Alfidi Capital at The MoneyShow San Francisco 2017

I had to attend the MoneyShow San Francisco 2017 because it has long been one of my favorite conferences. It has never lost its appeal since the first time I attended back in 2001 (or maybe it was 2002, I can't remember). I have my favorite speakers picked out weeks in advance but I try to learn something new every time I attend. Those of you who did not attend are about to get my full blast of recollections.

Kim Githler was as optimistic as ever in her welcome address. She has been running this conference for three decades and I don't think she ever gets tired. The webcast attendees now far exceed the live attendees. The future has arrived and my fellow Gen-Xers are the last generation to fully experience live trade conferences before they all completely migrate to AR/VR webcasts. Ms. Githler noted that her investing success factors included luck, something no analyst can ever quantify. Analysts will also never fathom the sheer greatness that my badge selfie below represents.

Alfidi Capital at the MoneyShow San Francisco 2017.

I picked up some useless knowledge right away from people I won't mention, and I put it down right away. The culprits shall remain nameless but their specious wisdom will become infamous. There is no way to determine whether trades in dark pools appear in NASDAQ Level 2 block trade quotes, or whether they indicate something directional for a ticker symbol. I had never heard of "stupid spreads" in options but apparently they're a periodic thing with professional traders who have worked in the big exchanges' trading pits. I had also never heard of a "double diagonal" spread, a much more frequently executed options play.

Other introductory speakers had more interesting things to say. I have my own thoughts about their theories in the next few paragraphs. Cash flow return on investment (CFROI) is an alternative to valuing equities by earnings. I think it's more reliable than venture investors' EBITDA method but less reliable than Buffettologists' earnings-based method. I can evaluate these methods by their real-world results. Venture investors lose a lot of money relying on EBITDA and Warren Buffett made a lot of money focusing on on earnings. The CFROI comparison to IRR and hurdle rate metrics reveals its limits, as those things fell out of favor with academics long ago when the CAPM came along.

Institutional investors are using more than a "periodic table of country returns" to allocate their portfolios among emerging markets. They are really counting on middle class growth in emerging markets to drive international stock returns, while they totally ignore geopolitical and country risk. It's the new BRICS-like fad. The whole BRICS concept was a Goldman Sachs marketing gimmick and the BRICS countries themselves fell for it by holding BRICS Summits. I am less interested in who the CCP Congress invites as its annual guest speakers. I am more interested in China's rank in highly credible indexes for economic freedom and development.

Advocates who say we have entered a new era in investing remind me of the Internet apologists common during the dot-com boom's terminal stage in 1999. People now totally ignore the tech unicorn bubble, the commercial real estate debt bubble, the high yield debt bubble, and the corporate debt bubble driving stock buybacks. The same people totally dismiss the ongoing retail collapse. Journalists are as guilty of this behavior as economists and analysts.

There is no obvious secret to investing success. Purveyors of said secrets totally ignore the Federal Reserve's ZIRP role in pushing stock market gains after the 2008 financial crisis. One such purveyor is a "Sovereign Investor" service, which I recognized as total baloney long ago for its non-stop hawking of extreme fear and greed. More conventional publishers ignore the hazards of extreme debt levels. Corporate balance sheets are more laden with debt than ever, and rising interest rates will increase interest expenses hardest for those companies with high short-term debt burdens, thus hurting earnings. A good basic thesis is to find undervalued stocks paying dividends, which is hard to do with the S+P 500 P/E ratio at an all-time high.

George Gilder thought there's life after Google. I think there's life after George Gilder. He still likes Bitcoin and gold, for crying out loud, a disappointment for me since I've actually studied the efficacy of hyperinflation hedges. He made no sense discussing IPOs, bizarrely comparing Bitcoin to the FANG stocks by saying Bitcoin's growth outperformed Google since that stock's IPO. Dude, Bitcoin is in a huge mania-driven bubble. The guy says free product giveaways prevent companies from learning; I say that's baloney. He should know that Google's main products are free (Search, Docs, Maps, etc.) yet obviously they are learning to make money selling ads and data. Sheesh, George. I think he's finally exhausted my patience by comparing Bitcoin and copycat ICOs to FANG companies with real earnings.

The featured artificial intelligence (AI) advocate mentioned The Innovator's Dilemma in the context of large companies pushing AI development. If his claim that 10.5% of Fortune 500 companies mentioned AI in their most recent conference calls is true (and I have no way to verify it), then he should not limit his picks of AI winners to the typical FANG stocks.

I had never heard of the US Regulatory Information Service Center, a GSA project tracking growth in economically significant regulations. One speaker mentioned it as a tracking tool for regulation acting as a drag on the economy. His stock picks for an era in which Ponzi-like government entitlement programs degrade GDP included water, energy, agriculture, and infrastructure, plus VIX volatility call options. I generally concur with that thesis, but timing is everything.

Ed Yardeni had a lot to say about the current administration in Washington. I disagree with his critique of mark-to-market accounting rules, which IMHO are necessary for transparency. It was hard to listen to yet another dismissal of geopolitical risk, assuming away any big wars. It gets tiresome to hear continual Pollyanna-like views that assume indefinitely low inflation.

Peter Schiff led the next introductory panel. I still like the guy even though he's been premature (just like me) on the next likely crisis for the financial markets. I agree with these particular experts that it's hard to find stocks at decent prices with indexes at all-time highs. I look forward to less blind worship of unfulfilled political promises and more attention to how a weaker US dollar will make commodities and emerging markets more attractive. Mr. Schiff is probably correct that excessive automobile loans are driving (no pun intended) the automotive sector's valuations. He appeared again later to reiterate his expectations of the next big market crash, a collapse in consumer spending, a debt default that destroys bonds, and a boon for dividend stocks paying out from earnings in stable currencies. I have had a similar thesis for quite some time. It is difficult to be patient while so many less observant people make money through complacency.

I did not need to see another walk-through of a trading platform but sponsors pay for the prime time they get. The best options trading platform must display Greeks. I learned a new options tactic called a "risk reversal," buying an OTM call spread and selling an OTM put spread. I suspect options will be very useful plays in advance of earnings announcements. Watching options with weekly expirations prior to a highly volatile stock's earnings announcement, along with the option's implied volatility, is probably worth my time.

We are all smarter thanks to the joint FINRA and SEC panel on outsmarting investment fraud. Check out FINRA's The Alert Investor, the SEC's Investor page, FINRA BrokerCheck, and the CFTC RED (Registration Deficient) List to see if someone pitching you a deal is legitimate. The regulators let us know that they have emerging concerns about cryptocoin ICOs, crowdfunding, simple agreements for future equity (SAFEs), and binary options. I will be on the lookout for shady operators in those areas so I can turn them in to law enforcement for prosecution.

Another options broker showcased some revolutionary trading system that promised to do everything except vacuum the floor. The dude argued that high frequency trading (HFT) can compress risk premia and lower volatility, but I think it actually magnifies those conditions. I need to see the dude's evidence. I did agree with him that all of the information available on very expensive Bloomberg terminals is freely available elsewhere. There is no way that volatility measurements will tell investors whether a stock is overvalued, undervalued, or fairly priced. Current data on corporate earnings and P/E ratios at all-time highs tell us more abut valuation than options volatility ever will. I mentioned above that watching volatile options in advance of earnings announcements was worthwhile; I put that activity in the context of making short-term profits from options trades, not in the context of long-term growth from finding undervalued stocks.

Utilities and REITs are still the favorites of experts who want the best of both world in dividends and growth. It's important to assess the predictability of dividends by finding the payout ratio, leverage ratios, and funds from operations (FFO). Higher interest rates will probably hit these stocks' valuations, making their yields more attractive. On the other hand, higher rates will hurt the balance sheets of the most highly leveraged stocks in these categories. Increasing consumer preference for online shopping over retail shopping will hurt REIT retail holdings. I did not believe one person's claim that REITs trading at premium valuations have a lower cost of capital. Commercial lenders are smart enough to distinguish market exuberance from underlying assets and earnings. I finally found good descriptions of the "genco" utility investment I heard about years ago. One MoneyShow expert described them as "merchant generators" where utilities build and operate plants without an exclusive geographic franchise. They are unregulated and risky.

One metric for evaluating an investment manager's track record is the upside capture / downside capture (UC/DC) ratio. A higher UC/DC ratio proves better performance. Most active managers have terrible UC/DC ratios over periods longer than ten years. They also have higher fees than passive investments. Active managers need to get out of financial market careers and do something more productive, like day labor or subsistence farming.

American investors seeking growth opportunities in Canada need to watch out for Canadian rules on something called a passive foreign investment company (PFIC), a designation that incurs an ordinary income tax liability for companies that don't even have income. It's another condition afflicting Canadian junior mining companies that still have difficulty raising capital.

