Can Turtles Fly?

It has been a rough year but fret not, a new year is upon us... To All My Fellow Bulls & Bears Happy New Year!!! All the best to you & your family And wishing a prosperous financial year for all... (source: picture from Frankfurt stock exchange (modified))

If there were awards for making black swan predictions, I think one gentlemen from Russia has everyone beat when it comes to the political category. In a prediction that rivals the best--or worst?--of science fiction writers, we have a Russian analyst forecasting the breakup of USA. I'm sure you are thinking that you have heard that before, not just once or twice but at least ten times. But, unlike prior "forecasters," this individual is predicting not only a major collapse of USA, but for it to happen by 2010. Yes, make no mistake, Americans only have 2 more years of peace and prosperity. After that, they'll be happy to know that they will be under the influence some distant forces as outlined in the map below: For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument -- that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. --

You can see why value investors such as Warren Buffett don't spend too much time making macroeconomic predictions. It's quite easy to be correct with the macro call yet end up with poor investment returns. Part of the reason is the inability to nail the timing. The other, obviously, is poor asset selection. An example of what I'm talking about is the International Harry Shultz Letter, which is some obscure newsletter that has posted a disastrous 70%+ loss . I wanted to highlight this letter, not because I have any strong negative opinion of the letter itself. Rather, there are a few important observations. But over the past 12 months through November, Schultz is down a heart-stopping 76.05% by Hulbert Financial Digest count, vs. negative 36.68% for the dividend-reinvested Dow Jones Wilshire 5000. This loss has wiped out Shultz's strong post-2000 run, when he benefited from the gold and commodities boom. Now, over the past 10 years, the HFD shows the letter achieving an

It looks like the proposed infrastructure spending of the Obama administration is not going to help the environment or improve energy efficiency. Although those were never the goals, some, including me, were hoping that it would improve energy efficiency and battle pollution. It looks like some states are simply going to be promoting urban sprawl (source: Bloomberg) : Missouri’s plan to spend $750 million in federal money on highways and nothing on mass transit in St. Louis doesn’t square with President-elect Barack Obama’s vision for a revolutionary re-engineering of the nation’s infrastructure. Utah would pour 87 percent of the funds it may receive in a new economic stimulus bill into new road capacity. Arizona would spend $869 million of its $1.2 billion wish list on highways. While many states are keeping their project lists secret, plans that have surfaced show why environmentalists and some development experts say much of the stimulus spending may promote urban sprawl while scrim

One should never be contrarian for the sake of being contrarian! Nevertheless, I do find it helpful to list a bunch of contrarian positions and think about them. Here are some contrarian positions one can take right now. The items below may conflict with each other and should only be used as a thought exercise. I urge readers to leave any additional ideas they have in a comment. (Positions that interest me are bolded.) Contrarian Investments US government bonds (short) US corporate bonds (long) real estate (long) commodities (long) gold (short) US$ (short or long): Depending on one's outlook, I think one can argue that either a short or a long position would be contrarian (since the market doesn't seem to favour it strongly either way.) I would consider a bullish (long) bet to be more contrarian since I notice more people questioning the strength of the US$, particularly due to the FedRes and government spending plans. Distressed sectors , particularly homebuilders, select Amer

The New York Times has an article touching on the imbalances that we observed in the decade. It's a story told largely from the perspective of Ben Bernanke. I see some bloggers taking issues with the article and, although I don't have a strong view on the article itself, I think the criticism by some bloggers is simplistic and impractical. I will refer to two thoughts to illustrate some issues that is missed. Housing is not the main problem! The first blogger I want to refer to is Paul Krugman, who takes issue with the notion that the housing bubble was only known in hindsight. He correctly points out how he, as well as several others, were warning about the housing bubble for years. It would have been preferable if the housing bubble didn't inflate as much as it did, but we are not looking at the possibility of a depression because of that. I think he, as well as many others--some prominent commentators, some not so prominent--are missing the core problem. My view is tha

They have been given up for dead but the bond insurers are still limping along. However, there is some bad news on the horizon, although I'm not sure if any of the bond insurers are impacted. Bloomberg reports that an analyst predicts as many as 10 municipal bankruptcies in the upcoming year with more the following year: The accountant who predicted the nation’s largest municipal bankruptcy says as many as 10 insolvencies will roil the $2.7 trillion U.S. market for state, county and city debt next year as public finances worsen amid calls for federal aid to state and local governments. John Moorlach said in 1994 that Orange County, California’s leveraged investing strategy could wreck its finances. The county went bankrupt about six months later after losing $1.6 billion. As many as four cities in the Golden State and six others nationwide may seek court protection from creditors next year under Chapter 9 of the bankruptcy code, the section devoted to municipal governments, Moorl

