Just charge it, shopper
Your card is good for a while
The store eats the fee
Sunday, November 30, 2008
Retailers Vs. Banks on Charge Fees
I have time for a brief observation on a slow Sunday with little economic news. Bloomberg reports that retailers don't like high bank fees:
My take on this is straightforward. Retailers are getting spooked that the rest of the Christmas shopping season won't be as rosy as Black Friday's numbers (which I discussed here yesterday). Stores want leverage over a charge that eats into their rapidly thinning margins, but banks need the charges in place to shore up their own troubled business models. If Congress takes up this issue, they will be forced to choose one sector over another in a case of robbing Peter to pay Paul. One or the other industry will be forced to live with thinning margins in a deepening recession.
I believe Congress will table this issue to protect the bailout money they've given to banks. The government has made no such commitment of taxpayer money to retail chains. Retailers will unfortunately suffer, and for some chains this charge may be the backbreaking straw that drives them under. Such an outcome would eventually realize some of the bankers' fears: chain stores will be less likely to accept credit, and smaller banks will issue fewer cards. Oh well, the new year will be all about frugality anyway.
I'm not going to make an investment play on this. I just needed something to talk about.
The subprime mortgage crisis is giving department and convenience stores and gas stations a new argument in asking Congress for power to negotiate the fees banks charge them to process credit-card transactions.
The banks say credit-card fees cover operating costs, protect banks against default and fraud, and allow them to offer cards with no annual fees and rewards. The charges vary from bank to bank and depend in part on whether the card includes cash rewards or other benefits.
My take on this is straightforward. Retailers are getting spooked that the rest of the Christmas shopping season won't be as rosy as Black Friday's numbers (which I discussed here yesterday). Stores want leverage over a charge that eats into their rapidly thinning margins, but banks need the charges in place to shore up their own troubled business models. If Congress takes up this issue, they will be forced to choose one sector over another in a case of robbing Peter to pay Paul. One or the other industry will be forced to live with thinning margins in a deepening recession.
I believe Congress will table this issue to protect the bailout money they've given to banks. The government has made no such commitment of taxpayer money to retail chains. Retailers will unfortunately suffer, and for some chains this charge may be the backbreaking straw that drives them under. Such an outcome would eventually realize some of the bankers' fears: chain stores will be less likely to accept credit, and smaller banks will issue fewer cards. Oh well, the new year will be all about frugality anyway.
I'm not going to make an investment play on this. I just needed something to talk about.
Saturday, November 29, 2008
Black Friday, Yeah Right
At first glance, consumer spending on the most important shopping day of the year doesn't look all that bad:
Sales were 3% higher than last year's Black Friday - in nominal terms. Shadow Government Statistics calculates that CPI inflation was at an annualized rate of 11.6% as of this October. Even if we assume that this month's massive Fed lending hasn't immediately made that number worse (of course it has!), that sales figure translates into an 8.6% decline in real dollars.
Friday's shopping action isn't even close to putting retailers in the black. Even the article hints that retailers had to sell at undesirable prices just to move inventory backlogs. The retail picture will get a lot worse as job losses accelerate between now and Jan. 2009.
The holiday shopping season got off to a surprisingly solid start, according to data released Saturday by a research firm. But the sales boost during the post-Thanksgiving shopathon came at the expense of profits as the nation's retailers had to slash prices to attract the crowds in a season that is expected to be the weakest in decades.
Sales were 3% higher than last year's Black Friday - in nominal terms. Shadow Government Statistics calculates that CPI inflation was at an annualized rate of 11.6% as of this October. Even if we assume that this month's massive Fed lending hasn't immediately made that number worse (of course it has!), that sales figure translates into an 8.6% decline in real dollars.
Friday's shopping action isn't even close to putting retailers in the black. Even the article hints that retailers had to sell at undesirable prices just to move inventory backlogs. The retail picture will get a lot worse as job losses accelerate between now and Jan. 2009.
Friday, November 28, 2008
Has Anything Bottomed Yet?
