Buffett Goes Whole Hog Into IBM

Warren Buffett revealed a big purchase of IBM stock, couching it in his familiar language of favoring companies with durable competitive advantages.  In IBM's case, the purported advantage is the loyalty of the company's IT clients to its services.  What else about Big Blue could have caused Mr. Buffett to shed his long-held aversion to owning technology stocks?  I'll offer a theory. 

I noted months ago that Mr. Buffett's recent investments reveal bets on oil scarcity (Lubrizol) and crony capitalist bailouts (Bank of America).  IBM can be seen as a similar play on those control systems that will prove necessary for a global population faced with energy scarcity and a transition to neofeudalism.  IBM is a leading provider of smart meter integration services for utilities.  You may not have heard much about the smart meter revolution but that's okay.  Smart meters are going to hear a lot about you.  These are devices that monitor the power consumption in each utility customer's home.  Utilities expect to be able to predict demand for energy at a household level and offer customized incentives targeted to each family's consumption patterns.  The smart grid will know exactly how long each of your electric appliances is turned on.  Data on the types of appliances households own and how they are used is invaluable to marketers. 

A bet on Big Blue is more than a bet on the low-hanging fruit of intelligent IT and energy conservation.  It's a wager that smart grids and the erosion of privacy they represent will be a windfall for technology companies.  Data service providers like IBM will store and sell data on consumer lifestyles to companies that want to know how you use everything in your home.  Mr. Buffett is a smart man indeed if he is betting on a trend toward more global controls on individual lifestyles. 

Full disclosure:  No position in IBM at this time. 

The Limerick of Finance for 11/13/11

Europe's crisis has now crossed the pond
And its savior fund can't sell a bond
Markets will adjust
The euro will be dust
Read the headline when it hits Le Monde

The Haiku of Finance for 11/12/11

E*Trade won't sell out
Share price down with mortgage debt
Not a value play

South American Silver (SAC.TO) Stays Down South

South American Silver (SAC.TO / SOHAF) has some things going for it, like over $28mm of working capital and preliminary estimates of favorable cash costs of production.  It also has 43-101 reports for its iridium and gallium deposits.  Those are always nice to see in junior resource companies. 

The bad news is that SAC.TO hasn't turned a profit, although their losses in the most recent three-month and nine-month periods have attenuated from comparable periods in 2010.  The price of silver is above its historical average; claims of demand growth aside, there is no assurance that this price will remain elevated forever.  Always remember that the single most important determinant of a resource company's value is the market price of its resource.

Risk-seeking investors are welcome to take a closer look at South American Silver.  I'd prefer a profitable company.

Full disclosure:  No position in SAC.TO / SOHAF.PK at this time. 

Sagebrush Gold (SAGE) Digging Up Sagebrushes

The Ord Oracle sent out a glossy promotional brochure for Sagebrush Gold (SAGE).  It ended up in my pile of such glossies at some point so I figured I'd do it justice with a once-over look.  Let's ignore the boilerplate random comments from unrelated news stories and look at this stock's fundamentals. 

SAGE's alleged possession of some advanced processing plant is meaningless.  Look at the 10-Q filed on August 22, 2011 for management's discussion of what this company is doing.  SAGE used to be a web consulting company of some sort and then executed a reverse merger with an entertainment company.  They got $13mm worth of cash by acquiring the subsidiaries of another company in July 2011.  How did that work out?  It's impossible to tell because their financial statements are unaudited.  They also had to withdraw a registered securities offering in July 2011. 

Note that all of their operating revenue so far for 2011 came from promoter's fees and advertising revenue.  If you think that a shell company with a limited history in promotions has the credibility to explore for gold, please stop reading now.  I can't help you. 

The company claims to be headquartered in Walnut Creek, California, across the bay from me.  I have no intention of wasting a trip there to perform due diligence because I've never heard of an exploration company being headquartered anywhere other than a resource-rich area.  Toronto and Las Vegas I could believe.  Walnut Creek?  Nope.