Investors expecting some good predictions for next year may be dissapointed to hear Marc Faber predict a catrastrophic economy next year. However, I think there is some inconsistency in Faber's predictions. He is expecting bad things all around yet is bullish on all the cyclicals such as commodities. He also seems to favour emerging markets, which seem like a bizarre bet if you are bearish on the world economy. Faber keeps dodging the China question. He keeps saying that the situation could get worse but doesn't come out and say to short China. He also seems to favour gold mining companies, such as exploration companies. He thinks the markets are likely to rally since they are oversold but doesn't expect it to be anything significant. For what it's worth, Faber relies on technical analysis for these calls and I tend to dimiss it for the most part. Oversold or overbought has little relevance to my thinking. I think the 'inflationists' are going to be wrong. I do

Crude oil is going to be a big story in 2009--for both investors as well as for the economy. I'm staying as far away from oil as possible but it is an interesting situation for investors. Oil & The Economy One of the reasons the economy hasn't done as badly as some of the pessimistic forecasts from early in the year was because of the massive decline in crude oil. Calculated Risk estimates that the decline in oil provides around $20 billion per month in extra disposal income (compared to prior spending.) This is equivalent to almost 1/4 of the big stimulus package that is being proposed. If you add in the decline in other commodities, you can see how big of a stimulus this has provided in this recession. The decline in oil (and other commodities) is, of course, bad for the oil industry (and related industries.) Roughly speaking, decline in oil is good for USA because it is a big user; but it is bad for the oil producers, whose economies are getting clobbered. One just need

(source: Globe Investor magazine, December 18, 2008.) Cool pic. Anyway, Globe Investor magazine, the Globe & Mail's insert, has a brief summary, written by Dan Hallett, on the nature of bear markets . Unfortunately, the attached table is very small and hard to read on high-resolution monitors. In any case, here are the key points he makes: 1. Bear markets are common. Canada has seen six bear markets in the last 39 years. That’s one every 6.5 years or so. The accompanying table shows that U.S. stocks have seen 15 bear markets over the last 137 years – an average of one every nine years. ... 2. Clustered bear markets are the norm. ...Notice that many past bear markets started shortly after stocks fully recovered from the previous decline. Most investors’ experience has, until this year, been the exception to the notion of clustered bear markets. The crash of 1987 was fully recovered by the summer of 1989. After that, the United States didn’t have a real bear market until 2000. 3.

One of my rules in investing is to be skeptical of economists' predictions. Economists generally don't consider valuations when making proclamations. They also tend to be influenced by peers and have a habit for looking backwards quite often. Nevertheless, since I am macro-oriented, I do think it's worth paying attention to the general picture that is put forth by an economist. One of the economists I was influenced by in the past was Stephen Roach of Morgan Stanley. He was a bear for a long period of time. So much so that he was "promoted" and sent off to head their Asian operations. You never heard much from him after that, of course. Another bear at Morgan Stanley, Andy Xie, who I think is too extremist and is often wrong, was fired around the same time period a few years ago for claiming that a big chunk of Singapore wealth comes from the Chinese and Indonesian organized criminals, corrupt politicians, and other nefarious sources. Xie was very bearish on Chi

Thanks to reader hpm for referring me to the transcripts of the December 3rd Legg Mason Annual Press Symposium. The format was that of a roundtable, with Bill Miller being one of the participants. I would put this low on the list of reading materials given that there wasn't much insight--at least for me. Anyway, I have some dissenting views on some of the points that were mentioned. Several individuals are quoted below so don't assume all the words are from Bill Miller. On Asset Values MILLER: The problem is collateral values and asset values. That's housing and all of the related securities relating to that, and all the securities out there in the system. You know, if the stock market were back where it was a year ago, there wouldn't be a recession. You know, things would be looking fine. Wealth would be up, you know, everything would be looking okay. So I think it's getting collateral values stabilized and rising. And, you know, Ken and I had a discussion about t

The Bush administration has decided to save the American automakers after all. The bailout is contingent on further compromise from other parties but I am still doubtful that this will save them. It will avoid imminent collapse and buy a few months but, if auto sales don't pick up--there is no sign of it picking up--then these companies will still face big problems in 3 or 4 months. To see how bad the situation is, consider the fact that Toyota, generally considered to be the best-run and strongest automaker, is expected to post its first loss on operations in its history. Toyota has big problems with the Yen but even then, if Toyota it getting whacked then the Big Three are in a far worse shape. Having said that, is is possible for sales to pick up at the Big Three as oil prices keep sliding. But this is no long term solution...

