Sunday, November 30, 2008
The subprime mortgage crisis is giving department and convenience stores and gas stations a new argument in asking Congress for power to negotiate the fees banks charge them to process credit-card transactions.
The banks say credit-card fees cover operating costs, protect banks against default and fraud, and allow them to offer cards with no annual fees and rewards. The charges vary from bank to bank and depend in part on whether the card includes cash rewards or other benefits.
My take on this is straightforward. Retailers are getting spooked that the rest of the Christmas shopping season won't be as rosy as Black Friday's numbers (which I discussed here yesterday). Stores want leverage over a charge that eats into their rapidly thinning margins, but banks need the charges in place to shore up their own troubled business models. If Congress takes up this issue, they will be forced to choose one sector over another in a case of robbing Peter to pay Paul. One or the other industry will be forced to live with thinning margins in a deepening recession.
I believe Congress will table this issue to protect the bailout money they've given to banks. The government has made no such commitment of taxpayer money to retail chains. Retailers will unfortunately suffer, and for some chains this charge may be the backbreaking straw that drives them under. Such an outcome would eventually realize some of the bankers' fears: chain stores will be less likely to accept credit, and smaller banks will issue fewer cards. Oh well, the new year will be all about frugality anyway.
I'm not going to make an investment play on this. I just needed something to talk about.
Saturday, November 29, 2008
The holiday shopping season got off to a surprisingly solid start, according to data released Saturday by a research firm. But the sales boost during the post-Thanksgiving shopathon came at the expense of profits as the nation's retailers had to slash prices to attract the crowds in a season that is expected to be the weakest in decades.
Sales were 3% higher than last year's Black Friday - in nominal terms. Shadow Government Statistics calculates that CPI inflation was at an annualized rate of 11.6% as of this October. Even if we assume that this month's massive Fed lending hasn't immediately made that number worse (of course it has!), that sales figure translates into an 8.6% decline in real dollars.
Friday's shopping action isn't even close to putting retailers in the black. Even the article hints that retailers had to sell at undesirable prices just to move inventory backlogs. The retail picture will get a lot worse as job losses accelerate between now and Jan. 2009.
Friday, November 28, 2008
The big American homebuilders have dug themselves into a hole from which they may not emerge for years. Having been abettors and subsequently victims of the U.S. housing bubble in the early years of this decade, they may be the last to profit when buyers finally return to the market.
Okay, so homebuilders are still not a good buy yet. What about REITs? Maybe they'll be on sale soon:
The full scope of the housing meltdown isn’t clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefronts nationwide. Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in.
Uh-oh, looks like they've got farther to fall if commercial mortgages go massively bust. What about emerging markets? They're down quite a bit:
This has been a painful year for investors all around. Nowhere is that more apparent than in emerging markets, where the average fund is down 64.6% in 2008, according to Lipper.
Hmmm, now there's an intriguing bit of data. A decline of almost two thirds for an entire style presents the possibility of a bargain acquisition. "Decoupling" is a controversial theory that some parts of the global economy can do well even while other areas are in recession. It's not a fully mature theory, but my take on it is that even in a global recession, some regions may do less poorly than others for a number of reasons. Some emerging nations are looking for macroeconomic solutions that don't depend on a revival of U.S. consumer spending. China's fiscal and monetary stimulus is one hopeful factor. Other emerging economies, like Malaysia, may follow suit to stimulate domestic demand.
I've written uncovered calls on VWO for several months. VWO is an intriguing vehicle not only for its low cost but also its dividend, something you may not get from every emerging market stock or actively managed mutual fund. Perhaps it will soon be time for me to go long VWO.
Nota bene: Anthony J. Alfidi is holds uncovered short calls on VWO at the time this commentary was published.
Thursday, November 27, 2008
Giving to charity in bad economic times is even more important than in bull markets. A lot more people have a hard time making ends meet. People with dependable incomes need to be mindful of how lucky they are not to be starving.
The cynical among you should think of charity as a form of insurance against social instability. The idealistic among you can think of it as a moral imperative. Me, I think of it as a tax writeoff along with the two reasons above. See, I don't make a decision about important things in life unless I have several good reasons for doing so.
If you need a better personal example than me, check out what Uncle Warren and some other fortunate people are doing with their money:
Many of America's ultra-rich continued to give big donations to charity in 2008, despite the worst financial crisis in decades. In the past year, seven philanthropists gave north of $200 million and nine gave more than $100 million to causes ranging from wilderness preservation to fighting malaria.
My play: I have given a chunk of my earnings to charities in San Francisco every year since the late 1990s, even in those years when I was making next to nothing as a graduate student. I recently emptied out what was left of my pantry to support a local canned food drive. Who knows, some of my canned goods might end up feeding a bankrupt ex-Wall Street preppie looking for work. I actually hope they come out okay. I know I will.
Wednesday, November 26, 2008
China’s biggest interest-rate cut in 11 years highlights government concerns that the country risks spiraling unemployment, social unrest and the deepest economic slowdown in almost two decades.
However, the rate stands now at 5.58%, much higher than interest rates in the Anglo-West economies. There's plenty of room for China to cut more if needed, whereas the U.S. is rapidly approaching ZIRP (a zero-interest rate policy, i.e. the approach that kept Japan's economy anemic for a decade). Interest-rate parity will soon be at work here, sports fans, which means that deploying capital in low-yielding U.S. bonds will look less attractive to Chinese investors.
China can afford other things besides further interest rate cuts:
China’s foreign-exchange reserves topped $2 trillion for the first time, strengthening the nation’s finances as the government boosts spending and cuts interest rates to counter the financial crisis.