Their Relief Canyon property, in a historically gold-producing area, already has heap-leach pads and solution ponds installed.  That would be interesting if this were an undeveloped property with lots of confirmed drill intercepts.  The problem is that it's an older property.  The gold's already been extracted.  The indicated average ore grade of 0.017 oz/ton is so minuscule that mining it will never be economically worthwhile. 

I really don't need to see anything else.  No thank you, Sagebrush. 

Full disclosure:  No position in SAGE at this time. 

The Haiku of Finance for 11/09/11

LTL rates rise
Good luck controlling your costs
Some truckers will stall

Apple Preps Retail Shops For Union Onslaught

Apple (AAPL) may be concerned that it's not being sensitive enough.  The company is offering internal training to its retail store managers on the effects of union organization.  I find it odd that workers at a tech company would even think about unionizing, but apparently some glorified customer service clerks calling themselves the Apple Retail Workers Union think they deserve more pay, perks, and job security than the highly educated engineers and computer scientists who design Apple's fine products.

I hope Apple includes the following topics in its internal training course.  Labor relations experts have found that operating costs in unionized companies are at least 25% higher than non-unionized companies.  Union negotiating tactics actually harm the ability of employers to retain union jobs.  GM and Chrysler went into government-brokered bankruptcy partly thanks to their high costs of labor and health benefits.  I also hope someone speaks up against unionization at Apple's next shareholder meeting so management gets a warning about what their approach should be. 

Steve Jobs must be rolling over in his grave.  He saved Apple from self-destruction without the help of a unionized workforce.  He advised his successors to "do the right thing."  That means Apple's leadership should resist any and all attempts by unions to organize. 

Full disclosure:  No position in AAPL at this time. 

Italy Worries Mount As Silvio Eyes Exit Sign Above Door

Italy's timing is absolutely perfect.  Greece's ruling elite is just now wrapping up the cute show it put on for its populace to deflect all blame for implementing austerity measures.  That dance ensured it will get to empty out the EFSF and leave not a drop for other deadbeat countries.  Now Italy is trying its best to copy Greece's dance moves, but no one told Rome that the EFSF will run dry just as the music stops.  Maybe the Italians are taking cargo cults to a whole new level, thinking that money will fall from the sky if they just go through the motions they've witnessed in Greece. 

Silvio Berlusconi may lose his job over Italy's deteriorating credit situation.  If I were him, I'd relish the chance to return to a career running a media conglomerate.  It beats running around Europe hat in hand asking China and Germany for dough while trying to explain to investment banks that they really shouldn't worry about insolvency. 

Let's get real.  Greece and Italy can't pay their debts.  Key players in the credit markets have known this for years.  They are now trying to decide whether to dump European sovereign debt or arrange flights to some island in Oceania where they can hide from the rampaging mobs at home.  The Occupy movement will figure out how to track them if they don't get moving soon.

Nota bene:  I don't own any European sovereign debt.  I really am too smart for that. 

The Limerick of Finance for 11/06/11

Start planning for "Bank Transfer Day"
Fed up people will make big banks pay
They've had it with fees
They'll bring banks to their knees
Their deposits will soon go away

The Haiku of Finance for 11/05/11

Pile debt upon debtThat won't help euro nations
Bankruptcy awaits

Sauer Energy (SENY) Brings Yet Another VAWT To Market

I got a glossy promotional brochure from Carpenter Global Stock Advisory about some wind company called Sauer Energy (SENY).  I'm uniquely qualified to evaluate companies pushing vertical axis wind turbines (VAWT) because I consulted for one in 2007.  It went nowhere.  Other companies won't have much better luck.

Sauer Energy would have to do everything right and then some to ever be profitable.  VAWT configurations only generate a fraction of the energy a horizontal  (HAWT) configuration can generate.  I won't bore you with the improbability of ever capturing an economically worthwhile amount of energy in the urban market from small wind turbines.  That's discussed admirably well at Paul Gipe's site.  I shake my head whenever I see small wind turbine makers tout their product as perfect for the urban market, complete with photos of a solitary turbine propped on someone's building.  Mounting turbines will be unworkable in most urban areas due to permitting restrictions and structural limitations.  Vibrations from these things will shake your home.  Noise will bother your neighbors. 

