Friday, July 31, 2009

The Haiku of Finance for 07/31/09

Contraction was worse
Yet the market keeps rising
Until "next wave" hits

Wednesday, July 29, 2009

The Haiku of Finance for 07/29/09

I know what to do
When bond prices start dropping
Short some T-L-T

Yields Up

We can expect more articles like this in the next few months. Record Treasury supply is driving down bond prices:

Treasury five-year notes fell as the government sold a record $39 billion of the ecurities, the third of four auctions totaling $115 billion that is the largest amount of so-called coupon securities sold in a single week.

Lower bond prices mean higher yields. It's as simple as that. My reaction? Short bets on ETFs like TLT look increasingly attractive.

Tuesday, July 28, 2009

Finally, Some Market Sanity and Common Sense

Stocks started today trading down. For once in his life, Mr. Market shows signs of rationality:

U.S. stocks fell and the Standard & Poor’s 500 Index retreated from an eight-month high as consumer confidence trailed projections and companies from Office Depot Inc. to Coach Inc. posted worse-than-estimated results. Oil and metal prices slid, while Treasuries climbed.

Maybe investors are listening more to their own common sense and less to the crummy Wall Street analysts I referenced in yesterday's post. If they do listen to common sense, maybe they'll hear it screaming this:

Confidence among U.S. consumers fell more than forecast in July, reflecting a surge in unemployment that threatens to undermine household spending.

The Conference Board’s confidence index dropped to 46.6, a second consecutive decline, following a reading of 49.3 in June, a report from the New York-based group showed today. The figure reached a record low of 25.3 in February.

I heard that! Now hear this: This bear market is still alive and kicking. I'm not paying any attention to "green shoots" that are suitable for some dingbat sell-side analyst's hookah.

Monday, July 27, 2009

The Haiku of Finance for 07/27/09

Bullish analysts
Pump the market up for you
And their bonus checks

Analyst Herd Stampedes to Premature Earnings Rebound

Wall Street analysts perennially get turning points wrong. I am not surprised that their herd mentality is forging a consensus around a market bottom in earnings right now:

Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.

Unfortunately, bad news on earnings continues to mount. Check out double-talk like this:

About 75 percent of S&P 500 companies have topped analysts’ estimates so far, with per-share earnings dropping 26 percent on average, according to Bloomberg data.

Analysts have uniformly lowered the bar on earnings expectations to make it easier for weakened companies to beat estimates. Kudos to Karl Denninger's Market Ticker for noticing this phenomenon.

This turn of opinion has something in common with the last time analysts were net bullish. Back in April 2007, only a handful of skeptics and heretics saw the subprime explosion coming. Analysts now seem to be ignoring the second phase of the credit crunch: commercial mortgage defaults. You can be certain that policymakers aren't ignoring the difficulties in commercial real estate:

U.S. commercial-property prices fell 7.6 percent in May from a month earlier, according to Moody’s Investors Service, bringing the total decline to 35 percent since the market’s peak.

Bernanke told lawmakers July 22 that a potential wave of defaults in the $3.5 trillion commercial-mortgage market as borrowers find it difficult to refinance may present a “difficult” challenge to the economy.

Folks, the show's not over. Act II promises more drama than we've seen so far.

Friday, July 24, 2009

The Haiku of Finance for 07/24/09

CalPERS rolls the dice
Bets big on Swensen model
And insolvency

Calpers Board Votes to Assure Its Self-Destruction

CalPERS has lost money. Haven't we all lately? Well, apparently they want to lose the rest of what they have left. They've gone and selected a new leader, Joseph A. Dear, who will probably assure that result:

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.

This guy and his ideas are the epitome of everything that's wrong with modern pension fund management. First of all, by his own admission, he's not an investment expert. His formative experiences were all in political appointments. He even thinks "the fun part is the investment part," in his own words, as if it should be secondary to things like organizational design and political relations. Secondly, his big bet on bold ideas is nothing more than a rehash of the Swensen Yale model. Remember that one? The one that delivered outsized returns during David Swensen's tenure at the Yale endowment until it blew up spectacularly last year? Yeah, that one. This dude didn't get the memo that the Age of Leverage is over, so all of those years that private equity delivered alpha of 3% are long gone. He also thinks that political tricks like asking investment firms to sequester the state's money in separate accounts will help manage risk. News flash: Sequestering money is of zero benefit if the manager's investment philosophy fails, because you'll have a heck of a time getting it out if other claimants to that failed fund litigate the manager.

