A brand spankin' new special report is available as of right now on the Alfidi Capital main website. It's a description of a methodology for valuing a REIT ETF. It even comes with its own fully-functional valuation template that analysts can tweak to their heart's content.
I'm productive even on New Year's Eve.
Friday, December 31, 2010
Ring Out 2010
I'll make this fast so you can all go enjoy yourselves tonight.
The U.S. stock market had a good year in 2010 but that doesn't nearly make up for the fact that stocks' performance over the past decade has been the worst since the (previous) Great Depression. I am fortunate that my net worth is much higher now than it was in 2000.
Bonds had a terrific year thanks to all of the artificial demand from quantitative easing. That effect is starting to backfire. Yields on the 10-year Treasury are heading back to where they were at the beginning of the year. The bloom will come off this rose thanks to out-of-control central bankers.
Real estate . . . don't even get me started. Read my blog posts for the last week or so to see the downward trend restarting.
Now you can go have your fun. Drink responsibly. Have a designated driver, call a taxi, or take mass transit. Try not to throw up on your clothing or your date.
The U.S. stock market had a good year in 2010 but that doesn't nearly make up for the fact that stocks' performance over the past decade has been the worst since the (previous) Great Depression. I am fortunate that my net worth is much higher now than it was in 2000.
Bonds had a terrific year thanks to all of the artificial demand from quantitative easing. That effect is starting to backfire. Yields on the 10-year Treasury are heading back to where they were at the beginning of the year. The bloom will come off this rose thanks to out-of-control central bankers.
Real estate . . . don't even get me started. Read my blog posts for the last week or so to see the downward trend restarting.
Now you can go have your fun. Drink responsibly. Have a designated driver, call a taxi, or take mass transit. Try not to throw up on your clothing or your date.
Thursday, December 30, 2010
Stupidity Guarantees More Crises In Finance
Stupidity isn't just confined to high-school dropouts. Think-tanks do it too. I've never heard of the TaxPayers' Alliance or Legatum Institute, but their theorists probably smoke the same jumbo-sized crack rock as the folks from our own Cato Institute. They claim global regulation causes global crises. That's cute. The problem I have with that stupidity is that the credit crunch occurred in the absence of global regulation. What is it with Right-Libertarians? I used to drift that way myself until I realized the real world was nothing like Ayn Rand's fiction.
More stupidity will like this will bring on another crisis. We're already well on our way there. Europe hasn't learned a thing from watching the PIIGS flirt with disaster. U.S. policymakers haven't learned that housing prices need to drop further for market equilibrium to take hold. Global investors haven't learned that their risk appetites are being stoked by the Federal Reserve's quantitative easing.
Here's a learning point for the rest of us. Europe and other established economies may be on the ropes for a while, depressing their equity markets. The iShares MSCI EAFE ETF is trading at a P/E of about 12 thanks to European trouble. That's a lot cheaper than some other index-based products right now.
Full disclosure: Short cash-covered puts under EFA.
More stupidity will like this will bring on another crisis. We're already well on our way there. Europe hasn't learned a thing from watching the PIIGS flirt with disaster. U.S. policymakers haven't learned that housing prices need to drop further for market equilibrium to take hold. Global investors haven't learned that their risk appetites are being stoked by the Federal Reserve's quantitative easing.
Here's a learning point for the rest of us. Europe and other established economies may be on the ropes for a while, depressing their equity markets. The iShares MSCI EAFE ETF is trading at a P/E of about 12 thanks to European trouble. That's a lot cheaper than some other index-based products right now.
Full disclosure: Short cash-covered puts under EFA.
Wednesday, December 29, 2010
Spiking Bond Yields Will Accelerate Housing Double-Dip
These things all feed each other. When our foreign creditors show insufficient appetite for our bonds, yields climb:
When yields rise, home mortgages get more expensive. Floating-rate ARMs get more costly to service. Homeowners lose equity faster. Foreclosures, forced sales, and abandonment follow. The market-clearing price for homes will sink:
Those of you who bought houses as rental properties in 2010 made mistakes only if you went into debt. That debt will be hard to service as deflation puts a ceiling on prevailing rents.
Oh, before I forget, let's note that China is reducing its export quotas for rare earth metals. This has nothing to do with the above, but everything to do with the gradual shift in prosperity from the Anglo-West to the East. Tesla Motors will have a very hard time getting lithium for its batteries unless it digs its own mine in Afghanistan.
