Washington State Opts for Wage-Price Spiral

I recently wrote about how government minimum wage laws can be a conduit for a wage-price spiral that would trigger hyperinflation.  The state of Washington is about to make this a self-fulfilling prophecy by raising its minimum wage to $9/hour.  Other states are automatically following suit.  Here we go!  Expect Washington to lose small businesses as entrepreneurs decamp for lower-cost states.

Minimum wage mandates can get silly.  I find it odd that California has a different monthly minimum wage just for sheepherders.  Their annual California minimum salary of $17,070.24 is higher than the minimum wage of $16K a worker would get for 50 weeks of 40-hour labor.  What's up with that?  Sheepherders probably work just as hard as janitors and restaurant servers and can get free meals and lodging too.  Why not special wages for cattle herders, rabbit pen monitors, and hog farmhands?  I don't get it.

What I do get is that public outcries for action on workers' stagnant buying power will prompt more minimum wage increases, more price hikes by employers, and yet more erosion in spending power.  This stagflationary spiral can erupt into hyperinflation any time foreign central banks or sovereign wealth funds turn away from our Treasury bond auctions.  China and Japan have already established a non-dollar financial conduit.  The U.S. dollar is already on a slippery slope thanks to decades of federal indebtedness and a Fed that no more room to lower interest rates.  The hyperinflationary fire awaits its first spark.  

The Haiku of Finance for 12/30/11

No blue light specials
Sears closing stores in some states
Many vacant malls

Flat 2011 Market Presages Flattening Of Many Portfolios In 2012

The U.S. stock market has gone pretty much nowhere in 2011.  In fact, it's gone pretty much nowhere for at least a decade.  Investors who started picking up bargains in tech stocks after the dot-com crash have little to show for their bottom-picking.  Blue chips with decent dividend yields have done better, especially for those who reinvested their dividends, and especially for those who stayed diversified with fixed income investments.  The bond market continues to rally with the Federal Reserve holding its interest rate target at zero.

The industrialized world has entered a fantasy land where credit can magically be paid off with the creation of more credit.  This is not as unique as it seems.  Previous credit explosions have always ended in tears when governments could not stop the monetary printing presses they started.  Paying your enormous debts with hyperinflated currency feels great until your paycheck starts to deteriorate even more rapidly.

In 2012 I will continue to find ways to defy conventional asset allocation.  Allocating capital to bonds makes little sense in the face of hyperinflationary credit creation.  The only bond exposure I will consider in 2012 (once my remaining California munis mature) is through TIPS and related instruments.  Allocating capital to stocks makes little sense with broad market valuations in excess of their historic P/E ratio of 14.  I will consider more stock investments in the aftermath of a major market decline but not before one occurs.  Even so, I remain a deep value fundamental investor.  Residential real estate in rent controlled locales would be disastrous purchases for new investors if high inflation becomes a reality.  Hard assets like precious metals are okay for my own portfolio as diversification tools, but I am mindful that gold's price is far above its historical average.  Rare earth metals are industrial inputs that will be hurt badly if exports of manufactured goods from China to Europe and the U.S. decline in 2012, as I suspect they probably will.

The eye of the hurricane is passing.  Europe cannot bail itself out.  The Fed's dollar swap lines can keep a drowning Europe afloat but cannot pump water (i.e., too much sovereign debt) out of its lungs.  U.S. government-owned financial assets await new buyers.  Some kind of storm can hit without warning in 2012 and blow a lot of portfolios away.

Nota bene:  Long GDX and FXI with covered calls.  Long some California state munis maturing in 2012.  Sitting on plenty of cash.  

The Haiku of Finance for 12/29/11

China penny stocks
Will they ever make money?
Hardly any chance

First China Pharmaceutical Group (FCPG) Won't Reorganize

Trinity Investment Research did it again.  They pumped another penny stock in a mailer last year and it went nowhere but down.  First China Pharmaceutical Group (FCPG) is a drug distributor in China that used to be called E-Dispatch.  Why the name change?  Beats me.  Maybe they just wanted to differentiate themselves from all of the links I found when I did a web search for "E-Dispatch."

They sure don't differentiate themselves with financial results.  They turned a profit in the last two quarters of 2010 but are now losing money.  Their negative retained earnings are getting farther in the hole.  Free cash flow has been negative for three years.

The company has problems that are forcing it to abandon a proposed corporate reorganization it had planned to execute.  The details don't interest me.  A foreign penny stock that can't get a simple administrative reorganization right isn't going to get serious attention from me.  Investors who bought FCPG when this mailer came out would have lost around 90% of their money if they had held on until now.  I don't like those kinds of returns.

Full disclosure:  No position in FCPG, ever.

The Haiku of Finance for 12/28/11

Another down day
Market barely moved this year
Only lucky gains

Eagleford Energy (EFRDF) Shouldn't Waste My Time

Hey, here's another so-called winner from one of Tim Fields' old Untapped Wealth mailers.  This one was about Eagleford Energy (EFRDF), an exploration company looking for oil in - you guessed it - Texas' Eagle Ford shale region.

