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November Bloomberg interview with Charles de Vaulx

I ran across a Bloomberg interview with Charles de Vaulx (thanks to Graham and Doddsville for the original mention.) Who the hell is Charles de Vaulx? Well, he is the protege of Jean-Marie Eveillard who was supposed to take over the First Eagle funds but who quit abruptly a few years ago due to some unexplainable reason. He is starting new mutual funds so we don't know how good, or bad, he is as an investor. Nevertheless, I liked what I heard and think he may be worth following due to his international focus. He gives a few of his picks so if you want some stocks to research, do listen to the full interview.

Some of the items he mentioned that I found noteworthy:

  • He implies that oil may be undervalued. He mentions how the Canadian oil sands cost of production is around $70 to $80 and thinks oil may be trading below marginal cost of production. According to one popular theory, commodities should trade at the marginal cost of production so if you buy them below such cost, it is pretty safe. I am not too confident with this call. Oil appears to be below below the cost of production of many producers, but here are two related things to keep in mind. What seemed like rising costs in the last few years may be due to the decline of the US$. Now that the US$ is appreciating, costs should come down in US$ terms. Furthermore, on top of the declining US$ driving up costs in the past (not true anymore,) cost of production may be abnormally high due to the oil bubble driving up costs in everything else. For example, I remember reading stories about businesses in Alberta, the oil sands region in Canada, needing to pay very high wages for almost any job. Because the oil sands was sucking up all the labour, even unrelated industries were impacted. Restauranteurs had to pay higher wages to keep their low-wage employees; trades businesses had to pay very high wages; and so forth. Moving to other parts of the world, many Middle East and Latin American countries also had a run-up in costs. A lot of this is unsustainable and if it collapses, the cost of oil production should also drop quite a bit. If cost of production drops, oil can drop further or at least stay where it is.
  • A surprising thing to me was how Charles de Vaulx said that operating margins for some of the Japanese industrial exporters (nearly all of them cyclical and/or exposed to strong Yen) can drop from the recent 20% to 2% or 3%. He was just citing an extreme scenario but it was still quite low compared to what I was thinking all this time. I was chopping down the cyclical margins by half (to around 8% to 10%) but if it drops to 3%, then stocks may drop further.
  • One thing I have never understood is the use of enterprise value for Japanese companies. Charles de Vaulx describes how he tends to look at the enterprise value multiple for Japanese companies because they hare overcapitalized and have a ton of cash on their balance sheet. The problem I have with this approach is that, given how Japanese companies are not shareholder-friendly, I'm not sure how someone is going to unlock the value. If you retain the high cash level, incidentally earning close to 0.5% in Japan, shareholder returns can stay low for a long time. In fact, there is nothing to stop these firms from staying like that forever. I personally think that the overcapitalized companies in Japan are a massive value trap. If you can't get these companies to either give out the cash to sharholders so that they can invest it with a higher return than around 0.5%, or if these companies don't use the cash to buy out other firms, I would be cautious with them.
  • He thinks continental European countries should do better than the developed countries going through a credit bust (USA, Britain, Ireland, Spain, etc.) European stocks seem attractive but I suspect that there is massive currency risk. I can see the Euro dropping against the US$ (or the Canadian dollar in my case.)

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