Saturday, January 31, 2009

The Haiku of Finance for 01/31/09

Numbers not revised
What looks like a bad decline
Will look worse later

More Bad Figures, and They're Not Even Revised Yet

I don't need any more confirmation of bad economic conditions, but some Wall Street permabulls certainly do. Read the numbers and weep:

The 3.8 percent annual pace of contraction in the fourth quarter was less than forecast, with a buildup of unsold goods cushioning the blow. Excluding inventories, the decline was 5.1 percent, the Commerce Department said yesterday in Washington.

Enough has been said in the blogosphere about how the inventory buildup made the GDP decline seem less precipitous than expected. Most of the Street's traders only see the headline number anyway before they execute. Wait until the Commerce Dept. revises these numbers down in the months ahead. The markets will finally get the message by Q209.

The economy isn't just going down the tubes. It's in the sewer and headed straight for the ocean.

Nota bene: Anthony J. Alfidi is short calls on SPY and IWM.

Friday, January 30, 2009

The Haiku of Finance for 01/30/09

Bad bank idea
Shove assets at Uncle Sam
Make him pay for them

News Flash: Future Preppies Get No Bonuses

Public outrage at Wall Street greed is rising. The taxpayer is only going to put up with so much theft before it becomes impossible to ignore. More analysis points to the need to rein in unjustifiable bonuses:

The Wall Street bonus, considered a sacred ritual, may become the industry’s biggest casualty as governments worldwide bail out financial institutions.

The current system of “asymmetric compensation,” in which people are rewarded when they do well and aren’t required to return the rewards when they lose money, is detrimental to society and needs to change, said Nassim Taleb, a professor at New York University and author of “The Black Swan: The Impact of the Highly Improbable,” in an interview.

I'd like every financial employee to have a clawback provision in their employment agreement. I'll even do them one better: How about multi-generational clawbacks? In other words, if you're the progeny of someone who has worked in finance or real estate and you are responsible for a screw-up, the clawback applies to your rich mommy and daddy's income! Brilliant! Maybe ruling class parents would be dis-incentivized from pulling strings to land their kids six-figure jobs if they knew they'd be personally liable for their brats' non-performance. Yeah, I know, it probably won't fly under Anglo-Saxon common law. I would just love to see people hired for their looks or bloodlines get in trouble with their parents for the lack of competence they display on the job. I long ago had my fill of well-pedigreed fools. No one ever handed me a thing.

The one good aspect of the coming nationalization of American finance is that do-nothing preppies will hopefully no longer be rewarded for merely walking in the door with Daddy Warbucks' connections. They'll actually have to work for a living, and a meager one at that (by Wall Street standards).

Thursday, January 29, 2009

Wednesday, January 28, 2009

The Haiku of Finance for 01/28/09

Hedgies go for gold
PE plans to cut head count
All in a day's work

Greenlight Capital Jumps on Gold Bandwagon

I kind of like David Einhorn, a hedge fund manager. He's honest enough to publicize accounting fraud and bet his own money accordingly through his firm Greenlight Capital. He's once again putting his money where his mouth is, this time regarding gold:

Greenlight said in the letter that in addition to buying gold, it has added call options on gold and the Market Vectors Gold Miners exchange-traded fund to its other investments.

The Federal Reserve’s policy of taking unorthodox steps to boost the supply of credit is essentially “printing money,” Greenlight said. The government’s “aggressive” fiscal policy also signals all efforts will be made to stem the effects of the current economic problems, the fund said.
I couldn't agree more with their rationale. Greenlight is even betting on GDX and its options. That's similar to the gold strategy I've been using since last year! Woo hoo! I called it first! Okay, enough celebrating.

This will likely start a trend among hedge fund managers who survive the shakeout. A lot of hedgies have run out of ideas after their magical multivariate algorithms have blown up their returns, so they'll start gravitating to the one asset class that has been ignored by the debt bubble: GOLD. The stampede will start this year. Thanks, David. Let's do lunch.

Nota bene: Anthony J. Alfidi is long IAU and GDX (both with covered calls).

Private Equity Prepares for Economic Annihilation

Private equity investment partnerships have enjoyed quite a run this decade, much like venture capitalists in the 1990s. Debt-driven corporate reorganizations look great in bull markets but are harder to pull off when credit gets tight. Things may soon get even harder:

The industry uses borrowed money to make leveraged buyouts of companies, improves their operations and sells them back to public investors at a profit. Private-equity firms are facing the gravest crisis in their 40-year history after the credit bubble they helped inflate burst.

Unfortunately Bloomberg isn't specific on how PE firms will be economically annihilated. Here's a little exposition. A bear market for equities means there are very few exit opportunities for restructured private firms, so PE partnerships have to fund debt repayments from limited cash flows instead of with a huge lump from an IPO. The share prices of publicly-traded PE firms like Blackstone and Apollo have seen massive haircuts since their peaks in mid-to-late 2007. The principals of some well-known PE firms can see the handwriting on the wall:

At least two private equity veterans at the World Economic Forum, Joseph L. Rice III of Clayton Dubilier & Rice and David M. Rubenstein of Carlyle Group, said at the time that the era of giant leveraged buyouts was over, at least for the moment — and indeed, buyout deals topping the $1 billion mark were extremely rare in 2008.