The management team has zero expertise in engineering.  Their other claims of expertise are irrelevant for a technology-intensive enterprise.  OMG, the photo of a glass-walled office building on their "About Us" page is disquieting; I wonder whether their offices look anything like that in reality.

Their financial results . . . well, the numbers speak for themselves.  Sauer had zero revenue in 2009 and 2010, and so far in 2011 they haven't earned any revenue.  Their net income went from ($13k) in 2009 to ($215k) in 2010.  They have burned through all of the cash they raised from issuing equity and now must borrow to keep pouring money into . . . what exactly?  Their 10-Q for the quarter ending May 31, 2011 shows them spending far more on consulting fees and investor relations than on R&D.  Most successful tech entrepreneurs would tell you that's the reverse of the emphasis needed to win. 

Folks, there are other ways to invest in wind energy besides small VAWT makers.  Throw away glossy promotions and do plenty of homework, including calculations of a fan's swept area (the single most important factor in wind energy). 

Full disclosure:  No position in SENY at this time (nor will I ever have anything to do with this company). 

MEDL Mobile Holdings (MEDL.OB) Stakes Claim In App Space

Forrester Research brought us expectations of infinite Internet growth during the dot-com era.  Their pronouncements induced plenty of investors to jump whole-hog into dot-com startups that later flamed out.  Now Forrester tells us that mobile technology is one of the greatest things since sliced bread.  Plenty of firms want a piece of that mobile pie.  MEDL Mobile Holdings (MEDL.OB) thinks its focus on custom mobile apps is a juicy slice. 

Mobile apps are shaping up to be a low-margin business where new entrants quickly become commodified.  Many app developers build their own apps and give them away for free or price them inexpensively just to get name recognition.  DIY developers understand the retail concept of products as loss leaders that drive their brand's visibility.  MEDL turns this on its head by positioning its apps as premium products with celebrity marquees.  That's certainly a unique strategy in tech. 

Their bet is that a small app library driven by custom content will be profitable on a per-user basis as users develop loyalty to what the MEDL brand produces.  I'm not sure that per-user value is the right metric.  If I were an app developer, I'd want to know which of my apps was the most downloaded so I could figure out which themes, styles, etc. drive an app category's ROI. 

MEDL's published financial results show the uphill climb they face with a business model focused on premium products and user loyalty.  Premium products have higher development costs, no matter what sector you're in.  Their SGA expenses more than tripled from 2009 to 2010.  Their focus on attracting marquee partners by promising back-end revenue sharing is interesting but I wonder if a lack of upfront revenue will diminish their staying power. 

Their unaudited financial results from 1H 2010 to 1H 2011 deserve a brief mention.  Consider that their revenue went from $295k to $952k in that period (good news), while net income dropped from ($12k) to ($208k) in the same period.  That's not so good news.  Net income that drops by a multiple greater than the multiple by which revenues increase signals troubling possibilities, that perhaps variable costs are hard to control or the company has to surrender more back-end revenue as app downloads increase.  These types of problems are only exacerbated by growth.  MEDL must seek some inflection point beyond which revenue growth turns into profits; a much larger app library with sub-premium brands and less generous revenue sharing licenses will help get them to that point.

Full disclosure:  No position in MEDL.OB or FORR at this time.

Alfidi Capital Exposes Chinese Domain Name Scammers

Attention all American business owners. Scam artists in China want to extort money from you with a non-existent threat of taking your domain name. I was recently targeted in this scam. I'm too smart to become the latest victim of Chinese criminals. Now I'm posting my response in public. 

Here's the first email I received. All emails are in italics below. 