Can you guess by now what their financial results have been like since 2009?  If you guessed anything other than negative net income, retained earnings, and free cash flow, you haven't been reading my critiques long enough.  I'm looking in SEC's EDGAR . . . was there even a 10-K published in 2010?!    Oh, wait, I found something that looks like a financial statement on a page about their annual meeting.  Check out the table on page 8 for the most important thing you need to know:  Net losses increased as revenue increased.  That means they can't control their variable operating costs.  The more they drill, the worse they'll perform.  I can't believe there's an analyst somewhere giving this a Buy rating but maybe some sell-siders really are desperate for attention.

The management team reads like a grab bag of dudes thrown together from some miscellaneous acquisitions.  I could probably find a couple of homeless people in San Francisco who could fill out any empty slots they have.  Eagleford can't afford my finder's fee.

The company touts its projects for being adjacent to the producing properties of larger competitors.  Folks, I've lived in San Francisco adjacent to multimillionaire neighborhoods for over seven years but that doesn't make me one.  Read phrases like "working to develop a number of potentially high volume oil targets" as really meaning "we haven't produced very much oil yet."  Wait, I take that back, they did hit something in June of this year but it's not clear how much.  That was their last press release for 2011.

I shouldn't even bother writing any more about this one.  Investors who bought the stock in late 2010 when I got this mailer paid well over a dollar for something now trading at twenty cents.  In a just world, Trinity Investment Research would have to explain its touts to investors after the fact.

Full disclosure:  No position in EFRDF, ever.

The Haiku of Finance for 12/27/11

Four main shopper types
All have one thing in common
They all pinch pennies

Quiznos And Sears In Trouble

I never would have guessed that Quiznos was on the verge of bankruptcy since I don't follow the fast food sector all that closely.  It has reached agreement with its major debtholders to execute a debt for equity swap, but that just buys time.  The fast food sector is really crowded and Quiznos has to compete against low-priced alternatives like Subway in addition to burger and pizza chains.  I've always thought of Quiznos as a premium alternative to Subway with its focus on grilled sandwiches with lots of meat - a high-cost way to serve the costliest part of a sandwich.  Maybe consumers are tightening belts in more way than one.  If they concede the low-price market to Subway then IMHO they can win in more upscale urban areas.  That means closing store locations in low-income areas.

Speaking of store closings, Sears has had problems for years.  Merging its blue-collar brand with an even more downscale brand like Kmart was always an uncomfortable mix.  The genius behind the idea was a hedge fund guy, not a retailer.  Now shareholders reap the harvest sown by his knowledge gap as Sears is forced to close the bottom 3% of its stores.  Sears needs to come to terms with the dominance of Wal-Mart and Target at the extreme low-price end of the retail spectrum and refocus its branding on the middle market where it belongs.  The demise of Montgomery Ward last decade should have been a golden opportunity for Sears to cherry-pick some better store locations.

Two retail brands that used to mean something are now in trouble for wandering outside their core demographics.  Growing without thinking first can do that to you.  How many Quiznos outlets are located in shopping malls with a Sears as the anchor?  In an ideal world, there would have been many.

Full disclosure:  No positions in any of the companies mentioned above.

China And Japan Getting Away From Dollars

The run on the dollar that could sink its value and bring surprise hyperinflation to the U.S. has just become a lot more likely.  China and Japan are moving to trade each other's currencies directly rather than use the U.S. dollar as an intermediary.  This won't lead to an immediate shift away from the dollar.  After all, the greenback has constituted around 60% or so of central banks' foreign currency holdings since at least 1995, according to the IMF's COFER report.

The change does signal to other nations that America's main trading partners will favor the illiquidity risk of less-traded currencies over the valuation risk of holding dollars tied to unsustainable spending.  China and Japan do have debt problems of their own, but they may be wagering that two drunks trying to stand each other up over the Sea of Japan is less tiresome than levitating a much larger drunk off of his back from across the Pacific Ocean.  They may even print some more of their own currencies just to have the liquidity to buy each others' bonds.  The Fed isn't the only player around that can do quantitative easing.

The U.S. financial elite should take a breather from its construction of swap lines for the eurozone to pay attention to this news.  America's deficit spending since 9/11 constituted a transfer of wealth from Asian central banks and sovereign wealth funds to shareholders in U.S. defense contractors and Medicare vendors.  Trade partners who opt out of petrodollar recycling will make it harder for the U.S. to peddle dollar-denominated debt outside the U.S., because there will be fewer nations willing to keep an inventory of dollars to buy it.

In any case, China and Japan have just quietly removed a source of demand for dollars.  This deal is another sign of higher U.S. interest rates to come, hyperinflation or not.

Full disclosure:  Long FXI with covered calls.