A lot of "highly talented" people in PE firms that didn't want to look at my resume are going to be unemployed soon. The coming PE bloodbath will also change the politics of your financial advisor's branch office. It knocks one more leg out from under wealth management firms' fixation on "alternative investments," all highly-leveraged versions of a black-boxed promise to outperform good old-fashioned buy and hold investing. Remember hedge funds? They were supposed to provide absolute returns and "portable alpha" through thick and thin until they imploded from one-sided bets or Madoff-style Ponzi fraud. Don't worry, your broker will find something else to push on you in a bear market. Watch out for anything charging a premium for a low "downside capture" ratio.

Private equity as a prepackaged product for the HNW brokerage channel will disappear, but private equity as an investment style will always be around in some form. It will simply revert to its roots in limited partnerships that execute small and mid-sized turnarounds in local markets. Just pick your partners carefully. I certainly will.

Nota bene: Anthony J. Alfidi has no holdings in BX, AINV, or any private equity fund at this time. He is of course actively looking for private equity exposure. General partners are welcome to contact him. Carlyle Group, this means you, because defense technologies are well understood at Alfidi Capital.

Tuesday, January 27, 2009

Some Thoughts on Warren Buffett and Useful Lifetimes

Uncle Warren has been getting a lot of knocks in the press lately for the lackluster short-term performance of Berkshire Hathaway. This article is typical of the assault:

As I wrote almost a year ago, Warren Buffett is justifiably revered by investors around the world, and I consider myself one of those who have worshiped at his investing altar over the past three decades. Nevertheless, from my perch, Buffett's salad days seem to be over; the only question that remains is the timing and to what degree investors will abandon the Oracle of Omaha.

In defense of Uncle Warren, his entire investing lifetime has taken place in an era of rising corporate and government debt when Keynesian thought dominated economics in the OECD nations. Even with his aversion to buying debt-laden companies, he could not have expected the secondary effects on his portfolio of the implosion of a debt-laden economy.

Addressing an individual's investing lifespan is a useful heuristic. People in the modern era really only have about four decades to build wealth, starting in their early twenties when they enter the adult workforce and ending with their retirement in their sixties. Those four decades provide limited opportunities for learning when macroeconomic interventions try to smooth out troughs. Perhaps a few more sharp recessions in the port-WWII era would have done us all some good by discouraging recklessness.

I'm 35 years old. Uncle Warren started to make a name for himself as an analyst and portfolio manager at about the same age. He had access to great minds like his father and Benjamin Graham from a very early age. I have access to the wisdom he has offered since then, building upon what he learned from his masters. If I remain healthy and avoid traffic accidents I should have more than four decades remaining to accumulate wealth and apply whatever wisdom I possess.

School is in session, and I'm taking notes. They're on this blog in case you want to read them.

The Haiku of Finance for 01/27/09

Not time to go long
Big shots still talking up stocks
Too much hope at work

Stocks Get Delusional While Consumers Get Sad

In case you haven't heard, Mr. Market is a schizophrenic nutcase. He can drive stock prices up even in the face of really bad news:

The major indexes briefly stumbled after the Conference Board said its Consumer Confidence Index in January slipped to its lowest level since the reading's inception in 1967. The report indicated that consumers, who have already cut back drastically, are likely to remain reluctant to spend in the coming months.

If you're like me, and you view share prices as something you pay for future earnings, then the market's recent moderate advances make no sense. Why pay higher prices for earnings when consumers have very little hope of contributing to those earnings with their spending? I'll hazard a guess that too many people are listening to analysts who are calling a market bottom.

Consumers are at their most pessimistic - ever.

Banks are at their most insolvent - ever.

I'm not going long this market - ever? Well, not forever, but certainly not now.

Monday, January 26, 2009

The Haiku of Finance for 01/26/09

Neo-feudal life
Limits on growth, wealth, and style
Line up for your share

Psychological Prep for Bank Nationalization Has Begun

The Grey Lady is floating a very significant trial balloon:

The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.

I think it's darkly humorous that the first sentence describes a "brief" nationalization as lasting years. If only Great Depression 2.0 would be that brief.

The NYT would not have published this article unless nationalization was the most likely next step. The public has to be psychologically prepped in advance to prevent them from panicking. The article provides a fair analysis but doesn't go far enough. There's no mention of how the nationalization will be funded, but the answer is obvious to those with eyes to see. The Fed will continue to create new currency to buy bad bank debt, which will eventually seep into the economy as extraordinarily high inflation.

