Tuesday, January 31, 2012

XcelMobility (XCLL) Talks Fast Mobile But Oddly Spent Little Capex

Tim Fields is at it again.  He must really like the analyses I've published of his past teaser mailings, because his Untapped Wealth Online keeps sending me more teasers for penny stocks that deserve public examination.  I got a brand new one last week.  This time he's touting XcelMobility (XCLL), some company that claims to accelerate Internet speed.  Maybe it's like a router on steroids.  It sure would be nice if such enhanced performance could have a steroidal effect on the company's financial results, because so far this stock is passed out on the gym floor.

The company has three years of zero revenue.  Why anybody would take such a company public is beyond my ability to appreciate.  They had no discernible capex spending for three years, which is unusual for a tech company with such a supposedly promising approach to acceleration.  In 2011 they spent a whopping $13K on capex.  It took them three years to figure out how to spend money on R&D, folks.  Figure that one out.  Other tech companies start spending on development right off the bat.

The leadership team seems to have relevant entrepreneurial credibility at first glance.  They also seem to have a common connection to CC Power, XCLL's predecessor company.  It's cool that founding teams stick together but they need to produce more than a corporate reorganization and name change.  I've noticed that the original company was born in Gold River, California before its reverse merger.  That's a stone's throw from where I grew up.  There is no precedent (of which I'm aware) for any special business innovation to come out of the east side of Sacramento - except for Yours Truly, of course.

If this stock is anything like the others in Tim Fields' mailers, I expect it to underwhelm in 2012.  I stay away from tech companies that run their big fat mouths about how much promise they have with little tangible results.

Full disclosure:  No position in XCLL, ever.

Monday, January 30, 2012

The Haiku of Finance for 01/30/12

Banks cutting credit
U.S. banks shine, Europe hurts
This party won't last

Germany Gets Its Wish, Not That It Matters

The German approach to fiscal prudence is gaining momentum as an overwhelming number of fellow EU countries agree to new legalisms limiting their profligacy.  This is all irrelevant.  Germany's victory over chronically indebted southern European countries is likely to be short-lived.  Markets aren't interested in what a piece of paper says about what countries are supposed to do with their budgets.  Bond players, unlike politicians, live in the real world and have to earn a real living.

Portugal is about to find out how much its bond buyers want to earn their wages.  Portugese bond insurance is almost as pricey as Greece's, and that's the good news.  The bad news is whatever news hasn't broken yet out of Italy or Spain.  I can hardly wait for one of these bankrupt Continental governments to call the EU's bluff on fiscal discipline.  The country that goes first will learn the hard way how painful it feels to be shut out of debt markets.  The countries that may want to follow next will think harder and delay even longer.  The countries that remain euro-bound will eventually wonder why they didn't exit first.  

Full disclosure:  No positions in European equities or the euro currency at this time.

Sunday, January 29, 2012

The Limerick of Finance for 01/29/12

EU fund is ready to go
Just when Greece is preparing to blow
Rescue won't be enough
This problem's too tough
German answer to bailouts is "no"

Saturday, January 28, 2012

Friday, January 27, 2012

The Haiku of Finance for 01/27/12

Fitch cuts Euro grades
Risk of leaving eurozone
More ratings cuts loom

College Aid Overhaul Must Start With Bankruptcy Law

No one likes overpaying for a product of questionable value.  College costs are now so exorbitantly high that elected leaders are calling for cost controls.  Great idea.  I know exactly where we can start.

Federal lawmakers should amend bankruptcy laws to allow student loans to be discharged in a personal bankruptcy.  Right now they sentence college graduates to decades of indentured servitude because they're not dischargeable.  This key reform will of course drastically reduce the amount of student loans that banks will write.  That will be good news.  Too many students attend college who really shouldn't go, so removing this financial enabler of future failure will free them to focus on more suitable career paths.  Not everyone should be a surgeon, but society always needs good bricklayers and mechanics.  Demand destruction happens in other commodified sectors and is now long overdue for higher education.

The federal plan mentioned in that article has details reminiscent of 1970s wage-price controls but at least it gets the topic on the table.  An effective plan would not focus federal aid on arbitrary metrics like numbers of college enrollees who graduate.  It should focus aid on academic subjects that will renew America's R&D edge.  That means aid for science and engineering students only, and even then priority will go to universities with productive laboratories.  Humanities students should get nothing, regardless of need.  Our great nation is ill-served with an excess of English majors, multicultural organizational social dynamics consultants, and underwater basket weavers.  

Thursday, January 26, 2012

The Haiku of Finance for 01/26/12

Samsung big profit
Hot smartphone competition
Challenge to Apple

Potential Fed QE3 Informing Anti-Dollar Trades

Let's take note of two seemingly unrelated developments.  The Fed is busying itself making noise about another round of quantitative easing.  The intended market signal is that even with internal dissent the Fed can still push QE3 liquidity into bank balance sheets and the bond market.  I think it's funny that one stated intent is to "keep inflation from slipping" below a target.  The Fed's historic mandate has always been to fight inflation.  Abetting the devaluation of the dollar is the new Fed mission.