Interest rates govern all yield plays. Martin Zweig's maxim "don't fight the Fed" does not hold for every market all of the time. Central banks must unwind their engorged balance sheets and interest rates are going to rise until those balance sheets return to normal. Watch the US Federal Reserve's bond roll off rate. Track the Fed's monthly "dot plot" interest rate model projections. Know the Atlanta Fed's GDPNow forecasting model. The Fed's political sensibilities determine the length of an interest rate cycle in months and the magnitude of its changes in basis points. The only Fed-proof bond substitutes are those dividend-paying stocks, MLPs, BDCs, and REITs with strong balance sheets, limited long-term fixed-rate debt, and no short-term debt or floating-rate debt.

I had never heard of one very prominently featured speaker in this year's lineup. I had to look him up to discover that he had been some kind of broker for most of his career. Now he produces a bunch of content. His talk reminded me of an old adage I heard about commodities many years ago, that the only people who made regular money trading the most volatile instruments were the brokers, not the traders or investors. He did make one interesting point about society's decline in risk-taking, which coincides with data I've seen on declines in new business formation. The rest of what he said was flat-out bizarre. I had no idea what he meant when he said liquidity providers must improve something or other, like order flow, maybe. Why did he throw disrespect at passive investing just because markets crashed in 1987, 2000, and 2007? They all came back. Oh yeah, it's because he makes money off of active traders who react with extreme panic. His next argument was that managers should show how they reduce the basis cost of their services. Well dude, that's what passive management does. Sheesh.

The star speaker above really tested the limits of my patience. He riffed one non sequitur after another, spouting "mechanics, strategy, repeatable, scalable" in word salads tossed into the air. He invented a new phrase called "economic bias" which seems to be an awkward interpretation of behavioral economics, and it underlies his claim that eBay "trades" improve decision making in business and finance. He cited zero sources for any of his quotes and stats, followed up with pedestrian observations about how important it is for successful people to demonstrate know-how and skill. No kidding, dude. I thought the guy was seriously stupid, or at least addicted to making stupid statements that played to the limited knowledge of his audience. I could not find one single observation he shared that's worth repeating in full, let alone adopting as a guiding mantra. Who knows what his new gig means. Warren Buffett doesn't make a fraction of the trades this guy's archetypal "decision-making skill builder" active trader makes, unless you count the times he says "no" to bad decisions, and he's the most successful investor ever.

Marilyn Cohen is still my favorite fixed income speaker. Check out the data on outstanding US Treasury maturity distributions; it's all free online. There's so much debt out there that it doesn't change Ms. Cohen's investment philosophy. Municipal bond investors will hear a lot more about "dark store theory" as the commercial real estate sector, already under pressure from online commerce, lobbies for reduced property taxes that will lower the revenue available to pay off muni bonds. One key insight she shared was to compare REIT yields to those REITs' bonds' YTMs. Some bonds will pay better yields given REIT share price gains. I attend Ms. Cohen's appearances at the MoneyShow just to appreciate such excellent knowledge.

There was some more nonsense going around another seminar about blockchain tech and crypto-currencies. One person claimed the blockchain's blocks and layers are encrypted, but hackers have proven that's not true for Bitcoin. The same person repeated the commonly accepted falsehood that Bitcoin is untraceable. That is totally stupid!

I walked out of another seminar when the speaker claimed he could outperform Warren Buffett with market timing. The guy made really unrealistic claims about his methodology. It's really dumb to think he can time market entry and exit points based on directional indicators. I could not stand to listen to some totally stupid nonsense about using a 200-day moving average with some standard deviation of volatility to measure the market's natural range.

There's a cottage industry of publishers and custodians pushing "self-directed IRAs" as some kind of magical machine that can process everything but the kitchen sink into a tax-free deal. I have always said these things are a misuse of tax-advantaged retirement accounts. People at this MoneyShow wanted to take it to a whole new level of nonsense by putting real estate into 529 college savings plan accounts and health savings accounts! That is stupid, risky, and possibly fraudulent! One guy who thinks this is a legitimate way to earn a living wasted half of his allotted time on nothing. He offered private "hard money" lending solutions that charged higher mortgage rates to their properties' borrowers than banks, so I guess those small lot home buyers are all poor, stupid, or bad credit risks. Folks, please listen to me very closely now. Self-directed IRAs are the classic baloney shell game for people doing dumb things with real estate.

One of the major wealth management firms made me LOL to myself during their presentation on consumer trends. I just LOL that they thought Nigeria is a growth market for consumers and that every emerging market will follow South Korea's path to a developed market. More investment firms are publishing research on "Peak Auto" to describe the end of growth in the automobile market. IMHO future electric vehicle growth must cannibalize market share from internal combustion engine cars. I will make one other important point about consumer spending that the rest of you should know. Household net worth versus personal debt (as a percentage of disposable income) is an important way to assess consumers' actual capacity to spend, especially compared to consumer confidence.

I always win at the MoneyShow San Francisco. I win by absorbing information and spewing wisdom to the entire world. I also win by exposing stupidity. Alfidi Capital is all about winning. You can be a winner too if you think exactly like me. You'll be winning so much you'll get bored with it. I never get bored with winning. I look forward to attending another MoneyShow to continue my winning. I am willing to speak at the show again (as I did in 2013) to show others what a winner I am. The MoneyShow is for winners.

The Haiku of Finance for 09/26/16

Hate to lose money
Happens to the best of us
Work to make it back

The Haiku of Finance for 02/11/16

Cash is always good
Nothing wrong with more money
Stuff pocket with change

The Haiku of Finance for 12/17/15

Shiny new coinage
Made from base metal alloy
Know the melt value

The Haiku of Finance for 11/07/15

Spend on solution
High opportunity cost
Save time for more work

When To Trade Dollars For Hours

Productive people do not have enough hours in the day to accomplish all that they need to do. The cheapskates among them, including me, will push non-urgent tasks off to the next day. The more rushed or spendthrift among them will splurge for outside help. There may be a way to optimize the decision point prompting someone to choose spending money that saves time.

The idle rich have both money and time on their hands. Paying someone to do work they could easily learn to do themselves gives them even more time. It also gives them the psychological satisfaction of pushing around people who are far beneath them on the socioeconomic scale and bragging about it to their peers. I have met people like this in San Francisco and I do not ever want to be like them. The behavior is self-reinforcing and enhances class solidarity among the only social class that matters. It also carries moral peril. Devaluing human life is easy when the handiest measuring tool available is a checkbook.

Most outsourcing decisions are thankfully practical and born of necessity rather than luxury. Spending for expertise or other outside help makes sense if it obtains an otherwise remote level of quality. Opportunity costs are useful here. The cost of acquiring a skill or asset on one's own may be greater than the cost of hiring a ready-made capability.

I host my website with a cloud provider. It is far cheaper than buying my own server, learning to be a sysadmin and DBA,  and running a dedicated 24/7 high-speed connection just so the Alfidi Capital website is available all the time. I spent a smaller amount of money because the cloud's scale delivers a very efficient solution. We make the same decisions when we buy groceries instead of raising our own crops. Trading dollars for hours is easy when the benefit is immediately clear.

The choice is less difficult after calculating the DIY cost. If I absolutely cannot easily do something myself, and the cost of learning a new skill takes too much time away from my real money-making activities, then paying for an outside solution is acceptable to me. The choice is even easier if I don't have to directly engage a human being. I prefer that others do whatever they are meant to do in their lives. Their time should matter as much as mine.

The Haiku of Finance for 10/19/15

Pick up that dropped coin
Lifetime habit paying off
Frugal on the street

The Limerick of Finance for 09/13/15

It's worthwhile to pay bills on time
Willful nonpayment looks like a crime
Just have enough cash
Checks can clear in a flash
Be accurate down to the dime

The Haiku of Finance for 06/16/15

Forgotten money
Spent on frivolous purpose
Where did it all go?

The Haiku of Finance for 06/04/15

Spending a windfall

Delay gratification

Commit to future

The Haiku of Finance for 03/28/15

No spending control
Blow cash on lifestyle folly
Head for the poorhouse

The Haiku of Finance for 09/27/14

Do not waste money
Scams and trinkets don't build wealth
Save instead of spend

The Haiku of Finance for 09/05/14

First rule of business
Never changes through the years
Do not lose money

The Haiku of Finance for 08/30/14

Money Show event
Future of trade show sector
Totally online

Alfidi Capital at The MoneyShow San Francisco 2014

I attended the annual MoneyShow San Francisco last week, as has been my preference most years since 2001.  I wasn't on the speaking calendar this year but there were plenty of other experts to keep me occupied in 2014.  My original thoughts in bold text are the most important things to read in this article.

Kim Githler welcomed us to note that the show's younger demographic was now mostly online.  The ease of participating in online conferences and webinars points the way for a trade show industry in the midst of transformation.  Virtual shows are the future.  She reminded us of her favorite themes in globalization and diversification, but noted the use of hard assets as inflation protection.