The brand name banks we've known for many years will either cease to exist or be transformed into something we won't recognize as banks. Every lending decision and underwriting offer will be heavily politicized from now on, which means that capital allocation decisions in the United States will be subject to brand new criteria. Money will flow to corporations and municipal projects based not on risk/return assessments but on patronage and redress of constituent grievances. Americans, like ancient Romans, have finally voted themselves the Treasury.

Many of the same "highly talented" people who got their banks into trouble will still be running the new entities, just for a lot less pay. Their new compensation will come largely in the form of vassal/patron relationships: invitations to participate in high society, political rewards, and the like. Anyone who aspires to upward mobility must take note of this new class arrangement. Maybe neo-feudalism won't be so bad once we get used to it.

I'm still short calls on XLF because I doubt that the government will be able to recapitalize banks' capital bases at much higher share prices than we see right now. I'm still long IAU and GDX (with covered calls), because I intend to survive inflation and emerge wealthy.

Sunday, January 25, 2009

The Haiku of Finance for 01/25/09

Corporate raider
Keeps management on their toes
Deters fraud and waste

Carl Icahn, Role Model

Alfidi Capital salutes fellow non-preppie made good, Carl Icahn, for his relentless assault on stupidity in business:

Activist investor Carl Icahn stepped up his battle against Steel Partners on Friday when he urged other investors to join him in opposing the hedge fund firm's recently announced plans to go public.

The lawsuit said Steel Partners was trying to turn its main fund into a publicly traded company instead of selling assets to return the money that investors had demanded to get back late last year when the fund suffered heavy losses.

I like Carl Icahn for several reasons. One, he invests in railcars, a transportation-related industry vital to the economy. Two, he's declared war on hedge fund chicanery. Three, he dislikes preppies as much as I do. Preppy hedge fund managers mistakenly think that clients' money is really their own money, which is why they feel no need to honor redemption requests. Finally, Carl Icahn is a financial blogger just like me. You can read his musings on shareholder activism at The Icahn Report, which I've added to my blogroll at the right.

Here's to you Carl! I'll raise a virtual negroni in your honor.

Saturday, January 24, 2009

The Haiku of Finance for 01/24/09

Good loans that go bad
Weren't so good after all
Good for my short sales

Phoney and Fraudie Suck Your Wallet Dry

Those two fantastic twins, Fannie Mae and Freddie Mac, are at it again. They just can't get enough of Uncle Sam's unlimited wallet:

Freddie Mac, the mortgage-finance company under federal control, needs as much as $35 billion more in federal aid, and Fannie Mae may soon ask the U.S. Treasury Department for rescue funds as well.

I'll spare you the details, but it's clear that their exposure to bad home mortgages is getting larger. There is no end to this in sight. If these two pathetic excuses for finance companies can't be straightforward enough to identify their full exposure to junk mortgages, then other firms can't be far behind.

Take a look at the banks that seem to be successfully navigating the Alt-A implosion, specifically JPMorgan and Wells Fargo. There is no reason to believe that their risk management techniques are any more robust than those of Merrill Lynch or WaMu. They all hire from each other! The same moronic, preppie MBAs hop from firm to firm with their "talent" for massaging turds into gold bricks.

Merrill Lynch and WaMu dissolved partly because they had a weak handle on their true exposure to bad loans. JPMorgan in particular will now have to take a "one-time" charge (who really believes it's just once?!), as the article specifies further down, as a result of WaMu's misrepresentation of the quality of the assets it sold to Freddie. Auditors at JPM and WFC will be very disturbed this year when a lot of their "prime" mortgages are revealed as garbage.

My decision to turn bearish again on XLF is fully justified by the above. Stay tuned for more bloodletting.

Friday, January 23, 2009

The Haiku of Finance for 01/23/09

Preppies born to fail
Too clever for their own good
I laugh and cash in

Greedy Preppies Are Born to Fail

Here's a follow up comment to my post yesterday about John Thain's greed at Merrill Lynch. Wall Street just doesn't get it:

"You've always had this Wall Street ethic of, I'm going to push the rules as far as I can. That's been part of the culture," said R. Edward Freeman, academic director of the Business Roundtable Institute for Corporate Ethics and Olsson Professor of Business Administration at University of Virginia's Darden School.

The long hours many bankers work help feed an attitude of entitlement, Freeman said.

The spoiled brats who run the investments in your retirement account will never stop trying to take your money. They've been raised to believe that they are superior to the rest of us financially, physically, and morally. The work ethic is an expression of separateness and distinction from the hoi polloi more than a desire for reward. More insights from the same article:
"Thain is a symbol of the species. It's a breed that I think is going to have to change its habits, at least for a time," said James Post, a management professor at Boston University. "We have lots of students who wanted to work on Wall Street. That lifestyle is not going to be there for most of them, if not all of them, for many years to come."

Unfortunately the professor doesn't dig deep enough for the real answer. I don't know if he's ever worked on Wall Street, but he should try to study this species up close instead of remaining detached.

