Tuesday, August 31, 2010

Automobile Sales Headed For Junkyard

If you're in the market for a new car, the sounds your hear in the dealer's lot may include the rustling of blowing tumbleweeds and the lonely chirps of crickets.  There's not much else going on in those lots, certainly not sales:

U.S. auto sales in August probably were the slowest for the month in 28 years as model-year closeout deals failed to entice consumers concerned the economy is worsening and they may lose their jobs.

Heading over the peak of a non-recovery into a double-dip recession is no fun at all, certainly not like the rush of going over a peak on a roller-coaster.  The market for cars in the U.S. is mature and will decline as gasoline gradually becomes priced out of reach for the poor and working class American.  Natural gas finds all over the world are certainly increasing but the energy industry will need years to convert those supplies to deliverable vehicle fuels available to Joe Six Pack.

There may be a silver lining in these auto numbers.  Americans who can't afford cars anymore may have to move to places where work commutes are serviced by mass transit.  I sincerely hope that buses and trains become the preferred mode of transit for most Americans.

Full disclosure:  No positions in makers of cars, trains, or buses at this time.  I do drive a blue 2003 Ford Mustang but I also take BART and SF Muni as much as possible. 

Monday, August 30, 2010

Gold At Its Most Secure

Hard-core gold bugs sometimes wonder out loud whether the United States Bullion Depository still holds any gold.  Every once in a while a lawmaker tries to require an audit of the gold.  Some observers will recall that the last time the Depository was subject to scrutiny in 1974 revealed that every ounce of Uncle Sam's gold was safe and fully accounted.  That was a generation ago. 

A generation is about as long as a typical gold mine's life cycle.  The gold in the Depository is accounted to the ounce by auditors who physically see and touch it, while the gold in a mine is estimated to the ounce by geologists who extrapolate from random samples.  Breaking into a gold vein with mining equipment is routinely feasible; breaking into the Depository is absolutely impossible.

Gold bugs should think about which system of accounting and estimation is more thorough and reliable.  Gold ore in the ground is fairly secure from theft and available to competent mining companies.  That's the gold investors should be worried about. 

Full disclosure:  Long GDX with covered calls and cash-covered short puts. 

The Haiku of Finance for 08/30/10

Modest spending gains
Make Americans feel good
While they lose it all

The Theory And Pactice Of Blowing Asset Bubbles

Central bankers have yet to demonstrate the ability to learn from history.  They continue to debate ways of preventing asset bubbles from forming:

Central bankers and economists at a Federal Reserve symposium clashed over how to best contain asset-price bubbles three years after a crash in U.S. housing prices led to the worst global recession since World War II.

This debate occurs while the BOJ engages in the one practice known as a surefire way to launch asset bubbles - monetary stimulus:

The Bank of Japan added 10 trillion yen ($118 billion) in liquidity injections after a surge in the nation’s currency to a 15-year high threatened economic growth.

You'd think that the one no-brainer course of action would be NOT to pump more liquidity into an economy that has already been over-liquefied for a generation.  The U.S. isn't nearly as far down this road as Japan but it's making the same mistake.  This lesson is even lost on international institutions, with the IMF angling for a permanent liquidity-producing vehicle
If the monetary steroid shot doesn't work, there's always another fiscal stimulus to be wasted.  China has reached the end of private enterprise growth thanks to its over-levered real-estate bubble and is now turning the fiscal spigot back on for its state-owned companies.  Tolerating a little stagflation look like a better deal than a hard landing with social unrest. 
This circus never seems to end.  It certainly will end, with plenty of despair and unrest for all countries playing this game. 

Sunday, August 29, 2010

The Limerick of Finance for 08/29/10

Asia's prospects, a darkening sky
Stalling growth in U.S. tells us why
BOJ meets in fright
China wage gains are tight
Global double-dip onslaught is nigh

Sanofi Offers To Buy Genzyme

I guess general economic worries aren't slowing down merger mania, at least not yet.  There's big action coming in Big Pharma:

Sanofi-Aventis SA said it is offering to buy Genzyme Corp. for $69 a share, or about $18.5 billion in cash.

