Showing posts from October, 2008

Some Slides From Grant's Fall 2008 Investment Conference

I don't have much access to Jim Grant (newsletter costs $800+; oriented towards professionals; etc) but one thing I like about him is the fact that he is a contrarian who isn't scared of going against the crowd. In fact, from what I can gather, he has been a contrarian for almost 30 years. One funny thing about Grant is that he is a value investor and hence says not to pay attention macro very much. Yet most of his writings are regarding macro items :) Well, I have never been to any of his investment conferences but they also seem like an off-the-wall mix of views from various individuals. Some slides from the Fall 2008 conference are posted on his website . I haven't gone through all the slides from everyone but perhaps the two most interesting ones are from Jim Chanos of Kynikos Associates (perhaps the most successful short-seller on the Street) and Jim Grant . Thoughts by Jim Grant As he has mentioned in some of his recent interviews, Jim Grant is making a bullish

Random Articles For The Day

Some articles... US GDP growth comes in at -0.3% (Bloomberg): I'm playing around with a contrarian macro call for a better economic growth than the market is pricing in. I don't have a firm view yet but I'm thinking that economic growth is not going to be terrible (worse than 2000 or 1990 recessions but not probably not as bad as 1974.) The problem with a GDP call is inflation. I'm still not leaning one way or another when it comes to future inflation. Critical thought about hedge funds in Canada (The Globe & Mail): Good thing the unsophisticated public--you and me--can't invest in what passes for hedge funds these days. At least when it comes to Canada, it's quite correct to say that many so-called hedge funds have nothing to do with hedging (most have high positive correlation to the index) and simply leveraged bets on resource companies. Hartford Financial, an insurer, facing problems (MarketWatch): This just goes to show how overrated American exec

Federal Reserve Cuts Rates to 1%

FedRes cut rates by 0.5% today , taking the rate to Japan territory of 1%. I think this is a mistake. But the effective rate, as well as market expectations were for a rate cut, so the FedRes has little room to maneuver. Contrary to some mistaken views, the FedRes actually tends to follow the market rather than lead it. The following chart shows the effective fed funds rate over the last 30 years. (Note that the effective rate is not the same as the target rate but it is the goal of the FedRes to perform open market operations to influence the effective rate. So for our purposes, it's almost the same as the target rate.) As you can see from the chart, we have hit the levels of 2004. It should be noted that some, particularly the hard currency advocates, argue that the low rates in 2004 was what led to gigantic bubbles, not just in housing but also in junk bonds, emerging market stocks, commodities, art, collectibles, and many others. Although I think he puts way too much emph

Canada's Tax-Free Savings Account

Canada is introducing a new tax-free method for savers starting in 2009. It is called the Tax-Free Savings Account (TFSA). It complements the already-existing RRSP method. There are numerous differences between the TFSA and the RRSP so they don't necessarily compete against each other. Unlike with an RRSP plan, you do not get a tax deduction for contributing to the plan. But you can withdraw from the plan at any time and do not pay taxes for any capital gains, dividends or interest income earned. The amount is also limited to $5000 per year. For further information check out one of the following links: Article from The Globe & Mail Department of Finance overview (note: refer to CRA for final details) ING Direct Top 10 FAQ (I'm not recommending ING but like the brief FAQ) Appropriateness of the plan depends on the details of an individual and do not construe anything I say to be investment advice, but I would say that this is an ideal plan if you need to save money for

Risk Arbitrage Thoughts: BCE, Huntsman, Q9 Networks

Thoughts on some risk arbitrage items... BCE Saga Well, it looks like there is another lawsuit against the BCE buyout . This time, some shareholders are suing BCE because it cancelled the dividend. Sounds like a frivolous suit to me. Maybe it's about time that some of these investors realized that companies are not obligated to pay dividends. The Globe & Mail also has some notes on various, conflicting, views on the BCE takeover from analysts . On top of the credit crisis, the sheer size of the takeover makes financing a legitimate threat to the deal. Huntsman Buyout One of the big M&A deals that was embroiled in a legal battle was the Huntsman buyout by Hexion Specialty Chemicals. It was moving forward after the court ruled in favour of Huntsman. Well, it looks like the banks are now refusing to finance the deal. It will go to the courts and it remains to be seen what comes of this. Again, like most of the recent spate of M&A legal battles, precedents and lon