Subject: Internet Domain Name And Keyword
From: Howard Zhong howard.zhong@yiguangroup.com
Date: Mon, Oct 31, 2011 12:29 am
To: Anthony J. Alfidi

 Dear Manager,

(If you are not in charge of this please transfer this email to your President or appropriate person, thanks)We are a Network Service Company which is the domain name registration center in Shanghai, China. On Oct 31, 2011, we received an application from Hantong company requested "alfidicapital" as their internet keyword and China (CN) domain names. But after checking it, we find this name conflict with your company name or trademark. In order to deal with this matter better, it's necessary to send email to you and confirm whether this company is your distributor or business partner in China?

Kind regards

Howard Zhong

Office Manager

Shanghai Office (Head Office)
3002, Nanhai Building, No. 854 Nandan Road,
Xuhui District, Shanghai 200070, China
Tel: +86-21-6191-8696
Mobile: +86-182-2195-1605
Fax: +86-21-6191-8697
Email: howard.zhong@yiguangroup.com
Web: www.yiguangroup.com

Needless to say, I was shocked when I read this message. I replied below.


Subject: Re: Internet Domain Name And Keyword
From: Anthony J. Alfidi
Date: Mon, Oct 31, 2011 10:31 am
From: Howard Zhong howard.zhong@yiguangroup.com

Mr. Zhong:

Alfidi Capital is my business and I own the "alfidicapital" domain name. I have never heard of Hantong Company and I have never done business with them. They have no legal right at all to register "alfidicapital" as a domain name in China. Please terminate their application. I would also like you to give me their contact information so that I may send them a strongly worded message to stop their behavior. Thank you for informing me of this matter.

Sincerely,

Anthony J. Alfidi
CEO, Alfidi Capital


I soon received a response from the so-called Chinese registrant of the mysterious "Hantong Company," which may very well be owned by none other than Dr. Fu Manchu himself. ;-)


Subject: alfidicapital
From: HuangGarerth gareth.huang@hotmail.com
Date: Tue, Nov 01, 2011 8:11 pm
To: Anthony J. Alfidi

Dear Sirs,
We are Hantong company based in Chinese office. We will register the "alfidicapital" as internet keyword and CN internet domain names for lifetime registration period. We have handed in our application and are waiting for Mr. Howard Zhong's approval. We think this name is important for our products in Chinese market. Even though Mr. Howard Zhong advises us to change another name, we will persist in this name.
Best regards
Gareth Huang

The arrogance of "HuangGareth" (however he spells his name is irrelevant to me) made me angry. I fired back a serious threat of legal action.


Subject: Re: alfidicapital
From: Anthony J. Alfidi
Date: Tue, Nov 01, 2011 10:21 pm
To: "HuangGarerth" <gareth.huang@hotmail.com>

Huang Gareth:

You have no legal right at all to register this name. I will initiate a lawsuit against your company if you register "alfidicapital" in China, and I will win, which means I will end up owning your entire company. Once I own your company, I will terminate your employment. Alfidi Capital is my business, not yours.

Do you understand how much legal trouble you will cause for yourself if you do something this stupid?! 

Sincerely,
Anthony J. Alfidi
CEO, Alfidi Capital

The first guy then emails me again with the following offer. Hmm, how convenient. A little too convenient by half. 

Subject: Re: Internet Domain Name And Keyword
From: Howard Zhong <howard.zhong@yiguangroup.com>
Date: Wed, Nov 02, 2011 8:16 pm
To: Anthony J. Alfidi

Dear Anthony J. Alfidi ,

Based on your company having no relationship with them, we have suggested they should choose another name to avoid this conflict but they insist on this name as CN domain names (.cn/.com.cn/.net.cn/.org.cn) and internet keyword on the internet. In our opinion, maybe they do the similar business as your company and register it to promote his company.
According to the domain name registration principle: Domain name and internet keyword which applied based on the international principle are opened to companies as well as individuals. Any companies or individuals have rights to register any domain name and internet keyword which are unregistered. Because your company haven't registered this name as CN domains and internet keyword on the internet, anyone can obtain them by registration. However, in order to avoid this conflict, the trademark or original name owner has priority to make this registration in our audit period.
If your company is the original owner of this name and want to register these CN domain names (.cn/.com.cn/.net.cn/.org.cn) and internet keyword to prevent anybody from using them, please inform us. We can send you an application form with price list and help your company register them.

