Can Turtles Fly?

This is the second post in a series covering my investment strategy for 2009 and beyond. The first post dealt with my macroeconmic view. This post will cover my investing ideas for the year. And in the final post, I will outline my investment ideas and list my watchlist of specific stocks/bonds/etc I'm attracted to. It is important that you not blindly follow anything I do. My stockpicking has been terrible and you should simply consider anything I say as ideas that you should accept or dismiss. I may change my mind at any point. All of this is obvious but I think my readership has gone up and I don't want any newbies losing their life savings. Not a pretty sight if I started getting mentioned in the same breath as Bernie Madoff ;) Views Going Into 2009 As one may sense from my macro outlook, I disagree with the consensus view of a strong recovery in the later part of the year. There is a possibility of a rally in the markets but it is difficult to see it being sustained. Reme...

January ended in the red, and I don't believe it technical analysis but some technicians say the negative January means there is a high chance of the year being negative. This goes against other views that suggest that the market rallies sharply after major crashes (happened in 1930, 1975, and 1988.) Whatever happens, it's starting out on an interesting note with the US$ still showing strength while gold may be entering a speculative stage. Anyway, here are some articles you may find interesting, in no particular order... Overly indebted mining giants diluting shareholders (Financial Post): Many commodity companies have serious problems with debt (if investors still keep shunning risky debt.) The risk for investors is that these companies will issue shares at, what are presently, very low share prices. So far Xstrata has done a rights offering, including it being priced 66% below the stock price along with an innovatie, but unusual asset swap with its majority shareholder. If ...

It looks like the 4th quarter US GDP number came in at -3.8% , which is better than the -5.4% consensus expectation. Even with the stronger-than-expected number, the US stock market is off slightly (down around 0.5%) right now. Although the number was much better than expected, it's still pretty weak and some think the worst will be first and second quarters of this year. The Canadian November GDP change --Canada reports monthly numbers--is weaker than consensus. GDP seems to have declined 0.7% in November versus around -0.4% expected by consensus. All these numbers may be revised later but this goes to show how blindly listening to economists is not a good technique.

(This is sort of a political post) Well, I guess it is only fitting that the World Economic Forum at Davos, attended mainly by senior bankers and senior government officials, marks the current malaise the world economy when fighting words and denials erupts into the public sphere. The forum seems to have gotten off to a rough start even before it started when several key players in the current financial crisis were nowhere to be found. It seems that only one senior American banker, Jamie Dimond of JP Morgan, showed up, while the CEOs of other banks don't seem to have made an effort to trek over there, although John Thain of Merrill Lynch was planning to attend before being shown the door. Not to be outdone, the Brazilian president, Luiz Inacio Lula, skipped the WEF for the competing, some claim anti-capitalist, activist-driven World Social Forum in the Amazon: Brazilian President Luiz Inacio Lula da Silva is shunning the World Economic Forum in Davos this week and the chance to h...

Obama administration should avoid labelling China as a manipulator. It is something that is being decided upon . Contrary to some who think that China is not manipulating its currency, I am of the opinion that it is clearly manipulating its currency. However, it isn't a one-way street, and China actually pays a price for this. It should also be noted that America's loss in manufacturing has little to do with the currency manipulation. America's peak in manufacturing, believe it or not, was somewhere in the 1940's and it has been declining ever since (I'm referring to manufacturing as a share of world production; in terms of raw production, USA probably has higher manufactured output now than at any time.) Clearly, American manufacturing started going down before China even showed up on the scene. In any case, speaking as a largely free-market guy (but not as free market oriented as libertarians or most on the right,) the currency peg has to go. It distorts everythin...

The question on the mind of many is whether huge swaths of the Western banking system is going to end up being nationalized. The huge outlays, ranging from purchasing preferred shares to offering credit insurance, sometimes in quantities seemingly larger than the market cap of such banks, seems to imply that the government owns the banks. Well, it's becoming clear slowly that the government is taking over control. Perhaps the most symbolic is the cancellation of an airplane order by Citigroup after the Obama administration made a call: On Monday an official of the Treasury Department called an official of Citigroup, recipient of $45 billion in TARP funds, and complained about the company's new $50 million dollar,12-seater corporate jet from a French company. The official "told them to fix it," a source with knowledge about the call tells ABC News. Citigroup this morning released the following statement: "We have no intent to take delivery of any new aircraft....

Some articles... Bond yield spreads high but not raw bond yields (Accrued Interest): This is a point I have made in the past and is worth keeping in mind if you are looking at bonds. Many analysts claim that corporate bond yields are trading more attractively than during the Great Depression. This is only true if you look at spreads. In contrast, if you look at raw yields, they are not necessarily that high. I think the junk bonds are worth considering but the rest of the corporate bonds do not look attractive. ConocoPhilips posts massive $31.8 billion non-cash loss (The Globe & Mail): This was supposedly announced before and most of it arises from writing down goodwill related to its Burlington Resources acquisition a few years ago. Talk about a terrible deal for shareholders (unless oil&gas prices rally or something.) Book value was around $93 billion (tangible was $63 billion) and it is going to get cut in third. Rio Tinto considering big stock sale to pay down debt (Mark...

