Friday, September 30, 2011

Huntington Ingalls Scores Nuke Revenue

Here's a story about a government contractor that caught my eye.  Huntington Ingalls Industries (HII), which spun off from Northrop Grumman (NOC) this past March, just landed a decent-sized contract to maintain prototype nuclear reactors for a U.S. Navy research program.  The minimum they'll earn is about $40mm per year with the base contract and another $80mm per year with the option.  Based on gross revenue of about $3B per year (an estimate based on six months' of data from their 10-Qs), that will amount to a topline increase of 1.33% to 4% depending on whether they fully earn that option.  That's not bad, but any contribution to earnings will depend on the cost of servicing this contract.  HII's ROE is clocking in at a respectable 12.73% but ROA lags at 2.75%, indicating that HII is not efficient at using its existing assets to generate earnings. 

Here's another tiny feather in HII's cap.  Its Continental Maritime of San Diego subsidiary was awarded OSHA's star status.  Nice work, folks.  Now translate that into lower costs for the contracts you service and you'll really impress me. 

Full disclosure:  No position in HII or NOC at this time. 

Thursday, September 29, 2011

Even Man Group Can't Get It Right

I entertained myself recently by attending an investment conference here in San Francisco.  Some dude from a feeder fund for hedge funds introduced himself to me by asking, "So, you're saying you'd pay a premium for a manager who can outperform?"  I smirked and told him "yes" then specified that my premium would be precisely zero.  It is a waste of effort to seek out managers who may outperform in the short term because their returns invariably revert to a mean over the long term, so paying them any premium at all is a waste of money.  That premium is the reason hedge funds actually underperform a passive indexed investment. 

More hedge fund investors are now finding this out the hard way.  Man Group, one of the world's largest agglomerator of hedge funds, has lost 25% of its value as its investors have begun redeeming their investments.  Even leading hedge funds can't get it right.  Gee, that's just too bad.  All of those whiz-bang models couldn't beat market benchmarks after all.  Portfolio management skill is so genetically rare that those few people who do possess it - Warren Buffett of course comes to mind - happen to also be innovators whose wisdom is widely available for free. 

No hedge fund will ever get my money. 

Wednesday, September 28, 2011

The Haiku of Finance for 09/28/11

Europe union end?
Debt crunch will leave a remnant
Franco-German rump

Tuesday, September 27, 2011

Time To End All Energy Subsidies And Feed-In Tariffs

The collapse of Solyndra will hopefully put a nail in the coffin for government loan guarantees targeted at specific industries.  Unfortunately, hope is not a method.  Solar technology is actually becoming extremely cost-effective completely on its own and probably won't need any subsidies.  We should take the same approach with funding other energy developments.

The oil depletion allowance is the mack daddy of energy subsidies.  Read that IRS publication carefully and you'll note that it also covers minerals and timber.  The depletion allowance is not merely a freebie handed to deep-pocketed industries that fund political campaigns.  It is easy to see how this tax break encourages accelerated reductions in our nation's vital economic resources that would otherwise be uneconomical without a tax break.  It makes no sense to help oil producers pump more crude than their sales forecasts and long-term contracts will justify. 

Nuclear power gets plenty of free help.  That should end along with the design preference for lightwater reactors.  Thorium-salt reactors are the future and allow for safer, smaller designs. 

I suppose we'd have to phase out feed-in tariffs just to be fair.  Such a mechanism distorts a free market in electricity by mandating different cost structures for renewable sources than for non-renewables.  The government's proper role, as guarantor of "the commons," is to invest in infrastructure like long-distance transmission lines that bring renewable sources within everyone's reach.  Good transmission lines that bring Montana's wind and the Southwest's sunlight to every grid operator are a much more appropriate public policy objective than cost-diluting tariffs. 

Full disclosure:  No investments in any energy companies at this time, with the exception of a sweat equity investment in a wind energy startup that never paid me for my services, has had no contact with me for about three years, and looks like it has had no real activity after I left.  Oh well. 

Monday, September 26, 2011

Alpha-D Update for 09/26/11

My GDX covered calls expired last Friday, which did not surprise me.  What did surprise me was the collapse in the value of GDX thanks to huge selling pressure in gold bullion.  The blogosphere is pointing to raised margin requirements on the CME as the likely culprit, which makes some sense if  traders with big gold positions had to liquidate some gold to cover margin calls.