Is there anything worth buying? Style, sector, or otherwise? Let's look at homebuilder stocks:
Okay, so homebuilders are still not a good buy yet. What about REITs? Maybe they'll be on sale soon:
Uh-oh, looks like they've got farther to fall if commercial mortgages go massively bust. What about emerging markets? They're down quite a bit:
Hmmm, now there's an intriguing bit of data. A decline of almost two thirds for an entire style presents the possibility of a bargain acquisition. "Decoupling" is a controversial theory that some parts of the global economy can do well even while other areas are in recession. It's not a fully mature theory, but my take on it is that even in a global recession, some regions may do less poorly than others for a number of reasons. Some emerging nations are looking for macroeconomic solutions that don't depend on a revival of U.S. consumer spending. China's fiscal and monetary stimulus is one hopeful factor. Other emerging economies, like Malaysia, may follow suit to stimulate domestic demand.
I've written uncovered calls on VWO for several months. VWO is an intriguing vehicle not only for its low cost but also its dividend, something you may not get from every emerging market stock or actively managed mutual fund. Perhaps it will soon be time for me to go long VWO.
Nota bene: Anthony J. Alfidi is holds uncovered short calls on VWO at the time this commentary was published.
The big American homebuilders have dug themselves into a hole from which they may not emerge for years. Having been abettors and subsequently victims of the U.S. housing bubble in the early years of this decade, they may be the last to profit when buyers finally return to the market.
Okay, so homebuilders are still not a good buy yet. What about REITs? Maybe they'll be on sale soon:
The full scope of the housing meltdown isn’t clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefronts nationwide. Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in.
Uh-oh, looks like they've got farther to fall if commercial mortgages go massively bust. What about emerging markets? They're down quite a bit:
This has been a painful year for investors all around. Nowhere is that more apparent than in emerging markets, where the average fund is down 64.6% in 2008, according to Lipper.
Hmmm, now there's an intriguing bit of data. A decline of almost two thirds for an entire style presents the possibility of a bargain acquisition. "Decoupling" is a controversial theory that some parts of the global economy can do well even while other areas are in recession. It's not a fully mature theory, but my take on it is that even in a global recession, some regions may do less poorly than others for a number of reasons. Some emerging nations are looking for macroeconomic solutions that don't depend on a revival of U.S. consumer spending. China's fiscal and monetary stimulus is one hopeful factor. Other emerging economies, like Malaysia, may follow suit to stimulate domestic demand.
I've written uncovered calls on VWO for several months. VWO is an intriguing vehicle not only for its low cost but also its dividend, something you may not get from every emerging market stock or actively managed mutual fund. Perhaps it will soon be time for me to go long VWO.
Nota bene: Anthony J. Alfidi is holds uncovered short calls on VWO at the time this commentary was published.
Thursday, November 27, 2008
The Haiku of Finance for 11/27/08
Happy Thanksgiving
Enjoy it more if you give
Let greed yield to need
Enjoy it more if you give
Let greed yield to need
Alfidi Capital Editorial: Go Ahead and Donate
I don't editorialize much here on the Alfidi Capital blog, but in the spirit of the holidays I do have something to say about charitable giving.
Giving to charity in bad economic times is even more important than in bull markets. A lot more people have a hard time making ends meet. People with dependable incomes need to be mindful of how lucky they are not to be starving.
The cynical among you should think of charity as a form of insurance against social instability. The idealistic among you can think of it as a moral imperative. Me, I think of it as a tax writeoff along with the two reasons above. See, I don't make a decision about important things in life unless I have several good reasons for doing so.
If you need a better personal example than me, check out what Uncle Warren and some other fortunate people are doing with their money:
My play: I have given a chunk of my earnings to charities in San Francisco every year since the late 1990s, even in those years when I was making next to nothing as a graduate student. I recently emptied out what was left of my pantry to support a local canned food drive. Who knows, some of my canned goods might end up feeding a bankrupt ex-Wall Street preppie looking for work. I actually hope they come out okay. I know I will.
Giving to charity in bad economic times is even more important than in bull markets. A lot more people have a hard time making ends meet. People with dependable incomes need to be mindful of how lucky they are not to be starving.
The cynical among you should think of charity as a form of insurance against social instability. The idealistic among you can think of it as a moral imperative. Me, I think of it as a tax writeoff along with the two reasons above. See, I don't make a decision about important things in life unless I have several good reasons for doing so.
If you need a better personal example than me, check out what Uncle Warren and some other fortunate people are doing with their money:
Many of America's ultra-rich continued to give big donations to charity in 2008, despite the worst financial crisis in decades. In the past year, seven philanthropists gave north of $200 million and nine gave more than $100 million to causes ranging from wilderness preservation to fighting malaria.