Cash bids are always nice to see.  Paying $69 per share for GENZ isn't much of a premium over last Friday's closing price of $67.62, so perhaps Sanofi-Aventis isn't expecting any competing bidders. 

A quick glance at GENZ's stats shows an enterprise value very close to its market value.  Bidders often go for a target whose enterprise value is far below its market cap.  Its ROE and EPS are both currently negative, so Sanofi-Aventis may see some hidden value here that's lost in the fundamentals.  Paying 20x EPS is a heck of a premium when your earnings have gone negative for two quarters.  Does GENZ have something in its pipeline that can help Sanofi regain ground lost to generics?  Time will tell. 

Full disclosure:  Anthony J. Alfidi has no position in any company discussed in this post. 

Saturday, August 28, 2010

The Haiku of Finance for 08/28/10

Growth ready to stall
Did you buy stocks on the dip?
Double-dip is here

Bernanke Bursts Bond Bubble

What can't be sustained, won't be sustained.  The slightest disturbance can upset a fragile state of nature.  Helicopter Ben did not meet expectations when he made future quantitative easing contingent on further deterioration in things like GDP.  This was the result:

Investors pulled money out of Treasurys Friday after expectations faded that the Federal Reserve will need to buy bonds to stimulate the economy.

The yield on the 10-year Treasury note jumped to 2.65 percent in afternoon trading, up from 2.50 percent late Thursday. The price for the note maturing in August 2020 dropped to $99.781 from $101.25. Bond yields rise when their prices fall.

See what happens when you let ZIRP blow a bond bubble?  You get held responsible for bursting it.  Ben can expect some trash talking from PimpCO and other fixed-income enthusiasts if he doesn't roll out the QE bond buying real soon.  Oh yeah, Fedsters, thanks for screwing up my equity valuation calculations by keeping the yield on the 10-year unusually low.  I may as just well resort to using a blanket 4% risk free rate; the 10-year is headed there anyway. 

Friday, August 27, 2010

U.S. Recovery Kaput

The head-fake recovery that bull-shills were counting on to part more investors from their money is petering out in plain sight. 

Helicopter Ben is about to drop hints on how he will execute Quantitative Easing Phase 2.  This keeps media chatterboxes busy parsing his every turn of phrase for hints on how investors should bet.  I am glad that at least Ben isn't as difficult to decipher as his predecessor. 

The shelf life on economic statistics like GDP growth keeps getting shorter.  Revisions to second quarter growth ought to put the U.S. economy back on the down slope toward economic annihilation. 

This gloomy horizon means the recent boom in M&A action will be short-lived.  That's too bad, because I've been looking at a lot of recent merger activity that might have made good arbitrage plays. 

Something else will crash besides the market:  municipal services.  Rolling shutdowns of fire stations are just the beginning of curtailments to local government services, although I suspect much of it will be a negotiating ploy by public employee unions unwilling to face cuts in benefits.  The rallying cry of "Protect our huge pensions or we cut more shifts!" will soon be heard in union halls and government cafeterias across this great land of ours.  The silver lining to that nonsense is that muni bond payments might be the last things to be cut, if ever. Maybe munis will come out looking good after all. 

Alfidi Capital Now On Yelp

Anybody who likes or dislikes my business can now post their reviews of Alfidi Capital on Yelp.  You can see that I'm quite controversial already.  I wouldn't have it any other way.

I invite all kinds of comments on the Alfidi Capital Blog but I don't censor them or tell people what to say.  Yelp works pretty much the same way.  I'm a frequent Yelper myself, and businesses I patronize are fair game for my wit and erudition.  My business is fair game too.  That's what makes America great. 

Come on, Teamsters.  I know you're out there, waiting to pounce on me when I take my next pot shot at union labor.  Bring on the comments!  I love it when my critics reveal their ignorance (as they've already begun to do on Yelp).