I'll always be honest. I envy preppies for the numerous advantages that pedigree and family connections provide. It's too bad that these fools decided collectively that people like me aren't "qualified" to work on Wall Street, because my application of honesty and common sense may have helped prevent their firms from imploding. No guarantees here, just an offer of charity.

Attention preppies: The academics above are correct that the lifestyles you were raised to expect by your parents and prep school headmasters are definitely gone for at least half a generation. That is your karmic punishment for failing to include people like me in your career paths and social circles. Meanwhile, the next generation of low-cost entrepreneurs (including yours truly) is building enterprises to capture all of the wealth you're going to miss. You will not be invited to our IPO parties, which is fair because the investment banks you've ruined with your greed aren't solvent enough to participate in the underwriting.

Thursday, January 22, 2009

The Haiku of Finance for 01/22/09

Greed has won again
Bailout cash for bonuses
Stolen from Merrill

Bailout Thieves at Mother Merrill!

Somebody at BofA (Ken Lewis?) did the right thing by booting this looter:

John Thain resigned under pressure from Bank of America on Thursday after reports he rushed out billions of dollars in bonuses to Merrill Lynch employees in his final days as CEO there, while the brokerage was suffering huge losses and just before Bank of America took it over.

Wow. What a surprise. Somebody who promised both the government and the investing public that he would use taxpayer dollars to shore up Mother Merrill's balance sheet instead threw the money out the window. That's $3 or 4B gone. GONE.

The bailout money that YOU gave to YOUR government has been stolen. The perpetrators are walking away with golden parachutes.

Nota bene: Anthony J. Alfidi no longer has any position in BAC.

Tuesday, January 20, 2009

The Haiku of Finance for 01/20/09

Financial woe comes
Banks wonder where profits went
Hint: Shorts looking good

Uncovered Calls Refreshed as Financials Drag Down Markets

The broad markets have begun their next leg down, led by financial stocks:

Financial stocks, many of them falling by double digit percentages, led a huge drop on Wall Street Tuesday that left the major indexes down more than 4 percent and the Dow Jones industrials down 332 points.

The collapse in bank stocks was swift: State Street Corp. plunged 59 percent, Citigroup fell 20 percent and Bank of America lost 29 percent. Royal Bank of Scotland fell 69 percent in New York trading.

The financial sector (with XLF as the proxy I track) is still getting hammered, with nationalization only a matter of months away:

Many experts believe Obama's administration will have little choice but to pump more money into the banking sector or create an entity to buy banks' soured assets such as subprime mortgages so they'll start lending again.

Both moves would signal a dramatic increase in the government's involvement in the banking sector, possibly threatening shareholders whose holdings could be wiped out in the event of a government takeover.

Even financial firms that previously claimed they could remain healthy are now reporting significant losses:

State Street Corp and Bank of New York Mellon Corp reported substantial losses on investments and sharply lower profits on Tuesday, and investors pummeled shares of the giant institutional money managers.

My estimates of further pain for the banking industry are proving correct. I'm glad I went bearish on XLF again. It didn't net me as much cash as I'd hoped, but it's the thought that counts.

Nota bene: Anthony J. Alfidi holds uncovered short call options on SPY, IWM, EFA, VWO, and XLF.

Monday, January 19, 2009

The Haiku of Finance for 01/19/09

Euro banks folding
Nationalize their holdings
U.S. right behind

Renewing Bear Bets Against Banking

I've renewed my bearish strategy against XLF, and this article on European sentiment helps to explain why I think it's a good move:

European stock markets fell Monday with banks in free fall as investors fretted over a second British government bailout of the sector in three months and some predicted that cash-strapped Royal Bank of Scotland Group PLC would end up fully nationalized.

Eurobanks are hurting as much as their U.S. counterparts. U.S. markets are closed today for the Dr. Martin Luther King Jr. federal holiday, so the short trade I've set on XLF calls will execute tomorrow. The problem now is that bearish sentiment has taken a lot of the premium out of XLF's call options. This strategy probably won't generate as much of a payoff for me this year as it did in 2008. Hey, I'll take what I can get.

Nota bene: Anthony J. Alfidi holds uncovered call options on XLF in the expectation that the price of this ETF will not rise more than 15% within the next month or two.

Saturday, January 17, 2009

The Limerick of Finance for 01/17/09

TARP is a waste of good money
Which I don't think is very funny
It's too late to stop
The markets still drop
And bankers walk off with the honey

The Haiku of Finance for 01/17/09

Endless TARP money
Thrown at bad banks like crazy
It's out of control

Friday, January 16, 2009

The Haiku of Finance for 01/16/09

Bad banks lose money
They can't deny the losses
Markets punish that

Bad Bank Citigroup Gets Spanked

When your child misbehaves, spanking is an appropriate punishment. When a bank misbehaves, the economy is supposed to punish it by denying it business. Citigroup is getting spanked hard:

After losing more than $28.5 billion in the last 15 months, including $8.29 billion in the fourth quarter, Citigroup said on Friday it would divide itself into one business focused on commercial and retail banking, and another on brokerage, retail asset management, consumer finance and troubled assets.

