Showing posts from August, 2008

Miscellaneous Articles for the Last Week of August

Here are some miscellaneous articles you may find interesting. As usual, click on "read more" if you are interested in hearing my opinions... Brief article on four Bearish Investors: Jeremy Grantham, Bob Rodriguez, John Hussman and Steve Leuthold Credit crunch redux : A recap of the credit crisis and what may be in store for corporate profits. (note: somewhat dated; from April 2008 Fortune) Long-term frontier investing: Jim Rogers suggests North Korea (thanks to Commodity on message board for mention); Russian farms another potential idea (not suggested by Rogers.)... all out of reach for small investors but someone reading this today may capitalize on them in 5 or 10 years (maybe if you work as a professional financier.) China's present predicament : Very good write-up of the economy in China and some of the problems it is facing. The inside story of an up-and-coming Canadian media distributor, Entertainment One : If you are interested in the entertainmen

Politicians Trying to be Bad Economists

Economics is called the dismal science so no one really knows much of the "truth" or what is really happening out there. However, there are some government policies that are just reckless and don't accomplish anything meaningful. I guess it's that time of the season :( First, we have the Japanese government trying to combat the rising energy and commodity prices by spending money on several things including an attempt to lower tolls on roads. This is going to totally backfire. It will actually increase, or at least maintain, oil demand. Japan unveiled a 2-trillion yen, or $18-billion (U.S.), stimulus package Friday, including assistance to small businesses and other pump-priming measures to shore up its flagging economy hit by soaring energy and material prices. The new measures include discounts on expressway tolls, assistance to farms and help for part-time workers to find better jobs, according to the Cabinet Office. Funds were also earmarked for better medical ca

MBIA Reinsures FGIC; Another Poor Quarter at Sears; US GDP Revised Higher; Fannie Mae Cleans House; Market Manipulation in Pakistan

Some articles that some of you may find interesting... MBIA agrees to reinsure $187 billion of FGIC muni bonds : In a deal cut by Eric Dinallo, FGIC unloading its valuable (and likely safe) muni bonds to MBIA. This should reduce the capital requirements for FGIC while permanently giving up future profits. It also shows that Dinallo cares a great deal about muni bonds (now the muni bonds will have MBIA's A rating whereas FGIC was BB (junk). I suspect that equityholders in FGIC--PMI, GE, Blackstone, Cypress and CVIC--will end up with very little in the end, if anything. Sears misses estimates but expects stronger second half : Sears keeps posting weakening profits... not too surprising given that retail isn't doing well, and a big chunk of Sears sales are in housing appliances. Believe it or not, US GDP is revised higher to 3.3% : I have alluded several times to the possibility that the US economy may not do that badly. A 3%+ growth is amazing for the US (it's very close to n

Japanese Real Estate Developer Declares Bankruptcy

If you though that only American, British, Spanish, and Irish homebuilders were having bankruptcy problems, well, add Japan to the mix . Shares of Japan's Sohken Homes Co. were suspended from trading Wednesday after the home builder filed for court-led rehabilitation with the Tokyo District Court, becoming the latest Japanese developer to enter into bankruptcy protection... The move comes in the wake of Urban Corp.'s filing for court protection earlier this month. July saw similar moves by condominium developer Zephyr Co., with debts of around 95 billion yen, and construction firm Suruga Corp. with debts of 62 billion yen. I'm not sure if this is the start of a trend or if it is just a few weak homebuilders falling by the wayside. I have been mildly bullish on Japanese real estate but it looks like it is starting to face some issues. The bullish case (from a contrarian point of view) for real estate in Japan lies with its massive decade+ bear market. The bearish case lies p

Contrarian Industries

One way to look for contrarian ideas is to look at the worst performing industries (needless to say this is the opposite of what growth or momentum investors would do.) Shown below are the worst industries in the last 5 years, according to Dow Jones and Morningstar categorizations. (as usual click on the image for a larger, more legible, table.) The lists are quite similar. The best performing industries are those in the commodity complex. The worst are anything that got infected with the subprime virus: homebuilders, banks, furniture makers, and so on. I would avoid areas like homebuilders and rather look at the medium-term underperformers like paper, media, automobile parts suppliers, insurance, and so on. One of the reasons is because industries that did really well in the past rarely lead in the future. Given that we just had an unprecedented real estate bubble, it is not clear when homebuilders, banks (with lots of real estate assets), and so forth, will recover. It is quite pos

China's Olympics: Coming Out Party Was Successful!