Wednesday, August 25, 2010

Debt Co-Chair Tells Truth About Milking Social Security

Money is the mother's milk of politics.  There's also another kind of mother's milk . . . the kind that the middle class expects from entitlement programs headed for bankruptcy:

An advocacy group is calling for the ouster of former Sen. Alan Simpson, the co-chairman of President Obama's bipartisan debt commission, who described Social Security as a "milk cow with 310 million tits!" in an email.

The idiots excoriating Sen. Simpson for his truth-telling no longer surprise me.  The ability to succinctly summarize an entitlement program's worth is a disqualifier for high-profile advisory commission work, at least in the eyes of morons.  Time will prove Sen. Simpson correct and his critics will find someone to blame for their destitution besides themselves. 

Another Senator, Bob Dole of Kansas, stated things even more precisely in a comment attributed to him at the second inauguration of President Reagan in Jan. 1985.  Sen. Dole supposedly said, "America, land of the provincial and home of the naive, thank God." 

Tuesday, August 24, 2010

Scary Credit Ratings Haunt Banks In Europe and U.S.

Karl Marx and Frederick Engels once said that Communism haunted Europe like some kind of freaky spectre, or words to that effect.  That ghost passed into nothingness but now a new one is hanging around - the spectre of collapsing credit ratings:

Slow economic growth and austerity measures in European Union countries may have negative rating implications for some sovereign ratings, Moody's Investors Service said on Monday.

Come on now, who's afraid of a little credit downgrade?  Well, for starters, European banks that played along with phony stress tests ought to be quaking in their boots.  Bad loans frighten bankers so badly that even here in the States the Fed is terrified of court-ordered scrutiny that will reveal just how close to failure some U.S. banks have come.  Bankers can look forward to more such scares as courts take an increasingly hard line on forcing disclosures of settlements

Man, I'm on a roll with all this linkin' goin' on. 

Monday, August 23, 2010

The Haiku of Finance for 08/23/10

Potash rejects bid
Fertilizer looking hot
Commodity play

Updating The Alpha-D For August 2010

The Monday after options expiration brings the usual updates.  There are no surprises this time.

I remain long GDX, FXI, and TDW.

I refreshed the following expired options positions:  Covered calls on GDX, FXI, and TDW.  Cash-covered puts on GDX and FXI. 

I remain long puts against IYR and LMT as hedges against the unpopped bubbles in real estate and defense spending.

I'm getting more interested by the day in FLIR, KEX, and now MDR but I won't go long until I'm more certain of their fair valuations. 

That's all.

Sunday, August 22, 2010

The Limerick of Finance for 08/22/10

Bond bubble fed by crashing stocks
But bonds are due for their own shocks
As big debts come due
Treasury will bill you
"I'm broke" is how Uncle Sam talks

Saturday, August 21, 2010


It took a government program to prove that throwing good money after bad is a dumb thing to do.  The HAMP program failure rate is almost at 50%:

Approximately 630,000 people who had tried to get their monthly mortgage payments lowered through the government program have been cut loose through July, according to the Treasury report. That's about 48 percent of the those who had enrolled since March 2009. And it is up from more than 40 percent through June.

Any corporation that saw only a 50% success rate for a business strategy it launched would immediately either terminate the effort or fire the people who conceived it and revamp the strategy.  That ususally doesn't happen with government programs.  Calling this thing "Making Home Affordable" is wrong; it should be re-named "Making Home Unaffordable" because it prevents home prices from dropping to price points that renters can afford.  This boondoggle wil continue until a bond market revolt and run on the dollar forces it to collapse. 

Friday, August 20, 2010

Youth And Innovation In The City

My loyal readers (yeah, all three of them) could have found me imbibing at a happy hour in my attorney friend's workspace tonight.  Props to Adam Bier of bierLegal for being a generous host and mixologist.  I was probably one of the senior citizens there at the ripe old age of 37, but one of the attractions of private happy hours is the proximity to the flower of youth without music that destroys your ears.  Youngsters have so much spunk and feistiness, ya know?  I never had it but I'm probably a late bloomer . . . or perhaps a reverse bloomer a la Benjamin Button.  Nah, scratch that second option.  I'm definitely getting grayer. 

