Seeking Alpha

Anthony Alfidi's  Instablog

Anthony Alfidi
Send Message
Anthony J. Alfidi is the founder and CEO of Alfidi Capital, a research firm in San Francisco, California. Alfidi Capital publishes free financial research with honesty and humor. Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame (cum laude) and... More
My company:
Alfidi Capital
My blog:
Alfidi Capital Blog
View Anthony Alfidi's Instablogs on:
  • Social Security Loopholes Will Accelerate Systemic Insolvency

    I had the misfortune of listening to a financial "expert" today who pointed out multiple loopholes in the Social Security system's enrollment and claims processes. Savvy enrollees have almost a dozen ways to game the system and milk it for more benefits. Only a small percentage of Americans figure out how to do this every year as they become eligible. Their impact on the system is probably small, but Social Security will be more unsustainable as a result.

    The Social Security Administration (SSA) publishes its financial reports every year. The FY14 statements show the SSA receipts and outlays as part of the total finances of the federal government. Remember that the next time someone says Social Security is an insurance program with its own asset base as collateral for liabilities. It is no such thing. It is a transfer payment from current taxpayers to current beneficiaries. More well-informed people legally gaming the system will increase the burden on current payees to keep the system solvent.

    I read the "Highlights of Financial Position" section of the SSA's FY14 report. The chart on page 31 for the number of months of expenditures the FY-end asset reserves can pay shows a decline from 42.5 in 2010 to 37.1 in 2014. That should concern anyone who thinks they can extract more early benefits with legal tricks. I will quote directly from page 31's long-term financing discussion: "Social Security's financing is not projected to be sustainable over the long term with the tax rates and benefit levels scheduled in current law." The trust fund asset reserves will be depleted by 2033. The fawning, laughing fools who listened to today's financial expert have another 18 years to jump through loopholes for a few thousand dollars more each year in benefits.

    I am getting much better at suppressing my inclination towards eye-rolling and smirking when self-proclaimed experts say dumb things. Today's expert showed his ignorance by claiming financial advisers don't sell TIPS because investors can get them commission-free directly from the US Treasury. True, but many advisers manage ETF wrap accounts that include TIPS ETFs that are eligible for covered call writing. A yield-enhancing ploy like covered call income more than makes up for a few basis points of expense.

    I felt disturbed when this expert claimed the US would renege on the bonds it owes to China before it would renege on the nonmarketable, intergovernmental holdings owned in the SSA's funds. He thought it was a joke. This guy had no clue what a selective bond default would do to the sovereign debt rating of the US. Selective defaults would make further bond issuance much more costly, jeopardizing the government's ability to fund future benefit recipients. Just ask Greece's finance minister. The valuations of bonds SSA currently owns would logically suffer if government accountants were honest and marked them to market. Since the bonds are technically nonmarketable, some exceptional financial excuse could keep their valuations artificially high so the SSA trust funds could remain technically solvent. Any argument for selective default also completely ignores the hyperinflation risk the US would experience in the event of a global run on the dollar. The international bond market would purge as many Treasuries as possible, making the Federal Reserve the instant buyer of last resort for every US bond on the planet. Way to go, mister expert.

    The audience entertaining this dude today just laughed it all up. I won't disclose the expert's identity or the venue, but suffice it to say it's one of my favorite intellectual haunts in The City. The expert admitted that the US government wants a broad constituency of payers and beneficiaries to maintain Social Security's political support. The financial services sector would call that a Ponzi scheme given its obvious unsustainability. The eventual political changes to the program will force means tests and lower benefits. It makes more sense for old folks between the ages of 66 and 70 to claim benefits ASAP before they evaporate. Maybe they'll make a few bucks before the whole Ponzi collapses. People in the audience were laughing heartily at the expert's lame jokes toward the end of the presentation. I could not laugh at all. The eventual impoverishment of many Americans who falsely assumed Social Security would be there for them is no laughing matter.

    Tags: TIP, TIPS, inflation, bonds
    Aug 15 1:21 AM | Link | 1 Comment
  • Continuing Oil Crash Points The Way To 2015's Energy Bargains

    The second coming of 2015's oil bear market is going on right about now. Plenty of bargain hunters who thought they bought into the bottom of the oil rout a few months ago are having buyer's remorse. Watch Brent fall to 49 today and WTI fall to 43 as Saudi pumping cuts the legs out from under US shale producers. Energy stocks can still get cheaper. Finding the ones likely to survive this bear market takes serious sleuthing.

    Forget about hunting junk bond bargains. The oil services sector in the US is not done culling its own herd. Junior producers are still pumping at full volume just to make it look like they can service their high-yield debt with cash flow. That charade still has a few more months to run. Any hedge funds or well-heeled private investors who think energy sector junk bonds have bottomed are welcome to try their luck. Some people learn the hard way.