A spanked child is supposed to learn a lesson about good behavior. If your kid told you that not only would he refuse to change his behavior but would create an invisible alter-ego upon which he could blame his bad behavior, you'd be perfectly jusitified in sending Junior to a shrink. When Citigroup engages in that kind of behavior, the market sends its stock into a tailspin:

Citigroup Inc. shareholders aren’t buying Vikram Pandit’s attempt to salvage the bank by splitting it in two. Nor are they buying the stock.

After initially rallying 17 percent yesterday on news of Pandit’s planned reorganization, Citigroup shares fell, closing down almost 9 percent at $3.50. At that level, it’s below the $3.77 it dropped to on Nov. 21, when the bank entered talks with officials from the U.S. Treasury Department and Federal Reserve over a second round of rescue funds.

Tough love sends a message. How about that.

Thursday, January 15, 2009

The Haiku of Finance for 01/15/09

More bad bank bailouts
So what to do about it?
Short the financials

More Bailouts, Ho-Hum

Get ready to pay bad banks even more of your money:

The move to provide more money for Bank of America would support the growing consensus among financial experts that Treasury's bailout program so far won't be enough to stabilize banks reeling from bad mortgage loans and falling home prices. As the recession deepens, consumers and businesses are increasingly defaulting on other loans, such as those involving credit cards and commercial real estate, analysts say.

"Will we need TARP 2.0?" asked Vincent R. Reinhart, former director of the Federal Reserve's monetary affairs division. "The first half wasn't used effectively, so we're certainly going to need the second half. But it probably won't be enough."

The silence that greets the likelihood of even more bailouts after the TARP has been emptied is like "the dog that didn't bark" in one of Sherlock Holmes' mysteries (which one, I don't know or care). People just don't care anymore. That means another TARP will happen, probably by Q209.

I'm definitely going to start shorting financials again very soon.

Wednesday, January 14, 2009

The Haiku of Finance for 01/15/09

Asian bond bubble
Inflated with guarantees
Just like the U.S.

Bond Bubble-Mania Spreads From U.S. to Asia

If you thought Asian bond investors couldn't be as fearful as their American counterparts, think again. Asian governments and corporations are as desperate to raise money as those in the U.S.:

Bond markets in the Asia-Pacific region are having their busiest January for at least a decade, with $32.3 billion in sales, as government guarantees and stimulus plans help boost investor appetite.

It is highly ironic that, for all of the scorn that foreign observers have heaped on the U.S. for instigating the housing bubble, other governments are now copying the same flawed macroeconomic solutions the U.S. is using to find a way back to economic health. Everybody is guaranteeing bank deposits for the indefinite future, among other unsustainable things.

The real test of whether Asian bond markets will spawn a bubble will come if the spread of corporate bond yields over government bond yields widens past 100bps as it has in the U.S. Government safety guarantees and massive new issues are finally heralding the "crowding out" effect long theorized by bond market academics. The only unforeseen twist is that the crowding out has gone global.

My play? I'm staying away from Asian bonds!

Tuesday, January 13, 2009

The Haiku of Finance for 01/13/09

Ben revving engines
Dropping money into banks
Helicopter cash

Helicopter Ben Revving Engines

Here is confirmation from Ben's own mouth of what I've been anticipating for months:

Federal Reserve Chairman Ben S. Bernanke warned that a fiscal stimulus won’t be enough to spur an economic recovery and that the government may need to buy or guarantee banks’ tainted assets to revive growth.

Forget about relief for beleaguered homeowners. They will stay underwater on their mortgages while Helicopter Ben drops more dough into bank balance sheets. Banks win, people lose. Score one for the ruling elite.

The Great Re-Inflation of 2009 is underway from two fronts: Fed loans to banks and fiscal spending for poorly planned infrastructure improvements. How am I playing this? Gold.

Monday, January 12, 2009

News Flash: Alfidi Capital Gives the Finger to Wall Street

This is hot off the presses. Finger length is a factor in financial success:

The length of a man's ring finger may predict his success as a financial trader. Researchers at the University of Cambridge in England report that men with longer ring fingers, compared to their index fingers, tended to be more successful in the frantic high-frequency trading in the London financial district.

The good news is that my ring fingers on both hands are longer than my index fingers, so apparently my fetal exposure to androgen leads me to tolerate higher risk and display more confidence. The bad news is that long ring-fingered financiers can be hampered when engaging in more analytical, long-term approaches. Most people I know have described me as stolidly cerebral. I'll just have to be the exception to that analytical handicap.

I've always wanted to give the finger to the Wall Street firms who wouldn't hire me to invest for them. Now I have a scientific justification for doing so.

The Haiku of Finance for 01/12/09

China feeling pain
Employees starve and protest
Buy them on the cheap

China Feels Its Customers' Pain

Global consumers are trimming back, and China's economy is feeling the pinch:

China’s exports fell the most in almost a decade in December as the deepening global recession cut demand for the nation’s toys, clothes and electronics.

