Did Baby Boomers Trade Retirement For Christmas?

We've heard this refrain before.  Americans approaching their golden years haven't saved for retirement: 

Through a combination of procrastination and bad timing, many baby boomers are facing a personal finance disaster just as they're hoping to retire. Starting in January, more than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years.

This season's retail results may indicate why this is so.  Shoppers are still very willing to part with their hard-earned money: 

Forget the returns line. People hit the stores after Christmas to buy, indulging the rediscovered retail appetite that may have made 2010's holiday shopping season the biggest ever.

I would love to see a generational breakdown of this year's shopoholics.  Did the Baby Boomers neglect their IRA contributions so they could have a glorious Christmas?  Did the Sixties' hippie kids keep on "living for today" right through tomorrow and the next day?  Did they spend all that they would earn tomorrow so that they could have today?  I know, that last sentence is a reference to an oft-heard line about sacrifice, but in this context it is an apt description of sacrifice through delayed gratification that did not occur at all. 

Entitlement can mean many things.  It can mean an expectation that Social Security and Medicare are fully collateralized insurance plans when they are in fact unfunded liabilities.  It can mean an expectation of ever-expanding material acquisitions with no regard for payment.  If entitlement means all of those things, it ultimately means insolvency. 

Old habits, acquired long ago and repeatedly reinforced, can prove very hard to break.  Unbroken habits will break us all financially.  Merry Christmas. 

Nota bene:  The author is a member of Generation X. 

Comparing PCYC and VVUS

A guy goes into a pharmacist and asks for a painkiller recommendation.  When the pharmacist asks him where it hurts, the guy says, "My portfolio!  I'm thinking about researching drug stocks."

Okay, that was a bad joke.  Pharmacists analyze drug prescriptions, not drug stocks.  Alfidi Capital doesn't profess drug expertise, but there are pharmaceutical firms in the San Francisco Bay Area whose financial statements are available for review.

Pharmacyclics (PCYC) makes drugs that treat lymphomas and cancerous tumors.  Their ROE this year was a stunningly negative 42%, but this is actually an improvement from their five-year average ROE of negative 81%.  PCYC has shown three straight years of improvement in net income, although it is still negative and exceeding total revenue.  The firm has over $70mm in current assets on hand as of this past September, which is probably enough to survive another three years assuming they can stabilize their net losses and properly manage their balance sheet. 

VIVUS (VVUS) makes therapeutic treatments for obesity, diabetes, and other difficulties.  Their current year ROE is slightly worse than PCYC's at negative 43% but shows no comparable improvement.  Indeed, VVUS's five-year ROE is over negative 29%.  Their annual net losses increased massively by 22x from 2007-2009, apparently due to a 50% drop in gross revenue starting in 2008 and a large increase in R&D spending.  VIVUS does deserve credit for holding large amounts of short term investments and keeping its long term debt low. 

These two stocks are not the right fit for my own investment philosophy but investors with specific knowledge of drug research may wish to review their product lines and market positions.  Small pharmaceutical companies are difficult to analyze without an intimate knowledge of biology, chemistry, and the FDA approval process.  The best that other investors and analysts can do is review their financial statements.

Full disclosure:  No position in PCYC or VVUS.

Rich Is A Quarter Million Annual Income

Right now I'm listening to the weekend edition of Marketplace on NPR.  There's a lot of discussion on the mentality of the wealthy.  Many rich folks don't seem to think they're rich, even if they're centimillionaires.  That's funny.  I would definitely think of myself as rich if I reported that kind of adjusted gross income on my IRS Form 1040.  I'll go with the argument that a $250,000 annual income qualifies an American as rich.

Pundits spent a lot of bandwith defending extension of the previous Administration's tax cuts.  The focus was on redefining wealth upward to portray quarter-million incomes as non-rich.  The meme won thanks to help from mass email lists and the blogosphere. 

The Census has a detailed breakdown of thresholds for relative affluence based on educational attainment.  The data for holders of master's degrees imply that I'm affluent.  I'll buy that.  The odd part is that the people I meet at the San Francisco Opera probably consider me to be unworthy of being affluent.  I'll buy that too.  I'll also buy their real estate out from under them when deflation wipes out their bond portfolios and hyperinflation leaves them too illiquid to pay their bills.

China Prepares To Fight Inflation

China has learned appropriate lessons from America's real estate bubble.  It is preparing a tighter monetary policy to avoid wrecking its economy:

The People’s Bank of China increased key one-year lending and deposit rates by 25 basis points on Christmas Day in its second move since mid-October. The change took effect yesterday.