Treasury market yields rose Tuesday after the government’s sale of $35 billion in new five-year notes drew weak demand. The annualized yield on the notes was 2.15%, the highest market yield on five-year securities since June and up from the rate of 2.04% on Monday on previously issued five-year notes.
When yields rise, home mortgages get more expensive. Floating-rate ARMs get more costly to service. Homeowners lose equity faster. Foreclosures, forced sales, and abandonment follow. The market-clearing price for homes will sink:
Housing markets have taken a turn for the worse, with the widely followed S&P/Case-Shiller index declining more than analysts had forecast in October, lending credence to the housing bears who have predicted a double dip.
Those of you who bought houses as rental properties in 2010 made mistakes only if you went into debt. That debt will be hard to service as deflation puts a ceiling on prevailing rents.
Oh, before I forget, let's note that China is reducing its export quotas for rare earth metals. This has nothing to do with the above, but everything to do with the gradual shift in prosperity from the Anglo-West to the East. Tesla Motors will have a very hard time getting lithium for its batteries unless it digs its own mine in Afghanistan.
The Haiku of Finance for 12/29/10
Holiday shoppers
Spent all of their cash, went broke
Golden years are gone
Spent all of their cash, went broke
Golden years are gone
Tuesday, December 28, 2010
Chinese Underground Lenders Signal Frothy Top
America had its freewheeling mortgage brokers during the housing bubble. Those generators of unregulated, undocumentable mortgages catapulted the U.S. housing market over a cliff. China now has something comparable with legions of underground lenders serving small businesses:
You would think China's larger banks would take this as an opportunity to develop a market for commercial paper. Lack of such a development illustrates the immaturity of fixed income trading in emerging markets. Investors drawn to emerging market bonds need to take heed.
I'll take this as a sign of an approaching top for China's own bubble.
Full disclosure; Long FXI with covered calls and cash-covered short puts.
Second-quarter figures from the Wenzhou branch of the People's Bank of China showed that 89 percent of local people and nearly 57 percent of enterprises had either borrowed from or made deposits at non-bank finance companies.
You would think China's larger banks would take this as an opportunity to develop a market for commercial paper. Lack of such a development illustrates the immaturity of fixed income trading in emerging markets. Investors drawn to emerging market bonds need to take heed.
I'll take this as a sign of an approaching top for China's own bubble.
Full disclosure; Long FXI with covered calls and cash-covered short puts.
YRCW New Counsel Notable For CEO Stint
YRC Worldwide hired a former CEO as its general counsel. It touts his background in external affairs as a nod to the cooperation they'll need from creditors in recapitalizing YRCW's balance sheet. A deeper reading of this is that his experience merging Embarq into CenturyTel may come in handy if YRCW is secretly looking for an acquirer. Embarq was Sprint Nextel's local phone service, carrying data traffic over local private line switches. That sounds almost like the telecom equivalent of an LTL trucker.
Speculation means nothing at this stage. Any potential suitor would face just as many financial and operational headaches as the current turnaround team. Note that one of the keys to CenturyTel's acquisition of Embarq was its agreement to assume $5.8B of the target's debt. It is not clear whether Arkansas Best or Con-Way or some other suitor would be so willing to save YRCW.
Full disclosure: No positions in YRCW, ABFS, or CNW at this time.
Speculation means nothing at this stage. Any potential suitor would face just as many financial and operational headaches as the current turnaround team. Note that one of the keys to CenturyTel's acquisition of Embarq was its agreement to assume $5.8B of the target's debt. It is not clear whether Arkansas Best or Con-Way or some other suitor would be so willing to save YRCW.
Full disclosure: No positions in YRCW, ABFS, or CNW at this time.
Monday, December 27, 2010
Newsreel for 12/17/10
Let's see what I missed by not watching television.
Japan's draft fiscal budget leaves economists unimpressed. Mainstream analysts are looking for signs that governments are serious about implementing austerity measures. Keep looking, folks. We won't see seriousness anywhere for a while.
Ireland nationalizes Allied Irish Banks. It had to be absorbed even after it needed billions in government support. The U.S. flirted with nationalizing Fannie and Freddie but chose half measures instead. More debt cannot cure insolvency.
