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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...

Four Bearish (Cautious?) Investors

MarketWatch has a brief story on Jeremy Grantham, Bob Rodriguez, John Hussman and Steve Leuthold. All these four can be called bears, with Grantham being a superbear. I personally do not consider any of these investors anywhere near superinvestors like Martin Whitman, Bill Miller, Edward Lampert, and the like. Nevertheless they are successful investors who are far better than the general investing population (or me :) ). I'm not too familiar with these four investors but I don't think any of them, except possibly Rodriguez, are value investors (the definition of value investing varies with some considering all successful investors as value investors but I use a specific definition that counts only those who are primarily bottoms-up fundamental investors.) However, Granthan and Hussman are definitely contrarian investors (not sure about the other two.)

Jeremy Grantham has turned even more bearish than his usual self:

One of his biggest fears, he added in an interview, is that "the whole global economy will be weaker than the market expects for quite a considerable time." How long? "I would guess at least two years of sustained disappointment."

Notably, just a few weeks ago Grantham turned negative on his "beloved" emerging markets, which had been a spot-on bullish call. "If the global economy is going to disappoint, the cost of holding them just seemed too high," he said.

A lot of people who were bearish on the US markets tended to be bullish on emerging markets and/or commodities. Grantham seems to be pulling out of EM (emerging markets) and I'm sure everyone is aware that those markets are getting clobbered. It's especially painful for American investors who are seeing the US$ appreciate on top of the EM share prices declining (of course, those markets are up a lot over the last few years so those who got in early likely made a lot of money.)

Grantham is particularly uneasy about China, a leading engine of world growth that seems to be sputtering. "I worry on behalf of the global economy at the consequences of China stumbling," he said. Without China's robust demand, he added, "the whole level of global imports and exports would start to drop."

As The Globe & Mail article I listed above alludes to, China is slowing down right now. I have been bearish on China for a few years for the reasons that are becoming evident right now. The problem is that China is running a totalitarian government on top of a so-called free market. It's not clear how the government will handle any economic slowdowns, which are natural events in capitalism. I just hope that the Chinese government doesn't do something stupid.

As for John Hussman, he has remained bearish for a while now...

Investors' consensus is mistaken, Hussman contends. He said the U.S. is mired in recession, and once investors realize that earnings expectations are overblown, stocks will take another major hit.

"The potential downside could be abrupt, leaving little opportunity to make defensive changes after the fact," Hussman wrote.

I share Hussman's--and Marc Faber's--opinion that US corporate profits are going get downgraded. This risk is likely high for technology, materials, and energy sectors. Interestingly, Hussman seems to think technology will do well but I'm not so sure. The market will reward growth (as Bill Miller likes to say) but I'm not so sure about companies like Amazon--which I actually like--trading at lofty earnings multiples.

That said, Hussman doesn't expect much from stocks. He predicted that U.S. market returns will average 4%-6% annualized over the next decade, primarily due to weaker corporate earnings.

This is very bearish. I think if this comes to pass, many investors will die of heart attacks. This is just a guessing game but I personally think the broad markets will probably average 7% to 8% over the next decade. I find it hard to believe that you will end up with 4% to 6% returns with valuations being what they are right now. Since the current valuation multiples are not very high in the US, even if you chop down earnings, things don't look that bad.

Frontier Market: North Korea

Thanks to Commodity, a message board poster, for originally pointing out this interview with Jim Rogers.

Jim Rogers, one of the ultimate world investors, shows his contrarian stripes when he recommends all the distant countries that scare most people--investors or not.

Jim thinks North Korea and South Korea will unify. North Korea has all the minerals, the cheap labor, and shares a border with China. South Korea has all the intellectual capital, the technology, and the expertise. Jim says it's the perfect match.

I have had the same feeling for a while now. It makes sense for North and South Korea to unify. Once the North Korean government collapses--it seems to be on its last legs--it is almost inevitable. It is very similar to East and West Germany. The people are the same ethnic group, speak the same language, and the borders are largely artificial. As Rogers points out, a unification will provide a huge economic boost in the long run. But similar to the difficulty Germany faced in the late 90's, it will be painful in the short-run. I think the unification can happen as quickly as within the next 10 years. North Korea is already running out of "allies" as Russia and China dump their state-controlled economic systems (both still need to do a lot in terms of political freedoms though.) As China's economy becomes stronger, while Russia also becomes prosperous, then North Korea will likely be forced into dumping whatever system it is following. USA will also be forced to remove it from its Axis of Evil list.

Investing in North Korea is totally out of the question for most investors (it might be illegal for Americans too--not sure (depends if there are penalties for dealing with Axis of Evil countries.)) However, for non-Americans or for the future, it's worth thinking about it.

I asked him if we could get money into North Korea. "You can always get money in," he said. "That's never a problem. It's getting money out you need to worry about."

I suggested buying a retail mall or a shopping plaza just across the border in South Korea. South Korean retail space could appreciate when the North Koreans come flooding across to buy their first iPods and laptops.

Jim said he hasn't figured out how he'll play it yet. "But real estate is very cheap up there [in northern South Korea]. Everyone's worried there's going to be a war. That's probably a good place to start."

