The official "blog of bonanza" for Alfidi Capital. The CEO, Anthony J. Alfidi, publishes periodic commentary on anything and everything related to finance. This blog does NOT give personal financial advice or offer any capital market services. This blog DOES tell the truth about business.
July went by pretty fast but not fast enough to avoid my sarcasm. Nothing on the calendar escapes my bitter rants.
It's really cute that China will audit debt at all levels of its government. I take this promise about as seriously as I took the bank stress tests in the US and Europe. There's no way Chinese regulators will ever announce anything other than a clean bill of health to the public. They liberalized bank loan requirements precisely because they plan to layer more debt on top of existing debt.
China isn't the only kid on the block that wants to continue their leverage binge. Germany has assured Greece that it will not face further debt haircuts. I can only guess at how ginormous the Fed's dollar swap lines with the ECB have now grown to make this promise possible. Even Frau Merkel's iron rhetoric has softened. Elite fear of asset destruction and revolution must be palpable in the halls of Brussels, London, and Washington.
Corporate earnings have declined, and I think they've probably peaked. No way could profits at twice their historic percentage of GDP ever be sustained indefinitely. I'm pretty sure I've said that on this blog more than once. Mean reversion to 6% of GDP means an overshoot to the downside is likely before another upturn can take place. People who work for a company listed in the S&P 500 need to update their resumes.
Now it's Brazil's turn to make me LOL. Brazil wants the IMF to exclude the debt owned by its central bank from formal government debt calculations. That is about as irresponsible as a homeowner asking their credit agency to exclude their delinquent mortgage from their credit report because it can't be securitized. Try running that argument past your home loan officer and see how fast they have security escort you out of the bank. Brazil's pleading makes it clear that their currency isn't ready to serve as part of a central bank reserve portfolio no matter how robust their natural resource inventory looks. At least they still have the next Summer Olympics going for them.
I'm not going to count on any of the above parties to tell the truth until real economic results are obvious even to the dullards running mutual funds and wealth management firms. The irony of evolution is that folks with the most attractive pedigrees have become the least able to adapt to environmental changes. Stupid losers deserve what they get for not reading my blog.
Auxilio (AUXO) provides managed print services to the health care sector. That's another way of saying they service photocopiers and printers in hospitals. I have a small amount of professional experience in dealing with managed print services. I recall that having a contract directly with a machine's vendor is simpler and cheaper than using a third party. The vendor's customer service rep was on call and did not need to be physically located in the office where the machines were installed. The contract I touched was for a small number of copiers in a small office. My own experience may not apply universally.
The company's leadership team has tons of general business experience, which begs the question of why the company isn't more financially successful. They've had negative net income from 2010-2012 and their retained earnings deficit has increased in each of those years. Auxilio has to compete directly against the makers of equipment such as Xerox and HP, who presumably know their own products pretty well. A web search for the term "managed print services market" brought up more confirmation of the difficulty users have with outsourcing their print services to anyone but OEM vendors.
Auxilio's 10-Q for May 15, 2013 showed cash on hand of $2.7M as of March 31, 2013. Their burn rate averaged about $200K/month in 2011 and 2012, although they reduced it somewhat in that most recent quarter. The concern is that they're still losing money even though revenue has more than doubled since 2010. If net income is still negative by this time in 2014 they will probably have to raise more capital.
This company isn't right for my portfolio. They've been publicly listed since 2001 and have been a low-priced stock pretty much since mid-2003. Auxilio needs to show some serious results.
Full disclosure: No position in AUXO (or other companies mentioned) at this time.
I've often wondered how successful people make it as far as they do on so little obvious talent or integrity. I read tons of anecdotes about how leaders have learned from failures, sought mentors, etc. That just doesn't cut it. The missing ingredient is the ability to manipulate stupid people into thinking you're successful before you've accomplished something. Steve Jobs had this magic with his "reality distortion field" propensity, and by golly you can have it too if you want to join the top 1% of our society. Manipulating people through public speaking is one way to pull this off.
I've assembled some speaking tips from some local sources who seem to know what they're doing. They practiced what they preached when I observed them live. Here ya go.
Speak using solid tonal support. This seems to involve using muscles in the lower abdominal region and lower back area, primarily the diaphragm. Tenors carry farther in public than baritones by using these muscles. I'm not a singer but I do enjoy yelling at stupid people, so I'll tighten my abdomen the next time I yell at a moron to ensure other people hanging around hear every insult I hurl at my hapless target.
Raising your pitch from 100 cycles/second to to 200 cycles/second makes public speaking more effective. Serious public speakers probably use a spectrum analyzer (aka frequency analyzer) to measure their cycles. I don't need no stinkin' analyzer.
Use your "outdoor voice" to raise your vocal intensity and pressure. This may seem like common sense, but I look at politicians for confirmation. The winners of elections do well in televised debates because they use their outdoor voices even while inside with microphones.
Keep your head up and face available so the audience can match your words to your facial expressions, and talk to the people in the back of the room so everyone can hear you. That's probably good advice for candidates stumping for votes who have to speak unamplified in high school gymnasiums and hotel conference rooms.
Shorter points are better, probably because most people are too dumb to follow complicated arguments. This isn't ancient Greece or Rome where educated people came to public forums just to hear philosophers expound on their pet theories for hours. This is America, where the calorie-addicted lumpen proletariat has been trained to think in sound bites that expire before their sugar rush wears off.
Simple repetition is memorable and effective. Keep hammering away at your main idea until even the dullest people can remember it and are ready to join your movement. Beethoven's Fifth Symphony repeated four notes in seven minutes. Martin Luther King Jr.'s "I Have a Dream" speech repeated four words nine times in seven minutes. I think 4x7 is some kind of gold standard in making humans pay attention. I'll try that by repeating four words, "you are totally stupid," seven times to the next person I meet at a high-end cocktail party. BTW, MLK also sprinkled that speech with visual references that cued his listeners to imagine inspiration scenes. Human beings are visual and need to be handed pretty pictures to help them understand things.
Those voice lessons are important but I don't think they're the total package. Illusionists are known to distract audiences with sleight-of-hand while pretending to pull rabbits out of hats. Successful leaders can use gestures and posture just as effectively. The discipline known as neuro-linguistic programming (NLP) is one approach to defining and codifying non-verbal cues that alter behavior. I've tried various hand gestures and body stances from NLP and other sources with varying degrees of effect. I discovered years ago that posturing techniques such as mirroring have no effect on sociopaths because they are incapable of feeling empathy. NLP probably works best in front of large crowds or on broadcast media because lots of empathetic suckers will be watching.
I will continue to broaden my knowledge of speech, gesture, and posture because I love impressing people with my genius. My success in employing these techniques may very well determine the course of human history. You people will be glad when you put me in charge. I promise that world domination under the Alfidi regime will be benevolent. Just listen to my vocal intonation and watch my thumb and forefinger to know that you can trust what I say.
I have a sinking feeling that many logistics professionals are unprepared for the havoc that inflation can wreak on supply chains. Corporate supply chain managers have rested on outsourcing non-core supply functions to third parties without considering how inflation will disrupt those functions. Just-in-time inventory and lean manufacturing assume that raw materials will be available on demand. Inflation destroys that assumption when suppliers who can't keep up with rising costs go out of business. Consider this article as a think-piece that logisticians will need to start their contingency planning for alternatives.
Pre-ordering inventory. Companies can stock up on raw materials if they have the storage space or can lease space. They can negotiate long-term contracts to deliver stuff but if they're smart they will lock in today's prices with fixed increases in annual increments. This will really stick it to suppliers who didn't plan ahead. Suppliers who don't hedge against increases in material delivery costs risk failure. Downstream companies will have once-in-a-lifetime opportunities to vertically integrate by acquiring those suppliers who end up in bankruptcy.
Financial engineering. This topic is too broad for one article. Suffice it to say that corporate treasurers will have to think more like hedge funds by taking positions in the futures markets that balance their supply commitments. If I were running steel mills or petrochemical plants, I would think long and hard about how many energy-related futures contracts my enterprise would need to neutralize rapid increases in prices for oil and coal. Mining companies that closed their hedge books will have to open them again.
Sourcing from non-inflating economies. I've blogged before about the desirability of currencies in Australia, New Zealand, and Canada because their central banks are not pursuing monetary stimulus. That disposition also makes these countries good choices for locating the origins of a supply chain. They also happen to have abundant natural resources (except maybe New Zealand, which has lots of sheep). Global purchasing managers may wish to look at sourcing from any African or Southeast Asian economies that have just conquered an inflationary period; good luck with that one. I'd avoid Latin American sourcing alternatives because that neighborhood loves inflation. Argentina and Venezuela just can't get enough of high prices and product shortages.
Have more suppliers. The Hershey Co. buys cocoa from hundreds of suppliers. They mitigate political risk and currency risk by having one of the most robust supply chains on the planet. Companies that survive hyperinflation will get deliveries from multiple sources. This also applies to delivery methods. Companies that depend on rail or pipelines are pretty much hostage to those methods. Companies supplied by truck have more flexibility. I suspect that a lot of trucking companies will go bankrupt if they haven't hedged their fuel costs or locked in long-term fuel contracts with minimal price adjustments.