I have no philosophical objection to investment vehicles like real estate partnerships and private equity funds. When used judiciously, in severely limited amounts that are restricted to areas within a manager's natural sphere of competence, they can diversify a very large portfolio. The problem comes when illiquid structures become a huge allocation within an investment philosophy that must be liability-driven (i.e., significantly liquid!). Year after year into perpetuity, a pension fund must cough up enough cash to pay its retirees according to tables designed by actuaries. If any one of those sequestered, illiquid investments blows up, CalPERS will risk defaulting on its legal obligations to pay pensioners and the state of California will be forced into a legal crisis. Taxpayers will of course have to fill that hole.

The funny thing is that I was just about to turn cautiously optimistic on California muni bonds now that the state's elected leaders have reached a budget compromise. CalPERS' stupidity is going to blow that right out the window within two years. The risk of a muni bond default is increased dramatically if state taxpayers have to make up shortfalls in CalPERS' payments to its retirees. Maybe a sovereign bankruptcy will ultimately be necessary to sort out whether muni bondholders or state retirees have a senior claim on California's tax revenues.

The NYT article ends on a telling note. This dude plans to spend a third of his precious time on "outside issues," as if the job of running the nation's biggest state pension plan isn't important enough to warrant all of his time. Note to Joseph A. Dear: Quit thinking of this job as some kind of extracurricular activity with a fun investment part. There is nothing more important to you right now than the security of retirees' money.

Nota bene: Anthony J. Alfidi does not receive a pension from CalPERS or hold California muni bonds. He is in fact a taxpayer to the state of California and is very interested in that state's financial solvency.

Thursday, July 23, 2009

The Haiku of Finance for 07/23/09

Market shooting up
"Green shoots" rumors drive action
Those shoots are just weeds

Wednesday, July 22, 2009

The Haiku of Finance for 07/22/09

The Fed wants more work?
If they can't do their job right
Let them clean toilets

The Fed And Consumer Protection? Gimme A Break!

Apparently the dual policy goals of fighting inflation and encouraging economic growth don't keep the Fed busy enough. They're looking for more things to do. Now the Fed wants to look after your best interests:

Federal Reserve Chairman Ben S. Bernanke said consumer protection should be added to the Federal Reserve Act as a formal policy goal along with low inflation and full employment.

“We were not quick enough, we were not aggressive enough to address consumer issues earlier in this decade,” Bernanke, 55, said in response to a question from Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee.

There's no way I can take this seriously. This trial balloon is obviously some kind of ploy to make naive people in Washington or the media think that the Fed is manned by do-gooders who place Joe Six-Pack's well being before Goldman Sachs'. I can't wait to see the next red herring they throw in our faces. Maybe this wouldn't be such a poor idea if it completely replaces the existing mandates for growth and against inflation, mandates which the Fed is spectacularly failing to deliver.

Note to Fed: The best thing you can do to protect consumers is to quit printing money at warp speed. This consumer destruction policy will make it very hard for savers to fund their retirement years.

I sent my resume to the Federal Reserve Bank of San Francisco several years ago and was dismissed as "unqualified." Yeah, I'd say I'm unqualified to ruin a nation's economy.

Monday, July 20, 2009

Refreshing The Alpha-D Portfolio for July '09

Here are the updates I've made to my asset allocation this month:

Equities: Bought more GDX.

Put options (covered): Sold on FXI, IAU, GDX.

Call options (covered): Sold on FXI and GDX.

Call options (uncovered): Sold on SPY, EFA, FXI, and GDX.

I added to my GDX pile for my usual reason: I believe gold will do well when serious inflation arrives.

Nothing else has changed.

Saturday, July 18, 2009

A Decent July For The Alpha-D Portfolio

My uncovered calls on SPY and EFA were the only options that expired this month, and they expired out of the money. That means I've preserved all of the proceeds from the original sale. Some patience and a little bit of luck paid off. I will renew these positions when the market opens Monday.

I'm staying short these ETFs' options because economic prospects for the G20 economies are poor.

Thursday, July 16, 2009

The Haiku of Finance for 07/16/09

China beats Japan
Impressive equity size
Will they keep it up?

China Markets On a Roll, Rolling Right Over Japan

The Middle Kingdom takes another step on its path to global dominance:

China overtook Japan as the world’s second-largest stock market by value for the first time in 18 months, after government stimulus spending and record bank lending boosted share prices this year.

The equity markets of China and Japan will probably leapfrog each other for another year or two given the global financial system's overall fragility. Still, China's fundamentals are relatively healthier.