DOE Reached Same Conclusion On Wind Rare Earths As Alfidi Capital

Some of my fine readers may have noticed my recent interview in The Gold Report where I named dysprosium as the rare earth metal most likely to remain strongly in demand.  I mentioned it in the context of continued strong demand for wind turbines that also used neodymium in their magnets.  Well, lo and behold, the U.S. Department of Energy reached a similar conclusion in its 2011 Critical Materials Strategy.  It specifically named dysprosium and neodymium as two of five metals that may pose supply challenges for the clean energy sector.  The Gold Report has a good article pointing out implications for the rare earth mining sector.

The DOE report also has some great details on alternative technologies that may ameliorate the rare earth supply crunch when they are fully mature.  This is another subject I mentioned in my interview.  Listen up, Wall Street!  Keep reading this blog if you want to hear about emerging industry issues.  

MabCure (MBCI) Still A Work In Progress

Tim Field's Trinity Investment Research once sent me a mailer about another so-called winner.  Let's check out MabCure (MBCI) and see if they performed as the teaser flyer from the Untapped Wealth newsletter predicted.  Here we go again with three years of negative net income, retained earnings, and free cash flow.  Just once I'd like to see some financial health from one of these publicly-traded companies that pumpers like to tout.

MabCure aims to research novel cancer diagnostics and treatments by identifying markers and antigens specific to tumors.  I do not possess the medical expertise to ascertain whether this is a valid approach.  I can only wonder how a traditional laboratory approach like this will fare when faced with massively distributed competition from small-scale biohacking labs.  There is probably enough  information in the public domain for a networked collaborative of garage biolabs to assemble bio-widgets that can identify markers.

I'd rather participate in a local biospace than invest in a biotech company doing marker identification the old-fashioned way.

Full disclosure: No position in MBCI at this time.  

The Haiku of Finance for 12/26/11

"Mega Monday" hope
Spenders had chance to buy sales
Redeem those gift cards

Athabasca Uranium (ATURF) Digging Brand New Sites

The eventual end of the program that extracts fissionable material from decommissioned Soviet-era nuclear warheads will require nuclear plant operators to find new uranium supplies.  Uranium producers can expect no shortage of capital to chase new deposits.  Athabasca Uranium (ATURF) is going after uranium in Canada.

I have concerns about the relevance of the management team's expertise.  There is little room for doubt about their collective talent, although I'm having difficulty looking up the operating histories of some of their previous companies (specifically Kinetex Resources and Choice Resources Corp.).  The thing about uranium is its uniqueness among energy sources.  Its radioactivity requires special handling far above and beyond normal mining safety protocols.  Its potential use in the most lethal weaponry possible make it subject to stringent controls on reporting and transportation.  I truly believe there only a small number of mining people on the planet with expertise that is germane specifically to uranium and other radioactive resources.  It's kind of nice that one ATURF director has nine years of experience with uranium explorer Northern Continental Resources (merged with uranium explorer Hathor in 2009).  Another director has a long background in nuclear energy.  I still wish the company had more nuclear bench strength in its management rather than its board.

All of the company's projects are still in the early surveying and drilling phases, so evaluating any of them is impossible for now.  At least they're digging in an area known to be productive.  I wish they had more capital because $4M doesn't sound like much for the number of sites they need to drill.  ATURF needs some 43-101 reports in 2012 on what they find.  Stay tuned.

Full disclosure:  No position in ATURF at this time.

Riverside Resources (RVSDF) With Multiple Mexico Properties

Most exploration-stage mining companies will stick to a handful of properties, like no more than three.  They do this to stay focused, contain costs, and keep operations predictable.  Portfolio approaches are typically for major miners that can deploy capital and talent globally, or incubation companies that can spin off projects as separate companies.  Riverside Resources (RVSDF) is an exploration-stage mining company with a business model that defies this conventional wisdom.  They are exploring multiple properties in North America with a focus on Mexico.

The good news is that they have plenty of cash and short-term investments, and are profitable as of June 30, 2011 (a big change from the net loss in the same quarter in 2010).  The quality of management probably has a lot to do with that result.  The CEO and members of the team responsible for drilling have strong backgrounds in mining.  Riverside seems to have done a lot of things right according to its unaudited financial statements, with timely capital raises and a sufficient number of wholly-owned properties.  Their key to turning a financial corner appears to be the revenue they've collected from larger partners who held options to explore various properties.  Majors who elect not to extend these options allow properties to revert to 100% ownership of the original explorer.

The risk for Riverside is that too many of its properties could be abandoned by larger partners.  Having 100% ownership is not a selling point if the owned properties have been abandoned by prospective joint venture partners.  Riverside would then be under pressure to prove its remaining properties are viable.  A quick scan of several of their press releases reveals a lot of drill intercepts at less than 1.0 g/t Au.  This past quarter's profitability gives Riverside some breathing room it can use for more exploration.

Full disclosure:  No position in RVSDF at this time.