. Bell's Law of computer classes describes a corollary of Moore's Law. Both are useful to determine the amount of capex to commit to enterprise development. Neither are useful in making personal investment decisions. I am not clear on Mr. Gilder's formulation of "bank assets ex cash" to describe the Fed's daily borrowing. A Web search of that phrase brings up legal discussions about dividing assets in a divorce. Adding the Federal Reserve to this Web search brings up the FRB's H.8 release, so I wonder if Mr. Gilder really meant to describe the assets and liabilities of commercial banks. He may have the big picture mostly correct about cloud layers but I still don't think blockchains will give him a magic currency.
The next panel in George Gilder's Telecosm Forum echoed the kind of stock picks he made 30 years ago when he said something about Intel. Bullish talk about SDN, cloud, and front-haul data processing for apps makes me think that data center REITs will do better than wireless telecom tower REITs if I had to choose between the two. Bring on the fog computing. Tech picks only go so far. Intel took off because it was tied to Microsoft Windows' desktop monopoly. These tech stocks only work as growth stories if they are tied to network effects that impose huge switching costs on millions of retail users.
I have sought a decent predictive model in life sciences for years. The finance community cannot rely upon the same old milestone drivers of stock price movements for drug development companies. I had a gentlemanly confrontation with another investor at the MoneyShow who became frustrated that one participating company did not mention its employee headcount, ticker symbol, annual revenue, target market, or other characteristics. Granted, those are details any analyst should ferret out in due diligence. The one valuable insight I did find was a computational algorithm that enabled better understanding of molecular-level biological processes. That one insight would be worth more to the finance sector than a stack of SEC filings. Financial analysts should read Isaiah Berlin's "The Hedgehog and the Fox" about the difference between divergent, multifaceted thinkers and singular, profound thinkers. Great investors can switch effortlessly between either perspective.
Silicon Valley is taking down Wall Street. New fin-tech concepts start with domain knowledge from human experts, then add machine learning. What if the human experts are flawed? Are they truly the best in their class? True finance experts are rare because their unique brain chemistry enables "six sigma" insights. Warren Buffet, Charles Munger, Burton Malkiel, Carl Icahn, Bill Gross, and John Bogle are true experts not because their methods are peer-reviewed, but because their intellects and temperaments combine for abnormal results. Obviously it is difficult but invaluable to tap them, so lesser experts are poor substitutes. The panel remarked that descriptive analytics give deep insights into a portfolio's geopolitical risks, like the probability of a regime change as a sell trigger. George Gilder just had to mouth off from the crowd during one Q+A. His complaint was that if every investor becomes a passive investor as robo-advisers herd them into low-cost index funds, they really become "parasitic investors" who mimic each other and deprive the market of growth and learning. All I could do is shake my head when I heard him blathering. Come on, George. Does he not understand index investing at all? The growth and learning happens within these stocks as they innovate, become more productive, and increase earnings. Developing new investing theories like modern portfolio theory and arbitrage pricing theory adds learning to a portfolio's efficient frontier. Index investing enables all of that growth and learning by minimizing the costs of wasteful active trading. I do not need Mr. Gilder to tell me how to invest.
Another biotech thesis was a pick and shovel play on specialized real estate for life science research campuses. That idea works as long as it rides the biotech bubble. I did not see any data on this particular idea's performance. Dropping brand names of top pharma companies' revenue is only relevant if they are tenants in such real estate.
I quietly LOL'd at a "tag cloud investing" slide covering cloud, China, wearables, and other trends completely out of context. More computing power, faster data transfer, cheaper data centers, app proliferation, and microbial engineering all have something to do with lifting the fog around innovation and change. Wireless capability has not yet caught up to storage or processing, so maybe there's some untapped opportunity in those wireless tower REITs after all.
Carver Mead invented Moore's Law. He wrapped up the Gilder Telecosm Forum with a peek into the basics of the universe. Quantum systems are so different from anything we understand in our daily reality. They have nothing to do with the thermal system disorder that gives time its one-way direction. I appreciated the reference to sci-fi author Robert Heinlein when he said we should "grok" quantum information exchanges intuitively. He concluded by predicting a revolution in science itself that would resemble technology's revolution. The guy was pure genius. I live for the chance to hear people like him speak in person.
After the telecosm comes the many microcosms of talks on specialized topics. I like business development companies (BDCs) as an idea but their fixed rate loan portfolios make them poor performers during high inflation. I would consider an ETF for BDCs but only in a normal economy with normal rates for growth, inflation, and debt interest. I am very skeptical about companies issuing debt just to pay extraordinary dividends or buy back stock, and some of them may end up in BDCs' portfolios.
I prefer options as hedges or yield enhancements, not as the "strategic" investment some brokerages want to pitch. Too many options specialists favor short term trading. They are gamblers rather than fundamental analysts. "Beta weighting" that ties options to equities sounds like an interesting concept. I will let others tie up the Greek letters they need to explain it.
The long march of ETFs into the fore brings passive investing to cheap robo-adviser platforms. These products have restored asset allocation as the primary driver of portfolio returns. Financial advisory relationships can now be valued in minuscule basis points as venture funding for robo-advisers makes cheap solutions more desirable. Cheap "core" portfolios mean the only "satellites" adding value must be extremely unique. I will remind myself not to trade any ETFs within one hour of the market's open or close, when bid/ask spreads are widest.
I an newly fascinated with farmland REITs. I wonder if the ROI of raw farmland correlates with agribusiness stocks or food commodity prices. Aqua farms and solar farms are boutique touches that may add value to farmland in some areas. Easements for pipelines, highways, and other infrastructure also add value. Farmland exposure is one more type of hard asset hedge. Such a REIT makes farmland liquid, and it retains pricing power during inflation if its owned farmland is leased to tenant farmers under short-term leases. Wow, I may have stumbled on a real game-changer.
One MLP expert said an MLP's distribution sustainability depends on where it operates in the energy chain: upstream, midstream, or downstream. Upstream MLP prices swing with the WTI crude oil price. Midstream MLPs are a larger, diverse sector. Downstream MLP refineries are tied to both crude and fuel prices. The crack spread of a low crude price and high fuel cost equals profitable refineries. Some MLPs issue bonds, so analysts should know how bond yields tie to issuers' credit ratings and distribution history.
Dividend paying companies became investors' little darlings as the Federal Reserve forced everyone to chase yield. I wonder about the typical payout ratio of a sustainable dividend. Are there valid REIT metrics too? How about lease length and type (i.e., triple net versus others), credit rating, and occupancy rates? I'm pretty sure any company whose dividend growth exceeds US GDP growth will outperform the market because it has some durable competitive advantage, unless they're taking on debt just to raise dividends. I would favor REITs with short term leases over long term leases because they have better pricing power during periods of high inflation.
Activist investing works for investors who have lots of money and can add value by directly advising company management over the long term. It's probably not suitable for the retail investor. The SEC's Form 13 series helps us follow the money trail, and I would add that Form 4 filings are also useful. Underperforming companies with clean balance sheets and low insider ownership may not stay so clean for long if they become activist targets, because bad management will lard them up with debt. I stay away from retail investment products that claim to use activist investing because they may not have the managerial acumen to fix what ails an underperforming company.
Marilyn Cohen of Envision Capital Management is always one of my favorite MoneyShow experts. Her approach to bold and brave bond investing acknowledges that many bond issues are rated in the BBB range. I bet calling it a "bold brave bonds" talk was a play on that BBB rating. She thinks investment grade bonds are the most overvalued part of the bond market because institutions have gravitated to them over Treasuries. Any investor can check SIFMA's Investing In Bonds and MSRB's EMMA for bond data but those sites don't give the whole picture for specialized bonds. Investors must track local factors affecting muni water bonds and prison bonds. I agree with Marilyn that the IMF and Federal Reserve obviously collaborate, and that Greece's problems will continue.
