The Limerick of Finance for 07/24/11

Now deficit talks just broke down

Debt default is the talk of the town
Treasuries aren't risk free
Just how much, we shall see

Dollar will lose reserve status crown

Deficit Talks Crash, May Crash Markets Too

I'm not prone to apocalyptic thinking.  Life goes on for most of us no matter what unpleasant surprises come along.  Here's a surprise that won't make life better for Americans.  Bipartisan deficit cutting talks have broken down, and the financial markets are starting to price in the possibility of a U.S. debt default. 

It didn't have to be this way. Politicians could have bit the bullet the bullet in countless ways but grandstanding for next year's elections was more important.  World War I started with a similar series of strategic miscalculations.  Now the global bond market will find out just how risk-free Treasuries really are.  Mutual funds and state pension funds that have to sell off Treasuries in anticipation of a ratings agency downgrade will be the first dominoes in a worldwide cascade. 

The long-dreaded run on the U.S. dollar is almost here. Brace yourselves.

The Haiku of Finance for 07/21/11

"Don't you dare default"

Say U.S. Chamber big shots

Business hates chaos

Updating The Alpha-D For July 2011

Wow, how about that gold action.  Gold's price strength propelled my GDX holdings past the strike price of the call options I had on them.  I bought back some of that pile in a wash sale (and sold more covered calls)but I let the rest go as a capital gain.  It is very difficult to tell right now whether we're headed for hyperinflation (good for gold, at least initially) or a renewed depression (probably bad for gold).  My GDX holdings have done their job so far, protecting me from the mild price inflation the U.S. has experienced in 2011.

I also renewed my covered calls on FXI; none of that pile of equities was sold off at options expiration this month.  China's economy is slowing down and inflation over there is heating up, but the country's central bank is in a much stronger position compared to the Fed.  They're able to keep the ship afloat. 

I used my growing cash pile to buy more State of California general obligation bonds and an out-of-state bank CD (short-term).  This is just to get a little bit more yield.  I believe my state government in Sacramento will take all necessary measures to cut its budget deficit and protect bondholder payments. 

Individual equities still look too pricey given the broad market's overvaluation.  No way am I re-entering TDW.  Their financial statements are a huge disappointment. 

That's it for this month.  This is too easy. 

Fake Signatures, Fake Mortgages, Fake Economy

The Fed's QE2 combined with regulators' lack of interest in pursuing justice has reflated the worst part of the housing bubble:  its lack of integrity.  Mortgage robo-signing continues unabated.

Readers can be forgiven if they must wonder if anything about the world economy is real anymore.  Shadow Government Statistics notes that most of the U.S. government's economic figures are untrustworthy but financial pundits cite them anyway to lend authority to their guesswork.  Fake European bank stress tests are starting to rattle equity markets, long after I first wondered why investors weren't paying attention.  A fake debate over cutting the U.S. budget deficit hasn't stopped foreign bond buyers from throwing their money away just yet.  No cuts are coming without a bond market implosion. 

Hey folks, I'm just keepin' it real here.  That's a hard job. 

The Haiku of Finance for 07/16/11

Buying up farmland
Not the same as buying stocks
Hard work required

YRCW Fantasizes About H2 Operating Profit

YRCW likes to send out very optimistic forecasts just before it announces that it's still losing money.  The company stays in that groove with its estimate that it will soon turn a profit of $4.2mm on revenue of $4.9B.  Mind you, that's merely a figure for the second half of 2011 because they still plan to lose money on an annual basis.  This is a bet on continually rising tonnage and rates.  Don't tell management how unrealistic that is with the price of fuel on the upswing again after a brief period of relief. 

Here are some even more unrealistic assumptions YRCW can figure into its turnaround plan. 

- They can buy unicorns to haul freight.  I hear they're cheaper than trucks and less trouble to maintain  provided Teamsters clean up after them. 

- They can relocate their trucking centers to the Moon.  Lower gravity means trucks can carry more mass and even get away with more height with no restrictions. 

- They can fire their Teamster workforce and hire brand new high school graduates in their place.  Their labor costs will be lower and the I.Q. of the workforce will skyrocket. 

None of the above ideas are on the table in the YRCW boardroom but that's okay.  The stock is going to massively dilute this month anyway and nothing can stop it. 

Full disclosure:  No position in YRCW.  No unicorns were harmed in the creation of this blog post. 

Barclays Learned Nothing From VZZ

Never underestimate the stupidity of a large financial firm.  The crash and forced redemption of VZZ should have taught Barclays not to build structured products around futures.  They've learned nothing. they're about to roll out a brand new version of the exact same product.  I guess the "B" added to the ticker is for baloney.

This reminds me of automakers who rebrand a poorly selling domestic model for relaunch in an international market.  The key there is that they can introduce the lemon to a whole new batch of suckers who've never encountered it.  Doing that with financial products is almost impossible because of the globalization of financial markets.  Word will get out instantly, like on this blog (thank you very much).

Ah, Barclays.  You don't want someone as smart as me working there.  I'd ruin some managing director's day by ridiculing stuff like this. 

Critiquing Some "Sovereign Investing" Concepts

A fellow private investor asked me today for my assessment of the following portfolio ideas for a hyperinflating economy:

- Physical gold and silver
- Agricultural commodities
- Cash-rich large-cap stocks

Those ideas were mentioned in today's edition of "The Sovereign Investor" email from Eric Roseman.  Here's my critique. Physical gold and silver don't come in small denominations.  They will be quickly depleted in a barter economy.  Try dividing a gold brick into spare change at the grocery store and you'll see what I mean.  Gold and silver have to produce some kind of yield - like dividends from mining stocks - to be practically useful. 