The Asian verdict on China's interest rate increase is mixed. I was too quick to note that the Chinese stock market initially showed a positive reaction to the rate increase, as it finished down 1.9%. This supports the traditional theory that rising interest rates present a more challenging environment for equities.
Rising oil prices baffle economists. This bafflement doesn't prevent leading investment firms from forecasting further price increases. Good investors don't bother with forecasting. Knowing the unknowable is impossible. Commodity prices move randomly over the long term (one year or more) and oil is no exception. Peak Cheap Oil is probably more of a factor here than interest rates.
Regulators warn that IT risk systems are still weak. They will always be imperfect. The complexity of the products and indicators they track makes them vulnerable to Black Swans. Human managers can always override risk protocols if that what the boss wants. A better solution is to keep investment products simple and prevent sales managers from dictating results to analysts.
I'm still not interested in watching television. I didn't miss anything important.
Japan's draft fiscal budget leaves economists unimpressed. Mainstream analysts are looking for signs that governments are serious about implementing austerity measures. Keep looking, folks. We won't see seriousness anywhere for a while.
Ireland nationalizes Allied Irish Banks. It had to be absorbed even after it needed billions in government support. The U.S. flirted with nationalizing Fannie and Freddie but chose half measures instead. More debt cannot cure insolvency.
The Asian verdict on China's interest rate increase is mixed. I was too quick to note that the Chinese stock market initially showed a positive reaction to the rate increase, as it finished down 1.9%. This supports the traditional theory that rising interest rates present a more challenging environment for equities.
Rising oil prices baffle economists. This bafflement doesn't prevent leading investment firms from forecasting further price increases. Good investors don't bother with forecasting. Knowing the unknowable is impossible. Commodity prices move randomly over the long term (one year or more) and oil is no exception. Peak Cheap Oil is probably more of a factor here than interest rates.
Regulators warn that IT risk systems are still weak. They will always be imperfect. The complexity of the products and indicators they track makes them vulnerable to Black Swans. Human managers can always override risk protocols if that what the boss wants. A better solution is to keep investment products simple and prevent sales managers from dictating results to analysts.
I'm still not interested in watching television. I didn't miss anything important.
The Haiku of Finance for 12/27/10
I fight corruption
Those who defraud and deceive
Shall be defeated
Those who defraud and deceive
Shall be defeated
Did Baby Boomers Trade Retirement For Christmas?
We've heard this refrain before. Americans approaching their golden years haven't saved for retirement:
This season's retail results may indicate why this is so. Shoppers are still very willing to part with their hard-earned money:
I would love to see a generational breakdown of this year's shopoholics. Did the Baby Boomers neglect their IRA contributions so they could have a glorious Christmas? Did the Sixties' hippie kids keep on "living for today" right through tomorrow and the next day? Did they spend all that they would earn tomorrow so that they could have today? I know, that last sentence is a reference to an oft-heard line about sacrifice, but in this context it is an apt description of sacrifice through delayed gratification that did not occur at all.
Entitlement can mean many things. It can mean an expectation that Social Security and Medicare are fully collateralized insurance plans when they are in fact unfunded liabilities. It can mean an expectation of ever-expanding material acquisitions with no regard for payment. If entitlement means all of those things, it ultimately means insolvency.
Old habits, acquired long ago and repeatedly reinforced, can prove very hard to break. Unbroken habits will break us all financially. Merry Christmas.
Nota bene: The author is a member of Generation X.
Through a combination of procrastination and bad timing, many baby boomers are facing a personal finance disaster just as they're hoping to retire. Starting in January, more than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years.
This season's retail results may indicate why this is so. Shoppers are still very willing to part with their hard-earned money:
Forget the returns line. People hit the stores after Christmas to buy, indulging the rediscovered retail appetite that may have made 2010's holiday shopping season the biggest ever.
I would love to see a generational breakdown of this year's shopoholics. Did the Baby Boomers neglect their IRA contributions so they could have a glorious Christmas? Did the Sixties' hippie kids keep on "living for today" right through tomorrow and the next day? Did they spend all that they would earn tomorrow so that they could have today? I know, that last sentence is a reference to an oft-heard line about sacrifice, but in this context it is an apt description of sacrifice through delayed gratification that did not occur at all.
