Financial Sarcasm Roundup for 01/29/16

People take self-identification to new extremes in the digital age. I self-identify as sarcastic, which ought to be a distinct personality type.

Japan's central bank goes for negative interest rates. That should pry the last yen out from under savers' mattresses and push Japanese investors into riskier territory. The positive feedback loop from such a nonsensical policy will never solve Japan's structural problems. Switzerland did this for a while but they had a strong currency. Japan's results will be worse.

Puerto Rico expects to issue new debt. The old debt isn't working out too well, so the new stuff will have to pay junk-bond type interest. Paying out 5% just isn't going to cut it with investors who got burned. No one likes taking a valuation haircut. I am so glad I never owned Puerto Rico bonds. They will make very nice wallpaper after several re-issues.

Theranos keeps having one problem after another. Specious tech claims and poor lab conditions should not justify a multi-billion dollar private market valuation. A whole bunch of top-shelf VC firms have staked their reputations on a business they never understood. I can imagine the panicked phone calls up and down Sand Hill Road about what desperate measures anyone can take to keep this unicorn from tipping over. Save the energy for the post-mortem court cases, people.

I may try self-identifying as a housecat just to see how people react. Nah, just kidding.

The Haiku of Finance for 06/05/14

Tax defeasance plan
Bonds offset new assessments
Wealth transfer done right

SF Prop A and California Prop 41 Tax Defeasance Through Muni Bonds

San Francisco Voters passed Proposition A this week, calling for a $400B muni bond issue to fund seismic retrofits of first responders' facilities in the City.  California voters passed Proposition 41, diverting bond proceeds raised for CalVet home and farm loans to low-income housing for homeless veterans.  San Francisco voters will eventually pay higher property taxes to pay off the principal and interest of these bonds.  Taxpayers are also investors.  They can effectively get their money back through a form of defeasance.

A San Francisco property owner can theoretically buy a sufficient amount of city and state muni bonds whose interest payments will offset their property tax increases.  They would have to buy whatever new general obligation issues are specifically intended to fund these most recent ballot measures.  If enough San Franciscans do it, their increased property taxes transform into tax-free income.

Here's an illustration of how this would theoretically work.  The San Francisco June 2014 Voter Information Pamphlet and Sample Ballot described the fiscal impact of Prop. A.  The City Controller estimated that Prop. A's fiscal impact is an average tax rate of $9.61 per $100,000 of assessed value through 2040.  Offsetting this with a purchase of San Francisco muni bonds means buying enough of them to pay at least that much in annual interest.  The California Voter Information Guide for Prop. 41 has a similar analysis but does not reveal the property tax rate impact for assessed property.  Darn, that's no help.  California's bonds carry the lowest rating in the nation because this state can't get its act together.

I logged into the brokerage where I maintain my portfolio and searched their bond inventory.  The California GO bond inventory revealed coupons of 4.25%-5.25% for maturities out to 2029, which is the target maturity implied by Prop. 41's analysis.  The San Francisco GO coupons for all maturities past 2014 ranged from 4.00%-5.00%.  Buying one SF GO 4% bond of $5000 face value will pay $200 in interest per year, more than enough to offset a Prop. A tax assessment on $100,000 worth of property.  I'll assume the same holds true for the state's Prop. 41 assessment; buying one $5000 California GO bond should be sufficient.  The bottom line is that San Francisco real property owners can elect to set aside the liquid equivalent of 10% of their real property's value (i.e., two $5K muni bonds for each $100K) as a defeasance for the taxes to fund these bond issues.  That's what I would do if I owned real property in this town, but I don't tell anyone else what to do with their own money.  I would of course receive much more from interest than I would pay in taxes, so muni bond defeasance of property taxes sure looks like a transfer of wealth from City taxpayers to bond holders.

I won't debate the political merits of either measure except to say that I voted against them.  I generally oppose issuing new government debt unless it is earmarked for spending on capital goods in the "public commons" that enhance economic activity.  I suppose I can live with Prop. A because it supports The City's long term capital improvement plan, but City Hall needs to cut other things first IMHO before planning bond issues.  I also won't recap my hyperinflation warning, which would make any bond purchase worthless.  Hyperinflation would rapidly eliminate property tax burdens anyway so defeasance would be a waste of effort.

Full disclosure:  None of this analysis constitutes financial advice; go see a registered financial advisor for that service.  I do not own any muni bonds at this time.  I do not own real property with assessable value in San Francisco.  

