Showing posts from February, 2009

For oil bulls with high risk tolerance... Iraq

I'm bearish on commodities, including oil & gas, but many, including my readers, aren't. For those who are bullish and can tolerate extremely high risk, one area they might want to check out is Iraq. Report on Business magazine, The Globe & Mail's magazine insert, has an in-depth story of the activities of several Canadian oil & gas companies that are prospecting for oil in Iraq . I didn't read the full article yet but it's interesting. It's quite obvious why Iraq is risky. The government is as unstable as the country. USA will be withdrawing from Iraq within two years according to Obama's plan. After the withdrawl, USA will be leaving behind a theocratic government*, and possibly a dysfunctional military and police apparatus. The legal system is questionable and property rights are uncertain. Of importance to these oil companies, who are operating in the Kurdistan region, is the question of the legality of the contracts they signed with Kurdista

Wisdom from the Oracle of Omaha... Thoughts on Buffett's 2008 Shareholder Letter

I don't usually cover Warren Buffett's shareholder letters since it is covered in detail by almost everyone else. You are probably also better off reading some thoughts from some value investor or Berkshire investor than someone like me who doesn't really follow him closely. Nevertheless, the latest letter, the 2008 Berkshire Hathaway Shareholder Letter , is worth reading in order to get a feel for the thinking of Buffett in the middle of a major stock market crash. I also thought it was worth covering it on my blog given how he devotes a section to the monoline bond insurers. As is generally the case on this blog, rather than summarizing his letter, let me present my opinion on some things I find interesting... Worst Year Ever Warren Buffett evaluates his performance of Berkshire Hathaway by looking at book value. I think this is the proper metric in the long run, especially since its holdings are not public, but short-term investors are probably correct in looking at shar

Jeremy Grantham 4th Quarter 2008 commentary (Part 2)

Thanks to GuruFocus for pointing me to Jeremy Grantham's latest two-part commentary (4Q 2008). I can't remember if I covered part I before but I believe I did, so I'll just go over part II. Jeremy Grantham, for those not familiar, is a macro-oriented value strategist for GMO funds. I find his writing hilarious at times so it's always a fun read. I wish I had read his stuff 3 years ago (I dismissed him back then because he seemed like an extreme permabear--a big mistake on my part :( ). Jeremy Grantham is one of the best macro thinkers out there (another great macro thinker is Marc Faber.) Unlike many other macro thinkers, he is very unique and comes up with insightful ideas. Most people, including me at times, cover the beaten down ideas of global trade, economic growth, bear market cycles, and so on. Grantham, in contrast, comes up with ideas that I haven't seen anywhere else. It is a sign of a great thinker! Overall, he says that the high-probability investment

Secular stock market cycles & Ten year rolling returns

Crestmont Research publishes some excellent macro-oriented documents on their website . I typically hit their site once or twice an year and, I have said this before but, I'll reiterate my recommendation of their 100 year S&P stock market return matrix . The best thing is that all this is free :) If you are macro-oriented, I recommend reading all the documents on their site. One may not necessarily agree with their thinking but it covers the main bases of macroeconomics pertaining to investing. Given how we are going through a nasty bear market, I pulled some tables/charts that are highly relevant right now. One of them deals with secular bull and bear cycles, while the other is about 10 year rolling returns. Secular Bull & Bear Markets The table below, extracted from Secular Bull & Bear Markets presents secular bull and bear markets (as defined by Crestmont) over the last 108 years. Everyone has their own way of defining bull and bear markets and nothing is ever perfe

Bruce Berkowitz thoughts on Sears

In his recent conference call with shareholders and fundholders, Bruce Berkowitz had some thoughts on Sears ( transcript here ; audio here .) I haven't mentioned Bruce Berkowitz before on this blog--at least I don't think I have--and FYI, he runs the Fairholme family of value mutual funds. His recent record won't show it but he has been quite successful over the years. He is one of the few value investors who avoided overloading on financials. Presently, on top of some legacy positions, he seems to favour healthcare and defense. His core investing strategy seems to rely on looking at free cash flow. He is one of the few bulls on Sears and here are his thoughts on Sears: Bruce Berkowitz: What are the – next question, what are the top successes of Eddie Lampert’s track record as a capital allocator? (Our key) is rather wide. How do you get comfortable with his ability for much of what he does and his hedge fund is not public? Well, we – Eddie Lampert’s overall record is still

Ambac announces 4Q 2008 results

Not surprisingly, Ambac announced a massive loss for the 4th quarter (you can access the presentation here ): Ambac Financial Group, Inc. today announced fourth quarter 2008 net loss of $2,340.8 million, or a net loss of $8.14 on a per share basis. This compares to fourth quarter 2007 net loss of $3,273.9 million, or net loss of $32.03 on a per share basis. The fourth quarter 2008 results reflect ($594.4) million net change in fair value of credit derivatives. ... Quarter Summary The deferred tax asset valuation allowance amounts to $2,053.0 million at December 31, 2008, representing an increase of $1,534.0 million from September 30, 2008. Over the past 24 months, Ambac has recorded significant mark-to-market losses on its CDS portfolio and has incurred losses in its insured RMBS portfolio... Net loss provisioning of $916.4 million was recorded for the quarter primarily relating to the RMBS insurance portfolio. The quarterly provision was offset by a benefit resulting from an increas

