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Anthony Alfidi
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Anthony J. Alfidi is the founder and CEO of Alfidi Capital, an investment research firm in San Francisco, California. Alfidi Capital publishes free investment research with honesty and humor. Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame... More
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  • Extraordinary Fund Manager Myopia

    I answered a survey today from a major consulting firm that canvasses senior people in portfolio management and investment analysis. I won't reveal the firm's name but I will get a copy of the survey upon publication. The questions addressed investment professionals' expectations to see in the markets over the near term. I expect a bunch of bad news, unlike many pros who manage serious money.

    A whole bunch of obvious risks have not deterred asset managers from seeking safe havens. Teachers' pension funds are piling into US residential real estate investments at all-time high prices. Currency arbitrageurs have not been deterred by several trading firms' blowups after the Swiss repriced their currency. Corporate earnings and P/E ratios at generational high points eventually revert to their historic means. I could go on about these things but the only people paying attention are on the fringes of the finance sector. Mainstream thinking among portfolio managers still encourages chasing yield. The Wall Street crowd assumes central bank puts under asset markets can never fail.

    Geopolitical risks should compound any sane money manager's planning. Russia's diversion of reserve funds from infrastructure investment to bank backstops should signal a low-growth future. Emerging market stocks that sold dollar-denominated debt will struggle to make higher interest payments while the dollar stays strong. The enormous potential for instability in Venezuela, Argentina, and Saudi Arabia should throw cold water on any bullish case for those countries in 2015. Money managers plow ahead anyway, oblivious to contrarian cases.

    The hard asset hedge crowd has enough myopia of its own. Perpetual fans of precious metals don't think about the impracticality of bullion bars in daily transactions. Stocks in the natural resource sector have cratered since 2014 and will stay low as long as currencies of hard asset producing countries stay weak. The oil sector shakeout means a lot of so-called bargain buys among junior producers will instead become bankrupt buys as major producers buy out their nonproducing assets.

    Watching supposedly smart money managers make increasingly dumb bets is a fun pastime. I like it when dumb people lose millions after greed and hubris destroy their judgment. A penultimate day of reckoning awaits investment professionals who assume central banks will never lose control of currencies or yield curves. Hedge fund managers will learn the hard way how to write farewell letters to their formerly wealthy clients. I will relish bottom-fishing for cheap assets once myopic fund managers are wiped out.

    Tags: global, macro, risk
    Jan 29 5:40 PM | Link | Comment!
  • Euro Drop Brings Woe To Europe

    The euro's precipitous decline reflects more than financial market nervousness over Greece's political stability. Persistent structural weaknesses in much of Europe's constituents feed the euro's fragility.

    The European Central Bank (ECB) watches the euro's unfolding crisis with alarm. Its most recent reforms allow it to act more decisively in setting monetary policy, much like the US's Federal Reserve. It can now move swiftly to unleash quantitative easing that can flood the Continent with new credit that supports the euro's nominal value. The deluge remains a simple-minded central banking solution to a complex problem that only the liquidation of bankrupt debtors has ever solved.

    The national economies of Spain, Greece, Italy, and even France continue to suffer from severe competitive deficiencies. All are saddled with high taxes and complex regulations that make their economies less competitive. Their exports would suffer without Germany's willingness to allow its creditworthiness to support their profligate borrowing. That profligacy partly drives the ECB's plan to buy European sovereign debt. It also leads to a vicious feedback cycle of debt-driven sovereign spending, credit-enhanced consumer spending, and currency inflation that will demand still more quantitative easing.

    European banks have unfortunately started down the road of paying negative interest rates on deposits. Charging depositors for the privilege of holding savings in cash accounts feeds the euro's deflationary trend by slowly taking the most liquid form of money out of circulation. Deflation gets a bad rap from central bankers, but the eurozone's high level of indebtedness means a deflationary spiral makes it harder for private-sector debtors to pay their bondholders. The ECB knows that European corporations can't afford to be sanguine about deflation, hence the increasingly loud financial sector chatter for a more inflationary monetary policy.

    The European unity experiment is under more stress now than at any time in its history. Lithuania's entry into the currency union is in no way a counterbalance to Greece's potential exit; the difference is measured in hundreds of billions of euro-denominated debt that could instantly evaporate. The ECB would be well advised to delay its planned QE past this month's Greek elections. It would otherwise swallow worthless Greek bonds whole.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: The author is long a put position against FXE.

    Tags: FXE, Europe, euro
    Jan 08 1:51 AM | Link | Comment!
  • Oil Price Drop Affects Real Economies

    The price of oil has fallen by more than half since its 2014 high over $100/barrel. The crash has been a boon to consumers and sectors heavily dependent on fuel, such as airlines and trucking. It has not been so kind to developing countries with economies heavily oriented towards natural resource extraction.

    The US is still the world's largest consumer of oil, both in gross volumes and per capita use. American consumers will be tempted to drive more in advance of their traditional summer driving season with gasoline so cheap. Trucking companies can afford to fit more less-than-truckload (NYSEARCA:LTL) cargo configurations into their daily delivery cycles because economizing on fuel is not such a strong concern. Airlines should be more profitable in 2015 as they will not need to purchase expensive forward contracts that hedge the cost of aviation fuel.

    The global supply glut in petroleum means ocean-going shippers can keep their supertanker fleets active. Time-charter equivalents (TCEs) for shipping contracts should remain strong. Carriers with weak balance sheets have a rare opportunity to bank some cash and pay down debts they incurred in recent years' shipbuilding booms.

    Oil exporters that cannot reduce their production costs are in for a very rough ride. The oil supply glut is forcing high-cost producers to pump at rates higher than normal just to maintain national revenues. Russia, Iran, and Venezuela will see their oil-dependent economies significantly hobbled in 2015. Investors betting on rebounds in those countries' equity markets or currencies will have their patience severely tested.

    Institutional investors domiciled in the US may be the most sorely affected by oil's collapse. Hedge funds and their institutional funders bet heavily on high-yield debt from shale oil explorers and oil field servicing companies. The Federal Reserve's determination to keep its interest rate target at zero forced yield-hungry funds to take on significantly more risk. The deteriorating financial positions of US oil sector companies will severely strain their ability to fulfill debt repayment commitments in 2015. Turning points in the high-yield debt market often presage broader turning points in the bond and stock markets. Weaker companies collapse as they fail to make debt payments, lay off employees, and abandon their suppliers. These effects can quickly ripple through the US economy and financially healthy companies will not be immune.

    Gasoline demand continues to soften as Europe and other developed world economies enter recession. The end of oil's drop is nowhere in sight. A car driver's gain is an energy investor's pain.

    Tags: energy, oil
    Jan 08 12:55 AM | Link | Comment!
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