The Haiku of Finance for 04/18/14

Monitor munis
Treasury tracking trouble
Powerless to rule

The Haiku of Finance for 12/04/13

Finally bankrupt
Broke city can wipe slate clean
Rebirth of Detroit

Bankrupt Detroit Officially Ready to Downsize

Detroit has finally filed for bankruptcy.  Many years of population flight, an eroding tax base, excess civic infrastructure, and overpaid public employees have sealed the city's fate.  I discussed Detroit's condition one month ago.  The city simply did not have enough time to fix all of its problems before its bills came due, and no external rescue could have stabilized the city's finances.

Detroit is now free to nullify any city employee union contracts that burden it.  No city deserves to be a permanent hostage to union greed.  It is also free to implement its long-discussed downsizing plan.  I sure hope they take my initial analysis seriously and go for as much permaculture as space will allow.  The sad recent spectacle of Detroit fast-food workers agitating for higher wages was comedic.  Those folks won't be laughing once their fast-food joints are bulldozed for farmland but they will certainly be eating healthier.

I have no sympathy for any investor who bought Detroit municipal bonds.  The handwriting for bankruptcy was on the wall for a very long time.  Bondholders will get nothing.  

Stockton Is Stuck On Stupid

I am grateful to be a resident of San Francisco, where the city's leaders at least try to balance the budget and  prevent city employee compensation from getting out of control.  I feel sorry for poor old Stockton, which has been run into bankruptcy after a couple of decades' worth of unsupportable promises to city government employees and retirees.  Read that linked article all the way to the end to find a retired city employee demanding the termination of the current city manager.  The city manager inherited the problem driven by the greedy demands made by people like her for many years, but she wants to fire the guy for trying to solve the problem and save the whole town.  Americans are enthralled with their entitlements.  Letting go will be loud and painful.

Stockton's pain is just beginning.  The city's 2011-2012 annual budget proposed a deficit of $161M, with only a $5M reduction from the previous year.  It's right there on page 2 so we can't miss it.  This meager stab at a return to solvency wasn't going to cut the mustard.  The numbers describing the city's inability to meet its obligations were in plain sight for any city government employee to see.

Stockton was a nice little farm town before the housing boom paved over its best acreage with unneeded McMansions.  I've driven through it several times. The city has a decent downtown, waterfront, and working port.  All it needs to do now is take a page out of Detroit's playbook and launch a de-urbanization program. Use eminent domain to bulldoze the suburbs built since 2003 and return Stockton to a level of physical infrastructure that its tax base can support.

The state government can theoretically bail out a city or county government but the folks in Sacramento are having a tough time balancing the state's budget (again).  I allowed the last of my California municipal bonds to mature this month and I won't buy any more.  The state can't default on its bonds unless a referendum or the Legislature amends the state Constitution.  That's not a good enough reason for me to buy Cal munis with the U.S. dollar facing devaluation from Fed QE and potential abandonment from international bond investors.  

Full disclosure:  No positions in City of Stockton bonds at this time.  

Alpha-D Updates for June 2012

This update comes a few days after I executed a few trades in my own portfolio.  There's a pretty good reason for this delay.  I spent much of June in a remote part of Monterey County, California where I had only intermittent access to the Internet and very little free time.  I had just enough time a few days ago to log into my brokerage account and make some trades.  Only now have I had the time to explain my actions.  My critics will just have to deal with it.

My short puts under GDX expired unexercised over June's options expiration weekend, but my covered calls were exercised when GDX rose in price.  I bought back all of my GDX holdings (no net change) and sold more covered calls; I did not sell any more puts.

My covered calls on FXI expired unexercised, so I renewed them for another month.

I still have my long positions in FXA and FXC with covered calls that are set to expire next month.  I also have my short put position under FXF that will expire next month.  Those currency positions are very important parts of my plan to hedge against the devaluation of the U.S. dollar from hyperinflation.  I reserve the right to go long FXF at some point.

My remaining California muni bonds will mature on July 1.  I will not buy any more fixed income instruments denominated in U.S. dollars until the possibility of hyperinflation has passed.  That could be years away, and if the U.S. actually enters hyperinflation the holders of U.S. dollar fixed income securities will wish they had never seen a bond or CD.

I'm sitting in plenty of cash, awaiting the European implosion that will get the economic crisis roaring once more.

Updating the Alpha-D for April 2012

Here's my quick update.  My covered calls on FXI and GDX expired unexercised.  I renewed them.  My short puts under GDX hit their strike price and were exercised; I'm now the proud owner of more GDX.  I'm trying to keep my gold (GDX) allocation at about 7% of my net worth.