Dubai bubble bursts

Dubai, Glitters in the Arabian Night (source: Original source unknown. Downloaded from CIV1120 ) Looks like the real estate bubble in Dubai has burst. On top of some real estate builders running into problems, it seems that consumer defaults are rising : For the UAE, a country more accustomed to the upward side of the economic curve, this is unchartered territory. The country has had few dealings with the bankruptcies and bad debts that follow financial storms, as demonstrated by the UAE's opaque insolvency legislation. Worse, banks are unsure how to deal with loans racked up by expatriates during boom-time, which are now looking increasingly shaky. Across the country job losses are mounting as the real estate market flounders. In December, Dubai state-backed developer Nakheel made 500 of its staff redundant. Dubai-based Damac Properties has cut 200 jobs while Al Shafar General Contracting has laid off 1,000 workers. Outside the property sector redundancies have also been felt with

We know when we are facing a massive consumer credit bust when...

Credit card companies--American Express in this case-- pay people to cancel their credit cards : American Express Co. is offering a $300 incentive for customers to cancel their accounts as the card issuer grapples with surging loan delinquencies and soft card-member spending. The company is offering a $300 prepaid card, which can be used anywhere American Express is accepted, to certain customers who pay off their entire balance between March 1 and the end of April. Enrolling in the deal automatically cancels the customer's account, regardless of whether he successfully pays off the balance. It only applies to select customers but we can be sure that they are high risk credit card users. Something like this would have been unthinkable two years ago when it seemed like every company was handing out credit cards to anyone that wanted them. The contraction in consumer credit is inevitable--consumers are the weakest link in America and Canada--and financial profits will decline materia

Gold vs Stocks... The end game is near

(source: Lustre lost , Market.view, Feb 22nd 2009) The graph is disarmingly simple. It simply shows the ratio of the Dow to the gold price since 1920. As can be seen, there have been three clear peaks in this ratio: in 1929, in the mid-1960s and in 2000. And it also shows three lows: in the early 1920s, in the 1930s after the crash and around the time of gold’s record high (in real terms) in 1979-1980. At those lows, the Dow and gold were almost equal. With gold flirting with $1,000 per ounce, could we be headed there again? A Dow/gold ratio of 2 would imply the former falling to 2000 or the latter rising to $3500 an ounce. Enormous profits would be made by those who got this call right. -- Buttonwood in Lustre Lost , The Economist The above, from a nice article by Buttonwood of The Economist, summarizes the 90-year performance of gold in relation to stocks . The above chart is a popular one that is used by many to gauge the attractiveness of gold against stocks. It is n

Last decade almost as bad as during the Great Depression

Although it may not seem like it, especially if you only started investing a few years ago and missed the 2000 crash, as I did, but, in real terms , the last decade has been as bad for stock investors as the 10 years subsequent to the stock market crash of 1929. Michael Mandel of BusinessWeek produced the following chart ( accompanying article here ): The chart plots the 10 worst years of the 1930's against the last 10 years. Both periods involved a 50% decline in stocks. It's not clear to me if this is based on a price chart that excludes dividends but I imagine the picture would still be similar with dividends. Looking at the chart, it seems that the vast majority of the suffering, at least for stock investors, is likely out of the way. The Great Depression was far worse for America than the current econmic crisis yet the stock market crashed almost as much in the last decade. But there is a bearish undercurrent that needs to be considered. One should be careful with these c

Moody's predicts junk bond defaults hitting 16% by end of 3rd quarter

I'm still thinking of investing in high yield bonds. I'm not sure if I can do it in an affordable manner (brokers seem to require very high minimum investment and chart very high commissions--do note that I'm only talking about attractive illiquid bonds.) My thinking is that the credit markets may lock up again when governmenats nationalize banks and bondholders end up with losses. I'm thinking that is a good time to buy. But this is pure speculation and I may be missing out on an opportunity (yields have fallen significantly from December.) Research Recap summarizes a report from Moody's stating that it expects a 16.4% default rate for junk bonds by November 2009, compared to 4.4% in 2008 and 1% in 2007. That's a huge jump and it goes to show why one should not draw much conclusion from the 2004-2007 time period. In fact, it is outright dangerous to use a chart like the one shown on that blog entry, and look back a few years in order to gauge valuation. Risk p

Gold passes $1000...bubble forming?

Gold hits $1000 -- Third time lucky? I guess any time one contemplates investing in gold, either taking a long position or a short one, we leave the value investing arena and move into the purely macro battleground. Many mistakenly think that you can compute the intrinsic value of gold--or commodities for that matter--whereas my opinion is that it cannot be done. It is nothing more than a speculative macro bet. Gold surpassed $1000 for the third time within two years. In the prior two cases, it quickly fell back below $1000 and stayed there. Is this a bubble being formed? Or is it simply representing fair value based on the world economy? One of my big bets this year was going to be shorting gold--likely through one of the inverse ETFs--so I have been trying to develop a bearish case. I know I said an year ago that I'm not going to be shorting anything ever again after my questionable experience shorting the TSX (which was a bearish bet on commodities.) I'm still uncertain but