(source: Beijing 2008 Closing Ceremony. Steve Russell for The Toronto Star. August 25, 2008) As Always, the Olympics are either a colossal waste of money, or a worthwhile pursuit. I'm not really into sports but I do consider the Olympics to be something special and watch some of it on TV. It's one of the few events where the whole world participates regardless of political or economic stance. China's Olympics, held in Beijing, was very successful in my eyes. The opening and closing ceremonies were entertaining; the events were hosted without many problems; infrastructure and facilities were supposedly excellent; many Olympic and world records were broken; exciting races; and everyone got to know China a little bit more. I've been "following" China for a while now so there is little new to me but I'm sure the general population, whose knowledge is often shaped by stereotypes and politically-driven views, learned something. Symbolic Event To some this is

How Close is USA to Japan of the 1990's?

What are the chances of America ending up similar to the Japan of the 1990's? That's the question being answered in this article from The Economist . It's a brief article but I urge everyone to check it out since it covers most of the issues. There is a very real risk of America ending up similar to Japan but things are never the same between countries, let alone across differing time periods. The big problem faced by America is the real estate bust that is unfolding: (source: The Economist) As can be seen in the chart above, the central bank response has been somewhat similar (at least when it comes to interest rates.) There are a number of advantages that America has and one of them is them is the following: ...It was from here on that Japan made its biggest policy mistakes. In 1997 the government raised its consumption tax to try to slim its budget deficit. And with interest rates close to zero, the BoJ insisted that there was nothing more it could do. Only much later di

The Problem with Government Funding Alternative Energy

I'm not as "right wing" or as fiscally conservative when it comes to the economy and government policy. However, unlike most liberals, whom I identify with, I am of the strong opinion that too much government intervention results in undesirable side effects. The unfortunate thing about most left-leaning individuals or liberals is that they seem to ignore the fact that government intervention can produce bad results even if the intention is good. Perhaps the most relevant and powerful example of this is the current energy situation and funding of alternative energy by the US government. Ethanol Although it's old news now, a good example is how the US government under the leadership of George Bush decided to stem the over-reliance on oil--which incidentally isn't a bad thing except for environmental concerns--by forcing fuel to be diluted with ethanol. Even if you ignore the conspiracy theory that this is actually a move to placate oil interests by increasing relia

Sam Zell... Jim Rogers... Marc Faber

Relying on predictions about the future can be harmful to your financial health so you shouldn't read this :) But for those, like me, that like to listen to some speculations about the future, here are some thoughts from Sam Zell, Jim Rogers and Marc Faber. Needless to say, all three contradict each other and hedge their bets by implying that these are just possibilities. Sam Zell Sam Zell, who is having a rough time with his Tribune ownership, sees a potential bottom in real estate early next year. He thinks real estate is priced fairly right now and thinks debt is more attractive than equity for the distress situations. Billionaire Sam Zell said the housing market could start recovering as early as next year and he's focusing on investing in debt rather than equity. ``We believe that the opportunities, particularly in difficult situations, are in the debt,'' said Zell, who made his fortune building the largest publicly traded office and apartment companies in the U.S

Anticommons and the Stifling of Innovation

In the second decade of the twentieth century, it was almost impossible to build an airplane in the United States. That was the result of a chaotic legal battle among the dozens of companies—including one owned by Orville Wright—that held patents on the various components that made a plane go. No one could manufacture aircraft without fear of being hauled into court. Are we hitting the point where excessive intellectual property legislation is starting to hamper innovation? This is something I am starting to wonder. Writing for The New Yorker James Surowiecki describes the problem of the "anticommons" : The situation that grounded the U.S. aircraft industry is an example of what the Columbia law professor Michael Heller, in his new book, “The Gridlock Economy,” calls the “anticommons.” We hear a lot about the “tragedy of the commons”: if a valuable asset (a grazing field, say) is held in common, each individual will try to exploit as much of it as possible. Villagers will se

Portfolio Management is a Tough Business

I know we all make fun of hedge fund managers, most of whom are overpaid, but running a portfolio is not easy. If investing was considered as a business--Benjamin Graham said it should be considered a business--then it is one of the toughest businesses out there. Andrew Ross Sorkin of The New York Times profiles Ronald Insana , a CNBC personality who left to run a hedge fun a couple of years ago. As an investor, Mr. Insana didn’t exactly have the wind at his back. During the 14 months his fund of funds was up and running, the Standard & Poor’s 500-stock index fell more than 15 percent. While some hedge funds managed to eke out gains, many did not. Ultimately, Mr. Insana’s fund lost 5 percent. In the mutual fund business, beating the S.& P. would be more than enough to survive, and even prosper. Mr. Insana would have been a hero. But the hedge fund business is far more cut-throat. For a small fund like Mr. Insana’s, it is imperative to make money regardless of whether the S.&

