Updating The Alpha-D For Feb. 2010

Here are the positions I've refreshed (due to options expirations) . . .

Short straddles on GDX and FXI. These are very long term holdings and I continue to use them to generate cash flow. I also write covered calls on GDX in my IRA.

Short puts under TDW at 40. I like Tidewater and I'm willing to buy at 40. I wouldn't mind being forced to do so when the second phase of the credit crunch roils the markets. TDW will be a long term holding if and when I ever go long.

Here are new positions . . .

Sold covered calls on ANV at 15. Allied Nevada has done very well for me, and I wouldn't mind it if my position is sold away should me covered calls be exercised at 15.

Sold short puts under SII at 37. This is a special situation presented by Schlumberger's buyout of Smith International. I sold puts at 37 to expire in March 2010 to get some quick cash.

Here are existing positions that haven't changed (mainly options awaiting expiration) . . .

Long COMS as special situation, awaiting closure of transaction. Short puts under KEX, willing to go long KEX at some point. Short puts under EFA (awaiting expiration). Long puts against IYR and LMT as bets against new bubbles in real estate and defense spending.

BTW, my puts under Burlington Northern have expired well in advance of their original expiration date. That special situation trade did quite well for me. Props to Warren Buffet for allowing me the opportunity.

First Dubai, Now Kuwait

There is probably no country on earth that can insulate itself from the next phase of the credit crunch. Witness the case of Kuwait, in Kuwaiti bankers' own words:

Most of Kuwait’s multibillion-dollar investment company industry could be wiped out by debt repayments on the finance houses’ leveraged investments made before the recession, senior bankers have warned.
(snip)

While bankers said the investment company woes were largely contained in Kuwait and should not spread, they could lead to distressed sales of overseas assets and were weighing on the exposed local banking sector.

I love the mention of "distressed sales of overseas assets." Take a guess where those assets are located. If you have trouble, just look out your window at the nearest shuttered shopping mall. While you're at it, let your neighbors know that they should slash the asking prices for their homes right now if they want any hope of selling. That's the only way they'll get ahead of the coming CRE debt crash.

These observations are tantamount to an admission that Middle Eastern sovereign wealth funds will be too preoccupied with their own solvency problems to fund any more debt-fueled stimulus in the Anglo-West. The U.S. can forget about a second fiscal stimulus. I blogged about all of this in 2009. Nobody listened to me and that's okay. My historical record is there for anyone to search.

That cloud you see on the horizon is a swarm of Black Swans. You do see it, don't you?

The Limerick of Finance for 02/20/10

Promising no more hikes is inane
Interest rates are too low to maintain
They can't always stay low
Investors ought to know
That's why stocks have continued to gain

Roubini Was Right About The Dollar Carry Trade

Remember last year when Dr. Nouriel Roubini said that any sudden rise in the U.S. dollar's value would put risky assets in a world of hurt? That world is starting to dawn on us:

The dollar posted its sixth straight weekly gain against the euro, the longest streak since 2000, as investors speculated on when the Federal Reserve would withdraw monetary stimulus after it raised the discount rate on Feb. 18.

See what happens when you keep interest rates artificially low just to artificially stimulate the economy? Stock prices become artificially high and you end up living in a world full of artifice.

We're entering a very difficult period for U.S. stocks, IMHO. Anybody who goes long stocks right now without doing serious fundamental analysis will probably be kicking themselves for many years.

The Haiku of Finance for 02/18/10

Fed launches exit
Raises discount rate for banks
Tightening begins

Holy Stagflation, Batman!

Kiss your recovery goodbye. Stagflation is here:

The number of U.S. workers filing new applications for unemployment insurance
unexpectedly surged last week, while producer prices increased sharply in
January, raising potential hurdles for the economy's recovery.

The Great Recession just got a lot greater. Anybody out there willing to go long stocks now? Anybody? (Deafening silence follows.)

General Growth Properties: A Special Situation

Real estate analysts have argued recently that 2010 will prove to be the "year of foreclosures" with an onslaught of bankrupt commercial and residential property coming to market. Simon Property (SPG) smells blood in the water and is making a bid for a troubled competitor, General Growth Properties (GGWPQ.PK):

Simon Property Group Inc., the nation's largest shopping mall owner, made a $10 billion hostile bid Tuesday to acquire ailing rival General Growth Properties.

The acquisition would allow General Growth, the No. 2 owner of shopping centers, to emerge from Chapter 11 bankruptcy protection. General Growth filed for bankruptcy last year after buckling under the weight of billions in debt it racked up during a massive expansion effort fueled by cheap credit.

It's a cash and stock hostile bid. Simon Property's balance sheet seems to be strong enough to handle both this purchase and its pending bid for some assets from Prime Outlets Acquisition Co. If the offer as currently structured gives General Growth's shareholders $6 in cash and $3 in assets per share, the simple math argues for a fair value of $9/share. The market has bid this up to $12, incorporating both the full enterprise value of General Growth (including the $7B going to its creditors) and the possibility that Simon may sweeten the offer now that General Growth has rejected the initial offer.