Waning export demand has led to protests by fired factory employees, an exodus of 600,000 migrant workers from the manufacturing hub of Guangdong, and an estimated urban unemployment rate of more than 9 percent. Premier Wen Jiabao pledged Jan. 11 to add to the nation’s 4 trillion yuan ($585 billion) stimulus package to create jobs and avoid social instability.

I sure hope Mr. Jiabao adds to that stimulus, because my portfolio depends on it. :-) Seriously, a weaker Chinese economy doesn't bother me. China's got the healthiest economy in the world right now in relative terms, so a little weakness just makes it a buying opportunity.

Nota bene: Anthony J. Alfidi is long FXI with covered calls.

Sunday, January 11, 2009

The Haiku of Finance for 01/11/09

Bears to attack banks
Clawing at their low earnings
Hunt down a short play

Hibernating Bears Ready to Devour Financial Stocks

Spring is still two months away, but the bears have come out to play again. Last week we saw them chewing on the broader indexes, and soon they'll feast on declining bank earnings:

Rising credit losses, poor economic conditions including a surge in unemployment, tighter lending margins and the cost of luring deposits are likely to dampen results at most of the nation's biggest lenders for the just-ended quarter.

Dismal bottom-line results, however, will quickly fade into the rear-view mirror as investors focus on how much lenders plan to boost reserves for soured loans, take new steps to preserve capital, or eliminate more jobs.

I wouldn't be too sure about that second paragraph's contentions. The options aren't good.

How exactly will banks boost reserves? By curtailing lending even further? That means less revenue from loans. Bearish.

Will they cut dividends to preserve capital? Normally that kind of move sends a stock into bear territory. A dividend cut may perversely be seen as a wise move given the banking industry's weakness. Moderately bullish at best, possibly bearish.

Cut more jobs? Good luck getting people to spend more with credit cards when job insecurity increases in the rest of the economy. Bearish.

Not much looks good for financials in the near future. Which means shorting XLF or its call options now looks very good indeed. I'll decide by next week whether that play is good enough for me.

Saturday, January 10, 2009

Friday, January 09, 2009

The Haiku of Finance for 01/09/09

Jobs numbers crashing
Unemployed don't like to spend
Goodbye to new cars

Jobs Numbers Down the Tubes, Will Sink Cars

The U.S. Labor Department's employment report is almost as bad as expected:

The Labor Department's much-anticipated report showed employers cut 524,000 jobs in December, a smaller decline than the loss of 550,000 jobs economists forecast. But the unemployment rate jumped to a 16-year high of 7.2 percent -- more than the 7 percent economists predicted -- from 6.8 percent in November.

Forget about any rebound in GDP growth for 2009. Jobless consumers won't spend as much:

Drivers rattled by the worst U.S. labor market since World War II are hanging on to old autos longer instead of buying new models, threatening to crimp sales again in 2009 after demand plummeted to a 16-year low.

The article quotes analysts who say the next installment of the automakers' bailout will be far larger than expected. No kidding. I could have told them that (in fact I did in my last post on the automakers' bailout) but Bloomberg doesn't ask little old me for my opinions.

Nota bene: Anthony J. Alfidi doesn't hold any positions in worthless automakers.

Thursday, January 08, 2009

The Haiku of Finance for 01/08/09

Belt-busting bond belch
Investors can buy no more
Bond bubble will blow

Bond Indigestion Makes Markets Belch

Investors have been gorging on Treasuries and other bonds lately as they flee the risk of equities. They may have had all they can stomach, if the latest German bond auction is any indication:

A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.

The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.

There will be more bond auction failures this year, perhaps even an unprecedented one in the market for U.S. Treasuries. Our Chinese creditors are getting tired of risking their domestic stability to feed Uncle Sam's profligacy:

China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.

Would the American people even notice if the U.S. government failed to clear a Treasury auction? Not if Helicopter Ben has any say in the matter. The multi-acronymic lending facilities that the Fed has created to print money can easily be used to clean up a government bond auction in the event of a panicked call from the Treasury Department. Once that precedent is set, it can and will be used more frequently as other foreign central banks opt to spend currency reserves at home. That's how the U.S. dollar will be debased in 2009.

I remain long gold. Now you know why.

Wednesday, January 07, 2009

The Haiku of Finance for 01/07/09

Small business layoffs
The economy's backbone
Gets even weaker

Small Biz Feels Pinch While Big Biz Pinches Pensions

Job losses have disappointed even the most pessimistic observers:

The battered U.S. job market may be losing one of its last remaining sources of strength as small businesses begin aggressively cutting payrolls in the face of a dismal holiday shopping season.

A report on Wednesday showed private sector job losses of 693,000 in December, far greater than economists had expected. Small businesses accounted for an unusually large 40 percent of the decline, according to the figures from ADP Employer Services and Macroeconomic Advisers.

