XcelMobility (XCLL) Talks Fast Mobile But Oddly Spent Little Capex

Tim Fields is at it again.  He must really like the analyses I've published of his past teaser mailings, because his Untapped Wealth Online keeps sending me more teasers for penny stocks that deserve public examination.  I got a brand new one last week.  This time he's touting XcelMobility (XCLL), some company that claims to accelerate Internet speed.  Maybe it's like a router on steroids.  It sure would be nice if such enhanced performance could have a steroidal effect on the company's financial results, because so far this stock is passed out on the gym floor.

The company has three years of zero revenue.  Why anybody would take such a company public is beyond my ability to appreciate.  They had no discernible capex spending for three years, which is unusual for a tech company with such a supposedly promising approach to acceleration.  In 2011 they spent a whopping $13K on capex.  It took them three years to figure out how to spend money on R&D, folks.  Figure that one out.  Other tech companies start spending on development right off the bat.

The leadership team seems to have relevant entrepreneurial credibility at first glance.  They also seem to have a common connection to CC Power, XCLL's predecessor company.  It's cool that founding teams stick together but they need to produce more than a corporate reorganization and name change.  I've noticed that the original company was born in Gold River, California before its reverse merger.  That's a stone's throw from where I grew up.  There is no precedent (of which I'm aware) for any special business innovation to come out of the east side of Sacramento - except for Yours Truly, of course.

If this stock is anything like the others in Tim Fields' mailers, I expect it to underwhelm in 2012.  I stay away from tech companies that run their big fat mouths about how much promise they have with little tangible results.

Full disclosure:  No position in XCLL, ever.

The Haiku of Finance for 01/30/12

Banks cutting credit
U.S. banks shine, Europe hurts
This party won't last

Germany Gets Its Wish, Not That It Matters

The German approach to fiscal prudence is gaining momentum as an overwhelming number of fellow EU countries agree to new legalisms limiting their profligacy.  This is all irrelevant.  Germany's victory over chronically indebted southern European countries is likely to be short-lived.  Markets aren't interested in what a piece of paper says about what countries are supposed to do with their budgets.  Bond players, unlike politicians, live in the real world and have to earn a real living.

Portugal is about to find out how much its bond buyers want to earn their wages.  Portugese bond insurance is almost as pricey as Greece's, and that's the good news.  The bad news is whatever news hasn't broken yet out of Italy or Spain.  I can hardly wait for one of these bankrupt Continental governments to call the EU's bluff on fiscal discipline.  The country that goes first will learn the hard way how painful it feels to be shut out of debt markets.  The countries that may want to follow next will think harder and delay even longer.  The countries that remain euro-bound will eventually wonder why they didn't exit first.  

Full disclosure:  No positions in European equities or the euro currency at this time.

The Limerick of Finance for 01/29/12

EU fund is ready to go
Just when Greece is preparing to blow
Rescue won't be enough
This problem's too tough
German answer to bailouts is "no"

The Haiku of Finance for 01/28/12

Europe tug-of-war
Germany wants to own Greece
This will break euro

The Haiku of Finance for 01/27/12

Fitch cuts Euro grades
Risk of leaving eurozone
More ratings cuts loom

College Aid Overhaul Must Start With Bankruptcy Law

No one likes overpaying for a product of questionable value.  College costs are now so exorbitantly high that elected leaders are calling for cost controls.  Great idea.  I know exactly where we can start.

Federal lawmakers should amend bankruptcy laws to allow student loans to be discharged in a personal bankruptcy.  Right now they sentence college graduates to decades of indentured servitude because they're not dischargeable.  This key reform will of course drastically reduce the amount of student loans that banks will write.  That will be good news.  Too many students attend college who really shouldn't go, so removing this financial enabler of future failure will free them to focus on more suitable career paths.  Not everyone should be a surgeon, but society always needs good bricklayers and mechanics.  Demand destruction happens in other commodified sectors and is now long overdue for higher education.

The federal plan mentioned in that article has details reminiscent of 1970s wage-price controls but at least it gets the topic on the table.  An effective plan would not focus federal aid on arbitrary metrics like numbers of college enrollees who graduate.  It should focus aid on academic subjects that will renew America's R&D edge.  That means aid for science and engineering students only, and even then priority will go to universities with productive laboratories.  Humanities students should get nothing, regardless of need.  Our great nation is ill-served with an excess of English majors, multicultural organizational social dynamics consultants, and underwater basket weavers.  

The Haiku of Finance for 01/26/12

Samsung big profit
Hot smartphone competition
Challenge to Apple

Potential Fed QE3 Informing Anti-Dollar Trades

Let's take note of two seemingly unrelated developments.  The Fed is busying itself making noise about another round of quantitative easing.  The intended market signal is that even with internal dissent the Fed can still push QE3 liquidity into bank balance sheets and the bond market.  I think it's funny that one stated intent is to "keep inflation from slipping" below a target.  The Fed's historic mandate has always been to fight inflation.  Abetting the devaluation of the dollar is the new Fed mission.

The lesson is not lost on other nations.  India will reportedly pay Iran in gold for oil shipments.  Take that with a grain of salt.  An unconfirmed report from an Israeli intelligence mouthpiece should be considered in the context of Israel's reported security ties to India.  Israel has little reason to formally embarrass its security partner but may wish to deter it from working around anti-Iran sanctions.  Releasing a hint from a grey source carries little risk.  At any rate, the public mention that large oil consumers are considering moving away from settling trades in dollars makes sense in the context of the Fed's willingness to harm the dollar's purchasing power.

