The Haiku of Finance for 04/30/09

Goodbye to Chrysler
Hedge fund greed sank bond swap deal
GM will be next

Market Levitation Defies Economic Annihilation

The market opened up strongly this morning even in the face of worsening news:

The economy shrank at a worse-than-expected 6.1 percent pace at the start of this year as sharp cutbacks by businesses and the biggest drop in U.S. exports in 40 years overwhelmed a rebound in consumer spending.

Consumer spending's resurgence is very odd at a time when job losses are rising and workers in major sectors - financial services and automotive manufacturing - are facing pay cuts. Is the Commerce Department gaming stats on consumer spending to make them look rosier than reality? And why is the stock market still looking past the avalanche of bad news in this report?

I don't have the answers to those questions. I only have the answer to this question: What am I doing with my money in response?

I'm still shorting SPY, EFA, IWM, and VWO. Sooner or later (probably sooner) Mr. Market will take note of the bad news.

Foolish Investors Pursue Fools' Gold

People fooling themselves about the economy? Nah, it couldn't be:

Consumers hoping that the worst of the recession is over may be setting themselves up for disappointment as the US economy continues to deteriorate, a panel of economists and financial experts said Tuesday.

Surging unemployment and the slow-moving impact of the government stimulus program will stall any real economic recovery until 2010 or even later, the panel said. Consumers fearful of losing their jobs are likely to continue to spend less while the housing and financial crises continue to unwind.

Oh yes it is true. At least someone gets it besides me:

The recent rise in stocks and talk about green shoots in the markets are optimistic assumptions, as the world downturn "still has a way to run," Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC Tuesday.

World gross domestic product looks overestimated, because global consumption has been based on debt, and this cannot continue, Hendry told "Squawk Box Europe."

So when do I get to go on Squawk Box Europe? They know where to reach me. I could have told them this months ago. In fact, I did.

The Haiku of Finance for 04/27/09

Now prime mortgages
Face big defaults and writedowns
When will this bottom?

The Alpha-D Rationale for Gold Investing

I'll take this opportunity on a day when U.S. markets are closed to recap my philosophy behind holding two different gold instruments in my Alpha-D Portfolio.

iShares COMEX Gold Trust owns physical gold stored in a vault in London. One share = one tenth of an ounce of gold. I own IAU because its price is directly correlated to the daily bullion spot price; i.e. it's real gold.

Market Vectors Gold Miners ETF owns shares of publicly traded gold mining companies. I own GDX for several reasons: in case the government confiscates gold bullion from private owners as it did in 1933 (the miners' gold reserves are in the ground and can't be so easily grabbed); because GDX's returns aren't perfectly correlated with the spot price of bullion (owning non-correlated assets is the key to a well-diversified portfolio); and because it pays a small dividend (gold bars don't kick off cash like mining stocks do).

Please do NOT take this as a recommendation. This is merely a summary of my personal rationale for owning some gold. I have a portion of my assets in gold but I would never put the majority of my money into any one type of investment. I personally believe that the U.S. will experience serious inflation in the near future, and I expect gold to rise along with inflation. I could always be wrong, of course.

Alfidi Capital Hits 5,000 Page Views!

Thanks to my loyal readers, Alfidi Capital LLC has reached an important milestone. The combined page views for both the main website and this blog have now reached 5000 (exactly!) as of April 25, 2009. This helps validate my business model. I would of course like to market this firm more aggressively to get more viewers, but unfortunately I am engaged in a major project right now that takes up all of the time that I would otherwise have available for marketing. Let's keep those hits coming! :-)

China Went For The Gold . . . And Got It

Looks like Olympic medals weren't the only kind of gold China's been pursuing in recent years:

China revealed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes - or a pot worth about US$30.9-billion - and confirming years of speculation it had been buying.

This confirms what I've suspected for a while. China has been "shaping the battlespace" in its undeclared economic contest with the Anglo-West by stockpiling an alternative store of value that competes with the U.S. dollar.

The article also reveals something that took me by surprise:

China is the world's largest gold producer and does not permit exports of gold ingots, only jewellery, leaving plentiful supplies for the domestic market.

I had always thought South Africa was the world's top gold producer. Not anymore! Now Asian producers have more pricing power at the start of the supply stream. This knocks another pillar out from under the Anglo-West's ability to dominate the world.

