Saturday, April 07, 2012
Don't Take Home-Buying Advice From Warren Buffett
Warren Buffett is awesome in so many ways. That's why I hate having to call him out for giving bad advice to home buyers and real estate investors (those aren't necessarily the same things). Uncle Warren says he'd buy fist-fulls of single-family homes if he could given the broad decline in home values across the U.S. Well, he really could with all of the cash Berkshire Hathaway controls, so why doesn't he? Let me explain.
Mr. Buffett likes the principle of buying anything at a discount and he can't help but sound off on a general trend. The trouble with applying discounting to home buying is that value in real estate always comes from three things: location, location, and location. Part of the problem with the U.S. housing market is that too many single-family homes were built too far from viable communities. The San Francisco Bay Area gives me more evidence of this than I care to see. The most depressing drive I made in 2011 was a long loop northward through the Dublin / Pleasanton area along the Hopyard / Dougherty corridor past clusters of brand new suburbs. Those suburbs are not tied to any major economic drivers that I could see. There were no factories, mines, or power plants around. These McMansion non-neighborhoods are car-focused in an age when cheap oil is increasingly more difficult to extract. I am not one to buy real estate that has little chance of ever being economically viable.
Uncle Warren's remarks remind me of the comments he made at the height of the 2008 financial crisis when he stated his willingness to buy a bond insurer that was in trouble, if only it could truthfully estimate its value. It couldn't, of course, so Mr. Buffett's comments only provided clarity. He did not act on his own advice but anyone who did got fist-fulls of very questionable equity.
It's unfortunate that some money managers still have more money than sense. Private equity funds are actually taking this approach seriously and are raising money to buy large numbers of distressed residential properties. It's ironic that the story leads off with an auction in my very own greater San Francisco suburban area, as if the buyer couldn't see what I see. Good luck with that. The REIT numbers work for large apartment complexes because those properties are located in viable large cities. Running the numbers for single-family homes means these private equity funds will be bidding for homes that never should have been built because they are too far from civic life for an affordable commute. I suspect these ambitious funds will be very disappointed with their yields when they discover that renters no longer want to live an hour away from their jobs. Maybe throwing a random comment out to the crowd is Mr. Buffett's way of seeing how many investors will go for it, thus clearing the field of people who can't see nuances.
Warren Buffett has nothing to worry about. He's been living in the same home for fifty years and has been working from it for much of that time. Smart money managers should do as he does, not as he says. I work from home too.
Mr. Buffett likes the principle of buying anything at a discount and he can't help but sound off on a general trend. The trouble with applying discounting to home buying is that value in real estate always comes from three things: location, location, and location. Part of the problem with the U.S. housing market is that too many single-family homes were built too far from viable communities. The San Francisco Bay Area gives me more evidence of this than I care to see. The most depressing drive I made in 2011 was a long loop northward through the Dublin / Pleasanton area along the Hopyard / Dougherty corridor past clusters of brand new suburbs. Those suburbs are not tied to any major economic drivers that I could see. There were no factories, mines, or power plants around. These McMansion non-neighborhoods are car-focused in an age when cheap oil is increasingly more difficult to extract. I am not one to buy real estate that has little chance of ever being economically viable.
Uncle Warren's remarks remind me of the comments he made at the height of the 2008 financial crisis when he stated his willingness to buy a bond insurer that was in trouble, if only it could truthfully estimate its value. It couldn't, of course, so Mr. Buffett's comments only provided clarity. He did not act on his own advice but anyone who did got fist-fulls of very questionable equity.
It's unfortunate that some money managers still have more money than sense. Private equity funds are actually taking this approach seriously and are raising money to buy large numbers of distressed residential properties. It's ironic that the story leads off with an auction in my very own greater San Francisco suburban area, as if the buyer couldn't see what I see. Good luck with that. The REIT numbers work for large apartment complexes because those properties are located in viable large cities. Running the numbers for single-family homes means these private equity funds will be bidding for homes that never should have been built because they are too far from civic life for an affordable commute. I suspect these ambitious funds will be very disappointed with their yields when they discover that renters no longer want to live an hour away from their jobs. Maybe throwing a random comment out to the crowd is Mr. Buffett's way of seeing how many investors will go for it, thus clearing the field of people who can't see nuances.