My play: I have given a chunk of my earnings to charities in San Francisco every year since the late 1990s, even in those years when I was making next to nothing as a graduate student. I recently emptied out what was left of my pantry to support a local canned food drive. Who knows, some of my canned goods might end up feeding a bankrupt ex-Wall Street preppie looking for work. I actually hope they come out okay. I know I will.
Wednesday, November 26, 2008
More Haiku of Finance for 11/26/08
China spends to grow
U.S. prints cash to stand still
Guess which one will win
U.S. prints cash to stand still
Guess which one will win
China Spends Cash While The U.S. Just Prints It
There are some indications that all is not well in China:
However, the rate stands now at 5.58%, much higher than interest rates in the Anglo-West economies. There's plenty of room for China to cut more if needed, whereas the U.S. is rapidly approaching ZIRP (a zero-interest rate policy, i.e. the approach that kept Japan's economy anemic for a decade). Interest-rate parity will soon be at work here, sports fans, which means that deploying capital in low-yielding U.S. bonds will look less attractive to Chinese investors.
China can afford other things besides further interest rate cuts:
Is the rise in reserves due partly to the sudden rise in value of the U.S. dollar? If so, China would be wise to liquidate the dollars in its reserve disproportionately to other currencies as it executes its massive fiscal stimulus plan. The levitating dollar will have to come down as an unintended consequence of the Fed's latest $800B boondoggle:
The point of adding this last excerpt is that China has productive uses for its available savings, while the U.S. must print new money just to stand still. Monetary policy has about a six-month time lag before its effects are felt in the real economy. The inflationary effects of the Fed's quantitative easing should be very apparent by the end of 2Q09.
I believe my overall stance of bullish on China, bearish on the U.S. is valid at least through 2009. China may very well see much slower GDP growth in the near future (as the first article warns), which is why I feel comfortable writing call options on my FXI holdings.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls) at the time this commentary was published.
China’s biggest interest-rate cut in 11 years highlights government concerns that the country risks spiraling unemployment, social unrest and the deepest economic slowdown in almost two decades.
However, the rate stands now at 5.58%, much higher than interest rates in the Anglo-West economies. There's plenty of room for China to cut more if needed, whereas the U.S. is rapidly approaching ZIRP (a zero-interest rate policy, i.e. the approach that kept Japan's economy anemic for a decade). Interest-rate parity will soon be at work here, sports fans, which means that deploying capital in low-yielding U.S. bonds will look less attractive to Chinese investors.
China can afford other things besides further interest rate cuts:
China’s foreign-exchange reserves topped $2 trillion for the first time, strengthening the nation’s finances as the government boosts spending and cuts interest rates to counter the financial crisis.
Is the rise in reserves due partly to the sudden rise in value of the U.S. dollar? If so, China would be wise to liquidate the dollars in its reserve disproportionately to other currencies as it executes its massive fiscal stimulus plan. The levitating dollar will have to come down as an unintended consequence of the Fed's latest $800B boondoggle:
The Federal Reserve’s new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren’t sure they want more debt.
Households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump, economists say. That means banks may end up returning the Fed’s new liquidity through deposits at the central bank.
(snip)
While officials yesterday contested claims that the Fed is undertaking quantitative easing, they acknowledged that the central bank’s new actions will result in another injection of funds into the system. Officials said their objective is to affect credit markets rather than to target money supply.
The point of adding this last excerpt is that China has productive uses for its available savings, while the U.S. must print new money just to stand still. Monetary policy has about a six-month time lag before its effects are felt in the real economy. The inflationary effects of the Fed's quantitative easing should be very apparent by the end of 2Q09.
I believe my overall stance of bullish on China, bearish on the U.S. is valid at least through 2009. China may very well see much slower GDP growth in the near future (as the first article warns), which is why I feel comfortable writing call options on my FXI holdings.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls) at the time this commentary was published.
