Showing posts from September, 2007

Added to Watch List: Pulte Homes Exchange Traded Bond (PHA)

(UPDATED) In a prior post I mentioned low-quality bonds that were beaten-down in the last few months. My contrarian impulses have made me to look at homebuilder bonds (I also thought about bonds of Abitibi Consolidated--a stock I'm thinking of investing in). There are a lot of bonds one can invest in but I am limiting myself to exchange-traded bonds. For those not familiar, these are bonds that trade on an exchange, whereas the vast majority of bonds do not trade on an exchange (this is also what makes bonds unattractive to small investors). With an exchange traded bond, you will buy/sell as if it were an ETF or stock. I have previously held one of the exchange-traded bonds of General Motors (symbol: GMS). The one that caught my eye is the Pulte Homes 7.375% Senior Notes due 6/1/2046 (symbol: HMA). You can get more information from the best free bond investing site on the planet: Quantum Online (if you are interested in bonds, you should bookmark this site. You need the free regi

Japan Post Privatization

Japan is set to privatize its mammoth postal service, Japan Post , on Monday. For those not familiar with Japan or Japan Post, this may seem innocuous and just another step towards privatization of government branches. But Japan Post is a bit different from any other government entity that has been privatized by any government elsewhere. Japan Post isn't a postal service; it's a massive bank. In fact, after privatization, it will become the largest bank by deposits: The entity privatized on Monday [with $3.03 trillion] will eclipse Citigroup, with assets of $2.22 trillion, as the world's largest commercial bank. Third will be Japan's Mitsubishi UFJ Financial Group, with $1.67 trillion. The privatization will be kind of slow with the final spin-off not occurring for 10 years: Under the 10-year privatization plan, Japan Post will on Monday be broken into four separate businesses, initially held under a government-controlled holding company: An insurance company, savings b

Purchase/Increase: TRB

Added more Tribune (TRB) today. As mentioned before (search for TRB or click on the TRB label for prior articles), this is a merger-"arbitrage" play. The risk is definitely quite high but I feel that the deal will close. The two big threats are: FCC won't approve the waiver: Tribune owns a waiver that enables it to own TV channels in the same regions, which is normally not permitted in USA. This is the biggest risk but I believe the commission will vote for the waiver given that newspapers are struggling. Even if there are some issues, Tribune can spin off their TV stations or something. Bankers can't raise the money through debt: This used to be a big threat a month ago but given that the bond market has calmed down somewhat, I think financing should be fine. Sam Zell is unlikely to walk away and Tribune has already taken on massive leverage as per the first part of the takeover deal, so it is unlikely for the bankers to walk and face lawsuits and damage to their

Takefuji Buying Back Shares

Takefuji (TSE: 8564) shares rallied recently after announcing that it is buying back stock . It will buy back at most 3 million shares, which represents 2% of the total outstanding. The amount of the buyback (2%) is small but I still like the idea of buying here given that the stock is trading near multi-year lows. Some companies announce buybacks without buying anything but hopefully this isn't the case here. Assuming enough reserves have been set aside for the consumer loan liabilities (I think they have) then buying back shares is prudent right now. The shares are down more than 50% this year alone and the stock looks cheap. Takefuji is trading around 66% of book value and should post positive earnings next year. It's better than issuing dividends (Takefuji already has a dividend yield of around 5%). I'm usually in favour of buybacks over dividends. The whole Japanese consumer lending sub-sector has been suffering lately, and I think buybacks is an attractive proposition

Insights from GaveKal

In my opinion, the best articles to read are those that (i) challenge your view, or (ii) look at the world from a unique point of view. I am always impressed by the thoughts emanating from Louis-Vincent Gave, Charles Gave, and Anatole Kaletsky of GaveKal . The fact that these ex-European (whatever that means :) ) are located in Hong Kong gives us a fresh perspective to those of us in Canada or USA. Unfortunately for small investors like me, it's hard to get free information from outfits like GaveKal. John Mauldin, who also writes interesting articles, has posted GaveKal's latest commmentary on his website (you can also subscribe to John's free commentary). This article, titled Do Not Forget About Changes in Velocity , is very timely and one of the most interesting I have read in the last few months. GaveKal basically questions whether a credit contraction can still occur. Right now, the market is pricing things as if there is an inflationary boom in front of us. One just ne