Warren Buffett has nothing to worry about. He's been living in the same home for fifty years and has been working from it for much of that time. Smart money managers should do as he does, not as he says. I work from home too.
Faking Jobs Numbers Must Be Hard Work
The latest unemployment figures have finally (sort of) caught up to some semblance of reality. The U.S. job picture is deteriorating because winter was warmer than expected and employers thus did much of their spring hiring early. If the impetus to hire for the year has sputtered out already then the rest of the year will be one big fat disappointment.
Please note that hiring still isn't keeping up with population growth. Job growth must average 1% per year just to keep up with population growth and we haven't dug ourselves out of the Great Recession's job deficit yet.
The bad jobs numbers don't surprise regular readers of Shadow Government Statistics. John Williams' lone voice of sobriety provides investors with an excellent baseline for interpreting news. We'd all be better off if the "official" numbers caught up with what used to be reality.
Please note that hiring still isn't keeping up with population growth. Job growth must average 1% per year just to keep up with population growth and we haven't dug ourselves out of the Great Recession's job deficit yet.
The bad jobs numbers don't surprise regular readers of Shadow Government Statistics. John Williams' lone voice of sobriety provides investors with an excellent baseline for interpreting news. We'd all be better off if the "official" numbers caught up with what used to be reality.
Friday, April 06, 2012
People Lie About Wanting Financial Advice From Ex-Military
I don't enjoy being angry. I read something today that made me boiling mad. Some survey claims that Americans value military veterans as financial advisers, and that this estimation increases with a respondent's affluence. I need to state for the record that nothing could be further from the truth.
I spent over a year as a financial advisor at a major wealth management firm. I worked harder than I ever have in my life to acquire clients. Every prospect I encountered - with two exceptions - completely ignored my military experience as a selling point for my abilities. The two exceptions were unique; one had very little liquid net worth to invest and the other was a phony who had zero net worth. All of the other prospects regarded my military background as something to disregard.
People with serious money to invest want it managed by someone who's achieved a comparable level of success. I find it telling that the Edward Jones survey above mentioned households with incomes of $100K or so. I hate to break this to the 1300 ex-military advisors they employ, but their careers will be short if they focus on acquiring people at that income level. Wealth management firms are increasingly discarding advisors who pursue clients with net worth under $1M. Making $100K/year isn't going to get anyone to millionaire status in an America beset by price inflation, equity overvaluation, creeping hyperinflation, and a rapacious elite bent on regulatory capture and financial repression.
I employed all of my military-acquired skills to establish trust, build rapport, demonstrate an extreme work ethic, prove my integrity, and persevere in the face of adversity. All of those traits turned off people with serious money. All of those attributes got me terminated. Most veterans hired as financial advisors don't realize that they're just filling an affirmative action quota and will be gone in a year. That's why brokerages can afford to brag that some percent of their sales force is comprised of veterans. They know that annual turnover for lack of production enables them to keep hiring and firing unsuspecting veterans over and over again. Americans who say they want military veterans as financial advisors probably don't make enough money to afford an advisor in the first place. Too many people just don't know what they're talking about.
I spent over a year as a financial advisor at a major wealth management firm. I worked harder than I ever have in my life to acquire clients. Every prospect I encountered - with two exceptions - completely ignored my military experience as a selling point for my abilities. The two exceptions were unique; one had very little liquid net worth to invest and the other was a phony who had zero net worth. All of the other prospects regarded my military background as something to disregard.
People with serious money to invest want it managed by someone who's achieved a comparable level of success. I find it telling that the Edward Jones survey above mentioned households with incomes of $100K or so. I hate to break this to the 1300 ex-military advisors they employ, but their careers will be short if they focus on acquiring people at that income level. Wealth management firms are increasingly discarding advisors who pursue clients with net worth under $1M. Making $100K/year isn't going to get anyone to millionaire status in an America beset by price inflation, equity overvaluation, creeping hyperinflation, and a rapacious elite bent on regulatory capture and financial repression.
I employed all of my military-acquired skills to establish trust, build rapport, demonstrate an extreme work ethic, prove my integrity, and persevere in the face of adversity. All of those traits turned off people with serious money. All of those attributes got me terminated. Most veterans hired as financial advisors don't realize that they're just filling an affirmative action quota and will be gone in a year. That's why brokerages can afford to brag that some percent of their sales force is comprised of veterans. They know that annual turnover for lack of production enables them to keep hiring and firing unsuspecting veterans over and over again. Americans who say they want military veterans as financial advisors probably don't make enough money to afford an advisor in the first place. Too many people just don't know what they're talking about.
