The Haiku of Finance for 10/31/09

Happy Halloween
Bad numbers spooked the market
No treat for the bulls

Consumers Prepare Early For a Blue Christmas

It is definitely not a good sign to see consumers caving in just as the stimulus effort is expiring:

Americans cut spending for the first time in five months and a gauge of confidence weakened, signaling consumers will make a limited contribution to the recovery without government incentives.

Here's our first inkling of a weak Christmas shopping season. I'm trying to avoid confirmation bias, but that's hard when I see stories like this one. It's even harder when federal lawmakers scramble to extend the first-time homebuyer tax credit.

The Haiku of Finance for 10/28/09

Politicized loans
Coming soon to your small bank
Fewer loans for you

Bankers See The Shifting Political Winds

Bankers can see right through the politicization of small business lending:

Bankers who gathered for the American Bankers Association annual meeting were hesitant to dismiss the administration's efforts, but said the government's programs have largely been unappealing for smaller banks.

They won't come out and say what I'm about to say because they don't want to be the victims of liquidity freezes and forced mergers. Lack of creditworthy borrowers and tons of paperwork aren't going to stop politically-driven loans from being made. Washington isn't happy that liquidity injections are tied up on bank balance sheets. They need that liquidity to circulate through the economy so that Americans won't notice their purchasing power disappearing or their middle-class entitlements becoming less of a liability. Inflation has a way of working that kind of magic and right now the mojo just isn't there. That will all change with the right political levers pushing loans to business owners in the ruling elite's favorite demographics. The conduit doesn't matter, although existing SBA-affiliated lenders are the most likely candidates.

Has there ever been such a thing as a bubble in small-medium enterprise (SME) lending? We'll find out soon enough. Here's a thought: Maybe some aspiring mendicants could assemble a REIT that would qualify for government-sponsored lending. That would kill two birds with one stone. It would scratch the government's lending itch and open a new category of liquidity recipient for Treasury's "Plan C" to bail out the commercial real estate sector.

Voila! All problems solved! They don't call me "Supreme Super-Genius" for nothing. Well, okay, that's what I call myself, but you get the picture.

The Haiku of Finance for 10/27/09

Doctor Doom calling
"Carry trades may unwind soon"
Dollar now at risk

Dr. Doom's Going To Get It Right Again

Nouriel Roubini, a.k.a. Dr. Doom for his accurate call on the credit crunch, is back with another bold warning for the markets:

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.
(snip)

Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

So is anyone paying attention? Especially serious investors? Some are, but most apparently are not. The bond market swallowed the Treasury's latest issuance without even blinking. Delusional homebuyers are paying premiums for a new housing mini-bubble driven by an expiring tax credit. At least institutional investors are starting to get nervous about an overvalued stock market.

As for me . . . I'm just waiting for a cheap entry point on some ETFs and stocks I've been watching.

Dangling Over The Precipice

Lots of juicy news items today indicate just how close we are to the cusp of a big downturn (or several). The rally was driven by the emergency stimulus, so much so that even the possibility of withdrawing the housing tax credit is enough to make the stock market very nervous. Meanwhile, the debt we're incurring with gimmicks like that housing credit is making the bond market nervous.

The housing market isn't faring much better and has yet to return to a realistic historical norm specifically because of government intervention.

All of this nervousness afflicting big asset classes should be good news for gold. I'm seriously considering unwinding some of my gold holdings to have more cash available if these other asset classes crash. Only time will tell whether that's a wise move on my part.

The Haiku of Finance for 10/25/09

Recession over?
Commentators say it is
But I say they're wrong

The Haiku of Finance for 10/24/09

OPIC tech funding
Pays for Asia's future growth
U.S. wealth transfer

Sovereignty Crunch Forces U.S. Tech Subsidies Overseas

The U.S. government, instead of supporting innovation at home to help its economy out of recession, instead chooses to launch a new subsidy for innovation elsewhere:

The White House said the US Overseas Private Investment Corporation (OPIC) had issued a call for proposals for the fund, which will provide financing of between 25 and 150 million dollars for selected projects and funds.

The Global Technology and Innovation Fund will "catalyze and facilitate private sector investments" throughout Asia, the Middle East and Africa, the White House said in a statement.