Talk About Short-Covering

Want to see short-covering taken to the extreme? Check out what happened to Volkswagen , a German automobile manufacturer: Volkswagen briefly became the world's biggest company by market value on Tuesday, as short sellers continued to pile into the stock on weekend news Porsche had bought up much of VW's remaining free float. Shares in the German car maker hit an intraday high of €1,005.01, valuing the company at €296.06-billion euros ($370.4-billion) based on ordinary stock, more than that of world number one company Exxon Mobil Corp's $343-billion market value at Monday's closing price. The shares later eased back to stand 25.4 per cent higher at €652.00 at 1103 GMT, after tripling in the previous session. Porsche said on Sunday it held over 74 per cent of VW, prompting a panic among short sellers who had sold VW shares in the hope of buying them back at lower prices. Here is the chart of the action: What just happened is unbelievable. Stuff like this happen

Random Articles For A Monday

Some articles some of you may find interesting... Has a trading mentality taken over the capital markets, business community, and government? (The Globe & Mail): An essay by the CEO of Thomson Reuters, Geoffrey Beattie, presents his opinion on the matter. He makes some fine points on the differences between a short-term mentality and a long-term one. I agree with most of the opinion but feel that an important point is missed. It is important to remember that this is not a North American problem; neither is it a capitalist problem. Some people like to say that countries like China have a longer term plan, but they don't. China, and others, are following a short-sighted policy on par with America. If you think about China's low currency peg or the ignorance of environmental problems, not to mention the disastrous one-child policy, you'll see that they share a lot with the executives, leaders, and politicians in America and Europe. Simple illustration of structured produ

A Sign Of New Entrants To The Global Capitalist System

Eureka! We have further signs of new entrants into the capitalist system. It's always a good sign. First step is to participate in the capital markets. The next step is to learn that the free market does not mean that everything only goes up. Unfortunately many are tripped up after the first step : But in Kuwait, the government has taken a less hands-on approach, angering investors who sued without success to temporarily close the bourse. On Sunday, traders walked off the floor of the bourse for the second time in less than a week. Investor al-Fadhli said about 40 brokers left the exchange, walking to the nearby seaside Seif Palace, calling on the prime minister for more government intervention. Yes folks, as unlikely as it may seem, some investors are suing to close the exchange. I presume the strategy here entails burying your head in the sand, literally, and happily pretending that asset prices have not declined. And you thought the Americans started a bad trend, now blin

A Bear Turns Bullish (Sort Of)

I have no idea if Krishnamurthy 'Nandu' Narayanan is just lucky or is actually talented. If you go by The Globe & Mail stories on the investment manager's thoughts over the last year or two, you would notice that he actually expected the credit bust. He had been bearish for a while--I believe he is primarily a short-seller but not sure--but seems to be bullish (at least on Canada right now): The Smartest Man, when delivering his prophesies, did not sugar-coat them. “This could potentially make Long-Term Capital [the financial crisis of 1998] look like some kind of walk in the park,” he predicted. “The reckoning has started.” No soft landing this time: It could even be “like the Great Depression of this century.” He said these things not last week, not last month, but on July 26, 2007. That day, the Dow Jones industrial average closed at 13,473. ... “I think we're ending the financial crisis now,” he said. “There will be countries, like the U.S., that will go int

Random Articles For The Day

Some random stuff for the day... One bright spot for Icleand... tourism (BusinessWeek): Iceland got a $2 billion loan from the IMF so that should stabilize things somewhat. Some of their industries will do extremely well, assuming their finances and access to credit is decent, given the massive collapse in the currency. One such industry is tourism. Emerging market debt problems (BusinessWeek): One of the last remaining bubbles is the emerging market debt bubble. Many emerging markets were priced as if defaults were a rare thing. The graphic accompanying the BusinessWeek article highlights the following danger regions: Baltics (Lithhuania, Latvia, Estonia), Ukraine, South Korea, Pakistan, Turkey, Persian Gulf, and Eastern Europe (Hungary.) One thing about a publication like BusinessWeek is that it is generally backward-looking and reports the problems faced right now. In contrast, a publication like The Economist is forward-looking and often speculates on potential future problems (