China's banks have been lending a lot, and news stories like this one report loan recipients playing Chinese stocks like casino chips. I wouldn't be surprised if this frothiness leads to a big market correction in a few months . . . giving long-term China bulls like me and Jim Rogers a chance to buy.

Nota bene: Anthony J. Alfidi is long FXI with covered calls and short puts covered with cash.

Tuesday, July 14, 2009

The Haiku of Finance for 07/14/09

Get scared, run to bonds
Just as the blowoff top crests
Will they ever learn?

Bond Market Blowoff Top, Part 2

In a sequel to my post yesterday, we see that terrified investors (no doubt pushed by their underperforming financial advisors eager to justify their annual 1% take) are flooding money into actively managed bond funds:

Bonds funds had net inflows of $81.2 billion in the second quarter, compared with $16.4 billion for stock funds, data compiled by the Chicago-based research firm show. It was the biggest quarter for bond-fund sales since Morningstar began tracking the figures in the first three months of 1998.

Never mind that a passive, laddered bond portfolio is more than adequate for almost all investors' fixed income allocation. People are ill-served by greed-driven salespeople who "advise" them that greed-driven portfolio managers can outguess the Fed and outmaneuver the yield curve.

Nota bene: Anthony J. Alfidi holds no positions in bonds at this time.

Monday, July 13, 2009

The Haiku of Finance for 07/13/09

Bond market blowoff
Suckers buy bonds for safety
Surprise! They default

Bond Market Blowoff Top

Bonds are exploding as Homo investus demands safety:

Bond investors across the country are snapping up 10-year Treasury notes as expectations for a U.S. economic recovery this year disappear.

The Fed's target funds rate can't go any lower than zero. Bond euphoria won't last forever, and the Fed can't possibly explain an exit strategy that won't devalue the dollar:

Federal Reserve Chairman Ben S. Bernanke probably will show how the central bank will exit the biggest monetary expansion in history when he reports to Congress next week, economists said.

Good luck with that. I'm staying as far away from this oncoming train wreck as I possibly can.

Nota bene: Anthony J. Alfidi owns no Treasuries at this time due to the default risk posed by massive government borrowing combined with plunging tax revenue.

Sunday, July 12, 2009

The Haiku of Finance for 07/12/09

The new normal comes
Not like the good times at all
Get used to sadness

The New Normal Is For You, Me, and Everyone

The Sovereignty Crunch is going to change life as we know it in the United States. Most Wall Streeters are in denial because they want the good times to come back. Some financial professionals are able to make the appropriate psychological transition:

While unemployment will peak between 10.5 percent and 11 percent in the U.S., it will remain high and stay above 7 percent, said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., manager of the world’s largest bond fund.

“The United States right now is in transition,” El-Erian said in an interview from Pimco headquarters in Newport Beach, California. “It’s coming out of one regime. It’s on this bumpy and painful journey to what we’ve called here the new normal.”

Of course, macroeconomic pessimism helps talk down equity prices, which is usually good for a bond book like PIMCO's. Nevertheless, the new normal will be a permanently lower standard of living for most Americans. People under 40 have very little idea of just how much they'll have to cut back. In a country with less well-developed democratic traditions such unpleasantness would be a pretext for civil unrest. We're Americans, so we're supposed to be better than that.

Thursday, July 09, 2009

China's Place in the Sun

China is surpassing the United States as the world's most powerful and dynamic economy, one milestone at a time. China's market for cars is now larger than America's. China's entry into Latin American markets is an insanely clever way to supplant America's Monroe Doctrine. Chinese firms are gaining ground in global rankings while U.S. firms are falling behind.

China's long term strategy is bearing fruit. The U.S. has no strategy, unless you consider increasing transfer payments from productive savers to politically favored union workers as a strategy.

Nota bene: Anthony J. Alfidi is long FXI with covered calls (and short puts covered with cash).

Wednesday, July 08, 2009

The Haiku of Finance for 07/08/09

G-8 can't agree
How much to spend? No one knows
My view: Spend nothing

Buying Busted Banks for Nothing Down

Subprime loans helped get our economy into this mess. Creating subprime banks won't get us out:

Regulators may ease a provision that would require private- equity investors to maintain Tier 1 capital ratios of at least 15 percent for lenders they purchase, said the people, who declined to be named because the talks are private. Tier 1 ratios, which measure a lender’s ability to withstand losses, currently must be at least 8 percent for new banks.