This is why I've renewed my covered calls to expire next month rather than at the end of this week.  I believe gold will retrace its climb upward as long as Fed policy is holding interest rates near zero, so I need to allow more time for the climb back up to reach the calls' strike price.  Trouble in the eurozone is definitely making the U.S. dollar look more attractive than gold as a temporary store of value, so gold's retreat from its record highs may not be finished yet. 

I made no other changes to my Alpha-D portfolio. 

Sunday, September 25, 2011

The Limerick of Finance for 09/25/11

If Europe's rescue fund does expand
It will give Greece a big helping hand
But it may be too late
Italy just can't wait
Its default would break up Euroland

Friday, September 23, 2011

Tidewater's Worsening Prospects In Fall 2011

I was reluctant to exit my position in Tidewater (TDW) a few months ago when I realized their balance sheet no longer had the strength I preferred (i.e., long-term debt should be less than twice net income).  I am even more grateful now that I made that call.  Tidewater has released pessimistic expectations for this quarter's revenue.  I guess their strong market position doesn't translate into pricing power.  Recent weakness in the price of oil probably doesn't help make offshore drilling projects desirable, and that's Tidewater's bread and butter. 

Full disclosure:  No position in TDW at the present time. 

Thursday, September 22, 2011

Tough Times For Rail Starting Fall 2011

Warren Buffett's favorite sector (besides insurance and banking) is rail.  American railroads had a good run for the past couple of years but now the rolling slowdowns in other sectors are hitting the rails (ha ha, a pun).  Big coal producers are cutting their production outlooks and won't need to order so many train shipments.  It's too bad that rail industry managers can't retrench as quickly as their share prices have declined.  Class I rail carriers are still hiring at a fast clip, and carriers of all sizes are still pulling idle cars out of yards for scheduling.  Neither of those trends will be sustainable for much longer if big customers keep reducing demand. 

The rail equipment sector also has its head in the sand with unrealistic expectations of rising demand for new railcars.  Those planned orders will be canceled soon once railroads put cars back into storage as quickly as they pulled them out.  Greenbrier (GBX), Trinity (TRN), and American Railcar Industries (ARII) are probably going to see a hard winter into 2012.  I wouldn't ramp up hiring if I were them; they'll just have to lay those folks off all over again once this bow wave of slacking demand works its way through the railroads to their servicers. 

Is there any good news?  There is for me, since I've got cash I'm waiting to commit to buying railroad stocks that can stay healthy through the next phase of Great Depression 2.0. 

Full disclosure:  No positions in any railroad stocks or other companies named above at this time. 

Operation Twist's Perverse Effects Confirmed

We did not need to wait long at all to see the Fed's desired end state become reality.  The stock market sank again today, while bonds rallied.  The crashing stock market makes bonds look desirable.  That will feed the federal government's insatiable desire to spend money it doesn't have and borrow money it can't pay back.  The falling 10-year Treasury rate will prop the housing market for another fake recovery.  Underwater homeowners can pretend they have regained lost home equity for a little while longer.  Those are all part of the Fed's master plan to keep America running on fumes. 

The reset of the American way of life to a much lower level of sustainable prosperity comes in fits but it comes nonetheless.  Stocks one week, perhaps bonds another week, then unfunded entitlement spending another week, until finally consumer spending collapses and pulls down seven decades of post-WWII middle class affluence with it.  The Fed can't keep the mirage up forever.  The age of Levittown was fun while it lasted. 

If it makes my readers feel better, I too am feeling the effects of this bear market.  The value of my GDX and FXI holdings are down with the rest of the equity market.  My reasons for holding them are still valid.  They are both long-term hedges of sorts against the U.S. economy.  China is carrying more internal debt than its foreign accounts surplus would indicate.  Gold's run up won't last forever.  I'm just glad I took time to reduce my holdings of each while they were highly valued.  My cash pile awaits the coming bargains. 

Full disclosure;  Long GDX and FXI with covered calls. 