This is totally out of the question for small investors like me but it's worth keeping in the back of the mind. Ideal situation, like with China, is to invest indirectly in companies that do trade or benefit from a unification.

Rogers also is thinking of Cambodia, Taiwan, and Malaysia's southern state, Johor. As usual, these are just ideas and they involve super-high-risk. Rogers, along with Marc Faber, were bullish on Vietnam a few years ago and anyone that invested a bit late would have suffered massive losses.

Frontier Market: Russian Farmland

(source: James Hill for The New York Times)

I ran across this New York Times story on Russian farmland and how capitalism has surplanted the collectivist farms of the yesteryear. A lot of Americans and others seem to be distrustful of Russia but I'm not as concerned. Contrary to the views espoused by the Western press, this isn't the Soviet Union. It's still early and the Russian government still meddles with business so one can never be sure what is going to happen. But that's the case in almost any developing country.

The farmland idea isn't anything new. Commodity bulls have been bullish on soft commodities--agricultural goods--lately and investors like Marc Faber have been recommending farmland in Argentina as investment. What I find interesting about the Russian story is the fact that I never knew that it had so much dormant fertile land--some 35 million hectares. I always used to think of Russia as a cold barren tundra but goes to show how little I know :)

This is another idea that is hard for small investors to capitalize on. I suppose one can start hunting through London Stock Exchange, where a lot of Russian companies are listed, to see if they can find Russian companies engaged in agriculture. There is huge risk involved here since the Russian government has a habit of attacking private investors. I'm not justifying it at all but there is a method to this madness. The Russian government, as well as the public, believes that their resources were looted by investors in the early 90's, often with the aid of powerful organized criminals. Vladimir Putin drew a line in the sand warning resource companies that they belong to Russia but technolgoy, service, and other industries have largely been left on their own. It's not clear to me how the Russian government will treat agriculture. Agriculture can be used as a government force--it might even be more valuable than oil to some highly populated Asian countries in the future--so it's not clear how safe private ownership of Russian farms will be in the future.

The concern is that private investors do all the hard work and risk their capital, while the government comes and seizes the operations after it becomes a success. I hope Russia doesn't revert to that but it's a risk in most developing countries. Nevertheless, the investment story looks attractive, with huge untapped agricultural lands and/or existing farms with low yields with potential for vast improvements.

As in other cases, one way to capitalize indirectly is to invest in American/Canadian/whatever businesses that benefit from the Russian agricultural boom. The NYT story mentions an instance where John Deere--an American agricultural equipment producer--tractors being used. An industrial concern like that is a safer bet, although it is a bit too diversified and isn't strictly a bet on the Russian farmland.

China's Slowdown

Well, finally it is happening: china is slowing down...

(source: Warning signs from the centre of the boom, By MARCUS GEE and BRIAN MILNER AND GEOFFREY YORK. The Globe and Mail. August 29, 2008 )

After fretting for the past five years or so about how to keep the economy from overheating, Beijing is now faced with the novel problem of how to keep it from cooling. “If you're sitting in Beijing, you're saying, ‘We've already lost two percentage points of economic growth. How much more are we going to lose?'” said Nicholas Lardy, a senior fellow at the Peterson Institute of International Economics in Washington.

“That's a big turning point for the Chinese economy. That means questions of profitability, questions of unemployment, questions of social stability.”

It's kind of interesting how things work. The Chinese government was trying to cool the economy to no avail over the last couple of years but now is contemplating how to prevent a cooling.

The Chinese government is facing a problem unlike anything it has in the past. The last big problem faced by the Chinese government was the 1997 Asian Financial Crisis. The country has changed so much that the current slowdown is far more complex. The difficulty for the government is that the current slowdown is "normal" in my eyes. So the government is battling something intrinsic to capitalism and any free market. Things go up. And things go down. The problem in China, though, is that increasing unemployment--growth rate below 8% would do it--can lead to the overthrow of the government. In a democracy, such a scenario results in the current government being replaced with a new one. But given that China is a one-party state, throwing away the current party is equivalent to a potential collapse of the system.

Barring a horrible scenario (hope it doesn't occur,) I think you will see the Chinese government start to democratize their government after this slowdown. All this talk about China always having been ruled by one party is complete nonsense. Either a political system is superior or it isn't. Democratic governments aren't superior because I say so; instead, they are superior because there is nothing else better. The Chinese government will start to dismantle their authoratarian structures in order to save themselves.

Inside Look at a Film Distrbution Company

A fun read for those interested in the entertinament industry or film distribution in inside look at Entertainment One, an up-and-coming Canadian content distribution company...

(source: Almost Famous by JOANNA PACHNER. Report on Business magazine. August 29, 2008 )

''Alliance reversed the Globe ban,"Patrice Theroux announces slyly after sneaking a peek at his e-mail. We've just settled into cushy leather in his huge, panoramic office in a midtown Toronto high-rise, which happens to be right across the street from Alliance Films. A month earlier, that giant of Canadian film distribution had barred The Globe and Mail's film critic Rick Groen from its movie previews after he bestowed a merciless goose egg on Sex and the City, one of Alliance's biggest releases. But the distributor backed down--these are rough times in the film business, and Alliance's smaller releases need all the ink they can get. "I wondered how long it'd take them to do that," says Theroux, nodding across the street.