I made the mistake of sitting through one panel on a "high growth" subject that was really all about growing something that gets people high. Yes indeed, the hot trend of investing in a certain green plant has hit the retail investing mainstream. I have never used that plant, nor will I ever use it. The product remains illegal to cultivate or sell under current Federal law but that has not stopped states like California from experimenting with decriminalization. The sector's advocates need to stop putting the cart before the horse and outline a path to legalization that is consistent with the rule of law in a constitutional republic. Big Pharma and agribusiness lobbies can be this young sector's allies if they will work with the US Congress on drafting legalization bills. Once the President signs such a bill into law, then Warren Buffett and whoever else can buy all the land they want for cultivation. I wonder what the CFTC will do with futures contracts for this plant after legalization.
Disruptive tech investing now has a unique approach thanks to BDCs. Apparently some BDCs have startup exposure in their loan portfolios. Exit events generate special dividends. The BDC shares experience run-ups prior to a startup's IPO and can then be shorted after the IPO. I think one way to play a BDC in advance of such an IPO is to buy-write the BDC with at-the-money calls and let it be sold away. It could then be a short sell after the shares are called away. I may just try that at some point with my own money, if we ever have a normal stock market again.
I will not embarrass one finance professional who tracks emerging markets. Ignoring international indexes like Transparency for corruption and Heritage for economic governance carries huge risk. Anyone who thinks the Chinese government is the best in the world needs their head examined. That country's rush to urbanization was a huge malinvestment. Their top leaders can't be that bright if they think state intervention in the stock market will stop a selloff. It is delusional to think Chinese companies will add Westerners to their boards for better governance. Boards are always rubber stamps for executives. Westerners typically ignore the Asian "two faced" approach to business with the non-Asian world. The Chinese way of "getting things done" pollutes the environment, steals IP, and overbuilds infrastructure. I will not invest in instruments that follow that approach.
Marilyn Cohen returned for a second talk on nitty-gritty bond investing. I dislike bond ETFs as much as Carl Icahn. Bond ETFs add imperfections that negate the role individual bonds are supposed to play in portfolios. Marilyn thinks institutional selling could trigger a bond market crash, combined with broker/dealers who who are unwilling or unable to commit capital to trades. Detroit's bankruptcy destroyed the myth that governments will raise taxes to pay off general obligation bonds. The new world of muni bonds mean bondholders will get the bad end of any deal in restructuring. She thinks muni bond investors should track facts: balanced budgets, good reserves, accurate spending projections, days of cash on hand, timely financial statement filings, and statement footnotes that reveal promised benefits and unfunded liabilities. The opposite or absence of such factors would indicate poor municipal management, giving reason to avoid such bonds.
Some ideas are too bad to deserve attention. Hard targets for return on capital make sense in a normal environment, but not now. Fully-invested herd followers have no contrarian edge. Separately managed accounts are totally stupid. Index changes remove poorly performing companies for price reasons, not fundamentals, and that is why index arbitrage strategies generate alpha.
Investing for income that anticipates inflation means having something other than plain vanilla bonds. We all have our pick of mortgage REITs, BDCs, convertible debt ETFs, sector ETNs, specialty finance companies, and LNG shipping companies. I love the funny term "offensive assets" because I've never heard a non-defensive strategy with that label. Allow me to vent a frustration here. All of these freaking newsletter publishers love the bubble sectors! Finance, housing, biotech, and health care get plenty of attention. Hardly anyone at the MoneyShow sees stock or bond corrections coming. I had good returns in past years by writing covered calls on high-dividend securities. I just won't risk it while central banks are pumping everything.
Anyone who expected more detail from me should have attended the MoneyShow themselves. I have blogged only a fraction of the things I learned. The remainder is mine to keep until such time as the markets allow me decent entry points. Investment wisdom is only truly actionable when an investor thinks on their own. I invest only for myself, and the MoneyShow always helps make that easier.
Friday, June 26, 2015
The Haiku of Finance for 06/26/15
Risky investment
Predict uncertain cash flows
Need high discount rate
Predict uncertain cash flows
Need high discount rate
Thursday, January 01, 2015
The Haiku of Finance for 01/01/15
Start the new year right
Max out tax-favored account
Compounding power
Max out tax-favored account
Compounding power
Monday, September 15, 2014
Saturday, August 30, 2014
Alfidi Capital at The MoneyShow San Francisco 2014
I attended the annual MoneyShow San Francisco last week, as has been my preference most years since 2001. I wasn't on the speaking calendar this year but there were plenty of other experts to keep me occupied in 2014. My original thoughts in bold text are the most important things to read in this article.
Kim Githler welcomed us to note that the show's younger demographic was now mostly online. The ease of participating in online conferences and webinars points the way for a trade show industry in the midst of transformation. Virtual shows are the future. She reminded us of her favorite themes in globalization and diversification, but noted the use of hard assets as inflation protection.
Jim Jubak gave the first keynote on the questionable quality of government economic data series. The four major data sets driving daily market action are US GDP, US unemployment, US inflation, and China's GDP. Jim noted that China's GDP is definitely skewed because the sum of its provincial GDP data is greater than the national figure. The farther down the reporting chain one goes in China, the more pressure local officials feel to report positive numbers. I have followed ShadowStats for years and Jim thinks that site raises real concerns dating to the Boskin Commission's 1996 report. The MIT Billion Prices Project once again receives praises for its accuracy. I used to hear it praised at fringe meetings but now mainstream commentators like Jim see its value. Jim also prefers the U-6 rate as an unemployment measure. He specifically used the word "baloney" to describe US quarterly GDP numbers due to swing inventories. That's one of my favorite words! He prefers to use the real final sales numbers that take out swing inventories. China's GDP mismatch with its export and energy numbers should IMHO drive analysts to use the Keqiang Index instead. Jim's bottom line is that a bunch of completely unreliable data is driving market moves. Amen, brother.
George Gilder spent his keynote endorsing Bitcoin and gold for their supposed time-based value. George is a really smart guy with a long career of delivering bold insights, but I just wasn't buying his line this time. I agree with him that financial markets are dysfunctional and that something's wrong when currency market trading is larger than financial markets and physical goods markets. His insights into knowledge driving wealth and resource abundance are still valid, but I don't agree that Bitcoin and gold somehow build from the one diminishing resource - time - that we all face. He would have made more sense if he had said gold's scarcity was a function of its extraction cost, but that does not support his time-based thesis. He made little sense in describing Bitcoin; I don't think he understands that its self-limiting algorithm makes it scarce in the short run, but its ability to "fork" into new currencies obliterates that scarcity. He totally lost me when he claimed Bitcoin drives an advance in information theory by creating a surprise entropy of "unexpected bits." That sounds more like a theological argument for angels dancing on pin heads than something empirical. He wandered off into an analogy that interest rates are the expected returns of an economy and profits are unexpected returns that correspond to Bitcoin's unexpected bits. Oookaaay, George, but where are the corresponding expected bits that are inputs driving Bitcoin? Sorry, dude, but the arguments for time-limiting currency bases make less sense the further you take them. If Bitcoin is such a challenge to monetarism and central banking, then it should solve the periodically high velocity of money that limits monetarism's power. Bitcoin is too volatile itself to damp down velocity, and too illiquid to use as a monetary base precisely because it is scarce. Come on, George. Fractional reserve banking allows economic growth when otherwise scarce hard assets (namely gold) would limit growth if they were currency bases. Gold and Bitcoin, or other assets with George Gilder's self-limiting time-based supply, do not allow for credit-based growth. I respect our society's distinguished thinkers for their lifetime of contributions, but even super-smart people can slow down in their old age. I've watched people go senile and it isn't pretty.
David Blitzer from the Standard and Poor's Dow Jones Indexes spoke on how the DJIA is calculated. Highly priced stocks skew its value, so the index designers consider range-bound stocks. Index changes immediately drive turnover in that portion of an index owned by index funds and ETFs. I have long known about arbitrage strategies for index changes but I've never tried to execute one. Analysts who want to study such an opportunity should review the index inclusion guidelines and SPIVA studies on benchmark performance. I have long been familiar with those sources, and once this insanely overvalued market drops to normalcy I'll be ready to pursue some index arbitrage. I will be curious to see if TD Ameritrade's InvestorMovement Index keeps up a strong correlation with broader indexes on the way down.