Wednesday, September 21, 2011

Fed Twist Quickly Sinks Stock Market As Monetary Tools Lose Punch

Today's a good day to be smart-alecky and say "I told you so," because I've long suspected that the Fed is running out of effective monetary games to play.  The Federal Reserve announced the launch of its "Operation Twist" bond-gaming program designed to keep Uncle Sam's borrowing costs as low as possible.  Note that the Bernanke Fed's approach to telegraphing its moves in advance is a far cry from the Greenspan Fed's opaque approach that kept market watchers guessing.  Anyway, as soon as the Fed disclosed the macroeconomic worries that prompted its decision, the DJIA lost two and a half percent of its value

The shortening duration of the U.S. government's debt is putting the Fed into a box.  The inability of further monetary measure to keep asset prices afloat is going to force internal Fed dissension out into the open soon enough.  The traditional six-month lag for monetary policy to take effect won't be long enough for the Fed's anti-inflation dissenters to wait. 

Monday, September 19, 2011

Alpha-D Update 9/19/11

I'll be brief.  All of the covered calls on my GDX and FXI holdings expires unexercised.  I renewed the GDX calls with a weekly expiration and the FXI calls with a monthly expiration. 

I made no other changes.  I like how my cash pile is growing from all of the expired call options I've executed this year.  My war chest is ready for whatever valuation disasters Europe's insolvency will throw at the markets. 

Sunday, September 18, 2011

The Limerick of Finance for 09/18/11

The Greeks will not cut what they spend
Their deficit spending won't end
With more bailouts in doubt
And all options played out
Euro's breakup is just 'round the bend

Day Of Rage Ignites In America

The Arab Spring's Day of Rage phenomenon has arrived in the United States.  A few hundred professional activists and unemployed do-gooders tried to occupy Wall Street on a day when no one's in business.  That shows how unserious they are at this stage.  Future protests will be more aggressive as economic conditions worsen. 

The ruling elite has begun to acknowledge that things are getting worse.  NYC's Mayor Bloomberg warns that unemployed college graduates are a paycheck away from becoming anarchists.  The country club set needs to get nervous after hearing this from one of their own.  Youth unemployment, income stagnation, and lack of upward mobility were necessary conditions for the Arab Spring but were not sufficient conditions.  The black swan of the Federal Reserve's dollar debasement drove investor capital into metals and commodity foodstuffs.  That was sufficient to spark the kindling for revolution. 

The Day of Rage phenomenon is a form of class warfare, pitting economically marginalized workers against members of favored sectors.  Wall Street is the most visible target but it will not be the last.  Union-controlled automakers backed by government favoritism hand out juicy bonuses while making uncompetitive products.  GM was not alone in getting a deal from Uncle Sam.  Solyndra's bankruptcy reveals that a politically-connected investor moved ahead of other creditors.  The Administration's investments in favored renewable energy companies are looking more and more like slush fund payoffs for campaign donors.  This kind of cronyism was the rallying cry of protesters in Tunisia, Egypt, and Bahrain. 

If the protesters are true to their public statements against cronyism, they'd enlarge their target set to include companies backed by government favoritism.  Omitting blue-collar beneficiaries would be an indicator that the protesters are instigated by the professional Left against the visible symbols of the American ruling elite.

It is interesting to note that the original "Days of Rage" were a Weatherman/SDS revolutionary action in 1960s America.  I don't think it is a coincidence that Arab Spring insurgent leaders branded their uprisings with this moniker after American left-wing organizers visited MENA countries.  Some memes retain their power to motivate action even after a generation.  Activist presence in MENA and on Wall Street begs the question of ultimate funding and strategic direction.  Ask yourself who would benefit most from the downfall of U.S.-friendly monarchies and the U.S. financial system.  Then ask yourself why well-meaning American activists - and their ideological sympathizers in government who are unskilled at performing link analysis - allow themselves to be used in this manner.

Friday, September 16, 2011

YRCW Restructuring Complete, And Completely Pointless

My prediction from May that YRCW's stock wouldn't be worth a nickel after its restructuring is proving to be accurate.  Today the shares in this soon-to-be-delisted LTL trucker closed at $0.07.  A stock under a buck doesn't stay on an exchange for long.  Delisting will drop it even further as major institutional holders exit their positions.  Big players don't touch penny stocks listed OTC. 

