Thursday, February 16, 2012
Wednesday, February 15, 2012
European Weakness Is Extremely Obvious
Today's market decline got a few headlines as "worst of 2012 so far" and other appropriate names. I wonder when we'll see more severe declines. Consider Moody's downgrade review for a large number of European financial institutions. Greece's private sector creditors really do exist, they really do have balance sheets subject to the Basel regime, and they really will be impaired when Greece executes a debt write-off. Eurocrats know this and are floating policy reform trial balloons as a stalking horse for kicking insolvent countries out of the eurozone.
China seems to prefer keeping the large European common market together for a while longer to avoid the headache of having to reprice its exports in multiple currencies. That may be why China is offering some vendor finance to the European Union's bailout project. Note the careful diplomatic wording of China's communique. They support the "principle of holding assets of EU sovereign debt," which avoids a pledge to buy more immediately and leaves them wiggle room to sell some of their current holdings so long as they maintain some minimal level. I think China's rationale has less to do with managing foreign exchange risk and more to do with securing more favorable trade terms that will keep its export engines humming.
Those investors who can't see the clear and present danger to their portfolios posed by this state of affairs can't be helped. I've been sounding the alarm about overvaluation in equities for a long time now. I may not have to sound it much longer if the alarm becomes a real conflagration.
Tuesday, February 14, 2012
Monday, February 13, 2012
Greece Deal Not Done Until Europe Sends Money
Television and Wall Street both give us reruns. The happy news at every twist in the Greek insolvency drama sparks a U.S. equity market bump, just as repeated reports of the housing collapse's containment pushed sucker rallies in 2007 and 2008. Saying that Greece faces further obstacles to receiving its bailout is the notable understatement of the day. The main obstacles to the deal's completion aren't in the parliamentary offices of Athens or Brussels; they're in the streets of Greece where indolent youth are torching neighborhood businesses. It's ironic that these aspirants to membership in the "black bloc" have set fire to productive businesses and banks that will be needed for a Greek recovery. Trashing government offices would have been less harmful to the country's future, as many of those offices will soon be empty of redundant public sector employees. Greek parliamentarians voting for austerity ignore news reports showing the Communist Party polling at a 40% approval rating. Hey, I heard that on NPR while driving around town, so it's probably true.
U.S. equity markets are pricing in headlines and ignoring reality. The stock market rally continues despite real unemployment still north of 20%, debt-to-GDP over 100%, and a European financial system on a hair trigger. Wondering whether capital markets traders can see the forest for the trees is an exercise in futility. I learned from personal experience years ago that financial markets professionals rarely see the forest, the trees, the underbrush, or the wildlife simultaneously thanks to the bonuses that drop out of the blue sky. All of that money is just too darn pretty.
What lies ahead will not be pretty for most people on Wall Street. The C-suite execs are pumping their media contacts with Facebook IPO chatter. The deals in the 2012 pipeline will float the last possible chances for financial insiders' sudden wealth in this generation. The next round of wealth creation comes after the eurozone breakup and the daisy chain ripple across the Atlantic, whenever that comes and however bad that will be. Liquidity events after the deluge may look more unconventional than what we have traditionally seen in this country. The spectrum will run from desktop manufacturing at the community level to financial repression at the national level. Creating wealth after 2012, at least for this observer, will have little to do with anticipating the stock market's reaction to headline news out of insolvent countries.
U.S. equity markets are pricing in headlines and ignoring reality. The stock market rally continues despite real unemployment still north of 20%, debt-to-GDP over 100%, and a European financial system on a hair trigger. Wondering whether capital markets traders can see the forest for the trees is an exercise in futility. I learned from personal experience years ago that financial markets professionals rarely see the forest, the trees, the underbrush, or the wildlife simultaneously thanks to the bonuses that drop out of the blue sky. All of that money is just too darn pretty.
What lies ahead will not be pretty for most people on Wall Street. The C-suite execs are pumping their media contacts with Facebook IPO chatter. The deals in the 2012 pipeline will float the last possible chances for financial insiders' sudden wealth in this generation. The next round of wealth creation comes after the eurozone breakup and the daisy chain ripple across the Atlantic, whenever that comes and however bad that will be. Liquidity events after the deluge may look more unconventional than what we have traditionally seen in this country. The spectrum will run from desktop manufacturing at the community level to financial repression at the national level. Creating wealth after 2012, at least for this observer, will have little to do with anticipating the stock market's reaction to headline news out of insolvent countries.