Montpelier Re Reports 3Q 2008 Results

In line with the hurricane losses it announced earlier, Montpelier reported its 3rd quarter results : Montpelier Re Holdings Ltd. (the "Company") reported an operating loss of $55 million (or $0.65 per share), which excludes net investment and foreign exchange gains and losses, income taxes and extraordinary gains, for the quarter ended September 30, 2008. The Company’s operating loss reflects a combined net financial impact from Hurricanes Gustav and Ike of $130 million, which is in line with our prior announcement. The Company reported a net loss of $142 million (or $1.69 per share) for the quarter ended September 30, 2008. The Company’s net loss reflects $27 million of net realized losses, $48 million of net unrealized losses and $13 million of net foreign exchange losses. The Company noted that, as a result of the adoption of FAS 159 in January 2007, it reports virtually all of its net unrealized investment gains and losses, whether considered temporary or permanent, a

China's Real Estate Bubble Finally Bursts

(Photo by Keith Bradsher for The New York Times) [The New York Times reports that only 50 of the 780 apartments above have been occupied] Bears like Stephen Roach, an economist, were saying there was a real estate bubble in China almost 3 years ago. Well, it took a while but I think we can safely say that the bust has finally arrived . China’s real estate bubble has turned into a bust in many cities, complicating the government’s effort to manage an economic slowdown here. As China’s real estate boom slows, construction projects are stalled for lack of financing. The pain is obvious in Liu Shirong’s apartment development. Mr. Liu, a shy electrical engineer doesn’t mind living in a complex where only 50 of 780 apartments are occupied and the swimming pool is eternally empty. “I have peace and quiet at night,” he said. But the vacant apartments are a nightmare for the mainly speculative investors who bought them a year ago. And nearby, only one of the two dozen towering cranes

Jim Rogers Interview on CNBC Europe; Plus My Thoughts On Commodities

I haven't seen Jim Rogers being challenged by many people for his polemic attacks but here is a clip where he is called to task . Thanks to A Jim Rogers' Blog for the video mentions. Do check out that blog for a few other clips, or other info about Jim Rogers. I think Jim Rogers is being very hypocritical when he says that financial institutions should be allowed to collapse, while saying that the problem in the 1930's was that money wasn't funnelled to the banks while bank runs were under way. A lot of people who take positions similar to Jim Rogers--Jim Grant is another--seem like the modern day Herbert Hoover or Andrew Mellon. I agree that the economy hasn't been cut in half (it isn't even down 10%) but the credit bust is fairly large. Some already claim that letting Lehman Brothers fail was a mistake and I'm not sure what would happen if AIG, Goldman Sachs, Morgan Stanley, Wachovia, potentially UBS, potentially Royal Bank of Scotland, and others, were

CNBC Interview with Martin Whitman, Jean-Marie Eveillard, and Charles Royce

CNBC conducted an interview with value investors Martin Whitman, Jean-Marie Eveillard, and Charles Royce. Check it out... Segment 1 Segment 2 Segment 3

Currencies Can Make Or Break Risk Arbitrage

If you are doing risk arbitrage, you need to be careful with currencies if you'll be receiving compensation in foreign currencies or foreign shares. Professionals will hedge the currencies but small investors often can't afford to do so. I'm located in Canada so changes in US$ vs C$ can wipe out all my gains. Anyone following my investment "career" :) will recall how I lost money in C$ terms on my US bond position last year even though it posted positive gains in US$. This wasn't a risk arbitrage position but the problem is very acute for risk arbitrage since the gap you are working with tends to be small and you have no chance of waiting to recoup. The following graphic depicts two takeover deals I have mentioned on this blog: BCE and Fording Canadian Coal Trust. In the BCE deal, shareholders will be paid a fixed amount in Canadian dollars. In contrast, the Fording deal involves receiving a fixed US$ amount (along with a small stake in Teck Caminco.) You

Added to position: Puget Energy (PSD)

