Baloney News In Institutional Finance This Week

My news feeds are sending me more baloney this week than I bargained for when I logged on.  I have very little patience for this kind of thing but I can't let it go unanswered.

Germany and France think the worst of the euro crisis is behind them.  I say they are wrong.  Portugal, Spain, and Italy await their funding crises (most likely in that order, with the kick-off time and event unknown).

The Fed thinks most U.S. banks are in good shape.  Yeah, right.  Defining "good" as "good enough to be made whole by another taxpayer bailout and emergency Fed swap line" is the only way that assessment makes sense.    Citigroup's failure of its stress test only means it will be first in line for the next bailout.

Fitch upgraded Greece's debt rating after its bond swap.  This one makes even less sense than the first two articles. The swap increased Greece's overall sovereign debt by 30% and the deal's required austerity measures will depress economic growth, hurt tax revenue and make debt repayment even more difficult.

Reading these three news stories in sequence shows a progressive decline in critical thinking skills when comparing European finance ministers to Fed analysts to credit rating analysts.  No wonder gold keeps rising in price.  Investors just don't believe qualified finance professionals anymore, so they'd rather trust a shiny metal with easily recognizable value.

Full disclosure:  No positions in banks or Eurozone debt at this time.  Long GDX with covered calls.

The Haiku of Finance for 03/13/12

Rare earth trade complaint
Rare earth deal pipeline growing
Lots of rare earth news

Molycorp Deal For Neo Material Technologies Moves REE To Vertical Integration

Molycorp has been consistently ahead of the game in rare earth metal production.  They were first to see the potential in reactivation of the old Mountain Pass rare earth motherlode.  Now they're the first REE producer to move toward large-scale vertical integration.  Molycorp's $1.3B offer for Neo Material Technologies will give the combined company end-to-end control of an entire REE value chain, from ore to finished products (specifically magnets).

Molycorp made a bold move last year with a $35M investment in Boulder Wind Power.  This investment sustains a wind turbine technology that is not dependent on dysprosium and is strategically complementary for Molycorp given that company's seeming lack of dysprosium among its deposits.  I've seen other media reports that describe Boulder Wind's technology as "non-ferrous," which is curious given Molycorp's move toward neodymium-iron-boron (NdFeB) magnet combinations.

It's worth noting that Great Western Minerals Group has had a well-integrated business model for many years.  Molycorp's model is large in scale and is notable for having something that has eluded Great Western for some time:  profitability.

Full disclosure:  No positions in any companies mentioned.  

The Limerick of Finance for 03/11/12

The swap of Greek debt has just passed
Some hedge funds no doubt took a blast
Yet favorites remain
Are investors insane?
Their swap bets could unravel fast

ISDA Validates Greek Default

A default is a default, no matter whether the debtor calls it a partial exchange or something else.  The ISDA finally admits as much in the Greek situation.  It didn't have much of a choice.  If the ISDA had ignored the effect of the debt swap on existing creditors, it would have called into question its reason for being.  I've always believed that credit default swaps are meaningless and even dangerous.  Banks and hedge funds use them to place directional bets with no regard for a counterparty's solvency.  The European versions of AIG, whoever they are, can now breathe easier for a few weeks knowing they can get away with more uncapitalized CDS writing.

The ISDA's decision prevents an immediate seizure of the credit markets that would have made 2008 look tame.  The equity markets are closed and have the weekend to mull over this decision.  I contended in one of my recent blog posts that Europe's approach to resolving Greece's debt would result in slow-rolling trouble for a select number of hedge funds and banks.  Dragging things out this way prevents a cascade of simultaneous defaults provided Greece remains the only trouble spot.  The rest of the PIIGS still get a vote, and when they eventually step up to bat the world's central bankers won't be able to raise enough capital to save them all.  The final option central banks can employ would thus be hyperinflation.

So far, so good.  The few hundred central bankers, finance ministers, and their staffs running this show have done a masterful job slowing down this collapse.  It remains a collapse, because the Greek state pension funds that were forced to take cramdowns won't be able to meet their payouts for years even if government employees agree to further cuts.  That will make for a fun electoral season in Greece, with political beliefs previously thought long gone preparing for resurrection.  Remember Communism?  How about extreme nationalism?  Turn back the clock to the future.