A couple of my California muni bonds are maturing soon and a couple more mature later this summer.  I will not replace them with more munis.  Like I've said before, things related to hard assets and forex are probably more suitable for me as asset protection tools.

I still have plenty of cash.  I am watching the renewed recessions in Spain and the UK with interest, wondering when their troubles will trigger the end of both the eurozone and the global equity bull market.  

Musings On Taxable Year 2011

Today was the last day for American citizens to file their federal tax returns for tax year 2011.  This calls for some reflection.  This year's tax filing deadline happily coincides with Tax Freedom Day for the first time I can recall (not that I paid attention in years past, but I'm not the one responsible for the calculation).

I learned a couple of things from reviewing my filing documents for 2011.  My realized short-term capital gains were lower in 2011 than they had been in 2010 because I didn't pursue as much event-driven investing, particularly M&A activity.  I tracked a flurry of mergers in the fall of 2011 but chose not to act on them because of the precarious nature of this bull market in equities.  I simply do not know when the bottom will fall out.  I was thus unwilling to risk going long-equity or short-put with stocks that were M&A targets because I did not want to risk holding something if a market crash forced a merger to unwind.  Stuff like that does happen.

I also learned that my tolerance for buying outstanding municipal bonds at a premium had some beneficial effects.  The premiums I paid, small though they often were, helped negate the capital gains I realized from selling equities and writing covered calls.  The net effect was to reduce the taxable amount of some of my gains while I collect the tax-free interest payments from the munis.  The only drawback was the negative effect of the accrued interest I had to pay out on bonds that were outstanding issues held by my brokerage on behalf of the underwriter.  It wasn't too much of a big deal because I always hold bonds to maturity, so the next coupon pays me back.  After that, the rest of the tax-free cash flow keeps rolling in.

I have no reason to be smug about using muni bonds this way in the near future.  I'm not buying any more fixed income instruments due to the severe threat of hyperinflation in the U.S.  My remaining California muni bonds will mature this summer and I will not replace them.  Some combination of TIPS and their ETFs, foreign currency ETFs, and hard assets (oil/gas/pipeline) MLPs and their ETFs will replace them in my asset allocation strategy.  I have convinced myself that those things will more effectively preserve my purchasing power and generate more yield than traditional fixed-income instruments in a high-inflation scenario.  The next year or two will determine whether I am making the right choice.  

Alpha-D Updates for Feb. 2012

I made no real changes to my Alpha-D Strategy this month.  My covered calls on FXI and GDX expired unexercised so I renewed them for another month.  I made no changes to the small amount of California state municipal bonds I hold and I am waiting for them to mature in a few months.  For the record, I'm still thinking about buying some TIPS but only if I can conclude that a TIPS ETF will reprice quickly enough to hold its NAV near fair value regardless of the face values of its constituent bonds.  This is a theory worthy of a severe real-world test.

I'm sitting on cash, just waiting for this Greek default action to really get going.  Nothing has been resolved by this week's deal in Brussels.  Too many Greeks on the street will refuse to accept austerity measures.  Pressure from below will probably obliterate the deal and remove Greece from the euro.  I expect other bankrupt nations in the PIIGS to line up for bailouts that will prove just as impossible to execute, and then their exits will follow.

Any future eurozone bank destruction will be felt on American shores.  It is a matter of time but the timing is unknowable. That is why the personal capital I've committed to equities is at the lowest percentage of my net worth since August 2007.  That was the last time the markets had some kind of high point, and they are reaching similar highs now.  I'd rather wait for new lows.  

The Haiku of Finance for 01/05/12

California cuts
Coming if no new taxes
Good for bondholders

Alpha-D Updates For 12/19/11

I made very simple changes to my portfolio today.  My covered calls on GDX and FXI expired unexercised.  I renewed them with monthly expirations.  The underlying equity positions have fallen from the last price I paid for them, so the possibility that these calls may be exercised raises the further risk that I will either realize a tax loss or repurchase them at a disadvantageous price.  Such is the nature of equity investing with covered call writing.  I'm fine with that.

I also remain the proud owner of some California muni bonds that will mature in 2012.  They are useful as a deflationary hedge.  I bought them at a premium to their face value because their coupons were higher than going rates on Treasuries.  The premium nets out against other capital gains; the cash flow from interest is tax free.  It is difficult to justify further purchases of fixed income products in a macroeconomic environment where central banks worldwide seem determined to devalue fiat currency.  Bonds and cash do poorly when such conditions persist.