I did not find the panel of "top financial advisors" to be particularly impressive. Financial advisers succeed at relationship management, not analytical accuracy or market outperformance. In other words, they succeed on personality and not technical competence. They would be more appropriate in forums requiring emotional intelligence and it sometimes showed. They all sounded fairly optimistic about the stock market, and IMHO fairly ignorant. One lady thought Tesla Motors was profitable because of robots. Wrong! It's trying to be profitable because of tax credits and green energy rebates. LOL. These people sounded very conventional and pedestrian. My jaw dropped when they said they still like certain types of bonds even after acknowledging the risk in this very old bond market bull run. They really like emerging markets but IMHO they ignore weaknesses in the rule of law and transparency in those countries. Hey folks, geopolitical risk is a fact of life in emerging markets. It's stupid to paint with a broad brush saying some emerging markets can grow if you don't know how to hedge exposures to each country. Sheesh.
Steve Forbes was a classic but he wasn't as funny as in years past. I agree with him that today's political authorities know far less bout money than their predecessor. His best zinger was about monetary policy: "Government monetary stimulus is a form of counterfeiting." LOL, that's awesome. I believe he is correct that Russia is about to relearn a lesson the Soviets learned in the 1980s when oil prices declined and energy exporting countries suffered. I still don't agree with his argument for a return to the gold standard. He compares apples to oranges by claiming the historically average GDP growth rate under the gold standard would continue today. Dude, I'd like to see data showing how all of the gold mined in the US since the end of the gold standard in 1933 would be a viable basis for our growth since then. I would also argue that the US has had some form of central bank for much of its history, including those years when we held to the gold standard. Central banking probably has a stronger relationship with growth than gold does with growth. I do like what Steve said about weak currencies correlating with high crime societies as trust erodes, but correlation is not causation. His strong point about the harm done by central banks is hard to refute without challenging his central argument that economic growth was higher during the US's gold standard era. History does show that inflationary periods occurred after the Revolutionary War and during the Civil War; a gold standard did nothing to stop it. Gold bugs need to compare inflationary periods to the US history of central banking and gold standards, or they can ride their gold hobby horse off into the sunset.
Rich Karlgaard drew from his book The Soft Edge to argue that corporate cultures matter in investing. His argument for a "triangle of health" referenced other sources that have little to do with corporate functions. Warren Buffett's thinking on durable cash flows, for example, has a lot to do with market position and switching costs. He has had very little to say about corporate culture. I have no objection to claims that fact-based disciplined thinking forms a strategic base, or that supply chain leadership and capital efficiency form a hard edge. I am not convinced that internal culture delivers some long-term competitive advantage, because any change in C-level leadership will eventually change that soft edge. It all makes for great reading and new management theories allow consultants to sell new feel-good concepts to executives who know little about their own professions. I prefer to rely on fundamental analysis in judging an investment, because then I don't need to know whether an internal culture makes a company a nice place to work.
The tech trends panel looked for paths to big IPO events. Bill Harris of Personal Capital, Jim Hurd of Green Science Exchange. and Cody Willard of Scutify all tried to figure out where we're going. Disruption from drones, robots, wearables, nanotech, and cleantech is coming our way but it won't be readily apparent in equities. Professional investors buying post-IPO on dips will probably do better than retail investors eager to jump on an IPO's first day. Fallen angel companies in tech have a hard time recovering if their corporate life cycle is really a reflection of a dominant product life cycle. All low-priced stocks have risk, and many nanotech plays are microcaps that may be worth something as merger plays. This panel was lively and funny, with many nano-puns. I would look at nanopriced nanostocks but I'd rather have mega profits than nanoprofits.
I got my picture taken after the keynote with Kim Githler, the founder and owner of the MoneyShow. I thanked her for the speaking slot I had last year. The rest of you who were too busy to attend will have to catch me at a future event. Kim is an awesome businessperson and she can sense that times are changing for the trade show sector. She sure looks happy to hang out with me, and I can't blame her. Attractive women find me irresistable.
Steve Forbes signed copies of his latest book Money for fans on the expo floor. I didn't buy a book and an earlier photo I took with him did not turn out well, so this is the only record I have that Steve was in the proximity of yours truly, Greatest Man Who Ever Lived, Anthony J. Alfidi.
TD Ameritrade's options seminar was based on lessons developed for their Think or Swim platform. Once investors understand that volatility is a standard deviation of movement, they can understand its use in analysis. The CBOE's VIX implied volatility measure intentionally omits short-term volatility, thus ignoring its imminent risk in favor of looking 30 days forward. I suspect that any preference traders display for short-maturity options may have an explanation in behavioral finance; search for academic papers on "jump memory" to see for yourself. I took away two good lessons from TD Ameritrade's presentation. First, weekly options help price risk. Those options' implied volatility has no directional bias but does indicate the probability of a move. In other words, one standard deviation represents a 68% probability that a share price's move will stay within that measured range until the option's expiration. Second, option markets are forward-looking by definition because they have expiration dates. That's better than using technical analysis, which is only historical. The implied volatility thus helps investors gauge the risk of an increased allocation to that security. My only additional caveat is that the known effect of option order flow on security prices brings an additional risk factor, because large option orders just prior to expiration may move a share price in a manner that implied volatility does not anticipate.
Todd Petersen of PetersenLowe and the Diamond Market had a very informative presentation on colored diamonds. Good for him. I had a run-in with another colored diamond purveyor in 2013 who tried to rip me off, and I ended up backing down from a lawsuit because I didn't have enough information to prove they were up to no good. Fortunately, I now have enough knowledge to avoid such traps in the future thanks to Todd's presentation. He noted that high net worth investors (HNWIs) like the rarity of treasure assets such as collectibles, fine wine, and gemstones. He made my day when he said that diamond sellers who aggregate the stones' returns are disreputable because each stone is unique. Well, that's exactly what my erstwhile legal opponent tried to claim last year! It's good to hear some sanity from the fancy colored diamond (FCD) sector. I was intrigued to learn that the wealthy instill so much emotional meaning in their illiquid treasures that they consider their auction proceeds a valid philanthropic avenue. There's a lot to know about conflict-free certifications, appraisals, and other factors for anyone who wants to invest knowledgeably in FCDs. I wonder why diamonds capture so much of the HNWI imagination and whether lesser gemstones (rubies, emeralds, etc.) deserve similar consideration. I'm sure I'll figure it out. Todd had tons of expertise, and he even gave me some wisdom I can apply to Alfidi Capital. Thanks, Todd.
I found one presentation to be totally useless in formulating a forward-looking economic outlook. Some guy tried to fit investor psychology into secular bear markets but it looked like he had a hard time drawing conclusions that fit the data. He referred to the Reinhart-Rogoff inflection point for sovereign debt overhangs without mentioning the controversy around their data errors. The ratio of full-time workers to part-time workers is not as great of an indicator as he thinks. Lots of other things determine the economy's inflection points, like credit availability, inventory swings, supply shocks, and margin debt. Come on, dude. Spend more time studying endogenous shocks than on adjusting bear market asset prices for inflation and you might have some workable theories.
I was one of a select few MoneyShow alumni who was invited to attend morning tea on the second day with longtime speaker Mark Skousen. That's the kind of exclusive offer I get all the time. I'm so darn special. I ate way more free croissants with butter than anybody else, so I have that additional claim to fame. Anyway, Mark spent a lot of time reminiscing for those of us who've been attending the MoneyShow for many years. He pitched his latest book The Maxims of Wall Street by quoting many of Wall Street's mystery men. He didn't quote me so I guess I'm not ranked up there with Warren Buffett just yet. His best line was about his time in the CIA in the 1970s and how they fail at predicting crises.
The serious action on the second day kicked off with Barron's keynote on the economy and markets. I have no idea which equity analysts he claimed see a record high wall or worry, or which fixed income pros seek safety. I keep hearing the same bullish nonsense from both camps. Barron's notes that money managers can't escape macro data and don't want to go against trends when everyone else is winning. Anchoring bias for the pain of 2008 explains why some portfolio managers sit on the sidelines. Well, I'm sitting there with a very small crowd, and I'm got getting up until these other bulls fall down. Barron's struck the right note.