The lesson is not lost on other nations.  India will reportedly pay Iran in gold for oil shipments.  Take that with a grain of salt.  An unconfirmed report from an Israeli intelligence mouthpiece should be considered in the context of Israel's reported security ties to India.  Israel has little reason to formally embarrass its security partner but may wish to deter it from working around anti-Iran sanctions.  Releasing a hint from a grey source carries little risk.  At any rate, the public mention that large oil consumers are considering moving away from settling trades in dollars makes sense in the context of the Fed's willingness to harm the dollar's purchasing power.

I will presume that the Fed has an Observe-Orient-Decide-Act loop even if it doesn't know such a thing exists.  Its policies on quantitative easing and zero interest rate targets are oriented upon fostering a gradual inflation that will whittle away the federal government's unfunded liabilities for middle class entitlements.  That is an internal orientation, which is the Achilles' heel of an effective grand strategy.  The Fed's OODA loop should take into account the gradual abandonment of the dollar that other G-20 nations will eventually pursue apace.  That is an external orientation that can keep strategy on target.  This OODA loop is thus incomplete and invites a positive feedback cycle that will end the dollar's status as the world's reserve currency.

Longtime readers may note that my tone when discussing the Fed and other major policy actors is now much more sanguine than the periodic vitriol I spewed in the early days of the Alfidi Capital Blog.  In 2008 I was angry about incompetence and fraud in the financial markets.  Now I am largely resigned to its continued existence.  I am not sufficiently pedigreed to gain the ear of policymakers so I cannot dissuade them from any course they choose.  I will always fight people who try to rip me off personally.  I can offer no such assurance to anyone else.  

Wednesday, January 25, 2012

The Haiku of Finance for 01/25/12

"Buffett rule" tax plan
Ignores loopholes in tax code
Flat tax is more fair

Three Reasons Why Europe Will Detonate

I'll give you three reasons why going long European equities (especially banks) is extremely risky right now.

First, the IMF is issuing yet another global recession warning driven by a persistent European insolvency threat.  These reports are almost getting old hat by now because investors have blown off previous warnings with no adverse effects.  Mme. Lagarde and crew project very few safe havens from a European recession.

Second, Greece and its creditors are unable to agree on principal writedowns that will enable further bailouts.  Those creditor banks and funds know all too well how their capital ratios will be damaged by any writedowns. European ministers are unwilling to agree to creditors' requested higher coupons to compensate them for the additional risk they would have to assume by purchasing new Greek debt.  

Third, the uncertainty over the Greek negotiations and the ability of the IMF and EU to fund more bailouts makes European banks reluctant to buy sovereign debt.  It will be fun to read future histories of this crisis to see just how many financial institutions are currently violating their internal risk profiles by owning too much questionable sovereign debt.  Lawmakers are late to the party by arguing that sovereign debt shouldn't carry a zero-risk weighting.

Sufficient evidence is out in the open for investors to use common sense.  Many hedge fund managers lack this common sense and will continue to buy European debt.  MF Global went long European sovereign debt and self-destructed.  They will not be the last institution to fail with that strategy.

Run for cover, investors.  Europe is going to implode on some unknowable date.  The contagion will cross the Atlantic.

Full disclosure:  No long positions in European equities or U.S. financial institutions at this time.  

Monday, January 23, 2012

Updating The Alpha-D For 01/23/12

I did have to make some minor portfolio changes today.  My FXI stake rose through the strike price of the covered calls I wrote last month.  I bought some of it back in a wash sale and some will be a realized gain.  Actually, come to think of it, some of what I allowed to sell away may in fact be a realized loss if my brokerage calculates the entry point for those positions at a fairly recent date, indicating I paid a higher price for them.  That's the way it goes sometimes, and I trust my brokerage's records methodology.

I allowed my China position to get smaller to reduce my exposure to what may very well be a hard landing.  Check out my posts for the past few months that chronicle my increasing skepticism about China's ability to keep its growth engine stoked.

I also renewed my covered calls on GDX, which expired unexercised.  Gold is important to me as a hard asset that has the potential to be an alternate store of value in the event the U.S. dollar loses its world reserve status.

Those are the only actions I've taken this month.  I keep looking at a few stocks in defense, railroads, and shipping to see if they're worth buying.  I'm not ready yet to go long.  Bring on the European implosion first so a major market decline will give me the entry points I need to generate good long-term returns. 

The Haiku of Finance for 01/23/12

Greek deal rejected
Lenders want higher coupon
Ministers said no

Sovereign Insolvency Iceberg Blocks Mortgage Principal Writedowns

Something has been missing from the economy's alleged recovery.  Despite assertions that Americans are paying off their debt overhangs, our great nation's debt/GDP ratio still rises.  Home mortgages remain a large part of this indebtedness with little hope for relief in sight.  The federal agency charged with overseeing Fannie and Freddie warns us that mortgage writedowns will require massive capital injections from the taxpayer.  Forbearance preserves the GSEs' balance sheets at the expense of household balance sheets.  This in turn preserves the balance sheets of asset management firms and their hedge fund and pension fund clients who own mortgage-backed securities.  Credit Suisse provides a bit of a theoretical assist by arguing that mass principal writedowns won't help homeowners.  That argument is a bit too clever.  Writedowns may not help homeowners borrow in the future to keep lenders like Credit Suisse profitable, but they have potential to help in the present by preventing defaults and thus keeping non-performing properties off of bank balance sheets.