The Risk With Fannie and Freddie

AccruedInterest quotes a Merril Lynch analyst in explaining why Fannie and Freddie shareholders have far greater risk than perceived : The ultimate problem here is best described by Merrill Lynch's Ken Bruce. You can dive into Freddie Mac or Fannie Mae's balance sheet and make a good case that they don't need new capital, at least under current forecasts for housing. You'd therefore conclude that if they were a truly private company, they'd best serve shareholders by trying to stick it out. But they aren't a truly private company. As the perception of their capital strength wanes, policy makers are going to conclude that we are better off nationalizing the GSEs. The case will be made that the collective needs lower mortgage rates, and only a strong, liquid and publicly minded GSE can help bring that about. This is an example of where being too entangled with government coming back to hurt you. You get the benefit during good times but when things get rough, your

Investing & Econopolitical Risk

UPDATE: I want to clarify others regarding John's decision. Basically, he considered investing in the troubled region but ruled it out in the end (if you read his blog post, that's obvious.) I was simply referring to him because he went through the whole process of identifying the troubled region and then contemplating an investment. He ruled out any investments in the region in th eend but my intention with the post is to examine the risk in such regions and the thought that shold go into them. One of the most important things for newbies (like us) to understand the political risk inherent in investing. It is one of the first lessons I learned when I started investing a few years ago (more on that later.) Given my rants on the Georgian conflict--I hope it doesn't drive too many of you off (just ignore it if it's not your thing)--it presents a good opportunity to look at the issue. John from Controlled Greed touches on some thoughts he had about investing in Russia, G

NATO Expansion is Going to End Up In a Disaster--Except for the Warmongers

(Another totally political post so ignore at will :) ) The whole Georgian situation hopefully puts a lid on American push--primarily from the George Bush administration (but McCain is even more hawkish)--to expand NATO. I still can't figure out if the present war was started due to an incompetent leader (the Georgian leader) or due to plans hatched by others (i.e. leader was a puppet.) The whole strategy seems so juvenile and laughable that it would really be a joke if it weren't for all the deaths involved. Did he really think that his military can somehow take on the 2nd most powerful military in the world? As some in the media have noted, all of this is quite puzzling given that Georgian military commanders didn't even brief the press on the progress of their war (it was all politicians who were speaking to the media all the time.) For what it's worth, Georgia actually seems to have shot down 4 Russian planes --just as improbable as the American stealth fighter that

Stocks are Generally Good Inflation Hedges

A lot of newbie investors don't realize how good of an inflation hedge stocks are. In the super long run, they have beat bonds, real estate, and even gold. As long as one doesn't buy at a major peak (such as 1929 or 2000) their stock investment should more than handily beat all other asset classes. Mark Hulbert wrote an article for the New York Times commenting on the misnomer regarding inflation and stocks. In it, he refers to studies that show that corporate profits have generally grown faster than inflation: Over the last eight decades, corporate profits have tended to grow faster when inflation is higher. In such periods, companies have been able to pass along higher costs to their customers. As a result, even though higher inflation leads to a greater discounting of future years’ earnings, those earnings tend to be bigger than they would have been otherwise. The net result is that the current value of a company’s future earnings remains relatively stable in the face of ri

Georgia: Nationalism & Saakashvili's Incompetence

UPDATE (Aug 16 12:08 PM): Mark Mackinnon of The Globe & Mail wrote, what I consider, an excellent piece on the blunder by Saakashvili . It parallels my thinking and questions the whole motive behind the Georgian president's move. Make no mistake; there are no righteous heroes in this conflict but I think the worst move came from the Georgian government. UPDATE (Aug 16 12:12 PM): One point for any investor reading this... It may be obvious already but if you are a shareholder or a potential shareholder of BP, it is worth noting how much their fate has taken a turn for the worst. I always thought of BP a supermajor who is widely diversified but it seems that they have most of their future tied up in either Russia or Central Asia. The disputed TNK-BP operation in Russia is something like 25% of their reserves (or something like that); and they are also a big backer of the Baku-Tbilisi-Ceyhan pipeline running through Georgia. This is a totally political post so ignore it if you do