Sunday, February 12, 2012
The Limerick of Finance for 02/12/12
Greek "black bloc" lights Athens on fire
Austerity raises their ire
The country is broke
Politics are no joke
Rioters are a poor choice to hire
Austerity raises their ire
The country is broke
Politics are no joke
Rioters are a poor choice to hire
Saturday, February 11, 2012
Friday, February 10, 2012
US Persists With Big Twin Deficits Into 2012
Those of us who grew up in the America of the 1980s remember persistent political handwringing over America's big twin deficits in foreign trade and the federal budget. Well, a few of us remember, while many others in Generation X were doing something else. My admiration for public television came partly from informative reports on the MacNeil/Lehrer NewsHour (now the PBS NewsHour), Nightly Business Report, and Wall $treet Week. The alarmist tone of these reports throughout the Reagan Administration all mentioned how the nation's competitiveness and national wealth would suffer if America could not curb its appetite for deficits. I remember it like it was yesterday.
That was yesterday. Tomorrow is here. The twin deficits are worse than ever today. The trade deficit in December 2011 widened despite the current Administration's stated goal of doubling exports by 2015 or whenever. Maybe they also meant that imports should quadruple in the same time period so our trade deficit can continue unabated. The federal budget deficit is also persistently large despite the political theater of Super Committees and debt ceiling fights. The warnings about the harm these deficits would do to our economy went unheeded. Now America suffers from wide-scale structural unemployment partly hidden by statistical tricks; the transfer of value-added manufacturing capability to strategic competitors; and a growing willingness among our largest trading partners to use anything but the U.S. dollar as a means of exchange.
America is about as serious as Greece when it comes to impulse control. No ambitious country ever overspent its way to dominance but every former empire overspent itself into decline. Partisans can nitpick over whether the absolute deficit numbers recorded by the current Administration are comparable to the percentages of national debt added by previous administrations. Such a debate is akin to arguing over whether more lifeboats should have been installed while the Titanic is sinking. A good debate could start by examining countries with healthy economies to see if low debt-to-GDP ratios are a factor in their success. I am a patriotic American. I care enough to keep sounding the alarm.
That was yesterday. Tomorrow is here. The twin deficits are worse than ever today. The trade deficit in December 2011 widened despite the current Administration's stated goal of doubling exports by 2015 or whenever. Maybe they also meant that imports should quadruple in the same time period so our trade deficit can continue unabated. The federal budget deficit is also persistently large despite the political theater of Super Committees and debt ceiling fights. The warnings about the harm these deficits would do to our economy went unheeded. Now America suffers from wide-scale structural unemployment partly hidden by statistical tricks; the transfer of value-added manufacturing capability to strategic competitors; and a growing willingness among our largest trading partners to use anything but the U.S. dollar as a means of exchange.
America is about as serious as Greece when it comes to impulse control. No ambitious country ever overspent its way to dominance but every former empire overspent itself into decline. Partisans can nitpick over whether the absolute deficit numbers recorded by the current Administration are comparable to the percentages of national debt added by previous administrations. Such a debate is akin to arguing over whether more lifeboats should have been installed while the Titanic is sinking. A good debate could start by examining countries with healthy economies to see if low debt-to-GDP ratios are a factor in their success. I am a patriotic American. I care enough to keep sounding the alarm.
Wednesday, February 08, 2012
Tuesday, February 07, 2012
Free Trade For Cuba
The US economic embargo against Cuba is half a century old. It has utterly failed to accomplish its stated purpose of regime change in Cuba. It is prone to leakage because the US does not enforce it with a naval task force that can interdict seaborne commerce. The pain it inflicts on ordinary Cubans has spurred some to seek refuge in the United States, adding to our country's immigration burden. This embargo is even outside the norms of the trade relations the US had with other Communist bloc countries during the Cold War. The US allowed American companies to buy Soviet oil and sell the Russkies some Midwestern wheat. Trade relations gave the US an additional lever it could pull to influence the Soviet Union's internal human rights policies.
Let's try a radical, outside-the-box solution to our Cuba problem. The US should lift the embargo and negotiate a free trade agreement with Cuba. The immediate effect of such a deal would be a rush of American companies looking to offshore low-wage production to Cuba. The follow-on effect would be newly prosperous Cuban workers looking to spend money on material goodies. Access to modern goods helped ordinary Soviet citizens see what they were missing in a system of central planning. A little middle class spending in Cuba would go a long way toward breaking Communism's psychological grip on the island.
The US can declare victory in the last Cold War front in the Western Hemisphere. The Castro boys have one foot in the grave anyway. Opening up trade relations now would undermine any plans they may have for a familial transfer of power in the style of North Korea's Kim dynasty. The Cuban-American lobby may not like this approach but they are much less influential now than in the 1960s. If Richard Nixon could go to China, then modern American leaders can go to Cuba. Economic influence is an element of national power. We should use it to invite Cuba into the capitalist world.
Nota bene: I have never smoked a Havana cigar.