I continue to be intrigued by the relative performance of FRO and SFL, two shipping twins I've been watching for years.  I missed my chance to buy SFL in 2008 when it was dirt cheap but now I'm tempted to go for it.  Bear in mind that the lesson of 2009 is that stocks can go even cheaper, so I'm willing to wait.  I'm also strongly considering taking a bearish position on YRCW (actually YRCWD for a while) by either buying puts or going short the stock.  I posted an update on YRCW last week and I'm finally tempted to actually make some money from this trucker's sad decline.  I'll let you know what I decide in a day or two. 

That's all for now.  Check back later for more genius updates.  I might as well remind people that my disclosures are not investment advice.  Consider my discussion to be a form of entertainment.  I don't give advice on what other people should do with their money.  I certainly don't take advice on what to do with mine. 

Alpha-D Updates for 11/21/11

This month was easy and boring.  All of my covered calls on GDX and FXI expired unexercised.  I renewed them for another month and made no other changes to my portfolio.  I still have small holdings in California muni bonds. 

I'm tempted to buy more California muni bonds but in a seriously inflationary economy new ones will quickly lose value.  I'd rather not take the risk right now.  I'll admit that it gets boring sitting on lots of cash and staring at small exposures to China, gold stocks, and muni bonds.  My thing is that I've convinced myself that the massive risks of buying now are too great for me to take.  We face a likely crash in Europe that may have incredibly destructive effects on U.S. banks holding European sovereign debt.  The inability of the U.S. Congress to agree to deficit cuts means austerity will probably come fast and furious, hitting GDP hard and restarting Great Depression 2.0.

Sorry folks, but what I do with my own money isn't going to be very exciting until trans-Atlantic economic annihilation puts everything on sale. 

Updating The Alpha-D For July 2011

Wow, how about that gold action.  Gold's price strength propelled my GDX holdings past the strike price of the call options I had on them.  I bought back some of that pile in a wash sale (and sold more covered calls)but I let the rest go as a capital gain.  It is very difficult to tell right now whether we're headed for hyperinflation (good for gold, at least initially) or a renewed depression (probably bad for gold).  My GDX holdings have done their job so far, protecting me from the mild price inflation the U.S. has experienced in 2011.

I also renewed my covered calls on FXI; none of that pile of equities was sold off at options expiration this month.  China's economy is slowing down and inflation over there is heating up, but the country's central bank is in a much stronger position compared to the Fed.  They're able to keep the ship afloat. 

I used my growing cash pile to buy more State of California general obligation bonds and an out-of-state bank CD (short-term).  This is just to get a little bit more yield.  I believe my state government in Sacramento will take all necessary measures to cut its budget deficit and protect bondholder payments. 

Individual equities still look too pricey given the broad market's overvaluation.  No way am I re-entering TDW.  Their financial statements are a huge disappointment. 

That's it for this month.  This is too easy. 

State Pension Plans And Hedge Funds Make Us All Miserable

Well, my evening is hereby ruined.  I was planning to have some fun watching videos of dancing cats or some such aimless baloney, but I had to go scanning financial headlines first.  It's a habit I just can't break.  Today I scanned some headlines that indicated I would be just miserable if I kept on reading.  Now I can share my misery with my readers.   

Let's read about desperate state pension fund managers drastically increasing their bets on hedge funds.  They feel compelled to roll the dice, swing for the fences, and do whatever it takes to increase their chances of meeting impossibly high discount rates that will fund future payout liabilities.  I stopped rolling my eyes long ago whenever I heard hedge fund managers spout their sales mantras of "equity returns with bond risk."  That kind of nonsense unwound many a hedge fund in the liquidity crunch of 2007-2009 and only the Fed's easy money policies saved the remainder. 

If reading about stupidity in finance doesn't make you miserable, paying higher taxes to fund it certainly will.  State and local government pension funds are so underfunded that the tax increases needed to save them will destroy taxpayers.  Let this sink in.  The extra taxes needed to maintain upper middle class lifestyles for municipal employees will eliminate the rest of the middle class within one generation. 

The easy fix is to eliminate defined benefit plans for government workers and pay out pensions that funds can support today, at sustainable levels, until they can be phased out in favor of defined contribution plans.  Nothing in government is that easy.  That means we'll do things the hard way with municipal bankruptcies, shutdowns of vital public services, and/or confiscatory levels of taxation. 

There you have it.  Now I hope you're all as miserable as I am for seeing once again just how much pain America is about to take thanks to its legions of useless professional money managers.  Misery loves company.  I also love keeping company with attractive women but there aren't any within arm's length right now.  That makes me even more miserable. 

Updating The Alpha-D For March 2011

Simple changes this month are solely due to options expiration last Friday.