    Other oil targets abound. Owning BNO means betting on Brent crude futures and owning USO means betting on WTI crude futures. Any compression between the Brent and WTI spot prices reduces the potential for arbitrage between these two ETFs. More exotic bets like DBO and USL look like very complicated ways of leveraging a single commodity price. Simple securities have fewer risks than complex ones. The ETFs and other instruments betting on the magnitude of changes in oil prices have more moving parts than I can track.

    The least complex ETF for exposure to the oil producing sector is probablyXLE, Holding a representative sample of large energy producers means each producer's operating costs are diversified away. A simple equity ETF also has no internal leverage, so it does not expose its owners to exorbitant expenses or magnify their losses. The P/E of 22 still looks high and resembles the broader equity market's high P/E after years of central bank stimulus. A weakening sector should be priced at a bargain to the broader market, so XLE may have further to fall.

    The price of oil itself may have further to fall. Saudi Arabia is not reducing its production. Storage is full in the US and shipping companies are seeing booming business in chartering tankers just for offshore storage. Iran may have already begun selling the oil it has stored and will certainly increase production later in 2015 as the end of sanctions allow it to export. I do not believe oil traders have priced in the effects of full production from Iran and other Middle Eastern countries that badly need hard currency. More pain for the US oil sector means more bargain entry points for investors.

    Tags: BNO, USO, DBO, USL, XLE, oil, energy
    Aug 12 7:20 PM | Link | 1 Comment
  • Alfidi Capital Visits The MoneyShow San Francisco 2015

    The annual pilgrimage to the MoneyShow San Francisco has been my ritual since graduate school. Experts keep my financial knowledge base refreshed. Times change and shows like this one will eventually be completely virtual. The highlights for 2015 covered the disruption of financial advising and health care. I don't need to repeat the most important talks because those will eventually be webcast. I do need to share my impressions from the MoneyShow.

    A former Bear Stearns economist led off by describing our post-monetarist environment. I won't blame an economist for Bear Stearns' collapse. Executives have the right not to listen to their top advisers. I will blame those economists who think zero interest rates and low reserve requirements are a permanent condition. Low commodity prices are already here, so that horse has left the barn. Economists don't get paid to predict something that has already happened. I'm all on board with weaker countries heading for crisis and more negative trends for US corporate earnings.

    Venerable tech guru George Gilder peered ahead into life after Google. If wealth is knowledge and growth is learning, then Mr. Gilder should be one of the richest people on the planet. I guess information theory doesn't always equate to investment theory if information ignores capex requirements. Bell's Law of computer classes describes a corollary of Moore's Law. Both are useful to determine the amount of capex to commit to enterprise development. Neither are useful in making personal investment decisions. I am not clear on Mr. Gilder's formulation of "bank assets ex cash" to describe the Fed's daily borrowing. A Web search of that phrase brings up legal discussions about dividing assets in a divorce. Adding the Federal Reserve to this Web search brings up the FRB's H.8 release, so I wonder if Mr. Gilder really meant to describe the assets and liabilities of commercial banks. He may have the big picture mostly correct about cloud layers but I still don't think blockchains will give him a magic currency.

    The next panel in George Gilder's Telecosm Forum echoed the kind of stock picks he made 30 years ago when he said something about Intel. Bullish talk about SDN, cloud, and front-haul data processing for apps makes me think that data center REITs will do better than wireless telecom tower REITs if I had to choose between the two. Bring on the fog computing. Tech picks only go so far. Intel took off because it was tied to Microsoft Windows' desktop monopoly. These tech stocks only work as growth stories if they are tied to network effects that impose huge switching costs on millions of retail users.

    I have sought a decent predictive model in life sciences for years. The finance community cannot rely upon the same old milestone drivers of stock price movements for drug development companies. I had a gentlemanly confrontation with another investor at the MoneyShow who became frustrated that one participating company did not mention its employee headcount, ticker symbol, annual revenue, target market, or other characteristics. Granted, those are details any analyst should ferret out in due diligence. The one valuable insight I did find was a computational algorithm that enabled better understanding of molecular-level biological processes. That one insight would be worth more to the finance sector than a stack of SEC filings. Financial analysts should read Isaiah Berlin's "The Hedgehog and the Fox" about the difference between divergent, multifaceted thinkers and singular, profound thinkers. Great investors can switch effortlessly between either perspective.

