Monday, April 16, 2012
Sunday, April 15, 2012
The Limerick of Finance for 04/15/12
Quants always want a greater fool
Eyeing China's capital pool
Hedge funds want to grow
Thinking they're in the know
Finding dummies with cash is their rule
Eyeing China's capital pool
Hedge funds want to grow
Thinking they're in the know
Finding dummies with cash is their rule
Saturday, April 14, 2012
Friday, April 13, 2012
Yuan Soon Ready For Global Settlement
The sun is setting on the U.S. dollar's position as world reserve currency. China is building a currency clearance system that will probably end up matching the capabilities of the US-backed SWIFT system. Control of SWIFT gives the West leverage over rogue states like Iran. Shutting bad states out of the world's main interbank payments system gives those renegades the painful options of starving, bartering, surrendering, or threatening war.
China's yuan trading system is more than another jab at the dollar's increasingly fragile leadership. It is an alternative diplomatic structure that can give China leverage over emerging economies where the US also competes for political influence. Once China has this system in place it will no longer need to worry about parrying US diplomatic pressure on behalf of its trading partners.
Full disclosure: Long FXI with covered calls.
China's yuan trading system is more than another jab at the dollar's increasingly fragile leadership. It is an alternative diplomatic structure that can give China leverage over emerging economies where the US also competes for political influence. Once China has this system in place it will no longer need to worry about parrying US diplomatic pressure on behalf of its trading partners.
Full disclosure: Long FXI with covered calls.
Thursday, April 12, 2012
Resurgent Inflation Hawks Question Fed's Next QE
Helicopter Ben may be getting impatient with the Fed's lack of unanimity. Senior Fed officials are now openly stating they will not support further monetary easing without first seeing evidence of the broader economy's deterioration. Couching it in language like "we'll do all we can to support growth" is political cover. I read these statements as a sign that the Fed minutes showing how some Fed members were questioning the QE approach weren't just a smokescreen to fool investors. There are real inflation hawks at the Fed who are willing to stand against the Chairman's predilection for monetary creation.
The Fed is now torn between keeping the exit strategy for ZIRP in mind and keeping the monetary spigot open so the Chairman can deliver on his "printing press" promise (thus immortalizing his pro-inflation PhD thesis). This potential paralysis is a salient indicator for investors. It means the hawkish holdouts who question further stimulus can try to delay Ben's next QE round until the deflationary depression signs are too obvious to ignore. Those deflationary signs may become very obvious if further European market troubles spill over into US equity markets.
The lesson I draw from all of this seemingly convoluted reasoning is simple. A deflationary crash followed by a hasty monetary attempt at reflation is the most likely scenario I can foresee based on this tug-of-war between Ben's pro-inflationists and the Fed's anti-inflation hawks. This is why I have reserved a large amount of cash in my portfolio for large and fast purchases of equities once US stocks take the severe discounts I expect to see in a market crash. Any stocks I do decide to purchase in the event of a crash must be aligned with sectors that will respond well to a hasty Fed attempt at reflation, and I've concluded that hard assets (minerals, energy, agriculture) and sectors that support them (railroads, pipelines, some utilities and service providers) are aligned with my own knowledge base and risk tolerances.
I cannot predict the future with any certainty and I could be wrong; any wrong move I make will hurt me financially. If high inflation comes first, contrary to my expectations, I'd be forced to buy things like TIPS and hard assets at their very high current valuations. The difference between me and most preppies on Wall Street is that I'm actually thinking through a methodology for surviving a hyperinflationary great depression.
Nota bene: None of the above discussion is actionable advice for any investor. Consider it a form of entertainment to watch me think out loud.
Wednesday, April 11, 2012
Fantasy Finance Sends Unwelcome Message To Investors
I can't let the Yahoo Fantasy Finance stock trading game go without a mention. Games like this send the wrong message to the retail investing community because they encourage investors to ignore their normal risk profiles and go for risk-seeking short-term returns. Adding in cash prizes as a superficial incentive makes it worse. The few who win this game in the short time it will play out will be emboldened to keep playing it with their actual portfolios. I believe such behavior will do a disservice to investors who should really seek low-cost, long term ways to participate in equity markets.
Professional hedge fund managers have poor enough track records compared to market indexes. Ordinary investors won't do themselves any favors by mimicking hedgies' temperaments on a smaller scale. Tempting retail investors with day-trading riches is like playing with fire in an environment when risky loans to subprime borrowers are back in vogue and the continuing financial crisis in Europe adds extreme risk to American capital markets. I'm not playing any fantasy stock game. I'd rather preserve my real portfolio.
Full disclosure: No position in YHOO at this time.