My covered calls on GDX, FXI, and TDW expired unexercised.  No equities were sold away.  I renewed those covered calls.

No change in ATHR or my covered calls and short puts.  I await the deal's closure.

I bought one California muni bond, maturing in 2012.  The premium will net against my equity gains and the cash flow is tax-free. 

That's all there is for March. 

Updating The Alpha-D For Feb. 2011

Options expiration last week left me with choices to make.  I allowed a small portion of my TDW holdings to be sold away and renewed my short covered calls on the remainder.  That stock has been on a tear recently so pocketing some gains is okay by me.

Similarly, I allowed some of my GDX to be called away and I renewed my covered calls on what was left.  The shares called away were sold at the exact price I was forced to pay a month ago when they were put to me.  That doesn't happen often, so I'm grateful to be lucky enough to have collected the cash from those covered call options. 

My covered calls on FXI expired unexercised.  I renewed them this month with no change in the size of my underlying equity position. 

I also still have my long ATHR position with covered calls and cash-covered short puts.  This special situation play still looks like it will pay off. 

I am not shorting any other puts this month against anything.  Markets worldwide are far too overvalued right now given the debt loads most companies and countries are carrying.  I'd rather not have any overvalued equities put to me at this time. 

I don't ignore fixed income, as I did when I was younger.  I added to my holdings of short-dated California state muni bonds.  I even grabbed some short-dated Treasuries.  It's hard to turn down a little extra yield.  The stagflationary U.S. economy could break either way towards depression/deflation (ruinous for equities) or higher inflation (bad for bonds).  No one knows in advance which will prevail, or even if stagflation will persist (my current opinion).  I'm just staying flexible, with cash on the sidelines ready to buy anything that breaks the right way. 

Full disclosure:  All positions described reflect my true portfolio. 

Day Of Greed In Wisconsin From Unions

Arab street protests have given the world a "Day of Rage" on several different days.  Now some misguided Americans are making this concept their own to protest the imminent destruction of their union benefits.  The state of Wisconsin is doing the right thing by moving to curtail state employee unions' collective bargaining rights.  The state has even thrown the unions a bone by promising no layoffs in exchange for higher employee contributions to their own pension and health care benefits.  In other words, the state asks its employees to accept the same lifestyle deal faced by the private sector taxpayers who pay their salaries.

On the plus side, passage of this fiscally responsible legislation will make credit analysts look more favorably upon the state of Wisconsin's finances.  The state's muni bonds will look more secure and taxpayers will save on interest costs.  On the minus side, unionized teachers and other employees show how clueless they can be when sufficiently roused. 

Unions are responding to this common sense legislation with their typical childishness, greed, and arrogance.  This goes to show that union leaders just aren't intelligent enough to grasp economic concepts.  These protesters may be even more dense than the Teamsters at YRC Worldwide, which I didn't think was possible until I read the stories coming out of Wisconsin today. 

Wake up, unions.  Your time is almost up.  Do your members a favor by breaking the news to them that the days of generous benefits and job security for low-skill occupations are rapidly drawing to a close. 

Full disclosure:  No position in YRCW or Wisconsin muni bonds.

Hedge Funds Buying Munis In Extremely Stupid Move

Stupidity isn't the exclusive provenance of people with low IQs.  Ostensibly well-educated people do dumb things too.  Hedge funds run by investment professionals who are supposed to be intelligent are jumping into muni bonds:

A spike in yields and a desire to diversify portfolios is prompting some unusual investors to jump into the municipal bond market, say traders and analysts.

This comes in the face of warnings of massive deficits facing municipal governments and unfunded pension liabilities that will now affect states' credit ratings.  Hedge funds buying New Jersey's bonds hoping for bargains may get more than they bargain for thanks to rating cuts driven by pension costs. 

The pension fund managers whose liabilities are contributing to muni bond haircuts are just as stupid as hedge funds.  CalPERS can't resist the siren call of higher returns from less liquid investments, which is exactly why it cannot solve its funding shortfalls. 

There's nothing wrong with buying munis for their triple tax free cash flow and ability to stabilize a diverse portfolio.  Buying munis from solvent governments or even insolvent governments that are prohibited from declaring bankruptcy (like California) makes sense if the bonds are held to maturity.  Unfortunately, that's not the typical hedge fund's approach.  Hedgies place their client's money at risk by using algorithms to play a guessing game with interest rates and credit ratings.  Due diligence and credit quality probably play a minor role.  That's what makes this latest hedge fund craze sound so stupid. 

Full disclosure:  The author has a small position in California state municipal bonds at this time.