New Template

I have changed the blogger template because the previous one was hard to read (the links on the left were hard to read, and the white background text was too plain for me). I edited two templates from to arrive at this one. The header is kind of messed up and doesn't line up but I'll try fixing that when I feel like--if I feel like it :) Every time I edit the template, I keep losing the lists on the menubar on the left so I have to re-type them. Kind of annoying... If you want some free templates, check out They have some good stuff there...

Sam Zell Lecture at Wharton

Forbes has a lengthy article on Sam Zell's recent lecture at Wharton. It is a very good article and I recommend it to anyone interested in real estate investing or contrarian strategies. Sam Zell, the Gravedancer (cool nickname; he also looks like one :) ), is a contrarian-type investor who made his fortune by buying real estate investments. He has owned large amounts of real estate but isn't a developer (refer to one of the quotes below to see why he isn't). I never heard of Sam Zell until I looked into the Tribune merger. I have a position in TRB (wish I had more money to invest in that) and expect the deal to close. I think contrarians may want to read some of the stuff Sam Zell has done because he is a textbook example of a successful contrarian. I am going to be heavily quoting the article because I find a lot of useful information in Zell's words and thoughts. I have bolded concepts that I find insightful. ...the Chicago-based investor said current markets are sp

Criticism of the High Inflation Supporters

I recently posted a response on the Crow Bar rebutting those who think inflation is much higher than the officially reported number. I'll paraphrase that comment here. To give some background, some people out there (mainly the goldbugs) believe that inflation is far higher than the reported number. Many actually think that inflation is way beyond 5% (officially full inflation is around 3% with core inflation around 2% (depends on period)). An argument for inflation being higher makes no sense whatsoever. My key arguments against such view are: The market, which is smarter and more nimble than any individual, central bank, or government, has not priced in such a high inflation. Depending on the number you pick, a high inflation number implies negative economic growth (i.e. contraction). There is zero real evidence of economic contraction. We all believe in the free market (I hope). Given that, why hasn't the market, which is smarter than anyone including central banks, priced i

New York Times free (WSJ likely as well)

Last week, The New York Times changed their policy and made everything on their website, including archives back to 1987, free. This makes a cheap guy like me happy :) Finally, we can not only read opinions and editorials for free, but we can also link to their full articles and research past historical articles. If the New York Times is as good as I think it is, this should increase its readership. The Wall Street Journal website may also become free. Rupert Murdoch (as much as I disagree with this conservative views, he is a one savvy businessman--with a trophy wife to boot ;) ) has indicated that he has thought about making WSJ free. This probably won't impact the business crowd or wealthier investors who would have paid anyway, but small investors or the general public will be tempted to use WSJ for their primary business news in the future. Since I am a liberal-libertarian, I love NYT for their stories on life, arts, politics, and so forth. I don't generally agree with t

Market Performance After Federal Reserve Rate Cut

Businessweek has an article looking at performance of S&P 500 components after the first rate cut. You can read the full article here . (source: The Fed's Move: Cause for Joy—or Worry? by Ben Steverman, BusinessWeek. URL referenced above) As is the case with most stock market analysis of inflection points, statistically the sample size is way too small to draw any meaningful conclusion. Nevertheless, we find that the market has gone up on average after 6 months after the first rate cut. However, in the last 20 years, the market actually declined in 1982, 1991, and 2001--these were recessions as you will recall. So the way I look at it, the market will likely decline if there is a recession. In other words, the most important thing now is, not what the Federal Reserve does next, but whether we have a recession on our hands or not. (On an unrelated note, the long bonds sold off very sharply today. This is one of the few instances where the bonds sold off big time while the broad