Piper Jaffray's keynote threw a bunch of technical chartist eyewash at the audience. I ignored it. I also ignored the claim that US treasury yields are higher than the G7 average because such a claim ignores the structural problems in all G7 countries. I don't break down portfolio choices as "offensive" or "defensive" sectors but those simplistic and faddish ideas give money managers some cute talking points. Portfolio managers who review sector relative strength charts are idiots. I did at least get a free technical analysis periodical out of this session and it confirms how money pros take the wrong ideas so seriously. Otherwise, this session was a look into how many dumb portfolio managers blindly follow trends. Sheesh.
Roger Conrad from Capitalist Times presented some unconventional income investing ideas. It's good to be reminded that interest rates have less effect on returns in dividend stocks and REITs than they do on fixed income investments. Some alternatives are not as useful as they appear. The CBOE's tradable TNX 10-year Treasury index is really another leveraged product and I'm not sure how to estimate its fair value. Plenty of ideas litter the landscape: yield cos, gen cos, utility stocks (aka "utes"), MLPs, REITs, and natural resource royalty trusts. This was the first MoneyShow where I heard someone describe telecom stocks as income plays, particularly when they spin off REITs. Oookaaay, but some investors lost big when MCI WorldCom went bankrupt last decade. Memories are short on Wall Street. The big Kinder buyout of its MLPs is recent news on many people's minds, and it may set a precedent for further consolidation as operating companies watch MLP tax advantages erode. Investors who hold Canadian-domiciled income investments were curious about whether IRS Form 1116 allows the recovery of foreign withholding taxes on qualified dividends. They were also concerned about UBTI liability for MLPs held in IRAs. That's beyond the scope of this blog because I'm not a tax adviser; I keep my own affairs simple by not owning such Canadian instruments. I have long sought to find firm criteria for determining a dividend's sustainability, so that may be a subject for a future blog article.
Zions Direct shared some specialized fixed income knowledge. Bond liquidity matters for investors who don't hold bonds to maturity, which IMHO is pretty stupid but some investors don't take portfolio volatility seriously. Bonds below investment grade are less liquid and have higher bid-ask spreads. Smaller size issues are less liquid because not every institutional bond investor will be able to fit them into their profiles at a moment's notice. FINRA has a very robust Bond Market Data search capability. Bond investors who are really into such searches should watch out for canary calls, Bermuda calls, and other things that can involuntarily remove a bond from a fixed income ladder. The MSRB EMMA search tool is a cool way to find munis and read their official statements. Those statements reveal which munis are subject to extraordinary redemption clauses that can make them riskier than general obligation bonds. Zions also shared some insights into sinking fund mechanics. Sinking funds allow muni bond issuers to retire bonds by lottery, and their clearing firm runs a second lottery to decide which bonds get called. Hey folks, that's two layers of probability a bond call has to work through to remove it from a portfolio, and according to the laws of probability a large institutional investor holding many bonds of a given issue is more likely to get that call than any individual investor. This is more evidence that individual investors need to quit worrying about the exotic exigencies of a single muni bond issue. Bond investors who need to know more than what their brokerage tells them can check out SIFMA's Investing in Bonds tutorials.
Grom Social demonstrated their social network for kids. Their extensive live monitoring must be costly, so IMHO they'll need dirt-cheap moderators. I can see how their colorful avatars appeal to kids. I can also see a problem with high turnover, because kids will leave the network as they mature. Turnover means growth from new users will have to be about twice as big as their natural attrition rate. The media buzz around their story reminds me of the Duck Dynasty franchise. I think the biggest winners from this are the founding family monetizing their own unique story.
Mark Skousen appeared on my radar because I was interested in hearing about how politicians invest. The US Senate Financial Disclosure site is searchable but that does not necessarily mean investors can get actionable investing insights. OpenSecrets tracks political finance but that does not mean politicians' financial decisions are well-informed. Washington, DC and Wall Street insiders do share semi-permeable membranes but that does not ensure something useful will pass through in either direction. The Federal Reserve's market instructions pass through the FRBNY but their firewalls between traders and board members minimize the chances for unfair insider advantages. "Insiders" in sectors that make heavy campaign contributions can demand regulatory advantages up to a point, like with the Affordable Care Act's protections for health care oligopolies. That point ends when the insiders' parasitical rent extractions kill the host of the broader economy, and their regulatory capture then becomes untenable. Much of the stuff I heard in this session was irrelevant to me. Some themes like BDCs ignore the vulnerability of senior secured loan portfolios to high inflation, but the story sounds cute to people who think they're sticking it to insiders. Banks' high net investment income from the Fed's yield subsidy has similar appeal, but the Fed can't keep those plates spinning forever. Arguing that precious metals prices reflect inflation sentiment ignores the broad supply and demand fundamentals that really drive prices.
Mark Skousen went through a lot of what must be his typical script and topped it off by tearing up a one dollar bill, showing his disdain for fiat currency. I picked up the shards after his lecture and he said I could have them. There's the picture above, showing that a couple of the shards were unrecoverable from the floor. I took them to my local bank branch this week and exchanged them for an undamaged one dollar bill, as the Federal Reserve allows. I consider this dollar to be found income for tax purposes, just like picking up spare change off the ground. I know the value of a dollar.
Here's a brief note on fracking. Insider interest in its expansion is driven by market demand, not powerful people playing games. Anyone interested in watching the fracking boom unfold can check out the North Dakota Industrial Commission's website for oil and gas data. The retro '90s look of that site brings back memories of my old GeoCities site on Yahoo. Ah, those were the days, when we could all get rich by doing nothing. It happens again every so often.
The equity crowdfunding forum was brand new at this MoneyShow. TheCrowdCafe tracks data for the sector. JOBS Act Title III still hasn't passed, so the non-accredited investor community still has to wait for its shot at true crowdfunding. The cumbersome, expensive legacy of Reg A state registered securities is still with us. The panelists believe the next step in crowdfunding is Big Data predictive analytics revealing investor preferences, time between raises, and successful raise amounts. I asked the panel whether they thought leading portals will become acquisition targets for big banks. That is absolutely my favorite thing to ask anyone in crowdfunding. They answered that acquisitions will happen because good crowdfunding portals are more capital efficient than big firms with legacy costs.
I attended Mark Skousen's evening talk on private equity. That made for three Skousen events in one day. It turned out to be three more than I needed. I expected a talk on how private equity works and how investors of any qualification can participate. The coverage of a few years' worth of returns from the traded stocks of leading private equity firms made me think ahead to the next available hospitality suite. Folks, I've seen this stuff before, and a single price movement chart isn't going to tell me whether a stock belongs in my portfolio. Mitt Romney worked in private equity but he had nothing to do with the publicly traded stocks of private equity firms, and Bain Capital is still privately held. Most Americans didn't want to hear Mitt Romney's campaign pitch for private enterprise in 2012 because they're all dependent on some form of welfare now. A nation of entitlement brats doesn't want successful people lecturing them on productivity.
George Gilder dropped in toward the end of Mark Skousen's evening talk. There they are above, out in the hallway. George is gesturing his approval of something Mark said and Mark is enjoying the attention. I did not stick around for autographs because I had to go find some free food from a hospitality suite. Fortunately one of the exhibitors promoting investment in Myanmar had some excellent free food and booze in their suite. Mission accomplished.
I started my third and final day at the MoneyShow with Marilyn Cohen's bond expertise. She noted how 10-year yields have defied most analysts' predictions. US rates must look better than rates in the rest of the world. Her key insight is that bond investors can use bonds with "moving parts" (floating Libor, coupon resets, etc.) to mitigate the risks of inflation and rising interest rates. Bonds with coupon resets often come with call features. She liked the bonds of one REIT but also thought the REIT itself was a good deal, a rare non-bond pick for her. If you want to know more about her specific picks, you'll have to ask her yourself. She was one of the rare contrarians at this MoneyShow who thought the stock market was at a peak valuation! Woo hoo! She's always been a genius in my book, and not just because she agrees with me. Marilyn likes bonds with state intercept enhancements. She also likes water and sewer bonds in good areas, defined as a prosperous region with stable incomes, no urban blight, and no municipal bankruptcies. I'm pretty sure that Detroit and Stockton would not meet that definition of a good area for infrastructure bonds.