I will presume that the Fed has an Observe-Orient-Decide-Act loop even if it doesn't know such a thing exists.  Its policies on quantitative easing and zero interest rate targets are oriented upon fostering a gradual inflation that will whittle away the federal government's unfunded liabilities for middle class entitlements.  That is an internal orientation, which is the Achilles' heel of an effective grand strategy.  The Fed's OODA loop should take into account the gradual abandonment of the dollar that other G-20 nations will eventually pursue apace.  That is an external orientation that can keep strategy on target.  This OODA loop is thus incomplete and invites a positive feedback cycle that will end the dollar's status as the world's reserve currency.

Longtime readers may note that my tone when discussing the Fed and other major policy actors is now much more sanguine than the periodic vitriol I spewed in the early days of the Alfidi Capital Blog.  In 2008 I was angry about incompetence and fraud in the financial markets.  Now I am largely resigned to its continued existence.  I am not sufficiently pedigreed to gain the ear of policymakers so I cannot dissuade them from any course they choose.  I will always fight people who try to rip me off personally.  I can offer no such assurance to anyone else.  

The Haiku of Finance for 01/25/12

"Buffett rule" tax plan
Ignores loopholes in tax code
Flat tax is more fair

Three Reasons Why Europe Will Detonate

I'll give you three reasons why going long European equities (especially banks) is extremely risky right now.

First, the IMF is issuing yet another global recession warning driven by a persistent European insolvency threat.  These reports are almost getting old hat by now because investors have blown off previous warnings with no adverse effects.  Mme. Lagarde and crew project very few safe havens from a European recession.

Second, Greece and its creditors are unable to agree on principal writedowns that will enable further bailouts.  Those creditor banks and funds know all too well how their capital ratios will be damaged by any writedowns. European ministers are unwilling to agree to creditors' requested higher coupons to compensate them for the additional risk they would have to assume by purchasing new Greek debt.  

Third, the uncertainty over the Greek negotiations and the ability of the IMF and EU to fund more bailouts makes European banks reluctant to buy sovereign debt.  It will be fun to read future histories of this crisis to see just how many financial institutions are currently violating their internal risk profiles by owning too much questionable sovereign debt.  Lawmakers are late to the party by arguing that sovereign debt shouldn't carry a zero-risk weighting.

Sufficient evidence is out in the open for investors to use common sense.  Many hedge fund managers lack this common sense and will continue to buy European debt.  MF Global went long European sovereign debt and self-destructed.  They will not be the last institution to fail with that strategy.

Run for cover, investors.  Europe is going to implode on some unknowable date.  The contagion will cross the Atlantic.

Full disclosure:  No long positions in European equities or U.S. financial institutions at this time.  

The Haiku of Finance for 01/24/12

Japan deficit
First trade hole in many years
Buried under debt

Updating The Alpha-D For 01/23/12

I did have to make some minor portfolio changes today.  My FXI stake rose through the strike price of the covered calls I wrote last month.  I bought some of it back in a wash sale and some will be a realized gain.  Actually, come to think of it, some of what I allowed to sell away may in fact be a realized loss if my brokerage calculates the entry point for those positions at a fairly recent date, indicating I paid a higher price for them.  That's the way it goes sometimes, and I trust my brokerage's records methodology.

I allowed my China position to get smaller to reduce my exposure to what may very well be a hard landing.  Check out my posts for the past few months that chronicle my increasing skepticism about China's ability to keep its growth engine stoked.

I also renewed my covered calls on GDX, which expired unexercised.  Gold is important to me as a hard asset that has the potential to be an alternate store of value in the event the U.S. dollar loses its world reserve status.

Those are the only actions I've taken this month.  I keep looking at a few stocks in defense, railroads, and shipping to see if they're worth buying.  I'm not ready yet to go long.  Bring on the European implosion first so a major market decline will give me the entry points I need to generate good long-term returns. 

The Haiku of Finance for 01/23/12

Greek deal rejected
Lenders want higher coupon
Ministers said no

Sovereign Insolvency Iceberg Blocks Mortgage Principal Writedowns

Something has been missing from the economy's alleged recovery.  Despite assertions that Americans are paying off their debt overhangs, our great nation's debt/GDP ratio still rises.  Home mortgages remain a large part of this indebtedness with little hope for relief in sight.  The federal agency charged with overseeing Fannie and Freddie warns us that mortgage writedowns will require massive capital injections from the taxpayer.  Forbearance preserves the GSEs' balance sheets at the expense of household balance sheets.  This in turn preserves the balance sheets of asset management firms and their hedge fund and pension fund clients who own mortgage-backed securities.  Credit Suisse provides a bit of a theoretical assist by arguing that mass principal writedowns won't help homeowners.  That argument is a bit too clever.  Writedowns may not help homeowners borrow in the future to keep lenders like Credit Suisse profitable, but they have potential to help in the present by preventing defaults and thus keeping non-performing properties off of bank balance sheets.

Writedowns do cause pain.  They can wreck homeowners' credit ratings, but this can deter them from future borrowing that may prove unhealthy.  They wreck the MBS/CDO holdings of investment funds, which in turn means pension plans will be underfunded and fixed-income retirees will get smaller checks.  There is no free lunch in a nation carrying many forms of massive debt.

Mortgage principal writedowns can sometimes be a fair thing to do.  They preserve the legal essence of a debt contract and assure the creditor that at least some of the outstanding principal can be repaid, and let an underwater homeowner stay in their house.  Sovereign debtors do it all the time with their bonds.  Greece is negotiating haircuts right now with European banks that own its debt.  If it's good enough for nations, it can be good enough for homeowners too.  Someday creditors will learn not to loan money to borrowers - be they nations or households - who have no hope of paying it back.  Until then, writedowns can take some sting out of poor lending decisions and allow parties to save face.

Nota bene:  I do not owe any long-term debt, and I do not carry revolving credit card debt because I pay my bills in full as they come due.  I cannot benefit in any way from mortgage writedowns because I have never taken out a mortgage.