Writedowns do cause pain.  They can wreck homeowners' credit ratings, but this can deter them from future borrowing that may prove unhealthy.  They wreck the MBS/CDO holdings of investment funds, which in turn means pension plans will be underfunded and fixed-income retirees will get smaller checks.  There is no free lunch in a nation carrying many forms of massive debt.

Mortgage principal writedowns can sometimes be a fair thing to do.  They preserve the legal essence of a debt contract and assure the creditor that at least some of the outstanding principal can be repaid, and let an underwater homeowner stay in their house.  Sovereign debtors do it all the time with their bonds.  Greece is negotiating haircuts right now with European banks that own its debt.  If it's good enough for nations, it can be good enough for homeowners too.  Someday creditors will learn not to loan money to borrowers - be they nations or households - who have no hope of paying it back.  Until then, writedowns can take some sting out of poor lending decisions and allow parties to save face.

Nota bene:  I do not owe any long-term debt, and I do not carry revolving credit card debt because I pay my bills in full as they come due.  I cannot benefit in any way from mortgage writedowns because I have never taken out a mortgage.  

Sunday, January 22, 2012

The Limerick of Finance for 01/22/12

The Davos elites will convene
As the world is perched on a ravine
They're all joined at the hip
But we need leadership
Total chaos could come to this scene

Saturday, January 21, 2012

The Haiku of Finance for 01/21/12

More Wind Out Of China's Sails

Writing "sales" instead of "sails" in this post's title might have been a cute play on words, but I don't feel like being all that cute today on the subject of China's continuing disappointments.  Manufacturing activity in China continues to slow down.  Europe's malaise is hitting China's exporters hard and the eurozone hasn't even fallen apart (yet).  The world copper price hasn't responded to this news, so perhaps Dr. Copper has decided to defy commodity analysts' wisdom and become a lagging indicator.  Steel futures indicate strong future demand, which no longer makes any sense at all.  Dude, like manufacturers use steel and copper, okay?  So, like, the prices should be cratering rather than meandering sideways or setting new highs.  This kind of action proves the old adage that the only people who make serious money in commodities markets are the brokers of transactions, not the investors going long or short.

The price of FXI hasn't factored in this bad news from China.  I'll renew my covered calls but I may be forced to eat a realized long-term loss as the market price went through my calls' strike price.  It all depends on how my brokerage calculates the purchase date for which shares will ultimately be sold off.  I can console myself with the reminder that the cash I've generated from years of covered call writing has built up a war chest I have yet to deploy.  More bad news out of Europe, China, and elsewhere will eventually give me the bargain opportunities I seek.  The waiting game is one I can play endlessly.

Full disclosure:  Long FXI with covered calls.

Thursday, January 19, 2012

Keystone XL Pipeline Could've Been A Contender

I may have been too generous a few days ago when I saluted a U.S. proposal to streamline business regulation.  What the government giveth, the government taketh away.  Federal support for the Keystone XL oil pipeline has suddenly ended, for the time being  I guess the reform proposal forgot to take away the State Department's veto power over commerce decisions.  This major infrastructure project would have provided jobs for unemployed Americans and secure energy for businesses.  The lesson for its backers is that it probably wasn't as environmentally friendly or cost-prohibitive as a failed solar panel maker like Solyndra, which of course got plenty of help from the U.S. government.  

Even our natural allies scratch their heads at this kind of decision making.  China now has a golden opportunity to obtain Canadian oil in furtherance of its strategic goals.  Chinese purchases of Canadian oil via pipeline would constitute a strategic breakout by giving an Asian nation its first-ever foothold in North America (well, at least since Russia owned Alaska in the 19th Century).  It sure would be nice if the State Department had taken that into account before it recommended against the Keystone XL pipeline.  TransCanada did the smart thing by trying to re-route the pipeline, so now it must wait until after the 2012 election cycle for the project to be approved when no one's paying attention.  

Wednesday, January 18, 2012

Imperial Resources (IPRC) Nowhere Close To Building An Oil Empire

I just can't get enough of these penny stock mailers.  Early in 2011, the Carpenter Global Stock Advisory sent me something touting Imperial Resources (IPRC).  It's another Texas oil and gas play.  Man, those things just don't quit, do they?  There's always another country gentleman with a derrick coming out of the sagebrush down there.

Okay, enough with the stupid humor already.  You can guess what I'm going to mention first if you follow my posts on stuff like this.  Three years of negative net income, retained earnings, and free cash flow.  I'm starting to wonder what these kinds of companies do with the money they raise.  I even wonder what they do with their time.  Do they spend this money and time on one purchase and sale agreement after another or do they actually drill for oil?  That comes as no surprise from a management team consisting of lawyer-financial types, with only one petroleum engineer anywhere in sight.