One other speaker offering some insight did not generate insights I would find useful. I won't name this person because I don't want to drive Web traffic to sources that I think offer little value. Folks, I don't need to walk through a fictional character's literary history to conclude that confirmation bias is bad. I also won't throw out CAPEs as a buy signal just because it doesn't time a sector rotation strategy very well. I like watching the P/E ratio for individual stocks and the whole market, and CAPE Ratio Calculator is free to use. Sector rotation is smack in the middle of the spectrum that puts stock picking on one end and broad market analysis on the other, and I'm no fan of splitting the difference that way in portfolio management. I would like to see data supporting the claim that stocks with high institutional ownership are more sensitive to bullish analyst sentiment. It may indeed open contrarian opportunities for investors tracking stocks with low institutional ownership, but those same stocks will also be less liquid.
Marilyn Cohen was up for a second time with some overlooked bond ideas. I learned from her that muni yield changes usually trail broader bond market yield changes. That makes sense if muni issuers' underwriters reset the offering prices of new issues when the 10-year Treasury yield moves. She revisited her earlier mention of bond intercept programs, which are mainly for school districts. States can divert school appropriations to pay school bondholders under such programs. That's a good enhancement to munis. She also likes port and harbor bonds, along with senior lien airport revenue bonds. She definitely does not like pension liability bonds or health care obligation bonds. She expects some hospitals to go bankrupt under ACA, destroying their bond holders. She likes watching bonds that are connected to merger plays because their change of control provisions will activate. I hope bond fund managers have fun watching the bonds of hard asset companies as the US enters hyperinflation. Marilyn notes that bond market crises often cause stock market crises. I agree with Marilyn that we can expect a very serious crash. I can hardly wait. She thinks bond ETFs may face serious problems in such a crash if investors sell in a panic. I asked her about the possibility of bond exit fees, and she agreed it's likely. Marilyn is totally awesome.
Morgan Housel of the Motley Fool told us why we can't have nice things in his afternoon keynote. Bad investor behavior means many stock market investors underperform the indexes. People buy high when they're greedy and sell low when they're fearful; Warren Buffett does the opposite. Volatility is common, the world is complex, and compounding takes time. Most investors lack the patience to see through that noise. The P/E ratio isn't perfect but it is the single best statistical explanation of equity market returns. That's good enough for me. Read Morgan's site for the rest of his wisdom.
Wayne Allyn Root delivered the final keynote. This was my first exposure to his bombastic personality. I consider his performance to be entertainment and it's fitting that he aspires to a political career. He threw lots of red meat at the audience and I got the impression he was test marketing some themes he can hit on the campaign trail. Lots of his points got applause and some people objected vocally, so it made for a good stump speech. If he runs as a Republican, he'll have to address some emerging research that shows economic performance to be superior under Democratic administrations in Washington. I think his assumption that Americans' offshore wealth will return to the US with a tax holiday is unrealistic. It may be there to facilitate trade or FDI, and no tax holiday will repatriate capital that is already productively deployed. His stuff was great for the Tea Party, libertarian, gold and silver crowd. He's definitely after the Ron Paul demographic because there's money to be made off those people now that their longtime patron saint is retired. I'm surprised he didn't mention Bitcoin. I'm sure he'll figure it out once his pollsters test it in Silicon Valley. George Gilder even hung around until the very end. That guy was everywhere.
The MoneyShow San Francisco 2014 was a winner for me. I came out with more building materials for my own portfolio's architecture. I'm amazed that the official program still mentioned Alfidi Capital as a participant even though I had no booth or speaking engagement. I sometimes wonder whether my career would have taken a different turn if I had paid for a booth here in 2005 and 2006 when I was a financial adviser. I can't turn back the clock to those days when I tried to find clients. I can only look forward to a future where I never need to deal with humans. The MoneyShow's wisdom will always be relevant to me.
Full disclosure: I edited a brief mention of Tesla Motors in the "top financial advisors" above to clarify its attempt at profitability. The company was not earning a net profit at the time of the MoneyShow San Francisco 2014.
Kim Githler welcomed us to note that the show's younger demographic was now mostly online. The ease of participating in online conferences and webinars points the way for a trade show industry in the midst of transformation. Virtual shows are the future. She reminded us of her favorite themes in globalization and diversification, but noted the use of hard assets as inflation protection.
Jim Jubak gave the first keynote on the questionable quality of government economic data series. The four major data sets driving daily market action are US GDP, US unemployment, US inflation, and China's GDP. Jim noted that China's GDP is definitely skewed because the sum of its provincial GDP data is greater than the national figure. The farther down the reporting chain one goes in China, the more pressure local officials feel to report positive numbers. I have followed ShadowStats for years and Jim thinks that site raises real concerns dating to the Boskin Commission's 1996 report. The MIT Billion Prices Project once again receives praises for its accuracy. I used to hear it praised at fringe meetings but now mainstream commentators like Jim see its value. Jim also prefers the U-6 rate as an unemployment measure. He specifically used the word "baloney" to describe US quarterly GDP numbers due to swing inventories. That's one of my favorite words! He prefers to use the real final sales numbers that take out swing inventories. China's GDP mismatch with its export and energy numbers should IMHO drive analysts to use the Keqiang Index instead. Jim's bottom line is that a bunch of completely unreliable data is driving market moves. Amen, brother.
George Gilder spent his keynote endorsing Bitcoin and gold for their supposed time-based value. George is a really smart guy with a long career of delivering bold insights, but I just wasn't buying his line this time. I agree with him that financial markets are dysfunctional and that something's wrong when currency market trading is larger than financial markets and physical goods markets. His insights into knowledge driving wealth and resource abundance are still valid, but I don't agree that Bitcoin and gold somehow build from the one diminishing resource - time - that we all face. He would have made more sense if he had said gold's scarcity was a function of its extraction cost, but that does not support his time-based thesis. He made little sense in describing Bitcoin; I don't think he understands that its self-limiting algorithm makes it scarce in the short run, but its ability to "fork" into new currencies obliterates that scarcity. He totally lost me when he claimed Bitcoin drives an advance in information theory by creating a surprise entropy of "unexpected bits." That sounds more like a theological argument for angels dancing on pin heads than something empirical. He wandered off into an analogy that interest rates are the expected returns of an economy and profits are unexpected returns that correspond to Bitcoin's unexpected bits. Oookaaay, George, but where are the corresponding expected bits that are inputs driving Bitcoin? Sorry, dude, but the arguments for time-limiting currency bases make less sense the further you take them. If Bitcoin is such a challenge to monetarism and central banking, then it should solve the periodically high velocity of money that limits monetarism's power. Bitcoin is too volatile itself to damp down velocity, and too illiquid to use as a monetary base precisely because it is scarce. Come on, George. Fractional reserve banking allows economic growth when otherwise scarce hard assets (namely gold) would limit growth if they were currency bases. Gold and Bitcoin, or other assets with George Gilder's self-limiting time-based supply, do not allow for credit-based growth. I respect our society's distinguished thinkers for their lifetime of contributions, but even super-smart people can slow down in their old age. I've watched people go senile and it isn't pretty.
David Blitzer from the Standard and Poor's Dow Jones Indexes spoke on how the DJIA is calculated. Highly priced stocks skew its value, so the index designers consider range-bound stocks. Index changes immediately drive turnover in that portion of an index owned by index funds and ETFs. I have long known about arbitrage strategies for index changes but I've never tried to execute one. Analysts who want to study such an opportunity should review the index inclusion guidelines and SPIVA studies on benchmark performance. I have long been familiar with those sources, and once this insanely overvalued market drops to normalcy I'll be ready to pursue some index arbitrage. I will be curious to see if TD Ameritrade's InvestorMovement Index keeps up a strong correlation with broader indexes on the way down.