Jim Jubak gave the first keynote on the questionable quality of government economic data series.  The four major data sets driving daily market action are US GDP, US unemployment, US inflation, and China's GDP.  Jim noted that China's GDP is definitely skewed because the sum of its provincial GDP data is greater than the national figure.  The farther down the reporting chain one goes in China, the more pressure local officials feel to report positive numbers.  I have followed ShadowStats for years and Jim thinks that site raises real concerns dating to the Boskin Commission's 1996 report.  The MIT Billion Prices Project once again receives praises for its accuracy.  I used to hear it praised at fringe meetings but now mainstream commentators like Jim see its value.  Jim also prefers the U-6 rate as an unemployment measure.  He specifically used the word "baloney" to describe US quarterly GDP numbers due to swing inventories.  That's one of my favorite words!  He prefers to use the real final sales numbers that take out swing inventories.  China's GDP mismatch with its export and energy numbers should IMHO drive analysts to use the Keqiang Index instead.  Jim's bottom line is that a bunch of completely unreliable data is driving market moves.  Amen, brother.

George Gilder spent his keynote endorsing Bitcoin and gold for their supposed time-based value.  George is a really smart guy with a long career of delivering bold insights, but I just wasn't buying his line this time.  I agree with him that financial markets are dysfunctional and that something's wrong when currency market trading is larger than financial markets and physical goods markets.  His insights into knowledge driving wealth and resource abundance are still valid, but I don't agree that Bitcoin and gold somehow build from the one diminishing resource - time - that we all face.  He would have made more sense if he had said gold's scarcity was a function of its extraction cost, but that does not support his time-based thesis.  He made little sense in describing Bitcoin; I don't think he understands that its self-limiting algorithm makes it scarce in the short run, but its ability to "fork" into new currencies obliterates that scarcity.  He totally lost me when he claimed Bitcoin drives an advance in information theory by creating a surprise entropy of "unexpected bits."  That sounds more like a theological argument for angels dancing on pin heads than something empirical.  He wandered off into an analogy that interest rates are the expected returns of an economy and profits are unexpected returns that correspond to Bitcoin's unexpected bits.  Oookaaay, George, but where are the corresponding expected bits that are inputs driving Bitcoin?  Sorry, dude, but the arguments for time-limiting currency bases make less sense the further you take them.  If Bitcoin is such a challenge to monetarism and central banking, then it should solve the periodically high velocity of money that limits monetarism's power.  Bitcoin is too volatile itself to damp down velocity, and too illiquid to use as a monetary base precisely because it is scarce.  Come on, George.  Fractional reserve banking allows economic growth when otherwise scarce hard assets (namely gold) would limit growth if they were currency bases.  Gold and Bitcoin, or other assets with George Gilder's self-limiting time-based supply, do not allow for credit-based growth.  I respect our society's distinguished thinkers for their lifetime of contributions, but even super-smart people can slow down in their old age.  I've watched people go senile and it isn't pretty.

David Blitzer from the Standard and Poor's Dow Jones Indexes spoke on how the DJIA is calculated.  Highly priced stocks skew its value, so the index designers consider range-bound stocks.  Index changes immediately drive turnover in that portion of an index owned by index funds and ETFs.  I have long known about arbitrage strategies for index changes but I've never tried to execute one.  Analysts who want to study such an opportunity should review the index inclusion guidelines and SPIVA studies on benchmark performance.  I have long been familiar with those sources, and once this insanely overvalued market drops to normalcy I'll be ready to pursue some index arbitrage.  I will be curious to see if TD Ameritrade's InvestorMovement Index keeps up a strong correlation with broader indexes on the way down.

I did not find the panel of "top financial advisors" to be particularly impressive.  Financial advisers succeed at relationship management, not analytical accuracy or market outperformance.  In other words, they succeed on personality and not technical competence.  They would be more appropriate in forums requiring emotional intelligence and it sometimes showed.  They all sounded fairly optimistic about the stock market, and IMHO fairly ignorant.  One lady thought Tesla Motors was profitable because of robots.  Wrong!  It's trying to be profitable because of tax credits and green energy rebates.  LOL.  These people sounded very conventional and pedestrian.  My jaw dropped when they said they still like certain types of bonds even after acknowledging the risk in this very old bond market bull run.  They really like emerging markets but IMHO they ignore weaknesses in the rule of law and transparency in those countries.  Hey folks, geopolitical risk is a fact of life in emerging markets.  It's stupid to paint with a broad brush saying some emerging markets can grow if you don't know how to hedge exposures to each country.  Sheesh.

Steve Forbes was a classic but he wasn't as funny as in years past.  I agree with him that today's political authorities know far less bout money than their predecessor.  His best zinger was about monetary policy:  "Government monetary stimulus is a form of counterfeiting."  LOL, that's awesome.  I believe he is correct that Russia is about to relearn a lesson the Soviets learned in the 1980s when oil prices declined and energy exporting countries suffered.  I still don't agree with his argument for a return to the gold standard.  He compares apples to oranges by claiming the historically average GDP growth rate under the gold standard would continue today.  Dude, I'd like to see data showing how all of the gold mined in the US since the end of the gold standard in 1933 would be a viable basis for our growth since then.  I would also argue that the US has had some form of central bank for much of its history, including those years when we held to the gold standard.  Central banking probably has a stronger relationship with growth than gold does with growth.  I do like what Steve said about weak currencies correlating with high crime societies as trust erodes, but correlation is not causation.  His strong point about the harm done by central banks is hard to refute without challenging his central argument that economic growth was higher during the US's gold standard era.  History does show that inflationary periods occurred after the Revolutionary War and during the Civil War; a gold standard did nothing to stop it.  Gold bugs need to compare inflationary periods to the US history of central banking and gold standards, or they can ride their gold hobby horse off into the sunset.

Rich Karlgaard drew from his book The Soft Edge to argue that corporate cultures matter in investing.  His argument for a "triangle of health" referenced other sources that have little to do with corporate functions.  Warren Buffett's thinking on durable cash flows, for example, has a lot to do with market position and switching costs.  He has had very little to say about corporate culture.  I have no objection to claims that fact-based disciplined thinking forms a strategic base, or that supply chain leadership and capital efficiency form a hard edge.  I am not convinced that internal culture delivers some long-term competitive advantage, because any change in C-level leadership will eventually change that soft edge.  It all makes for great reading and new management theories allow consultants to sell new feel-good concepts to executives who know little about their own professions.  I prefer to rely on fundamental analysis in judging an investment, because then I don't need to know whether an internal culture makes a company a nice place to work.

The tech trends panel looked for paths to big IPO events.  Bill Harris of Personal Capital, Jim Hurd of Green Science Exchange. and Cody Willard of Scutify all tried to figure out where we're going.  Disruption from drones, robots, wearables, nanotech, and cleantech is coming our way but it won't be readily apparent in equities.  Professional investors buying post-IPO on dips will probably do better than retail investors eager to jump on an IPO's first day.  Fallen angel companies in tech have a hard time recovering if their corporate life cycle is really a reflection of a dominant product life cycle.  All low-priced stocks have risk, and many nanotech plays are microcaps that may be worth something as merger plays.  This panel was lively and funny, with many nano-puns.  I would look at nanopriced nanostocks but I'd rather have mega profits than nanoprofits.

I got my picture taken after the keynote with Kim Githler, the founder and owner of the MoneyShow.  I thanked her for the speaking slot I had last year.  The rest of you who were too busy to attend will have to catch me at a future event.  Kim is an awesome businessperson and she can sense that times are changing for the trade show sector.  She sure looks happy to hang out with me, and I can't blame her.  Attractive women find me irresistable.

Steve Forbes signed copies of his latest book Money for fans on the expo floor.  I didn't buy a book and an earlier photo I took with him did not turn out well, so this is the only record I have that Steve was in the proximity of yours truly, Greatest Man Who Ever Lived, Anthony J. Alfidi.

TD Ameritrade's options seminar was based on lessons developed for their Think or Swim platform.  Once investors understand that volatility is a standard deviation of movement, they can understand its use in analysis.  The CBOE's VIX implied volatility measure intentionally omits short-term volatility, thus ignoring its imminent risk in favor of looking 30 days forward.  I suspect that any preference traders display for short-maturity options may have an explanation in behavioral finance; search for academic papers on "jump memory" to see for yourself.  I took away two good lessons from TD Ameritrade's presentation.  First, weekly options help price risk.  Those options' implied volatility has no directional bias but does indicate the probability of a move.  In other words, one standard deviation represents a 68% probability that a share price's move will stay within that measured range until the option's expiration.  Second, option markets are forward-looking by definition because they have expiration dates.  That's better than using technical analysis, which is only historical.  The implied volatility thus helps investors gauge the risk of an increased allocation to that security.  My only additional caveat is that the known effect of option order flow on security prices brings an additional risk factor, because large option orders just prior to expiration may move a share price in a manner that implied volatility does not anticipate.