Normally, raising interest rates is bad for stocks.  It increases companies' borrowing costs and tempts them to pay higher dividends to keep their earnings yields competitive with new bond issues.  China's stock market is reacting much more positively to this news than theory would allow:

China’s stocks rose and yuan forwards climbed to the highest level in five weeks after the central bank increased interest rates for a second time since October, bolstering speculation inflation will be contained.

Chinese stocks like the news because it signals that the government is committed to smart growth policies.  It also means the yuan will be more valuable, signaling to the currency markets that China will indeed let the yuan appreciate on its own terms. 

Will the U.S. follow suit with interest rate increases?  It's doubtful.  The U.S. needs a weaker dollar to keep its exports attractively priced.  That plus credit availability are supposed to keep GDP growth from stalling here.  The U.S. is unable to accept a sharp downturn as the bitter medicine for asset bubbles.  It may be forced upon us anyway.

Full disclosure:  Long FXI with covered calls and cash-covered short puts.

Goldman Sachs Gets Smart On Bonuses

I've had my fair share of skeptical things to say about big firms like Goldman Sachs, but I do take note when they do something right.  Goldman is going to make a greater effort to tie compensation to performance:

The investment bank, based in New York, said in a regulatory filing this week that bonuses will be linked to financial benchmarks that might include return on equity, earnings, or the price of Goldman's stock or other securities issued by the company.

The good news is that top executives will have their fate tied more closely to the long-term health of the firm, so closing some big deals one year won't have an outsized impact.  The bad news is that this kind of structure tempts executives to play games with reported earnings and leverage that can skew compensation upward.  Please, Goldmanites, don't wreck your balance sheet just to shoehorn an extra dime into your deferred compensation account. 

The Limerick of Finance for 12/26/10

Holiday shopping went well
Retailers had plenty to sell
Spending cash is such fun
And when it's all done
After-holiday deals ring a bell

RIP Roy Neuberger

It's rare to see passion for the arts and finance combined in a single human life.  Roy Neuberger, founder of investment firm Neuberger Berman, lived such a life.  Mr. Neuberger passed away recently at the age of 107.

I honor him for achieving his stated life goal of using a finance career to promote the arts.  Too many investment professionals get those priorities reversed, using connections in the arts community merely to further their own pecuniary interests.  He was fortunate to begin his career with substantial wealth, and lucky enough to preserve it through the Great Depression.  Luck is an inescapable part of all success.  That luck later enabled him to support the work of countless artists. 

Good job, Mr. Neuberger. 

Christmas Geese And Black Swans

Christmas has come but I'm not sure if the geese have gotten fat.  The old nursery rhyme at that link is a comforting reminder of simpler times and timeless values.  When the holiday ends, the real world returns.  What surprises could be in store for us?

State and local finance troubles can sink the municipal bond market.  This subject is getting beaten to death.  A "bond market collapse" does not mean funding will be permanently unavailable to governments that need it.  It does mean that interest rates will be much higher for solvent governments when bond investors freak out at municipal bankruptcies.

The PIIGS can still cause more trouble for Europe.  The EU's critical constitutional weakness is its reliance upon the sovereign authority of its constituent nations to raise taxes.  A truly continental budget would allow the EU to issue its own debt as raise taxes to fund things like debt bailouts.  Lack of that mechanism means the EU will need outside help if Portugal and Spain can't pay bondholders.  If the IMF can't help, China shows every willingness to step into the breach.  This is a convenient window for China to diversify away from the U.S. dollar. 

Real estate foreclosures could send the banking sector back into a tailspin.  Mortgage-relief programs aren't working out very well for many participants.  Healthy retail sales are helping commercial property owners collect rents right now, but it's hard to say how much of those sales are just future demand pulled forward.  Try sustaining this spending splurge with structural unemployment staying high for the forseeable future. 

The Sun could go supernova.  Hey, you never know.  Gotta cover all the bases. 

The events mentioned above may not come to pass.  Black swan disasters can have six-sigma probabilities, but they can still happen in an investor's lifetime.  Risk management techniques abound.  Muni bond risk can be hedged with credit default swaps (for large holdings from single issuers) or with options on a muni bond ETF.  Risk of a euro collapse can be mitigated by holding multiple currencies.  Real estate exposure is harder to hedge; REIT ETFs are optionable but the best tools are nonrecourse mortgages and free-and-clear ownership.  I know of no hedges against supernovas, so perhaps one of my super-intelligent readers can invent a working starship affordable for the average family. 