Anyone who thinks this is solely a foreign policy outreach to give disillusioned Muslim youth an alternative to becoming suicide bombers is welcome to make me an offer on the bridge I own in Brooklyn. The real backstory is more complicated, and like an iceberg we can only see what's on the surface. Uncle Sam's creditors are beginning to flex their muscles. Sovereign wealth funds in Asia and the Middle East have probably begun to demand assurances from Uncle Sam that they won't be left out in the cold in the event he defaults on his sovereign debt. U.S. willingness to fund technology transfer is one such assurance, with the expectation that foreign creditors will continue to buy U.S. government debt (or least not sell their current debt holdings in a panic).

Civilization's center of gravity is gradually moving eastward.

IPO Trough Worse Than Dot-Bomb Drought

There is even more reason to believe that this phantom recovery is fake when its IPO revival produces less of a pop than the drought that followed the dot-com implosion:

Initial public offerings in the U.S. are suffering the worst returns since at least 1995 at the same time that the stock-market rally is spurring the most new listings in almost two years.

Investors need to be absolutely certain that they have iron-clad reasons to buy equities given current valuations. Articles like this can reinforce confirmation bias for bears like me, so of course I've also noted that this week's earnings announcements have given the market some positive earnings surprises.

The Haiku of Finance for 10/22/09

China and U.S.
Chasing stimulus effects
These end at some point

U.S. And China Prepare To Diverge On Stimulus

The U.S. ruling elite needs to hear this warning from Japan (but probably won't listen) on the pain that comes with excessive macroeconomic stimulus:

“If you learn your lesson from the Japanese experience, you don’t remove your fiscal stimulus until private sector de-leveraging is over,” Koo, 55, chief economist at the research arm of Japan’s biggest brokerage, said in an interview at his Tokyo office last week. “When we see the private sector coming to borrow again, I’ll be the loudest person on earth arguing for fiscal reform. That’s the exit.”

The quickest way to get to that private sector de-leveraging is to let highly leveraged firms go bankrupt. American leaders think this is too painful to contemplate. China thinks otherwise, and is signalling its readiness to endure some pain in the short term:

Chinese officials may be preparing to reduce monetary stimulus that propelled growth to 8.9 percent in the third quarter and led the world out of recession.

I disagree with the article's contention that the world is heading out of recession. Most of the G-20, at a minimum, is still very much in recession but you wouldn't know that from the way governments dress up their economic statistics. Granted, the Japan article addresses fiscal stimulus while the China article addresses monetary stimulus, but the effects of either on GDP are comparable.

Nota bene: Anthony J. Alfidi is long FXI with (covered call options) and is short cash-covered put options on SPY.

Greed Wins Again

Here we go again. The people who helped cause the problem are definitely not part of the solution:

A 40 percent jump in Wall Street bonuses this year may bring relief to New York City and Albany as the state and its biggest metropolis struggle with a combined $14 billion in budget deficits this fiscal year and next.

There's a larger lesson here besides the need for NYC to diversify its economy away from such a heavy reliance on the financial sector. The "masters of the universe" have learned absolutely nothing about the limits of their knowledge and the amount of damage their hubris can cause. Hopefully the next dip in the market (after Christmas?!) will drive this point home.

Updating The Alpha-D Portfolio For Oct. 2009

All of my covered calls in my taxable account expired without exercise last Friday. I have refreshed the covered short calls on IAU, GDX (some but not all of the holding), and FXI. I wouldn't mind seeing the IAU called away to make room for other equities I will eventually add once the market heads down at some point. My long position in ANV is unchanged, as is my cash-covered short put under ANV for March 2010. Remember, that's the one junior gold miner that's a very small but speculative play on gold. I have made no change to my cash-covered short put under SPY; it will expire in November. I also refreshed the cash-covered short puts I have had for a while under FXI, as I wouldn't mind owning some more of China at a lower price.

The covered calls I had on IAU and GDX in my IRA were exercised. I bought back the GDX and refreshed the OTM calls but I let the IAU go. I'm making room in my IRA for the long positions I will eventually establish for IWM, VWO, and IYR.

BTW, you can expect to see my first research reports on individual stocks I will cover by the end of the year. You won't see a report on ANV since I won't hold it for the long term, but other stocks will appear in the Alpha-D soon.