Saturday, November 10, 2007 0 comments ++[ CLICK TO COMMENT ]++

Random Thoughts

Here are some random thoughts running through my head...


Housing Stuff

There is a lengthy 5-page article on Countrywide Financial (CFC) at New York Times. I glanced at it and it runs over the history of CFC and some of what happened in the lending industry recently. Pretty good article for anyone that is thinking of investing in CFC or learning about what the lenders were doing in the last couple of years.

One of the big risks for anyone like me dumb enough ;) to consider investing in debt insurers is the chaos that may be unleashed if some mortgage insurers fail. I am still working through my examination of Ambac (ABK) and it seems that it should survive, but I am not so sure about the smaller companies that insure mortgages. News articles like this makes me think that there could be further sell-offs in the debt insurers if one or more of the mortgage insurers collapse. Although value investors generally don't try to time stuff, I'm not a value investor and I don't want to invest too early and face further sell-offs. One of the reasons I decided to add to my short-term risk arbitrage position in Tribune (TRB) instead of buying something like Ambac right now is because I would rather give up some upside in order to minimize further downside. In other words, I don't mind buying ABK after it goes up 10% or 20% if I'm sure that I can avoid, say, a further 10% drop.


Japan & the Yen Carry-Trade

As is generally the case, the Yen strengthens whenever the broad markets sell off. Last week was no different:

(source: stockcharts.com)



The US$ keeps weakening but it's going to get a lot interesting pretty soon--if the US economy weakens. As I was expecting, the trade deficit has been shrinking lately due to the weak US$ (US imports are down (especially if you strip out oil&gas); US exports are up). We may be hitting a peak in commodities. I know I felt that way early this year and have been completely wrong--and suffering with my portfolio for that, but this may be it. US oil imports in terms of quantity is actually down compared to last year (but it is up in US$ terms). Many of the supermajors also missed their earnings and we are clearly facing demand contraction.

I haven't checked lately but I believe the Japanese stock market is the worst performing major index this year. But if Yen flows back into the country, it must go somewhere and we may be setting up for a mini-bull market next year.

Having said that, Japan's economy has weakened considerably of late. Some of the estimates coming out there (I think I was looking at their leading indicator) basically implies zero nominal growth, and slightly positive real growth (due to deflation). I'll be concentrating on Japan during my lonely :( Christmas holidays and I would really like to get my head around their economy. I'm really not sure what they are going through. They clearly went through a deflationary bust in the 90's but I'm wondering if they are in a deflationary boom now. Basically, as long as Japan holds the current economic level (i.e. grows 0%), they will still have positive real growth if there is actually deflation. Deflationary booms have been rare in the last 100 years so I'm still not sold on it yet but, of all the countries, Japan probably has the highest probability of unleashing a deflationary boom.


Some Intriguing Articles

I bookmarked and printed a bunch of articles a while ago but am just going through them now. I'll link some of the ones I found interesting below. Most of these biographical stories on investors or some unorthodox issue facing businesses:

If you are interested in Sam Zell--and I definitely have been ever since I started looking into Tribune--here is a lengthy biographical sketch courtesy of The New Yorker: Rough Rider by Connie Bruck, November 12, 2007. Sam Zell is a real estate tycoon whose is is one of the most contrarian investors I have encountered.

Here is another excellent one from The New Yorker with a behind-the-scenes look at the rise and fall of Victor Nierderhoffer: The Blow-Up Artist by John Cassidy, October 15, 2007. For those of you who have never heard of Victor Nierderhoffer, he is an intellectual financial speculator. He collapsed after the Asian Financial Crisis in 1998 and he seems to have fallen again recently, after the credit crisis that is enveloping the markets these days.

Piracy is something that always interests me and here is a September article from The New Yorker sort of touching on that issue. It covers the rampant copying of clothing fashion. Here is one from The Economist talking about how India and China copy rather than innovate.

For something totally different--and I'll warn the politically sensitive that is is an opinionated--here is an article from the New York Times that says that Iraqi bonds are predicting a dismal future for Iraq. I personally think that capital markets are wrong quite often. I especially hold this view for the futures market (the FedFunds Futures market hardly ever predicts anything until the decision date) but the bond market is something that is more correct. Bonds are long term investments and I think the market prices in risk much better than for equities or derivatives.

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