I did not find the panel of "top financial advisors" to be particularly impressive. Financial advisers succeed at relationship management, not analytical accuracy or market outperformance. In other words, they succeed on personality and not technical competence. They would be more appropriate in forums requiring emotional intelligence and it sometimes showed. They all sounded fairly optimistic about the stock market, and IMHO fairly ignorant. One lady thought Tesla Motors was profitable because of robots. Wrong! It's trying to be profitable because of tax credits and green energy rebates. LOL. These people sounded very conventional and pedestrian. My jaw dropped when they said they still like certain types of bonds even after acknowledging the risk in this very old bond market bull run. They really like emerging markets but IMHO they ignore weaknesses in the rule of law and transparency in those countries. Hey folks, geopolitical risk is a fact of life in emerging markets. It's stupid to paint with a broad brush saying some emerging markets can grow if you don't know how to hedge exposures to each country. Sheesh.
Steve Forbes was a classic but he wasn't as funny as in years past. I agree with him that today's political authorities know far less bout money than their predecessor. His best zinger was about monetary policy: "Government monetary stimulus is a form of counterfeiting." LOL, that's awesome. I believe he is correct that Russia is about to relearn a lesson the Soviets learned in the 1980s when oil prices declined and energy exporting countries suffered. I still don't agree with his argument for a return to the gold standard. He compares apples to oranges by claiming the historically average GDP growth rate under the gold standard would continue today. Dude, I'd like to see data showing how all of the gold mined in the US since the end of the gold standard in 1933 would be a viable basis for our growth since then. I would also argue that the US has had some form of central bank for much of its history, including those years when we held to the gold standard. Central banking probably has a stronger relationship with growth than gold does with growth. I do like what Steve said about weak currencies correlating with high crime societies as trust erodes, but correlation is not causation. His strong point about the harm done by central banks is hard to refute without challenging his central argument that economic growth was higher during the US's gold standard era. History does show that inflationary periods occurred after the Revolutionary War and during the Civil War; a gold standard did nothing to stop it. Gold bugs need to compare inflationary periods to the US history of central banking and gold standards, or they can ride their gold hobby horse off into the sunset.
Rich Karlgaard drew from his book The Soft Edge to argue that corporate cultures matter in investing. His argument for a "triangle of health" referenced other sources that have little to do with corporate functions. Warren Buffett's thinking on durable cash flows, for example, has a lot to do with market position and switching costs. He has had very little to say about corporate culture. I have no objection to claims that fact-based disciplined thinking forms a strategic base, or that supply chain leadership and capital efficiency form a hard edge. I am not convinced that internal culture delivers some long-term competitive advantage, because any change in C-level leadership will eventually change that soft edge. It all makes for great reading and new management theories allow consultants to sell new feel-good concepts to executives who know little about their own professions. I prefer to rely on fundamental analysis in judging an investment, because then I don't need to know whether an internal culture makes a company a nice place to work.
The tech trends panel looked for paths to big IPO events. Bill Harris of Personal Capital, Jim Hurd of Green Science Exchange. and Cody Willard of Scutify all tried to figure out where we're going. Disruption from drones, robots, wearables, nanotech, and cleantech is coming our way but it won't be readily apparent in equities. Professional investors buying post-IPO on dips will probably do better than retail investors eager to jump on an IPO's first day. Fallen angel companies in tech have a hard time recovering if their corporate life cycle is really a reflection of a dominant product life cycle. All low-priced stocks have risk, and many nanotech plays are microcaps that may be worth something as merger plays. This panel was lively and funny, with many nano-puns. I would look at nanopriced nanostocks but I'd rather have mega profits than nanoprofits.
I got my picture taken after the keynote with Kim Githler, the founder and owner of the MoneyShow. I thanked her for the speaking slot I had last year. The rest of you who were too busy to attend will have to catch me at a future event. Kim is an awesome businessperson and she can sense that times are changing for the trade show sector. She sure looks happy to hang out with me, and I can't blame her. Attractive women find me irresistable.
Steve Forbes signed copies of his latest book Money for fans on the expo floor. I didn't buy a book and an earlier photo I took with him did not turn out well, so this is the only record I have that Steve was in the proximity of yours truly, Greatest Man Who Ever Lived, Anthony J. Alfidi.
TD Ameritrade's options seminar was based on lessons developed for their Think or Swim platform. Once investors understand that volatility is a standard deviation of movement, they can understand its use in analysis. The CBOE's VIX implied volatility measure intentionally omits short-term volatility, thus ignoring its imminent risk in favor of looking 30 days forward. I suspect that any preference traders display for short-maturity options may have an explanation in behavioral finance; search for academic papers on "jump memory" to see for yourself. I took away two good lessons from TD Ameritrade's presentation. First, weekly options help price risk. Those options' implied volatility has no directional bias but does indicate the probability of a move. In other words, one standard deviation represents a 68% probability that a share price's move will stay within that measured range until the option's expiration. Second, option markets are forward-looking by definition because they have expiration dates. That's better than using technical analysis, which is only historical. The implied volatility thus helps investors gauge the risk of an increased allocation to that security. My only additional caveat is that the known effect of option order flow on security prices brings an additional risk factor, because large option orders just prior to expiration may move a share price in a manner that implied volatility does not anticipate.
Todd Petersen of PetersenLowe and the Diamond Market had a very informative presentation on colored diamonds. Good for him. I had a run-in with another colored diamond purveyor in 2013 who tried to rip me off, and I ended up backing down from a lawsuit because I didn't have enough information to prove they were up to no good. Fortunately, I now have enough knowledge to avoid such traps in the future thanks to Todd's presentation. He noted that high net worth investors (HNWIs) like the rarity of treasure assets such as collectibles, fine wine, and gemstones. He made my day when he said that diamond sellers who aggregate the stones' returns are disreputable because each stone is unique. Well, that's exactly what my erstwhile legal opponent tried to claim last year! It's good to hear some sanity from the fancy colored diamond (FCD) sector. I was intrigued to learn that the wealthy instill so much emotional meaning in their illiquid treasures that they consider their auction proceeds a valid philanthropic avenue. There's a lot to know about conflict-free certifications, appraisals, and other factors for anyone who wants to invest knowledgeably in FCDs. I wonder why diamonds capture so much of the HNWI imagination and whether lesser gemstones (rubies, emeralds, etc.) deserve similar consideration. I'm sure I'll figure it out. Todd had tons of expertise, and he even gave me some wisdom I can apply to Alfidi Capital. Thanks, Todd.
I found one presentation to be totally useless in formulating a forward-looking economic outlook. Some guy tried to fit investor psychology into secular bear markets but it looked like he had a hard time drawing conclusions that fit the data. He referred to the Reinhart-Rogoff inflection point for sovereign debt overhangs without mentioning the controversy around their data errors. The ratio of full-time workers to part-time workers is not as great of an indicator as he thinks. Lots of other things determine the economy's inflection points, like credit availability, inventory swings, supply shocks, and margin debt. Come on, dude. Spend more time studying endogenous shocks than on adjusting bear market asset prices for inflation and you might have some workable theories.
I was one of a select few MoneyShow alumni who was invited to attend morning tea on the second day with longtime speaker Mark Skousen. That's the kind of exclusive offer I get all the time. I'm so darn special. I ate way more free croissants with butter than anybody else, so I have that additional claim to fame. Anyway, Mark spent a lot of time reminiscing for those of us who've been attending the MoneyShow for many years. He pitched his latest book The Maxims of Wall Street by quoting many of Wall Street's mystery men. He didn't quote me so I guess I'm not ranked up there with Warren Buffett just yet. His best line was about his time in the CIA in the 1970s and how they fail at predicting crises.
The serious action on the second day kicked off with Barron's keynote on the economy and markets. I have no idea which equity analysts he claimed see a record high wall or worry, or which fixed income pros seek safety. I keep hearing the same bullish nonsense from both camps. Barron's notes that money managers can't escape macro data and don't want to go against trends when everyone else is winning. Anchoring bias for the pain of 2008 explains why some portfolio managers sit on the sidelines. Well, I'm sitting there with a very small crowd, and I'm got getting up until these other bulls fall down. Barron's struck the right note.