Think fast, logisticians. Hyperinflation will catch a lot of businesses by surprise. Don't let your employer be one of them.
Arch's chairman used to lead Inovio Pharmaceuticals, another low-priced stock. I blogged last year about OncoSec Medical and about Stevia First, two other companies whose management teams overlapped with Inovio Pharmaceuticals. My longtime readers can probably guess where this story is going. I'm puzzled as to why some of the very accomplished advisers to this company would jump on board with a CEO and founder who left the medical sector for finance. Normally a founder who has worked steadily in pharmaceuticals or medical devices would run such a startup.
Their market overview shows an effort at Customer Development but they need viable sales channels. I suspect that at some point they'll be competing directly with gauzes and bandages. The biggest advantage of those products is their nearly indefinite shelf life. I do not know the expected shelf life of Arch's AC5 squirted product but it needs to be fairly stable at room temperature for long periods if it's going to compete for storage space in hospital product inventories. Modern bandages intended for surgical use have been pretreated for quite some time. Those pretreatments mitigate effects like adhesion and infection. Other gel products are already on the market, so AC5 will need data showing superior clotting. The competing product Surgicel is priced at just over $40/item when purchased in bulk, and that's a low-end price. The trouble with the health care market is that channels are so atomized that pricing even the same product across multiple geographic markets or even single hospital buyers in the same city is difficult.
Arch's predecessor's 10-Q for May 20, 2013 indicates that they were barely surviving. They held a whopping $52 in cash on March 31 of this year. Their monthly burn rate varied from $1000-$3000 depending on what they were doing. Their 10-Q was published when the company was known as Almah, before it executed a reverse merger with Arch Therapeutics. Almah was intended to distribute spare automobile parts online but it never got off the ground. Arch took their corporate structure and registration so it can raise capital for its surgical gel. There's nothing wrong with that provided they can execute their business model. Next quarter will show Arch's first results under its new business model.
Arch Therapeutics is not right for my own portfolio because it still needs to successfully market its main product. Touters notwithstanding, Arch needs to raise capital and prove itself.
Full disclosure: No position in any of the companies mentioned, ever.
The Committee on the Marine Transportation System (CMTS) is the US government's interagency effort to regulate waterborne traffic and commerce. It needs to address one of the most important laws governing the marine industry. The best thing CMTS can do for marine transportation is advocate for changes to the Merchant Marine Act of 1920, aka the Jones Act. That protectionist law allowed US maritime vessel builders and service providers to operate behind a safe wall for years. The results have been a mixed bag.
The Jones Act never defined the term "seaman," leaving the courts to define exactly which categories of maritime workers are covered and thus eligible for redress of grievances in civil court. A broader definition means more employers will take risk mitigation seriously knowing that more people can sue them.
The disadvantage of protectionism is that some domestic markets are denied superior service and surge support is unavailable in the event of logistics bottlenecks during crises. The GAO found that Puerto Rico's economy would probably benefit from access to foreign flag carriers who can operate more cheaply than US carriers protected by the Jones Act. The Deepwater Horizon blowout in 2010 could have been resolved more speedily if more foreign-flagged vessels had been allowed to participate earlier. Alas, the Jones Act hindered their ability to respond.
Here's the Alfidi Capital solution. CMTS should staff "Jones Act 2.0" so the White House can draft legislation for submission to Congress. The main points are as follows. First, define "maritime worker" as any sailor, dockworker, rig operator, or any other person who works in, on, or around a waterborne vessel of any draft. Make that labor classification as broad as possible. Second, exempt Alaska, Guam, Hawaii, and Puerto Rico from the requirement to ship using only US-flagged carriers. Those lands are isolated from the US mainland's transportation system and higher shipping costs negatively affect the quality of life and viability of small businesses in those areas. Finally, allow the Secretary of Transportation to immediately waive Jones Act provisions that prevent non-US flagged carriers from operating in US waters or the outer continental shelf without requiring lengthy reviews. This waiver would be triggered by the President's declaration of a federally-designated disaster area that mobilizes FEMA, the Coast Guard, and other national-level resources.
These three measures are a small start towards a reformed Jones Act for the 21st century. I'll bet even Popeye the Sailor Man would support them if it meant he could get his spinach shipped faster and cheaper. Okay, maybe that's a stretch, but it's the only colorful seagoing image I can manage.
Live music is an opportunity to wonder at mass behavior. Some artists fade away after a single hit and others have careers for decades. The handful of bands that have survived in American pop culture since the mid-90s captured the zeitgeist of the dot-com bubble's promise of endless prosperity. Matchbox Twenty and the Goo Goo Dolls are among that small number. I got to hear them live on July 23 at the Sleep Train Pavilion in Concord during their 2013 Summer Tour.
The Pavilion itself is impressive. It's a Frank Gehry creation that looks like someone chopped an edge off a Borg Collective cube and propped it up in the hill country of Contra Costa County. I don't quite get the business logic behind Sleep Train's sponsorship, unless people in the Bay Area really need new mattresses more than once a decade. Bay Area denizens break down into tribes of intellectuals and laborers. I normally hang out with intellectuals but I can deal with the masses when I'm out in public. Longtime concert goers mark their tribal affiliations with T-shirts from previous tours. Lots of these folks must love the big name tour circuit.
The opening act was Kate Earl, a very strong performer with radio-friendly tracks like "One Woman Army" and "All I Want." Kate will easily be a star because she has talent and the crowd felt it when she connected with them. I was particularly impressed when she hit several progressively higher notes to demonstrate her vocal range, and her voice was stable at each octave. It also helps that her looks and emotive ability translate well to video. Check out her video for "Melody." She's a natural performer and boldly displays sensuality.
Even top acts aren't above using base comic relief. After Kate Earl's set, some random performer in a bear costume got up on stage and gesticulated to the old Disney standard "Bare Necessities." I guess that was to please the kids in the crowd, or perhaps to fulfill a union contract that stipulates some minimum amount of time the roadies must be on stage. Even roadies have unions these days, and the International Alliance of Theatrical Stage Employees (IATSE) helps ensure that the ticket prices you pay at live performance venues remain as high as possible to pad their fat pockets.
The Goo Goo Dolls had tons of energy in their set, plus tons of touring musicians who aren't part of their regular lineup. The one thing I've never fully understood about touring performers is their desire to supplement their official lineup with extra musicians who didn't record the songs in a studio. I have a pet theory that I would like a music industry insider to either confirm or debunk. I think studio recordings are now so overly processed, engineered, and dubbed that the only way to achieve a comparably rich sound while live is to add more live musicians. I don't care much either way. The Goo Goo Dolls sounded great with their extra backups.
John Rzeznik was a crowd favorite. I suspect he'll go down in music history as a game-changing singer and songwriter. His lyrics are poetic and his vocals have so many alternating layers that the band's oldest hits never tire out. Their newer songs often share similar rhythms with their older standards but it's not like you're listening to the same song twice. The only thing the Goo Goo Dolls need to do to remain successful is to stop their bassist Robby Takac from singing lead. His bass playing is fine, but the dude just can't sing. His raspy voice contrasted with John's melody displays an obvious talent gap. It is no coincidence that the band achieved its commercial success when John took the lead vocal role from Robby after their first two albums. It is also no coincidence that none of the album songs where Robby sings lead have ever been released as singles. Even the audience noticed the difference in vocal quality; they were polite and sedate when Robby sang but enthusiastic when John regained control of the stage. This observation won't sit well with hardcore GGD fans but someone has to tell the truth. Just play, Robby, and let John sing.
Matchbox Twenty went last and played the longest set. Here's another of my pet theories. I suspect that music industry tradition reserves the last and longest set for the band that has sold the most retail music. That used to be measured in CD sales but now MP3 downloads are probably the leading metric. The RIAA keeps statistics on shipments of music packages. The IFPI has worldwide data. I don't subscribe to either service so I don't get full access to their data histories by artist. The closest I can come in open sources is to compare the unofficial Matchbox Twenty discography with the comparable Goo Goo Dolls discography. Argh, the GGD page doesn't have total sales figures per album. Shucks. Billboard is no help either; it has article histories but no sales data.
I'm getting off track here, but I just can't help thinking about business topics even at a rock concert. Matchbox Twenty simply rocked. Their old standards from the mid-'90s pleased the youngsters in the crowd. The two hot chicks in front of me just couldn't stop shaking their shapely bee-hinds during "3AM" and "Real World." I had to stand for most of Matchbox Twenty's set because so many yahoos were standing up in front of me, including one tubby guy who insisted on waving his arms in some bizarre Tai Chi poses. That's rock 'n roll for ya, where even no-talent slobs think they can be stars.