Speaking of turning back the clock, Daylight Savings Time starts tomorrow in the U.S.  

Full disclosure:  No positions at all in any of this nonsense.  

MF Global Ripped Off Big Players Too

Individual clients of bankrupt commodities brokerage MF Global can take some cold comfort in the news that big corporations also got their pockets picked.  Major corporations that used futures to hedge commodity prices through MF Global comprised a fifth of the client funds that "vaporized."  The good news is that these players have the deep pockets for class action lawsuits and the political pull to ensure regulators don't sweep this under the rug.

I actually once considered opening a futures account with Refco, MF Global's predecessor firm, years before it collapsed.  I decided against it mainly because I'm not some heavy commodity user who really needs a hedge.  There are plenty of ETFs in oil, metals, and agriculture to satisfy the diversification needs of most normal investors.

Trust is in short supply.  Even big companies can't trust their brokerages anymore.  I hope these Fortune 500 victims get together and strategize some lawfare that will bury the MF Global malefactors in a big pile of . . . well, you can insert a fanciful agricultural commodity here.  

The Haiku of Finance for 03/08/12

Greek "successful" swap
Assumes CAC activation
That implies default!

Apple Takes Planned Obsolescence To A Whole New Level

Here it comes.  It's a moment many gadget addicts have anticipated.  Apple is rolling out a 4G iPad.  That's nice for those folks who like throwing away $499 on something that is only a marginal improvement over the previous thing that now costs "only" $399.  This does not count the monthly subscription you pay to a WiFi service, which by definition is unsecure and easily sniffed by hackers.  I just don't get how people can get excited over something that has to be completely replaced when the battery goes out.

I'm sounding a wake-up call that will go unheard but I can't live with myself by remaining silent.  The genius factory that Steve Jobs built is just another oligopoly pushing planned obsolescence on a buying public that should know better.  The cute little tablet that took the world by storm is just a commodity to this here non-user.  Pretty soon all of the Chinese engineers reverse engineering the thing will have a generic copy out for less than $50.  Electronic book reading is the future but that does not mean the future has to be expensive.  There's only so much market growth a premium electronic product can wring out of the industrialized West and Apple's marketers know it.  They don't waste time growing the nonexistent iPad market among African bushmen who live beyond the reach of a WiFi signal.  Instead, they know the real money is made from selling tiny improvements to existing customers who just have to show off the latest gizmo to friends.  That's the real genius of the iPad's adoption.  It's not the capabilities that matter; it's the peer acceptance.

Having common sense does not make me a Luddite.  My first computer was an Apple Macintosh because I had grown accustomed to using one in my undergraduate studies.  My next one was a PC because I needed something that was cheaper than a premium product and would translate to what the rest of the world used.  Apple's technology is great for getting hobbyists excited.  My rose-colored glasses came off years ago.

Full disclosure:  No position in AAPL at this time.

The Haiku of Finance for 03/06/12

You thought bulls were back?
Nope! Market gives a big loss
Thank China and Greece

LTS Nutraceuticals (LTSN) Not My Cup Of Tea

My mailbox is getting full again.  Sometimes it's full of invitations to cultural events in San Francisco or local business conferences.  Sometimes it's full of informative periodicals that keep me up to date on my favorite sectors and technologies.  Sometimes it's even full of baloney.  I got a free mailer recently from none other than my favorite whipping post, Trinity Investment Research.  Take a gander back at many of my postings for the past few months and you'll see my reflections on the stocks they've touted.  I just couldn't wait to digest their latest missive.

This latest mailer was pumping LTS Nutraceuticals (LTSN).  I'm wondering just what a "nutraceutical" is supposed to do.  It sounds like something you eat that might cure an ailment.  Man, it sure would be great to bite into a granola bar that cures cancer.  Maybe this company makes some kind of "superfood" like an acai/pomegranate smoothie.  I'm getting hungry already.

Trinity's brochure didn't describe this company's products very well.  I had to dig through LTSN's website to discover that it sells vitamins and dietary supplements though network marketing.  The website also touts the "entrepreneurial opportunity" of selling this stuff.  That almost sounds like Herbalife, which already has a pretty good lock on this kind of distribution channel.  You can probably find some former Herbalife distributors in line at your local unemployment office.  Ask them just how much success they had with creating personal distribution channels that compete directly with retail grocery stores and pharmacies.