The restructuring leaves existing shareholders with almost nothing.  Teamsters now own 25% of a failing company.  They should take firm delivery of their share certificates so they have enough to use as wallpaper at home in the event of Chapter 7.  Day traders and undercapitalized hedge funds now have an extra 300mm shares with which to waste time during market hours. 

The Wall Street analysts covering this turkey weren't as accurate as me.  Four firms actually upgraded their estimates of this stock in 2008 and 2009 while I've remained consistently bearish.  The analyst community's specific estimates of revenue and earnings have been so far off as to be meaningless.  The only estimate that matters IMHO is a calculation of intrinsic value at any given time based on a decade of performance.  That's why accuracy means far more than precision in estimation; accuracy gets it "about right" while precision runs the risk of getting it "exactly wrong." Human-driven events like market action can never be as precisely measured as engineering concepts.

I had it right all along.  Congratulate me any time. 

Full disclosure:  I never had any position at all in YRCW at any time. 

Trump Takes Gold Deposit In Signal To Ignorant Followers

Donald Trump likes PR that burnishes his image as a savvy guy on the cutting edge.  He's sort of joining the gold party by letting slip that he took gold bullion as a deposit from a tenant instead of cash.  I say "sort of" because I can't imagine The Donald ever going whole hog into the gold camp.  His real estate holdings are undoubtedly benefiting from the Fed's ZIRP focus.  Any rise in interest rates would put his heavily-leveraged properties seriously underwater and make loans for further development prohibitively expensive.  Taking a gold deposit from a precious metals dealer is good PR for the new tenant too.  Trump threw them a bone that didn't cost him anything extra. 

Gold is the hot asset class now, so Trump's leap onto its bandwagon means that the aspirational, wanna-be, know-nothing, Robert Kiyosaki-reading, suburban NASCAR dad, part-time real estate mini-mogul who bought a duplex last year and plans to flip it this year is going to start buying bullion.  That crowd can't scrape up enough cash for a 32-oz. bar but that's okay.  They'll be rushing on down to the corner pawn shop to drop cash on spare gold teeth and earrings that aren't acceptable as currency at your local grocery store.  I hope they really go for it.  They'll make it easier for me to reduce my GDX holdings at record high prices and build the cash pile I'll use to buy the real estate they won't need after they're bankrupt. 

Full disclosure:  Long GDX with covered calls.

Thursday, September 15, 2011

UBS Not Minding The Store While Trader Wipes Out $2B

I can't resist taking a swipe at a former employer that treated me poorly.  A loose cannon at UBS decided to play some unauthorized games with the firm's capital and lost $2B.  I think that's just great.  I'm not surprised at all given the lack of competent people there.  If you're dumb enough to gamble with somebody else's money with no regard for consequences, work at UBS.  If you don't know how to design risk management systems that can catch irregular trades, work at UBS.  This firm touted its Dillon Read internal fund while I was there and had to fold it up a year later because the people running the fund were clueless.

Go down hard, UBS.  You've had it coming for the longest time. 

Full disclosure:  No position in UBS at this time. 

Tuesday, September 13, 2011

Possible Greek Default And Probable U.S. Regulatory Outsourcing

The more a Greek default looks likely, the further into denial some in the financial establishment will go.  International Financing Review posits that a Greek default will not destroy the euro.  Perhaps a Greek default by itself will not be a sufficiently strong straw to break the camel's back.  There's always Italy and Spain, two much more substantial bundles of hay ready to drop.  The plunging share prices of European banks tell us plenty about just how much debt is bearing down on valuations.

I love riffing at random on such a fun topic.  We'll have even more fun on this side of the Atlantic if a proposal to surrender some SEC regulatory power to FINRA actually goes through.  The financial sector's capture of government, coupled with the crushing debt burden that will consume revenue meant for law enforcement, is outsourcing the rule of law.  It will pay very well to have friends in high and low places in neofeudal America.

Europe and America need banking but don't necessarily need certain banks.  Both regions need strong regulation of banking.  That observation escapes notice in the midst of efforts to preserve bankers' equity-linked deferred compensation packages. 