Todd Petersen of PetersenLowe and the Diamond Market had a very informative presentation on colored diamonds.  Good for him.  I had a run-in with another colored diamond purveyor in 2013 who tried to rip me off, and I ended up backing down from a lawsuit because I didn't have enough information to prove they were up to no good.  Fortunately, I now have enough knowledge to avoid such traps in the future thanks to Todd's presentation.  He noted that high net worth investors (HNWIs) like the rarity of treasure assets such as collectibles, fine wine, and gemstones.  He made my day when he said that diamond sellers who aggregate the stones' returns are disreputable because each stone is unique.  Well, that's exactly what my erstwhile legal opponent tried to claim last year!  It's good to hear some sanity from the fancy colored diamond (FCD) sector.  I was intrigued to learn that the wealthy instill so much emotional meaning in their illiquid treasures that they consider their auction proceeds a valid philanthropic avenue.  There's a lot to know about conflict-free certifications, appraisals, and other factors for anyone who wants to invest knowledgeably in FCDs.  I wonder why diamonds capture so much of the HNWI imagination and whether lesser gemstones (rubies, emeralds, etc.) deserve similar consideration.  I'm sure I'll figure it out.  Todd had tons of expertise, and he even gave me some wisdom I can apply to Alfidi Capital.  Thanks, Todd.

I found one presentation to be totally useless in formulating a forward-looking economic outlook.  Some guy tried to fit investor psychology into secular bear markets but it looked like he had a hard time drawing conclusions that fit the data.  He referred to the Reinhart-Rogoff inflection point for sovereign debt overhangs without mentioning the controversy around their data errors.  The ratio of full-time workers to part-time workers is not as great of an indicator as he thinks.  Lots of other things determine the economy's inflection points, like credit availability, inventory swings, supply shocks, and margin debt.  Come on, dude.  Spend more time studying endogenous shocks than on adjusting bear market asset prices for inflation and you might have some workable theories.

I was one of a select few MoneyShow alumni who was invited to attend morning tea on the second day with longtime speaker Mark Skousen.  That's the kind of exclusive offer I get all the time.  I'm so darn special.  I ate way more free croissants with butter than anybody else, so I have that additional claim to fame.  Anyway, Mark spent a lot of time reminiscing for those of us who've been attending the MoneyShow for many years.  He pitched his latest book The Maxims of Wall Street by quoting many of Wall Street's mystery men.  He didn't quote me so I guess I'm not ranked up there with Warren Buffett just yet.  His best line was about his time in the CIA in the 1970s and how they fail at predicting crises.

The serious action on the second day kicked off with Barron's keynote on the economy and markets.  I have no idea which equity analysts he claimed see a record high wall or worry, or which fixed income pros seek safety.  I keep hearing the same bullish nonsense from both camps.  Barron's notes that money managers can't escape macro data and don't want to go against trends when everyone else is winning.  Anchoring bias for the pain of 2008 explains why some portfolio managers sit on the sidelines.  Well, I'm sitting there with a very small crowd, and I'm got getting up until these other bulls fall down.  Barron's struck the right note.

Piper Jaffray's keynote threw a bunch of technical chartist eyewash at the audience.  I ignored it.  I also ignored the claim that US treasury yields are higher than the G7 average because such a claim ignores the structural problems in all G7 countries.  I don't break down portfolio choices as "offensive" or "defensive" sectors but those simplistic and faddish ideas give money managers some cute talking points.  Portfolio managers who review sector relative strength charts are idiots.  I did at least get a free technical analysis periodical out of this session and it confirms how money pros take the wrong ideas so seriously.  Otherwise, this session was a look into how many dumb portfolio managers blindly follow trends.  Sheesh.

Roger Conrad from Capitalist Times presented some unconventional income investing ideas.  It's good to be reminded that interest rates have less effect on returns in dividend stocks and REITs than they do on fixed income investments.  Some alternatives are not as useful as they appear.  The CBOE's tradable TNX 10-year Treasury index is really another leveraged product and I'm not sure how to estimate its fair value.  Plenty of ideas litter the landscape:  yield cos, gen cos, utility stocks (aka "utes"), MLPs, REITs, and natural resource royalty trusts.  This was the first MoneyShow where I heard someone describe telecom stocks as income plays, particularly when they spin off REITs.  Oookaaay, but some investors lost big when MCI WorldCom went bankrupt last decade.  Memories are short on Wall Street.  The big Kinder buyout of its MLPs is recent news on many people's minds, and it may set a precedent for further consolidation as operating companies watch MLP tax advantages erode.  Investors who hold Canadian-domiciled income investments were curious about whether IRS Form 1116 allows the recovery of foreign withholding taxes on qualified dividends.  They were also concerned about UBTI liability for MLPs held in IRAs.  That's beyond the scope of this blog because I'm not a tax adviser; I keep my own affairs simple by not owning such Canadian instruments.  I have long sought to find firm criteria for determining a dividend's sustainability, so that may be a subject for a future blog article.

Zions Direct shared some specialized fixed income knowledge.  Bond liquidity matters for investors who don't hold bonds to maturity, which IMHO is pretty stupid but some investors don't take portfolio volatility seriously.  Bonds below investment grade are less liquid and have higher bid-ask spreads.  Smaller size issues are less liquid because not every institutional bond investor will be able to fit them into their profiles at a moment's notice.  FINRA has a very robust Bond Market Data search capability.  Bond investors who are really into such searches should watch out for canary calls, Bermuda calls, and other things that can involuntarily remove a bond from a fixed income ladder.  The MSRB EMMA search tool is a cool way to find munis and read their official statements.  Those statements reveal which munis are subject to extraordinary redemption clauses that can make them riskier than general obligation bonds.  Zions also shared some insights into sinking fund mechanics.  Sinking funds allow muni bond issuers to retire bonds by lottery, and their clearing firm runs a second lottery to decide which bonds get called.  Hey folks, that's two layers of probability a bond call has to work through to remove it from a portfolio, and according to the laws of probability a large institutional investor holding many bonds of a given issue is more likely to get that call than any individual investor.  This is more evidence that individual investors need to quit worrying about the exotic exigencies of a single muni bond issue.  Bond investors who need to know more than what their brokerage tells them can check out SIFMA's Investing in Bonds tutorials.

Grom Social demonstrated their social network for kids.  Their extensive live monitoring must be costly, so IMHO they'll need dirt-cheap moderators.  I can see how their colorful avatars appeal to kids.  I can also see a problem with high turnover, because kids will leave the network as they mature.  Turnover means growth from new users will have to be about twice as big as their natural attrition rate.  The media buzz around their story reminds me of the Duck Dynasty franchise.  I think the biggest winners from this are the founding family monetizing their own unique story.

Mark Skousen appeared on my radar because I was interested in hearing about how politicians invest.  The US Senate Financial Disclosure site is searchable but that does not necessarily mean investors can get actionable investing insights.  OpenSecrets tracks political finance but that does not mean politicians' financial decisions are well-informed.  Washington, DC and Wall Street insiders do share semi-permeable membranes but that does not ensure something useful will pass through in either direction.  The Federal Reserve's market instructions pass through the FRBNY but their firewalls between traders and board members minimize the chances for unfair insider advantages.  "Insiders" in sectors that make heavy campaign contributions can demand regulatory advantages up to a point, like with the Affordable Care Act's protections for health care oligopolies.  That point ends when the insiders' parasitical rent extractions kill the host of the broader economy, and their regulatory capture then becomes untenable.  Much of the stuff I heard in this session was irrelevant to me.  Some themes like BDCs ignore the vulnerability of senior secured loan portfolios to high inflation, but the story sounds cute to people who think they're sticking it to insiders.  Banks' high net investment income from the Fed's yield subsidy has similar appeal, but the Fed can't keep those plates spinning forever.  Arguing that precious metals prices reflect inflation sentiment ignores the broad supply and demand fundamentals that really drive prices.

Mark Skousen went through a lot of what must be his typical script and topped it off by tearing up a one dollar bill, showing his disdain for fiat currency.  I picked up the shards after his lecture and he said I could have them.  There's the picture above, showing that a couple of the shards were unrecoverable from the floor.  I took them to my local bank branch this week and exchanged them for an undamaged one dollar bill, as the Federal Reserve allows.  I consider this dollar to be found income for tax purposes, just like picking up spare change off the ground.  I know the value of a dollar.

Here's a brief note on fracking.  Insider interest in its expansion is driven by market demand, not powerful people playing games.  Anyone interested in watching the fracking boom unfold can check out the North Dakota Industrial Commission's website for oil and gas data.  The retro '90s look of that site brings back memories of my old GeoCities site on Yahoo.  Ah, those were the days, when we could all get rich by doing nothing.  It happens again every so often.