Piper Jaffray's keynote threw a bunch of technical chartist eyewash at the audience. I ignored it. I also ignored the claim that US treasury yields are higher than the G7 average because such a claim ignores the structural problems in all G7 countries. I don't break down portfolio choices as "offensive" or "defensive" sectors but those simplistic and faddish ideas give money managers some cute talking points. Portfolio managers who review sector relative strength charts are idiots. I did at least get a free technical analysis periodical out of this session and it confirms how money pros take the wrong ideas so seriously. Otherwise, this session was a look into how many dumb portfolio managers blindly follow trends. Sheesh.
Roger Conrad from Capitalist Times presented some unconventional income investing ideas. It's good to be reminded that interest rates have less effect on returns in dividend stocks and REITs than they do on fixed income investments. Some alternatives are not as useful as they appear. The CBOE's tradable TNX 10-year Treasury index is really another leveraged product and I'm not sure how to estimate its fair value. Plenty of ideas litter the landscape: yield cos, gen cos, utility stocks (aka "utes"), MLPs, REITs, and natural resource royalty trusts. This was the first MoneyShow where I heard someone describe telecom stocks as income plays, particularly when they spin off REITs. Oookaaay, but some investors lost big when MCI WorldCom went bankrupt last decade. Memories are short on Wall Street. The big Kinder buyout of its MLPs is recent news on many people's minds, and it may set a precedent for further consolidation as operating companies watch MLP tax advantages erode. Investors who hold Canadian-domiciled income investments were curious about whether IRS Form 1116 allows the recovery of foreign withholding taxes on qualified dividends. They were also concerned about UBTI liability for MLPs held in IRAs. That's beyond the scope of this blog because I'm not a tax adviser; I keep my own affairs simple by not owning such Canadian instruments. I have long sought to find firm criteria for determining a dividend's sustainability, so that may be a subject for a future blog article.
Zions Direct shared some specialized fixed income knowledge. Bond liquidity matters for investors who don't hold bonds to maturity, which IMHO is pretty stupid but some investors don't take portfolio volatility seriously. Bonds below investment grade are less liquid and have higher bid-ask spreads. Smaller size issues are less liquid because not every institutional bond investor will be able to fit them into their profiles at a moment's notice. FINRA has a very robust Bond Market Data search capability. Bond investors who are really into such searches should watch out for canary calls, Bermuda calls, and other things that can involuntarily remove a bond from a fixed income ladder. The MSRB EMMA search tool is a cool way to find munis and read their official statements. Those statements reveal which munis are subject to extraordinary redemption clauses that can make them riskier than general obligation bonds. Zions also shared some insights into sinking fund mechanics. Sinking funds allow muni bond issuers to retire bonds by lottery, and their clearing firm runs a second lottery to decide which bonds get called. Hey folks, that's two layers of probability a bond call has to work through to remove it from a portfolio, and according to the laws of probability a large institutional investor holding many bonds of a given issue is more likely to get that call than any individual investor. This is more evidence that individual investors need to quit worrying about the exotic exigencies of a single muni bond issue. Bond investors who need to know more than what their brokerage tells them can check out SIFMA's Investing in Bonds tutorials.
Grom Social demonstrated their social network for kids. Their extensive live monitoring must be costly, so IMHO they'll need dirt-cheap moderators. I can see how their colorful avatars appeal to kids. I can also see a problem with high turnover, because kids will leave the network as they mature. Turnover means growth from new users will have to be about twice as big as their natural attrition rate. The media buzz around their story reminds me of the Duck Dynasty franchise. I think the biggest winners from this are the founding family monetizing their own unique story.
Mark Skousen appeared on my radar because I was interested in hearing about how politicians invest. The US Senate Financial Disclosure site is searchable but that does not necessarily mean investors can get actionable investing insights. OpenSecrets tracks political finance but that does not mean politicians' financial decisions are well-informed. Washington, DC and Wall Street insiders do share semi-permeable membranes but that does not ensure something useful will pass through in either direction. The Federal Reserve's market instructions pass through the FRBNY but their firewalls between traders and board members minimize the chances for unfair insider advantages. "Insiders" in sectors that make heavy campaign contributions can demand regulatory advantages up to a point, like with the Affordable Care Act's protections for health care oligopolies. That point ends when the insiders' parasitical rent extractions kill the host of the broader economy, and their regulatory capture then becomes untenable. Much of the stuff I heard in this session was irrelevant to me. Some themes like BDCs ignore the vulnerability of senior secured loan portfolios to high inflation, but the story sounds cute to people who think they're sticking it to insiders. Banks' high net investment income from the Fed's yield subsidy has similar appeal, but the Fed can't keep those plates spinning forever. Arguing that precious metals prices reflect inflation sentiment ignores the broad supply and demand fundamentals that really drive prices.
Mark Skousen went through a lot of what must be his typical script and topped it off by tearing up a one dollar bill, showing his disdain for fiat currency. I picked up the shards after his lecture and he said I could have them. There's the picture above, showing that a couple of the shards were unrecoverable from the floor. I took them to my local bank branch this week and exchanged them for an undamaged one dollar bill, as the Federal Reserve allows. I consider this dollar to be found income for tax purposes, just like picking up spare change off the ground. I know the value of a dollar.
Here's a brief note on fracking. Insider interest in its expansion is driven by market demand, not powerful people playing games. Anyone interested in watching the fracking boom unfold can check out the North Dakota Industrial Commission's website for oil and gas data. The retro '90s look of that site brings back memories of my old GeoCities site on Yahoo. Ah, those were the days, when we could all get rich by doing nothing. It happens again every so often.
The equity crowdfunding forum was brand new at this MoneyShow. TheCrowdCafe tracks data for the sector. JOBS Act Title III still hasn't passed, so the non-accredited investor community still has to wait for its shot at true crowdfunding. The cumbersome, expensive legacy of Reg A state registered securities is still with us. The panelists believe the next step in crowdfunding is Big Data predictive analytics revealing investor preferences, time between raises, and successful raise amounts. I asked the panel whether they thought leading portals will become acquisition targets for big banks. That is absolutely my favorite thing to ask anyone in crowdfunding. They answered that acquisitions will happen because good crowdfunding portals are more capital efficient than big firms with legacy costs.
I attended Mark Skousen's evening talk on private equity. That made for three Skousen events in one day. It turned out to be three more than I needed. I expected a talk on how private equity works and how investors of any qualification can participate. The coverage of a few years' worth of returns from the traded stocks of leading private equity firms made me think ahead to the next available hospitality suite. Folks, I've seen this stuff before, and a single price movement chart isn't going to tell me whether a stock belongs in my portfolio. Mitt Romney worked in private equity but he had nothing to do with the publicly traded stocks of private equity firms, and Bain Capital is still privately held. Most Americans didn't want to hear Mitt Romney's campaign pitch for private enterprise in 2012 because they're all dependent on some form of welfare now. A nation of entitlement brats doesn't want successful people lecturing them on productivity.
George Gilder dropped in toward the end of Mark Skousen's evening talk. There they are above, out in the hallway. George is gesturing his approval of something Mark said and Mark is enjoying the attention. I did not stick around for autographs because I had to go find some free food from a hospitality suite. Fortunately one of the exhibitors promoting investment in Myanmar had some excellent free food and booze in their suite. Mission accomplished.
I started my third and final day at the MoneyShow with Marilyn Cohen's bond expertise. She noted how 10-year yields have defied most analysts' predictions. US rates must look better than rates in the rest of the world. Her key insight is that bond investors can use bonds with "moving parts" (floating Libor, coupon resets, etc.) to mitigate the risks of inflation and rising interest rates. Bonds with coupon resets often come with call features. She liked the bonds of one REIT but also thought the REIT itself was a good deal, a rare non-bond pick for her. If you want to know more about her specific picks, you'll have to ask her yourself. She was one of the rare contrarians at this MoneyShow who thought the stock market was at a peak valuation! Woo hoo! She's always been a genius in my book, and not just because she agrees with me. Marilyn likes bonds with state intercept enhancements. She also likes water and sewer bonds in good areas, defined as a prosperous region with stable incomes, no urban blight, and no municipal bankruptcies. I'm pretty sure that Detroit and Stockton would not meet that definition of a good area for infrastructure bonds.