It must be strange to come to work every day and look out at the headquarters of the company you were instrumental in building, which is run by a man who's been called your surrogate father, and which you now intend to topple from the pinnacle of Canada's entertainment industry. But after 18 years at Alliance--eight of them as president of its movie distribution unit--Theroux was unceremoniously canned in July, 2006, for trying to orchestrate a management buyout.

It was the best thing that could have happened to him. As soon as his non-compete agreement expired last summer, he came here, to Entertainment One, Canada's largest wholesale distributor of CDs, DVDs and video games. Last year, it grossed $577 million, largely by delivering its wares to retailers' racks. Theroux is now head of the company's new Filmed Entertainment division, and E1 has spent more than $200 million on eight film and TV acquisitions (see "Big deals," page 61), catapulting it into the position of No. 2 distributor and largest television producer in Canada. That's in just over a year.

John McCain's Interesting VP Selection

John McCain is potentially gambling big time by going with an unknown VP. Sarah Palin will appeal to the core Republican base of social conservatives and the Christian Right (she is against abortion, generally against the environment, and so on.) McCain seems to be betting his campaign on attracting the so-called female vote, and likely pushing for energy independence through Arctic drilling (Palin is pro-Arctic drilling.) What this does, however, is distance his position from the George Bush administration. Anyway, a bold pick for sure.

(Just for disclosure purposes, I'm not American and don't really care much about their party politics. I also don't vote for social conservatives so the modern-day Republican Party is not my thing. However, American politics impacts the rest of the world (although less than most imagine) and I find this pick interesting. It looks like Canada will be having an election soon too.)

EU & Russia

(source: Peter Shrank for The Economist)

I love the above cartoon by Peter Shrank for The Economist (story here). It succintly captures why the EU, represented with the little stars behaving independently, won't do anything to the the bear (Russia.) We are, of course, talking about the EU reaction to the Russia-Georgia war (EU is supposed to be holding a meeting on September 1st.) The fact of the matter is that there is strong economic trade between Russia and the EU. Some countries benefit greatly from this relationship while others not so much. I personally think it's ridiculous that some high level EU officials have even suggested sanctions. It's one thing for the hawks distant from any potential damage in America or Canada to call for some harsh response, but it's totally ludicrous for EU officals to suggest sanctions while potentially driving their economies into the ground with the resulting trade war. This sounds just as crazy as the trade war against China suggested by some in America.

I have expressed my views in the past and nothing has changed my mind, even with all the one-sided reporting in the West. I still feel that it's hard to fault Russia when Georgia is the one that started the big attack on South Ossetia, killing not only civilians but also the so-called Russian "peacekeepers." It's ridiculous for the EU or USA or Canada to say that Russia shouldn't have done anything. If Canadian soliders died due to foreign shelling I think we all know what Canada would do. Technically, Abkhazia and South Ossetia belong to Georgia but they have operated independently for more than a decade and have little ethnic or linguistic attachment to Georgia.

Obviously it seems to have escaped some politicians in EU that Europe needs Russia more than Russia needs Europe. Practically the only thing Russia needs Europe is for discretionary consumer goods and capital (capital is less of a need these days.) Conversely, Europe needs Russia for resources such as natural gas, oil, and steel. Sure, it can import them from elsewhere but it would be far more expensive (hence destroying their economies in the process.) Russia would lose little in the long run (although short term would be painful) by exporting their resources to China, India, and south-east Asia. Already, Sashkavalli's dumb war is leading to Azerbajan thinking of re-routing oil through Russia, by-passing Georgia. There is also some attempt to re-route the oil through Iran, in order to avoid Russian dependence. If America was actually supporting Saskhavalli's attack--hard to see how that wouldn't be the case with 100+ American soldiers in Georgia at that time--this could turn into another huge blowback for America. Not only do you end up with American ally Georgia--the third biggest supporter of the Iraqi war--being run over by Russia, you also end up with more oil being shipped to Iran.

This whole Shaskavalli Strategy is turning into a mess for Georgia and innocent citizens are the ones that are going to be hurt. If Georgia loses the oil routes, it will permanently hurt its economy. America, EU, World Bank, and other governments may provide loans but private investors will be reluctant to invest in Georgia.

Having said all that, I hope Russia does the moral thing and withdraws back to Abkhazia and South Ossetia. The checkpoints that cut off the key east-west route, and the occupation of the port city far away from Abkhazia is totally uncalled for. This is nothing more than insulting a deated foe on its back. It would gain a lot of goodwill, not from those that distrust it but from those who are more neutral, if it withdrew back to the original positions. I also hope that Russia keeps control of the paramilitaries that seem to be loose and can potentially cause serious crimes (war crimes, ethnic cleansing, mass rapes, etc,) such as the vicious Chechen militias, the so-called Russian Cossacks, and the Ossetian paramilitaries. Unprofessional, lawless, heavily armed individuals running around is the last thing the world needs--in Georgia or elsewhere :(

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