Is the rise in reserves due partly to the sudden rise in value of the U.S. dollar? If so, China would be wise to liquidate the dollars in its reserve disproportionately to other currencies as it executes its massive fiscal stimulus plan. The levitating dollar will have to come down as an unintended consequence of the Fed's latest $800B boondoggle:
The Federal Reserve’s new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren’t sure they want more debt.
Households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump, economists say. That means banks may end up returning the Fed’s new liquidity through deposits at the central bank.
While officials yesterday contested claims that the Fed is undertaking quantitative easing, they acknowledged that the central bank’s new actions will result in another injection of funds into the system. Officials said their objective is to affect credit markets rather than to target money supply.
The point of adding this last excerpt is that China has productive uses for its available savings, while the U.S. must print new money just to stand still. Monetary policy has about a six-month time lag before its effects are felt in the real economy. The inflationary effects of the Fed's quantitative easing should be very apparent by the end of 2Q09.
I believe my overall stance of bullish on China, bearish on the U.S. is valid at least through 2009. China may very well see much slower GDP growth in the near future (as the first article warns), which is why I feel comfortable writing call options on my FXI holdings.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls) at the time this commentary was published.
Anyway, let's see what happens when fund management companies offer actively managed bond funds, rather than ETFs. PIMCO stated today that one of its muni bond vehicles may have trouble delivering dividends to its investors:
PIMCO California Municipal Income Fund II (the "Fund'') may be required to delay the payment of the declared November dividend and the declaration of the next scheduled dividend on the Fund's common shares.
Continued severe market dislocations have caused the value of the Fund's portfolio securities to decline and as a result the Fund's asset coverage ratio has fallen below the 200% Level.
If the 200% Level is not met on December 1, 2008, the Fund would have to postpone the payment of the previously declared November dividend and the declaration of the December dividend until the situation is corrected. Depending on market conditions, this coverage ratio may increase or decrease further.
The fund's stated objective is to provide current income; failure to make a dividend payment means it has failed this objective. I am not a securities attorney, so I cannot say whether this exposes PIMCO to some kind of liability. I would say, as a private investor, that any fixed income fund that can't meet its performance objectives because of market volatility, and not for reasons such as asset impairment or fund company bankruptcy, is not worth my personal consideration. If an investor holds a comparable bond portfolio as individual securities and not as part of an actively managed fund, the investor would receive the coupons on schedule.
This isn't just a problem with PIMCO's Cal muni fund. Some of their other funds have hit the same snag:
PIMCO Corporate Income Fund and PIMCO Corporate Opportunity Fund (each, a "Fund'' and collectively, the "Funds'') today announced that each Fund will redeem, at par, a portion of its auction rate preferred shares ("ARPS''), beginning December 15, 2008 and concluding on December 19, 2008. The Funds also announced that they may postpone the payment of previously declared November dividends for common shares and postpone the declaration of dividends for common shares, currently scheduled to occur on December 1, 2008.
But wait, there's more! Other PIMCO funds had problems just last week that will prevent them from paying declared dividends:
The Boards of Trustees of PIMCO High Income Fund, PIMCO Floating Rate Income Fund and PIMCO Floating Strategy Fund (each, a "Fund'' and collectively, the "Funds'') today announced each Fund will redeem, at par, a portion of its auction rate preferred shares ("ARPS''), beginning December 8, 2008 for PHK and PFN and December 10, 2008 for PFL and concluding on December 12, 2008 for all Funds.
PIMCO is regarded (by those same market "experts" who told us securitization of debt was a great innovation) as a firm chock full of bond expertise. If this vaunted expertise couldn't anticipate a volatility-induced payment stoppage in several bond funds, then what exactly are investors getting by paying PIMCO to actively manage their bond money? PIMCO sure has a snazzy website for press releases, which curiously doesn't feature the releases noted above. Any asset redemptions (sales) PIMCO has to make to meet that 200% threshold may come back to investors as taxable capital gains distributions from the funds! Aw, that's just great (sarcasm filter off).
Here's my approach to fixed income investing. I currently use some fixed income securities (CDs, Treasuries, corporate notes, and others with short-term maturities) as my cash management strategy for the proceeds I collect from selling options. I buy them and hold them to maturity. It's that simple. At some future date I'd be willing to buy long-term bonds to protect my principal and get some form of interest rate immunization, but once again I will hold them to maturity. I am not going to waste my time or money actively trading bonds to try to outguess the Fed's interest rate changes. I have a life, you know.
Oh yeah, PIMCO is yet another firm that never responded when I sent them my resume. Now they're having problems. Coincidence? I don't think so. ;-)
Tuesday, November 25, 2008
Fixed income ETFs make little sense to me. The point of having FI in a portfolio is to generate a regular cash stream and smooth out volatility through diversification. Throwing an FI ETF into the mix may actually raise portfolio volatility because hedge funds and day traders will be tempted to time FOMC moves. Also, if you're a covered call writer (like me), the option chains are so thin on FI ETFs as to be useless. In this market a buy-write strategy can easily see you position called away. No thanks to fixed income ETFs!
I'll have more to say on ETFs as time goes by. I am conquering the world wide web of finance, one pithy post at a time. ;-)
Sovereign wealth funds in the Gulf are switching their focus away from Western stock markets to shore up ailing economies in the Middle East and protect themselves from losses in the City and on Wall Street.
Investment funds in Kuwait, Qatar, Dubai and Abu Dhabi are understood to be changing their investment strategies after losing billions of dollars buying shares in Western companies. Several Gulf-based banks are being propped up with state investment. Local stock markets have collapsed and some funds are shifting their assets into local shares in an attempt to inject confidence.
Under the new mortgage program, the Fed will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It will also buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.
The central bank also launched a $200 billion facility to support consumer finance, including student, auto, and credit card loans and loans backed by the federal Small Business Administration. This will lend to investors who hold securities backed by this debt.
