Random Articles for the Week ending May 23

Here are some articles on various topics that interest me. Click through if any of the topics interest you:

  1. Vietnam: One of the worst markets this year but is there a big future?
  2. Consequences of government intervention: The Hugo Chavez example
  3. Alabama County: Update on what may be the biggest municipal bankruptcy in American history
  4. Perma-bears rule the world--for now


Marketwatch updates the state of the Vietnamese stock market and provides some opinion from various money managers. Needless to say, given that all of them work in that region, all of them are bullish. As a contrarian, I like to discount opinions about particular sector/region/asset from those money managers who specialize in them. You can get use them to generate ideas but if they say something like 'the future looks good', I would be wary.

What was once euphoria has turned to gloom. In a classic case of how emerging markets offer both risk and reward, Vietnam's stocks have tumbled more than 50% this year, making them the worst performer in their asset class, as the Southeast Asian country struggles to contain skyrocketing inflation and a hefty trade deficit....

Despite its rapid economic growth, Vietnam faces pressing short-term challenges: soaring inflation and a large trade deficit, which in turn have dented sentiment in the stock market. "The increasingly dire appearance of the economy started to attract people's attention," said Kevin Snowball, director of PXP Vietnam Asset Management Ltd, based in Ho Chi Minh City. "That has damaged sentiment, and now there is no bid in the market."

In early May, Standard & Poor's lowered its outlook on Vietnam's sovereign credit ratings to negative from stable, citing rising risks to macroeconomic stability from an overheating economy. "Hectic investment activity of recent years appears to have pushed the economy to the limits of its capacity," S&P said. Vietnam's trade deficit soared to $11 billion during the first four months of the year, or 90% of the deficit level for all of 2007. Inflation hit a 15-year high of 21.4% on a year-on-year comparison basis in April, the second highest in the region after Sri Lanka's 25%.

I haven't followed Vietnam--it's not exactly easy to invest or get information--but I'm citing this story because Marc Faber (and I think Jim Rogers too--not sure) were bullish on Vietnam over the last few years. It looks like Faber's call is completely off--at least in the short term--given that the stock market is down 50%. Admittedly, Marc Faber seemed to be bullish on farmland so maybe that is doing well given the rice shortage crisis. Whatever it is, the stock market is one of the worst markets this year.

Apart from valuations, one of the reasons I have been avoiding emerging markets is my concern over what is currently plaguing Vietnam: current account deficit and inflation. Some EM (emerging markets) run current account deficits (eg. India) while others don't (eg. China). So I don't think that is necessarily a big problem. Instead, the real big issue is going to be inflation. Given how EM governments often subsidize certain products or have price controls, the potential for a collapse is increasing by the minute as commodities soar. In addition to corruption, it is very difficult for politicians in those countries to eliminate the subsidies/price controls/etc because a huge chunk of an average person's costs are in food and transportation. For example, if you look at the following chart, you'll see that around 15% of consumer costs are for food in developed countries (using government price baskets), whereas it is as much as 60% in poor countries like India.

Investors investing in EM are probably compensated for the inflation risk (returns in those countries are much higher) but I don't think too many people account for the side-effects that can lead to a political crisis.

Chavez's Policies Unravelling Slowly

(if you don't want to hear my political views, skip this post :) )

I don't think too many of my readers are a fan of Hugo Chavez and you can criticize a lot of his actions but I'm going to stick with the economic side. He presents a good example of how excessive government intervention is detrimental to society.

For what it's worth, I don't think Chavez is as crazy as some media portray him. I certainly don't agree with most of what he does but he hasn't committed any mass killings, ethnic cleansing, or various other activities that have been carried out by other "democratically-elected" leaders in Latin America or elsewhere. Some of the leaders of the past including so-called pro-capitalist presidents (eg. Argentina, Colombia, Nicaragua) have been monsters. Similarly, "elected" leaders in other parts of the world, such as Robert Mugabe in Zimbabwe, have been a disaster of epic proportions (on top of ethnically cleansing whites and other minorities, he has literally jailed, tortured, and killed anyone that he doesn't like, printed money like it was going out of fashion, and seems to lack sense of morals or ethics of any sort). Chavez has actually been remarkably controlled in a Putin-like sense--for whatever that's worth. Given that Venezuelans seem to have voted to limit presidential terms, I think Chavez will accept that and hopefully just ride off into the sunset.

I touch on the Venezuela example because, unlike many other countries with similar results, Venezuela actually has seen booming oil revenue. Yet if you read the Bloomberg story I link below, you'll see that there are shortages of basic items.

(source: Chavez Price Controls Mean Record Oil Fails to Prevent Shortage, By Matthew Walter. May 23, 2008. Bloomberg)

``Venezuela is a place of paradox right now, the paradox of plenty,'' says Leopoldo Lopez, the 37-year-old, U.S.- educated mayor of the Caracas borough of Chacao and leader of opposition party Un Nuevo Tiempo. ``There's plenty of oil, and plenty of dollars coming in from the oil industry, but we don't have enough food.''

The cause of shortages can be traced to government actions, particularly price controls and limits of foreign exchange (hard for local companies to import items when they can't get enough US dollars to transact with foreign merchants). Other disastrous policies, such as seizing so-called "unused land" from landowners, have also contributed negatively to the situation. Fortunately, the free market forces are starting to be recognized by the government and it seems to be weakening some of its policies. There isn't anything investing-related per se but it's a good read for anyone who is in favour of heavy government intervention of free markets. You can see the side-effects of meddling in the free market.

Another Few Chapters In The Alabama County Saga

Bloomberg has a detailed article on the shady, corrupt, and possibly incompetent dealings with swap contracts in Alabama. This is a continuation of the story I have posted about in the past. We are essentially looking at the largest municipal bankruptcy in US history. Bankruptcy looked imminent a few months ago but some of the creditors seem to have forgiven some terms so the situation is still unfolding. The municipality problems started with the collapse of the bond insurers (FGIC and XL Capital in this case) and the insured bonds were downgraded by the rating agencies. Clearly, the county, as well as its advisors, didn't seem to account for the wild flucations and rating changes in the credit market.

Perma-bears Rule the World (For Now)

This is an interesting article and worth reading for casual interest. An excellent article from Bloomberg covers David Tice, the perma-bear who runs the Prudent Bear Fund. For those not familiar, David Tice has been predicting doom & gloom for over a decade. When I first started investing a few years ago, he was one of the first bears I encountered. He was wrong for years and was only saved by the commodities and precious metals boom (particularly gold). I have this weird feeling that even if David Tice is correct with his macro calls (I'll mention them below), his fund may end up as a disaster because commodities and gold, may collapse along with everything else.

Now, Tice says the Standard & Poor's 500 Index may tumble 40 percent during the next 12-24 months as the credit crisis undermines the economy, bankrupts households and companies and whacks profits. The drop would be worse than the 37 percent plunge in the index from 2000 through 2002.

Tice predicts U.S. equities will enter a bear market that may exceed the 15-year slump from 1965 to 1980. Moreover, he says if the Fed and Wall Street don't break their addiction to easy credit, the economy will eventually crash in a depression -- a condition marked by reduced purchasing power, unemployment and corporate failures.

The U.S. can't continue to inflate bubbles in stocks, real estate and other assets without crippling the financial system, Tice says.

(grr... I lost a huge post on why I thought short-selling is going to get tough but oh well :( )

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