Articles for your perusal for the week ending February 7th of 2009

The market rallied this week on expectation that the US government bailout is going to solve the problems. This could turn into another 'buy the rumour, sell the news' day if the market doesn't like what it hears of the government plan next week. Credit has improved significantly since late last year thank to FedRes actions but I'm still skeptical and would be careful. 'Danger...Stranger Beware' is probably the appropriate motto for the time being.

Nothing much happening in my investment world. Just reading up and trying to come up with some investment ideas for the year. I will post my views soon. Unlike the last few years of floundering around and, at times, even being saved by the bull, I think now is the time to succeed or fail. Similar to how many hedge funds or mutual funds will go bankrupt in the near future, I think we, as small investors, will know very soon if we are cut out for stopicking or not. If the market ends up behaving as poorly as I think, the bull won't save you; and if you are a short-seller the bear won't save you either.

Anyway, some articles you may want to check out, along with my thoughts... as usual, not in any particular order...

• The fall of the Russian oligarchs (The Globe & Mail): I have beaten this issue to death but for anyone that is interested, Eric Reguly of The Globe & Mail provides an interesting, and in-depth, look at the fall of the Russian oligarchs and the ascent of the Russian government. I am not a fan of either--the oligarachs or the Russian government--but the best that can happen is if both of them left the scene. The oligarchs still have a sliver of hope. If commodity prices recover, they may be able to save themselves. I think fates of many similar to them is written on a stone somewhere: Leverage is a two-sided sword. Never forget that it cuts both ways.
  
• Always keep in mind that China's official GDP numbers are year-over-year numbers, versus quarter-over-quarter in USA/Japan/etc (Associated Press via The Toronto Star): If you are into macroeconomics, be careful when you compare the year-over-year GDP numbers of China versus quarter-over-quarter of many other countries such as USA. China reported 6.8% growth in 4th quarter but if we use the quarter-over-quarter basis, it is thought to be close to zero. In the long-run it doesn't matter what you use, but if you are only looking at a few quarters, or looking for macro shifts as most macro investors tend to do, this causes big discrepancies. It is thought GDP growth below 7% will cause political instability in China (I actually think the number will have to be lower) and GDP growth below 3% in most developing countries is essentially a recession.
  
• Employed women expected to surpass men (The Toronto Star): The New York Times also had a story about a similar situation in America. Men are being laid off at a greater pace than women and hence women are expected to make up a greater portion of the labour force (according to The Toronto Star, this last seemed to have occurred in the 1940's in Canada--USA is likely similar.) This makes sense because the really hard hit areas--construction, capital goods manufacturing, financial services, securities industries, primary resource extraction--laregely employ men. Women tend to dominate service industries like childcare or government areas such as healthcare and teaching so layoffs haven't been as bad. Unfortunately for couples everywhere, areas that women dominate pay lower salaries (say a nurse vs oil&gas worker) so things are going to be rough for families.
  
• Supposedly executives can't live on $500k in New York (The New York Times): The story has some merit if you were to assume that executives will only send their kids to private schools, hire nannies, live in high-end homes, and so on; if you don't assume that, then the argument is questionable. The cost of living in New York is much higher so the article lobbies to increase the government cap. My feeling is that there isn't a right answer to this problem. I clearly do not want the government coming up with some arbitrary limit on salaries. But on the other hand, it is questionable whether executives should be paid tens of millions while their companies are saved (for mostly their own mistakes) by the government. It is dissapointing to me that the free market, if I were to treat it as a living and breathing entity, does not price the incentive programs properly. My opinion is that executive compensation is one of the failures of the free market (it's similar to how I also believe that the free market doesn't price pollution properly.)
  
• Bank of England to bypass commercial banks (The Globe & Mail): Truly radical for the central bank to bypass the commercial banks but I guess they are really desperate over there in Britain. There is no way the private sector can compete against the central bank. Although this is a limited action, one wonders if this can turn into a multi-year plan, especially if the big British banks end up as zombies that still exist but are undead, a la Japan. I'm not too knowledgeable about banking but my understanding is that the structure is completely different in America and hence this won't happen in the same manner in America. Unlike most other parts of the world, American banking is more diversified and there are literally thousands of banks! There are probably more regional banks listed on the NYSE than the total number of publicly-traded banks in all of Europe. These regional banks are smaller but they will still still keep lending, whereas the insolvency of megabanks in Europe pretty much cuts of all lending. (However I will note that, unlike Europe, commercial paper is supposedly a big funding source for corporations in America and the FedRes has intervened in that market a few months ago.)
  
• Debt problems looming in Europe (BusinessWeek): As if Europeans don't have enough problems with toxic mortgages, this article paints a negative picture of looming debt problems for corporations. It's amazing how addicted to leverage these corporations have become. The story mentions how old-school businesses, such as the French construction behemoth Lafarge, took on too much debt; and how many private equity buyouts are turning into a disaster. European stocks look attractive from a P/E valuation point of view but their debt load tends to be higher than in America. Anyone buying these seemingly attractive European companies should study the outstanding debt.
  
• Ruper Murdoch loses billions on the Dow Jones buyout (Fortune): Murdoch wanted the Wall Street Journal as a trophy but it looks like he wasted billions. News corporation seems to have written down almost $3 billion of the $5 billion it paid for Dow Jones. The impariment charge is not surprising given how the New York Times is having financing problems. Most liberals including me tend not to agree with Murdoch's views or his properties but, however, he is one of the best minds in the industry and if anyone can turn around these newspaper companies, it would be him. The Wall Street Journal would likely have run into financial problems on its own.
  
• Did someone say freedom of speech? (The Economist): When the stock market falls what do we do? Why, yes, punish the analysts who issue bearish outlooks. This is what has happened, to various degrees, in Taiwan and South Korea. The Economist reports In Taiwan: "When critical brokers’ opinions are cited in newspapers, regulators now want “explanations”...Regulators have insidiously suggested that investment firms take a harder line by suing media outlets that report on their opinions." ... In South Korea: "In South Korea, a reluctance to issue sell recommendations has already taken hold. Of the 17,335 reports issued by South Korean brokers in 2008, there were 14,903 “buy” recommendations but not a single “sell”, according to FnGuide, a Seoul-based financial-information company." In political crises, totalitarian governments crush free speech; In financial crises, I guess "freedom-loving" democratic governments crush bearish analysis. After all, freedom is slavery, ignorance is power, and bearish analysts are just plain evil... :(
  
• Forbes Jeremy Grantham interview from Jan 2009 (Forbes via Change Alley): Change Alley, some blog I recently encountered, has a link to a Jeremy Grantham interview with Forbes (click on the link from his/her blog.) No stock picks--Grantham's a macro guy--but he says some interesting stuff. There are also older Forbes articles with Grantham's thoughts.