Monday, June 29, 2009

Inflation Alarm Bells Start Ringing

The BIS is sounding alarm bells about inflation:

History shows that policy makers “have a tendency to be late, tightening financial conditions slowly for fear of doing it prematurely or too severely,” the BIS, which oversees central banks, said in its annual report published today in Basel, Switzerland. “Because their current expansionary actions were prompted by a nearly catastrophic crisis, central bankers’ fears of reversing too quickly are likely to be particularly intense, increasing the risk that they will tighten too late.”

We can expect to see more reports like this into early 2010 as central banks become alarmed at the extent to which they've let the inflation genie out of the bottle. They'll become even more alarmed when they realize that the gold they've surreptitiously sold off will be very expensive to buy back . . . unless governments confiscate it for them, of course.

Nota bene: Anthony J. Alfidi is long IAU and GDX (with covered puts) and is also long ANV in the expectation that gold will hold up well during inflationary times.

The Haiku of Finance for 06/29/09

Big China bubble
Blow up stocks and real estate
Will we ever learn?

Warning Signs Mount in China's Banking System

I'm always willing to hear out the contrarian view to one of my positions. I've been bullish on China, but there is evidence that their banking sector is as susceptible to bubbles and systemic risks as the U.S. system:

China risks frittering away its stimulus spending on speculation in stocks and real estate, reports said Monday, citing economists who say surging bank loans risk inflating risky asset bubbles.

While recent gains in shares and property prices are a welcome respite for investors, putting funds meant for stimulus projects into speculative investments could undermine the government's effort to boost growth and reduce the economy's heavy reliance on exports.

Human nature is a constant across cultures. Our species is genetically wired to feel an endorphin rush when we experience something that makes us feel more able to reproduce, or increases our "inclusive fitness" as biologists would say.

Is the Chinese economy headed for a bubbly burst? Maybe. It doesn't change my opinion that China is still a healthy place to hold a portion of my portfolio for the long term. Once the U.S. equity bubble is fully deflated (it has further to fall!), it will get a long allocation too.

Nota bene: Anthony J. Alfidi is long FXI with covered calls at the time this comment was published.

Sunday, June 28, 2009

The Limerick of Finance for 06/28/09

Big Oil will be closing some plants
So green energy can have a chance
They'll import some more
Expensive gas is in store
Motorists will howl out with their rants

Thursday, June 25, 2009

The Haiku of Finance for 06/25/09

Get optimistic?
Think growth and jobs will come back?
It's still premature

Economy Better? Don't Hold Your Breath

At fist glance, the economy's contraction seems to be abating:

The revised reading on gross domestic product, released Thursday by the Commerce
Department, showed the economy from January through March didn't fall as deeply as the 5.7 percent annualized decline reported a month ago. Economists expected the government would stick with its previous estimate.

Revisions have tended to be on the downside since 2007, so an upward revision is a positive sign. It's still only a plus of 0.2%. That's not much to crow about.

Analysts (not me) who have claimed that improvements in unemployment statistics happen after an economy turns will have fodder for their argument now:

The number of Americans filing new jobless claims jumped unexpectedly last week, and the total unemployment benefit rolls rose to more than 6.7 million.

I remain unmoved by the above reports. Conditions should worsen once the full force of defaults on credit card debt and commercial real estate insolvency hit later this year.

Nota bene: Anthony J. Alfidi is short uncovered calls on SPY and IWM in expectation of further economic pain.

Tuesday, June 23, 2009

Formerly Emerging Markets Sink

I for one would like this trend to continue:

Stocks of developing nations fell, dragging the MSCI Emerging Markets Index down 10 percent from its 2009 peak, and oil approached a similar decline, on concern the recovery will be weaker than economists forecast. The yen rose for a third day against the dollar.

I've said it before and I'll say it again. This recent run-up in emerging markets is absolutely ludicrous. A lot of less developed economies depend heavily on exports of natural resources to get hard currency for development. With the developed world in recession, the main driver of emerging markets' revenues lately has been China's quest for resources. That stimulus won't last forever.