Professional hedge fund managers have poor enough track records compared to market indexes. Ordinary investors won't do themselves any favors by mimicking hedgies' temperaments on a smaller scale. Tempting retail investors with day-trading riches is like playing with fire in an environment when risky loans to subprime borrowers are back in vogue and the continuing financial crisis in Europe adds extreme risk to American capital markets. I'm not playing any fantasy stock game. I'd rather preserve my real portfolio.
Full disclosure: No position in YHOO at this time.
Tuesday, April 10, 2012
Monday, April 09, 2012
Encroaching Inflation Devouring China And Wrecking Growth
I'm a recovering former fan of the Chinese miracle growth story. Too much forced infrastructure development and not enough balance from domestic consumer spending has left China's economy bereft of any driver for sustainable growth. The evidence accumulates by the day.
Official inflation in March was 3.6% higher than in March 2011; more ominously, it is a rise from the trough recorded one month prior. We can see the effects of inflation in the rise in the China Purchasing Managers' Index for March. The index of activity is rising despite evidence that US-based manufacturers are departing China's increasingly costly factories for cheaper sourcing elsewhere in Asia. "Activity" measurements can be nominally skewed upwards by rising prices even if real activity is declining.
China's shipping industry is beginning to feel the squeeze of higher costs at home and weakening demand abroad. China Cosco lost $1.66B in 2011. China Shipping Container Lines lost $428M in 2011. Shippers' weakness will eventually pass through to port operators as China Merchants Holdings sees its profits dropping despite rising container volume. Chinese shipping companies pay more for fuel because China's previously secure oil supplies from Iran are now jeopardized by the US-EU policy of embargoing Iran. Hong Kong insurers are now refusing to fully cover shortfalls in oil shipments from Iran to China.
Tight oil supplies and declining world demand mean the Chinese growth train is off its rails. Domestic demand will not materialize until China gets inflation under control. With no end in sight to the curtailment of Iranian oil, relieving inflationary pressure on the average Chinese consumer demands a hawkish central bank orientation that would put severe pressure on the Chinese economy in the short run. Any remaining China bulls need to think of a case for buying and holding longer than the next five-year plan.
Full disclosure: Long FXI with covered calls.
Official inflation in March was 3.6% higher than in March 2011; more ominously, it is a rise from the trough recorded one month prior. We can see the effects of inflation in the rise in the China Purchasing Managers' Index for March. The index of activity is rising despite evidence that US-based manufacturers are departing China's increasingly costly factories for cheaper sourcing elsewhere in Asia. "Activity" measurements can be nominally skewed upwards by rising prices even if real activity is declining.
China's shipping industry is beginning to feel the squeeze of higher costs at home and weakening demand abroad. China Cosco lost $1.66B in 2011. China Shipping Container Lines lost $428M in 2011. Shippers' weakness will eventually pass through to port operators as China Merchants Holdings sees its profits dropping despite rising container volume. Chinese shipping companies pay more for fuel because China's previously secure oil supplies from Iran are now jeopardized by the US-EU policy of embargoing Iran. Hong Kong insurers are now refusing to fully cover shortfalls in oil shipments from Iran to China.
Tight oil supplies and declining world demand mean the Chinese growth train is off its rails. Domestic demand will not materialize until China gets inflation under control. With no end in sight to the curtailment of Iranian oil, relieving inflationary pressure on the average Chinese consumer demands a hawkish central bank orientation that would put severe pressure on the Chinese economy in the short run. Any remaining China bulls need to think of a case for buying and holding longer than the next five-year plan.
Full disclosure: Long FXI with covered calls.
Sunday, April 08, 2012
The Limerick of Finance for 04/08/12
Don't say inflation's a good thing
Food and energy prices do swing
"Non-core" is all wrong
Stagflation lasts long
Hard assets could make one a king
Food and energy prices do swing
"Non-core" is all wrong
Stagflation lasts long
Hard assets could make one a king
IZEA Inc. (IZEA) Plays In A Crowded Social Media Space
Carpenter Global Stock Advisory sent me a teaser letter late in 2011 for IZEA Inc. (IZEA). Hey, at least the ticker is easy to remember. It's got one of those snazzy net-names that branding consultants are paid $300/hour to generate in five minutes using some free software they downloaded from the web. Just kidding. I'm sure a lot of thought went into the name.
IZEA has a tough row to hoe. They compete in the part of social media where SEO meets sponsored blogging and tweeting. I'm not sure how they can differentiate themselves from services like Twellow, which provides some market data beyond what a basic Twitter account reveals. Bloggers who are tied to one advertising partner would probably love an open-architecture approach that connects them with multiple ad partners. The catch is that bloggers have to sign up to blog about . . . their advertisers? That's a pretty limiting deal; most bloggers publish because they love to speak freely. I think their offerings to publishers are a little complex, with free samples probably unnecessary and costly to administer.