Monday, September 12, 2011

Alpha-D Update 09/12/11

Another week brings another set of covered calls on GDX that expired unexercised at the end of last week.  I renewed them on the GDX holdings in both my IRA and taxable account.  I am more inclined to set these calls with exercise prices closer to GDX's market price at the time of execution just to see if they'll be exercised within the week.

Like I've said before, gold's bull run has a lot more to do with the Fed's ZIRP stance than with any usefulness the metal possesses as an inflation hedge.  The price of gold may not respond well to renewed inflation if consumers' purchasing power is curtailed and governments implement restrictions on gold ownership.  I will continue to allow call option expirations to reduce my GDX holdings as the weeks go by. 

No other changes to the Alpha-D are in the pipeline for right now. 

Sunday, September 11, 2011

The Limerick of Finance for 09/11/11

EU wants a financial tax
So its welfare state won't get the ax
It's not a bad deal
Revenue would be real
Keeps the euro from getting more smacks

Friday, September 09, 2011

Europe's Troubles Sink DJIA With Insiders Sitting It Out

Europe's debt troubles are so severe and intractable that the resignation of a senior ECB official was sufficient to cause a big drop in the Dow.  This should indicate to even the uninformed casual observer that even the tiniest of black swans can now crash the West's stock markets. 

Elite opinion is more inclined towards panic than the hints leaking out in that article.  Recent declines in stock sales by insiders are deceptive.  Insiders sold plenty of their holdings in 2009 with the market's head-fake recovery and continued to sell into a rising market in 2010.  They're done selling because they've sold all they need to sell, not because they're suddenly bullish on America's prospects. 

The developed West is in for a very hard time.  This is 1932 all over again, but with digital communications shouting the latest HFT-driven swings to all corners of the world instantly.  More crashes await the dirt-cheap value investor. 

Thursday, September 08, 2011

Disgusting Union Thugs Harm Sea-Tac Ports

Economic hardship is no excuse for thuggish behavior.  Economic obsolescence is even less of an excuse.  Immature brutes used union solidarity as a cover for physical threats that closed sea ports in Seattle and Tacoma, Washington.  These idiots had the temerity to threaten security officers and the insolence to halt legitimate trade.  Who do they think they are? 

This is disgusting behavior from people whose employment is no longer viable at prevailing wages.  Instead of adjusting their expectations downward, or retraining for gainful employment that pays more, they lash out at economic forces beyond their control.  It's time to call these union dirtbags on the carpet and hand them their walking papers.  If they don't think their longshoremen's jobs at the ports are good enough, they need to step aside and let in the non-union hires who obviously want to work. 

There is no such thing as entitlement to a job.  Union thugs are placing American trade at risk, and with this particular action they are placing lives at risk by blocking train tracks (an immediate physical hazard in violation of OSHA workplace safety rules) and preventing grain from moving (a potential risk to life if food can't get to market).  Self-serving stupidity isn't unique to longshoremen.  Teamsters are suing to stop Mexican truckers from doing their jobs faster, cheaper, and better than they could ever do. 

America's union workers are finished.  The labor market in this country is long overdue for liberation from the iron hand of unionization. 

Wednesday, September 07, 2011

German Judiciary Renders Euro Reprieve

Reports of the euro's death are greatly exaggerated, at least for another month.  Germany's constitutional court gave its government a retroactive green light to bail out insolvent European governments.  It meekly called for legislative consultations in future bailouts, but in the increasingly elite-driven Western world that admonishment can safely be regarded as moot. 

Western political leaders can rest assured that threats of "tanks in the streets" (whether from officials like Hank Paulson or this new research report from UBS) will work wonders in forcing bailouts into action.  How the West's leaders gathered around saving the euro isn't clear.  Germany's Merkel was wavering in her support for more eurozone bailouts as recently as August.  Perhaps Rothschild's recent backing of SocGen was the signal that the old European noble houses were not about to let this grand experiment in Continental unity go down the drain.  At any rate, the Swiss bank's devaluation of its franc yesterday confirmed the unanimity of elite opinion on the matter of saving the euro. 