Callinan continues to prospect in areas with proven mineral histories, increasing the likelihood that they'll hit fresh deposits. Prospecting near existing mining infrastructure means lower up-front costs for installing a new mine's support structure (like electric hookups). As far as I can tell, they turn production over to other firms and collect royalty interest from producing properties.
The disadvantage with Callinan is that they don't pay out enough of their revenue to shareholders to make their royalty-income model worthwhile. Their EPS in 2007 was only $0.06, which is probably why they're a penny stock. Other royalty plays like Royal Gold have a much higher EPS. Callinan is a penny stock for good reason. IMHO one key to success for a royalty operation is the ability to spread its risk over a large number of portfolio properties by acquiring different types of royalty interests. Every production locale is slightly different, so diversification keeps steady payouts flowing. Without knowing the quality control measures a royalty operation has in place, it's hard to form an opinion on the likelihood of future payouts.
Mineral royalty companies try to apply the Berkshire Hathaway approach to resource investing. They buy interests in well-run properties with predictable cash flows. The theory is sound, but it's hard to find a company that does it well enough to fit my portfolio.
I really don't go for penny stocks, so I won't buy Callinan Mines. Those of you who are so inclined are welcome to do further research on your own.
Nota bene: Anthony J. Alfidi does not hold any positions in the stocks mentioned here at the time this commentary was published.
I don't know whether further bailouts are in the offing, providing future artificial pops to its share price.
I don't know whether it will be the target of a takeover attempt by either Goldman Sachs or Morgan Stanley, the two most oft-quoted names. Those former investment banks are looking for retail deposits to shore up their own balance sheets, and an ailing commercial bank looks good to them.
I don't know whether Citi will sell off pieces of itself to leave a rump commercial bank that's more viable than a disintegrating "universal" bank.
So, no uncovered calls or short sales on C for now.
Monday, November 24, 2008
The Federal Reserve, which has already pumped out hundreds of billions of dollars, might formally adopt a policy of flooding the world financial system with even more money. The Treasury, on course to borrow some $1.5 trillion this fiscal year, may tap global capital markets for even more to finance a fiscal stimulus package of as much as $700 billion and provide additional bailout money for banks.
There’s always a danger the Fed and Treasury may go too far, setting the stage for a big rise in inflation or another asset bubble down the road as the economy revs up and investors get back their nerve. (snip)
Bernanke and Paulson might welcome a bit of that exuberance right now -- even at the risk of higher inflation later -- as they try to prevent the biggest credit catastrophe in decades from sending the economy into a deflationary nosedive.
“It’s true that, over the long run, too much money creates inflation,” says Lyle Gramley, a former Fed governor now at the Stanford Group Co. in Washington. “But they’re trying to keep the economy from going over the precipice and into the abyss.”
Thanks Bloomberg! I've bolded the passages above that support what I've been saying since the bailout was initiated. Flooding the world with extraordinary amounts of new dollars will have a very predictable result: inflation. They used that word three times in the article.
I soon expect Mish Shedlock and Noriel Roubini to revise their opinions dismissing the possibility of inflation. That's why I track their blogs in my blogroll; I pay attention to their well-informed commentary.
Wall Street barreled higher Monday for the second straight session, this time in a relief rally over the government's plan to bail out Citigroup Inc. — a move it hopes will help quiet some of the uncertainty hounding the financial sector and the overall economy. The Dow Jones industrials soared nearly 400 points and the major indexes all jumped more than 4.5 percent.
These bear market rallies are getting quite predictable. Let me start my analysis by reposting a comment I just made at Clusterstock:
China demanded the nationalization of Fannie and Freddie to safeguard its own holdings of agency debt.
The Saudi royal family just played the same card to safeguard its holdings of Citi common stock. It's been obvious for some time that the Paulson TARP is not following the playbook of the Swedish model, which demands that shareholders are wiped out.
I can be a little cryptic sometimes, so here's some exposition. The Fannie and Freddie conservatorship was executed after senior Chinese officials publicly stated that they expected the U.S. government to safeguard China's existing investments in Fannie and Freddie securities. Their implied threat was that China can and will dump its holdings of U.S. dollars and Treasury bonds if its interests are not protected. The Saudi royal family has probably taken note of the newfound power that foreign creditors have over the U.S. and have moved to safeguard their own interests.
Traditional approaches to recpaitalizing banks, using either bankruptcy proceedings or Scandinavian-style equity wipeouts, are clearly not on Secretary Paulson's agenda. Paulson's use of TARP, in contrast to the Scandinavian approach to hitting the reset button on equity shareholders, appears to prolong for as long as possible any destruction of either the shareholders or bondholders of a floundering bank.
The Sovereignty Crunch is in full swing. I'll let you know tomorrow if I do anything to make some money off the Citigroup sucker's rally.
Sunday, November 23, 2008
Citigroup is such a large, interconnected player in the financial system that if it were to collapse it would wreak havoc on already fragile financial and economic conditions. The company has operations stretching around the globe in more than 100 countries.
Haven't we heard this before? The government bailed out AIG because its operations touched so many counterparties, and the bill for that keeps growing. This is getting absurd. Citi's balance sheet is waaaaay bigger than AIG's, so get ready for more financial tomfoolery from these tom turkeys.
What to do about all of this? Why, make money off of it, of course! If the government announces some kind of bailout within the next 24 hours, the price of C will probably jump a little. Not a lot, but enough to make calls at higher strike prices worth a little more. That would make it a little bit safer for me to write some uncovered calls on C without the burden of going long this worthless stock. I'd hate to spend my money on this turkey so close to Thanksgiving.
Nota bene: Anthony J. Alfidi does not yet have a bearish position on C. Stay tuned.
Pacific Rim nations assured the world Sunday that the global financial crisis can be quelled in 18 months, but provided few details of how they expect that to happen — or how their governments can help.