They've only been publicly traded since this February and I suspect their IPO was premature given their net loss in 2011 was $1.8M worse than in 2010 (from their 10-K of Mar. 28, 2012). It's hard to control costs for a strategy that demands a lot of customization. Google mints money because much of its platform is customizable by users within strictly controlled limits.
Web 2.0 is a fun game to play but only a few of the hundreds of wanna-be players will end up winners. Quite a few social media optimizers and connectors will be bought out by the big players only to see their technology shelved (as Google did with Aardvark). These tiny companies can innovate but their technology is often perishable, because they have only a small window of opportunity to grow explosively before a big company tries to copy their model.
Full disclosure: No position in IZEA at this time.
IZEA has a tough row to hoe. They compete in the part of social media where SEO meets sponsored blogging and tweeting. I'm not sure how they can differentiate themselves from services like Twellow, which provides some market data beyond what a basic Twitter account reveals. Bloggers who are tied to one advertising partner would probably love an open-architecture approach that connects them with multiple ad partners. The catch is that bloggers have to sign up to blog about . . . their advertisers? That's a pretty limiting deal; most bloggers publish because they love to speak freely. I think their offerings to publishers are a little complex, with free samples probably unnecessary and costly to administer.
They've only been publicly traded since this February and I suspect their IPO was premature given their net loss in 2011 was $1.8M worse than in 2010 (from their 10-K of Mar. 28, 2012). It's hard to control costs for a strategy that demands a lot of customization. Google mints money because much of its platform is customizable by users within strictly controlled limits.
Web 2.0 is a fun game to play but only a few of the hundreds of wanna-be players will end up winners. Quite a few social media optimizers and connectors will be bought out by the big players only to see their technology shelved (as Google did with Aardvark). These tiny companies can innovate but their technology is often perishable, because they have only a small window of opportunity to grow explosively before a big company tries to copy their model.
Full disclosure: No position in IZEA at this time.
All American Gold Corp. (AAGC) Digs From Indiana
Here comes another one. I got a free teaser mailer from Michael Williams Market Movers back in Oct. 2011. You know what's coming next. This teaser pumps All American Gold Corp. (AAGC), some gold explorer based in Indianapolis that digs in Nevada. Indianapolis? Really? I've never heard of a successful gold explorer based in that state. Indiana has little to do with this company other than the fact the CEO got his law degree from IU. BTW, neither of the two principals behind this one is a geologist. Strike one.
The company has been around in some form since 2006 and used to be known as Osprey Ventures (not to be confused with a similarly named firm in California). The name doesn't seem to matter because this company hasn't made much progress toward profitability. Companies like All American Gold are a useful vehicle for the principals to use as perpetual capital raising vehicles. Their usefulness to shareholders is open to question. Note that they terminated exploration of a property in China due to high costs. That can happen to non-geologists who go exploring outside their home countries. Note the last line on this summary page from their most recent 10-Q, where they acknowledge that they have no ores or reserves at this time on any of their properties. That can happen to companies that keep raising capital to explore poor properties. Strike two.
The front cover of Michael Williams' teaser brochure says it has a $7.95 value. That's cute, because AAGC is only worth about six cents right now. Ask yourself if you'd really pay almost eight bucks for pump letter on a stock worth almost nothing. Then ask yourself how much money you would have lost if you had bought AAGC when this teaser came out in Oct. 2011, when it traded between $0.15 and $0.30. Strike three.
Full disclosure: No position in AAGC, ever.
The company has been around in some form since 2006 and used to be known as Osprey Ventures (not to be confused with a similarly named firm in California). The name doesn't seem to matter because this company hasn't made much progress toward profitability. Companies like All American Gold are a useful vehicle for the principals to use as perpetual capital raising vehicles. Their usefulness to shareholders is open to question. Note that they terminated exploration of a property in China due to high costs. That can happen to non-geologists who go exploring outside their home countries. Note the last line on this summary page from their most recent 10-Q, where they acknowledge that they have no ores or reserves at this time on any of their properties. That can happen to companies that keep raising capital to explore poor properties. Strike two.
The front cover of Michael Williams' teaser brochure says it has a $7.95 value. That's cute, because AAGC is only worth about six cents right now. Ask yourself if you'd really pay almost eight bucks for pump letter on a stock worth almost nothing. Then ask yourself how much money you would have lost if you had bought AAGC when this teaser came out in Oct. 2011, when it traded between $0.15 and $0.30. Strike three.
Full disclosure: No position in AAGC, ever.
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