This is not by any means a signal to go long the euro.  Bailouts have a funny way of masking troubles that later reappear despite all good intentions at hiding them.  Insolvency can't hide forever. 

Tuesday, September 06, 2011

The Haiku of Finance for 09/06/11

Europe debt effects
U.S. stocks get more nervous
Oil price falling too

Goldman Sachs' New Euro Bearishness Proves Instantly Costly

We have fresh evidence that trading ideas from the masters of the universe over at Goldman Sachs aren't all they're cracked up to be.  In a "leaked" report that quickly went viral through the financial blogosphere, a Goldman Sachs trading strategist advised the firm's hedge fund clients to consider a complex bearish option play against the euro as a way to profit from multiple economic headwinds.  The headwinds themselves - capital-starved European banks, lack of U.S. job creation, questionable Chinese prospects - have proven costly enough to investors.  What proved even more costly today would have been any hedge fund action to follow through on GS's bearish options for the euro. 

The Swiss National Bank threw a big monkey wrench into that anti-euro strategy today by announcing a fix of the Swiss Franc at 1.2 to the euro.  The SNB's intent to buy unlimited euros would have destroyed any bearish options initiated against the euro prior to that announcement.  It remains to be seen whether GS will apologize to any hedge fund clients that acted on its leaked report's bright idea.  Investors also now have one less safe-haven currency available, as capital fleeing to quality recently bid up the CHF and priced Swiss exporters out of markets.  Now the SNB's frantic franc printing will inflate the price of any imports Swiss consumers need. 

Price inflation spawned by desperate central banks is rapidly becoming commonplace worldwide.  Soon no currency will be a pure safe haven (although a basket of them may be useful as portfolio diversifiers and arbitrage instruments).  The sovereignty crunch is in full swing.  John Robb at Global Guerrillas is proving more prescient by the day in tracking this truly global crisis of capitalism. 

Full disclosure:  No position in GS at this time.  No position in Swiss francs (commonly noted as CHF) or any CHF-derived instruments (such as the ETF trading as ticker FXF) at this time. 

Alpha-D Update for 09/06/11

Well, those covered calls on GDX are working out alright.  My GDX holdings rose through the calls' strike price last week; I repurchased most of what was sold off in my taxable account and all of what was sold off in my IRA.  What was sold away in my taxable account will be a long-term capital gain.  I renewed the covered calls to expire next week.  The cash flow is nice, but what's even nicer is that I can gradually reduce my holdings of GDX at large gains.

I believe gold is doing what I anticipated it would do when I first started accumulating it via GDX several years ago.  I do not think gold will do as well if foreign investors spark a run on the dollar by dumping dollar-based assets.  That will push up real interest rates and make gold less attractive as a dollar alternative. 

I made no other portfolio changes, although I am looking at merger action for special situation plays. More on this as developments warrant commentary. 

Monday, September 05, 2011

Rent Control Likely To Survive Hyperinflation

Real estate is arguably an inflation hedge, but it is crucial to identify what kind of real estate - residential, commercial, undeveloped land, etc. - is likely to perform well in a hyperinflationary scenario.  Hyperinflation often brings unpredictable political changes that can affect the attractiveness of real estate. 

One early casualty of hyperinflation is the control landlords can exert over rental property.  Local governments often implement rent control laws to ameliorate public outcries over the rising cost of living.  This is good news for renters who live in rent-controlled apartments and bad news for multi-unit landlords who can't raise rents to match their increasing costs for utilities and maintenance. 

Commercial property may or may not be subject to rent control depending on how it is zoned.  Rent controls are designed to protect live human beings who vote in elections and support political campaigns.  Commercial tenants may not be a protected class during hyperinflationary politics, so their rents may not be protected.  That's potentially good news for commercial landlords.  Property that has no live tenants - warehouses, mini-storage units, etc. -  may be able to maintain cash flow that keeps up with inflation.  The valuation of the property is another story.  Rising interest rates in an inflationary economy will depress the value of real estate. 

