Saturday, August 30, 2008

The Haiku of Finance for 08/30/08

Economic growth
Won't see it for a long time
We're in recession

Friday, August 29, 2008

Stocks Lower, Accounting Easier

Closing out a weird but light week, the DJIA was off today as it should be. I'm still waiting for The Crash, and any number of things could set it off.

In good news, the SEC is finally moving away from GAAP and toward international standards.

Introduced in two steps, the shift could eventually cut costs for companies and smooth cross-border investing. At the same time, investors worry it will create confusion, especially during the transition. Other critics worry that the international system offers too much wiggle room for companies, compared with the more precise rules enshrined in U.S. standards.

Aw, come on. Any worries are misplaced. U.S. accounting standards gave us dot-com EBITDAs, Enron, WorldCom, Tyco, mark-to-manure valuations of CDOs on bank balance sheets, and everything else contributing to the U.S.'s current malaise. I for one am glad to see the U.S. harmonize with the rest of the world on something. Now if only we could adopt the metric system of weights and measures . . . nah, that's just wishful thinking.

Thursday, August 28, 2008

The Haiku of Finance for 08/28/08

Green investment plan
Renewables want your cash
Not a dot-com fad

Wednesday, August 27, 2008

Pickens' Plan Possible Pickings

T. Boone Pickens' plan to move the U.S. economy from petroleum to wind/solar/natural gas has been getting plenty of attention. What's been absent is how investors can play this move if it grows beyond Pickens' initial order of 667 wind turbines from GE.

Which companies are best positioned to supply a new building boom in wind towers? That isn't clear yet. Let's say the next presidential administration needs to put a lot of out-of-work former homebuilders and mortgage brokers into some new WPA-type program building renewable energy infrastructure. Any such undertaking would presumably, for political reasons, look first to U.S.-based sources for materials and expertise. Some potential players:

GE: Great 5yr ROE, subpar 5yr EPS growth. Too much exposure to the broad U.S. economy to be a good wind pure-play.
Trinity Industries: Subpar 5yr ROE. Not for me, thanks.
Broadwind Energy: Too young to have good long-term data! No thanks.

But if the priority is for rapid build-up of capacity and not political sensitivity, maybe Vestas and other foreign wind suppliers would get a piece of the action. Hard to say at this point, so I'll wait until some large utilities start placing big orders. The next few years may see dot-com-like enthusiasm for anything green, in which case solar and wind ETFs might make sense.

Nota bene: Anthony J. Alfidi does not hold a position in any of the companies mentioned here at the time this commentary was published.

The Haiku of Finance for 08/27/08

Notre Dame degree
Never landed me a job
Useless in business

Tuesday, August 26, 2008

Fed Minutes Revelation: Bet Against Common Sense

I have been humbled in years past by my inability to predict the Fed's interest rate moves. As a fan of sound monetary policy, I have heretofore failed to appreciate the pro-inflationary bias that Helicopter Ben has adopted as a result of his reading of the Fed's historical response to the Great Depression. The Fed's rate-cutting in 2007 was the exact opposite of what I had anticipated from the standpoint of fulfilling the Fed's inflation-fighting mandate.

My mistake was in thinking that the Fed thinks the way I do as a Myers-Briggs INTJ "Duty Fulfiller." I've learned my lesson. Instead of imagining what I would do if I were Fed BOG Chairman, I will imagine the exact opposite of what I would do.

Today the Fed released minutes from its last meeting in August.

While the members agreed the next policy move would likely be an increase in rates, most of them did not see the Fed's current monetary stance as "particularly accommodative," because households and businesses were facing tighter credit and higher borrowing costs.

The Fed doesn't see its unbelievably low target rate as "particularly accomodative" to higher inflation, so they're in no hurry to raise rates even though they admit that a tightening at some future date is justified. That's the thing I don't get. Why isn't a tightening justified right now, given that the latest CPI clocked in a 5.6% year-over-year (yoy) increase?

Like I said up top, to be a better Fed predictor I now must imagine the opposite of what my sound-money prudent instinct dictates. The Fed will allow inflation to run its course for the forseeable future. Therefore, my heavy allocation to gold makes more sense than ever.

Nota bene: Anthony J. Alfidi is long IAU and GDX in anticipation of higher inflation.

Sunday, August 24, 2008

Trading One ETF For Another

I have been planning on adding an emerging markets ETF to the index strategy of my portfolio. However, I've been reconsidering EEM from Barclays as the specific vehicle for doing so. Its expense ratio is unbelievably high for an ETF: 74 bps! Holy canole, that's almost as much as a typical actively-managed mutual fund. By comparison, VWO from Vanguard tracks the same index but at 25 bps costs only a third as much. Expense ratios matter very much when picking an ETF, because minimizing costs is the name of the game.