The article concludes with Hou Huimin, vice general secretary of the China Gold Association, forecasting the end of U.S. dollar hegemony:

"The financial crisis means the U.S. dollar value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage."

I couldn't have said it better myself. :-)

Nota bene: Anthony J. Alfidi is long FXI (with covered calls), IAU (with short puts), and GDX (with short puts).

The Haiku of Finance for 04/22/09

Morgan Stanley sinks
How can they buy Smith Barney?
With more TARP money

Alpha-D Portfolio Updates for April '09, Part 3

Oh yeah, one more thing before I forget. I was very happy when Dow Chemical closed its acquisition of Rohm and Haas at a price just over $78 per share, because that allowed my uncovered ROH calls at 80 to expire unexercised. My special situations approach sure paid off that time.

Alpha-D Portfolio Updates for April '09, Part 2

I reset my short calls on SPY and EFA today, expiring in a couple of months. I've also decided to bet in a different direction with my gold holdings. I've decided to sell puts on IAU and GDX (and maintain my long holdings of the ETFs) because I believe, at some point in the very near future, the price of gold will finally begin its inexorable move upward. I don't want to be forced out of my long positions in gold when that happens, so I'd rather risk the possibility that I'll be forced to buy a little more gold.

Why do I believe in gold? Here's one reason. China has recently shifted its purchases of Treasuries to the ultra-short end of the curve, which will eventually force the U.S. to roll over more of its debt in the short term than in the long term. This accelerates the date at which the U.S. will face a bond market dislocation, thus furthering Beijing's long-term strategy of financially weakening the U.S. China's moves out of long-term Treasuries are also consistent with this approach.

BTW, I also purchased more FXI (with covered calls) based on the continuing strength of the Chinese economy.

Alpha-D Portfolio Updates for April '09, Part 1

This month was a slight disappointment for my Alpha-D Portfolio. I decided to buy back my short calls on SPY and EFA at losses last week when the share prices looked they would rise through the strike price. :-( Remember, I'm doing uncovered calls on these things because I believe the world economy has farther to fall, and I didn't want to be caught with uncovered in-the-money options after expiration. That's why I'm going to renew these bearish positions when the market opens tomorrow.

The Haiku of Finance for 04/18/09

A couple of calls
Didn't work out well this month
Close them at small loss

China On The Mend

Told ya so:

China’s economy, the world’s third largest, may rebound this quarter as Premier When Jiabao’s 4 trillion yuan ($585 billion) stimulus package cushions the effects of the global recession.

Urban fixed-asset investment surged by almost a third in March and industrial-output growth accelerated, reports accompanying China’s gross domestic product figures showed yesterday. First-quarter GDP grew 6.1 percent, the slowest pace in almost a decade, as exports slumped.

China manages to hang in there thanks to their national savings cushion. They've been slowing their purchases of Treasury debt, accelerating the U.S. government's bond auction failure date.

I'm long FXI with covered calls, and I'm staying that way.

Chinese Banks Grow Assets While U.S. Banks Dilute Equity

In a sign of relative strength, Chinese banks are able to grow their loan portfolios de novo, i.e., without artificial capital infusions:

President Hu Jintao said April 1 that China’s 4 trillion yuan stimulus plan was taking effect, after urban fixed-asset investment surged 26.5 percent in the first two months. China’s lending boom contrasts with the struggle in the U.S. to rid banks of illiquid assets and efforts by central banks from Switzerland to Japan to unfreeze credit.

The excerpt above hints at my next point. U.S. banks are unable to make capital available for asset growth without severely diluting their owners:

Goldman Sachs Group Inc., by selling stock to help it repay $10 billion to the U.S. Treasury, may pressure competitors to follow suit or appear dependent on government support, analysts said.

Now do you guys see why I'm staying long China and short the U.S.? We're going to see this story play out in many different ways over the next few years.

Nota bene: Anthony J. Alfidi is long FXI (with covered calls) and short uncovered calls on SPY and IWM.

The Limerick of Finance for 04/10/09

Bank profits sure seem to be mending
Traders hope the bear market is ending
With reports yet to come
Earnings season's not done
Bear attacks will keep big banks from lending