Fixed Income Bond Funds Might be as Dumb as ETFs
I'd like to continue my train of thought from yesterday about the difficulty of using instruments like ETFs to actively manage exposure to the bond market. BTW, I may not have been clear in my post yesterday that potential exposure to additional volatility through FI ETFs would come from hedge funds and individual investors who actively trade these instruments. Such volatility would less likely originate with the trading activity of the ETFs' fund management companies (BGI, SSgA, etc.) because their corporate size gives them the ability to buy bonds in bulk to fit their products' maturity ranges.
Anyway, let's see what happens when fund management companies offer actively managed bond funds, rather than ETFs. PIMCO stated today that one of its muni bond vehicles may have trouble delivering dividends to its investors:
The fund's stated objective is to provide current income; failure to make a dividend payment means it has failed this objective. I am not a securities attorney, so I cannot say whether this exposes PIMCO to some kind of liability. I would say, as a private investor, that any fixed income fund that can't meet its performance objectives because of market volatility, and not for reasons such as asset impairment or fund company bankruptcy, is not worth my personal consideration. If an investor holds a comparable bond portfolio as individual securities and not as part of an actively managed fund, the investor would receive the coupons on schedule.
This isn't just a problem with PIMCO's Cal muni fund. Some of their other funds have hit the same snag:
But wait, there's more! Other PIMCO funds had problems just last week that will prevent them from paying declared dividends:
PIMCO is regarded (by those same market "experts" who told us securitization of debt was a great innovation) as a firm chock full of bond expertise. If this vaunted expertise couldn't anticipate a volatility-induced payment stoppage in several bond funds, then what exactly are investors getting by paying PIMCO to actively manage their bond money? PIMCO sure has a snazzy website for press releases, which curiously doesn't feature the releases noted above. Any asset redemptions (sales) PIMCO has to make to meet that 200% threshold may come back to investors as taxable capital gains distributions from the funds! Aw, that's just great (sarcasm filter off).
Here's my approach to fixed income investing. I currently use some fixed income securities (CDs, Treasuries, corporate notes, and others with short-term maturities) as my cash management strategy for the proceeds I collect from selling options. I buy them and hold them to maturity. It's that simple. At some future date I'd be willing to buy long-term bonds to protect my principal and get some form of interest rate immunization, but once again I will hold them to maturity. I am not going to waste my time or money actively trading bonds to try to outguess the Fed's interest rate changes. I have a life, you know.
Oh yeah, PIMCO is yet another firm that never responded when I sent them my resume. Now they're having problems. Coincidence? I don't think so. ;-)
Anyway, let's see what happens when fund management companies offer actively managed bond funds, rather than ETFs. PIMCO stated today that one of its muni bond vehicles may have trouble delivering dividends to its investors:
PIMCO California Municipal Income Fund II (the "Fund'') may be required to delay the payment of the declared November dividend and the declaration of the next scheduled dividend on the Fund's common shares.
(snip)
Continued severe market dislocations have caused the value of the Fund's portfolio securities to decline and as a result the Fund's asset coverage ratio has fallen below the 200% Level.
If the 200% Level is not met on December 1, 2008, the Fund would have to postpone the payment of the previously declared November dividend and the declaration of the December dividend until the situation is corrected. Depending on market conditions, this coverage ratio may increase or decrease further.
The fund's stated objective is to provide current income; failure to make a dividend payment means it has failed this objective. I am not a securities attorney, so I cannot say whether this exposes PIMCO to some kind of liability. I would say, as a private investor, that any fixed income fund that can't meet its performance objectives because of market volatility, and not for reasons such as asset impairment or fund company bankruptcy, is not worth my personal consideration. If an investor holds a comparable bond portfolio as individual securities and not as part of an actively managed fund, the investor would receive the coupons on schedule.
This isn't just a problem with PIMCO's Cal muni fund. Some of their other funds have hit the same snag:
PIMCO Corporate Income Fund and PIMCO Corporate Opportunity Fund (each, a "Fund'' and collectively, the "Funds'') today announced that each Fund will redeem, at par, a portion of its auction rate preferred shares ("ARPS''), beginning December 15, 2008 and concluding on December 19, 2008. The Funds also announced that they may postpone the payment of previously declared November dividends for common shares and postpone the declaration of dividends for common shares, currently scheduled to occur on December 1, 2008.