If you bought this stock in March 2011 when it debuted at $0.75, you watched it seesaw for a couple of months until it eventually settled to about a dime per share today.  Nice work.

Full disclosure:  No position in IPRC, ever.

Tuesday, January 17, 2012

The Haiku of Finance for 01/17/12

World Bank gets a clue
Weak growth popping up worldwide
Well, ya don't say now?

American Power Corporation (AMPW) Remains Powerless To Earn Money

Let's pull yet another old penny stock teaser out of the dead letter file.  Myers Energy & Gold Report sent me something in January 2011 about how American Power Corporation (AMPW) was going to be just about the greatest thing in the coal sector since sliced bread.  One year has passed.  That's enough time to learn something.

The company has three years of increasingly negative net income, retained earnings, and free cash flow.  The corporate website sure looks pretty, with its flash intro and all, but I really need to see some confirmed resource discoveries and not just estimates from preliminary exploration.  The executive team looks to be heavy on investment banking experience and light on experience running actual coal mining projects.  One thing they're doing right is developing a project in an area with good rail and power infrastructure.  Time will tell whether their coal project in Montana actually produces anything, but that doesn't necessarily mean this particular company will be the one producing it.

Read their financial statements to find out whether they have enough capital to operate for much longer.  Go ahead, read the stuff.  I dare you.  I can't be the only one to do any work around here.  Oh, what's that, you don't like to do work?  Fine, I'll do it anyway.  Their 10-K dated Jan. 5, 2012 says this under MD&A:  "We do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months."  Alrighty, then!

When the mailer came out in January 2011, AMPW was just over a buck.  I guess you could say it "soared" to $2.14 on Jan. 27, 2011 when suckers bought in that month.  The stock then promptly collapsed and kept sliding to trade at $0.17 today.  Great job, everybody!  Well, actually, I should say poor job by everybody but I had to be sarcastic first.

Well kids, what did we learn today?  We all should have learned not to buy penny stocks touted by pretty-looking mailed brochures.  Some investors will never learn.  That's why I'm here, getting in Mr. Market's face day after day as my life's work.

Full disclosure:  No position in AMPW, ever.

Monday, January 16, 2012

The Haiku of Finance for 01/16/12

Morgan Stanley pay
Deferred comp in future years
No big cash for you

Smart Reorganization Coming To Federal Business Regulation

Sometimes Uncle Sam gets it right.  The White House has proposed a consolidation of several major business-oriented agencies into one federal department.  These agencies all grew out of multiple efforts over decades to make American businesses more competitive in the world marketplace.  Getting serious about promoting exports means getting regulatory messes out of exporters' paths.

Concerns that this reorganization will curtail federal contracts available to small businesses are legitimate but can be addressed.  Requirements for prime contractors to award portions of their contracts to small businesses will very likely always remain in federal law.  Big contractors have plenty of experience certifying small businesses as partners to fulfill this mandate and know the value of businesses owned by women, ethnic minorities, and veterans.

There is some bad news that reform-minded observers may not be willing to notice.  The inability of the U.S. government to balance its budget will eventually exhaust the bond market's patience, and either an austere balanced budget or a hyperinflationary economy will result.  There will then be less federal spending available for all businesses, large and small.  Agency consolidation won't prevent that outcome but it will make a bitter pill easier for all to swallow once the business community sees the federal government get ahead of the downsizing curve.

One odd thing about the effort is the elevation of the SBA to a Cabinet-level agency.  That cannot outlast the reform if the SBA is to be eventually folded into the Department of Commerce.  It's a no-cost political move in an election year, the equivalent of a shout-out to entrepreneurs.

Reformers have finally found a voice in Washington D.C.  They're from the government and they're here to help.  

Sunday, January 15, 2012

The Limerick of Finance for 01/15/12

China launched a trading platform
To make iron trading the norm
A consistent price
Would be really nice
With bid spreads that stay uniform

Inter-Citic Minerals (ICI) Struggles Even With Strong Gold And Yuan

The stream of junk mailers from stock touters never seems to end.  Even among a flood of hopeless penny stocks, one or two might stand out as worth more than just cursory dismissal.  Today's let's consider whether a Chinese gold miner named Inter-Citic Minerals (ICI) deserves study.

I first took notice of this company when I saw their promotional booth at the San Francisco Hard Assets Conference in 2010.  They positioned themselves as an affordably priced gold producer.  They're still a low-priced stock, which is disappointing in the face of two fundamental forces that should have worked in Inter-Citic's favor.

The first force is the price of gold itself.  Gold is now trading at over $1600/oz., an increase of about 20% since the time of that conference in late November 2010.  Now watch the other shoe drop.  ICI.TO was trading at $1.83 on November 29, 2010 and has since dropped to $1.13.  The stock has declined in the face of a rising metal price.  Junior miners typically experience a significant pop when their commodity price rises, and that's precisely why many gold bugs find them attractive.  Inter-Citic Minerals did the opposite.