Enough with the conjecture and comparison.  Look at LTSN's facts.  They've been around since 2010 with net losses, negative retained earnings, and negative free cash flow.  Yeah, this one meets all of Trinity Investment Research's criteria alright but in fairness they haven't been around long enough to lose as much money as some of Trinity's other picks.  The company's Form 8-K disclosures in the past few months discuss some acquisitions of product lines, but frankly the terms of those acquisitions look to be very disadvantageous to LTSN shareholders.  There is also little to differentiate the company's products (like some calcium-enriching supplement) from mundane solutions (like good old-fashioned Pasteurized milk).

This is one investment I just can't stomach.  Thanks again, Trinity Investment Research, for giving me some amusement.  Your so-called "breakaway stocks" make me want to break out an indigestion remedy.  Hey, maybe that's something LTSN could distribute just for Trinity's newsletter subscribers.

Full disclosure:  No position in LTSN at this time.  

The Haiku of Finance for 03/05/12

AIG big sale
Raise cash to pay back U.S.
For "Bailout Round 2"

The Limerick of Finance for 03/04/12

China still says more growth is key
It brings increased stability
So promised reform
Might become the norm
And benefit society

ISDA Ignores CDS Trigger From Greek Default

There are no surprises in the transition from the rule of law to the rule of money.  Those who possess money decide how contract law will be interpreted and enforced.  The ISDA determined that Greece's debt exchange with forced principal cramdowns and term alterations does not constitute a default.  This gross misreading of CDS terms is purely intentional.  This will prove fortunate for some counterparties whose CDS payouts will not be triggered.

There is no need to wonder why some international financial leaders are supremely confident that Greece's bond swap will succeed.  They had little doubt that the ISDA would render a friendly decision.  There is little doubt that global financial elites will keep ignoring rules and laws they find inconvenient.

Consider how American policyholders would feel if insurance companies decided that this week's losses from storms and tornadoes did not constitute loss events.  The insurance companies, in a nation subject to the rule of law, would face class action lawsuits from aggrieved homeowners who would win big settlements.  In neofeudalism, the insurance companies would survive because the losses are limited to a small number of policyholders in politically unimportant areas.  The insurers would also be able to send goons to threaten any policyholders who complain.

The ISDA's decision is not far removed from something a king would do to a feudal subject just for sport.  Expect more lawlessness from financiers who pay to write laws.  

Fed Vs. Banks On Hard Assets Foreshadows Inflation Preparation

There's more than meets the eye in news of banks fighting the Fed to retain their ownership of commodity storage facilities.  Forget the debate over how far the Volcker Rule should go in requiring banks to maintain capital.  That's for the equity side of the balance sheet.  This commodity stuff is about the asset side of the ledger.

Banks know as well as anyone - well, probably better than the average person - that the Fed's dollar debasement policy will eventually push serious inflation into the economy.  Inflation destroys the value of fixed income instruments.  Banks have every reason to be concerned about how badly inflation will hurt the book value of loans they've issued.  Holding hard assets on their balance sheets can ameliorate the effect of inflation on their loan portfolios.  How much it will help will of course vary by institution, but those TBTFs that went hog-wild with home mortgages have the most to lose from inflation.  They know who they are.  BofA's rush to buy Merrill Lynch may be a saving grace if the bank can hold onto whatever hard asset store Mother Merrill is allowed to retain..

The Fed may not have much choice but to accommodate banks' desires to continue holding commodities, even if they are restricted in trading them.  Think of a hard asset hoard as a balance sheet backstop that gives the Fed time to delay further QE.  Keeping this grandfather exemption for bank holding companies will give the Fed room to focus liquidity backstops on banks that didn't do much trading with commodities.  Helicopter Ben needs to think about how he can make the Fed's job less difficult as we approach the next round of the financial crisis.  Think hard, Ben.  Think hard assets.

Full disclosure:  No positions in any company mentioned.  

The Haiku of Finance for 03/01/12

Index investing
Boring, low-cost, long term deal
Just what most folks need