The youngsters at the shindig weren't gray yet.  One was a social entrepreneur who had raised money for a relief project in Cambodia (I think, my memory's hazy as I was in the middle of a nectarine cocktail).  Another guy owned a bicycle repair business and had a retired investment banker as a mentor.  One gal was hosting comedy performances in her home and was planning to exhibit experimental films.

None of them needed bailouts or stimulus money to get these projects going.  They just scraped some resources together, found a niche, and launched.  That's the kind of thinking that built America into what it was before the entitlement mentality made it prematurely senile.  It's the kind of phenomenon that will eventually get us out of Great Depression 2.0 once we realize that entrepreneurship is the only thing left to try once all of the wasted stimulus money is gone. 

This is why I won't live anywhere besides San Francisco.  Urban collectives like Noisebridge are hacking their way into future technologies while soccer moms worry about whether their Social Security checks will cover their SUVs' hydrocarbon fuel bill (hint: they won't).  Creative spaces like ARK221 are spawning artists and filmmakers while Hollywood shovels the same formulaic baloney onto Joe Six Pack's plate. 

Count on San Franciscans to show the world how technology and culture are done.  The kids are all right.  :-) 

Wednesday, August 18, 2010

Note Of Thanks To Seeking Alpha

Tonight the leadership of Seeking Alpha gave some of its contributors (including me) an introduction to the financial apps they're building into their platform. 

I think the apps are a cool way for contributors to tailor content.  Readers of Seeking Alpha can even custom tailor a dashboard to their liking.  Their pricing model will likely follow a "dim sum" approach in contrast to the "buffet" model of data purveyors like Bloomberg that offer all-in-one platforms. 

I'm not sure if I'll use any of the apps yet.  I'll have to digitally kick the tires on each one to see if they add something to my articles. 

Tuesday, August 17, 2010

Pro-Mortgage Bloviation Abounds

The banking industry has instructed our government to continue pumping the value of home mortgages lest they be forced to reveal their balance sheets to be wishful thinking.  Uncle Sam had better keep a-pumpin' as there's trouble ahead.

Construction loans are cratering, taking out another sector where banks used to make money.  That's to be expected in a nation that paved over the few remaining green farm belts outside its megalopolises to lay down tract after tract of empty McMansions.  God bless America! 

It's too bad nobody told the Fed that banks needed so much more help, because they're about to implement a rule that will ban yield spread premiums.  Slap that limit on home loan liquidity and profitability and you've tied the banking industry's fate that much more tightly to whatever QE program the Fed dreams up next.  This one at least benefits the little guy a little bit. 

Full disclosure:  Author has no mortgage. 

Monday, August 16, 2010

The Haiku of Finance for 08/16/10

Sinking homebuilders
Sentiment drop isn't done
Hold off on home buys

Challenges For U.S. Transportation And Trade

China's surge past Japan in GDP is making headlines worldwide as its economy grows to match that of the U.S.  Less heralded are more specific trade-related metrics for these Pacific countries that do not bode well at all for the U.S. and its transportation sector. 

U.S. trade with Japan is at its lowest dollar value since 1992, immediately after the peak of Japan-phobia in the States.  Adjusting for the weaker dollar indicates that American goods are probably much less desirable to Japanese consumers.  Japan will be even less inclined to spend more on U.S. goods given its economic weakness.  The U.S. administration's plan to double exports in five years will have to find some other market. 

Container traffic has passed its peak now that the U.S. recovery is dying.  Inventories are rising across the board as many industries find that they ordered too much too fast.  Transporters had a jolly good time shipping peak loads while that lasted. 

The larger lesson for investors in any of this news is that right now is a very poor time to invest in U.S.-based transportation stocks.  U.S. trade is suffering, especially in the Pacific, and tonnage is about to drop.  I'll wait this one out for some very cheap transportation stocks in Q4 this year. 

Full disclosure:  No positions in any U.S. transportation stocks.