I have nothing against emerging markets, but I need them to be affordable before I can go long. Maybe soon I'll get my wish.

Oh, before I forget, insiders were bailing through this head-fake rally while suckers were jumping back in. Maybe I'll get some large-cap action on sale too. The end of summer may be just the right time for me to buy something.

Nota bene: Anthony J. Alfidi is short uncovered call options on VWO.

Monday, June 22, 2009

More Alpha-D Action for June 2009

It's that time of the month again . . . time to rebalance the Alpha-D Portfolio and refresh some option positions. Let's make a long story short. I'm staying long China (FXI, with covered short calls) and gold (IAU and GDX, with covered short puts, and a small long position in junior miner ANV). I'm staying short the broad markets (short uncovered calls on SPY, IWM, EFA, and VWO).

Don't ask me when my research website will be updated with new research and portfolio reports. I've got bigger fish to fry right now.

Sunday, June 21, 2009

Friday, June 19, 2009

The Haiku of Finance for 06/20/09

Scary sales tactics
Make you want to buy advice
Best advice is free

Random Thoughts on Sales Tactics and Inflation

I see a lot of these types of ads from firms hawking investment newsletters. Most investors make decisions based on fear or greed. The gloom and doom story is always an attempt to play on the fear trigger, then towards the end of the page the promise of huge gains pulls the greed trigger.

Real assets are good to own if you believe inflation is coming. That's why China is stockpiling natural resources, buying up both raw materials and stakes in mining companies. So how will inflation get going? Zero Hedge's post nails it, and I completely agree. The U.S. government can't pay off its unfunded liabilities unless it debases the dollar. Banks aren't lending out all the new money the Fed has electronically created to fight deflation. The fiscal stimulus is thus the means of transmission for the planned increase in the money supply. Fatter unemployment checks are part of that plan.

Thursday, June 18, 2009

Alpha-D Update for 06/22/09

Today was another crummy day for my Alpha-D Multi-Strategy Portfolio. I decided to buy back my short call options on EFA and VWO for this month as they had gone seriously in the money. You can't be right all the time.

Does this mean I'm changing my strategy? No way! I'll open new short positions next week as I remain convinced that the world economy is headed for further shrinkage. As the Terminator said . . . "I'll be back."

Wednesday, June 17, 2009

Smart Money Sells At The Top

The titans of Wall Street have done some dumb things with other people's money in the past few years. Their counterparts in smokestack industries, by contrast, are trying to do the right things:

More than 165 companies raised a record $87 billion in U.S. secondary share sales this quarter, and 77 percent of them used the proceeds to slash leverage, according to data compiled by Bloomberg. Ford Motor Co., the only major U.S. automaker that hasn’t filed for bankruptcy, sold $1.6 billion in equity last month to obtain cash and finance a retiree medical fund. Las Vegas-based casino owner MGM Mirage issued $1.1 billion of stock to repay debt, fueling a rally of as much as 14 cents on the dollar in its bonds.

Getting out of debt during a deflationary recession is a smart move. How long this deflation lasts is a larger concern:

The cost of living in the U.S. rose less than forecast in May, culminating in the biggest 12-month drop in prices in almost 60 years.

The consumer price index increased 0.1 percent after no change a month earlier, the Labor Department said today in Washington. In the 12 months ended in May, costs dropped 1.3 percent, the biggest decline since 1950.

Sounds like we don't have to worry about inflation from the Fed's quant easing, right? Wrong. I'm not budging from my stance that the Fed will prove itself unable to take back all of the freshly baked dough they've shoveled into banks.

The companies raising capital are taking advantage of an equity rally that we won't see again for a while.

Tuesday, June 16, 2009

Strengthening the Bear Case, Continued

More bad news on industrial production:

Industrial production in the U.S. fell in May for the 16th time in the last 17 months, reflecting declines in consumer goods and business equipment that signals the manufacturing slump remains broad-based.