One other speaker offering some insight did not generate insights I would find useful. I won't name this person because I don't want to drive Web traffic to sources that I think offer little value. Folks, I don't need to walk through a fictional character's literary history to conclude that confirmation bias is bad. I also won't throw out CAPEs as a buy signal just because it doesn't time a sector rotation strategy very well. I like watching the P/E ratio for individual stocks and the whole market, and CAPE Ratio Calculator is free to use. Sector rotation is smack in the middle of the spectrum that puts stock picking on one end and broad market analysis on the other, and I'm no fan of splitting the difference that way in portfolio management. I would like to see data supporting the claim that stocks with high institutional ownership are more sensitive to bullish analyst sentiment. It may indeed open contrarian opportunities for investors tracking stocks with low institutional ownership, but those same stocks will also be less liquid.
Marilyn Cohen was up for a second time with some overlooked bond ideas. I learned from her that muni yield changes usually trail broader bond market yield changes. That makes sense if muni issuers' underwriters reset the offering prices of new issues when the 10-year Treasury yield moves. She revisited her earlier mention of bond intercept programs, which are mainly for school districts. States can divert school appropriations to pay school bondholders under such programs. That's a good enhancement to munis. She also likes port and harbor bonds, along with senior lien airport revenue bonds. She definitely does not like pension liability bonds or health care obligation bonds. She expects some hospitals to go bankrupt under ACA, destroying their bond holders. She likes watching bonds that are connected to merger plays because their change of control provisions will activate. I hope bond fund managers have fun watching the bonds of hard asset companies as the US enters hyperinflation. Marilyn notes that bond market crises often cause stock market crises. I agree with Marilyn that we can expect a very serious crash. I can hardly wait. She thinks bond ETFs may face serious problems in such a crash if investors sell in a panic. I asked her about the possibility of bond exit fees, and she agreed it's likely. Marilyn is totally awesome.
Morgan Housel of the Motley Fool told us why we can't have nice things in his afternoon keynote. Bad investor behavior means many stock market investors underperform the indexes. People buy high when they're greedy and sell low when they're fearful; Warren Buffett does the opposite. Volatility is common, the world is complex, and compounding takes time. Most investors lack the patience to see through that noise. The P/E ratio isn't perfect but it is the single best statistical explanation of equity market returns. That's good enough for me. Read Morgan's site for the rest of his wisdom.
Wayne Allyn Root delivered the final keynote. This was my first exposure to his bombastic personality. I consider his performance to be entertainment and it's fitting that he aspires to a political career. He threw lots of red meat at the audience and I got the impression he was test marketing some themes he can hit on the campaign trail. Lots of his points got applause and some people objected vocally, so it made for a good stump speech. If he runs as a Republican, he'll have to address some emerging research that shows economic performance to be superior under Democratic administrations in Washington. I think his assumption that Americans' offshore wealth will return to the US with a tax holiday is unrealistic. It may be there to facilitate trade or FDI, and no tax holiday will repatriate capital that is already productively deployed. His stuff was great for the Tea Party, libertarian, gold and silver crowd. He's definitely after the Ron Paul demographic because there's money to be made off those people now that their longtime patron saint is retired. I'm surprised he didn't mention Bitcoin. I'm sure he'll figure it out once his pollsters test it in Silicon Valley. George Gilder even hung around until the very end. That guy was everywhere.
The MoneyShow San Francisco 2014 was a winner for me. I came out with more building materials for my own portfolio's architecture. I'm amazed that the official program still mentioned Alfidi Capital as a participant even though I had no booth or speaking engagement. I sometimes wonder whether my career would have taken a different turn if I had paid for a booth here in 2005 and 2006 when I was a financial adviser. I can't turn back the clock to those days when I tried to find clients. I can only look forward to a future where I never need to deal with humans. The MoneyShow's wisdom will always be relevant to me.
Full disclosure: I edited a brief mention of Tesla Motors in the "top financial advisors" above to clarify its attempt at profitability. The company was not earning a net profit at the time of the MoneyShow San Francisco 2014.
Friday, August 22, 2014
Sunday, June 15, 2014
The Limerick of Finance for 06/15/14
No chart can say where stocks will go
Random walk turns a high to a low
Investing makes sense
When thinking's intense
Technicals are worth one big zero
Random walk turns a high to a low
Investing makes sense
When thinking's intense
Technicals are worth one big zero
Sunday, April 27, 2014
The Limerick of Finance 04/27/14
Investors are totally lame
Their mistakes will all turn out the same
Paying a premium
Is exceedingly dumb
Watching them fail is one funny game
Their mistakes will all turn out the same
Paying a premium
Is exceedingly dumb
Watching them fail is one funny game
Saturday, March 22, 2014
Americans Lulled To Sleep By Pumped Markets
I have noted for some time that Americans are oblivious to the main force driving their portfolios to the moon. That would be central bank quantitative easing, all around the world. One BIS report from 2013 said it all. I'm not linking to it this time. Go find it yourself. Earn that knowledge with some work.
Americans typically don't save their paychecks and invest for retirement. The poor don't have much income to save, although staying off booze and cigarettes would help. The middle class has been instructed to believe in Social Security's mythical solvency. That leaves the bottom four quintiles at the mercy of the top quintile. The serf population will be quite large and desperate after the next crack-up. I expect to have my pick of the litter as itinerant labor after I become their overlord. This is where I would insert a sinister laugh track if I cared enough.
I do not listen to the nonsensical chatter spewing from financial advising media. I did when I was a financial adviser from 2005-2006 and much of it made little sense to me. I was terminated as a financial adviser because people don't want to hear the truth. The retail salespeople attached to investment banks are riding the pump scheme for all it's worth. I don't expect them to wake up. The few financial advisers with sense enough to pursue independent paths can't compete with central banks determined to pump asset classes to the moon. That's why I'm not a financial adviser. No one wants my advice and I don't give any.
Lemmings can enjoy the wealth effect of pumped markets while it lasts. Taking out HELOCs ended badly for many home "investors" after 2006. Everyone has forgotten how that ended. People are going to learn the hard way all over again. America went to sleep after the financial crisis of 2008. I'm not trying to wake the country up. Other investors' pain will be my gain.
Americans typically don't save their paychecks and invest for retirement. The poor don't have much income to save, although staying off booze and cigarettes would help. The middle class has been instructed to believe in Social Security's mythical solvency. That leaves the bottom four quintiles at the mercy of the top quintile. The serf population will be quite large and desperate after the next crack-up. I expect to have my pick of the litter as itinerant labor after I become their overlord. This is where I would insert a sinister laugh track if I cared enough.
I do not listen to the nonsensical chatter spewing from financial advising media. I did when I was a financial adviser from 2005-2006 and much of it made little sense to me. I was terminated as a financial adviser because people don't want to hear the truth. The retail salespeople attached to investment banks are riding the pump scheme for all it's worth. I don't expect them to wake up. The few financial advisers with sense enough to pursue independent paths can't compete with central banks determined to pump asset classes to the moon. That's why I'm not a financial adviser. No one wants my advice and I don't give any.
Lemmings can enjoy the wealth effect of pumped markets while it lasts. Taking out HELOCs ended badly for many home "investors" after 2006. Everyone has forgotten how that ended. People are going to learn the hard way all over again. America went to sleep after the financial crisis of 2008. I'm not trying to wake the country up. Other investors' pain will be my gain.
Wednesday, March 12, 2014
Wednesday, February 19, 2014
The Haiku of Finance for 02/19/14
Capex can drive growth
Research and development
Cash flow keeps it real
Research and development
Cash flow keeps it real
Friday, January 17, 2014
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