Small businesses (and small-cap publicly held companies) are usually the last to report the results of an economic downturn and the first to show signs of life in an upturn. That's because they have a lot more flexibility in decisionmaking on pricing, ordering, and hiring or firing people. The news that small biz is just now beginning to react to a recession that is over a year old signals that they've absorbed as much pain from declining earnings as they can stand and will have to seriously cut costs, starting with employee headcount. The economy has a lot farther to fall.

Oh, by the way, when the economy does recover, fixed-income retirees (Baby Boomers who didn't save) risk having a lot less spending power:

Volatile markets have saddled U.S. companies with a $409 billion deficit on pension plans, reversing a $60 billion surplus a year earlier, and will cut into earnings in 2009, consulting firm Mercer said.

The shortfall suggests that more companies will have to pump cash into their pension plans to ensure they can meet their commitments to retirees.

The article notes that the pension plan deficits will negatively affect corporate balance sheets. I'm sure they will also have to impact income statements as cash is diverted from other uses to fund the plans. Companies are now faced with the unpleasant choice of cutting pension benefits or funding plans to the point where their business prospects (and thus future share prices) are decimated. Say goodbye to earnings growth!

No wonder the markets finally dropped today. Investors will hopefully start shedding the optimistic sentiments they've been harboring since Christmas. When they've finally capitulated, I'll be ready to buy.

Nota bene: Anthony J. Alfidi has uncovered short calls on SPY and IWM in anticipation of further declines in price.

Tuesday, January 06, 2009

The Haiku of Finance for 01/06/09

Merger arbs tempt me
Just pick the right strategy
And keep playing them

New Year's Resolutions on Special Situation Investing

I don't normally make personal New Year's Resolutions, but in my capacity as a business leader I can apply some to my company.

This is turning out to be another not-so-great month for the Alpha-D's special situations options plays. Today I closed out my short calls on WB (now WFC), MER (now BAC), AW (now RSG), and APPX (now contingent rights APCVZ, plus ABII). The plays on the two financial stocks made me some money, but the garbage hauler and the drug maker cost me quite a bit. The risk premia on the latter two were actually increasing rather than declining as their expiration dates approached. I would have been left with the unfavorable option of converting the holdings to a buy-write strategy by going long the underlying stock. My problem with that is that I simply don't know the waste management or pharmaceutical industries well enough to publish covered research on their stocks, so I decided to close out the options at losses rather than take on more enterprise risk.

So should I give up M&A action? Heck no! There's too much easy money on that table for me to walk away. I've learned my lessons:

1. I will only write uncovered calls on M+A targets that are purchased in all-cash offers. I really bought myself some trouble when the APPX options transformed into contingent rights that were hard for me to value in terms of cash flow, book value, or anything else.

2. I will consider going long the target stock in all cash offers. I missed out on some money to be made on other plays I executed well in 2008 (Budweiser) by not buying the target firm.

3. I will consider going short the acquirer in both cash and stock deals. This is one way I could have made some money on the two losing plays above. Shorting acquirers (or selling uncovered calls) is a way to participate in merger arbitrage without exposing myself to the converted options of the target firms in all-stock or cash-stock deals. Of course, taking a position in the acquirer brings its own risk that the acquirer's share price could increase. "There are no solutions, only changed problems." My old MBA professor's wisdom is never far away.

I therefore resolve to be more diligent with Alfidi Capital's special situation investing for 2009. You can read my elaboration of all of my lessons learned in my upcoming annual report for 2008. You'll be able to find it on the Alfidi Capital main site by the end of January.

Monday, January 05, 2009

The Haiku of Finance for 01/05/09

Asian market bonds
CDS bets turn bearish
Waiting to bottom

Bad Bond News in Asia

Markets are discounting Asian governments' efforts to stimulate their way back to prosperity:

The Markit iTraxx Japan index of credit-default swaps, the benchmark gauge of 50 investment-grade companies including All Nippon Airways Co. and Japan Tobacco Inc., rose 9 basis points to 276 at 10:39 a.m. in Tokyo, according to BNP Paribas SA prices. Benchmarks in Asia outside Japan and Australia also rose, indicating strengthening perceptions that companies may default on their debt.

Institutional bond investors are hedging the chance that their Asian corporate bonds are exposed to default risk. Not all bond investors are so fretful. Some appear to be regaining their risk appetite and seeking out higher yields in emerging markets (near bottom of this article):

Emerging-market bonds are starting to draw investors. The extra yield they demand to own the debt instead of Treasuries fell to 6.94 percentage points from 8.62 percentage points in October, according to JPMorgan’s EMBI+ Index.

Of course, not all emerging market bonds are issued by Asian companies. I'm not long Asian bonds, so CDS hedging and yield chases don't immediately concern me. What does interest me is that bearish bets on higher-yielding bonds indicate pessimism on corporate earnings in Asia and other emerging markets. This strengthens my bearish outlook for emerging market equities, so I will continue to wait for further declines in VWO before going long.