The equity crowdfunding forum was brand new at this MoneyShow.  TheCrowdCafe tracks data for the sector.  JOBS Act Title III still hasn't passed, so the non-accredited investor community still has to wait for its shot at true crowdfunding.  The cumbersome, expensive legacy of Reg A state registered securities is still with us.  The panelists believe the next step in crowdfunding is Big Data predictive analytics revealing investor preferences, time between raises, and successful raise amounts.  I asked the panel whether they thought leading portals will become acquisition targets for big banks.  That is absolutely my favorite thing to ask anyone in crowdfunding.  They answered that acquisitions will happen because good crowdfunding portals are more capital efficient than big firms with legacy costs.

I attended Mark Skousen's evening talk on private equity.  That made for three Skousen events in one day.  It turned out to be three more than I needed.  I expected a talk on how private equity works and how investors of any qualification can participate.  The coverage of a few years' worth of returns from the traded stocks of leading private equity firms made me think ahead to the next available hospitality suite.  Folks, I've seen this stuff before, and a single price movement chart isn't going to tell me whether a stock belongs in my portfolio.  Mitt Romney worked in private equity but he had nothing to do with the publicly traded stocks of private equity firms, and Bain Capital is still privately held.  Most Americans didn't want to hear Mitt Romney's campaign pitch for private enterprise in 2012 because they're all dependent on some form of welfare now.  A nation of entitlement brats doesn't want successful people lecturing them on productivity.

George Gilder dropped in toward the end of Mark Skousen's evening talk.  There they are above, out in the hallway.  George is gesturing his approval of something Mark said and Mark is enjoying the attention.  I did not stick around for autographs because I had to go find some free food from a hospitality suite.  Fortunately one of the exhibitors promoting investment in Myanmar had some excellent free food and booze in their suite.  Mission accomplished.

I started my third and final day at the MoneyShow with Marilyn Cohen's bond expertise.  She noted how 10-year yields have defied most analysts' predictions.  US rates must look better than rates in the rest of the world.  Her key insight is that bond investors can use bonds with "moving parts" (floating Libor, coupon resets, etc.) to mitigate the risks of inflation and rising interest rates.  Bonds with coupon resets often come with call features.  She liked the bonds of one REIT but also thought the REIT itself was a good deal, a rare non-bond pick for her.  If you want to know more about her specific picks, you'll have to ask her yourself.  She was one of the rare contrarians at this MoneyShow who thought the stock market was at a peak valuation!  Woo hoo!  She's always been a genius in my book, and not just because she agrees with me.  Marilyn likes bonds with state intercept enhancements.  She also likes water and sewer bonds in good areas, defined as a prosperous region with stable incomes, no urban blight, and no municipal bankruptcies.  I'm pretty sure that Detroit and Stockton would not meet that definition of a good area for infrastructure bonds.

One other speaker offering some insight did not generate insights I would find useful.  I won't name this person because I don't want to drive Web traffic to sources that I think offer little value.  Folks, I don't need to walk through a fictional character's literary history to conclude that confirmation bias is bad.  I also won't throw out CAPEs as a buy signal just because it doesn't time a sector rotation strategy very well.  I like watching the P/E ratio for individual stocks and the whole market, and CAPE Ratio Calculator is free to use.  Sector rotation is smack in the middle of the spectrum that puts stock picking on one end and broad market analysis on the other, and I'm no fan of splitting the difference that way in portfolio management.  I would like to see data supporting the claim that stocks with high institutional ownership are more sensitive to bullish analyst sentiment.  It may indeed open contrarian opportunities for investors tracking stocks with low institutional ownership, but those same stocks will also be less liquid.

Marilyn Cohen was up for a second time with some overlooked bond ideas.  I learned from her that muni yield changes usually trail broader bond market yield changes.  That makes sense if muni issuers' underwriters reset the offering prices of new issues when the 10-year Treasury yield moves.  She revisited her earlier mention of bond intercept programs, which are mainly for school districts.  States can divert school appropriations to pay school bondholders under such programs.  That's a good enhancement to munis.  She also likes port and harbor bonds, along with senior lien airport revenue bonds.  She definitely does not like pension liability bonds or health care obligation bonds.  She expects some hospitals to go bankrupt under ACA, destroying their bond holders.  She likes watching bonds that are connected to merger plays because their change of control provisions will activate.  I hope bond fund managers have fun watching the bonds of hard asset companies as the US enters hyperinflation.  Marilyn notes that bond market crises often cause stock market crises.  I agree with Marilyn that we can expect a very serious crash.  I can hardly wait.  She thinks bond ETFs may face serious problems in such a crash if investors sell in a panic.  I asked her about the possibility of bond exit fees, and she agreed it's likely.  Marilyn is totally awesome.

Morgan Housel of the Motley Fool told us why we can't have nice things in his afternoon keynote.  Bad investor behavior means many stock market investors underperform the indexes.  People buy high when they're greedy and sell low when they're fearful; Warren Buffett does the opposite.  Volatility is common, the world is complex, and compounding takes time.  Most investors lack the patience to see through that noise.  The P/E ratio isn't perfect but it is the single best statistical explanation of equity market returns.  That's good enough for me.  Read Morgan's site for the rest of his wisdom.

Wayne Allyn Root delivered the final keynote.  This was my first exposure to his bombastic personality.  I consider his performance to be entertainment and it's fitting that he aspires to a political career.  He threw lots of red meat at the audience and I got the impression he was test marketing some themes he can hit on the campaign trail.  Lots of his points got applause and some people objected vocally, so it made for a good stump speech.  If he runs as a Republican, he'll have to address some emerging research that shows economic performance to be superior under Democratic administrations in Washington.  I think his assumption that Americans' offshore wealth will return to the US with a tax holiday is unrealistic.  It may be there to facilitate trade or FDI, and no tax holiday will repatriate capital that is already productively deployed.  His stuff was great for the Tea Party, libertarian, gold and silver crowd.  He's definitely after the Ron Paul demographic because there's money to be made off those people now that their longtime patron saint is retired.  I'm surprised he didn't mention Bitcoin.  I'm sure he'll figure it out once his pollsters test it in Silicon Valley.  George Gilder even hung around until the very end.  That guy was everywhere.

The MoneyShow San Francisco 2014 was a winner for me.  I came out with more building materials for my own portfolio's architecture.  I'm amazed that the official program still mentioned Alfidi Capital as a participant even though I had no booth or speaking engagement.  I sometimes wonder whether my career would have taken a different turn if I had paid for a booth here in 2005 and 2006 when I was a financial adviser.  I can't turn back the clock to those days when I tried to find clients.  I can only look forward to a future where I never need to deal with humans.  The MoneyShow's wisdom will always be relevant to me.

Full disclosure:  I edited a brief mention of Tesla Motors in the "top financial advisors" above to clarify its attempt at profitability.  The company was not earning a net profit at the time of the MoneyShow San Francisco 2014.

Four Simple Money Things For San Francisco Simpletons

Some people are just too stupid to be in finance.  I saw plenty of them in major investment firms and nowadays I also see them as solo practitioners.  I attended a Commonwealth Club event this week for a book touting the four most simplistic things one can do with money.  True to form, San Francisco coughed up plenty of simpletons to give this banal material their usual rapt attention.

Here's all you need to know about these four simple things, straight from my brain to yours.  We earn money from work (although most people hate their jobs).  We save money for future goals (although most people don't do it; they'd rather pine for entitlement programs funded by taxes on someone else's savings).  We spend money on our lifestyles (although most spending is wasteful, impulsive, and aspirational).  We give money away to feel generous (although many charities are inefficient and fraudulent).  There you have it.  Lesson concluded.

I have not read the book.  I will not ever read this book.  I am not interested in pop-culture rehashes of behavioral finance research.  I prefer to examine the original research itself.  This subject's simplistic appeal tells me everything about why most humans will never have control of their own financial situations.

Humans respond to simplistic emotional hooks.  The more manipulative sociopaths in our species convince their low-information peers to make harmful decisions.  Evolutionary biology reveals that humans have a natural talent for self-deception.  Susceptibility to myth helped us socialize into larger communities where the hunter-gather work could be shared.  The same susceptibility to myth keeps people gathering into temporary tribes that attend stupid lectures.  That's why simplistic "wisdom" in finance is so popular.

Linking money attitudes to people's recollections of their childhoods establishes an emotional hook.  People must somehow become exceptionally vulnerable to sales pitches when recalling some formative experience.  It's like grown adults become kids all over again.  Being led around by the nose is a pathetic lifestyle.  I outgrew the need for external validation long ago but I am amazed that adults with advanced educations fall for it every time.

There must be a Big Data solution for human stupidity.  Total persistent surveillance at the point of sale for anything, combined with facial recognition algorithms in video searches, should enable multinational corporations to finally identify the inflection point at which a consumer's mind turns to mush.  Locating that moment will ignite a new generation of startup fortunes.  It will also permanently cement the susceptibility of the mass consumer into our cultural DNA.  I suppose I should marvel at the ease of manipulating the masses.  It will come in handy.