The 18-month timeline fits with a calculation by the International Monetary Fund, which forecast developed economies would grow barely 0.1 percent in 2009, and that the world would emerge from the crisis the following year.
But some delegates and analysts were skeptical that the timetable was much more than wishful thinking, and some leaders distanced themselves from the language.
Unfortunately, these countries' leaders could do no better than crib from the IMF's own estimates. It's fair to say that these countries' leaders were ill-served by their ministerial staffs, the ones who do the real leg-work in preparing for a conference like this one. Solving global economic problems isn't really in APEC's portfolio anyway, although they definitely have a stake in keeping trans-Pacific trade going.
It's good to know that some of the heads of state were realistic enough to downplay the official language.
Saturday, November 22, 2008
The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.
Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE finance ministry said last month it would inject 70 billion dirhams ($19 billion) into the banking system, and is already looking at doing more to keep interbank liquidity flowing.
Sources like Dubai Inc. have been financing Uncle Sam's spending spree up to now. Their increasing focus on using fiscal and monetary stimulus to shore up their own economies bodes ill for the U.S. economy. It's kind of hard to buy goods from the U.S., even if the dollar is devaluated in the future, if you need to spend money at home to keep your citizens from revolting. I'm going to keep making this point until everyone on the Web is sick of hearing me.
Middle East central banks will next have to dip into their dollar reserves to keep their economies from sinking. Future headline (proposed): "Dubai dumps dollars to defray domestic demand destruction." You heard it here first.
The U.S. Treasury agreed to help speed up the liquidation of the $6.3 billion Reserve U.S. Government Fund, ensuring investors are paid in full after their money was frozen in September.
The Treasury, drawing from its Exchange Stabilization Fund, will buy any securities the fund doesn't sell by Jan. 3, according to statements today by the department and New York- based Reserve Management Corp., the fund's owner. Shareholders can expect their money by Jan. 7.
The effect of the Treasury's actions will be to release dollars into circulation and eliminate the existence of illiquid assets in the Reserve Fund. This is a small-scale version of what the TARP was supposed to do, and the consequences are straightforward. More dollars chasing fewer assets in an economy is the concept known as inflation. This fund is small, only $6.3B, so the inflationary consequences of this particular action are small. The precedent is of course huge, as the Treasury is temporarily insuring the value of every money-market fund in the U.S. I expect the Fed's economists to monitor this, so they can estimate the effects of canceling the junk collateral they accepted from banks that signed up for emergency credit.
Never mind the impropriety of using the Exchange Stabilization Fund for something other than supporting the value of the dollar in forex markets. Any action to replace decaying assets with devalued currency is bad enough.
Friday, November 21, 2008
Wall Street is ending a volatile week with an unexpected jolt of confidence following reports that President-elect Barack Obama plans to name New York Federal Reserve President Timothy Geithner as Treasury secretary. The major indexes have jumped more than 5 percent, with the Dow Jones industrials surging nearly 500 points.
The U.S. economy's weakness will stretch well into next year, a Federal Reserve official warned Friday.
In the aftermath of the corporate scandals earlier this decade, investor confidence was (partially) restored by a parade of "perp walks" of fallen chieftains like Ken Lay, Bernie Ebbers, and Dennis Kozlowski.
Thursday, November 20, 2008
The $25 billion rescue plan for the auto industry, desperately sought by Detroit's beleaguered Big Three, collapsed Thursday as Congress drew the line at one more bailout and Democrats said they wouldn't even consider it until the companies produced a convincing plan for rebuilding their once-mighty industry.
Chinese carmakers SAIC and Dongfeng have plans to acquire GM and Chrysler, China’s 21st Century Business Herald reports.
This newspaper cites a senior official of China’s Ministry of Industry and Information Technology– the state regulator of China’s auto industry– who dropped the hint that “the auto manufacturing giants in China, such as Shanghai Automotive Industry Corporation (SAIC) and Dongfeng Motor Corporation, have the capability and intention to buy some assets of the two crisis-plagued American automakers.”
The unnamed Chinese government official may be bluffing or floating a trial balloon. If the leak is serious, it is a true sign of the times. Note that Chinese suitors are not necessarily interested in all of the U.S. automakers' business lines, just some of their assets. They are certainly not interested in a unionized workforce.
The U.S.'s creditors are lining up to seize economic prizes as a form of payment for our nation's profligacy. Time to pay the piper.
Here's something big they could try.
Force every ailing firm, regardless of size, to immediately mark all MBS to market. Those that go bankrupt are immediately sold to healthy institutions even if that means a foreign bank or your local firefighters' credit union can buy Citigroup.
Shareholders are completely wiped out. Senior debt holders become new equity holders at 20 cents on the dollar or less. TARP money is used as the equivalent of DIP to keep banks running during reorganization (prevents credit market seizure). FDIC personnel can run the retail outlets even if they have to hire temps (lots of laid-off Wall Streeters can be bank tellers for a couple of months).
Voila. The system is saved. Feel free to quote me.
See, I'm as good of an artist as I am a critic.
Wednesday, November 19, 2008
Wall Street hit levels not seen since 2003 on Wednesday, with the Dow Jones industrial average plunging below the 8,000 mark amid a dour economic outlook from the Federal Reserve and worries over the fate of Detroit's three automakers.
A cascade of selling occurred in the final minutes of the session as investors yanked money out of the market. For many, the real fear is that the recession might be even more protracted if Capitol Hill is unable to bail out the troubled auto industry.
GM's PR campaign of fearmongering is probably no small contributor to today's bleeding. I personally wouldn't mind the collapse of the U.S. auto industry. It will give me the chance to make some short-term profits (if I pull the trigger on some uncovered calls on GM) and some long-term gains (by making widely followed ETFs cheaper to buy if the broader market declines further).