Let's try a radical, outside-the-box solution to our Cuba problem. The US should lift the embargo and negotiate a free trade agreement with Cuba. The immediate effect of such a deal would be a rush of American companies looking to offshore low-wage production to Cuba. The follow-on effect would be newly prosperous Cuban workers looking to spend money on material goodies. Access to modern goods helped ordinary Soviet citizens see what they were missing in a system of central planning. A little middle class spending in Cuba would go a long way toward breaking Communism's psychological grip on the island.
The US can declare victory in the last Cold War front in the Western Hemisphere. The Castro boys have one foot in the grave anyway. Opening up trade relations now would undermine any plans they may have for a familial transfer of power in the style of North Korea's Kim dynasty. The Cuban-American lobby may not like this approach but they are much less influential now than in the 1960s. If Richard Nixon could go to China, then modern American leaders can go to Cuba. Economic influence is an element of national power. We should use it to invite Cuba into the capitalist world.
Nota bene: I have never smoked a Havana cigar.
Monday, February 06, 2012
Europe Divests Hedgies While England Doubles Down
Some European pension plans are finally wising up to the statistical reality that hedge funds are an expensive way to add no value. These plans are reducing their stakes in hedge funds or divesting altogether. Good for them. It's too bad that the Church of England has yet to figure that out. It has increased its commitment to hedge funds. The Church's commitment makes no sense in light of its governing body's commitment to better corporate governance.
Hedge funds are among the most opaque, poorly managed investment vehicles available. So-called evidence that these things proved their worth in the 2008 financial crisis ignores what would have happened if a few more prime brokers had gone under. Prime brokerages provide credit to hedge funds. Those funds' leveraged bets on obscure, illiquid instruments would have collapsed without the bailouts that backstopped the largest investment banks.
England is further from insolvency than than the Continent. Its troubles are no more than a year or two behind Europe's so there is still a small window during which British institutions can be foolish with money.
Nota bene: Alfidi Capital is not a hedge fund. I have never invested in hedge funds and never will.
Hedge funds are among the most opaque, poorly managed investment vehicles available. So-called evidence that these things proved their worth in the 2008 financial crisis ignores what would have happened if a few more prime brokers had gone under. Prime brokerages provide credit to hedge funds. Those funds' leveraged bets on obscure, illiquid instruments would have collapsed without the bailouts that backstopped the largest investment banks.
England is further from insolvency than than the Continent. Its troubles are no more than a year or two behind Europe's so there is still a small window during which British institutions can be foolish with money.
Nota bene: Alfidi Capital is not a hedge fund. I have never invested in hedge funds and never will.
Sunday, February 05, 2012
The Limerick of Finance for 02/05/12
A south-of-the-border joint bank
Fuels Chavez's image as crank
With a nebulous goal
Funds are hard to control
Its credit won't have a high rank
Fuels Chavez's image as crank
With a nebulous goal
Funds are hard to control
Its credit won't have a high rank
Saturday, February 04, 2012
Friday, February 03, 2012
Frivolous Lawsuit Bothers Hecla Mining (HL)
Some people just can't take life's setbacks in stride. Drops in a company's share price are normal and can happen for any reason or no reason at all. Some shareholders are suing Hecla Mining just because the share price dipped. They allege the company made statements that overestimated its value. Numbers from operational results don't support such an allegation. Hecla is generating decent ROE (about 12%) and margins are extremely healthy. It helps that the price of silver is at record highs but Hecla has been around for over a century, so somebody there must know what they're doing.
Accidents happen in mining. It figures that a union would bring this suit. Unions just don't get the free market. It also figures that the source of this irritation is a bricklayers' union. These particular opportunists must be as dumb as bricks, reflecting unfairly on the vast majority of bricklayers. The case should be thrown out forthwith for lack of merit.
Full disclosure: No position in HL at this time.
Thursday, February 02, 2012
Wednesday, February 01, 2012
Facebook IPO Looking Smaller Already
Greedy financial advisors love to gouge their clients by pushing some hot new thing. The hot new thing in the 1990s was an Internet company going IPO. Everything old is new again. Facebook's long-awaited IPO is almost ready. The company is making plenty of money but there are still plenty of reasons why I'm not buying any FB shares. These are the same reasons I didn't buy shares in any tech companies fifteen years ago.
Facebook's sector has no barriers to entry. The basic principles of good social media design are now universally accepted: a central scrolling timeline with constant minor tweaks to add data embeds; a front page with sidebars to commonly used items like an accepted appointment reminder; a simple messaging tool; and a couple of other gizmos. All of the attendees at social media conferences pick up on these key items. Any of them could rapidly create and deploy a competitor to FB at little or no cost. Someone in China has probably already started.