The second force is the gradual appreciation of the yuan versus the U.S. dollar.  A currency that can buy more in dollar terms would make earnings denominated in that currency worth more to equity investors.  The stock market did bid up the price of ICI.TO but this crested in February 2011 at over $2.00/share.  Inter-Citic's operations don't seem to be motivating the market to bid up its value along with the gradual strengthening of the yuan.

Sometimes even powerful macroeconomic tailwinds can't push up a weak stock.  Their 2010 annual financial statement revealed negative net income in 2009 that grew even more negative in 2010; free cash flow was also negative.  The company is still losing about a penny per share (measured in Canadian dollars) according to their Q3 2011 report.  I'm glad I chose not to commit money to this stock way back in 2010.  I would have been poorer by now.

Full disclosure:  No position in ICI.TO or ICMTF.PK, ever.

Friday, January 13, 2012

Multiple European Sovereign Downgrades Prompt More Yawns

In ordinary times, the pending downgrade of several advanced economies' sovereign credit ratings would prompt some kind of sensible reaction.  Portfolio managers would dump those countries' bonds.  Yields would rise for future issues.  It says something about the collective ability of bond market buy-side players that these things are happening in slow motion and not immediately.

Maybe buyers have no highly liquid safe havens left, with the U.S. and Japan already having fallen off the triple-A perch.  Maybe "anticipated" is too kind a way to describe sovereign credit deterioration, with Bill Gross and others banging the drum for months in public about what to expect.  Maybe investment professionals and their cheerleaders in the media really are so clueless that they can't see the rapids churning into a waterfall up ahead.

I have zero exposure to European equities or debt at the present time.  No one can entice me to go long either of those things until long after the euro has dissolved and regrouped into something much smaller.  

Thursday, January 12, 2012

Bankrupt Solyndra Will Pay Bonuses For Failure

Only a government-subsidized enterprise could pull a stunt like this one.  Solyndra wants to pay bonuses to some key employees to "incentivize" them to stick around.  The legal grounds for this are specious.  Granted, employees' unpaid wages have senior claim status in a bankruptcy, but I have a really hard time believing such a claim covers incentive bonuses in addition to base pay.  The key folks look like the kinds of equipment specialists who need to stick around until the end anyway just to catalog all of the unsold inventory and fixed property so Solyndra's assets can be valued for sale.  Why doesn't the bankruptcy court just hire a turnaround and liquidation firm to do that?  They can hire the former Solyndra workers on contract to wrap up the asset sale and be compensated with a portion of the sale proceeds.  Nah, that would make too much sense for a politically connected corporate implosion.

It's really funny that the company's founder and another director have pending claims for huge bonuses they feel they are owed.  A bankruptcy court focused on justice would deny these claims and claw back previously paid bonuses to reimburse creditors.  I've got news for Solyndra's former leadership team:  Life owes you people nothing.  

Tuesday, January 10, 2012

Are Corporations Really People?

Dinner tonight with some deep thinkers at a private club in San Francisco brought forth an interesting discussion of Mitt Romney's statement that "corporations are people."  A quick read of his quote reveals it may have been taken out of context.  I think Gov. Romney meant to say that corporations are comprised of people - workers, managers, shareholders, etc. - who make it run by earning incomes and paying taxes.  I don't think he meant to say that a corporation is the equivalent of a living, breathing human being with comparable political rights.

Unfortunately, American law seems to substantiate the "corporate personhood" argument more than ever.  The most significant legal support for corporate personhood in modern times is the 2010 U.S. Supreme Court decision removing any restrictions on corporate spending in political campaigns.  A disembodied corporate "person" thus has the same right to express political opinions as a live person without fear of government interference.  This is a significant departure from what legal scholars in the era of our Founding Fathers considered corporations to represent.

I believe a return to the original spirit of the Framers' time is in order.  Corporations back then were chartered in the public interest to accomplish a specific project, then allowed to disband.  They had a definite life span, which is as close an analogy to a human life as an artificial non-person could possibly get.  Corporations chartered for an indefinite life span are the norm today, so our legal system needs mechanisms to deter them from egregious behavior.  These mechanisms would be analogous to legal sanctions against individual's lives and property.  One such mechanism would be a corporate death penalty.  Any corporation with a sufficiently long and troubled history of conduct could be found to be in violation of its corporate charter and disbanded.  The capital structure of the company would be rendered worthless and its stock and bondholders would lose their entire investment.  The financial assets and physical property of the company would remain intact and could be sold to another corporation.  The employees and managers would remain a viable part of the new enterprise.  Handled wisely, such a transition could even go unnoticed by customers and suppliers in a manner similar to debtor-in-possession bankruptcy proceedings.

Such a legal solution would be impossible to implement today with corporate spending governing political campaigns.  It will have to wait until after the next financial meltdown, when both politicians and corporate executives sufficiently fear citizens in the streets to agree to limits on corporate power.  Society needs corporations and capital markets, but it does not need certain corporations that have habitually violated the public trust.  