These two ETFs both have very deep option chains, so either will accomodate my strategy of using out-of-the-money options to add yield. It is true that sometimes these ETFs can briefly outperform or underperform their given benchmark due to tracking error and the way they sample the benchmark's components, but frankly that can't be helped. Brief periods of mismatching the benchmark don't bother me as much as wasting money on exorbitant expense ratios.

The edge from now on will go to VWO, so that's the one I will use in the future to get emerging markets exposure in my core portfolio.

Nota bene: Anthony J. Alfidi currently holds short calls on EEM but does not hold a long position in the underlying ETF. After these options expire in September 2008, Mr. Alfidi will replace EEM with VWO in his portfolio.

Saturday, August 23, 2008

Uncle Warren Knows We're in a Recession; Do You?

Warren Buffett doesn't adhere to the NBER's definition of a recession, but calls one nonetheless. Old news from Janaury 2008 measured sluggish growth in consumer spending, and that old report's growth forecasts for the rest of 2008 haven't panned out.

I honestly think this recession began just before Thanksgiving of 2007. Can I prove it? Check out this table from the BEA, and note the revised GDP growth figure for Q407 is now negative 0.2. The numbers for Q1-Q208 are in my opinion deceptive; I expect them to drop in future revisions. What's really worrisome is the impact of the massive and continuing drop in residential spending in row 11, a reflection of curtailed housing construction. That's been reported ad nauseum, so I won't belabor the point here.

What's important is that most equity indices, as a supposedly forward-looking indicator, IMHO haven't fully factored in this weakness. Maybe too many hedge fund algorithims are expecting some kind of V-shaped recovery based on who knows what kind of macro inputs (butterfiles fluttering in South America perhaps?). As a Buffetologist, I think I'll hang on to my cash a few months longer when Mr. Market is finally ready to sell at a bargain price.

Nota bene: Anthony J. Alfidi continues to write uncovered calls against SPY and IWM in the belief that they are seriously overvalued.

Friday, August 22, 2008

Thursday, August 21, 2008

Misplaced Bet on a Bailout

Too many regional banks have too much GSE junk on their balance sheets and too much misplaced faith in Uncle Sam's ability to bail them out. With Fannie and Freddie on deathwatch, a lot of small-town bankers are going to be in a world of hurt if Secretary Paulson has to fire his bazooka. From the linked article:

``My fear is that if the Treasury allows the preferreds to fall to zero, all they're going to do is shift the problem from two entities, Fannie and Freddie, to the 8,000 banks that hold this in their portfolios,'' Wiest at Midwest said. Shares of Midwest, with 539 employees at the end of 2007, are down 63 percent this year.

No kidding. Do CIOs stress test their portfolios for black swans? We've seen a flock of those in recent years.

Nota bene: Anthony J. Alfidi does not hold any positions in Fannie Mae or Freddie Mac.

Wednesday, August 20, 2008

Tuesday, August 19, 2008

A Long Way To China

I've had mostly short positions this year, but I've finally decided to take a long position in addition to my gold holdings. I have opened a long position in FXI because I am bullish on the long-term prospects of the Chinese economy.

In simple terms, FXI is on sale. Today's closing price of 39.43 is almost half of what the ETF was worth a year ago. Bottoms are hard to call, but I'm not going to call one. Too many investors are fearful of further declines, so it's time for yours truly to get greedy.

The macroeconomic rationale is even stronger than the opportunity posed by FXI's price haircut. China is in a position of strength relative to the United States. Beijing's enormous holdings of U.S. Treasuries gives the Chinese political leverage over Washington, and I believe they have been quietly using it. Treasury Secretary Henry Paulson knows this, which is why he is so keen to stay on the Middle Kingdom's good side. A long position on the Chinese stock market is a kind of carry trade against the dollar given the interest payments the U.S. must make on China's Treasuries.

Most importantly, China's internal market and trade relations with its neighbors have matured to the point where it can afford an export slowdown without worrying too much about whether its economy will suffer. The combination of China's newfound strength and the historic drop in the FTSE/Xinhua China 25 index is too attractive for me to ignore.

Nota Bene: Anthony J. Alfidi is long FXI and is writing out-of-the-money covered calls against this position for additional yield.