Facebook's business model expects unlimited compound growth. The user base is already so large that FB has probably saturated the market for all literate computer users and as many of the semi-literate ones who can be reached. Growing market share into "under-computed" parts of the globe is probably a waste of effort. Maybe semi-intelligent metering devices linked to energy "smart grids" could be some blue-sky source for exponential growth, especially if they are enabled with their own avatars that can push updates to their owners. On second thought, forget I said that. Semi-intelligent bots crawling around Facebook 2.0 sounds like a scenario for a globally self-aware AI.
Facebook offers little customer service. I use this platform daily and I still cannot figure out how to turn off certain applications. Facebook claims to change its design to enhance the user experience but hasn't yet mastered the arts of testing changes with trial runs. They should take a hint from how Microsoft and Apple manage their developers' conferences. App designers already congregate to display their monetized wares, but it is not clear how well Facebook cultivates their contributions. Maybe I should attend the next Facebook developers conference so I can ask them what changes would make the platform more valuable.
Facebook's CEO is still running a big company like a small one. Mark Zuckerberg is undoubtedly a sharp guy. The problem founding CEOs often have is their inability to run a large, mature company the same way they ran the startup version when it was still in their garage. Steve Jobs at Apple was the rare founding CEO who could make the psychological transition. Bill Gates at Microsoft did it too, growing into larger strategic roles later in life and eventually stepping away completely. Jerry Yang at Yahoo could not pull this off and that is why Yahoo has been so troubled for so long. I have not seen any evidence yet that Mr. Zuckerberg is capable of making the kind of transition that will cement his legend as a transformational entrepreneur. Anecdotal stories of temper tantrums and spiteful terminations are not encouraging signs.
Count me out of the FB IPO. The smartest money on the planet usually likes to liquidate big private stakes when they smell troubled times ahead. Note that Blackstone Group went IPO in the summer of 2007, just before the market's all-time high. Major smart money is pushing this IPO both as a liquidity event for their own stakes and as a positive news event that will push more IPOs through the deal pipeline. The underwriters are already spinning the $5B debut as a deliberate step down from the planned $10B deal for the sake of conservatism and follow-on interest. That's a nice story. Maybe they're lowering expectations just in case it doesn't do so well.
Nota bene: I am a heavy user of Facebook but I have no investment in FB at this time.
Facebook's sector has no barriers to entry. The basic principles of good social media design are now universally accepted: a central scrolling timeline with constant minor tweaks to add data embeds; a front page with sidebars to commonly used items like an accepted appointment reminder; a simple messaging tool; and a couple of other gizmos. All of the attendees at social media conferences pick up on these key items. Any of them could rapidly create and deploy a competitor to FB at little or no cost. Someone in China has probably already started.
Facebook's business model expects unlimited compound growth. The user base is already so large that FB has probably saturated the market for all literate computer users and as many of the semi-literate ones who can be reached. Growing market share into "under-computed" parts of the globe is probably a waste of effort. Maybe semi-intelligent metering devices linked to energy "smart grids" could be some blue-sky source for exponential growth, especially if they are enabled with their own avatars that can push updates to their owners. On second thought, forget I said that. Semi-intelligent bots crawling around Facebook 2.0 sounds like a scenario for a globally self-aware AI.
Facebook offers little customer service. I use this platform daily and I still cannot figure out how to turn off certain applications. Facebook claims to change its design to enhance the user experience but hasn't yet mastered the arts of testing changes with trial runs. They should take a hint from how Microsoft and Apple manage their developers' conferences. App designers already congregate to display their monetized wares, but it is not clear how well Facebook cultivates their contributions. Maybe I should attend the next Facebook developers conference so I can ask them what changes would make the platform more valuable.
Facebook's CEO is still running a big company like a small one. Mark Zuckerberg is undoubtedly a sharp guy. The problem founding CEOs often have is their inability to run a large, mature company the same way they ran the startup version when it was still in their garage. Steve Jobs at Apple was the rare founding CEO who could make the psychological transition. Bill Gates at Microsoft did it too, growing into larger strategic roles later in life and eventually stepping away completely. Jerry Yang at Yahoo could not pull this off and that is why Yahoo has been so troubled for so long. I have not seen any evidence yet that Mr. Zuckerberg is capable of making the kind of transition that will cement his legend as a transformational entrepreneur. Anecdotal stories of temper tantrums and spiteful terminations are not encouraging signs.
Count me out of the FB IPO. The smartest money on the planet usually likes to liquidate big private stakes when they smell troubled times ahead. Note that Blackstone Group went IPO in the summer of 2007, just before the market's all-time high. Major smart money is pushing this IPO both as a liquidity event for their own stakes and as a positive news event that will push more IPOs through the deal pipeline. The underwriters are already spinning the $5B debut as a deliberate step down from the planned $10B deal for the sake of conservatism and follow-on interest. That's a nice story. Maybe they're lowering expectations just in case it doesn't do so well.
Nota bene: I am a heavy user of Facebook but I have no investment in FB at this time.
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