Hope this doesn't blow up since I'm running out of free capital. Anyway, I added to my Puget Energy (PSD) risk arbitrage position. The stock is trading as if the deal won't be completed. If this were a normal market, the downside risk here is very close to zero; but given the market conditions, the stock can drop anywhere from 5% to 25% if the deal collapses. From an analyst report I read, if the buyers walk away, Puget Energy will be paid what amounts to around $1 per share (about 4% or one year worth of dividends.) So the break fee isn't anything major. Purchase price: $22.18 Investment time frame: short

This Is More Than A Housing Bust...But Good Time To Invest

UPDATE: Gurufocus also has a post looking at potential future returns . I think it's worth checking that out, along with Geoff Gannon's more nuanced look . It's very important to keep in mind that we are not just facing a housing bust. The problem is much bigger and is essentially a credit bust. The media and some in the market seem to be concentrating on the housing market but huge swaths of the credit market won't return--ever! If you follow this thinking, the implication is that a recovery in housing will not necessarily improve the economy or your investments. Don't get me wrong: housing is very important. But it's only a big piece of the crisis. Nevertheless, it's starting to be an attractive period for investments. Many also seem to ignore the fact that risk premium was unsustainably low over the last 5 years (conversely, this means asset prices were unsustainably high.) This means that some of the spreads/yields/etc won't return to what they w

Ambac CEO Replaced

This is probably bad news, with earnings almost around the corner (likely in first week of November,) but Ambac replaced its CEO . This is never a good sign and remains to be seen if there are any negative surprises when they release earnings. However, it should be noted that Michael Callen only took over the job as an interim CEO so it isn't as surprising as it may seem. The CEO position is being taken up by the Chief Risk Officer, David Wallis. There is good and bad in this. I have been dissapointed with the risk control at Ambac over and I recall David Wallis saying that the situation was under control back in late 2007. Yet the whole thing fell apart later on. That's the bad aspect to this. The good news, if any, is the fact that he will be intimately familiar with the insured risk. Going with someone outside the firm who is not familiar with any of these complex securities would have been risky. Recall how AIG hired an executive from outside the firm and it completely col

Dividend Investors Hit Hard

Focusing on dividend stocks works out in the long run (in terms of passive strategies) but dividend investors have been hit really hard over the last couple of years. The following chart plots a popular dividend-oriented ETF (DVY) against the S&P 500 (other ETFs, mutual funds, and indexes have similar returns.) Dividend payouts are not shown but I doubt that they can make up the capital losses in the last year or two. Typically dividend stocks hold up in bear markets but that hasn't been the case this year. In fact the dividend ETF dropped far more than the S&P 500 in the early part of the year. The reason is fairly obvious in hindsight: the collapse of almost all financial companies. A lot of the big dividend payers over the last 25 years have been financials. Even if you had used a tough screen looking at consistent dividend payers that have been paying for 20+ years, with sold earnings growth, you wouldn't have avoided the losses. In fact, this quarter is shaping

Gross Abuse of Property Rights In Argentina

Well, maybe it's not a surprise given that it's Argentina but here is an example of total disregard for property rights : Argentine stocks plunged 13 percent Tuesday after the government announced plans to nationalize nearly $30 billion in private pension funds. The government of President Cristina Fernandez said that it had to protect retirees as stocks and bonds fall amid the global financial crisis. But her political opponents called it a naked scramble for cash to prop up falling tax revenue. ... The nationalization would allow the government to pay off millions of dollars in debt and finance stalled infrastructure projects starved for credit, a former finance minister Miguel Kiguel told Buenos Aires-based television station TodoNoticias. ... Argentina’s private accounts were created in 1994 under President Carlos Menem, who embarked on a wave of privatization in Argentina during his 1989-1999 terms. The pension funds are controlled by the BBVA Banco Frances, a unit