Defense Contractors At Risk From Pension Obligations
Moody's is saying that America's leading defense contractors are at risk from underfunded pension plans. There is little comfort in arguing that contractors' ability to bill the government for their pension gaps will reduce the risk to their balance sheets or credit ratings. The government's ability to pay any unanticipated pension shortfalls is limited by the total appropriations for a given fiscal year. DOD's typical practice is to reduce Operations and Maintenance spending when it finds contingency-driven costs exceeding budgeted estimates. Paying such a sudden request for pension shortfalls will force DOD to rob money from O&M accounts even earlier in a fiscal year than it already does. This will place any contingency operations at serious risk and force DOD to seek even more frequent supplemental appropriations throughout the year.
This unheralded DOD accounting change will add a measurable burden to the federal government's already large unfunded liabilities. The defense industry lobbyists who pushed for this change shouldn't gloat. Any acceleration in the U.S. government's default/hyperinflation inflection point accelerates the day when defense contracts will be paid in hyperinflated dollars or go unfunded altogether. The defense sector has gained hypothetical relief for its balance sheet and credit rating pressures in the face of an oncoming fiscal train wreck.
This unheralded DOD accounting change will add a measurable burden to the federal government's already large unfunded liabilities. The defense industry lobbyists who pushed for this change shouldn't gloat. Any acceleration in the U.S. government's default/hyperinflation inflection point accelerates the day when defense contracts will be paid in hyperinflated dollars or go unfunded altogether. The defense sector has gained hypothetical relief for its balance sheet and credit rating pressures in the face of an oncoming fiscal train wreck.
Thursday, April 05, 2012
Alexandria Minerals (ALXDF) Exploring In Quebec
I'm not sure how this one ended up on my radar but I'll give it a quick once-over. Alexandria Minerals (ALXDF / AZX.V) is one of those early-stage gold explorers that may have something if further exploration bears out their early results. Their initial 43-101 estimate for the Akasaba property has some pretty decent indicated and inferred ore grades, but further exploration is needed to turn these into 2P reserves. Road connections to the outside world do not appear in the photos and diagrams of the Akasaba property, so logistics should be a concern. The Sleepy and Orenada projects also appear to need logistics development (based on their photos), although the inferred grades at Sleepy are more attractive than those at Orenada.
The trouble with property groups like these in the Cadillac Break is that they've been explored since the 1930s. Drilling past historical depths of 150m will require more capital. Alexandria had $1.8M cash and short-term investments on hand as of Jan. 31, 2012 and lost $372K in the quarter ending on that date. This company's burn rate will likely demand a capital raise no later than the end of 2012 if it wishes to increase its chances of successfully completing its drill programs and final 43-101 reports. Please note that I calculate burn rates very conservatively because I believe in paying bills with cash and not promises of future receivables or tax credits.
The CEO has a long background in running mining projects. That's nice. It's also nice that big producers like Agnico-Eagle and IAMGOLD are backing Alexandria as part owners. Let's see if a future set of 43-101 reports on 2P reserves justifies those big firms' interest in these properties.
Full disclosure: No position in Alexandria Minerals at this time.
The trouble with property groups like these in the Cadillac Break is that they've been explored since the 1930s. Drilling past historical depths of 150m will require more capital. Alexandria had $1.8M cash and short-term investments on hand as of Jan. 31, 2012 and lost $372K in the quarter ending on that date. This company's burn rate will likely demand a capital raise no later than the end of 2012 if it wishes to increase its chances of successfully completing its drill programs and final 43-101 reports. Please note that I calculate burn rates very conservatively because I believe in paying bills with cash and not promises of future receivables or tax credits.
The CEO has a long background in running mining projects. That's nice. It's also nice that big producers like Agnico-Eagle and IAMGOLD are backing Alexandria as part owners. Let's see if a future set of 43-101 reports on 2P reserves justifies those big firms' interest in these properties.
Full disclosure: No position in Alexandria Minerals at this time.