Monday, January 09, 2012

China's Obvious Growth Troubles Have Non-Obvious Effects

I haven't had much to say in detail about China's economy so far in 2012.  The accumulated evidence for the end of the Chinese growth miracle is now impossible to ignore.  Overall trade volume growth is slowing.  China's export markets in the U.S. and Europe are tightening their belts and its own domestic consumers are not ready to spend at Western levels.  Curtailing shadow banking will be harmful in the short run as it will force a credit crunch on real estate developers and risk popping the urban real estate bubble.  It will of course benefit China in the long run by putting its capital markets on a more transparent footing so creditors can avoid funding malinvestment.  A trilateral free trade agreement may be in the works.  This would amount to a structural revolution for Japan and Korea, as both grew their economies from state-managed export growth, and a strategic breakout for China.  An alternative to the WTO would appeal to China as a way to exert indirect influence over neighbors who also have strong trade links with the U.S.

The temptation to completely sell out of a long position in Chinese stocks is strong given the country's obvious problems with environmental stewardship and social discontent.  The case that emerging economies eventually re-emerge from any temporary difficulties they experience is also strong.  It is difficult to accumulate wealth by running away from every sign of trouble.  It easier to accumulate wealth by staying invested in an economy with untapped natural resources and an enormous population.  The United States was in a similar position in the 19th century and turned out just fine.

Full disclosure:  Long FXI with covered calls.

Sunday, January 08, 2012

The Limerick of Finance for 01/08/12

The German and French plan for growth
Aims to create enough jobs for both
But some Tobin tax
May give EU the axe
Britain will not swear them an oath

Friday, January 06, 2012

Colombia Energy Resources (CERX) Applies Coal Expertise To New Projects

The U.S. is the "Saudi Arabia of coal" with enough proven supply in the ground to last for centuries at present rates of consumption.  One of the main problems in digging it out is the high cost of operating a coal mine in the U.S.  Colombia Energy Resources (CERX) is ready to dig coal in - you guessed it - Colombia, where labor ought to be cheaper.

CERX's four properties in Colombia look attractive, and not just for their deposits.  They are close to viable road and barge links that can handle existing traffic.  The company may have to budget more capex to facilitate barge operations on the Magdalena River if it cannot benefit from the Colombian government's efforts to upgrade infrastructure.  This will help ensure it has the logistics capacity to meet its production targets for 2013.

CERX claims that its cost of production is $50/ton.  Consider that coal prices in many producing locations in the U.S. were under this threshold in 2010, and that the price of coal in the U.S. has rarely been above $70 in the past three years.  The good news is that the export price of coal from the U.S. averaged $120 in 2010.  Perhaps CERX should target export markets other than the U.S.  CERX's advantage is that its deposits contain mid-volatility coal, used to make coking coal.  The price outlook for coking coal is much more attractive, with some forecasts predicting it to sell for $226/ton in 2012.  South Korean steelmakers are willing to pay as much as $235/ton for coking coal.  The company does not yet have funding for the coking facility they plan to install in a wholly-owned energy park (according to their 10-K filed on March 30, 2011) but I give them credit for acknowledging the need to raise capital to do so.

The strongest aspect of this particular company is its management.  It is rare for junior explorers and producers in the resource sector to have an entire top management team with careers exclusively in that sector.  CERX comes closer to an ideal team than any junior coal company I have seen.  I have been skeptical of other resource companies with histories of negative net income, free cash flow, and retained earnings.  Those other companies were almost invariably run by inexperienced teams who didn't understand mining.  I am willing to be more patient with CERX in awaiting improvement.  This one is worth tracking for future developments.

Full disclosure:  No position in CERX at this time.

Wednesday, January 04, 2012

The Haiku of Finance for 01/04/12

Consumer watchdog
Topic of elite laughter
Rich folk make the rules

Greece Sets Its Own Hard Deadline For Default

Imagine a homicidal maniac who points a weapon at his neighbor's house and dares the police not to shoot him.  Now imagine a tiny country taking the same approach with an entire continent.  Greece is giving its friends in the eurozone exactly three months to give it more bailout money or it will abandon the euro.  Perhaps the neighborhood maniac analogy is overdrawn.  After all, the worst that could happen to Greece is immediate  forced austerity and a return to a currency with far less buying power, plus a lockout from the international bond market lasting for several years.  The damage to the eurozone would be far greater.

Greece's prospective departure from the eurozone would break a taboo against leaving the currency union.  Larger European economies would follow suit in short order; Italy and Spain are the next leading candidates to return to their native currencies.  The more important result is the immediate 50-70% debt writeoff that Greece's creditors would be forced to swallow.  European banks could no longer kick the can down the road for months on end in the hope that indefinite bailouts will continue.  The daisy chain from a Greek default, to European bank defaults, to insolvency at American banks holding European bank debt, to a failed U.S. Treasury bond auction from capital-starved American banks would be swift.  