Iceland...An example of the unfolding shift to the left

I consider myself left-leaning so I don't mind it but many investors may not like it. I'm talking about the likely shift across the world towards left-wing econopolitical ideals. Iceland is a sign of things to come as I suspect that you will see monumental shift in their politics for the next 20 years. More than any of its Nordic neighbors, Iceland under Prime Minister Geir Haarde imbibed the economic policies of Margaret Thatcher and Ronald Reagan -- state-asset sales, light regulation and corporate growth abroad through debt. Now that the hangover has arrived, many of Haarde's countrymen want his Independence Party-led coalition to pay the price for turning one of the world's wealthiest countries per capita into a beggar state staving off depression. Goverments don't control economies but they do influence it. The capitalist strategy has completely backfired in Iceland and it's hard to see them continuing down that path. It's sad to see one of the w

An example of high probability, low return, risk arbitrage: Fording Canadian Coal Trust (FDG; TSX: FDG.UN)

A reader e-mailed me and asked about taking a position in the Fording Canadian Coal Trust (FDG; TSX: FDG.UN) takeover. I never took a position for various reasons (I describe this takeover below) but what I want to do is to point out how there are two types of risk arbitrage deals: the high probability, low return ones; and the low probability, high return ones. The thinking behind each is quite different. Anyone following this blog would notice that, with the few I have dealt with, I tend to take seemingly high risk arbitrage positions. You know, deals that the market doesn't think will close easily. I'm just a newbie and still trying to figure out what works for me, but so far I like the low probability, high return deals. I usually look at deals with wide spreads (preferably 10% total, or say 20% to 40% annualized.) Such wide spreads essentially means that the market doesn't think the deal will be likely to close. Although one may view such deals as risky from an arbit

Marc Faber October 20th Bloomberg Interview

One might be bored of reading too many Marc Faber references lately on this blog but Bloomberg has a lengthy interview that captures his present world view . I think it's well worth checking out for those not familiar with Marc Faber; and for those familiar, well, there are some nice insights as well as his investment thoughts. I personally think he is less useful during bear markets (I consider bears to be useful during bull markets and bulls to be interesting during bear markets--I know, the opposite of most people.) In any case, here is a summary of his key points. I don't think it does justice to his colour commentary ;) but for those short on time... (bullet points are in no particular order) Is out of the market for the most part: He says he is mostly in cash, with gold behing his largest holding (equities less than 10% of portfolio.) He views gold as more of an insurance holding. Market oversold and sees potential for a rally but no new (real) highs: I'm not in

Capitalism Is Dead... Long Live Capitalism

(source: Kevin Kallaugher for The Economist ) Probably one of the best cartoons from Kal. While some on the left are calling for the end of capitalism, we have some on the far-right (American Libertarians/traditional conservatives/free market supporters) saying the current mess is mostly the government's fault. I personally don't buy that view but if someone is in the mood for a critique of the current system from an extremist, Austrian eocnomist, view, check out Jim Grant's latest piece in The Wall Street Journal . I just don't see how he can pin the blame on the central bank (The book hasn't come out yet but my impression is that his forthcoming book will blame the central bank actions.) I'm trying to dig up some information from the 1800's to illustrate how terribles things were when gold or silver backed currencies, there was no central bank resembling the present ones, and deflation was the norm. It's amazing that so many libertarians and conser

Warren Buffett Bets On America... Finally

(Illustration by Brad Holland for The New York Times) It took a while but Warren Buffett finally considers American equities attractive. Warren Buffett wrote an opinion piece for The New York Times today and he is buying American equities for his private account. This is a big shift from Warren Buffett, who says he has been holding US Treasuries in his private account. There isn't anything insightful in his essay for any value investor or a contrarian but I recommend reading it. In fact, the most important thing to me is not his comments but the fact that this is a powerful signal. It's one thing for some guy off the street to be saying stocks are cheap; and it's another when someone great like Buffett says so. I hate to insert my views into an opinion piece but here are some brief thoughts... (source: Buy American. I Am. , By Warren E. Buffett. October 16, 2008. The New York Times) This is my personal account I’m talking about, in which I previously owned nothing b