Entitlement can mean many things. It can mean an expectation that Social Security and Medicare are fully collateralized insurance plans when they are in fact unfunded liabilities. It can mean an expectation of ever-expanding material acquisitions with no regard for payment. If entitlement means all of those things, it ultimately means insolvency.
Old habits, acquired long ago and repeatedly reinforced, can prove very hard to break. Unbroken habits will break us all financially. Merry Christmas.
Nota bene: The author is a member of Generation X.
Comparing PCYC and VVUS
A guy goes into a pharmacist and asks for a painkiller recommendation. When the pharmacist asks him where it hurts, the guy says, "My portfolio! I'm thinking about researching drug stocks."
Okay, that was a bad joke. Pharmacists analyze drug prescriptions, not drug stocks. Alfidi Capital doesn't profess drug expertise, but there are pharmaceutical firms in the San Francisco Bay Area whose financial statements are available for review.
Pharmacyclics (PCYC) makes drugs that treat lymphomas and cancerous tumors. Their ROE this year was a stunningly negative 42%, but this is actually an improvement from their five-year average ROE of negative 81%. PCYC has shown three straight years of improvement in net income, although it is still negative and exceeding total revenue. The firm has over $70mm in current assets on hand as of this past September, which is probably enough to survive another three years assuming they can stabilize their net losses and properly manage their balance sheet.
VIVUS (VVUS) makes therapeutic treatments for obesity, diabetes, and other difficulties. Their current year ROE is slightly worse than PCYC's at negative 43% but shows no comparable improvement. Indeed, VVUS's five-year ROE is over negative 29%. Their annual net losses increased massively by 22x from 2007-2009, apparently due to a 50% drop in gross revenue starting in 2008 and a large increase in R&D spending. VIVUS does deserve credit for holding large amounts of short term investments and keeping its long term debt low.
These two stocks are not the right fit for my own investment philosophy but investors with specific knowledge of drug research may wish to review their product lines and market positions. Small pharmaceutical companies are difficult to analyze without an intimate knowledge of biology, chemistry, and the FDA approval process. The best that other investors and analysts can do is review their financial statements.
Full disclosure: No position in PCYC or VVUS.
Okay, that was a bad joke. Pharmacists analyze drug prescriptions, not drug stocks. Alfidi Capital doesn't profess drug expertise, but there are pharmaceutical firms in the San Francisco Bay Area whose financial statements are available for review.
Pharmacyclics (PCYC) makes drugs that treat lymphomas and cancerous tumors. Their ROE this year was a stunningly negative 42%, but this is actually an improvement from their five-year average ROE of negative 81%. PCYC has shown three straight years of improvement in net income, although it is still negative and exceeding total revenue. The firm has over $70mm in current assets on hand as of this past September, which is probably enough to survive another three years assuming they can stabilize their net losses and properly manage their balance sheet.
VIVUS (VVUS) makes therapeutic treatments for obesity, diabetes, and other difficulties. Their current year ROE is slightly worse than PCYC's at negative 43% but shows no comparable improvement. Indeed, VVUS's five-year ROE is over negative 29%. Their annual net losses increased massively by 22x from 2007-2009, apparently due to a 50% drop in gross revenue starting in 2008 and a large increase in R&D spending. VIVUS does deserve credit for holding large amounts of short term investments and keeping its long term debt low.
These two stocks are not the right fit for my own investment philosophy but investors with specific knowledge of drug research may wish to review their product lines and market positions. Small pharmaceutical companies are difficult to analyze without an intimate knowledge of biology, chemistry, and the FDA approval process. The best that other investors and analysts can do is review their financial statements.
Full disclosure: No position in PCYC or VVUS.
Sunday, December 26, 2010
Rich Is A Quarter Million Annual Income
Right now I'm listening to the weekend edition of Marketplace on NPR. There's a lot of discussion on the mentality of the wealthy. Many rich folks don't seem to think they're rich, even if they're centimillionaires. That's funny. I would definitely think of myself as rich if I reported that kind of adjusted gross income on my IRS Form 1040. I'll go with the argument that a $250,000 annual income qualifies an American as rich.
Pundits spent a lot of bandwith defending extension of the previous Administration's tax cuts. The focus was on redefining wealth upward to portray quarter-million incomes as non-rich. The meme won thanks to help from mass email lists and the blogosphere.