I honestly think the Dow will go to 5000 before it ever gets a chance to go to 15,000. The macroeconomic picture continues to deteriorate. Trying to make an accurate forecast is an exercise in futility, so I'll just stick with broad intuitive guesses.
Nota bene: Anthony J. Alfidi does not hold any position in GM at the time this commentary was published, although he is seriously considering selling uncovered calls before the end of Dec. 2008.
Tuesday, November 18, 2008
American Express Co., Hartford Financial Services Group Inc., Popular Inc. and Synovus Financial Corp. are among at least 80 companies applying for about $61 billion from the U.S. Troubled Asset Relief Program.
Lincoln National Corp. and Aegon NV, owner of Transamerica Corp., may buy savings and loan companies in Indiana and Maryland whose methods were found to be "unsafe and unsound'' by the Office of Thrift Supervision. Hartford is acquiring a Florida lender that was told by the OTS in May to curb lending. Genworth Financial Inc.'s target got a "cease-and-desist'' order tied to potentially fraudulent loans.
Dividing the remaining TARP pool by 80 applicants leaves about $763mm for each firm, assuming it's divided equally among them. It won't be, of course, so a lot of firms are going to walk away disappointed.
Even the usual cheerleaders in the media are growing skeptical of TARP's effectiveness:
Hatched hastily about two months ago, the TARP (Troubled Asset Relief Program) was conceived to stabilize financial markets and restore investor confidence. But now it is looking so amorphous and vulnerable to political trade winds, that it is has become almost a constant of uncertainty.
Treasury's people have said that TARP was intended partly to support healthy firms' forced acquisitions of ailing firms. They never mentioned whether TARP would be used to help insurance firms, formerly among the most scrupulous businesses, acquire criminal enterprises. The future history of TARP will include its transformation into CRAP: Criminal Remuneration Assistance Program.
Here's my potential play: Firms denied TARP money might be useful bearish bets if the market judges them to be incapable of survival. We'll see after the New Year if Uncle Sam's policy of picking winners and losers in finance can generate some alpha.
Monday, November 17, 2008
Yahoo Inc. said Monday that its co-founder and chief executive, Jerry Yang, will step down after the company finds a replacement, following a tumultuous and short tenure that included the company's rejection of an offer by Microsoft Corp. to buy the company.
I mention this because Yang was the sole obstruction to Microsoft's acquisition of Yahoo earlier this year. YHOO closed at 10.63 today, about a third of what MSFT was ultimately willing to pay, so this move obviously leaves the door open to a renewed bid at a much lower price. MSFT has every incentive to renew the offer as Google continues to widen its lead in domestic web searches. Finally, there is no longer an antitrust obstacle to a Microsoft-Yahoo merger now that Google has pulled out of its search ad partnership with Yahoo. Watch this blog for a future special situaton play.
Note to all aspiring company founders: It's not "your" company anymore once you go IPO. If you need a good model of how to exit gracefully after founding and growing a company, look at how Bill Gates gradually wound up his control relationship with Microsoft.
Nota bene: Anthony J. Alfidi does not hold a position in YHOO, GOOG, or MSFT at the time this commentary was published.
Sunday, November 16, 2008
Chief Executive Officer Lloyd Blankfein, 54, and six deputies told the New York-based bank's compensation committee yesterday that they would forgo the year-end awards, according to Lucas van Praag, a company spokesman. Each of the executives receives a salary of $600,000; Blankfein's bonus last year was almost $70 million.
I'll have to eat my words of recent days, as I had gone on record stating that Congressional scrutiny would have no effect on bonuses for bailed-out bankers (scroll down for my most recent writings). Christmas came early for GS's shareholders. Since their net income is on track for a loss in Q4, maybe this bonus suspension will leave enough left over to forestall a dividend cut. The other six execs won't make nearly as much as the CEO's $70mm, so let's say they each would have received $50mm (a generous guess based on their 2007 bonuses) for their outstanding achievements in making Goldman less profitable. Here's my back-of-the envelope estimate:
Dividend as of 11/14/08 = $1.40/share
Shares outstanding as of 11/14/08 = 394.53mm
Total est. dividend payment for 2008 = $552.34mm
Top seven bonuses forgone (wild guess) = $70mm + 6x($50mm) = $370mm
Yeah, I'd say the common stock's dividend is safe through at least Q209. Now I'm wondering: Did Warren Buffett call Lloyd Blankfein and demand that he safeguard Uncle Warren's preferred dividend by giving up these bonuses?
Nota bene: Anthony J. Alfidi holds no position in GS at the time this commentary was published.
JP Morgan, the US investment bank, is drawing up plans to axe thousands of jobs across its worldwide operations, reports The Sunday Telegraph.
Not to be outdone, Citigroup is planning on getting rid of people:
Citigroup Inc plans to shed about 10 percent of its global workforce, a person familiar with the matter said Friday, as the bank tries to return to profitability and faces mounting criticism of Chief Executive Vikram Pandit.
I'm glad I don't work for a zombie bank. What these banks don't realize is that they can't cut costs fast enough to remain profitable ahead of renewed credit problems. Trouble with bad credit card debt is just getting started:
Executives told the Reuters Summit the mortgage-inspired crisis infecting markets will likely be followed by even bigger problems borne out of growing credit card debt.
A credit card collapse would further squeeze the financial sector. Americans had accumulated $971.4 billion in revolving consumer debt at the end of September, up 3.4 percent from the end of 2007, according to the U.S. Federal Reserve.
I'm staying the heck away from these two banks as investments. Their balance sheets are indecipherable and their earnings prospects are extremely poor.
Nota bene: Anthony J. Alfidi does not hold positions in JPM or C at the time this commentary was published.
Saturday, November 15, 2008
Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves "in a big way," the source said.