    Silicon Valley is taking down Wall Street. New fin-tech concepts start with domain knowledge from human experts, then add machine learning. What if the human experts are flawed? Are they truly the best in their class? True finance experts are rare because their unique brain chemistry enables "six sigma" insights. Warren Buffet, Charles Munger, Burton Malkiel, Carl Icahn, Bill Gross, and John Bogle are true experts not because their methods are peer-reviewed, but because their intellects and temperaments combine for abnormal results. Obviously it is difficult but invaluable to tap them, so lesser experts are poor substitutes. The panel remarked that descriptive analytics give deep insights into a portfolio's geopolitical risks, like the probability of a regime change as a sell trigger. George Gilder just had to mouth off from the crowd during one Q+A. His complaint was that if every investor becomes a passive investor as robo-advisers herd them into low-cost index funds, they really become "parasitic investors" who mimic each other and deprive the market of growth and learning. All I could do is shake my head when I heard him blathering. Come on, George. Does he not understand index investing at all? The growth and learning happens within these stocks as they innovate, become more productive, and increase earnings. Developing new investing theories like modern portfolio theory and arbitrage pricing theory adds learning to a portfolio's efficient frontier. Index investing enables all of that growth and learning by minimizing the costs of wasteful active trading. I do not need Mr. Gilder to tell me how to invest.

    Another biotech thesis was a pick and shovel play on specialized real estate for life science research campuses. That idea works as long as it rides the biotech bubble. I did not see any data on this particular idea's performance. Dropping brand names of top pharma companies' revenue is only relevant if they are tenants in such real estate.

    I quietly LOL'd at a "tag cloud investing" slide covering cloud, China, wearables, and other trends completely out of context. More computing power, faster data transfer, cheaper data centers, app proliferation, and microbial engineering all have something to do with lifting the fog around innovation and change. Wireless capability has not yet caught up to storage or processing, so maybe there's some untapped opportunity in those wireless tower REITs after all.

    Carver Mead invented Moore's Law. He wrapped up the Gilder Telecosm Forum with a peek into the basics of the universe. Quantum systems are so different from anything we understand in our daily reality. They have nothing to do with the thermal system disorder that gives time its one-way direction. I appreciated the reference to sci-fi author Robert Heinlein when he said we should "grok" quantum information exchanges intuitively. He concluded by predicting a revolution in science itself that would resemble technology's revolution. The guy was pure genius. I live for the chance to hear people like him speak in person.

    After the telecosm comes the many microcosms of talks on specialized topics. I like business development companies (NYSEARCA:BDCS) as an idea but their fixed rate loan portfolios make them poor performers during high inflation. I would consider an ETF for BDCs but only in a normal economy with normal rates for growth, inflation, and debt interest. I am very skeptical about companies issuing debt just to pay extraordinary dividends or buy back stock, and some of them may end up in BDCs' portfolios.

    I prefer options as hedges or yield enhancements, not as the "strategic" investment some brokerages want to pitch. Too many options specialists favor short term trading. They are gamblers rather than fundamental analysts. "Beta weighting" that ties options to equities sounds like an interesting concept. I will let others tie up the Greek letters they need to explain it.

    The long march of ETFs into the fore brings passive investing to cheap robo-adviser platforms. These products have restored asset allocation as the primary driver of portfolio returns. Financial advisory relationships can now be valued in minuscule basis points as venture funding for robo-advisers makes cheap solutions more desirable. Cheap "core" portfolios mean the only "satellites" adding value must be extremely unique. I will remind myself not to trade any ETFs within one hour of the market's open or close, when bid/ask spreads are widest.

    I an newly fascinated with farmland REITs. I wonder if the ROI of raw farmland correlates with agribusiness stocks or food commodity prices. Aqua farms and solar farms are boutique touches that may add value to farmland in some areas. Easements for pipelines, highways, and other infrastructure also add value. Farmland exposure is one more type of hard asset hedge. Such a REIT makes farmland liquid, and it retains pricing power during inflation if its owned farmland is leased to tenant farmers under short-term leases. Wow, I may have stumbled on a real game-changer.

    One MLP expert said an MLP's distribution sustainability depends on where it operates in the energy chain: upstream, midstream, or downstream. Upstream MLP prices swing with the WTI crude oil price. Midstream MLPs are a larger, diverse sector. Downstream MLP refineries are tied to both crude and fuel prices. The crack spread of a low crude price and high fuel cost equals profitable refineries. Some MLPs issue bonds, so analysts should know how bond yields tie to issuers' credit ratings and distribution history.

    Dividend paying companies became investors' little darlings as the Federal Reserve forced everyone to chase yield. I wonder about the typical payout ratio of a sustainable dividend. Are there valid REIT metrics too? How about lease length and type (i.e., triple net versus others), credit rating, and occupancy rates? I'm pretty sure any company whose dividend growth exceeds US GDP growth will outperform the market because it has some durable competitive advantage, unless they're taking on debt just to raise dividends. I would favor REITs with short term leases over long term leases because they have better pricing power during periods of high inflation.

    Activist investing works for investors who have lots of money and can add value by directly advising company management over the long term. It's probably not suitable for the retail investor. The SEC's Form 13 series helps us follow the money trail, and I would add that Form 4 filings are also useful. Underperforming companies with clean balance sheets and low insider ownership may not stay so clean for long if they become activist targets, because bad management will lard them up with debt. I stay away from retail investment products that claim to use activist investing because they may not have the managerial acumen to fix what ails an underperforming company.