The Census has a detailed breakdown of thresholds for relative affluence based on educational attainment. The data for holders of master's degrees imply that I'm affluent. I'll buy that. The odd part is that the people I meet at the San Francisco Opera probably consider me to be unworthy of being affluent. I'll buy that too. I'll also buy their real estate out from under them when deflation wipes out their bond portfolios and hyperinflation leaves them too illiquid to pay their bills.
Pundits spent a lot of bandwith defending extension of the previous Administration's tax cuts. The focus was on redefining wealth upward to portray quarter-million incomes as non-rich. The meme won thanks to help from mass email lists and the blogosphere.
The Census has a detailed breakdown of thresholds for relative affluence based on educational attainment. The data for holders of master's degrees imply that I'm affluent. I'll buy that. The odd part is that the people I meet at the San Francisco Opera probably consider me to be unworthy of being affluent. I'll buy that too. I'll also buy their real estate out from under them when deflation wipes out their bond portfolios and hyperinflation leaves them too illiquid to pay their bills.
China Prepares To Fight Inflation
China has learned appropriate lessons from America's real estate bubble. It is preparing a tighter monetary policy to avoid wrecking its economy:
Normally, raising interest rates is bad for stocks. It increases companies' borrowing costs and tempts them to pay higher dividends to keep their earnings yields competitive with new bond issues. China's stock market is reacting much more positively to this news than theory would allow:
Chinese stocks like the news because it signals that the government is committed to smart growth policies. It also means the yuan will be more valuable, signaling to the currency markets that China will indeed let the yuan appreciate on its own terms.
Will the U.S. follow suit with interest rate increases? It's doubtful. The U.S. needs a weaker dollar to keep its exports attractively priced. That plus credit availability are supposed to keep GDP growth from stalling here. The U.S. is unable to accept a sharp downturn as the bitter medicine for asset bubbles. It may be forced upon us anyway.
Full disclosure: Long FXI with covered calls and cash-covered short puts.
The People’s Bank of China increased key one-year lending and deposit rates by 25 basis points on Christmas Day in its second move since mid-October. The change took effect yesterday.
Normally, raising interest rates is bad for stocks. It increases companies' borrowing costs and tempts them to pay higher dividends to keep their earnings yields competitive with new bond issues. China's stock market is reacting much more positively to this news than theory would allow:
China’s stocks rose and yuan forwards climbed to the highest level in five weeks after the central bank increased interest rates for a second time since October, bolstering speculation inflation will be contained.
Chinese stocks like the news because it signals that the government is committed to smart growth policies. It also means the yuan will be more valuable, signaling to the currency markets that China will indeed let the yuan appreciate on its own terms.
Will the U.S. follow suit with interest rate increases? It's doubtful. The U.S. needs a weaker dollar to keep its exports attractively priced. That plus credit availability are supposed to keep GDP growth from stalling here. The U.S. is unable to accept a sharp downturn as the bitter medicine for asset bubbles. It may be forced upon us anyway.
Full disclosure: Long FXI with covered calls and cash-covered short puts.
Goldman Sachs Gets Smart On Bonuses
I've had my fair share of skeptical things to say about big firms like Goldman Sachs, but I do take note when they do something right. Goldman is going to make a greater effort to tie compensation to performance:
The good news is that top executives will have their fate tied more closely to the long-term health of the firm, so closing some big deals one year won't have an outsized impact. The bad news is that this kind of structure tempts executives to play games with reported earnings and leverage that can skew compensation upward. Please, Goldmanites, don't wreck your balance sheet just to shoehorn an extra dime into your deferred compensation account.
The investment bank, based in New York, said in a regulatory filing this week that bonuses will be linked to financial benchmarks that might include return on equity, earnings, or the price of Goldman's stock or other securities issued by the company.
The good news is that top executives will have their fate tied more closely to the long-term health of the firm, so closing some big deals one year won't have an outsized impact. The bad news is that this kind of structure tempts executives to play games with reported earnings and leverage that can skew compensation upward. Please, Goldmanites, don't wreck your balance sheet just to shoehorn an extra dime into your deferred compensation account.
The Limerick of Finance for 12/26/10
Holiday shopping went well
Retailers had plenty to sell
Spending cash is such fun
And when it's all done
After-holiday deals ring a bell
Retailers had plenty to sell
Spending cash is such fun
And when it's all done
After-holiday deals ring a bell
Subscribe to:
Posts (Atom)