Wednesday, April 04, 2012
YRC Worldwide (YRCW) Worse Off Than Ever
Poor, pathetic YRC Worldwide (YRCW). No number of out-of-court restructurings can change its miserable circumstances. Its credit default swaps are priced at an 87% chance of bankruptcy, worse than Greece's swaps just prior to its latest EU bailout. The company's leadership remains unrealistically confident in its ability to reset its debt covenants even though it incurs more new debt to pay its old debt. The company's chief accountant has thrown in the towel. The CFO of YRC's freight arm has also departed.
Look at the last four quarters' worth of financial statements. Revenue at the end of 2011 was about where it was a year prior but net income is still negative. Retained earnings is even farther in the hole. Free cash flow is still negative. I guess even cutting back on break room donuts isn't helping where it counts financially.
It's hard to say which YRCW constituency is the dumbest: the executives running the place, the Teamsters who think it will turn around, or the creditors who keep agreeing to debt restructures. I'd like the creditors to explain just what assets they expect to recover from the company in the event it finally expires. Please note that unemployed Teamsters do not count as assets.
Full disclosure: No position in YRCW, ever.
Look at the last four quarters' worth of financial statements. Revenue at the end of 2011 was about where it was a year prior but net income is still negative. Retained earnings is even farther in the hole. Free cash flow is still negative. I guess even cutting back on break room donuts isn't helping where it counts financially.
It's hard to say which YRCW constituency is the dumbest: the executives running the place, the Teamsters who think it will turn around, or the creditors who keep agreeing to debt restructures. I'd like the creditors to explain just what assets they expect to recover from the company in the event it finally expires. Please note that unemployed Teamsters do not count as assets.
Full disclosure: No position in YRCW, ever.
Alfidi Capital Predicted Solar Trust Of America Disaster In August 2011
My analysis is usually far ahead of current events. I predicted in August 2011 that Solar Trust of America was making a very poor strategic decision with its plant in Blythe, California. Events have finally caught up to my prediction. The world's largest solar installation is now the world's largest pile of solar junk. Solar Trust of America has declared bankruptcy. The DOE loan guarantee of $2B was conditional and apparently Solar Trust never accepted it (as I stated in my original post), so Uncle Sam isn't on the hook here like he was in the Solyndra debacle. The dumbest thing the company did was change the basic technology of the Blythe plant, rendering all work up to that point as a sunk cost.
Local officials shouldn't pin any false hopes on reactivating development of the project with a relatively tiny amount of DIP financing. Whatever hardware exists at the Blythe project site will either be sold and carted away to a smaller site or will sit in the sun until another deep-pocketed solar developer comes along. Maybe I could buy the whole thing for a buck fifty and restart it as originally configured for solar thermal generation. I'd be smart enough to take the DOE loan guarantee this time.
The U.S. DOE should take away one very important lesson from its numerous efforts to accelerate domestic solar production. Solar PV panel technology is a commodified industry. The lowest-cost producers are in China so it makes little sense to subsidize U.S. panel manufacturers or even full sites that have to compete purely on base material cost. The U.S. DOE should limit its industry promotion to the kind of basic research in material science where its national labs have always excelled. DOE's Innovation Hubs can commercialize the tech.
DOE loses when it tries to pick "winners" in a commodified sector who get a subsidized cost of capital. Utilities and ratepayers lose when the subsidized winners abandon their projects. Taxpayers lose when the subsidized companies can't compete.
Nota bene: No position in Solar Trust of America or any of the companies affiliated with this project, ever.
Local officials shouldn't pin any false hopes on reactivating development of the project with a relatively tiny amount of DIP financing. Whatever hardware exists at the Blythe project site will either be sold and carted away to a smaller site or will sit in the sun until another deep-pocketed solar developer comes along. Maybe I could buy the whole thing for a buck fifty and restart it as originally configured for solar thermal generation. I'd be smart enough to take the DOE loan guarantee this time.
The U.S. DOE should take away one very important lesson from its numerous efforts to accelerate domestic solar production. Solar PV panel technology is a commodified industry. The lowest-cost producers are in China so it makes little sense to subsidize U.S. panel manufacturers or even full sites that have to compete purely on base material cost. The U.S. DOE should limit its industry promotion to the kind of basic research in material science where its national labs have always excelled. DOE's Innovation Hubs can commercialize the tech.