China's fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson's US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.
China's desire to reduce its exposure to U.S. Treasuries, combined with its recently announced fiscal stimulus plan, spell trouble for Uncle Sam's plan to fund the TARP with new debt. Who will buy that debt if China doesn't belly up to the bar? Not me, unless they pay a whopping yield (15% or more).
Unfortunately, the deflation-fixated Anglo-West continues to misread the global impact of conditions in China:
After a recent visit to China, Nobuyuki Saji, chief economist and equity strategist for Japanese investment bank Mitsubishi UFJ Securities, issued a report warning that China could be on the verge of pushing the world into a deflationary spiral. The problem? Swelling industrial overcapacity, which threatens to undermine prices both for China's exported goods and its imports of raw materials.
Industrial overcapacity is IMHO more of a problem for the West, where labor unions and their political retainers fight tooth and nail for bailouts to stave off retooling. China's political system suffers from no such obstacle. China's fiscal stimulus will, at a minimum, flood consumers' pockets with money in the short term and provide price support for retail goods. Deflation in China is now a much less likely outcome.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls), IAU, and GDX at the time this commentary was published.
Friday, November 14, 2008
Along the way, the Bush administration has committed $290 billion of the $700 billion rescue package.
Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.
This lack of accountability has no doubt emboldended the Treasury Secretary to completely change the direction of TARP:
The original plan was to use the money in the Troubled Assets Relief Program to purchase, as the name suggests, troubled assets, especially mortgage-backed securities. Well, not anymore, Paulson revealed. Instead, the administration decided that buying troubled assets of financial institutions at the current time was "not the most effective way" to use the bailout package.
I am not the least bit surprised that TARP has rapidly evolved into a colossal boondoggle. We get what we pay for.
Wednesday, November 12, 2008
The United States may be on course to lose its 'AAA' rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.John Whitehead, former chairman of Goldman Sachs, has gone public with a similar negative assessment of U.S. solvency:
"Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."
There are at least ten "trillion dollar problems," facing the United States, he said, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.
I bolded that last sentence in his quote. Why has it come to this? Instead of leading the way in preparing the American people for austerity measures and financial realism, our ruling elite and their enablers in the professional caste engage in magical thinking typical of children. The most well-educated and privileged people in our governing class - lobbyists - are engaged in a final desparate grab for largesse:
Of the initial $350 billion that Congress freed up, out of the $700 billion in bailout money contained in the law that passed last month, the Treasury Department has committed all but $60 billion. The shrinking pie — and the growing uncertainty over who qualifies — has thrown Washington's legal and lobbying establishment into a mad scramble.
The Treasury Department is under siege by an army of hired guns for banks, savings and loan associations and insurers — as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages.
A sovereign debt default will probably spur the U.S.'s main foreign creditors - China, Russia, and sovereign wealth funds in Asia and the Middle East - to demand enormous financial concessions from the U.S. government. These entities may be willing to renegotiate payment terms if Uncle Sam accedes to putting their interests first, ahead of the American people. That could mean a number of things . . .
- Cuts in federal discretionary spending to ensure debt payments will be made without delay. Imagine: no space program, no school lunches, no farm subsidies, no state disaster aid, no SBA loans, and basically no more goodies for all kinds of constituencies.
- Cuts in military commitments that encroach upon on our creditors' regional spheres of influence.
- Cuts in middle class entitlements (ouch, the most painful one). Bye-bye Social Security and Medicare for the Baby Boom generation, starting in 2009.
Think I'm being alarmist? We'll find out soon enough (probably by the end of 2009) whether the U.S. addiction to debt will result in the "nuclear option" of the destruction of our superpower status via a Sovereignty Crunch. The only possible silver lining is that forced austerity will trim the fat from America's welfare state and force our people to become as self-reliant and hardy as our ancestors on the frontier. One can only hope.
Maglev is a promising technology, but this particular application has some flaws. The advantage of train travel is moving large numbers of people in a single carriage to a station, either intracity or intercity; mixing this mode with a car's point-to-point modality will cause problems. An automobile can move around another parked or stalled car, but a SkyTran pod is confined to one track. Also, it looks like their initial target market is airport transit. Why would someone need web access and personalized entertainment in a two-person carriage for a ninety second ride from one end of SFO to the other? I don't see the advantage.
Furthermore, maglev depends upon the availability of superconducting materials in sufficient quantities to make laying large amounts of track commercially viable. Using materials like pyrolytic carbon to lift a train off maglev track requires rare earth elements like neodymium for the track's magnets. There isn't enough of that stuff to go around to supply all of the PDAs, cell phones, and thin-film solar cells in the world and still have enough left over to lay SkyTran track door-to-door in every major city. Next generation solar companies in particular, like First Solar, will have a heck of a time finding the supplies of rare earth metals they need. A lot of tech entrepreneurs miss the significance of natural resource constraints!
I personally think maglev trains have enormous advantages over current high-speed rail technology, as long as they're used the way rail has always been used: moving lots of people between large nodes. Maglev trains have fewer moving parts to maintain and the frictionless tracks exhibit little or no wearout from wheel contact. The maglev industry can be viable if it can find a widely available base material to power its superconducting tracks. Perhaps nanotech applications in material science can deliver what our civilization needs.
I personally would not invest my money in the SkyTran concept.
Shareholders of Anheuser-Busch Cos. Inc. on Wednesday approved the $52 billion sale of the nation's largest brewer to Belgium-based InBev SA, a deal that is set to create the world's largest brewer.
My play: This is a merger-arbitrage special situation. I sold Jan 10 puts (the longest time horizon available) on BUD at 30. Why am I betting that BUD won't drop to that level even though the U.S. market is in serious bear territory? Because this is an all-cash offer at $70/share; because InBev has the cash on hand right now; becuase the shareholders of both companies have approved the deal; and because BUD hasn't touched 30 (adjusted) since June 2000. This fully funded all-cash offer has supported BUD's share price throughout the volatility of the past several months, and I believe my short options will expire worthless by the end of this year when the merger closes.