Monday, August 18, 2008

Saturday, August 16, 2008

Inflation vs. Deflation

"Inflation is always and everywhere a monetary phenomenon." That quote is often attributed to Milton Friedman.

Does the U.S. economy face inflation or defaltion? Signals abound either way. But which force is stronger? For inflation to be truly resurgent, we would have to see more than merely a rise in the price level. Institutional demand for commodity investments can do that all by itself. Inflation would require a wage-price spiral as employers raise worker wages to keep up with rising prices of goods, if only to stave off demand destruction for their own products.

Problem is, the destruction of demand has a deflationary effect, as producers would eventually reduce prices to find an equilibrium point at which a price signal would clear their goods from the market. Note that I said eventually, not immediately. Our immediate future is where we see the inflationary effects of low interest rates continuing to stimulate demand for money in the form of corporate and consumer credit. A surge in inflation would need to see a surge in the money supply to meet this demand, perhaps in the form of . . .

. . . dollar dumping on a global scale. If foreign holders of U.S. currency decide they don't need so many greenbacks anymore, all that U.S. currency will come flooding back to American shores. You'd think a flood on that scale would prompt the Fed to raise interest rates to make the dollar look attractive again, but the Fed may be thinking instead of Uncle Sam's unfunded liabilities. The temptation to inflate our way out of paying the Baby Boomers' Medicare bills in full may prove too strong to resist. Our governing class may have already decided to trade away dollar hegemony in exchange for an easy way out of the U.S. national debt time bomb.

Friday, August 15, 2008

Gold Down, But Not Out

I admit my surprise that gold has declined since its all-time high in March. I put a nice chunk of my portfolio into a bullion ETF and a mining ETF in the expectation of massively rising inflation. Well, inflation is here, but Mr. Market doesn't seemed to have noticed.

Maybe it's the decline in oil prices that has put gold on the ropes; they are alleged to move in tandem. No matter. I'm a long-term investor, and my gold positions are designed to preserve my portfolio when Helicopter Ben starts running the printing presses. I will keep holding IAU and GDX, and it looks like I'll be involuntarily acquiring some more of the latter now that a short put I had on it will be exercised! Fine with me.

BTW, I've had buyers' remorse about selecting the Barclays gold ETF instead of the State Street product ever since State Street made their ETF optionable. Too late to change now! I can only hope that BGI gets their act together to have their product follow suit.

Nota bene: Anthony J. Alfidi holds long positions in IAU and GDX, and sometimes writes covered calls against GDX for additional yield.

Thursday, August 14, 2008

Defying All Reason

A lot of people are ready to call a bottom in financial stocks. Too many, IMHO.

``It goes completely counter to what you read, that everybody is selling, everybody is bearish, everybody is shorting financial stocks,'' said Birinyi's Robert Leiphart, who helps manage $350 million in Westport, Connecticut. ``When people say, `It's the worst it's ever been,' it's usually the bottom and the time to start to buy.''
Problem is, too many investors (or their hedge funds) are betting on further declines.
Short interest in financial companies rose in June to 4.6 percent of shares outstanding, the highest on record, Deutsche Bank AG data show. Traders pared bets against banks and brokerages and investors pulled money from ETFs in July as the stocks advanced, data compiled by Birinyi and Bloomberg show.

With short interest remaining that high, the recent run-up in financial ETFs is IMHO merely short covering. Maybe a lot of the folks (hedge funds?) doing the covering haven't noticed that a lot of banks' Level III asset ratios are still ridiculously high, making them extremely risky bets to lead a new bull run.

Nota bene: Anthony J. Alfidi holds a long put and short call on XLF.

Wednesday, August 13, 2008

CVAC Systems: A Disruptive Health Care Technology

I'm always on the lookout for the next big thing, but the trouble with the San Francisco Bay Area is that everybody and his brother claims they can deliver it once you hand them a few million in startup cash. Startup investing is not for the faint of heart and requires thorough due diligence. I have only invested in one startup to date, but I believe I picked a huge winner.

In late 2006 I came across a remarkable startup: CVAC Systems of Temecula, California. The CVAC (pronounced "SEE-vack") acronym stands for Cyclic Variations in Altitude Conditioning. They have engineered a one-person pressure chamber that simulates a high-altitude physical training environment by exerting multiple pressure and temperature changes on the human body. The basic effect is to stimulate the body's production of red blood cells, producing the benefits of high-altitude physical training.

The basic description of this technology's potential effects piqued my curiosity, so I actually drove down to Temecula from SF in October 2006 to check it out for myself. CVAC's inventor, Carl Linton, put me through a 20-minute session in a prototype CVAC pod. Folks, all I can say is that after 20 minutes in that pod I felt like I could have run for ten miles.