    Marilyn Cohen of Envision Capital Management is always one of my favorite MoneyShow experts. Her approach to bold and brave bond investing acknowledges that many bond issues are rated in the BBB range. I bet calling it a "bold brave bonds" talk was a play on that BBB rating. She thinks investment grade bonds are the most overvalued part of the bond market because institutions have gravitated to them over Treasuries. Any investor can check SIFMA's Investing In Bonds and MSRB's EMMA for bond data but those sites don't give the whole picture for specialized bonds. Investors must track local factors affecting muni water bonds and prison bonds. I agree with Marilyn that the IMF and Federal Reserve obviously collaborate, and that Greece's problems will continue.

    I made the mistake of sitting through one panel on a "high growth" subject that was really all about growing something that gets people high. Yes indeed, the hot trend of investing in a certain green plant has hit the retail investing mainstream. I have never used that plant, nor will I ever use it. The product remains illegal to cultivate or sell under current Federal law but that has not stopped states like California from experimenting with decriminalization. The sector's advocates need to stop putting the cart before the horse and outline a path to legalization that is consistent with the rule of law in a constitutional republic. Big Pharma and agribusiness lobbies can be this young sector's allies if they will work with the US Congress on drafting legalization bills. Once the President signs such a bill into law, then Warren Buffett and whoever else can buy all the land they want for cultivation. I wonder what the CFTC will do with futures contracts for this plant after legalization.

    Disruptive tech investing now has a unique approach thanks to BDCs. Apparently some BDCs have startup exposure in their loan portfolios. Exit events generate special dividends. The BDC shares experience run-ups prior to a startup's IPO and can then be shorted after the IPO. I think one way to play a BDC in advance of such an IPO is to buy-write the BDC with at-the-money calls and let it be sold away. It could then be a short sell after the shares are called away. I may just try that at some point with my own money, if we ever have a normal stock market again.

    I will not embarrass one finance professional who tracks emerging markets. Ignoring international indexes like Transparency for corruption and Heritage for economic governance carries huge risk. Anyone who thinks the Chinese government is the best in the world needs their head examined. That country's rush to urbanization was a huge malinvestment. Their top leaders can't be that bright if they think state intervention in the stock market will stop a selloff. It is delusional to think Chinese companies will add Westerners to their boards for better governance. Boards are always rubber stamps for executives. Westerners typically ignore the Asian "two faced" approach to business with the non-Asian world. The Chinese way of "getting things done" pollutes the environment, steals IP, and overbuilds infrastructure. I will not invest in instruments that follow that approach.

    Marilyn Cohen returned for a second talk on nitty-gritty bond investing. I dislike bond ETFs as much as Carl Icahn. Bond ETFs add imperfections that negate the role individual bonds are supposed to play in portfolios. Marilyn thinks institutional selling could trigger a bond market crash, combined with broker/dealers who who are unwilling or unable to commit capital to trades. Detroit's bankruptcy destroyed the myth that governments will raise taxes to pay off general obligation bonds. The new world of muni bonds mean bondholders will get the bad end of any deal in restructuring. She thinks muni bond investors should track facts: balanced budgets, good reserves, accurate spending projections, days of cash on hand, timely financial statement filings, and statement footnotes that reveal promised benefits and unfunded liabilities. The opposite or absence of such factors would indicate poor municipal management, giving reason to avoid such bonds.

    Some ideas are too bad to deserve attention. Hard targets for return on capital make sense in a normal environment, but not now. Fully-invested herd followers have no contrarian edge. Separately managed accounts are totally stupid. Index changes remove poorly performing companies for price reasons, not fundamentals, and that is why index arbitrage strategies generate alpha.

    Investing for income that anticipates inflation means having something other than plain vanilla bonds. We all have our pick of mortgage REITs, BDCs, convertible debt ETFs, sector ETNs, specialty finance companies, and LNG shipping companies. I love the funny term "offensive assets" because I've never heard a non-defensive strategy with that label. Allow me to vent a frustration here. All of these freaking newsletter publishers love the bubble sectors! Finance, housing, biotech, and health care get plenty of attention. Hardly anyone at the MoneyShow sees stock or bond corrections coming. I had good returns in past years by writing covered calls on high-dividend securities. I just won't risk it while central banks are pumping everything.

    Anyone who expected more detail from me should have attended the MoneyShow themselves. I have blogged only a fraction of the things I learned. The remainder is mine to keep until such time as the markets allow me decent entry points. Investment wisdom is only truly actionable when an investor thinks on their own. I invest only for myself, and the MoneyShow always helps make that easier.

    Tags: economy
    Aug 07 5:58 PM | Link | 1 Comment
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.