Sunday, August 15, 2010

The Limerick of Finance for 08/15/10

Now China has outgrown Japan
Still growing as fast as it can
But growth's not enough
Keeping up can be tough
Eco-damage is what they must ban

More Junk Bonds For A Junk Economy

Corporate borrowers with nary a chance of repaying debt are taking advantage of record low interest rates to sell junk bonds:

U.S. companies issued risky "junk" bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets.

The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.

Fixed-income investors are so desperate for yield that they're willing to clear the junk bond market of any and all inventory.  The last time I recall seeing stories like this was Spring 2007, just months before the first panic attacks started hitting credit markets.  We can thank the Fed's gamble on QE2 for returning us to this precipice.  Not everyone at the Fed is happy to gamble with America's solvency:

The Federal Reserve is undertaking a "dangerous gamble" by keeping rates at near zero for so long, and must start raising rates or risk damaging the nascent U.S. recovery, a top Federal Reserve official said on Friday.

Helicopter Ben will stay the course despite dissenters like Thomas Hoenig.  China isn't waiting for any further quantitative easing and is diversifying away from dollar holdings in advance of more Fed purchases of debt.  If only American investors could do the same.  Alas, it's too late for many Baby Boomers to diversify, and what little they have left in U.S. assets won't see them through their retirement years

America's hard times will last a long time.  Prepare for long, lean years by spending less and saving more. 

Saturday, August 14, 2010

End Of Spill, Ready to Drill

BP has stopped the Deepwater Horizon blowout.  Hooray.  Any talk of stopping deepwater drilling in the Gulf of Mexico is now mere political theater with the mitigation of this six-sigma event. 

Consider that much of the feared damage from the spill never materialized.  Much of the spilled oil degraded due to natural environmental action with no help needed from BP and its relief teams.  The U.S. government now has a firm methodology for calculating the potential damage from oil spills.  NOAA's Oil Budget Calculator will help determine the scale of the response needed for future accidents.

The government isn't the only party that's acquired valuable experience from this event.  The supermajors are committing to build a billion-dollar rapid-response system.  The world's leading sub-sea engineers have now nailed down firm procedures for capping gushers on the deep seabed, adding to the industry's body of knowledge.  Future spills can now be solved without wasting so much time with trial-and-error engineering. 

The U.S. simply can't get by without oil from the Gulf.  The offshore oil industry will be indispensable to the world economy for the next several decades. 

Full disclosure:  Long TDW with covered calls.  No position in BP. 

Friday, August 13, 2010

Don't Fight Slides Of Dollar Or Equities

If investing is about fundamentals, then currency investing is about betting on a country's overall health.  The U.S. dollar's slide is a sign that the rest of the world is discounting U.S. assets.  The next shoe to drop:  U.S. equity markets should soon follow the dollar down.  The increasingly jobless recovery is a forewarning for those who choose to listen.  We're not as bad as Greece yet but we'll get there soon enough. 

Any good news for America lately?  Well, a weaker dollar will help exports.  The Russian drought isn't the only reason U.S. grain exports are rising; a cheap dollar makes them more competitive. 

Thursday, August 12, 2010

No Mortgage Revival, No Property Recovery

Even with the Fed's announced intention to increase its purchases of mortgage-backed securities, purveyors of said securities cannot see a bright future:

Investors doubt the market for home- loan securities without government backing will revive until 2012, according to Moody’s Investors Service.

Thanks for the heads-up, Moody's.  Too bad you couldn't have given us comparably prescient views when the market for the MBS securities you rated as AAA was about to go down hard in 2008.  The home loan market can't survive at its present size anyway because zero net employment growth for a decade has capped the number of homes that can be sold to working Americans.  Those homes that have been sold are permanently underwater and will never regain their lost value:

During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

Despondent consumers continue to spend their mortgage money on imported goods in a sign that we're developing a cargo cult mentality as a society.  That can't be good. 

Tuesday, August 10, 2010

Fed Begins Incremental QE2

No one can say that this comes as a surprise.  The Fed hasn't crossed the Rubicon towards hyperinflation just yet, but it has definitely waded in:

The Federal Reserve on Tuesday took a small but significant step to counter a weakening U.S. economic recovery, saying it would use cash from maturing mortgage bonds it holds to buy more government debt.