Dubai, in all its glory... It goes without saying that, after every bubble bursts, someone justifies bubbles and claims that they are good for society. Daniel Gross who wrote the book Pop!: Why Bubbles Are Great For The Economy --I haven't read it--wrote an article for Slate justifying the benefits of bubbles last year. I don't have a strong opinion on this topic. I need to think a lot more about it. My gut feeling right now is that bubbles are bad because they are inefficient. However, I also know that certain activities would have never occurred without the mania inherent in bubbles. For instance, the present state of the Internet, which relies on very cheap communications, would have, instead, taken decades without the dot-com bubble. Without the various railroad and canal bubbles, America would not have expanded to the western states. Thus, the question, in my mind, comes down to whether the inefficient allocation of capital is worth it, in order to realize a larger-than-l

Well, the Japanese government is considering buying shares on their stock exchange: Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported. Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported. The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying. Needless to say, the notion of a free market is kind of dissapearing by the minute. Japan is further along the deflation cycle and is simply following strategies put forth by mainstream economists such as Ben Bernanke (recall that one of the later tactics, after others fail, is to buy, first, bonds, then, potentially, stocks.) I am not familiar wi

Financial Post--WSJ of Canada--has a good note on contrarian investing . The content mostly seems to come from a Citigroup analyst note but it's interesting to me. I think relying on some wild guesses at a party to form theses can result in incorrect results. But nevertheless, the analyst seeems to capture some insight. I think some of what is described describes some of my investing, thinking, and behaviour this year. Let me highlight some interesting things and throw in my opinion as well: Before I say anything, it should be noted that the verdict is still out on many of the investments. Some people have posted large share price losses but they may be irrational "quotational" losses. In contrast, others have posted real losses. We probably won't know what the final outcome is for several years. Contrarian investors may have done really well when the tech bubble burst, but similar strategies haven’t fared very well since 1997 and 2008 was another poor year for their

Mostly macro stuff... Seth Klarman Interview at Harvard Business School (HBS): Thanks to gurufocus.com for bringing this interview to my attention. Some people put Seth Klarman a step below Warren Buffett when it comes to value investing but I have no idea. It's really hard to say how good, or bad, any of these guys are when they run opaque funds and all we know is some quoted return. For instance, I'm still uncertain of Edward Lampert's skills. Anyway, Seth Klarman is one of the few value investors who actually seems to follow Benjamin Graham's principles fairly closely. Oil keeps sliding (MarketWatch): Near-term futures contracts breached the $37 mark and analysts are lowering their estimates. From a long-term contrarian point of view, analysts cutting estimates is good. Semiconductors seeking bailouts (BusinessWeek): It's not only the auto industry that is seeking bailouts. The semiconductor industry, particularly in Taiwan and Korea, are seeking bailouts as

I don't know much about Stephen Jarislowsky but have read some stories about him in the past. He primarily seems to be an activist investor but I thought it's worthwhile for anyone reading this blog to check out his interview with The Globe & Mail. He is a deflationist whereas I'm still in the disinflation camp. Here are some excerpts: Q: Some market seers say that what we're seeing is a revisiting of the tough investing environment of the 1970s. It's nowhere near like it. At that time, we went to inflation and high interest rates. Now we're going to deflation and we already have very low interest rates. This is a 1929 bubble-and-balance-sheet recession. We are going to see the lowest valuations in stocks since the Depression. Q: How does a balance-sheet recession differ from a plain, run-of-the-mill kind? In an ordinary recession, demand for goods is less and commodity prices come down. A balance-sheet recession is where you have a big bubble, and everybo

How likely is it for a recently burst "bubble" to inflate again in a short period of time (on its own without government intervention)? The bubble I'm talking about is none other than the oil bubble. Let's for the sake of argument, since some still claim oil was not in a bubble, assume that oil was in a bubble whose low was marked in 1998. Commodities are very volatile and I agree with Jim Rogers that 50% corrections are nothing special in commodities. But the current correction is way more than 50% and seems more remniscent of a blow-off. Now, one of the popular arguments made by oil bulls, as well as many leading analysts, is the notion that oil is going to rise rapidly once the world economies start growing faster in the future. Is that likely? I have been bearish on commodities for a few years and been mostly wrong but still maintain my views for the most part. I don't think many of the commodities are in a bubble at current prices but I am not bullish either.