But wait, there's more! Other PIMCO funds had problems just last week that will prevent them from paying declared dividends:
The Boards of Trustees of PIMCO High Income Fund, PIMCO Floating Rate Income Fund and PIMCO Floating Strategy Fund (each, a "Fund'' and collectively, the "Funds'') today announced each Fund will redeem, at par, a portion of its auction rate preferred shares ("ARPS''), beginning December 8, 2008 for PHK and PFN and December 10, 2008 for PFL and concluding on December 12, 2008 for all Funds.
PIMCO is regarded (by those same market "experts" who told us securitization of debt was a great innovation) as a firm chock full of bond expertise. If this vaunted expertise couldn't anticipate a volatility-induced payment stoppage in several bond funds, then what exactly are investors getting by paying PIMCO to actively manage their bond money? PIMCO sure has a snazzy website for press releases, which curiously doesn't feature the releases noted above. Any asset redemptions (sales) PIMCO has to make to meet that 200% threshold may come back to investors as taxable capital gains distributions from the funds! Aw, that's just great (sarcasm filter off).
Here's my approach to fixed income investing. I currently use some fixed income securities (CDs, Treasuries, corporate notes, and others with short-term maturities) as my cash management strategy for the proceeds I collect from selling options. I buy them and hold them to maturity. It's that simple. At some future date I'd be willing to buy long-term bonds to protect my principal and get some form of interest rate immunization, but once again I will hold them to maturity. I am not going to waste my time or money actively trading bonds to try to outguess the Fed's interest rate changes. I have a life, you know.
Oh yeah, PIMCO is yet another firm that never responded when I sent them my resume. Now they're having problems. Coincidence? I don't think so. ;-)
Tuesday, November 25, 2008
A Brief Comment on the Pointlessness of Fixed-Income ETFs
Here's a repost of something I posted to Seeking Alpha now that I've expanded my reach there:
I'll have more to say on ETFs as time goes by. I am conquering the world wide web of finance, one pithy post at a time. ;-)
Fixed income ETFs make little sense to me. The point of having FI in a portfolio is to generate a regular cash stream and smooth out volatility through diversification. Throwing an FI ETF into the mix may actually raise portfolio volatility because hedge funds and day traders will be tempted to time FOMC moves. Also, if you're a covered call writer (like me), the option chains are so thin on FI ETFs as to be useless. In this market a buy-write strategy can easily see you position called away. No thanks to fixed income ETFs!
I'll have more to say on ETFs as time goes by. I am conquering the world wide web of finance, one pithy post at a time. ;-)
The Haiku of Finance for 11/25/08
Big Asian players
Keep investment cash at home
Starve the West of funds
Keep investment cash at home
Starve the West of funds
SWFs Stay Home While Helicopter Ben Takes Off
I love being right! I've been blogging that Asian institutional investors will increasingly focus on using their remaining reserves to shore up the economies of their home countries instead of investing in the West. Media reports are beginning to confirm this trend:
Sovereign wealth funds in the Gulf are switching their focus away from Western stock markets to shore up ailing economies in the Middle East and protect themselves from losses in the City and on Wall Street.
Investment funds in Kuwait, Qatar, Dubai and Abu Dhabi are understood to be changing their investment strategies after losing billions of dollars buying shares in Western companies. Several Gulf-based banks are being propped up with state investment. Local stock markets have collapsed and some funds are shifting their assets into local shares in an attempt to inject confidence.
Nationalism trumps modern portfolio theory. The coming bust in foreign direct investment into the West will be especially bad for the U.S. No foreign buyers for U.S. debt means that the only solution left for U.S. policymakers is inflation. They have not admitted this in so many words, but recent actions speak volumes:
Under the new mortgage program, the Fed will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It will also buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.
The central bank also launched a $200 billion facility to support consumer finance, including student, auto, and credit card loans and loans backed by the federal Small Business Administration. This will lend to investors who hold securities backed by this debt.
The Fed's creation of $800B out of thin air is a huge step in devaluing the U.S. dollar against other currencies and real assets (like gold!). Helicopter Ben's printing press is running at full tilt.
Hmmm . . . how can I play this? Note the mention of credit to support SBA loans. If I take out a loan to expand the operations of Alfidi Capital, a couple of years' worth of inflation will whittle it down to nothing in real terms. Paying off a fixed amount of principal with devalued future dollars makes inflation a debtor's best friend. Thanks Helicopter Ben! I might as well head on down to my local SBA office and fill out a loan application ASAP.
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