Central Banks Can't Target Asset Prices; Reversion To The Mean May Not Work

I ran across a blog entry at Aleph referring to a Bloomberg story suggesting that some believe asset prices should be targetted by central banks. Mark Thoma also tackles this topic in a SeekingAlpha post. IANAE (I'm not an economist) but here is my layperson perspective on this. The Bloomberg story is a bit narrow and concerned with asset bubbles due to excessive credit (basically the current problem.) But if we generalize it and consider asset bubbles in general, I would say it's impossible for central banks to target asset bubbles. I quote a WSJ blog entry last year dealing with this topic so you may want to check that out . It's impossible to know what is in a bubble ahead of time. For instance, consider some of the recent scenarios. People like me entertained the possibility that commodities were in a bubble, yet we have many others who are confident that commodities are not in a bubble. So which is it? The answer, of course, is that we don't know right now. B

Marc Faber Interview

Thanks to Naked Capitalism for pointing me to an interview of Marc Faber being conducted by Australian television . True to form, Marc Faber is expecting a lot of gloom, boom, and doom. Marc Faber is an extremist and his comments often border on extreme doom. And I'm not even talking about the current crisis. He is always superbearish so some of his views are ridiculous. For instance, I'm sure that even he doesn't seriously believe that US government debt should be rated junk, as he claims. Nevertheless, he presents non-mainstream views and I'm a big fan of him (even though his timing is off at times.) It's a good read if you want to hear bearish views.

Mutlimedia Rundown

Here are some multimedia clips consisting mostly of interviews over the last few months. A lot of it is not new and has made the round in media and blogs but I'm repeating them here in case someone missed it. Donald Coxe (Financial Sense Newshour with Jim Puplava): For those not familiar, Donald Coxe is a commodity superbull who had been bullish on commodities for many years. He shares his views on the current situation. I don't agree with all his views, but it's interesting to hear his take on agriculturals. If I were to bet on commodities, I would go for the soft commodities (agriculturals.) Donald Coxe, Jim Rogers, and Marc Faber are all bullish on them so that's a good sign. This seems a safer bet than industrial commodities or oil&gas, most of which are already up almost 200% to 500% within 10 years. MP3 Audio Windows Media streaming Audio Jim Grant (Financial Times): There are no libertarians in a crisis... except for Jim Grant that is. (original mentio

Massive Captial Injections and Partial Nationalization Underway

Free market proponents may not like it but governments of the world have taken almost-unprecedented action to inject capital into major banks. Many feel that there is few other alternatives, other than letting the banks collapse. You can get more details at your favourite media source so I'm not going to repeat that story except to provide a summary of the key moves courtesy The New York Times: There are several elements and they keep changing so it's hard to say what the final situation is. My impression is as follows: Although the details of the plans differ, we are seeing a global effort. This should increase confidence in the system and was essential. If only America did something while Europe and others did nothing, the impact would may not be significant. The US government is forcing the leading banks to accept capital injections. Dilution for shareholders amount to around 20% of book value (depending on the bank in question.) The thinking behind the forceful move i

Congratulations to Paul Krugman

Congratulations to Paul Krugman for winning the Nobel prize in economics . Strictly speaking, there isn't a Nobel prize in economices but the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is considered to be the unofficial Nobel prize in this field. I'm not an economist and don't really understand or agree with much of it but here is what he is being cited for: The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008 to Paul Krugman (Princeton University, NJ, USA) for his analysis of trade patterns and location of economic activity. Patterns of trade and location have always been key issues in the economic debate. What are the effects of free trade and globalization? What are the driving forces behind worldwide urbanization? Paul Krugman has formulated a new theory to answer these questions. He has thereby integrated the previously disparate research fields of

Can Governments Actually Afford to Back Their Banks?

One of the popular strategies these days is for governments to announce that they are backing the deposits in their country. I approve of the government strategy since we need to prevent bank runs that were the norm in the 1900's or earlier (or in modern day developing and undeveloped countries.) However, as investors and savers, the question is whether there is any merit to any of this. Can these governments actually back up their deposits? The Economist examines this topic , and produces the following chart plotting debt and deposit as a percentage of GDP (as usual, click on chart for a bigger picture): That chart looks scary. We can easily see how Iceland has little ability to do anything given the size of the exposure. I also remarked recently that Switzerland is another country that may face potential difficulties (I questioned whether a bullish bet on the Swiss Franc, as Jim Rogers seems to favour, is a smart bet.) Well, I never knew that Britain and Ireland were just a