I like several things about this company. The CVAC technology's potential applications in enhancing physical fitness and treating metabolic disorders (pending scientific confirmation) offers the possibility of multiple revenue sources once the devices are placed in rehab centers, clinics, fitness clubs, and anywhere else customers can access it.

The company recently released the results of a study by researchers at Stanford University that indicates the potential use of CVAC as a diabetes treatment. This ought to be jaw-dropping, given the size of the diabetes-afflicted population in the U.S.

I put some of my own money into this company in February 2007 because I was convinced that this company's technology will be as disruptive to the health care industry as the Palm Pilot (PALM) was to mobile communication devices. I have complete confidence in the ability of CEO Allen Ruszkowski and his team's entrepreneurial vigor.

In a side note, Johnson & Johnson's (JNJ) latest quarterly earnings held up very well. Why mention this here? Medical device companies are considered defensive plays in recessions, so device makers may perform well even if the U.S. economy continues to stall in the near future. This is a potential feather in CVAC's cap if they go IPO between now and 2011 or so, because reliable share price performance from comparable peers in their sector will make it easier to price their own shares.

I remain convinced that CVAC is a winner. If anybody else can show me a startup with similar potential for multiple revenue streams and monopolistic pricing power, I'm all ears.

Nota bene: Anthony J. Alfidi holds a small private stake in CVAC Systems Inc. This company is privately held and represents a high-risk opportunity typically limited to institutional investors and accredited investors as defined by the SEC.

Tuesday, August 12, 2008

Not A Silver Lining After All

The Journal has this to say about credit default swaps:
“If you are looking for a silver lining in these findings, it seems that most institutions think we are currently in the most dangerous period for global financial-services firms,” Feenstra said. “Perhaps if the markets can make it through the next six months, the level of pessimism may begin to subside.”

I never expected to see the Friedman Unit make its appearance in financial commentary. I thought it applied exclusively to foreign affairs. Its use in this context implies that it is appropriate for measuring the progress of all manner of debacles.

The salient point here is that "most institutions" are barely competent at judging the risk on their own balance sheets. I for one do not expect them to be any more skilled at judging risk for the market as a whole. At any rate, if we are in fact in the most dangerous period for the market, doesn't that imply that a crash in equities is imminent? Don't hold your breath waiting to hear that from the Journal.

Monday, August 11, 2008

Strong Dollar, Strong Equities: Chicken vs. Egg

I like Bespoke Investment Group. They do some original thinking and helped inspire me to create my own virtual investment firm. A good example is this description of how a strong dollar is associated with a bull market in U.S. equities.

Nice job guys, but let's take it a step further. What's the reason for the apparent correlation? Does it mean that investors who hold dollars with more buying power are more likely to demand equities, thus pushing up the value of the stock market? Not if they're foreign investors, because it would take more of a weaker currency to buy a dollar's worth of a U.S. equity share. And not necessarily so for a U.S. investor either, since their stronger dollars would make investments denominated in foreign currencies look more attractive (think about it, just as imported cars and bananas would be cheaper).

Maybe it has something to do with U.S.-based multinationals being able to lower their costs by seeking foreign sources for inputs like raw materials and labor. Costs go down, earnings and share prices go up. Who knows for sure, but the guys at Bespoke are becoming notorious for provoking me to think like this. Thanks, guys; maybe I'll call you the Notorious B.I.G. (meant in jest, of course). :-)

Sunday, August 10, 2008

Somebody Doesn't Understand Lending

This MSNBC article is a gem.

But the government may also end up paying nothing at all, largely because it received collateral in return for backing much of these debts and could recoup some money if borrowers stop making their interest payments.

And how exactly is that going to happen?! If you hold collateral, and your debtor stops making payments, then your collateral just became worth a whole lot less. You recoup no money whatsoever. Jeez louise. I didn't even have to use my MBA to figure that one out.

The article's author isn't the only one having trouble understanding what a "loss" means.
That forced him to reluctantly accept a major Democratic proposal that authorized FHA to spend up to $300 billion to help homeowners who, because of falling prices, owe more than their homes are worth. The expected cost to taxpayers of this program is $1.7 billion, the Congressional Budget Office said.

Wow. Apparently the FHA's potential spending of $300B that it doesn't have on homeowners who can't pay it back has no bearing on the cost estimate of "only" $1.7B.

The preceding non-logic is par for the course and shows us all why we are in such a mess. The lack of competence of journalists and government budget officials spills over to a mis-informed public unable to comprehend problems.