The prominent use of video effects as part of both headliners' stage acts is a sea change from road shows of yesteryear. My very first live rock concert was Tesla in Sacramento on New Year's Eve 1992. The hued lights would blink in time with the rhythm section and the bright lights would cue the audience to go nuts at the musical "bridge" points in each song, much like an "Applause" sign in a TV recording studio. The last big name rock concert I attended was when The Cranberries played San Francisco's Warfield in 2002 as their popularity was just about to wane. It really does take me a decade to get around to a show. Anyway, the Cranberries had plenty of flashy lighting but no big video monitors to tell the audience what they should be feeling. The video cues in the Goo Goo Dolls' "Come to Me" included supertitles of the lyrics so we could all sing along to one of their new releases. Matchbox Twenty launched their set with a video of some Vaudevillian actor introducing them, and introduced "3AM" with a video of a clock radio hitting that time. Video added a dimension to these groups' artistry that I never expected to see live. Watch a YouTube video of some old '80s hair metal band and you'll see that lighting and video cues used to be as subtle as sledgehammers; now they're as sharp as scalpels.
Many of the younger folks in attendance couldn't have been past elementary school age when these two bands were in their heyday during the dot-com bubble. Most of them weren't even born when INXS released "Don't Change," but they rocked out to it anyway when Matchbox Twenty covered it during their encore. Those teens and twentysomethings now have a memory of an old song made new again.
Pop music's pervasiveness allows us to time-stamp our lives. I'm in Generation X, the first generation to transition its listening preferences from FM radio to CDs to MP3s and finally web streaming. The time-stamps of each of the hits that night are as readily visible for me now as when they were first imprinted . . .
- Goo Goo Dolls' "Name" in 1995 . . . meeting my platoon for the first time at Yongsan Garrison, Republic of Korea.
- Matchbox Twenty's "Push" and "3AM" in 1997 . . . driving back country Texas roads around Fort Hood after major exercises, going past the boundaries of the maps the base gave me.
- Goo Goo Dolls' "Iris" in 1998 . . . browsing the old German shops made new for tourists outside of Warner Barracks in Bamberg, and regretting that the remake City of Angels wasn't nearly as good as Wim Wenders' original Wings of Desire.
- Goo Goo Dolls' "Black Balloon" in 1999 . . . watching Air Force pilots throw plastic furniture from the Officers' Club patio at Osan Air Base, Republic of Korea, with a very attractive female Air Force lieutenant who might have done anything I'd asked her to do (if only I had thought to ask).
- Matchbox Twenty's "Real World" in 1999 . . . at my promotion to Captain on the fourth floor of the Zone night club in Songtan, Republic of Korea, surrounded by my fellow soldiers and Korean bar girls with Anglicized stage names.
- Goo Goo Dolls' "Here is Gone" in 2002 . . . commuting to MBA classes in San Francisco where most of my classmates held me in contempt for my military background, and wondering how badly my pending recall to active duty would hurt my civilian career (as it turned out, almost terminally).
- Matchbox Twenty's "Unwell" in 2003 . . . risking my rank and paycheck to fight every illegal order I received from corrupt and incompetent military superiors, all while wondering why I was still bothering with the Army.
- Goo Goo Dolls' "Before It's Too Late" in 2007 . . . rebuilding an Army unit and its training regimen from the inside out at Fort Bragg, North Carolina, in the same barracks where I was told as a cadet in 1994 that I did not deserve to be a soldier.
- Goo Goo Dolls' "Notbroken" in 2010 . . . returning from war in Iraq, not broken at all.
- Matchbox Twenty's "She's So Mean" in 2013 . . . when my Army rank, personal net worth, and business reputation are higher than I ever imagined they would be in my darkest days.
I marked a new time-stamp at this concert with Kate Earl's "All I Want." All I wanted was to see awesome performers live. Popular music will never really change. Frank Sinatra was the first pop crooner to make young women swoon and Elvis Presley was the first to make their boyfriends jealous. The Beatles made pop music go transnational, with or without Tavistock's help. Heavy rhythms recall our tribal origins as hunter gatherers. Those rhythms can still bind us as temporary tribes, under the stars in outdoor pavilions.
I'm a big fan of industry best practices. Maybe it comes from my military background, where doctrinal sources form the core of a professional's body of knowledge. Maybe I just don't like reinventing the wheel. The best practice I've seen for structuring a startup's pitch to private investors is Guy Kawasaki's 10/20/30 Rule of PowerPoint. It's been around for years but I still see tons of startups giving pitches that wander through endless narratives without telling us how their idea will solve market problems and make enormous profits.
I know why startups have trouble adopting the rule. It's laid out in text and most human beings think visually. Even smart people like entrepreneurs need pictorial examples of how to articulate a pitch using this awesome rule. I have just solved this enormous problem for the benefit of all humanity.
Alfidi Capital has just published an outstanding Sample 10/20/30 Rule Pitch Template on its Special Reports page. This template adapts the Alfidi Capital business model into a form that anyone can understand. Entrepreneurs are free to marvel at the slide format and use it as a shining example of how to construct a pitch. It even comes with a separate notes page version so entrepreneurs can see the kind of language a bona fide genius would use while speaking about the slides. I make no warranty as to whether or not anyone could actually raise capital using my verbiage. I'm not running anyone else's business and no else is running mine.
Please note that I reserve the right to update the slides any time I wish. That's what entrepreneurs do as times change.
Sometimes you just gotta wonder what tech executives are thinking. Cisco is buying Sourcefire for $2.7B. That prices the target at a 540 P/E (my calculation, based on their year-end 2012 earnings). Who the holy heck pays that much for a company?! It's not like Cisco is incapable of developing enterprise security technology themselves if they really wanted it. I got a peek inside their headquarters in 2006 and they had plenty of capability even then. They could have prowled the expo floor at any of the tech trade shows I've attended for startups developing network security. Startups building firewalls can be owned for much less than several billion.
Cisco is buying a company that earned just a hair over $5M last year and those earnings have declined precipitously in the last three years. I would understand paying a premium for growth but not for shrinkage. Sourcefire has begun to dig itself out of its retained earnings deficit but that doesn't necessarily mean Cisco is getting a bargain.
Security sector executives need not get overly excited about seeing their own companies getting snatched up at premia. Any consolidation in the sector will need to happen right now, like in the next few months, before the US economy tips back into recession and businesses seriously cut back their IT spending.
In normal times I'd be tempted to short Cisco's stock on news like this but I'll stay on the sidelines. If the deal makes sense it won't be because of the price.
Full disclosure: No position in CSCO or FIRE at this time.
IBC Advanced Alloys (IAALF / IB.V) has struggled for years. You'd think their beryllium alloys would be in high demand for the coming explosive growth in the markets for drones and micromachines. Alas, those markets can't come fast enough. The management team has a diverse enough background to find some use for beryllium-laden things, although a few of their personnel selections seem odd. A retired Marine general may know something about procurement needs for beryllium-aluminum mounts on airframes but that's no guarantee of contract awards.
They've made an effort to commercialize a nuclear fuel technology since 2009. Reading the MD&A report for 3rd quarter FY2013 reveals that this is a part-time effort of one person. That MD&A report also mentions that they suspended their mineral exploration efforts. I take this to mean that they will not become a vertically integrated mine-to-metal enterprise since they don't have any geologists in management.
The company has been losing money since 2001 and the recent fall in the price of copper hurt the market for their copper alloys. Their financial statement for Q3 2013 (dated March 31) shows cash on hand of $US2.2M and a burn rate of $330K/month, so they would have survived another seven months from that date. They were fortunate enough to raise $2M in a PPO so someone must want them to stick around. Recall from their MD&A that raised capital is committed to sustaining their corporate headquarters because of loan covenants governing cash already committed to manufacturing. It's also noteworthy that their retained earnings are negative $36M, with no remedy in sight.
This company is not the right investment for my portfolio. I prefer a company that doesn't have to go begging to keep the lights on at headquarters. They have an uphill climb against larger competitors like Materion (MTRN).
Full disclosure: No position in IBC Advanced Alloys, or other companies mentioned, at this time.
I find it un-freaking believable that markets continue to hit new highs while central banks pump them with liquidity and dingbat money managers keep gambling with other people's money. The only way out of this mess is through sarcasm.
The G-20 is doing a u-turn away from austerity even though it knows by know that monetary easing doesn't spur real growth. All of those ugly protests in Greece and Spain spooked the elites into thinking they won't get their weekly caviar fill if austerity brings revolution.
China's interest-rate liberalization now makes excessive borrowing easier than ever. This extends the life of the shadow banking system's overburdened balance sheets by months, or perhaps years. Chinese real-estate developers now have to meet fewer hurdles to commit control fraud.
Mme. Lagarde wants the US Supreme Court to reaffirm the doctrine of sovereign immunity so she can get on with the IMF's business of ignoring the imminent sovereign debt defaults of the PIIGS bloc. The IMF and other transnational institutions didn't get the memo that sovereignty still matters to investors who consider tax policies, political risk, and other factors specific to nation-states. The globalization of the ruling class into a transnational blob came about thirty years too late. Now the pendulum swings back to nations and their tribal constituents, just as it did in the fifth century as the Roman Empire came apart.