Foodstuffs make excellent stockpiles of hard assets for hard times.  I have many shelves full of canned goods and will keep adding to my pile.  I would have to take a serious look at agriculture-related stocks' fundamentals (five year ROE, etc.) to complete this part of the portfolio. 

Cash-rich large cap stocks can be deceptive; it all depends on what the balance sheet is hiding.  GE was cash-rich in 2008 but took TARP money to avoid a bailout.  Investors would have to sift through a cash-rich company's financials to figure out just how quickly that cash would be depleted if hyperinflation pushed up raw material costs faster than the firm can raise prices. 

It's not bad advice in general because it covers several asset classes that are mostly non-correlated.  The key is to translate these things into forms that are fungible and allow investors to pay for their daily existence without depleting their portfolios. John T. Reed's book on hyperinflation is a much better guide to assembling a portfolio. 

Full disclosure:  Long GDX with covered calls. 

The Haiku of Finance for 07/12/11

Irish bonds are junk
Moody's keeps it negative
Crunch time on the isle

U.S. Won't Take IMF's Medicine

The IMF is notorious for requiring recipients of its aid packages to undergo draconian austerity measures.  Imposing similar measures upon the U.S. might actually be effective in reducing the country's debt.  Alas, the U.S. has little appetite for anything but political theater and empty gestures.  Would-be debt reducers are unwilling to tell the American people that their debt-driven party is over.  They'd rather just pretend to cut deficit spending and push their luck to see just how much uncertainty the bond market will tolerate. 

My fellow Americans need to know that delaying their inevitable reduction in living standards will only make said reduction more harsh and sudden when it comes.  European leaders are finally coming to terms with the inevitable consequences of delaying Greece's insolvency and debt restructuring.  The sooner we come to terms with our own country's need to quit the debt binge, the faster our prosperity can return. 

The Limerick of Finance for 07/10/11

Both sides want to make a debt deal
Resolving this does have appeal
But without massive cuts
Any deal would be nuts
Phony "savings" will never be real

IMF Wants U.S. To Extend And Pretend

Mme. Lagarde is wasting no time settling into her new job as head of the IMF.  She wasted no time unpacking her office move-in before brokering Greece's adhesive bandage version of a bailout.  Now she does her part to endorse the mounting elite chorus singing the siren song of sovereign debt.  She wants the U.S. to get its debt deal done so it can keep borrowing into bankruptcy.

Her concerns are well-founded, at least in mainstream elite thinking.  The U.S. sovereign credit rating is currently the most stable in the world, so any uncertainty over its ability to pay its national bills will destroy the global bond market's confidence in any and all sovereign debt.  The short term impact of a bond market crash would be an immediate spike in interest rates, including LIBOR.  Mme. Lagarde is probably well-aware of the number of European banks that would be destroyed by an interest rate spike.

Their is no escaping contagion in global bond markets.  Any sovereign default anywhere will knock over dominoes on both sides of the Atlantic.  The crash is inevitable.  Timing it is impossible.

Just Say No To Groupon's IPO

The Web 2.0 phenomenon is approaching its apotheosis.  Sometime between now and the next eurozone debt crisis - like another two months or so - a bunch more  Web commerce businesses are likely to go IPO or get bought out.  Groupon is one of them.  They remind me of Netscape in 1995, which had a hot IPO based on first-mover advantage but had no durable competitive advantage that could keep competitors away.  Groupon's competitors see a similar opportunity and are lining up to be the next big thing in merchant services. 

The new competition is a boon to merchants, who will now have multiple channels for reaching out to customers with shopping incentives.  It's ultimately bad for Groupon and all of its copycats because they'll end up copying each other's "services" to seek differentiation.  That means they'll end up competing on price, because there's no way they can build brand loyalty without an emotional component in their customer service.  That emotional hook is how all of those worthless Wall Street wealth management firms survive despite the universal similarity of their product lines. 

Here's a prediction.  The IPOs of these online coupon aggregators will tempt larger online megaportals like Yahoo and Google to buy them out at unwarranted premiums just to get a "presence" in this "space."  You have to love the lingo these kids use nowadays.  The whole trend will turn out the way GeoCities did for Yahoo.  Remember GeoCities?  I sure do, because I built my first website there in 1998.  It cost me nothing, and that's ultimately what GeoCities' business model was worth.  Nothing.  Yahoo bought GeoCities for $3.57B in 1999 and shut it down ten years later.  The same fate awaits most of these online enablers of merchant gizmos.  The founders will do quite well; hence the scramble for media attention at this stage. 

People desparate to make a quick buck will line up to buy hot Web stocks.  Just a few headlines in investment magazines targeting the harried middle class will do the trick every time.  Mutual fund managers chase the same hot trends.  Nothing has changed since the dot-com era. 

France Defeats Itself With Stupid Fracking Ban

Frenchies are hilarious.  Their banks bought billions of euros worth of worthless Greek debt and can't admit the massive losses they're about to take.  Meanwhile their government is very concerned about the mostly imaginary environmental hazards of fracking in oil exploration.  France's new ban on hydraulic fracturing ensures that Frenchies' energy needs will be held hostage to instability in Libya and elsewhere indefinitely.  This is just too darn bad.  The Paris Basin's geology resembles that of the U.S.'s oil-rich Bakken Formation and may hold very large amounts of shale oil.  Frenchies are handcuffing themselves by eliminating a very successful exploration method. 

The U.S. isn't that dumb (not yet anyway, although arguably we can give the rest of the world a run for its money in other categories of stupidity).  The Niobrara Formation has plenty of shale oil and natural gas.  Fracking is the only way to get at it.  Explorers are plenty busy in Wyoming to bring this trapped energy to you and me.  If I owned some shale-rich land I'd love to let wildcatters go fracking all over it in search of oil.