DOE loses when it tries to pick "winners" in a commodified sector who get a subsidized cost of capital. Utilities and ratepayers lose when the subsidized winners abandon their projects. Taxpayers lose when the subsidized companies can't compete.
Nota bene: No position in Solar Trust of America or any of the companies affiliated with this project, ever.
Tuesday, April 03, 2012
Monday, April 02, 2012
Manufacturing Up? Really?
I have a hard time understanding what's driving U.S. manufacturing growth. The ISM doesn't massage its statistics nearly as much as government agencies, so its numbers are probably accurate. The government's last revisions put GDP growth for Q4 2011 at an annual 3.0% but those numbers are so twisted with seasonal statistical adjustments that they mean less now than they did a generation ago. Manufacturing still adds value but not as much as it did in grandpa's day before the U.S. outsourced all of its hard work to Asia. Compare the value added by manufacturing to the value added by finance/insurance/real estate. The FIRE sector wins hands down. See how skewed the U.S. economy has become? That's why it's so easy for the Fed's ZIRP policy to impact nominal GDP; so much more of the GDP figure now depends on easy credit and leverage for the FIRE sector.
Sunday, April 01, 2012
The Limerick of Finance for 04/01/12
Chinese exports have run aground
Global growth is nowhere to be found
Manufacturing stuff
Is about to get tough
Inflation's an unwelcome sound
Global growth is nowhere to be found
Manufacturing stuff
Is about to get tough
Inflation's an unwelcome sound
Intellicheck Mobilisa (IDN) Shows Its Identification
I've been following Intellicheck Mobilisa (IDN) for about two years. They have some intriguing technology and I'd like to see them achieve some real business success. Their management team is certainly capable enough and has been around long enough to turn this maker of ID scanners into a consistently profitable company.
Part of the problem is the structure of their market. They sell handheld ID scanners to government agencies. Breaking into the market is difficult for a small firm because they have to compete against existing products from large defense firms. If scanners are built to last and the physical configuration of the cards they read hardly changes, the market can fill up pretty quickly and stay full for years. Intellicheck is doing some strategic things right by being located in a HUB Zone and being listed in the GSA Register. Local military installation commanders do have a wide degree of latitude over procurement for local security solutions. Intellicheck could help itself with more visibility at military-related trade shows and more effort in areas where military and federal installations are highly concentrated.
I often root for the little guy and the security market badly needs a diverse supply base. Intellicheck's challenge is to turn the momentum they get from their publicly announced milestones into consistent earnings. Competing for homeland security news recognition and getting recognition as a fast-growing tech company only go so far. IDN's share price was north of $7 in the spring of 2007 until it collapsed in 2008 along with the rest of the market. Since then it has gone pretty much nowhere for years with the exception of a brief run-up to about four bucks in early 2010. The stock even managed to slide during much of the last decade while the U.S. has spent enormous sums on defense. Intellicheck's strategy must evolve beyond the basics if it is to thrive during the coming years of severe cuts in defense spending.
Full disclosure: No position in IDN at this time.
Part of the problem is the structure of their market. They sell handheld ID scanners to government agencies. Breaking into the market is difficult for a small firm because they have to compete against existing products from large defense firms. If scanners are built to last and the physical configuration of the cards they read hardly changes, the market can fill up pretty quickly and stay full for years. Intellicheck is doing some strategic things right by being located in a HUB Zone and being listed in the GSA Register. Local military installation commanders do have a wide degree of latitude over procurement for local security solutions. Intellicheck could help itself with more visibility at military-related trade shows and more effort in areas where military and federal installations are highly concentrated.
I often root for the little guy and the security market badly needs a diverse supply base. Intellicheck's challenge is to turn the momentum they get from their publicly announced milestones into consistent earnings. Competing for homeland security news recognition and getting recognition as a fast-growing tech company only go so far. IDN's share price was north of $7 in the spring of 2007 until it collapsed in 2008 along with the rest of the market. Since then it has gone pretty much nowhere for years with the exception of a brief run-up to about four bucks in early 2010. The stock even managed to slide during much of the last decade while the U.S. has spent enormous sums on defense. Intellicheck's strategy must evolve beyond the basics if it is to thrive during the coming years of severe cuts in defense spending.
Full disclosure: No position in IDN at this time.
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