This announcement from Greece marks the first hard deadline set by the only party that really matters - the one with its finger on a debt trigger.  The trigger-puller has a target rich environment with U.S. high-yield bonds already expected to see a rise in defaults even when interest rates remain at record lows.  The technocrats running Greece are not couching their threat in language designed to placate local politics.  They are fulfilling their Eurocentric mandate by speaking truth to power in Brussels.  

Tuesday, January 03, 2012

The Haiku of Finance for 01/03/12

Europe debt wild card
Money center banks at risk
Tighter credit looms

Exxon (XOM) Out Of Venezuela And Out Of Luck

Exxon (XOM) can't catch a break.  An international arbitration panel awarded it a mere $908M judgement for its loss of a $7B investment in Venezuela, and now Venezuela's national petroleum company wants the award reduced further to net out money it claims Exxon owes.  The portion of the claim that represents assets held in the U.S. will be hard to take seriously.

Exxon will most likely end up writing the whole thing off at zero.  It will be lucky to recover a penny from this given the Venezuelan government's attitude towards foreign direct investment.  The $7B represents about 2.3% of Exxon's total assets but as a charge-off it can take a hefty 70% from Exxon's quarterly net income if it hasn't already.  BTW, Exxon's earnings look unusually even for the last four quarters.  I wonder what accounting treatments make it so smooth.  It's worth noting that XOM has a P/E of just over 10, not really a bargain among supermajors when its peers mostly trade at single-digit P/Es.

The other majors who continue to do business in Hugo Chavez's playpen must think that keeping a minority stake in a forced corporate marriage is preferable to a total loss.  Socialism is stupid but Latin American despots find it useful.  Good luck to any oil company that wants to throw good money after bad in Venezuela.

Full disclosure:  No position in XOM at this time.  

Blue Sphere (BLSP) Converts Farm Waste Into Nothing So Far

Prepare yourselves for another penny stock.  Trinity Investment Research sent me a mailer touting Blue Sphere (BLSP), some Israeli company that claims to be doing something in carbon credits and bio-waste.  Claims of launching projects all over the world mean nothing without operational results to back up those claims.

They haven't filed their 10-K for 2011 so it's impossible to tell how well they're doing now.  If the previous three years are any indication, there is plenty of reason to be pessimistic.  Blue Sphere has earned zero revenue since 2008.  Their massive increase in negative retained earnings came entirely from their SGA expenses.  It is unusual for a company with a claimed orientation in a high-tech sector to have such high SGA expenses while spending nothing on R&D.

It makes no sense for a bio-waste conversion startup to pursue small-scale waste sources on farms and landfills in emerging markets.  That's why Blue Sphere's approach isn't scalable.  Large-scale thermal depolymerization plants at big agribusiness installations would work.  This small-scale stuff Blue Sphere is doing is uneconomical.  They announce "discussions" with major farms in the U.S. but have no announcements of firm contracts to operate waste conversion plants.

This turkey traded at a whopping high of $0.90/share on Jan. 21, 2011 and is now at a nickel.  People who bought this stock then have seen their investment destroyed.  This is fitting for a company focused on biological waste.  I could make a joke here but Google probably wouldn't like it.  I watch out for my brand.  That's the difference between Alfidi Capital and Trinity Investment Research.

Full disclosure:  No position in BLSP, ever.

Monday, January 02, 2012

The Haiku of Finance for 01/02/12

Generation X
Started dot-coms that went bust
Now they own nothing

(Did I already use this one?  If so, I apologize.)

Algae.Tec (ALGXY) Growing Algae For Energy

Algae.Tec (ALGXY) has designed a prototype bioreactor that uses carbon dioxide and sunlight to drive algae growth.  The algae is supposed to be harvested for conversion into fuel.  Let's walk through their technology to see if their business model is viable.

One metric ton of algae has an energy content equal to seven barrels of oil, according to this company.  One Algae.Tec 40-foot container can produce 250 tons of algae per year (they claim).  The company's projections envision a configuration of 500 containers producing 125K metric tons algae per year.  That configuration will be difficult to reliably achieve due to the space required for sunlight collection.  Algae.Tec's parabolic solar collection system requires about 1/2 of a hectare to emplace the collectors.  Their business model envisions these container installations adjacent to existing fossil fuel power plants so the carbon dioxide captured from the plant's generation can feed the algae reaction inside the containers.  How many mixed-use power plants in the world have at least 250 hectares of empty real estate around their plants for the assembly of these containers and their solar collectors?  That, and the willingness of utilities to buy adjacent land for expansion, will determine whether Algae.Tec's plan is scalable.