I took only one action with my portfolio this month in the aftermath of options expiration weekend. My covered calls on FXF expired unexercised and I renewed them. I think the Swiss franc is stable now and the Swiss central bank won't be able to hold down its value indefinitely.
I am still long FXA and FXC (with no option positions) as currency hedges against the devaluation of the US dollar. I'm also still long a small put position against FXE because I do not expect the euro to survive in its present form. I'm still long GDX (with no option positions); I will keep holding it as a hard asset hedge against the onset of high inflation but its usefulness will diminish as high inflation turns into hyperinflation.
Future portfolio candidates are all overpriced or inappropriate. I keep looking at REITs for a sign the housing market will cool off, with no such luck. IYR is still valued at more than twice what I think its fair value should be based on its dividend stream. My watchlist of stocks in mining, energy, agriculture, and logistics is similarly overpriced. There will be very few opportunities to make money in the defense sector for many years.
I briefly considered the merits of non-US fixed income instruments but pickings are slim. The only countries I'm willing to consider are the same as my currency strategy: Australia, Canada, and Switzerland. There are few ETFs devoted to the government debt of those countries and those ETFs are not optionable.
My cash pile remains silent. The S&P 500 is hitting record highs today but I don't care. I have no regrets about being largely absent from an equity market where corporate earnings are twice their historic averages. I'll keep waiting for a dirt-cheap entry point.
I do not know whether the Michigan State judge's injunction against Detroit for filing bankruptcy will be overturned by a federal court. Bankruptcy law is rarely exercised for municipalities so any new case law will set clear precedents for whatever bankruptcy wave is coming. There is plenty of precedent for one extreme measure that municipalities may consider if their backs are against a fiscal wall. That would be the seizure of private assets under eminent domain whose resale will make municipal bondholders and pension recipients whole.
This nightmare scenario could easily unfold if state and local politicians believe fighting public employee unions in court will harm their re-election prospects. The US Constitution prohibits the government from taking private property without just compensation but legal history leaves the definition of "just compensation" to state and local governments. Consider also that property owners who endure a taking under eminent domain may be compensated in the form of a "condemnation award." I'm not an attorney, but I'm under no impression at present that such an award absolutely must be in the form of cash or in-kind property. My nightmare is that private property owners in Detroit or elsewhere may see their land seized and businesses condemned with their only "just compensation" as some new non-marketable junior security issued by a broke municipality just for such an occasion. The IOU would of course be worthless but the property seized would be sold to other parties (presumably with political connections) and the proceeds used to fund pension liabilities.
Consider also that the people charged with enforcing this confiscatory doctrine - police, judges, government clerks - are all beneficiaries of this process if they depend on defined benefit pensions. Their interests would theoretically align with fulfillment of a strict interpretation of contractual obligations outside of federal bankruptcy proceedings and against the interests of taxpayers and private property owners. Finally, consider that legal precedent also allows the taking of personal property and intangible property. I do not see any legal barrier to the confiscation of privately held liquid investments such as brokerage accounts or bank accounts.
This is a thought piece that I very much want to be invalidated. I truly want Detroit to have a successful restructuring through federal bankruptcy proceedings that are unencumbered by state-level judicial maneuvers. I do not at all look forward to the depressing prospect of desperate politicians, backed up by destitute law enforcement officers and government functionaries, confiscating private assets under eminent domain just to placate some very vocal unions. I want to be wrong about this prospect. I would like bankruptcy attorneys and legal scholars to debate this scenario in the public sphere and prove my concerns to be unfounded.
I laugh when people waste money. It's easy to accumulate wealth just be avoiding bad decisions and the stupid people who make them. Here's today's run-down of stupidity on a blessed Sunday morning.
Rent-to-own. I don't know why this business model still exists. The interest you pay on renting a durable household good you later intend to purchase is as usurious as the annualized interest you'd pay if you purchased it with your credit card and carried the balance for years. Maybe this is popular in that wedge of the population where low income intersects with low intelligence on a Venn diagram.
Smoking. I just don't get this one. Throw scientific studies in people's faces for years about the bad health effects of smoking and they do it anyway. I never got started on any addictions because all of the anti-drug messages that bombarded me during my school years scared me straight while I was still impressionable. People literally burn money.
College. This is now the dumbest financial decision of them all. Interest rates on federally-guaranteed student loans are about to go way up and yet people who shouldn't be attending college are still borrowing money they'll never earn for a degree that will never pay off. Stupid people must really love indentured servitude, because that's what they'll get by working as baristas or warehouse clerks for thirty years to pay off student loans.
Hopeless people can't be helped. I triage them out of my life so they can be someone else's problem. Since this is Sunday, a lot of them might be praying for more money. I don't attend church because I don't want these people hitting me up for cash.
Thompson Creek Metals (TC) mines molybdenum. It's really helpful that they currently display the market price for moly on their corporate site. One would think that with several properties and a metallurgical facility they'd be vertically integrated enough to process their own production and that of other miners.
The good news about their Thompson Creek moly mine is that they have solid 2P estimates. The bad news is that the mine's 43-101 assumes a moly price of $12/lb. Check the site's front page again; this week's average moly oxide price was $9.40. Check the price of moly at InfoMine if you need a second opinion. This mine is operating at a severe disadvantage. The Endarko mine also has plenty of 2P ore but its estimates also depend on a long-term moly price of $12/lb. I don't see how the company can sustain production at a price below the long-term estimate of the price it needs to be successful.
Thompson is developing other projects. The Mt. Milligan project is almost completely developed but the Cu concentrates and Au grades are extremely poor. The price of gold has dropped significantly since 2012. The company's other exploration projects are too early to value, but Berg Property's low MII grades are not encouraging.
The single most important thing I've learned about the mining sector is that a mining company's valuation is determined by the relationship between its grades, its cash costs of production, and the market price of its final product. Those things matter more than anything else. A company cannot indefinitely produce a metal at a cash cost that exceeds that metal's world price. Projects whose costs exceed world prices must either cut their costs or eventually shut down. Moly prices are at four year lows. Thompson Creek Metals had massive losses in 2012 and has just barely turned in positive net income as of March 2013. They will need some serious cost cutting at their two moly mines or a major positive surprise in the grades at their exploratory projects.
America has long been rich in hydrocarbon energy. That's great for Joe Six Pack and his fellow energy hogs who forget to turn off a light when they leave a room. The country's remaining reserves of coal and natural gas are still plentiful but are more expensive to extract than ever. Choosing between gas and coal is not easy.
The US Potential Gas Committee has published estimates of natural gas reserves for decades using rigorous peer-reviewed methods. The Committee estimated that the US's recoverable gas reserves stood at 2.38 Tcf at the end of 2012 with no caveat for expected production timelines or market prices. The New York Times's "Drilling Down" series exposed the hype some shale gas enthusiasts had pushed on the public. Large US gas reserves are not necessarily cheap or easy to obtain.
Shale gas may be cheaper and cleaner to burn than coal but that does not mean its extraction is without cost. Methane is still a greenhouse gas and its uncontrolled escape exposes the atmosphere to global warming. That's why monitoring orphan gas leakage from wells and pipelines is important for the energy sector.
I will go out on a limb to suggest that the risk of groundwater contamination from fracking is overblown. The GAO-12-732 found no evidence of aquifer contamination from fracking. Oil companies already know how to purge contaminated water from a well by plugging it at the bottom and creating air pressure that sucks contaminants out of a compromised bore hole. The scene in the documentary film Gasland of a water faucet lighting on fire displayed the results of biogenic methane gas unrelated to oil and gas exploration.
Fracking's impact on surface topology also appears to be negligible. A fracking well's surface footprint is 5-7 acres for each well pad, but horizontal drilling means several wells can fit on a single well pad to save space. Surface traffic into rural areas will increase as trucks bring in large amounts of water to sustain fracking, but refer again to that GAO-12-732 study above which was inconclusive on the impact of surface disturbance. The GAO's 2013 High Risk Report concluded that the management of oil and gas royalties from production on federal lands needs improvement because of uncertainty over monitoring and revenue collection. It all comes down to money, folks. Uncle Sam will ignore fracking's potentially unknown impact on surface degradation if it gets a more accurate account of the enormous revenue it generates.
Trucking in all that water means someone else doesn't get to use it. The "water wars" of the Western states have always been pretty intense between environmentalists and farmers. Introducing fracking wells' need for water may end those wars unexpectedly because energy companies are rich enough to outbid other parties.
Fracking may have some common cause with the geothermal energy sector. Injecting water into deep wells does induce seismic activity. LBL's Earth Sciences Division has studied induced seismicity for years in the context of energy exploration. It would be great if the geothermal sector could partner with the oil and gas sector by sharing data on deep well injection because they could probably learn from each other. Both sectors should also peruse the USGS Earthquake Hazards Program data to see where their drilling is likely to raise their costs if they get hit with lawsuits from earthquake victims.