I walk out of events that disappoint me.  I could not take more than twenty minutes of this Commonwealth Club seminar.  Twenty minutes is the upper bound on my attendance at something intolerable.  I attended this particular talk to identify four very simple things we all do with our money and that our attitudes toward such things are difficult to change.  That was evident in the event's single paragraph description.  I do not need some combination of Mister Rogers Neighborhood handholding and Jonathan Livingston Seagull transcendence to understand that financial security enables self-actualization.  Viewing money as some kind of "portal to self awareness" is terrific New Age drivel for the majority of Americans raised to be permanent children.  

Mobile Money Spells Economic Annihilation For Credit Cards

I don't let hype over US-Russia economic sanctions take my eye off the ball.  Other wanna-be global powers can talk all they like about creating alternative global settlement systems to the US-based SWIFT system.  Russia will not succeed even with help from China until both of their economies are completely open.  Transparency and the rule of law have enterprise value even though they are weakening in the US.  The relative advantage still lies with the Anglo-West and even Asian banks prefer more transparent interbank transfers.

The real action worth tracking is in mobile P2P payments.  The emerging tech for smartphones is an existential threat to the major credit card companies.  Any combination of Google Wallet and M-Pesa is a knockout blow to credit card payment systems.  The combo will eventually metastasize in the developed world.

Vendors who migrate from card payments to mobile payments will find many advantages.  They won't lose gross margin by paying credit card charges.  Reducing the number of steps in a transaction means less friction for purchases.  Consumers will love the simplicity of mobile transactions and spend even more of their dwindling middle-class paychecks.  The unbanked poor in the US will finally join the mobile revolution once they see how quickly M-Pesa fills their SNAP accounts.  Everybody wins.  

The Haiku of Finance for 02/26/14

Internet magic
Turn digits into Bitcoin
Pretend money store

Alfidi Capital at MoneyShow San Francisco 2013

I had to attend the annual MoneyShow San Francisco last week.  This was more than just another conference for me.  I presented my first MoneyShow seminar ever.  This was something I've wanted to do ever since I attended my first MoneyShow in 2001 during my MBA program.  I spoke this year about my small-cap stock evaluation methodology on the first day of this year's show.  If you want to hear my thinking, you have to invite me to speak at your high-powered conference.  I paraphrase what a few other speakers said below.  My thinking in response to the presenters is noted in italics below, as per my usual style of commenting on major public events.

Thank you to Kim Githler and Charles Githler for allowing me time on your show's calendar.  Kim kicked off the conference in her usual way by covering her basic philosophies:  capital preservation, the big picture, and adapting to change.  She noted that strategies for handling inflation and deflation are different and that long-term stock market investors are rewarded.  Her take on an old adage was a classic:  "Finish your homework.  People in India and China are starving - for your job."  Charles spoke next; he thinks the US is at major risk of deflation (hence the Fed's QE goal of asset appreciation).  He interprets rising real 10-year yields as the result of investors demanding more reward for the risk they take.  Referring to the "2020 scenario" of energy independence for North America, Charles thinks materials and energy may outperform.  I appreciated his mention of GDX and GDXJ (the gold mining ETF tickers) as beaten-down value plays that may also be useful as inflation hedges.  There may be some life in my GDX holdings yet if other luminaries come around.

The first keynoter from TD Ameritrade covered his firm's Investor Movement Index (IMX), which I take to be a Big Data compilation of their clients' aggregate trade activity that measures market sentiment.  I don't use sentiment indicators because I consider most retail investors to be reactive rather than contemplative.  Some hedge fund somewhere can probably throw the IMX into one of their algorithms and measure its signal strength.

The keynoter from S+P Capital IQ said that bullish market action in January and February usually signals a positive twelve month total return, but I'm skeptical.  Ask anyone who was in the markets from late 2008 to early 2009 how the crisis impacted their annual returns.  He noted that the number of "all-time high days" in this bull market are below historical averages; once again, I'm skeptical that this is anything other than random noise.  He noted that narrow yield differentials between the S&P 500 and the 10-year Treasury are generally good for bull markets but I must caveat that with some kind of adjustment for risk.  Only in recent years have investors ignored risk and focused exclusively on total return, and that's only because QE has driven them out of cash and savings accounts.  IHS Global Insight believes that most developed countries have passed the troughs in their business cycles.  I'd like to see IHS's track record in forecasting economic turning points; it's not obvious from their product page.

Roger McNamee from Elevation Partners (and let's not forget his rock band, Moonalice, whom I've heard live) had ten hypotheses about tech that probably went over the heads of most MoneyShow attendees.  I think MoneyShow attendees are much more intelligent than the average American, but not all of them are the type of innovators who would launch or fund a tech startup.  He thinks there's no income overlap between mobile apps and the web, partly because apps are the search engines for mobile.  He thinks Apple should pivot to the cloud and the Google's Android has spawned incompatible systems that degrade app experiences.  He continued to pound Android, saying its OEMs often lose money on hardware.  I'd take a look at Samsung's sales before I count out Android makers.  Roger likes that HTML5 incorporates Flash, which gives it more design flexibility and makes monetization easier.  He predicts that "home cloud" architecture offering remote access to lifestyle devices is coming.  I see that as another manifestation of VCs going for IoT as the next funding trend, something I've blogged about this year.  He also predicts that content providers will have to move to broadband distribution to survive given the decline of cable and satellite channels.  His most alarming hypothesis is that the "sharing economy" allows consumers to imitate corporations' capital efficiency techniques (like outsourcing), his evidence being that Millennials are renting capital goods for short periods via Airbnb and Zipcar.  I hope he knows what's driving this phenomenon.  Millennials' income is constrained by student loan debt and lack of upward mobility.  They must rent cars because they can't afford to own them.  They must lease out their homes and apartments because they really need the extra income.  Check out Roger's slide show on Elevation Partners' mission page.

Steve Forbes was the next keynoter.  He's still pretty sharp but sooner or late the next generation of handsome, intelligent keynoters will have to replace the old guard, and that's exactly why I'm appearing at these conferences.  Steve noted that middle class incomes are still declining after four years of so-called economic recovery, similar to a pattern in the 1930s.  The MoneyShow audience applauded his prediction that the Democratic Party would lose the US Senate due to the Affordable Care Act's implosion.  I'm sad to note that such a reversal is probably a pipe dream.  Americans are addicted to entitlements at all levels of our society.  These programs and their political sponsors will remain in place until a hyperinflationary depression eliminates their funding sources.  Steve thinks fixing federal spending to a percentage of GDP is a more effective budgeting tool than a legislated debt ceiling.  I don't think that is going to work.  Government statistics are already significantly altered, gamed, adjusted, and otherwise misused as to be unreliable, according to Shadow Government Statistics.  Targeting GDP will just incentivize the policy apparatus to artificially inflate GDP so the government can collect more revenue.  The best guide for targeting federal revenue collection and spending IMHO is Hauser's Law.  Steve went back to his advocacy for the gold standard, another impossibility because it's too inflexible as a rule.  The Rentenmark is a better example because it was backed by a broad range of hard assets.  

Jim Rogers was the final keynoter.  He's still pretty sharp but he was starting to show his age while wandering all over the stage.  He's proud of his young daughters for speaking Mandarin and showed off their videos from a speech exhibition.  The guy has been a relentless China bull for something like forever.  Someone needs to tell him that China's most important economic figures are falsified and that English is the international language of business.  I could beat the ground about how China will get old before it will get rich, its resource shortages and little arable land, its economy's fixation on the pork cycle, and the insolvency of its shadow banking system.  I do concur with the rest of his general advocacy of mining, energy, and agriculture.  Jim set up his family's bank accounts in Asia because he doesn't trust the US dollar.  I hope he calculated those banks' Basel capital adequacy ratios first.  He noted that simultaneous monetary stimulus in the largest developed economies is unprecedented and that we should prepare for that to end.  I've been saying that too but I don't think Jim reads my blog.  He's shorting junk bonds.  I'm not, because I don't want to pay the bonds' interest to a counterparty in addition to the margin interest I'd have to pay.  He's still bullish on agriculture because a dearth of farmers will make farming careers more lucrative.  Jim likes Canada's economy and currency but doesn't like US TIPS due to their tax consequences at maturity.  He then rolled into a rambling Q&A and was very friendly with Asian women in the audience.

The vendor booths on the expo floor had more representation from hard assets companies and investment projects than I've ever seen at a MoneyShow.  Big Oil (supermajors), Little Oil (prospectors), pipeline MLPs, timber, REITs, BDCs, and non-US agriculture were all there.  I'll cover these selectively, in pretty broad swaths, working backwards.

Let's consider farmland.  I can understand investing in agribusiness stocks with an international presence because they must publish detailed financial statements.  A pure-play deal in Latin America or the Baltics requires a different kind of due diligence.  Investors would have to physically travel to the country in question to see the land, meet the farmers, and examine the title document in the native language.  That's more effort than I can make just for one potential investment.  Please don't pitch me on the ability of coconut oil to treat Alzheimer's disease.  Please don't tell me that a bunch of neem trees are a miracle without explaining the plan to cultivate them outside their native habitat.  Plants have natural pests and predators.  I'd say investors have natural predators too.  I'd much rather invest in permaculture, which I can do right here at home.