Nota bene: Anthony J. Alfidi is long FXI with covered calls. He is short uncovered calls on VWO.

Sunday, January 04, 2009

Saturday, January 03, 2009

The Haiku of Finance for 01/03/09

Go from ZIRP to NIRP
Fed churns out more quant easing
Pump up bond bubbles

How Low Can the Fed Go? All the Way to NIRP

Fed leaders are signalling their willingness to further shred the value of the U.S. dollar and investors' money market accounts through more quantitative easing:

A grim economic outlook highlights the need for the Federal Reserve to step up quantitative measures to boost growth, with official interest rates already effectively at zero, Charles Evans, president of the Chicago Fed, said on Saturday.

Evans said that based on the outlook for rising unemployment, falling industrial production and a wider output gap, economic models suggest rates should be below zero.

However, there is some dissension in the Fed's ranks. Another Fedster thinks it wise to hedge bets and prepare to address the inflationary future that the Fed's policies have made very likely:
Setting an explicit inflation target would help the U.S. Federal Reserve keep deflation at bay now that interest rates have been cut to almost zero, a top central banker said on Saturday.

"Now would be a particularly good time to do that because you have this possibility of expectations drifting off to deflation or a lot of inflation," James Bullard, president of the St Louis Federal Reserve Bank, told a panel discussion during the annual meeting of the American Economics Association.
Nowhere in the article does Mr. Bullard say the Fed should actually curtail its quant easing. He seems to say the Fed should take stronger steps to "signal" its concern about inflation, as if somehow the economy's deflationary output decline can do the Fed's inflation-fighting work all by itself. The risk in whistling past the graveyard like this is that one may not know where the graveyard ends. Combining quant easing with declining goods availability actually widens the graveyard, so the Fed's governors will need all the lungpower they can muster.
I'm not the only independent observer who thinks the Fed has risked the health of both its balance sheet and the U.S. dollar on a wild macroeconomic experiment:
The Federal Reserve has embarked on a campaign of unsupervised industrial policy to end the country's financial crisis, a move that could undermine its independence, a former top U.S. official said on Saturday.

John Taylor, who was under secretary of treasury for international affairs from 2001 to 2005, said the explosive growth of the Fed's balance sheet since September was "unbelievable."
Unfortunately, Helicopter Ben is flying at full speed and has no time to read those kinds of warnings. Now that the U.S. has won the central bankers' race to ZIRP, the next race will be about NIRP: Negative Interest Rate Policy.

It's no longer a question of whether the Fed will pursue negative real rates. That die is cast. The bond bubble thus has further to run, at least a quarter or two. After that, serious inflation will be baked in to the U.S. economy and gold will be a very attractive alternative to the dollar.

Full disclosure: I'm long IAU and GDX but not GLD. I'm seriously considering buying more of IAU and GDX, or even selling puts against GLD (which now has a much deeper option chain than IAU).

Friday, January 02, 2009

The Haiku of Finance for 01/02/09

Loss of confidence
Treasury pumps zombie cash
Taxpayer will bleed

More Dead Banks to be Re-Animated

In the 1980s, the horror movie Re-Animator portrayed a mad scientist obsessed with bringing dead bodies back to life. Today the real-life mad scientists in the U.S. Treasury Department have performed that feat with companies like AIG and Citigroup that should by any account be dead.

The Treasury Department is making plans to do this over and over again:

Treasury said participation by other companies in such a program would be weighed on a case-by-case basis. Treasury said it would consider, among other things, whether the "destabilization" of a financial institution could threaten the viability of creditors and others. It also would weigh the extent to which the institution faced a loss of confidence because of the troubled assets it held.

In other words, when the next wave of defaults hits option-ARMs and prime mortgages, every major bank in America will be "destabilized" and face a "loss of confidence." Last fall's solvency crunch will play itself out all over again by the end of 2Q09.

Can I make money from dead banks? I did in 2008! Maybe it's time for to make some short plays on XLF again. I'll let you know if I decide to re-animate this strategy later this month. It's not dead yet, and I could make some killer profits. I hope I haven't bored you to death with my puns.

Thursday, January 01, 2009

The Limerick of Finance for 01/01/09

Bank stocks that get merged go away
But their options may very well stay
I can handle the choice
Without raising my voice
That I may end up having to pay

The Haiku of Finance for 01/01/09

All-stock deals have closed
So what happens to options?
Sometimes they're still here

Mother Merrill and Wobbly Wachovia Finally Gone

Merrill Lynch and Wachovia have completed their scheduled disappearance into the annals of brokerage and banking:

Bank of America Corp. said Thursday it has completed its $19.4 billion all-stock purchase of Merrill Lynch & Co., while Wells Fargo & Co. said it has completed its $12.7 billion all-stock purchase of Wachovia Corp.

I still hold some uncovered short calls on both of these collapsed institutions. It remains to be seen whether the options will be erased or converted to options on Bank of America and Wells Fargo. These are all-stock deals, so I may see some legacy exposure. We shall see in the next few days.