It is noteworthy that the $3/share asset offer amounts to a total value of over $900mm given General Growth's outstanding shares of 312mm. Simon's shareholders would thus experience a dilution of about 4.2% given its present market cap. That's not so bad if Simon can translate the deal into higher rents from combining anchor properties. Success would mean Simon gains enough earning power to arrest the slide of its retained earnings into negative territory, even if it has to lever up slightly to make this bid more attractive.

Nota bene: Anthony J. Alfidi holds no direct position in either SPG or GGWPQ.PK at this time. He is long puts on IYR as a bearish bet against the entire real estate sector; IYR has a long position in SPG.

Battle Over Greek Debt

In keeping with the theme of hollow states, check out how the EU - a transnational actor primarily staffed by elites - is reacting to Greece's hollowing out:

Greece turned to Goldman Sachs Group Inc. in 2002, just after adopting the euro, to get $1 billion in funding through a swap on $10 billion of debt, Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time, said in an interview last week. Eurostat, the EU’s statistics office, was aware of the plan, he said. Risk Magazine also reported on the swap in July 2003.

“Eurostat was not until recently aware of this alleged currency swap transaction made by Greece,” spokesman Johan Wullt said by e-mail yesterday.

How about that. The issuance of sovereign debt is theoretically something democratic leaders are supposed to debate in public. This controversy is more than the result of bond market vigilantes at work (we can see their handiwork as bond issuers get nervous about the ability of the market to handle more sales). Debt is now a football tossed around among transnational actors, in this case the EU's unelected bureaucrats and Goldman Sachs' unelected bankers and arbitrageurs.

One scholar in the article above calls for Greece's expulsion from the EU. This cry may rise to a cacophony in the coming weeks as Greece finds that its problems (like an epidemic of tax dodgers sapping its state revenue) aren't amenable to EU-friendly solutions. The pending defaults of other PIIGS nations will weaken the euro further.

Nota bene: Anthony J. Alfidi is short puts under EFA because he wouldn't mind buying into the Eurozone at much lower prices.

The Haiku of Finance for 02/14/10

Hollow states for sale
Public assets auctioned off
Get in line for deals

Greece is Europe's First Hollow State

Some of you may know that I'm a fan of John Robb's work over at Global Guerrillas. His thesis that transnational actors are working to hollow out nation states is proving to be more accurate with each passing day. Check out this news item on how Goldman Sachs has appropriated Greece's wealth:

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.


Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

Goldman bankers possess asymmetric information, i.e., they are probably more well informed of the workings of financial markets than Greek civil servants who are overpaid just to make it through the day. When this trend reaches full bloom here in the U.S., we can expect to see bridges and toll roads owned and operated by investment firms. Ownership of municipal assets will be auctioned off by your bankrupt city and state governments to feed their employee unions' pension funds.

If you can't beat 'em, join 'em. I'd like to get in line to buy some publicly owned assets. The Golden Gate Bridge would look great with the Alfidi Capital logo on it.

Nota bene; Anthony J. Alfidi has no investment position in Goldman Sachs or Greek debt at this time.

A Bonanza for Aardvark

Google recently bought a startup called Aardvark. I wouldn't normally comment on a Web 2.0 buyout but I'll mention this one for a special reason. See, last night I crashed Aardvark's celebratory party at a SoMa nightclub called Temple and saw their employees partying like it was 1999. Remember 1999? It was the height of the dot-com boom and everybody in SoMa was launching Internet startups that were supposed to make us all rich forever.

I missed out on all of the early web hoopla in the '90s as I was otherwise employed. This Aardvark deal is a rare throwback to that era. Congratulations, folks. The outgoing CEO (and now nouveau riche Web 2.0 rock star) gave a rousing speech thanking his employees. I enjoyed the open bar but I tripped over the giant Buddha statue in the entryway on my way over to claim a free Heineken (and I hadn't even had my first drink yet). I met one of their software engineers who'd never been through a transaction like this. I only had one piece of free advice: The best job security comes from one's own abilities and not some big corporate parent. I'll bet some future serial entrepreneurs were born that night.

BTW, if you're wondering how I found out about this party, let's just say I'm well-informed enough about The City's social scene that I can always find a way into places where I'm not supposed to be. ;-)

Nota bene: I have no investment in Aardvark or Google at this time, although Google is the web ad distributor for Alfidi Capital. I have no investment in Heineken but I do contribute to its bottom line with the occasional purchase (just not last night, thanks to Google's generosity with the open bar).

The Limerick of Finance for 02/13/10

Greek debt gives the Euro some pain
Germany's skepticism remains
When they're all out of cash
Euro markets will crash
America has little to gain

The Haiku of Finance for 02/11/10

China selling debt
No more appetite for risk
Yield curve starts to rise

China Shows Its Hand, Smacks U.S. Debt

China's alleged move to sell the riskiest assets in its foreign reserve holdings is the talk of the markets. The Asia Times isn't exactly the most reputable news outlet, but no official Chinese source has yet moved to dismiss or deny the alleged leak so it may turn out to be legit. This (alleged) turn of events should be the final nail in the coffin for investors' expectations of recovery, if the Greek bailout saga hadn't accomplished that already.

Get ready for the next massive leg down for U.S. equity prices, coming soon to a 401(k) balance near you.

The Haiku of Finance for 02/10/10

Bargain real estate
Be careful what you look for
Some of it won't sell