If you don't like the headaches involved with shale gas, you won't like the coal sector either. The current Administration seems determined to make life difficult for the coal sector with increased regulatory attention. Goal gasification in situ may provide a favorable solution. The heat transfer to the surface generates electricity and the carbon byproduct stays locked in the Earth's crust away from the atmosphere. DOE's support for the FutureGen coal plant conversion project shows that the Administration is willing to back a demonstrated carbon capture technology for the coal sector. One big potential drawback to coal gasification is the uncertain means of turning off the thermal reaction underground. I recently had a conversation with a former energy company executive who mentioned some underground coal mine fires in Pennsylvania that have burned for decades and then migrated to consume other deposits. He had the same concern about extracting methane hydrates from Arctic tundra and the frozen ocean floor. Taking out too much at once may cause an unpredictable reaction.
California is set to play a big role in satisfying America's future energy needs. The Monterey Shale Formation may be the biggest oil-bearing formation in the US. Getting energy out will be hard because of its complex geology. I predict it's going to happen anyway. Ignore the political noise and focus on the money. America is going to build clean coal plants, lay the Keystone-Xcel pipeline, and frack California's shale. The energy companies that line up first will be minting money for years.
The founder of Micello regaled us with stories from the trenches about how he raised money for his startup without significantly diluting equity. I was amazed to learn that major prospective customers are willing to subsidize up to 50% of their estimate of a tech startup's product development costs if the beta version is something they really want to use. Putting IP in escrow is no worry as long as you execute and crowdfunding is an excellent way to discover demand. Early stage startups can skimp on non-core functions by getting free or cheap services, bartering for services, getting loaner hardware from excited business development reps at big partners, holding meetings at free WiFi hot spots, and volunteering at events just to get access to big shots. These are all IMHO examples of effective Toilet Paper Entrepreneur tactics for success.
I noticed that serendipity played a major role in the lives of many of the entrepreneurs at TiE who have shared their stories. Getting outside your comfort zone increases the numbers of people you meet who may help you with free services or product development subsidies. Attending conferences and winning startup contests is integral to amassing a "collection of small wins" that will keep a startup team motivated through the ups and downs of its early years.
The best lessons were about parceling out equity in exchange for services. The Micello co-founders had to buy their way in if they wanted significant equity; other employees and advisors who aren't being paid in cash would be smart to have options agreements that grant them more equity later as they keep performing their roles. I did not know that some law firms will accept a deferred payment for their services in lieu of equity, so long as the startup successfully raises capital later.
Convertible notes are useful in Silicon Valley. Micello granted a convertible note to an early partner that funded their product development. Convertible notes can be "fixed discount" or "capped convertible." The very first angel investment I made in 2007 was under the terms of a convertible note called a bridge loan. It granted me shares upon the company's completion of a subsequent fundraising round and had a warrant attached that allowed additional shares to accrue. I've read a few VC blogs on the subject and capped notes seem be falling out of favor because they offer little flexibility in subsequent fundraising rounds. Convertible notes increasingly come with liquidation preferences nowadays so earlier investors have some options in later rounds. Speaking of options, sweat-equity contributors need to know how their equity options accrue and entrepreneurs need to know how their attorney accounts for their vesting schedules in the cap table.
I have much more appreciation for the nuances of early stage investing after reading up on the controversies around some ways to structure convertible notes. I'm not the kind of investor who holds entrepreneurs over a barrel and I won't structure my own investment in a way that hurts a company's future growth.
My regular readers know that I routinely attend events at the World Affairs Council and Commonwealth Club here in San Francisco. I get plenty of genius material there but other attendees do things that annoy me to no end. I have a hard time accepting that so many smart people can do so many dumb things. I chalk it up to the self-absorption of at least two generations reared on the primacy of "self-esteem." This stupid sentiment has obliterated common sense and basic standards of conduct in the name of immature self-actualization.
Fear not, San Francisco. Alfidi Capital has a solution to all social ailments, provided free of charge thanks to my enormous generosity and concern for the human condition. Here are some areas where Bay Area intellectuals need to pay more attention when they're out enriching their minds at high-end venues.
Canine companions. Dogs are cute and I pet them when I see them. They do not belong in intellectual seminars. First of all, they can't comprehend English and don't possess advanced degrees, so they can't benefit from listening to experts. Sarcasm aside, they bark during lectures no matter how well-behaved their owners think they are, so they disrupt important discussion points. None of the dogs I've seen at these lectures are service dogs in harnesses that guide disabled people; they're just pets out for a walk. People need to leave their pets at home, or else find them a home where they won't be owned by an inconsiderate nitwit.
Drinks in containers. I've never understood the phenomenon of the last decade or so where urban dwellers need to drag a bottle of water, coffee, green tea with pomegranate and aloe additives, or some other liquid encumbrance with them everywhere they go. It's bad enough to be in line behind these people on a bus or trolley while they fumble for change with one hand and hang onto their sports bottle with the other. Now I have to deal with them in club lectures where they kick over their bottles and stain carpets. People, drink something at home or at the cafe before you come to the lecture.
Cell phones. Turn them off before hand, for crying out loud. That's what the hosts always tell us to do but intellectuals with expensive educations sometimes have difficulty following simple instructions.
Grandstanding. This is something that happens all the time at the Commonwealth Club. The panel opens up for audience Q&A and invariably an attention-starved loudmouth will preface a question with a long-winded diatribe about their background working with some precious non-profit. This tends to happen at the environment and energy events because the closet socialists (excuse me, professional activists) around town are pathologically unable to refrain from pushing their agendas. Hey idiots, just because you feel passionately about taxing the 1% just to save your favorite single-celled amoeba doesn't mean you deserve a seat at the table with real experts. Quit hogging air time. Ask your question and then shut your fat mouth so other people can get their questions answered.
I hereby request that my fellow intellectuals in The City grow the heck up and make life more pleasant during public lectures. If any of you overeducated ding-dongs are confused about how to behave properly at intellectual events, just follow my example. I don't bring animals into lectures they won't understand. If I need a drink, I head out afterwards to a bar where the hot women of this town await my attention. I turn off my cell phone before the event begins, because my high-powered contacts can wait until I'm done. I sit quietly and usually take notes, because genius lectures deserve praise on a genius blog like mine. I ask a question without introducing myself or proclaiming my agenda, and then I sit down. San Franciscans need to use more common sense while out in public. That's a tall order but it's part of my lifelong one-person war against stupidity.
Banks are not the safe havens of yesteryear, if there ever was a yesteryear. The 2008 financial crisis showed us all that banks often have no clue about the risk they take when making loans. Investors have a few tools to evaluate bank risk before they stroll up to the teller window or click "buy" in their brokerage account.
The Texas ratio is explicitly focused on those asset categories that immediately threaten a bank's solvency. The capital adequacy ratio (CAR) is a more complex assessment of a bank's ability to survive impairment of several asset categories. The Texas ratio is simple and straightforward. The CAR's utility depends on how closely the bank adheres to several accounting principles and whether it caveats its exposure by adjusting the risk weights.
A bank with a poor Texas ratio must make it healthy by making operational changes. It can increase its loan loss reserves, sell off its REO inventory, pursue delinquent loans, or sell non-performing loans to third-party collectors. In other words, the Texas ratio requires a bad bank to solve its problems. The CAR requires its own set of fixes that probably take longer to execute than those for the Texas ratio as they require significant shifts in the bank's strategy. It is important to note that Basel rules allowing a risk weighting of zero percent for government debt in the CAR may be unrealistic in an era when governments allow their central banks to devalue currencies with quantitative easing.
The bottom line is that understanding the Texas ratio and making changes to improve it are both easier than doing the same for the CAR. Both metrics are useful and I don't intend to buy stock in any bank until I understand how they stack up in each ratio.
Detroit is now free to nullify any city employee union contracts that burden it. No city deserves to be a permanent hostage to union greed. It is also free to implement its long-discussed downsizing plan. I sure hope they take my initial analysis seriously and go for as much permaculture as space will allow. The sad recent spectacle of Detroit fast-food workers agitating for higher wages was comedic. Those folks won't be laughing once their fast-food joints are bulldozed for farmland but they will certainly be eating healthier.
I have no sympathy for any investor who bought Detroit municipal bonds. The handwriting for bankruptcy was on the wall for a very long time. Bondholders will get nothing.
Bankers can be as stupid as all get-out. That should have been obvious after the recent revelations of collusion among bankers who fixed LIBOR to cook their own books and skim some quick profits. There must be a more effective way to price short-term lending and assess credit risk among counterparties. Let's go exploring.
Credit default swap (CDS) spreads are premiums that investors pay as insurance against the default of debt issued by an underlying company. This is in effect a derivative bet on a company's solvency. CDS data isn't available from conventional media sources or retail brokerages. Investors would have to subscribe to a data service like Bloomberg Professional to get access. That's probably a bridge too far for most folks and not every company will have debt that traders will want to exchange in CDS deals. Companies with daily presence in credit markets need something uncomplicated and universally applicable. I may have a satisfactory answer.