Fixed-income portfolio managers recognize this as a yield enhancement technique.  When you're unsure of which way to bet on interest rates, just use the spare cash you have to buy more of what you already have.  The difference here is that the Fed is such a potentially large buyer of bonds that it creates its own demand.  The supposedly independent Fed is now a hostage to politics that demand an indefinite postponement of America's sorely needed wake-up call. 
All ordinary policy tools are exhausted, so the Fed is left with incremental steps back into asset purchases and the eventual creation of more artificial liquidity when the incrementalism proves insufficient.  Whatever exit strategy the Fed had contemplated up until now is gone.  The only possible exit from this mess will come when a run on the dollar forces full-on hyperinflationary QE. 

Monday, August 09, 2010

Corporate Bond Annihilation Postponed

Here comes more happy talk from the media establishment.  Blandishments for bond investors are right in here to keep them buying debt:

At its worst point in November last year, the 12-month default rate for American high-yield bonds was 11.3%, according to Standard and Poor’s (S&P). That rate is now rapidly declining, with S&P forecasting it will hit 2.8% by June next year.

The admission that a temporary stimulus bubble is all that stood between bondholders and economic annihilation is there for anyone to see.  Most readers won't get past the headline or the first sentence.  Gotta get back to watching reality TV, ya know.  This news whets suckers' appetites for new debt from exotic places like Venezuela.  There'll be plenty more buyers jumping in when the Fed ramps up its own QE2 purchases.  The Fed will have to sop up those U.S. bonds to replace the lost Chinese demand that's now heading into Japanese bonds

Bonds bonds bonds!  Everybody wants bonds.  The bad part is that buyers will regret getting in at the peak if they buy anything other than ultra-short maturities.

Nota bene:  The author owns 30-day Treasuries maturing in September 2010. 

Friday, August 06, 2010

The Haiku of Finance for 08/06/10

Boeing loses planes
Canary in air's "coal mine"
Air travel will shrink

Nothing But Negatives Today

Everything's coming up snake eyes today and yet Mr. Market barely lost a nanoparticle of worth

Berkshire Hathaway's net income is down by almost half in Q2, mainly because of bullish options bets on indices that have soured.  Warren Buffett hasn't lost his touch just yet but sometimes it's better to bet all-in on what you know and avoid hedging what Mr. Market might do. 

Permanent private sector hiring is still anemic.  The trend towards temp work and a permanent freelance class among white collar professionals will soon be the expected norm.  Salaried jobs will be reserved for members of elite families that will not quietly surrender control of career tracks in prominent corporations.

AIG is still a bottomless sinkhole.  Really?  No kidding.  It's funny how Treasury and its media mouthpieces continue to shill for TARP recipeints' availability to pay back their rescue money.  It's darkly funny how selling assets to repay loans puts AIG even further into an untenable position that the taxpayer must backfill. 

The consumer credit engine is shutting down.  Perhaps Joe Six Pack is finally realizing that skipping mortgage payments doesn't keep enough cash in his pocket to maintain a middle class lifestyle.  Look for stories like this to intensify the economy's downward plunge as ARM resets keep hitting.  So long, recovery, we hardly knew ye. 

Full disclosure:  No positions in BRK-A or AIG's remnant. 

Thursday, August 05, 2010

Send Fannie Mae To Iraq

Good news!  Your (okay, our) government isn't going to lose as much money on Fannie Mae this quarter as it usually does in most quarters.  That's great!  This postpones the U.S. government's eventual bond default by a few nanoseconds. 

Bad news.  :-(  This is the same government that can't account for another government's oil money.  Iraq's oil revenue must have disappeared into thin air.  Oops!  Sorry about that, Iraqi kids.  You'll have to go without electricity in your elementary schools for a few more years.  Better luck next time. 

Let's implement the obvious solution.  Fannie Mae's accountants should have been running the Iraq oil trust accounts from the get-go.  Deploy them immediately to recover the dough from wherever it went. 

Full disclosure:  No position in FNM. 