Let's talk about business development companies (BDCs).  I picked up flyers for a couple of these at the MoneyShow.  In normal times BDCs are useful additions to a fixed income portfolio.  These are not normal times.  The likelihood of hyperinflation in the US means any security based on fixed income flows is the kiss of death.  Too many BDCs have portfolios structured as loan funds.  The companies owing those loans to the BDCs will pay them off with worthless dollars in hyperinflation.  Structuring the loans as secured with liens on assets won't matter; the indebted companies will end hyperinflation much healthier as their liabilities are inflated away.  BDCs that structure their investments as convertible debt or project equity might fare better in hyperinflation for a little while.

Let's mention REITs.  John T. Reed's anticipation of nationwide rent control laws puts the kibosh on whatever refuge I might have found in commercial REITs.  Residential REITs are similarly out of my consideration.  The remaining option would be storage REITs, and I found a suitable candidate for my own money in my blog article earlier this week.

Let's check out timber.  I sat through one timber pitch recently.  It was (of course) for a project outside the US.  No thanks.  Timber is a hard asset and thus a potential inflation hedge but it must be structured correctly if it wants my respect.  I suspect that much of the infatuation with timber in recent years is the result of timber's correlation with the housing market.  Housing booms drive demand for lumber and pulp.  The financial sector started to take timber seriously when the Harvard Management Company hired a lumberjack to evaluate timber farms all over the world.  The strikes me as analytical overkill.  There are simpler and cheaper tools around for evaluating timber.  The NCREIF Timberland Index shows the return history for timber investments.  The index's declines since the housing bust are a contraindicator to contemporary claims that the housing sector is strong, but those declines may also indicate that the timber sector is underpriced.  Institutional investors hire timber investment management organizations (TIMOs) to care for their trees but those structures aren't available to ordinary retail investors.  The best the rest of us can do is evaluate timber REITs like Rayonier (RYN), Potlatch Corp. (PCH), and Plum Creek Timber (PCL).  Compare them to the timber REIT ETFs with the adorable tickers CUT and WOOD.

Let's look at pipeline MLPs.  The only thing preventing me from going long one of these babies (aside from finding one at a decent bargain) is the unresolved question of whether they can raise their rates at will or are limited by FERC to rate increases at set intervals.  Pricing power counts for everything in hyperinflation.  I'm still digging for the answer.

Let's wrap up my digression by mentioning oil and gas.  You've heard me talk about energy many times already on this blog.  I've discovered that there's a specialized part of the finance sector called "oil and gas lease banks" that provide capital specifically to drillers.  Even oil and gas royalty trusts need access to capital because wells will mechanically fail over time.  They must spend capex on maintenance and restoration of production.  I don't invest in these tiny little well plays or their lease banks but some people just love the tax advantages.  The IRS has an entire handbook devoted oil and gas, and there's a cottage industry of accountants and attorneys devoted to figuring it out.  There's also a cottage industry of community banks with internal offices devoted to helping oil and gas royalty owners manage their income streams.

Okay, enough of my fixation with oddball asset plays.  I'm switching back to the MoneyShow speakers.  There were so many talks that I couldn't possibly cover them all, so I only attended those that mattered for my own portfolio or professional development.

Serial entrepreneur Bill Harris of Personal Capital explained how money meets tech in financial services.  His three requirements for a money management service are that it should be virtual, secure, and personal.  Virtualization should be a disruptive force in a sector that has four times as many bank branches now as it did before the ATM, especially now that digitization has transformed financial projects into intangibles. The security of vaults and access can now be delivered with smartphone 3-factor authentication (password / phone activation / voiceprint).  Technology now allows for mass personalization that obliterates the old crasftsperson model of wealth advisory.  Much of his talk hit the strengths of his finance startup, Personal Capital, without being a blatant sales pitch.  Great presentation, Bill!

The MoneyShow promoters displayed their own proprietary investment sentiment indicator, collated from attendee responses.  Attendees still expect a rising S&P 500 in 2013 and a steady unemployment rate at 7%.  They plan on buying more stocks.  Okay folks, but your due diligence needs to be as robust as mine.  My own seminar presented a detailed due diligence checklist that I've spent years developing.

The Everbank folks think we're paused at a crossroads.  They presented a FRED chart of nominal GDP growing, but to me that's more an indicator of inflation than economic growth.  Their stats on just how little money most Americans have were depressing, like the median figure for financial holdings at $6000.  I'm not in the top 1% but I feel like I should be compared to people at that level.  Everbank noted that the only real job growth in the 2000s was defense-related.  Manufacturing is no longer a job creating sector because it isn't labor intensive.

Legendary stock analyst Laszlo Birinyi spoke on inefficiency in the stock market.  He had a couple of truisms, like "don't sell into strength," which I didn't quite grok.  Maybe this WSJ data set is what he meant.  He thinks money flows are the best tools for understanding the stock market but he didn't mention any sources.  Maybe he means data like this money flows report in the WSJ's Market Data Center.  It seems like a pretty raw supply/demand technique but I'll have more to say about it after I've studied Birinyi's own money flow methodology.  He also uses a cyclically adjusted P/E to make buy/sell decisions and call market turning points.  I've been wrong when I've tried to call market turning points so I'll check out his system.  I agree with him that technical analysis doesn't work, but some speakers here will swear by it.  Laszlo lamented that investors today are on their own because institutional money managers don't read, think, study, or practice.  He said other money managers never asked him how he outperformed because they thought he was just lucky.  I witnessed all of that behavior inside investment firms where I worked.  I want nothing to do with those people.  

Next up was Doug Roberts' Channel Capital Research speaking on the QE-driven rally.  Follow the Fed to Investment Success lays out Doug's thesis.  The Fed has driven down bond yields and boosted bond valuations, forcing investors to take on more risk.  QE3 is different from previous rounds because of its indefinite size and duration.  Hew drew a brilliant analogy with markets in the 1930s, where low to negative real interest rates and violent bear markets in equities destroyed investors.  The oil shocks of the 1970s had similar effects, where inflation rose and equities dropped.  Accommodative Fed policy can last longer than rational investors can expect.  Crises and shocks can always surprise policymakers.  Mean regression will penalize long-term returns.  I asked Doug what could cause a run on the US dollar by foreign investors.  He answered that a Middle East conflict could cause autocratic leaders to take power, or that China's internal conflict between its military leaders and its Western-educated business elite could become a power grab that sparks open military conflict.  His basic analogy was with political turmoil in Germany in the 1930s.

Ronald Muhlenkamp, the patriarch of Muhlenkamp, gave his first talk on natural gas an an energy game changer.  I'll cover his second talk farther down this article.  He noted that natural gas at $3/mcf equals coal's price.  Natural gas has always been a local commodity because it can't be shipped economically without being compressed into LNG or constructing pipelines.  He gave an example of how the shale gas boom is lowering consumers' commodity charges on home heating bills.  The cost spread of crude oil versus natural gas is currently too wide to be sustained.  Changing the fuel mix of over-the-road trucks to NG will lower the price of diesel fuel.  Steel plants now use NG as a feedstock.  Comparing NG to other energy sources reveals that it takes seven or eight wind turbines to equal the energy output of one typical NG well.  He also noted that NG wells have a much lower acreage footprint that solar or wind installations.  Ron said that coal has gotten a lot cleaner and US carbon emissions are now below the levels specified in the Kyoto Protocols even though we never ratified that treaty.  Other Kyoto signatories are still above the limits.  Ron said that the concerns about water use in NG fracking are overblown because using 1M gallons on 40 acres is the equivalent of less than an inch of rain on said property.  He mentioned that T. Boone Pickens' Clean Energy Fuels is building coast-to-coast NG filling stations for long-haul trucks.  I asked Ron if the Henry Hub price is a decent proxy for world NG prices.  He said not necessarily because NG prices really are discrete by region.  Ron closed by saying that he likes Sam Walton's book on retailing because that's how the guy got rich as a middleman; as a purchasing agent, he delivered goods to markets more cheaply.  I guess that's the analogy with NG distribution.

I listened briefly to a presentation on managed futures but departed because I'd heard the main points before, and I even gave a pitch like this once when I was a licensed broker at a large firm trying to sell a managed futures product.  The CFTC has regulations governing futures commission merchants (FCMs) and introducing brokers.  Alfidi Capital doesn't fall into either of those categories.  The CME Group is a popular market for futures traders.  I don't trade futures.  I believe futures are only relevant for businesses that want to hedge against adverse price movements for commodities they produce or transport.  Turning the futures market into just another casino for retail investors is IMHO an exercise in futility.  How deep is a given futures market's liquidity?  Can an investor really unwind positions instantly?  What is the counterparty risk?  I'll look for answers to these questions in a future blog article, with the sad case histories of Long Term Capital Management and MF Global as examples of what can go wrong.  Oh yeah, one more thing on managed futures.  Reg FD on selective disclosure pretty much eliminated the ability of actively managed futures to generate alpha.