Output at factories, mines and utilities decreased 1.1 percent last month, in line with forecasts, after falling a revised 0.7 percent in April, Federal Reserve data showed today in Washington. The amount of industrial capacity in use dropped to a record-low 68.3 percent.

It's bad enough that the U.S. needs to export a lot more to earn its way out of this recession. This data shows that we're not even close to producing what we'll need. Some negatively inclined pundits claim the U.S. doesn't manufacture anything anymore after having outsourced some of its old-school smokestack industrial base to China. That's only partly true; the third wave of the Industrial Revolution will come when manufacturers of things like carbon nanotubes come to the fore.

Until then, we're left with these depressing, bearish stats.

Monday, June 15, 2009

Strengthening the Bear Case for Summer '09

Need more evidence for a speedy end to this head-fake equity rally? Look no further:

Foreign demand for long-term U.S. financial assets fell in April as both China and Japan trimmed their holdings of Treasury securities.

With the government's borrowing needs soaring, there have been some concerns that foreign interest in holding U.S. debt might falter, causing interest rates to rise.

A drop in foreign demand for Treasuries means those interest rates will have to rise to entice those buyers back. Higher rates in the commercial paper market will take us right back to the liquidity crunch of Sept. 2008, which will lead to more stories like this one:

Manufacturing in the New York region this month contracted at a faster pace as sales and inventories declined, showing the economy is still months away from a sustained recovery.

The Federal Reserve Bank of New York’s June general economic index fell to minus 9.4, less than forecast, from minus 4.6 the prior month, the bank said today. Readings below zero for the Empire State index signal manufacturing is shrinking.

The New York Fed data gives us a preview of what we'll see nationwide in a few months.

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

Friday, June 12, 2009

Consumers Oblivious to Their Dire Straits

The human capacity for self-delusion is limitless. Check this out:

Confidence among U.S. consumers rose this month for a fourth straight time, reflecting signs that the worst recession in at least five decades may end this year.

The Reuters/University of Michigan preliminary index of consumer sentiment increased to 69, less than forecast while the highest level in nine months, from 68.7 in May.

People feel better about spending more even though they are demonstrably worse off:

U.S. household wealth fell in the first quarter by $1.3 trillion, extending the biggest slump on record, as home and stock prices dropped.

Net worth for households and non-profit groups decreased to $50.4 trillion, the lowest level since 2004, from $51.7 trillion in the fourth quarter, according to the Federal Reserve’s Flow of Funds report today. The government began keeping quarterly records in 1952.

Calling this cognitive dissonance would be too kind, for that would imply feelings of pain and confusion. Maybe wishful thinking or sleepwalking would be more appropriate terms.

This cannot continue indefinitely. American consumers will at some point acknowledge their inability to spend beyond their means. Equity values will adjust accordingly.

Thursday, June 11, 2009

The Haiku of Finance for 06/11/09

China growing up
Takes bond business from Goldman
Underwrites Asia

Good Job, China!

The Chinese are making me proud. They've actually done something smart with their stimulus spending:

China’s spending on factories, property and roads surged by the most in five years as the government’s 4 trillion yuan ($585 billion) stimulus package countered a record slump in exports.

Climbing property and auto sales, record new lending and growth in manufacturing are also signs that the stimulus spending announced in November is driving a recovery in the world’s third-biggest economy. Falling exports because of the global recession are the nation’s biggest challenge, the State Council said last month.

China is building out infrastructure that will provide productive work for its people, whose earnings will substitute for the increasingly comatose American consumer. Contrast this with the U.S.'s stimulus spending, a ginormous agglomeration of transfer payments that encourage wasteful consumption.

China 1, U.S. 0.

And as for China's financial maturity, well, just check this out:

China’s banks, the world’s largest by stock market value, are starting to beat Western financial companies in underwriting Asian bonds as the government turns to capital markets to stimulate the economy.