Alan Greenspan Unplugged

Well, now that Alan Greenspan does not work for the government, he has been freely disclosing some interesting thoughts. His just-published book The Age of Turbulence: Adventures in a New World is supposedly worth reading if you are interested in Alan Greenspan's views, central banking, or economics in general. I'm too cheap to buy the book ;) and have a million other books on the list (I'm a newbie so I still have a million classics to catch up on). I'm going to list two interesting views of his. I agree with both of them. Oil is a Big Factor in War Alan Greenspan managed to say what warmongers and war profiteers the world over never say. Namely, that oil was one of the major--but not the only--reason for the Iraqi war, not to mention US foreign intervention in the Middle East. I'll quote Robert Weissman's remark regarding this situation: Greenspan's remarks, appearing first in his just-published memoirs, are eyebrow-raising for their directness: "Wha

Navigating the Takeover Propaganda

Saul Sterman recently wrote a good article about all the rumours, lies, exaggerations, truths, and propaganda that revolve around takeover deals. In his article he analyzes the Whole Foods Markets (WFMI) takeover of Wild Oats (OATS). He zeroes in on people that he terms deal breakers , who are opposed to the deal. A lot of words are typically uttered by these deal breakers regarding the feasibility of the deal but hardly any of it becomes true. Saul mentions 10 commandments that can be used to shed some light on the comments by deal breakers. I think his article is a good framework for those, like me, looking at takeovers. As I have mentioned previously, I'm attempting to profit from the ABN and TRB takeovers. If the risk is ok with you, TRB still looks attractive to me.

Greenspan's Book: Inflation Likely Higher in the Distant Future

I ran across The Wall Street Journal's quick summary of some of Alan Greenspan's thoughts in his new book, The Age of Turbulence: Adventures in a New World . The part I found insightful is where he talks about his expectation for higher inflation and the need for far higher interest rates over the next 25 years. (I bolded some key words in the quote below) In coming years, as the globalization process winds down , he predicts inflation will become harder to contain. Recent increases in the price of imports from China and a rise in long-term interest rates suggest "the turn may be upon us sooner rather than later." Left alone, he said, the Fed's policy-making body, the Federal Open Market Committee, can keep inflation between 1% and 2%, but that could require forcing interest rates to double-digits , a level "not seen since the days of Paul Volcker," his predecessor as Fed chairman. "I fear that my successors on the FOMC, as they strive to maintain

Dissenting Opinion of Peak Oil

Someone posted a reference to a news story mentioning potential catastrophic effects of Peak Oil on the Morningstar message board that I post on. I thought I would post my response to Peak Oil. As someone who doesn't subscribe to the theory of Peak Oil, let me offer my dissenting views. First of all, it is possible for oil prices to go up even without Peak Oil if the US$ declines substantially (I don't think it will happen but some are expecting the US$ to decline a lot more). For the sake of argument, let's assume these people are predicting $200 oil based on present value and not based on substantial US$ decline. Anyway... As I have been saying for a while now. a lot of the Peak Oil theory is based on high growth rates in developing countries, along with pretty good growth in developed countries. This rarely lasts for long. Investors, economists, and policymakers love to project the present far into the future but it never turns out that way. It wasn't too long ago, 1

US Long Bonds Moving Along With the Yen

Although this isn't anything dramatic, I have noticed the high correlation between US long bonds and the Japanese Yen lately. The following chart of Yen and TLT, the 20 yr US Treasury bond ETF, illustrates this point perfectly. (source: For all of 2007, but especially in the last few months, the US long bonds have behaved similarly as the Yen. I am not sure if this is a coincidence that won't going to last, or if this is a pattern that may develop further, but I'll be keeping a close eye on it. This could simply be capital flight (both Yen and US Treasuries are safe havens in terms of valuations) so it may be a coincidence. Since I am long TLT, and think the Yen carry-trade may unwind soon, it may not make sense to sell TLT until the Yen finishes its move.