There are several widely available amalgamated borrowing rates that large investors use to price credit. I'm thinking of LIBOR, HIBOR, SIBOR, TIBOR, and Euribor. If I were evaluating the credit risk of a borrower, I'd use a simple average of all of these rates. It just needs a catchy name . . . GIBOR. That stands for global interbank offered rate. You heard it here first.
GIBOR could even assess the health of the global financial system in the same manner as the Ted spread and LIBOR-OIS spread. In this case, GIBOR would be the numerator and an average of several central banks' overnight lending rates (approximating a global version of a risk-free rate) would be the denominator. A higher spread in basis points between the two means a rising price for short-term credit and increasing stress on the global financial system.
I wouldn't adjust the weight of each of the interbank offered rates by the size of their respective capital markets. I'd weight them equally on the premise that a single overnight loan or issue of a debt security may be packaged for offer in any of those rates' jurisdictions simultaneously. That means the issue could be immediately subject to any or all of the IBORs without regard to each market's size. Capital markets are liquid and global. Investment banks have the ability to reach across them instantaneously with offers.
I haven't worked out the kinks of this idea yet but it's worth a shot. The individual IBORs are subject to manipulation but so is everything else in our modern world. It would be much more difficult, but not totally impossible, for a participating bank to manipulate or front run all of them. The advantage of my proposed method is that it removes credit risk from the impenetrable darkness of proprietary analytical methods or CDS data trapped in dark pools of liquidity. Using all of the IBORs together brings credit risk into the light of day, for those with eyes to see. Let's go GIBOR!
An acquaintance got me thinking about the fixed-income universe. I haven't thought about it much lately for good reason. Fixed-income investments are wiped out in high-inflation economies and the Federal Reserve's implied policy of monetizing US sovereign debt dramatically increases the chances of high inflation. The fixed-income universe is much broader than sovereign debt. I ought to see if any income-generating instrument can survive high inflation.
The Dividend Yield Hunter lists multiple categories of fixed-income instruments that go way beyond bonds. I was not aware that exchange-traded debt existed in forms other than preferred stock (not really debt, but acts like it) and funds. The Tennessee Valley Authority, for example, lists its bonds on exchanges for the public to trade (TVC and TVE are examples). The usual cast of characters like MLPs, royalty trusts, and REITs round out exchange-listed offerings. I've never considered business development companies (BDCs) as fixed-income investments because they are unique ways to invest in undercapitalized small companies, sort of like VC firms but publicly traded. Dividend Yield Hunter lists BDCs as fixed-income, presumably because they must pay out their earnings like other pass-through entities. BDCs are also searchable over at QuantumOnline, and that site also lists exotic things like income deposit securities.
Fixed-income investing is a fine stabilizing element for a diversified portfolio in normal times when interest rates are at their long-term historical average and the national debt-to-GDP ratio is manageable. Americans are not living in normal times any longer. Most fixed-income investments will see their principal destroyed when high inflation reduces the dollar's value to nothing.
These are the types of fixed-income investments I have decided to avoid due to their vulnerability to inflation. US sovereign debt of any kind. The Fed is going to swallow these things whole when foreign central banks sell them in a panic. The QE needed to absorb the world's outstanding stash of Treasuries will have to be monstrously huge. Coupon debt of any kind. This includes any corporate debt or municipal bonds that pay a fixed coupon based on the bond's face amount. That face amount will be worth less than nothing after hyperinflation ends. Say goodnight, internotes. BDCs. I don't care how generous the cash flow from repaid loans looks right now. BDCs are highly sensitive to short-term interest rates and real rates will skyrocket at the onset of high inflation. Their funding is unsecured, which means investors have little recourse to recover assets after bankruptcy. No thanks. Finally, their assets are loan portfolios. High inflation is a debtor's dream come true because it allows them to pay existing debts with future dollars that are worth less than current dollars. Inflation will destroy BDC loan portfolios. These are the crucial differences between BDCs and other private equity vehicles. High yield debt. No way, ho-say. This was the first debt category to crack when the market turbulence of 2007 became the crisis of 2008. Junk bonds are always the first to be wiped out in any market downturn because their issuers have weak earnings or troubled business models.
These are the types of fixed-income investments I am open to considering, given the caveats mentioned. Their common denominator is their basis in a hard asset sector. MLPs. I like pipeline MLPs as a play on hard asset servicing. Oil and gas are energy hard assets whose demand will be price inelastic during high inflation. My concern is whether FERC regulations will prove to be so onerous during hyperinflation that they destroy the pricing power of MLPs and their pipeline operating companies. I cannot rule out regulatory risk with pipeline MLPs. I may have to wait until renewable MLPs are active. Royalty trusts. These are collections of orphaned oil and gas wells whose owners do not need to spend capex to upgrade them. They pass their earnings through to trust holders as the wells' reserves run down. REITs. These are the trickiest to consider. Some residential REITs will fair poorly during hyperinflation if their holdings are concentrated in urban areas that are hostages to rent control ordinances. Those will not retain their pricing power during hyperinflation. Commercial REITs will fare better but many REITs own a mix of properties. The best sector bet for me may be iShares Dow Jones US Real Estate (IYR), an ETF of REITs, but based on its dividends it's currently trading more than twice what it should be worth.
I feel like restating my enmity for actively managed funds of any kind, including fixed-income. Bond mutual funds are no longer needed now that index funds and ETFs exist. Active management of fixed income portfolios is for institutional investors and corporations who must immunize their portfolios against interest rate moves or match durations to liabilities. They have specific goals in liability-driven investing. The larger investing world doesn't need to constantly fine-tune a fixed-income portfolio.
I must also reiterate my disdain for the superficial analysis some fixed-income investors use to evaluate the attractiveness of securities. I've heard some investors claim that MLPs and REITs trading for less than book value are bargains, but if those same entities have low ROEs then there's a reason they trade at such discounts. The market is discounting their ability to generate cash flow because a low ROE indicates they use capital inefficiently. They may be paying too much for debt because of past negative credit events or committing capital to operating payouts (like lawsuit settlements or regulatory fines) instead of facilities maintenance or improvements.
San Francisco's SoMa yields unexpected life lessons for those of us who pay attention. I had time before a meeting tonight to wander around Mission Street and I walked into the front door of Freespace. It's a Hack for Change experiment to see what creative types will do with a few months' worth of unstructured communal effort. Civic hacking is the kind of vibe that could only thrive in a big city, and could only be born in a place like San Francisco. Come to think of it, there is no place like San Francisco.
The tour guide for my brief sojourn into civic hacking was as unstructured as his work space. The dude showed me around various free-form art and recreation spaces where not much was getting done except by one lonesome painter with his oils. The space outside was more productive, with a functioning garden and some shipping containers redesigned into classrooms.
Civic hacking has the potential to birth brand new ways of living and working, but IMHO the Freespace version looks too unstructured to be an effective laboratory. Contrast this with hackathons where highly competent programmers and engineers design functioning software prototypes that fill market needs. Hacking a system works best when qualified pros focus effort on a working product. Maybe I caught Freespace on a night when the leadership team was out to dinner. Let's see what projects they can complete before their lease runs out.
Freespace filled the white space in my calendar before my formal commitment of the evening. I went across the street to Soma Grand for a Meetup on fixed-income investing. The contrast in settings could not have been more stark. Where Freespace was disorderly, Soma Grand was regimented. Freespace mixed work and leisure areas freely; Soma Grand clearly delineated its boundaries.
The Meetup ran much like a Freespace arrangement. The old hands ironed out rules and briefed the newcomers like me. The resident expert regaled us with facts and principles for fixed-income investing. Attendees were free to choose the tools they needed to solve problems. The whole point was to find more effective ways of organizing capital for investment. The similarities between civic hacking and financial hacking are there for anyone who chooses to see them.
Meetups and Freespace occupy temporary autonomous zones (TAZs) where normal social hierarchies are suspended just long enough for experiments to test hypotheses. Anarchism may have inspired the TAZ philosophy but that doesn't invalidate its application to solving real problems. Even the White House and Forbes recognize the value of civic hacking that makes social institutions more effective in addressing people's needs. In the spirit of a true TAZ, hackathons always end, Meetup groups evolve or disband, and hackerspaces like Freespace relocate to other digs. If the innovations they spawn work in the larger super-connected world outside then the TAZs fulfilled their missions.
It may not have occurred to anyone but me that Soma Grand probably could not exist without something like Freespace occurring in the distant past. Dissatisfaction with the status quo spurs innovation. Complex HVAC systems, steel-reinforced concrete, and LEED certification all sprang from the minds of human innovators who looked at shabby living arrangements and vowed to do better. Some stoners at Freespace may be dreaming up the next big thing right now over a bag of nacho chips. Hopefully they'll finish their prototype before they have to vacate the premises.