The Anglo-West's long hegemony over world financial markets is slowly coming to an end. The first sign was the joint Russian-Chinese proposal for a world currency that would relegate the U.S. dollar to also-ran status. The rise of Chinese banks is not merely a function of the relative decline of U.S. firms' market capitalizations; they can now win underwriting business in their own right throughout emerging markets.

China 2, U.S 0.

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

Monday, June 08, 2009

The Haiku of Finance for 06/08/09

Insider selling
Dilute shareholders and run
They get paid for that?

The Bear Market Rally Has (Hopefully) Peaked

Predicting the future is always difficult, but short-term pictures are a lot clearer than the long-term. There's plenty of data out right now to justify a return to bearishness, starting with large-scale dilutions of common equity:

American common equity is increasing for the first time in five years, threatening to dilute corporate profits as companies sell a record amount of stock and cut dividends the most since 1938.

Wells Fargo & Co., ProLogis and more than 150 other companies raised $82.2 billion this quarter, beating the record pace at the height of the technology bubble in 2000, according to data compiled by Bloomberg. The combination of adding shares and restricting dividends will reduce annual equity returns as much as 4.1 percent, the data show.

Please note that issuance of new shares does not increase the value of retained earnings' contribution to shareholders' equity, which is the most important contribution to a company's intrinsic value over time (if you're a value investor, like me). The end of the article hints that increased selling by insiders is coinciding with the rise in secondary equity offerings. Looks to me like the smart money is heading for the last exit they'll see for a while.

Furthermore, Robert Shiller thinks your home equity ATM will be even less useful next year than it is now:

Shiller, co-founder of a home-price index that bears his name, said prices may “continue to fall, or stagnate” in 2010 and 2011. The S&P/Case Shiller index of 20 major cities showed median home prices were down 32 percent in March from their peak in July 2006.

I don't think I need to re-hash here how lower home equity prices will push down consumer spending by making people feel poorer. Just remember how I'm harnessing these inexorable forces to try to make some money in a long bear market. Only time will tell whether this is worth my effort.

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

Saturday, June 06, 2009

The Haiku of Finance for 06/06/09

BOHICA, my friend
The ruling class cuts your pay
They think you like that

Your Canceled Bonus Went to Your Rich Neofeudal Boss

It's a slow news cycle Saturday. Let's check out another signpost on the road to neofeudalism:

Regulators and politicians who want to curb the huge bonuses paid to financiers in the wake of the global credit crisis may find the banking sector's response even more unpalatable.

More money for the highest flyers and less for the rest.

Britain's finance watchdog said in March: "Although it is hard to prove a direct causal link, there is widespread consensus that remuneration practices may have been a contributory factor to the market crisis."

Ya don't say? Really? A compensation consultant quoted in the article is incredulous that guaranteed bonuses could prove to be perverse incentives. That's disingenuous; that consultant is paid by investment banks to justify those bonuses. Some people can make themselves believe any kind of bunkum if their paycheck depends on it. I witnessed that self-delusion when I worked for large investment firms and I even came pretty darn close to accepting it myself. My resistance and ultimate rejection of such temptation bought me my termination notices.

But how can banks afford to continue the largess for their top pedigreed preppies? By taking the money from you:

Fifteen percent of employers surveyed by the Society of Human Resource Management reduced pay in the past six months — a threefold increase from earlier this year. Companies like Hewlett-Packard, Caterpillar and the New York Times have taken the pruning shears to wages.

Granted, this excerpt is from an opinion column, but facts are facts. The only social class in the United States that has ever had any social cohesion is the ruling class (thank you G. William Domhoff and E. Digby Baltzell), and that class is now circling the wagons to defend their Olympian redoubt from the proletariat. Look for media stories over the next few years to happily chronicle the noble lives of the struggling poor, to make it seem as if remaining poor is natural and desirable. Look for Hollywood dramas and comedies to sing a similar tune. The programming is being prepared.