Undeveloped land is another story.  Raw land with rights of way, minerals, farm/ranch potential, and other goodies will not be subject to rent control.  The unpredictability of development costs and the general lack of credit available during hyperinflation may prohibit all but the most rudimentary development of raw land.  Developers with deep pockets and cash flows that keep place with inflation will not suffer.  Investors buying raw land as an inflation hedge should see it as a store of value that will not be available for cash flow until after hyperinflation ends.  The remainder of their portfolios should be in assets that will generate inflation-indexed cash flows. 

Consider hyperinflation under Germany's Weimar government as a possible template.  Germany printed its Papiermark into oblivion to alleviate its war reparations burden.  The introduction of the Rentenmark ended the hyperinflation by reorienting Germany's currency toward hard, productive assets.  Gold bugs will be dismayed that the new currency was not directly redeemable in gold, but was subject to a complex valuation involving gold bonds, agricultural land, and industrial assets.  Any similar innovation to halt hyperinflation in the U.S. has the advantage of an immediate supply of assets with which to back the new currency.  The problem is that these assets - mortgage backed securities held by the Federal Reserve and bank stocks/warrants held by the U.S. Treasury under TARP - may have very questionable valuations themselves.  The U.S. government will need additional stores of assets - perhaps stocks and bonds confiscated from investors' retirement accounts - to back a new currency.

We will keep wargaming hyperinflationary endgames here at Alfidi Capital.  Meanwhile, we can seek out investments that will offer some hope of retaining value during hyperinflation.  Rent-controlled residential properties probably are not among the safest choices for investors. 

Sunday, September 04, 2011

The Limerick of Finance for 09/04/11

The unemployed still have it rough
Seeking jobs when there aren't enough
When part-timers compete
The jobless feel the heat
Finding stable work really is tough

Fed Study On Demographics And Markets Ignores Boomers' Lack Of Savings

The Federal Reserve's economists can be counted on to provide food for thought.  The downside is that they sometimes only cover half the story.  The San Francisco Fed recently published an Economic Letter comparing age demographics to stock market returns.  The theory is sound; after all, prices for stocks are driven as much by demand for investment and the supply of shares available as any other marketable good.  One major problem with this study is that Boomers may not have enough invested in the stock market to make withdrawals on a scale that will depress market returns. 

This study assumes that Boomers' retirement assets are significant enough to move the market upon conversion to cash.  Evidence of Boomers' savings do not support this assumption.  More Americans than ever before have negligible to zero retirement savings.  One quarter of all Baby Boomers are totally without any retirement resources at all. 

Perhaps the other three-quarters of the Baby Boom generation will be the ones depressing the stock market with their withdrawals.  All it would take is for them to figure out how much to withdraw.  Most Baby boomers don't even know how to plan for their needs in retirement.  There is no way they can estimate how much of their portfolios they'll have to liquidate. 

The Fed economists may be correct, but we are equally likely to stumble into a chaotic period where stock market prices remain the plaything of central bank monetary experiments.  Retirement assets that are out of individual investors' control - like 401(k) plans and public employee pension plans - may be subject to nationalization and confiscation if a dollar collapse forces the U.S. government to repay its foreign creditors in desperation.  If that happens, stock prices may not be hurt all that much if equities are surrendered to the Chinese central bank as payment in kind for U.S. Treasuries.  A collapsing dollar would prompt the Chinese to demand progressively more equities in exchange for Treasuries sinking in value as a dollar crisis progresses.  It seems that such demand would sustain U.S. equity prices in the face of Boomer withdrawals, negating the Fed researchers' conclusions. 

Follow this think-piece to its conclusion.  China will end up owning the U.S. stock market and Boomers who haven't saved will "withdraw" devalued U.S. Treasuries from what remains of their former employers' sponsored plans.  See, it won't be so bad after all. 

Saturday, September 03, 2011

Stupid Schools Waste Your Tax Money On iPads

Public "education" gets dumber by the day.  The latest fad to catch the attention of school administrators is the iPad.  Some school administrators think buying iPads is a better investment than textbooks.  They failed to do the math.  A textbook costing $50 to $70 will last years; my textbooks did all through my K-12 years.  A $500 iPad is designed to become obsolete in a year or less; its apps require constant upgrades; and its battery has a limited life.  Apple's battery replacement service requires the entire iPad to be replaced, so schools will have to spend extra money backing up all of their iPads' data before shipping them in.  The $100 or more spent on an upgraded but blank iPad could have bought a couple of textbooks. 