Kind regards

Howard Zhong

Office Manager
Shanghai Office (Head Office)
3002, Nanhai Building, No. 854 Nandan Road,
Xuhui District, Shanghai 200070, China
Tel: +86-21-6191-8696
Mobile: +86-182-2195-1605
Fax: +86-21-6191-8697
Email: howard.zhong@yiguangroup.com
Web: www.yiguangroup.com


I needed something further to go on, so I asked him to send me price quotes. I wanted to have as much ammunition as possible for what I thought would be a long legal fight to put "Hantong Company" out of business and its proprietors in prison. Well, the quote sheet that Mr. Howard Zhong of Yi Guan Group sent me demanded astronomically high prices . . . over US$6000 for a "lifetime" domain name registration!!! I did some web searching on "China domain registration" and soon found the link at the very top of this blog post. It turns out that Chinese scammers quite commonly troll non-Chinese domain name owners and attempt to extort money from them for a completely unnecessary domain name registration in China.

I did not spend a penny on this action. My final response to my new Chinese wanna-be business colleagues is below.



Subject: Alfidi Capital Owns China
From: Anthony J. Alfidi
To: Howard Zhong and Gareth Huang

Dear Howard Zhong and Gareth Huang:

Read my blog post about your scam:  http://alfidicapitalblog.blogspot.com/2011/11/alfidi-capital-exposes-chinese-domain.html 

I just made you famous. You are both seriously stupid morons if you think I'm going to fall for your scam, assuming you are in fact two different idiots and not the same idiot using two email accounts.

Go (expletive deleted) yourselves.

Sincerely,

Anthony J. Alfidi
CEO, Alfidi Capital

Ladies and gentlemen, the moral of this story is quite simple. Don't fall for Chinese domain name registration scams. Check out every single unsolicited email you receive from unknown parties by performing multiple Web searches. Finally, and most importantly . . . don't ever try to rip off yours truly, Anthony J. Alfidi, CEO of Alfidi Capital.  

The Haiku of Finance for 11/02/11

Fed sees downside risks
Growth forecasts reduced again
Downturn did not end

Alfidi Capital Open For Business During Oakland General Strike

The Occupy Wall Street movement is morphing into something that hasn't been seen in America for decades.  What started as a well-intentioned critique of unpunished fraud in the finance sector now has the potential to do as much damage to economic life in this country as any malfeasance on Wall Street.

Occupy Oakland has called for a general strike tomorrow, November 2, 2011.  Their stated intent is to shut down the Port of Oakland, one of the largest in the United States.  These activists fail to realize that the Port of Oakland is a vital transit point for goods headed to Asia.  The port exports an enormous amount of meat, fruit, nuts, cereals, and grains essential to healthy diets.  Even a one-day shutdown endangers the global supply chain for Asian retailers and will have unpredictable effects on the lives of American producers.  Any resultant food shortages in Asia will be the moral responsibility of Occupy Oakland's strike participants.  Any collapse in revenue from American exporters of food and finished goods will be on their heads as well. 

Loyal readers of this blog know that I have often criticised Wall Street firms myself.  I started my own firm as an antidote to the tainted investment products I saw from dysfunctional firms.  Entrepreneurship can solve whatever core problems afflict capitalism.  Activists who can't see the second-order effects of their actions will disrupt the economic lives of entrepreneurs who are not at all responsible for Wall Street's excesses.

Alfidi Capital will remain open through any general strike.  My business will never shut down due to social unrest or political extortion.  I stand in solidarity with other entrepreneurs and self-employed creatives who know how to make free market capitalism work.