Junk bond defaults likely to rise

Moody's is warning that junk bond default rates may go up: Defaults among companies with speculative-grade credit are likely to more than double over the next year, Moody's Investors Service said Tuesday. Many of the defaults and bankruptcies in the coming year may be triggered by companies simply running out of cash to sustain business, because most used strong markets in the past few years to relax financial covenants on their bank credit facilities, Gates said. Well this is no surprise and I have been expecting it for a while now. Mortgage debt has been in the process of repricing over the last few months; now it looks like junk bonds (quite popular in LBOs over the last few years). I am predicting that the next thing will be emerging market bonds. Some EM bulls think that emerging markets are not risky anymore but the fact of the matter is that hardly any of them have ever repaid their debt in full. The current commodities boom is making some countries look good on paper b

Testing New Blog Themes

I'm in the process of testing out new themes for this blog so bear with me for a few days. Things may be messed up for the time being.

Sold: Harmony (HMY)

Not sure if this is a dumb idea or not (I have a habit of missing gold rallies) but I sold my gold holding, Harmony (HMY). Ended up with practically zero gain, after taxes and commissions. Although gold can break out here, I'm not confident enough yet with it. Furthermore, I think Tribune looks way more attractive, albeit with big risk of the deal not closing, so I have decided to either add to that or hold cash. For what it's worth, I still like Harmony and I would look at if someone wants a high-risk miner with high-leverage (due to high costs). But the macro environment is very questionable for gold right now. Although gold should rally with all housing problems and a switch to an easis bias by the Federal Reserve, it hasn't been as impressive as I would have liked it. It is still tracking too closely to the broad market for my liking. Since I'm bearish on the broad market, I don't like it. HMY Sale price: $9.41 ROI: 3.29% (excl taxes and commissions)

To Watch: Low-quality Bond Funds

Given the credit problems and the widening of the junk bond spread (over Treasury bonds), I think a good contrarian area to watch are credit investments. Aaron Pressman's BusinessWeek blog postings (here and here) talks about potential opportunities in low-quality debt instruments. It's illuminating to read the older blog entry and see how much things have fallen since then. Anyone who thought these instruments were attractive in July has lost quite a bit in one month. To refresh your memory, the amount of extra yield over Treasury bonds that junk investors demanded leaped from a record low of less than 2.5 percentage points in early June to over 4.5 points in recent days I personally think that this spread will widen even further. All this widening is occurring without any material slowdown in the economy. If corporate profit growth, which I view as near a peak, starts slowing down then low-quality corporate bonds will correct even further. Some of the corporations that issu

Let's Look at Labour During the Labour Day Holiday

National Holidays Here's a graphic from the New York Times pointing out national holidays in select countries: (source: More Days Off? Better Move to Colombia , Sept 2, 2007, New York Times) For reference, Canada has 10 national holidays (my province also has one extra holiday (Civic Day)). What I find interesting is that Japan has 50% more holidays than USA (15 vs 10). I should also note that some countries may have a low number of national holidays while employers provide more vacation time. European countries typically provide longer paid vacation. American Productivity Leads Productivity is arguably the most important measure for an economy when looking at labour. According to this story from BusinessWeek , USA had the highest productivity. The way some of these things are measured are too simplistic IMO but, nevertheless, they provide some rough indication. The average U.S. worker produces $63,885 of wealth per year, more than their counterparts in all other countries, the I

Jean-Marie Eveillard Interview with FA Magazine

Thanks to Dah Hui Lau's blog (aka David) for the following reference to a Jean-Marie Eveillard interview in the August edition of Financial Advisor magazine. Jean-Marie Eveillard is a respected value manager who runs First Eagle Funds. It's worth reading about his thoughts on diverse topics, many of which are quite pertinent right now. I'll list some of the items I found insightful below (for some reason I can't seem to copy the text from that PDF document). He isn't so worried about the current boom except for the fact that it is a credit boom. He says credit booms end with credit busts. As is the case with most value managers, he says private equity competes with him and makes it harder to find opportunities. Warren Buffett has remarked on this quite often. Although this might be a bit biased given that he is a mutual fund manager, he says that hedge funds are basically money-making schemes for the managers. He wonders what's the difference between a hedge f