The awesome, mind-blowing action of last week's solar and semiconductor conventions left me with little material for sarcasm. The only comic relief was some inebriated dude in an alien jump suit doing somersaults and almost smashing into a solar panel. This is why I need headline news to deliver sarcasm.
China's GDP growth is toast. Their falsified official statistics have caught up to them and their national leadership can no longer deny that they will have trouble reconciling the accounting for their internal debts. That crashing sound you hear is a giant panda bear tearing through the bamboo shoots that undergird all of the empty real estate built in China's ghost cities.
Global business confidence is down the tubes. Executives who pull the levers that make things are probably better judges of market reality than their lying sales reps or illiterate delivery drivers. The folks at the bottom of the corporate food chain will be the last to know. This is business as usual. Real cuts in advertising budgets and IT spending will confirm this sentiment, so I'll watch for those numbers to appear.
Egypt's oil-rich neighbors gave it an economic lifeline. The Sunni autocracies don't want the Muslim Brotherhood spreading its nonsense in their backyards. The aid is enough to reduce the prices of basic food staples. Exploding food prices caused the Arab Spring in the first place. The major oil producers had enough money to buy off their restive citizens or put them down with force. The minor oil producers - Syria and Egypt - have had more instability. Oil money made the difference for those regimes that survived.
I've got a business meeting down in San Jose tomorrow so I can't afford to overdo it on the sarcasm tonight.
I only got the free expo pass but that's good enough for my needs. The technical panels that required paid tickets were for industry practitioners. I missed the opening day Intersolar welcome addresses from Gov. Jerry Brown and Mayor Ed Lee due to a previous commitment but I did hit up the welcome reception at the InterContinental San Francisco. Man, that was some juicy turkey they carved up with my free drink.
The opening SEMICON West keynote was all about foundry-driven innovation in the mobility era. I was impressed that the keynoter polled the audience and updated his poll result slide in real time as people were voting via texts. I guess if anyone could pull that off, it would be a bunch of tech executives. It was interesting to learn that the mobile market is driving increases in silicon consumption now that the PC market is flattening. I attended Mobile Commerce World 2013 a couple of weeks ago. I think the semiconductor industry will be pleased to know that the entire retail sector is about to make multi-year investments in WiFi, smart sensors, POS terminals, and other things that will inundate every store with silicon. I also sense that smartphone makers will be challenged by the power consumption requirements that are key to smartphones' data management ability and screen resolution. I had heard others at this SEMICON mention the likelihood that Moore's Law will slowly lengthen in time as processors reach physical limits. These folks must know that MIT's Technology Review posited a connection between Moore's Law and Koomey's Law for the amount of electric power that can power devices, subject to the limits of battery chemistry. The keynoter also noted that semiconductor manufacturing capacity gets strained when a new demand node for semiconductors (i.e., smartphones) debuts. The number of high-volume semiconductor manufacturers in the world is very small, and I presume they forecast demand fairly accurately. The keynoter made an interesting point about how the longer life cycle time of more advanced technology drives the complexity and cost of semiconductor products, with risk increasing and product life cycles compressing faster than ever. I think the solution to this trap lies in the application of less complex technology that scales out in any increment, small or large, mass or custom. I'm referring specifically to the open-source standard known as Arduino, something I discovered when I visited Maker Faire 2013. There are product functions where complexity adds diminishing marginal returns past some point and Arduino is ideally suited to fill gaps between simple products and hugely complex systems. The keynoter's final points about the complexity of the ecosystem supporting foundry labs actually reinforces my own point. Open-source DIY solutions will fill demand for semiconductor products that cannot be profitably made in complex foundries.
The SolarTech presenter mentioned that long timelines for "permission to operate" (PTO) mean that money committed to a purchasing power agreement (PPA) sits on a rooftop without generating energy. I did some digging on PTO and found that some jurisdictions require a revised PTO application if the system configuration is changed. An owner who wants to add panels needs a new application?! Let's add wasted time to the soft cost of installation. Third party ownership (TPO, not PTO folks) is changing the finance game by allowing investors to finance new solar systems independent of the properties where the systems reside. Property owners can relax if another investor is responsible for submitting PTO applications and negotiating PPAs. TPO isn't the only innovation in solar finance. NREL's project finance team pushes a host of finance initiatives in credit enhancement and securitization.
My final note on the SolarTech keynote is that their Solar 3.0 program is alive and well but IMHO it won't be enough to push standardization of zoning, permitting, and connection rules. The renewable energy sector needs to piggyback on the utility sector's smart grid movement if it wants to see standardization. Smart grid adoption will drive harmonization of data transfer protocols that are crucial to energy metering. Connectivity standards will follow naturally. Renewable developers need a seat at the table when utilities make their push for smart grid adoption with municipalities.
I flipped the switch back to the SEMICON side of things and went to the Silicon Innovation Forum, with an awesome keynote from serial entrepreneur and semiconductor luminary Brad Mattson. I can't find a link to the presentation he used so you'll just have to live with my recap. Different parts of the silicon market are at different maturity stages. I'm imagining executives at the silicon product makers plotting their BCG growth-share matrices with "mobile devices" in the Star box. Innovation is hard in mature markets and a bi-modal corporate culture that splits creativity into a separate part of its structure is best able to handle the challenge. Brad introduced the concept of a "design CEO" running an intrapreneurial research lab inside a big company, but IMHO startups will recognize it as an adaptation of the "scientific and technical founder" who developed the tech and then steps away from enterprise management.
Brad mentioned the tendency of VC money to travel in packs for economic reasons. I don't know whether he meant they crowd into the same hot startups at once or just follow the same trends. My new pet theory is that VCs chase similar deals because they also chase the same institutional pools as clients, and those institutions are themselves susceptible to falling for the same hot trends touted in popular media. Too much money chasing a trendy but immature idea does not reduce risk, and Brad found that the best time to invest is during a sector's downturn to leverage a long gestation period for new tech. He also contradicted something I had previously heard about VCs. I had previously thought that VCs often replace a startup CEO with a COO to institute repeatable processes during a company's maturation. Brad said VCs don't like to replace CEOs because it makes them look like they made a mistake. Maybe it comes down to the reputation of some VC firms. Some may like to bet on the jockey but fire him when the horse outgrows him, while others keep the match together. Now I understand why startups with hot prospects are advised to "pick their VC" just as carefully as the VC picks them. Those VCs that offer just the right "Goldilocks" combination of reputational capital and minimally dilutive investment must exist somewhere over the rainbow past Sand Hill Road.
The Silicon Innovation Forum expert panel had even more to say about VCs, from VCs themselves. They think any potential slowdown in Moore's Law may be complicated by the semiconductor supply chain's inability to adapt and innovate. Bottlenecks are opportunities to innovate; IMHO this cries out for startups who can carve out a disruptive niche. VCs stick to their standard metrics of market size and amount of capital needed when they evaluate startups, but they also like a mix of strategic and financial investors who can collaborate to reduce risk. I might as well introduce my own definitions here. "Strategic VCs" invest because they want to harvest technology or product innovation; these are typically the venture arms of big corporations. "Financial VCs" want pure play returns that fit their own expertise and deal history; these are the usual Sand Hill Road denizens. Strategic VCs (according to the strategic VCs on this panel) tend to put more restrictions on the startup's outside partners to keep their tech away from competitors.
I didn't stick around for all of the startups in the Pitch Zone because I'm not professionally qualified to evaluate their prospects. I'm a finance guy, not an engineer. I'm also too cheap to pay for the Showcase and Reception, so if SEMICON wants my perspective in the room they should let me in for free.
Okay, let's continue with the BCP workshop. The pandemic and disease folks cited recent case studies to note travel restrictions, supply chain disruptions, and protocols for entering buildings that businesses will face. They mentioned that little things such as handwashing and critical surface cleaning have high ROIs. The environment, health, and safety (EHS) speaker advocated using a risk matrix to track those materials subject to increased regulation or outright bans. Enterprises should monitor the EU REACH (Europe) and TSCA SNURS (US EPA) for changes in regulated chemicals. Small businesses that outsource their supply chains can benefit from subscription services and trade associations to stay informed on what becomes prohibited. The point is to make the supply chain robust by having a replacement strategy if some materials are unavailable.
The BCP critical materials speakers reinforced what I've been hearing at resource conferences about declining material grade discoveries worldwide; they further noted that exploration spending to offset resource depletion is well above historical averages. Semiconductor material inputs are to small to bother primary producers; they need specialty firms for processing and quality control. Recycling finished products is a more cost-effective method of metals extraction than mining. It all makes me think back to my interview with the Gold Report in 2011 when I made a prediction about China's rare earth export policy that was proven correct in 2012. I am a genius, but my readers already knew that. The BCP workshop finished up with some case studies from companies with exemplary BCP programs in place. I'll run down the good stuff in a checklist . . .
- Pre-designate members of a cross-functional crisis response team and hold rehearsals based on likely disruption scenarios.