Wednesday, August 04, 2010

Energy Milestone For China

Another marker appears on the long road to Chinese economic ascendancy.  The Middle Kingdom is now even more of an energy hog than we are:

China's energy use has more than doubled over the last decade to overtake the United States as the word's biggest user, according to preliminary data from the International Energy Agency.

As the data from the IEA shows, China has gone from using 1,107 million tons of oil equivalent (Mtoe) in 2000, to 2,131 Mtoe in 2008 and is estimated to have consumed 2,265 Mtoe in 2009.

The IEA's estimates are probably more honest than data from the Chinese government.  You can read this development in one of two ways.  China's domestic coal reserves and push for mega-generation projects like the Three Gorges Dam are a foundation for huge future growth.  Alternatively, they may be about to run smack into the limits of their ability to exploit their environment; rainwater runoff is flushing enough trash into the Yangtze River to clog the Three Gorges Dam.  I'm willing to bet that China is so desperate to keep its development on track that it will spend money to solve the erosion and recycling problems it now faces.  Plenty of new urbanites are underemployed,, or soon will be as the Chinese real estate bubble deflates.  Maybe they'll be grateful for the chance to scoop detritus out of hydroelectric intakes for a dollar a day.  China doesn't have the luxury of waiting a generation for a green revolution. 

Full disclosure:  Long FXI with covered calls and cash-covered short puts.

Tuesday, August 03, 2010

Falling Homeownership Isn't Such A Disaster

I look askance at Alan "Maestro" Greenspan's lament that a second housing collapse will spark an unfortunate recessionary relapse.  Boo hoo.  Home prices need to fall to clear the market of vacant inventory.  The housing bubble's first collapse would have brought about that new equilibrium already were it not for the reinflationary drive of Greenspan's proteges at the Fed and Treasury.  There's nothing unfortunate about forcing homeowners who deliberately overstretched to finally learn to live within their means.  This is necessary even if it comes at the price of homeownership falling to its lowest level in almost two generations

Aspiring home buyers will wince when the Fed rolls out its latest QE move to further prop the mortgage market.  The Fed is holding onto those junk mortgage bonds because their imaginary value represents what little net worth many Baby Boomers have as they head into what would have been their golden years. 

This mad pumping of a moribund housing market can't continue forever. 

Full disclosure:  Anthony J. Alfidi does not own a home but is long puts against IYR. 

The Haiku of Finance for 08/03/10

Careful consumers
Hesitant to crack wallets
Except for autos

YRC Worldwide Can't Shake Downward Spiral In Q2

There is little good news from YRC Worldwide's Q2 filings.  Their per-share net losses narrowed to a penny, beating Wall Street analysts' consensus estimate of an $0.08/share loss.  That's small comfort given the looming problems the company still faces.

The LTL carrier found a way to make its August payment to its remaining bondholders without selling any mothballed freight centers.  They're issuing debt (maturity 2014) at a 6% coupon, which is 100 basis points more costly than the debt they're trying to retire (maturity 2023).  The finer point is difficult to ignore:  YRCW is faced with exchanging long-dated debt for short-term debt at a higher interest cost.  A rapidly inverting yield curve is a sign that bond underwriters are faced with selling this company's debt to increasingly skeptical buyers.  This cannot be anything but negative news for the company's credit standing or short-term solvency. 

YRCW will face further trouble with a pension contribution "snapback" poised to clobber whatever earnings it may post in early 2011.  This $300mm unfunded liability can be deferred only if the company and its union leaders agree on further concessions early enough in Q3 to allow drivers to vote for another deferral in Q4.  The negotiations deserve scrutiny but it remains to be seen whether the Teamsters can back away from their strident demands for restored benefits long enough to allow YRCW the breathing room it needs. 

The story of YRCW seems to be one step forward, one and a half steps back.  The next half step back may return it to the path it was on in 2009 - toward bankruptcy. 

Full disclosure:  No position in YRCW.

Sunday, August 01, 2010

The Limerick of Finance for 08/01/10

The wealthy have curtailed their spending
The economy won't be mending
So don't spend your cash
Hold on to your stash
The nascent recovery is ending