Bloomberg is reporting that the arbitrageurs trying to profit from the oil contago are starting to unload some of their cargo : Royal Dutch Shell Plc sold more than 1 million barrels of crude stored off the U.K. and a vessel hired by Citigroup Inc.’s Phibro LLC left its anchorage in Scotland for the U.S. as the incentive to keep oil in tankers disappears. Shell sold two 600,000-barrel cargoes of North Sea Forties crude for delivery in mid-February at Scapa Flow near Scotland’s Orkney Islands to oil trader Vitol Group, the companies said. The oil, already on board the supertanker Oliva, has been anchored off the U.K. coast since at least December, according to Bloomberg vessel tracking data. Oil companies and traders have stored as much as 80 million barrels of crude on tankers as the so-called contango, a market where buyers pay more for supplies later in the year than now, allowed them to profit from storing crude. The incentive to store oil on vessels is shrinking as the spread betw...

Economists are often wrong. They tend to be early with their gloomy predictions, and they tend to be late with their bullish views. For example, Paul Krugman was calling for the real estate bust back in 2005 if I recall but nothing really happened until 2007. The same with Stephen Roach, who was warning about commodities bubble and the trade imbalance back in 2005, while nothing happened until 2008. So, if you are going to listen to them, keep that in mind. Bloomberg interviewed Stephen Roach recently and he is quite bearish. For what it's worth, he has always been bearish for the most part over the last 3 or 4 years but it seems that his view hasn't changed much. He says all of Asia is in recession or slowing materially. He does not agree with the view floating around in Wall Street that China will lead us out of this mess. He reiterates his view that the US economy is going to face serious issues and a Japan-like lost decade is not out of the question, although he doesn'...

"The only function of economic forecasting is to make astrology look respectable." -- John Kenneth Galbraith Making forecasts is never good for one's reputation; but given how my reputation is close to zero or possibly negative, I probably don't lose much by making them ;) This will be my main outlook for the year and the future in general. There will be another post where I will lay out my investment plan for the year (since I am macro-oriented, my investments are mainly driven by my macro view, except for risk arbitrage, distress investing, and such.) To tell you the truth, regardless of how bad you are at it, I think forecasts are actually a good thought exercise if you are macro-inclined . If, however, you are bottom-up then avoiding forecasts is a good idea (in this case, forecasts, which are nothing more than guesses, will adversely cloud your view.) Before I started my blog, I used to write yearly forecasts on some of the forums I was posting on. My forecasts h...

We had one major M&A deal blow up in Canada--the BCE deal--but it looks like the proposed buyout of Rohm & Haas by Dow Chemical might be the next big one--this time in America. Similar to the BCE deal, this one was cut near the peak of the cycle (in this case, the commodities cycle back in July.) If you ever want to know why arbitrage hedge funds are doing terribly, it's because of situations like this. It's a good case study for arbitrageurs. This is an example of a deal, that seemed somewhat certain at that time, completely disintegrate within two months. I never pursued this as a risk arbitrage play because (i) I didn't have enough free money, (ii) I am bearish on cyclicals and don't want to be holding any of them if the deal fell apart, and (iii) the deal is not a simple cash-only deal and I'm not skilled enough to properly hedge these deals by shorting, in this case, Dow Chemical. Never the less, the deal "looked" somewhat safe to me because i...

Happy Chinese New Year to all! The astrologers, in true fashion of hedging their bets and proclaiming some vague results--kind of reminds me of Wall Street portfolio strategists :)--are expecting a rough year . One unskilled in astrology might be forgiven for thinking that the ox--this is the year of the ox by the way--is somehow related to a bull and hence portends to a bull market. Apparently not. At least that's how I'm reading the situation. I should note that I'm neither an astrologer nor a very good investor so take that for what it's worth ;)... So, let's check out some Chinese statistics as a New Year arrives in China... China is potentially one of the top stories of the year. One can argue it was already the story in the last decade but a lot of that was hype and obscured by the bull market in, practically, every single asset--except US$ and Yen, of course. The real story is if it can survive a severe world recession without an implosion of the political sy...

Thanks to Todd Sullivan's ValuePlays for bringing Jeremy Grantham's 4Q letter to my attention. It's a good read. Grantham is considered by some to be a value investor but, unlike most value investors, he is a top-down, macro-focused, strategist. At least that's my impression of him. I recommend this letter to anyone, including non-macro-oriented investors since it gives an overview of the size of the problem. Jeremy Grantham has been critical of many policymakers and so-called leaders and he is critical of Obama's Treasury team as well. In any case, the most valuable thing for me is his quantification of potential losses in America, and how they compare to Japan. I had been trying to figure out how the US situation compares to Japan and Grantham finally provides his estimate. The bad news is that there will be huge losses; the good news is that it looks better than Japan. I personally felt before that the losses would be better than Japan since Japanese real estate...

One of my potentially big macro bets this year (and beyond) is shorting gold. It's just an idea at this point, and I am likely early, but I don't find gold attractive. So, I've been researching and building my thesis. So far early indications are that gold is only worth shorting if it goes past $1000 to, say, $1500. I'm researching some theories I have and will post entries as I finalize them. The first theory to test is if gold does indeed do poorly during deflationary periods. One of my reasons for considering a short of gold, apart from it doing so well in the last 10 years, is due to my belief that it isn't a good asset to own if we enter a long slump like the 30's and 40's. I'm not expecting a depression but I do think growth will be below potential (3% real growth is roughly the potential for USA.) Most of the world was on a gold standard during, or at least going into, the Great Depression. USA was also on the gold and silver standards during big...