Normally I would have sold uncovered calls on BUD at a price above 70, but those have disappeared by now. I went with Plan B to get a little bit of cash.
Nota bene: Anthony J. Alfidi holds short puts on BUD at the time of this commentary's publication.
Tuesday, November 11, 2008
U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don't want executives' bonuses reduced. They want them eliminated.
The article quotes numerous outraged Joe Schmoes who are aghast that the blank check their elected officials handed to Wall Street was used for unintended purposes. My question to the newly outraged: Did any of you exercise your Constitutional right to petition your elected representatives to oppose the bailout legislation? Or were you spooked into acquiesence by the volatility you were seeing in your IRAs?
I wrote about this misuse of bailout money on Oct. 29, and not just because I happen to know something about how our government spends money. If bonuses have already been paid the government would probably have to launch criminal probes to recover any money. Bonuses that remain to be paid would have to be impounded by federal regulators to ensure compliance with the bailout law. I just don't see any of that happening. What's done is done. The taxpayer got the hosing he deserved for believing Secretary Paulson's sales pitch.
Monday, November 10, 2008
China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world's fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession.
I've argued before how China's neofeudalist economic structure (Communist in name only) enables their elites to make effective decisions faster than U.S. elites. The bad news for the U.S. is that all of the reserve money China is spending on infrastructure will not be available to buy new issues of U.S. government debt. I'm so glad to be a long-term investor in China.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls) at the time this commentary was published.
Circuit City Stores Inc. filed for bankruptcy protection on Monday heading into the busy holiday season as analysts question whether the nation's second-biggest electronics retailer will be able to survive.
I don't think I ever shopped there. The article makes a point to recognize that CC's sizable DIP financing is positive in the eyes of vendors, but I'm not sure how valuable that is if consumers aren't spending. We can expect to see a lot more retail chains to be hurt badly by Great Depression 2.0. Many will disappear, never to return.
Nota bene: Anthony J. Alfidi does not hold (nor has he ever held) any position in CC.
Sunday, November 09, 2008
Saturday, November 08, 2008
Big universities having very little in bonds? It's not that hard to match expected income (bond interest) to projected liabilities (tuition and operating expenses) one or two semesters out. Thanks a lot, Dave Swensen. The Yale model was innovative, but outsourcing much of your strategy to multiple managers invites trouble. Funds-of-funds that charge fees-of-fees are neat conversation pieces at cocktail parties but not good for much else. There's only so much investment talent to go around, you know.
No wonder Sequoia Capital told its portfolio companies not to count on cash infusions from here on out. They probably had advance warning from endowments that the check would be a few quarters late, if it arrived at all.
I guess someone will have to break the bad news to the preppies at these schools that there will be less foie gras and more grilled cheese sandwiches in the dining halls. Boo hoo.
I still like Dave Swensen's overall concept, but its execution by endowment managers has been flawed. Endowment CIOs simply have too much faith in multilayered teams of investment managers. Mr. Swensen has also argued that the more intermediaries you place between a client and his money, the less value you add as a portfolio manager. Warren Buffett is able to make a multi-strat approach work because he looks at his portfolio selections as capital infusions into real businesses and not slices of statistically non-correlated asset classes.
There's a lesson here for aspiring portfolio managers. Think like a corporate treasurer or operations manager when you make investment decisions.
The Fed staff planned to recommend that Bloomberg's request be denied under an exemption protecting ``confidential commercial information,'' according to Alison Thro, the Fed's FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn't subject to the freedom of information law.Since I'm not an attorney, it's hard for me to say whether the Fed has legal grounds to deny an FOIA request. The Fed may be able to delay a response indefinitely or, in the finest traditions of government service, simply issue heavily redacted pages from its balance sheet. The assets could thus be revealed while banks' account numbers are blacked out. That in itself may be fairly revealing; assets named according to certain SIVs or mortgage pools would be easily traceable to their parent institution anyway.
The Fed is obviously fighting revelation because the assets are garbage. If they were worth something, the Fed wouldn't be so afraid of disclosure. I wouldn't be surprised if banks dumped their worst assets on the Fed and kept the best assets to shore up their own balance sheets. The relevant question to ask now is what the Fed plans to do if the collateral it has accepted becomes completely worthless. Will it call in its TARP loans, or just write them off? (Hint: Write offs would be a stealth means of running Helicopter Ben's printing press.)
Meanwhile, I'll be hanging on to my gold, thank you very much.
Friday, November 07, 2008
Take a look at the latest results from one of the mack daddies of private equity investing, the Blackstone Group:
The Blackstone Group said Thursday that it lost $502.5 million for its third quarter, a sharp reversal from last year as the private equity firm’s investments were buffeted by the market turmoil that swept the world.
I generally agree with Blackstone's contention that mark-to-market rules shouldn't be applied to private equity firms, but the problem here is that Blackstone surrendered its right to call itself a "private" firm when it went IPO last year. Sorry, guys, but if you want access to the capital markets you have to live with transparency and all of its disclosure requirements.
They're not the only private equity firm in trouble. Cerberus is grasping at straws for a way out of its malinvestment in GM and Chrysler:
Cerberus is weighing a plan to distribute its GMAC stake to investors in its private-equity funds, according to the people, who declined to be identified because the deliberations aren't public. The tactic, one of several options under discussion, may enable Detroit-based GMAC to become a bank and get funding from the U.S. Treasury and Federal Reserve without subjecting Cerberus to banking regulations.