The Haiku of Finance for 12/25/10

Mystery shoppers
Do they track retail spending?
There's a lot to see

Shoppers Made Christmas Worthwhile

Congratulations to the American consumer.  You've truly outdone yourselves:

Shoppers came back in force for the holidays, right to the end. After two dreary years, Christmas 2010 will go down as the holiday Americans rediscovered how much they like to shop.

Never mind that real unemployment is over 20% and largely structural now.  Never mind that home prices will have to drop by another 23% or so to revert to their historical mean.  Never mind any of that.  It's time to party like it was 1999, when American civilization was probably at its apogee.  Maybe Americans deserve one final blowoff before the economy heads back down into the gutter.  Everyone needs some kind of Golden Age they can refer to in their memories. 

Saudia Arabia's Fiscal Reality

The Saudi government is basing its fiscal budget for 2011 on a world oil price of about US$50/bbl, which is more than a third lower than the current market price of US$90/bbl.  It is now drawing on reserve funds and deficit spending to keep its multi-year US$400 billion infrastructure improvement program on track. 

Saudi Arabia is very concerned about its ability to sustain its infrastructure projects in the face of both slackening oil demand (from a possible global recession) and constrained supply (from reservoir depletion).  Despite Saudi Aramco spending $100 billion on improvements in production capacity to 12 million bbls/day, average daily output in 2009 fell by 11%.  This inability to raise production may be more a function of dwindling reserves than insufficient infrastructure.  They may be throwing good money after bad in the face of Peak Oil, much as Dubai did. 

YRC Worldwide Asks For Stay Of Execution

YRC Worldwide is looking for a way out of a death spiral debt trap.  Its creditors are giving it a little slack, but other stakeholders may not be so understanding:

YRC Worldwide is asking the Teamsters union and pension fund managers for more time to restructure the trucking company’s troubled balance sheet.

I have to hand it to YRCW's management.  They manage to stave off one short-term disaster after another.  The Teamsters are a different story.  The new creditors' agreement may embolden them to ask for accelerated reinstatement of the pension plan contributions they surrendered. 

Recapitalizing a balance sheet involves writing down debt and/or injecting equity.  Forget about the debt writedowns; creditors extended the payment timeline with the expectation that their positions won't be written down at all.  That leaves YRCW with a need for more equity in Q1 of 2011.  Hmmm, they just went through a reverse split to raise their share price past the de-listing threshold, so issuing more shares means dilution.  They'll be right back in the NASDAQ de-listing queue with that move. 

I still don't see a happy ending for this company, but comatose patients have been known to hang on for years before either reviving or expiring.  I am not aware of any coma patient who could revive while a cancer was eating away inside them.  YRCW's cancer is its unionized workforce.  It is time to cut them out to ensure survival. 

Nota bene:  No position in YRCW.  I know that's difficult for you Teamsters to comprehend, but you folks can't operate at my intellectual level anyway.  I really only write for smart people. 

The Haiku of Finance for 12/21/10

Chinese IPOs
Hitting all-time record highs
Tide is shifting East

Updating The Alpha-D For Dec. 2010

Can you guess what changes I've made this month?  Don't worry, I won't make you do that.  I'll spell them out.

First, my entire TDW position got called away when it went through the strike price.  I bought them all back in a wash sale (albeit at a slightly higher price then the called-away price).  That's the risk I take with writing covered calls on a stock I'll hold forever.  I renewed my short-term covered calls on TDW and even sold some cash-covered puts under the position.  TDW is one stock I'm counting on to deliver long-term returns during Peak Oil.

My covered calls and short puts with GDX and FXI all expired, so of course I renewed them all.  Gold and China are my way of hedging the eventual collapse of the U.S. dollar and so far they're doing fine. 

I sold more cash-covered puts under EFA.  The P/E of 12 still looks good to me.  I'll go long when Mr. Market decides to capitulate on the rest of the world outside the U.S. 

My long puts on LMT and IYR will expire next month.  I set them to hedge against the re-bubble in housing and the mega-bubble in the defense/aerospace sector.  Neither of those bubbles has popped yet.  If they expire worthless I'll net them as tax losses. 

My option sales gave me some cash.  I don't like sitting on cash, so I put some of it to work in a CD and a few T-Bills.  Yeah, that extra buck fifty in yield will put me right up there on the Forbes 400 some day. 

Finally, I've made no moves on KEX, FLIR, SCHW, or other stocks I've been watching since mid-2009.  They're great companies but they're just not on sale yet.  I'll wait. 

The Limerick of Finance for 12/19/10

Risky stocks have so far gained the most
High performance is what they all boast
But with their junk debt
They're a poor long term bet
The next slowdown will make them all toast