Consider the potential financial returns.  Oil is now priced at about $100/bbl, so one Algae.Tec container can yield (7x250) no more than 1750 bbls/yr, worth $175K/yr in gross revenue.  That's the equivalent of a small oil well.  Algae.Tec claims an all-in cost of production at around $47/bbl (perhaps lower), so one container will yield ($53x1750) about $92,750/yr in net income at current oil prices.  It's important to remember that the oil will probably have to be trucked to refineries because most coal/gas power plants don't have petroleum pipelines leading out from their facility.  Trucking small batches of algae oil to refineries will be costly, unless the company can further refine the algae oil on site directly into biodiesel.  If the final product from these cogeneration facilities is biodiesel, it can be sold directly to local gas station franchises.  The amount of algae each container will yield also depends on regular sunlight and carbon dioxide inputs.  Power plants in cold northern climates will not have year-round sunshine.  Algae.Tec's facilities will thus be most viable in places like the American Southwest.

My analysis does not include the value of other products like animal feed that can come from this process.  That can add to the net income of $92,750/container.  Algae.Tec is thinking big by planning 500-container installations that can produce a net income stream of over $46M/yr by my math, but space requirements are everything.  Their pilot plant in Australia needs to prove that the whole integrated concept can work before they pursue cogeneration and carbon capture agreements with utilities.

This stock is very thinly traded for something with a market cap over $100M, with daily volume in the mere hundreds.  The inventors of their core technology hold 78% of the stock.  That makes it difficult for individual investors to exit a long position.  It appears that their Pink Sheet listing is brand new.

Frankly, I find this stock intriguing.  Most of its initial installations will be small and geographically limited to sunny climates but the income per container is valuable to utilities that need affordable cogeneration options and carbon capture tax credits.  I'm skeptical that the 500-module configuration will work everywhere, but as long as Algae.Tec keeps its costs low and has accurately estimated its production then the concept can attract the interest of utilities.  This one actually has some promise.  Let's see if they deliver.

Full disclosure:  No position in ALGXY at this time.  

Horiyoshi Worldwide (HHWW) Tattoos Investors With Losses

Going through my old pile of Trinity Investment Research teaser mailers is always a joy.  They sent me one about a year ago promoting Horiyoshi Worldwide (HHWW), a clothing company that used to be called Kranti Resources before they rebranded the company in a forward stock split.  A reverse merger with an existing ticker shouldn't be a big deal as long as the new company is successful.

Horiyoshi has yet to experience financial success.  The company's negative net income, free cash flow, and retained earnings since 2008 are obvious for all to see.  This invaluable article from the Vancouver Sun describes the company's dealings with very questionable stock promoters.  I can only add that spending $3000 on a promotional campaign is actually pretty cheap in the penny stock world.  Mailing out these multi-page three-color brochures to tens of thousands of suckers week after week can rack up the bills.

Clothing based on the work of a renowned tattoo artist is a cute concept but positioning this apparel as a premium product may have been a big mistake.  Hoping for movie stars to wear this stuff for publicity . . . well, hope is not a method.  It costs almost nothing to mass produce T-shirts and jeans.  Cutting the price and promoting them in discount retailers might have worked but these people seem to like the glamorous Hollywood route.  It doesn't matter now.  Investors buying in when this thing was pumped have watched it drop from over a buck to around two cents.

Full disclosure:  No position in HHWW, ever.

Sunday, January 01, 2012

The Limerick of Finance for 01/01/12

Financial repression may come
It limits investments for some
Debt brings us this fate
Gives us "choices" we'll hate
Failing to prepare just seems dumb

IRA Contributions And Financial Repression

Tax-advantaged retirement accounts have long been a key to building wealth for the professional class and building careers for legions of financial advisers.  The start of a new year brings broker calls from advisers urging their clients to make the maximum contribution to their IRAs for the new tax year.  That would be $5000 for 2012, which hasn't changed since last year.  A traditionalist approach to accumulating wealth emphasizes regular investments in a balanced portfolio of asset classes that are risk-weighted according to an investor's tolerance for volatility.

The problem with this traditionalist thesis is that it breaks down in times of extreme economic upheaval.  U.S. government and household debt-to-income ratios are abnormally high and neither politicians or consumers show any desire to take responsibility for paying debt down.  The capital held in custody for tax-advantaged retirement accounts - IRAs (be they traditional, Roth, SEP/SIMPLE, etc.) and 401(k)s - is a tempting morsel for a debt-addicted governing class.  There is no plan at the current time to confiscate IRA assets or force custodians to offer only government debt as an acceptable investment.  That will be of little importance in a hyperinflationary environment.  There is precedence for sustained financial repression.  Central banks in the developed world held interest rates below inflation for decades after World War II to help their governments accelerate war bond repayment.  

I don't need any financial adviser to tell me what to do.  I made the maximum allowable contribution to my own IRA today, knowing full well that the account exists at the suffrage of a governing class unfamiliar with financial restraint.  IRAs can still help a portfolio survive hyperinflation if government leaves the asset mix alone and the portfolio mix includes hard assets (stocks and funds in mining, energy, commercial real estate, and related sectors).  The good news is that our governing class is subject to Wall Street's constraint thanks to the financial sector's campaign contributions.  Asset management firms and investment banks don't want to lose fee revenue from products in retirement accounts.  Limiting IRA and 401(k) financial choices is a political football that would make Wall Street howl.  Plutocracy isn't all bad.  Mandarins need financial product choices too.