Oh, BTW, schools in low-income neighborhoods just made their students targets for theft by forcing them to carry a $500 brand-name device home to complete their homework.  When Johnny gets jumped and robbed by some punks on his way home, he will be out one very expensive iPad (and the school will probably bill his parents!) and have no way to study for tomorrow's algebra test.  In even the most violent schools today, punks don't steal ordinary textbooks because they don't have a street value outside the school. Way to go, school administrators.  You've just increased the chance that your students will suffer bodily harm.

Most hardbound textbooks - math texts, English lit, etc. - don't change much from year to year and don't need "upgrades" like electronic material.  Spending foolishly on faddish toys is now a hallmark of school administrators who are at a loss when faced with educating Ritalin-addled children raised by video games.  How many city school districts will face budget shortfalls because of wasteful spending?  The muni bond investor's loss is the AAPL shareholder's gain. 

Apple has long had a dominant position in the education market, so introducing the iPad to its captive audience didn't require much penetration.  This is why Apple is so profitable.  It can count on the stupidity of the education establishment.  Smart move.

Full disclosure:  No position in AAPL at this time. 

Friday, September 02, 2011

No New Jobs For A New Recession

Fans of "The Simpsons" TV cartoon know about the fat kid who laughs "ha ha" whenever Bart or another main character do something embarrassing.  I wish I could find an audio file of that laugh that would play here.  Verbiage will have to suffice.  It's time for me to laugh "ha ha" at all of the idiotic commentators, zombie analysts, and dilettante economists who have claimed for the past year that the U.S. economy is out of recession.  Today's U.S. Bureau of Labor Statistics report on non-farm payroll employment reveals that no new jobs were created in August.  I wonder how advocates of stimulus will claim that unemployment holding at 9.1% is a measure of its effectiveness.  The stock market certainly appreciates the new reality of structural unemployment. 

I can't say that all economists are dumb.  A bunch of them hanging out in Italy, including Dr. Nouriel Roubini, know all too well just how weak the world economy is going to be for a while.  It's good that they're speaking in probabilities and not certainties.  No one can know for certain how severe or lengthy this renewed weak period will be.  Nor can anyone know whether the Fed is going to recreate its "Operation Twist" strategy from the 1960s that is supposed to push down long-term interest rates.  Selling any short-duration instruments will push up short-term rates in the face of increasingly nervous European banks unwilling to lend to each other.  Operation Twist is fraught with the risk of locking up overnight lending and relaunching the credit crunch. 

Ha ha!

Thursday, September 01, 2011

U.S. Energy Is A Mess, And Not Just From Irene

Stop wondering whether infrastructure spending is going to jump-start a U.S. economic recovery, despite any official job-growth plans driven by the broken window fallacy.  Utilities in areas back east that were most heavily affected by Hurricane Irene are mobilizing every spare resource they have to restore knocked-out energy grids.  That means it will be months before the status quo as of August can be restored.  Any capital outlays these utilities have planned will be diverted into emergency maintenance and repair.  Rates will rise for neighborhoods in unaffected areas with functioning grids to subsidize these expenses, squeezing businesses' cash flow as they pay more for the same amount of energy used. 

Federal spending on new enterprises in renewable energy won't help in the short run either.  Remember what I mentioned yesterday about solar companies going down the tubes even after getting big bucks from Uncle Sam?  That doesn't prevent the industry from dangling a carrot in front of politicians, promising . . . what exactly?  Campaign contributions after the next round of government loan guarantees?  It's funny how that article mentions First Solar (FSLR) and LDK Solar (LDK) as big potential winners.  Their stock prices have been totally hammered this year.  LDK, a Chinese company, is suffering as much from overcapacity in solar panel production as American companies like LDK.

China isn't putting all of its eggs in the solar basket.  It continues to develop its nuclear energy sector to generate the baseload power that solar can't produce.  Let's see the U.S. government's proposed infrastructure bank allow for investment in nuclear energy.  It couldn't possibly turn out any worse than Uncle Sam's failed loan guarantees for bankrupt solar producers. 

Full disclosure:  No positions in FSLR or LDK at this time.