Saturday, August 09, 2008

GATX Corp.: An Interesting Prospect

GATX (GMT) is in the news for its proposed $3.5B purchase of GE Rail Services. Consolidation in rail car leasing bears watching, and is probably a smart move going into an economic downturn. GATX is IMHO looking to position itself as a dominant player when this downturn ends, and in the meantime the high price of oil makes rail movement more economical.

GATX's key fundamentals look enticing. Their 5-year EPS growth is in the neighborhood of 47%, and their 5-year ROE is almost 13%. The ROE isn't as high as I'd like for an investment, but this year's ROE of almost 17% may point to an upward trend.

GATX deserves further scrutiny. I need a good transportation-oriented play that will survive this sovereignty crunch.

Nota bene: Anthony J. Alfidi does not hold any position in GMT at the time of publication of this commentary.

Friday, August 08, 2008

X Minutes to Midnight

Mr. Market had another one of his dead cat bounces today. Oil prices aside, this market can't rely on anything but hedge funds' program trades to generate a direction.

As long as these high-speed trades are based on price action, it's hard to say just when the true health of the U.S. economy will be priced in to the stock market.

Thursday, August 07, 2008

Financial Advising: Only Rich Need Apply

Have you ever thought about becoming a financial advisor? Stop thinking right now. It doesn't matter how many sources predict that the industry will grow. The industry can never grow past its present size, and will be much smaller in the future. Allow me to explain.

First of all, Baby Boomers haven't saved nearly what they need to prepare for retirement, so all of those advisors counting on 401(k) rollovers into IRAs they can manage are going to be sorely disappointed between now and, say, 2020.

Secondly, the great credit/solvency/sovereignty crunch of 2008 onward is going to force a lot of brokerages to trim fat until they bleed. Horizontally integrated investment firms will have a hard time justifying the employment of anyone who can't gross at least a few hundred thousand dollars annually. That means cutting a lot of low-producing financial advisors. The ones who can fend for themselves will go independent, assuming their clients are tied to a human being and not some shiny platform.

Finally, advising has finally become a career path designed by the rich, for the rich. The Do Not Call legislation has pretty much eliminated the dinnertime cold call that generations of broker trainees used to build their books. Firms now expect their trainees to walk in the door with millions that will immediately generate revenue for the firm. Sorry, but Chris Gardner would never be allowed in the door at a brokerage today, except as an affirmative action hire to dress up the firm's HR quotas and avoid lawsuits.

How can I be so sure of this? A few years ago I actually worked as a financial advisor at a brand name firm. I was the only non-millionaire trainee in the office, hired for my education and background, and I was the only one in my group who didn't make it all the way through the program. The trust fund babies sitting around doing nothing thought that my Chris Gardner work ethic was a joke, and my silver-spoon bred managers couldn't relate to me once they saw my non-millionaire net worth. These managers hooked up the millionaire trainees with the firm's investment bankers as a reward for bringing in their parents' money. No way were they going to do that for me.

Firms nowadays design trainee performance targets so that their revenue targets greatly outpace the actual revenue their asset targets will produce after a couple of years in the program. This creates a deliberate gap between the gross revenue you're expected to generate after your second year and what your asset target will really generate. The only way to bridge this gap is to get the first ten million or so from your immediate family. The non-wealthy trainees who work extra-hard to bring in assets will be pushed out, and their assets handed on a silver platter to . . . the rich kids who walked in the door on day one with daddy's trust funds.

Financial advising is now a career path designed by the rich, for the rich. If you're not from a family of multigenerational millionaires, you won't make it. It really is that simple.

Wednesday, August 06, 2008

And Now For Something Completely Different

Financial markets are perhaps the most necessary Rube Goldberg device ever devised in the absence of some deus ex machina to allocate capital to productive enterprise. They are as complex as particle physics, as difficult to master as a bucking bronco, and as necessary as a toothbrush in our modern world.

The wilderness of modern finance demands a lone voice crying out for an audience of Homo investus (investing human).

That voice belongs to me.

I am Anthony J. Alfidi, private investor and founder of Alfidi Capital LLC. Friends call me Tony, but most other people can call me anything they like except late for dinner. I have been thinking about investing since I was a young'un, and now in adulthood I relish the opportunity that Web 2.0 tech gives me to publish my thoughts. I know a few facts and theories about investing, but I can always learn more. This blog is a tool for that end.

If you're a serous investor, then you and I will find common cause in our mutual search for ways to make money. Enjoy reading. See ya!