What is to be done about this? As far as most Americans are concerned, nothing. After all, doesn't God want you to be poor? As far as I am concerned, I am as focused as can be on taking care of myself financially before the door to upward mobility slams shut in my face forever.

Thursday, June 04, 2009

Not So Fast On That Emerging Market Recovery

Looking for green shoots? Start looking outside the U.S.:

After a crushing fall in the last year and a half, stock markets in developing countries are riding a wave of optimism that the recovery of the global economy is at hand and being led by the developing world, especially China. Though emerging markets remain far below the lofty highs they attained more than a year ago, investors are again viewing their chances of growth as better than those of the United States or Europe.

There's a good case to be made for China's continued growth given its deep reserves and trade surplus. The rest of the developing world is another story. I suspect a lot of the enthusiasm has to do with the recent resurgence of oil:

Crude oil rose to a seven-month high and gasoline surged after Goldman Sachs Group Inc. said prices may reach $85 by the end of the year as demand recovers and supplies shrink.

I thought about going long emerging markets a few months ago, so maybe I've missed the boat. I still might turn bullish on something this year besides China, but I'm willing to bet that people like Dr. Mark mobius are wrong that the 37% rise in emerging markets this year has a lot farther to go. I just can't help being cheap.

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

Tuesday, June 02, 2009

The Haiku of Finance for 06/02/09

Blew up your old bank?
Launch yourself a new hedge fund
Destroy some more dough

Good At Losing Money? Start A Hedge Fund And Prove It!

This just goes to show you how stupid the "smart money" really is. A money manager who risked his parent bank's solvency on derivatives gets another huge pile o' dough to play with:

Boaz Weinstein, the bond trader who lost more than $1 billion last year at Deutsche Bank AG, has raised about $160 million since the end of April for his new hedge fund, according to two people familiar with the matter.

“One bad year of performance, especially when that year was 2008, shouldn’t preclude people from raising money, so long as they have a good pedigree and sound long-term track record,” said Peter Greene, a partner in New York at law firm Lowenstein Sandler PC, whose clients include hedge funds.

Great work if you can get it! Note the emphasis on how highly the hedgie lawyer quoted above values pedigree (I bolded it). He must be able to smell suckers a mile away, so he's trolling for new business by kissing up to Saba Capital Management in the press. Apparently having the right parents and prep schools entitles a philosophy major to run billions of dollars. Oh, sorry, he must mean financial pedigree. Right. So having the right mentors at Merrill Lynch, a firm that has been rescued from bankruptcy after making wrong-headed bets, means you're good at making bets for other banks. Right? WRONG!

Is a decade a long enough track record? Warren Buffet would disagree, which is why he confines his investments to businesses that have existed for several decades in mature industries.

Just when I think the best and brightest on Wall Street can't get any dumber, they surprise me once again. Attention Wall Street: I have two business degrees, not some philosophy degree, and both were earned with honors. I've been managing investments for myself at least as long as this Saba dude has and I haven't lost nearly as much money. So where's my hedge fund? Oh, sorry, I don't have a pedigree.

Monday, June 01, 2009

GM Out Of Its Misery, Bond Investors Out Of Their Minds

GM's bankruptcy is old news by now, and in fact it's been a slow-motion train wreck since the first bailout payment last year. Check out my blog postings at that time for my take on the inevitable outcome.

Let's move on to something else that's inevitable . . . the collapse of the U.S. bond market:

For all the hand-wringing over the dollar’s slide, the expanding U.S. deficit and the nation’s AAA credit rating, the bond market shows international demand for American financial assets is as high as ever.

Folks, that demand will dry up as soon as China has had its fill of sales pitches from senior U.S. government officials. They are quietly finding other stores of value to buy, like commodity sources in emerging markets.

Okay, so this is a thin post. I'm pressed for time today.

Nota bene: Anthony J. Alfidi has never owned GM stock and does not currently hold U.S. Treasuries.