The Forbes columnist roundtable was a fun panel, primarily because bond guru Marilyn Cohen was on it.  The panel seemed to hold a consensus that the Fed's tapering is inevitable.  IMHO the Fed is already losing control of the long end of the yield curve.  The panel hinted that this is happening by noting big drops in the value of long term bonds and mortgage REITs.  Every panelist had their own approach to ideal portfolio construction but Marilyn likes split-rated bonds (i.e. bonds where rating agencies differ on the ultimate rating, implying the bond may be undervalued) and individual junk bonds from firms that have pricing power.  She also thinks the Detroit bankruptcy will be a seminal event for the muni bond market, predicting the case will go to the US Supreme Court and contagion coming to other states' bonds.  The stock picking columnists on this panel mentioned stocks that are driven by consumers' disposable income.  Those are stocks I avoid.  They also mentioned some new spinoff ETF (maybe Guggenheim's CSD, I didn't catch the ticker), which is another thing I'll avoid because spinoffs are the result of active decision rules and don't belong in a passive index.  One panelist said that some large gold miners tie their dividends to the price of gold.  I didn't know that, but it makes some sense because the price of gold determines how much cash miners can get for their metal.  The panelists discussed their sell disciplines.  They all have price level rules except Marilyn.  Her sell rule for a bond is to sell upon discovering any accounting discrepancy in the issuer, any private equity buyout attempt of an issuer (because the target issues new bonds that denigrate the existing bondholders' interest coverage), and any denigration of yield when rolling down the yield curve.  Marilyn Cohen is brilliant, and I told her so after the panel was over.  I heard her speak at the first MoneyShow I attended in 2001 and she's as sharp as ever.  I respect her because she understands fundamental drivers of a bond's value.  Marilyn shared a couple of her corporate bond picks and said bondholders don't like share repurchases because those actions divert cash flow from potential bond interest payments.  The panel let the audience chew on the arbitrage potential between GDX and GLD by going long miners and short paper bullion.  It's not a perfect arbitrage because it's an apples-to-oranges comparison, but it's a useful mental exercise in demonstrating that the price of gold has outrun the profitability of gold miners.  Marilyn's final zinger was to say that I Savings Bonds are a bomb due to lack of inflation, but even she is skeptical of the US government's reported inflation numbers.  Just wait, Marilyn, because when hyperinflation really takes off those I-Bonds will be even worse bombs.

I got to hear more from Marilyn Cohen when she held her own seminar on remedies for situations when management disregards bondholders.  Check out her work at Envision Capital Management.  Marilyn reiterated that M&A and spinoffs affect bonds, and that accounting improprieties are sell triggers for corporate bonds.  Acquirers issue bonds to fund their takeovers, but a failed acquisition makes these newer bonds less desirable than older bonds.  Private equity buyouts hurt existing bondholders if they don't have covenants with change of control provisions in their bonds.  She said the median equity in private equity buyouts is 40%, and any less means existing bondholders suffer.  She warned us all to stay away from covenant-light bonds and to read prospectuses for covenants.  Bond indentures with change of control provisions ensure that your bonds are taken out at a premium to par.  High coupon bonds deserve attention in buyouts; she sells them upon a buyout's announcement.  Bond clawbacks can happen if an issuer has the right to buy back a percentage of bonds issued.  A clawback action is more typical of junk bonds and not so much for investment grade bonds.  Buyout targets take on the acquirer's bond rating.  The bond indenture will describe the make-whole provision of any potential clawback offer.  Bond buyers must beware of these clawback provisions!  Marilyn also advised us all not to buy bonds in private equity companies themselves, because they use those bond issues to pay themselves dividends.  She also told us not to buy pension obligation bonds, because they're taxable.  She wants us to stay away from general obligation munis issued in problem areas (I'm thinking Detroit, Stockton, etc.) or that need appropriations.  She really likes senior lien airport revenue bonds, personal income tax (PIT) bonds, sales tax revenue bonds, and water/sewer bonds.  She also likes bonds of companies that just emerged from bankruptcy because they have clean balance sheets.  Way to go, Marilyn!

I attended Ron Muhlenkamp's second seminar on the squeeze effects of taxes and interest rates.  When someone impresses me, I elect to learn everything I can from them.  He noted that government has never collected more than 20% of GDP as taxes; please refer to Hauser's Law for confirmation.  If the federal deficit grows less than GDP, the debt-to-GDP ratio gets healthier.  Ron also gave us a hint on how frugal lifestyles beget wealth.  He said buying used cars helps you get rich, and one should never borrow to buy a depreciating asset.  I'd caveat that by saying that a depreciating asset that generates cash flow may be worth the debt needed to buy it.  Entrepreneurs who buy taxi cabs, dump trucks, limousines, or hearses should at least calculate the NPV including the periodic negative outlays for debt repayments.  Ron noted that higher taxes won't cure the federal deficit because people will just work less.  Defined benefit pension plans will bankrupt employers.  I'm pretty sure I blogged about that at some point and that's why I read balance sheets to identify underfunded pension liabilities.

I attended Marilyn Cohen's second seminar on how the bond crisis is moving at glacial speed.  Like I said before, I pay attention to people who know what they're talking about.  She borrowed the term "Global Thermonuclear Devaluation" from finance guru Mark Grant to describe what happens after QE.  The best thing Marilyn did for her audience today was to share a method for minimizing taxes.  The Affordable Care Act's tax on capital gains from high earners is unpopular but bondholders can amortize premiums to avoid it.  Amortize the premium of a taxable bond by taking it as an annual deduction on your income tax returns, rather than using it as a capital loss at maturity or sale.  The Form 1099 from a brokerage will show the adjusted cost and premium only for the last year an investor owned a bond.  Amortizing it annually will reduce the ACA's tax.  Competent CPAs know how to calculate this amortization.  I think the risk in this approach lies in the ability of the IRS to change allowable amortization on a whim.  Marilyn thinks it's unique that all new bond issues are at premiums now because ZIRP keeps short term rates at zero.  You'll never find bonds at par or discount anymore because of ZIRP.  She thinks Payment-In-Kind (PIK) bonds are horrible because the issuer (usually distressed) can keep paying in PIKs like an eternal Ponzi.  She noted that even private equity firms are now issuing PIKs.  Which ones?!  I don't think I want to find out.  She admonished us to get more selective on munis, because Detroit really has changed everything.  Many other muni issuers are just as troubled.  Investors in general obligation (GO) bonds may become unsecured creditors.  She said any bonds whose revenues rest partly on federal grants are risky, with Build America Bonds (BABs) as a prime example.  The BAB indentures state that they can be called at par if the federal government cuts its subsidy.  Sequestration puts all grants and subsidies at risk.  She thought GARVEE bonds for highways were usually safe, until now.  The Treasury Offset Program (TOP) can withhold money from these bonds' repayments.  The federal assistance built into some munis is part of Marilyn's glacial crisis picture.  She disparages "yield hogs," investors who just chase high yields with no concern for covenant risks.  I saw a variant of the yield hog breed in some writers who extolled the value of high-interest savings accounts in Cyprus before that country's banking system went into lockdown.  Marilyn thinks California's high speed rail project is a boondoggle and that's part of the reason she now prefers revenue bonds; GO issues are funding useless projects.  She likes "intercept bonds" but I don't think those originate with California issuers.  Marilyn uses Investing In Bonds for research and thinks everyone should use it too.  Okay, I sure will.

That's the exhaustive summary, with pithy italicized Alfidi Capital commentary, of all the seminars I attended.  I already blogged about John T. Reed's MoneyShow seminar because it was too good to delay.

I want to impart a few more random but related Alfidi Capital observations before I wrap up this report.

#1) I am really starting to suspect that oil and gas royalty trusts belong in tax advantaged accounts but I need to look into some rules to be sure.  The payouts from a royalty trust include both return of principal and additional yield.  Eventually the principal will be zero as wells deplete.

#2) IMHO rising real interest rates will eventually crash the value of bonds (particularly Treasuries) that banks hold on their balance sheets, destroying their capital adequacy ratios.

#3) Pension liability analysis must be part of any public company valuation.

#4) The normal interest rate for a 10-year Treasury may very well be its average since 1962, which is 6.58%.  The impact of a mean reversion to this figure from where we are now will be hugely adverse for stocks, bonds, and housing.

These four observations, plus everything else I learned at the MoneyShow San Francisco 2013, play a huge role in how I invest my own money.  I'm totally convinced that the investing public is better off for reading my synopses of investment conferences and that my own seminar added tremendous value to MoneyShow 2013.  I'll see you again next year.