Saturday, January 31, 2009 0 comments ++[ CLICK TO COMMENT ]++

Some items of interest for the last week of January 2009

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 you are considering investing in these companies, allow for the possibility of massive dilution (but the market may already be pricing in some of this.)
  • There is risk in Canadian bank preferred shares (Financial Post): American and European banks have been getting capital injections from the government. Although located close to America, Canadian banks have avoided most of the problems so they have mostly been raising capital by issuing preferred shares to retail investors. The article raises the risk that the whole preferred share market may collapse if one bank cuts the dividend--the big 5 Canadian banks have not cut their dividends since the Great Depression. Unlike America, I suspect the Canadian pref shares aren't pricing in the possibility of dividends being cut or suspended (not that I expect it to happen.)
  • In-depth look at the massive losses at Caisse de dépôt et placement du Québec (The Globe & Mail): The Caisse de dépôt et placement du Québec is Canada's largest pension fund--essentially the province of Quebec's fund. It has gotten into some serious problems, with its massive investment in iliquid non-bank ABCP (asset-backed commerical paper) being the biggest mistake. To make matters worse, and I never knew this until I read this article, it seems that Caisse invested in index futures without putting up much of a collateral. I don't think there is anything wrong with long-term investors using derivatives--Buffett does it; Caisse is a long-term investor--but I really wonder if that's the right path for pension funds, endowments, and the like. The problem is not so much the instrument but the possibility of promoting too much speculation. Harvard Endowment Fund and a bunch of others are also posting huge losses, albeit for using different assets and techniques than Caisse.
  • Comparison chart of 4 major stock market crashes (dshort.com; original mention CalculatedRisk): You may have seen this chart, or similar ones, comparing the crashes in 1929, 1974, 2000, and now. Although it's worth looking at this, I am of the opinion that this chart is primarily useful for traders and short-term investors. These charts are useful for comparing various bottoms. But the risk, to longer term investors, is a bear market that may rise from its bottom but stay in a range for many years. My concern is not necessarily that the bottom may be further below; instead, my concern is buying a stock that goes nowhere or doesn't keep up with opportunity cost (or even inflation) over the years. For example, even if the market has 20% more to decline and you mistakenly buy something now, you may end up losing a lot more on currency losses or inflation or declining profit margins over the next 5 years than the 20% loss you take. (Recommended)
  • Economic overview of Asia (The Economist): A run-down of the situation in Asia. There is a lot of conflicting theories floating around and I have no idea which one is right (this is probably why stockpickers avoid macroeconomics.) This article mentions a bunch of things which are quite surprising and I never knew before. For instance, it mentions that South Korean consumers have a higher debt to income than even Americans! Yikes! It also raises questions about the true exposure of China to external exports. It suggests that only 15% of China's real growth between 2002 and 2007 came from 'net' exports. If this is accurate, China would not be vulnerable to the collapse in consumption in the developed world. However, it's not clear to me how much of the economy indirectly depends on the exports.
  • Geoff Gannon podcasts on various value investing topics (Gannon On Investing): Geoff Gannon has started podcasting daily. I haven't listened to all of them yet but several of them seem to cover core tenets of value investing and the emphasis on bottom-up investing. The first few (Jan 26 2009 and Jan 27 2009) may be useful for newbies. The podcasts are lengthy (45+ minutes) and I think he repeats his points too often. He could probably shave off 10 min from each episode. Perhaps he'll get a bit better once he gets gets into a normal routine and focuses on specific topics.

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