I can't see how the Big Three--that's GM, Ford, and Chrysler for foreign readers--can survive without restructuring within a bankruptcy court. Any restructuring would require two items to be addressed: employee costs and reduction in brands. I don't see how those issues will be solved without bankruptcy court help. The right tends to scream about the high employee costs and suggest that lowering wages will fix everything. Of course, this is nothing more than simplistic thinking akin to claiming that tax cuts will solve all the economic problems. The fact of the matter is that wages are high--way too high--but they only make up around 10% of the cost of a car. The New York Times illustrates the case of Ford, which has total costs of around $71 per hour (includes benefits, pensions, etc) versus $49 for Japanese companies. However, the Big Three cut deals with the UAW in the last few years to lower costs in the future. Ford is expected to have a cost of around $53 per hour in

Some articles some may find worth checking out: FedRes targets a hard limit of 0% to 0.25% (MarketWatch): Monetary policy has run out of ammunition. FedRes will try unorthodox strategies but their impact is uncertain. Fiscal policies will start having a much greater impact from now on so the actions of governments, rather than central banks, will significantly impact investors going forward. Will we see high inflation if government stimulus works? (Financial Post): I am not sold on the inflation case. Anyone calling for quick re-flation--this is the consensus of commodity bulls, including some quoted in the article--will be in for a surprise. Betting against the bond market is very risky, since it tends to be correct most of the time (recall how the yield curve was inverted a few years ago and was indicating a potential economic weakness, while everyone thought it was a bogus signal due to foreign central bank purchases.) Nortel bondholders bailing out (The Globe & Mail): For Ca

The latest problem , albeit a minor one, AIG is facing is a seemingly frivolous suit claiming it is not Christian-enough due to its support of some Islamic financial products: A Michigan man is challenging the bailout of American International Group Inc., claiming it is illegal because the insurer has financial products that promote Islam and are anti-Christian. The lawsuit was filed Monday in federal court in Detroit by the Thomas More Law Center, which pursues cases on behalf of Christian causes. The lawsuit says AIG offers financial services that comply with Sharia principles. It says the government is violating the Establishment Clause of the First Amendment with billions of dollars of aid for AIG. The clause prevents the U.S. government from endorsing a religion. I think this suit will be thrown out because it can apply to almost any multinational company since they tend to tailor their products for the local market, which can include supporting religious customs. It's not cle

Another day. Another stock manipulation charge. This time against National Lampoon. Yes, that name does ring a bell doesn't it? Could it really be what I think it is? Why, yes, it is none other than the company that holds the rights to the infamous college movie from the late 70's: Animal House . I'm not into that type of movie and think it's overrated but many would disagree with me. In any case, clearly their movies haven't been generating much money lately, given that the executives are being accused of illegally propping up the stock price : Federal prosecutors in Philadelphia have filed charges against the chief executive officer and other executives at National Lampoon Inc. [NLN-A], saying they tried to inflate the company's stock price. Los Angeles-based National Lampoon owns the rights to the “Vacation” and “Animal House” movies, among others. Prosecutors charged seven people with conspiracy and securities fraud on Monday. Prosecutors said the company ma

Frauds tend to be revealed during the bursting of bubbles; no one asks questions when everyone is intoxicated with money when times were good. The Bernard Madoff case will go down in history as the worst scam in modern American history. Fortunately, most of the losses are accruing to the wealthy, who can afford to take losses, and to "sophisticated" institutional and hedge fund investors. I'm not trying to unsympathetic to the victims but the damage won't be as heartbreaking as cases such as Enron, where working class and middle class lost nearly their whole life savings. There will be indirect impact on everyone but it should be largely contained to those who blindly gave their capital to Madoff and his associates. It should also be noted that some speculate that some of Madoff's investors thought he was doing something illegal but didn't realize that allying with the devil doesn't guarantee your success. These investors are thought to have assumed that M

I have no strong bullish view when it comes to commodities but I do feel that soft commodities (agriculturals) may do better than the industrials or energy in the future. I want to refer you to an article in last month's Globe Investor magazine presenting a bullish argument for agricultural commodities, and highlight a flaw in the thinking. The article is Canadian so it refers to Canadian securities but agricultrual bulls and bears may still want to read it (although nothing earthshattering was discussed.) The biggest flaw commodity bulls can make--and I see them doing this all the time--is the following: No matter how deep or protracted the economic downturn becomes, the world’s population will still need food on the dinner table each night . So, for some, it’s been a bit of a curiosity that grain prices have been halved in recent months as equities tanked and economies contracted. Tight bank credit and a splurge of investor redemptions forced many hedge funds and other speculato