Maybe Cerberus learned something from Blackstone's headaches with mark-to-market accounting. Treating GMAC like a bank will make it subject to accounting rules for publicly held companies without exposing the rest of Cerberus' holdings to forced writedowns. Pretty crafty, guys, if you can pull it off.
Private equity ventures are yet another casualty of excessive leverage. Too much liquidity was force-fed into deals that shouldn't have been executed. I intend to eventually engage in private equity transactions via Alfidi Capital LLC, but I've learned my lessons from the problems above. My firm will never go IPO, borrow several multiples of its earnings, or give up control of its holdings in exchange for government assistance. My private deals will be just that: private.
Thursday, November 06, 2008
Retailers suffered through the weakest October in at least 39 years, despite frenzied price cutting as they desperately try to pull in consumers who are too worried about their finances to shop.
The problem is that the most widely traded ETFs covering retailers aren't good pure plays for short-term special situation investing.
SPDR S&P Retail (XRT): Holds Family Dollar (FDO) and Sears (SHLD), which aim for a thriftier clientele.
iShares Dow Jones U.S. Consumer Goods (IYK): Holds a lot of consumer staples like Coca-Cola (KO) and Colgate-Palmolive (CL).
iShares Dow Jones U.S. Consumer Services (IYC): Holds Wal Mart (WMT), which is doing okay given its position as a low price leader.
All in all, the choices for a retail ETF aren't as clear cut as for the Financial Select SPDR (XLF) I used earlier in the year for a bearish bet against Wall Street. Banks and brokerages were both hurt in the credit crunch, but the same can't be said for widely diverse discount retailers and specialty retailers. Buying a put or selling uncovered calls against retail ETFs is too risky, so I'm not playing it.
Thinking about situations like this leads me to conclude that many ETFs just shouldn't exist in the first place. Benchmarks like the S&P 500 and the Russell 2000 are useful because they are broad and not subject to large, frequent changes. ETFs that slice and dice markets into too-small segments, like consumer retail, are mere marketing gimmicks.
Nota bene: Anthony J. Alfidi does not hold any position in the consumer retail ETFs mentioned in this commentary.
Wednesday, November 05, 2008
Tuesday, November 04, 2008
Investors believing that Wall Street is on the verge of a yearend rally piled into the market Tuesday, brushing off more weak economic data while they scarfed up stocks and propelled the Dow Jones industrials up 300 points to its highest close in four weeks.
I've said it before, and I'll say it again. Recent economic data does not support this kind of optimism. Today the U.S. Commerce Department has reported two straight months of declining factory orders, worse than the forecast. Yesterday the ISM manufacturing index declined for the third month in a row. What gives?
Maybe investors are hoping that President Obama (I'll go ahead and predict his victory) will start paying their bills. This woman obviously thinks he will:
"The market can stay irrational longer than you can stay solvent." The lady above is irrational but thinks she will now be guaranteed solvency. Welcome to insolvency, America.
Monday, November 03, 2008
The U.S. Treasury more than tripled its planned debt sales for this quarter to help finance a 2009 budget deficit that bond dealers advising the department estimate may swell to almost $1 trillion.
The worsening credit crisis and sluggish economy are straining the country's finances and will leave the winner of tomorrow's U.S. presidential election facing the worst budget shortfall on record next year. The Treasury is scheduled to announce in two days plans to expand debt sales to fund the gap.
I first predicted a steeper yield curve last month when I assessed the long-term impact of moving Fannie and Freddie debt onto the U.S. government's balance sheet. This was even before the bailout ballooned the coming supply of Treasuries:
Even as Ben S. Bernanke cuts borrowing costs to 50-year lows, taxpayers will likely be paying ever increasing interest rates on U.S. debt.
The next president may find foreign investors, the biggest creditors to the U.S., unable to absorb a growing supply of Treasury bonds as the financial crisis prompts nations to invest in their own banks and currencies. That would drive up yields just as a widening budget deficit pushes borrowing needs to a record $2 trillion, according to estimates by Goldman Sachs Group Inc. and Wrightson ICAP LLC.
My play: I'm not buying long-term T-bonds until yields are well over 15%. I'm not a conservative investor, but new-issue bonds with double-digit coupons are a once in a lifetime event. Unrealistic you say? Just wait until early 2010. The cash flow from these ginormous yielding bonds will fund my purchases of radically cheap equities by then.
Sunday, November 02, 2008
The Treasury Department has turned down a request by General Motors for up to $10 billion to help finance the automaker's possible merger with Chrysler, according to people close to the discussions.
Instead of providing new assistance, the Treasury Department told GM on Friday, the Bush administration will now shift its focus to speeding up the $25 billion loan program for fuel-efficient vehicles approved by Congress in September and administered by the Energy Department.
The message is clear: Use the loan money as intended to revamp your product line with smaller, fuel-efficient cars. The only problem is that mercantilist policies like this risk retaliation from our trading partners. Remember that the Smoot-Hawley tariff was a major factor in prolonging Great Depression 1.0. Let's not overdo things with a repeat.
Saturday, November 01, 2008
China's cabinet has pledged extra infrastructure spending to stimulate the world's fourth-biggest economy amid the global slowdown. The government has already lowered rates three times in the past two months, increased export rebates and cut property transaction taxes.
China's one-party rule enables a much faster decision cycle than the West's ponderous decision-making. China has no difficulty deciding to rapidly cut interest rates or push fiscal stimulus. If the US is to compete effectively after Great Depression 2.0 eviscerates its global leadership, it will have to find a way to streamline the way it executes macroeconomic policies.
Might I be so bold as to offer a suggestion? Fiscal policy would be more effective if the US jettisons its cumbersome income tax code for something simple - say, a flat tax on income and a national value-added tax on retail sales. Adjusting a flat tax up or down is politically simpler than crafting tax bills loaded with special perks designed to micromanage business activity.