- Have backup power and water supplies to keep production running.
- Collect damage and degradation reports from business units and cost centers, so the enterprise can prioritize its response if its resources are constrained.
- Assess the BCP annually in coordination with major suppliers.
- Have business units update their own BCPs that are nested within the enterprise's BCP.
- Have an automated messaging system for mass notification of employees.
This BCP panel wasn't done until we talked through some final hints. One attendee said DHS has a federal regulation requiring self-identified "high-profile facilities" to have an anti-terrorist plan. The only public source I could find for such a regulatory requirement is DHS's Chemical Facility Anti-Terrorism Standards (CFATS). Another sharp player here mentioned the ISO's best practice, which I take to mean ISO 22301 on business continuity. This stuff was extremely important and more people should have attended. It was so important that I even learned a bunch of new acronyms . . .
I headed back to Intersolar for the Joint Forces for Solar speakers and panels. The PV energy market update was informative but the market for renewable energy certificates needs to be a lot larger if solar is going to grow. Some states have rolled out solar RECs specific to their RPS standards and DOE's Green Power Network has identified products and tracking systems to make the REC market viable. SEIA and CALSEIA have plenty of data on how the market for solar is growing. Take heed, solar installers. If you want to boost your business, you need to connect to those two industry associations along with Joint Forces for Solar, and you need to review DOE's listing of REC products in your state. One expert from the panel discussion had another hint for installers: Hot climates seem to be good markets for parking lot solar panel farms. I've seen quite a few of those even in the moderate climate of the San Francisco Bay Area.
The Joint Forces for Solar folks had a lot to say about finance, my favorite topic. The cost of capital has now become the dominant cost of many PV systems because the prices of components have fallen so rapidly. Private equity firms are now stepping in to fund projects that banks won't fund with loans. More storage on the grid will mean more load-shifting capability from peak to non-peak hours, but the grid still needs upgrades to make it intelligent enough to handle bi-directional flows. That means IMHO utilities and transmission line owners will need to spend massive capital just to keep up with growing demand for renewables. The Edison Electric Institute has researched flaws in the traditional sales models of electric utilities, and private utilities are thus looking more closely into PPAs that get revenue from distributed generation. The panel was concerned that scaling back "net metering" will threaten the business models of some solar producers. I asked the panel about the impact of renewable energy MLPs and REITs once legislation makes them available, and the experts were in totally in favor of this development. They told me MLPs and REITs will allow aggregation of multiple projects into a single portfolio. The objective of securitization is to lower the cost of capital, which in turn will help enable more distributed generation. I'd be remiss if I didn't mention a crowdfunding site called Mosaic that enables crowdfunded investments in solar projects. This stuff is right up my alley.
I stayed with Intersolar events on the final day because I wanted as much perspective on the sector as possible. NABCEP held a certification workshop on the credentials they offer to solar installers. It's important to note that their certifications represent mastery of best practices; they are not licenses to conduct trades. Those licenses are granted by state and local governments. Just for kicks, I did a Web search for "renewable energy finance certification" and nothing came up except links to RECs. Finance experts like Yours Truly thus have no credential to hold out to the world as proof of expertise in green finance. That cries out for remedy, given the proliferation of financial tools such as feed-in tariffs, RECs, and tax equity that are made just for the green sector. Okay, back to the NABCEP workshop. I asked the presenter why NABCEP offered a Small Wind Installer certification and he said it had been suspended for lack of demand. They will continue to offer small wind subjects as an entry-level exam. That is IMHO a good move. Even the American Wind Energy Association recognizes that small wind turbines are best suited for rural sites. I learned from personal involvement with a small wind company that wind turbines don't work in urban areas.
The next workshop was on product differentiation in a commodified market, presented by Albie Fong, co-editor of Project Development in the Solar Industry. He cited Greentech Media's ranking of top solar panel producers by revenue, which is good to know for any company supplying components to this market. NREL has found that solar system prices and gross margins are dropping. I was surprised to learn that reliability has overtaken price as a product choice criteria. I guess all of the news on China taking solar market leadership as a low-cost producer doesn't tell the whole story. Buyers now want modules that are compatible with other parts of their installations and are resilient in local environmental conditions. Product differentiation by geographic environment has emerged as a value-adding strategy. One example Albie cited was that customers near transportation nodes and routes want PV panels with anti-glare glass. I can see how reflective glass could be a navigation hazard near an airport. I came away from this presentation convinced that Customer Development matters in solar! It's not just for tech startups anymore. It's for solar manufacturers and installers too.
The one thing I got out of the panel on maximizing system output via inverters was the importance of bankability. A manufacturer's warranty on inverters and modules does not translate into a financially viable PV system. Only performance data verifying the viability of solar PV installation defines bankability. This is especially relevant for large-scale solar project developers. Third-party testing consultants can analyze components for short and long term light availability, exposure degradation, irradiance and temperature coefficients, microclimate effects, and much, much more.
The final workshop I attended on successful solar business was presented by a guy from Quick Mount PV who also has a leading role in NABCEP. You can get the workshop's awesome slides yourself from Quick Mount PV's download page. LLNL has cool-looking flowcharts on US energy use that show room for growth in solar. The solar market is segmented into residential, commercial, and utilities. Once a servicer has picked a segment they must get the proper licenses, and IREC maps out the training they need. I noticed the solar sector has become so specialized that solar brokerage businesses now offer third-party consulting to property owners looking to install solar systems. The solar broker performs all non-installation services in TPO-leased systems.
The EIA Annual Energy Review shows the most viable geographic markets for solar and wind systems. It's buried in there among pricing and consumption data but solar installers need to know how to pick the most viable markets. The guru recommended small wind as a backup supply for a solar system; my readers know how I feel about small wind but it's okay in rural areas with good data on wind speed. I will always remember that the height of the tower and the size of the fan's swept area are the two most important factors in a wind turbine's energy capability. I had to learn that the hard way so my readers can avoid pain. I got to ask this speaker about the viability of small-scale geothermal systems as complements to a solar-wind combination. He said geothermal systems in the form of heat pumps can be very cost-effective but dry climates pose a challenge with long payback periods, and they work well where water is close to the surface.
Financing a project is crucial to the solar system sales cycle. Property Assessed Clean Energy (PACE) bonds use property tax assessments to fund loans for energy retrofits. DSIRE's Quantitative RPS Data Project maps out details on state-by-state standards. This is all a ton of stuff for a solar entrepreneur to master. The one final thing installers need to consider is the coming shakeout in the industry. Some components makers are going to disappear, so buyers who watch warranties should stick with PV system makers who will be around another 25 years. I would add that the solar sector has seen some very large component makers go bankrupt in recent years, so market share is not at all an indication of longevity for a company that is artificially sustained by subsidized loans. This is where I come in as an analyst. I need to take a serious look at the financial viability of leading solar manufacturers. You'll see my commentary here on this blog as the solar industry evolves.
I didn't spend all of my time listening to expert panels and workshops. I got out on the trade show floors to see vendors. I spoke with some of the minor components manufacturers about their impressions of 3D printing. Just as I suspected, many of them are complacent about the threat to their product lines from DIY parts makers. I believe the first vendors to fall to 3D printed objects will be vendors of testing and diagnostic devices. Those are not subject to the pressure and temperature stresses that delaminate printed objects and their performance parameters are well known in open sources. Once the 3D sector solves that delamination problem, ceramic molded components will be the next subsector to fall. I truly hope the SEMICON West organizers put some 3D printing demonstrations on their extreme tech stage in 2014.
I'm also endlessly fascinated by the small number of third-party service providers that always pop up. There were no finance providers this year. The leading inventory managers and asset liquidators were in their usual places. I liken asset liquidators to the insects and microorganisms in an ecosystem that break down decaying plant and animal structures into soil nutrients. They are absolutely vital to capitalism. It's also vital to have competition in permit review, so along comes the Institute for Building Technology and Safety to fill the gap. Those folks are going to get really busy if more developers go with building integrated PV (BIPV) materials. The one vendor that impressed me the most this year was the IEEE Xplore Digital Library, with a searchable database of technical articles. The search function revealed long histories of published research, and I'm convinced this tool offers hi-tech entrepreneurs access to knowledge of manufacturing and quality control processes that will save them time and money.
My final impressions of this joint conference include surprise that some of the seminars and panels I attended were not at full capacity. I suspect many attendees are purchasing managers looking for product or engineers looking for innovations, so they would gravitate to the tech demonstration stages. The panels I found most useful addressed enterprise-wide factors that a solar business must manage.
I cam away from SEMICON West and Intersolar North America with even more market intelligence than I collected last year. I also collected memories of which exhibitors had the most attractive women staffing their booths. I would have no objection to exhibitors using attractive men to draw female visitors, but that begs the question of how to get more women interested in solar and semiconductor careers in the first place. That's a question for trade show organizers to ponder. My focus is to keep hitting up those booths offering booze, food, and babes in between free workshops. Check me out next year as I prowl for more knowledge.