Instead of equity cramdowns and bondholder writeoffs, our financial system regulators propose to continue abandoning all pretense of adult supervision of the banking system. See, private equity investors are some of the savviest dealmakers around, so they'd understandably balk at trying to buy troubled banks at the inflated prices regulators would need to maintain the fiction of a healthy system.

Any bank stock makes me nervous right now. I'm saying no thanks.

Nota bene: Anthony J. Alfidi holds no position in any bank stock at this time.

Monday, July 06, 2009

Taking Risk at the Wrong Time

The small investor is jumping on the wrong bandwagon at the wrong time:

Lately, however, as stock and bond markets have rebounded, mutual-fund investors have had a split personality.

They’re back to buying relatively safe investments like high-quality corporate bonds. But they’re also pouring money into the riskiest investments.

I don't need to go into the disadvantages of actively managed mutual funds here. Consider John Bogle's arguments against active management if you need reasons to know why mutual funds are a worse deal than index funds and ETFs. I also take issue with the article's assertion that high-quality corporate bonds (rated of course by the same credit rating agencies that completely misread MBS risk) are a "safe investment" in an era when public and private sector debt is over 300% of this country's GDP. Oh well. Some people are going to learn the hard way, over and over again. That lesson is coming soon as we head into earnings season for Q2 with some pessimistic estimates:

The year-over-year profit slide for Standard & Poor’s 500 Index members may narrow to 21 percent from July through September, after declines of an estimated 34 percent in the second quarter and about 60 percent in the year’s first three months, according to data compiled by S&P and Bloomberg. Earnings may rise by year-end based on comparisons to late 2008, which was roiled by the meltdown in financial markets.

This is why I'm short the markets, folks, while uninformed investors are busy chasing past performance.

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

Friday, July 03, 2009

The Haiku of Finance for 07/03/09

Forget muni bonds
State issuers may go bust
Goodbye "safe" coupons

Muni Bond Outlook: Crummy

Let's count the reasons why it's bad to own municipal bonds right now. First, many states are in dire financial straits:

"This downturn, even more so than previous downturns, really is affecting every state right now," said Brian Sigritz, a staff associate with the National Association of State Budget Officers.

The Washington-based organization says 42 states wrestled with budget deficits this spring, the most since it began tracking budgets 30 years ago.

This means that any state unable to balance its budget is in serious risk of a credit ratings downgrade. Higher repayment risk hurts bond values! Second, the sheer volume of Treasury debt being issued will eventually push interest rates up for any kind of debt. The crowding-out effect was only thought to affect corporate debt, but now we're seeing its effects on mortgages and other forms of debt:

Billionaire investor George Soros on Tuesday predicted a “stop-go” economy for the United States, saying fears of inflation will drive up interest rates and choke off growth, Reuters reported.

Rising U.S. Treasury yields have driven mortgage rates back up, threatening a recovery in the housing market and a refinancing boom that has helped preserve the still-fragile health of recession-weary households and the banks that lend to them.

You tell 'em, George. Rising interest rates lower the value of outstanding bonds and will blow an even bigger hole in state budgets as the cost of servicing new debt rises. Muni bond holders are set to get hit by a double whammy in the near future.

Nota bene: Anthony J. Alfidi does not own any muni bonds at this time.

Thursday, July 02, 2009

The Haiku of Finance for 07/02/09

EU loses jobs
Just like here in the U.S.
Goodbye to green shoots

Eurozone Not Looking Good

The EU's consumers will have a tough time jump-starting their economy if they keep losing their jobs:

Eurostat, the statistics office of the EU, said Thursday the seasonally-adjusted unemployment rate for the euro zone in May stood at 9.5 percent of the work force, up from April's 9.3 percent. It said just over 15 million people were unemployed in May, up 273,000 on April's figure.

Coincidentally, the EU's unemployment rate is fairly close to the U.S.'s rate (assuming you trust official stats, which I don't). The ECB has its monetary fire hose turned on at full blast to try to goose the continent's economy:

ECB officials meeting in Luxembourg today will leave the benchmark rate at a record low of 1 percent, according to all but two of 60 economists in a Bloomberg News survey. The central bank, led by President Jean-Claude Trichet, may keep the rate there until the fourth quarter of 2010, a separate survey shows.

Good luck with that move. They'll be hard pressed to fight inflation in 2010 with such a pro-growth bias.

Stagflation is not in the life experience of the younger generations of either North America or Europe. I don't see any green shoots across the Atlantic. Do you?

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